Business Context and Reporting Period
This Form 10-Q covers The McGraw-Hill Companies, Inc. for the quarterly period ended June 30, 1997. The company operates through three primary segments: Educational and Professional Publishing, Financial Services (including Standard & Poor's), and Information and Media Services. The reporting period reflects significant operational changes due to the October 1996 exchange of the Shepard's/McGraw-Hill legal publishing business for the Times Mirror Higher Education Group.
Key Financial Metrics
| Metric | Three Months Ended June 30, 1997 | Six Months Ended June 30, 1997 |
|---|---|---|
| Operating Revenue | $836.7 million | $1,489.6 million |
| Net Income | $65.2 million | $80.1 million |
| Earnings Per Share (EPS) | $0.65 | $0.80 |
| Operating Cash Flow | N/A (Quarterly) | ($116.4 million) used |
| Total Debt (Notes Payable + Long-Term) | $935.6 million | $935.6 million |
| Cash and Equivalents | $6.8 million | $6.8 million |
| Effective Tax Rate | 40.0% | 40.0% |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenue increased 17.7% ($125.7 million) for the quarter and 15.0% ($194.8 million) for the six months compared to the prior year. Growth was driven by strong elementary/high school publishing sales, new issuance volume at Standard & Poor's, and the inclusion of the Times Mirror Higher Education Group.
- Profitability: Net income rose 14.0% for the quarter and 9.2% for the six months. However, the Educational and Professional Publishing segment reported an operating loss of $8.3 million for the six months (compared to a $5.0 million loss in 1996) due to seasonal losses in the expanded higher education business.
- Debt and Liquidity: Total debt increased by approximately $354 million from year-end 1996. This increase was primarily due to $150 million in tax payments related to the 1996 business exchange, seasonal inventory build-up for school publishing, and share repurchases. Commercial paper borrowings totaled $664 million at June 30, 1997.
- Cash Flow: Operating activities used $116.4 million in cash for the six months, a significant shift from the $62.2 million provided in the prior year period, largely attributed to the aforementioned tax payments and working capital changes.
Outlook, Risks, and Management Commentary
- Seasonality: Management notes that earnings and borrowing patterns are highly seasonal, with borrowing typically occurring in the first half of the year and cash generation in the second half, particularly the fourth quarter.
- Integration and Costs: The company is integrating the acquired higher education business, having eliminated over 500 positions. A non-cash after-tax charge of up to $20 million related to real estate write-offs is expected in the third quarter due to office consolidation.
- Capital Expenditures: The company plans to lease new office space in New York, with build-out costs estimated at up to $150 million, primarily in 1998 and 1999.
- 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. The District Court dismissed the professional negligence claim but denied the motion to dismiss the breach of contract claim.
- Divestitures: In July 1997, the company divested its London House, School Systems, and Datapro businesses, expecting an after-tax gain of approximately $20 million from the Datapro sale.
Investor Verification Checklist
- Verify the impact of the $150 million tax payment on the 1996 business exchange on current liquidity and debt levels.
- Monitor the integration progress of the Times Mirror Higher Education Group and the timing of expected cost savings.
- Review the status of the County of Orange litigation and potential exposure to damages.
- Assess the seasonal nature of cash flows and the company's reliance on commercial paper for first-half funding.
- Confirm the execution of the planned office consolidation and the associated $20 million non-cash charge in Q3 1997.