Business Context and Reporting Period
This Form 10-Q covers The McGraw-Hill Companies, Inc. for the quarterly period ended September 30, 1999. The company operates through three primary segments: Educational & Professional Publishing, Financial Services (including Standard & Poor's), and Information and Media Services. The filing notes that operating results are seasonal and not necessarily indicative of full-year performance.
Key Financial Metrics
| Metric | Three Months Ended Sept 30, 1999 | Nine Months Ended Sept 30, 1999 |
|---|---|---|
| Operating Revenue | $1,318.5 million | $2,957.7 million |
| Net Income | $190.5 million | $305.0 million |
| Diluted EPS | $0.96 | $1.53 |
| Operating Cash Flow | N/A (Quarterly not provided) | $302.6 million |
| Total Debt | $785.2 million (Notes Payable + Current LT + LT Debt) | $785.2 million |
| Cash and Equivalents | $15.4 million | $15.4 million |
| Operating Margin | 24.6% | 18.0% |
Note: Total debt calculated as Notes Payable ($283.6M) + Current Portion of Long-Term Debt ($95.0M) + Long-Term Debt ($406.6M).
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 9.3% ($112.1M) for the quarter and 6.0% ($166.7M) for the nine-month period compared to 1998.
- Profitability: Net income rose 18.6% for the quarter and 17.9% for the nine-month period. Diluted EPS increased from $0.81 to $0.96 (quarter) and $1.30 to $1.53 (nine months).
- Cash Flow: Operating cash flow for the nine months decreased to $302.6 million from $420.4 million in 1998, primarily due to a significant increase in accounts receivable driven by Standard & Poor's performance and seasonal publishing cycles.
- Debt Levels: Total debt increased by $257.6 million from year-end 1998, largely due to increased commercial paper borrowings to fund receivables, prepublication costs, and the acquisition of Appleton & Lange.
Guidance, Outlook, and Risks
- Segment Performance:
- Financial Services: Driven by strong Standard & Poor's Ratings performance, particularly in the Eurobond market (up 162% in volume). Public finance issuance declined.
- Educational Publishing: Strong growth in K-12 (SRA/Glencoe) and Higher Education. The Continuing Education Center is winding down operations.
- Media Services: Business Week reported its best third quarter in 70 years with a 41.7% increase in advertising pages.
- Year 2000 (Y2K) Readiness: Management estimates 99% of applications are remediated and 97% tested. Remaining systems are expected to be certified by year-end 1999. Estimated total cost for remediation is $19 million, with $15.6 million spent through September 30, 1999.
- One-Time Items: 1998 results included a $26.7M gain on building sale and an $8.7M extraordinary loss on debt extinguishment. Excluding these, 1999 net income growth was 17.0% for the quarter.
- Risks: Forward-looking statements are subject to risks including worldwide economic conditions, capital market health, currency volatility, and potential Y2K disruptions affecting third-party vendors or internal systems.
Investor Verification Checklist
- Receivables Quality: Verify the collectability of the $1.27 billion in accounts receivable, which increased significantly year-over-year and drove the decline in operating cash flow.
- Debt Structure: Confirm the reliance on commercial paper ($400M outstanding) and the impact of interest rate fluctuations on the $785M total debt load.
- Y2K Contingency: Assess the company's business continuity plans and the status of critical third-party vendors regarding Year 2000 readiness.
- Seasonality: Acknowledge that Q3 results are heavily influenced by the seasonal nature of educational publishing and may not reflect full-year trends.
- Acquisition Integration: Monitor the financial impact and integration of the Appleton & Lange acquisition ($46M) on the Professional Publishing segment.