UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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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Not Applicable
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
YES [X] NO[ ]
On October 31, 1997 there were approximately 99 million shares of
common stock (par value $1.00 per share) outstanding.
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 and nine month periods ended
September 30, 1997 and 1996 3
Consolidated Balance Sheet at September 30, 1997,
December 31, 1996 and September 30, 1996 4-5
Consolidated Statement of Cash Flows for the nine
months ended September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Operating
------- Results and Financial Condition 11-16
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings 17
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Item 2. Exhibits 17-20
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-2-
PART I
Financial Information
Item 1. Financial Statements
--------------------
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Statement of Income
--------------------------------
Periods Ended September 30, 1997 and 1996
-----------------------------------------
Three Months Nine Months
--------------------- ----------------------
1997 1996 1997 1996
---------- --------- ---------- ----------
(In thousands, except per-share data)
Operating revenue $1,143,740 $ 949,009 $2,633,327 $2,243,794
Expenses:
Operating 510,345 397,775 1,207,425 1,018,040
Selling and general 310,710 265,517 830,399 708,419
Depreciation and amortization 104,442 84,716 226,763 178,974
---------- --------- ---------- ----------
Total expenses 925,497 748,008 2,264,587 1,905,433
Other income - net 23,029 4,847 31,720 14,817
---------- --------- ---------- ----------
Income from operations 241,272 205,848 400,460 353,178
Interest expense - net 15,299 13,075 40,917 36,906
---------- --------- ---------- ----------
Income before taxes on income 225,973 192,773 359,543 316,272
Provision for taxes on income 82,474 78,265 135,902 128,406
---------- --------- ---------- ----------
Net income $ 143,499 $ 114,508 $ 223,641 $ 187,866
========== ========= ========== ==========
Earnings per common share $ 1.44 $ 1.15 $ 2.24 $ 1.88
========== ========= ========== ==========
Average number of common
shares outstanding 99,582 99,477 99,971 100,109
-3-
The McGraw-Hill Companies, Inc.
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Consolidated Balance Sheet
--------------------------
Sept. 30, Dec. 31, Sept. 30,
1997 1996 1996
---------- ---------- ----------
(In thousands)
ASSETS
Current assets:
Cash and equivalents $ 19,183 $ 3,430 $ 9,883
Accounts receivable (net of allowance
for doubtful accounts and sales
returns) (Note 3) 1,085,947 879,466 965,932
Receivable from broker-dealers and
dealer banks (Note 4) 2,474 2,473 14,218
Inventories (Note 3) 316,587 273,158 264,272
Prepaid income taxes 107,079 106,464 71,579
Prepaid and other current assets 82,654 84,592 65,063
---------- ---------- ----------
Total current assets 1,613,924 1,349,583 1,390,947
---------- ---------- ----------
Prepublication costs (net of accumulated
amortization) (Note 3) 316,774 353,064 300,854
Investments and other assets:
Investment in Rock-McGraw, Inc. - at
equity 70,878 66,899 65,514
Prepaid pension expense 108,848 104,515 102,931
Other 173,213 150,373 153,040
---------- ---------- ----------
Total investments and other assets 352,939 321,787 321,485
---------- ---------- ----------
Property and equipment - at cost 808,269 835,680 854,055
Less - accumulated depreciation 547,988 524,187 535,069
---------- ---------- ----------
Net property and equipment 260,281 311,493 318,986
Goodwill and other intangible assets - at
cost (net of accumulated amortization) 1,268,578 1,306,312 945,727
---------- ---------- ----------
$3,812,496 $3,642,239 $3,277,999
========== ========== ==========
-4-
The McGraw-Hill Companies, Inc.
-------------------------------
Consolidated Balance Sheet
--------------------------
Sept. 30, Dec. 31, Sept. 30,
1997 1996 1996
---------- ---------- ----------
(In thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 236,019 $ 24,518 $ 179,790
Accounts payable 249,262 241,736 192,270
Payable to broker-dealers and dealer
banks (Note 4) 2,331 2,400 13,520
Accrued liabilities 243,402 232,024 186,166
Income taxes currently payable 164,500 235,573 144,858
Unearned revenue 190,128 229,216 222,075
Other current liabilities 254,784 253,196 229,714
---------- ---------- ----------
Total current liabilities 1,340,426 1,218,663 1,168,393
---------- ---------- ----------
Other liabilities:
Long-term debt (Note 5) 562,902 556,850 556,766
Deferred income taxes 137,990 150,319 138,959
Accrued postretirement healthcare and
other benefits 197,562 198,709 199,441
Other non-current liabilities 164,570 156,580 132,601
---------- ---------- ----------
Total other liabilities 1,063,024 1,062,458 1,027,767
---------- ---------- ----------
Total liabilities 2,403,450 2,281,121 2,196,160
---------- ---------- ----------
Shareholders' equity (Note 6):
Capital stock 102,933 102,933 102,933
Additional paid-in capital 43,399 37,473 37,635
Retained income 1,511,316 1,394,884 1,119,732
Foreign currency translation adjustments (69,919) (57,302) (56,419)
---------- ---------- ----------
1,587,729 1,477,988 1,203,881
Less - common stock in treasury-at cost 164,601 107,410 110,551
unearned compensation on
restricted stock 14,082 9,460 11,491
---------- ---------- ----------
Total shareholders' equity 1,409,046 1,361,118 1,081,839
---------- ---------- ----------
$3,812,496 $3,642,239 $3,277,999
========== ========== ==========
-5-
The McGraw-Hill Companies, Inc.
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Consolidated Statement of Cash Flows
------------------------------------
For The Nine Months Ended September 30, 1997 And 1996
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1997 1996
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(In thousands)
Cash flows from operating activities
Net income $ 223,641 $ 187,866
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation 53,068 52,719
Amortization of goodwill and intangibles 37,429 27,336
Amortization of prepublication costs 136,266 98,919
Provision for losses on accounts receivable 64,296 50,047
Provision for Facility Reserve 33,152 -
Gain on the Disposition of Datapro (20,404) -
Other 4,949 458
Changes in assets and liabilities net of effect of
acquisitions and dispositions:
Increase in accounts receivable (286,385) (162,553)
Increase in inventories (46,081) (22,259)
Decrease/(Increase) in prepaid and other current assets 769 (7,562)
Increase/(Decrease) in accounts payable and
accrued expenses 21,421 (25,963)
Decrease in unearned revenue (24,515) (19,017)
Decrease in other current liabilities (461) (24,038)
(Decrease)/increase in interest and income taxes
currently payable (76,547) 70,056
Decrease in prepaid/deferred income taxes (643) (1,174)
Net change in other assets and liabilities (16,771) 189
- --------------------------------------------------- --------- ---------
Cash provided by operating activities 103,184 225,024
- --------------------------------------------------- --------- ---------
Investing activities
Investment in prepublication costs (122,376) (126,919)
Purchases of property and equipment (46,172) (36,895)
Proceeds from exchange of Shepard's/McGraw-Hill
for the Times Mirror Higher Education Group 6,730 -
Acquisition of businesses (24,834) (31,809)
Disposition of property, equipment and businesses 57,579 6,657
Other - 1,189
- --------------------------------------------------- --------- ---------
Cash used for investing activities (129,073) (187,777)
- --------------------------------------------------- --------- ---------
Financing activities
Additions to short-term debt - net 212,630 108,671
Dividends paid to shareholders (107,209) (98,629)
Exercise of stock options 18,291 16,316
Repurchase of treasury shares (79,899) (63,313)
Other (2,171) (659)
- --------------------------------------------------- --------- ---------
Cash provided by/(used for) financing activities 41,642 (37,614)
- --------------------------------------------------- --------- ---------
Net change in cash and equivalents 15,753 (367)
Cash and equivalents at beginning of period 3,430 10,250
- --------------------------------------------------- --------- ---------
Cash and equivalents at end of period $ 19,183 $ 9,883
========= =========
-6-
The McGraw-Hill Companies, Inc.
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Notes to Financial Statements
-----------------------------
1. The financial information in this report has not been audited, but in the
opinion of management all adjustments (consisting only of normal recurring
adjustments) considered necessary to present fairly such information have
been included. The operating results for the three and nine month periods
ended September 30, 1997 and 1996 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, 1996.
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 and nine months ended
September 30, 1997 and 1996 follows:
1997 1996
--------------------- ---------------------
Operating Operating
Revenue Profit Revenue Profit
---------- --------- --------- ---------
(In thousands)
Three Months
------------
Educational and Professional
Publishing $ 681,214 $178,276 $523,575 $140,822
Financial Services 243,944 49,660 209,867 63,624
Information and Media Services 218,582 37,336 215,567 18,088
------------------------------ ---------- -------- -------- --------
Total operating segments 1,143,740 265,272 949,009 222,534
General corporate expense - (24,000) - (16,686)
Interest expense - net - (15,299) - (13,075)
------------------------------ ---------- -------- -------- --------
Total company $1,143,740 $225,973* $949,009 $192,773*
========== ======== ======== ========
<FN>
*Income before taxes on income.
</FN>
-7-
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Financial Statements
-----------------------------
1997 1996
-------------------- ---------------------
Operating Operating
Revenue Profit Revenue Profit
---------- --------- ---------- ---------
(In thousands)
Nine Months
-----------
Educational and Professional
Publishing $1,235,349 $169,929 $ 967,059 $135,844
Financial Services 713,272 194,186 630,062 193,404
Information and Media Services 684,706 89,508 646,673 67,077
----------------------------- ---------- -------- ---------- --------
Total operating segments 2,633,327 453,623 2,243,794 396,325
General corporate expense - (53,163) - (43,147)
Interest expense - net - (40,917) - (36,906)
----------------------------- ---------- -------- ---------- --------
Total company $2,633,327 $359,543* $2,243,794 $316,272*
========== ======== ========== ========
<FN>
*Income before taxes on income.
</FN>
3. The allowance for doubtful accounts and sales returns, the components of
inventory and the accumulated amortization of prepublication costs were as
follows:
Sept. 30, Dec. 31, Sept. 30,
1997 1996 1996
--------- --------- ---------
(In thousands)
Allowance for doubtful accounts $ 100,197 $ 85,965 $ 80,654
========= ========= =========
Allowance for sales returns $ 87,945 $ 76,295 $ 48,249
========= ========= =========
Inventories:
Finished goods $ 242,608 $ 219,295 $ 195,639
Work-in-process 43,012 19,887 38,706
Paper and other materials 30,967 33,976 29,927
--------- --------- ---------
Total inventories $ 316,587 $ 273,158 $ 264,272
========= ========= =========
Accumulated amortization of
prepublication costs $ 576,938 $ 486,960 $ 456,267
========= ========= =========
-8-
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Financial Statements
-----------------------------
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 $275 million of matched purchase and sale commitments at
September 30, 1997. Only those transactions not closed at the settlement
date are reflected in the balance sheet as receivables and payables.
5. A summary of long-term debt follows:
Sept. 30, Dec. 31, Sept. 30,
1997 1996 1996
--------- --------- ---------
(In thousands)
9.43% senior notes due 2000 $ 250,000 $ 250,000 $ 250,000
Commercial paper supported by
bank revolving credit agreement 300,000 300,000 300,000
Other 12,902 6,850 6,766
--------- --------- ---------
Total long-term debt $ 562,902 $ 556,850 $ 556,766
========= ========= =========
6. Common shares approved for issuance for conversions and stock based awards
were as follows:
Sept. 30, Dec. 31, Sept. 30,
1997 1996 1996
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$1.20 convertible preference stock
at the rate of 6.6 shares for each
share of preference stock 9,134 9,161 9,260
Stock based awards 10,591,967 6,350,994 6,479,841
---------- --------- ---------
10,601,101 6,360,155 6,489,101
========== ========= =========
7. Cash dividends per share declared during the periods were as follows:
Three Months Nine Months
------------ -----------
1997 1996 1997 1996
---- ---- ----- ----
Common stock $.36 $.33 $1.08 $.99
Preference stock .30 .30 .90 .90
-9-
The McGraw-Hill Companies, Inc.
-------------------------------
Notes to Financial Statements
-----------------------------
8. In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings per Share.
Under the new standard, which must be adopted on December 31, 1997, the
company will be required to change the method used to compute earnings per
share and to restate prior periods presented. A dual presentation of basic
and diluted earnings per share will be required. The basic earnings per
share calculation, which will replace primary earnings per share, will
exclude the dilutive impact of stock options and other common share
equivalents. The dilutive earnings per share calculation, which will
replace fully diluted earnings per share, will include common share
equivalents. The adoption of SFAS No. 128 is not expected to have a
significant impact on earnings per share for the nine months ended
September 30, 1997 and 1996.
-10-
Management's Discussion and Analysis of Operating
-------------------------------------------------
Results and Financial Condition
-------------------------------
Operating Results - Comparing Periods Ended September 30, 1997 and 1996
- -----------------------------------------------------------------------
Three Months
- ------------
Consolidated Review
- -------------------
Operating revenue for the quarter grew $194.7 million, or 20.5%, over the 1996
quarter to $1.14 billion. The revenue increase reflects excellent sales in
elementary-high school (el-hi) publishing, continued strong new issuance volume
in the U.S. bond market and global expansion at Standard & Poor's Rating's
Services, and the acquisition of the former Times Mirror Higher Education Group.
Net income for the quarter increased $29 million, or 25.3%, to $143.5 million.
Earnings per share were $1.44 compared to $1.15 last year. The seasonality of
the company's earnings increased over the prior year due to the October 1996
exchange of the Shepard's/McGraw-Hill legal publishing business for the Times
Mirror Higher Education Group. The exchange transaction contributed 9 cents to
earnings in the quarter, compared to 9 cents dilution in the first half of the
year, reflecting the seasonality of the higher education business as compared to
Shepard's and cost reductions from integration activities.
In July 1997 the company divested its McGraw-Hill London House and McGraw-Hill
School Systems businesses for proceeds of $29 million in cash; the proceeds
approximated the book values of the properties. Also in July, the company
divested its Datapro Information Services business for proceeds of $25 million
in cash; the quarter results reflect a pre-tax gain of $20.4 million ($20.2
million after tax, or 20 cents per share) on the divestiture. The pre-tax gain
is recorded as other income on the consolidated statement of income and is
reflected in the operating profit of the Information and Media Services segment.
1997 expenses include a one-time, non-cash provision of $33.2 million ($19.9
million after tax, or 20 cents per share) for the consolidation of office space
in New York City. The company is consolidating its locations in New York City
and will lease approximately 1.3 million square feet of office space for 20
years. The one-time provision is primarily for a writedown of a building which
the company will sell as part of the office consolidation and the writedown of
leasehold improvements for the early surrender of office space to be vacated in
the company's headquarters building. The company has taken these actions to
consolidate its offices into fewer and more efficient locations and to align its
future space requirements with the growth plans of its businesses. The
operating profit of each segment and corporate expenses reflect the amount of
the provision associated with each segment.
-11-
Total expenses in 1997, excluding the provision for the consolidation of office
space, increased $144.3 million, or 19.3%, reflecting volume-related costs due
to the revenue growth, operating costs of the acquired higher education business
and expenses associated with new products and initiatives.
Net interest expense increased $2.2 million, or 17%, due primarily to higher
commercial paper borrowing levels. Average commercial paper interest rates
increased from 5.5% in 1996 to 5.6% in 1997.
The provision for taxes as a percent of income before taxes, excluding the gain
on the sale of Datapro, was 40.0% in 1997 compared to 40.6% in 1996. The
reduction in the effective tax rate reflects lower state taxes resulting
primarily from the acquisition of the Times Mirror Higher Education Group.
Including the gain on the sale of Datapro, the effective tax rate was 36.5% due
to lower taxes on the gain.
Segment Review
- --------------
Educational and Professional Publishing revenues increased $157.6 million, or
30.1%, to $681.2 million. The revenue increase is due to strong elementary
school publishing sales including a market leading 35% share in the 1997
California reading adoption. The company had two successful product offerings
in the California adoption, the McGraw-Hill School Division's basal program,
Spotlight on Literacy, and the SRA/McGraw-Hill reading series, Collections for
Young Scholars. These programs also performed well in other adoption states and
open territories. Also, completing a strong start in the second quarter, the
School Division finished with a 60% share in the Texas social studies adoption.
Secondary school publishing sales improved due to open territory sales. 1997
revenues include $95 million from the former Times Mirror Higher Education
properties compared to $22 million contributed by Shepard's last year.
International publishing revenues increased due to sales of the Times Mirror
products, the new edition of Harrison's Principles of Internal Medicine and
improved economic conditions in Canada. Domestic professional publishing
revenues improved due to strong computer titles while revenues declined at the
Continuing Education Center. Segment operating profit of $178.3 million
includes a $8.6 million provision for the consolidation of office space.
Excluding the provision, operating profit improved 32.7% reflecting the strong
el-hi performance, improved operating results in international markets and
increased profits in the expanded higher education business, partially offset
by a decline at the Continuing Education Center.
Financial Services' revenue increased $34.1 million, or 16.2%, to $243.9
million. Segment operating profit of $49.7 million reflects a $20.4 million
provision for the consolidation of office space. Excluding the provision,
operating profit improved 10.2%. Standard & Poor's Ratings Services' revenues
and profits improved due to increased new issuance volume in the U.S. bond
market, particularly the high yield sector. New ratings products and continued
global expansion also significantly contributed to the strong performance.
Standard & Poor's Financial Information Services' revenue improved due to growth
in the retail, institutional and global sectors while revenues were flat in
municipal securities services reflecting a continued weak market. Operating
profit declined due to investments in new products to be launched later this
year and the weak municipal securities services market.
-12-
Information and Media Services' revenue increased $3.0 million, or 1.4%, to
$218.6 million. Excluding the impact of the Datapro divestiture, revenues
increased 4.6%. Segment operating profit of $37.3 million includes the $20.4
million gain on the sale of Datapro Information Services and a $1.5 million
provision for the consolidation of office space. Excluding these items,
operating profit improved 1.9%. Business Week revenues increased modestly
despite flat advertising pages as revenue per page improved; profits declined
due to higher marketing and circulation expenses. Revenues and profits declined
at the Information Technology and Communications Group due to reduced
advertising pages. The operating performance of the healthcare, aviation and
science and technology publications improved modestly from the prior year.
Revenue and profits improved in the Construction Information Group due to growth
in electronic products and increased advertising in Architectural Record and ENR
magazines. Broadcasting revenue improved while profits grew at a greater rate
due to cost reductions.
Nine Months
- -----------
Consolidated Review
- -------------------
For the first nine months of the year, operating revenue of $2.6 billion
increased $389.5 million, or 17.4%, over 1996. The revenue increase reflects
excellent sales in elementary-high school (el-hi) publishing, continued strong
new issuance volume in the U.S. bond market and global expansion at Standard &
Poor's Rating's Services, the acquisition of the former Times Mirror Higher
Education Group and larger advertising revenues at Business Week and other
magazines. 1997 expenses include a one-time, non-cash provision of $33.2
million ($19.9 million after tax, or 20 cents per share) for the consolidation
of office space in New York City. Total expenses in 1997, excluding the
provision for the consolidation of office space, increased $326.0 million, or
17.1%, reflecting volume-related costs due to the revenue growth, operating
costs of the acquired higher education business and expenses associated with new
products and initiatives. Also reflected in the results is a pre-tax gain of
$20.4 million ($20.2 million after tax, or 20 cents per share) on the sale of
Datapro Information Services. Net income increased $35.8 million, or 19.0%,
reflecting the revenue increases. Earnings per share were $2.24 compared to
$1.88 last year. The year to date results reflect no dilution in earnings from
last year's exchange of Shepard's/McGraw-Hill for the Times Mirror Higher
Education Group.
Net interest expense increased $4.0 million, or 10.9%, due primarily to higher
commercial paper borrowing levels. Average commercial paper borrowing rates
increased from 5.4% in 1996 to 5.6% in 1997.
The provision for taxes as a percent of income before taxes, excluding the gain
on the sale of Datapro, was 40.0% in 1997 compared to 40.6% in 1996. This
reduction in the effective tax rate reflects lower state taxes resulting
primarily from the acquisition of the Times Mirror Higher Education Group.
Including the gain on the sale of Datapro, the effective tax rate was 37.8% due
to lower taxes on the gain.
Segment Review
- --------------
Educational and Professional Publishing revenue increased $268.3 million, or
27.7%, to $1.235 billion. The revenue increase is due to strong elementary
-13-
school publishing sales including a market leading 35% share in the 1997
California reading adoption. The company had two successful product offerings
in the California adoption that also performed well in other adoption states and
open territories. The company also captured a 60% share in the Texas social
studies adoption. Secondary school publishing sales improved due to open
territory sales. 1997 revenues include $159 million from the former Times
Mirror Higher Education properties compared to $54 million contributed by
Shepard's last year. International publishing revenues increased due to sales
of the Times Mirror products and improved economic conditions in Canada.
Revenues declined at the Continuing Education Center. Segment operating profit
of $169.9 million includes a $8.6 million provision for the consolidation of
office space. Excluding the provision, operating profit improved 31.4%
reflecting the strong el-hi performance, improved operating results in
international markets and increased profits in the expanded higher education
business, partially offset by a decline at the Continuing Education Center.
Financial Services' revenue increased $83.2 million, or 13.2%, to $713.3
million. Segment operating profit of $194.2 million includes a $20.4 million
provision for the consolidation of office space. Excluding the provision,
operating profit improved 11.0%. Standard & Poor's Ratings Services' revenues
and profits improved due to increased new issuance volume in the U.S. bond
market, particularly the high yield sector. New ratings products and continued
global expansion also significantly contributed to the strong performance.
Standard & Poor's Financial Information Services' revenue improved due to growth
in the retail, institutional and global sectors offsetting a decline in
municipal securities services reflecting a continued weak market. Operating
profit declined due to investments in new products to be launched later this
year and reduced profits at municipal securities services.
Information and Media Services' revenue increased $38.0 million, or 5.9%, to
$684.7 million. Segment operating profit of $89.5 million includes the $20.4
million gain on the sale of Datapro and a $1.5 million provision for the
consolidation of office space. Excluding these items, operating profit improved
5.2%. Business Week revenues and profits increased due to advertising page
growth and increased revenue per page. Revenues and profits declined at the
Information Technology and Communications Group due to reduced advertising
pages. The operating performance of the healthcare, aviation and science and
technology publications improved due to increased advertising pages and the
acquisition of several healthcare publications late last year. Revenue and
profits improved in the Construction Information Group due to growth in
electronic products and increased advertising in Architectural Record and ENR
magazines. Broadcasting revenue improved modestly while profits grew at a
greater rate due to cost reductions.
Financial Condition
- -------------------
The company continues to maintain a strong financial position. Cash generated
by operating activities in the first nine months of 1997 totaled $103 million,
which is net of $150 million in tax payments on last year's gain on the exchange
of Shepard's/McGraw-Hill for the Times Mirror Higher Education Group, compared
to $225 million for the same period last year. Total debt increased $218
million from year-end reflecting the tax payments, expenditures for the
integration of the higher education businesses, seasonal spending for inventory
and marketing costs for school publishing adoptions, prepublication spending for
publishing programs and the repurchase of common shares, partially offset by the
net proceeds from the disposition of businesses. The company's strong presence
-14-
in school and higher education publishing significantly impacts the seasonality
of its earnings and borrowing patterns over 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 in the fourth quarter.
Commercial paper borrowings at September 30, 1997 totaled $529 million, an
increase of $207 million from December 31, 1996. Commercial paper debt is
supported by a $800 million revolving credit agreement with a group of banks
terminating in February 2002, and $300 million has been classified as long-term.
There are no amounts outstanding under this agreement.
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.
In January 1996, the company's Board of Directors approved a stock repurchase
program authorizing the purchase of up to four million shares of the company's
common stock. In 1997, the company has repurchased 1.3 million shares at a cost
of $80 million. In fiscal 1996, 1.4 million shares were repurchased under the
program at a cost of $63 million. The repurchased shares will be used for
general corporate purposes, including the issuance of shares for the exercise of
employee stock options.
Accounts receivable before reserves of $1.274 billion increased $232 million
from the end of 1996 due primarily to the seasonal nature of the company's book
publishing businesses, reflecting an increase in school publishing receivables
from third quarter sales. Inventories increased $43 million to $317 million
from the end of 1996 due primarily to inventory purchases for school publishing
adoptions and the seasonal buildup for the annual Sweet's files.
Net prepublication costs decreased $36 million from the end of 1996 to $317
million as amortization expense in this significant adoption year exceeded
spending; prepublication costs also declined due to the divestiture of McGraw-
Hill London House and McGraw-Hill School Systems. Prepublication cost spending
in the first nine months of 1997 totaled $122 million compared to $127 million
in 1996. The level of spending is expected to increase over the remainder of
the year.
Purchases of property and equipment of $46 million were $9 million higher than
the comparable period last year; the purchases were primarily for computer
equipment and the integration of the Times Mirror Higher Education properties.
The company's consolidation of office space in New York City will entail capital
expenditures for the build-out of the new space of up to $150 million, primarily
in 1998 and 1999, which are expected to be financed by operating cash flow and
commercial paper borrowings under existing facilities.
The company has reviewed its technology environment to assess Year 2000 risks,
develop plans and timetables to convert or replace systems to achieve Year 2000
compatibility and to estimate related costs. The company currently estimates
that the costs for conversion will approximate $15 million. Certain systems
that are not Year 2000 compliant may be replaced as part of the company's
ongoing system development projects.
On November 12, the company acquired the outstanding shares of Micropal Group
Limited, the leading provider of mutual funds data and information, for $48
million in cash and notes.
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"Safe Harbor Statement under the Private Securities Litigation Reform Act of
- ----------------------------------------------------------------------------
1995"
- -----
This section, as well as other portions of this document, include 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: the timing of integration
actions related to the Times Mirror Higher Education Group; the strength of
profit levels at Standard & Poor's Rating's Services; the level of
prepublication cost spending in 1997; shares to be reacquired under the share
repurchase plan; and the level of the future cash flow and debt levels.
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, the successful marketing of new products, the effect of competitive
products and pricing, and the timing of reducing costs in the newly merged
higher education business.
-16-
PART II
Other Information
Item 1. Legal Proceedings
-----------------
On September 5, 1997, a Complaint was filed in New York State Supreme
Court in an action captioned Julian H. Robertson, Jr. v. The McGraw-
------------------------ -----------
Hill Companies, Inc., et al.(Index No. 105357/97); an Amended
- ----------------------------
Complaint was filed on September 11, 1997. The Amended Complaint
alleges that an article about Mr. Robertson entitled "The Fall of the
Wizard of Wall Street" published in the April 1, 1996 issue of
Business Week was false and defamatory. The Amended Complaint seeks
- -------------
compensatory damages in the amount of $500 million and punitive
damages in the amount of $500 million. The Company believes that the
allegations in the Amended Complaint lack merit and intends to
vigorously contest the lawsuit. As a threshold matter, on October
28, 1997 the Company filed a motion for summary judgment seeking
dismissal of the Amended Complaint on statute of limitations grounds.
Item 2. Exhibits Page Number
-------- -----------
(12) Computation of Ratio of Earnings to Fixed Charges. 19
(27) Financial Data Schedule. 20
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE McGRAW-HILL COMPANIES, INC.
-------------------------------
Date: 11/13/97 By Robert J. Bahash
------------------ -------------------------------
Robert J. Bahash
Executive Vice President
and Chief Financial Officer
Date: 11/11/97 By Thomas J. Kilkenny
------------------ -------------------------------
Thomas J. Kilkenny
Vice President and Controller
Date: 11/11/97 By Kenneth M. Vittor
------------------ -------------------------------
Kenneth M. Vittor
Senior Vice President
and General Counsel
-18-
Exhibit (12)
The McGraw-Hill Companies, Inc.
-------------------------------
Computation of Ratio of Earnings to Fixed Charges
-------------------------------------------------
Periods Ended September 30, 1997
--------------------------------
Nine Twelve
Months Months
--------- ---------
(In thousands)
Earnings
Earnings from continuing operations
before income tax expense (Note)...... $ 355,564 $ 852,714
Fixed charges........................... 64,023 82,529
--------- ---------
Total Earnings....................... $ 419,587 $ 935,243
========= =========
Fixed Charges (Note)
Interest expense........................ $ 43,713 $ 55,691
Portion of rental payments deemed to be
interest.............................. 20,310 26,838
--------- ---------
Total Fixed Charges.................. $ 64,023 $ 82,529
========= =========
Ratio of Earnings to Fixed Charges 6.6x 11.3x
<FN>
(Note) For purposes of computing the ratio of earnings to fixed charges,
"earnings from continuing operations before income taxes" excludes
undistributed equity in income of less than 50%-owned companies. "Fixed
charges" consist of (1) interest on debt, and (2) the portion of the
company's rental expense deemed representative of the interest factor in
rental expense.
Earnings from continuing operations before income taxes for the nine and
twelve month periods ended September 30, 1997 includes a $33.2 million
provision for real estate write-downs and a $20.4 million gain on the
sale of Datapro Information Services. The twelve month period ended
September 30, 1997 also includes a $418.7 million gain on the exchange of
Shepard's/McGraw-Hill for the Times Mirror Higher Education Group and a
one-time integration charge of $25.0 million.
</FN>
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