UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995 or
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
- --- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-1023
The McGraw-Hill Companies, Inc.
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(Exact name of registrant as specified in its charter)
New York 13-1026995
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(State or 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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McGraw-Hill, Inc.
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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
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Number of shares of Common Stock (par value $1.00 per share)
outstanding as of April 28, 1995: 49,835,628.
PART I
Financial Information
The McGraw-Hill Companies, Inc.
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Consolidated Statement of Income
--------------------------------
Three Months Ended March 31, 1995 and 1994
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1995 1994
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(In thousands, except
per-share data)
Operating revenue $568,548 $559,774
Expenses:
Operating 281,300 276,571
Selling and general 215,063 209,147
Depreciation and amortization 41,037 40,477
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Total expenses 537,400 526,195
Other income - net 5,369 3,223
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Income from operations 36,517 36,802
Interest expense - net 12,790 11,348
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Income before taxes on income 23,727 25,454
Provision for taxes on income 9,776 10,487
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Net income $ 13,951 $ 14,967
======== ========
Earnings per common share $ 0.28 $ 0.30
======== ========
Average number of common shares outstanding 49,679 49,445
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Financial Information (cont'd)
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Balance Sheet
--------------------------
March 31, Dec. 31, March 31,
1995 1994 1994
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(In thousands)
ASSETS
Current assets:
Cash and equivalents $ 7,934 $ 8,056 $ 28,744
Accounts receivable (net of allowance
for doubtful accounts) (Note 3) 679,406 757,949 621,680
Receivable from broker-dealers and
dealer banks (Note 4) 7,217 23,047 17,110
Inventories (Note 3) 239,870 213,253 225,953
Prepaid income taxes 70,195 70,556 92,536
Prepaid and other current assets 71,337 51,226 45,203
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Total current assets 1,075,959 1,124,087 1,031,226
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Prepublication costs (net of accumulated
amortization) (Note 3) 276,802 270,506 293,893
Investments and other assets:
Investment in Rock-McGraw, Inc. - at
equity 58,727 57,652 54,157
Prepaid pension expense 97,121 95,110 90,160
Other 144,438 142,502 156,476
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Total investments and other assets 300,286 295,264 300,793
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Property and equipment - at cost 795,473 788,671 745,149
Less - accumulated depreciation 458,455 442,889 409,696
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Net property and equipment 337,018 345,782 335,453
Goodwill and other intangible assets - at
cost (net of accumulated amortization) 983,085 972,894 1,007,823
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$2,973,150 $3,008,533 $2,969,188
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Financial Information (cont'd)
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Balance Sheet
--------------------------
March 31, Dec. 31, March 31,
1995 1994 1994
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(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 204,750 $ 105,288 $ 154,243
Accounts payable 163,422 176,314 173,914
Payable to broker-dealers and dealer
banks (Note 4) 6,697 21,909 16,338
Accrued liabilities 117,099 177,172 106,542
Income taxes currently payable 50,506 54,300 46,677
Unearned revenue 235,432 239,715 250,339
Other current liabilities 219,920 233,287 216,229
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Total current liabilities 997,826 1,007,985 964,282
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Other liabilities:
Long-term debt (Note 5) 657,285 657,517 757,890
Deferred income taxes 125,054 129,750 114,853
Accrued postretirement healthcare and
other benefits 191,491 191,650 191,477
Other non-current liabilities 109,921 108,579 123,356
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Total other liabilities 1,083,751 1,087,496 1,187,576
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Total liabilities 2,081,577 2,095,481 2,151,858
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Shareholders' equity (Note 6):
Capital stock 51,474 51,474 51,475
Additional paid-in capital 73,820 69,314 66,732
Retained income 907,139 923,052 820,614
Foreign currency translation adjustments (55,830) (45,224) (26,449)
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976,603 998,616 912,372
Less - common stock in treasury-at cost 71,583 76,987 83,320
unearned compensation on
restricted stock 13,447 8,577 11,722
---------- ---------- ----------
Total shareholders' equity 891,573 913,052 817,330
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$2,973,150 $3,008,533 $2,969,188
========== ========== ==========
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Financial Information (cont'd)
The McGraw-Hill Companies, Inc.
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Consolidated Statement of Cash Flows
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For The Three Months Ended March 31, 1995 and 1994
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1995 1994
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(In thousands)
Cash flows from operating activities
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Net income $ 13,951 $ 14,967
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 16,557 15,524
Amortization of goodwill and intangibles 9,317 9,706
Amortization of prepublication costs 15,163 15,247
Provision for losses on accounts receivable 14,283 18,174
Other (576) (1,205)
Changes in assets and liabilities net of effect of
acquisitions and dispositions:
Decrease in accounts receivable 79,948 69,720
Increase in inventories (29,455) (10,111)
Increase in prepaid & other current assets (19,976) (83)
Decrease in accounts payable and accrued expenses (77,019) (80,423)
Decrease in interest and income taxes payable (8,717) (2,289)
Net change in other assets and liabilities (28,300) (1,125)
- --------------------------------------------------- --------- ---------
Cash provided by/(used for) operating activities (14,824) 48,102
- --------------------------------------------------- --------- ---------
Investing activities
- --------------------
Purchases of property and equipment (7,540) (7,089)
Investment in prepublication costs (24,403) (24,089)
Acquisition of businesses (24,264) -
Disposition of property and equipment - 2,285
Other 434 2,653
- --------------------------------------------------- --------- ---------
Cash used for investing activities (55,773) (26,240)
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Financing activities
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Dividends paid to shareholders (29,864) (28,603)
Additions to/(repayment of) short-term debt - net 99,639 (16,707)
Exercise of stock options 3,499 4,485
Other (2,799) (246)
- --------------------------------------------------- --------- ---------
Cash provided by/(used for) financing activities 70,475 (41,071)
- --------------------------------------------------- --------- ---------
Net change in cash and equivalents (122) (19,209)
Cash and equivalents at beginning of period 8,056 47,953
- --------------------------------------------------- --------- ---------
Cash and equivalents at end of period $ 7,934 $ 28,744
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Financial Information (cont'd)
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 is based on estimates which include all adjustments
(consisting only of normal recurring adjustments) considered necessary to
present fairly such information. The operating results for the three
months ended March 31, 1995 and 1994 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, 1994.
Certain prior year amounts have been reclassified for comparability
purposes.
2. Operating profit by segment is total operating revenue less expenses which
are deemed to be related to the unit's operating revenue. A summary of
operating results by segment for the three months ended March 31, 1995 and
1994 follows:
1995 1994
----------------------- -----------------------
Operating Operating
Revenue Profit/(Loss) Revenue Profit/(Loss)
--------- ------------- --------- -------------
(In thousands)
Educational and Professional
Publishing $ 171,296 $ (29,371) $ 176,315 $ (24,933)
Financial Services 199,366 59,301 194,446 58,782
Information and Media Services 197,886 19,443 189,013 14,472
-------------------------------- --------- --------- --------- ---------
Total operating segments 568,548 49,373 559,774 48,321
General corporate expense - (12,856) - (11,519)
Interest expense - net - (12,790) - (11,348)
-------------------------------- --------- --------- --------- ---------
Total company $ 568,548 $ 23,727* $ 559,774 $ 25,454*
========= ========= ========= =========
<FN>
*Income before taxes on income.
</FN>
-6-
Financial Information (cont'd)
The McGraw-Hill Companies, Inc.
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Notes to Financial Statements
-----------------------------
3. The allowance for doubtful accounts, the components of inventory and the
accumulated amortization of prepublication costs were as follows:
March 31, Dec. 31, March 31,
1995 1994 1994
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(In thousands)
Allowance for doubtful accounts $ 79,432 $ 78,732 $ 79,057
========= ========= =========
Inventories:
Finished goods $ 163,676 $ 140,168 $ 168,478
Work-in-process 43,235 47,795 36,571
Paper and other materials 32,959 25,290 20,904
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Total inventories $ 239,870 $ 213,253 $ 225,953
========= ========= =========
Accumulated amortization of
prepublication costs $ 314,450 $ 346,172 $ 252,169
========= ========= =========
4. 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 $340 million of matched purchase and sale commitments at
March 31, 1995. Only those transactions not closed at the settlement date
are reflected in the balance sheet as receivables and payables.
-7-
Financial Information (cont'd)
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Financial Statements
-----------------------------
5. A summary of long-term debt follows:
March 31, Dec. 31, March 31,
1995 1994 1994
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(In thousands)
9.43% senior notes due 2000 $ 250,000 $ 250,000 $ 250,000
Commercial paper supported by
bank revolving credit agreement 400,000 400,000 500,000
Other 7,285 7,517 7,890
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Total long-term debt $ 657,285 $ 657,517 $ 757,890
========= ========= =========
6. Common shares reserved for issuance, for conversions and for the
exercise of stock options were as follows:
March 31, Dec. 31, March 31,
1995 1994 1994
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$1.20 convertible preference stock
at the rate of 3.3 shares
for each share of preference stock 4,689 4,996 5,277
Exercise of stock options 3,880,694 4,055,114 4,256,218
--------- --------- ---------
3,885,383 4,060,110 4,261,495
========= ========= =========
Common shares reserved for issuance at March 31 and December 31, 1994 were
restated to include 2.3 million shares under the 1993 key Employee Stock
Incentive Plan. No stock options under the 1993 Plan were issued prior to
1995.
7. Cash dividends per share declared during the three months ended March 31, 1995
and 1994 were as follows:
1995 1994
----- -----
Common stock $.60 $.58
Preference stock .30 .30
-8-
Financial Information (cont'd)
Management's Discussion and Analysis of Operating
-------------------------------------------------
Results and Financial Condition
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Operating Results - Comparing Three Months Ended March 31, 1995 and 1994
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Consolidated Review
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Operating revenue for the first quarter grew $8.8 million, or 1.6%,
over the 1994 quarter to $568.5 million reflecting price and volume
increases. The revenue growth was primarily in Broadcasting, Business
Week, Financial Information Services and Tower Group International,
partially offset by a revenue decline in School Publishing. Net
income declined 6.8% to $14.0 million from the comparable quarter a
year ago and earnings per share were 28 cents versus 30 cents a year
ago. The first quarter represents the company's smallest quarter due
to the seasonality of the company's businesses, primarily the book
publishing operations.
Total expenses in 1995 increased $11.2 million, or 2.1%, reflecting
increased operating expenses due primarily to the increase in revenue,
higher marketing costs for 1995 school publishing adoption sales later
this year and investments at S&P Ratings.
Net interest expense increased $1.4 million, or 12.7%, reflecting an
increase in average commercial paper interest rates from 3.3% in 1994
to 6.1% in 1995. The impact of the higher rates was partially offset
by reduced average commercial paper borrowing levels from the prior
year.
The provision for taxes as a percentage of income before taxes was
41.2% in both 1994 and 1995.
Segment Review
- --------------
Educational and Professional Publishing revenue declined $5.0 million,
or 2.8%. The year-to-year decline reflects 1994 first quarter School
Publishing reorders from the strong adoption year in 1993 that did not
recur in 1995 from 1994's off-adoption year. Excluding School
Publishing, the revenues of the company's other publishing operations
were even with last year in total, with a decline in medical
publishing offset by gains in professional publishing, both domestic
and international. The decline in medical publishing is due to last
year's publication of "Harrison's Principles of Internal Medicine,"
which is published every four years. Internationally, the company
faces a soft market in Mexico, offset by revenue increases in other
Spanish-language markets and gains in Europe and Asia. The segment's
operating loss, reflecting typical first quarter seasonal losses in
educational publishing, increased 17.8% to $29.4 million largely due
to the revenue decline, increased marketing costs for School
Publishing adoptions and publication timing in the Legal Information
Group.
-9-
Financial Information (cont'd)
Financial Services' revenue increased $4.9 million, or 2.5%, while
operating profit improved $0.5 million, or 0.9%. The Financial
Information Services Group benefited from continued growth in
financial information products, particularly MMS International, and
stabilized performance at DRI. S&P Ratings matched last year's
revenue level reflecting the growth of new ratings services and
expanded global operations offsetting an approximate 37% decline in
new issuance volume in the U.S. bond market. S&P Ratings' operating
profit declined from a year ago reflecting the softness in the
corporate bond market and continuing investments in the expansion of
the business.
Information and Media Services' revenue increased $8.9 million, or
4.7%, while operating profit improved $5.0 million, or 34.3%. Strong
performances by Business Week and Broadcasting, the company's two
largest ad-based businesses, were the prime contributors to these
increases. Business Week's results reflect strong performances in
both the North American and international editions. Broadcasting
benefited from strong automotive advertising and increased network
compensation. The change in network affiliation for the company's
Denver broadcast station from CBS to ABC announced last year is
scheduled for early July. Publication Services' results approximated
last year and the Construction Information Group showed modest
improvement. Tower Group International acquired UCB Canada, Ltd. on
March 31, 1995.
Financial Condition
- -------------------
The company continues to maintain a strong financial position. Cash
used in operating activities in the quarter totaled $14.8 million
compared to cash flow generated from operations last year of $48.1
million. This year-to-year decline in the cash flow from operations
reflects primarily inventory purchases and sampling costs for 1995
school publishing adoptions. Total debt increased $99.2 million from
yearend reflecting the factors noted above, as well as the acquisition
of UCB Canada, Ltd. The increased seasonality of the company's
businesses caused by the 1993 acquisition of the Macmillan/McGraw-Hill
School Publishing Company has impacted the company's borrowing
patterns during the year, with the company borrowing during the first
half of the fiscal year and generating cash in the second half of the
year, primarily from fourth quarter collections from customers in the
education markets. This pattern is magnified in years where there is
significant state adoption activity, such as 1995. Cash expenditures
related to the consolidation of book publishing operations, primarily
for severance costs and lease terminations, had a minimal impact on
the company's liquidity.
Commercial paper borrowings at March 31, 1995 totaled $599 million, an
increase of $100 million from December 31, 1994. Commercial paper
debt is supported by an $800 million revolving credit agreement with a
group of banks terminating in November 1999, and $400 million has been
classified as long-term. There are no amounts outstanding under this
agreement.
-10-
Financial Information (cont'd)
Under a shelf registration which became effective with the Securities
and Exchange Commission in mid-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.
Accounts receivable before reserves of $758.8 million decreased $77.8
million from the end of 1994, due primarily to the seasonal nature of
some of the company's businesses, partially offset by the inclusion of
receivables for UCB Canada, Ltd. Receivables were $58.1 million
higher than at March 31, 1994 as a result of higher revenues,
increased international sales where terms of sale and repayment are
traditionally longer and the acquisition of UCB Canada, Ltd.
Inventories increased $26.6 million to $239.9 million from the end of
1994 due primarily to inventory purchases for 1995 school publishing
adoptions and the seasonal buildup for the annual Sweet's Files.
Inventories were $13.9 million higher than at March 31, 1994 due to
the 1995 school publishing adoptions.
Net prepublication costs at March 31 increased $6.3 million from the
end of 1994 to $276.8 million due to additional spending on new titles
and school programs net of first quarter amortization expense. Net
prepublication costs were $17.1 million lower than at March 31, 1994
due to the timing of spending on new programs. Investment in
prepublication costs of $24.4 million in the quarter ended March 31,
1995 approximated the prior year spending of $24.1 million, although
spending levels over the remainder of the year will increase
reflecting investment for 1996 and primarily 1997 adoption years for
School Publishing.
Purchases of property and equipment of $7.5 million approximated the
level of the prior year; the purchases were primarily for computer
equipment.
-11-
PART II
Other Information
Item 5. Other Information
--------------------------
Effective as of April 26, 1995 the Registrant's corporate name was changed
to "The McGraw-Hill Companies, Inc." from "McGraw-Hill, Inc."
Item 6. Exhibits and Report on Form 8-K
----------------------------------------
a) Exhibits
--------
(12) Computation of ratio of earnings to fixed charges.
(27) Financial Data Schedule
SIGNATURES
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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 hereunto duly authorized.
The McGraw-Hill Companies, Inc.
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Date: 5/10/95 By Robert J. Bahash
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Robert J. Bahash
Executive Vice President
and Chief Financial Officer
Date: 5/10/95 By Thomas J. Kilkenny
------------------ ------------------------------
Thomas J. Kilkenny
Vice President and Controller
Date: 5/10/95 By Robert N. Landes
------------------ ------------------------------
Robert N. Landes
Executive Vice President,
Secretary and General Counsel
-12-
Exhibit (12)
The McGraw-Hill Companies, Inc.
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Computation of Ratio of Earnings to Fixed Charges
-------------------------------------------------
Periods Ended March 31, 1995
----------------------------
Three Twelve
Months Months
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(In thousands)
Earnings
Earnings from continuing operations
before income tax expense (Note)...... $ 22,652 $ 340,455
Fixed charges........................... 21,983 87,588
Capitalized interest.................... (111) (376)
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Total Earnings....................... $ 44,524 $ 427,667
========= =========
Fixed Charges (Note)
Interest expense........................ $ 14,503 $ 57,886
Portion of rental payments deemed to be
interest.............................. 7,480 29,702
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Total Fixed Charges.................. $ 21,983 $ 87,588
========= =========
Ratio of Earnings to Fixed Charges 2.0x 4.9x
<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 capital leases, and (2) the
portion of the company's rental expense deemed representative of the
interest factor in rental expense.
</FN>
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