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 June 30, 2000
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
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(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 July 14, 2000 there were approximately 194.7 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 six month periods ended
June 30, 2000 and 1999 3
Consolidated Balance Sheets at June 30, 2000,
December 31, 1999 and June 30, 1999 4-5
Consolidated Statement of Cash Flows for the six 6
months ended June 30, 2000 and 1999
Notes to Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of Operating
------ Results and Financial Condition 12-15
Part II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 16
------
Item 4. Submission of Matters to a Vote of Security Holders 16
------
Item 6. Exhibits and Reports on Form 8-K 17-20
------
<PAGE>
Part I
Financial Information
Item 1. Financial Statements
---------------------
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Statement of Income
-------------------------------
Periods Ended June 30, 2000 and 1999
------------------------------------------
<CAPTION>
Three Months Six Months
------------------- -------------------
2000 1999 2000 1999
-------- -------- --------- ---------
(in thousands, except per-share data)
<S> <C> <C> <C> <C>
Operating revenue $1,019,223 $ 922,721 $ 1,821,757 $ 1,639,192
Expenses:
Operating 425,249 410,042 799,094 761,123
Selling and general 329,387 290,409 620,895 557,999
Depreciation and
amortization 86,035 69,241 145,232 122,108
---------- ----------- ----------- -----------
Total expenses 840,671 769,692 1,565,221 1,441,230
Other income - net 8,113 4,840 33,152 9,426
---------- ----------- ----------- -----------
Income from operations 186,665 157,869 289,688 207,388
Interest expense - net 11,238 10,296 20,583 19,737
---------- ----------- ----------- -----------
Income before taxes on income 175,427 147,573 269,105 187,651
Provision for taxes on income 67,539 57,553 103,605 73,183
---------- ----------- ----------- -----------
Net income $ 107,888 $ 90,020 $ 165,500 $ 114,468
=========== =========== =========== ===========
Earnings per common share:
Basic $ 0.56 $ 0.46 $ 0.85 $ 0.58
========== =========== =========== ===========
Diluted $ 0.55 $ 0.45 $ 0.84 $ 0.57
========== =========== =========== ===========
Average number of common
shares outstanding (Note 9):
Basic 193,705 197,100 194,227 197,079
========== =========== =========== ===========
Diluted 195,440 199,385 195,952 199,463
========== =========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Balance Sheet
--------------------------
<CAPTION>
June 30, Dec. 31, June 30,
2000 1999 1999
---------- ----------- ----------
(in thousands)
<S>
ASSETS
Current assets: <C> <C> <C>
Cash and equivalents $ 8,726 $ 6,489 $ 23,003
Accounts receivable (net of allowance
for doubtful accounts and sales
returns) (Note 4) 964,263 1,048,991 921,419
Receivable from broker-dealers and
dealer banks (Note 5) 6,142 3,615 9,988
Inventories (Note 4) 410,607 295,255 337,797
Prepaid income taxes 111,529 113,206 93,102
Prepaid and other current assets 95,675 86,169 74,500
---------- ---------- ----------
Total current assets 1,596,942 1,553,725 1,459,809
---------- ---------- ----------
Prepublication costs (net of accumulated
amortization) (Note 4) 472,762 439,351 404,511
Investments and other assets:
Investment in Rock-McGraw, Inc. - at
Equity 90,540 85,997 82,836
Prepaid pension expense 136,245 119,495 113,518
Other 196,495 206,770 202,965
---------- ---------- ----------
Total investments and other assets 423,280 412,262 399,319
---------- ---------- ----------
Property and equipment - at cost 953,739 993,704 996,748
Less - accumulated depreciation 548,773 563,296 575,506
---------- ---------- ----------
Net property and equipment 404,966 430,408 421,242
Goodwill and other intangible assets - at
cost (net of accumulated amortization) 1,196,238 1,253,051 1,258,798
---------- ---------- ----------
$4,094,188 $4,088,797 $3,943,679
========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Balance Sheet
--------------------------
<CAPTION>
June 30, Dec. 31, June 30,
2000 1999 1999
---------- ----------- -----------
(in thousands)
<S>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities <C> <C> <C>
Notes payable $ 246,158 $ 86,631 $ 280,264
Current portion of long-term debt 95,043 95,043 -
Accounts payable 258,462 340,220 296,935
Payable to broker-dealers and dealer
banks (Note 5) 4,757 2,725 9,833
Accrued liabilities 223,515 345,339 206,816
Income taxes currently payable 129,044 105,066 109,832
Unearned revenue 254,590 242,494 241,500
Other current liabilities 322,357 307,935 288,114
---------- ---------- ----------
Total current liabilities 1,533,926 1,525,453 1,433,294
---------- ---------- ----------
Other liabilities:
Long-term debt (Note 6) 353,117 354,775 451,656
Deferred income taxes 123,142 135,426 123,311
Accrued postretirement healthcare and
other benefits 185,700 187,485 191,852
Other non-current liabilities 203,882 194,165 166,796
---------- ---------- ----------
Total other liabilities 865,841 871,851 933,615
---------- ---------- ----------
Total liabilities 2,399,767 2,397,304 2,366,909
---------- ---------- ----------
Shareholders' equity (Notes 7 & 8):
Capital stock 205,852 205,852 205,852
Additional paid-in capital 37,587 24,305 24,812
Retained income 2,001,098 1,926,816 1,699,813
Accumulated other comprehensive income (105,504) (87,731) (83,823)
---------- ---------- ----------
2,139,033 2,069,242 1,846,654
Less - common stock in treasury-at cost 425,667 363,728 250,219
Unearned compensation on restricted stock 18,945 14,021 19,665
---------- ---------- ----------
Total shareholders' equity 1,694,421 1,691,493 1,576,770
---------- ---------- ----------
$4,094,188 $4,088,797 $3,943,679
========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Statement of Cash Flows
------------------------------------
For The Six Months Ended June 30, 2000 and 1999
--------------------------------------------------
<CAPTION>
2000 1999
<S> -------- --------
Cash flows from operating activities (in thousands)
--------------------------------------------------- <C> <C>
Net income $ 165,500 $ 114,468
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation 43,741 39,365
Amortization of goodwill and intangibles 28,861 26,424
Amortization of prepublication costs 72,730 56,319
Provision for losses on accounts receivable 21,065 25,091
Gain on sale of Tower (16,587) -
Other (4,112) (1,548)
Changes in assets and liabilities net of effect of
acquisitions and dispositions:
Increase in accounts receivable (47,475) (1,086)
Increase in inventories (120,591) (51,159)
(Increase)/decrease in prepaid and other current assets (11,585) 11,375
Decrease in accounts payable and accrued expenses (168,057) (128,222)
Increase in unearned revenue 12,882 5,455
Increase in other current liabilities 10,881 20,841
Increase in interest and income taxes
currently payable 27,538 57,097
Increase/(decrease) in prepaid/deferred income taxes 463 (170)
Net change in other assets and liabilities (7,713) (21,709)
--------------------------------------------------- ---------- ---------
Cash provided by operating activities 7,541 152,541
--------------------------------------------------- ---------- ---------
Investing activities
---------------------------------------------------
Investment in prepublication costs (104,469) (94,893)
Purchases of property and equipment (34,625) (98,505)
Acquisition of businesses, net of cash acquired - (42,879)
Disposition of property, equipment and businesses 139,150 2,112
--------------------------------------------------- --------- ---------
Cash provided by/(used for) investing activities 56 (234,165)
--------------------------------------------------- --------- ---------
Financing activities
---------------------------------------------------
Additions to short-term debt - net 160,677 205,693
Dividends paid to shareholders (91,218) (84,756)
Exercise of stock options 12,403 14,329
Repurchase of treasury shares (84,250) (39,417)
Other (994) (5)
--------------------------------------------------- --------- ---------
Cash (used for)/provided by financing activities (3,382) 95,844
--------------------------------------------------- --------- ---------
Effect of exchange rate fluctuations on cash (1,978) (1,668)
--------- ---------
Net change in cash and equivalents 2,237 12,552
Cash and equivalents at beginning of period 6,489 10,451
--------------------------------------------------- --------- ---------
Cash and equivalents at end of period $ 8,726 $ 23,003
========= =========
</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 six month periods
ended June 30, 2000 and 1999 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, 1999.
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 six-month periods ended June
30, 2000:
<TABLE>
<CAPTION>
Three Months Six Months
---------------------- ----------------------
2000 1999 2000 1999
--------- ---------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Net income $ 107,888 $ 90,020 $ 165,500 $ 114,468
Other comprehensive income,
net of tax: Foreign currency
translation adjustment (17,662) (4,848) (17,773) (7,861)
--------- --------- --------- ----------
Comprehensive income $ 90,226 $ 85,172 $ 147,727 $ 106,607
========= ========= ========= ==========
</TABLE>
3. The company has three reportable segments: McGraw-Hill Education, Financial
Services, and Information and Media Services. McGraw-Hill Education
provides educational and professional reference materials, training and
lifetime learning for students and professionals. The Financial Services
segment consists of Standard & Poor's operations, which provide a wide
range of financial information, credit ratings and analysis globally. The
Information and Media Services segment includes business and professional
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 six months ended June 30, 2000 and 1999
follows:
<CAPTION>
2000 1999
---------------------- ----------------------
Operating Operating
Revenue Profit Revenue Profit
--------- ---------- --------- ---------
Three Months (in thousands)
------------
<S> <C> <C> <C> <C>
McGraw-Hill Education $ 451,574 $ 53,814 $ 371,068 $ 41,250
Financial Services 316,774 98,180 298,723 93,069
Information and Media Services 250,875 55,828 252,930 41,848
------------------------------ ---------- --------- --------- ---------
Total operating segments 1,019,223 207,822 922,721 176,167
General corporate expense - (21,157) - (18,298)
Interest expense - net - (11,238) - (10,296)
------------------------------ --------- --------- --------- ---------
Total company $1,019,223 $ 175,427* $ 922,721 $ 147,573*
========== ========== ========= =========
</TABLE>
*Income before taxes on income.
<TABLE>
<CAPTION>
---------------------- ----------------------
Operating Operating
Revenue Profit Revenue Profit
--------- ---------- --------- ---------
Six Months (in thousands)
------------
<S> <C> <C> <C> <C>
McGraw-Hill Education $ 690,256 $ 17,044 $ 580,051 $ (2,607)
Financial Services 633,815 199,691 591,569 184,722
Information and Media Services 497,686 112,894 467,572 59,932
------------------------------ ---------- ---------- ---------- ---------
Total operating segments 1,821,757 329,629 1,639,192 242,047
General corporate expense - (39,941) - (34,659)
Interest expense - net - (20,583) - (19,737)
------------------------------ ---------- ---------- ---------- ----------
Total company $1,821,757 $ 269,105* $1,639,192 $ 187,651*
========== ========== ========== ==========
</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>
June 30, Dec. 31, June 30,
2000 1999 1999
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Allowance for doubtful accounts $ 123,979 $ 125,144 $ 107,631
========== ========== ==========
Allowance for sales returns $ 67,813 $ 107,382 $ 65,699
========== ========== ==========
Inventories:
Finished goods $ 340,753 $ 239,139 $ 272,190
Work-in-process 35,895 25,205 43,848
Paper and other materials 33,959 30,911 21,759
---------- ---------- ----------
Total inventories $ 410,607 $ 295,255 $ 337,797
========== ========== ==========
Accumulated amortization of
Prepublication costs $ 585,734 $ 661,207 $ 555,007
========== ========== ==========
</TABLE>
<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 $221.6 million of matched purchase and sale commitments at
June 30, 2000. Only those transactions not closed at the settlement date
are reflected in the balance sheet as receivables and payables.
6. A summary of long-term debt follows:
<CAPTION>
June 30, Dec. 31, June 30,
2000 1999 1999
---------- ---------- ----------
(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 350,000 350,000 350,000
Other 3,117 4,775 6,613
---------- ---------- ----------
$ 448,160 $ 449,818 $ 451,656
Less: current portion of long-term debt (95,043) (95,043) -
---------- ---------- ----------
$ 353,117 $ 354,775 $ 451,656
========== ========== ==========
</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>
June 30, Dec. 31, June 30,
2000 1999 1999
---------- ---------- ----------
<S> <C> <C> <C>
$1.20 convertible preference stock
at the rate of 13.2 shares for each
share of preference stock 17,846 17,846 17,912
Stock based awards 24,568,829 15,941,131 16,792,511
---------- ---------- ----------
24,586,675 15,958,977 16,810,423
========== ========== ==========
</TABLE>
<TABLE>
8. Cash dividends per share declared during the periods were as follows:
<CAPTION>
Three Months Six Months
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common stock $.235 $.215 $.470 $.430
Preference stock .300 .300 .600 .600
</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 six months ended June 30, 2000 and 1999 follows:
<CAPTION>
Three month period 2000 1999
------------------ ---------- ----------
(thousands of shares)
<S> <C> <C>
Average number of common shares outstanding 193,705 197,100
Effect of stock options and other dilutive securities 1,735 2,285
---------- ----------
195,440 199,385
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Six month period 2000 1999
---------------- ---------- ----------
(thousands of shares)
<S> <C> <C>
Average number of common shares outstanding 194,227 197,079
Effect of stock options and other dilutive securities 1,725 2,384
---------- ----------
195,952 199,463
========== ==========
</TABLE>
Restricted performance shares outstanding at June 30, 2000 of 715,000 were
not included in the computation of diluted earnings per common shares
because the necessary vesting conditions have not yet been made.
<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.
Operating Results - Comparing Results Ended June 30, 2000 and 1999
------------------------------------------------------------------
Three Months
------------
Consolidated Review
-------------------
Operating revenue for the quarter increased $96.5 million, or 10.5%, over the
prior year's quarter to $1.0 billion. This increase was due primarily to the
outstanding performance of the McGraw-Hill Education segment, particularly the
Educational Publishing Group, good performance of the Financial Services segment
and Business Week.
Net income for the quarter increased $17.9 million, or 19.8% over the comparable
quarter in the prior year. Diluted earnings per share for the quarter were 55
cents versus 45 cents in the prior year, a 22.2% increase.
Net interest expense increased $0.9 million or 9.1%, primarily from higher
average commercial paper rates, 6.6% versus 4.9%, in 2000. The effect of the
higher interest rates is partially offset by slightly lower average debt levels,
as the proceeds from the Tower divestiture offset the impact of higher share
repurchases.
The provision for taxes as a percent of income before taxes was 38.5%, 0.5% less
than the second quarter of 1999.
On June 22, 2000, the Company agreed to acquire from the Tribune Company all of
the outstanding shares of capital stock of the Tribune Education Company and
Landoll, Inc. The purchase price is $634.7 million in cash, subject to certain
post-closing adjustments. The transaction is expected to be finalized in the
third quarter, pending government approval.
Segment Review
--------------
The McGraw-Hill Education segment revenue increased 21.7% over the prior year's
second quarter to $451.6 million. Operating profits climbed by 30.5% over prior
year's second quarter to $53.8 million.
SRA/McGraw-Hill performed well with its basic reading skills program,
particularly in California, where SRA/McGraw-Hill continues to benefit from the
state's supplemental funding program. The School division continued its solid
performance with its social studies program in California and reading program in
Texas. Glencoe/McGraw-Hill successfully entered the literature market, the only
major discipline in which it did not publish. Glencoe/McGraw-Hill had a very
good capture for Florida in its new science program which is also doing well in
North Carolina, Oklahoma and West Virginia. CTB/McGraw-Hill showed continued
strength in its custom testing in Tennessee, Mississippi, Indiana, and Missouri
with its TerraNova program. A good back list performance helped produce a modest
revenue increase for the Higher Education Group but operating profits declined
partially from softness at Custom Publishing and Dushkin, a producer of
paperback supplemental product for the higher education market. The Professional
Book and International operations had increased revenue for the quarter. Last
year's acquisition of Appleton and Lange, a medical publisher, contributed to
the revenue growth. Softness in scientific, technical and medical businesses
contributed to the operating loss increase in Professional Book. Favorable
results for Latin America and the Asia-Pacific markets were offset by shortfalls
in Canada and Europe for International Publishing.
Financial Services revenue increased 6.0% to $316.8 million and operating profit
increased 5.5% to $98.2 million. Standard & Poor's Ratings Services revenue
increased even though new issue dollar volume in the second quarter was down
8.9% in the U.S. bond market and off 18.2% in Europe. The areas that contributed
the most to the growth were Corporate Finance and Insurance. More than 30% of
Standard & Poor's Ratings' revenue for the quarter came from international
sources. Standard & Poor's Information Services showed revenue increases from
index and portfolio services and through the sale of content and quote feeds to
financial Websites and Internet redistributors. Operating profits declined
slightly due to softness in the secondary municipal bond market, services for
foreign exchange and continued investment in new products and services.
Information and Media Services revenue decreased 0.8% to $250.9 million
including the impact of divested operations and increased 16.2%, or $34.9
million excluding the impact of divested operations. In 1999, McGraw-Hill
divested its Petrochemical magazines, and in February 2000, Tower Group
International was sold. Operating profit for the segment increased to $55.8
million, 33.4% over the prior year's second quarter. Excluding the impact of
divested businesses, operating profit would have increased 41.0% as compared to
the prior year's second quarter.
<PAGE>
Business Week continued its outstanding performance with a 44% increase in
advertising pages, according to the Publishers Information Bureau. This was the
best quarter in Business Week's 71-year history. Broadcasting also showed
continued growth due to political advertising and increases in its base
business. The Business-to-Business Groups, comprising of the Aviation Week,
Energy, Healthcare and Construction Information Groups, recorded higher revenues
versus the prior year's second quarter excluding the impact of the divested
Petrochemical magazines. Including the impact of the divested Petrochemical
magazines revenues would have declined as compared to the prior year's second
quarter. Operating profit declined due to investments in the introduction and
expansion of Internet hubs in Construction, Aviation and Energy. The Aviation
Week Group, which benefited from the Paris Air Show in 1999, also showed a
decline in both revenue and operating profit.
Six Months
----------
Consolidated Review
-------------------
For the first six months of the year, revenue increased 11.1%, or $182.6
million, to $1.8 billion. Net income through the first six months rose 44.6% to
$165.5 million including the gain on the sale of Tower Group International in
the first quarter. Excluding the gain, net income rose 35.7% to $155.3 million.
Diluted earnings per share rose 47.4% to 84 cents including the gain and 38.6%
to 79 cents excluding the gain. All segments contributed favorably to this
growth with the Educational Publishing Group, Standard & Poor's Ratings and
Business Week being the largest contributors within each.
Net interest expense through the first half of 2000 was $20.6 million, $0.8
million higher than the prior year. The increase was due primarily to higher
average commercial paper rates, 6.1% versus 5.0%, in 2000. The effect of the
higher interest rates was partially offset by slightly lower average debt
levels, as the proceeds from the Tower divestiture offset the impact of higher
share repurchases.
The provision for taxes as a percent of income before taxes was 38.5%, 0.5% less
than the first six months of 1999.
Segment Review
--------------
The McGraw-Hill Education segment revenue increased $110.2 million to $690.3
million and operating profit increased $19.7 million to $17.0 million compared
to the first six months of 1999. The first quarter reflected the segment's
seasonal operating loss due to investments for the peak sales period later in
the year.
SRA/McGraw-Hill performed well with its basic reading skills program,
particularly in California. The School division's social studies program had
positive results in California. Glencoe/McGraw-Hill successfully entered the
literature market, the only major discipline in which it did not publish.
Glencoe/McGraw-Hill had very good sales in its new Science program in Florida,
North Carolina, Oklahoma and West Virginia. CTB/McGraw-Hill had a strong first
half with its TerraNova program and its custom contracts. The Higher Education
Group had increased revenue and profits due to strong title performance offset
by softness in Custom Publishing and Dushkin. The Professional Book and
International operations had increased revenue from the Appleton and Lange
acquisition and strong performance by both Latin America and Asia-Pacific.
Softness in scientific, technical and medical business as well as in Canada and
Europe contributed to the profit decline for the Professional Book and
International Operations.
Financial Services' revenue increased 7.1%, or $42.2 million, to $633.8 million.
Standard & Poor's Ratings Services posted good growth despite year-to-date
domestic dollar volume being down 7.5% along with a 16.6% decline in the number
of issues from the prior year. Total European issuance was off in excess of 17%
as compared to the first half of 1999. The sector that contributed the most to
growth was Corporate Finance. More than 30% of Standard & Poor's Ratings revenue
for the first half of the year came from international services. Standard &
Poor's Information Services showed revenue increases from index and portfolio
services as expansion continued in this area. Internet redistribution services
benefited from sales of quote feeds and analytical commentary to financial
Websites and Internet redistribution. Operating profit declined due to continued
softness in the secondary municipal bond market, weakness in the services for
foreign exchange information and continued investment in new products and
services.
Information and Media Services revenue increased 6.4%, or $30.1 million, to
$497.7 million for the first six months. Excluding the impact of the divested
Petrochemical magazines, October 1999, and Tower Group International, February
2000, revenue would have increased 20.1%. Operating profit for the segment
including the gain on the sale of Tower Group International increased $53.0
million to $112.9 million. Excluding the gain on the sale of Tower Group
International, operating profit for the segment increased 60.7%. Excluding both
the impact of the gain on the sale of Tower Group International and the impact
of divested businesses, operating profit would have grown 62.0%.
<PAGE>
Business Week continued its outstanding performance with a 39% increase in
advertising pages, according to the Publishers Information Bureau. Broadcasting
showed continued growth due to political advertising and increases in its base
business. The Business-to-Business Group, comprised of the Aviation Week Group,
the Energy Group, the Health Group and Construction Information Group, had
increased revenues as compared to the first half of 1999, excluding the impact
of the divested Petrochemical magazines. Including the impact of the divested
Petrochemical magazines, revenues declined as compared to the prior year's first
half. Operating profits declined due to investments in the introduction and
expansion of Internet hubs in Construction, Aviation and Energy. The Group was
also negatively impacted by the lack of the Paris Air Show which benefited 1999.
Financial Condition
-------------------
The Company continues to maintain a strong financial position. Cash provided by
operating activities in the first half totaled $7.5 million compared to $152.5
million provided in the prior year. Total debt increased $160.0 million since
year-end. Seasonal spending for inventory and prepublication costs, expenditures
related to the share repurchase program, and higher tax payments were partially
offset by the proceeds from the divestiture of Tower Group International and
decreased real estate investments.
Commercial paper borrowings at June 30, 2000 totaled $568 million, a decrease of
$32 million from the prior year. Commercial paper borrowings have decreased
mainly as a result of the net proceeds from the sale of Tower Group
International partially offset by share repurchases. Commercial paper is
supported by a $800 million revolving credit agreement with a group of banks
terminating in February 2002, and $350 million is classified as long term. There
are no amounts outstanding under this agreement.
$95 million of 9.43% notes, due in September of the current year, remain
outstanding. Under a shelf registration that became effective with the
Securities and Exchange Commission in 1990, the Company can issue an additional
$300 million of debt securities. The new debt could be used to replace a portion
of the commercial paper borrowings with longer-term securities when management
has determined and interest rates are attractive and markets are favorable.
Gross accounts receivable decreased $125.5 million from year end due primarily
to seasonality of the education business and the impact of the sale of Tower
Group International. Year over year receivables increased $61.3 million due to
higher sales, particularly international sales where collections are slower.
Inventories increased $115.4 million from the end of 1999 because of the
anticipated higher sales in education as we enter the adoption selling season.
Net prepublication costs increased $33.4 million from the end of 1999 to $472.8
million due to heavy investments in anticipation of the adoption selling season
in the third quarter. Purchases of property and equipment were $34.6 million
through the current six months period, $63.9 million lower than the prior year.
Spending has decreased from the prior year as the consolidation of office space
in New York was completed in 1999.
On June 22, 2000, the Company agreed to acquire from Tribune Company all of the
outstanding shares of capital stock of the Tribune Education Company and
Landoll, Inc. for $634.7 million in cash, subject to certain post closing
adjustments. The transaction is expected to close in the third quarter subject
to government approvals under the Hart-Scott-Rodino act. The source of the funds
needed to pay the purchase price will be through internally generated funds and
the sale of commercial paper.
The Board of Directors approved a 9.3% increase in the regular quarterly
dividend on the Company's common stock from $.215 to $.235 per common share. The
Board of Directors also authorized in 1999 a stock repurchase program to
repurchase up to 15 million shares. The repurchased shares will be used for
general corporate purposes, including the issuance of shares for the exercise of
employee stock options. Purchases under this program may be made from time to
time on the open market and in private transactions dependent on market
conditions. Approximately 4.9 million shares have been repurchased under this
program as of July 18, 2000. 1.7 million shares have been repurchased at a cost
of $83.9 million under this program during the first half of 2000.
Year 2000 Issue
---------------
The Company experienced no significant problems or disruption to its normal
business activities related to this issue as of July 14, 2000. The cost to
assess, remediate and test systems that were not replaced approximated $19
million from 1998 to the present.
No material expenditures were made in the current year or are expected to be
included in the future related to the Year 2000 issue.
<PAGE>
Part II
Other Information
Item 1. Legal Proceedings
While the Registrant and its subsidiaries are defendants in numerous legal
proceedings in the United States and abroad, neither the Registrant nor its
subsidiaries are a party to, nor are any of their properties subject to, any
known material pending legal proceedings which Registrant believes will result
in a material adverse effect on its financial statements or business operations.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The 2000 Annual Meeting of Shareholders of the Registrant was held on April
26, 2000.
(b) The following nominee, having received the FOR votes set forth opposite his
name, constituting a plurality of the votes cast at the Annual Meeting for
the election of Directors, was duly elected Director of the
Registrant for a two-year term:
DIRECTOR FOR WITHHOLD AUTHORITY
Winfried Bischoff 161,627,395 2,877,471
The following nominees, having received the FOR votes set forth opposite their
respective names, constituting a plurality of the votes cast at the Annual
Meeting for the election of Directors, were duly elected Directors of the
Registrant for three year terms:
DIRECTOR FOR WITHHOLD AUTHORITY
Vartan Gregorian 163,568,456 936,410
James H. Ross 163,581,431 923,435
Sidney Taurel 163,578,468 926,398
The terms of office of the following directors continued after the meeting:
Pedro Aspe, George B. Harvey, Robert P. McGraw, Lois Dickson Rice, Linda Koch
Lorimer, and Harold W. McGraw III.
(c) (i) Shareholders approved the Amendments to and Restatement of the 1993
Employee Stock Incentive Plan. The vote was 100,980,390 shares
FOR and 42,851,703 shares AGAINST, with 20,669,963 shares abstaining
and 2,800 broker non-votes.
(ii) Shareholders approved the Amendments to and Restatement of the 1996 Key
Executive Short-Term Incentive Compensation Plan. The vote was
156,233,668 shares FOR and 7,364,039 shares AGAINST, with 905,857
shares abstaining and 1,302 broker non-votes.
(iii) Shareholders ratified the appointment of Ernst & Young as
independent auditors for the Registrant and its subsidiaries
for 2000. The vote was 163,765,804 shares FOR and 268,086 shares
AGAINST, with 470,976 shares abstaining and no broker non-votes.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K Page Number
-------------------------------- -----------
(a) Exhibits
(2) Stock Purchase Agreement, dated as of June 22, 2000,
among Tribune Company and Registrant, incorporated
by reference from the Registrant's Form 8-K
dated June 30, 2000.
(10) 1993 Amended and Restated Employee Stock Incentive Plan,
incorporated by reference from the Registrant's Proxy
Statement dated March 23, 2000;
(10) 1996 Amended and Restated Key Executive Short-Term Incentive
plan, incorporated by reference from the Registrant's Proxy
Statement dated March 23, 2000;
(12) Computation of Ratio of Earnings to Fixed Charges; 19
(27) Financial Data Schedule 20
(b) Reports on Form 8-K
A report on Form 8-K was filed on, and dated, June 30, 2000.
Item 2, Acquisition of Assets, was reported. Item 7, financial
statements of the business acquired, was not required.
<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 June 30, 2000
----------------------------
Six Twelve
Months Months
--------- ---------
(In thousands)
<S> <C> <C>
Earnings
Earnings from continuing operations
before income tax expense and
extraordinary item (Note) $ 264,562 $ 768,282
Fixed Charges 45,699 82,375
---------- ---------
Total Earnings $ 310,261 $ 850,657
========== =========
Fixed Charges (Note)
Interest expense $ 23,345 $ 47,124
Portion of rental payments deemed to be
interest 22,354 35,251
---------- ---------
Total Fixed Charges $ 45,699 $ 82,375
========== =========
Ratio of Earnings to Fixed Charges 6.8x 10.3x
<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.
Earnings from continuing operations before income taxes for the
six-month period ended June 30, 2000 includes a $16.6 million gain
on the sale of Tower Group International. Earnings from continuing
operation before income taxes for the twelve month period ended
June 30, 2000 includes the pre-tax gain on the sale of Tower Group
International and the $39.7 million pre-tax gain on the sale of the
company's Petrochemical publication.
</FN>
</TABLE>
