Harold McGraw - Chairman, Chief Executive Officer, President and Chairman of Executive Committee
Jack Callahan - Chief Financial Officer and Executive Vice President
Donald Rubin - Senior Vice President of Investor Relations
Michael Meltz - JP Morgan Chase & Co
Sloan Bohlen - Goldman Sachs Group Inc.
Craig Huber -
Peter Appert - Piper Jaffray Companies
The McGraw-Hill Companies (MHP) Q2 2011 Earnings Call July 28, 2011 8:30 AM ET
Good morning, and welcome to The McGraw-Hill Companies' Second Quarter 2011 Earnings Call. I'd like to inform you that this call is being recorded for broadcast. [Operator Instructions] To access the webcast and slides, go to www.mcgraw-hill.com, and click on the link for the earnings announcement conference call. At the bottom of the webcast page are 3 links. If you are listening by telephone, please select the first link for slides only. For both slides and audio via webcast, select the Windows Media link. [Operator Instructions] I'd now like to introduce Mr. Donald Rubin, Senior Vice President of Investor Relations for the McGraw-Hill Companies. Sir, you may begin.
Thank you, and good day to our worldwide audience. We thank everyone for joining us this morning for The McGraw-Hill Companies' Second Quarter 2011 Earnings Call. I'm Donald Rubin, Senior Vice President, Investor Relations for The McGraw-Hill Companies. With me today are Harold McGraw III, Chairman, President and CEO; and Jack Callahan, Executive Vice President and Chief Financial Officer.
This morning, we issued a news release with our results. We trust you have all had a chance to review the release. If you need a copy of the release and financial schedules, they can be downloaded at www.mcgraw-hill.com. Once again, that's www.mcgraw-hill.com.
In today's earnings release and during the conference call, we are providing adjusted revenue and free cash flow information. This information is provided to enable investors to make meaningful comparisons of the company's operating performance between periods and to view the company's business from the same perspective as management's. The earnings release contains exhibits that reconcile the differences between the non-GAAP measures and the comparable financial measures calculated in accordance with U.S. GAAP.
Before we begin, I need to provide certain cautionary remarks about forward-looking statements. Except for historical information, the matters discussed in the teleconference may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates and descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. In this regard, we direct listeners to the cautionary statements contained in our Form 10-Ks, 10-Qs and other periodic reports filed with the U.S. Securities and Exchange Commission.
We're aware that we do have some media representatives with us on the call. However, this call is for investors, and we would ask that questions from the media be directed to Jason Feuchtwanger in our New York office at area code (212) 512-3151 subsequent to this call. Today's update will last approximately an hour. After the presentations, we will open the meeting to questions and answers.
It's now my pleasure to introduce the Chairman, President and CEO of The McGraw-Hill Companies, Terry McGraw.
Okay, thank you very much, Don. And good morning, everyone, and welcome to today's conference call. Besides Don, as Don mentioned, with me today is Jack Callahan, our Chief Financial Officer. He'll be providing a little bit more color to our financials in just a moment.
We have 2 objectives for today's call. First, we want to review our encouraging second quarter results and share our perspective on the positive outlook that we have for the second half of this year. Second, we want to update you on our important strategic portfolio review, which is intended to accelerate global growth and unlock shareholder value. And as always, after our presentations, we'll be pleased to address any of your comments, questions or we can go any direction you'd like.
I trust that you all had an opportunity to review our second quarter earnings release. If you recall, on our first quarter call in April, we said a promising year was off to a good start. Well, our second quarter results bear that out. Overall, our business is performing well. Earnings per share in the second quarter grew approximately 12% to $0.68 per share. Revenue grew more than 7% to $1.6 billion. We're very pleased with that.
Our revenue growth for the first half is the best since 2007. First half revenue increased by 7.4% to $2.9 billion. Earnings per share grew by 14.4% to $1.07. Based on our solid start this year and a promising outlook for the second half, we now expect to achieve the top end of our 2011 diluted earnings per share guidance of $2.79 to $2.89.
While we're encouraged by our first half results and prospects for the year, we are intent on growing faster and unlocking shareholder value by allocating our resources to support the best opportunities in growing global markets. That process is already well along. The most recent review of our businesses began with a decision to create McGraw-Hill Financial as a new segment for 2011.
We reorganized and refocused this business and put it under separate leadership to leverage our intellectual property for new value creation. By integrating previously separate but strong and successful business lines into one scaled operation, McGraw-Hill Financial is delivering a growing array of innovative solutions and high-value content across all asset classes to financial professionals around the world.
Our S&P Indices business and the new Integrated Desktop Solutions Group, which includes Capital IQ, continue to grow rapidly, driving year-over-year increases of 13.5% in revenue and 17.3% in operating profit in the second quarter.
McGraw-Hill Financial is now actively reviewing opportunities for creating even more value through organic growth, strategic partnerships and acquisitions. But that's not the whole story. And so last month, we informed the market that a strategic review of the entire portfolio is underway. The goal, quite simply, is to increase shareholder value by building on the high-growth global brands at the core of our franchise.
Many of you have asked what this review entails and what is our timeline. What we can tell you today is this: We have multiple work streams underway that everything is being scrutinized and that we expect to continue this process with a number of significant actions in the second half of this year. As an important corollary to this process, we're also evaluating our organization structure and design and our G&A costs across the corporation to ensure that we are both nimble and responding to an ever more dynamic marketplace while improving overall efficiency.
Excellent examples of effective capital allocation are the recent investments to expand our high-growth Platts business. An underappreciated gem, Platts is the most global brand, with clients in more than 150 countries subscribing to our realtime news, data and price discovery services for energy, petrochemicals, metals and other important commodities. Platts is also one of our fastest-growing businesses, and this year alone, we have enhanced its organic growth with 2 significant additions to its platform.
In January, Platts expanded its energy information platform by acquiring BENTEK Energy. This is widely recognized as the leading provider of fundamental data and analytics to the natural gas market in North America. And on July 1, we acquired the Steel Business Briefing Group, a leading provider of news, pricing and analytics to the global steel market. With world steel consumption projected to increase by approximately 60% during the next decade, this acquisition creates excellent new opportunities for Platts. And with these new additions, Platts is now even better positioned as a leading provider of critical news, pricing and analytical services.
There are other early milestones to report in our portfolio review. On June 14, we announced that we are pursuing the sale of our Broadcasting Group. This business consists of ABC affiliates in the attractive Denver, San Diego, Indianapolis and Bakersfield, California markets, as well as 5 TV Azteca America affiliates in California and Colorado. There has been a very strong response to our announcement from financial and nonfinancial buyers. Based on the level of interest and the quality of firms that we're now engaging with, we are very optimistic about the outcome of this process.
Our decision to sell the Broadcasting Group is a window into our review process. Broadcasting has been a part of the company -- an important part of the company, for 40 years. We have nurtured this business, and it has made a solid contribution to our bottom line. But as we examined our enterprise and assessed the future, we determined that the Broadcasting Group does not have the characteristics we define as core. It lacks scale. It's cyclical. It's advertising-based, and the growth prospects seem somewhat limited. As a result, it became a candidate for divestiture. We also believe this action is better for our associates in the broadcasting business as they hopefully will be a part of an organization with greater capability in this space.
Before reviewing our business segments, I want to touch on 2 additional topics: first, is our commitment to use our strong cash flow and balance sheet to return capital to shareholders; and the other is the vastly improving legal and regulatory environment in which we are now operating.
We remain committed to returning capital to shareholders. From 1996 to the first half of 2011, we have returned $10.4 billion to shareholders through a combination of share repurchases and dividends.
When it comes to paying dividends, the McGraw-Hill Companies is exceptional. We are one of only 25 corporations in the S&P 500 that has increased dividends annually for each of the past 38 years. Our current annualized rate of $1 per share represents an average compound annual dividend rate of 9.8% since 1974. As for stock buybacks, I am sure you are aware that on June 29, our Board of Directors approved a new repurchase authorization of up to 50 million shares, that's 17% of the total shares outstanding. In the first half of this year, we repurchased 7.7 million shares for $300 million at an average price of $38.96.
As some have recently observed, legal and regulatory concerns facing the rating agencies are continuing to abate. I am pleased to report that our latest count shows 21 lawsuits have been dismissed in their entirety, and another 9 have been voluntarily withdrawn. 5 dismissals by lower courts have now been reaffirmed by higher courts.
The recent ruling by the U.S. Court of Appeals for the Second Circuit is a significant victory for S&P in subprime litigation since this category has attracted the most lawsuits. In affirming the dismissal of 3 underwriter cases filed against Standard & Poor's and other rating agencies, the panel of judges' unanimous decision is unambiguous, in concluding that credit rating agencies cannot be sued as underwriters. In view of this favorable ruling, our attorneys believe it will be very difficult for any future plaintiff to bring a new underwriter claim against Standard & Poor's.
We have also received earlier this month a significant ruling on the Parmalat case, which has been in the Italian court since 2005. The court in Milan rejected, in its entirety, Parmalat's principal claims for damages of more than EUR 4 billion. The court also ruled that Standard & Poor's breached its rating agreement and will have to return rating fees and pay some attorney and expert fees, a total of about $1 million, even though Parmalat repeatedly provided false and misleading information to Standard & Poor's in the entire period that it was under contract, and that massive and systematic fraud resulted in criminal convictions of several of the company's former executives.
This ruling comes at a time when there's been criticism in Europe of Standard & Poor's sovereign ratings and calls by some politicians to place new limits on rating agencies. While the issue has not confined to S&P, it is important to note that these suggestions are being sharply criticized. We believe these criticisms are misguided, and we think the Financial Times' influential Lex column said it best when it noted and I quote, "Eurozone politicians and the European Central Bank should thank Standard & Poor's for telling the truth." More recently, a special report by a committee of the House of Lords on the euro debt crisis called suggestions to suspend ratings for countries in international financial assistant programs, "wholly impractical and smacks of censorship."
We're encouraged that transparency and the importance of objective third-party opinion for investors are highly valued. That's evidenced in the United States where the Dodd-Frank Act is just over a year old. At yesterday's hearings before the U.S. House of Representatives' Committee on Financial Services Subcommittee on Oversight and Investigation, S&P pointed out the significant actions and investments that it has taken in recent years to improve transparency, quality and the timeliness of its ratings and to comply with the Dodd-Frank Act. Real progress is being made.
Okay, with that said, let me turn now to the operating results, and let's begin with McGraw-Hill Financial. We have already touched on the key measures of this segment's second quarter performance, 13.5% revenue growth, 17.3% increase in operating profit. Clearly, our new segment is on the right track with first half revenue growth of 14.8% and a 29.5% operating margin. Subscriptions produced 74% of the segment revenue and grew by 15.8% in the first half.
We are making very good progress in integrating our businesses. We are building scale in core franchises. We are leveraging our market position for further expansion with new enhancements and products. For example, through an integration of S&P Indices' unique methodologies with Compustat and Capital IQ's fundamental data, we launched a new package -- a new data package, that offers more than 100 Index-level statistics focused on income statements, balance sheets and trading data.
The S&P fundamental data package represents one example of a series of planned offerings based on the collaboration and integration of capabilities and assets across McGraw-Hill Financial. Our deep fundamental information on S&P 500 constituents makes it easier for clients to benchmark, back test and execute investment strategies.
We are also enhancing our Capital IQ consensus offering to include the industry's first aggregate estimates tied directly to share counts for S&P 500 companies, as well as reporting daily during earnings seasons on trends and outliers. As we evolve and introduce new and innovative data and analytic offerings, we will also continue to improve our broad portfolio of existing products and services by leveraging the scale and strength of the new McGraw-Hill Financial. So to sum up, expansion continues, and we expect a solid first half from McGraw-Hill Financial to be followed by a solid second half performance.
Let's move over to Standard & Poor's. Surging new issue volume, a booming bank loan market, low interest rates, investor demand for yield and strong refinancing activity combined for an outstanding second quarter at Standard & Poor's despite a decline in public finance markets and softness in Structured Finance. In the second quarter, revenue increased by 18.6%. Operating profit increased by 17.3%. The operating margin of 44.3% compares to 44.8% for the same period last year.
Some of the challenging expense comparisons that were evident in the first quarter, increasing compensation and regulatory costs, were still a factor in the second quarter. First half comparisons were particularly difficult this year because of the timing of incremental costs for compliance. Most of the increase in 2010 occurred in the second half. In 2011, expenses, which will increase from $12 million to $15 million, will be more evenly spread, which will help second half comparisons.
Investment in resources to support strong growth in our corporate and government's group, as well as CRISIL businesses, are primary drivers of expense growth, along with investment in infrastructure and new resources to support compliance with regulatory requirements. Foreign exchange also contributed to the growth in expenses as well.
We continue to watch events in the market relating to the sovereign debt situation and the debate on the United States debt ceiling. While there are uncertainties and an expectation of month-to-month volatility at this time, our view is with easier cost comparisons and the continuation of favorable market conditions, we see the potential for a solid second half performance from Standard & Poor's.
Let's review some of the reasons for our confidence in the second half outlook. Corporations continue to borrow for expansion even as earnings remain strong and cash builds on the balance sheet. Low default rate expectations and low yields on less risky debt should keep investors interested in the high yield and leverage loan markets for the balance of the year. M&A activity, a key driver of new bond issuance, is obviously picking up. Public markets will continue to benefit from the bank disintermediation in Europe, and refinancing activity remains strong.
According to S&P's leveraged commentary and data group, 56% of the proceeds from high-yield bonds were used for refinancing in the second quarter. The amount of maturing debt increases significantly through 2015, and that's according to a new study issued by Standard & Poor's earlier this month. S&P estimates that $8 trillion of debt, $8 trillion of debt, will mature from the second quarter of 2011 through the end of 2015. About $1.4 trillion comes due in 2011. Next year, more than $2 trillion of corporate debt will mature.
We continue to remain optimistic about the potential for the Structured Finance market. The asset-backed sector is stabilizing. There are modest increases in the commercial mortgage-backed securities market and the collateralized debt obligation market, strengthening our criteria to enhance stability, transparency, comparability and become more forward looking may have led to some decline in share, but positions us well for the future. As issuance picks up in the Structured Finance and the need to invest in our regulatory framework declines, margin improvement should be expected. So summing up for Standard & Poor's, a solid first half performance and sustained top and bottom line growth in the second half despite some market volatility.
Let's look at McGraw-Hill Education. Normally, there is concern in the second quarter about orders being pulled forward to the third quarter; not this year. Delays in ordering affected both state new adoption and open territory revenue as potential sales shifted from the second quarter into the third quarter and possibly even into the fourth quarter.
Second quarter comparisons were also affected by the McGraw-Hill School Education's strong results last year, and that was in the Texas reading and literature adoptions. These were important factors in the 10.1% decline in McGraw-Hill School Education Group second quarter revenue.
From McGraw-Hill Higher Education, Professional and International Group, revenue increased 1.8% as digital products and services grew at a double-digit rate in a seasonally-slow quarter. As a result, McGraw-Hill Education's revenue declined by 5% in the second quarter and operating income was off by 18.3%. The timing of sales and growth of digital products are key to our second half prospects this year in the education market, which we think are good. We have greatly -- we have greater clarity in this year's elementary, high school market now that Texas has appropriated $399 million for new instruction material programs plus another $393 million for the purchase of-previously-adopted materials covered by continuing contracts.
Earlier this year, we said Texas funding was the wildcard in the 2011 state new adoption market. The issue was not settled until the Texas State Legislature completed a special session, and that was on June 29. Consequently, there were no orders from Texas in May, June or July. Not until August 8 will the Texas Education Agency begin the process -- processing orders from local school districts. With Texas now on the record, we believe the state new adoption market could equal or surpass last year's $850 million to $875 million level. If so, the total elementary, high school market could be flat or modestly up in 2011.
State budgets remain under pressure but there are some indication that state cuts in education spending will be deeper for higher education than K-12. It is easier politically to cut higher education funding because colleges and universities can raise tuition and make other adjustments more easily than public schools, where most of the education budget is devoted to salaries and related pension and healthcare costs.
There are also indications that some states may restore K-12 funding if their revenues continue to improve. That has already happened, for example, in Michigan. The uncertainty over how much funding would be available in Texas and the possibility that some categories may not be funded at all, led us to focus our participation on about half of the state's expensive adoption call for 2011.
Under the circumstances, making heavy investments creates state-specific products necessary to match the Texas standards and meet district demands was too problematic. For the same economic reasons, we elected not to participate in the Florida K-5 science adoption. We still expect to capture approximately 30% of the state new adoption market in which we are participating this year because some opportunities did not warrant the investment, we will participate in a little over 70% of the total markets.
Our investment in digital opportunities are gaining traction. In the school market, our-- all-digital cloud-based K-12 science program, we call this program the McGraw-Hill CINCH Learning, was approved by Texas for this year's special science adoption. Students can access our content on any tablet, computer or mobile device they choose. Strong double-digit growth increases in the sales of digital products and services were key to McGraw-Hill Higher Education, Professional and International's 1.8% revenue growth in the second quarter.
The rapid acceptance of digital products is transforming the higher education market. The response to McGraw-Hill Connect, that's our homework management and study system, has been outstanding because it improved the workflow for both faculty and students. McGraw-Hill Connect seamlessly integrates into the widely-used Blackboard learning management system for quick and easy access. Importantly, McGraw-Hill Connect and other homework management products represent a new revenue stream for us. Unlike textbooks, which are purchased by students but selected by instructors, these products can be earmarked directly to students.
Acquisitions have also added new talent and products that strengthens our capabilities in key markets. For example, we recently acquired Tegrity. This is the Israeli software firm that is doing groundbreaking work in the education market. The firm has already created a market-leading lecture capture service in higher education, and its talented team played a key role in the development of a new service that will help speed the digital transformation of the higher education market. We call the new service McGraw-Hill Campus.
More than 100 higher education institutions will be using it this fall. McGraw-Hill Campus is a first of its kind service that enables us to provide universal access to our digital content tools directly from any campus portal. That means faculty and students will have true single sign-on to all of our course content and digital tools no matter what learning management system is being used on campus.
Our strong lineup of digital products is an important reason why we expect growth this year in the higher education market. The industry will also benefit from a modest increase in enrollments, probably in the 1% to 2% range. Growth will occur largely in the community colleges and public universities. Enrollments in the for-profit schools are expected to stabilize and build toward the end of the year.
The impact of rentals in this year's higher education market is still difficult to gauge. Not all college bookstores are aggressively promoting rentals and not all titles can be rented. We currently estimate that rentals will account for about 5% of the new and used book market this year. We continue to expect that the U.S. colleges and university market will grow 4% to 6% this year, although the lower end of the range now appears to be probably more likely.
Let's sum up for McGraw-Hill Education. In the third quarter, the elementary and high school market would benefit from delayed orders in the second quarter, and that's particularly from Texas. Higher education and professional markets will see widespread adoptions of digital products and services, which will continue to grow at double-digit rates, and we're in an excellent position to benefit from both of these trends.
Moving over to our Business-to-Business Group. Double-digit growth of our Business-to-Business Group was key to the Information & Media's second quarter and first half performance. B2B Group's 11.7% increase in the revenue offset a 6% decline at Broadcasting. As a result, in the second quarter, revenue for the segment was up 9.7%. Operating income was up 5.9% and the operating margin was 20.5%. Earlier this year, we said that 2010 improvement in this segment's operating margin was sustainable. With a solid first half performance now in the books, we are demonstrating the improvement is not a one-year phenomenon.
Our Business-to-Business Group is now primarily a subscription business delivered digitally. More than 70% of the group's revenue is digital, the result of investments and capabilities that create the foundation for developing new products and revenue streams. More than 60% of the group's revenue comes from subscriptions.
In the second quarter, strong demand for Platts proprietary content and growth -- proprietary content and growth in syndicated studies and consulting services at J.D. Power in automotive and non-automotive sectors were key drivers. A decrease in political advertising in a non-election year was a major factor in Broadcasting's second quarter performance. So summing up, sustainable margin improvement and an encouraging second half outlook.
So wrapping up my review of operations and summing up The McGraw-Hill Companies. Overall, our businesses are performing well. Based on the solid start to the year and a promising outlook for the second half, we now expect to achieve the top end of our 2011 diluted earnings per share guidance of $2.79 to $2.89.
Okay. With that, let me turn it over to Jack Callahan. And as Chief Financial Officer, he'll walk through -- us through the numbers. Jack?
Thank you, Terry. It's a pleasure to review with you a very strong quarter and a strong first half to 2010 -- 2011. Let's start by providing additional detail on several items. Our solid organic revenue growth also benefited from acquisitions, as well as foreign exchange.
In the second quarter, acquisitions completed over the past 12 months accelerated revenue growth by approximately 140 basis points, while the profit impact was modestly dilutive. Foreign exchange also positively impacted consolidated revenue results by approximately 160 basis points. Impact on the bottom line was minimal. Information & Media's Q2 segment expenses were impacted by a number of nonrecurring items, consisting of a write-off of deferred costs recorded in prior periods, largely offset by a gain on the sale of our interest in the LinkedIn Corporation.
Corporate expense was $44 million in the quarter and increased by $6.6 million from the prior year. For the first half, corporate expense was $78.4 million, an increase of 6.9%. These increases were driven by a step-up in incentive compensation due to the timing of accruals as well as improved operating results. For the full year, we continue to expect corporate expense to increase in the mid-single-digit range versus 2010 adjusted corporate expense of $164 million. As a reminder, the 2010 expense exclude the one-time charge of $15.6 million related to subleasing excess space in the company's New York facilities.
Net interest expense was $20 million in Q2, a modest decline of $1 million versus prior year. We still expect full year interest to be comparable to 2010, which was $82 million. Our effective tax rate was 36.4% in the second quarter, flat versus 2010. We expect our full year effective tax rate to remain in that range. Net income attributable to noncontrolling interests was $4.7 million, largely driven by CRISIL.
Let me turn now to capital allocation. We spent $426 million on acquisitions and share repurchases in the first half, $126 million for acquisitions and $300 million for share repurchases. As Terry mentioned, the most notable acquisition was BENTEK Energy, which was acquired in the first quarter. Next, our acquisition of Steel Business Briefing Group closed on July 1 and will be included in our Q3 results. Both acquisitions added to Platts' growing platform, adding critical capability in the natural gas and iron ore markets.
We continue to actively repurchase shares. In Q2, we repurchased 4.4 million shares, a step-up from Q1 repurchases of 3.3 million shares. For the first half, we repurchased 7.7 million shares for approximately $300 million, averaging $38.96 per share. Our diluted weighted average shares outstanding for the quarter was 309.2 million, a 4 million decrease from the prior year. The decline is due primarily to share repurchases, which more than offset equity-related awards.
We continue to expect another year of strong cash flow. Before dividends, we expect to generate cash flow greater than $1 billion. After dividends, free cash flow is projected to be in excess of $700 million. Going forward, our robust free cash flow and strong balance sheet enable us to selectively add attractive, strategically-relevant businesses like BENTEK Energy and the Steel Business Briefing Group to the McGraw-Hill portfolio, while continue -- continuing to return cash to shareholders via share repurchases subject to market conditions.
We are extremely well capitalized, with cash and short-term investments at quarter end of $1.3 billion. The $223 million decline in cash and short-term investments from year-end 2010 is due -- is primarily due to share repurchases in the acquisitions we've mentioned. Gross debt was approximately -- was comprised of approximately $1.2 billion in long-term unsecured senior notes. No commercial paper is outstanding.
Turning to capital investments. We now expect prepublication investment to be below $200 million versus our previous guidance of roughly $200 million to $225 million. This decline is largely due to a rescoping of our new core reading program and some fine tuning overall financial requirements.
Prepublication amortization for the full year is expected to be approximately $210 million, a $36 million decline from 2010, reflecting the recent reduced level of investment. Capital expenditures continue to be projected up to $150 million, driven in part by increased digital and technology investments. This compares to $115 million in 2010.
In closing, the McGraw-Hill Companies is off to a solid start, and we are on track for a very good year. To reiterate several points made by Terry, our revenue growth for the first half is the best since 2007, and we now expect to achieve the top end of our 2011 diluted earnings per share guidance of $2.79 to $2.89.
Now let me turn the call over to Donald Rubin for the Q&A session. Don?
Thank you, Jack. [Operator Instructions]
Our first question comes from Sloan Bohlen from Goldman Sachs.
Sloan Bohlen - Goldman Sachs Group Inc.
First question for Terry. I imagine you know this is the one that's coming. I wonder if you could give us some color around what significant changes you may proceed with regard to one, kind of give us an idea of the scope of some G&A cuts that you could make; and then second to that, what areas of the business you think you could make changes in.
Okay, Sloan, help me with that last part of your question. What kind of support we can do in terms of the businesses overall, what was that?
Sloan Bohlen - Goldman Sachs Group Inc.
So just trying to get a sense of what that means. Is it -- Does it mean additional investment in businesses? Does it mean divestiture of businesses? Kind of give us a sense of what your portfolio review entails?
Okay, all right. Well, actually, Sloan, as you know, this all started in 2010. We had to make sure some of the bigger issues that were influencing the corporation in terms of things like legal and regulatory and the Structured Finance revenues and some of the funding issues from state, we needed to get those sorted through. And so as we progressed in 2010, we really focused on getting those behind us and sharpening on the expectation for execution, and that's why you saw some of the management changes and so forth. As part of all that, we also then began to look really hard at the overall portfolio in terms of where we ought to be allocating a lot of the capital and given some of the cash generation and so forth. One is that we wanted to really reinvigorate a commitment that we've always had to share repurchase, and then as well as to the dividend situation. But that also led then to the whole issue of McGraw-Hill Financial. McGraw-Hill Financial is a completely different business than Standard & Poor's. It needs its own management structure, it's an own design. It needs its own growth pattern and so forth. So integrating those businesses became a priority. And so as we got into 2011, we needed to be running McGraw-Hill Financial,I think. And we're really, really pleased with the results in the first half of this year and what the prospects for McGraw-Hill Financial are. The second one was then starting to look at some more non-core assets, and that's what led us to the Broadcasting piece. Some of the things that we've talked about in terms of focusing on more core properties led us to really, really strengthening our initiatives on Platts, and that led to the BENTEK Energy acquisition and the Steel Business Briefing that we just announced on that one. We need to accelerate aggressively the digital transformation at the education side, and clearly, we're seeing it at the higher ed, professional, international, and we're now beginning to see it again on the K-12 side. We have to deal, obviously, with the state funding issues. And obviously, for this year, Texas, as we've said, was going to be the wildcard in all of this. The good news is that they are funding. The issue is it didn't come in May, June or July. It's going to be into the third quarter, and so we look to benefit nicely from that part. In terms of other aspects of the portfolio, the only thing that I really would say at this point, Sloan, is that again, everything is being looked at. There is an awful lot of things that are on the table right now, from a timing standpoint. I look to the second half of this year to be making some pretty significant action statements, on that part. But again, overall, we've got a very strong cash and balance sheet position. The share repurchase and dividend, we're going to continue to emphasize. We've had a strong first half. We're going to have a very strong second half, on that part. But it gives us an opportunity, having all of that, to be able to make some changes and focusing more on some of the core assets that we have. So other than saying that there's going to be more actual statements coming relatively soon, we feel very excited about the portfolio review that we've done, and it will continue, on that part. Does that -- without going into any other specifics, I mean, the actions we're taking on this one, more to come.
Sloan Bohlen - Goldman Sachs Group Inc.
Okay. And Terry, maybe I'd just add one follow-up to kind of piece out some detail. The idea that there's significant changes potentially in the second half suggests that things are in the work. Is that incremental to the sale of the broadcasting unit? Can we expect that there's things beyond that, that will be announced in the second half?
I think you can infer that, yes.
Sloan Bohlen - Goldman Sachs Group Inc.
Okay. And then maybe just one question on how we should think about the pace of share repurchase activity going forward. Is the pace that's been set out in the first half of this year a good run rate going forward? Or in the past, I know you guys have been more opportunistic given where the stock is. But maybe just give us a sense.
Sloan, we've got to take a look at what conditions, and all of that. The answer to your question is yes. It is to say that the step up in the first half is more of what we're looking at in the second half. But again, we will take a look at conditions as they exist, and if we think it's necessary to accelerate, we will.
Our next question comes from Michael Meltz, JPMorgan.
Michael Meltz - JP Morgan Chase & Co
I appreciate the -- what you said about the portfolio review at the outset. Can you tell us though -- Terry, I think you said you have different work streams and I guess folks looking at things internally. Is this also -- have you engaged consultants or bankers as well with the broader analysis? That's my first question.
Well, the answer is yes. I mean, when we look at things, we're looking to get as much intelligence and support as we can. And so the answer is yes.
Michael Meltz - JP Morgan Chase & Co
Okay. And does it also -- besides the portfolio review, which -- I think that at the end of the quarter, you had net cash of over $1 billion. Is there -- are you reassessing your comfort level with the balance sheet and maybe having a set leverage target of some sort?
Yes. I mean, again, dependent upon conditions and the like, I mean, those things are on constant review on this part. Making sure that -- going back to our first premise always, as we came out of 2010 and a lot of the external market factors that were influencing things and moving beyond that. The question is, is: How do you allocate more capital to your high-growth global brands, one; and two, in doing so, how do you define core, and where are you going to make those investments? The nice situation, Michael, is that we've got the wherewithal. We've got the flexibility. We've got the capacity, and we just want to make sure those allocations are going to those that are going to give us the best returns.
Michael Meltz - JP Morgan Chase & Co
Okay. And then a question for you on the guidance. I believe -- I got to look back but I believe last quarter, you had -- or previously, you've been giving pretty specific segment guidance. And while you're pointing to the high end of EPS range, can you tell us what the x revenue growth expectation is for the 3 segments versus the prior -- I guess, for the 4 segments versus what you had previously been pointing to?
No. I mean, I think that the issue for us is that the first half showed us the revenue growth expectations that we wanted. We were hoping to get to the double-digit growth. Now in all 3 segments, with the exception of Education, which is under a different kind of pressure, issues in terms of revenue growth, we saw the double-digit growth that we wanted.
Yes, let me give specifics by segments. There's no real change in our overall segment guidance at this point in time. So from McGraw-Hill Financial, that would be double-digit growth. Although double-digit growth for S&P, there would be high single-digit growth. Now obviously, there's always could be some potential volatility in the capital markets. Information & Media, more in the sort of the mid-single, a bit better there but we'd hold to the mid-single for right now. And then MHE is low-single digit guidance for the full year. Obviously, that would require a pretty significant Q3 given where we are so far within the year. But we'd stand with that initial guidance right now.
And the other aspect here, Michael, is that again, everything is relative to the environments in which we operate. And so as we were putting numbers together last year, we thought the $2.79, $2.89 was a very responsible platform for what we were seeing. Clearly, given the strength of the first half and some of our expectations, we can now say the upper end of that, on that part. But again, it's one that, relative to environment conditions, we want to be able to operate at the highest level we possibly can. And if it's doing better, we'll do it better.
Michael Meltz - JP Morgan Chase & Co
Okay. And then one clarification for me, please. Terry, I think to the last question -- last questioner, you had said to get to this review, you had to assess the legal situation and some of the other things that were happening. Is that meaning -- just to understand -- to get some of the dismissals out of the way? Or is there -- to the extent you look to spin off some things or do something more significant, you might be restricted because of lawsuits that are still outstanding? I don't...
No, no, no. It's a very different situation. Obviously, given the turmoil in the financial markets and all of those kind of things, we were clearly influenced and clearly the stock was influenced with some of the uncertainty and the regulatory and legal situation and the like. Today, what we said -- and by the way, what we said from the very beginning is being reaffirmed, is that it's a vastly different legal and regulatory environment. We have -- we don't have anywhere near the uncertainty in the regulatory issue that you had a year ago. Both the United States, Europe, Japan, Canada, Australia have all completed those kinds of forms. Now, by the way, one that we're pushing very aggressively on and why we're focused on the G20 coming up at the end of the year is that there still needs to be an effort, and hopefully, led by the United States, to harmonize some of the financial regulation. They're not all in compliance with each other, so we need to push very aggressively on that. But the regulatory environment is vastly improved in terms of certainty and those kind of things. The legal issue, we said from the very beginning that the overall legal situation is low in all of that but you have to bear it out. Today, 30 suits have been dismissed or dropped, and we see that continuing. Most importantly, the categories that those suits were in, underwriter suits, stock drop suits and things like that, the courts have all set precedents now that those are not germane. So we don't see any additional activity on those things. But as those dark clouds go away and the earnings power and the execution capability is there, what we're focusing on now from a strategic standpoint is where we want that capital allocation to go in terms of the core assets and how we can expand faster.
Our next question comes from Peter Appert from Piper Jaffray.
Peter Appert - Piper Jaffray Companies
So Terry, you mentioned that perhaps you're seeing a little bit of market share pressure at S&P, and I was just hoping you might give us a little color on where you're seeing that pressure and how significantly you take that in terms of something that requires action.
Well, it doesn't. I mean, this is day-to-day, everyday business conditions, and you watch it, all of it, very carefully. Sometimes, in terms of how you establish criteria, what the -- who's financing what, what capabilities it takes on. There are shifts back and forth in all of that. We want to make sure that from a clarity standpoint that we're as transparent as we possibly can be about what the criteria we establish for certain instruments is and that we apply it in such a way that it's coherent to the marketplace on that part. From time to time, you'll see some share gains or reverse in all of that. But that's just normal operating conditions. The most important thing is that people have a very clear understanding of how we are viewing and assessing any particular instrument, and that they see a very clear application of that.
Peter Appert - Piper Jaffray Companies
Okay. And then, Terry, with regard to the margin expectations for S&P. I mean, given the, I think, a broad expectation that revenue growth would certainly have to slow in the second half, are you confident that you can see year-to-year margin improvement at S&P in the second half, even in the context of what would likely be, I would imagine, significantly slower revenue growth?
Let me put it -- flip it around on that one. Given some of the cost pressures that we talked about and whether it be foreign exchange or some of the others that we've dealt with, I am personally very pleased with the margin level that we're running at right now. Quite frankly, my expectation was not where it is right now on this one. So I would say to you without getting into forecasting margin levels or whatever, you can assume that margin level that we achieved in the first half, we should be able to at least match in the second half. And obviously, everything we're looking at is trying to improve that. But I think that for Standard & Poor's, that is a pretty good level relative to some things that we faced.
Peter Appert - Piper Jaffray Companies
Okay, fair enough. And then based on that Terry, should we anticipate that the current level of margins are sort of around on the 44% level, I guess, is what you would view as an appropriate level going forward?
No, I wouldn't forecast yet on that part. I mean, again, as markets recover and as this business is getting all the attention that it's getting in all of that, obviously, we want to try and improve upon that. But I wouldn't forecast anything yet. I think where we are right now, I'm pleased in the first half. We're going to do everything we can to build on that.
The flat outlook for the balance of the year is prudent. Also, I'd just -- and even we -- the expense comparisons in the back half are a bit more favorable for us relative to last year than they were in the first half of this year. So and it's still too early to comment on next year.
Peter Appert - Piper Jaffray Companies
Okay. And then one last thing. Terry, you said participation in 70% of adoptions this year. And I think that's sort of a strategic change because in the past, I believe you've been very broad-based in terms of your participation.
Yes, you're exactly right, Peter. You should think and given the fact that states have been healthier in the past and funding is more predictable and all of those kind of thing, we tend to have been in near 100%, 95% to 100% anyway, of the market opportunity. This year, and this came out a part of the strategic study that was initiated last year, our decision is that on some of the smaller disciplines, that we were not going to participate, and we're not just going to be in every single thing. Getting -- making sure that in terms of reading, math, science, those are very core disciplines that you have to have high competency in. And some of the others, we'll be very selective in terms of where we're going to allocate capital.
Our next question comes from Craig Huber, Access 342.
Craig Huber -
My first question just on education. What is your outlook? Just to elaborate a little bit further here, for the open territories for this full year? And can you talk a little bit further about -- on the adoption market you're expecting there?
Well, the good picture overall, Craig, is that the comment that we made coming in into this year, is that we thought the state adoption market -- I mean, and I think a good story, is that the state adoption market would equal or do a little bit better than 2010, and that all was dependent upon obviously Texas being the biggest part of this year. When we saw the state legislature in Texas wandering a little bit in terms of funding initiatives, it concerned us obviously, on that part. The fact that they have now come out and are going to fund and fund at the levels that they're funding and into the third quarter, that makes this a much better year. So last year, the $858 million, $875 million range, I think we'll definitely do that, and we might even do better than that. Open territory is again spotty. I mean, it's sort of like looking at numbers for the EU or something. You've got so many different countries with different growth prospects. You can come up with an average but some states are doing a little bit better in the open territory area, but then you have some outliers as well. But overall, I would say the situation is clearly improving.
Craig Huber -
And also on the S&P ratings front, I mean, given how poor public finance debt issuance has been in the first 6 months of the year, are you expecting that to materially pick up here in the back half of the year?
That's -- obviously, that is one that we're watching very carefully because of the health of the states and the influences, lots of other decisions as well. I mean, in terms of activity levels, we're starting to see some activity on this. But I'm still a little bit guarded on that. I wish we were seeing a little bit more at this point. But I would certainly hope that the second half and certainly 2012 begins to show a very different picture than what we saw in the first half of this year.
Yes. To be specific on this year, our outlook is fairly conservative for the balance of the year. We're not banking on any material improvements relative to our outlook right now.
Yes, but Craig, that's one for all of us, that we need to see some improvement.
Craig Huber -
Also Terry, if I could ask, your outlook for the Structured Finance market, what signs are you looking for to potentially help that out here off of a very low base?
Well, this is one that's definitely improving, on that one. We have seen a little bit more strength, obviously in more of the plain vanilla side of the structured market in terms of asset-backed securities. We're seeing more activity in Europe. We're seeing the commercial mortgage-backed market showing some signs. So it's definitely improving. I mean, if anybody wants to talk about the residential mortgage-backed market, no, you're not seeing any pickup in activity there. But in terms of ABS and CMBS and so on , yes, you're starting to see some here and in Europe.
That was our final question. That concludes this morning's call. A PDF version of the presenter's slides is available now for downloading from www.mcgraw-hill.com. A replay of this call will be available in about 2 hours. Please note that a replay of this call, including Q&A, will be maintained on McGraw-Hill's website for 12 months from today and for one month from today by telephone. On behalf of The McGraw-Hill Companies, we thank you for participating and wish you good day.