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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-1023
THE MCGRAW-HILL companies, INC.
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(Exact name of registrant as specified in its charter)
New York 13-1026995
- --------------------------------- -----------------------------------
(State of 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
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(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 29, 1999 there were approximately 196.1 million shares of common
stock (par value $1.00 per share) outstanding.
<PAGE>
The McGraw-Hill Companies, Inc.
-------------------------------
TABLE OF CONTENTS
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Page Number
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PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
-------
Consolidated Statement of Income for
the three and nine month periods ended
September 30, 1999 and 1998 3
Consolidated Balance Sheets at September 30, 1999,
December 31, 1998 and September 30, 1998 4-5
Consolidated Statement of Cash Flows for the nine 6
months ended September 30, 1999 and 1998
Notes to Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of Operating
------ Results and Financial Condition 12-17
Item 3. Quantitative and Qualitative Disclosures About
------ Market Risk 17
Part II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits 18-21
------
<PAGE>
Part I
Financial Information
Item 1. Financial Statements
---------------------
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Statement of Income
-------------------------------
Periods Ended September 30, 1999 and 1998
------------------------------------------
<CAPTION>
Three Months Nine Months
-------------------- -------------------
1999 1998 1999 1998
-------- -------- --------- ---------
(in thousands, except per-share data)
<S> <C> <C> <C> <C>
Operating revenue (Note 3) $1,318,477 $1,206,425 $2,957,669 $2,790,967
Expenses:
Operating 508,746 497,128 1,269,869 1,245,906
Selling and general 378,170 340,124 936,169 882,074
Depreciation and amortization 113,508 115,400 235,616 234,838
---------- --------- ---------- ----------
Total expenses 1,000,424 952,652 2,441,654 2,362,818
Other income - net 6,901 37,583 16,327 48,957
---------- ---------- ---------- ----------
Income from operations 324,954 291,356 532,342 477,106
Interest expense - net 12,591 13,643 32,328 38,770
---------- ---------- ---------- ----------
Income before taxes on income
and extraordinary item (Note 3) 312,363 277,713 500,014 438,336
Provision for taxes on income 121,822 108,308 195,005 170,951
---------- ---------- ---------- ---------
Income before extraordinary
item $ 190,541 $ 169,405 $ 305,009 $ 267,385
Extraordinary item - Loss on
Early extinguishment of debt,
net of tax - (8,716) - (8,716)
---------- ---------- ---------- ----------
Net income (Note 2) $ 190,541 $ 160,689 $ 305,009 $ 258,669
========== ========== ========== ==========
Earnings per common share:
Basic
Income before extraordinary
item $ 0.97 $ 0.86 $ 1.55 $ 1.35
Net Income $ 0.97 $ 0.82 $ 1.55 $ 1.31
Diluted
Income before extraordinary
item $ 0.96 $ 0.85 $ 1.53 $ 1.34
Net Income $ 0.96 $ 0.81 $ 1.53 $ 1.30
========== ========== ========== ==========
Average number of common shares
Outstanding: (Notes 8 and 9)
Basic 196,104 196,642 196,673 197,506
Diluted 198,078 198,558 198,920 199,344
</TABLE>
PAGE>
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Balance Sheet
--------------------------
<CAPTION>
Sept. 30, Dec. 31, Sept. 30,
1999 1998 1998
---------- ----------- -----------
<S> (in thousands)
ASSETS
Current assets: <C> <C> <C>
Cash and equivalents $ 15,356 $ 10,451 $ 55,850
Accounts receivable (net of allowance
for doubtful accounts and sales
returns) (Note 4) 1,269,738 950,296 1,074,931
Receivable from broker-dealers and
dealer banks (Note 5) 7,546 4,597 7,477
Inventories (Note 4) 313,383 284,729 326,682
Prepaid income taxes 93,186 92,496 100,298
Prepaid and other current assets 74,411 86,192 74,567
---------- ---------- ----------
Total current assets 1,773,620 1,428,761 1,639,805
---------- ---------- ----------
Prepublication costs (net of accumulated
amortization) (Note 4) 386,962 358,429 305,795
Investments and other assets:
Investment in Rock-McGraw, Inc. - at
Equity 84,303 79,394 76,886
Prepaid pension expense 116,856 107,997 108,539
Other 206,435 189,991 175,203
---------- ---------- ----------
Total investments and other assets 407,594 377,382 360,628
---------- ---------- ----------
Property and equipment - at cost 976,460 914,805 902,809
Less - accumulated depreciation 552,957 550,781 583,914
---------- ---------- ----------
Net property and equipment 423,503 364,024 318,895
Goodwill and other intangible assets - at
cost (net of accumulated amortization) 1,250,147 1,259,548 1,267,520
---------- ---------- ----------
$4,241,826 $3,788,144 $3,892,643
========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Balance Sheet
--------------------------
<CAPTION>
Sept. 30, Dec. 31, Sept. 30,
1999 1998 1998
---------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 283,630 $ 75,500 $ 93,338
Current portion of long term debt(Note 6) 95,043 - -
Accounts payable 282,674 318,572 261,949
Payable to broker-dealers and dealer
banks (Note 5) 5,932 4,585 6,168
Accrued liabilities 303,323 312,916 278,003
Income taxes currently payable 180,694 67,396 179,932
Unearned revenue 224,364 236,167 215,783
Other current liabilities 319,445 276,315 289,320
---------- ---------- ----------
Total current liabilities 1,695,105 1,291,451 1,324,493
---------- ---------- ----------
Other liabilities:
Long-term debt (Note 6) 406,560 452,097 606,934
Deferred income taxes 123,298 129,303 107,359
Accrued postretirement healthcare and
other benefits 190,321 192,743 202,495
Other non-current liabilities 181,444 170,742 160,076
---------- ---------- ----------
Total other liabilities 901,623 944,885 1,076,864
---------- ---------- ----------
Total liabilities 2,596,728 2,236,336 2,401,357
---------- ---------- ----------
Shareholders' equity (Note 7):
Capital stock 205,852 205,852 102,933
Additional paid-in capital 25,166 - 41,654
Retained income 1,848,249 1,670,101 1,685,394
Accumulated other comprehensive income (84,079) (75,962) (77,323)
---------- ---------- ----------
1,995,188 1,799,991 1,752,658
Less - common stock in treasury-at cost 331,684 234,673 243,873
Unearned compensation on
restricted stock 18,406 13,510 17,499
---------- ---------- ----------
Total shareholders' equity 1,645,098 1,551,808 1,491,286
---------- ---------- ----------
$4,241,826 $3,788,144 $3,892,643
========== ========== ==========
</TABLE>
PAGE>
<TABLE>
<CAPTION>
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Statement of Cash Flows
------------------------------------
For The Nine Months Ended September 30, 1999 and 1998
------------------------------------------------------
1999 1998
<S> --------- ---------
Cash flows from operating activities (In thousands)
- --------------------------------------------- <C> <C>
Net income $ 305,009 $ 258,669
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation 57,138 56,473
Amortization of goodwill and intangibles 41,377 39,831
Amortization of prepublication costs 137,101 138,534
Provision for losses on accounts receivable 41,548 79,689
Gain on sale of Building - (26,656)
Other (2,341) 2,220
Changes in assets and liabilities net of effect of
acquisitions and dispositions:
Increase in accounts receivable (363,172) (189,116)
Increase in inventories (26,544) (37,892)
Decrease in prepaid and other current assets 10,910 10,655
Decrease in accounts payable, accrued
Expenses and other current liabilities (48,118) (24,696)
(Decrease)/increase in unearned revenue (11,872) 1,898
Increase in other current liabilities 72,287 42,231
Increase in interest and income taxes
currently payable 110,425 72,739
(Decrease)/increase in prepaid/deferred income taxes (499) 1,449
Net change in other assets and liabilities (20,611) (5,659)
- --------------------------------------------------- ---------- ---------
Cash provided by operating activities 302,638 420,369
- ---------------------------------------------------- ---------- ---------
Investing activities
Investment in prepublication costs (157,418) (113,796)
Purchases of property and equipment (119,532) (111,942)
Acquisition of businesses (45,922) (13,668)
Disposition of property, equipment and businesses 2,158 66,383
- --------------------------------------------------- ---------- ----------
Cash used for investing activities (320,714) (173,023)
- --------------------------------------------------- ---------- ----------
Financing activities
Net additions to commercial paper borrowings 259,125 171,058
Repayments of long-term debt - (154,878)
Dividends paid to shareholders (126,861) (116,129)
Exercise of stock options 15,972 15,750
Repurchase of treasury shares (123,968) (105,636)
Other (387) (4,752)
- --------------------------------------------------- ---------- ----------
Cash provided by/(used for) financing activities 23,881 (194,587)
- --------------------------------------------------- ---------- ----------
Effect of exchange rate fluctuations on cash (900) (1,677)
---------- ----------
Net change in cash and equivalents 4,905 51,082
Cash and equivalents at beginning of period 10,451 4,768
- --------------------------------------------------- ---------- ----------
Cash and equivalents at end of period $ 15,356 $ 55,850
========== ==========
</TABLE>
<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, 1999 and 1998 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, 1998.
On January 27, 1999, the Board of Directors declared a two-for-one stock
split of the company's common stock which was distributed on March 8,
1999 to all shareholders of record on February 24, 1999. 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.
2. The following table is a reconciliation of the company's net income to
comprehensive income for the three month and nine month periods ended
September 30, 1999:
<TABLE>
<CAPTION>
Three Months Nine Months
---------------------- ----------------------
1999 1998 1999 1998
--------- ---------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Net income $190,541 $160,689 $305,009 $258,669
Other comprehensive income,
net of tax: Foreign currency
translation adjustment (256) 1,383 (8,117) (3,076)
--------- --------- --------- ---------
Comprehensive income $190,285 $162,072 $296,892 $255,593
========= ========= ========= =========
</TABLE>
3. The company has three reportable segments: Educational & Professional
Publishing, Financial Services, and Information and Media Services.
The educational and professional publishing segment provides education,
training and lifetime learning textbooks and instructional materials
for students and professionals. The financial services segment consists
of Standard & Poor's operations, which provide financial information,
ratings and analyses, enabling access to capital markets. The information
and media services segment includes business and trade media offering
information, insight and analysis.
<PAGE>
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Financial Statements
-----------------------------
Operating profit by segment is the primary basis for the chief operating
decision maker of the company, the CEO Council, to evaluate the performance
of each segment. A summary of operating results by segment for the three
months and nine months ended September 30, 1999 and 1998 follows:
<CAPTION>
1999 1998
---------------------- ----------------------
Operating Operating
Revenue Profit Revenue Profit
<S> --------- ---------- --------- ---------
Three Months (in thousands)
- ------------
Educational and Professional <C> <C> <C> <C>
Publishing $ 766,557 $ 235,122 $ 713,023 $ 183,930
Financial Services 321,939 91,829 287,131 111,163
Information and Media Services 229,981 21,978 206,271 19,130
- ------------------------------ --------- --------- --------- ----------
Total operating segments 1,318,477 348,929 1,206,425 314,223
General corporate expense - (23,975) - (22,867)
Interest expense - net - (12,591) - (13,643)
- ------------------------------ --------- ---------- --------- ----------
Total company $1,318,477 $ 312,363*$1,206,425 $ 277,713*
========== ========== ========== ==========
</TABLE>
*Income before taxes on income.
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
Operating Operating
Revenue Profit Revenue Profit
<S> --------- ---------- --------- ---------
Nine Months (in thousands)
- ------------
Educational and ProfessionalC> <C> <C> <C> <C>
Publishing $1,346,608 $232,515 $1,275,597 $ 179,656
Financial Services 945,274 281,823 850,775 280,362
Information and Media Services 665,787 76,638 664,595 73,066
- ------------------------------ ---------- --------- ---------- ---------
Total operating segments 2,957,669 590,976 2,790,967 533,084
General corporate expense - (58,634) - (55,978)
Interest expense - net - (32,328) - (38,770)
- ------------------------------ ---------- --------- ---------- ---------
Total company $2,957,669 $500,014* $2,790,967 $ 438,336*
========== ========= ========== ==========
</TABLE>
*Income before taxes on income.
PAGE>
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Financial Statements
-----------------------------
4. The allowance for doubtful accounts and sales returns, the components of
inventory and the accumulated amortization of prepublication costs were as
follows:
<CAPTION>
Sept. 30, Dec. 31, Sept. 30,
1999 1998 1998
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Allowance for doubtful accounts $ 117,391 $ 113,639 $ 115,115
========== ========== ==========
Allowance for sales returns $ 111,018 $ 98,784 $ 97,143
========== ========== ==========
Inventories:
Finished goods $ 240,772 $ 235,341 $ 253,892
Work-in-process 45,539 31,260 47,294
Paper and other materials 27,072 18,128 25,496
---------- ---------- ----------
Total inventories $ 313,383 $ 284,729 $ 326,682
========== ========== ==========
Accumulated amortization of
Prepublication costs $ 634,629 $ 607,574 $ 593,634
========== ========== ==========
</TABLE>
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 $280.2 million of matched purchase and sale commitments at
September 30, 1999. 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>
Sept. 30, Dec. 31, Sept. 30,
1999 1998 1998
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
9.43% Notes due 2000 $ 95,043 $ 95,043 $ 95,043
Commercial paper supported by
Bank revolving credit agreement 400,000 350,000 504,878
Other 6,560 7,054 7,013
---------- ---------- ----------
501,603 452,097 606,934
Less: current portion of long-term debt (95,043) - -
---------- ---------- ----------
Total long-term debt $ 406,560 $ 452,097 $ 606,934
========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Financial Statements
-----------------------------
7. Common shares reserved for issuance for conversions and stock based awards
were as follows:
<CAPTION>
Sept. 30, Dec. 31, Sept. 30,
1999 1998 1998
---------- ---------- ----------
<S>
$1.20 convertible preference stock
at the rate of 13.2 shares for each <C> <C> <C>
Share of preference stock 17,912 17,978 17,978
Stock based awards 16,653,328 18,015,440 18,867,618
---------- ---------- ----------
16,671,240 18,033,418 18,885,596
========== ========== ==========
</TABLE>
<TABLE>
8. Cash dividends per share declared during the periods were as follows:
<CAPTION>
Three Months Nine Months
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common stock $.215 $.195 $.645 $.585
Preference stock .300 .300 .900 .900
</TABLE>
<TABLE>
9. A reconciliation of the number of shares used for calculating basic earnings
per common share and diluted earnings per common share for the three months
and the nine months ended September 30, 1999 and 1998 follows:
<CAPTION>
Three month period 1999 1998
------------------ ---------- ----------
(thousands of shares)
<S> <C> <C>
Average number of common shares outstanding 196,104 196,642
Effect of stock options and other dilutive securities 1,974 1,916
---------- ----------
198,078 198,558
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Nine month period 1999 1998
---------------- ---------- ----------
(thousands of shares)
<S> <C> <C>
Average number of common shares outstanding 196,673 197,506
Effect of stock options and other dilutive securities 2,247 1,838
---------- ----------
198,920 199,344
========== ==========
</TABLE>
Restricted performance shares outstanding at September 30, 1999 of 537,000
were not included in the computation of diluted earnings per common shares
because the necessary vesting conditions have not occurred.
<PAGE>
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Financial Statements
-----------------------------
10. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The new standard is effective January 1,
2001. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities, requiring companies to
recognize all derivatives as either assets or liabilities on their balance
sheet and measuring them at fair value. The adoption of SFAS No. 133 will
not have a material impact on the company's financial statement disclosures.
<PAGE>
Management's Discussion and Analysis of Operating Results and
Financial Condition
Operating Results - Comparing Periods Ended September 30, 1999 and 1998
Three Months
Consolidated Review
Operating revenue for the quarter of $1.3 billion increased $112.1 million, or
9.3% over the 1998 quarter on the strong performances of all three segments.
Net income for the quarter was $190.5 million, an 18.6% increase over 1998.
Included in the 1998 third quarter results are the following one-time items: a
$26.7 million pre-tax gain ($16.3 million after tax) on the sale of an office
building, which is recorded in the Financial Services segment; an $8.7 million
extraordinary loss after taxes of $5.6 million on the early extinguishment of
debt; and a pre-tax charge of $16.0 million ($9.8 million after-tax) for the
write-down of assets at the Continuing Education Center, which is recorded in
the Educational and Professional Publishing segment. Diluted earnings per share
for the quarter were 96 cents versus 81 cents in the prior year. Excluding
one-time items in 1998, net income was 17.0% higher in the third quarter of 1999
versus the prior year. Prior year EPS would have been 1 cent higher excluding
one-time items.
Net interest expense of $12.6 million decreased $1.1 million, or 7.7% from the
prior year primarily due to lower average interest rates on commercial paper
borrowings and the $155 million tender offer of the company's 9.43% notes in
September 1998.
Segment Review
Educational and Professional Publishing revenues of $766.6 million rose 7.5%,
$53.5 million, over 1998. Operating profit, including the impact of the
one-time charge for the Continuing Education Center in 1998, increased 27.8% to
$235.1 million. Excluding the one-time charge in 1998, operating profit
increased 17.6%. SRA/McGraw-Hill had strong revenue and operating profit growth
as a result of strong unit sales of the Collection for Young Scholars and Direct
Instruction in both adoption states and open territories. Glencoe had record
sales in math for the quarter and robust adoption sales, particularly in
California. Sales for the School Division were up as a result of the revised
math program doing well in open territories, despite some shortfalls in
expectations in adoption states. California Testing Bureau (CTB) had strong
sales growth due to custom contract sales. McGraw-Hill Consumer Products
continues to grow as product is repurposed for sale to parents and students.
Higher Education had strong sales growth with the front-list being extremely
strong and returns decreasing. Best sellers included: Garrison's Managerial
Accounting; Mader, Inquiry into Life and Brinkley, Unfinished Nation. The
Professional Book Group had strong seasonal stock demands from major retail
stores and on-line retailers, resulting in year-over-year growth. The Appleton
and Lange acquisition also accounted for $4.9 million worldwide in increased
sales over 1998. International Publishing had strong performances in Canada and
Asia-Pacific, which offset softness in Latin America and Spain. Canada performed
well on the strength of school and trade sales and Asia-Pacific did particularly
well in Singapore and Malaysia.
Financial Services revenue increased 12.1% to $321.9 million and, including the
impact of the one-time gain on the sale of real estate and higher rent expense
from their relocation to 55 Water Street, operating profit declined 17.4% to
$91.8 million. Excluding the impact of the one-time gain, operating profit rose
8.7%. The growth was fueled by the outstanding performance of Standard & Poor's
Ratings. Standard & Poor's Ratings produced substantial gains in both the
domestic and international markets. Standard & Poor's Ratings also benefited
from a soaring Eurobond market, where the new issue dollar volume increased 113%
in the quarter. Euro-denominated market volume was up 162% with the growing
acceptance of this currency. New issue dollar volume in the U.S. dropped 2.2%,
as municipal issuance fell 19.4%, while the corporate and structured markets
remained strong. Standard & Poor's Ratings, corporate finance and structured
finance units grew substantially, offsetting the weakness in the public finance
area. Some of the strength in structured financing in the third quarter was
attributable to a changed pattern of deal flows. To avoid potential liquidity
problems at year-end because of concern over possible Year 2000 difficulties,
some issuers accelerated deals in the asset-backed market. The extent of the
acceleration is difficult to gauge; however, Standard & Poor's Ratings expects
growth for the balance of the year. Standard & Poor's Retail Group sales grew
significantly due to increased sales to the library market and new portfolio
launches. Index Services benefited from increased trading in SPDRs, Standard &
Poor's Depository Receipts based on S&P Stock price indices, and the growth of
the SPDR Trust. At the end of the third quarter, there was $13.2 billion in the
large cap SPDR Trust, up from $8 billion for the third quarter of 1998.
Standard & Poor's generates revenue through fees based on trading volume and
assets in the SPDR Trusts.
ComStock continues to grow as a prime source of real-time stock quotes and news
feeds from around the world for redistributors of information over the
Internet. MMS International declined in the quarter due to industry
consolidation and lower foreign currency trading volumes. Softness in the
energy market negatively impacted Platt's, while weakness in the secondary
municipal bond market impacted Kenny. DRI showed softness due to declining
subscription and data revenue.
Information and Media Services revenue grew by 11.5% to $230 million. Operating
profit grew 14.9% to $22 million on the outstanding performance of Business
Week. Business Week completed the best third quarter in its 70-year history
with a 41.7% increase in advertising pages, according to Publishers Information
Bureau. The Broadcasting Group showed profit gains on a modest revenue
increase. Advertising was soft for the Publication Services Group, resulting in
declines at Aviation Week, Healthcare and Energy and Petrochemical
publications. In 1998, Aviation Week benefited from the Farnsborough Air Show.
On October 29, McGraw-Hill announced the sale of its Petrochemical publications;
the impact of this sale is not expected to significantly impact our consolidated
results. Tower Group International's results improved, however it continued
its reorganization process during the third quarter. Construction Information
Group's operating profit improved substantially on a modest increase in revenue;
but the gain in profit was offset by investments in creating a digital
production and distribution platform.
PAGE>
Nine Months
Consolidated Review
For the first nine months of the year, operating revenue of $3.0 billion
increased 6% or $166.7 million over 1998. Standard & Poor's Ratings,
Educational Publishing, and Business Week were the primary drivers of the
increase. Excluding the impact of the sale of the Information Technology and
Communications Group in 1998 and the decision to discontinue the Continuing
Education Center in 1999, revenue increased $229.1 million, or 8.4%.
Net income for the first nine months of the year increased 17.9%. Diluted
earning per share were $1.53 versus $1.30 for the comparable period last year.
Excluding the impact of discontinued operations and one-time items, net income
for the first nine months of the year increased 11%.
Net interest expense of $32.3 million is $6.4 million, or 16.6%, lower than
1998, primarily due to the impact of the company's tender offer, which retired
$155 million of its 9.43% notes in September 1998. Average borrowings for the
nine months were $14 million lower than for the same period in the prior year.
Segment Review
Educational and Professional Publishing revenue increased 5.6% to $1.3 billion.
Excluding the impact of CEC, which is winding down operations, sales increased
8.2% over the prior year. Educational Publishing has performed very well for
the first nine months on the strength of SRA/Glencoe and CTB.
Higher Education's excellent third quarter was the major factor in the
year-to-date comparison. Professional Publishing had significant growth over
prior year, with benefits from the Appleton & Lange acquisition and growth in
sales of its computer titles. International Publishing had strong growth in all
regions with the exception of the Ibero Group, which continues to suffer from
local economic conditions.
Financial Services revenue increased $94.5 million to $945.3 million for the
first nine months as compared to 1998. Operating profit increased $1.5 million
to $281.8 million including the one-time gain on the sale of real estate in
1998. Excluding the one-time gain, operating profit grew $28.1 million.
Standard & Poor's Ratings continues its strong performance as all units turn in
strong double-digit revenue and operating profit growth, with the exception of
public finance. This performance occurred on a soaring Eurobond market, up
87.6% to date on dollar volume issuance and as the Euro-denominated market gains
more acceptance, up 147.9% on dollar volume issuance. The U.S. market has
declined versus prior year 4.6% in dollar volume issuance, primarily as a result
of the 21.5% decease in the municipal bond market. Revenue also increased in
Index Services, S&P Comstock, Compustat, and Funds Services. However, operating
profit declined slightly year-to-date at these companies due to a decline in
global information services and investment in the development of products.
Information and Media Services' revenue was flat with the prior year at $665.8
million with operating profit of $76.6 million, a growth of 4.9% over the prior
year. Excluding the impact of the sale of the Information Technology and
Communications group in 1998, revenue increased 5.1% and operating profit
declined 5.4%. The revenue growth comes primarily from Business Week, which has
had an outstanding performance from an increase in advertising pages.
Construction Information group's revenue increased due to its electronic
products, but operating profits are down due to investment in creating a digital
production and distribution platform and the effects of the rollout of Dodge
Plans and Specs.
<PAGE>
Financial Condition
Net cash flow provided by operating activities amounted to $302.6 million in
1999 versus $420.4 million for the same nine-month period in 1998. The main
reason for the decrease despite improved operating results is the increase in
accounts receivable. Receivables are up year over year and from year-end
December 31, 1998 due to the outstanding performance at Standard & Poor's
Ratings and the seasonal impact of Educational and Professional Publishing. The
company's strong presence in school and higher education publishing
significantly impacts the seasonality of its earnings and borrowing patterns
during the year, with the company borrowing during the first half of the year
and generating cash in the second half of the year, particularly in the fourth
quarter.
Cash used for investing activities increased to $320.7 million from $173.0 in
1998. The increase is the result of investments in prepublication costs due to
the cycle of sales for school, professional and higher education publishing.
Net prepublication costs are higher from year-end as well as year over year.
Capital was also expended for the acquisition of Appleton & Lange at the end of
June 1999, for $46 million. Investments continue to be made in property and
equipment related to the consolidation of the company's New York office space.
Total debt as of September 30, 1999 increased $257.6 million from year-end 1998
to $785.2 million. Commercial paper borrowings at September 30, 1999 totaled
$652.4 million, an increase of approximately $255 million over December 31,
1998. This increase is the result of an increase in accounts receivable, higher
prepublication spending, the acquisition of Appleton & Lange, and the continued
investment in shares of the company's common stock repurchased for treasury.
Year 2000 Issue
Computer software and certain embedded systems that use two digits rather than
four to identify the applicable year may be unable to interpret appropriately
the calendar year 2000, and thus could potentially disrupt normal business
activities. The Year 2000 issue affects virtually all companies and
organizations, including vendors, suppliers, customers and other third parties
that interface with the company.
The company uses software and data in various aspects of its business, including
its products, product development, product support and many administrative
functions such as billing and receiving information and merchandise from
suppliers. The company has completed an inventory of its technology environment,
including non-information technology systems, with special emphasis placed on
the company's key information processes. Plans have been developed to remediate
or replace, and to test systems at each operating unit to achieve Year 2000
readiness, as appropriate.
The company has hired outside vendors to assist the operating units in
implementing and/or remediating computer systems to be Year 2000 ready and to
assist in testing. Each of the company's operating units has designated a leader
responsible for overseeing and coordinating the day-to-day process to become
Year 2000 ready.
As of September 30, 1999, we estimate 99% of the company's applications have
been remediated or replaced, with the remaining 1% to be remediated or replaced
early in the 4th quarter. Approximately 97% of the applications have been tested
and are considered Year 2000 ready. Management estimates that the remainder of
the computer systems that have not been certified as Year 2000 ready will be
tested and certified no later than the end of calendar year 1999. As of the
filing date of this document, management does not foresee significant problems
achieving Year 2000 readiness for any of its material computer systems by the
end of the year.
The company is communicating with third parties, including its key vendors,
redistributors and customers, to determine their plans to address the Year 2000
issue. The company has taken the following steps to determine if key third
parties are addressing the Year 2000 issue: (1) identified and documented all
third parties related to the company's vital information systems or critical
business processes; (2) sent letters asking them to detail the steps they are
taking to become Year 2000 ready; and (3) based on the responses, met with
selected vendors and is in the process of establishing follow-up time schedules
to evaluate progress on the issue.
Standard & Poor's Financial Services groups have been responding to the
Securities Industry Association's (SIA) inquiries on the securities industry's
readiness. As a part of this inquiry, the Financial Services groups have
provided SIA with the appropriate documents, including an overview of Year 2000
projects, the techniques used to make their products Year 2000 ready, results of
tests, methods of updating databases and critical third party product
dependencies. These responses are being updated periodically.
Although the company expects a positive resolution to these issues, due to the
unique and pervasive nature of the Year 2000 issue, it is difficult at this time
to ascertain the financial impact to the company if the company experiences
unanticipated problems related to the Year 2000 issue. The following describes
the company's most reasonably likely worst case scenario, while recognizing the
uncertainties inherent in a global problem that could potentially affect any
business. Material systems failures resulting from the Year 2000 problem have
the potential to adversely affect the company's operations and financial
systems. Material failures could affect, by way of example, billing systems,
collections, payroll, ordering, processing of financial records and access to
facilities. The company's business segments could face additional operational
problems in the event of a material systems or vendor failure, such as by way of
example, an inability to fulfill book orders on a timely basis, a disruption in
the company's ability to provide real time financial information or a disruption
in our periodicals publishing schedule.
The company is also reviewing its business continuity plans that cover current
worldwide operations and is preparing to devote appropriate internal and
external resources in the event of an unforeseen or unanticipated Year 2000
readiness issue arising on or after January 1, 2000, including those related to
third party dependencies, such as power outages, telecommunications failures or
vendor failures. For example, as part of the planning process for the December
31, 1999 weekend, the company is making arrangements to: staff a Crisis Center
at the company's Hightstown, NJ facilities with senior executives; station key
facilities, security and information technology personnel at locations
worldwide; and to have a major component of our information technology personnel
at their work stations over that weekend and continuing as long thereafter as
required.
The cost to assess, remediate and test systems that will not be replaced will
approximate $19 million between 1998 and 2000; approximately $15.6 million has
been spent through September 30, 1999 to remediate these systems. Certain
systems that are not Year 2000 ready are being replaced as part of ongoing
system development projects.
PAGE>
"Safe Harbor Statement under the Private Securities Litigation Reform
Act of 1995"
This section, as well as other portions of this document, includes certain
forward-looking statements about the company's business, new products, sales,
expenses, cash flows, and operating and capital requirements. Such
forward-looking statements include, but are not limited to: the strength of
profit levels at Standard & Poor's Ratings Services; the level of capital
expenditures, cash flow, debt levels and prepublication cost spending; the
Educational and Professional Publishing Group's level of success in state
adoptions; the level of success in obtaining advertising; the level of success
of new product development and resolution of Year 2000 and Euro conversion
issues.
Actual results may differ materially from those in any forward-looking
statements because any such statements involve risks and uncertainties and are
subject to change based on various important factors, including but not limited
to: worldwide economic and political conditions, the health of capital and
equity markets, currency and foreign exchange volatility, continued state and
local funding for educational matters, expenditures for advertising, the
successful marketing of new products, the effect of competitive products and
pricing.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------ ----------------------------------------------------------
The company has no material changes to the disclosure made on this
matter in the company's report on Form 10-K for the year ended December
31, 1998.
<PAGE>
Part II
Other Information
Item 6. Exhibits and Reports on Form 8-K Page Number
-------------------------------- -----------
(a) Exhibits
(12) Computation of ratio of earnings to fixed charges 20
(27) Financial data schedule 21
(b) Reports on Form 8-K
No reports were filed during the period covered
by this report
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, thereunto duly authorized.
The McGraw-Hill Companies, Inc.
-------------------------------
Date: By
-------------------- ------------------------------
Robert J. Bahash
Executive Vice President
and Chief Financial Officer
Date: By
-------------------- ------------------------------
Kenneth M. Vittor
Executive Vice President
and General Counsel
Date: By
-------------------- ------------------------------
Talia M. Griep
Corporate Controller
<PAGE>
<TABLE>
Exhibit (12)
The McGraw-Hill Companies, Inc.
-------------------------------
Computation of Ratio of Earnings to Fixed Charges
-------------------------------------------------
Periods Ended September 30, 1999
---------------------------------
Nine Twelve
Months Months
--------- ---------
(In thousands)
<S> <C> <C>
Earnings
Earnings from continuing operations
before income tax expense and
extraordinary item (Note) $500,014 $604,311
Fixed charges 66,360 84,948
-------- --------
Total Earnings $566,374 $689,259
======== ========
Fixed Charges (Note)
Interest expense $ 34,564 $ 45,317
Portion of rental payments deemed to be
interest 37,796 39,631
-------- --------
Total Fixed Charges $ 66,360 $ 84,948
======== ========
Ratio of Earnings to Fixed Charges 8.5 8.1
<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 (2) the portion of the
company's rental expense deemed representative of the interest factor in
rental expense.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 15,356
<SECURITIES> 0
<RECEIVABLES> 1,269,738
<ALLOWANCES> 212,258
<INVENTORY> 313,383
<CURRENT-ASSETS> 1,773,620
<PP&E> 976,460
<DEPRECIATION> 552,957
<TOTAL-ASSETS> 4,241,826
<CURRENT-LIABILITIES> 1,695,105
<BONDS> 0
14
0
<COMMON> 205,838
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,241,826
<SALES> 2,957,669
<TOTAL-REVENUES> 2,957,669
<CGS> 2,441,654
<TOTAL-COSTS> 2,441,654
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 41,548
<INTEREST-EXPENSE> 32,328
<INCOME-PRETAX> 500,014
<INCOME-TAX> 195,005
<INCOME-CONTINUING> 305,009
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 305,009
<EPS-BASIC> 1.55<F1>
<EPS-DILUTED> 1.53<F2>
</TABLE>
