Business Context and Reporting Period
This Form 10-Q covers The McGraw-Hill Companies, Inc. for the quarterly and six-month periods ended June 30, 2002. The company operates through three primary segments: McGraw-Hill Education, Financial Services (including Standard & Poor's), and Information and Media Services. The filing notes that the company adopted SFAS No. 142 effective January 1, 2002, which eliminated the amortization of goodwill and indefinite-lived intangible assets, significantly impacting reported earnings compared to the prior year.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2002 | Six Months Ended June 30, 2002 |
|---|---|---|
| Operating Revenue | $1,191.4 million | $2,038.1 million |
| Net Income | $136.5 million | $165.7 million |
| Diluted EPS | $0.70 | $0.85 |
| Operating Cash Flow (6mo) | $171.7 million | |
| Total Debt (Long-term + Short-term) | $1,163.5 million ($919.4M LT + $244.1M ST) | |
| Cash and Equivalents | $50.5 million | |
| Goodwill (Net) | $1,246.2 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 3.6% for the quarter and 2.1% for the six-month period compared to 2001, driven primarily by the Financial Services segment.
- Profitability: Net income rose 13.7% for the quarter and 18.0% for the six-month period. A significant portion of this increase is attributable to the cessation of goodwill amortization under SFAS No. 142, which added approximately $14.5 million (quarter) and $28.5 million (six months) to pre-tax income.
- Interest Expense: Interest expense decreased 55.4% for the quarter and 58.7% for the six-month period due to lower average interest rates on commercial paper (dropping from 5.1% in 2001 to 1.9% in 2002).
- Segment Performance:
- Financial Services: Revenue up 13.9% (quarter) and 12.2% (six months); Operating profit up 40.3% (quarter) and 32.8% (six months).
- McGraw-Hill Education: Revenue up 1.9% (quarter) but down 1.8% (six months). The segment reported an operating loss of $7.8 million for the six months, compared to a profit of $10.2 million in the prior year, due to seasonality and market softness.
- Information and Media Services: Revenue declined 9.1% (quarter) and 7.1% (six months) due to a soft advertising market.
Guidance, Outlook, and Risks
- Restructuring: The company is executing a worldwide restructuring program announced in Q4 2001, involving a $159.0 million pre-tax charge recorded in 2001. As of June 30, 2002, a remaining reserve of $23.5 million exists for severance and contract termination costs. The program is expected to be completed by December 31, 2002.
- Market Conditions: Management cites a soft advertising market impacting the Information and Media Services segment and a global economic slowdown affecting the Education segment. However, printing, paper, and distribution costs are expected to decrease by a total of 3.8% in 2002.
- Capital Markets: The company maintains a strong financial position with a 364-day revolving credit facility and a 5-year revolving credit facility. Commercial paper borrowings totaled $898.2 million at June 30, 2002.
- Dividends and Buybacks: The quarterly common stock dividend was increased to $0.255 per share. Approximately 10.4 million shares have been repurchased under the authorized program through June 30, 2002.
- Forward-Looking Risks: Risks include worldwide economic conditions, currency volatility, the health of capital markets, and the level of funding in the education market.
Investor Verification Checklist
- Goodwill Accounting Impact: Verify the specific impact of SFAS No. 142 on year-over-year earnings comparisons, as the elimination of goodwill amortization artificially inflates current period profits relative to 2001.
- Education Segment Seasonality: Confirm the seasonal nature of the Education segment, which typically generates the majority of its earnings in the third and fourth quarters, explaining the first-half operating loss.
- Restructuring Progress: Monitor the drawdown of the $23.5 million remaining restructuring reserve and the completion of the workforce reduction (773 of 925 planned terminations completed as of June 30).
- Debt Maturity: Review the maturity of the $898.2 million in commercial paper borrowings and the terms of the new 364-day credit facility replacing the one expiring in August 2002.
- Advertising Market Recovery: Assess the trajectory of the advertising market, which is a primary driver for the Information and Media Services segment and currently showing significant weakness.