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The McGraw-Hill Companies
Quarterly Review
October 24, 2000
Harold McGraw III
Chairman, President and CEO
Welcome to our quarterly review.
We are pleased you can join us today to review the outlook for The McGraw-
Hill Companies. I will start with comments on third quarter results and our
prospects. Then, we will hear from Bob Bahash, our chief financial officer.
As you know, at these meetings, we also ask a line manger to review some
aspects of operations. Today, we've selected Joanne Rose, the executive
managing director of Structured Finance at Standard & Poor's Ratings
Services. She will speak to you about the growing opportunities in that
dynamic market.
A few days ago, we announced third quarter results, so I won't spend a lot
of time reviewing those numbers. But just to set the stage, I would like to
point out that:
. Revenue from ongoing operations increased 8.6% for the third quarter and
was up 12.0% after nine months.
. Net income, including the impact of dilution from the Tribune Education
acquisition, was up 14.3% for the third quarter and 22.3% for nine
months. That excludes the gain on Tower.
. Earnings per share, reflecting three cents dilution, was $1.11, a 15.6%
increase for the third quarter. For nine months, our EPS is up 24.2%,
excluding the gain on Tower.
With these results on the books, we are clearly on our way to our eighth
year of double-digit earnings growth. With that in mind, let's look at our
three segments in more depth.
Let's start with McGraw-Hill Education:
. Revenues were up 10.1% for the 3/rd/ quarter and 14% for nine months,
. Operating profits were up 8.6% for the 3/rd/ quarter and 17.1% for nine
months,
. The operating margin after nine months is 17.74%, an expansion of 47
basis points.
We are having a terrific year in Education. Earlier this year, we said:
. the elementary-high school market would grow by more than 10% in 2000,
. that California alone would spend $500 million this year,
. and that we expected to take market share.
Through eight months, industry sales are up 15.3%. We are growing faster.
We said the battleground would be in the big adoption states in reading,
science, social studies and literature.
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Our capture rate tells the story:
. 38% share of the Texas reading adoption,
. More than 40% of California social studies,
. 26% of the Texas literature market, and
. more than 60% of the secondary school science adoption market.
Our only disappointment is in elementary school science where we finished
second.
There also was some concern about California spending the AB-2519 funds
this year. Based on our experience, California schools are spending the
funds. Our supplemental publisher, SRA/McGraw-Hill is a major beneficiary.
The SRA phonics-based Open Court and Direct Instruction reading programs
enjoyed robust sales in California all year. As a result, SRA experienced
substantial increases in the first, second and third quarters.
This early ordering had another impact on this year's results. In effect,
there appears to have been more early ordering than usual this year in the
adoption states.
Industry sales in adoption states are up more than 25% while open
territories are up 6.4% after eight months. We expected even more growth
this year from open territories, which tend to order later in the cycle.
Slower growth in open territories is one reason we produced a single-digit
gain in our el-hi group in the third quarter. Another factor is timing at
CTB/McGraw-Hill, our testing business. Revenue for this unit declined
during the third quarter due to the timing of custom contracts and lower
software sales.
But the fact remains that our el-hi business after nine months is growing
at a double-digit rate and outperforming the industry.
We are also moving quickly to integrate Tribune Education operation into
our education group. We had expected to complete this deal on July 31, but
a second request from the Justice Department delayed the closing until
September 5. We had our plans and integration teams ready to go and are now
well along in the process.
We are folding five of the six businesses acquired from Tribune into our
operations. Only the Wright Group will continue to operate as a separate
unit under the direction of Sari G. Factor. She will report to Buzz Ellis,
president of our Elementary-High School Group. Before becoming President of
the Wright Group/McGraw-Hill, Sari was vice president and general manager
of Everyday Learning, which was also part of Tribune Education. We will
also be adding some of the National Science Foundation funded products that
we've acquired from Tribune to this group's lineup. And given the target
market for these products, it makes sense to keep the Wright Group intact.
After studying the businesses that comprised Tribune Education, we saw
substantial opportunities to create new efficiencies by carefully
integrating most of the product lines into our operations.
Here is what we've done:
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Everyday Learning produces elementary and secondary math and health
programs and titles for the college market. This group is being integrated
into our elementary, secondary supplementary and higher education units.
Creative Publications develops core and supplemental mathematics products
for elementary and secondary schools. The core secondary math program will
become part of Glencoe/McGraw-Hill. The supplemental math products are
being folded into Wright/McGraw-Hill.
NTC/Contemporary Publishing produces language arts, foreign language,
health, social studies, developmental reading, and non-fiction references
and adult trade titles. These product lines will be folded into six of our
operating units: Professional Publishing, Glencoe, the School Division,
Higher Education, International and Children's Publishing.
Landoll, which produces children's books and other products for the
consumer market, is being integrated into our Children's Publishing
Business. There are still some questions to be answered about the Landoll
businesses, particularly the consumer mass market, but that is still under
review.
These steps will clearly result in substantial savings and greater
efficiency. The new products also expand our opportunities in a growing
education market. For example, we've expanded our reach into the pre-K to 5
language arts market. The National Science Foundation-funded math products
will provide a competitive advantage in this major market segment. We now
have new teacher training products, and Glencoe will enter the growing
market for remedial reading.
Overall, we have gained experienced editorial, production and sales staff.
The integration of this front office is basically complete.
It will take a little longer to integrate billing and distribution systems.
Tribune Education operated 22 distribution centers and obviously we plan to
rationalize that setup. Clearly, there will be substantial savings as we
complete the process. Until we are further along, I'm not going to quantify
staff reductions or other savings.
As you know the delay in the original closing date did lead to increased
dilution. Instead of five cents this year, we now expect seven to nine
cents. Three cents was already reported in the third quarter.
Because we were prepared, the integration process is off to a good start.
But we did lose a month and we're moving as quickly as possible to make up
for lost time. We will keep you posted on our progress.
Let's turn to Higher Education, International and Professional Publishing
operations. A strong front list helped produce a good third quarter for our
college and university business.
I am also pleased with our progress in providing digital solutions for this
marketplace. Today, more than 200,000 college instructors use the Internet
in their courses. We're building on this trend with a growing range of
products and services with consistent design and navigation:
. PageOut, which enables instructors to create their own course-specific
Website, now has more than 30,000 registered instructors in the United
States. We now have more than 3,700 users in Canada and anticipate
adding another 3,000 by the end of the year. We're successfully
introducing PageOut in Europe, where there are now 1,300 registered
users.
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. Online Learning Centers support all our major texts, providing online
resources for instructors and students. The Online Learning Center
easily links PageOut to further facilitate online course management.
. Interactive eSource provides digitized content from our texts and other
sources. This service is delivered over the Web or by CD-ROM.
. PowerWeb is our answer to the coursepak. Our Website provides online
articles, news and essays recommended by experts for discipline specific
topics.
. The latest step is the introduction of eBooks from Primis. With Primis
Online, an instructor can search our database to customize course
material.
The student decides how to order it: either electronically, by downloading
from our eBookstore to a PC using a secure format from Adobe Systems, or
buying a hardcopy version at the campus bookstore
We're also using technology to gain share in the first-and-second year
college math market. ALEKS is a Web-based artificial intelligence system
which is so powerful that it can determine an individual's math abilities
and provide customized self-paced instruction. ALEKS stands for Assessment
and Learning in Knowledge Spaces and you will be hearing more about it in
the future.
Our International Group had a good quarter. We're continuing to benefit
from the rebound in Asia-Pacific markets and improvement in Mexico. As I
suggested earlier, we are now offering digital solutions globally for a
competitive advantage. PageOut is growing in Europe and we are introducing
it in Asian markets. ALEKS is being demonstrated in Canada.
At our Professional Book group, we saw a decline in revenue and operating
profits in the third quarter. There was softness in our computer titles as
well as our scientific, technical and medical lines. But we're looking for
some improvement in the fourth quarter with the introduction of new
editions of seven major medial titles. These include:
. Hurst's The Heart,
. Williams Hematology,
. Principles of Neurology,
. The Metabolic & Molecular Bases of Inherited Diseases, and
. Current Medical Diagnosis & Treatment 2001
So, let's sum up for this segment:
. A fine year in education with prospects for another good adoption year
in 2001,
. Solid progress in integrating the Tribune Education acquisition, and
. Growing use of digital solutions to create a competitive advantage both
here and abroad.
Now, let's spend a few minutes on Financial Services:
. Revenue was up 4.6% for the third quarter and 6.3% for nine months,
. Operating profits grew by 12.8% in the third quarter and are up 9.6%
year-to-date, and
. After nine months, the operating margin expanded to 31.4%.
In a difficult market, we have been carefully watching our costs. But from
what we can see in the marketplace, Standard & Poor's Ratings is still
bigger, growing faster and more diversified than its nearest competitor.
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The numbers help tell the story. Despite the decline new issue volume in
the U.S. market, Standard & Poor's continues to grow. The successful
diversification of our ratings business has played a central role in
keeping S&P moving ahead.
Our business is growing at a double-digit clip in all our international
markets - Europe, Latin America, Asia and Canada. Today, more than 30% of
S&P Ratings' revenue comes from international markets. Last year, it was
less than 30% of the total.
We're continuing to benefit from the creation of a single currency and
continuing bank disintermediation in Europe, our largest international
market. Despite the weakness of the Euro, the bond market in Europe
continues to grow as more corporate borrowers turn to public debt markets.
That trend will continue to grow.
Although new issue dollar volume is down by more than 22% in Europe, the
number of European bonds issued in the first nine months is up to 4,701, an
increase of 8.4% over last year.
A falloff in big sovereign issues is a key factor in the declining dollar
volume in Europe this year. But growing activity in the corporate sector
has helped keep the unit volume growing in this market. And these issuers
continue to raise substantial funds through Euro-denominated bond issues,
even under current conditions.
We're also seeing increased activity from U.S. multinationals in the Euro
corporate bond market in the second and third quarters. Freddie Mac, which
used to arrange all its financing in U.S. dollars, has set up a Euro
borrowing program. In September, Freddie Mac issued the first 5 billion
Euro-denominated bond from a non-government entity. The credit rating was
Triple A.
The trend in the U.S. bond market has not been as favorable with new issue
volume declining every quarter so far this year.
. In the first quarter, dollar volume was $332.3 billion, down 6.4%.
. In the second quarter, dollar volume was $314.6 billion, down 7.9%.
. In the third quarter, dollar volume was $276.4 billion, down 11.2%.
As we move into the fourth quarter, comparisons do get easier.
Last year, new issue volume fell nearly 25% in the fourth quarter to $214.5
billion. The biggest declines this year in the U.S. bond market have come
in the public finance and mortgage-backed areas. After nine months,
. Corporates issuance is off only 0.59%,
. Municipals are off 18.3%,
. Asset-backed issues are off 1.25%, and
. Mortgage-backed issuance is down 48.4%.
For the fourth quarter, we expect continued strength in overseas markets
and more growth in what we call non-traditional servicesratings that are
not reflected in new issue statistics. Global Infrastructure Ratings, Bank
Loan Ratings and Rating Evaluation Services are some examples of non-
traditional ratings that are contributing to S&P's growth.
We're also anticipating a good fourth quarter in the structured finance
market both here and abroad. We expect more emphasis on credit quality in
the weeks ahead now that spreads have widened and borrowing costs are up.
That's why structured financing should be attractive in the
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fourth quarter. You will see more high quality assets securitized with
Double A and Triple A ratings. But you will hear more about the structured
finance market and our prospects there in a few minutes from Joanne Rose.
As we look ahead in 2001, we now expect a more positive market environment
for debt issuance. While it is early days, we anticipate:
. Some growth in corporates with a resurgence in the high-yield market,
. Growth in U.S. municipals,
. More growth in the asset-backed market,
. Not much if any growth in residential mortgages, but a better picture in
the commercial sector, and
. Another solid year in the European market and increased penetration by
S&P Ratings.
At Standard & Poor's Information Services, we continue to expand our high-
margin index services and fee-generating portfolio businesses. Revenue is
derived from licensing fees based on assets under management and
transaction volume.
We've helped foster the proliferation of exchange traded funds. Clearly,
they are no longer just an institutional investment vehicle. The growth in
assets has climbed dramatically. Through August, exchange traded funds
captured more than $50 billion in assets. And more than 50% of those assets
are based on S&P Indexes and S&P Depositary Receipts.
More exchanged traded funds are on the launch pad. In early December the
S&P Global 100 will start trading as an ETF on The New York Stock Exchange.
Next, we expect it to be traded on the Japanese Stock Exchange. More ETFs
are coming in Canada and Australia, all based on S&P indexes.
The number of derivative products based on our indexes is also continuing
to grow in Canada, Japan, Australia and Europe. The Chicago Mercantile
Exchange, the Spanish Futures and Options Exchange, and S&P have reached an
agreement that will result in the launch of stock index futures contracts
based on the S&P Euro Index and the S&P Europe 350 Index, as well as three
sector indices based on the S&P Europe 350. These are the first futures
products that trade on a European exchange while clearing on a U.S.
exchange.
That arrangement will give instant liquidity for those who want to use the
S&P Europe 350 futures. In other words, traders with established margin
accounts for S&P 500 futures won't have to put up additional funds to use
the 350. This is an area with enormous potential and you will be hearing
more from us in the future.
S&P Comstock's business with Internet redistributors continues to grow. We
recently launched financial distribution with iWon.com, a leading search
engine and portal site. And Comstock announced a partnership with bSmart.to
Markets to deliver financial market data over multiple channels so each
user can make their own selection of information on a preferred channel.
Finally, I should mention our new agreement with Charles Schwab & Co.
Schwab customers will have access to a broad range of S&P information on
equities, fundamental data, analyst commentary, news, rankings and
proprietary valuation indexes. In addition, S&P MarketScope is delivered to
2,700 desktops at Schwab.
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So, let's sum up for Financial Services:
. Continued growth in international markets for S&P Ratings,
. Continued expansion of S&P Ratings' non-traditional products,
. Continued build-out of our index-based services,
. More S&P data feeds to institutional customers and Internet
redistributors, and
. A better U.S. new issue bond market in 2001.
Now, let's look at Information and Media Services:
. Ongoing revenue for this segment was up 8.7% for the third quarter and
16.2% after nine months,
. Operating profits from ongoing operations were up more than 60% for the
third quarter and 61.7% for nine months,
. The operating margin on ongoing operations after nine months has
expanded to 18.65%.
Business Week is having another banner year. In the third quarter, Business
Week produced an 18% gain in advertising pages on top of a 44% gain last
year. After nine months, BW ad pages are up 32% with one less issue.
To give you some notion of where the growth is coming from, here is the ad
page count for nine months, as measured by the Publishers Information
Bureau:
. Our high tech ad pages are up 60.4% in this period,
. Financial Services/Insurance ad pages are up 13.6%, and
. Professional Services pages are up 85.4%.
The comparisons don't get much easier as we head into the fourth quarter.
Last year, Business Week registered a 32.3% gain in fourth quarter ad
pages. This year, after four issues in October, Business Week is down 6.5%
for the quarter.
It is true we are seeing some cancellations, but we are still getting new
business. And our two e.biz editions for later in the quarter are already
sold out. But while we are experiencing some slowing, we still expect to
show another gain in the fourth quarter.
We're also launching our first issue of Leaders Online, the publication
that is linked to Business Week Online's Careers channel and the newly
established partnership with the recruitment firm, Heidrick & Struggles.
That is part of our plan to extend the Business Week franchise for more
growth in the future. There will be six editions of Leaders Online in 2001.
We are also increasing the rate base and the ad rates for Business Week in
2001. The rate base for North America will grow from 900,000 to 950,000, an
increase of 5.5%. The advertising rate will increase 8.8%.
As part of our effort to transform Business Week into a global franchise,
we are also increasing the rate base for the international editions. The
international rate base will go from 187,000 to 200,000, an increase of
7.0%. Ad rates for the international edition will increase 8.5%.
We will also continue to expand our very successful e.biz "magazine within
a magazine" concept next year by adding issues in North America, Asia and
Europe. Last year, we published five in North America. This year, we will
publish nine and next year e.biz will appear monthly. This year, we
published e.biz for the first time in our international editions - seven in
Europe and six in Asia. Next year, e.biz will appear monthly in Europe and
seven times in Asia. Since e.biz
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appears within the pages of Business Week, we've been able to leverage our
existing circulation and hold down marketing costs.
In addition, e.biz anchors our technology channel on Business Week Online
and has been the source of three successful conferences in 2000. We charge
a premium rate for advertising in e.biz.
We now plan to expand the e.biz and "magazine within a magazine" concept in
our construction, aviation and healthcare areas next year.
. ENR will publish e-construction supplements four times next year.
There is also an opportunity to sponsor an e-Construction conference.
. In Aviation, we are planning special sections in Aviation Week & Space
Technology and B/CA. There is now an e.biz channel on AviationNow.com
and it is attracting new sponsors. We think there is an e.biz
conference opportunity for the aviation industry next year.
. Our healthcare publications ran four e.MD supplements this year and
will publish six in 2001.
All this effort will generate incremental revenue and represents, in my
opinion, a fine example of using our brands to innovate and add value.
Our Broadcasting group is having a very good year and we're anticipating a
good fourth quarter. Political advertising is picking up in October as the
elections come down to the wire. In California, there also are several
propositions on the ballot, including some on school-related issues that
are being supported by ad dollars. We expect more than $9 million of
political advertising this year.
Our B-to-B businesses had a good third quarter with the Aviation Week Group
clearly the best performer. Every other year in the third quarter, the
Aviation Week Group benefits from the Farnborough Air Show in Great
Britain. This year was no exception. Next year, the action will shift to
the Paris Air Show in the spring.
We continue to invest and grow traffic at AviationNow.com We recently
improved the design and functionality of the site. We are attracting new
sponsors, including Lockheed Martin and United Technologies. Traffic is
also continuing to build. Our goal had been 500,000 user sessions by July
and we are 25% ahead of that target.
In Construction, the fourth quarter belongs to Sweets and this year is no
exception. We're continuing to reduce costs in the Construction Group as
part of the transformation process. Since we've launched Dodge Plans
Online, we've closed 26 plan rooms around the country. In the fourth
quarter, we are scheduled to close eight more. This rationalization process
is an ongoing one. There are more opportunities for savings and we will
keep you posted as we take future action.
We've also continued to invest in Construction.com. We recently completed a
strategic agreement with BuildPoint that gives Construction.com the
exclusive right to use BuildPoint as the e-commerce engine for bidding and
procurement on the site. With this step, we now offer industry
professionals a complete range of services that matches their workflow.
Page views continue to grow and now exceed 3.5 million per month. And there
is no doubt that Construction.com is the largest and most heavily
trafficked Website in the industry by a huge margin.
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The volatile oil market has increased the demand for news and prices from
Platts, our energy service and that helped produce a solid third quarter.
Growth in European and Asian markets was particularly strong at Platts.
We launched Platts.com in June and continue to develop the site. Page views
have reached the 400,000 mark.
So, let's sum up for Information and Media Services:
. This has been another year of investment in creating and launching our
new vertical hubs. Traffic is growing as we add more functionality.
. We expect advertising revenue to keep growing in the fourth quarter,
although probably not at the pace established earlier in the year.
. We're taking steps to position these businesses for more improvement
next year.
So there you have the outlook for our operations.
Now, as we look to complete the year, we are reasonably comfortable with
the current consensus forecast for the fourth quarter of 50 cents, which
also includes dilution from the Tribune Education acquisition.
In looking ahead to 2001, we are just beginning our budgeting process for
2001, so it would be premature to comment at this time on the consensus
forecast for next year. But what I can tell you is that we believe we have
created a resilient portfolio that can deliver results even when others
face greater uncertainty. The environment for financial services is
improving, and we look forward to another good year in education in 2001.
Now, I'd like Bob Bahash to review some aspects of our financial
performance and then we will hear from Joanne Rose about the structured
financial market.
Robert J. Bahash
Executive Vice President and CFO
Thank you, Terry.
Let me review for you some more aspects of the Tribune Education
acquisition that was completed on September 5. As a result of that
acquisition, our debt has risen to a level we haven't seen for many years.
Nevertheless, our long-term ratings have been maintained at A-1 from
Moody's and Single A+ from Fitch.
At the end of the third quarter, our debt was $1,220,000,000. That's $435
million higher than it was at the end of the third quarter last year and
$526 million higher than it was at the end of this year's second quarter.
We repaid $95 million in medium term notes that came due on September 1, so
our debt at the end of the quarter is in commercial paper with an average
weighted yield of 6.6 percent. By the end of the year, we still expect to
reduce debt to just over the $1.0 billion level. Debt at the end of last
year was $536 million.
Interest expense grew 19.4% in the third quarter reflecting one month of
the Tribune acquisition and higher CP rates this year. After nine months,
interest expense is up 10.2% to $35.4 million. We anticipate ending the
year a little below $60 million.
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Corporate expenses grew by only 2.1% in the third quarter and are up 9.9%
for the year to $64.2 million. We anticipate that these expenses will grow
at about the rate of inflation in the fourth quarter.
As you know, pre-publication expenditures remain our biggest single
investment. Pre-pub spending in the third quarter was $58.9 million and is
$163.4 million year-to-date. We do expect a somewhat higher run rate in the
fourth quarter as we ramp up for 2001, which is another big year for the
elementary-high school market. We still expect $230-$240 million of pre-pub
expenditures for the year, including a small amount from Tribune Education.
Capital expenditures for the third quarter were $18.5 million and $53.1
million after nine months. We have some more real estate expenditures in
the fourth quarter and expect Cap X in the $90-$100 million range for the
year, down slightly from earlier forecasts, but substantially below last
year when we spent $154 million.
Now, let's look at our non-cash charges. Amortization of pre-publication
costs were $98 million in the third quarter and $170.8 million year-to-
date. We still expect to end the year in the $200 million range.
Depreciation was $20.5 million in the third quarter and $64.2 million after
nine months should end the year in the $100 million range.
Amortization of goodwill and intangibles were $16.8 million in the third
quarter and $45.6 million after nine months. Reflecting the acquisition of
Tribune Education, we anticipate finishing the year in the $65-$70 million
range. For next year, the run rate is probably in the $80 million range. It
could be as high as $85 million.
I'll conclude with a few comments on our share buyback program. We
repurchased 1,688,000 shares in the first half for $85.7 million. We are
now back in the market. Our new total is now 2.1 million. We will continue
to buy back opportunistically as conditions warrant. So far, our buyback
program has more than offset the exercise of options as well as the
issuance of restricted shares, which has always been one of the goals of
the program.
Thank you.
Harold McGraw III
Chairman, President and CEO
Now, let's hear from Joanne Rose.
She is the executive managing director for Structured Finance Ratings at
Standard & Poor's. Before being named to this position last June, Joanne
was senior managing director and general counsel for S&P.
She has served as chair of the Rating Policy Board, Standard & Poor's
senior analytical policy-making group; and is a member of the Ratings
Services Executive Committee and Senior Operations Committee.
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Before joining Standard & Poor's in 1988, she was associated with the law
firm of White & Case. Joanne has a law degree from the Columbia University
School of Law where she was a Harlan Fiske Stone Scholar. She has a B.A.
degree from the University of Rochester.
Joanne W. Rose
Executive Managing Director, Structured Finance
Standard & Poor's Ratings Services
Securitization is fast becoming the finance tool of choice for an ever-
broadening array of global issuers. Securitizations' ability to unlock
illiquid assets, thereby allowing them to be financed based on their own
independent credit strength regardless of the strength of the originator of
the assets, is the key to its value to both originators and investors. The
need to be efficient in the use of capital is the driving factor behind the
growth of the global securitization market and the growth in the use of
structured finance techniques. Whether that need is generated by a
regulatory capital requirement that is out of balance with the true risk of
an asset, by a focus on shareholder returns, by the reduced financial
borrowing capacity of an issuer, by the need to reduce the cost of
borrowing, or by the need to access new classes of investors, doesn't
matter. Securitization can be the answer. And since securitization involves
complex structures and the transfer of illiquid assets, the key to a
successful securitization is an independent and objective analysis of both
the structure and the credit strength of the assets. And it is in this
function that Standard & Poor's Structured Finance Ratings have excelled.
I'd like to use a few slides to illustrate the growth in the structured
finance market. This first slide illustrates the growth in what is
considered the traditional U.S. securitization market. This traditional
market includes non-agency (called private label) residential mortgage-
backed transactions, asset-backed transactions (including credit cards,
auto loans, auto leases, etc), and commercial real-estate securitizations.
This slide excludes private transactions and 144A transactions and also
excludes certain asset classes (e.g. CBO/CLOs and asset-backed commercial
paper).
As you can see, the year-to-year growth in market volume has been very
impressive. The declines this year in private label residential mortgage-
backed transaction volume and commercial real estate securitization volume
can be explained by rising interest rates during most of 2000 and the
corresponding decrease in the number of mortgages originated and
refinanced. The traditional asset-backed market continues to grow at
healthy rates. For 2001 we believe that issuance in the private label
residential mortgage-backed market will be flat while issuance in
commercial real estate will increase by approximately 3-5%. We expect the
traditional asset-backed market to grow 6% in 2001. In addition, our market
penetration in private label mortgage-backed and traditional asset-backed
is very high and we do not anticipate changes in that market penetration.
In commercial real estate we have the opportunity to, and expect to,
increase market penetration.
A new, very strong asset class emerged just a little over three years ago.
This class is known by the acronym CBO/CLO. The underlying assets in these
transactions are corporate loans and corporate bonds either purchased in
the open market or from the balance sheets of financial institutions. As
you can see, the growth in this market has been exceptional. This market
didn't really exist 4 years ago. We anticipate that market volume for this
asset class in 2001 will be similar to 2000, but much will depend on
spreads on corporate bonds and the availability of high yield corporate
securities. More importantly, we've seen the emergence of a new type of
transaction, a CBO type structure that uses other asset-backed and
mortgage-backed securities as its underlying asset. The CBO of ABS. This
asset class is a substitute for corporate bonds in the
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event spreads are unfavorable or high yield issuance is low. We hope to see
continued development and growth in this new type of transaction.
Moving outside the U.S., we see very exciting opportunities. Securitization
in Europe has really hit its stride as regulatory and legal impediments
have been removed and as banks and other financial institutions have begun
to focus on shareholders returns and the efficient use of capital. What
started out as a residential mortgage-backed market in the U.K. has
expanded into a diversified asset-backed market in France, Germany, Italy,
and, a few other countries. Market volume growth from 1999 to 2000 is
expected to be around 17%, and we anticipate continued growth in the range
of 12-15% in 2001.
The markets in Asia (outside of Australia) and Latin American are still in
their infancy, but continue to grow nicely. In Asia there are many legal
and regulatory hurdles to securitization but they are starting to be
addressed. For example, Japan has adopted new laws to encourage
securitization and we expect to see more transactions in Japan in 2001.
Australia has a well-developed residential mortgage-backed market and we
expect growth in other asset classes in 2001. As you can see from this
slide, the market is developing nicely. In Asia, we see a full range of
transaction types from residential mortgage-backed to asset-backed to
commercial real estate. The big increase in volume in 2000 in Asia-ex Japan
and Australia (shown on this slide) is the Korean domestic securitization
market.
In Latin America, most transactions are what we call future flow
transactions, which are securitizations of cash flows off of future sales
of goods and services. To date, they are very dependent on the large oil
companies and other large export companies. In addition to this cross-
border market, there is a healthy domestic securitization market in
Argentina that is not shown on this chart.
As you all know, the market for ratings and other credit risk evaluation
services for the structured finance market is highly competitive.
Competition in this market can be played out in many ways but we believe
that there is only one way to compete, and that is on credibility and
service. Credibility comes from the performance of your ratings over time
and is built slowly but can be lost quickly. Service is delivering to the
markets the most informative ratings and other credit risk evaluation
services at the time and in the manner that the market wants. We strive for
excellence on both these measures. In order to maintain our credibility and
the credibility of our ratings we focus on the real source of that
credibility, our staff. Standard & Poor's Structured Finance Department has
a comprehensive training program for our staff, covering all aspects of
analyzing structured finance transactions. We are making investments in
order to be able to deliver the training program and its accompanying
criteria manuals over the Internet so our analysts can access it worldwide
when they need it, as they need it. In addition, Standard & Poor's stands
alone in having a dedicated team of research professionals whose sole job
is to conduct the research critical to the evaluation of precedent-setting
transactions. Our research group is also responsible for back testing our
ratings to show their credibility over time. Each year we publish the
results for the market to see.
When we talk about service, we are talking about providing a quality
experience for each market participant who interacts with us. That means
having well-trained, accessible, experienced staff that can handle the
complex analysis these transactions require and can communicate the
results. That means publishing our criteria so that the market can see and
understand how we look at these transactions. That means having the
information that the participant is looking for when they need it and in
the form they want it--whether that is print or electronic. We believe we
are
<PAGE>
13
second to none in the scope and quality of our staff and the information we
provide on the structured finance market.
Now I know what most of you are really interested in. And that is what is
the 4/th/ quarter shaping up to look like. Well, there are some very
interesting patterns in the parts of the structured finance market that are
transaction-driven. This pattern is especially pronounced in the U.S.,
which of course is still home to the majority of the issuance in the
structured finance market. What we repeatedly see is surges in issuance
volume at the end of each quarter, with especially heavy issuance at the
end of the fiscal year. In fact, this pattern is easily explained.
Securitization is just one of a number of financing techniques that an
entity can use to manage its balance sheet. One of the most interesting
effects of securitization is that in accounting terms it removes the assets
and liabilities relating to the securitization from the balance sheet of
the entity. This can materially improve an entity's financial ratios,
especially the debt-to-equity ratio. Of course the effect is equally
dramatic for regulated institutions and their capital-to-asset ratios. That
coupled with the fact that securitizations are complex and take several
months to assemble and document has resulted in this pattern of issuance.
On the other side of the equation, investors have adjusted their investment
patterns to match the pattern of issuance. We often speak to investors who
tell us that they plan out how much to invest quarter by quarter. Also, no
investor wants to head into the end of its fiscal year with uninvested
funds, so they appreciate the surge of issuance at year-end. Every once in
a while someone asks, "What if there is a mismatch." I have never seen one
truly develop. In fact because of the length of time it takes to execute a
structured finance transaction, investors know far in advance the pipeline
and behave accordingly. We expect 4/th/ quarter this year to follow this
pattern and believe that the 4/th/ quarter will be strong.
Standard & Poor's Structured Finance Ratings Department's strategy is to
maintain its leadership position in providing ratings and other credit risk
evaluation services to the rapidly growing global securitization market. In
addition, we are focused on capturing additional revenue and profit growth
by extending the reach of our ratings and services to non-U.S. transactions
and "non-securitization" transactions, such as aircraft financing, business
acquisition financing, investment and asset portfolio analysis, derivatives
and synthetic securities and arbitrage vehicles. The strategy is focused on
leveraging Standard & Poor's brand identity, our overwhelming recognition
for quality, independence and objectivity, our global network, and our most
valuable asset, our employees.
I am very excited about the long-term prospects of the Standard & Poor's
Structured Finance Ratings Department. Governments, regulators, financial
institutions, and corporations all over the world are seeing the benefits
of securitization. And why not, Structured Finance has proven to be a
reliable, highly flexible financing tool. In its most basic form, it allows
the liquification of illiquid assets, the proper allocation of risk and
reward, and the rebalancing of supply-demand imbalances in the financing
markets. But most importantly, the men and women in Standard & Poor's
Structured Finance Department have proven their ability to meet the demands
of this fast growing and challenging market. I look forward to working with
them to meet the future demands of this complex, challenging, and
profitable market.
Harold McGraw III
Chairman, President and CEO
Thank you. That concludes today's update meeting.
<PAGE>
"Safe Harbor" statement under the Private
Securities Litigation Reform Act of 1995
--------------------------------------------------------------------------------
Information in this presentation contains 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: future paper, printing and distribution prices; future
compensation merit increase rates; McGraw-Hill Education's level of success in
2000 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 Ratings Services; the level of success of new product
development and strength of domestic and international markets at Standard &
Poor's Information Services; Business Week's success in expansion into
international markets; the strength of the domestic and international
advertising markets; the contract value of non-residential building; McGraw-Hill
Construction Information Group's ability to introduce new electronic products,
product extensions and enhancements; Broadcasting's level of political and
ballot-initiative advertising; and the level of future cash flow, debt levels,
capital expenditures and prepublication cost investment.
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 upon various important factors, including, but not
limited to, worldwide economic and political conditions, currency and foreign
exchange volatility, the health of capital and equity markets, continued
strength in advertising, continued strength in the education market, the
successful marketing of new products, and the effect of competitive products and
pricing.
THE Mc GRAW - HILL COMPANIES
<PAGE>
Quarterly Update
--------------------------------------------------------------------------------
Presenters:
Harold McGraw III
Chairman, President and CEO
Robert J. Bahash
Executive Vice President and CFO
Joanne W. Rose
Executive Managing Director,
Structured Finance, Standard & Poor's
THE Mc GRAW - HILL COMPANIES
<PAGE>
A strong record of growth
--------------------------------------------------------------------------------
For 3Q For 9 Months
--------------------------------------------------------------------------------
Revenue . 8.6% . 12.0%
Net income . 14.3% . 22.3%
(including dilution
from acquisition
of Tribune Education)
$1.11 3Q EPS . 15.0% . 24.2%
(including .03 dilution)
THE Mc GRAW - HILL COMPANIES
<PAGE>
--------------------------------------------------------------------------------
McGraw-Hill Education
THE Mc GRAW - HILL COMPANIES
<PAGE>
A strong record of growth
--------------------------------------------------------------------------------
McGraw-Hill Education For 3Q For 9 Months
--------------------------------------------------------------------------------
Revenue . 10.1% . 14.0%
Operating Profits . 8.6% . 17.1%
Operating Margin . 17.74%
THE Mc GRAW - HILL COMPANIES
<PAGE>
Sales Performance
--------------------------------------------------------------------------------
MHP INDUSTRY
--------------------------------------------------------------------------------
Sales Growth . Faster than . 15.3%
through 8 months the industry
Our market share in key adoptions
. Texas reading 38%
. California social studies 40%
. Texas literature 26%
. Secondary school science 60% +
THE Mc GRAW - HILL COMPANIES
<PAGE>
Education market's spending patterns
--------------------------------------------------------------------------------
California spent $500 million
- SRA/McGraw-Hill was a major beneficiary
- AB-2519 funds led to substantial increases for the unit in each quarter this
year
More early ordering this year
THE Mc GRAW - HILL COMPANIES
<PAGE>
Integrating Tribune Operations
--------------------------------------------------------------------------------
Closed on September 5
- Second inquiry from U.S. Justice Dept. delayed original closing date of
July 31
Integration well underway
- Folding in 5 of the 6 businesses
- Substantial opportunities to integrate product lines and create new
efficiencies
- The Wright Group will operate as stand alone
THE Mc GRAW - HILL COMPANIES
<PAGE>
Integrating Tribune Operations
--------------------------------------------------------------------------------
Tribune McGraw-Hill
Everyday Learning ---------------- Elementary, secondary
Elementary and secondary supplementary and higher
math and health programs; education units
titles for college market
Creative Publications
Core secondary math -------------- Glencoe/McGraw-Hill
Supplemental math Wright/McGraw-Hill
NTC/Contemporary ----------------- Folding into six of our units:
Language arts, foreign language Professional Publishing, Glencoe,
health, social studies, develop- School division, Higher Education
mental reading, non-fiction and International and Children's
adult trade titles Publishing
Landoll -------------------------- Children's Publishing
Children's books and other
products for the consumer market
THE Mc GRAW - HILL COMPANIES
<PAGE>
Tribune will expand market reach
--------------------------------------------------------------------------------
Expanded reach into pre-K to 5 language arts market
. New National Science Foundation-funded math products
. New teacher training products
. Entering remedial reading, a growing market
THE Mc GRAW - HILL COMPANIES
<PAGE>
Additional benefits from Tribune
--------------------------------------------------------------------------------
. New talent:
- Experienced editorial, production and sales staff
. Cost savings:
- Integration of "back office" functions (billing, distribution, etc.)
underway
- Rationalization of distribution centers
THE Mc GRAW - HILL COMPANIES
<PAGE>
McGraw-Hill Education
-------------------------------------------------------------------------------
. Higher Education
. International
. Professional Publishing
THE Mc GRAW - HILL COMPANIES
<PAGE>
We are providing digital solutions
------------------------------------------------------------------------------
PageOut
. Enables instructors to easily create course-specific Web sites
. More than 30,000 registered instructors in U.S.
. Successfully introducing PageOut in Canada with 3,700 users; and 1,300 in
Europe
. Links to Online Learning Centers
[WEB PAGE]
www.pageout.com
THE Mc GRAW - HILL COMPANIES
<PAGE>
We are providing digital solutions
--------------------------------------------------------------------------------
Online Learning Centers
Content in digital format provides:
. Complete textbook online
. Online resources for instructors
. Supplementary materials for students
. Links to PageOut
[WEB PAGE]
www.mhhe.com
THE Mc GRAW - HILL COMPANIES
<PAGE>
We are providing digital solutions
-------------------------------------------------------------------------------
Interactive e-Source
- Digitized content from text and other sources
- Delivery via the Web or CD-ROM
- 25 titles this year in major disciplines
[WEB PAGE]
Interactive eSource
THE Mc GRAW - HILL COMPANIES
<PAGE>
We are providing digital solutions
--------------------------------------------------------------------------------
PowerWeb
_ A web-based coursepak for instructors
_ Online source for discipline-specific articles, news and essays
[WEBPAGE APPEARS HERE]
www.mhhe.com
THE Mc GRAW - HILL COMPANIES
<PAGE>
Increasing the functionality of content
--------------------------------------------------------------------------------
Primis Online
- Instructor goes online to select content, structure of text based on search
of our database of 230,000 textbook pages
- Student selects delivery: online eBookstore, or text from college bookstore
- Content available for easy, cost-effective updating
[WEBPAGE APPEARS HERE]
www.mhhe.com/primis
THE Mc GRAW - HILL COMPANIES
<PAGE>
Using technology to gain market share
--------------------------------------------------------------------------------
ALEKS (TM)
- Web-based artificial intelligence system
- Determines math abilities and provides self-paced learning
- First and second year college math markets
[WEBPAGE APPEARS HERE]
www.highed.aleks.com
THE Mc GRAW - HILL COMPANIES
<PAGE>
Progress in our International Group
--------------------------------------------------------------------------------
. Benefiting from rebound in Asia-Pacific and improvement in Mexico
. Globalizing our digital solutions for competitive advantage
- PageOut is in Europe, Asia and Canada
- ALEKS is being demonstrated in Canada
THE Mc GRAW - HILL COMPANIES
<PAGE>
Update on Professional Book Group
--------------------------------------------------------------------------------
. Softness in computer and STM titles resulted in decline in 3Q revenue and
operating profits
. 4Q: Expect improvement
- Introducing seven major medical titles, including:
- Hurst's The Heart
- Principles of Neurology
- Williams' Hematology
THE Mc GRAW - HILL COMPANIES
<PAGE>
Summary
--------------------------------------------------------------------------------
. McGraw-Hill Education
- A fine year in education with prospects for another good adoption year in
2001
- Solid progress in integrating the Tribune Education acquisition
- Growing use of digital solutions to create global competitive advantage
THE McGRAW - HILL COMPANIES
<PAGE>
--------------------------------------------------------------------------------
Financial Services
THE McGRAW - HILL COMPANIES
<PAGE>
A strong record of growth
--------------------------------------------------------------------------------
Financial Services FOR 3Q FOR 9 MONTHS
------------------------------------------------------------------------------
Revenue . 4.6% . 6.3%
Operating Profits . 12.8% . 9.6%
Operating Margin . 31.36%
THE McGRAW - HILL COMPANIES
<PAGE>
Growing through diversification
--------------------------------------------------------------------------------
- Double-digit gains in all our international markets
- Today, more than 30% of S&P's revenues are from foreign sources
THE McGRAW - HILL COMPANIES
<PAGE>
Overseas trends benefiting S&P
--------------------------------------------------------------------------------
. Creation of single currency
. Disintermediation of banks in Europe
. Europe Bond market is growing
- Number of European bonds in first nine months is up by 8.4% despite
decline in new issue dollar volume
THE McGRAW - HILL COMPANIES
<PAGE>
Bond market activity
--------------------------------------------------------------------------------
. Growing activity in European
corporate bond market
- Corporate sector is growing in unit volume
- Increased activity from U.S. multinationals
. Trends in U.S. market
- New issue volume declined
1Q '00 $ 332.3 - 6.4%
2Q '00 $ 314.6 - 7.9%
3Q '00 $ 276.4 -11.2%
- 4Q 2000 comparisons get easier
(4Q `00 $214.5 billion)
THE Mc GRAW - HILL COMPANIES
<PAGE>
Results in U.S. bond market
--------------------------------------------------------------------------------
AFTER 9 MONTHS
--------------------------------------------------------------------------
Corporates issuance . 0.59%
Municipals . 18.30%
Asset-backed issues . 1.25%
Mortgage-backed issuance . 48.40%
THE Mc GRAW - HILL COMPANIES
<PAGE>
Expectations for 4Q activity
--------------------------------------------------------------------------------
. Continued strength overseas
. More growth in non-traditional services
- Bank loan ratings, rating evaluation services not reflected in new
issue statistics
- Expecting a good fourth quarter in structured finance market
THE Mc GRAW - HILL COMPANIES
<PAGE>
2001 Outlook
--------------------------------------------------------------------------------
. More positive U.S. market environment for debt issuance
- Anticipate growth in corporate, U.S. municipals, asset-backed market
- Improved commercial mortgage sector
. Good growth in European market
- S&P to increase penetration of European market
THE McGRAW - HILL COMPANIES
<PAGE>
Total Assets in ETFs
--------------------------------------------------------------------------------
. More than $50
billion in assets
. More than 50% of
total asset based [GRAPH APPEARS HERE]
on S&P indexes,
SPDRs
. More ETFs are planned
THE McGRAW - HILL COMPANIES
<PAGE>
Building a global index business
--------------------------------------------------------------------------------
Derivative products based on S&P indexes continue to grow
. Stock index futures contracts based on S&P Euro Index and S&P Europe
350
. Will be the first futures products to trade on a European exchange
while clearing on a U.S. exchange
THE Mc GRAW - HILL COMPANIES
<PAGE>
Building S&P Comstock's online business
New relationships with Internet redistributors
- iWon.com: A leading search engine and portal site
[WEBPAGE APPEARS HERE]
www.iWon.com
THE Mc GRAW - HILL COMPANIES
<PAGE>
Selling S&P Data
--------------------------------------------------------------------------------
New agreement at Charles Schwab:
- For Schwab customers S&P equities analysis, fundamental data, news,
commentary, proprietary valuation indices
- For Schwab employees S&P MarketScope service delivered to 2,700 desktops
at the firm
[WEBPAGE APPEARS HERE]
S&P MarketScope
THE Mc GRAW - HILL COMPANIES
<PAGE>
Summary
--------------------------------------------------------------------------------
. Financial Services
- Continued growth in international markets for S&P Ratings
- Continued expansion of S&P Ratings' non-traditional products
- Continued build-out of our index-based services
- More S&P data feeds to institutional customers and Internet
redistributors
- A better U.S. new issue market in 2001
THE Mc GRAW - HILL COMPANIES
<PAGE>
--------------------------------------------------------------------------------
Information and Media Services
THE Mc GRAW - HILL COMPANIES
<PAGE>
A strong record of growth
-------------------------------------------------------------------------------
Information &
Media Services FOR 3Q FOR 9 MONTHS
--------------------------------------------------------------------------
Revenue . 8.7% . 16.2%
Operating Profits . +60% . 57.8%
Operating Margin . 18.65%
THE Mc GRAW - HILL COMPANIES
<PAGE>
Business Week: Another banner year
-------------------------------------------------------------------------------
. 3Q Results:
- 18% gain in advertising pages, on top of 44% gain last year
. After nine months, ad pages are up 32% with one less issue:
- High tech, up 60.4%
- Financial services, up 13.6%
- Professional services, up 85.4%
THE Mc GRAW - HILL COMPANIES
<PAGE>
Extending the Business Week franchise
-------------------------------------------------------------------------------
. 4Q gains can be expected from:
- Two e.biz editions (sold-out)
- Launching first issue of Leaders Online, publication linked to our
Careers channel
THE Mc GRAW - HILL COMPANIES
<PAGE>
Transforming BW into a global franchise
-------------------------------------------------------------------------------
. Increasing opportunities in 2001:
- Six editions of Leaders Online
- Increasing rate base and ad rates:
North America:
- Base increases to 950,000 (up 5.5%)
- Ad rates increasing 8.8%
International:
- Base increases to 200,000 (up 7.0%)
- Ad rates increasing 8.5%
THE Mc GRAW - HILL COMPANIES
<PAGE>
Expand e.biz, our magazine-within-a magazine
-------------------------------------------------------------------------------
'99 '00 '01
-------------------------------------------------
North America 5 9 12
Europe 0 7 12
Asia 0 6 7
- Leveraging existing circulation and holding down marketing costs
- Anchors our technology channel online
- Source of three successful conferences in 2000
THE Mc GRAW - HILL COMPANIES
<PAGE>
Expand magazine-within-a-magazine concept
--------------------------------------------------------------------------------
2001: Publish "e" supplements in construction, aviation and healthcare
ENR: - Will publish four e-construction supplements
- Leverage idea for e.Construction conference
Aviation: - Planning sections in Aviation Week and B/CA
- New e.biz channel on AviationNow.com
- Conference opportunities
Healthcare: - Four e.MD supplements in 2000; six scheduled for 2001
THE Mc GRAW - HILL COMPANIES
<PAGE>
Broadcasting: Anticipating a good 4Q '00
--------------------------------------------------------------------------------
. Will benefit from:
- Political advertising
- Expect more the $9 million in 2000
- Propositions on California ballot being supported by ad dollars
THE Mc GRAW - HILL COMPANIES
<PAGE>
More progress in B2B businesses
--------------------------------------------------------------------------------
. Aviation Week Group:
- Farnborough Air Show helped with strong results
- Continue to invest and grow traffic at www.AviationNow.com
- Recently improved site design and functionality
- Site is attracting new sponsors
- 25% ahead of 500,000 user session target
THE Mc GRAW - HILL COMPANIES
<PAGE>
More progress in B2B businesses
--------------------------------------------------------------------------------
. Construction Group:
- Sweets will produce strong 4Q results
- Continue to reduce costs as we transform to digital platform
- Scheduled to close 8 more Dodge Plan rooms
THE Mc GRAW - HILL COMPANIES
<PAGE>
Developing online marketplaces
--------------------------------------------------------------------------------
Construction.com
- Signed strategic agreement with BuildPoint for bidding and e-procurement
- Site offers end-to-end project management solutions
- Page views exceed 3.5 million per month
[WEBPAGE APPEARS HERE]
www.construction.com
THE Mc GRAW - HILL COMPANIES
<PAGE>
Platts.com for the energy industry
--------------------------------------------------------------------------------
- News, pricing benchmarks, market data commentary, analysis from 325
professionals around the world
- Volatile oil market has increased demand for news and prices from Platts
- Good growth in Europe and Asia
[WEB PAGE APPEARS HERE]
www.platts.com
THE Mc GRAW - HILL COMPANIES
<PAGE>
Summary
--------------------------------------------------------------------------------
. Information and Media Services
- Year of investment in creating and launching our new vertical hubs
- Traffic is growing as we add more functionality
- Expect advertising revenue to keep growing, in 4Q
- Taking steps to improve business for more improvement next year
THE Mc GRAW - HILL COMPANIES
<PAGE>
Outlook
--------------------------------------------------------------------------------
. McGraw-Hill Education
. Financial Services
. Information and Media Services
- A resilient portfolio that can deliver results even when others face
greater uncertainty
- Environment for financial services is improving
- Look forward to another good year for education in 2001
THE Mc GRAW - HILL COMPANIES
<PAGE>
Financial Review
--------------------------------------------------------------------------------
Robert J. Bahash
Executive Vice President and Chief Financial Officer
THE Mc GRAW - HILL COMPANIES
<PAGE>
Debt levels at year-end
--------------------------------------------------------------------------------
$1,220,000,000 at end of 3Q 2000
- $435 million higher than 3Q `99
- $526 million higher than 2Q `00
. Repaid $95 million in medium term notes Sept. 1, 2000
- Average weighted yield of 6.6 percent for debt at end of quarter
. Expect debt at $1.0 billion at end of 2000
- $536 million at end of 1999
THE Mc GRAW - HILL COMPANIES
<PAGE>
Interest expense
--------------------------------------------------------------------------------
. 3Q: Increased 19.4%
. After nine months: Up 10.2% to $35.6 million
. 2000: End a little below $60 million
THE Mc GRAW - HILL COMPANIES
<PAGE>
Corporate expenses
--------------------------------------------------------------------------------
. 3Q: Grew by 2.1%
. After nine months: Up 9.9% to $64.2 million
. 4Q: Anticipate expenses to grow at about the rate of inflation
THE Mc GRAW - HILL COMPANIES
<PAGE>
Pre-publication expenditures
--------------------------------------------------------------------------------
. 3Q: $58.9 million
. Year-to-date: $163.4 million
. 2000:
- Anticipate higher run rate in 4Q as we ramp up for 2001, another big
year for el-hi market
- Still expect $230-$240 million for the year
THE Mc GRAW - HILL COMPANIES
<PAGE>
Capital expenditures
--------------------------------------------------------------------------------
. 18.5 million in 3Q
. 53.1 million after nine months
. 2000: $90-$100 million range
THE Mc GRAW - HILL COMPANIES
<PAGE>
Non-cash charges
--------------------------------------------------------------------------------
Pre-publication amortization
- 98 million in 3Q
- 170.8 million year-to-date
- Expect to end year in $200 million range
Depreciation
- 20.5 million in 3Q
- 64.2 million year-to-date
- Expect to end year in $100 million range
THE Mc GRAW - HILL COMPANIES
<PAGE>
Non-cash charges (cont'd)
--------------------------------------------------------------------------------
Amortization of goodwill and intangibles
- $16.8 million in 3Q
- $45.6 milion after nine months
- Anticipate finishing the year in $65-70 range
- Reflects acquisitions of Tribune Education
- 2001: Run rate in $80 million range
THE Mc GRAW - HILL COMPANIES
<PAGE>
Share repurchases
--------------------------------------------------------------------------------
. First half: Repurchased 1,688,000 shares for $85.7 million
. Back in the market now
. New total about 2.0 million shares
. Will continue to be opportunistic
THE Mc GRAW - HILL COMPANIES
<PAGE>
Guest Speaker
--------------------------------------------------------------------------------
Joanne W. Rose
Executive Managing Director,
Structured Finance Ratings,
Standard & Poor's
THE Mc GRAW - HILL COMPANIES
<PAGE>
North American Issuance Volume
--------------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
. Residential Mortgage-Backed Securities
. Asset-Backed Securities
. Commercial Mortgage-Backed Securities
Includes:
. HEL in ABS
Excludes:
. Private Transactions
. Asset-Backed CP
. CBO/CLO
(in billions)
1980 '85 '90 '96 '97 '98 '99 '00e
0.5 6.0 24.4 38.4 63.5 134.5 96.0 65.0
1.00.5 34.6 152.0 15.0 186.6 193.1 205.0
1.0 27.6 44.0 80.0 66.1 50.0
THE Mc GRAW - HILL COMPANIES
<PAGE>
CBO/CLO Issuance Volume
--------------------------------------------------------------------------------
[BAR CHART APPEARS HERE]
Cash Flow and Market Value
Includes:
. 144A Transactions
(in billions)
1996 1997 1998 1999 e2000
9.0 49.0 65.8 77.2 73.0
THE Mc GRAW - HILL COMPANIES
<PAGE>
European Issuance Volume
--------------------------------------------------------------------------------
Includes:
. All Asset Classes
Excludes:
. Private Transactions
. Asset-Backed CP
. Synthetics
. Credit Default Swaps
[GRAPH APPEARS HERE]
(in billions)
1998 1999 e2000
51.9 72.8 85.0
THE Mc GRAW - HILL COMPANIES
<PAGE>
Asian Issuance Volume
--------------------------------------------------------------------------------
. Japan . Australia . Asia - Excluding Japan and Australia
Includes:
. All Asset Types
. Domestic Issuance
[GRAPH APPEARS HERE]
(in billions)
1998 1999 e2000
Japan 8.1 18.0 20.0
Australia 7.4 9.8 16.0
Asia 2.0 4.6 16.0
THE Mc GRAW - HILL COMPANIES
<PAGE>
Latin American Issuance Volume
--------------------------------------------------------------------------------
Includes: All Cross-Border Issues Only
[GRAPH APPEARS HERE]
(in billions)
1999 e2000
6.4 3.1
THE Mc GRAW - HILL COMPANIES
<PAGE>
Quarterly Update
--------------------------------------------------------------------------------
Question and Answers with
Harold McGraw III
Chairman, President and CEO
Robert J. Bahash
Executive Vice President and CFO
Joanne W. Rose
Executive Managing Director,
Structured Finance, Standard & Poor's
THE Mc GRAW - HILL COMPANIES
<PAGE>
The McGraw-Hill 8
Companies
THE Mc GRAW - HILL COMPANIES
