Business context and reporting period
The McGraw-Hill Companies, Inc. (the registrant named in this filing) reported unaudited results for the quarter and six months ended June 30, 2009, compared with the same 2008 periods. Its segments are McGraw-Hill Education, Financial Services (Standard & Poor’s), and Information & Media. The company cited significant seasonality in education publishing. The interim financial statements received an independent accountant’s review, not an audit.
Key financial metrics
Amounts below are in millions of dollars, except per-share data.
| Metric | Q2 2009 | Q2 2008 | First half 2009 | First half 2008 |
|---|---|---|---|---|
| Revenue | $1,465.2 | $1,673.2 | $2,613.4 | $2,891.1 |
| Operating profit before corporate expense and interest | $311.8 | $398.2 | $469.6 | $583.1 |
| Operating margin on that basis | 21.3% | 23.8% | 18.0% | 20.2% |
| Income from operations | $296.3 | $364.7 | $420.7 | $515.7 |
| Net income attributable to the company | $164.1 | $212.3 | $227.1 | $293.4 |
| Diluted earnings per share | $0.52 | $0.66 | $0.73 | $0.91 |
| Cash provided by operating activities | Not separately stated for the quarter | $289.1 | $37.4 |
- Q2 revenue fell 12.4%, operating profit 21.7%, and attributable net income 22.7% year over year. First-half declines were 9.6%, 19.5%, and 22.6%, respectively.
- At June 30, cash and equivalents were $556.1; current assets were $2,397.2 and current liabilities $2,417.6. Total debt was $1,287.3, including $89.6 of short-term debt and $1,197.7 of long-term debt. Total liabilities were $4,592.0 and shareholders’ equity $1,466.0.
- First-half investing cash outflow was $99.8 and financing cash outflow was $115.0. Cash increased $84.5 from year-end 2008. The company paid $141.8 in dividends and made no share repurchases in the first half.
- Quarterly dividends declared were $0.225 per share, up from $0.22.
Material changes and segment performance
- All three segments reported lower Q2 revenue and operating profit. Education revenue fell 17.2% and operating profit 70.1%; Financial Services revenue fell 8.4% and operating profit 8.8%; Information & Media revenue fell 11.5% and operating profit 41.8%.
- Education weakness centered on lower school adoption sales and constrained school budgets; higher education products grew. The estimated 2009 U.S. state new-adoption market was $500–$550 million, versus about $980 million in 2008.
- Financial Services was pressured by declines in structured-finance issuance and investment research, partly offset by growth in credit-related information products and Capital IQ. Structured-finance new-issue dollars fell 51.5% in the U.S. and 88.9% in Europe year to date, according to company estimates.
- Information & Media faced weaker advertising, construction and automotive markets; growth at Platts partly offset declines. In July 2009, the company said it was exploring strategic options for BusinessWeek.
- Foreign exchange reduced Q2 revenue by $37.2 and first-half revenue by $74.6. Total expenses declined, reflecting lower activity and cost-saving measures, but not enough to offset revenue pressure.
Outlook, risks and unusual items
- Management said it did not expect difficult global financial-market conditions to improve in the near term. It warned that structured-finance weakness could persist through 2009 and that continuation of the corporate-bond recovery was uncertain.
- Management expected an effective tax rate of 36.4% for the remainder of 2009, absent specified changes or unusual events. It expected 2009 capital expenditures of approximately $75–$80 million, prepublication investment of approximately $200 million, and retirement-plan contributions of approximately $44 million.
- Second-quarter restructuring generated a net pretax charge of $15.2 ($9.7 after tax, or $0.03 per diluted share), following $24.3 of charges and reversals of about $9.1. The plan involved an approximately 550-position workforce reduction. The company also recorded a $13.8 pretax loss ($8.8 after tax) on the May sale of Vista Research.
- Credit-rating-agency regulation was increasing in the U.S. and Europe; the effects of further rules were uncertain. The company faced numerous lawsuits and investigations concerning ratings activity, including securities-related claims. It said it could not predict outcomes or potential losses, but did not expect currently pending matters to materially adversely affect consolidated financial condition.
- The company had $1.15 billion of revolving credit facilities, with the $383.3 million 364-day tranche scheduled to terminate September 11, 2009. No facility borrowings were outstanding at June 30; the credit agreement included a maximum indebtedness-to-cash-flow ratio of 4:1. Commercial paper borrowings were $89.6 million. Management stated the extendible commercial-note market was unavailable and it did not plan to use it.
- The filing reported effective disclosure controls as of June 30, 2009 and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether school adoption funding, state budgets and federal stimulus distributions support education sales in the second half of 2009.
- Whether structured-finance issuance and corporate-bond market activity recover, and how that affects Financial Services transaction revenue.
- Whether cost reductions can offset continuing revenue declines without further material restructuring charges.
- The status and potential financial exposure of ratings-related litigation, investigations and evolving regulation.
- How the September 2009 expiration of the 364-day credit tranche was addressed, and whether liquidity or debt needs changed after quarter-end.
- The effect of the Vista Research sale and any strategic decision regarding BusinessWeek.