SPGI

Business Context and Reporting Period

This Form 10-Q covers The McGraw-Hill Companies, Inc. for the quarterly period ended September 30, 2003. 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 divested S&P ComStock in February 2003, which is reported as a discontinued operation.

Key Financial Metrics

Note: Debt figures represent Notes Payable ($46.4M) plus Long-term Debt ($168.6M) as of September 30, 2003.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 4.0% in the quarter and 2.6% for the nine-month period compared to 2002. Growth was primarily driven by the Financial Services segment.
• Profitability: Net income increased 5.1% for the quarter and 19.4% for the nine-month period. The nine-month increase was significantly boosted by an $87.0 million pre-tax gain from the sale of S&P ComStock (discontinued operations).
• Interest Expense: Interest expense decreased 66.0% in the quarter and 62.2% for the nine months, driven by reduced average debt levels and lower interest rates on commercial paper.
• Segment Performance:
  • Financial Services: Revenue up 15.1% (quarter) and 11.0% (nine months); Operating profit up 33.6% (quarter) and 18.1% (nine months), driven by structured finance ratings and index products.
  • McGraw-Hill Education: Revenue up 1.0% (quarter) but down 0.5% (nine months); Operating profit declined 2.0% (quarter) and 5.6% (nine months) due to state budget pressures and adoption delays.
  • Information and Media Services: Revenue declined 3.5% (quarter) and 4.3% (nine months) due to a soft advertising market.

Guidance, Outlook, and Risks

• Outlook: Management expects combined printing, paper, and distribution costs to decrease modestly in 2003. Prepublication cost spending is estimated to total $225.0 million for the full year. Technology project additions are expected to approximate $60 million to $65 million for 2003.
• Capital Allocation: The company continues a stock repurchase program (15 million shares authorized in 1999, plus a new 15 million share authorization in Jan 2003). Approximately 14.3 million shares have been repurchased through September 30, 2003. Dividends were increased to $0.27 per share in Q1 2003.
• Risks and Contingencies:
  • Market Conditions: Continued weakness in the B2B advertising market and softness in the global technology sector impact specific segments.
  • Education Funding: State and local budget shortfalls continue to delay adoptions and open territory sales in the Education segment.
  • Foreign Exchange: Favorable exchange rates contributed to revenue growth; future volatility remains a risk.
  • Pension Assumptions: The company reduced its long-term return on pension plan assets assumption to 8.75% and discount rate to 6.75% effective Jan 1, 2003, reflecting market weakness.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the extent to which the $57.2 million after-tax gain from the S&P ComStock sale inflated nine-month net income and EPS.
• Education Segment Headwinds: Monitor state budget resolutions and their impact on textbook adoptions for the upcoming fiscal year.
• Debt Structure: Confirm the status of the $575 million 364-day credit facility (renewed July 2003) and the $625 million 5-year facility.
• Advertising Recovery: Assess the trajectory of the B2B advertising market recovery for the Information and Media Services segment.
• Pension Liability: Review the sensitivity of pension expenses to changes in discount rates and asset returns given the recent assumption adjustments.