SPGI

Business Context and Reporting Period

This Form 10-Q is filed by The McGraw-Hill Companies, Inc. for the quarterly period ended September 30, 1995. The company operates through three primary segments: Educational and Professional Publishing, Financial Services (including S&P Ratings), and Information and Media Services (including Business Week). The filing covers the three and nine months ended September 30, 1995, compared to the same periods in 1994.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Operating revenue increased 5.7% ($48.8 million) for the quarter and 5.9% ($122 million) for the nine-month period compared to 1994.
• Profitability: Net income rose 17.4% for the quarter and 12.7% for the nine-month period. Earnings per share increased from $1.82 to $2.12 (quarter) and $3.09 to $3.46 (nine months).
• Segment Performance:
  • Educational/Professional Publishing: Revenue grew 2.8% (quarter) and 5.6% (nine months), driven by school publishing adoptions and legal publishing, offset by declines in the Mexican market.
  • Financial Services: Revenue grew 8.0% (quarter) and 5.1% (nine months), led by S&P Ratings and Financial Information Services.
  • Information and Media Services: Revenue grew 10.9% (quarter) and 7.2% (nine months), primarily due to strong advertising page growth in Business Week.
• Expenses: Total expenses increased 2.5% for the quarter and 4.6% for the nine months, reflecting volume-related costs and investments in S&P Ratings. Operating expenses were flat year-over-year for the quarter due to cost controls offsetting higher paper costs.
• Interest Expense: Net interest expense increased 14.7% for the quarter and 18.6% for the nine months due to higher commercial paper rates (averaging 6.0% in 1995 vs. 4.6% in 1994), partially offset by lower borrowing levels.

Outlook, Risks, and Management Commentary

• Seasonality: Management notes that results are seasonal, particularly in school publishing. The company borrows in the first half of the year and generates cash in the second half from fourth-quarter collections. Significant state adoption activity in 1995 magnified this pattern.
• Liquidity and Debt: Total debt increased to $794.8 million, driven by seasonal factors and the acquisition of UCB Canada, Ltd. Commercial paper borrowings totaled $529.5 million, supported by an $800 million revolving credit agreement. The company has a shelf registration to issue an additional $250 million in debt securities.
• Working Capital: Accounts receivable increased significantly ($175.3 million from year-end 1994) due to third-quarter school publishing sales. Inventories increased $48.2 million due to seasonal requirements for school publishing and Sweet's Files.
• Risks and Contingencies:
  • Depressed market conditions in Mexico continue to negatively impact international revenues.
  • Softness in the public markets affected J.J. Kenny results.
  • Broadcasting profits were impacted by a lack of political advertising in 1995.
• Unusual Items: The prior year (1994) included a $3.7 million write-down for the CanCite legal information service in Canada, which favorably impacts the year-over-year profit comparison for 1995.

Investor Verification Checklist

• Verify the sustainability of revenue growth in the Educational Publishing segment given the seasonal nature of school adoptions.
• Monitor the impact of rising interest rates on net interest expense, as commercial paper rates increased significantly in 1995.
• Assess the collection efficiency of the increased accounts receivable balance ($1.0 billion) resulting from school publishing sales.
• Review the performance of the Mexican market and its continued drag on international revenues.
• Confirm the status of the $800 million revolving credit agreement and the company's ability to refinance commercial paper with longer-term debt if rates become favorable.