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Executives

Donald S. Rubin - Senior Vice President of Investor Relations

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

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

Analysts

Craig Huber

Peter P. Appert - Piper Jaffray Companies, Research Division

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

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

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

Sloan Bohlen - Goldman Sachs Group Inc., Research Division

The McGraw-Hill Companies (MHP) Q4 2011 Earnings Call January 31, 2012 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 fourth 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

Good morning. We thank everyone in our global audience for joining us this morning at The McGraw-Hill Companies' Fourth Quarter and Full Year 2011 Earnings Call. I'm Donald Rubin, Senior Vice President of Investor Relations for The McGraw-Hill Companies.

This morning, we issued a news release with our fourth quarter results. We trust you've all had a chance to review the release. If you need a copy of it and for the financial schedules, they can be downloaded at www.mcgraw-hill.com. Once again, that is 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 comparison 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 comparable financial measures calculated in accordance with U.S. GAAP. The results we are reporting also reflect the reclassification of the Broadcasting Group as a discontinued operation following the signing of a definitive agreement in October 2011 to sell this business to E.W. Scripps.

In today's news release and on the conference call, we are introducing new names for some operations to reflect changes being created by our Growth and Value Plan. In each case, more information about the new entity is being provided to investors. Under the separation plan, the newly named McGraw-Hill Financial company includes 5 lines of business. They are S&P Ratings, S&P Capital IQ, S&P Indices and Commodities and Commercial Operations. The segment previously named McGraw-Hill Financial now becomes S&P Capital/S&P Indices. We are providing revenue for both S&P Capital IQ and S&P Indices. And over time, additional financial information will be provided on these operations. Information & Media becomes Commodities and Commercial. We are providing revenue for both Commodities and Commercial operations and, over time, more information will be provided about them as well.

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 and 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 Patti Rockenwagner in our New York office at area code (212) 512-3533 subsequent to this call. That's (212) 512-3533.

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

Harold Whittlesey McGraw

Okay, thank you very much, Don, and good morning, everybody, and welcome to our conference call today on the fourth quarter and on the full year results. With me today, besides Don, is Jack Callahan, our Chief Financial Officer.

And this morning, I will briefly review our results for the fourth quarter and the full year, and Jack will provide some additional detail. We're going to discuss the 2011, and 2011 was a milestone year for The McGraw-Hill Companies. I will provide an overview of the accomplishments of our businesses, both across the newly formed McGraw-Hill Financial and McGraw-Hill Education, and then we'll take a look into 2012, which promises to be one of the most momentous periods in our 24-year -- 124-year history of the company. As always, after our prepared remarks, we will be pleased to answer any questions that you may have about The McGraw-Hill Companies.

All right. In the fourth quarter, adjusted diluted earnings per share from continuing operations increased 17% year-over-year to $0.63. That includes $66 million in restructuring charges for severance related to a workforce reduction of approximately 800 positions and $10 million for onetime separation expenses necessary to implement the Growth and Value Plan. Revenue was up 2% and adjusted operating profit grew 8% as results across the portfolio were mixed. Looking at the year in its entirety, 2011 was the second best year in our history for revenue, operating profit and earnings per share. Only 2007 topped our performance in 2011. Revenue increased by 3% to $6.2 billion. On an adjusted basis, 2011 net income from continuing operations grew by 6% to $883 million. Adjusted earnings per diluted share from continuing operations increased 9% to $2.91.

Let me spend a few minutes reflecting on this past year. 2011 was, beyond a doubt, a landmark year for The McGraw-Hill Companies. We produced a strong performance in the face of volatile market conditions and we made important decisions that will better position the company for the future and, we believe, increase returns to our shareholders.

There were 9 milestones -- 9 major milestones during the year and they included: First, the announcement last September of a Growth and Value Plan whose centerpiece is the creation of 2 strong public companies, McGraw-Hill Financial and McGraw-Hill Education.

Secondly, significant and rapid progress in realizing the promise of the Growth and Value Plan, including fourth quarter restructuring and realignment of our benefit plans.

Third was the targeting of at least $100 million in cost reductions.

Fourth was the divestiture of the Broadcasting Group at a very attractive price.

Fifth was the expansion of the core Commodities franchise with a strategic acquisition of 2 new companies in natural gas and steel.

Sixth was the partnership with the Chicago Mercantile Exchange, the CME, to drive future growth of S&P Indices.

Seventh was the successful combination in 2011 of S&P Capital IQ and S&P Indices in a new segment that leverages resources, creates scale, produces solid growth and will be a source of new growth opportunity in financial markets.

Eighth is the rapid growth of digital products and services that are transforming the education market and creating enormous new opportunities for McGraw-Hill Education.

And finally, ninth, was $1.5 billion of share repurchases in 2011.

We are moving quickly to unlock the value inherent in our Growth and Value Plan. Jack Callahan, our CFO, will provide more detail in just a moment on the restructuring to date, but we have already taken significant actions to create 2 efficiently sized corporate structures and separate shared services.

We have established and staffed a Program Management Office, PMO, with 17 work streams. It is a massive global effort. Teams are focusing on growth opportunities, transaction management and cost reductions across the enterprise, including business support services and information technology. They are identifying growth synergies and scalable capabilities. We are using the most seasoned and experienced staffers to help us start realizing the benefits of all this work later this year. It is another reason why we're more confident than ever that at least $100 million in cost savings will be realized.

As part of the Growth and Value Plan, we sought opportunities to monetize assets that do not fit with our strategic thrust. That is why we sold our Broadcasting Group to E.W. Scripps at the end of 2011. We generated excellent value for this asset, $212 million in cash and a pretax gain of $123 million. We also want to make strategic investments in areas that we believe will drive future growth. A common theme is our creation of valuable benchmarks for participants in capital, commercial and commodity markets that become deeply embedded in the workflow of our customers. There are few better examples than Platts and its role in global oil markets. And with new growth opportunities in the trading of gas, steel and iron ore, we expanded the Platts platform by acquiring BENTEK Energy and Steel Business Briefing in 2011. And in November, we announced another important strategic milestone for our Growth and Value Plan, and that was the joint venture partnership with the Chicago Mercantile Exchange that brings together S&P Indices with Dow Jones Indexes once the deal is closed. The new venture provides S&P Indices with a more diversified and enhanced revenue stream. And instead of paying S&P Indices a fixed fee per trade, the CME will pay a share of the profits that it makes on trading and clearing of equity-based futures, swaps and options on the futures. The proposed joint venture is currently undergoing review by the Department of Justice. Subject to regulatory approval and customary closing conditions, we expect the joint venture to close by the end of the second quarter.

In the midst of all this activity, we continue to return wealth to shareholders through the payment of dividends and an active share repurchase program. We completed $1 billion in share repurchases over the course of 2011. And late in the year, we initiated an accelerated $500 million repurchase transaction. That adds up to $1.5 billion for the year, including $845 million in the fourth quarter.

As you can see, we covered a lot of ground in a short period, so we can create later this year 2 independent public companies that, as stand-alones, will increase their respective growth prospects and deliver shareholder value.

In recent months, the Board of Directors of The McGraw-Hill Companies has been engaged in a number of important initiatives as part of this Growth and Value Plan and has been taking into consideration constructive input from major shareholders, including JANA Partners, Ontario Teachers Pension Plan among others. The company is committed to continue working to deliver value to all shareholders by continually evaluating opportunities to improve its corporate structure and portfolio of businesses, aggressively pursuing additional cost reduction initiatives, accelerating growth and returning substantial value to shareholders through share repurchases and dividends.

Now I want to discuss the performance of McGraw-Hill Financial in a little bit more depth. A highlight of 2011 is the demonstrated ability of the operating company, that we will call McGraw-Hill Financial, to navigate successfully through the volatility that characterized capital markets for most of the year and still deliver a solid performance.

Revenue for the recently named McGraw-Hill Financial increased 9%, and adjusted operating profits improved by 7% in 2011. A growth driver is the operation we now call S&P Capital IQ/S&P Indices. We have succeeded in creating a scalable organization with a unique integrated offering for global financial markets. In 2011, it proved to be a resilient revenue and earnings generator and we expect another good year in 2012. Incremental value is being created by leveraging scale, improving the vertical operations and creating horizontal solutions. S&P Capital IQ and S&P Indices, which was formerly known as McGraw-Hill Financial segment, grew its top line at a double-digit rate in 2011. Revenue was up 14% for the year and grew by 11%, excluding the acquisitions of TheMarkets.com. The operating margin expanded to 30%, up from 26.5% in 2010.

Subscriptions account for 73% of the total revenue and grew by 13% in 2011, which is a good sign for performance in 2012. One of the crown jewels is S&P Indices which produced revenue of $323 million in 2011, an 18% year-over-year increase. S&P Indices generates revenue from a variety of sources. There are fees based on assets under management in exchange-traded funds that are linked to S&P Indices. At year-end 2011, there were $314 billion in assets under management in exchange-traded funds based on S&P Indices, and that's a year-over-year increase of 4.5%. There are royalties based on the trading volume of derivative contacts -- contracts listed on the Chicago Mercantile Exchange, the Chicago Board Options Exchange, the Australian Securities Exchange and the Montréal Exchange. In the fourth quarter, the average daily volume of more than 3.7 million contracts for the major exchange-traded derivatives represented a 26% year-over-year increase and we're paid every time a contract is traded.

There are also fees for over-the-counter derivatives and retail-structured products. And finally, there are data subscriptions for our information and research.

Revenue for S&P Capital IQ, which includes the Integrated Desktop Solutions, Enterprise Solutions and Research & Analytics, increased by 13% in 2011 compared to 2010. Capital IQ, the Global Credit Portal and the Global Data Solutions all grew in 2011. Capital IQ gained share and increased its number of clients to more than 3,800, and that's a 14% year-over-year increase.

Let me move over to Standard & Poor's Ratings. And at Standard & Poor's Ratings, despite lackluster new-issue dollar volume in the closing months of 2011, for the most part, in the face of the European debt crisis and concerns over an economic downturn, we still produced a 4% increase in revenue for the year. Indeed, the first half of 2011 was quite strong with revenue growth of 14%. But revenue did tail off in the second half, declining by 5%. Excluding fourth quarter restructuring charges, operating profit in 2011 declined by 4% to $728 million with an operating margin of 41%. Once again, non-transaction revenue proved its durability, growing by 8% in 2011 to $1.1 billion and accounting for 63% of Standard & Poor Ratings' total revenue. Non-transaction revenue includes annual contracts, surveillance fees and a royalty from S&P Capital IQ/S&P Indices to distribute the content. But the growth of non-transaction revenue is partially offset by a 2% decline in transaction revenue in 2011. We expect non-transaction revenue to grow again in 2012, and transaction revenue faces some challenging comparisons after a very, very strong first half in 2011.

We note that regulatory costs for our QCCR program came in essentially on target in 2011 and we're expected to increase just slightly this year for 2012.

Looking forward, we remain encouraged by the longer-term outlook for the bond market. There is a huge pipeline of maturing global corporate debt that will need to be refinanced over the next several years. In Europe, increasing bank capital requirements will continue to shift corporate financing from bank loans to the public debt market. The recovery of structured finance markets remains problematic. Most activity in residential mortgage-backed securities and commercial mortgage-backed securities depends on the recovery of the residential and commercial real estate market, but we do expect a pickup in auto and credit card issuance to lead to improvement in the asset-backed securities market in both in the United States and in Europe.

We do anticipate continued volatility in 2012, but we remain optimistic about the growth potential longer-term. We continue to make progress in regulatory and legal matters. In Europe, there is mounting criticism of some of the features of CRA 3. Now that's the European Commission's latest proposal for regulating rating agencies. Significantly, the pushback is coming from market participants and the European Securities and Markets Authority or ESMA. A lot of criticism is focused on the issue of proposed mandatory rotation of coverage among rating agencies for certain periods. It is still early days in this latest round with the European Commission, but it is already clear that its new proposals are coming under significant criticism from a wide range of parties who are concerned about the potential for market disruption and obviously unintended consequences.

Since our last report, the number of lawsuits that have been dismissed outright has grown to 24, and 10 have been voluntarily withdrawn. Seven dismissals by lower courts have been reaffirmed by higher courts. We will be appealing the latest court decision in the CalPERS case. We strongly disagree with the court's ruling earlier this month that CalPERS had made a sufficient showing to allow the case to proceed. There will be no pretrial discovery while the appeal is pending. And the process could take another 12 to 18 months. On January 23, we filed a motion for summary judgment in the Abu Dhabi case. Any decision on our motion is probably many months away. And as we said consistently from the very beginning and it is proving out, we continue to believe that the legal risk is low.

Consistent with the Growth and Value Plan strategy and the divestiture of Broadcasting, we report results for Commodities and Commercial brands, which were formerly named in the Information & Media segment. Revenue for all of these brands grew by 10% in 2011, and excluding restructuring charges, operating profit was up 13% with an operating margin of 21%. These operations are increasingly digital and based on subscriptions. Total subscription revenue grew by 13% in 2011 and now accounts for 63% of the revenue. In Commodities, Platts completed another strong year by growing 22% to $419 million. Excluding the acquisition of BENTEK Energy and Steel Business Briefing, revenue was up 15% for 2011. Volatility in energy prices drives demand for Platts' proprietary content, including news, price assessments and analytics for trading decisions. Platts, obviously, is one of our gems. We have steadily built this business over the years, creating high value and double-digit growth. In fact, Platts has produced a compound annual growth rate since 1994 of 12%. That’s 17 years with a compound annual growth rate of 12%. We like the outlook for this business.

Revenue for Commercial, which includes J.D. Power, McGraw-Hill Construction and Aviation Week, grew by 2% in 2011 to $477 million. Continued strength in emerging markets, including China, recovery in the Western Europe and growth in the U.S. is increasing demand for automotive studies. New digital products like SpecShare, BuildShare and BidPro, will be key factors in the recovery of the McGraw-Hill Construction. More are on the way.

We expect another year of growth in Commodities and Commercial markets in 2012. These highlights will begin to give you some indication of what we are planning overall for McGraw-Hill Financial.

As this slide illustrates, we plan to report results for 5 lines of business. In today's earnings release, we provided tables recapping quarterly revenue for 2011 and 2010 for each of these 5 lines of business. As we move closer to separation, close our deal with the Chicago Mercantile Exchange and realign our cost structure, we will provide greater transparency on the bottom line contribution from these 5 lines of businesses as well.

Let me hold it there and let me move over to McGraw-Hill Education. In 2011, we have a tale of 2 markets and repositioning of Education for the digital world; Growth in Higher Education, Professional and International spurred by digital products and services and a decline in elementary-high school education. A strong finish in the U.S. higher education marketplace helped produce 4% revenue growth for us to $516 million for McGraw-Hill Education in the fourth quarter. Revenue for the year declined by 6% to $2.3 billion. Tight expense controls, lower prepublication amortization, lower reserve requirements and reduced selling and marketing expenses were all factors in McGraw-Hill Education's 2011 performance. The growth of digital products and services is fundamentally changing the higher education and professional market. In U.S. higher education, our sales of digital products and services grew by more than 40% and enabled us to gain share in 2011. Digital sales now account for about 20% of our Higher Education revenue. Homework management products for students are key to this rapid growth.

In professional markets, we are also experiencing strong double-digit growth for eBooks and for subscriptions to online professional products. In 2011, nearly 30% of our revenue in professional markets came from eBooks, online subscriptions and apps for mobile devices. The digital integration of curricula, technology and distribution is creating significant new global growth opportunities for McGraw-Hill Education by providing new revenue streams, including more subscription-based businesses while lowering our costs.

The digital evolution is moving more slowly in the elementary and high school market, but it is picking up speed. Last June, we became the first educational publisher to launch completely digital, cloud-based curriculums with our CINCH, that's C-I-N-C-H, CINCH Learning programs for science and math. These programs are device-agnostic, accessible on any computer, tablet or mobile service. And as announced earlier this month, we are working with Apple to create enhanced interactive program specifically for the iPad. Five high school math and science titles are already available, and we expect to double this number during the year. Our goal is to improve learning outcomes by making learning more accessible, personalized and engaging. These dynamics should help McGraw-Hill Education improve its results in 2012.

The decline in school education reflects historically low funding for U.S. elementary and high school markets. Sales in the el-hi market in 2011 decreased by 9.4% to about $3.3 billion according to the Association of American publishers. Our performance was heavily influenced by a decision not to participate in several state adoptions due to the uncertainty over funding and to challenging comparisons in Texas and Florida where large orders in 2010 did not repeat due to changes in subject categories being purchased.

We will ramp up our participation in the new state adoption market in 2012 to 96%. That's an increase from 75% in 2011. But we expect another challenging year for el-hi publishing as the size of state new adoption markets will decline by an estimated 40%.

So let's sum up. In 2011, we produced enormous change in a short period of time and recorded the second best results in our history. This year promises to be even more momentous as we prepare for the introduction of 2 separate companies. We see another challenging and volatile year in our markets, but I'm confident in the strength of our businesses and the leadership team that was tested in 2011.

On a consolidated basis for the McGraw-Hill Companies, our baseline earnings per share outlook for 2012 is $3.25 to $3.35. Actual results will be significantly influenced by the timing of separation and the additional cost-reduction actions that are still ahead of us, but $3.25 to $3.35 representing 12% to 15% over 2011. We will provide regular updates on our progress throughout the year.

Now, at this point, let me turn it over to Jack Callahan, and he's going to give us a few more details on our financial performance. Jack?

Jack F. Callahan

Thank you, Terry. 2011 was certainly an active and productive year at the McGraw-Hill Companies. Let's start off with a review of fourth quarter segment operating performance. I want to provide additional detail to the summary Terry provided.

McGraw-Hill Education had an outstanding quarter with revenue growing 4% or $20 million and expenses declining $37 million, yielding adjusted operating profit of $72 million, an increase year-on-year of $57 million. This step-up in performance was led by the Higher Education, Professional and International Group with a revenue increase of 8% or $27 million in the quarter. This was partially offset by a modest decline at the School Education Group. Fourth quarter revenue growth was particularly strong in Higher Ed, aided by custom publishing and strong digital sales with Higher Ed digital sales growing more than 40%. Additionally, Higher Ed and Professional both benefited from significant decline in returns. Expenses benefited from tight overall expense control, lower prepublication amortization, lower reserve requirements and lower selling and marketing expense.

Turning now to McGraw-Hill Financial. The volatility on the global credit markets certainly had an impact on quarterly results. Revenue was essentially flat and adjusted operating profit declined 8%.

Let's take a look at the fourth quarter results across McGraw-Hill Financial. Overall, a decline at Standard & Poor's Ratings offset continued growth at the other lines of business. The global credit markets were down significantly in the fourth quarter. For example, the high-yield market globally was down by almost 2/3. As a result, S&P Ratings revenue declined 8%, driven by a 26% decline in transaction revenue. This resulted in a $49 million decline in adjusted operating profit.

S&P Capital IQ and S&P Indices had another strong quarter. Revenue grew 8% versus the toughest comps of the year and the lapping of TheMarkets.com acquisition that closed in the fourth quarter a year ago. Operating profit, driven in part by the continuing leverage of increasing integration across these businesses, grew 29%. The Commodities and Commercial lines of business revenue also grew 8%, driven by continued momentum in Platts, aided by the acquisitions of BENTEK Energy and Steel Business Briefing Group. Commercial revenue declined modestly in the quarter, largely due to the construction business although the introduction of new digital products has begun to mitigate the contraction. Overall, Commodities and Commercial adjusted operating profit grew 2% for the quarter. Margins were impacted a bit by the integration of the acquisitions and the timing of investments.

Let's now review the drivers of consolidated profit growth both for the fourth quarter and the full year. Adjusted corporate expense was $54 million in the quarter, an increase of $7 million from the prior year, largely driven by increased professional fees and incentive compensation. For the full year, adjusted corporate expense increased $9 million or 5% to $173 million. 2011 adjusted corporate expense excludes $17 million in restructuring charges for a workforce reduction of approximately 120 positions as we begin to realign corporate costs. 2011 adjusted corporate expense also excludes $10 million for onetime separation-related expenses.

The excellent results for McGraw-Hill Education drove an increase in the fourth quarter consolidated adjusted operating profit of 8%. For the full year, consolidated adjusted operating profit was $1.5 billion, up 5% from last year. Net interest expense was $18 million in Q4, a modest decline versus prior year. For the full year, net interest expense was $75 million, a decline of $7 million from the prior year. Our effective tax rate from continuing operations was 36.3% both for the fourth quarter and the full year, flat versus 2010. Net income attributable to noncontrolling interest was $7 million in the fourth quarter and $23 million for the year. CRISIL represents the overwhelming majority of this number. Adjusted net income from continuing operations grew 10% in the fourth quarter to $184 million. Full year adjusted net income was $883 million, an increase of 6%. Our diluted weighted average shares outstanding for the quarter was $292.4 million, a $17.9 million decrease from the prior year and $11.3 million decrease from the third quarter. This decline is due to share repurchases, which more than offset equity-related awards. The $500 million accelerated share repurchase transaction that we entered into on December 7 had a minimal impact on the fourth quarter shares outstanding. Adjusted earnings per share from continuing operations for the fourth quarter grew 17% to $0.63. For the full year, adjusted earnings per share was $2.91, up 9% versus 2010.

Let me spend a minute discussing several onetime items related to the Growth and Value Plan. We completed the sale of non-core Broadcasting Group to E.W. Scripps for $212 million in cash, providing a onetime pretax gain of $123 million. This is shown as part of discontinued operations. We also implemented Wave 1 of targeted cost reductions by eliminating approximately 800 positions, including activities at Education, corporate and shared services and selected businesses with the McGraw-Hill Financial. We incurred $66 million in restructuring charges with these actions. Lastly, we incurred $10 million in onetime separations costs. These costs are professional fees tied directly to the work underway to separate the 2 businesses. Restructuring charges and onetime separation costs are both excluded from adjusted earnings. We anticipate additional restructuring and separation costs throughout 2012.

Now let me turn to cash flow. As a reminder, we define free cash flow as GAAP cash provided by operating activities less capital expenditures and dividends. Our computation of free cash flow also excludes $48 million in taxes paid on the gain from a disposition of the Broadcasting Group. We generated cash flow of $1.1 billion before dividends. After dividends, free cash flow was $807 million versus $881 million in 2010. The modest decline was driven by challenging end-of-year working capital comparison.

Turning now to capital allocation. We spent $1.7 billion on acquisitions and share repurchases in 2011, $200 million for acquisitions, $1.5 billion for share repurchases. The most notable acquisitions were BENTEK Energy and Steel Business Briefing Group. Both acquisitions added to Platts' growing platform, adding critical capability in the natural gas and iron ore markets. Share repurchases were $845 million in the fourth quarter, including $500 million through an accelerated share repurchase program. Excluding the accelerated share program, we spent $1 billion on share repurchases in 2011, acquiring 24.7 million shares at an average price of $40.48 per share. We have received a substantial majority of the shares underlying the accelerated share repurchase transaction. This transaction will be complete in early 2012. The corporation finished the year with 276 million basic shares outstanding. Fully diluted shares outstanding at December 31, 2011, were approximately 283 million. Adjusted for the estimated full impact of the accelerated share repurchase transaction, approximately 23 million shares remain under our existing share repurchase authorization.

I'll now provide an update on separation. Focus on separation before the end of 2012 requires coordination of multiple complex work streams. Our cost-reduction program involves disaggregating shared services and establishing 2 appropriately sized corporate centers. Wave 1 of the cost reductions are well underway based on Q4 restructuring and the benefit plan realignment. Additional waves of cost reduction are anticipated during 2012, targeting at least $100 million in total cost reductions on a run rate basis by the end of the year. As I mentioned earlier, restructuring and onetime separation costs should be anticipated in 2012.

Let me provide some additional color on our guidance for 2012. Our 2012 baseline guidance provided on a going-concern basis. It includes the benefits of the Wave 1 cost-reduction program. It excludes the impact of additional restructuring and onetime separation costs. Our EPS guidance is not dependent on additional share repurchase. We will provide regular updates as new leadership teams are formed and implementation plans are finalized.

More specifically, let me provide some details on our growth expectations for 2012.

For McGraw-Hill Financial overall, we expect high-single digit revenue and adjusted operating profit growth. S&P Capital IQ and Indices and Commodities and Commercial are expected to continue to grow strongly, consistent with our expectations for McGraw-Hill Financial overall. Our current guidance for S&P Ratings is mid-single digit growth. S&P Ratings will benefit from continued growth in non-transaction revenue. Transaction revenue will benefit from the pipeline of maturing global corporate debt that will need to be refinanced, though volatility in the capital markets makes quarterly timing difficult to project. As Terry indicated earlier, first half comparisons for the Ratings business will be challenging.

McGraw-Hill Education revenue and profit are expected to be relatively flat versus 2011 as a result of the challenging el-hi market. Restructuring savings from 2011 actions will offset the market softness and enable reinvestment in digital capability, positioning the business well as the market recovers.

Benefiting from strong growth at McGraw-Hill Financial, augmented by the impact of share repurchases, earnings per share is expected to be $3.25 to $3.35, representing 12% to 15% growth versus 2011's adjusted earnings per share of $2.91. Obviously, actual results will be impacted by the timing of separation.

Let me just add a number of other items. On corporate expense, benefiting from the restructuring actions in 2011, we expect a single-digit decline in corporate expense. Our effective tax rate and interest should be comparable to 2011. This guidance that we're providing today is based on a fully diluted weighted shares outstanding of approximately 284 million, which includes the completion of the accelerated share repurchase transaction as well as the impact of equity-related awards. 2012 cash flow is expected to be approximately $750 million after dividends despite modest increases in reinvestment. Capital expenditures are projected to be $125 million to $150 million versus the $119 million in 2011. And prepublication investment is projected to be $160 million to $190 million versus the $158 million in 2011.

As we prepare for the separation of McGraw-Hill Financial and Education business in 2012, we are extremely well capitalized with cash and short-term investments at the end of the year of approximately $973 million. Cash and short-term investments decreased $575 million from December 31, 2010, largely due to acquisitions and share repurchase. Gross debt was comprised of approximately $1.2 billion unsecured senior notes. No commercial paper is outstanding.

So in closing, the McGraw-Hill Companies finished a strong 2011 despite challenges in some of our key markets. We anticipate continued growth into 2012. And overall, 2012 promises to be a momentous year as we prepare for the introduction of 2 stand-alone companies, each with industry-leading positions.

With that, let me turn the call back over to Terry.

Harold Whittlesey McGraw

Okay, thanks, Jack, and let me turn it to Don Rubin who will moderate our question-and-answer session.

Donald S. Rubin

Thank you, Terry. [Operator Instructions] We are now ready for the first question.

Question-and-Answer Session

Operator

Our first question comes from Craig Huber, Huber Research Partners.

Craig Huber

Terry, question. On your cost savings target of over $100 million, as you think about that number and you think about you had about $4.8 billion of cost in 2011, it looks like you adjusted for these onetime items. Isn't roughly $100 million kind of a drop in the bucket here? I mean don't you think at the end of the day you guys could get multiples of that number?

Harold Whittlesey McGraw

Now look, in terms of the most important aspect of the Growth and Value Plan, in terms of developing these 2 powerful dynamic stand-alone companies, is to get the cost structures right for both of them. And that's what we're working very hard on. As Jack was talking about, the biggest area in the issue are the shared costs, especially in terms of some of the corporate expenses and the IT expenses. And so as we get into those and breaking those down, we'll see. And I think that going into this Growth and Value Plan saying at least $100 million is the right thing. As we get through the work streams in terms of the separation, we'll see what's what on that one. We get a lot of questions. Could it be $150 million, could it be even higher and all those kind of things. We're going to do whatever it takes to be able to get the right cost structure so that from a value standpoint, we're getting the recognition for that. So I think just saying at least $100 million at this point is the right thing to do. But again, we will keep you updated on our progress as we go.

Jack F. Callahan

I would just add there's a timing aspect to this, too. We're saying exceed $100 million by the end of 2012 on a run rate basis. As we're getting to the detailed plans, we're seeing lots of opportunities, but it may take a little bit longer to realize beyond that target. But we're feeling very good based on the progress that we're making and the discussions that we have underway in terms of the disaggregations of the business.

Craig Huber

And then within your EPS guidance, if I could ask, how much cost cutting is in there for full year 2012?

Jack F. Callahan

For right now, it just includes the Wave 1 restructurings that are part of this announcement. So additional cost reductions would be on top of that guidance. Now how much of that is actually realized in 2012, we'll be back with more detail on that as we go through the year.

Craig Huber

And my other question, if I could, there’s $973 million of cash on your balance sheet end of the quarter, how much of that roughly is tied up overseas? And then also, what is your use -- what's your thoughts on uses of free cash flow in this upcoming year?

Jack F. Callahan

We do have to balance our domestic and international cash. We do have several hundred million dollars that are offshore and we do need -- particularly in the first half of the year, we do need to manage our domestic cash position to some degree. So going forward to this year, we will look for continued tuck-in acquisitions like we have completed over the last few years. And we look to be sure that we want to have the financial flexibility as we move to the separation of separate entities. And beyond that flexibility, if we think that then there's additional opportunity for further share repurchase on top of what is included in the guidance, we will come back and contemplate that as we get deeper into the year and the timing and means of separation is clear.

Harold Whittlesey McGraw

And Craig, yes, as you know, of the 4 uses for our free cash flow, the comments on dividends and share repurchase, those are very important to us on one hand. The other is that on the McGraw-Hill Education side, organic growth is going to be very important in terms of some of the digital transformation and all the progress that we're making on that side, which is very exciting. Transactions probably more on the McGraw-Hill Financial side.

Operator

Our next question comes from Peter Appert with Piper Jaffray.

Peter P. Appert - Piper Jaffray Companies, Research Division

Terry, a couple of questions on the Ratings business. Can you talk a little bit about what you're seeing from a market share perspective? My sense is maybe you've seen a little slippage there in 2011. Second, can you talk about what you're seeing at the start of 2012? My sense is the market may be off to a reasonably robust start so far this year. And then lastly, what should we think about in terms of near- and longer-term targets in terms of margin potential in the Ratings business?

Harold Whittlesey McGraw

Okay. Again, in terms of market share, Peter, the only area that we’re impacted a little bit is on the structured finance side. And I would see as that starts to pick up and we hope for some more recovery, not just the asset-backed area, but as we see probably more on the commercial mortgage-backed market a little bit -- I think residential mortgage-backed is going to stay softer for a while -- that that would improve a little bit. But on the other areas, we're in really good shape. As you asked on 2012 and the start of the year, again remembering that the first half of last year was so strong and the second half was weaker, we're starting on a weaker demand pipeline at this point. Obviously, the refinancings and some of the infrastructure financings that are going on are going to have some pickup in all of that. We'll have to see as the year starts to unfold. But I think that from an activity level overall, the market activity is a little softer getting started. Longer-term targets on margins really are going to be influenced more by the cost basis. Increasingly, as some of the legal and regulatory cost issues subside, I think that we will definitely see margin improvement on that part. But we're very pleased with the margin levels that we're at now. But we just think that with some of the expense issues starting to subside that, that'll give us some benefit.

Jack F. Callahan

Just to add on the margin point, if you guys look at our expense growth in the business this year, I mean the first half of the year was high-double digit expense growth, back half of the year just around 3%. So the growth -- the expense growth is moderating a bit, and I think the actual result was going to depend a little bit on just the way the markets behave and what sort of volatility we see -- we have seen and we know the long-term pipeline looks pretty good. It's just a question of timing.

Peter P. Appert - Piper Jaffray Companies, Research Division

Okay. And then could I ask one follow-up, please? In terms of the Cap IQ and Index business, you had phenomenal performance there this year. Is there further room for margin upside in that business?

Harold Whittlesey McGraw

Yes, I think so. And obviously, as we complete the joint venture with CME, you have a really exciting opportunity with the complementary nature of the Dow Jones Indexes and the S&P Indices. Again, the S&P Indices focused on the institutional investor market and the Dow Jones more retail-oriented, so you've got a wonderful platform in a combination there. And there's endless permutations to the exchange-traded funds that you can develop. And therefore, we're benefiting from that kind of growth and that's why I think that, from an expense standpoint, it's pretty modest and therefore you can expect further growth.

Peter P. Appert - Piper Jaffray Companies, Research Division

When does that deal close, Terry?

Harold Whittlesey McGraw

Well, it's all up to the examination at the Justice Department at this point. We think that clearly by the end of the second quarter, Peter, but hopefully maybe even sooner.

Operator

Our next question comes from Doug Arthur with Evercore.

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

Terry, the big -- clearly, the big surprise in the quarter was Higher Ed. It looks like Professional was down in the quarter or at least International was down, Professional up slightly. So Higher Ed had a great revenue quarter, particularly compared to year-to-date. What changed? Was there anything unusual? Were there any onetime orders? Or was that just a catch-up?

Harold Whittlesey McGraw

Well, I think it's probably a little bit more of the latter, but you also have very, very good expense controls there that also helped that issue. But again, the growth of digital product, 40% growth, 20% of our revenues really is there. You're talking about programs like McGraw-Hill Connect, McGraw-Hill Campus, McGraw-Hill Create, LearnSmart, which is the adaptive learning capability in the learning solution business. And now with our introduction of our agreement with Apple, you're going to see an acceleration of that. But the digital transformation is that we've been talking about, working on, investing in is really materializing on that, and that's very exciting.

Operator

Our next question comes from Michael Meltz with JPMorgan.

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

Three questions for you. First one, Don, what number earnings report is this for you?

Donald S. Rubin

I'll have to get back to you, Michael.

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

Terry or Jack, can you tell us on the spend -- education spend, I mean it sounds like there's no change to the timing. But can you talk about, kind of from here, when should we expect the Form 10 to be out? Or what are the major milestones ahead? And then I have one follow-up.

Jack F. Callahan

Yes, sure. Mike, we've already knocked a few of those off. We already have submitted -- put our letter into the IRS for the tax ruling. That was completed in December. We are very much on pace with the filing of the Form 10. We'd probably target right now, I would say, the first few weeks of April in terms of moving that forward. So we're progressing. I might actually -- I think some of the bigger things for us to sort through are less the sort of regulatory or formulaic pieces of a spin. It's more just the hard work we have ahead of us in terms of disassembling some of the plumbing that connects all the businesses and sorting out how we build stand-alone capability in each business. That's probably the bigger pacing element ahead of us.

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

Okay. And then really a separate question on S&P. I think, Jack, you said mid-single digit revenue growth in '12. That's your expectation?

Jack F. Callahan

That's right.

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

Can you talk -- I think at the end of the day, '11 was up about 4% and so I'm just wondering, you mentioned the word challenging and volatile many times on this call. Can you talk a little bit more discreetly about your expectations? How do you get to mid-single digit revenue growth in that business this year?

Jack F. Callahan

Well, it's what we know that's the overall fundamental demand in terms of the amount of debt out there that has to be refinanced is quite considerable. We know just in terms of companies coming in looking to ask for our update, their company rating to be ready to move is our -- that part of our business is doing quite well. So our sense is the pipeline’s quite good. And then whenever the capital markets appear to open, there seems to be a pretty good flood of interest into the market. So what makes it challenging looking forward is exactly when that's going to happen. I mean if you look at 2011, first half of the year was actually quite good, back half really challenging. So that's why we've kind of landed so we've gone back and forth on sort of that mid-single digit, pretty much in line with what we saw this year. Admittedly, it was very volatile quarter-to-quarter.

Harold Whittlesey McGraw

Yes, and I think, Michael, I think from a forecasting standpoint, it's very responsive, but obviously modest. And what we would hope for is a pickup. We'll see as we go. But comparisons, as Jack says, to the first half of the year are going to be difficult. But not only is it the refinancing number that's a big one. S&P is projecting that between now and 2020, you've got some $15 trillion of infrastructure financing that's going to take place. About 1/2 of that is coming out of Asia, and so those are big numbers as well. And so we're tracking a lot of the bigger pools on that part. But hopefully, we'll start to see the pipeline get a little bit more robust and we'll start to see a pickup on parts of the structured finance as well. And by the way, Michael, thank you very much for your comment about Don Rubin. Don Rubin has been at it for 52 years. He is one of our absolute stars and you are going to miss the heck out of him in all of that and -- but thank you for bringing that up.

Operator

Our next question comes from Bill Bird from Lazard.

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

Two questions. I just wanted to clarify what your best estimate is now on spend timing. And then second, what's a reasonable range to think about for 2012 buybacks?

Harold Whittlesey McGraw

Okay. In terms of the spend, as you know, as we talked about the Program Management Office and the 17 work streams, so much work has gone on and so much -- I think we're still focusing on the separation of the shared expenses and to be able to articulate very clear, effective and efficient cost structures for the 2 entities. Clearly, we're talking 2012 and we're going to do everything we can to accelerate this as best we can. As Jack was talking about, looking at early April for the Form 10. Once we get those notions completed, then it's execution of the cost structure. So it will be in the second half of 2012. But every effort is being made to speed that along, but clearly in the second half of 2012. And in terms of share repurchases, well, yes, we did $1.5 billion in 2011 and we're still completing a little bit more of the accelerated share repurchase of the $500 million. We have a little left to go on that. We have 23 million shares authorized left in the current authorization and we'll be watching market activity levels and the like. You know we're very strong on share repurchase and believe in it. And therefore, we're just going to complete the $500 million accelerated portion and then we'll gauge market conditions early on in the year and we'll make an assessment on that. But we're very favorable towards it.

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

And just a follow-on, on CRA 3, what is your best estimate on when you'll know an outcome on it?

Harold Whittlesey McGraw

It's still early on. In some cases, people are still trying to understand CRA 1 and CRA 2 on this one. CRA 3 is not very well understood and what we're just beginning to see is a broader understanding of what some of the issues there are. And the early on criticism of it, I think, is taking its toll. And my sense is that there's going to be sort of a resolution process here where things are going to change and people are going to take on different initiatives. So at this point, it's very early on. But and again, CRA 2 isn't very well understood, so CRA 3 has got a lot of work and a lot of places to go. So we're going to be a part of it and we're going to be putting our comments in, but also you can expect a lot of market reaction. And everybody doesn't want to see the market wounded or unintended consequences associated with that. So I think it's very early on.

Operator

Our next question comes from Sloan Bohlen with Goldman Sachs.

Sloan Bohlen - Goldman Sachs Group Inc., Research Division

Terry, just a couple of questions on Education. In your 2012 guidance, I think you speak to revenues being flat for the segment. Can you maybe reconcile that with the 40% decline you expect from the new adoption market in '12? Just where do they offset?

Harold Whittlesey McGraw

Well, again, in terms of the overall, Sloan, the cost reductions and the expense controls on that, we're going to see a lot from that standpoint. The real issue is coming out of el-hi. The funding pressures are there. We are pushing very aggressively on the high school market and where it needs to be. But also, the digital transformation at the Higher Ed is going to be the area that we're going to succeed the most. We're obviously looking at a successful participation in the Florida's social studies area, which is the biggest opportunity coming up for this year. But again, it's going to be expensed, it's going to be competing well in some of the key areas and the digital transformation on that one. But those are market pressures that we're seeing there. The digital transformation is something we're going to continue to focus on.

Jack F. Callahan

And just by segment, while we do, in the plan, consistent with the discussion, we do have a decline in K-12 consistent with what we see in the adoption market. We are gaining sufficient growth elsewhere in the portfolio to offset the decline. And even within K-12, our participation rate this year, it -- we're going to -- that's going to go up a little bit, so we’ll see. But it's going to be a little bit of a balancing act between what is admittedly going to be a weak overall market in K-12 versus the balance of the portfolio.

Sloan Bohlen - Goldman Sachs Group Inc., Research Division

Okay. And then just a question on the alignment with Apple and maybe outside of Apple even, just what could the profit margin be on a digital offering that maybe comes at a $15 price point? Could you maybe talk a little bit about that.

Harold Whittlesey McGraw

Yes, I think the -- it's very early on. We have developed 5 programs for the iPad for the high school market. We will double that this year, maybe more on that part. But when you start talking about the introduction of this, you're talking about a huge change in terms of not only the curricula but the distribution and the learning capability of this. We're very excited about this thing. And the $15 price point, if we get the scale and if we get the volume, we'll be in fine shape with this. But it's really early on with this one. This is one that we just announced a couple of weeks ago on this part. But we'll keep this in front of us. But I'm anxious to demonstrate some of this, Sloan, to investors in terms of how exciting this is and all that.

Operator

We will now take our final question from Craig Huber, Huber Research Partners.

Craig Huber

Can you update us, if you would, please, on your thoughts on price increases for the transaction, non-transaction revenues within the Ratings business for 2012?

Donald S. Rubin

Craig, all-in, S&P is looking at a 4% to 5% price increase for 2012.

Craig Huber

Does that include the same on the transaction side, Don?

Donald S. Rubin

That's sort of a consensus figure representing a very complex pricing schedule over all kinds of instruments.

Craig Huber

And there's also -- that's okay. So 4% to 5%. And then my other question, can you talk about the open territories a little bit further here for 2012? Are you thinking the adoption market will drop 40% given the state budget issues out there, the economic issues and all that? What's your preliminary thought on the open territories for 2012?

Harold Whittlesey McGraw

Yes, I think that it's going to be obviously mixed and it depends on state-by-state, but I'm looking for very modest participation in the aggregate. Again, the state funding issues in the open territories are the same ones facing the adoption states. And so I think that you'll see some decline there as well.

Jack F. Callahan

Yes, but the declines won't be quite as dramatic, so in mid-single digits. Overall, I do think -- and our hope is that 2012 now overall between both the new adoption, the open territories sort of is a new base on which we can begin to move out to as we move past 2012.

Operator

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, 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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