[COVER PAGE GRAPHIC]
ANNUAL REPORT 2002
THE McGRAW-HILL COMPANIES
THE McGRAW-HILL COMPANIES
[STANDARD & POOR'S LOGO]
EVERY MINUTE OF EVERY DAY...
IN EVERY CORNER OF THE WORLD...
PEOPLE MAKE DECISIONS -
DECISIONS ABOUT THEIR LIVES AND FAMILIES,
THEIR BUSINESS AND CAREERS, THEIR FUTURES.
WE HELP OUR CUSTOMERS MAKE BETTER DECISIONS.
THE IMPACT WE MAKE ON THOSE DECISIONS,
THROUGH OUR INSIGHT AND EXPERTISE,
MAKES US A LEADER IN THE THREE LARGE AND
GROWING MARKETS WE SERVE.
[PHOTO OF WALL]
FINANCIAL HIGHLIGHTS
SHAREHOLDER RETURN
Five-Year Cumulative Total Return
[12/31/97 12/31/02]
[LINE GRAPH]
McGH S&P Peer
97 100 100 100
98 140 129 104
99 173 156 137
00 167 141 120
01 177 125 125
02 178 97 135
OPERATING REVENUE
[dollars in millions]
[LINE GRAPH]
98 3,725
99 3,992
00 4,281
01 4,645
02 4,788
YEAR END SHARE PRICE
[dollars]
[LINE GRAPH]
98 50.94
99 61.63
00 58.63
01 60.98
02 60.44
DIVIDENDS PER SHARE
[dollars]
[LINE GRAPH]
98 0.78
99 0.86
00 0.94
01 0.98
02 1.02
YEARS ENDED DECEMBER 31 (IN MILLIONS EXCEPT PER-SHARE DATA) 2002 2001 % CHANGE
- ---------------------------------------------------------------------------------------------------------
Operating revenue $4,787.7 $4,645.5 3.1
Net income 576.8 377.0 53.0
- ---------------------------------------------------------------------------------------------------------
Diluted earnings per share 2.96 1.92 54.2
- ---------------------------------------------------------------------------------------------------------
Dividends per share of common stock -
$.255 per quarter in 2002 and $.245 in 2001 1.02 0.98 4.1
- ---------------------------------------------------------------------------------------------------------
Total assets $5,032.2 $5,161.2 -2.5
Capital expenditures* 319.3 411.4 -22.4
Total debt 578.3 1,056.5 -45.3
Shareholders' equity 2,165.8 1,853.9 16.8
- ---------------------------------------------------------------------------------------------------------
*Includes investment in prepublication costs.
[PHOTO OF HAROLD McGRAW III]
HAROLD McGRAW III
Chairman, President and CEO
"I'm proud of the results we delivered in 2002 and our record of growth
over the past decade. And in a year marked by economic uncertainty, corporate
scandal and the threat of war and terrorism, I'm especially proud of the
contributions made by the men and women of The McGraw-Hill Companies to the
progress of the individuals, markets and societies we serve."
3
[PHOTO OF HAROLD MCGRAW III] [PHOTO OF HAROLD MCGRAW III]
TO OUR SHAREHOLDERS:
IMPACT. It's evident in every corner of The McGraw-Hill Companies.
Our customers see it when children learn to read, when investors better
understand the risks and opportunities they face, when workers enhance their
skills and when countries attract capital to improve their standards of living.
Our shareholders see it - year after year - reflected in our performance. I'm
proud of the results we delivered in 2002 and our record of growth over the past
decade.
And in a year marked by economic uncertainty, corporate scandal and the threat
of war and terrorism, I'm especially proud of the contributions made by the men
and women of The McGraw-Hill Companies to the progress of the individuals,
markets and societies we serve. Simply stated, our work has never been more
vital and valued.
We hold this position because we have aligned our businesses with three large
and growing global needs:
- - the need for capital to drive economic growth;
- - the need for knowledge to enhance learning; and
- - the need for information transparency to improve decision-making.
This focus has helped to make us leaders in our markets. Standard & Poor's is
the world's leading provider of independent opinions and analysis on the debt
and equity markets, as well as the creator of the largest family of index
products and services. McGraw-Hill Education remains a U.S. leader in the
primary and secondary grades, while our higher education business is gaining
market share by setting the pace for technological innovation. BusinessWeek is
the most widely read business publication in the world; our energy, aviation and
construction
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information businesses lead their respective markets; and our four broadcast
stations continue to meet the needs of their audiences.
Central to our leadership and impact is the talent within The McGraw-Hill
Companies. We honor the work of our predecessors, who helped build our great
franchises, as well as the 16,500 men and women whose expertise, independence
and integrity allow us to prosper today. I am delighted that this annual report
shares a sampling of their insights on a range of timely issues.
FINANCIAL IMPACT. Perhaps the most compelling evidence of our impact is our
track record of financial success. In 2002, we extended our record of earnings
growth, achieving a double-digit increase amid difficult economic conditions.
- - Earnings per share increased to $2.96.
- - Net income rose to $576.8 million.
- - Operating margins reached 21.3%.
- - Revenue rose to an all-time high of $4.8 billion.
In 2002, we provided our shareholders with a positive total return on their
investment, a notable achievement in a year when the total return of the S&P 500
decreased by more than 22%. Since 1997, our annualized compounded total return
to shareholders has increased by an average of 12.2% annually, exceeding the
annualized return of the S&P 500 (-0.6%) and our proxy peer group companies
(6.5%).
We also reached an important milestone in our ongoing commitment to maximizing
shareholder value. In January 2003, our Board of Directors approved the 30th
consecutive annual increase in The McGraw-Hill Companies' stock dividend. The
new rate of $1.08 per share, an increase of 5.9%, represents a compounded annual
dividend growth rate of 10.3% since 1974.
MARKET IMPACT. The trends driving our markets have considerable power and should
provide growth opportunities for the Corporation well into the future.
In the financial services segment, securitization, disintermediation and
privatization create a growing demand for our independent ratings and analysis.
The importance and value of education is recognized worldwide and was
highlighted in the U.S. last year by passage of the landmark No Child Left
Behind legislation, which promises to raise accountability, standards and
funding, building the workforce of tomorrow. And professionals, facing an
increasingly complex global marketplace, need more of the information and
intelligence our business-to-business franchises offer.
In short, each of our business segments is positioned to strengthen and deepen
its impact in 2003 and beyond. We have created the size and scale necessary to
capture new opportu-
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nities and to leverage our operations by expanding globally and by using
technology to reach new customers and maximize efficiency.
Standard & Poor's demonstrated resiliency in the face of challenging markets.
The continued growth in structured finance and the resurgent public finance
market more than offset softness in the U.S. corporate bond market.
International growth, particularly in Europe, remains strong, as does our
performance in non-traditional ratings. Non-U.S. revenue now accounts for more
than 30% of overall ratings-related revenue, and the trends look positive.
Standard & Poor's continues to sharpen its focus on higher growth opportunities.
Several new index products were launched during the year, including a new
broad-based S&P 500 in Japan. Despite a declining stock market, assets in
Exchange-Traded Funds (ETFs) linked to S&P indexes reached record levels at
year-end; about 60% of all assets in U.S. ETFs are based on S&P indexes.
Our independent equity analysis and stock research efforts gained greater
recognition, boosted by new rules requiring investment banks to provide
independent research to their customers. Backed by 75 analysts doing fundamental
and technical analysis on 1,450 companies around the world, our 5-STARS stock
selections have an outstanding record of performance since their inception in
1986.
At McGraw-Hill Education, our School Education Group is a leader in the U.S.
pre-K to 12 market, and it gained share during the year while total market
spending declined. We continue to expand our range of traditional, supplemental
and assessment products to improve teaching and learning. Our testing and
assessment products posted strong gains, and the market is expected to grow
significantly in the next five years to meet new requirements. Another area of
focus is the emerging pre-K market, where demand is growing with the recognition
that early learning is key to future achievement.
Sales of our higher education products increased at double-digit rates again in
2002. Enrollments are strong and the trends are positive globally. We have a
record of successfully using technology to enhance learning by supplementing
traditional texts, enabling students to self-assess, and helping educators teach
more efficiently.
The impact of BusinessWeek, Platts, McGraw-Hill Construction, Aviation Week and
our broadcast stations has never been greater. Our continuing focus on
maximizing our reach, quality and value is generating new opportunities. We have
prudently managed costs in the face of a persistent advertising slump, which has
softened the financial impact of the ad decline while positioning our franchises
for the coming rebound.
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BusinessWeek continues to expand its position as a powerful global franchise,
reaching customers through multiple channels and partnerships. Our two-year-old
weekly syndicated television program is gaining new viewers and is now reaching
nearly one million households in the U.S.
Platts developed new information products and services for the energy industry,
while effectively integrating FT Energy, acquired in September 2001. And we
successfully united our construction information brands under the McGraw-Hill
Construction banner to strengthen their customer focus and market presence.
VALUING OUR HERITAGE; CONTINUING OUR IMPACT. I am privileged to lead an
enterprise with a distinguished history marked by an abiding commitment to our
customers, shareholders, employees and the larger community we serve.
And at a time when serious questions have been raised about business leadership
in the U.S., our shareholders can take pride in the clear and constructive
guidance provided by the Corporation's Board of Directors, which has long
supported progressive disclosure and governance practices. I am grateful for
their counsel. And I especially want to recognize and thank Lois Dickson Rice,
who is retiring from the Board following 15 years of dedicated service.
Given these uncertain and challenging times, the strength of our mission and the
clarity of our vision are brought into sharper focus. We approach the future
with confidence.
Of course, central to our success is the commitment of our employees, who enable
the personal and professional growth of our customers.
As you will read in the coming pages, our insight, analysis and expertise are
valued worldwide and contribute to the progress of the individuals, markets and
societies we serve. We can - and we do - make an impact, each and every day.
What a wonderful and ennobling responsibility.
I thank you for your continued support.
Sincerely,
/s/ Harold McGraw III
- ----------------------------
Harold McGraw III
February 18, 2003
7
1 2 3
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IMPACT ON
INDIVIDUALS
[PHOTO OF WOMAN]
IN CLASSROOMS AND BOARDROOMS, ON SHOP FLOORS AND TRADING FLOORS, MILLIONS OF
INDIVIDUALS RELY ON THE McGRAW-HILL COMPANIES TO LEAD THEM FORWARD.
Making a difference in people's lives. It starts with ensuring that
today's students gain the knowledge and skills they'll need tomorrow.
McGraw-Hill Education's digital and print solutions - for pre-K through college
- - meet this need by enhancing teaching and learning and more effectively
measuring educational progress.
But that's only the beginning. Standard & Poor's investment analysis
and tools help customers build a more secure financial future. BusinessWeek and
our B-to-B information groups provide the news, analysis and insight that are
required for effective decision-making and career success.
[PICTURE OF RUTH COCHRANE]
RUTH COCHRANE
Vice President and Publisher, SRA
McGraw-Hill Education
[PICTURE OF GEORGE DALLAS]
GEORGE DALLAS
Managing Director, Governance Services
Standard & Poor's
ESTABLISHING A STRONG FOUNDATION
R.C. "Early success in reading is the foundation for a child's learning of
virtually all other subjects. The ability to decode - to convert the
printed word to its spoken form - by the end of first grade is a
significant predictor of future success. Many experts would say the
ability to decode isn't an issue until after third grade, but by then
there is so much catching up to do that some children may never
recover. Studies show that success in reading delivers other bonuses,
too, such as fewer behavioral problems and lower absentee rates."
G.D. "Investors need to look under the surface of the companies they're
investing in. That's why a qualitative type of investment analysis is
emerging that complements the traditional numbers-driven approach. What
are the implications of a company's ownership structure? What rights do
investors enjoy? What are the quality and timeliness of a company's
reporting? How can we better understand the effectiveness of a
company's Board? These are the questions that will make more systematic
analysis of corporate governance a fundamental component of investor
decision-making."
10
[PHOTO OF STORY BOOK]
EARLY LEARNING is recognized as the key to future achievement, as
demonstrated by passage of the No Child Left Behind Act by Congress.
It's why we're expanding our offerings for the pre-K, K and elementary
markets through new products such as Breakthrough to Literacy, while
continuing our success with Open Court Reading. And we're teaching the
fundamentals of a fourth "R" as well: retirement. To help investors
plan their financial futures, Standard & Poor's sets the standard as
the world's leading provider of independent equity research, which
includes its STARS stock selection system, while BusinessWeek launched
new investor workshops.
[PICTURE OF BO CHUNG]
BO CHUNG
Managing Director, Investment Services
Standard & Poor's
[PICTURE OF GRACE WALKUS]
GRACE WALKUS
Senior Vice President, Media Technology
McGraw-Hill Education
EXPANDING OPPORTUNITIES
B.C. "Today, individuals have more investment choices and opportunities than
ever before. These include mutual funds and Exchange-Traded Funds
designed to mirror the performance of major indexes. Some of these
products focus on specific sectors, regions and investment styles. So,
investors can tailor their holdings to meet their own financial goals.
It's one of the reasons why index investing has become so popular in
the U.S. and is growing fast in Europe and elsewhere."
G.W. "Technology is having a remarkable impact on education. Interactive
offerings help bring texts to life. The Internet enables classrooms to
connect with current events. And online testing and diagnostic tools
let students and instructors better understand where extra work is
needed. The whole learning process becomes more effective, more
efficient, more targeted. And what we're seeing is only the tip of the
iceberg in terms of the opportunity to enrich and customize teaching,
learning and studying across all levels of education."
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[PHOTO OF PRESS RELEASE PAGES]
$63.2 BILLION. That's the level of assets in Exchange-Traded Funds
(ETFs) linked to Standard & Poor's indexes. In 2002, Standard & Poor's
was the first to rate fixed-income ETFs, further expanding
opportunities for individual investors, and launched new equity indexes
in Hong Kong, Japan and Italy. Individuals investing in a college
education are getting an assist from us, too. We're the leader in
combining text and technology to improve learning and teaching.
ALEKS(R), the one-on-one online tutor, was expanded to include a broad
range of math courses.
[PHOTO OF STOCK TRADERS]
1 2 3
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IMPACT ON
MARKETS
DAYTIME. NIGHTTIME. REAL TIME. ACROSS BORDERS AND BUSINESS SECTORS, THE
INTEGRITY AND BREADTH OF OUR INSIGHT AND ANALYSIS DRIVE THE GROWTH AND
EFFICIENCY OF GLOBAL MARKETS.
From raising new capital to finding new business leads, we help markets
remain current, connected and competitive. Standard & Poor's, the world's
largest credit ratings network, facilitates the flow of capital in the financial
markets. Our market-leading energy, construction and aviation information
businesses bring buyers and sellers together. McGraw-Hill Education is moving
the education market forward with products that benchmark learning progress. And
BusinessWeek, the world's most widely read business publication, consistently
probes beneath the headlines to uncover key market dynamics.
[PICTURE OF JOHN A. BYRNE]
JOHN A. BYRNE
Senior Writer
BusinessWeek
[PICTURE OF ELLEN HALEY]
ELLEN HALEY
Vice President, Development and Research, CTB
McGraw-Hill Education
SETTING THE STANDARD
J.A.B. "It's been said that the genius of capitalism is to pacify greed into
benign self-interest. In the boom years, greed often went unchecked.
Too many took advantage of a financial system that is based on trust
and integrity. But now we're seeing changes. Auditors are doing a
better job at going over the books. Investors are getting more
meaningful information. Directors are becoming more diligent and
independent. These changes prove that the true genius of capitalism is
its ability to change and adapt with the times."
E.H. "How does the nation truly ensure that no child is left behind? The
answer begins with states continuing to define standards of educational
achievement for all children. Then effective programs must be developed
so that teachers can help students meet or exceed those standards. But
you have to be able to measure progress. That's what assessment is all
about. Effective assessment allows you to identify and focus on areas
that need improvement. The answer is standards, teaching, testing - and
more teaching."
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[PICTURE OF MAGAZINES]
CLEAR STANDARDS and benchmarks are essential for markets to function
effectively. That's why BusinessWeek led the way with its incisive
analysis of corporate misdeeds. It's why Standard & Poor's led in
defining best practices for corporate governance, transparency,
disclosure and "core earnings." And it's why CTB/McGraw-Hill, the
nation's only full-service testing company, introduced new solutions,
such as i-know online assessments for math and reading in grades 3 to
8, that allow educators to set the benchmarks needed to improve
learning.
[PICTURE OF GALE SCOTT]
GALE C. SCOTT
Managing Director, Structured Finance Ratings
Standard & Poor's
[PICTURE OF JORGE MONTEPEQUE]
JORGE MONTEPEQUE
Director of Market Reporting
Platts
STAYING CURRENT
G.C.S. "You can securitize almost anything that has a predictable cash flow -
mortgages, credit card receivables, auto loans. And that's exactly what
debt issuers are doing, because securitization enables them to use
assets more efficiently. The U.S. led the way, and growth remains
strong here, but in Europe and Asia the market is increasing at an even
faster pace. The only constant in securitization seems to be growth -
in both the market itself and in the complexity of the product types."
J.M. "The energy markets are far more financially oriented than ever before.
Just as derivatives and risk management are transforming capital
markets around the world, they're also changing the way energy products
are traded, bought and sold. The increased complexity makes
transparency and liquidity even more important. Benchmark prices have
to be based on current market realities and conditions. Continuous
development of benchmarks helps ensure that markets function smoothly
and efficiently."
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[PICTURE OF WEB SITE]
GROWTH IN SECURITIZATIONS. Standard & Poor's structured finance ratings
enable financial innovation by evaluating the credit risk of
instruments such as mortgage-backed securities, which grew by 23% in
the U.S. last year. Platts keeps the energy industry up to date. In
2002, it revised a key crude oil benchmark to enhance liquidity and
introduced an online oil trading system in Singapore. Our
network-affiliated broadcast stations are keeping their audiences
current by launching all-news stations on cable; Aviation Week launched
Aviation Week Intelligence Network, an online news and information
service for aviation and aerospace professionals; and McGraw-Hill
Construction launched an integrated approach to serving the
construction industry.
[PHOTO OF SUBWAY]
1 2 3
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IMPACT ON
SOCIETIES
CAPITAL, KNOWLEDGE, INFORMATION TRANSPARENCY: THE FOUNDATIONS ON WHICH ECONOMIC
GROWTH IS BUILT. AND THE FOCUS OF THE McGRAW-HILL COMPANIES.
Around the world, countries and corporations need capital to develop,
grow and innovate. Students and employees need to strengthen their skills to
enrich their lives. Companies and individuals need reliable information to make
effective decisions.
The businesses of The McGraw-Hill Companies are aligned to meet these
growing needs. And by satisfying them, The McGraw-Hill Companies has an impact
on the development and progress of societies.
The McGraw-Hill Companies
[PICTURE OF COMPANY]
THE McGRAW-HILL COMPANIES AT A GLANCE
THE McGRAW-HILL COMPANIES is a leading global company aligned around
three powerful and enduring forces essential to economic growth
worldwide: the need for capital, the need for knowledge and the need
for information transparency. The Corporation has built strong
businesses with leading market positions in financial services,
education and business information. Over the past decade these
businesses have been transformed by expanding capabilities in
higher-growth areas through acquisitions and partnerships and by
leveraging talent and technology.
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McGRAW-HILL FINANCIAL SERVICES www.standardandpoors.com
STANDARD & POOR'S is the world's leading provider of independent investment
research, indexes and ratings. Products and services include widely recognized
investment data, analysis and opinions for financial decision-makers that set
the standard for the global investment community.
Credit Market Services, which includes the world's largest network of credit
ratings professionals, provides ratings services for a wide array of credit
obligations, including corporate and municipal bonds, asset- and mortgage-backed
securities, sovereign governments and bank loans. It also provides evaluation
services for risk management and credit performance, as well as evaluation
services for corporate governance and schools.
Investment Services provides institutional and retail investors with a wide
range of investment information, analysis and opinions in equities, fixed
income, foreign exchange and mutual funds markets. It offers comprehensive
market data, news, financial commentary, advice and evaluations on equities and
other asset classes. The S&P indexes are the largest and most actively traded in
the world.
Corporate Value Consulting is the U.S. market leader in providing valuation and
value analysis for financial reporting, tax, business combinations, corporate
restructuring, capital allocation and capital structure purposes.
McGRAW-HILL EDUCATION www.mheducation.com
McGRAW-HILL EDUCATION is a global leader in education and professional
information. The Corporation has built its education division into a powerhouse
covering virtually every aspect of the market from pre-K to professional
learning. It has two core units:
School Education Group is a leader in the U.S. pre-K to 12 school market. It
creates educational materials that can be used at home or at school in any
media. Leading brands include SRA/McGraw-Hill, Macmillan/McGraw-Hill,
Glencoe/McGraw-Hill and Wright Group/McGraw-Hill. The group also features the
CTB/McGraw-Hill testing and assessment business and a teacher-training unit.
Higher Education, Professional, and International Group - Higher Education is
the leading technological innovator in the field, offering e-books, online
tutoring, customized course Web sites and subscription services, as well as
traditional materials. Professional focuses on professional, reference and trade
publishing for medical, business, engineering and other professions.
International operations cover markets worldwide with locally developed and
produced products as well as English-language materials.
McGRAW-HILL INFORMATION AND MEDIA SERVICES
These businesses provide information, business intelligence and solutions that
business, government and professionals worldwide use to remain competitive in
their fields and in the global economy.
BUSINESS-TO-BUSINESS GROUP
BusinessWeek is the world's most widely read business magazine. The franchise
includes BusinessWeek Online, BusinessWeek TV, investor workshops, conferences
and events. www.businessweek.com
Platts is the world's largest provider of energy information and marketing
services. Its products and services span the oil, petrochemical, natural gas,
electricity, nuclear power, coal and metals markets. www.platts.com
McGraw-Hill Construction connects people, projects and products across the
design and construction industry. www.construction.com
Aviation Week is the largest multimedia information provider to the aviation and
aerospace industry. www.aviationnow.com
Healthcare Information provides clinical and business intelligence and marketing
services to the healthcare industry. www.mcgraw-hill.com/healthcare
BROADCASTING GROUP
Broadcast television (ABC affiliates) in Bakersfield, CA (KERO); Denver, CO
(KMGH); Indianapolis, IN (WRTV); and San Diego, CA (KGTV).
www.mcgraw-hill.com/broadcast
23
COMMUNITY
[PICTURE OF KIDS, MCGRAWS, AND THANK YOU]
The Corporation supports wide-reaching programs that benefit children and
education. Pictured left with our Chairman, Harold McGraw III, and Chairman
Emeritus Harold W. McGraw, Jr. (seated), are the 2002 Harold W. McGraw, Jr.
Prize in Education winners (left to right): Libia Socorro Gil, Superintendent,
Chula Vista Elementary School District; Eric Smith, Superintendent, An Arundel
County Public Schools; and Dennis Littky, Co-Director, The Met, and Director,
Principal Residency Network.
THE McGRAW-HILL COMPANIES adheres to a simple philanthropic mission: to use its
financial and human resources to help people around the world to improve their
lives and enhance their communities.
Employees are our most important partners in fulfilling this
philanthropic mission. By mentoring disadvantaged students, helping nonprofits
with their communications needs, donating clothes and filling pantries, we help
people reach their potential.
The Corporation continues to expand its focus on financial literacy by
supporting a variety of initiatives to help individuals understand basic
financial concepts and acquire the tools needed for a sound future.
Our involvement also extends to public affairs. During 2002, we helped
support passage of the Trade Act of 2002, which will lead to more open markets
and increased transparency in business and governmental activities. We supported
efforts to promote the privacy of customer data and to protect intellectual
property from piracy. We also continued to support state-level education
improvements necessary to meet the requirements of the No Child Left Behind Act.
24
FINANCIAL CONTENTS
26 Financial Charts
27 Management's Discussion and Analysis
47 Consolidated Statement of Income
48 Consolidated Balance Sheet
50 Consolidated Statement of Cash Flows
51 Consolidated Statement of Shareholders' Equity
52 Notes to Consolidated Financial Statements
67 Report of Management
68 Report of Independent Auditors
69 Supplemental Financial Information
70 Eleven-Year Financial Review
72 Shareholder Information
25
FINANCIAL CHARTS
OPERATING PROFIT BY SEGMENT
[dollars in millions]
[BAR CHART]
McGraw-Hill Financial Information and
Education Services Media Services
00 $308 $391 $213
01 $263 $435 $ 65
02 $332 $570 $118
Includes the following Items:
2002 Loss on the sale of MMS International
2001 Restructing and asset write-down
Gain on the sale of DRI
Write-down of certain asset, contribution of Rational Investors
and the shutdown of Blue List
2000 Gain on the sale of Tower Group International
CAPITAL EXPENDITURES BY SEGMENT
[dollors in millions]
[BAR CHART]
McGraw-Hill Financial Information and
Education Services Media Services
00 $290 $ 43 $ 29
01 $376 $ 30 $ 33
02 $329 $ 27 $ 17
Includes investments in prepublication costs, purchase of fixed assets
and investment in technology projects
OPERATING REVENUE BY SEGMENT
[dollors in millions]
[BAR CHART]
McGraw-Hill Financial Information and
Education Services Media Services
00 $1,993 $1,280 $1,008
01 $2,322 $1,477 $ 846
02 $2,357 $1,621 $ 810
26
MANAGEMENT'S DISCUSSION AND ANALYSIS
Operating Results
CONSOLIDATED REVIEW
(in millions) 2002 2001 2000
- ---------------------------------------------------------
Operating Revenue $4,787.7 $4,645.5 $4,281.0
% Increase 3.1 8.5 7.2
- ---------------------------------------------------------
Operating Profit $1,019.5 $ 763.2 $ 911.5
% Increase (Decrease) 33.6 (16.3) 10.8
- ---------------------------------------------------------
% Operating Margin 21 16 21
- ---------------------------------------------------------
Income Before Taxes $ 905.1 $ 615.1 $ 767.3
- ---------------------------------------------------------
Cumulative change in
accounting, net of tax - - $ (68.1)
- ---------------------------------------------------------
Net Income $ 576.8 $ 377.0 $ 403.8
- ---------------------------------------------------------
Operating profit is income before taxes on income, interest expense and
corporate expense.
2002 COMPARED WITH 2001
The Segment Review that follows is incorporated herein by reference.
REVENUE AND EARNINGS
Operating revenue for 2002 increased $142.2 million, 3.1% over 2001 primarily
due to growth in the Financial Services segment and acquisitions. Operating
profit of $1.0 billion increased 33.6% from 2001. Product revenue comprises the
revenue from the McGraw-Hill Education segment and the circulation revenue from
the Information and Media Services segment, and represents primarily books and
magazines. Product revenue increased 1.6% to $2.5 billion as compared to the
prior year. Service revenue comprises the revenue of the Financial Services
segment and the remaining revenue of the Information and Media Services segment,
and represents information-related services and advertising. Service revenue
increased to $2.3 billion, a 4.7% increase over the prior year.
In September 2002, the Financial Services segment divested MMS
International, which resulted in a pre-tax loss of $14.5 million and an
after-tax benefit of $2.0 million, 1 cent per diluted share. The variance
between the pre-tax loss on the sale of MMS International and the after-tax
benefit is the result of previous book write-downs and the inability of the
Company to take a tax benefit for the write-downs until the unit was sold. The
impact on the effective tax rate for the year ended December 31, 2002 from this
transaction is a reduction of 1.2 percentage points. 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 the
operating segments. As a result, the Company recorded a restructuring and asset
impairment charge of $159.0 million pre-tax ($112.0 million after-tax, or 57
cents per diluted share). Employee severance and benefits costs amounted to
$30.2 million pre-tax and were included in operating expenses in 2001. Also
included in operating expenses in 2001 were $92.8 million in asset impairment
losses. In 2001, non-operating expenses related to the restructuring consisted
of $36.0 million related to the write-downs of certain e-commerce and emerging
technology investments. As of December 31, 2002, this restructuring was
completed.
The Company purchased Corporate Value Consulting (CVC) in August 2001,
recorded in Financial Services, and Financial Times Energy (FT Energy), in
September 2001, recorded in Information and Media Services. In 2002, Corporate
Value Consulting (CVC) added $58.3 million of incremental revenue to the
Financial Services segment. FT Energy contributed $28.2 million of incremental
revenue to 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
$56.6 million pre-tax, or approximately 18 cents per diluted earnings per share,
for 2002.
In May 2001, the Company divested DRI, which resulted in a $26.3
million after-tax gain (13 cents per diluted share, $8.8 million pre-tax),
recorded within the Financial Services segment. The variance between the pre-tax
gain recognized on the sale of DRI of $8.8 million and the after-tax benefit of
$26.3 million is the result of previous book
27
write-downs and the inability of the Company to take a tax benefit for the
write-downs until the unit was sold. The impact on 2001 effective tax rate for
this transaction was a reduction of 3.4 percentage points. Also included in net
income in 2001 in the Financial Services segment was the write-down of certain
assets, the shutdown of the Blue List and the contribution of Rational Investors
to mPower.com in exchange for an equity position in the online investment
advisory service for the retirement market. The total charge for these items was
$21.9 million after tax (11 cents per diluted share, $22.8 million pre-tax). The
impact on the 2001 effective tax rate from these actions was an increase of 1.3
percentage points due to the inability of the Company to take a benefit for
these write-downs. Net income for 2001 also included $6.9 million pre-tax, 2
cents per diluted share, related to a gain on the sale of real estate in the
first quarter of 2001, which was recorded as other income on the consolidated
statement of income. Other income in 2002 increased $9.1 million due to the
write-down of certain e-commerce and emerging technology investments in 2001
($36.0 million pre-tax) partially offset by the loss from the MMS International
disposition ($14.5 million pre-tax).
EXPENSES
Total expenses decreased due to cost containment activities in 2002 and goodwill
amortization and restructuring charge included in 2001. In 2001, operating
expenses included $123.0 million related to the restructuring. Product operating
expenses included the amortization of prepublication costs of $280.4 million and
$240.2 million in 2002 and 2001, respectively. Product operating expense
decreased 1.0%, primarily due to cost savings initiatives offset by an increase
in the amortization of prepublication costs. Service operating expense declined
3.7%, primarily due to the impact of cost savings measures. In 2002, combined
paper, printing and distribution prices for product-related manufacturing
decreased by approximately 3.6%, or $17.4 million. Successful supplier
negotiations and weak conditions in the printing and paper marketplaces more
than offset a 4.3% increase in distribution prices resulting from a mid-year
2002 increase from the U.S. Postal Service and increases from other airfreight
and trucking carriers. Combined paper, printing and distribution volumes
declined 4% in 2002 as compared with 2001. Combined paper, printing and
distribution expense represents 23% of operating expense.
Selling and general expense was flat in 2002 as cost savings
initiatives benefited the Company. Product selling and general expense increased
$2.7 million and service selling and general expense decreased $11.0 million. A
significant portion of both operating and selling and general expense is salary
expense, which increased approximately 5.1% to $1.3 billion. Compensation
increased primarily due to volume increases. Over the past several years, the
tight labor market caused most companies, including The McGraw-Hill Companies,
to enhance rewards and benefits in order to attract top talent. During 2001, the
economy slowed, altering this previous trend. The slow economy continued in
2002, resulting in a continuation of the labor relations pattern established in
2001. In 2002, the Company experienced a decrease in pension income from the
Company's U.S. retirement plans of $2.3 million. Effective January 1, 2003, the
Company changed its discount rate assumption on its retirement plans to 6.75%
from 7.25% utilized in 2002. The Company also changed its return on assets
assumption to 8.75% from 9.5% utilized in 2002. The effect of these changes on
pension income for 2003 is expected to be $14.4 million pre-tax, 5 cents per
diluted share.
Depreciation expense increased modestly, 0.9%, over 2001 due to the
completion of the majority of the Manhattan Occupancy Project. Amortization of
intangibles increased
28
$3.9 million, 11.1%, over 2001 due to recent acquisitions. Under SFAS No. 142
the Company no longer amortizes goodwill. The impact of SFAS No. 142 was $56.6
million pre-tax, or approximately 18 cents per diluted share, for 2002.
Starting in 2003, the consolidation of the London facilities to Canary
Wharf will result in increased rental rates. The increase in rental rates for
2003 will be somewhat mitigated by an outsourcing arrangement with CB Richard
Ellis Services, Inc. The outsourcer will oversee the Company's facility services
and management of its 42 U.S. business locations, effective March 1, 2003. In
2003, combined printing, paper and distribution prices on product-related
manufacturing are expected to increase modestly. Printing prices, including book
multimedia products, are expected to decline slightly while paper prices are
expected to rise approximately 2%. While no new postal increases are anticipated
in 2003, there will be a carry forward impact of 5% from the June 30, 2002 rate
increase of 10%. In addition, an average increase of 4% is anticipated for
airfreight and trucking costs for 2003. Merit increases for 2003 will
approximate 3.1%, a 0.2% increase over 2002.
INTEREST EXPENSE
Interest expense in 2002 was $22.5 million versus $55.1 million in 2001, a $32.6
million, or 59.1%, decrease primarily due to a reduction in interest rates and
lower average debt levels. The average commercial paper rate was 1.9% in 2002
versus 4.4% in 2001. Commercial paper borrowings averaged $908.5 million in
2002, down from $1.1 billion in 2001. Reduced interest rates produced $22.7
million of the decrease in interest expense, while lower average debt levels
produced $9.5 million of the decrease.
In 2003, average interest rates on commercial paper are anticipated to
rise from current levels in the second half of the year, but full year average
rates are not expected to change materially from those experienced in 2002.
PROVISION FOR INCOME TAXES
The provision for income taxes as a percent of income before taxes was 36.3% in
2002 and 38.7% in 2001. The 2002 rate reflects the impact of the divestiture of
MMS International (1.2 percentage point reduction) and the elimination of
goodwill amortization (1.7 percentage point reduction). Without the one-time
benefit of the MMS International transaction but with continuing benefit from
the elimination of the goodwill amortization, the 2003 rate is expected to rise
to 37.5%.
2001 COMPARED WITH 2000
The Segment Review that follows is incorporated herein by reference.
REVENUE AND EARNINGS
Operating revenue for 2001 increased $364.5 million, 8.5% over 2000 due to
growth and acquisitions in the McGraw-Hill Education segment. Operating profit
of $763.2 million declined 16.3% from 2000. Product revenue increased 16.0% and
service revenue increased 1.3% over 2000. 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 the operating segments.
As a result, the Company recorded a restructuring and asset impairment charge of
$159.0 million pre-tax ($112.0 million after-tax, or 57 cents per diluted
share). Employee severance and benefit costs amounted to $30.2 million pre-tax
and asset impairment losses amounted to $128.8 million pre-tax. Asset impairment
losses include $36.6 million associated with the closing of McGraw-Hill
Education's business training courseware operation, $37.2 million attributed to
the disposing of non-strategic properties in the investment services area in
Financial Services and costs associated with the disposal, $36.0 million
primarily arising from losses on the McGraw-Hill Construction e-commerce
investments and emerging technology investments in the venture fund,
29
and $19.0 million on the write-off of certain assets. Approximately 5% of the
Company's workforce was reduced. In May 2001, the Company purchased Frank
Schaffer Publications, in January 2001, Mayfield Publishing, and in September
2000, Tribune Education Company and Landoll, Inc. (Tribune Education). The
results of these operations are reflected in the McGraw-Hill Education segment.
On August 31, 2001, the Company purchased Corporate Value Consulting (CVC) from
PricewaterhouseCoopers, and its results are accounted for in the Financial
Services segment. In early May 2001, DRI was divested, which resulted in a $26.3
million after-tax gain (13 cents per diluted share, $8.8 million pre-tax),
recorded within the Financial Services segment. The variance between the pre-tax
gain recognized on the sale of DRI of $8.8 million and the after-tax benefit of
$26.3 million is the result of previous book write-downs and the inability of
the Company to take a tax benefit for the write-downs until the unit was sold.
The impact on the effective tax rate for the year from this transaction is -3.4
percentage points. Also included in the operating profit of the Financial
Services segment during the second quarter of 2001 is the write-down of certain
assets, the shutdown of the Blue List and the contribution of Rational Investors
to mPower.com. The total charge for these items was $21.9 million after-tax (11
cents per diluted share, $22.8 million pre-tax). On September 4, 2001, the
Company purchased Financial Times Energy from Pearson plc, and its results are
reflected in the Information and Media Services segment. Income from operations
in 2001 also includes $6.9 million pre-tax, 2 cents per diluted share, related
to a gain on the sale of real estate in the first quarter of 2001, which was
recorded as other income in the consolidated statement of income. In February
2000, Tower Group International was divested and an after-tax gain of $10.2
million, or 5 cents per diluted share, was included in the Information and Media
Services segment. In January 2000, the Company adopted Staff Accounting Bulletin
No. 101 (SAB 101), Revenue Recognition in Financial Statements, and recognized a
cumulative adjustment of $68.1 million, net of tax, or 35 cents per diluted
share. $1.7 million and $60.8 million of the cumulative adjustment was
recognized in 2001 and 2000, respectively. Net income in 2001 was $377.0
million, 6.6% lower than 2000. Earnings per share for 2001 decreased 6.8% to
$1.92.
EXPENSES
Total expenses for 2001 increased 13.4%. The increase in total expenses is
primarily the result of the restructuring charge and acquisitions net of
divestitures. Operating product expense increased 20.9%, also as a result of the
restructuring charge and acquisitions net of divestitures. Operating service
expense increased 8.0% in 2001 primarily from higher volume in the Financial
Services segment. In 2001, combined paper, printing and distribution prices for
product-related manufacturing increased 0.2%. The overall increase was held to
this modest level primarily through negotiations with paper suppliers and a weak
paper marketplace, as well as negotiated savings in printing and paper from the
Tribune Education acquisition. These actions more than offset the 7.5% increase
in distribution costs resulting from increases from the U.S. Postal Service and
other airfreight and trucking carriers. Combined paper, printing and
distribution volumes declined 2% in 2001 as compared to 2000. Combined paper,
printing and distribution expense represent 23% of operating expenses.
Selling and general expense increased 10.9% in 2001, reflecting volume
increases in the Financial Services segment and increases in the prepublication
costs and restructuring charges. Selling and general product expense increased
19.5%, reflecting a $31.6 million increase in amortization of prepublication
costs for McGraw-Hill Education's products and the restructuring
30
charge. Selling and general service expense increased due to higher volume at
Financial Services. A large component of both operating and selling and general
expense is compensation, which increased approximately 11.0% to $1.3 billion.
The compensation increased primarily due to acquisitions and other volume
related increases. Over the past several years, the tight labor market caused
most companies, including The McGraw-Hill Companies, to enhance rewards and
benefits in order to attract top talent. During 2001, the economy slowed
altering the previous trend.
Depreciation expense increased $1.8 million in 2001, due to
acquisitions. Amortization of intangible assets increased $15.6 million and
goodwill amortization increased $9.2 million primarily due to recent
acquisitions. Starting in 2002, the Company no longer had to amortize goodwill
or intangibles with indefinite lives in accordance with Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets. The full
year amortization of goodwill was $56.6 million and $47.4 million for 2001 and
2000, respectively.
INTEREST EXPENSE
Interest expense in 2001 was $55.1 million versus $52.8 million in 2000, a $2.3
million, or 4.2%, increase primarily due to borrowings related to acquisitions.
The average commercial paper rate was 4.4% in 2001 and 6.4% in 2000.
PROVISION FOR INCOME TAXES
The provision for income taxes as a percent of income before taxes was 38.7% in
2001 and 38.5% in 2000. The 2001 rate reflects the impact of the restructuring
charge (2.3 percentage point change), the divestiture of DRI (-3.4 percentage
point change) and the write-down of selected assets, the shutdown of the Blue
List and the contribution of Rational Investor to mPower.com (1.3 percentage
point change).
SEGMENT REVIEW
McGRAW-HILL EDUCATION
(in millions) 2002 2001 2000
- ----------------------------------------------------------
Operating Revenue $2,357.1 $2,322.2 $1,993.2
% Increase 1.5 16.5 14.9
- ----------------------------------------------------------
Operating Profit $ 331.8 $ 263.4(a) $ 307.7
- ----------------------------------------------------------
% Increase (Decrease) 26.0 (14.4) 12.4
- ----------------------------------------------------------
% Operating Margin 14 11 15
- ----------------------------------------------------------
(a) Includes a $62.1 million pre-tax charge for restructuring and asset
write-downs.
McGraw-Hill Education is one of the premier global educational
publishers and is the largest U.S. educational publisher serving the elementary
and high school (el-hi), college and university, professional, and international
markets. The segment comprises two operating groups: the School Education Group,
and the Higher Education, Professional, and International Group. McGraw-Hill
Education revenue of $2.4 billion increased 1.5% over the prior year. Operating
profit increased by $68.4 million to $331.8 million for the year ended December
31, 2002. The softness in operating performance came from the School Education
Group, which experienced lighter adoption and open territory opportunities. The
segment's operating results include 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 a
favorable $39.5 million. In 2002, McGraw-Hill Education launched its Global
Transformation Project, which will support the segment's global growth
objectives, provide technological enhancements that support the infrastructure
of management information and customer-centric services, enable process and
production improvements throughout the organization, and position McGraw-Hill
Education to support the advancement of digital products as an emerging growth
opportunity. In 2002, $36.3 million of additions to technology projects were
capitalized
31
for the Global Transformation Project. An additional $21.5 million impacted
operating profit. The total cost of this project is anticipated to be $140.0
million.
In 2001, McGraw-Hill Education revenue again achieved double-digit
growth, increasing 16.5% over 2000. Included in 2001 performance is the
acquisition of Frank Schaffer Publications, in May 2001, Mayfield Publishing, in
January 2001, and the Tribune Education Company and Landoll, Inc. (Tribune
Education), in September 2000. Operating profit decreased by 14.4%, with Tribune
Education, the largest of the acquisitions, having a negligible impact on the
operating profit. In the fourth quarter of 2001, the Company announced a
worldwide restructuring program that resulted in a $62.1 million pre-tax charge
to the McGraw-Hill Education segment. McGraw-Hill Education discontinued small
local publishing activities in certain international markets, consolidating
international operations to better leverage editorial and production operations
globally, and exited its business training courseware operations. McGraw-Hill
Education wrote down fixed assets, inventory, goodwill and contracts related to
these activities. Almost 600 employees were terminated in this segment as part
of these actions.
SCHOOL EDUCATION GROUP
The School Education Group consists of key brands including: SRA/McGraw-Hill,
supplementary materials and specialized niche basal programs for the elementary
market; Wright Group/McGraw-Hill, innovative supplementary products for the
early childhood, elementary, and remedial markets; Macmillan/McGraw-Hill, basal
instructional programs for the elementary market; Glencoe/McGraw-Hill, secondary
and postsecondary products; CTB/McGraw-Hill, customized and standardized testing
materials and scoring services; McGraw-Hill Children's Publishing,
consumer-oriented learning products for sale through educational dealers, mass
merchandisers, bookstores, and e-commerce; McGraw-Hill Professional Development,
dedicated to serving the growing market for fee-based teacher training; and
McGraw-Hill Digital Learning, new digital products including McGraw-Hill
Learning Network (MHLN.com). The McGraw-Hill School Education Group had revenue
decline by 2.3% to $1.4 billion. The McGraw-Hill School Education Group was
negatively impacted by the change in both adoption and open territory
opportunities within key states. The significant 2001 adoption opportunities
included basal reading adoptions in Indiana, Alabama, North Carolina, and
Tennessee and the reading and literature adoptions in Texas. 2002 was projected
as a much lighter adoption year. The McGraw-Hill School Education Group
experienced reductions in adoption opportunities primarily within North
Carolina, California and Texas. Macmillan/McGraw-Hill Reading did not meet
expectations in the Oklahoma and Florida adoptions. Open Court Reading,
McGraw-Hill's research-based reading program, performed well in Florida,
California and in the open territories. McGraw-Hill School Education Group
obtained over 30% of the elementary reading adoption in California. The Group
led all competition in K-12 science, the largest adoption opportunity in 2002.
The Group's science products in the middle school science adoption in Texas
achieved a 40% share. Everyday Mathematics, designed for grades K-6, also saw
growth in sales. According to the Association of American Publishers'
year-to-date statistics through December 2002, for the kindergarten through
twelfth grade excluding testing, total adoption and open territory sales for the
industry decreased 5%. With cutbacks in fiscal year 2002 state budgets, which
ran through June 30 in most states, the industry experienced further decline.
Facing deficits when their tax revenues fell short of projections, 33 states had
to revise their budgets downward during the first half of 2002, and 17% of those
states made some cuts in their
32
kindergarten through twelfth grade spending, according to the National
Conference of State Legislatures. The state of Virginia cancelled its reading
adoption, but did make some discretionary purchases.
In 2002, supplemental product sales were down across the industry. A
large proportion of supplemental sales is made up of small orders from
individual teachers using classroom or school discretionary funds to meet the
needs of their particular students. At many schools these discretionary funds
were cut back in the fall of 2002 as a result of reductions in state budgets. In
the case of reading, the largest supplemental curriculum area, sales were also
affected by delays concerning the release of federal Reading First funds, which
caused uncertainty regarding the upcoming year. The McGraw-Hill School Education
Group's Jamestown remedial reading product was one bright spot in the
supplemental product area in 2002. This remedial reading product meets a
critical need at the secondary and postsecondary levels.
In 2002, McGraw-Hill's summative test products performed well. New
contracts in California, West Virginia and Washington, D.C. added to revenue
growth. Higher revenue from Indiana, New York, Missouri, New Mexico and
Tennessee also generated summative testing product growth. In particular, the
California Star program, which utilizes TerraNova 2/e, a standardized
achievement test, provides a continuous market for ancillary products such as
teachers' guides.
In 2002, the McGraw-Hill School Education Group exited the children's
coloring book business. This decision resulted in a revenue loss of $3.1 million
for 2002.
For 2003, the adoption cycle offers higher sales potential for grades
K-12. A public- policy consensus supporting continued emphasis on accountability
and the need to improve the level of achievement of the nation's students, added
to a student population that continues to grow, should contribute to sales
growth. Other factors driving sales growth include steadily growing school and
home markets for technology-based products and services and emerging markets for
preschool and teachers' professional development. Other issues will serve to
counterbalance these growth factors, including a slowdown in the rate of
enrollment increase, particularly in grades K-6; budget constraints in some
states in reaction to diminished tax revenues caused by the soft economy of
2002; and competition for educational budget dollars with other school
improvement efforts. K-12 social studies presents the biggest adoption
opportunity for 2003 with Indiana, North Carolina and Texas all scheduled to
purchase materials.
The McGraw-Hill School Education Group continues to hold strong
positions in both the custom testing markets and in shelf test materials. In
2003, the McGraw-Hill School Education Group will not only focus on winning
additional custom contracts in key states, but also will pursue development of
online tests and low-stakes assessment products that can be offered in an online
environment. To respond effectively to these and other opportunities, the Group
has been making investments in technological improvements, which will continue
in 2003. With the passage of the federal education reform plan, which requires
states to demonstrate adequate yearly progress through the use of an annual test
in reading and math for grades 3-8, the Group is nicely positioned to grow in
the summative testing area again in 2003. The growth rate is difficult to
predict, however, because much of the current funding in the testing market
comes from state budgets, and many states are under severe constraints given
shortfalls in state revenues. Although the No Child Left Behind legislation is
clearly a major driver in the testing market, it is difficult to determine the
exact amount of federal versus state dollars that flow to the marketplace
because of the way state contracts are awarded and paid over time.
For 2003, the K-12 market is anticipated to grow 2-4% and the Company
anticipates its K-12 business will outperform the market.
33
The School Education Group's revenue grew 24.0% to $1.38 billion for
2001. The year was characterized by a difficult economy, which was exacerbated
by the tragic events of September 11th. Strong adoption opportunities in most
states, a student population that continued to grow, albeit at a slower rate,
and a public-policy consensus supporting continued emphasis on accountability
and the need to improve the level of achievement of the nation's students,
resulted in the revenue growth at the School Education Group.
Within the School Education Group, the infusion of former Tribune
Education properties, in particular Everyday Mathematics, designed for grades
K-6, provided for growth. Although the program's extraordinary 2000 success in
California could not be fully replicated in 2001, Open Court Reading sales
increased in the open territories and in targeted adoption states. McGraw-Hill
Reading was successful in Indiana, North Carolina, and Tennessee as well as the
open territories. School Education Group took an estimated share in excess of
40% of the reading adoption in Texas, grades 4-6, and approximately 40% of the
North Carolina reading adoption. McGraw-Hill Education also launched new
mathematics and language arts programs in 2001. McGraw-Hill Mathematics did not
meet expectations in California but performed well elsewhere, while McGraw-Hill
Language Arts captured one-third of the Texas adoption business in its category.
Funding issues in several key states and reduced demand for science compared to
2000, when there were excellent adoption opportunities in North Carolina,
Florida, and West Virginia tempered growth. Higher statewide testing contract
sales and related scoring revenues generated growth while shelf tests and
software sales remained level with prior year. Contract work reflected expanded
effort in California, Indiana, and Maryland. TerraNova, a standardized
achievement test, continued to be a very successful shelf test in its product
offering.
HIGHER EDUCATION, PROFESSIONAL AND INTERNATIONAL GROUP
The Higher Education, Professional and International Group serves the college,
professional, international and adult education markets. In 2002, revenue for
the Higher Education, Professional and International Group grew 7.0% to $1.0
billion. McGraw-Hill Higher Education provided most of the growth both
domestically and internationally. All major imprints experienced growth, with
Science, Engineering and Mathematics the strongest. The Group gained market
share in the Science, Engineering and Mathematics and the Business and Economics
imprints. Some of the more important titles include McConnell, Economics, 15/e;
Nickels, Understanding Business, 6/e; Raven, Biology, 6/e; Shier, Hole's Human
A&P, 9/e; Garrison, Managerial Accounting, 10/e; Mader, Inquiry into Life, 10/e;
and Kerin, Marketing, 7/e.
The downturn in the equity markets had an unfavorable impact on the
business, investing, and finance professional publishing programs. The
successful release of Harrison's Principles of Internal Medicine, 15/e, in the
first quarter of 2001 was not repeated in 2002. The performance of the computing
titles was unfavorably affected by the continued decline in information
technology spending as well as the reduction in PC sales. These trends were
experienced both domestically and internationally. The change to a "credit card
only" policy at the beginning of 2002 in the direct marketing channel depressed
2002 revenue but increased margins. The domestic medical marketplace has
stabilized after two years of disruption, and a strong interest in robotics in
consumer and educational markets has driven demand for books on this subject and
for innovative build-your-own educational kits. Trade and reference products
performed well, especially in academic markets such as foreign languages,
dictionaries and test preparation.
34
Higher Education imprints performed well internationally particularly
in Latin America, Canada and Europe. In addition, Canada increased revenue by
$3.7 million, partially benefiting from the elimination of the 13th grade, which
will take effect in 2003. In anticipation of this change, early enrollments in
colleges and universities grew in 2002. The benefit of the elimination of the
13th grade will be experienced for the next few years. Professional titles
remained soft in all regions.
The Higher Education, Professional, and International Group is
expecting revenue to grow in the coming year. With continued increases in
enrollments in college and increased demand in specific professional segments of
the market, such as digital photography, wi-fi technologies, and the upcoming
Office 11 release, the McGraw-Hill Higher Education, Professional, and
International Group is prepared to grow ahead of the industry projections in
2003. Recognizing that technology continues to be the key trend in higher
education for course management and content delivery, the Group will
aggressively pursue a variety of e-initiatives, including PageOut, e-books,
e-learning, and online faculty training and support. The title count of
professional books will remain flat in 2003, and will not include the release of
the Encyclopedia of Science and Technology, 9/e, as in 2002 or Harrison's
Principles of Internal Medicine, 15/e, as in 2001. A key competitive trend in
the professional reference market is the development of digital distribution
channels and digital products, which are growing more rapidly than print
products. The Higher Education, Professional, and International Group will
continue to pursue investments in digital publishing and e-commerce via internal
and external co-publishing alliances. The improvement in the general economic
environment should spur the growth for this Group's products globally in 2003.
The college market is expected to grow revenue approximately 6% to 7%
in 2003. The Company anticipates that its college business will outperform the
industry.
In 2001, revenue for the Higher Education, Professional, and
International Group grew 7.0% to $942.0 million. All major Higher Education
imprints experienced double-digit growth rates from their ongoing business, with
Business and Economics the strongest unit. Key titles driving this performance
were Kapoor, Personal Finance, 6/e; O'Brien, Introduction to Information
Systems, 10/e; and McConnell, Economics, 15/e. The Science, Engineering and
Mathematics imprint had a solid front list performance owing in part to Mader,
Biology, 7/e, and Saladin, Anatomy and Physiology, 2/e, while the Humanities,
Social Science and Languages did equally well with sales of Lucas, Art of Public
Speaking, 7/e, and Knorre, Puntos de Partida, 6/e, contributing. Mayfield
Publishing, a 2001 acquisition, was successfully integrated into the Humanities,
Social Science and Languages, bringing added growth over prior year. Tribune's
NTC trade product line also contributed to the growth in revenue. The downturn
in the equity markets in 2001 had an unfavorable impact on the pre-acquisition
business, investing, and finance publishing programs. The Scientific, Technical
and Medical business, generally less volatile than other product lines,
registered a modest increase in sales, in part owing to the new edition of
Harrison's Principles of Internal Medicine, 15/e, which was published in
February 2001. Computing titles were unfavorably affected by the steep decline
in information technology spending as well as the reduction in PC sales and the
demise of numerous dot-coms, resulting in the first downturn for this imprint in
many years.
35
FINANCIAL SERVICES
(in millions) 2002 2001 2000
- -------------------------------------------------------------
Operating Revenue $1,621.1 $1,477.2 $1,280.2
% Increase 9.7 15.4 4.4
- -------------------------------------------------------------
Operating Profit $ 569.7(a) $ 434.8(b) $ 390.9
% Increase 31.0 11.2 7.5
- -------------------------------------------------------------
% Operating Margin 35 29 31
- -------------------------------------------------------------
(a) Includes $14.5 million pre-tax loss on the sale of MMS International.
(b) Includes a $43.1 million pre-tax charge for restructuring and asset
write-downs, an $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 the Blue
List and the contribution of Rational Investors to mPower.com.
Financial Services operates under the Standard & Poor's brand as one
reporting unit and provides credit ratings, evaluation services, and analyses
globally on corporations, financial institutions, securitized and project
financings, and local, state and sovereign governments. Financial Services
provides a wide range of analytical and data services for investment managers
and investment advisors globally. Corporate Value Consulting (CVC) is a leading
provider of valuation and consulting services.
In September 2002, the Financial Services segment divested MMS
International, which resulted in a pre-tax loss of $14.5 million and an
after-tax benefit of $2.0 million, 1 cent per diluted share. The variance
between the pre-tax loss on the sale of MMS International and the after-tax
benefit is the result of previous book write-downs and the inability of the
Company to take a tax benefit for the write-downs until the unit was sold. The
impact on the effective tax rate for the year from this transaction is a
reduction of 1.2 percentage points.
The impact of the accounting change under Statement of Financial
Accounting Standards No. 142 (SFAS No. 142), Goodwill and Other Intangible
Assets was a contribution of $14.0 million to operating profit.
In the fourth quarter of 2001, the segment took a restructuring and
asset impairment charge of $43.1 million pre-tax. The bulk of the restructuring
charge comes from write-downs of intangible assets related to Standard & Poor's
decision to dispose of certain non-strategic properties in the investment
services area. Standard & Poor's acquired the U.S. Corporate Value Consulting
business of PricewaterhouseCoopers on August 31, 2001. Results of operations for
2002 reflect an incremental $58.3 million in revenue related to the acquisition
of CVC versus 2001. In early May 2001, DRI was divested, which resulted in an
$8.8 million pre-tax gain ($26.3 million after-tax, 13 cents per diluted share).
The variance between the pre-tax gain recognized on the sale of DRI of
$8.8 million and the after-tax benefit of $26.3 million is the result of
previous book write-downs and the inability of the Company to take a tax benefit
for the write-downs until the unit was sold. The impact on the effective tax
rate for 2001 of this transaction was a reduction of 3.4 percentage points. Also
included in operating profit of 2001 is the write-down of certain assets, the
shutdown of the Blue List and the contribution of Rational Investors to
mPower.com. The total charge for these items was $22.8 million pre-tax ($21.9
million after-tax, 11 cents per diluted share). The impact on the effective tax
rate for 2001 of these transactions was an increase of 1.3 percentage points due
to the inability of the Company to take a benefit for these write-downs.
In 2002, the Financial Services segment revenue increased 9.7%
benefiting from Structured Finance, contributing $72.1 million to the growth in
revenue, the acquisition of CVC contributing $58.3 million incremental revenue
growth and Corporate and Government ratings contributing $30.4 million to the
growth in revenue of the segment. Operating profit in 2002 increased by 31%.
Operating margin increased to 35% from 29% in 2001. International revenue for
the Financial Services segment grew by 11.1% and represents 27.8% of total
revenue of the segment.
Standard & Poor's ratings operates in four areas: Corporates &
Governments (Corporate & Infrastructure, Financial Services, Municipal Finance,
Sovereigns and Evaluation Services), Structured Finance, Securities Services and
36
Risk Solutions. Securities Services, formerly known as E-Business Services,
comprises Securities Classifications, Securities Information and Securities
Evaluations. Risk Solutions focuses on delivering quantitative tools and
analytics, customized services and training to the credit risk management
market.
In 2002, revenues for Standard & Poor's grew on the strength of the
structured finance market due primarily to the strength of the mortgage-backed
securities sector. The asset- and mortgage-backed markets continued to benefit
from the series of interest rate reductions by the Federal Reserve. Asset-backed
dollar volume issuance rose 16%, while mortgage-backed dollar volume issuance
rose 23%, according to Securities Data Corporation. Revenue from Corporates and
Governments ratings grew at a more modest rate due to a 36% issuance decline in
the corporate sector, which reflected the weak economic environment as well as
the accounting irregularities that shook investor confidence. High-yield dollar
volume issuance, also down by 36% for the year, was attributable to the flight
to quality and mistrust of corporate management. U.S. municipal issuance was up
25% due to the favorable interest rate environment which drove refinancing and
reduced tax receipts which increased the need for financing for general
expenditures including education. In total, U.S. new issue dollar volume was off
7% and unit volume was off 2% for 2002 according to Securities Data Corporation.
In Europe, new issue dollar volume fell 12% but unit volume increased 5% for
2002 according to Bondware. The negative economic environment impacted European
issuance, primarily in the corporate and financial services sectors.
Bank loan ratings, ratings evaluation services and counter-party risk
ratings showed double-digit growth in revenue globally. Asset-backed and
mortgage-backed issuance in the United States, Asia and Europe contributed to
the growth in the Financial Services segment. The segment also experienced
increased demand for modeling and related analytic tools and credit training.
On August 31, 2001, Standard & Poor's acquired CVC. This acquisition
expanded Standard & Poor's capabilities to provide valuation and consulting
services. CVC's primary services are valuations for financial and tax reporting,
financial modeling, assistance regarding capital usage and the management of
intellectual property assets. The acquisition contributed $58.3 million, or
40.5%, to the growth in revenue of the Financial Services segment in 2002. CVC
was negatively impacted in 2002 by the reduced level of merger and acquisition
activity. According to Bloomberg Mergers and Acquisitions Database, as of
December 31, 2002, the dollar volume and the number of announced deals involving
a U.S. company declined 40% and 21%, respectively, as compared with the year
ended December 31, 2001.
Standard & Poor's is a leading provider of data, analysis and
independent investment advice and recommendations. The financial services
industry experienced adverse market conditions in 2002 and profit pressures
faced by financial services firms led to cost reductions and layoffs at these
firms. These conditions were the result of declining merger and acquisition
transactions as well as general market declines as the S&P 500 declined for the
third straight year. These market conditions resulted in decreased demand for
information products and services. Retail brokerage, Internet redistribution and
foreign exchange markets remained soft throughout the year.
Assets of the S&P Depositary Receipts (SPDRs) traded on the American
Stock Exchange and the Barclays Global Investors-sponsored iShares increased in
2002. ETFs based on S&P indexes grew to $63.2 billion, up 30% over 2001. Demand
for advice on portfolio strategies based on S&P's STARS stock recommendations,
fund evaluations, asset allocation and other proprietary investment techniques
declined in 2002.
During 2002, MMS International was divested in order to focus on
serving investment managers and investment advisers. Cost containment occurred
throughout the segment.
37
In 2003, Standard & Poor's anticipates an economic recovery will
require corporations to raise capital both domestically and overseas, with the
exception of Latin America. The outlook is very dependent on the timing and
extent of the economic recovery and interest rate movements. In 2003, the
corporate sector is expected to benefit from the long-delayed recovery in
economic fundamentals, which will strengthen the business sentiment needed for
corporations to engage in capital spending. Growth will be driven by equipment
replacement initially and some merger and acquisition activity. The financial
sector is expected to continue to consolidate, and the insurance sector is
expected to increase capital levels significantly due to catastrophic losses in
both underwriting and in investment activities. Standard & Poor's expects that
the European Monetary Union will continue to facilitate disintermediation with
borrowers obtaining increasingly more financing through the public debt markets
rather than banks. This trend and the anticipated economic recovery will drive
issuance levels in 2003. The securitization market has grown significantly over
the last decade in the United States, Europe and Asia. This trend should
continue in 2003. Issuance in the public finance sector should remain strong as
states and municipalities continue to turn to the debt markets to help stem the
decline in tax receipts. Standard & Poor's anticipates continued growth in
demand for its corporate credit ratings, primarily in Europe. The segment
anticipates continued demand for modeling and other risk-based tools as well.
In 2003, Standard & Poor's foresees the market environment to remain
essentially unchanged for CVC. The merger and acquisition activity in 2002,
which was well below 2001, is anticipated to modestly improve in 2003.
In 2003, Standard & Poor's will continue to focus on providing data,
analysis and advisory services to investment managers and investment advisors.
The economic recovery in the financial markets will provide growth opportunities
for analytic and advisory services and products. Standard & Poor's anticipates
continued growth in its revenues tied to assets under management and transaction
volumes. In 2003, Standard & Poor's will grow while continuing to focus its
efforts on its core customers and continuing to expand its analytical
excellence.
In 2001, the Financial Services segment revenue increased 15.4% benefiting
from a strong public bond market. Operating profit in 2001 increased by 11.2%.
Operating margin declined to 29% from 31% in 2000. In the fourth quarter of
2001, the segment took a restructuring and asset impairment charge of $43.1
million pre-tax. The bulk of the restructuring charge comes from write-downs of
intangible assets related to Standard & Poor's decision to dispose of certain
non-strategic properties in the investment services area. Standard & Poor's
acquired the U.S. Corporate Value Consulting business of PricewaterhouseCoopers
on August 31, 2001. In early May 2001, DRI was divested, which resulted in an
$8.8 million pre-tax gain ($26.3 million after tax, 13 cents per diluted share).
The variance between the pre-tax gain recognized on the sale of DRI of $8.8
million and the after-tax benefit of $26.3 million is the result of previous
book write-downs and the inability of the Company to take a tax benefit for the
write-downs until the unit was sold. This transaction was offset by write-downs
in 2001 for which no tax benefit could be taken. The impact on the effective tax
rate for the year from this transaction is -3.4 percentage points. Also included
in operating profit is the write-down of certain assets, the shutdown of the
Blue List and the contribution of Rational Investors to mPower.com. The total
charge for these items was $22.8 million pre-tax ($21.9 million after tax, 11
cents per diluted share). The impact of the restructuring and asset impairment
charge, the sale of DRI, the write-down of selected assets, the shutdown of the
Blue List and the contribution of Rational Investors resulted in a 4% decrease
in the operating
38
margin. The impact of the acquisition of CVC on 2001 operating profit and
operating margin was not material. In 2001, a portion of Personal Wealth was
transferred from the Information and Media Services segment to Investment
Services. All years have been restated for the transfer.
The markets in 2001 benefited from a year-long series of interest rate
reductions by the Federal Reserve. Issuers capitalized on the low interest rate
environment and as a result, new public debt issuance was strong both inside and
outside of the United States and across all sectors of the bond market. In the
U.S., public debt issuance grew by 50%, while European bond issuance rose by
12%. Structured finance, corporates and municipals were major drivers of the
growth in new issuance. Revenue growth in the segment came primarily from
asset-backed and strong mortgage-backed market issuance and continued strong
demand in Europe and Asia for structured products. In addition, significant
revenue growth was derived from such products as issuer credit ratings, bank
loan ratings and rating evaluation services. Revenues from these non-traditional
services were exceptionally robust internationally, especially in Europe.
Counter-party risk ratings also contributed to growth. New municipal issuance
grew significantly for education and general government purposes; however, much
of the growth in issuance was driven by refundings. Non-traditional products
such as School Evaluation Services continue to gain favorable market acceptance.
In 2001, the following indexes were launched: futures trading in
Australia on the S&P/ASX 200, in Japan on the S&P/Topix 150 and in Europe
(Madrid Futures Exchange) on the S&P Europe 350. Assets of the S&P Depositary
Receipts (SPDRs) traded on the American Stock Exchange and the Barclays Global
Investors-sponsored iShares increased in 2001. ETFs based on S&P indexes grew to
$48.6 billion, up 27% over 2000. Assets under management for the largest fund
licensed to the 5-STAR Picks portfolios reached $2.8 billion in 2001.
INFORMATION AND MEDIA SERVICES
(in millions) 2002 2001 2000
- -----------------------------------------------------------------
Operating Revenue $ 809.5 $ 846.1 $1,007.6
% Decrease (4.3) (16.0) (2.2)
- -----------------------------------------------------------------
Operating Profit $ 118.0 $ 65.0(a) $ 212.9(b)
% Increase (Decrease) 81.6 (69.5) 14.8
- -----------------------------------------------------------------
% Operating Margin 15 8 21
- -----------------------------------------------------------------
(a) Includes a one-time charge of $34.9 million pre-tax for restructuring and
asset write-down.
(b) Includes a one-time gain of $16.6 million pre-tax from the sale of Tower
Group International.
The Information and Media Services segment comprises two operating
groups, which include business and professional media offering information,
insight and analysis: the Business-to-Business Group (comprising brands
including BusinessWeek, McGraw-Hill Construction, Platts, Aviation Week, and
Healthcare Information) and Broadcasting.
The Information and Media Services segment revenue declined 4.3% to
$809.5 million in 2002 and operating profit increased 81.6% to $118.0 million.
In the fourth quarter 2001, the segment took a charge of $34.9 million pre-tax
for restructuring and asset write-downs. Most of this charge relates to
write-downs of certain e-commerce investments at McGraw-Hill Construction and
staff reductions across the segment. On September 4, 2001, Platts purchased
Financial Times Energy (FT Energy), a leading provider of energy information,
research and consulting services. FT Energy contributed $28.2 million of
incremental revenue to the Information and Media Services segment in 2002.
During 2002, the segment reduced 400 positions, including those contemplated by
the restructuring in the fourth quarter of 2001, in excess of 10% of total
positions. The operating results of the segment reflect the weak advertising
market experienced in 2002 and cost containment activities. The change in
accounting pursuant to SFAS No. 142 contributed $3.1 million to operating profit
in 2002.
In 2003, the economy is expected to improve and with it the advertising
market.
39
The growth in advertising should occur in the second half of 2003.
The Information and Media Services segment revenue declined 16.0% to
$846.1 million in 2001 and operating profit declined 69.5% to $65.0 million. In
the fourth quarter 2001, the segment took a charge of $34.9 million pre-tax
for restructuring and asset write-downs. Most of this charge related to
write-downs of certain e-commerce investments at McGraw-Hill Construction
(formerly Construction Information Group) and staff reductions across the
segment. Approximately 300 employees were terminated. On September 4, 2001,
Platts purchased Financial Times Energy (FT Energy), a leading provider of
energy information, research and consulting services. In 2001, the segment also
transferred a portion of its Personal Wealth business from BusinessWeek to the
Financial Services segment. All periods have been restated to reflect this
transfer. The operating results of the segment reflect the weak advertising
market experienced in 2001.
BUSINESS-TO-BUSINESS GROUP
The economy and business environment continued to be unfavorable in 2002.
Revenues declined 5.5% to $700.1 million from 2001 for the Business-to-Business
Group.
BusinessWeek's North American edition revenue declined for a second
consecutive year in 2002. Advertising spending was impacted by the weak economy
and the related decline in business-to-business technology advertising. Branding
money continued to decline in 2002. According to the Publishers Information
Bureau, BusinessWeek's North American advertising pages declined 12.1% in 2002,
with one less issue but the same number of issues for revenue recognition
purposes. The decline in advertising pages is consistent with that experienced
by BusinessWeek's major competitors.
The rate of expansion in the construction industry slowed during 2002. The value
of new construction starts increased 1% to $498.7 billion, after a 5% gain in
2001 and an 8% average growth during the previous ten years. Residential
building in 2002 continued to be robust, rising 12%, while public works
construction advanced 4%. However, non-residential building fell 10% due to the
weakness for the commercial property types, such as offices, hotels and
warehouses. The construction related advertising market was soft during 2002,
resulting in reduced advertising pages in ENR magazine. Both ENR and
Architectural Record gained market share in 2002, according to Inquiry
Management Systems. During 2002, the Business-to-Business Group divested CAP, a
non-core business, resulting in a reduction of revenue of $2.4 million, with no
significant impact on operating profit. Also in 2002, Dodge SCAN, an outdated
product line, was discontinued. Dodge electronic project lead manager, an
electronic project news product, and the digital plans and specifications
product experienced increased demand. Increased demand for Sweets Residential
products helped offset lower Sweets File sales both domestically and in Canada.
In September 2001, Platts acquired FT Energy from Pearson plc. FT
Energy contributed $28.2 million of incremental revenue to the
Business-to-Business Group for 2002.
Aviation advertising volumes declined in 2002 as the commercial airline
industry remained in turmoil. Healthcare advertising declined due to the general
economic downturn, fewer drugs approved in 2002 versus 2001 and an increase in
direct-to-consumer advertising by the pharmaceutical industry.
Across the Business-to-Business Group positions were eliminated and
costs rationalized in light of the weak advertising market.
In 2003, the Business-to-Business Group anticipates an up tick in the
advertising market in the second half of 2003, as the economy recovers.
Advertising growth for the business publications is dependent on a recovery in
the technology and financial services driven by strong corporate earnings in
these and other sectors of the economy. In 2003, there will be advertising rate
increases of 5.0% for the BusinessWeek North American edition and 3.0% for the
European and Asian
40
editions. In 2003, total construction is expected to decline to 2%, as the
result of a slower pace for single family housing and some loss of momentum for
public works. At the same time, non-residential building is projected to
stabilize after two years of decline. The downturn for commercial building will
be less severe than in 2002, and school construction is expected to remain at a
high volume. The potential uncertainty surrounding the oil industry is expected
to negatively impact the demand for energy information products. Some specific
categories within the energy market, like trading and plant construction, will
be relatively flat year-to-year. The aerospace advertising market is expected to
recover in 2004, after remaining flat in 2003. The commercial airline industry
is going through turmoil with significant restructuring and consolidation
impacting the entire industry. Opportunities for growth in this market in 2003
exist in the areas of homeland security and military aviation. The
pharmaceutical market is expected to remain focused on direct-to-consumer
advertising. In 2003, the Business-to-Business Group will continue efforts to
cut costs, outsource non-core competencies and right-size its businesses.
The economy and business environment, which was so favorable to the
group in the latter part of 1999 and 2000, turned unfavorable in 2001. Revenues
declined 14.0% to $740.6 million from 2000. Only energy information products
produced revenue increases.
BusinessWeek's North American edition revenue declined from a record
level in 2000. During 2001, a significant number of dot-com companies ceased
operations and earnings pressure on corporations, particularly technology
companies, resulted in a slowdown in the advertising spending. According to the
Publishers Information Bureau, BusinessWeek's North American advertising pages
declined 37% in 2001. The decline in advertising pages was consistent with that
experienced by BusinessWeek's major competitors. During 2001, BusinessWeek North
America, BusinessWeek Online and other ancillary products resized their
resources. The rate of expansion in the construction industry slowed during
2001. The rate of expansion in non-residential building declined in 2001. The
value of new construction starts for 2001 was estimated to decrease 3% as
compared with a 2000 positive growth of 3%.
Revenue grew in 2001 for the energy information products as volatility
in the energy market increased the demand for news and information. Market
conditions for aviation information products were better than expected at the
beginning of 2001, as industry sales were up. However conditions deteriorated
dramatically after September 11th and revenue and operating profit in this
sector declined.
BROADCASTING
The Broadcasting Group operates four television stations, all ABC affiliates:
VHF stations in Denver, Indianapolis and San Diego and a UHF station in
Bakersfield, California. In 2002, the Group's revenue increased by 3.6%, to
$109.4 million as a result of political advertising. Weaker advertiser demand
experienced across the entire broadcasting industry, due to the economic
downturn, dampened the benefit of the increase in political advertising. In
addition, during 2002, NBC affiliated stations benefited from the broadcast of
the Winter Olympics which garnered advertising funds that would have been spent
on other television stations. The Group softened the impact of lower revenue
growth through the cost reduction efforts including the implementation of
technology that allowed the stations to streamline local news production. The
stations finished the year with operating expenses below 1993 levels, and with
advertising time sales up 4.2% over 2001. Excluding political advertising,
advertising time sales fell 4.0% from 2001. National advertising time sales
excluding political advertising advanced, while local advertising time sales
excluding political advertising declined.
In 2002, the Denver station renegotiated its contract with Comcast,
allowing for cable
41
retransmission of its signal plus a new cable 24 hour news channel. In addition,
the Bakersfield station negotiated an agreement with Time Warner Cable for an
evening cable news channel. All of the stations now have cable news channels,
allowing them to further leverage their news content.
In 2003, the Broadcasting Group expects to remain flat with 2002. ABC's
airing of the Super Bowl and NBA games, as well as the recovery of the
advertising market as the general economy improves, is expected to offset the
loss of political advertising. The stations will continue to refine and promote
their local brands to improve ratings in local newscasts and other programming.
Starting in the fourth quarter of 2004, the network compensation
agreements with ABC will begin to expire. The current favorable terms of these
contracts are not expected to recur.
In 2001, the Broadcasting Group's revenue declined by 17.5%, to $105.5
million as a result of prior year political advertising and weak advertiser
demand that was experienced across the entire broadcasting industry due to the
economic downturn. Excluding political advertising from 2000, advertising time
sales were down 11.4% in 2001. The Group softened the impact of lower revenue
through cost reduction efforts including the implementation of technology that
allowed the stations to centralize certain broadcasting functions.
CRITICAL ACCOUNTING POLICIES
The SEC issued Financial Reporting Release No. 60, Cautionary Advice Regarding
Disclosure About Critical Accounting Policies (FRR 60), relating to the
provision of additional disclosure and commentary on those accounting policies
of the Company considered most critical. FRR 60 considers an accounting policy
to be critical if it is important to the Company's financial condition and
results, and requires significant judgment and estimates on the part of
management in its application. The Company believes the following represents its
critical accounting policies as contemplated by FRR 60.
Revenue is generally recognized when goods are shipped to customers or
services are rendered. Units whose revenue is principally from service contracts
record revenue as earned. Revenue relating to agreements which provide for more
than one service is recognized based upon the fair value to the customer of each
service component and as each component is earned. If the fair value to the
customer for each service is not objectively determinable, revenue will be
recognized ratably over the service period. Fair value is determined for each
service component through a bifurcation analysis which relies upon the pricing
of similar cash arrangements that are not part of the multi-element arrangement.
Advertising revenue is recognized when the page is run or the spot is aired.
Subscription income is recognized over the related subscription period.
Product revenue comprises the revenue from the McGraw-Hill Education
segment and the circulation revenue from Information and Media Services, and
represents primarily books and magazines. Service revenue represents the revenue
of the Financial Services segment and remaining revenue of Information and Media
Services, and represents information-related services and advertising.
The accounts receivable reserve methodology is based on historical
analysis and a review of outstanding balances. The impact on operating profit
for a one percentage point change in the allowance for doubtful accounts is
$12.3 million. A significant estimate in the McGraw-Hill Education segment, and
particularly within the Higher Education, Professional and International Group,
is the allowance for sales returns, which is based on the historical rate of
return and current market conditions. Should the estimate for Higher Education,
Professional and International Group vary by one percentage point, it would have
an approximate $10 million impact on operating profit. Inventories are stated at
the lower of cost (principally first-in, first-out) or market. A significant
estimate in the McGraw-Hill Education segment
42
is the reserve for inventory. The reserve is based upon management's assessment
of the marketplace of products in demand as compared to the number of units
currently on hand. Prepublication costs, principally outside preparation costs,
are amortized primarily from the year of publication over their estimated useful
lives, generally two to five years, using either an accelerated or straight-line
method. The majority of the programs are amortized using an accelerated
methodology. The Company periodically evaluates the remaining lives and
recoverability of such costs, which are sometimes dependent upon program
acceptance by state adoption authorities, based on expected undiscounted cash
flows. The Company reviews long-lived assets, including intangible assets, and
goodwill for impairment annually, or sooner whenever events or changes in
circumstances indicate the carrying amounts of such assets may not be
recoverable. Upon such an occurrence, recoverability of these assets is
determined as follows. For long-lived assets that are held for use, the Company
compares the forecasted undiscounted net cash flows to the carrying amount. If
the long-lived asset is determined to be unable to recover the carrying amount,
then it is written down to fair value. For long-lived assets held for sale,
assets are written down to fair value. Fair value is determined based on
discounted cash flows, appraised values or management's estimates, depending
upon the nature of the assets. Intangibles with indefinite lives are tested by
comparing their carrying amounts to fair value. Impairment within goodwill is
tested using a two step method. The first step is to compare the fair value of
the reporting unit to its book value, including goodwill. If the fair value of
the unit is less than its book value, the Company then determines the implied
fair value of goodwill by deducting the fair value of the reporting unit's net
assets from the fair value of the reporting unit. If the book value of goodwill
is greater than its implied fair value, the Company writes down goodwill to its
implied fair value.
LIQUIDITY AND CAPITAL RESOURCES
(in millions) 2002 2001
- ---------------------------------------------------
Working Capital $ (101.0) $ (63.4)
- ---------------------------------------------------
Total Debt $ 578.3 $1,056.5
- ---------------------------------------------------
Gross Accounts Receivable $1,232.9 $1,315.2
% (Decrease) (6.3) (2.7)
- ---------------------------------------------------
Inventories $ 360.8 $ 402.6
% (Decrease) Increase (10.4) 3.5
- ---------------------------------------------------
Investment in
Prepublication Costs $ 249.3 $ 294.5
% (Decrease) Increase (15.4) 17.8
- ---------------------------------------------------
Capital Expenditures $ 70.0 $ 116.9
% (Decrease) Increase (40.1) 19.6
- ---------------------------------------------------
The Company continues to maintain a strong financial position. Cash
flow from operations remained at $1.1 billion for 2002 as compared with 2001.
Cash flow from operations more than covered dividends, investment in publishing
programs, capital expenditures, repurchase of shares and permitted the Company
to reduce outstanding debt. Shares repurchased under the repurchase program were
used for general corporate purposes including the issuance of shares for stock
compensation plans. Included in other current liabilities in 2002 is the offset
of current assets to previously established reserves for the final closedown of
the former Continuing Education Center, resulting in no cash or income statement
impact.
In 2002, total debt decreased $478.2 million, as cash flow was used to
repay debt. At December 31, 2002, commercial paper borrowings were $573.1
million and there were no Extendible Commercial Notes (ECNs) outstanding. On
August 14, 2001, the Company entered into a $650 million, 364-day revolving
credit facility. On October 10, 2001, an additional $25 million was added to the
facility, bringing the total to $675 million. This facility provided that the
Company could borrow until August 13, 2002, on which date the facility
commitment terminated and the maturity of such borrowings could not be later
than August 13, 2003. On July 23, 2002, the Company replaced this credit
facility with a
43
new 364-day, $675 million credit facility that allows it to borrow until July
22, 2003, on which date the facility agreement terminates and the maturity of
such borrowings may not be later than July 22, 2004. The Company continues to
pay 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 basis points above
the prevailing LIBOR rates. The commercial paper borrowings are also supported
by a $625 million, 5-year revolving credit facility, which expires August 15,
2005. The Company pays a facility fee of seven basis points on the 5-year credit
facility whether or not amounts have been borrowed, and borrowings may be made
at 13 basis points above the prevailing LIBOR rates. All of the 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 December 31, 2002, there were
no borrowings under any of the facilities. Eighty percent or $458.5 million of
the commercial paper borrowings outstanding are classified as long-term. These
amounts were determined based upon the Company's detailed financial budgets and
cash flow forecasts and supports the Company's ability and intent to retain this
debt level throughout 2003.
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 December 31, 2002.
In the third quarter of 2002, the Company redeemed all of the
outstanding shares of $1.20 convertible preference stock. The redemption price
of $40 per share, as provided by the terms of the preference stock, became
payable to holders, who did not otherwise convert their shares into the
Company's common stock, on September 1, 2002. Most holders elected conversion
prior to redemption.
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 long-term securities. Total debt as a percentage of total
capital decreased to 21.1% at the end of 2002 from 36.3% at the end of 2001.
Earnings and cash flow are significantly impacted by the seasonality of
businesses, particularly educational publishing. The first quarter is the
smallest, accounting for 18% of revenue and only 5% of net earnings in 2002. The
third quarter is the largest generating over 45% of 2002 annual earnings. This
seasonality also impacts cash flow and related borrowing patterns. The Company
typically increases its borrowing through the beginning of the third quarter and
generates cash over the balance of the year.
Negative working capital at the end of 2002 was $101.0 million versus
$63.4 million at the end of 2001. The change is primarily because of reductions
in accounts receivable, inventory and federal tax refunds.
Accounts receivable (before reserves) decreased $82.3 million, or 6.3%,
even with a sales increase of 3.1%. This decrease compares with a decrease of
$36.2 million in 2001. The year-to-year decrease was primarily due to improved
collection processes for accounts receivable. Number of day's sales outstanding
decreased 11 days in 2002 and 4 days in 2001. The accounts receivable reserve
methodology is based on historical analysis and a review of outstanding
balances. A change of one percentage point in the accounts receivable reserve
would have a $12.3 million impact on operating profit.
44
Total inventories declined by 10.4% in 2002 from the prior year due
primarily to improved efficiencies in inventory management.
Capital expenditures totaled $70.0 million, primarily from the purchase
of property and equipment, compared with $116.9 million in 2001. The decrease in
spending in 2002 relates primarily to the reduction in acquisitions in 2002
versus 2001. For 2003 capital expenditures are expected to be approximately $175
million reflecting increased spending for our London centered office space,
Canary Wharf, consolidation.
Additions to technology projects totaled $55.5 million in 2002,
primarily from investments in infrastructure for the McGraw-Hill Education
segment. For 2003, additions to deferred technology projects are expected to be
approximately $90 million.
Net prepublication costs decreased to $534.8 million at December 31,
2002. Prepublication investment totaled $249.3 million in 2002, $45.2 million
less than 2001, reflecting the adoption opportunities. For 2003, prepublication
spending is expected to remain at approximately $285 million reflecting the
adoption opportunities in key states.
In 1999, the Board of Directors approved a stock repurchase program
authorizing the purchase of up to 15 million shares, which was about 7.5% of the
outstanding common stock. The Company repurchased 3.2 million shares for $195.7
million in 2002 for a total of 12.7 million shares for $719.2 million under this
program. On January 29, 2003 the Board of Directors approved a new stock
repurchase program authorizing the purchase of up to 15 million additional
shares, which was approximately 7.8% of the total shares of the Company's
outstanding common stock. In addition, there remains available 2.3 million
shares under the original stock repurchase program.
On January 29, 2003, the Board of Directors approved an increase in the
quarterly common stock dividend of $0.015, or 5.9% to $0.27 per share.
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. $123.0 million of the
restructuring expenses were classified as operating expenses on the Consolidated
Statement of Income for the year ended December 31, 2001 and $36.0 million were
considered non-operating. The operating expenses consisted of $30.2 million in
employee severance and benefit costs and $92.8 million in asset impairment
losses. The non-operating expenses consisted of $36.0 million related to the
write-downs of certain e-commerce and emerging technology investments. The
planned workforce reduction of 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 December 31, 2002, all the employees under this restructuring program
have been terminated and all of the employee severance and benefit costs were
paid. The restructuring under this program was completed as of December 31,
2002.
In 2003, cash flow from operations is expected to be sufficient to
cover dividends, investment in publishing programs, capital expenditures, and
expected stock repurchases.
MARKET RISK
The Company has operations in various foreign countries. The functional currency
is the local currency for all locations, except in the McGraw-Hill Education
segment where operations that are extensions of the parent have the U.S. dollar
as the functional currency. In the normal course of business, these operations
are exposed to fluctuations in currency values. The Company does not generally
enter into derivative financial instruments in the normal course of business,
nor are such instruments used for speculative purposes. The Company has
naturally hedged positions in most countries with a
45
local currency perspective and asset and liability offsets. The gross amount of
the Company's foreign exchange positions is $148.6 million as of December 31,
2002, and management has estimated using a value at risk analysis with 90%
certainty that based on the historical volatilities of the portfolio that the
foreign exchange gains and losses will not exceed $16.1 million during 2003. The
Company's interest expense is sensitive to changes in the general level of
U.S. interest rates. Based on average debt outstanding over the past twelve
months, the following is the projected impact on interest expense on current
operations:
Percent change in interest rates Projected impact on operations
(+/-) (millions)
- -------------------------------------------------------------------------
1% $8.8
- -------------------------------------------------------------------------
"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; compensation increase rates; pension plan
income; the strength of the U.S. and global economy; Educational Publishing's
level of success in 2003 adoptions and enrollment and demographic trends; the
level of educational funding; the level of education technology investments; 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 the economic recovery, 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
level of merger and acquisition activity in the U.S. and abroad; the strength of
the domestic and international advertising markets; the volatility of the energy
marketplace; the strength of the pharmaceutical marketplace; the contract value
of public works, manufacturing and single family unit construction;
Broadcasting's level of political and other 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.
46
CONSOLIDATED STATEMENT OF INCOME
Years ended December 31 (in thousands, except per-share data) 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------
REVENUE (Notes 1, 4 and 14)
Product revenue $2,471,878 $2,433,402 $2,096,968
Service revenue 2,315,790 2,212,133 2,184,000
- --------------------------------------------------------------------------------------------------------------
Total Revenue 4,787,668 4,645,535 4,280,968
- --------------------------------------------------------------------------------------------------------------
EXPENSES (Note 5)
Operating
Product 1,210,810 1,223,658 1,012,184
Service 848,106 881,115 816,082
- --------------------------------------------------------------------------------------------------------------
Total Operating Expenses 2,058,916 2,104,773 1,828,266
- --------------------------------------------------------------------------------------------------------------
Selling and general
Product 914,557 911,873 762,840
Service 777,630 788,660 770,494
- --------------------------------------------------------------------------------------------------------------
Total Selling and General Expenses 1,692,187 1,700,533 1,533,334
- --------------------------------------------------------------------------------------------------------------
Depreciation (Note 1) 89,589 88,802 86,993
Amortization of intangibles (Note 13) 38,789 34,919 19,288
Goodwill amortization (Note 13) - 56,636 47,427
- --------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 3,879,481 3,985,663 3,515,308
Other income - net (Notes 2 and 5) 19,395 10,256 54,523
- --------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 927,582 670,128 820,183
- --------------------------------------------------------------------------------------------------------------
Interest expense 22,517 55,070 52,841
- --------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME 905,065 615,058 767,342
Provision for taxes on income (Note 6) 328,305 238,027 295,426
- --------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE ADJUSTMENT 576,760 377,031 471,916
Cumulative change in accounting, net of tax (Note 14) - - (68,122)
- --------------------------------------------------------------------------------------------------------------
NET INCOME $ 576,760 $ 377,031 $ 403,794
- --------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER COMMON SHARE (Note 12)
Income before cumulative adjustment $ 2.99 $ 1.95 $ 2.43
Net income $ 2.99 $ 1.95 $ 2.08
- --------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER COMMON SHARE (Note 12)
Income before cumulative adjustment $ 2.96 $ 1.92 $ 2.41
Net income $ 2.96 $ 1.92 $ 2.06
- --------------------------------------------------------------------------------------------------------------
See accompanying notes.
47
CONSOLIDATED BALANCE SHEET
December 31 (in thousands, except per-share data) 2002 2001
- --------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and equivalents (Note 1) $ 58,186 $ 53,535
Accounts receivable (net of allowances for doubtful accounts and sales returns:
2002 - $241,061; 2001 - $276,889) (Note 1) 991,806 1,038,308
- --------------------------------------------------------------------------------------------------------------
Inventories:
Finished goods 314,420 340,488
Work-in-process 18,128 30,595
Paper and other materials 28,209 31,564
- --------------------------------------------------------------------------------------------------------------
Total inventories (Note 1) 360,757 402,647
Deferred income taxes (Note 6) 169,829 218,676
Prepaid and other current assets (Note 1) 93,729 99,781
- --------------------------------------------------------------------------------------------------------------
Total current assets 1,674,307 1,812,947
- --------------------------------------------------------------------------------------------------------------
PREPUBLICATION COSTS: (net of accumulated amortization:
2002 - $924,867; 2001 - $910,720) (Note 1) 534,835 557,295
INVESTMENTS AND OTHER ASSETS:
Investments in Rock-McGraw, Inc. - at equity (Note 1) 119,442 105,538
Prepaid pension expense (Note 10) 261,243 211,582
Other 205,243 200,443
- --------------------------------------------------------------------------------------------------------------
Total investments and other assets 585,928 517,563
- --------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT - AT COST
Land 13,252 13,235
Buildings and leasehold improvements 330,484 335,313
Equipment and furniture 728,217 730,182
- --------------------------------------------------------------------------------------------------------------
Total property and equipment 1,071,953 1,078,730
Less - accumulated depreciation 640,493 623,790
- --------------------------------------------------------------------------------------------------------------
Net property and equipment 431,460 454,940
- --------------------------------------------------------------------------------------------------------------
GOODWILL AND OTHER INTANGIBLE ASSETS - AT COST (Notes 1 and 13)
Goodwill - net 1,294,831 1,231,028
Copyrights - net 272,243 353,252
Other intangible assets - net 238,578 234,166
- --------------------------------------------------------------------------------------------------------------
Net goodwill and other intangible assets 1,805,652 1,818,446
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $5,032,182 $5,161,191
- --------------------------------------------------------------------------------------------------------------
See accompanying notes.
48
2002 2001
- --------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable (Note 3) $ 119,414 $ 222,953
Accounts payable 303,354 339,541
Accrued royalties 119,821 112,423
Accrued compensation and contributions to retirement plans 317,640 273,289
Income taxes currently payable 82,016 77,628
Unearned revenue (Note 14) 538,961 508,055
Other current liabilities (Note 1) 294,085 342,504
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 1,775,291 1,876,393
- --------------------------------------------------------------------------------------------------------------
OTHER LIABILITIES
Long-term debt (Note 3) 458,923 833,571
Deferred income taxes (Note 6) 200,114 190,334
Accrued postretirement healthcare and other benefits (Note 11) 172,067 175,844
Other non-current liabilities 259,965 231,164
- --------------------------------------------------------------------------------------------------------------
Total other liabilities 1,091,069 1,430,913
- --------------------------------------------------------------------------------------------------------------
Total liabilities 2,866,360 3,307,306
- --------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 7)
- --------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (Notes 8 and 9)
$1.20 preference stock, $10 par value: authorized - 891,256;
outstanding - 0 shares in 2002 and 1,328 shares in 2001, respectively - 13
Common stock, $1 par value: authorized - 300,000,000 shares;
issued - 205,853,583 shares in 2002 and 205,838,910 shares in 2001, respectively 205,853 205,839
Additional paid-in capital 79,410 64,638
Retained income 2,672,086 2,292,342
Accumulated other comprehensive income (103,965) (126,860)
- --------------------------------------------------------------------------------------------------------------
Less - Common stock in treasury - at cost
(14,021,056 shares in 2002 and 12,620,573 in 2001) 669,499 566,775
Unearned compensation on restricted stock 18,063 15,312
- --------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 2,165,822 1,853,885
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $5,032,182 $5,161,191
- --------------------------------------------------------------------------------------------------------------
49
Consolidated Statement of Cash Flows
Years ended December 31 (in thousands) 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 576,760 $ 377,031 $ 403,794
Cumulative change in accounting principle - - 68,122
Restructuring and asset write-downs - 158,962 -
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation 89,589 88,802 86,993
Amortization of goodwill and intangibles 38,789 91,555 66,715
Amortization of prepublication costs 280,393 240,241 208,617
Provision for losses on accounts receivable 33,024 55,254 47,589
Gain on sale of real estate - (6,925) -
Loss on sale of MMS International 14,534 - -
Gain on sale of Tower Group International - - (16,587)
Other (9,618) (8,347) (9,173)
Change in assets and liabilities net of effect of acquisitions and dispositions:
Decrease/(increase) in accounts receivable and inventory 61,623 23,308 (117,031)
Decrease/(increase) in prepaid and other current assets 7,185 27,023 (19,707)
Increase/(decrease) in accounts payable and accrued expenses 4,373 42,202 (19,717)
(Decrease)/increase in unearned revenue and other current liabilities (56,149) (42,696) 31,346
Increase/(decrease) in interest and income taxes currently payable 18,475 42,618 (29,848)
Net change in deferred income taxes 64,492 7,357 34,680
Net change in other assets and liabilities 18,921 3,196 (15,039)
- ----------------------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 1,142,391 1,099,581 720,754
- ----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Investment in prepublication costs (249,317) (294,538) (250,005)
Purchase of property and equipment (70,019) (116,895) (97,721)
Acquisition of businesses and equity interests (19,310) (333,234) (703,719)
Proceeds from disposition of property, equipment and businesses 24,304 17,876 142,418
Other 3,299 - -
Additions to technology projects (55,477) (28,840) (15,194)
- ----------------------------------------------------------------------------------------------------------------------------
Cash used for investing activities (366,520) (755,631) (924,221)
- ----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Dividends paid to shareholders (197,016) (189,834) (182,462)
(Payments)/additions to commercial paper and other short-term debt - net (478,501) 12,137 606,276
Repayment of long-term debt - (741) (95,043)
Repurchase of treasury shares (183,111) (176,468) (167,611)
Exercise of stock options 77,465 63,917 45,317
Other (575) (376) (3,239)
- ----------------------------------------------------------------------------------------------------------------------------
Cash (used for)/provided by financing activities (781,738) (291,365) 203,238
- ----------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 10,518 (2,221) (3,089)
- ----------------------------------------------------------------------------------------------------------------------------
Net change in cash and equivalents 4,651 50,364 (3,318)
Cash and equivalents at beginning of year 53,535 3,171 6,489
- ----------------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR $ 58,186 $ 53,535 $ 3,171
- ----------------------------------------------------------------------------------------------------------------------------
See accompanying notes.
50
Consolidated Statement of Shareholders' Equity
Years ended Accumulated Less- Less-
December 31, other common unearned
2002, 2001 and 2000 $1.20 Additional compre- stock compensation
(in thousands, preference Common paid-in Retained hensive in treasury on restricted
except per-share data) $10 par $1 par capital income income at cost stock Total
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1999 $ 14 $205,838 $24,305 $1,883,813 $ (87,731) $363,728 $14,021 $1,648,490
Net income - - - 403,794 - - - 403,794
Other comprehensive
income, net of tax -
entirely due to
foreign currency
translation adjustments - - - - (22,627) - - (22,627)
----------
COMPREHENSIVE INCOME 381,167
Dividends ($.94 per share) - - - (182,462) - - - (182,462)
Share repurchase - - - - - 167,611 - (167,611)
Employee stock plans - - 19,828 - - (60,348) (1,153) 81,329
Other (1) 1 43 - - (88) - 131
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 2000 13 205,839 44,176 2,105,145 (110,358) 470,903 12,868 1,761,044
Net income - - - 377,031 - - - 377,031
Other comprehensive
income, net of tax -
entirely due to
foreign currency
translation adjustments - - - - (16,502) - - (16,502)
----------
COMPREHENSIVE INCOME 360,529
Dividends ($.98 per share) - - - (189,834) - - - (189,834)
Share repurchase - - - - - 176,468 - (176,468)
Employee stock plans - - 20,407 - - (80,070) 2,444 98,033
Other - - 55 - - (526) - 581
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 2001 13 205,839 64,638 2,292,342 (126,860) 566,775 15,312 1,853,885
Net income - - - 576,760 - - - 576,760
Other comprehensive
income, net of tax -
entirely due to
foreign currency
translation adjustments - - - - 22,895 - - 22,895
----------
COMPREHENSIVE INCOME 599,655
Dividends ($1.02 per share) - - - (197,016) - - - (197,016)
Share repurchase - - - - - 183,111 - (183,111)
Employee stock plans - - 14,737 - - (80,298) 2,751 92,284
Other (13) 14 35 - - (89) - 125
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 2002 $ - $205,853 $79,410 $2,672,086 $(103,965) $669,499 $18,063 $2,165,822
- -----------------------------------------------------------------------------------------------------------------------------
See accompanying notes.
51
Notes to Consolidated Financial Statements
1. ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the
accounts of all subsidiaries and the Company's share of earnings or losses of
joint ventures and affiliated companies under the equity method of accounting.
All significant intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH EQUIVALENTS. Cash equivalents consist of highly liquid investments
with maturities of three months or less at the time of purchase.
INVENTORIES. Inventories are stated at the lower of cost (principally
first-in, first-out) or market. A significant estimate in the McGraw-Hill
Education segment is the reserves for inventory obsolescence. The reserve is
based upon management's assessment of the marketplace of products in demand as
compared to the number of units currently on hand.
PREPUBLICATION COSTS. Prepublication costs, principally outside
preparation costs, are amortized primarily from the year of publication over
their estimated useful lives, generally two to five years, using either an
accelerated or the straight-line method. The Company periodically evaluates the
remaining lives and recoverability of such costs, which is sometimes dependent
upon program acceptance by state adoption authorities, based on expected
undiscounted cash flows.
INVESTMENT IN ROCK-McGRAW, Inc. Rock-McGraw owns the Company's
headquarters building in New York City. Rock-McGraw is owned 45% by the Company
and 55% by Rockefeller Group, Inc. The Company accounts for this investment
under the equity method of accounting.
GOODWILL AND OTHER INTANGIBLE ASSETS. Goodwill and other intangible
assets that arose from acquisitions of $1.3 billion at December 31, 2002 and
$1.2 billion at December 31, 2001 are not amortized unless there has been a
reduction in the value of the related assets. The Company currently reviews the
recoverability of these assets using the methodology prescribed in Statement of
Financial Accounting Standards No. 142 (SFAS No. 142), Goodwill and Other
Intangible Assets. Gross intangible assets of $783.2 million at December 31,
2002 and $815.6 million at December 31, 2001 are being amortized over periods of
up to 40 years. The Company reviews long-lived assets, including intangible
assets and goodwill for impairment annually, or sooner whenever events or
changes in circumstances indicate the carrying amounts of such assets may not be
recoverable. Upon such an occurrence, recoverability of these assets is
determined as follows. For long-lived assets that are held for use, the Company
compares the forecasted undiscounted net cash flows to the carrying amount. If
the long-lived asset is determined to be unable to recover the carrying amount,
then it is written down to fair value. For long-lived assets held for sale,
assets are written down to fair value. Fair value is determined based on
discounted cash flows, appraised values or management's estimates, depending
upon the nature of the assets. Intangibles with indefinite lives are tested by
comparing their carrying amounts to fair value. Impairment within goodwill is
tested using a two step method. The first step is to compare the fair value of
the reporting unit to its book value, including goodwill. If the fair value of
the unit is less than its book value, the Company then determines the implied
fair value of goodwill by deducting the fair value of the reporting unit's net
assets from the fair value of the reporting unit. If the book value of goodwill
is greater than its implied fair value, the Company writes down goodwill to its
implied fair value. Beginning in January 2002,
52
the Company did not amortize goodwill on its books in accordance with SFAS No.
142, Goodwill and Other Intangible Assets. The amount of goodwill amortization
recognized was $0 million, $56.6 million and $47.4 million for 2002, 2001 and
2000.
RECEIVABLE FROM/PAYABLE TO BROKER-DEALERS AND DEALER BANKS. 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 matched purchase and sale commitments of $238.9 million and $159.9
million at December 31, 2002 and 2001, respectively. Only those transactions not
closed at the settlement date are reflected in the balance sheet as a component
of other current assets and liabilities.
FOREIGN CURRENCY TRANSLATION. The Company has operations in various
foreign countries. The functional currency is the local currency for all
locations, except in the McGraw-Hill Education segment where operations that are
extensions of the parent have the U.S. dollar as functional currency. In the
normal course of business these operations are exposed to fluctuations in
currency values. Assets and liabilities are translated using current exchange
rates, except certain accounts of units whose functional currency is the U.S.
dollar, and translation adjustments are accumulated in a separate component of
shareholders' equity. Revenue and expenses are translated at average monthly
exchange rates. Inventory, prepublication costs and property and equipment
accounts of units whose functional currency is the U.S. dollar are translated
using historical exchange rates, and translation adjustments are charged and
credited to income.
REVENUE. Revenue is generally recognized when goods are shipped to
customers or services are rendered. Units whose revenue is principally from
service contracts record revenue as earned. Revenue relating to agreements which
provide for more than one service is recognized based upon the fair value to the
customer of each service component and as each component is earned. If the fair
value to the customer for each service is not objectively determinable, revenue
will be recognized ratably over the service period. Fair value is determined for
each service component through a bifurcation analysis which relies upon the
pricing of similar cash arrangements that are not part of the multi-element
arrangement. Advertising revenue is recognized when the page is run or the spot
is aired. Subscription income is recognized over the related subscription
period.
Product revenue is comprised of the revenue from the McGraw-Hill
Education segment and the circulation revenue from Information and Media
Services, and represents primarily books and magazines. Service revenue
represents the revenue of the Financial Services segment and the remaining
revenue of Information and Media Services, and represents information-related
services and advertising.
DEPRECIATION. The costs of property and equipment are depreciated using
the straight-line method based upon the following estimated useful lives:
Buildings and leasehold improvements - 15 to 40 years
Equipment and furniture - three to 10 years
ADVERTISING EXPENSE. The cost of advertising is expensed as incurred.
The Company incurred $92 million, $107 million and $104 million in advertising
costs in 2002, 2001 and 2000, respectively.
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURNS. The accounts
receivable reserve methodology is based on historical analysis and a review of
outstanding balances. A significant estimate in the McGraw-Hill Education
segment, and particularly within the Higher Education, Professional, and
International Group, is the allowance for sales returns, which is based on the
historical rate of return and current market conditions. The impact on the
operating profit for a 1% change in the allowance for doubtful accounts and
sales returns is $12.3 million and $10.0 million, respectively, in 2002.
53
STOCK-BASED COMPENSATION. As permitted by SFAS No. 123, Accounting for
Stock-Based Compensation, the Company measures compensation expense for its
stock-based employee compensation plans using the intrinsic method prescribed
by Accounting Principles Board Opinion No. 25 (APBO No. 25), Accounting for
Stock Issued to Employees.
Beginning in 1997, participants who exercise an option by tendering
previously owned shares of common stock of the Company may elect to receive a
one-time restoration option covering the number of shares tendered. Restoration
options are granted at fair market value of the Company's common stock on the
date of the grant, have a maximum term equal to the remainder of the original
option term, and are subject to a six-month vesting period.
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation:
Twelve Months Ended December 31,
(in thousands except
earnings per share) 2002 2001 2000
- --------------------------------------------------------------
Net income, as reported $576,760 $377,031 $403,794
Stock-based compensation
cost included
in net income $ 12,984 $ 15,002 $ 19,381
Fair value of stock-based
compensation cost,
net of tax $(63,113) $(51,724) $(42,471)
- --------------------------------------------------------------
Pro forma net income $526,631 $340,309 $380,704
- --------------------------------------------------------------
Basic earnings per
common share
As reported $ 2.99 $ 1.95 $ 2.08
Pro forma $ 2.73 $ 1.76 $ 1.96
Diluted earnings
per common share
As reported $ 2.96 $ 1.92 $ 2.06
Pro forma $ 2.71 $ 1.74 $ 1.94
- --------------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS. 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 in
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. This
pronouncement will not have a material impact on the Company's financial
statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). Under SFAS No.
146 companies recognize a cost associated with an exit or disposal activity when
a liability has been incurred, while under EITF Issue No. 94-3 companies
recognized costs once management implemented a plan to exit an activity. SFAS
No. 146 also introduces discounting the liability associated with the exit or
disposal activity for the time between the cost being incurred and when the
liability is ultimately settled. This pronouncement is effective January 1,
2003. The Company does not expect that the adoption will have a material impact
on its financial statements.
RECLASSIFICATION. Certain prior-year amounts have been reclassified for
comparability purposes.
2. ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS. In 2002, the Company acquired seven companies, principally Open
University Press, Reality Based Learning and Bredex Corporation, for $19.3
million. In 2001, the Company acquired eight companies, principally
Financial Times Energy, Frank Schaffer Publications, Corporate Value Consulting
and Mayfield Publishing Company, for $333.2 million, net of cash acquired. In
2000, the Company acquired three companies, principally Tribune Education and
CBRS, for
54
$703.7 million, net of cash acquired. All of these acquisitions were accounted
for under the purchase method. Intangible assets recorded for all current
transactions are amortized using the straight-line method for periods not
exceeding 15 years. In accordance with SFAS 142, no goodwill amortization was
recorded in 2002.
NONCASH INVESTING ACTIVITIES. Liabilities assumed in conjunction with
the acquisition of businesses:
(in millions) 2002 2001 2000
- --------------------------------------------------------------
Fair value of
assets acquired $20.9 $369.9 $840.5
Cash paid (net of
cash acquired) 19.3 333.2 703.7
- --------------------------------------------------------------
Liabilities assumed $ 1.6 $ 36.7 $136.8
- --------------------------------------------------------------
DISPOSITIONS. In 2002, the Company sold MMS International and
recognized a pre-tax loss of $14.5 million ($2.0 million after-tax benefit or 1
cent per diluted share). The variance between the pre-tax loss and the after-tax
benefit is the result of previous book write-downs and the inability of the
Company to take a tax benefit for the write-downs until the unit was sold. In
2001, the Company sold DRI and recognized a pre-tax gain of $8.8 million ($26.3
million after-tax, or 13 cents per diluted share). The difference between the
pre-tax gain on the sale of DRI of $8.8 million and the after-tax benefit of
$26.3 million is the result of previous book write-downs and the inability of
the Company to take a tax benefit for the write-downs until the unit was sold.
In 2000, the Company sold Tower Group International for $138.2 million. As a
result of this transaction a pre-tax gain of $16.6 million ($10.2 million
after-tax, or 5 cents per diluted share) was recognized.
3. DEBT
At December 31, 2002, the Company had total borrowings of $578.3 million,
primarily representing domestic commercial paper borrowings of $573.1 million
maturing at various dates during 2003 and other long-term debt of $0.4 million
at an average interest rate of 1.9%. Extendible Commercial Notes (ECNs)
replicate commercial paper, except that the Company has an option to extend the
note beyond its initial redemption date to a maximum final maturity of 390 days.
However, if exercised, such an extension is at a higher reset rate, which is at
a predetermined spread over LIBOR, and is related to the Company's commercial
paper rating at the time of extension. As a result of the extension option, no
backup facilities for these borrowings are required. Like commercial paper, ECNs
have no financial covenants. There were $0 and $40 million of ECNs outstanding
at December 31, 2002 and 2001, respectively. The commercial paper borrowings in
2002 are supported by the revolving credit agreement described below, and
approximately $458 million and $800 million have been classified as long-term in
2002 and 2001, respectively. These amounts were determined based upon the
Company's detailed financial budgets and cash flow forecasts and supports the
Company's ability and intent to retain this debt level throughout 2003.
The Company has two revolving credit facility agreements, consisting of
a $625 million, five-year revolving credit facility (Five-year Facility) and a
$675 million, 364-day revolving credit facility. The Five-year Facility provides
that the Company may borrow at any time until August 15, 2005, when the
commitment would terminate and any outstanding loans mature. The Company pays a
facility fee of seven basis points on the 5-year credit facility whether or not
amounts have been borrowed, and borrowings may be made at 13 basis points above
the prevailing LIBOR rates. The fees and spreads on the Five-year Facility
fluctuate based upon a schedule related to the Company's long-term credit rating
by Moody's and Fitch.
On July 23, 2002, the Company obtained a new 364-day credit facility
for $675 million (364-day Facility) as the Company's existing 364-day Facility
was about to expire. The new 364-day Facility agreement provides that the
Company may borrow until July 22, 2003,
55
on which date the facility agreement terminates and the maturity of such
borrowings may not be later than July 22, 2004. The Company pays a facility fee
of 5 basis points on the new 364-day Facility (whether or not amounts have been
borrowed) and borrowings may be made at 15 basis points above the prevailing
LIBOR rates. All of the 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, which was also
in place under the existing 364-day Facility, has never been exceeded. At
December 31, 2002 and 2001, there were no borrowings under any of the
facilities. The commercial paper borrowings outstanding are supported by the
aforementioned revolving credit facilities, and 80% of these borrowings have
been classified as long-term.
A summary of long-term debt at December 31 follows:
(in millions) 2002 2001
- --------------------------------------------------------------
Commercial paper supported
by bank revolving credit agreement $458.5 $800.1
Extendible commercial notes - 32.0
Other (primarily acquisition related notes) 0.4 1.5
- --------------------------------------------------------------
Total long-term debt $458.9 $833.6
- --------------------------------------------------------------
The Company paid interest on its debt totaling $22.2 million in 2002,
$61.5 million in 2001 and $56.3 million in 2000.
The carrying amount of the Company's commercial paper borrowings
approximates fair value.
4. SEGMENT REPORTING AND GEOGRAPHIC INFORMATION
The Company has three reportable segments: McGraw-Hill Education, Financial
Services and Information and Media Services. The McGraw-Hill Education segment
is one of the premier global educational publishers servicing the elementary and
high school (el-hi), college and university, professional, and international
markets. The segment comprises two operating groups: the School Education Group,
and the Higher Education, Professional, and International Group.
The Financial Services segment operates under the Standard & Poor's
brand as one reporting unit and provides credit ratings, evaluation services,
and analyses globally on corporations, financial institutions, securitized and
project financings, and local, state and sovereign governments. Financial
Services provides a wide range of analytical and data services for investment
managers and investment advisors globally. Corporate Value Consulting (CVC) is a
leading provider of valuation and consulting services.
The Information and Media Services segment comprises two operating
groups, which include business and professional media offering information,
insight and analysis: the Business-to-Business Group (comprising BusinessWeek,
McGraw-Hill Construction, Platts, Aviation Week and Healthcare Information) and
Broadcasting.
Information as to the operations of the three segments of the Company
is set forth below based on the nature of the products and services offered. The
Executive Committee, comprising the Company's principal corporate executives, is
the Company's chief operating decision maker and evaluates performance based
primarily on operating profit. The accounting policies of the operating segments
are the same as those described in the summary of significant accounting
policies - refer to Note 1 for the Company's significant accounting policies.
The operating profit adjustments listed below relate to the operating
results of the corporate entity, which is not considered an operating segment,
and includes all corporate expenses of $91.9 million, $93.1 million and $91.4
million, respectively, for 2002, 2001 and 2000, and net interest expense of
$22.5 million, $55.0 million, and $52.8 million, respectively, of the Company.
Corporate assets consist principally of cash and equivalents, investment in
Rock-McGraw, Inc., prepaid pension expense, deferred income taxes and leasehold
improvements related to subleased areas.
56
Foreign operating profit from our continuing businesses was $195.7
million, $119.1 million, and $143.5 million in 2002, 2001 and 2000,
respectively. Foreign revenue, operating profit and long-lived assets include
operations in 33 countries. The Company does not have operations in any foreign
country that represents more than 5% of its consolidated revenue. Transfers
between geographic areas are recorded at agreed upon prices and intercompany
revenue and profit are eliminated.
information
McGraw-Hill Financial and Media Segment Consolidated
(in millions) Education Services Services Totals Adjustments Total
- ------------------------------------------------------------------------------------------------------------
2002
Operating revenue $2,357.1 $1,621.1 $ 809.5 $4,787.7 $ - $4,787.7
Operating profit 331.8 569.7 118.0 1,019.5 (114.4) 905.1*
Depreciation and amortization+ 347.0 34.9 21.8 403.7 5.1 408.8
Assets 3,024.5 819.6 446.5 4,290.6 741.6 5,032.2
Capital expenditures++ 281.3 25.3 12.7 319.3 - 319.3
Technology project additions 47.3 2.4 4.4 54.1 1.4 55.5
- ----------------------------------------------------------------------------------------------------------
2001
Operating revenue $2,322.2 $1,477.2 $ 846.1 $4,645.5 $ - $4,645.5
Operating profit 263.4 434.8 65.0 763.2 (148.1) 615.1*
Depreciation and amortization+ 336.5 54.4 26.3 417.2 3.4 420.6
Assets 3,069.6 847.7 481.2 4,398.5 762.7 5,161.2
Capital expenditures++ 354.4 29.1 27.9 411.4 - 411.4
Technology project additions 21.4 1.0 5.3 27.7 1.1 28.8
- ----------------------------------------------------------------------------------------------------------
2000
Operating revenue $1,993.2 $1,280.2 $1,007.6 $4,281.0 $ - $4,281.0
Operating profit 307.7 390.9 212.9 911.5 (144.2) 767.3*
Depreciation and amortization+ 281.0 51.3 27.5 359.8 2.5 362.3
Assets 3,004.1 827.9 452.4 4,284.4 647.0 4,931.4
Capital expenditures++ 286.7 32.4 28.6 347.7 - 347.7
Technology project additions 3.0 10.6 0.5 14.1 1.1 15.2
- ----------------------------------------------------------------------------------------------------------
* Income before taxes on income.
+ Includes amortization of goodwill and intangible assets and prepublication
costs. Goodwill amortization of $0 million, $56.6 million and $47.4 million for
2002, 2001 and 2000.
++ Includes purchase of property and equipment and investments in prepublication
costs.
The following is a schedule of revenue and long-lived assets by
geographic location:
(in millions) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------
Long-lived Long-lived Long-lived
Revenue assets Revenue assets Revenue assets
- ----------------------------------------------------------------------------------------------------------
United States $3,897.1 $2,848.8 $3,819.8 $2,830.5 $3,492.9 $2,685.7
European region 491.1 63.2 455.2 114.0 406.9 69.9
Rest of world 399.5 66.6 370.5 56.3 381.2 57.7
- ----------------------------------------------------------------------------------------------------------
Total $4,787.7 $2,978.6 $4,645.5 $3,000.8 $4,281.0 $2,813.3
- ----------------------------------------------------------------------------------------------------------
5. RESTRUCTURING
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
57
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 is $112.0 million, or 57
cents per diluted share. $123.0 million of the restructuring expenses were
classified as operating expenses on the Consolidated Statement of Income for the
year ended December 31, 2001 and $36.0 million were considered non-operating.
The operating expenses consisted of $30.2 million in employee severance and
benefit costs and $92.8 million in asset impairment losses. The non-operating
expenses consisted of $36.0 million related to the write-downs of certain
e-commerce and emerging technology investments.
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. At December 31, 2002, all employees have been terminated under
this restructuring and all employee severance and benefit costs were paid.
Asset impairment losses of $128.8 million include $36.6 million
associated with the exiting of the McGraw-Hill Education's business training
coursework operation, $37.2 million attributed to the disposing of non-strategic
properties in the investment services area in Financial Services and costs
associated with the disposal, $36.0 million primarily arising from losses on the
McGraw-Hill Construction's e-commerce investments and emerging technology
investments in the venture fund, and $19.0 million on the write-off of certain
assets.
Changes in the marketplace led to a shift to online learning solutions
which impacted McGraw-Hill Education's business training coursework operations.
As a result and as part of the restructuring, the Company initiated an exiting
of the business training coursework operations leading to a charge of
approximately $36.6 million. This charge is primarily comprised of write-offs of
prepublication costs and goodwill associated with the operation.
As a result of the Company's decision to dispose of the non-strategic
properties in the investment services area, losses of approximately $37.2
million were recognized which comprised the complete write-off of certain
investments and the write-down of goodwill associated with properties to be
sold. As part of the restructuring plan, discussions were initiated with
potential buyers and the write-down of goodwill was determined based upon the
net realizable values. The remaining carrying values of these assets
approximated $22 million and the disposals were completed within one year.
Also reflected in the total asset impairment losses is $36.0 million
primarily arising from losses on McGraw-Hill Construction's e-commerce
investments and the emerging technology investments in the venture fund as the
Company has decided to scale back on these initiatives. These impairment losses
reflect the permanent write-down of the investments to fair value that was
determined based upon the earnings capability and expected cash flow of the
related investments.
The $19.0 million is primarily attributed to the write-off of net
assets associated with the programs and product lines to be discontinued.
At December 31, 2001, the remaining reserve of approximately $36.5
million was included in other current liabilities. The restructuring was
completed at December 31, 2002.
58
6. TAXES ON INCOME
Income before taxes on income resulted from domestic operations (including
foreign branches) and foreign subsidiaries' operations as follows:
(in millions) 2002 2001 2000
- --------------------------------------------------------------
Domestic operations $841.8 $579.7 $724.8
Foreign operations 63.3 35.4 42.5
- --------------------------------------------------------------
Total income before taxes $905.1 $615.1 $767.3
- --------------------------------------------------------------
A reconciliation of the U.S. statutory tax rate to the Company's
effective tax rate for financial reporting purposes follows:
2002 2001 2000
- --------------------------------------------------------------
U.S. statutory rate 35.0% 35.0% 35.0%
- -------------------------------------------------------------
Goodwill amortization - 1.7 0.9
Effect of state and local
income taxes 3.9 3.9 3.9
Disposition of businesses -1.2 -2.1 -0.1
Restructuring and
asset impairment - 2.3 -
Other - net -1.4 -2.1 -1.2
- -------------------------------------------------------------
Effective tax rate 36.3% 38.7% 38.5%
- -------------------------------------------------------------
The provision for taxes on income consists of the following:
(in millions) 2002 2001 2000
- --------------------------------------------------------------
Federal:
Current $208.8 $196.3 $235.5
Deferred 47.4 (8.1) (3.9)
- --------------------------------------------------------------
Total federal 256.2 188.2 231.6
- --------------------------------------------------------------
Foreign:
Current 18.1 14.2 17.9
Deferred (0.5) (1.1) 0.1
- --------------------------------------------------------------
Total foreign 17.6 13.1 18.0
- --------------------------------------------------------------
State and local:
Current 36.6 38.5 46.9
Deferred 17.9 (1.7) (1.1)
- --------------------------------------------------------------
Total state and local 54.5 36.8 45.8
- --------------------------------------------------------------
Total provision for taxes $328.3 $238.1 $295.4
- --------------------------------------------------------------
The principal temporary differences between the accounting for income
and expenses for financial reporting and income tax purposes as of December 31
follow:
(in millions) 2002 2001
- --------------------------------------------------------------
Fixed assets and intangible assets $ 168.8 $ 181.7
Prepaid pension and other expenses 145.6 120.1
Unearned revenue 27.9 30.5
Reserves and accruals (219.7) (266.8)
Postretirement and
postemployment benefits (87.3) (88.3)
Other - net (5.0) (5.5)
- --------------------------------------------------------------
Deferred tax liability/(asset) - net $ 30.3 $ (28.3)
- --------------------------------------------------------------
The Company made net income tax payments totaling $246.0 million in
2002, $202.4 million in 2001, and $290.3 million in 2000.
The Company has not recorded deferred income taxes applicable to
undistributed earnings of foreign subsidiaries that are indefinitely reinvested
in foreign operations. Undistributed earnings amounted to approximately $180
million at December 31, 2002, excluding amounts that, if remitted, generally
would not result in any additional U.S. income taxes because of available
foreign tax credits. If the earnings of such foreign subsidiaries were not
indefinitely reinvested, a deferred tax liability of approximately $29 million
would have been required.
7. RENTAL EXPENSE AND LEASE OBLIGATIONS
Rental expense for property and equipment under all operating lease agreements
was as follows:
(in millions) 2002 2001 2000
- --------------------------------------------------------------
Gross rental expense $173.2 $154.4 $134.4
Less: sublease revenue 19.9 29.9 28.5
- --------------------------------------------------------------
Net rental expense $153.3 $124.5 $105.9
- --------------------------------------------------------------
59
The Company is committed under lease arrangements covering property,
computer systems and office equipment. Certain lease arrangements contain
escalation clauses covering increased costs for various defined real estate
taxes and operating services.
Minimum rental commitments under existing noncancelable leases with a
remaining term of more than one year, including the Company's headquarters
building, are shown in the following table. The annual rental commitments for
real estate is reduced by $4 million in 2003 and then by approximately $4
million a year thereafter through 2007 for sublease income.
(in millions)
- -------------------------------------
2003 $ 135.8
2004 127.8
2005 114.5
2006 103.7
2007 98.3
2008 and beyond 1,347.2
- -------------------------------------
Total $1,927.3
- -------------------------------------
8. CAPITAL STOCK
On January 27, 1999, the Board of Directors approved a share repurchase program
authorizing the repurchase of up to 15 million shares, approximately 7.5% of the
Company's outstanding common stock. The Company implemented the program through
open market purchases and private transactions. Through December 31, 2002, the
Company had repurchased approximately 12.7 million shares of common stock from
the 1999 program at a total cost of $719.2 million. The repurchased shares will
be used for general corporate purposes, including the issuance of shares for
stock compensation plans. In the event of a significant investment opportunity,
the Company may slow the pace of repurchase activity.
The number of common shares reserved for issuance for employee stock
plan awards was 28,348,251 at December 31, 2002 and 20,835,331 at December 31,
2001. Under the Director Deferred Stock Ownership Plan, 298,812 and 300,753
common shares were reserved for issuance at December 31, 2002 and 2001,
respectively.
In the third quarter 2002, the Company redeemed all of the outstanding
shares of $1.20 convertible preference stock. The redemption price of $40 per
share, as provided by the terms of the preference stock, became payable to
holders, who did not otherwise convert their shares into the Company's common
stock, on September 1, 2002. Most holders elected conversion prior to
redemption. None of the convertible preference shares provided a beneficial
conversion feature at the time they were originally issued.
Two million shares of preferred stock, par value $1 per share, are
authorized; none have been issued. 600,000 shares have been reserved for
issuance under a Preferred Share Purchase Rights Plan adopted by the Company's
Board of Directors on July 29, 1998. Under the 1998 Rights Plan, one Right for
each share of common stock outstanding was issued to shareholders of record on
August 14, 1998. These Rights will become exercisable only if a person or group
acquires 20% or more of the Company's common stock or announces a tender offer
that would result in the ownership of 20% or more of the common stock. Each
Right will then entitle the holder to buy a 1/400th interest in a share of
Series A preferred stock at an exercise price of $150. The Rights are redeemable
by the Company's Board of Directors for one-quarter cent each prior to a 20%
acquisition by a third party. The 1998 Plan also gives the Board of Directors
the option to exchange one share of common stock of the Company for each Right
(not owned by the acquirer) after an acquirer holds 20% but less than 50% of the
outstanding shares of common stock. In the event, after a person or group
acquires 20% or more of the Company's stock, that the Company is acquired in a
merger or other business combination transaction of 50% or more of its
consolidated assets or earning power are sold, each Right becomes exercisable
for common stock equivalent to two times the exercise price of the Right.
60
In 2002, dividends were paid at the quarterly rate of $0.255 per common
share. Total dividends of $0.80 per preference share were paid in 2002. All
dividends on preference stock are cumulative. Total dividends paid in 2002, 2001
and 2000 were $197.0 million, $189.8 million and $182.5 million, respectively.
9. STOCK PLAN AWARDS
The Company applies the provisions of APBO No. 25, Accounting for Stock Issued
to Employees, in accounting for its stock-based awards. Accordingly, no
compensation cost has been recognized for its stock option plans other than for
its restricted stock performance awards.
The Company has three stock option plans: the 2002, 1993 and 1987
Employee Stock Incentive Plans.
The Plans provide for the granting of incentive stock options,
nonqualified stock options, stock appreciation rights, restricted stock awards,
deferred stock (applicable to the 1987 Plan only) or other stock-based awards to
purchase a total of 47.3 million shares of the Company's common stock - 9.2
million shares under the 1987 Plan, 28.6 million shares under the 1993 Plan and
9.5 million shares under the 2002 plan, as amended.
Stock options, which may not be granted at a price less than the fair
market value of the Company's common stock at date of grant, vest in two years
in equal annual installments and have a maximum term of ten years.
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions for
2002, 2001, and 2000, respectively: risk-free average interest rate of 5.1%,
4.7%, and 6.6%; dividend yield of 1.6%, 1.7%, and 1.7%; volatility of 29%, 28%,
and 28%; and expected life of five years for all years.
A summary of the status of the Company's stock option plans as of
December 31 and activity during the year follows:
Weighted average
exercise
(in thousands of shares) Shares price
- -------------------------------------------------------------------
Outstanding at December 31, 1999 10,350 $38.41
- -------------------------------------------------------------------
Options granted 4,154 49.96
Options exercised (1,847) 31.20
Options cancelled and expired (451) 50.32
- -------------------------------------------------------------------
Outstanding at December 31, 2000 12,206 $42.97
- -------------------------------------------------------------------
Options granted 4,806 $60.16
Options exercised (2,093) 36.65
Options cancelled and expired (341) 51.35
- -------------------------------------------------------------------
Outstanding at December 31, 2001 14,578 $49.34
- -------------------------------------------------------------------
Options granted 4,987 67.06
Options exercised (1,703) 39.66
Options cancelled and expired (341) 58.80
- -------------------------------------------------------------------
Outstanding at December 31, 2002 17,521 $55.13
- -------------------------------------------------------------------
At December 31, 2002, 2001, and 2000, options for 10,689,000,
8,340,000, and 6,841,000 shares of common stock were exercisable. The weighted
average fair value of options granted during 2002, 2001, and 1999 was $19.87,
$16.76, and $15.70, respectively.
A summary of information about stock options outstanding and options
exercisable at December 31, 2002 follows:
(in thousands of shares) Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------------
Range of Weighted average Weighted average Weighted average
exercise prices Shares remaining term exercise price Shares exercise price
- ----------------------------------------------------------------------------------------------------
$15.23 to $22.81 1,012 2.88 years $20.59 1,012 $20.59
$24.97 to $37.30 575 4.80 years $34.03 575 $34.03
$37.73 to $56.59 5,567 6.47 years $48.20 5,559 $48.19
$56.66 to $70.41 10,367 8.63 years $63.40 3,543 $60.47
- ----------------------------------------------------------------------------------------------------
$15.23 to $70.41 17,521 7.49 years $55.13 10,689 $48.89
- ----------------------------------------------------------------------------------------------------
61
Under the Director Deferred Stock Ownership Plan, a total of 298,812
shares of common stock was reserved as of December 31, 2002, and may be credited
to deferred stock accounts for eligible Directors. In general, the Plan requires
that 50% of eligible Directors' annual compensation plus dividend equivalents be
credited to deferred stock accounts. Each Director may also elect to defer all
or a portion of the remaining compensation and have an equivalent number of
shares credited to the deferred stock account. Recipients under this Plan are
not required to provide consideration to the Company other than rendering
service. Shares will be delivered as of the date a recipient ceases to be a
member of the Board of Directors or within five years thereafter, if so elected.
The Plan will remain in effect until terminated by the Board of Directors or
until no shares of stock remain available under the Plan.
Restricted stock performance awards have been granted under the 1993
and 1987 Plans. These restricted stock awards will vest only if the Company
achieves certain financial goals over various vesting periods. Other restricted
stock awards have total vesting periods of up to three years with vesting
beginning on the first anniversary of the awards. Recipients are not required to
provide consideration to the Company other than rendering service and have the
right to vote the shares and to receive dividends.
A total of 274,875 restricted shares were issued at an average market
value of $66.73 in 2002, 264,213 shares at an average market value of $59.28 in
2001 and 270,176 shares at an average market value of $51.77 in 2000. The awards
are recorded at the market value on the date of grant. Initially, the total
market value of the shares is treated as unearned compensation and is charged to
expense over the respective vesting periods. Under APBO No. 25, for performance
incentive shares, adjustments are also made to expense for changes in market
value and achievement of financial goals. Restricted stock compensation charged
to expense was $20.8 million for 2002, $24.4 million for 2001 and $31.5 million
for 2000. Restricted shares outstanding at the end of the year were 710,872 in
2002, 670,959 in 2001, and 690,307 in 2000.
10. RETIREMENT PLANS
The Company and its subsidiaries have a number of defined benefit pension plans
and defined contribution plans covering substantially all employees. The
Company's primary pension plan is a noncontributory plan under which benefits
are based on employee career employment compensation. The Company also sponsors
voluntary 401(k) plans under which the Company may match employee contributions
up to certain levels of compensation as well as profit-sharing plans under which
the Company contributes a percentage of eligible employees' compensation to the
employees' accounts.
For purposes of determining annual pension cost, prior service costs
are being amortized straight-line over the average remaining service period of
employees expected to receive benefits. For 2002, the assumed return on plan
assets of 9.5% is based on a calculated market-related value of assets, which
recognizes changes in market value over five years. The Company has changed its
return on assets assumption for 2003 to 8.75% from 9.5% utilized in 2002.
A summary of pension income for the Company's domestic defined benefit
plans follows:
(in millions) 2002 2001 2000
- -----------------------------------------------------------
Service cost $ 23.2 $ 19.9 $ 18.2
Interest cost 43.8 42.5 41.2
Expected return on assets (101.1) (95.4) (84.1)
Curtailment credit - - (2.0)
Settlement charge - - 0.5
Amortization of:
Prior service cost 1.2 1.1 1.1
Actuarial (gain) (16.8) (20.1) (15.0)
- -----------------------------------------------------------
Net pension income $ (49.7) $(52.0) $(40.1)
- -----------------------------------------------------------
Assumed rates - January 1:
Discount rate 7 1/4% 7 1/2% 7 1/2%
Compensation increase factor 5 1/2 5 1/2 5 1/2
Return on assets 9 1/2 9 1/2 9 1/2
- -----------------------------------------------------------
62
The Company also has unfunded supplemental benefit plans to provide
senior management with supplemental retirement, disability and death benefits.
Certain supplemental retirement benefits are based on final monthly earnings.
Pension cost was approximately $6.4 million for 2002, $6.7 million for 2001, and
$6.0 million for 2000. The accrued benefit obligation as of December 31, 2002
and 2001 was $40.6 million and $36.7 million, respectively.
Total retirement plans cost was $33.7 million for 2002, $23.1 million
for 2001, and $26.3 million for 2000.
The funded status of the domestic defined benefit plans as of December
31 follows:
(in millions) 2002 2001
- ---------------------------------------------------------------------
Change in benefit obligation
Net benefit obligation at
beginning of year $ 613.8 $ 585.8
Service cost 23.2 19.9
Plan amendments 1.1 -
Interest cost 43.8 42.5
Actuarial loss 26.5 2.7
Gross benefits paid (37.2) (37.1)
- ---------------------------------------------------------------------
Net benefit obligation at end of year $ 671.2 $ 613.8
- ---------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at
beginning of year 953.5 1,095.5
Actual return on plan assets (142.0) (104.9)
Gross benefits paid (37.2) (37.1)
- ---------------------------------------------------------------------
Fair value of plan assets at end of year $ 774.3 $ 953.5
- ---------------------------------------------------------------------
Funded status at end of year 103.0 339.8
Unrecognized net actuarial loss/(gain) 156.2 (130.2)
Unrecognized prior service costs 2.0 2.0
- ---------------------------------------------------------------------
Prepaid pension cost $ 261.2 $ 211.6
- ---------------------------------------------------------------------
Assumed rates - December 31:
Discount rate 6 3/4% 7 1/4%
Compensation increase factor 5 1/2 5 1/2
- ---------------------------------------------------------------------
Assets of the defined contribution plan consist primarily of index
funds, equity funds, debt instruments, and McGraw-Hill common stock. The U.S.
plan held approximately 1.9 million and 1.8 million shares of McGraw-Hill common
stock at December 31, 2002 and 2001, respectively, with market values of $114.7
million and $111.1 million, respectively. The plan received dividends on
McGraw-Hill common stock during 2002 and 2001 of $1.9 million and $1.8 million,
respectively.
The Company has several foreign pension plans that do not determine the
accumulated benefits or net assets available for benefits as disclosed above.
The amounts involved are not material and are therefore not included.
11. POSTRETIREMENT HEALTHCARE AND OTHER BENEFITS
The Company and some of its domestic subsidiaries provide certain medical,
dental and life insurance benefits for retired employees and eligible
dependents. The medical and dental plans are contributory while the life
insurance plan is noncontributory. The Company currently does not fund any of
these plans.
Postretirement benefits cost was $9.1 million in 2002, $8.0 million in
2001, and $3.4 million in 2000. A summary of the components of the cost in 2002,
2001 and 2000 follows:
(in millions) 2002 2001 2000
- -----------------------------------------------------
Service cost $ 2.5 $ 2.4 $ 2.3
Interest cost 10.2 9.9 9.0
Curtailment credit - - (0.8)
Settlement gain - - (1.4)
Amortization of:
Prior service cost (2.5) (2.5) (2.6)
Actuarial (gain) (1.1) (1.8) (3.1)
- -----------------------------------------------------
Postretirement benefits cost $ 9.1 $ 8.0 $ 3.4
- -----------------------------------------------------
63
A summary of the components of the unfunded postretirement benefit
obligation as of December 31 follows:
(in millions) 2002 2001
- ---------------------------------------------------------------------
Change in benefit obligation
Net benefit obligation at
beginning of year $ 142.0 $ 135.2
Service cost 2.5 2.4
Interest cost 10.2 9.9
Plan participants contributions 2.0 1.8
Settlements - -
Actuarial loss 25.4 5.1
Gross benefits paid (14.9) (12.4)
- ---------------------------------------------------------------------
Net benefit obligation at end of year $ 167.2 $ 142.0
- ---------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at
beginning of year - -
Employer contributions 12.9 10.6
Plan participants' contributions 2.0 1.8
Gross benefits paid (14.9) (12.4)
- ---------------------------------------------------------------------
Fair value of plan assets at end of year - -
- ---------------------------------------------------------------------
Funded status at end of year $(167.2) $(142.0)
Unrecognized net actuarial (gain) (4.2) (30.7)
Unrecognized prior service costs (0.7) (3.2)
- ---------------------------------------------------------------------
Accrued benefit cost $(172.1) $(175.9)
- ---------------------------------------------------------------------
The initial weighted average healthcare cost rates for 2002 and 2001
were 10.25% and 5.5%, respectively. The assumed weighted average healthcare cost
trend rate will decrease ratably from 10.25% in 2002 to 5.5% in 2012 and remain
at that level thereafter. The weighted average discount rate used to measure
expense was 7.25% in 2002 and 7.5% in 2001; the rate used to measure the
accumulated postretirement benefit obligation was 6.75% at December 31, 2002 and
7.25% at December 31, 2001. Assumed healthcare cost trends have a significant
effect on the amounts reported for the healthcare plans. A one-percentage point
change in assumed healthcare cost trend creates the following effects:
One-Percentage One-Percentage
(in millions) Point Increase Point Decrease
- --------------------------------------------------------------------
Effect on total of service
and interest cost $ 1.1 $ (1.0)
Effect on postretirement
benefit obligation $13.4 $(12.4)
- --------------------------------------------------------------------
12. EARNINGS PER SHARE
A reconciliation of the number of shares used for calculating basic earnings per
common share and diluted earnings per common share follows:
(in thousands) 2002 2001 2000
- ------------------------------------------------------------------------
Net income $576,760 $377,031 $403,794
- ------------------------------------------------------------------------
Average number of common shares
outstanding 192,888 193,888 194,099
Effect of stock options and
other dilutive securities 1,685 1,985 1,973
- ------------------------------------------------------------------------
Average number of common shares
outstanding including effect of
dilutive securities 194,573 195,873 196,072
- ------------------------------------------------------------------------
Restricted performance shares outstanding at December 31, 2002 of
674,000 were not included in the computation of diluted earnings per common
share because the necessary vesting conditions have not yet been met.
13. GOODWILL AND INTANGIBLE ASSETS
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
January 1, 2002. For each of the reporting
64
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.
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, 2000:
Twelve Months Ended December 31,
(in thousands,
except earnings per share) 2002 2001 2000
- ---------------------------------------------------------------------------------
Net income, as reported $ 576,760 $ 377,031 $ 403,794
Add back: amortization
expense, net of tax - 34,831 29,168
- ---------------------------------------------------------------------------------
Pro forma net income $ 576,760 $ 411,862 $ 432,962
- ---------------------------------------------------------------------------------
Basic earnings per common share:
As reported $ 2.99 $ 1.95 $ 2.08
Pro forma $ 2.99 $ 2.12 $ 2.23
Diluted earnings per common share:
As reported $ 2.96 $ 1.92 $ 2.06
Pro forma $ 2.96 $ 2.10 $ 2.21
- ---------------------------------------------------------------------------------
The following table summarizes the activity in goodwill for the periods
indicated:
December 31,
(in thousands) 2002 2001
- -------------------------------------------------------------------
Beginning balance $1,231,028 $ 1,155,268
Net change from acquisitions
and dispositions 9,088 188,657
Amortization expense - (56,636)
Purchase price allocations 39,146 -
Other 15,569 (56,261)
- -------------------------------------------------------------------
Total $1,294,831 $ 1,231,028
- -------------------------------------------------------------------
The following table summarizes net goodwill by segment:
December 31,
(in thousands) 2002 2001
- -------------------------------------------------------------------
McGraw-Hill Education $ 913,624 $ 853,829
Financial Services 288,236 288,400
Information & Media Services 92,971 88,799
- -------------------------------------------------------------------
Total $1,294,831 $ 1,231,028
- -------------------------------------------------------------------
The following table summarizes the activity in goodwill for the periods
indicated:
December 31,
(in thousands) 2002 2001
- -------------------------------------------------------------------
McGraw-Hill Education
Beginning balance $ 853,829 $ 842,953
Additions/(dispositions) 15,271 54,714
Amortization - (39,516)
Purchase price allocations 39,146 -
Other 5,378 (4,322)
- -------------------------------------------------------------------
Total $ 913,624 $ 853,829
- -------------------------------------------------------------------
Financial Services
Beginning balance $ 288,400 $ 269,207
Additions/(dispositions) (4,979) 84,114
Amortization - (14,041)
Other 4,815 (50,880)
- -------------------------------------------------------------------
Total $ 288,236 $ 288,400
- -------------------------------------------------------------------
Information & Media Services
Beginning balance $ 88,799 $ 43,108
Additions/(dispositions) (1,204) 49,829
Amortization - (3,079)
Other 5,376 (1,059)
- -------------------------------------------------------------------
Total $ 92,971 $ 88,799
- -------------------------------------------------------------------
There were no material acquisitions or dispositions for the periods
indicated, both individually and in the aggregate, and therefore pro forma
financial information is not required.
The following table summarizes other intangibles subject to
amortization at the dates indicated:
December 31,
(in thousands) 2002 2001
- -------------------------------------------------------------------
Copyrights $ 475,054 $ 538,784
Accumulated amortization (202,811) (185,532)
- -------------------------------------------------------------------
Net copyrights 272,243 353,252
- -------------------------------------------------------------------
Other intangibles 308,179 276,788
Accumulated amortization (107,666) (80,687)
- -------------------------------------------------------------------
Net other intangibles 200,513 196,101
- -------------------------------------------------------------------
Total $ 472,756 $ 549,353
- -------------------------------------------------------------------
65
The following table summarizes other intangibles not subject to
amortization at the dates indicated:
December 31,
(in thousands) 2002 2001
- ------------------------------------------------------------------
FCC Licenses $ 38,065 $ 38,065
- ------------------------------------------------------------------
Amortization expense for intangibles totaled $38.8 million, $34.9
million and $19.3 million for the twelve months ended December 31, 2002, 2001
and 2000, respectively. The weighted average life of the intangible assets at
December 31, 2002, is 17 years. The projected amortization expense for
intangible assets, assuming no further acquisitions or dispositions, is
approximately $30 million per year over the next five years.
14. ACCOUNTING CHANGE
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements, which
summarized the Staff's views regarding the recognition and reporting of revenue
and related expenses in certain transactions. SAB 101, which was further
clarified in 2000, was required to be implemented by the fourth quarter
retroactive to January 1, 2000.
In consideration of the views expressed in SAB 101 and related
interpretations, the Company modified its revenue recognition policies related
to various service contracts.
Revenue is generally recognized when goods are shipped to customers or
services are rendered. Units whose revenue is principally from service contracts
record revenue as earned. Revenue relating to agreements which provide for more
than one service is recognized based upon the fair value to the customer of each
service component and as each component is earned. If the fair value to the
customer for each service is not objectively determinable, revenue will be
recognized ratably over the service period. Fair value is determined for each
service component through a bifurcation analysis which relies upon the pricing
of similar cash arrangements that are not part of the multi-element arrangement.
The cumulative effect of the accounting change as of January 1, 2000
resulted in a charge to income of $68.1 million (net of income taxes of $46.7
million). The effect of the change on the year ended December 31, 2000 was to
decrease net income before the cumulative effect of the accounting change by
$(9.2) million, or $(0.04) per diluted share.
For the quarters ended March 31, June 30, September 30, and December
31, 2000, the Company recognized $43.4 million, $31.8 million, $18.6 million and
$5.9 million, in revenue, respectively, that was included in the cumulative
effect adjustment as of January 1, 2000. The effect on the first, second, third
and fourth quarters was to increase net income by $26.5 million, $19.4 million,
$11.3 million and $3.6 million, respectively (after reduction for income taxes
of $16.9 million, $12.4 million, $7.3 million and $2.3 million, respectively),
during those periods. The total amount of this cumulative adjustment that was
recognized for the year ended December 31, 2002 and December 31, 2001 was $1.8
million and $1.7 million, respectively. The cumulative adjustment has been fully
recognized as of December 31, 2002.
66
REPORT OF MANAGEMENT
TO THE SHAREHOLDERS OF THE McGRAW-HILL COMPANIES, INC.
The financial statements in this report were prepared by the management of The
McGraw-Hill Companies, Inc., which is responsible for their integrity and
objectivity.
These statements, prepared in conformity with accounting principles
generally accepted in the United States and including amounts based on
management's best estimates and judgments, present fairly The McGraw-Hill
Companies' financial condition and the results of the Company's operations.
Other financial information given in this report is consistent with these
statements.
The McGraw-Hill Companies' management maintains a system of internal
accounting controls designed to provide reasonable assurance that the financial
records accurately reflect the Company's operations and that the Company's
assets are protected against loss. Consistent with the concept of reasonable
assurance, the Company recognizes that the relative costs of these controls
should not exceed the expected benefits in maintaining these controls. It
further assures the quality of the financial records in several ways: a program
of internal audits, the careful selection and training of management personnel,
maintaining an organizational structure that provides an appropriate division of
financial responsibilities, and communicating financial and other relevant
policies throughout the corporation. The financial statements in this report
have been audited by Ernst & Young LLP, independent auditors, in accordance with
auditing standards generally accepted in the United States. The independent
auditors were retained to express an opinion on the financial statements, which
appears on the next page.
The McGraw-Hill Companies' Board of Directors, through its Audit
Committee, composed entirely of outside directors, is responsible for reviewing
and monitoring the Company's financial reporting and accounting practices. The
Audit Committee meets periodically with management, the Company's internal
auditors and the independent auditors to ensure that each group is carrying out
its respective responsibilities. In addition, the independent auditors have full
and free access to the Audit Committee and meet with it with no representatives
from management present.
/s/ Harold McGraw III
- ---------------------
Harold McGraw III
Chairman of the Board, President and
Chief Executive Officer
/s/ Robert J. Bahash
- --------------------
Robert J. Bahash
Executive Vice President and
Chief Financial Officer
67
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS OF THE McGRAW-HILL COMPANIES, INC.
We have audited the accompanying consolidated balance sheets of The McGraw-Hill
Companies, Inc. as of December 31, 2002 and 2001, and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The McGraw-Hill Companies, Inc. at December 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States.
As discussed in Note 13 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142 in 2002. In
addition, as discussed in Note 14 to the consolidated financial statements,
effective January 1, 2000, the Company changed its method of accounting for
revenue recognition on certain service contracts.
/s/ Ernst & Young LLP
- ---------------------
New York, New York
January 28, 2003
68
SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands, except per-share data) First quarter Second quarter Third quarter Fourth quarter Total year
- ------------------------------------------------------------------------------------------------------------------------------------
2002
Operating revenue $ 846,652 $ 1,191,401 $ 1,577,334 $ 1,172,281 $4,787,668
Income before taxes 46,723 218,352 424,200(a) 215,790 905,065
Net income 29,202 136,470 276,219(a) 134,869 576,760
Earnings per share:
Basic 0.15 0.71 1.43 0.70 2.99
Diluted 0.15 0.70 1.42 0.69 2.96
- ------------------------------------------------------------------------------------------------------------------------------------
2001
Operating revenue $ 846,397 $ 1,149,470 $ 1,535,100 $ 1,114,568 $4,645,535
Income before taxes 33,156(b) 174,029(c) 389,412 18,461(d) 615,058
Net income 20,391(b) 119,997(c) 239,488 (2,845)(d) 377,031
Earnings per share:
Basic 0.11 0.62 1.24 (.01) 1.95
Diluted 0.10 0.61 1.22 (.01) 1.92
- ------------------------------------------------------------------------------------------------------------------------------------
2000
Operating revenue (Note 14) $ 784,214 $ 1,015,924 $ 1,394,470 $ 1,086,360 $4,280,968
Income before taxes and cumulative adjustment 70,561(e) 173,710 350,588 172,483 767,342
Income before cumulative adjustment (Note 14) 43,395(e) 106,832 215,611 106,078 471,916
Net income (24,727) 106,832 215,611 106,078 403,794
Earnings per share:
Basic:
Income before cumulative adjustment 0.22 0.55 1.11 0.55 2.43
Net income (0.13) 0.55 1.11 0.55 2.08
Diluted:
Income before cumulative adjustment 0.22 0.55 1.10 0.54 2.41
Net income (0.13) 0.55 1.10 0.54 2.06
- ------------------------------------------------------------------------------------------------------------------------------------
Note: Earnings per share may not crossfoot due to rounding.
(a) 2002 results reflect a pre-tax loss of $14.5 million and an after-tax
benefit of $2.0 million, 1 cent per diluted share on the sale of MMS
International. The variance between the pre-tax loss on the sale of MMS
International and the after-tax benefit is the result of previous book
write-downs and the inability of the Company to take a tax benefit for the
write-downs until the unit was sold.
(b) Includes a $6.9 million pre-tax gain, 2 cents per diluted share, on the sale
of a building.
(c) Includes an $8.8 million pre-tax gain ($26.3 million after-tax gain, 13
cents per diluted share) on the disposition of DRI; the variance between the
pre-tax gain recognized on the sale of DRI of $8.8 million and the after-tax
benefit of $26.3 million is the result of previous book write-downs and the
inability of the Company to take a tax benefit for the write-downs until the
unit was sold. It also includes a $22.8 million pre-tax loss ($21.9 million
after-tax charge, 11 cents per diluted share) on the closing of Blue List, the
contribution of Rational Investors and the write-down of selected assets.
(d) Includes a $159 million pre-tax charge ($112.0 million after-tax, 57 cents
per diluted share) for the restructuring and asset write-downs.
(e) 2000 results reflects a $16.6 million pre-tax gain ($10.2 million after-tax,
5 cents per diluted shares ) on the sale of Tower Group.
HIGH AND LOW SALES PRICES
OF THE McGRAW-HILL COMPANIES COMMON STOCK ON THE NEW YORK STOCK EXCHANGE*
2002 2001 2000
- ------------------------------------------------------------------------------------------------
First Quarter $ 69.70-58.88 $ 64.74-54.09 $ 61.69-43.50
Second Quarter 68.73-56.30 70.87-57.84 59.88-41.88
Third Quarter 65.98-50.71 67.95-50.55 67.69-54.25
Fourth Quarter 66.30-55.51 61.80-48.70 66.00-52.00
- ------------------------------------------------------------------------------------------------
Year $ 69.70-50.71 $ 70.87-48.70 $ 67.69-41.88
- ------------------------------------------------------------------------------------------------
* The New York Stock Exchange is the principal market on which the Corporation's
shares are traded.
69
ELEVEN-YEAR FINANCIAL REVIEW
(in thousands, except per-share and employee data) 2002 2001
- ----------------------------------------------------------------------------------------------------------------
OPERATING RESULTS BY SEGMENT AND INCOME STATISTICS
Operating Revenue
McGraw-Hill Education $ 2,357,127 $ 2,322,208
Financial Services 1,621,102 1,477,264
Information and Media Services 809,439 846,063
- ----------------------------------------------------------------------------------------------------------------
TOTAL OPERATING REVENUE 4,787,668 4,645,535
- ----------------------------------------------------------------------------------------------------------------
OPERATING PROFIT
McGraw-Hill Education 331,792 263,424
Financial Services 569,672 434,763
Information and Media Services 118,052 65,003
- ----------------------------------------------------------------------------------------------------------------
Operating Profit 1,019,516 763,190
Share of profit of Macmillan/McGraw-Hill School Publishing Company(i) - -
Unusual charges(g,j) - -
Gain on exchange of Shepard's/McGraw-Hill(h) - -
General corporate (expense)/income (91,934) (93,062)
Interest expense (22,517) (55,070)
- ----------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME(a, b, c, d, e, f and h) 905,065 615,058
Provision for taxes on income 328,305 238,027
- ----------------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE ADJUSTMENT 576,760 377,031
- ----------------------------------------------------------------------------------------------------------------
Early extinguishment of debt, net of tax(k) - -
Cumulative effect on prior years of changes in accounting(k) - -
- ----------------------------------------------------------------------------------------------------------------
NET INCOME $ 576,760 $ 377,031
- ----------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income before extraordinary item and cumulative adjustment $ 2.99 $ 1.95
Extraordinary item and cumulative adjustment(k) - -
- ----------------------------------------------------------------------------------------------------------------
Net income $ 2.99 $ 1.95
DILUTED EARNINGS PER SHARE
Income before extraordinary item and cumulative adjustment $ 2.96 $ 1.92
Extraordinary item and cumulative adjustment(k) - -
- ----------------------------------------------------------------------------------------------------------------
Net income $ 2.96 $ 1.92
Dividends per share of common stock $ 1.02 $ 0.98
- ----------------------------------------------------------------------------------------------------------------
OPERATING STATISTICS
Return on average shareholders' equity 29.4% 20.7%
Income before taxes as a percent of revenue 18.9 13.2
Income before extraordinary item and cumulative adjustment as a percent of revenue 12.0 8.1
- ----------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Working capital $ (100,984) $ (63,446)
Total assets 5,032,182 5,161,191
Total debt 578,337 1,056,524
Shareholders' equity 2,165,822 1,853,885
- ----------------------------------------------------------------------------------------------------------------
NUMBER OF EMPLOYEES 16,505 17,135
- ----------------------------------------------------------------------------------------------------------------
(a) 2002 income before taxes reflects a $14.5 million pre-tax loss on the
disposition of MMS International.
(b) 2001 income before taxes reflects the following items: a $159.0 million
pre-tax charge for restructuring and asset write-down; a $8.8 million pre-tax
gain on the disposition of DRI; a $22.8 million pre-tax loss on the closing of
Blue List, the contribution of Rational Investors and the write-down of selected
assets; and a $6.9 million pre-tax gain on the sale of a building.
(c) 2000 income before taxes reflects a $16.6 million gain on the sale of Tower
Group.
(d) 1999 income before taxes on income reflects a $39.7 million gain on the sale
of the Petrochemical publications.
(e) 1998 income before taxes on income reflects a $26.7 million gain on sale of
a building and a $16.0 million charge at Continuing Education Center for
write-down of assets due to a continuing decline in enrollments.
(f) 1997 income before taxes on income reflects a $33.2 million provision for
the consolidation of office space in New York City and a $20.4 million gain on
the sale of Datapro Information Services.
(g) 1996 operating profit excludes a net gain on the exchange of
70
2000 1999 1998 1997 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
$ 1,993,189 $ 1,734,922 $ 1,620,343 $ 1,573,797 $ 1,277,895 $ 1,235,578 $ 1,162,157 $ 667,444 $ 567,363
1,280,227 1,226,748 1,089,030 921,135 802,280 736,788 699,436 651,601 573,864
1,007,552 1,030,015 1,015,598 1,035,834 990,924 962,379 896,960 876,098 905,184
- -----------------------------------------------------------------------------------------------------------------------------------
4,280,968 3,991,685 3,724,971 3,530,766 3,071,099 2,934,745 2,758,553 2,195,143 2,046,411
- -----------------------------------------------------------------------------------------------------------------------------------
307,712 273,667 202,076 187,722 151,921 162,604 125,765 49,374 62,746
390,930 363,737 343,466 249,220 243,889 215,320 202,757 186,148 155,186
212,921 185,551 139,352 158,879 131,397 130,145 120,482 116,751 122,326
- -----------------------------------------------------------------------------------------------------------------------------------
911,563 822,955 684,894 595,821 527,207 508,069 449,004 352,273 340,258
- - - - - - - 28,376 11,280
- - - - (25,000) - - (229,800) -
- - - - 418,731 - - - -
(91,380) (83,280) (80,685) (75,342) (62,073) (63,570) (54,134) (48,538) (50,774)
(52,841) (42,013) (47,961) (52,542) (47,656) (58,766) (51,746) (36,342) (37,557)
- -----------------------------------------------------------------------------------------------------------------------------------
767,342 697,662 556,248 467,937 811,209 385,733 343,124 65,969 263,207
295,426 272,088 216,937 179,238 317,665 158,922 141,367 54,582 112,390
- -----------------------------------------------------------------------------------------------------------------------------------
471,916 425,574 339,311 288,699 493,544 226,811 201,757 11,387 150,817
- -----------------------------------------------------------------------------------------------------------------------------------
- - (8,716) - - - - - -
(68,122) - - - - - - - (124,587)
- -----------------------------------------------------------------------------------------------------------------------------------
$ 403,794 $ 425,574 $ 330,595 $ 288,699 $ 493,544 $ 226,811 $ 201,757 $ 11,387 $ 26,230
- -----------------------------------------------------------------------------------------------------------------------------------
$ 2.43 $ 2.17 $ 1.72 $ 1.46 $ 2.48 $ 1.14 $ 1.02 $ 0.06 $ 0.77
(0.35) - (0.04) - - - - - (0.64)
- -----------------------------------------------------------------------------------------------------------------------------------
$ 2.08 $ 2.17 $ 1.68 $ 1.46 $ 2.48 $ 1.14 $ 1.02 $ 0.06 $ 0.13
$ 2.41 $ 2.14 $ 1.70 $ 1.45 $ 2.47 $ 1.14 $ 1.02 $ 0.06 $ 0.77
(0.35) - (0.04) - - - - - (0.64)
- -----------------------------------------------------------------------------------------------------------------------------------
$ 2.06 $ 2.14 $ 1.66 $ 1.45 $ 2.47 $ 1.14 $ 1.02 $ 0.06 $ 0.13
$ 0.94 $ 0.86 $ 0.78 $ 0.72 $ 0.66 $ 0.60 $ 0.58 $ 0.57 $ 0.56
- -----------------------------------------------------------------------------------------------------------------------------------
23.5% 26.7% 22.9% 20.8% 41.4% 23.3% 23.4% 1.3% 3.0%
17.9 17.5 14.9 13.3 26.4 13.1 12.4 3.0 12.9
11.0 10.7 9.1 8.2 16.1 7.7 7.3 0.5 7.4
- -----------------------------------------------------------------------------------------------------------------------------------
$ 20,905 $ (14,731) $ 94,497 $ 217,912 $ 92,629 $ 157,244 $ 94,486 $ 28,463 $ (53,966)
4,931,444 4,118,111 3,817,336 3,740,569 3,668,381 3,081,846 2,984,745 3,066,750 2,496,413
1,045,377 536,449 527,597 684,425 581,368 628,664 762,805 928,710 482,991
1,761,044 1,648,490 1,508,995 1,394,384 1,322,827 998,964 877,266 788,584 874,390
- -----------------------------------------------------------------------------------------------------------------------------------
16,761 16,376 15,897 15,690 16,220 15,452 15,339 15,661 13,393
- -----------------------------------------------------------------------------------------------------------------------------------
Shepard's/McGraw-Hill for the Times Mirror Higher Education group comprising a
$418.7 million gain on the exchange and a $25 million one-time charge for
integration costs.
(h) 1995 income before taxes on income reflects a $26.8 million provision for
best practices initiatives and a $23.8 million gain on sale of the topical
publishing division of Shepard's/McGraw-Hill.
(i) Reflects The McGraw-Hill Companies' share of profit of Macmillan/
McGraw-Hill School Publishing Company through September 30, 1993.
Macmillan/McGraw-Hill results are consolidated effective October 1, 1993 in the
McGraw-Hill Education segment.
(j) 1993 amount reflects unusual charges in connection with the acquisition of
the additional 50% interest in Macmillan/McGraw-Hill.
(k) The cumulative adjustment in 2000 reflects the adoption of SAB 101, Revenue
Recognition in Financial Statements. The cumulative adjustment in 1992 reflects
the adoption of the provisions of SFAS No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions, and SFAS No. 112, Employers'
Accounting for Postemployment Benefits. The extraordinary item in 1998 relates
to costs for the early extinguishment of $155 million of the Company's 9.43%
Notes during the third quarter.
71
SHAREHOLDER INFORMATION
ANNUAL MEETING
The 2003 annual meeting will be held at 11 a.m. on Wednesday, April 30 at the
Corporation's world headquarters: 1221 Avenue of the Americas, Auditorium, 2nd
floor, New York, NY 10020-1095.
The annual meeting will also be Webcast at www.mcgraw-hill.com.
STOCK EXCHANGE LISTING
Shares of the Corporation's common stock are traded primarily on the New York
Stock Exchange. MHP is the ticker symbol for the Corporation's common stock.
INVESTOR RELATIONS WEB SITE
Go to www.mcgraw-hill.com/investor_relations to find:
- - Dividend and stock split history
- - Stock quotes and charts
- - Investor Fact Book
- - Financial reports, including the annual report, proxy statement and SEC
filings
- - Financial news releases
- - Management presentations
- - Investor e-mail alerts
INVESTOR KIT
Available online or in print, the kit includes the current annual report, proxy
statement, 10-Q, 10-K, current earnings release, and dividend reinvestment and
direct stock purchase program.
Online, go to www.mcgraw-hill.com/investor_relations and click on the
Digital Investor Kit.
Requests for printed copies can be e-mailed to
investor_relations@mcgraw-hill.com or mailed to Investor Relations, The
McGraw-Hill Companies, 1221 Avenue of the Americas, New York, NY 10020-1095.
You may also call Investor Relations toll-free at 866.436.8502.
International callers may dial 212.512.2192.
SHAREHOLDER SERVICES
InvestorService Direct(SM) allows registered shareholders to view and manage
their account online. Go to www.melloninvestor.com/isd.
For shareholder assistance, call Mellon Investor Services, the
Corporation's transfer agent, toll-free at 888.201.5538, or write to Mellon
Investor Services, PO Box 3316, South Hackensack, NJ 07606-1937.
NEWS MEDIA INQUIRIES
Go to www.mcgraw-hill.com/media to view the latest Company news and information
or to submit an e-mail inquiry.
You may also call 212.512.4145, or write to Corporate Affairs, The
McGraw-Hill Companies, 1221 Avenue of the Americas, New York, NY 10020-1095.
DIRECT STOCK PURCHASE AND DIVIDEND REINVESTMENT PLAN
This program offers a convenient, low-cost way to invest in the
Corporation's common stock. Participants can purchase and sell shares
directly through the program, make optional cash investments weekly,
reinvest dividends, and send certificates to the transfer agent for
safekeeping.
To order the prospectus and enrollment forms, call the
automated request line at 800.842.7629 or write to Mellon Investor
Services, PO Box 3316, South Hackensack, NJ 07606-1937.
For specific questions about the program, call Mellon Investor
Services at 888.201.5538.
72
DIRECTORS AND PRINCIPAL EXECUTIVES
BOARD OF DIRECTORS
Harold McGraw III (E)
Chairman, President and
Chief Executive Officer
The McGraw-Hill Companies
Pedro Aspe (A,E,F)
Chairman and Chief Executive Officer
Protego Asesores Financieros
Sir Winfried F. W. Bischoff (A,F)
Chairman
Citigroup Europe
Douglas N. Daft* (A,C)
Chairman and Chief Executive Officer
The Coca-Cola Company
Vartan Gregorian (C,E,N)
President
Carnegie Corporation of New York
Linda Koch Lorimer (C,N)
Vice President and Secretary
Yale University
Robert P. McGraw (F)
Chairman and Chief Executive Officer
Averdale International, LLC
Lois Dickson Rice (A,C)
Guest Scholar
The Brookings Institution
James H. Ross (E,F,N)
Deputy Chairman
National Grid Transco
Edward B. Rust, Jr. (A,C)
Chairman and Chief Executive Officer
State Farm Insurance Companies
Kurt L. Schmoke* (F,N)
Dean
Howard University School of Law
Sidney Taurel (C,E,N)
Chairman, President and
Chief Executive Officer
Eli Lilly and Company
Harold W. McGraw, Jr.
Chairman Emeritus
The McGraw-Hill Companies
PRINCIPAL CORPORATE EXECUTIVES
Harold McGraw III
Chairman, President and
Chief Executive Officer
Robert J. Bahash
Executive Vice President and
Chief Financial Officer
David L. Murphy
Executive Vice President
Human Resources
Deven Sharma
Executive Vice President
Global Strategy
Kenneth M. Vittor
Executive Vice President and
General Counsel
Glenn S. Goldberg
Senior Vice President, Corporate Affairs
Assistant to the Chairman and
Chief Executive Officer
PRINCIPAL OPERATIONS EXECUTIVES
Henry Hirschberg
President
McGraw-Hill Education
Scott C. Marden
President
McGraw-Hill Information and Media Services
Leo C. O'Neill
President
McGraw-Hill Financial Services
*Elected to the Board of Directors, effective February 26, 2003.
(A) Audit Committee
(C) Compensation Committee
(E) Executive Committee
(F) Financial Policy Committee
(N) Nominating and Corporate Governance Committee
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WWW.McGRAW-HILL.COM
THE McGRAW-HILL COMPANIES
1221 Avenue of the Americas
New York, NY 10020-1095
221.512.2000