Business Context and Reporting Period
This Form 10-Q covers The McGraw-Hill Companies, Inc. for the quarterly and nine-month periods ended September 30, 2001. The company operates through three primary segments: McGraw-Hill Education, Financial Services (including Standard & Poor's), and Information and Media Services. The reporting period was significantly impacted by the September 11, 2001 terrorist attacks, which negatively affected advertising revenue and financial market transaction volumes.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2001 | Nine Months Ended Sep 30, 2001 |
|---|---|---|
| Operating Revenue | $1,535.1 million | $3,531.0 million |
| Net Income | $239.5 million | $379.9 million |
| Diluted EPS | $1.22 | $1.93 |
| Operating Cash Flow (9mo) | $584.1 million | |
| Total Debt (Long-term + Notes Payable) | $1,239.1 million | |
| Cash and Equivalents | $1.8 million | |
| Effective Tax Rate (9mo) | 36.3% |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 10.1% for the quarter and 10.5% for the nine-month period compared to 2000. Growth was driven by the McGraw-Hill Education segment (17.8% quarterly increase) and Financial Services (8.9% quarterly increase), partially offset by a 17.3% decline in Information and Media Services due to advertising slowdowns.
- Profitability: Net income rose 11.1% for the quarter and 27.6% for the nine-month period. Operating profit for Education increased 18.4% (quarterly), while Information and Media Services operating profit dropped 74.6% (quarterly).
- Acquisitions: Results include contributions from recent acquisitions: Frank Schaffer Publications, Mayfield Publishing, PricewaterhouseCoopers' Corporate Value Consulting (CVC), and Financial Times Energy.
- Debt Levels: Total debt increased by approximately $193.7 million since year-end 2000, primarily to fund acquisitions. Commercial paper borrowings totaled $986.4 million at period end.
- Unusual Items: The nine-month net income included a $26.3 million after-tax gain from the divestiture of DRI and a $6.9 million pretax gain on real estate sales. Conversely, there was a $21.9 million after-tax charge related to asset write-downs and the shutdown of the Blue List.
Guidance, Outlook, and Risks
- Outlook: Management anticipates slower growth in Educational Publishing for 2002 due to lighter textbook adoptions. The weak advertising environment, exacerbated by the September 11 attacks, is expected to persist for the next two quarters, negatively impacting the Information and Media Services segment.
- Financial Condition: The company maintains a strong financial position with operating cash flow of $584.1 million for the nine months. A new $650 million 364-day revolving credit facility was secured in August 2001, with an additional $25 million added in October 2001.
- Risks and Contingencies:
- Legal Proceedings: Standard & Poor's SA is facing a lawsuit in Paris by AFPER seeking approximately $2.49 billion in damages regarding Russian debt ratings. The company intends to contest the action vigorously.
- Market Risks: Exposure to worldwide economic conditions, capital market health, currency volatility, and state/local funding for education.
- Accounting Changes: The company is evaluating FAS No. 141 and 142 regarding business combinations and goodwill, effective January 1, 2002.
Investor Verification Checklist
- Verify the sustainability of revenue growth in the Education segment given the forecast of lighter adoptions in 2002.
- Monitor the duration and severity of the advertising market decline in the Information and Media Services segment post-September 11.
- Review the status of the $2.49 billion litigation against Standard & Poor's in France.
- Assess the impact of the $193.7 million increase in debt on future interest expense and liquidity ratios.
- Confirm the integration progress and financial contribution of recent acquisitions (CVC, FT Energy, Frank Schaffer).