UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
- - --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994 or
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
- - --- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- --------------
Commission File Number 1-1023
McGRAW-HILL, INC.
- - ---------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-1026995
- - ---------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1221 AVENUE OF THE AMERICAS, NEW YORK, N.Y. 10020
- - ---------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 512-2000
------------------
Not Applicable
- - ---------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
YES X NO
----------- -----------
Number of shares of Common Stock (par value $1.00 per share)
outstanding as of April 29, 1994: 49,521,916.
<PAGE>
PART I
Financial Information
<TABLE>
McGraw-Hill, Inc.
-----------------
Consolidated Statement of Income
--------------------------------
Three Months Ended March 31, 1994 and 1993
------------------------------------------
<CAPTION>
1994 1993
--------- ---------
(In thousands,
except per share data)
<S> <C> <C>
Operating revenue $ 559,774 $ 466,947
Expenses:
Operating 295,854 245,520
Selling and general 230,341 169,269
--------- ---------
Total expenses 526,195 414,789
Share of loss of
Macmillan/McGraw-Hill joint venture (Note 3) - (20,345)
Other income - net 3,223 3,000
--------- ---------
Income from operations 36,802 34,813
Interest expense - net (11,348) (8,199)
--------- ---------
Income before taxes on income 25,454 26,614
Provision for taxes on income 10,487 11,364
--------- ---------
Net income $ 14,967 $ 15,250
========= =========
Earnings per common share $ 0.30 $ 0.31
========= =========
Average number of common shares outstanding 49,445 49,063
</TABLE>
- 2 -
<PAGE>
Financial Information (cont'd)
<TABLE>
McGraw-Hill, Inc.
-----------------
Consolidated Balance Sheet
--------------------------
<CAPTION>
March 31, Dec. 31, March 31,
1994 1993 1993
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 28,744 $ 47,953 $ 10,556
Accounts receivable (net of allowance
for doubtful accounts) (Note 4) 621,680 711,919 507,110
Receivable from broker-dealers and
dealer banks (Note 5) 17,110 19,136 21,350
Inventories (Note 4) 225,953 215,228 106,808
Prepaid income taxes 92,536 92,912 42,469
Prepaid and other current assets 45,203 44,634 44,800
---------- ---------- ----------
Total current assets 1,031,226 1,131,782 733,093
---------- ---------- ----------
Prepublication costs (net of accumulated
amortization) (Note 4) 293,893 285,445 92,410
Investments and other assets:
Investment in Macmillan/McGraw-Hill
School Publishing Company - at
equity (Note 3) - - 488,721
Investment in Rock-McGraw, Inc. - at
equity 54,157 53,077 51,298
Prepaid pension expense 90,160 87,655 80,067
Other 156,476 159,861 125,673
---------- ---------- ----------
Total investments and other assets 300,793 300,593 745,759
---------- ---------- ----------
Property and equipment - at cost 745,149 753,452 628,375
Less - accumulated depreciation 409,696 408,126 349,702
---------- ---------- ----------
Net property and equipment 335,453 345,326 278,673
Goodwill and other intangible assets - at
cost (net of accumulated amortization) 1,007,823 1,021,017 548,266
---------- ---------- ----------
$2,969,188 $3,084,163 $2,398,201
========== ========== ==========
</TABLE>
- 3 -
<PAGE>
Financial Information (cont'd)
<TABLE>
McGraw-Hill, Inc.
-----------------
Consolidated Balance Sheet
--------------------------
<CAPTION>
March 31, Dec. 31, March 31,
1994 1993 1993
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 154,243 $ 170,780 $ 125,385
Accounts payable 173,914 178,466 115,990
Payable to broker-dealers and dealer
banks (Note 5) 16,338 18,695 20,944
Accrued liabilities 106,542 182,156 86,781
Income taxes currently payable 46,677 42,783 34,532
Unearned revenue 250,339 248,036 229,719
Other current liabilities 216,229 227,979 151,697
---------- ---------- ----------
Total current liabilities 964,282 1,068,895 765,048
---------- ---------- ----------
Other liabilities:
Long-term debt (Note 6) 757,890 757,567 333,419
Deferred income taxes 114,853 119,548 109,797
Accrued postretirement healthcare and
other benefits 191,477 190,985 187,237
Other non-current liabilities 123,356 124,160 103,627
---------- ---------- ----------
Total other liabilities 1,187,576 1,192,260 734,080
---------- ---------- ----------
Total liabilities 2,151,858 2,261,155 1,499,128
---------- ---------- ----------
Shareholders' equity (Note 7):
Capital stock 51,475 51,475 51,475
Additional paid-in capital 66,732 63,512 59,531
Retained income 820,614 834,250 922,009
Foreign currency translation adjustments (26,449) (28,577) (21,746)
---------- ---------- ----------
912,372 920,660 1,011,269
Less - common stock in treasury-at cost 83,320 87,687 99,925
unearned compensation on
restricted stock 11,722 9,965 12,271
---------- ---------- ----------
Total shareholders' equity 817,330 823,008 899,073
---------- ---------- ----------
$2,969,188 $3,084,163 $2,398,201
========== ========== ==========
</TABLE>
- 4 -
<PAGE>
Financial Information (cont'd)
<TABLE>
McGraw-Hill, Inc.
-----------------
Consolidated Statement of Cash Flows
------------------------------------
Three Months Ended March 31, 1994 and 1993
------------------------------------------
<CAPTION>
1994 1993
--------- ---------
(In thousands)
<S> <C> <C>
Cash flows from operating activities
- - ------------------------------------
Net income $ 14,967 $ 15,250
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation 15,524 12,519
Amortization of goodwill and intangibles 9,706 5,809
Amortization of prepublication costs 15,247 8,621
Provision for losses on accounts receivable 18,174 19,032
Share of loss of and distribution from
Macmillan/McGraw-Hill joint venture - 22,403
Other (1,205) (171)
Changes in assets and liabilities net of effect of
acquisitions and dispositions:
Decrease in accounts receivable 69,720 61,975
Increase in inventories (10,111) (9,029)
Decrease in accounts payable and accrued expenses (80,423) (56,415)
Decrease in interest and income taxes payable (2,289) (9,519)
Net change in other assets and liabilities (1,208) (4,465)
- - --------------------------------------------------- --------- ---------
Cash provided by operating activities 48,102 66,010
- - --------------------------------------------------- --------- ---------
Investing activities
- - --------------------
Purchases of property and equipment (7,089) (6,958)
Investment in prepublication costs (24,089) (11,258)
Disposition of property & equipment 2,285 249
Other 2,653 -
- - --------------------------------------------------- --------- ---------
Cash used for investing activities (26,240) (17,967)
- - --------------------------------------------------- --------- ---------
Financing activities
- - --------------------
Dividends paid to shareholders (28,603) (27,883)
Repayment of commercial paper and other
short-term debt-net (16,707) (24,002)
Exercise of stock options 4,485 1,929
Other (246) (759)
- - --------------------------------------------------- --------- ---------
Cash used for financing activities (41,071) (50,715)
- - --------------------------------------------------- --------- ---------
Net change in cash and equivalents (19,209) (2,672)
Cash and equivalents at beginning of period 47,953 13,228
- - --------------------------------------------------- --------- ---------
Cash and equivalents at end of period $ 28,744 $ 10,556
========= =========
</TABLE>
- 5 -
<PAGE>
Financial Information (cont'd)
McGraw-Hill, Inc.
-----------------
Notes to Financial Statements
-----------------------------
1. The financial information in this report has not been audited, but in the
opinion of management is based on estimates which include all adjustments
(consisting only of normal recurring adjustments) considered necessary to
present fairly such information. The operating results for the three
months ended March 31, 1994 and 1993, are not necessarily indicative of
results to be expected for the full year due to the seasonal nature of some
of the company's businesses. The financial statements included herein
should be read in conjunction with the financial statements and notes
included in the company's Annual Report on Form 10-K for the year ended
December 31, 1993.
Certain prior year amounts have been reclassified for comparability
purposes.
<TABLE>
2. Operating profit by segment is total operating revenue less expenses which
are deemed to be related to the unit's operating revenue. A summary of
operating results by segment for the three months ended March 31, 1994 and
1993 follows:
<CAPTION>
1994 1993 (Note)
---------------------- ----------------------
Operating Operating
Revenue Profit/(Loss) Revenue Profit/(Loss)
--------- ----------- --------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Educational and Professional
Publishing $ 176,315 $ (24,933) $ 109,935 $ (1,644)
Financial Services 194,446 58,782 172,821 51,731
Information and Media Services 189,013 14,472 184,191 16,105
-------------------------------- --------- --------- --------- ---------
Total operating segments 559,774 48,321 466,947 66,192
Share of loss of Macmillan/
McGraw-Hill joint venture - - - (20,345)
General corporate expense - net - (11,519) - (11,034)
Interest expense - net - (11,348) - ( 8,199)
-------------------------------- --------- --------- --------- ---------
Total company $ 559,774 $ 25,454* $ 466,947 $ 26,614*
========= ========= ========= =========
<FN>
*Income before taxes on income.
Note: Revenue and operating profit by segment for the 1993 period have been
restated to reflect the combining of the Broadcasting and Information and
Publications Services segments and Tower Group International operations into
one segment, Information and Media Services.
</FN>
</TABLE>
- 6 -
<PAGE>
Financial Information (cont'd)
McGraw-Hill, Inc.
-----------------
Notes to Financial Statements
-----------------------------
3. On October 4, 1993, the company purchased the additional 50% interest in
the Macmillan/McGraw-Hill School Publishing Company for $337.5 million in
cash. The company now owns 100% of Macmillan/McGraw-Hill and it is
consolidated in McGraw-Hill's operations from the date of acquisition of
the additional 50% interest. Prior to the acquisition of the additional
50% interest, the company accounted for its 50% interest under the equity
method.
The following pro forma information presents the consolidated results of
operations of the company for the three months ended March 31, 1993 as if
the acquisition of the additional 50% of Macmillan/McGraw-Hill had occurred
at the beginning of 1993, after giving effect to certain adjustments,
including amortization of goodwill and other intangibles, increased
interest expense from debt issued to fund the acquisition and related
income tax effects. Pro forma results are: operating revenue $519.2
million; net income $2.7 million and earnings per common share $.06. These
pro forma results are not necessarily indicative of those that would have
occurred had the acquisition taken place at the beginning of 1993.
<TABLE>
4. The allowance for doubtful accounts, the components of inventory and the
accumulated amortization of prepublication costs were as follows:
<CAPTION>
March 31, Dec. 31, March 31,
1994 1993 1993
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Allowance for doubtful accounts $ 79,057 $ 79,461 $ 82,668
========= ========= =========
Inventories:
Finished goods $ 168,478 $ 166,584 $ 67,817
Work-in-process 36,571 29,259 20,425
Paper and other materials 20,904 19,385 18,566
--------- --------- ---------
Total inventories $ 225,953 $ 215,228 $ 106,808
========= ========= =========
Accumulated amortization of
prepublication costs $ 252,169 $ 282,052 $ 149,449
========= ========= =========
Prepublication costs of $92.4 million included in inventory at March 31, 1993
have been reclassified to a separate non-current category to conform with
current industry practice.
</TABLE>
- 7 -
<PAGE>
Financial Information (cont'd)
McGraw-Hill, Inc.
-----------------
Notes to Financial Statements
-----------------------------
5. A subsidiary of J.J Kenny Co. acts as an undisclosed agent in the purchase
and sale of municipal securities for broker-dealers and dealer banks and
the company had $560.5 million of matched purchase and sale commitments at
March 31, 1994. Only those transactions not closed at the settlement date
are reflected in the balance sheet as receivables and payables.
<TABLE>
6. A summary of long-term debt follows:
<CAPTION>
March 31, Dec. 31, March 31,
1994 1993 1993
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
9.43% senior notes due 2000 $ 250,000 $ 250,000 $ 250,000
Commercial paper supported by
bank revolving credit agreement 500,000 500,000 75,000
Other 7,943 7,930 8,499
--------- --------- ---------
757,943 757,930 333,499
Less: portion included in other
current liabilities 53 363 80
--------- --------- ---------
Total long-term debt $ 757,890 $ 757,567 $ 333,419
========= ========= =========
</TABLE>
<TABLE>
7. Common shares reserved for issuance, for conversions and for the
exercise of stock options were as follows:
<CAPTION>
March 31, Dec. 31, March 31,
1994 1993 1993
--------- --------- ---------
<S> <C> <C> <C>
$1.20 convertible preference stock
at the rate of 3.3 shares
for each share of preference stock 5,277 5,277 5,326
Exercise of stock options 1,956,218 2,054,087 2,140,085
--------- --------- ---------
1,961,495 2,059,364 2,145,411
========= ========= =========
</TABLE>
<TABLE>
8. Cash dividends per share declared during the three months ended March 31, 1994
and 1993 were as follows:
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Common stock $.58 $.57
Preference stock .30 .30
</TABLE>
- 8 -
<PAGE>
Financial Information (cont'd)
Management's Discussion and Analysis of Operating
-------------------------------------------------
Results and Financial Condition
-------------------------------
Operating Results - Comparing Three Months Ended March 31, 1994 and 1993
- - ------------------------------------------------------------------------
Consolidated Review
- - -------------------
The company acquired its partner's 50% interest in the Macmillan/McGraw-Hill
School Publishing Company in October 1993. The company now owns 100% of the
former joint venture company which was renamed the McGraw-Hill School
Publishing Company in 1994. School Publishing's results are consolidated in
the company's 1994 first quarter segment results in the Educational and
Professional Publishing segment. 1993's results reflect the company's 50%
equity share of the former joint venture's seasonal loss.
Operating revenue for the quarter grew $92.8 million, or 19.9%, to $559.8
million. $57 million of the revenue increase reflects the consolidation of
School Publishing. The remainder of the revenue increase reflects volume
increases and new products in the Financial Services' units as well as a mix
of price and volume increases in Educational and Professional Publishing and
Information and Media Services.
Net income declined 1.9% to $15 million from $15.3 million reflecting the
seasonal impact of owning 100% of School Publishing. Excellent results in
Financial Services, gains in Broadcasting and some of the other advertising-
based businesses, and improved results in School Publishing significantly
offset the incremental impact of recognizing 100% of School Publishing's
first quarter seasonal loss. Earnings per share were 30 cents versus 31
cents last year.
Total expenses in 1994 increased $111.4 million or 26.9% reflecting the
inclusion of School Publishing. Excluding School Publishing, the company's
expenses increased 7.4% due primarily to volume increases in some market
focus groups and some cost increases.
Net interest expense increased $3.1 million due primarily to increased
borrowings associated with the acquisition of the additional 50% of the
school publishing joint venture.
The provision for taxes as a percent of income before taxes was 41.2% in the
1994 quarter and 42.7% in 1993. The 1994 rate reflects a reduction in the
state effective tax rate due to a restructuring of subsidiaries in the
second quarter of 1993, partially offset by an increase in the federal tax
rate.
-9-
<PAGE>
Financial Information (cont'd)
Segment Review
- - --------------
Educational and Professional Publishing revenue increased $66.4 million or
60.4%, due largely to the inclusion of School Publishing revenues of $57
million. Revenue increases were also reported by all of the market focus
groups in the segment, with excellent growth in medical publishing.
Operating profit declined sharply due to the seasonal loss of School
Publishing. School publishers typically report losses in the first quarter.
School Publishing's improved year to year performance significantly reduced
the impact of absorbing the full seasonal loss in 1994's first quarter.
School Publishing's operating results improved from last year reflecting
increased sales, principally reorders from adoption states, and reduced
costs from actions taken last year. Despite the revenue increase in the
first quarter, School Publishing still anticipates a full year revenue
decline in 1994 due to an unfavorable state adoption cycle. The impact on
profits from the full year revenue decline will be mitigated by cost
reduction measures. Excluding School Publishing, the combined operating
results of the company's other publishing units improved slightly from last
year. The company is proceeding with plans to consolidate certain functions
and systems of School Publishing and its other book publishing operations.
This consolidation should be completed by mid-1995 and is expected to
generate annual savings of more than $10 million, which will begin to be
realized later this year.
Financial Services' revenue grew $21.6 million or 12.5% and operating profit
increased $7.1 million, or 13.6%. Standard & Poor's Debt Rating benefited
from increased activity in the high yield bond market. The Ratings Group'
growth reflects greater penetration in international markets and new
ratings initiatives. The Financial Information Services Group benefited
from gains at S&P ComStock and Kenny Evaluation and Information Services.
Information and Media Services revenue increased $4.8 million or 2.6%, while
operating profit declined $1.6 million, or 10.1%. Strong performance in
Broadcasting and improved advertising pages at Business Week and several
other publications contributed to the revenue increase. Broadcasting's
results reflect strong gains at the Denver station due to improved overall
ratings and the Winter Olympics. Construction Information Group' profits
declined due to the continued sluggish recovery in the construction
industry, particularly in the northeast where the severe winter had a harsh
impact on the industry.
Financial Condition
- - -------------------
The company continues to maintain a strong financial position. Cash flow
from operations declined to $48 million from $66 million last year,
reflecting the company's 100% ownership and the seasonal impact of the
School Publishing business. Total debt was $912.2 million, down $16.5
million from yearend.
-10-
<PAGE>
Financial Information (cont'd)
Financial Condition (cont'd)
- - ----------------------------
Commercial paper borrowings at March 31, 1994 totaled $651.1 million, a
decrease of $16.6 million from December 31, 1993. Commercial paper debt is
supported by a $500 million revolving credit agreement with a group of banks
terminating in November 1997, and $500 million has been classified as long-
term. The company has several other revolving credit agreements that
terminate in 1994 totaling $350 million. There are no amounts outstanding
under these agreements.
Under a shelf registration which became effective with the Securities and
Exchange Commission in mid-1990, the company can issue an additional $250
million of debt securities. The new debt could be used to replace a portion
of the commercial paper borrowings with longer term securities.
Accounts receivable before reserves of $700.7 million decreased by $90.6
million from the end of 1993, due primarily to the seasonal nature of some
of the company's businesses. Receivables were $111 million higher than at
March 31, 1993, as a result of the inclusion of School Publishing in 1994
and increased receivables resulting from higher revenues than a year ago.
Inventories increased $10.7 million to $226 million from the end of 1993 due
primarily to the seasonal buildup for the Sweet's Files. Inventories were
$119.1 million higher than at March 31, 1993 as a result of the inclusion of
School Publishing in 1994.
Net prepublication costs at March 31 increased $8.5 million from the end of
1993 to $293.9 million due to additional spending on new titles and school
programs net of first quarter amortization expense. Net prepublication
costs were $201.5 million higher than at March 31, 1993 as a result of the
inclusion of School Publishing in 1994. Investment in prepublication costs
of $24.1 million in the quarter ended March 31, 1994 increased $12.8 million
over last year's first quarter, and amortization expense increased $6.6
million, due primarily to the inclusion of School Publishing in 1994.
Purchases of property and equipment of $7.1 million approximated the level
of the prior year. The purchases were primarily for computer equipment for
the market focus groups.
-11-
<PAGE>
Part II
Other Information
Item 6. Exhibits and Report on Form 8-K
----------------------------------------
a) Exhibits
--------
(12) Computation of ratio of earnings to fixed charges.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
McGRAW-HILL, INC.
--------------------------------
Date: 5/6/94 By Robert J. Bahash
------------------ ------------------------------
Robert J. Bahash
Executive Vice President
and Chief Financial Officer
Date: 5/6/94 By Thomas J. Kilkenny
------------------ ------------------------------
Thomas J. Kilkenny
Vice President and Controller
Date: 5/6/94 By Robert N. Landes
------------------ ------------------------------
Robert N. Landes
Executive Vice President,
Secretary and General Counsel
- 12 -
<PAGE>
<TABLE>
Exhibit (12)
McGraw-Hill, Inc.
------------------
Computation of Ratio of Earnings to Fixed Charges
-------------------------------------------------
Periods Ended March 31, 1994
----------------------------
<CAPTION>
Three Twelve
Months Months
--------- ---------
(In thousands)
<S> <C> <C>
Earnings
Earnings from continuing operations
before income tax expense and unusual
charges in 1993 (a) (b)............... $ 24,013 $ 291,183
Fixed charges........................... 20,292 76,508
Capitalized interest.................... (88) (527)
--------- ---------
Total Earnings....................... $ 44,217 $ 367,164
========= =========
Earnings from continuing operations
before income tax expense (b)......... $ 24,013 $ 61,383
Fixed charges........................... 20,292 76,508
Capitalized interest.................... (88) (527)
--------- ---------
Total Earnings....................... $ 44,217 $ 137,364
========= =========
Fixed Charges (b)
Interest expense........................ $ 12,267 $ 48,271
Portion of rental payments deemed to be
interest.............................. 8,025 28,237
--------- ---------
Total Fixed Charges.................. $ 20,292 $ 76,508
========= =========
Ratio of Earnings to Fixed Charges
Before unusual charges 2.2x 4.8x
After unusual charges 2.2x 1.8x
<FN>
- - ------------
(a) Unusual charges in 1993 totaled $229.8 million before taxes in
connection with the purchase of 50% interest in the Macmillan/McGraw-
Hill School Publishing Company owned by Macmillan for $337.5 million
in cash. The unusual charges consisted of $199.8 million primarily
to adjust the company's original investment to values established in
this transaction. This charge has been allocated primarily to
goodwill and other intangibles. In addition, the company recorded a
provision of $30 million relating to the consolidation of certain
functions and systems of Macmillan/McGraw-Hill and the company's book
publishing operations.
(b) For purposes of computing the ratio of earnings to fixed charges,
"earnings from continuing operations before income taxes"
excludes undistributed equity in income of less than 50%-owned
companies. "Fixed charges" consist of (1) interest on debt and
capital leases, (2) the portion of the company's rental expense
deemed representative of the interest factor in rental expense, and
(3) the company's proportionate share of such fixed charges of the
Macmillan/McGraw-Hill joint venture through September 30, 1993.
</FN>
</TABLE>
-13-
</PAGE>
