SPGI

Business Context and Reporting Period

This summary covers the Form 10-Q filed by The McGraw-Hill Companies, Inc. (Note: The input metadata references S&P Global, but the filing text identifies the registrant as The McGraw-Hill Companies, Inc., the parent of S&P Global at the time). The report covers the quarterly period ended June 30, 2007, and the six-month period ended on the same date. The company operates through three segments: McGraw-Hill Education, Financial Services (Standard & Poor's), and Information & Media.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 12.5% for the quarter and 13.0% for the six months compared to the prior year periods. Growth was primarily driven by the Financial Services segment (+21.2% Q/Q, +21.3% YTD) and McGraw-Hill Education (+5.8% Q/Q, +5.7% YTD).
• Profitability: Net income rose 25.4% for the quarter and 42.6% for the six months. Operating profit margins expanded to 28.9% (Q2) and 25.3% (YTD) from 25.8% and 20.7% respectively in 2006.
• Segment Performance:
  • Financial Services: Strong growth in structured finance (CDOs, CMBS) and corporate ratings. A pre-tax gain of $17.3 million was recognized from the sale of the mutual fund data business.
  • McGraw-Hill Education: Revenue growth driven by adoption cycles in Texas and California. Operating loss narrowed significantly compared to the prior year.
  • Information & Media: Revenue grew 4.7% (Q2) and 4.4% (YTD), aided by the transformation of the "Sweets" database to a bundled online service. Broadcasting revenue declined due to lower political advertising.
• Debt and Liquidity: Short-term borrowings increased to $994.2 million (up from $678.6 million in Q2 2006) to fund seasonal working capital and share repurchases. Cash provided by operating activities increased to $388.5 million for the six months ended June 30, 2007.

Guidance, Outlook, and Risks

• Outlook: Management expects the effective tax rate to remain at 37.5% for the remainder of the year. Capital expenditures for 2007 are projected at approximately $250 million. Prepublication investment is expected to reach $310 million.
• Market Risks:
  • Subprime Mortgage Concerns: The company anticipates a decline in U.S. residential mortgage-backed securities (RMBS) issuance (20-30% in H2) and slower growth in CDO issuance due to credit quality concerns. On July 10, 2007, S&P placed 612 classes of subprime RMBS on CreditWatch with negative implications.
  • Regulatory Environment: S&P is subject to the Credit Rating Agency Reform Act of 2006 and increased SEC oversight. The company has submitted its application for registration as a Nationally Recognized Statistical Rating Organization (NRSRO).
• Legal Contingencies: The company is defending against a lawsuit in Milan, Italy, brought by the Parmalat Extraordinary Commissioner, claiming damages of over €4 billion related to S&P's ratings of Parmalat. Management believes the claims lack merit.
• Share Repurchases: The company repurchased 19.5 million shares for $1.3 billion in the first half of 2007. A new program authorizing up to 45 million additional shares was approved in January 2007.

Investor Verification Checklist

• Verify the impact of the subprime mortgage market deterioration on the Financial Services segment's H2 2007 revenue guidance.
• Confirm the status of the Parmalat litigation in Italy and any potential reserve requirements.
• Review the composition of the $994.2 million in short-term debt and the company's reliance on commercial paper markets.
• Assess the sustainability of the 21%+ growth rate in the Financial Services segment given the anticipated slowdown in CDO and RMBS issuance.
• Monitor the adoption cycle results for McGraw-Hill Education in key states (Texas, California) for the remainder of the fiscal year.