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, 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
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(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
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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 23, 2000 there were approximately 195.4 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, 2000 and 1999 3
Consolidated Balance Sheet at September 30, 2000,
December 31, 1999 and September 30, 1999 4-5
Consolidated Statement of Cash Flow for the nine 6
months ended September 30, 2000 and 1999
Notes to Consolidated Financial Statements 7-12
Item 2. Management's Discussion and Analysis of Operating
------ Results and Financial Condition 13-18
Item 3. Quantitative and Qualitative Disclosures About
------ Market Risk 19
Part II. OTHER INFORMATION
---------------------------
Item 1 Legal Proceedings 19
------
Item 6. Exhibits 19-21
------
<PAGE>
Part I
Financial Information
Item 1. Financial Statements
---------------------
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Statement of Income
-------------------------------
Periods Ended September 30, 2000 and 1999
------------------------------------------
<CAPTION>
Three Months Nine Months
-------------------- -------------------
2000 1999 2000 1999
-------- -------- --------- ---------
(in thousands, except per-share data)
<S> <C> <C> <C> <C>
Operating revenue (Note 3) $1,391,650 $1,318,477 $3,213,407 $2,957,669
Expenses:
Operating 518,595 508,746 1,317,689 1,269,869
Selling and general 384,400 378,170 1,005,295 936,169
Depreciation and amortization 135,337 113,508 280,569 235,616
---------- --------- ---------- ----------
Total expenses 1,038,332 1,000,424 2,603,553 2,441,654
Other income - net 15,734 6,901 48,886 16,327
---------- ---------- ---------- ----------
Income from operations 369,052 324,954 658,740 532,342
Interest expense - net 15,035 12,591 35,618 32,328
---------- ---------- ---------- ----------
Income before taxes on income 354,017 312,363 623,122 500,014
Provision for taxes on income 136,297 121,822 239,902 195,005
---------- ---------- ---------- ----------
Net income (Note 2) $ 217,720 $ 190,541 $ 383,220 $ 305,009
========== ========== ========== ==========
Earnings per common share:
Basic
Net Income $ 1.12 $ 0.97 $ 1.97 $ 1.55
Diluted
Net Income $ 1.11 $ 0.96 $ 1.95 $ 1.53
========== ========== ========== ==========
Average number of common shares
Outstanding: (Notes 8 and 9)
Basic 194,488 196,104 194,194 196,673
Diluted 196,850 198,078 196,131 198,920
</TABLE>
<PAGE>
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Balance Sheet
--------------------------
Sept. 30, Dec. 31, Sept. 30,
2000 1999 1999
---------- ----------- -----------
<S> (in thousands)
ASSETS
Current assets: <C> <C> <C>
Cash and equivalents $ 36,758 $ 6,489 $ 15,356
Accounts receivable (net of allowance
for doubtful accounts and sales
returns) (Note 4) 1,324,957 1,048,991 1,269,738
Receivable from broker-dealers and
dealer banks (Note 5) 2,566 3,615 7,546
Inventories (Note 4) 441,738 295,255 313,383
Prepaid income taxes 134,062 113,206 93,186
Prepaid and other current assets 96,274 86,169 74,411
---------- ---------- ----------
Total current assets 2,036,355 1,553,725 1,773,620
---------- ---------- ----------
Prepublication costs (net of accumulated
amortization) (Note 4) 463,615 439,351 386,962
Investments and other assets:
Investment in Rock-McGraw, Inc. - at
equity 92,811 85,997 84,303
Prepaid pension expense 147,303 119,495 116,856
Other 211,424 206,770 206,435
---------- ---------- ----------
Total investments and other assets 451,538 412,262 407,594
---------- ---------- ----------
Property and equipment - at cost 1,018,515 993,704 976,460
Less - accumulated depreciation 607,240 563,296 552,957
---------- ---------- ----------
Net property and equipment 411,275 430,408 423,503
Goodwill and other intangible assets - at
cost (net of accumulated amortization) 1,707,697 1,253,051 1,250,147
---------- ---------- ----------
$5,070,480 $4,088,797 $4,241,826
========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Balance Sheet
--------------------------
<CAPTION>
Sept. 30, Dec. 31, Sept. 30,
2000 1999 1999
---------- ----------- -----------
(In thousands)
<S>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities: <C> <C> <C>
Notes payable $ 265,140 $ 86,631 $ 283,630
Current portion of long term debt(Note 6) - 95,043 95,043
Accounts payable 244,560 340,220 282,674
Payable to broker-dealers and dealer
banks (Note 5) 2,163 2,725 5,932
Accrued liabilities 343,961 345,339 303,323
Income taxes currently payable 175,460 105,066 180,694
Unearned revenue 253,289 242,494 224,364
Other current liabilities 364,455 307,935 319,445
---------- ---------- ----------
Total current liabilities 1,649,028 1,525,453 1,695,105
---------- ---------- ----------
Other liabilities:
Long-term debt (Note 6) 954,787 354,775 406,560
Deferred income taxes 178,949 135,426 123,298
Accrued postretirement healthcare and
other benefits 184,808 187,485 190,321
Other non-current liabilities 213,967 194,165 181,444
---------- ---------- ----------
Total other liabilities 1,532,511 871,851 901,623
---------- ---------- ----------
Total liabilities 3,181,539 2,397,304 2,596,728
---------- ---------- ----------
Shareholders' equity (Note 7):
Capital stock 205,852 205,852 205,852
Additional paid-in capital 42,636 24,305 25,166
Retained income 2,173,157 1,926,816 1,848,249
Accumulated other comprehensive income (113,025) (87,731) (84,079)
---------- ---------- ----------
2,308,620 2,069,242 1,995,188
Less - common stock in treasury-at cost 404,112 363,728 331,684
Unearned compensation on
restricted stock 15,567 14,021 18,406
---------- ---------- ----------
Total shareholders' equity 1,888,941 1,691,493 1,645,098
---------- ---------- ----------
$5,070,480 $4,088,797 $4,241,826
========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
The McGraw-Hill Companies, Inc.
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Consolidated Statement of Cash Flows
------------------------------------
For The Nine Months Ended September 30, 2000 and 1999
------------------------------------------------------
<CAPTION>
2000 1999
<S> --------- ---------
Cash flows from operating activities (In thousands)
--------------------------------------------- <C> <C>
Net income $ 383,220 $ 305,009
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation 64,207 57,138
Amortization of goodwill and intangibles 45,583 41,377
Amortization of prepublication costs 170,779 137,101
Provision for losses on accounts receivable 34,341 41,548
Gain on sale of Tower Group (16,587) -
Other (6,109) (2,341)
Changes in assets and liabilities net of effect of
acquisitions and dispositions:
Increase in accounts receivable (302,434) (363,172)
Increase in inventories (76,912) (26,544)
Decrease in prepaid and other current assets 19,013 10,910
Decrease in accounts payable, accrued
expenses and other current liabilities (110,070) (48,118)
Increase/(Decrease) in unearned revenue 6,222 (11,872)
Increase in other current liabilities 26,414 72,287
Increase in interest and income taxes
currently payable 85,641 110,425
Increase in prepaid/deferred income taxes (21,290) (499)
Net change in other assets and liabilities (13,566) (20,611)
--------------------------------------------------- ---------- ----------
Cash provided by operating activities 288,452 302,638
---------------------------------------------------- ---------- ----------
Investing activities
Investment in prepublication costs (163,464) (157,418)
Purchases of property and equipment (53,142) (119,532)
Acquisition of businesses, net of cash acquired (676,988) (45,922)
Disposition of property, equipment and businesses 142,350 2,158
--------------------------------------------------- --------- ----------
Cash used for investing activities (751,244) (320,714)
--------------------------------------------------- ---------- ----------
Financing activities
Net additions to commercial paper borrowings 778,968 259,125
Repayments of long-term debt (95,043) -
Dividends paid to shareholders (136,879) (126,861)
Exercise of stock options 37,236 15,972
Repurchase of treasury shares (85,635) (123,968)
Other (1,106) (387)
--------------------------------------------------- ---------- ----------
Cash provided by financing activities 497,541 23,881
--------------------------------------------------- ---------- ----------
Effect of exchange rate fluctuations on cash (4,480) (900)
---------- ----------
Net change in cash and equivalents 30,269 4,905
Cash and equivalents at beginning of period 6,489 10,451
--------------------------------------------------- ---------- ----------
Cash and equivalents at end of period $36,758 $ 15,356
========== ==========
</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, 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 nine-month periods ended
September 30, 2000:
<TABLE>
<CAPTION>
Three Months Nine Months
---------------------- ----------------------
2000 1999 2000 1999
--------- ---------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Net income $ 217,720 $ 190,541 $ 383,220 $ 305,009
Other comprehensive income,
Net of tax: Foreign currency
Translation adjustment (7,521) (256) (25,294) (8,117)
--------- --------- --------- ---------
Comprehensive income $ 210,199 $ 190,285 $ 357,926 $ 296,892
========= ========= ========= =========
</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 analyses globally, enabling access
to capital markets. 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 to evaluate the performance of each segment. A
summary of operating results by segmentfor the three months and nine months
ended September 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 $ 844,170 $ 255,236 $ 766,557 $ 235,122
Financial Services 319,910 99,382 305,983 88,086
Information and Media Services 227,570 38,918 245,937 25,721
------------------------------ ---------- --------- ---------- ---------
Total operating segments 1,391,650 393,536 1,318,477 348,929
General corporate expense - (24,484) - (23,975)
Interest expense - net - (15,035) - (12,591)
------------------------------ ---------- ---------- ---------- ----------
Total company $1,391,650 $ 354,017*$1,318,477 $ 312,363*
========== ========== ========== ==========
</TABLE>
*Income before taxes on income.
<TABLE>
<CAPTION>
2000 1999
---------------------- ----------------------
Operating Operating
Revenue Profit Revenue Profit
--------- ---------- --------- ---------
Nine Months (in thousands)
------------
<S> <C> <C> <C> <C>
McGraw-Hill Education $1,534,426 $ 272,280 $1,346,608 $ 232,515
Financial Services 953,725 299,073 897,552 272,808
Information and Media Services 725,256 151,812 713,509 85,653
------------------------------ ---------- ---------- ---------- ----------
Total operating segments 3,213,407 723,165 2,957,669 590,976
General corporate expense - (64,425) - (58,634)
Interest expense - net - (35,618) - (32,328)
------------------------------ ---------- ---------- ---------- ----------
Total company $3,213,407 $ 623,122*$2,957,669 $ 500,014*
========== ========== ========== ==========
</TABLE>
*Income before taxes on income.
<PAGE>
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Financial Statements
-----------------------------
On September 5, 2000, the Company acquired from Tribune Company
("Tribune"):(i) all of the outstanding shares of capital stock of Tribune
Education Company, a Delaware corporation ("TEC") and a wholly-owned
subsidiary of Tribune, and (ii) all of the outstanding shares of capital
stock of Landoll, Inc., an Ohio corporation ("Landoll") and a wholly-owned
subsidiary of Tribune. The foregoing transaction was made pursuant to a
Stock Purchase Agreement, dated as of June 22, 2000, among Tribune and the
Company (the "Stock Purchase Agreement").
The purchase price paid by McGraw-Hill for the shares of TEC and Landoll
(collectively, the "Companies") was approximately $647.7 million, including
post-closing adjustments. We anticipate additional post-closing adjustments
in the fourth quarter. The acquisition was accounted for under the purchase
method of accounting. The source of the funds to pay the purchase price was
through internally generated funds and the sale of commercial paper.
Tribune Education is a leading publisher of supplementary educational
materials for the K-12, higher education, professional education and
consumer markets, with strength in language arts, math, foreign language,
social studies, health, English, reading, educational software and teacher
training. During the second quarter of 2000, the Company sold Tower Group
International to FedEx Corporation. The total gain recognized was
approximately $16.6 million on a pre-tax gain, or five cents per diluted
share.
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,
2000 1999 1999
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Allowance for doubtful accounts $ 132,974 $ 125,144 $ 117,391
========== ========== ==========
Allowance for sales returns $ 128,283 $ 107,382 $ 111,018
========== ========== ==========
Inventories:
Finished goods $ 349,102 $ 239,139 $ 240,772
Work-in-process 53,901 25,205 45,539
Paper and other materials 38,735 30,911 27,072
---------- ---------- ----------
Total inventories $ 441,738 $ 295,255 $ 313,383
========== ========== ==========
Accumulated amortization of
prepublication costs $ 738,991 $ 661,207 $ 634,629
========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Financial Statements
-----------------------------
5. A subsidiary of J.J. Kenny Co. acts as an undisclosed agent in the purchase
and sale of municipal securities for broker-dealers and dealer banks and the
company had $149.7 million of matched purchase and sale commitments at
September 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>
Sept. 30, Dec. 31, Sept. 30,
2000 1999 1999
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
9.43% Notes due 2000 $ - $ 95,043 $ 95,043
Commercial paper supported by
bank revolving credit agreement 949,840 350,000 400,000
Other 4,947 4,775 6,560
---------- ---------- ---------
954,787 449,818 501,603
Less: current portion of long-term debt - (95,043) (95,043)
---------- ---------- ---------
$ 954,787 $ 354,775 $ 406,560
========== ========== =========
</TABLE>
On August 15, 2000, the Company retired its existing revolving credit
facility that was due to expire on February 13, 2002 and replaced it with
two new revolving credit facilities. The two revolving credit facility
agreements, each with the same 11 domestic and international banks,
consisting of a $625 million, five year revolving credit facility ("New
5-year Facility") and a $625 million 364-day revolving credit facility
("New 364-day Facility"). The New 5-year Facility provides that the Company
may borrow at any time until August 15, 2005, when the commitment
terminates and any outstanding loans mature. The New 364-day Facility
agreement provides that the Company may borrow until August 14, 2001, on
which date the facility commitment terminates and the maturity of such
borrowings may not be later than August 14, 2002. The Company pays a
facility fee of 5 and 7 basis points on the New 364-day Facility and New
5-year Facility, respectively, (whether or not amounts have been borrowed)
and borrowings may be made at a range of 13 to 20 basis points above LIBOR
at the Company's current credit rating. The fees and spreads on the New
5-year Facility fluctuate based upon a schedule related to the Company's
credit rating by Moody's and Fitch. The facility agreements each contain
certain covenants, and the only financial covenant requires that the
Company not exceed an indebtedness to cash flow ratio, as defined, of 4 to
1 at any time. This restriction, which was also in place under the retired
facility, has never been exceeded. At September 30, 2000, there were no
borrowings under either facility. The commercial paper borrowings
outstanding is supported by the new revolving credit facilities, and 80% of
these borrowings have been classified as long-term.
<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,
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 17,530 17,846 17,912
Stock based awards 23,879,053 15,941,131 16,653,328
---------- ---------- ----------
23,896,583 15,958,977 16,671,240
========== ========== ==========
</TABLE>
<TABLE>
8. Cash dividends per share declared during the periods were as follows:
<CAPTION>
Three Months Nine Months
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Common stock $.235 $.215 $.705 $.645
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 thethree months
and the nine months ended September 30, 2000 and 1999 follows:
<CAPTION>
Three month period 2000 1999
------------------ ---------- ----------
(thousands of shares)
<S> <C> <C>
Average number of common shares outstanding 194,488 196,104
Effect of stock options and other dilutive securities 2,362 1,974
---------- ----------
196,850 198,078
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Nine month period 2000 1999
---------------- ---------- ----------
(thousands of shares)
<S> <C> <C>
Average number of common shares outstanding 194,194 196,673
Effect of stock options and other dilutive securities 1,937 2,247
---------- ----------
196,131 198,920
========== ==========
</TABLE>
Restricted performance shares outstanding at September 30, 2000 of 453,000
were not included in the computation of diluted earnings per common shares
because the necessary vesting conditions have not occurred.
<PAGE>
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 Periods Ended September 30, 2000 and 1999
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Three Months
------------
Consolidated Review
-------------------
Operating revenue for the quarter of $1.4 billion increased $73.2 million,
or 5.6% over the 1999 quarter on the strong performance of the McGraw-Hill
Education and Financial Services segments. The revenue from ongoing operations,
excluding the impact of the divested Petrochemical Magazines in the fourth
quarter of 1999 and the sale of Tower Group International in the first quarter
of 2000 and excluding Tribune Education's (as defined below) results, rose 6.6%.
On September 5, 2000, the Company acquired from the Tribune Company ll of
the outstanding shares of capital stock of the Tribune Education Company and
Landoll, Inc ("Tribune Education"). The purchase price was $647.7 million in
cash including post-closing adjustments. We anticipate additional post-closing
adjustments in the fourth quarter. Integration of Tribune Education has begun
and the quarterly and year to date results include one month of operations. The
Company expects the acquisition will be earnings accretive in 2001 and cash flow
positive this year and in the years ahead. Given the delay in closing the
transaction due to the U.S. Department of Justice's request for additional
information, the acquisition will dilute 2000 earnings per share two to four
cents ($.02 - $.04) more than the initial estimate of five cents ($.05).
Net income for the quarter was $217.7 million, or a 14.3% increase over
1999. Included in the quarter are the results of the recently acquired Tribune
Education and related acquisition costs, which diluted earnings per share by
three cents. Excluding the impact from the acquisition of Tribune Education, net
income for the quarter was $223.6 million.
Net interest expense rose 19.4%, primarily from higher average borrowings
due to the acquisition of Tribune Education during the third quarter. Average
interest rates increased during the quarter to 6.6% in 2000 versus 5.2% in 1999.
The provision of taxes as a percent of income before taxes was 38.5%, 0.5% less
than the third quarter of 1999, but the same level as the second quarter of
2000.
Segment Review
--------------
The McGraw-Hill Education segment revenue, including $25.5 million from the
newly acquired Tribune Education, increased 10.1% over the prior year's third
quarter to $844.2 million. Operating profits climbed by 8.6% over the prior
year's third quarter to $255.2 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. SRA/McGraw-Hill also benefited from high
open territory selling. The School division continued its solid performance with
strong sales in reading, social studies, and science in key adoption states
enabling McGraw-Hill to gain market share in the elementary-high school market.
The School division continued its significant investment in plant cost and
marketing costs. The overall elementary-high school market should grow by more
than 10% this year. In Texas, the School division and SRA/McGraw-Hill combined
to win more than 38% of the reading adoption this year. Glencoe's revenue
performance was flat with the prior year due to lower than anticipated adoption
sales. However, in North Carolina, Florida, West Virginia, and Oklahoma,
Glencoe's secondary science program led the market. CTB/McGraw- Hill's revenue
declined during the quarter due to the timing of custom contracts and lower
software sales.
The Higher Education Group had strong front list sales that produced a
double-digit gain in operating profit in the third quarter. Important new or
revised titles include Mader, Biology 7/e; Garrison, Managerial Accounting 9/e;
Kamien, Music, An Appreciation 7/e; Lucas, Art of Public Speaking 7/e; and
Feldman, Power Learning, 1/e. Continued softness in computer, scientific,
technical and medical titles resulted in declines in revenue and operating
profit at Professional Publishing. International Publishing experienced gains in
most markets, with Latin America and Asia-Pacific being particularly strong.
Integration of Tribune Education into McGraw-Hill Education has begun with five
of the six businesses acquired to be merged into McGraw-Hill Education, with the
Wright Group operating as a separate unit.
Financial Services revenue increased 4.6% to $319.9 million and operating
profit increased 12.8% to $99.4 million. Standard & Poor's Ratings Services
revenue and operating profit increased despite the continuing decline of new
issue volume in the U.S. bond market. New issue dollar volume in the U.S. bond
market fell 11.2% for the quarter. The areas that contributed most to the growth
were Structured Finance, Financial Institutions and Ratings Information
Services. Standard & Poor's Ratings Services continues to benefit from the
successful globalization and diversification of its products. In Europe,
Standard & Poor's Ratings largest international market, growth was strong as
more issuers raised capital in the public debt markets. The number of new issues
in Europe climbed 2.8% for the quarter while dollar volume was off 8.9% for the
same period. More than 30% of Standard & Poor's Ratings revenue was generated in
international markets for the third quarter. 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 were flat due to shortfalls in the secondary
municipal markets, services for the foreign exchange markets and continued
investment in new products and services.
Information and Media Services revenue, including the impact of divested
operations decreased 7.5% to $227.6 million. Excluding the impact of divested
operations, revenue increased 8.7%, or $18.3 million. In October of 1999, the
Petrochemical magazines were sold and in February 2000, Tower Group
International was sold. Operating profit for the segment increased 51.3% over
the prior year's third quarter. Excluding the impact of divested businesses,
operating profit increased 60.9% over the prior year's third quarter.
Although Business Week faced very tough comparisons - advertising pages
grew 44% in the third quarter last year - the publication registered an 18% gain
in advertising pages in this year's third quarter. As a result, Business Week
had the best third quarter in its 71-year history. Broadcasting also showed
continued growth due to the political advertising and an increase in its base
business. The Business-to-Business Group, comprised of Aviation Week, Energy,
Healthcare and Construction Information groups recorded an increase in revenues
and operating profit versus the prior year's third quarter on an ongoing basis.
Including the impact of divested businesses, revenue would have declined as
compared to the prior year's third quarter. Aviation Week Group benefited from
the biennial Farnborough Air Show. A volatile oil market increased the demand
for real-time news and prices from Platt's. Revenue in the Construction
Information Group was off primarily due to timing at Sweet's but cost controls
offset the impact.
<PAGE>
Nine Months
-----------
Consolidated Review
-------------------
For the first nine months of the year, revenue increased 8.6%, or $255.7
million, to $3.2 billion, including $25.5 million of revenue contributed by the
recently acquired Tribune Education business. Excluding the impact of the
divested Petrochemical magazines and Tower Group International, revenue
increased 12.0%. Net income through the first nine months rose 25.6% to $383.2
million including the gain on the sale of Tower Group International in February
2000. Excluding the gain on the sale of Tower Group International, net income
increased 22.3%. Diluted earnings per share rose 27.5% to $1.95 including the
gain on the sale of Tower Group International and 24.2% to $1.90 excluding the
gain. All segments contributed favorably to this growth with the Educational
Publishing Group, Standard & Poor's Ratings Services and Business Week being the
largest contributors within each.
Net interest expense through the first nine months of 2000 was $35.6
million, $3.3 million higher than the prior year. The increase was due primarily
to a higher average balance because of the acquisition of Tribune Education and
to higher average commercial paper rates, 6.3% versus 5.1% in 1999. The proceeds
from the Tower divestiture in February 2000 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 nine months of 1999 period.
Segment Review
--------------
The McGraw-Hill Education segment revenue, including $25.5 million from the
newly acquired Tribune Education, increased 13.9% over the prior year to
$1,534.4 million. Operating profits climbed by 17.1% over the prior year to
$277.3 million. 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. CTB/McGraw-Hill had good performance in its custom contracts and
TerraNova program. Higher Education had good frontlist and backlist performance.
The International Publishing Group had strong revenue growth particularly in
Latin America and Asia-Pacific. Softness in Canada, Europe, and Ibero
contributed to a profit decline. The Professional Publishing operation had flat
revenue and a profit decline due to softness in the general reference and
computing.
Financial Services' revenue increased 6.3%, or $56.2 million to $953.7
million. Standard & Poor's Ratings Services posted good growth despite
year-to-date domestic dollar volume being down 8.2% along with a 14.6% decline
in the number of issues from the prior year. Total European issuance dollars was
off in excess of 8.4% as compared to the first nine months of 1999. The sector
that contributed the most to the growth was Corporate Finance. More than 30% of
Standard & Poor's Ratings revenue for the first nine months of the year came
from international services. Standard & Poor's Information Services had revenue
increases from portfolio services as expansion continued in this area. Operating
profit was flat 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 1.6%, or $11.7 million,
to $725.3 million for the first nine months. Excluding the impact of the
divested Petrochemical magazines in October 1999, and Tower Group International
in February 2000, revenue would have increased 16.2%. Operating profit for the
segment including the gain on the sale of Tower Group International increased
$66.2 million to $151.8 million for the first nine months of 2000. Excluding the
gain on the sale of Tower Group International, operating profit for the segment
increased 57.9%. 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 61.7%.
Business Week continued its outstanding performance with a 32% increased 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 Aviation Week, Energy,
Healthcare, and Construction Information groups had increased revenue and
operating profit as compared to the first nine months of 1999, excluding the
impact of the divested Petrochemical magazines. Including the impact of the
divested Petrochemical magazines, both revenue and operating profit declined as
compared to the prior year's first nine months.
<PAGE>
Financial Condition
-------------------
The Company continues to maintain a strong financial position. Cash
provided by operating activities in the first nine months totaled $288.5 million
compared to $302.6 million in 1999. The primary reasons for this decrease are
higher inventory on hand for the 2000 adoption selling season and higher
estimated tax payments. 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.
Total debt as of September 30, 2000 increased $683.5 million from year-end
1999 to $1,219.9 million. Commercial paper borrowings at September 30, 2000
totaled $1,187.3 million, an increase of approximately $776.1 million over
December 31, 1999. This is primarily due to the acquisition of Tribune Education
that was consummated in the third quarter. The total amount of cash paid for
this acquisition was approximately $647.7 million, including some post-closing
adjustments. We anticipate additional post-closing adjustments in the fourth
quarter. Aside from the acquisition, there were additional expenditures related
to prepublication costs for the heavy adoption-selling schedule.
Gross accounts receivable increased $304.7 million from year-end due
primarily to seasonality of the education business and the acquisition of the
Tribune Education, partially offset by the impact of the sale of Tower Group
International in the first quarter. Year-over-year gross accounts receivables
increased $88.1 million. Inventories increased $146.5 million from the end of
1999 because of the anticipated higher sales in education as it enters the
adoption selling season and as a result of the acquisition of Tribune Education.
Net prepublication costs increased $24.3 million from the end of 1999 to
$463.6 million due largely from the Tribune Education acquisition. Purchases of
property and equipment were $53.1 million through the current nine months
period, $66.4 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.
The Company retired the remaining $95 million of its 9.43% notes in
September 2000. 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 that interest rates are attractive and markets are favorable.
On August 15, 2000, the Company retired its existing revolving credit
facility that was due to expire on February 13, 2002 and replaced it with two
new revolving credit facilities. The two revolving credit facility agreements,
each with the same 11 domestic and international banks, consisting of a $625
million, five year revolving credit facility ("New 5-year Facility") and a $625
million 364-day revolving credit facility ("New 364-day Facility"). The New
5-year Facility provides that the Company may borrow at any time until August
15, 2005, when the commitment terminates and any outstanding loans mature. The
New 364-day Facility agreement provides that the Company may borrow until August
14, 2001, on which date the facility commitment terminates and the maturity of
such borrowings may not be later than August 14, 2002. The Company pays a
facility fee of 5 and 7 basis points on the New 364-day Facility and New 5-year
Facility, respectively, (whether or not amounts have been borrowed) and
borrowings may be made at a range of 13 to 20 basis points above LIBOR at the
Company's current credit rating. The fees and spreads on the New 5-year Facility
fluctuate based upon a schedule related to the Company's credit rating by
Moody's and Fitch. The facility agreements each contain certain covenants, and
the only financial covenant requires that the Company not exceed an indebtedness
to cash flow ratio, as defined, of 4 to 1 at any time. This restriction, which
was also in place under the retired facility, has never been exceeded. At
September 30, 2000, there were no borrowings under either facility.
In the first quarter of 2000, 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 October 20, 2000. The Company has
repurchased 1.7 million shares at a cost of $85.6 million under this program
during the first nine months of 2000.
<PAGE>
Year 2000 Issue
---------------
The Company experienced no significant problems or disruption to its normal
business activities related to this issue as of October 20, 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.
"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 included, but are not limited to: McGraw-Hill
Education's level of success in adoptions and the level of educational funding;
the strength of higher education, professional and international publishing
markets; the strength of profit levels and the capital markets in the U.S.and
abroad with respect to Standard & Poor's Information Services; the strength of
the domestic and international advertising markets; the level of future cash
flow, debt levels, capital expenditures and prepublication cost investment; the
level of success in new product development; and the expected financial impact
of the Tribune Education acquisition on the Company's financial condition.
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.
<PAGE>
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, 1999.
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 6. Exhibits and Reports on Form 8-K Page Number
-------------------------------- -----------
(a) Exhibits
(10.1) 364-Day Credit Agreement dated as of August 15,
2000 among the Registrant, the lenders listed
therein, and The Chase Manhattan Bank, as
administrative agent, incorporated by reference
from the Registrant's Form 8-K dated August 21,
2000.
(10.2) Five-Year Credit Agreement dated as of August
15, 2000 among the Registrant, the lenders
listed therein, and The Chase Manhattan Bank,
as a administrative agent, incorporated by
reference from the Registrant's Form 8-K dated
August 21, 2000.
(12) Computation of ratio of earnings to fixed charges 20
(27) Financial data schedule 21
(b) Reports on Form 8-K
A Form 8-K was filed on, and dated, August 21,
2000, with respect to Item 5 of said Form.
<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, 2000
--------------------------------
Nine Twelve
Months Months
--------- ---------
(In thousands)
<S> <C> <C>
Earnings
Earnings from continuing operations
before income tax expense and
extraordinary item (Note) $ 616,308 $ 812,574
Fixed charges 72,171 84,009
---------- ----------
Total Earnings $ 688,479 $ 896,583
========== ==========
Fixed Charges (Note)
Interest expense $ 38,685 $ 49,074
Portion of rental payments deemed to be
interest 33,486 34,935
---------- ----------
Total Fixed Charges $ 72,171 $ 84,009
========== ==========
Ratio of Earnings to Fixed Charges 9.5 10.7
<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
nine-month period ended September 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
September 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 publications.
</FN>
</TABLE>
