Business Context and Reporting Period
This Form 10-Q covers The McGraw-Hill Companies, Inc. for the quarterly period ended March 31, 1998. The company operates through three primary segments: Educational and Professional Publishing, Financial Services (including Standard & Poor's), and Information and Media Services. The first quarter is historically the company's smallest due to the seasonal nature of its educational publishing business.
Key Financial Metrics
| Metric | Q1 1998 | Q1 1997 |
|---|---|---|
| Operating Revenue | $703.4 million | $652.9 million |
| Net Income | $20.1 million | $15.0 million |
| Diluted EPS | $0.20 | $0.15 |
| Operating Margin | 6.4% | 5.6% |
| Cash from Operations | $69.1 million | ($134.1 million) |
| Total Debt (Long-term + Short-term) | $682.4 million | $789.6 million |
| Cash and Equivalents | $1.7 million | $4.8 million |
Note: Total debt includes $75.5 million in notes payable and $606.9 million in long-term debt as of March 31, 1998.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenue increased 7.7% ($50.5 million) driven by strong performance in S&P Ratings Services and educational publishing.
- Profitability: Net income rose 34.4% to $20.1 million. The effective tax rate decreased to 39% from 40% due to favorable state tax apportionment.
- Cash Flow: Operating cash flow improved significantly to $69.1 million from a negative $134.1 million in the prior year. The 1997 figure was negatively impacted by a $150 million tax payment related to a prior year gain.
- Segment Performance:
- Financial Services: Revenue up 19.8% and operating profit up 11.2%, led by S&P Ratings Services growth in the high-yield corporate bond market.
- Educational Publishing: Revenue up 5.8%; operating loss narrowed 6.6% to $39.7 million due to cost reductions and integration of the Times Mirror Higher Education business.
- Information and Media: Revenue declined 3.4% (excluding Datapro divestiture impact) and operating profit declined 2.3%.
Outlook, Risks, and Unusual Items
- Divestiture: On May 5, 1998, the company announced the sale of its Information Technology and Communications Group (including magazines BYTE and Data Communications) for $26.8 million in cash, expected to close in late May.
- Capital Expenditures: Spending is expected to increase significantly for the remainder of the year, particularly for office consolidation in New York City.
- Year 2000 Compliance: Estimated total cost is $15 million; $2.9 million was spent in Q1. Risks remain regarding third-party vendor compliance.
- Legal Proceedings: The company is vigorously contesting a lawsuit filed by the County of Orange alleging breach of contract and professional negligence regarding bond ratings. Discovery is underway.
- Stock Repurchase: No shares were repurchased in Q1, though the company intends to resume purchases later in the year under its existing program.
Investor Verification Checklist
- Verify the closing date and final proceeds of the Information Technology and Communications Group divestiture.
- Monitor the status of the County of Orange litigation and potential liability exposure.
- Track the execution of the Year 2000 remediation plan and associated costs.
- Assess the impact of the upcoming school publishing adoption season on Q2 and Q3 revenue.
- Review the company's debt refinancing strategy, specifically the potential replacement of commercial paper with long-term securities.