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 March 31, 2002
Commission File Number 1-1023
THE MCGRAW-HILL companies, INC.
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(Exact name of registrant as specified in its charter)
New York 13-1026995
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(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1221 Avenue of the Americas, New York, N.Y. 10020
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(Address of Principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 512-2000
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Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
On April 15, 2002 there were approximately 194.3 million shares of common
stock (par value $1.00 per share) outstanding.
<page>
The McGraw-Hill Companies, Inc.
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TABLE OF CONTENTS
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Page Number
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
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Consolidated Statement of Income for
the three months ended March 31, 2002 and 2001 3
Consolidated Balance Sheet at March 31, 2002,
December 31, 2001 and March 31, 2001 4-5
Consolidated Statement of Cash Flows for the three 6
months ended March 31, 2002 and 2001
Notes to Consolidated Financial Statements 7-13
Item 2. Management's Discussion and Analysis of Operating
------ Results and Financial Condition 14-19
Item 3. Quantitative and Qualitative Disclosures About
------ Market Risk 19
Part II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 19
------
Item 6. Exhibits and Reports on Form 8-K 19-21
------
<page>
Part I
Financial Information
Item 1. Financial Statements
---------------------
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Statement of Income
-------------------------------
Three Months Ended March 31, 2002 and 2001
------------------------------------------
2002 2001
----------- -----------
(in thousands, except
per-share data)
Operating revenue $ 846,652 $ 846,397
Expenses:
Operating 403,431 412,462
Selling and general 330,444 321,570
Depreciation 23,684 22,624
Amortization of intangibles and prepublication
Costs 43,002 37,698
Goodwill amortization (Note 10) - 14,031
----------- -----------
Total expenses 800,561 808,385
Other income - net 7,054 12,024
----------- -----------
Income from operations 53,145 50,036
Interest expense - net 6,422 16,880
----------- -----------
Income before taxes on income 46,723 33,156
Provision for taxes on income 17,521 12,765
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Net income $ 29,202 $ 20,391
=========== ===========
Basic earnings per common share $ 0.15 $ 0.11
Diluted earnings per common share $ 0.15 $ 0.10
Average number of common
shares outstanding: (Note 11)
Basic 192,889 193,957
Diluted 194,967 195,963
The McGraw-Hill Companies, Inc.
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Consolidated Balance Sheet
--------------------------
March 31, Dec. 31, March 31,
2002 2001 2001
---------- ----------- ----------
(in thousands)
ASSETS
Current assets:
Cash and equivalents $ 20,782 $ 53,535 $ 22,723
Accounts receivable (net of allowance
for doubtful accounts and sales
returns) (Note 5) 826,056 1,038,308 866,078
Inventories (Note 5) 443,985 402,647 435,766
Deferred income taxes 218,795 218,676 196,313
Prepaid and other current assets (Note 6) 134,224 99,781 151,830
---------- ---------- ----------
Total current assets 1,643,842 1,812,947 1,672,710
---------- ---------- ----------
Prepublication costs (net of accumulated
amortization) (Note 5) 558,567 557,295 530,766
Investments and other assets:
Investment in Rock-McGraw, Inc. - at
Equity 108,614 105,538 98,332
Prepaid pension expense 225,772 211,582 172,623
Other 224,412 200,443 221,275
---------- ---------- ----------
Total investments and other assets 558,798 517,563 492,230
---------- ---------- ----------
Property and equipment - at cost 1,078,312 1,078,730 1,043,111
Less - accumulated depreciation 639,656 623,790 618,773
---------- ---------- ---------
Net property and equipment 438,656 454,940 424,338
Goodwill - net (Note 10) 1,229,838 1,231,028 1,181,115
Copyrights - net (Note 10) 346,458 353,252 385,726
Other intangible assets - net (Note 10) 224,855 234,166 191,917
---------- ---------- ----------
Total Assets $5,001,014 $5,161,191 $4,878,802
========== ========== ==========
The McGraw-Hill Companies, Inc.
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Consolidated Balance Sheet
--------------------------
March 31, Dec. 31, March 31,
2002 2001 2001
---------- ----------- ----------
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 228,887 $ 222,953 $ 244,475
Accounts payable 289,428 339,541 278,584
Accrued liabilities 245,840 385,712 221,395
Income taxes currently payable 67,623 77,628 79,787
Unearned revenue 530,450 508,055 499,012
Other current liabilities (Notes 4 & 6) 343,761 342,504 354,917
---------- ---------- ----------
Total current liabilities 1,705,989 1,876,393 1,678,170
---------- ---------- ----------
Other liabilities:
Long-term debt (Note 7) 856,410 833,571 876,319
Deferred income taxes 182,953 190,334 170,131
Accrued postretirement healthcare and
other benefits 175,213 175,844 176,985
Other non-current liabilities 221,960 231,164 228,532
---------- ---------- ----------
Total other liabilities 1,436,536 1,430,913 1,451,967
---------- ---------- ----------
Total liabilities 3,142,525 3,307,306 3,130,137
---------- ---------- ----------
Shareholders' equity (Notes 8 & 9):
Capital stock 205,852 205,852 205,852
Additional paid-in capital 66,836 64,638 54,703
Retained income 2,272,407 2,292,342 2,077,971
Accumulated other comprehensive income (130,977) (126,860) (129,290)
---------- ---------- ----------
2,414,118 2,435,972 2,209,236
Less - common stock in treasury-at cost 541,946 566,775 441,808
Unearned compensation on restricted stock 13,683 15,312 18,763
---------- ---------- ----------
Total shareholders' equity 1,858,489 1,853,885 1,748,665
---------- ---------- ----------
Total Liabilities & Shareholders'
Equity $5,001,014 $5,161,191 $4,878,802
========== ========== ==========
The McGraw-Hill Companies, Inc.
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Consolidated Statement of Cash Flows
------------------------------------
Three Months Ended March 31, 2002 and 2001
--------------------------------------------------
2002 2001
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Cash flows from operating activities (in thousands)
- ---------------------------------------------
Net income $29,202 $20,391
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation 23,684 22,624
Amortization of goodwill and intangibles 9,933 21,232
Amortization of prepublication costs 33,069 30,497
Gain on the sale of real estate - (6,925)
Provision for losses on accounts receivable 6,720 10,958
Other (3,075) (3,114)
Changes in assets and liabilities net of effect of
Acquisitions and dispositions:
Decrease in accounts receivable 199,907 222,051
Increase in inventories (42,069) (45,985)
Increase in prepaid and other current assets (34,913) (30,389)
Decrease in accounts payable and accrued expenses (189,916) (176,101)
Increase in unearned revenue 24,759 13,690
Increase in other current liabilities 1,809 28,369
(Decrease) / increase in interest and income taxes
currently payable (6,317) 32,025
(Decrease) / increase in deferred income taxes (1,365) 709
Net change in other assets and liabilities (25,970) (10,001)
- --------------------------------------------------- --------- ---------
Cash provided by operating activities 25,458 130,031
- --------------------------------------------------- --------- ---------
Investing activities
- -------------------------
Investment in prepublication costs (34,853) (37,190)
Purchases of property and equipment (9,386) (19,862)
Acquisition of businesses and equity interests 3,299 (107,794)
Disposition of property, equipment and businesses 314 10,587
Additions to technology projects (21,894) (1,668)
- --------------------------------------------------- --------- ---------
Cash used for investing activities (62,520) (155,927)
- --------------------------------------------------- --------- ---------
Financing activities
- ----------------------------
Additions to short-term debt - net 29,099 75,688
Dividends paid to shareholders (49,137) (47,565)
Repurchase of treasury shares (5,653) (5,451)
Exercise of stock options 30,630 25,045
Other (111) (100)
- --------------------------------------------------- --------- ---------
Cash provided by financing activities 4,828 47,617
- --------------------------------------------------- --------- ---------
Effect of exchange rate fluctuations on cash (519) (2,169)
--------- ---------
Net change in cash and equivalents (32,753) 19,552
Cash and equivalents at beginning of period 53,535 3,171
- --------------------------------------------------- --------- ---------
Cash and equivalents at end of period $20,782 $22,723
========= =========
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Consolidated 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
months ended March 31, 2002 and 2001 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, 2001.
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 period ended March 31:
2002 2001
----------- -----------
(in thousands)
Net income $ 29,202 $ 20,391
Other comprehensive income, net of tax:
Foreign currency translation adjustments (4,117) (18,932)
----------- -----------
Total other comprehensive income (4,117) (18,932)
----------- -----------
Comprehensive income $ 25,085 $ 1,459
=========== ===========
3. The Company has three reportable segments: McGraw-Hill Education,
Financial Services, and Information and Media Services. McGraw-Hill
Education is one of the premier global educational publishers serving
the elementary and high school, college and university, professional
and international markets. The Financial Services segment consists of
Standard & Poor's operations including ratings, indexes, related
financial and investment analysis and information, and corporate value
services. The Information and Media Services segment includes business
and professional media offering information, insight and analysis.
Operating profit by segment is the primary basis for the chief
operating decision maker of the Company, the Executive Committee, to
evaluate the performance of each segment. A summary of operating
results by segment for the three months ended March 31, 2002 and 2001
follows:
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Consolidated Financial Statements
------------------------------------------
2002 2001
------------------- -------------------
Operating Operating
Revenue Profit Revenue Profit
-------- -------- -------- --------
(in thousands)
McGraw-Hill Education $281,621 $(71,810) $ 307,758 $(57,831)
Financial Services 380,878 133,254 345,181 106,608
Information and Media Services 184,153 11,962 193,458 13,672
-------------------------------- -------- -------- -------- --------
Total operating segments 846,652 73,406 846,397 62,449
General corporate expense - (20,261) - (12,413)
Interest expense - net - (6,422) - (16,880)
-------------------------------- -------- -------- -------- --------
Total Company $846,652 $ 46,723* $846,397 $ 33,156*
======== ======== ======== ========
*Income before taxes on income.
4. In the fourth quarter of 2001, the Company announced a worldwide
restructuring program that includes the exiting of certain businesses,
product lines and markets in each of its operating segments. As part of
the restructuring program, the Company is focusing its resources on those
businesses and products with higher profit margins and improving the
effectiveness of the organization. As a result, the Company recorded a
restructuring and asset impairment charge of $159.0 million pre-tax. This
charge is comprised of $62.1 million for McGraw-Hill Education, $43.1
million for Financial Services, $34.9 million for Information and Media
Services and $18.9 million for Corporate. The after-tax charge recorded
was $112.0 million, or 57 cents per diluted share. All of the
restructuring expenses were classified as operating expenses on the
Consolidated Statement of Income at December 31, 2001.
The restructuring that was recorded at December 31, 2001 consisted of the
following:
(in millions)
Employee severance and benefit costs $ 30.2
Asset impairment losses 128.8
-------
Total $ 159.0
=======
Employee severance and benefit costs of $30.2 million includes a planned
workforce reduction of approximately 925 people related to the exiting of
certain business activities, product lines and publishing programs to be
discontinued or curtailed, and other efforts to improve the effectiveness
of the organization. Through March 31, 2002, 348 employees have been
terminated and $7.1 million of employee severance and benefit costs were
paid.
The McGraw-Hill Companies, Inc.
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Notes to Consolidated Financial Statements
------------------------------------------
Asset impairment losses of $128.8 million included $92.8 million
associated with the closing of the McGraw-Hill Education's business
training coursework operation, the disposing of the non-strategic
properties in the investment services area and costs associated with the
disposal and write-down of goodwill and other long-lived assets. The
remaining balance at December 31, 2001 of $36.0 million is primarily
impairment losses on Construction Information Group's e-commerce
investments and the emerging technology investments in the venture fund as
the Company has decided to scale back on those initiatives. Those
impairment losses reflected the permanent write-down of the investments to
fair value that was determined based upon the earnings capability of the
related investees.
The restructuring is expected to be completed by December 31, 2002. At
March 31, 2002, the remaining reserve, which is included in other current
liabilities, was approximately $32.3 million and comprised $23.1 million
for employee severance and benefit costs and $9.2 million for other costs;
primarily, contract termination costs.
5. The allowance for doubtful accounts and sales returns, the components of
inventory and the accumulated amortization of prepublication costs were as
follows:
March 31, Dec. 31, March 31,
2002 2001 2001
---------- ---------- ----------
(in thousands)
Allowance for doubtful accounts $146,172 $147,855 $136,391
========== ========== ==========
Allowance for sales returns $107,514 $129,034 $101,036
========== ========== ==========
Inventories:
Finished goods $392,518 $340,488 $365,969
Work-in-process 21,147 30,595 23,598
Paper and other materials 30,320 31,564 46,199
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Total inventories $443,985 $402,647 $435,766
========== ========== ==========
Accumulated amortization of
Prepublication costs $740,878 $910,720 $697,643
========== ========== ==========
6. 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 $240.2 million of matched purchase and sale
commitments at March 31, 2002. Only those transactions not closed at the
settlement date are reflected in the balance sheet as receivables and
payables.
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Consolidated Financial Statements
------------------------------------------
7. A summary of long-term debt follows:
March 31, Dec. 31, March 31,
2002 2001 2001
---------- ---------- ----------
(in thousands)
Commercial paper supported by
bank revolving credit agreements $854,960 $800,080 $874,560
Extendible commercial notes - 32,000 -
Other 1,450 1,491 1,759
---------- ---------- ----------
Total long-term debt $856,410 $833,571 $876,319
========== ========== ==========
8. Common shares reserved for issuance for conversions and stock based
awards were as follows:
March 31, Dec. 31, March 31,
2002 2001 2001
---------- ---------- ----------
$1.20 convertible preference stock
at the rate of 13.2 shares for each
Share of preference stock 17,530 17,530 17,530
Stock based awards 20,278,945 21,136,084 22,617,323
---------- ---------- ----------
20,296,475 21,153,614 22,634,853
========== ========== ==========
9. Cash dividends per share declared during the three months ended
March 31, 2002 and 2001 were as follows:
2002 2001
---- ----
Common stock $.255 $.245
Preference stock .300 .300
10.Effective as of January 1, 2002, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets. Under SFAS No. 142, goodwill and other intangible
assets with indefinite lives are no longer amortized but are reviewed
annually, or more frequently if impairment indicators arise. During
the year ended December 31, 2001, the Company started the required
transitional impairment review of goodwill. This review required the
Company to estimate the fair value of its identified reporting units as
of December 31, 2001. For each of the reporting units, the estimated
fair value was determined utilizing the expected present value of the
future cash flows of the units. In all instances, the estimated fair
value of the reporting units exceeded their book values and therefore
no write-down of goodwill was required as of March 31, 2002.
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Consolidated Financial Statements
------------------------------------------
The following table reflects unaudited pro forma results of operations
of the Company, giving effect to SFAS No. 142 as if it were adopted on
January 1, 2001: (in thousands except earnings per share)
Three Months Ended
March 31,
2002 2001
---------- ----------
Net income, as reported $ 29,202 $ 20,391
Add back: amortization expense, net of tax - 8,629
---------- ----------
Pro forma net income $ 29,202 $ 29,020
========== ==========
Basic earnings per common share:
As reported $ 0.15 $ 0.11
Pro forma $ 0.15 $ 0.15
Diluted earnings per common share:
As reported $ 0.15 $ 0.10
Pro forma $ 0.15 $ 0.15
The following table summarizes the activity in goodwill for the periods
indicated: (in thousands)
Three Months Twelve Months Three Months
Ended Ended Ended
March 31, December 31, March 31,
2002 2001 2001
------------ ------------ ------------
Beginning balance $ 1,231,028 $ 1,155,268 $ 1,155,268
Net change from acquisitions
And dispositions - 188,657 45,281
Amortization expense - (56,636) (14,031)
Other (1,190) (56,261) (5,403)
------------ ------------ -----------
Total $ 1,229,838 $ 1,231,028 $ 1,181,115
============ ============ ===========
The following table summarizes net goodwill by segment: (in thousands)
March 31, December 31, March 31,
2002 2001 2001
------------ ------------ ------------
McGraw-Hill Education $ 853,254 $ 853,829 $ 875,589
Financial Services 287,785 288,400 262,834
Information & Media Services 88,799 88,799 42,692
------------ ------------ ------------
Total $ 1,229,838 $ 1,231,028 $ 1,181,115
============ ============ ============
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Consolidated Financial Statements
------------------------------------------
The following table summarizes other intangibles subject to
amortization at the dates indicated: (in thousands)
Three Months Twelve Months Three Months
Ended Ended Ended
March 31, December 31, March 31,
2002 2001 2001
------------ ------------ ------------
Copyrights $ 538,963 $ 538,784 $ 538,960
Accumulated amortization (192,505) (185,532) (153,234)
------------ ------------- ------------
Net copyrights 346,458 353,252 385,726
------------ ------------- ------------
Other intangibles 276,574 276,788 222,708
Accumulated amortization (89,784) (80,687) (68,856)
------------ ------------- ------------
Net other intangibles 186,790 196,101 153,852
------------ ------------- ------------
Total $ 533,248 $ 549,353 $ 539,578
============ ============ ============
The following table summarizes other intangibles not subject to
amortization at the dates indicated: (in thousands)
Three Months Twelve Months Three Months
Ended Ended Ended
March 31, December 31, March 31,
2002 2001 2001
------------ ------------ ------------
FCC Licenses $ 38,065 $ 38,065 $ 38,065
------------ ------------ ------------
Total $ 38,065 $ 38,065 $ 38,065
============ ============ ============
Amortization expense for other intangibles totaled $9.9 million and
$7.2 million for the three months ended March 31, 2002 and 2001,
respectively. Amortization expense for the twelve months ended
December 31, 2001 totaled $34.9 million.
11. 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 ended March 31, 2002 and 2001 follows:
2002 2001
---------- ----------
(in thousands)
Average number of common shares outstanding 192,889 193,957
Effect of stock options and other dilutive securities 2,078 2,006
---------- ----------
Average number of common shares outstanding including
effect of dilutive securities 194,967 195,963
========== ==========
Restricted performance shares outstanding at March 31, 2002 of 493,000
were not included in the computation of diluted earnings per common
shares because the necessary vesting conditions have not yet been met.
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Consolidated Financial Statements
------------------------------------------
12.In June 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS
No. 143 requires that the fair value of the liability for an asset
retirement obligation be recognized in the period which it is incurred
if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount
of the long-lived assets. This statement is effective January 1,
2003. The Company is currently evaluating this pronouncement and does
not believe it will have a material impact on its financial statements.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 establishes
a single accounting model for long-lived assets to be disposed of by
sale and to address significant implementation issues. The framework
of SFAS No. 144 was established in SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of. The Company does not expect that the adoption of SFAS No.
144 will have a material impact on its financial statements.
Item 2. Management's Discussion and Analysis of Operating Results and
- ------- --------------------------------------------------------------
Financial Condition
-------------------
Operating Results - Comparing Three Months Ended March 31, 2002 and 2001
- ------------------------------------------------------------------------
Consolidated Review
- -------------------
The Segment Review that follows is incorporated herein by reference.
Operating revenue for the first quarter remains flat at $846.7 million, as
compared to prior year's first quarter. The revenue increase in the Financial
Services segment was offset by declines in the McGraw-Hill Education and the
Information and Media Services segments. Net income was $29.2 million, an
increase of $8.8 million, or 43.2%, over the first quarter of 2001. Results from
operations reflect the acquisitions of Frank Schaffer Publications, in May 2001,
recorded in McGraw-Hill Education, Corporate Value Consulting (CVC) in August
2001, recorded in Financial Services and Financial Times Energy, in September
2001, recorded in Information and Media Services. Beginning January 2002, in
accordance with Statement of Financial Accounting Standards No. 142 (SFAS No.
142), Goodwill and Other Intangible Assets, the Company no longer amortizes
goodwill. The impact of SFAS No. 142 was $14.0 million, or 5 cents per diluted
earnings per share, for the first quarter 2002 comparative. The 2001 first
quarter net income includes a $6.9 million pre-tax gain related to the sale of
real estate, or 2 cents per diluted share, and is recorded in other income.
The first quarter represents the Company's smallest quarter due to the seasonal
aspect of the Company's educational publishing operations.
Total expenses in 2002 decreased 1.0% due to cost containment activities and
some volume related savings, and non-amortization of goodwill, somewhat offset
by increases due to normal recurring expenses and investment in new and acquired
products and services. For 2002, combined printing, paper and distribution
prices are now expected to decrease an additional 0.2%, for a total decrease of
3.2%, due to the results of successful supplier negotiations and weak market
conditions.
Net interest expense decreased 62.0% to $6.4 million from $16.9 million in the
first quarter of 2001. The primary reasons for the decrease is a reduction in
total debt as compared to the first quarter of 2001, which had high acquisition
related debt, and a reduction in the average interest rate. The average interest
rate on commercial paper borrowings decreased from 6.2% in 2001 to 1.9% in 2002.
The provision for taxes as a percent of income before taxes is 37.5%, as
compared to 38.5% for the first quarter of 2001, due primarily to the adoption
of SFAS No. 142.
Segment Review
- --------------
McGraw-Hill Education's revenue decreased 8.5% over the prior year's first
quarter to $281.6 million. The operating loss increased 24.2% to $71.8 million
over the prior year's first quarter. The segment's operating results include the
acquisition of Frank Schaffer Publications in May of 2001, and the impact of the
accounting change pursuant to Statement of Financial Accounting Standards No.
142 (SFAS No. 142) Goodwill and Other Intangible Assets. The impact of SFAS No.
142 on this segment was $9.6 million. Solid results in McGraw-Hill Higher
Education partially offset a seasonally slow performance in the elementary-high
school business and declines in the international and professional units.
SRA/McGraw-Hill, Macmillan/McGraw-Hill and Glencoe/McGraw-Hill were negatively
impacted by the change in adoption opportunities and non-adoption opportunities
within key states. These three large business units, within the School Education
Group, experienced reductions primarily in the adoption opportunities within
North Carolina and California. Most of the decline is occurring in North
Carolina due to the size of the adoptions and ordering patterns. North Carolina
ordered early in 2001 for Reading and Literature. This year the state is
adopting Music and Art, which represent a smaller market. In California in 2001,
SRA/McGraw-Hill secured a large sale to the Los Angeles school district of Open
Court Reading, which will not be repeated in 2002. SRA/McGraw-Hill did have
higher sales of its Open Court Reading and Direct Instruction in Texas, as well
as increased revenue from Everyday Math. The Wright Group/McGraw-Hill continues
to recover from distribution and integration related issues. The new
intervention program, Fast Track Reading, is showing promise in California.
Although scoring sales and norm reference test sales were higher in the first
quarter 2002 than the same period in 2001, they were more than offset by
declines in custom contract revenue at CTB/McGraw-Hill. The shortfall in custom
contracts reflects both timing, and, to a lesser extent, non-repeat business or
contract changes for some major contracts. Contracts that had reduced revenue
recognition due to the timing of milestones include Alaska's Comprehensive
System of Student Assessment, the California English Language Development test,
Maryland's High School Assessment and Indiana's ISTEP (Indiana State Testing for
Educational Progress). McGraw-Hill/Children's Publishing showed strong growth,
primarily from the acquisition of Frank Schaffer Publications.
McGraw-Hill Higher Education, Professional and International Group had a revenue
decline despite McGraw-Hill Higher Education having a solid start on frontlist
sales, particularly Business and Economics. Some of the more important titles
include McConnell, Economics, 15/e; Larson, Fund Accounting Principles, 16/e;
Garrison, Managerial Accounting, 10/e; and Schiller, Economy Today, 10/e.
McGraw-Hill Professional's revenue declined from the first quarter 2001 level as
all three of its major imprints experienced a decrease, with the largest
occurring in Science, Technical and Medical. Contributing significantly to the
Science, Technical and Medical decrease was the successful release of Harrison's
Principles of Internal Medicine, 15/e, in the first quarter 2001 which will not
be repeated in 2002. In addition, the change to a "credit card only" policy at
the beginning of 2002 in the direct marketing channel further reduced 2002 first
quarter revenue. Trade sales fell and the Osborne Media Group, the computing
product line, continued to decline largely due to continued softness in the
investing/business and computer/technology markets. While the domestic economy
had started to weaken in the first quarter of 2001, the dramatic decline that
occurred in the latter half of the year is still being felt in both of these
markets. International revenue also declined significantly from the first
quarter 2001. As with McGraw-Hill Professional, the decline in revenue from
Harrison's Principles of Internal Medicine, 15/e, was an important contributor
to the International variance, particularly in Asia. Softness in the Latin
America region from economic instability in key markets also contributed to the
shortfall. Weak sales of professional titles, especially those in computing
across all markets, negatively impacted results. McGraw-Hill/Contemporary showed
very strong growth primarily due to providing educational materials to assist
students with the new GED test.
Financial Services' revenue increased 10.3% to $380.9 million and operating
profit increased 25.0% to $133.2 million over 2001 first quarter results. The
SFAS No. 142 accounting change contributed $3.6 million to operating profit of
this segment. Standard & Poor's Credit Market Services revenue and operating
profit experienced double-digit increases based on a favorable interest rate
environment and strong growth in the structured finance area. Public finance
also contributed favorably to the results as a combination of falling tax
receipts and low-interest spurred growth in the public finance market.
International revenue and revenue from non-traditional products grew at
significantly faster rates than the domestic traditional business. New issue
dollar volume in the U.S. market was off 8.3% and unit volume declined 2.9% in
the first quarter, according to Securities Data. In Europe, new issue dollar
volume fell 23.7% and unit volume was off 21.4%, according to Bondware. U.S.
Corporate new issue dollar volume was off 22.2% in the first quarter while U.S.
municipal issuance was up 11.5% and U.S. mortgage-backed volume climbed 35.5%.
U.S. asset-backed issuance was off 2.2%. The change in accounting due to SFAS
NO. 142 had a negligible impact on Standard & Poor's Credit Market Services.
Investment Services showed a decline in revenue primarily due to shortfalls in
its Internet redistribution and foreign exchange markets and retail brokerage
services. Investment Services operating profit benefited significantly from the
change in accounting under SFAS NO. 142, and to a lesser degree the sale of
fundamental data and analytics by S&P Compustat and the growth in the Index
Alert Service.
Information and Media Services' revenue decreased $9.3 million, or 4.8%, to
$184.2 million from 2001 first quarter results. Operating profit decreased $1.7
million, or 12.5%, to $12.0 million from 2001 first quarter results. The
acquisition of Financial Times Energy in September 2001 and the change in
accounting pursuant to SFAS No. 142 contributed positively to operating profit.
Revenue declined at both the Business-to-Business and Broadcasting Groups.
At Business Week, advertising pages in the first quarter were off 33.4%,
according to the Publishers Information Bureau, with one fewer issue published,
but the same number of issues recognized for revenue recognition purposes.
Aviation Week and the Healthcare Information Group were also impacted by the
softness in the advertising market. The Construction Information Group's revenue
declines for Dodge and Engineering News Record were more than offset by cost
savings, especially at Dodge and Sweets. Platts produced solid gains on both its
base business and from the Financial Times Energy acquisition, as volatility in
the petroleum market continued to increase the demand for information.
At Broadcasting, weakness in the local advertising markets, mainly in Denver,
more than offset increased political revenues. The Olympics on NBC, a competing
network, also negatively impacted results. National time sales were up in most
markets.
Financial Condition
- -------------------
The Company continues to maintain a strong financial position. Cash flow from
operations decreased to $25.5 million in 2002 compared with $130.0 million in
the first quarter of 2001. The decrease in cash provided by operating activities
primarily relates to a decrease in the change in accounts receivable and income
taxes payable and an increase in the change in accounts payable. Total debt
increased $28.8 million since year-end, reflecting the seasonal spending on
inventory and prepublication costs, and dividend payments. The Company's strong
presence in the school and higher education markets significantly impacts the
seasonality of its earnings and borrowing patterns during the year, with the
Company borrowing during the first half of the year and generating cash in the
second half of the year, primarily in the fourth quarter.
Commercial paper borrowings at March 31, 2002 totaled $1.1 billion, an increase
of $60.6 million from December 31, 2001. The Company's 364-day revolving credit
facility agreement provides that the Company may borrow until August 13, 2002,
on which date the facility commitment terminates and the maturity of such
borrowings may not be later than August 13, 2003. The Company pays a facility
fee of 5 basis points on the 364-day facility (whether or not amounts have been
borrowed) and borrowings may be made at 15 points above LIBOR. The Company
anticipates that it will renew the 364-day facility. The commercial paper
borrowings are also supported by a $625 million 5-year revolving credit
facility. Both facilities contain certain covenants, and the only financial
covenant requires that the Company not exceed indebtedness to cash flow ratio,
as defined, of 4 to 1 at any time. This restriction has never been exceeded. At
March 31, 2002 there were no borrowings under either facility. Eighty percent or
$855.0 million of the commercial paper borrowings outstanding are classified as
long-term.
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. As is the case with commercial paper, ECNs have no financial
covenants. There were no ECNs outstanding at March 31, 2002.
Under a shelf registration that became effective with the Securities and
Exchange Commission in 1990, an additional $250 million of debt securities can
be issued. Debt could be used to replace a portion of the commercial paper
borrowings with longer-term securities if and when market conditions warrant.
Gross accounts receivable of $1.1 billion decreased $235.5 million from the end
of 2001 primarily from seasonal collections from the educational publishing
business and improved collection processes. Inventory increased $41.3 million
from the end of 2001 to $444.0 million as the Company prepares itself for the
school and higher education publishing selling season later this year and
because of the Frank Schaffer Publication acquisition.
Net prepublication cost increased $1.3 million from the end of 2001 to $558.6
million due to spending for school, higher education, children's and
professional publishing titles. Prepublication cost spending in the first
quarter totaled $34.9 million, a decrease of $2.3 million compared with last
year's first quarter spending. Spending is expected to increase over the
remainder of the year. Purchases of property and equipment were $9.4 million,
$10.5 million lower than the prior year. Spending is expected to be lower than
the comparative prior year period for the remainder of the year.
The Board of the Directors approved a 4.1% increase in the quarterly common
stock dividend to 25.5 cents per share. 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 9.4 million shares
have been repurchased under this program through March 31, 2002.
In the fourth quarter of 2001, the Company announced a worldwide restructuring
program that includes the exiting of certain businesses, product lines and
markets in each of its operating segments. The restructuring expenses were
classified as operating expenses on the Consolidated Statement of Income at
December 31, 2001 and consisted of $30.2 million in employee severance and
benefit costs and $128.8 million in asset impairment losses. The planned
workforce reduction of 925 people related to exiting of certain business
activities, product lines and publishing programs to be discontinued or
curtailed, and other efforts to improve the effectiveness of the organization.
Through March 31, 2002, 348 employees have been terminated and $7.1 million of
employee severance and benefit costs were paid. The restructuring is expected to
be completed by December 31, 2002. At March 31, 2002 the remaining reserve,
which is included in other current liabilities, was approximately $32.3 million
and comprised $23.1 million for employee severance and benefit costs and $9.2
million for other cost, primarily, contract termination costs.
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act
- --------------------------------------------------------------------------
of 1995
-------
This section, as well as other portions of this document, includes certain
forward-looking statements about the Company's business, new products, sales,
expenses, cash flows, and operating and capital requirements. Such
forward-looking statements include, but are not limited to: future paper,
printing and distribution prices; Educational Publishing's level of success in
2002 adoptions and enrollment and demographic trends; the level of educational
funding; the strength of higher education, professional and international
publishing markets and the impact of technology on them; the level of interest
rates and the strength of profit levels and the capital markets in the U.S. and
abroad with respect to Standard & Poor's Credit Market Services; the level of
success of new product development and global expansion and strength of domestic
and international markets at Standard & Poor's Investment Services; the strength
of the domestic and international advertising markets; the volatility of the
energy marketplace; the contract value of public works, manufacturing and single
family unit construction; Broadcasting's level of 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, financial and political conditions, currency and
foreign exchange volatility, the health of capital and equity markets, including
future interest rate changes, the level of funding in the education market (both
domestically and internationally), the pace of recovery of the economy and in
advertising, continued investment by the construction, computer and aviation
industry, the successful marketing of new products, and 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, 2001.
Part II
Other Information
Item 1. Legal Proceedings
- ------ -----------------
In Registrant's Form 10-Q for the quarter ended June 30, 2001, Registrant
reported that 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) 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
$2.37 billion), plus 50,000 francs (approximately $6,700) 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 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
No reports were 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 March 31, 2002
----------------------------
Three Twelve
Months Months
--------- ---------
(in thousands)
Earnings
Earnings from continuing operations
before income taxes expense (Note) $ 43,646 $ 618,342
Fixed charges 18,192 89,822
--------- ---------
Total Earnings $ 61,838 $ 708,164
========= =========
Fixed Charges (Note)
Interest expense $ 6,902 $ 47,062
Portion of rental payments deemed to be
interest 11,290 42,760
--------- ---------
Total Fixed Charges $ 18,192 $ 89,822
========= =========
Ratio of Earnings to Fixed Charges 3.4x 7.9x
<FN>
(Note) For purposes of computing the ratio of earnings to fixed charges,
"earnings from continuing operations before income taxes expense"
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 tax expense for
the twelve month period ended March 31, 2002 includes a $159.0
million provision for restructuring and asset write-down, a $8.8
million pre-tax gain on the sale of DRI and a $22.8 million
pre-tax charge for the write-down of certain assets, the shutdown
of Blue List and the contribution of Rational Investor.
</FN>