UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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
THE McGRAW-HILL COMPANIES, 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[ ]
On October 31, 1996 there were approximately 99.5 million shares of
Common Stock (par value $1.00 per share) outstanding.
<PAGE>
The McGraw-Hill Companies, Inc.
-------------------------------
TABLE OF CONTENTS
-----------------
Page Number
-----------
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
-------
Consolidated Statement of Income for
the three and nine month periods ended
September 30, 1996 and 1995 3
Consolidated Balance Sheet at September 30, 1996,
December 31, 1995 and September 30, 1995 4-5
Consolidated Statement of Cash Flows for the nine
months ended September 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Operating
------- Results and Financial Condition 11-15
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 16
-------
Item 6. Exhibits and Reports on Form 8-K 16-19
-------
-2-
<PAGE>
PART I
Financial Information
Item 1. Financial Statements
--------------------
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Statement of Income
--------------------------------
Periods Ended September 30, 1996 and 1995
-----------------------------------------
<CAPTION>
Three Months Nine Months
-------------------- ----------------------
1996 1995 1996 1995
--------- --------- ---------- ----------
(In thousands, except per-share data)
<S> <C> <C> <C> <C>
Operating revenue $ 949,009 $ 904,351 $2,243,794 $2,185,681
Expenses:
Operating 397,775 365,512 1,018,040 971,151
Selling and general 265,517 264,600 708,419 709,663
Depreciation and amortization 84,716 81,422 178,974 180,145
--------- --------- ---------- ----------
Total expenses 748,008 711,534 1,905,433 1,860,959
Other income - net 4,847 3,473 14,817 14,238
--------- --------- ---------- ----------
Income from operations 205,848 196,290 353,178 338,960
Interest expense - net 13,075 16,320 36,906 45,399
--------- --------- ---------- ----------
Income before taxes on income 192,773 179,970 316,272 293,561
Provision for taxes on income 78,265 74,148 128,406 120,947
--------- --------- ---------- ----------
Net income $ 114,508 $ 105,822 $ 187,866 $ 172,614
========= ========= ========== ==========
Earnings per common share (Note 1) $ 1.15 $ 1.06 $ 1.88 $ 1.73
========= ========= ========== ==========
Average number of common
shares outstanding (Note 1) 99,477 99,960 100,109 99,704
</TABLE>
-3-
<PAGE>
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Balance Sheet
--------------------------
<CAPTION>
Sept. 30, Dec. 31, Sept. 30,
1996 1995 1995
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 9,883 $ 10,250 $ 4,921
Accounts receivable (net of allowance
for doubtful accounts) (Note 3) 965,932 855,372 930,961
Receivable from broker-dealers and
dealer banks (Note 4) 14,218 9,674 11,025
Inventories (Note 3) 264,272 238,030 261,410
Prepaid income taxes 71,579 67,128 69,881
Prepaid and other current assets 65,063 59,351 45,147
---------- ---------- ----------
Total current assets 1,390,947 1,239,805 1,323,345
---------- ---------- ----------
Prepublication costs (net of accumulated
amortization) (Note 3) 300,854 268,200 255,571
Investments and other assets:
Investment in Rock-McGraw, Inc. - at
equity 65,514 61,797 60,985
Prepaid pension expense 102,931 98,177 94,864
Other 153,040 141,861 152,416
---------- ---------- ----------
Total investments and other assets 321,485 301,835 308,265
---------- ---------- ----------
Property and equipment - at cost 854,055 827,307 818,797
Less - accumulated depreciation 535,069 491,178 489,693
---------- ---------- ----------
Net property and equipment 318,986 336,129 329,104
Goodwill and other intangible assets - at
cost (net of accumulated amortization) 945,727 958,420 963,655
---------- ---------- ----------
$3,277,999 $3,104,389 $3,179,940
========== ========== ==========
</TABLE>
-4-
<PAGE>
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Balance Sheet
--------------------------
<CAPTION>
Sept. 30, Dec. 31, Sept. 30,
1996 1995 1995
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 179,790 $ 71,299 $ 137,458
Accounts payable 192,270 215,179 171,114
Payable to broker-dealers and dealer
banks (Note 4) 13,520 7,469 11,044
Accrued liabilities 186,166 188,382 176,515
Income taxes currently payable 144,858 70,405 129,046
Unearned revenue 222,075 241,816 216,471
Other current liabilities 229,714 251,909 228,266
---------- ---------- ----------
Total current liabilities 1,168,393 1,046,459 1,069,914
---------- ---------- ----------
Other liabilities:
Long-term debt (Note 5) 556,766 557,365 657,328
Deferred income taxes 138,959 140,531 125,184
Accrued postretirement healthcare and
other benefits 199,441 200,100 201,156
Other non-current liabilities 132,601 124,868 114,523
---------- ---------- ----------
Total other liabilities 1,027,767 1,022,864 1,098,191
---------- ---------- ----------
Total liabilities 2,196,160 2,069,323 2,168,105
---------- ---------- ----------
Shareholders' equity (Notes 1 and 6):
Capital stock 102,933 102,933 102,933
Additional paid-in capital 37,635 26,740 25,436
Retained income 1,119,732 1,030,526 1,005,946
Foreign currency translation adjustments (56,419) (56,247) (49,359)
---------- ---------- ----------
1,203,881 1,103,952 1,084,956
Less - common stock in treasury-at cost 110,551 60,778 63,587
unearned compensation on
restricted stock 11,491 8,108 9,534
---------- ---------- ----------
Total shareholders' equity 1,081,839 1,035,066 1,011,835
---------- ---------- ----------
$3,277,999 $3,104,389 $3,179,940
========== ========== ==========
</TABLE>
-5-
<PAGE>
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Statement of Cash Flows
------------------------------------
For The Nine Months Ended September 30, 1996 And 1995
-----------------------------------------------------
<CAPTION>
1996 1995
--------- ---------
(In thousands)
<S> <C> <C>
Cash flows from operating activities
- ------------------------------------
Net income $ 187,866 $ 172,614
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation 52,719 49,485
Amortization of goodwill and intangibles 27,336 28,434
Amortization of prepublication costs 98,919 102,226
Provision for losses on accounts receivable 50,047 49,427
Other 458 582
Changes in assets and liabilities net of effect of
acquisitions and dispositions:
Increase in accounts receivable (163,580) (204,628)
Increase in inventories (22,259) (50,108)
(Increase)/decrease in prepaid and other current assets (7,562) 6,074
Decrease in accounts payable and accrued expenses (25,963) (6,833)
Decrease in unearned revenue (19,017) (23,369)
Decrease in other current liabilities (23,011) (1,236)
Increase in interest and income taxes currently payable 70,056 68,879
(Decrease)/increase in prepaid/deferred income taxes (1,174) 668
Net change in other assets and liabilities 3,819 (5,838)
- --------------------------------------------------- --------- ---------
Cash provided by operating activities 228,654 186,377
- --------------------------------------------------- --------- ---------
Investing activities
- --------------------
Investment in prepublication costs (126,919) (89,150)
Purchases of property and equipment (36,895) (32,045)
Acquisition of businesses (31,809) (26,165)
Disposition of businesses 6,335 429
Other 1,511 1,174
- --------------------------------------------------- --------- ---------
Cash used for investing activities (187,777) (145,757)
- --------------------------------------------------- --------- ---------
Financing activities
- --------------------
Dividends paid to shareholders (98,629) (89,720)
Additions to short-term debt - net 108,671 32,478
Repurchase of treasury shares (63,313) -
Exercise of stock options 16,316 15,828
Other (4,289) (2,341)
- --------------------------------------------------- --------- ---------
Cash used for financing activities (41,244) (43,755)
- --------------------------------------------------- --------- ---------
Net change in cash and equivalents (367) (3,135)
Cash and equivalents at beginning of period 10,250 8,056
- --------------------------------------------------- --------- ---------
Cash and equivalents at end of period $ 9,883 $ 4,921
========= =========
</TABLE>
-6-
<PAGE>
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Financial Statements
-----------------------------
1. The financial information in this report has not been audited, but in the
opinion of management all adjustments (consisting only of normal recurring
adjustments) considered necessary to present fairly such information have
been included. The operating results for the three and nine month periods
ended September 30, 1996 and 1995 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, 1995.
On January 31, 1996, the Board of Directors declared a two-for-one stock
split of the company's common stock which was distributed on April 26, 1996
to all shareholders of record on March 28, 1996. Accordingly, all
references to common share data in the financial statements and notes have
been restated to reflect the split.
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 and nine months ended
September 30, 1996 and 1995 follows:
<CAPTION>
1996 1995
-------------------- ---------------------
Operating Operating
Revenue Profit Revenue Profit
--------- --------- --------- ---------
Three Months (In thousands)
------------
<S> <C> <C> <C> <C>
Educational and Professional
Publishing $523,575 $140,822 $496,709 $134,256
Financial Services 209,867 63,624 193,953 57,359
Information and Media Services 215,567 18,088 213,689 21,878
-------------------------------- -------- -------- -------- --------
Total operating segments 949,009 222,534 904,351 213,493
General corporate expense - (16,686) - (17,203)
Interest expense - net - (13,075) - (16,320)
-------------------------------- -------- -------- -------- --------
Total company $949,009 $192,773* $904,351 $179,970*
======== ======== ======== ========
<FN>
*Income before taxes on income.
</FN>
</TABLE>
-7-
<PAGE>
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Financial Statements
-----------------------------
<CAPTION>
1996 1995
-------------------- ---------------------
Operating Operating
Revenue Profit Revenue Profit
---------- --------- ---------- ---------
Nine Months (In thousands)
-----------
<S> <C> <C> <C> <C>
Educational and Professional
Publishing $ 967,059 $135,844 $ 969,615 $136,105
Financial Services 630,062 193,404 585,394 172,635
Information and Media Services 646,673 67,077 630,672 73,818
----------------------------- ---------- -------- ---------- --------
Total operating segments 2,243,794 396,325 2,185,681 382,558
General corporate expense - (43,147) - (43,598)
Interest expense - net - (36,906) - (45,399)
----------------------------- ---------- -------- ---------- --------
Total company $2,243,794 $316,272* $2,185,681 $293,561*
========== ======== ========== ========
<FN>
*Income before taxes on income.
</FN>
</TABLE>
<TABLE>
3. The allowance for doubtful accounts, the components of inventory and the
accumulated amortization of prepublication costs were as follows:
<CAPTION>
Sept. 30, Dec. 31, Sept. 30,
1996 1995 1995
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Allowance for doubtful accounts $ 80,654 $ 79,980 $ 80,976
========= ========= =========
Inventories:
Finished goods $ 195,639 $ 185,608 $ 188,592
Work-in-process 38,706 15,675 34,842
Paper and other materials 29,927 36,747 37,976
--------- --------- ---------
Total inventories $ 264,272 $ 238,030 $ 261,410
========= ========= =========
Accumulated amortization of
prepublication costs $ 456,267 $ 391,384 $ 409,095
========= ========= =========
</TABLE>
-8-
<PAGE>
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Financial Statements
-----------------------------
4. 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 $299 million of matched purchase and sale commitments at
September 30, 1996. Only those transactions not closed at the settlement
date are reflected in the balance sheet as receivables and payables.
<TABLE>
5. A summary of long-term debt follows:
<CAPTION>
Sept. 30, Dec. 31, Sept. 30,
1996 1995 1995
--------- --------- ---------
(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 300,000 300,000 400,000
Other 6,766 7,365 7,328
--------- --------- ---------
Total long-term debt $ 556,766 $ 557,365 $ 657,328
========= ========= =========
</TABLE>
<TABLE>
6. Common shares approved for issuance for conversions and stock based awards
were as follows:
<CAPTION>
Sept. 30, Dec. 31, Sept. 30,
1996 1995 1995
--------- --------- ---------
<S> <C> <C> <C>
$1.20 convertible preference stock
at the rate of 6.6 shares for each
share of preference stock 9,260 9,346 9,346
Stock based awards 6,479,841 7,245,226 7,393,424
--------- --------- ---------
6,489,101 7,254,572 7,402,770
========= ========= =========
</TABLE>
<TABLE>
7. Cash dividends per share declared during the periods were as follows:
<CAPTION>
Three Months Nine Months
------------ -----------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common stock $.33 $.30 $.99 $.90
Preference stock .30 .30 .90 .90
</TABLE>
-9-
<PAGE>
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Financial Statements
-----------------------------
8. On October 15, 1996, The McGraw-Hill Companies completed the exchange of
its Shepard's/McGraw-Hill legal publishing unit for the Times Mirror Higher
Education Group and other consideration, including approximately $25
million in cash. In addition, a post-closing adjustment to the purchase
price may result in a cash payment by either party to the other party. The
final valuation of the properties being exchanged will be based on
independent appraisals; the company estimates that this transaction will
result in a pre-tax gain, net of one-time charges, of more than $300
million in the fourth quarter.
-10-
<PAGE>
Item 2. Management's Discussion and Analysis of Operating
-------------------------------------------------
Results and Financial Condition
-------------------------------
Operating Results - Comparing Periods Ended September 30, 1996 and 1995
- -----------------------------------------------------------------------
Three Months
- ------------
Consolidated Review
- -------------------
Operating revenue for the quarter grew $44.7 million, or 4.9%, over the 1995
quarter to $949 million. Educational and Professional Publishing revenues
improved despite an off-adoption year in school publishing, primarily due to
strong secondary school market and supplemental material sales. Financial
Services' revenues improved on strong ratings activity and increased sales of
global information products. Revenues in Information and Media Services were
flat as sales growth in the Construction Information Group was offset by a
decline in Broadcasting. Net income increased 8.2% to $114.5 million; earnings
per share were $1.15 compared to $1.06 last year.
All references to common share data, including earnings per share, reflect the
two-for-one stock split of the company's common stock that was distributed to
shareholders on April 26, 1996.
Total expenses in the quarter increased $36.5 million, or 5.1%, reflecting
volume related expenses, primarily in Educational and Professional Publishing
and Financial Services, and product development costs.
Net interest expense declined $3.2 million, or 19.9%, resulting from a reduction
in average commercial paper interest rates from 6.0% in 1995 to 5.5% in 1996 and
reduced average commercial paper borrowing levels from the prior year, due to
paydowns from the company's operating cash flow.
The provision for taxes as a percent of income before taxes was 40.6% in 1996
compared to 41.2% in 1995. The reduction in the effective tax rate reflects the
declining impact of non-deductible goodwill amortization on higher pre-tax
earnings as well as favorable settlement of state tax audits.
On October 15, The McGraw-Hill Companies completed the exchange of its
Shepard's/McGraw-Hill legal publishing unit for the Times Mirror Higher
Education Group and other consideration, including cash. At the closing, The
McGraw-Hill Companies received a cash payment of approximately $25 million from
Times Mirror. In addition, a post-closing adjustment to the purchase price may
result in a cash payment by either party to the other party. The final
valuation of the properties being exchanged will be based on independent
appraisals; the company estimates that this transaction will result in a pre-tax
gain, net of one-time charges, of more than $300 million in the fourth quarter.
Integration plans to consolidate the Times Mirror Higher Education Group with
existing McGraw-Hill operations are being developed.
-11-
<PAGE>
Segment Review
- --------------
Educational and Professional Publishing segment revenue increased $26.9 million,
or 5.4%, over the 1995 quarter to $523.6 million. The favorable revenue
variance was due to strong sales in the school market, despite 1996 being an
off-adoption year for the school publishing industry. There was particular
strength in secondary school math and science programs and supplemental
materials sales in both adoption states and open territories. The first quarter
acquisition of Open Court Publishing contributed to the improved results.
College revenues also increased, benefiting from strength in front and back
lists and custom publishing. Legal publishing revenues declined as expected
following last year's publication by Shepard's/McGraw-Hill of a 21-volume
Federal Citator series as well as from the December 1995 divestiture of
Shepard's topical publishing business. International revenues were flat as the
slow pace of recovery in Mexico was offset by favorable results from a new
secondary program in Spain and improved sales in Asia. Revenues for domestic
professional publishing and the Continuing Education Center declined. Segment
operating profit improved $6.6 million, or 4.9%, reflecting the revenue
performances noted above, partially offset by development costs for the McGraw-
Hill Home Interactive division, which began to sell multimedia education titles
in the consumer market in October.
Financial Services segment revenue increased $15.9 million, or 8.2%, and
operating profit improved $6.3 million, or 10.9%. Standard & Poor's Ratings
Services' revenues and profits improved over the prior year reflecting strength
across its entire product lineup. Strong corporate new issue volume,
particularly in the high yield debt market, and strong activity in structured
finance, primarily in asset-backed securities, combined with continued growth
overseas and from new products, were the primary factors in a very strong
quarter. There was also strength in insurance ratings and improved share in
public finance. Standard & Poor's Financial Information Services' revenues and
profits also gained in the quarter, reflecting growth in the global information
businesses, particularly Platt's and MMS International. These results offset
weakness in municipal securities services and consulting revenues at DRI/McGraw-
Hill.
Information and Media Services segment revenue increased $1.9 million, or 0.9%,
while operating profits declined $3.8 million, or 17.3%. Revenue increases at
Tower Group International and the Construction Information Group were offset by
declines in Broadcasting and the computer magazines. Business Week revenue
increased despite a decline in advertising pages due to a rate increase earlier
this year; circulation revenue also improved, reflecting both volume and price
increases. As a result, Business Week profits improved. The results of the
other magazines were mixed with Aviation Week and the healthcare magazines
improved over last year while the computer magazines, particularly BYTE and LAN
Times, declined in revenue and profits. Revenue for the Construction
Information Group increased, primarily at F.W. Dodge; however, profits declined
due to development and marketing costs for launching the windows version of
Dodge DataLine and higher costs at the construction magazines. Broadcasting
revenues and profits declined, despite stronger than anticipated political
advertising, due primarily to competition from the Summer Olympics coverage on a
rival network. Tower Group International profits improved as a result of
revenue growth.
-12-
<PAGE>
Nine Months
- -----------
Consolidated Review
- -------------------
For the first nine months of the year, operating revenue of $2.2 billion was
$58.1 million, or 2.7%, ahead of 1995. Financial Services and Business Week
were the primary contributors to the revenue increase. Total expenses increased
$44.5 million, or 2.4%, reflecting the revenue growth and development expenses
for new products partially offset by cost controls in school publishing in
anticipation of the off-adoption year. Net income increased $15.3 million, or
8.8%, to $187.9 million. Earnings per share were $1.88 compared to $1.73 last
year.
Net interest expense declined $8.5 million, or 18.7%, resulting from a decline
in average commercial paper interest rates from 6.1% in 1995 to 5.4% in 1996 and
reduced average commercial paper borrowing levels from the prior year, due to
paydowns from the company's operating cash flow.
The provision for taxes as a percent of income before taxes was 40.6% in 1996
compared to 41.2% in 1995. The reduction in the effective tax rate reflects the
declining impact of non-deductible goodwill amortization on higher pre-tax
earnings as well as favorable settlement of state tax audits.
Segment Review
- --------------
Educational and Professional Publishing revenue declined slightly, $2.6 million,
or 0.3%, to $967.1 million. Despite an off-adoption year in school publishing,
elementary-high school revenues rose on the strength of secondary and
supplemental sales as well as the impact of the acquisition of Open Court
Publishing. College publishing revenues also increased as did international
sales, as gains in Spain and Asia offset a decline in Mexico. Offsetting these
increases, was a decline in legal publishing revenue due to the divestiture of
Shepard's/McGraw-Hill's topical publishing business late last year and last
year's Federal Citator revision. Domestic professional publishing revenues,
including the Continuing Education Center, were down from last year. Segment
operating profit was flat with last year reflecting cost controls implemented in
anticipation of the off-adoption year, offset by development costs for the
McGraw-Hill Home Interactive division.
Financial Services' revenue increased $44.7 million, or 7.6%, to $630.1 million.
Operating profit improved $20.8 million, or 12.0%, to $193.4 million. Standard
& Poor's Ratings Services' revenue and profits increased reflecting expanded
global operations, increased new issuance volume in the U.S. bond market and
non-traditional ratings products, net of continuing investments. Revenue and
profits for Standard & Poor's Financial Information Services also improved from
the prior year reflecting broader distribution of global products over third
party networks, particularly MMS International and Platt's, and improved results
at Compustat. These favorable results offset weakness in municipal securities
services and at DRI/McGraw-Hill.
-13-
<PAGE>
Information and Media Services' revenue increased $16.0 million, or 2.5%, to
$646.7 million. Operating profit declined $6.7 million, or 9.1%, to $67.1
million. The revenue increase reflects improved advertising revenues at
Business Week as an advertising rate increase offset a decline in advertising
pages while circulation revenues increased. The Tower Group International
acquisition of UCB Canada and last year's acquisition of Hospital Practice
magazine also contributed to the revenue increase. Revenues for the
Construction Information Group also improved, primarily at F.W. Dodge, while
revenue at the computer magazines declined. Broadcasting revenues also
declined. The decline in segment operating profits reflects the impact of the
revenue declines at the computer magazines and Broadcasting, and start-up costs
associated with the launch of tele.com magazine, which debuted in March.
Financial Condition - September 30, 1996 versus December 31, 1995
- -----------------------------------------------------------------
The company continues to maintain a strong financial position. Cash generated
by operating activities totaled $228.7 million compared to $186.4 million in
1995. This year-to-year improvement in cash flow from operations reflects the
higher income in 1996 and reduced working capital requirements due to the 1996
off-adoption year in school publishing. Total debt was $736.6 million, an
increase of $107.9 million from year-end. The increase in debt reflects
seasonal working capital requirements for school publishing, prepublication cost
spending for 1997 and 1998 school adoption programs, the acquisition of Open
Court and several smaller acquisitions and borrowings to finance the repurchase
of common shares by the company. The company's strong presence in school
publishing significantly impacts the seasonality of its earnings and borrowing
patterns during the year, with the company typically borrowing during the first
half of the year and generating cash in the second half of the year, primarily
from collections from customers in the education markets. Borrowing patterns
are further impacted, such as in 1996, by spending for subsequent years'
adoptions.
In January, the company's Board of Directors approved a share repurchase program
authorizing the purchase of up to 4 million shares of the company's common
stock. Year-to-date, the company has repurchased 1.4 million shares at a cost
of $63.3 million; the majority of the shares were repurchased in the second
quarter. The repurchased shares will be used for general corporate purposes,
including the issuance of shares for the exercise of employee stock options.
Future purchases under the program may be made from time to time dependent on
market conditions.
In the fourth quarter of 1995, the company implemented a best practices program
to improve the efficiency and effectiveness of the company's operations. The
program included the review of major systems and processes, including certain
administrative functions and related technology. The program encompasses the
elimination of approximately 750 positions. At the end of the third quarter of
1996, approximately 500 positions had been eliminated and the company has
undertaken various technology initiatives. Cash expenditures related to the
best practices program in the first nine months of 1996 did not have a
significant impact on the company's liquidity.
Commercial paper borrowings at September 30, 1996 totaled $471.8 million, an
increase of $103.3 million from December 31, 1995. These borrowings are
supported by an $800 million revolving credit agreement with a group of banks
terminating in November 1999, and $300 million is classified as long-term.
There are no amounts outstanding under this agreement.
-14-
<PAGE>
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, when and if
interest rates are attractive and markets are favorable.
Accounts receivable before reserves of $1,046.6 million increased $111.2 million
from the end of 1995 due primarily to the seasonal nature of some of the
company's businesses. Inventories increased $26.2 million to $264.3 million
from the end of 1995 due primarily to the seasonal requirements for school
publishing and the seasonal buildup for the annual Sweet's files.
Net prepublication costs at September increased $32.7 million from the end of
1995 to $300.9 million due to additional spending for 1997 and 1998 adoption
year programs and new college and professional publishing titles.
Prepublication cost spending in the first nine months of 1996 totaled $126.9
million compared to $89.1 million in 1995. Purchases of property and equipment
of $36.9 million were $4.9 million higher than the comparable period last year;
the purchases were primarily for computer equipment.
The exchange of the Shepard's/McGraw-Hill legal publishing unit for the Times
Mirror Higher Education Group is expected to dilute fourth quarter operating
earnings between five and seven cents per share due to the typical seasonal
decline in the higher education business and the timing of integration savings.
The tax payment on the pre-tax gain, net of one-time charges, resulting from
this exchange transaction in the fourth quarter will be paid in March 1997.
-15-
<PAGE>
PART II
Other Information
Item 1. Legal Proceedings
-----------------
In Item 1 of Part II of Registrant's Form 10-Q for the quarter ended
June 30, 1996, Registrant reported that a Complaint had been filed on
June 11, 1996 in the United States Bankruptcy Court, Central District
of California, in an action captioned County of Orange v. McGraw-Hill
-------------------------------
Companies, Inc., d/b/a Standard & Poor's (Case No. SA 94-22272-JR;
----------------------------------------
Adversary No. SA 96-01624-JR). On October 17, 1996, the United
States District Court, Central District of California, granted
Registrant's motion to withdraw the Bankruptcy Court reference.
Accordingly, the action will proceed in the United States District
Court for the Central District of California (Case No. SA CV 96-765-
GLT). The Registrant continues to believe that the allegations of
the Complaint lack merit and intends to vigorously contest the
action.
Item 6. Exhibits and Reports on Form 8-K Page Number
-------------------------------- -----------
(a) Exhibits
(2.1) Exchange Agreement dated as of July 3, 1996 between The
Times Mirror Company, Mosby-Year Book, Inc., and The McGraw-
Hill Companies, Inc., incorporated by reference from
Registrant's Form 8-K filed October 29, 1996.
(2.2) Amendment to Exchange Agreement dated as of October 15, 1996,
incorporated by reference from Registrant's Form 8-K filed
October 29, 1996.
(12) Computation of Ratio of Earnings to Fixed Charges. 18
(27) Financial Data Schedule. 19
(b) Reports on Form 8-K.
A Report on Form 8-K was filed on October 29, 1996. Said report was
dated October 15, 1996. In said Report, Item 2, Acquisition or
Disposition of Assets was reported. Item 7, financial statements of
the businesses acquired are not required under SEC Release No. 34-
37802.
-16-
<PAGE>
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.
THE McGRAW-HILL COMPANIES, INC.
-------------------------------
Date: 11/12/96 By Robert J. Bahash
------------------ -------------------------------
Robert J. Bahash
Executive Vice President
and Chief Financial Officer
Date: 11/12/96 By Thomas J. Kilkenny
------------------ -------------------------------
Thomas J. Kilkenny
Vice President and Controller
Date: 11/12/96 By Kenneth M. Vittor
------------------ -------------------------------
Kenneth M. Vittor
Senior Vice President
and General Counsel
-17-
<PAGE>
<TABLE>
Exhibit (12)
The McGraw-Hill Companies, Inc.
-------------------------------
Computation of Ratio of Earnings to Fixed Charges
-------------------------------------------------
Periods Ended September 30, 1996
--------------------------------
<CAPTION>
Nine Twelve
Months Months
--------- ---------
(In thousands)
<S> <C> <C>
Earnings
Earnings from continuing operations
before income tax expense (Note)...... $ 312,555 $ 404,453
Fixed charges........................... 59,057 79,890
Capitalized interest.................... - (188)
--------- ---------
Total Earnings....................... $ 371,612 $ 484,155
========= =========
Fixed Charges (Note)
Interest expense........................ $ 39,369 $ 53,883
Portion of rental payments deemed to be
interest.............................. 19,688 26,007
--------- ---------
Total Fixed Charges.................. $ 59,057 $ 79,890
========= =========
Ratio of Earnings to Fixed Charges 6.3x 6.1x
<FN>
(Note) 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, and (2) the
portion of the company's rental expense deemed representative of the
interest factor in rental expense.
</FN>
</TABLE>
-18-
</PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 9,883
<SECURITIES> 0
<RECEIVABLES> 1,046,586
<ALLOWANCES> 80,654
<INVENTORY> 264,272
<CURRENT-ASSETS> 1,390,947
<PP&E> 854,055
<DEPRECIATION> 535,069
<TOTAL-ASSETS> 3,277,999
<CURRENT-LIABILITIES> 1,168,393
<BONDS> 0
<COMMON> 102,919
14
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,277,999
<SALES> 2,243,794
<TOTAL-REVENUES> 2,243,794
<CGS> 1,905,433
<TOTAL-COSTS> 1,905,433
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 50,047
<INTEREST-EXPENSE> 36,906
<INCOME-PRETAX> 316,272
<INCOME-TAX> 128,406
<INCOME-CONTINUING> 187,866
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 187,866
<EPS-PRIMARY> 1.88
<EPS-DILUTED> 1.88
</TABLE>
