Business Context and Reporting Period
This Form 10-Q covers The McGraw-Hill Companies, Inc. for the quarterly period ended September 30, 1996, and the nine-month period ended on the same date. The company operates through three primary segments: Educational and Professional Publishing, Financial Services (including Standard & Poor's), and Information and Media Services. The financial data reflects a two-for-one stock split distributed in April 1996.
Key Financial Metrics
| Metric | Three Months Ended Sept 30, 1996 | Nine Months Ended Sept 30, 1996 |
|---|---|---|
| Operating Revenue | $949.0 million | $2,243.8 million |
| Net Income | $114.5 million | $187.9 million |
| Earnings Per Share (Diluted) | $1.15 | $1.88 |
| Operating Cash Flow (9 months) | N/A | $228.7 million |
| Total Debt | $736.6 million (Notes Payable + Long-term) | $736.6 million |
| Cash and Equivalents | $9.9 million | $9.9 million |
| Effective Tax Rate | 40.6% | 40.6% |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenue increased 4.9% ($44.7 million) for the quarter and 2.7% ($58.1 million) for the nine months compared to 1995.
- Profitability: Net income rose 8.2% for the quarter and 8.8% for the nine months. Earnings per share increased from $1.06 to $1.15 (quarter) and $1.73 to $1.88 (nine months).
- Segment Performance:
- Financial Services: Revenue up 8.2% (quarter) and 7.6% (nine months), driven by strong ratings activity and global information products.
- Educational Publishing: Revenue up 5.4% (quarter) despite an "off-adoption" year, aided by secondary school sales and the Open Court acquisition. Nine-month revenue was flat.
- Information and Media: Revenue was flat for the quarter and up 2.5% for nine months, but operating profits declined due to weakness in computer magazines and broadcasting.
- Interest Expense: Net interest expense declined 19.9% for the quarter and 18.7% for nine months due to lower commercial paper rates and reduced borrowing levels.
Outlook, Risks, and Unusual Items
- Major Transaction: On October 15, 1996, the company exchanged its Shepard's/McGraw-Hill legal publishing unit for the Times Mirror Higher Education Group. Management estimates a pre-tax gain of over $300 million in the fourth quarter, net of one-time charges.
- Fourth Quarter Guidance: The Times Mirror acquisition is expected to dilute fourth-quarter operating earnings by 5 to 7 cents per share due to seasonality and integration timing.
- Share Repurchases: The company repurchased 1.4 million shares for $63.3 million year-to-date under a program authorizing up to 4 million shares.
- Legal Proceedings: A lawsuit filed by the County of Orange regarding Standard & Poor's ratings was moved from Bankruptcy Court to District Court. The company intends to vigorously contest the allegations.
- Cost Reduction: A "best practices" program is underway to eliminate approximately 750 positions; about 500 had been eliminated by the end of the third quarter.
Investor Verification Checklist
- Verify the final valuation and tax implications of the Shepard's/Times Mirror exchange transaction expected in Q4.
- Monitor the integration progress of the Times Mirror Higher Education Group and its impact on Q4 earnings dilution.
- Review the seasonal cash flow patterns, noting the increase in debt to $736.6 million to fund prepublication costs and working capital.
- Assess the performance of the Financial Services segment, specifically the sustainability of high-yield debt and structured finance ratings volume.
- Track the outcome of the County of Orange v. McGraw-Hill legal proceeding.