UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES AND EXCHANGE COMMISSION
OR
For the Transition Period From to
-------- --------
Commission File Number 1-1023
THE MCGRAW-HILL COMPANIES, INC.
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-1026995
- --------------------------------- -----------------------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1221 Avenue of the Americas, New York, N.Y. 10020
- -----------------------------------------------------------------------------
(Address of Principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 512-2000
------------------
Not Applicable
- -----------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
On July 16, 2001 there were approximately 194.7 million shares of common stock
(par value $1.00 per share) outstanding.
The McGraw-Hill Companies, Inc.
-------------------------------
TABLE OF CONTENTS
-----------------
Page Number
-----------
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
-------
Consolidated Statement of Income for
the three and six month periods ended
June 30, 2001 and 2000 3
Consolidated Balance Sheets at June 30, 2001,
December 31, 2000 and June 30, 2000 4-5
Consolidated Statement of Cash Flows for the six 6
months ended June 30, 2001 and 2000
Notes to Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of Operating
------ Results and Financial Condition 12-17
Item 3. Quantitative and Qualitative Disclosures
------ About Market Risk 17
Part II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 18
------
Item 4. Submission of Matters to a Vote of Security Holders 18
------
Item 6. Exhibits and Reports on Form 8-K 19-21
------
Part I
Financial Information
Item 1. Financial Statements
---------------------
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Statement of Income
--------------------------------
Periods Ended June 30, 2001 and 2000
------------------------------------
Three Months Six Months
-------------------- -------------------
2001 2000 2001 2000
------- -------- ------- -------
(in thousands, except per-share data)
Operating revenue $ 1,149,470 $ 1,015,924 $ 1,995,867 $ 1,800,138
Expenses:
Operating 481,819 423,667 894,281 802,309
Selling and general 382,132 329,387 703,702 620,895
Depreciation & amortization 105,393 86,035 179,746 145,232
---------- ----------- ----------- -----------
Total expenses 969,344 839,089 1,777,729 1,568,436
Other income - net 9,924 8,113 21,948 33,152
---------- ----------- ----------- -----------
Income from operations 190,050 184,948 240,086 264,854
Interest expense - net 16,021 11,238 32,901 20,583
---------- ----------- ----------- -----------
Income before taxes on
income 174,029 173,710 207,185 244,271
Provision for taxes on
income 54,032 66,878 66,797 94,044
---------- ----------- ----------- -----------
Income before cumulative
adjustment 119,997 106,832 140,388 150,227
Cumulative change in accounting,
net of tax (Note 10) - - - (68,122)
--------- ---------- ----------- -----------
Net income / (loss) $ 119,997 $ 106,832 $ 140,388 $ 82,105
========= =========== =========== ===========
Earnings per common share:
Basic
Income before cumulative
adjustment $ 0.62 $ 0.55 $ 0.72 $ 0.77
Net income $ 0.62 $ 0.55 $ 0.72 $ 0.42
Diluted
Income before cumulative
adjustment $ 0.61 $ 0.55 $ 0.71 $ 0.77
Net income $ 0.61 $ 0.55 $ 0.71 $ 0.42
Average number of common
shares outstanding: (Note 9)
Basic 194,571 193,705 194,433 194,227
Diluted 196,962 195,440 196,632 195,952
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Balance Sheet
--------------------------
June 30, Dec. 31, June 30,
2001 2000 2000
---------- ----------- ----------
(in thousands)
ASSETS
Current assets:
Cash and equivalents $ 11,428 $ 3,171 $ 8,726
Accounts receivable (net of allowance
for doubtful accounts and sales
returns) (Note 4) 1,094,172 1,095,118 964,263
Inventories (Note 4) 484,574 388,947 396,782
Deferred income taxes 196,394 192,789 149,481
Prepaid and other current assets (Note 5) 132,971 121,665 101,817
---------- ---------- ----------
Total current assets 1,919,539 1,801,690 1,621,069
---------- ---------- ----------
Prepublication costs (net of accumulated
amortization) (Note 4) 547,311 518,031 472,762
Investments and other assets:
Investment in Rock-McGraw, Inc. - at
equity 100,802 95,862 90,540
Prepaid pension expense 185,648 159,598 136,245
Other 242,950 226,910 196,495
---------- ---------- ----------
Total investments and other assets 529,400 482,370 423,280
---------- ---------- ----------
Property and equipment - at cost 1,034,443 1,046,369 953,739
Less - accumulated depreciation 614,367 614,464 548,773
---------- ---------- ----------
Net property and equipment 420,076 431,905 404,966
Goodwill and other intangible assets - at
cost (net of accumulated amortization) 1,742,565 1,697,448 1,196,238
---------- ---------- ----------
Total Assets $5,158,891 $4,931,444 $4,118,315
========== ========== ==========
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Balance Sheet
--------------------------
June 30, Dec. 31, June 30,
2001 2000 2000
---------- ----------- -----------
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $283,529 $227,848 $246,158
Current portion of long-term debt - - 95,043
Accounts payable 303,259 313,286 258,462
Accrued liabilities 248,594 358,274 223,515
Income taxes currently payable 107,183 55,388 81,454
Unearned revenue 494,916 475,559 452,705
Other current liabilities (Note 5) 345,048 350,430 327,114
---------- ---------- ----------
Total current liabilities 1,782,529 1,780,785 1,684,451
---------- ---------- ----------
Other liabilities:
Long-term debt (Note 6) 1,012,774 817,529 353,117
Deferred income taxes 169,872 163,231 123,142
Accrued postretirement healthcare and
other benefits 175,443 178,525 185,700
Other non-current liabilities 233,053 230,330 203,882
---------- ---------- ----------
Total other liabilities 1,591,142 1,389,615 865,841
---------- ---------- ----------
Total liabilities 3,373,671 3,170,400 2,550,292
---------- ---------- ----------
Shareholders' equity (Notes 7 & 8):
Capital stock 205,852 205,852 205,852
Additional paid-in capital 64,897 44,176 37,587
Retained income 2,150,288 2,105,145 1,874,700
Accumulated other comprehensive income (127,793) (110,358) (105,504)
---------- ---------- ----------
2,293,244 2,244,815 2,012,635
Less - common stock in treasury-at cost 477,707 470,903 425,667
Unearned compensation on restricted stock 30,317 12,868 18,945
---------- ---------- ----------
Total shareholders' equity 1,785,220 1,761,044 1,568,023
---------- ---------- ----------
Total liabilities & shareholders'
equity $5,158,891 $4,931,444 $4,118,315
========== ========== ==========
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Statement of Cash Flows
------------------------------------
For The Six Months Ended June 30, 2001 and 2000
--------------------------------------------------
2001 2000
---------- -----------
(in thousands)
Cash flows from operating activities
- ---------------------------------------------------
Net income $ 140,388 $ 82,105
Cumulative change in accounting principle - 68,122
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation 45,380 43,741
Amortization of goodwill and intangibles 44,686 28,861
Amortization of prepublication costs 89,680 72,730
Provision for losses on accounts receivable 25,909 21,065
Gain on sale of Tower - (16,587)
Gain on sale of Real Estate (6,925) -
Other (5,756) (4,112)
Changes in assets and liabilities net of effect of
acquisitions and dispositions:
Increase in accounts receivable (19,450) (47,475)
Increase in inventories (84,774) (111,605)
Increase in prepaid and other current assets (11,038) (14,112)
Decrease in accounts payable and accrued expenses (127,729) (168,057)
Increase in unearned revenue 15,352 28,729
Increase in other current liabilities 10,631 12,913
Increase in interest and income taxes
currently payable 68,341 17,977
Decrease in deferred income taxes 369 463
Net change in other assets and liabilities (16,076) (7,217)
- --------------------------------------------------- --------- ---------
Cash provided by operating activities 168,988 7,541
- --------------------------------------------------- --------- ---------
Investing activities
- ---------------------------------------------------
Investment in prepublication costs (115,608) (104,469)
Purchases of property and equipment (41,083) (34,625)
Acquisition of businesses (146,265) -
Disposition of businesses, property and equipment 17,324 139,150
- --------------------------------------------------- --------- ---------
Cash (used for)/provided by investing activities (285,632) 56
- --------------------------------------------------- --------- ---------
Financing activities
- ---------------------------------------------------
Net additions of commercial paper and other
short-term debt 251,222 160,677
Dividends paid to shareholders (95,245) (91,218)
Exercise of stock options 47,216 12,403
Repurchase of treasury shares (75,455) (84,250)
Other (165) (994)
- --------------------------------------------------- --------- ---------
Cash provided by/(used for)financing activities 127,573 (3,382)
- --------------------------------------------------- --------- ---------
Effect of exchange rate fluctuations on cash (2,672) (1,978)
--------- ---------
Net change in cash and equivalents 8,257 2,237
Cash and equivalents at beginning of period 3,171 6,489
- --------------------------------------------------- --------- ---------
Cash and equivalents at end of period $ 11,428 $8,726
========= =========
The McGraw-Hill Companies, Inc.
------------------------------
Notes to Financial Statements
-----------------------------
1. The financial information in this report has not been audited, but in the
opinion of management all adjustments (consisting only of normal recurring
adjustments) considered necessary to present fairly such information have
been included. The operating results for the three and six month periods
ended June 30, 2001 and 2000 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, 2000.
Certain prior year amounts have been reclassified for comparability
purposes.
2. The following table is a reconciliation of the company's net income to
comprehensive income for the three month and six month periods
ended June 30:
Three Months Six Months
---------------------- ----------------------
2001 2000 2001 2000
--------- ---------- --------- ---------
(in thousands)
Net income $ 119,997 $ 106,832 $ 140,388 $82,105
Other comprehensive income,
net of tax: Foreign currency
translation adjustment 1,497 (17,662) (17,435) (17,773)
--------- --------- --------- ---------
Comprehensive income $ 121,494 $89,170 $ 122,953 $64,332
========= ========= ========= =========
3. The company has three reportable segments: McGraw-Hill Education, Financial
Services, and Information and Media Services. McGraw-Hill Education
provides educational and reference materials for all levels, from preschool
to lifelong learning, for students and professionals. The Financial
Services segment consists of Standard & Poor's operations, which provide a
wide range of financial information, credit ratings and analysis globally.
The Information and Media Services segment includes business and
professional media offering information, insight and analysis.
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Financial Statements
-----------------------------
Operating profit by segment is the primary basis for the chief
operating decision-maker of the company, the CEO Council, to evaluate the
performance of each segment. A summary of operating results by segment
for the three months and six months ended June 30, 2001 and 2000 follows:
2001 2000
---------------------- ----------------------
Operating Operating
Revenue Profit Revenue Profit
--------- ---------- --------- ---------
(in thousands)
Three Months
- ------------
McGraw-Hill Education $ 566,150 $ 67,990 $ 447,734 $ 51,126
Financial Services 365,781 110,051 315,924 96,200
Information and Media Services 217,539 33,073 252,266 58,779
- ------------------------------ ---------- -------- ---------- ---------
Total operating segments 1,149,470 211,114 1,015,924 206,105
General corporate expense - (21,064) - (21,157)
Interest expense - net - (16,021) - (11,238)
- ------------------------------ ---------- --------- ---------- ---------
Total company $1,149,470 $ 174,029* $1,015,924 $ 173,710*
========== ========= ========== =========
*Income before taxes on income.
2001 2000
---------------------- ----------------------
Operating Operating
Revenue Profit Revenue Profit
--------- ---------- --------- ---------
(in thousands)
Six Months
- ----------
McGraw-Hill Education $ 873,908 $ 10,160 $ 684,096 $ 12,730
Financial Services 710,962 216,659 620,612 184,180
Information and Media Services 410,997 46,744 495,430 107,886
- ------------------------------ ---------- ---------- ---------- ---------
Total operating segments 1,995,867 273,563 1,800,138 304,796
General corporate expense - (33,477) - (39,942)
Interest expense - net - (32,901) - (20,583)
- ------------------------------ ---------- ---------- ---------- ----------
Total company $1,995,867 $207,185* $1,800,138 $ 244,271*
========== ========== ========== ==========
*Income before taxes on income.
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Financial Statements
-----------------------------
4. The allowance for doubtful accounts and sales returns, the components of
inventory and the accumulated amortization of prepublication costs were as
follows:
June 30, Dec. 31, June 30,
2001 2000 2000
---------- ---------- ----------
(in thousands)
Allowance for doubtful accounts $111,795 $137,741 $ 123,979
========== ========== ==========
Allowance for sales returns $ 87,009 $118,522 $ 67,813
========== ========== ==========
Inventories:
Finished goods $404,394 $324,852 $ 326,928
Work-in-process 37,709 24,231 35,895
Paper and other materials 42,471 39,864 33,959
---------- ---------- ----------
Total inventories $484,574 $388,947 $ 396,782
========== ========== ==========
Accumulated amortization of
prepublication costs $757,733 $757,034 $ 585,734
========== ========== ==========
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 $207.6 million of matched purchase and sale commitments at
June 30, 2001. 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:
June 30, Dec. 31, June 30,
2001 2000 2000
---------- ---------- ----------
(in thousands)
9.43% Notes due 2000 $ - $ - $ 95,043
Commercial paper supported by
bank revolving credit agreement 871,200 815,600 350,000
Extendible Commercial Notes 140,000 - -
Other 1,574 1,929 3,117
----------- ---------- ----------
Total long-term debt $ 1,012,774 $817,529 $448,160
Less: current portion of long-term debt - - (95,043)
----------- ---------- ----------
$ 1,012,774 $817,529 $353,117
=========== ========== ==========
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Financial Statements
-----------------------------
Extendible Commercial Notes (ECNs) replicate commercial paper, except that the
company has an option to extend the note beyond its initial redemption date to a
maximum final maturity of 390 days. However, if exercised, such an extension is
at a higher reset rate, which is at a predetermined spread over LIBOR, and is
related to the company's commercial paper rating at the time of extension. As a
result of the extension option, no backup facilities for these borrowings are
required. Like commercial paper, ECNs have no financial covenants.
7. Common shares reserved for issuance for conversions and stock based awards
were as follows:
June 30, Dec. 31, June 30,
2001 2000 2000
---------- ---------- ----------
$1.20 convertible preference stock
at the rate of 13.2 shares for each
share of preference stock 17,530 17,846 17,846
Stock based awards 21,654,441 23,474,142 24,568,829
---------- ---------- ----------
21,671,971 23,491,988 24,586,675
========== ========== ==========
8. Cash dividends per share declared during the periods were as follows:
Three Months Six Months
------------ ------------
2001 2000 2001 2000
---- ---- ---- ----
Common stock $.245 $.235 $.490 $.470
Preference stock .300 .300 .600 .600
9. A reconciliation of the number of shares used for calculating basic
earnings per common share and diluted earnings per common share for the
three months and the six months ended June 30, 2001 and 2000 follows:
Three month period 2001 2000
------------------ ---------- ----------
(thousands of shares)
Average number of common shares outstanding 194,571 193,705
Effect of stock options and other dilutive securities 2,391 1,735
---------- ----------
196,962 195,440
========== ==========
Six month period 2001 2000
---------------- ---------- ----------
(thousands of shares)
Average number of common shares outstanding 194,433 194,227
Effect of stock options and other dilutive securities 2,199 1,725
---------- ----------
196,632 195,952
========== ==========
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Financial Statements
-----------------------------
Restricted performance shares outstanding at June 30, 2001 of 652,000 were not
included in the computation of diluted earnings per common shares because the
necessary vesting conditions have not yet been met.
10. In June 2001, the Financial Accounting Standards Board approved Financial
Accounting Standard (FAS) No. 141, Business Combinations, and FAS No. 142,
Goodwill and Other Intangible Assets. FAS No. 141 prohibits the use of the
pooling-of-interest method of business combinations initiated after June
30, 2001. FAS No. 142 institutes new requirements for testing goodwill and
indefinitely lived intangible assets for impairment instead of amortizing
them. The effective date of this pronouncement is January 1, 2002.
The company adopted Staff Accounting Bulletin No. 101 (SAB 101),
Revenue Recognition in Financial Statements, effective January 1,
2000. In consideration of the views expressed in SAB 101, the company
modified its revenue recognition policies for various service contracts.
Under SAB 101, the company recognizes revenue relating to agreements where
it provides more than one service based upon the fair value to the customer
rather than recognizing revenue based on the level of service effort to
fulfill such contracts. The cumulative impact of the accounting change at
January 1, 2000 was $68.1 million, net of tax of $46.7 million. The total
amount of this cumulative adjustment that was recognized for the period
ended June 30, 2001 is $0.8 million.
In June 1998, the FASB issued FAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The standard was effective January 1,
2001. FAS 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 FAS No. 133 had no
material impact on the company's financial statement disclosures.
Item 2. Management's Discussion and Analysis of Operating Results and
- ------- -------------------------------------------------------------
Financial Condition
-------------------
Operating Results - Comparing Results Ended June 30, 2001 and 2000
- ------------------------------------------------------------------
Three Months
- ------------
Consolidated Review
- -------------------
The Segment Review that follows is incorporated herein by reference.
Operating revenue for the quarter increased $133.5 million, or 13.1% over the
prior year's quarter to $1.1 billion. This increase was due primarily to the
strong performance of the McGraw-Hill Education segment, particularly the School
Education Group, and the strong performance of Credit Market Services within the
Financial Services segment, offset somewhat by a decline in advertising revenue
at the Information and Media Services segment. Included in the results of the
McGraw-Hill Education segment are the results for the acquisitions of Frank
Schaffer Publications in late May 2001, Mayfield Publishing in January 2001 and
the acquisitions of the Tribune Education Company and Landoll, Inc. ("Tribune
Education") in September 2000. These acquisitions have been fully integrated
into the McGraw-Hill Education segment. In early May, the Financial Services
segment divested DRI, a provider of economic analysis and information.
Net income for the quarter increased $13.2 million, or 12.3% over the comparable
quarter in the prior year. Diluted earnings per share for the quarter were 61
cents versus 55 cents in the prior year, a 10.9% increase. As part of a
restructuring initiative, included in net income is the gain on the sale of DRI
of $26.3 million after taxes (13 cents per diluted share, $8.8 million pretax).
Also included in net income is $21.9 million after tax (11 cents per diluted
share, $22.8 million pretax) for the write-down of selected assets, the shutdown
of the Blue List and the contribution of Rational Investor to mPower.com within
the Financial Services segment. Blue List was a municipal bond service for the
secondary market. Rational Investor was exchanged for an equity position in the
online investment advisory service for the retirement market.
Total expenses increased 15.5% due to normal recurring expenses and the
introduction of new services and products.
Net interest expense increased $4.8 million, 42.6%, over the comparable quarter
in the prior year, primarily due to increased debt levels resulting from
acquisitions, principally Tribune Education. The average interest rate on
commercial paper borrowing decreased from 6.6% in 2000 to 5.1% in 2001.
The provision for taxes as a percent of income before taxes was 31.0%, 7.5% less
than the second quarter of 2000. The change in the effective tax rate is
primarily the result of additional benefit from the DRI divestiture.
Segment Review
- --------------
McGraw-Hill Education's revenue increased 26.4% over the prior year second
quarter to $566.2 million. The segment's operating results include the results
from Frank Schaffer Publications, Mayfield Publishing and Tribune Education,
acquired in May 2001, January 2001 and September 2000, respectively.
SRA/McGraw-Hill performed well with its Open Court reading program in
California, North Carolina and Florida. The Wright Group was added as of January
1, 2001 as a sixth division of the School Education Group, and is a publisher of
innovative supplementary products for the early childhood, elementary and
remedial markets. The Wright Group contributed positively to the growth of the
segment.
Macmillan/McGraw-Hill was negatively impacted by slower than anticipate sales of
its math program. Glencoe/McGraw-Hill benefited from buying by Texas and a
strong open territory performance. CTB/McGraw-Hill had an excellent quarter with
its TerraNova program and an increase in custom contracts. Children's
Publishing/McGraw-Hill benefited from the acquisition of Frank Schaffer
Publications in May 2001 but was negatively impacted by a weak environment,
where deep discounting is a standard. The Higher Education Group had a solid
start on all lines of business and its front and back list. The Professional
Book operation increased its revenue in a difficult economic environment.
International Publishing increased revenue primarily due to the performance of
Canada and Asia - Pacific. Shortfalls in Latin America and Ibero negatively
impacted operating profit of the Group. The operating profit for the McGraw-Hill
Education segment increased $16.9 million to $68.0 million, reflecting the
strong performance of the School Education Group, the impact of acquisitions and
the seasonal nature of the businesses.
Financial Services' revenue increased 15.8% to $365.8 million and operating
profit increased 14.4% to $110.1 million over 2000 second quarter results. As
part of a restructuring initiative, the divestiture of DRI negatively impacted
the growth in revenue by 3.2%. Included in Financial Services' results is the
gain on the sale of DRI, $8.8 million pretax, ($26.3 million after tax, 13 cents
per diluted share). Also impacting Financial Services' results is the write-down
of selected assets, the shutdown of the Blue List and the contribution of
Rational Investor to mPower.com in exchange for an equity position in the online
investment advisory service for the retirement market. The total charge for
these items is $22.8 million pretax, ($21.9 million after tax, 11 cents per
diluted share). Standard & Poor's Credit Market Services revenue and operating
profit experienced strong double-digit increases as new issue dollar volume in
the U.S. bond market increased 62.6% and European bond issuance increased 31.5%.
Strong growth in Structured Finance, Financial Services, and Public Finance, as
well as solid growth in Corporate Finance contributed to the results.
Non-traditional products grew at a faster rate than the domestic traditional
business. Standard & Poor's Information Services showed revenue increases from
retail markets, index services, Compustat, fund data and fund ratings. New index
futures contracts for the S&P Europe 350 and the S&P/TOPIX 150 for Japan were
launched in June in Madrid and Tokyo, respectively. Operating profit declined
due to investment in new products and softness in the foreign exchange markets.
Information and Media Services' revenue decreased $34.7 million, or 13.8%, to
$217.5 million as compared to the 2000 second quarter results. Operating profit
decreased $25.7 million, or 43.7%, from 2000 second quarter to $33.1 million. A
slowdown in the advertising market negatively impacted both the
Business-to-Business Group and Broadcasting. At BusinessWeek, advertising pages
in the second quarter were off 38.3% with one additional issue, according to the
Publishers Information Bureau. Aviation Week benefited from the Paris air show.
The Construction Information Group benefited from growth at Sweet's and cost
savings from sales force and editorial rationalization. Platts produced gains in
the second quarter on strong subscription sales of oil information and increased
demand for power information. The Healthcare Information Group showed declines
due to reduced advertising spending. Broadcasting had a difficult comparison to
2000 second quarter due to the lack of political advertising. National and local
time sales were down as well.
Six Months
- ----------
Consolidated Review
- -------------------
The Segment Review that follows is incorporated herein by reference.
For the first six months of the year, revenue increased 10.9%, or $195.7
million, to $2.0 billion. The revenue increase reflects the strong start in
education and the solid performance of Standard & Poor's Credit Market Services,
offset somewhat by a decline in advertising revenue. Net income was $140.4
million, an increase of $58.3 million over the six month period ended June 30,
2000. In May 2001, the Company purchased Frank Schaffer Publications, and in
January 2001 Mayfield Publishing. The results of these operations are reflected
in the McGraw-Hill Education segment. As part of a restructuring initiative, in
early May 2001, the Company divested DRI, which resulted in a $26.3 million
after tax gain (13 cents per diluted share, $8.8 million pretax), recorded
within the Financial Services segment. Also included in net income in the
Financial Services segment is the write-down of certain assets, the shutdown of
the Blue List and the contribution of Rational Investor to mPower.com in
exchange for an equity position in the online investment advisory service for
the retirement market. The total charge for these items was $21.9 million after
tax (11 cents per diluted share, $22.8 million pretax). Net income also
includes $6.9 million pretax, 2 cents per diluted share, related to a gain on
the sale of real estate in the first quarter of 2001, which is recorded as other
income on the consolidated statement of income. The six month period also
reflects the results of the Tribune Education Company and Landoll, Inc.
("Tribune Education") acquisition, which occurred in September 2000, and is
reflected in the McGraw-Hill Education segment. In February 2000, Tower Group
International was divested, and an after-tax gain of $10.2 million, or 5 cents
per diluted share, was recorded. In January 2000, the Company adopted Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, and recognized a cumulative adjustment of $68.1 million, net of tax,
or 35 cents per diluted share.
Total expenses increased 13.3% due to new and acquired products and services, in
addition to increases in normal recurring expenses.
Net interest expense increased 59.8% to $32.9 million from $20.6 million in the
first half of 2001. The primary reason for the increase is higher debt levels
due to acquisitions, primarily Tribune Education. The average interest rate or
commercial paper borrowing decreased from 6.1% in 2000 to 5.6% in 2001.
The provision for taxes as a percent of income before taxes was 32.2%, 6.3% less
than the first six months of 2000. The change in the effective tax rate is
primarily the result of the additional tax benefit from the DRI divestiture.
Segment Review
- --------------
McGraw-Hill Education's revenue increased 27.7% to $873.9 million over the first
six months of 2000. The segment's operating results include those of Frank
Schaffer Publications, Mayfield Publishing, and Tribune Education, acquired in
May 2001, January 2001, and September 2000, respectively.
SRA/McGraw-Hill performed well with its Open Court reading program in
California, North Carolina, and Florida. The Wright Group was added as of
January 1, 2001 as a sixth division of the School Education Group, and
contributed positively to the growth of the Group. Macmillan/McGraw-Hill
performed well with its social studies program, but was negatively impacted by
slower than anticipated sales of its math program. Glencoe/McGraw-Hill benefited
from buying in North Carolina, Texas and strong open territory performance.
CTB/McGraw-Hill had an excellent six months with its TerraNova program.
Children's Publishing/McGraw-Hill was negatively impacted by a weak environment
where deep discounting is standard. The Higher Education Group had a solid start
on both its front list and back list sales. The Professional Book operation grew
in part from the introduction of the 15th edition of Harrison's Principles of
Internal Medicine. International Publishing grew revenue on the performance of
Canada, Europe, Ibero and Asia-Pacific. The shortfall in Latin America
negatively impacted the Group. The operating profit for the segment decreased
$2.6 million to $10.2 million reflecting the seasonal nature of the businesses,
the strong performance of the School Education Group and the impact of
acquisitions.
Financial Services' revenue increased $90.4 million to $711.0 million for the
first six months as compared to the same period in 2000. As part of a
restructuring initiative, the divestiture of DRI negatively impacted the revenue
comparison by $9.8 million. Standard & Poor's Credit Market Services revenue and
operating profit experienced double-digit increases as new issue dollar volume
in the U.S. bond market increased 66.4% and European bond issuance increased
26.8%. Strong performances at Structured Finance, Financial Services, Public
Finance and Corporate Finance contributed to the results. International and
non-traditional product revenue grew at significantly faster rates than the
domestic, traditional business. Standard & Poor's Information Services showed an
increase in revenue from retail markets, index services, Compustat and Fund
Services. Operating profit declined due to investment in web facilities and
services, new products and investment in fund services. Softness in the foreign
exchange markets also negatively impacted operating profit. Included in
Financial Services' results is the gain on the sale of DRI for $8.8 million
pretax ($26.3 million after tax, 13 cents per diluted share). Also impacting
Financial Services' results is the write-down of selected assets, the shutdown
of the Blue List and the contribution of Rational Investor to mPower.com in
exchange for an equity position in the online investment advisory service for
the retirement market. The total charge for these items was $22.8 million pretax
($21.9 million after tax, 11 cents per diluted share).
Information and Media Services' revenue decreased $84.4 million, or 17.0%, to
$411.0 million for the first six months as compared to the same period in 2000.
Operating profit decreased $61.1 million, or 56.7%, for the first six months as
compared to the same period in 2000. Included in 2000 revenue was $18.7 million
from Tower Group International, which negatively impacted the year to year
growth comparison by 3.2%. Included in the operating profit for the segment for
2000 was the gain on the sale of Tower Group International representing $16.6
million ($10.2 million after tax, or 5 cents per diluted share). The divestiture
of Tower Group International also negatively impacted operating profit by 7.2%.
A slowdown in the advertising market negatively impacted both the
Business-to-Business Group and Broadcasting.
At BusinessWeek, advertising pages in the first half of the year were off 33.0%
with one additional issue according to the Publishers Information Bureau.
Aviation Week benefited from the Paris air show. Construction Information Group
declined due to investment in electronic products, softness in advertising, and
timing at Sweet's. Platts produced gains as volatility in the oil and energy
markets increased demand for information. The Healthcare Information Group
showed declines due to reduced advertising spending. Broadcasting had a
difficult comparison to 2000 due to the lack of political advertising and the
lack of the Super Bowl in 2001. National and local time sales were down as well.
Financial Condition
- -------------------
The Company continues to maintain a strong financial position. Cash provided by
operating activities in the first half totaled $169.0 million compared to $7.5
million for the same period in the prior year. Total debt increased $195.2
million since year-end. Seasonal spending for inventory and prepublication costs
and acquisitions as well as spending for repurchases of shares partially offset
these increases.
Commercial paper borrowings at June 30, 2001 totaled $1.1 billion, an increase
of $70 million from December 31, 2000. The commercial paper borrowings are
supported by two revolving credit agreements, each with the same domestic and
international banks, consisting of a $625 million, five-year revolving credit
facility and a $625 million, 364-day revolving credit facility. At June 30,
2001, there were no borrowings under either facility. The company also has $175
million of extendible commercial notes (ECNs) outstanding as of June 30, 2001.
80%, or $871.2 million, of the commercial paper borrowings and $140.0 million of
the ECNs outstanding are classified as long-term. ECNs replicate commercial
paper, except that the company has an option to extend the note beyond its
initial redemption date to a maximum final maturity of 390 days. However, if
exercised, such an extension is at a higher reset rate, which is at a
predetermined spread over LIBOR, and is related to the company's commercial
paper rating at the time of extension. As a result of the extension option, no
backup facilities for these borrowings are required. Like commercial paper, ECNs
have no financial covenants.
Under a shelf registration that became effective with the Securities and
Exchange Commission in 1990, the Company can issue an additional $250 million of
debt securities. The new debt could be used to replace a portion of the
commercial paper borrowings with longer-term securities when and if interest
rates are attractive and markets are favorable.
Gross accounts receivable of $1.3 billion decreased $58.4 million from the end
of 2000 primarily from the impact of the seasonality of the educational
publishing business. Inventories increased $95.6 million from year-end as the
Company prepares itself for the school and higher education selling season later
this year and because of the Mayfield Publishing acquisition.
Net prepublication costs increased $29.3 million from the end of 2000 to $547.3
million due to spending for school, higher education, children's and
professional publishing titles. Prepublication cost spending in the second
quarter totaled $115.6 million, an increase of $11.1 million over last year's
second quarter spending. Purchases of property and equipment were $41.1 million,
$6.5 million higher than the prior year.
The Board of Directors approved a 4.3% increase in the quarterly common stock
dividend to $0.245 per share in January 2001. In 1999, the Board of Directors
authorized a stock repurchase program of 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 depending on market conditions. Approximately 7.5 million shares
have been repurchased under this program.
"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; 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.
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, 2000.
Part II
Other Information
Item 1. Legal Proceedings
- ------ -----------------
A summons was served on June 20, 2001 in an action brought by L'Association
Francaise des Porteurs d'Emprunts Russes (AFPER) against Standard & Poor's SA
(an indirect subsidiary of the Registrant) filed in the Court of First Instance
of Paris, France. In this suit, AFPER, a group of holders of pre-Revolutionary
Russian bonds, makes claims against Standard & Poor's and another rating agency
for lack of diligence and prudence in their ratings of Russia and Russian debt.
AFPER alleges that, by failing to take into account the post-Revolutionary
repudiation of pre-Revolutionary Czarist debt by the Soviet government in rating
Russia and new issues of Russian debt beginning in 1996, the rating agencies
enabled the Russian Federation to issue new debt without repaying the old
obligations of the Czarist government. Alleging joint and several liability,
AFPER seeks damages of 17.85 billion francs (approximately $2.34 billion), plus
50,000 francs (approximately $6,550) under certain provisions of the French Code
of Civil Procedure and legal costs. The Registrant believes that the allegations
lack legal or factual merit and intends to vigorously contest the action.
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
(a) The 2001 Annual Meeting of Shareholders of the Registrant was held on
April 25, 2001.
(b) (i) The following nominees, having received the FOR votes set forth
opposite their respective names, constituting a plurality of the votes
cast at the Annual Meeting for the election of Directors, were duly
elected Directors of the Registrant for three year terms:
DIRECTOR FOR WITHHOLD AUTHORITY
Pedro Aspe 165,808,337 803,381
Robert P. McGraw 165,738,174 873,544
Lois Dickson Rice 165,732,752 878,966
Edward B. Rust, Jr. 165,799,817 811,901
The terms of office of the following directors continued after the meeting:
James H. Ross, Sidney Taurel, Vartan Gregorian, Winfried Bischoff, Linda Koch
Lorimer, and Harold W. McGraw III.
(ii) Shareholders ratified the appointment of Ernst & Young as
independent auditors for the Registrant and its subsidiaries for
2001. The vote was 165,307,999 shares FOR and 693,549 shares
AGAINST, with 610,170 shares abstaining and no broker non-votes.
Item 6. Exhibits and Reports on Form 8-K Page Number
-------------------------------- -----------
(a) Exhibits
(12) Computation of Ratio of Earnings to Fixed Charges; 21
(b) Reports on Form 8-K
There were no reports filed during the period covered by this report.
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 /S/
-------------------- ------------------------------
Robert J. Bahash
Executive Vice President
and Chief Financial Officer
Date: By /S/
-------------------- ------------------------------
Kenneth M. Vittor
Executive Vice President
and General Counsel
Date: By /S/
-------------------- ------------------------------
Talia M. Griep
Senior Vice President
and Corporate Controller
Exhibit (12)
The McGraw-Hill Companies, Inc.
-------------------------------
Computation of Ratio of Earnings to Fixed Charges
-------------------------------------------------
Periods Ended June 30, 2001
----------------------------
Six Twelve
Months Months
--------- ---------
(In thousands)
Earnings
Earnings from continuing operations
before income tax expense (Note) $ 202,245 $ 719,994
Fixed
charges $ 54,753 101,152
---------- ----------
Total Earnings $ 256,998 $ 821,146
========== ==========
Fixed Charges (Note)
Interest expense $ 34,470 $ 67,559
Portion of rental payments deemed to be
interest 20,283 33,593
---------- ---------
Total Fixed Charges $ 54,753 $ 101,152
========== =========
Ratio of Earnings to Fixed Charges 4.7x 8.1x
<FN>
(Note) For purposes of computing the ratio of earnings to
fixed charges, "earnings from continuing operations before income
taxes" excludes undistributed equity in income of less than
50%-owned companies. "Fixed charges" consist of (1) interest on
debt, and (2) the portion of the company's rental expense deemed
representative of the interest factor in rental expense.
Earnings from continuing operations before income taxes for the
six-month and twelve-month periods ended June 30, 2001 includes a $6.9
million pretax gain on the sale of real estate, a one-time gain on the
sale of DRI ($8.8 million pretax) and the write-down of selected
assets, the shutdown of the Blue List and the contribution of Rational
Investor to mPower.com ($22.8 million pretax).
</FN>