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Executives

Harold McGraw - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Lou Eccleston - President of McGraw-Hill Financial

Jack F. Callahan - Chief Financial Officer and Executive Vice President

Donald S. Rubin - Senior Vice President of Investor Relations

Analysts

Douglas M. Arthur - Evercore Partners Inc., Research Division

Peter P. Appert - Piper Jaffray Companies, Research Division

Sloan Bohlen - Goldman Sachs Group Inc., Research Division

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Craig A. Huber - Access 3:42, LLC

William G. Bird - Lazard Capital Markets LLC, Research Division

Michael A. Meltz - JP Morgan Chase & Co, Research Division

The McGraw-Hill Companies (MHP) Q3 2011 Earnings Call October 20, 2011 8:30 AM ET

Operator

Good morning, and welcome to The McGraw-Hill Companies' Conference 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 third quarter earnings webcast. [Operator Instructions] I would now like to introduce Mr. Donald Rubin, Senior Vice President of Investor Relations for The McGraw-Hill Companies. Sir, you may begin.

Donald S. Rubin

Thank you. Good morning, everyone. We thank you for joining us on this morning's Third Quarter Conference Call for The McGraw-Hill Companies. I'm Donald Rubin, Senior Vice President, Investor Relations for The McGraw-Hill Companies. This morning, we issued a news release with our results. We trust you have all had a chance to review that release. If you need a copy of it and the financial schedules that accompany it, 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 financial information to enable investors to make meaningful comparisons of the company's operating performance between periods 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 that includes projections, estimates and descriptions of future events. Any such statements are based on current expectations, current economic conditions and are subject to risks and uncertainties that may cause the actual results to differ materially from results anticipated in these forward-looking statements. In this regard, we direct visitors -- or listeners, excuse me, 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 Patti Rockenwagner in our New York office at area code (212) 512-3533. That's (212) 512-3533 and subsequent to this call.

Now I'd like to turn the call over to Harold McGraw, our Chairman, President and CEO of The McGraw-Hill Companies. Terry?

Harold McGraw

Okay. Good morning, everyone, and thank you, Don, and welcome to our third quarter conference call. With me this morning is Jack Callahan, our Chief Financial Officer. I've also asked Lou Eccleston, President of McGraw-Hill Financial to join us. Lou will review the results in the new McGraw-Hill Financial segment, and he'll also address some of the steps that he is taking to streamline that structure and create value-added solutions for future growth. Also in future meetings, we'll continue to include other senior managers so that you can hear directly from them. Certainly we'll have Doug Peterson, the recently appointed President of Standard & Poor's; Glenn Goldberg, President of Information & Media, and other senior managers to address key aspects of our operations.

This morning, Jack and I will review the third quarter results and the outlook for the balance of the year. We're also providing an update on our Growth and Value Plan, including the cost reduction target, our accelerated share repurchase program and the sale of our broadcasting business.

On balance, our business performed well in the third quarter and this is despite some very challenging market conditions. We benefited from strong double-digit revenue and profit growth at McGraw-Hill Financial, and we're pleased with the solid performance of our Information & Media segment, where revenue grew by nearly 12% on a continuing basis.

Standard & Poor's Ratings and McGraw-Hill Education both experienced significant headwinds, which affected our overall performance in the third quarter. For Standard & Poor's Ratings, the challenge really was market volatility and the sharp decline in the new issue market. For McGraw-Hill Education, the challenge was the decline in the elementary-high school market, marked by low purchasing for state new adoption instruction materials. And here, despite these challenges, earnings per share from continuing operations in the third quarter was $1.21, the same as on an adjusted basis as last year. Revenue declined slightly to $1.9 billion in the third quarter and that's compared to $2 billion last year. Earnings per diluted share on an adjusted basis for the first 9 months increased by 6.3% to $2.27, and revenue grew by 3.3% to $4.7 billion.

Uncertainty in global credit markets and the ongoing challenges in education make us a bit cautious about the near-term outlook, but despite market volatility, we expect to finish the year well and within our current 2011 guidance of $2.81 to $2.86 per diluted earnings per share from continuing operations, and that compares to adjusted earnings per share of $2.68 in 2010.

Our results also highlight the logic of the recent announcement to separate The McGraw-Hill Companies into 2 public companies, and this is all a part of our Growth and Value Plan that we've put out. In this slide, there's a snapshot of the financial performance in the third quarter and year-to-date of what will become our Markets company. By the third quarter, these businesses produced revenue of $970.7 million, which is a 7.7% increase from prior year and the operating profit of $333 million or a 7.6% increase on an adjusted basis. And on a year-to-date basis, the businesses in McGraw-Hill Markets produced revenue of $2.9 billion, 11.7% more than prior period, and operating profit of $1.1 billion, a 12.1% increase from the comparable 2010 adjusted results. And these strong results do not reflect the benefits that we will also be able to capture when these businesses are combined into one streamlined operating company.

Okay, with that as a start, let's turn to our segment results and let's get into a little bit more detail. We'll start with McGraw-Hill Financial, which under the leadership of Lou Eccleston produced the strongest quarterly revenue and operating profit growth of the year in the third quarter. And as we've mentioned before, establishing McGraw-Hill Financial was the first step towards the Growth and Value Plan, and the organization is fully in line with the Growth and Value Plan's primary purpose, which is to unlock value for shareholders by harnessing the power of great brands, leading-edge technology and first rate intellectual capital. In its short life, McGraw-Hill Financial has established an impressive track record. Simply put, McGraw-Hill Financial represents a more effective way to monetize our considerable intellectual capital, proprietary data and analytics. As such, it serves investment bankers, commodity traders, lenders, broker-dealers and others in the way they want and the way they need to be served. But at this point, let me ask Lou to review the results and give us a little bit of the outlook for McGraw-Hill Financial.

Lou?

Lou Eccleston

Okay. Thanks, Terry. As Terry said, we had an excellent quarter, delivering an 18.4% increase in revenue and a 31.2% increase in operating profit. Revenue for the quarter was $348.5 million and operating profit reached $112.6 million. Our operating margin was 32.3%. Year-to-date revenue topped $1 billion for the period, showing a year-over-year increase of 16%, while operating profit increased by 27.6% for the same period to $306.7 million. Operating margin for the 9-month period was also up to 30.5%.

McGraw-Hill Financial's strongest quarterly performance to date really reflects the successful execution of our innovative operating model, which Terry referred to. This has allowed us to successfully integrate our businesses, capitalize quickly on market opportunities and even further benefit from market dynamics such as the continued growth of ETF products that are based on various S&P Indices.

Market volatility during the third quarter contributed to a more than 30% increase in S&P Indices revenue. The average daily trading volume of major exchange-based derivative contracts based on the S&P Indices soared by 58.5%. Assets under management in ETFs that are linked to our indices grew by 6.8% and that's up to nearly $280 billion. ETF providers introduced 11 new products that were based on S&P Indices in the third quarter, bringing the number of ETFs trading on S&P Indices to 359. S&P Indices overall accounted for about 25% of McGraw-Hill Financial's revenue.

Also significantly contributing to our successful quarter was the accelerated sales and market share growth of S&P Capital IQ and the Global Credit Portal which, along with the integration of TheMarkets.com, helped drive a 15.6% increase in subscription revenue. Subscriptions tend to provide stable and predictable revenue streams, and that amounted to $251.8 million for us in the third quarter.

Overall for McGraw-Hill Financial, subscriptions accounted for more than 72% of our third quarter revenue.

We also continued building out the S&P Capital IQ platform to include more content and analytics from across all of McGraw-Hill Financial, and we continued expanding globally, ending the third quarter with more than 3,800 clients, and this is nearly an 18% increase from a year earlier.

In addition to our platforms, Enterprise Solutions continued expanding its integrated coverage, again across all McGraw-Hill Financial proprietary data assets, as well as adding third-party data and information and that led to strong year-over-year sales growth for Enterprise Solutions.

So in summary, the expectation that was expressed on the second quarter that McGraw-Hill Financial would in fact continue on a solid growth strip trajectory is bearing out and we do anticipate a strong 2011 finish.

Now importantly, this slide demonstrates what we can achieve when we maximize the capabilities of our entire portfolio of assets through an operating model that allows us to leverage infrastructure and more quickly and effectively combine assets to create new solutions, and that allows us to create solutions that offer high-value, differentiated offerings. This model reflects a discipline approach to technology and data infrastructure. And at the foundation of this is what you see at the bottom of the slide. This allows for faster, more prolific and innovative packaging of products, services, content and analytics across all asset classes and for a broad range of customers.

Let me give you an example. Leveraging this global and flexible infrastructure has allowed us to quickly launch localized versions of the Global Credit Portal in Russia, China and Japan all in the last 8 months. Providing solutions with local data sets and in local languages has driven new sales and faster growth and without requiring significant new investments.

Another great example is the creation of S&P Indices fundamental data package. This supplies S&P Indices unique and widely accepted index-level aggregation methodology, and that has been nursed by Compustat and Capital IQ fundamental data. This solution offers more than 100 index-level statistics focused on income statements, balance sheets and trading data items. So with the launch of this package, Capital IQ and Compustat become the global fundamental data source for all published statistics on S&P Indices.

The success of our efforts and the implementation of this new operating model really underscores the business logic and the economic incentive to unlock value behind the creation of McGraw-Hill Markets. As we grow, we will build economies of scale that allow us to leverage and maximize the value of content and analytics across all of our different businesses and markets, that'll allow us to create innovative new solutions that will help investors, our clients, face the new challenges of today's volatile and changing market landscape.

Thanks, and now back to Terry.

Harold McGraw

Okay. Well, very exciting and obviously much more to come. Thank you, Lou.

Okay, let's now take a look at the performance of Standard & Poor's Ratings. In anticipation of market volatility, we have over the years diversified the S&P business by building a durable non-transaction revenue stream and expanding globally. We benefited from that strategy again in the third quarter. With non-transaction revenue growing by 9.5% and international revenue increasing by 9.1%, Standard & Poor's Ratings was largely able to offset a 19.5% decline in transaction revenue in the third quarter, and that's why Standard & Poor's revenue decreased by only 1.8% in this period despite the market volatility and despite a steep decline in global new issue volume for investment grade and high-yield bonds. New issue dollar volume in the U.S. high-yield market dropped by 68% in the third quarter, investment-grade dollar volume declined by 36%, European corporate issuance was down by nearly 60%, and high-yield issuance fell by more than 76%. And obviously, these are not good issuance numbers after some very strong issuance in the first half of this year. But we also made good on our promise to rein in costs in the second half of the year. Excluding a $7.3 million pretax gain on the sale of certain equity interests in India last year, expenses grew by only 1.4% in the third quarter and that's compared to a 19.3% increase in the first half of 2011. That tight grip on costs helped to hold the decline in the operating profit in the third quarter to 6.1%, and that compared to an adjusted results for the same period last year. We will continue to keep a tight grip on these costs in the fourth quarter.

Uncertainty and volatility will continue to be factors for the balance of the year, but there also is a very positive demand for investment-grade corporate debt. Refinancing will continue to contribute to volume in fourth quarter. Bank lending will continue to be constrained, which will benefit bond issuance. Structured finance will continue to be soft. The bank loan ratings market still looks very promising, but spreads remain wide and that will be a key factor in any fourth quarter pickup in new issue volume.

Okay with that, let me update you on the legal and regulatory matters. Since our last report, the number of lawsuits that have been dismissed outright has grown to 23; 9 have been voluntarily withdrawn and 7 dismissals by lower court have now been affirmed by higher courts.

Yesterday, the previous dismissal of 2 stock drop lawsuits was affirmed by the U.S. Second Circuit Court of Appeals. The decision concerns the Gearren and Sullivan ERISA lawsuits brought against McGraw-Hill, our Board of Directors and several executives. The Court of Appeals ruled that the facts alleged that by the plaintiffs, even if proven, were insufficient to establish a cause of action.

Another motion to dismiss a case against Standard & Poor's was granted last month by a federal court in Ohio. The lawsuit had been initiated by the Ohio Attorney General's Office in 2009 and that was on behalf of the Ohio pension funds in connection with structured finance securities rated by Standard & Poor's. The court held that the complaint failed to demonstrate the existence of any legal duty by S&P to the Ohio funds or any actionable misrepresentation in S&P's publication of rating opinions concerning these securities.

Last week, we resolved the lawsuit brought by the Connecticut Attorney General's Office in 2008 in connection with S&P's Ratings regarding public finance bonds. Under the settlement agreement, S&P does not admit any liability or violation of law. S&P will give the state a credit against future rating fees and make a presentation at no charge on municipal bonds to Connecticut officials. We look forward to continuing to provide transparent ratings on public bonds issued by the State of Connecticut, as well as any other public debt issuers.

In New Mexico, a federal court denied our motion to dismiss a complaint alleging violations of that state's security laws and that was in connection with ratings issued on certain mortgage pass-through certificates. We have not received the court's rationale for its decision, but are prepared to demonstrate in later proceedings that the complaint lacks factual as well as legal merit.

In Australia, we are involved in a trial before a judge with the plaintiff looking to recover losses stemming from an investment in Constant Proportion Debt Obligation. We have pointed out to the court that the plaintiffs were not even permitted to purchase the instrument under their own mandates and that they did not know or attempt to understand what a rating meant when they made their investment. The trial is scheduled to last through the end of the year and the court may not issue a ruling here until next spring.

As we also announced, we received a Wells Notice on September 22 from the SEC, notifying us that the staff is considering recommending that the Commission institute a civil proceeding against Standard & Poor's. The issue involves the rating in 2007 of a single collateralized debt obligation, a CDO known as the Delphinus. Informed observers know that the Wells Notice is neither a formal allegation nor a finding of wrongdoing. It allows the S&P the opportunity to address the issues raised by the staff before it decides whether or not to make a recommendation to the Commission or before a decision is reached by the SEC. We have been cooperating with the Commission in this matter, and we continue to do so. We have seen some speculation about this situation in the media, but we're not in a position to set that record straight at this point until we get through that.

In the CalPERS case, the court is scheduled to hear concluding arguments and that will be coming up on October 28 on whether CalPERS has met its burden under California law to move this case to another state.

And as far as the regulatory landscape, we're keeping pace with those changes and we'll continue to keep you updated on any further developments there. We expect, by the way, to successfully complete the registration process in Europe and that will be in the next few weeks.

You may also have read about plans in the media to launch a new European rating agency. We welcome competition because the market benefits from a diversity of opinions on credit risk, that as long as they're independent, transparent and comparable across asset classes and geographies, we believe our ultimate success will be based on the value investors derive from the ratings and research produced by our 1,300 analysts worldwide.

On September 30, the SEC staff issued a report on its examination of each of the national recognized statistical rating agencies, NRSROs, and that's also mandated by the Dodd-Frank legislation. The report highlights several areas for improvement, but also recognizes the many changes that we have made in recent years. The key point or the takeaway is no material regulatory deficiency was found.

Given that, let's now turn to the Information & Media segment. This segment's revenue from continuing operations increased by nearly 12% to $228.5 million in the third quarter. Operating profit was $51.3 million and that's a 17.1% increase from last year, and the operating margin for the third quarter was 22.4%. For the 9-month period, segment revenue increased by 11.4% and operating profit increased nearly 18% to $139 million, with an operating margin of 21.1%.

These figures reflect the reclassification of the Broadcasting Group as a discontinued operation as a result of its pending sale. Information & Media concludes Platts, which had a 25% increase in revenue in the third quarter. The increase includes contributions from the recent acquisitions of BENTEK, as well as Steel Business Briefing earlier in this year.

In the third quarter, Platts accounted for almost 50% of the segment's $228.5 million in revenue. Volatility in global energy prices continues to generate demand for Platts' news and pricing assessments, and that plays a vital role in energy and commodity markets. Platts continues to expand its suite of price assessments, and again we're talking some 8,500 price assessments and benchmarks daily. In the third quarter, it added weekly assessments, 5 polymers imported into Brazil and key to manufacturing of film and plastics in Latin America. Brazil is a rapidly growing player in the global petrochemical market. In the changing world of commodities, the assessments reflect the open market spot value of the polymers delivered to the key ports in Brazil. That change represents an important growth opportunity for Platts because as markets become more sophisticated, there is new demand for price discovery that Platts is well positioned to deliver.

J.D. Power and Associates also had solid results in the third quarter. Two keys to their growth: increased demand for J.D. Power's benchmark research data on the U.S. automotive market; as well as the expansion of the firm's global business and especially in China.

That wraps up our look at the businesses that would comprise McGraw-Hill Markets. And again, what McGraw-Hill Markets led, that would be a 7.7% increase in revenue in the third quarter and operating profit of 7.6% and year-to-date, 11.7% revenue on 12.1% operating profit.

Now let's take a look at McGraw-Hill Education. As you know, the third quarter is the biggest revenue quarter for the el-hi [elementary-high school] instructional materials market and that's true this year, too. But unfortunately for the industry, it proved to be a weaker quarter than originally projected.

Across the country, school districts postponed or limited purchasing, citing tight budgets and concerns that further budget cuts might be coming. We don't have industry data for September yet, but the latest AAP numbers, that's the Association of American Publishers' report, shows that overall sales in the el-hi market were down by 15.6% through August. Open territory sales were down by 4.6%, while adoption state sales declined by 24.5%. This last number should improve as additional orders from Texas are reported, but it also reflects lower purchasing levels than usual in many of the adoption states where ordering for the year is largely completed. We now estimate that total 2011 state new adoption market at approximately $720 million, and that's a decline of about 17% from last year.

The Texas situation for 2011 obviously was key to understanding both the industry data and the third quarter performance and certainly for us at McGraw-Hill School Education Group, where revenue of $420.4 million represented a decrease of 21.4% from prior year quarter. As we've been saying for more than a year, Texas was the wildcard in 2011 market. The state had issued an adoption call for various subjects in the K-12 language arts plus prekindergarten supplemental science. However, there were months of debate about which subject categories, if any, would actually get funding. Finally, late in June, a special session of the Texas Legislature approved funding for all categories. It also enacted a new system for instructional material purchasing. Under this system, each district receives an allotment, sort of like a block grant, based on its school population or its student population. The district can then decide which state adopted material it wishes to buy. It can use the money for various other purposes and it can save unspent funds for future needs. The state's order processing site opened on August 8 and to date, it appears that the allotment system will have a more dampening effect on district implementation. That is, districts will spend less than they did under the old system when they typically bought a book per student in a newly adopted subject. For McGraw-Hill, the funding uncertainty in Texas funding posed publishing questions for us. We developed Texas versions of programs in several call categories, but decided to bypass the largest call, which was a K-5 language arts program. Producing that major print program with the required Texas-specific content would have meant a substantial investment in materials that could not be sold elsewhere if funding fell through.

Instead, we decided to make our big investment in a forward-looking product for the state's digital science call. Our CINCH -- that's C-I-N-C-H, our CINCH Science is a comprehensive cloud-based instructional system and this was for grades 5 through 12. With all digital content, it could easily be adapted for other markets and in fact, it is being rolled out more widely now. Fortunately, funding was approved and CINCH Science is leading its Texas competition by a wide margin. As a digital subscription product, it will not produce the high first-year sales that print titles do but on the other hand, it will also provide steady revenue recognition over the entire life of this adoption.

Cost considerations are accounted for our decision but not to produce a customized print program for Florida's K-5 science adoption. In 2010, our school education group competed for 97% of total available dollars in the state new adoption market and we captured a share of about 30%. This year, we made the decision to participate in approximately 75% of state new adoption opportunities, and we expect to capture about 25% of the total available dollars and 33% of the available dollars in the markets where we're competing.

Although the third quarter is less significant in the testing market, we saw a growth in custom contract revenue, as well as new business and strong renewals for our Acuity formative assessment product.

At the McGraw-Hill Higher Education, Professional and International Group, third quarter revenue was $516.9 million, and that's a decline of less than 1% from prior year quarter. We don't have official static -- statistics yet, but regional surveys and other sources indicate that higher education enrollments for the current fourth -- fall term have not matched the strong growth seen at the start of the last 2 academic years. In fact, enrollments are estimated to be flat with 2010 across the 2-year and 4-year colleges. Sharp enrollment declines have been reported in the for-profit postsecondary market, where many schools are tightening their admissions policies in order to improve graduation rates and student outcomes as required under the new federal guidelines. Despite the enrollment picture, McGraw-Hill Higher Education saw net sales increased over the third quarter of last year for 3 of its 4 main product lines and that includes career education. We lost ground in only one and that was in the Humanities, Social Sciences and Languages product group, which includes many textbooks for first year courses.

We also saw a double-digit growth for our Higher Education digital products. The response of instructors and students to Connect which is, as you'll recall, our innovative homework management platform, and LearnSmart, which is our computer-adapted tutorial system, has been very positive. Sales of these products are expected to increase during the fourth quarter as more and more students register to use them. We now have about 2.5 million registered users for our homework management products and we expect that number to reach close to 3 million by year-end.

In Professional markets, combined print and e-book sales showed improvement over the prior year quarter and that was helped by the release of a new edition of Harrison's Principles of Internal Medicine. Revenue generated by our digital subscription products such as AccessMedicine grew at a double-digit rate.

And finally, our International markets achieved overall growth during the quarter as gains in the Middle East, Canada and Europe offset lower results in Asia and Australia. Higher Education performed particularly well in the Middle East, where we developed and delivered numerous custom titles for Saudi Arabia.

Okay, that completes our reviews of the operations. Let me turn it over now to Jack Callahan, our Chief Financial Officer, and he'll give us an update on the key financials.

Jack?

Jack F. Callahan

Thank you, Terry. I wanted to briefly provide some additional detail. Let's start off with a wrap up of operating performance. Overall, the performance our 2 businesses was quite different in the quarter. Despite significant decline in global credit markets which directly impacts S&P Ratings, the Markets business had solid revenue and operating profit growth of approximately 8%. This demonstrates the strength and breadth of this business and the benefits of acquisitions completed over the past 12 months. We are pleased with the early performance of these important additions to the Markets portfolio like BENTEK, Steel Business Briefing and TheMarkets.com. Foreign exchange was also favorable, benefiting revenue by approximately $15 million or approximately 170 basis points. On the other hand, as Terry just reviewed, the Education business in the all-important third quarter was down approximately 11% in both revenue and operating profits. The decline in the top line was driven by the U.S. el-hi segment as the balance of the portfolio was largely flat. On a year-to-date basis, the performance of Markets is even stronger, with revenue and profit growth -- of revenue growth approximately 12%, with margins close to 35%.

Overall, this business is well positioned for future growth especially as the global credit markets stabilize in return. Revenues in Education on a year-to-date basis are down approximately 8% and profit down approximately 18%, well below our incoming expectations for the year.

Corporate expense was $41 million in the quarter and decreased by $3.5 million from the prior year primarily due to a decreased incentive-related compensation, essentially flat headcount and tight cost controls. Year-to-date, corporate expense was $119 million and increased just over 1%. For the full year, we expect limited increase in corporate expense. We now anticipate growth in the low single digits versus 2010 adjusted corporate expense of $164 million. As a reminder, the 2010 expense excludes the one-time charge of $15.6 million related to subleasing excess space the company's New York facilities.

Consolidated adjusted operating profit was $607 million, down 2% versus last year. For the full year, adjusted operating profit is approaching $1.2 billion, up 4% from last year. Net interest was $18 million in Q3, a modest decline versus prior year. Our effective tax rate was 36.3% in the third quarter, flat versus last year. With the reclassification of Broadcasting into discontinued operations, our effective tax rate in both periods declined modestly by 10 basis points. We expect our full year effective tax rate to remain in that range. After this call, we will post to our Investor Relations website a reconciliation of our current reporting to previously reported results, which had Broadcasting as part of Information & Media.

Net income attributable to noncontrolling interests increased to $8.3 million, largely driven by the continuing strong performance of CRISIL. Our diluted weighted average shares outstanding for the quarter was 303.6 million, a 5.6 million decrease from the prior year, a 5.5 million decrease from the second quarter. The decline is due primarily to our continuing share repurchase program which more than offset equity-related awards.

Now I'll turn to cash flow. 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 now projected to be roughly $750 million.

Turning to capital investments. We now expect prepublication investment to be approximately $175 million versus $151 million in 2010. Prepublication amortization for the full year is expected to be approximately $205 million, a $41 million decline from 2010, reflecting the recent reduced level of investment. Capital expenditures are now projected to be approximately $125 million. This compares to $115 million in 2010.

Turning now to capital allocation. We spent $854 million on acquisitions and share repurchases in the first 9 months: almost $200 million for acquisitions, $655 million for share repurchases. The most notable acquisitions where BENTEK Energy and Steel Business Briefing Group; both acquisitions added to Platts growing platform, adding critical capability in natural gas and iron ore markets. As I mentioned earlier, both businesses are performing well and they're becoming appropriately integrated into the Platts business.

We continue to actively repurchase shares. In Q3, we repurchased 9 million shares for $355 million, a significant step up from the 4.4 million shares repurchased in Q2. Year-to-date, we repurchased 16.7 million shares for approximately $655 million, averaging $39.20 per share. 19 million share repurchases remain unsettled at quarter-end. Looking forward, we are well positioned to meet our $1 billion target for 2011, subject to market conditions.

As we approach the end of the year and prepare for the separation of Markets and Education businesses in 2012, we are extremely well capitalized with cash and short-term investments at quarter-end of approximately $1.5 billion. Cash and short-term investments increased close to $150 million from the second quarter. From year-end 2010, cash and short-term investments declined only slightly as share repurchases and acquisitions were largely funded from free cash flow. As I previously indicated, we expect full year cash flow, post dividends, to be approximately $750 million. Gross debt was approximate -- was comprised of approximately $1.2 billion and long-term unsecured senior notes; no commercial paper is outstanding.

In closing, The McGraw-Hill Companies is on track for another year of growth in 2011. We expect to achieve full year 2011 diluted earnings per share from continuing operations of $2.81 to $2.86. This implies fourth quarter earnings per share of $0.54 to $0.59 versus adjusted earnings per share of $0.54 in the fourth quarter last year.

Now, let me turn it back over to Terry.

Harold McGraw

Okay. Thanks, Jack, and that completes a review of our operations and our financial position and conditions. Let me quickly make some comments about our Growth and Value Plan. And as you may recall, this is something that we announced last month that it was the combination of a strategic portfolio review that began in midyear 2010, which resulted in a number of the acquisitions that Jack mentioned, especially in Platts, the divestiture of Broadcasting and the creation of McGraw-Hill Financial and it culminated into the Growth and Value Plan.

And as you know, the centerpiece of our Growth and Value Plan is the creation of 2 strong public companies, McGraw-Hill Markets and McGraw-Hill Education, and this would be in need of a tax-free spin. Separating global operations obviously is a complex undertaking, which we plan to complete by the end of next year at the latest. We have multiple work streams underway. We're making very good headway. And we are pursuing this plan with a greater sense of urgency so that we complete this work as quickly as possible. We also are making significant headway in our extensive cost reduction program as we disaggregated shared services and established 2 appropriately sized corporate centers, again for the 2 public companies. Based on our initial analysis, we are targeting at least $100 million in cost reductions over the next 15 months.

We also entered into an agreement to sell our non-core Broadcasting Group to E.W. Scripps and for $212 million in cash. This move demonstrates our commitment to more sharply define and focus on our portfolio of core businesses.

We're also working with Heidrick & Struggles in the search of a new CEO for the Education business, and I'm pleased with the progress that we're making there.

So with that, let me sum up and say that for The McGraw-Hill Companies, we had a solid third quarter and certainly the first 9 months very solid for 2011. We're making progress to implement our Growth and Value Plan and our results demonstrate the rationale for our decision to separate Markets and Education, 2 great businesses with divergent models. We are delivering significant capital to investors through share repurchases and dividends. We are on track for another year of growth and expect our full year earnings per diluted share from continuing operation will be in the $2.81 to $2.86 range.

Okay, let's leave it with that and let's go to the questions.

And Don, let's go back to you.

Donald S. Rubin

Thank you, Terry. Just a couple of instructions for our phone participants [Operator Instructions]. I think we're now ready for the first question.

Question-and-Answer Session

Operator

This question comes from William Bird from Lazard.

William G. Bird - Lazard Capital Markets LLC, Research Division

Terry, I was wondering if you could comment on Markets. Given how high differentiated growth has been at Indexes and Platts, are you concerned the value of these businesses could be overlooked in the new Markets business where around 2/3 of the mix will be Ratings?

Harold McGraw

Yes, no, and that's a little high, but I don't because one of the things that we're going to be doing, Bill, in terms of streamlining the organization is to make it very, very transparent in terms of what those actual numbers and what those growth configurations are, as well as the direction that the new product development initiatives we'll take on in that part. Lou Eccleston was talking and showed one of the slides about all of the cross-asset class collaboration that can go on in terms of developing new product capabilities for new audiences and the like, and we're going to keep that in front of everybody. And then -- and so I think it will be very clear what those businesses are capable of doing and whatever. We're not going to change to a new configuration until we've got the cost structures right in terms of the new entities. So what we're working on now is developing those cost structures so that those operations can be efficient and effective in delivering those. But then we will -- and then we'll streamline the organizational schedule to comply to that. So we'll do everything we can to keep it very transparent so that you can see exactly where we are and where we're going.

William G. Bird - Lazard Capital Markets LLC, Research Division

And is there any reason why you wouldn't pull 2012 buybacks forward given where the stock is and given the value to be created by new initiatives?

Harold McGraw

Yes, we look at that all the time and we're very pleased with the program that we have for this year, and we'll continue to evaluate that and given current conditions, you can expect probably more.

William G. Bird - Lazard Capital Markets LLC, Research Division

And just a housekeeping question, what was the diluted share base at quarter-end?

Harold McGraw

Hold on one sec, Bill. Bill, let me get that number for you. We'll give it to you as soon as we got it right here.

Operator

This question comes from Craig Huber from Access 3:42.

Craig A. Huber - Access 3:42, LLC

I wanted to first ask about this cost-saving target you guys have been talking about, $100 million plus. Just given that you guys last year had $5 billion of costs across all your different segments and stuff, I mean do you think at the end of the day you could actually get multiples to that $100 million target out of the whole system? And also, if you just elaborate a little bit further about what areas you're looking at to take the most costs out of?

Harold McGraw

Okay, Craig, well first of all, as I've mentioned, when you're talking about an aggregate number in excess of $1 billion of corporate assessment -- corporate administration, IT and shared services, the first thing that you have to do is obviously make sure that the cost structures are efficient and effective for the 2 public companies, then we can start talking about how we can reduce that. We believe that at this point, at least $100 million can come out of those -- in those components. And again, it's an ongoing process and we'll just keep you updated as we go. Some people think it could be a lot more, we'll see, but I think at least $100 million at this point and we're going to keep refining and working on that.

Jack F. Callahan

And let me provide a little more detail. Because we do have -- to your point that it's a complex cost structure, we have multiple work streams detailing efficiency opportunities across the organization, let me give you a couple of examples. Each business is reviewing its cost base in detail as part of our planning process for next year, and several have already identified no specific interactions. More specifically, we're looking to simplify and streamline the org structure by increasing spans of control and reducing layers. And across corporate and shared services, we have some work to do to separate functions and activities to realign costs to the specific and appropriate cost structure of both Education and Markets. We're reshaping compensation and benefits to meet the industry standards of each industry. And in longer-term, we need to reconsider the footprint of our facilities. So I just give you some examples of the streams of works that are well underway that kind of will fit into the creation of 2 separate companies and a more efficient cost structure.

Craig A. Huber - Access 3:42, LLC

And then also, can you speak a little bit if you -- about your -- what's left in Information & Media segment aside from Platts, the Aviation Week, J.D. Power, in your construction of database business? I mean, how wed are you to keeping those businesses in the portfolio here, given that you've sold TV stations, sold Business Week, obviously, 2 years ago?

Harold McGraw

All right. Well, certainly in terms of -- we talked about the progress that we're making with J.D. Power and also on the construction side, everybody knows the weakness of the commercial construction business in the marketplace today. And we are combining right now the whole combination of capital markets, commodity platforms, as well as commercial market parts. So at least at this point, we're very wedded to that. And if there's any change, obviously we would let you know. By the way, Jack, on the quarter-end base.

Jack F. Callahan

Yes, the quarter-end number was right around 300 -- with 300 million.

Harold McGraw

300 million shares on the fully diluted thing.

Operator

This question comes from Peter Appert from Piper Jaffray.

Peter P. Appert - Piper Jaffray Companies, Research Division

So, Terry, early in the year, you've highlighted potentially some market share losses at S&P as a reason for a relative revenue weakness. You highlighted specifically, I think, Structured Finance. You think that was a factor in the third quarter in terms of the relatively soft numbers you're seeing?

Harold McGraw

A little bit, definitely on that. And hopefully we'll see some pickup but -- in that area, but I don't think materially at this point. Yes, I mean again, when you just talk about the overall, the new issuance numbers in the first half of the year with a lot of the M&A activity and so forth, we're very pleasing in all of this. The contraction obviously is disappointing, but it's very, very reflective obviously of current economic conditions and the lack of some of the corporate activities. Now hopefully with the bank loan market, hopefully with some of the high-yield coming back a little bit, and it will see corporate issuance because of the refinancings and things like that. But we'll -- we're watching it very, very carefully, but that's a key component at this point but it's economic-market driven. We also have to watch the European markets very carefully and we'll see what response comes out of the G20 in another week. But we've got to watch their -- the sovereign debt situation there very carefully as well. So I think we'll see some progress, but we've got to be very cautious here.

Peter P. Appert - Piper Jaffray Companies, Research Division

Right. And I assume as regards to the fourth quarter, no change in pipeline or issuance like that do you think still continue to be slow?

Harold McGraw

Well, we're seeing some pickup. We're watching very carefully again the bank loan market on that part. We're starting to see a little bit more pipeline on the corporate side, and we're looking for the offsets on that as well. And so I'm hopeful that it's going to be a little better situation.

Jack F. Callahan

But our outlook is based on a very cautious view. If it's -- if for some reason, confidence comes back in and it springs forward, that would be an upside right now.

Peter P. Appert - Piper Jaffray Companies, Research Division

And I'm sorry to focus extensively on this, but the comps are pretty tough here for the next 3 quarters in S&P business. In terms of the cost reduction efforts, is there a focus on the S&P business in particular in the context of what could be a pretty tough revenue environment?

Harold McGraw

Well, exactly right. I mean, I think that what we have been doing is taking very and hard looks to maybe what that in the worst-case pipeline situation could be, and Doug Peterson is very much focused on a cost reduction program. And we're see -- you're seeing the effect of that right now. And we'll continue to monitor the pipeline aspect to what more we may have to do.

Jack F. Callahan

The thing that will help with S&P is just -- as you know, we've been investing in that business around it in a number of areas over the last 3 to 4 quarters, and the rate of that investment has considerably slowed down in the third quarter, so for example, the QCCR program is now largely flat to year ago. There's been some headcount and comp-related costs that have largely had slowed down Platts. So the slowing of that piece of investment resulted that legal expenses moderated a bit. So there's a number of things that are going to ease some of the expense pressures that we have been seeing for the last few quarters.

Peter P. Appert - Piper Jaffray Companies, Research Division

That's helpful. And then just one last thing, Jack, the -- any further thoughts in terms of the timeframe on the spin? Maybe you could just highlight what the constraints are in terms of getting it done sooner rather than later?

Harold McGraw

Well, Peter, this is Terry. Obviously, speed is a critical requirement here. I -- what we have said is that we can complete this by the end of 2012, and I think that gives us a fair bit of leeway at this point. And our effort is to do it obviously quicker and I think for all people concerned, that would be a good thing. But let us get through the resizing of the cost structures and get the -- and to get those cost savings, we need to start to implement that sooner rather than later. And so all the effort will go on to that part and we'll just keep you updated on how that proceeds. But yes, and I do think we can put that sooner, but I'll keep with the by the end of 2012 at this point until we've got hard numbers or otherwise.

Jack F. Callahan

And I would just add, since the announcement, we now have the opportunity to create a full-blown corporate-wide program management structure to get up the activities that's well underway, and it's part of our weekly rhythm to start working with the various teams to start making decisions and moving forward.

Operator

Our next question comes from Sloan Bohlen with Goldman Sachs.

Sloan Bohlen - Goldman Sachs Group Inc., Research Division

This is probably a question for Lou just on some of the segments within McGraw-Hill Financial. You broke out some of the revenue for Platts and for the index business. Do you think about operating margin targets for each of the different businesses, Ratings, Capital IQ, Index and Platts?

Lou Eccleston

Well, when you look at the businesses inside of McGraw-Hill Financial, you're talking about it and we refer to the big pieces: the Global Credit Portal, which is really; and Capital IQ which is really a part of how we think about a desktop. And then the other big piece is Enterprise, and then you've got Indices. So the way to think about this model is we're driving not so much individual P&L's of a business as Capital IQ or a business as the Global Credit Portal, but if you go back to that model we put up, Sloan, you see there's a lot of the efficiencies and shared costs that actually create the ability for a desktop business to build faster, to create solutions faster. As you integrate all of these data sets for Enterprise, you can go out with an offering that gives you all the asset classes integrated into a single solution. And then you've got single contracts. It just creates a lot of efficiency. So really, the focus is more around how does McGraw-Hill Financial at the top line grow? How do we grow overall profitability? And then as Terry said, we're going to be very transparent in terms of how are the Index business is going, how is Platts doing, so where you've really got clear individual businesses, we'll be very transparent on that. But overall, what you're really going to be focused on is around desktop and Enterprise, and how it drives both the efficiencies and the foundation of the model, and then driving those product segments more so than seeing them as individual businesses.

Sloan Bohlen - Goldman Sachs Group Inc., Research Division

Okay. And so in terms of, say, all else being equal on the top line, is there an amount you expect in terms of margin enhancement by kind of realizing those synergies?

Lou Eccleston

Well, I think you've already seen the results this year of that. Just by simply, Sloan, not doing things multiple times, you pick up margin enhancement. The beauty of the model, which is whether it's McGraw-Hill Financial that we've been at for the last 8 or 9 months or where we're going to go with Markets is that, that model does 2 things automatically. First and foremost it creates efficiencies, it creates the opportunities for margin expansion, but it also gives you the ability to drive revenue growth faster because you can get products out the door faster. So by definition, it creates those opportunities. And I think where you see our margin goes will be a function of where do we go organically and then are there inorganic opportunities well in the future. So I think our overall goal, though, is maximum growth and the margin will be a reflection of how much of this is organic versus -- inorganic versus organic. And that -- but the goal there is the fastest growth and the broadest footprint globally.

Harold McGraw

Yes. And, Sloan, this is Terry. Obviously, as we're finishing up on 2011 and so forth, we're already living in 2012 and that plan, it's a little early to come out with the projections on that part but the whole game plan is revenue growth and margin expansion in the Markets area. And so as we get the cost structures implemented as the -- and as we get the organizational implementation done, you fully can expect margin expansion.

Sloan Bohlen - Goldman Sachs Group Inc., Research Division

Okay. And then just maybe one question on whether or not there's an update on the potential joint venture with the Dow Jones Indexes from CMU?

Harold McGraw

Well, I can't really comment on that one at this point, Sloan. I saw the press reports that came out with some of those kind of things. We didn't come out with that. And so right now, the S&P Index business is doing fabulous and we're very excited about it. And Lou talked about it, almost 360 exchange-traded funds now based on S&P Indices and it's growing at a terrific rate. We're very excited about this business and stay tuned.

Operator

Our next question comes from Doug Arthur from Evercore.

Douglas M. Arthur - Evercore Partners Inc., Research Division

Yes. Terry, on the Texas change in terms of giving the districts flexibility on how they spend the money that's allotted, do you think that, that is short-term in nature and that they will -- these districts will eventually have to buy books? Or do you think that's more of a permanent change in terms of their -- how they get state money to allocate however they want?

Harold McGraw

Yes. And it's a great question, Doug, and it's a nebulous answer because everything in K-12 right now is short term and Texas is no exclusion to that. They've come up with this allotment system, trying to bring some equity between different districts within Texas. They could very easily change it again. It's just that the funding pressures at the state level are so enormous. And right now, my sense of it is that there's a process of taking a little from here, a little from here, and so forth then trying to think through that you've got a coordinated approach, and it's not. One of the things that states are going to have to do is prioritize better and then fully fund those disciplines that they're going to prioritize. So everything right now on the K-12 funding side, again is short term.

Operator

Our next question comes from Michael Meltz, JPMorgan.

Michael A. Meltz - JP Morgan Chase & Co, Research Division

I have 2 questions for you. Understanding the adjustment to EPS guidance, can you update us on where your expectations are for segment revenues for the 4 segments, please? And then I have a follow-up.

Harold McGraw

Is that for the fourth quarter, Michael?

Michael A. Meltz - JP Morgan Chase & Co, Research Division

No, I'm saying full year. Full year S&P, you had been pointing to 7% to 9% revenue growth.

Jack F. Callahan

Well, I mean, let's -- going back to initial guidance, I mean obviously, the year is -- it's had its upsides and its down. I think on relative to our ingoing and expectations in guidance on the year from a revenue point of view, McGraw-Hill Financial is pretty much right on in the top line, doing better on the bottom line based on some of the margin expansion that Lou spoke with. Information & Media has had a better year than we anticipated with stronger top line, and so it's been a good year for Information & Media. I think the 2 places where obviously in this building of the themes of the call where relative to our incoming assumptions we've been struggling with is Education where we thought we'd get some growth there, but I think we're looking at a mid to high single-digit decline in Education given what's happened in the all-important third quarter here. And Standard & Poor's is -- had some good quarters kind of given the activity we saw in the first half for the year, but that clearly has slowed. So we're probably sort of in the mid-single range for the full year, which is a bit down from that high single view we thought we had coming into the year and the more robust capital markets outlook that we had in the first half.

Michael A. Meltz - JP Morgan Chase & Co, Research Division

So does that imply S&P flattish in Q4 or down?

Harold McGraw

Well and again, from our standpoint, we are -- the word that we're using is cautious in terms of the near-term outlook. But as I was saying with Bill Bird's question, we're hopeful here. We see some pipeline in all of that. And I think it's a little early to just see how much of that is going to translate. But we're optimistic that there could be some good activity in the fourth quarter. So at this point, I think that in terms of the overall guidance of $2.81, $2.86, we've got a range there that takes into account a flat fourth quarter to a much more positive one, especially for S&P.

Michael A. Meltz - JP Morgan Chase & Co, Research Division

Okay. And then related to that, your guidance, your shifting out the TV business and -- or it sounds like you are, and -- but your year -- I think the year-ago -- maybe the answer is what was the EBIT or EPS benefit for TV last year?

Jack F. Callahan

Michael, first of all, we'll have detailed reconciliations on the Web right after this call to help you all through that because we did take Broadcasting in discontinued operations. Last year from an EPS point of view, it did provide about $0.01 a year ago. So that's why our -- and opposed to stock's view of Broadcasting, last year went from $2.69 to $2.68.

Michael A. Meltz - JP Morgan Chase & Co, Research Division

Okay. And so that's my -- leads up to my final question. So the -- when you have tax in here, you're giving great disclosure on Indexes and now Platts, that the Platts revenues where you are saying it's now half the revenues in the quarter?

Jack F. Callahan

That's approaching half. It's approaching half.

Michael A. Meltz - JP Morgan Chase & Co, Research Division

Is that a run rate? Was that -- and is that all -- essentially all subscription or is there -- was there something that really helped it in the quarter and it's not a full year basis, it's not that high?

Jack F. Callahan

Well, I mean it's obviously been aided because you have -- it's organic growth is quite strong, but it's been benefited by 2 acquisitions. That's still positive versus a year ago. BENTEK closed in the first very early days of January and Steel Business Briefing in July, so I wouldn't -- 25% does have those 2 acquisitions that are helping it.

Harold McGraw

I mean, that wouldn't necessarily be a run rate.

Operator

Our final question comes from Edward Atorino with Benchmark.

Edward J. Atorino - The Benchmark Company, LLC, Research Division

Terry, the non-transaction revenues really took a jump. Could you sort of explain what went on there? Is that going to continue at the nice high rate? And secondly, you mentioned I think in -- about a little pick up in bonds. Are you seeing anything happening in Europe? I presume the increase was in the U.S.

Harold McGraw

Ed, you're exactly right, and we expect -- and again, I don't want to get ahead of ourselves in projecting what people are going to do, but we are seeing some activity on the corporate side and we'd like to see that continue. We also are looking very much at the bank loan market. Europe is very much a wildcard and we're watching that very carefully. I mean, the obvious demand and need is extremely high. How it gets translated is the issue. I would -- I think that you are going to see a pickup in bond issuance in Europe, but we haven't seen it today. On the non-transaction side, that was the game plan for quite a while now to be able to smooth out volatility associated with the transaction side. And so that is the much bigger piece now in terms of the fees and the subscriptions and in terms of surveillance and all of those kind of things. It gives us a very, very strong steady base. And you put with that the pickup on the transaction side, as well as the focus on bank loans and the refinancings, I think the picture looks a little brighter.

Jack F. Callahan

We also, too, have been benefiting there on the non-transaction side from international growth, both about to some degree in Europe but also from CRISIL. So there is the -- that we grow outside U.S., that's also helping that metric.

Operator

That concludes this morning's call. The presenter's slides will be available soon for downloading from www.mcgraw-hill.com. To request a copy sooner, please e-mail Investor Relations at investor_relations@mcgraw-hill.com. A replay of this call including the Q&A session will be available in about 2 hours. The replay 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.

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