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Executives

Robert S. Merritt - Vice President of Investor Relations

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

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

Analysts

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

Manav Patnaik - Barclays Capital, Research Division

George K. Tong - Piper Jaffray Companies, Research Division

Craig Huber

David Reynolds - Jefferies & Company, Inc., Research Division

William A. Warmington - Raymond James & Associates, Inc., Research Division

The McGraw-Hill Companies (MHP) Q3 2012 Earnings Call November 2, 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 third quarter earnings webcast. [Operator Instructions]

I'd now like to introduce Mr. Chip Merritt, Vice President of Investor Relations for The McGraw-Hill Companies. Sir, you may begin.

Robert S. Merritt

Good morning, and thank you for joining us for McGraw-Hill's Third Quarter 2012 Earnings Call. This morning, we issued a news release with our results. We trust you've all had a chance to review it. If you need a copy of the release and financial schedules, they can be downloaded at www.mcgraw-hill.com. Once again, that's www.mcgraw-hill.com.

In today's earnings release and during the conference call, we are providing adjusted financial information. This information is provided to enable investors to make meaningful comparisons of the corporation's operating performance between periods and to view the corporation'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. The results for the prior year quarter also reflect the reclassification of the Broadcasting Group as a discontinued operation.

Before we begin, I need to provide certain cautionary remarks about forward-looking statements. Except for historical information, the matters discussed in the teleconference may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates and descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. In this regard, we direct listeners to the cautionary statements contained in our Form 10-Ks, 10-Qs and other periodic reports filed with the U.S. Securities and Exchange Commission.

We are aware that we do have some media representatives with us on the call. However, this call is intended for investors, and we would ask that questions from the media be directed to Patti Rockenwagner in our New York office at (212) 512-3533.

Now I would 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, Chip. And good morning, everyone, and welcome to today's conference call. Joining me on today's conference call is Jack Callahan, our Chief Financial Officer. This morning, Jack and I will review our corporate results. We're going to provide an update on our Growth and Value Plan progress. We'll provide a detailed look at the segment results that make up what will be McGraw-Hill Financial and McGraw-Hill Education and then, provide an outlook for the balance of the year.

Now, like many other New York companies, we delayed our earnings report from Wednesday to today to accommodate employees and shareholders impacted by Hurricane Sandy. And thankfully, all of our employees are safe, and our business continuity plans are operating effectively. Our employees have really stepped up to work through the many challenges, and I'm grateful to them and to the state and city workers who have done so much to help us over this past week. And I hope those of you on the phone affected by the storm are safe and starting the process to return to some state of normality as well.

All right. Let me begin by saying that we are pleased by the success of our Growth and Value Plan and the strong results of the McGraw-Hill Financial businesses. Now while the Education company is facing some very tough current challenges in the U.S. education sector, we feel very excited by the promise of digital learning and by our new digital products and services, which are improving learning outcomes for students everywhere. And this digital transformation is gaining momentum, and we'll talk about that in just a little bit.

During the third quarter, the company delivered a 2% increase in revenue. McGraw-Hill Financial, which realized a boost from the robust global issuance, delivered a 15% increase in revenue. Separately, McGraw-Hill Education delivered an 11% decrease in revenue as it managed the impact of the weakest level of state funding for K-12 textbooks in the past decade. Adjusted operating profit increased 3%, and due to our aggressive share repurchase program, we delivered 10% growth in adjusted diluted earnings per share, and Jack will provide a little additional financial detail on that in just a moment.

A little over a year ago, we made a set of commitments in this Growth and Value Plan, and I'm proud of the substantial progress that our employees have made on each of these commitments. And let me take a moment and just walk through these different commitments and give you an update as to where we are.

The first and most visible commitment is the separation of the company into 2 industry-leading companies, McGraw-Hill Financial and McGraw-Hill Education; and we are on track to do so. Amendment #2 to the Form 10 SEC Registration Statement for the potential spinoff of McGraw-Hill Education was filed with the Securities and Exchange Commission earlier this month, and we don't anticipate any substantial issues with that.

In parallel with our efforts to spin off McGraw-Hill Education, we have undertaken a thorough evaluation process of numerous options, including the option to sell the business. This process is near its conclusion, and we expect to reach a decision in the coming weeks. Critical to this decision is ensuring that we choose the option that maximizes shareholder value. The timing of the ultimate separation will be dictated by which option is chosen.

We have also committed to more than $100 million in run rate cost reductions by the end of the year. We're on track for this, and Jack will provide some color on this in just a moment. We committed to aggressively repurchasing shares, and after completing the $1.5 billion share repurchase program earlier this year, we reentered the market in the third quarter and purchased an additional $295 million of McGraw-Hill stock.

Lastly, we committed to investing for growth. Earlier this year, we formed the S&P Dow Jones Indices joint venture. Importantly, this is the first quarter that we have managed and reported the combined results for some of the most widely followed and trusted brands in the index space. We believe this joint venture will prove to be a great value not only to our customers, but also our shareholders.

In addition, earlier this year, the company acquired R2 Financial Technologies, QuantHouse, Credit Market Analysis Limited and Coalition Development Ltd. And most recently, we announced the acquisition of Kingsman SA, which I'll discuss in more detail in just a moment. So whether it's through the separation process, cost reductions, share repurchases or investing in growth, McGraw-Hill is meeting its Growth and Value Plan commitments and is on target and on track to do so.

With that, let me now turn to the business results. McGraw-Hill Financial on a pro forma basis delivered a 15% increase in revenue and a 21% increase in adjusted operating profit during the quarter. Of the 15% revenue growth, 11% was organic and 4% was from the transactions that I just mentioned.

While all 3 segments delivered revenue growth, it was Standard & Poor's Rating Services and Commodities & Commercial markets that provided the most impressive adjusted operating profit growth of 28% and 29%, respectively, as well as improved adjusted operating margins. McGraw-Hill Financial delivered 40% of its revenue from outside the United States during the third quarter. Domestic revenue growth of 17% outpaced International growth of 12%, which was impacted by adverse foreign exchange rates.

Standard & Poor's Ratings continues to be the segment with the largest international presence, with 45% of its revenue coming from outside the United States. Standard & Poor's Ratings also delivered the largest revenue increase within McGraw-Hill Financial and delivered its strongest quarterly revenue since the third quarter of 2007. Revenue for this segment grew 22%, with a 33% increase in domestic revenue and a 12% increase in international revenue. The increase in international revenue occurred despite a 7% negative impact from foreign exchange rates. Adjusted segment operating profit increased 28%, and the corresponding operating margin increased almost 200 basis points.

Actions during the quarter by both the European Central Bank, the ECB, and the Federal Reserve resulted in increased global bond issuance. The ECB's pledge to intervene in the sovereign bond markets and the Federal Reserves' Quantitative Easing 3 program caused global spreads to contract and fueled a surge in September bond issuance. These actions helped to drive U.S. speculative-grade corporate bond issuance to a record $85.4 billion in the third quarter.

Transaction revenue increased 64% to $215 million. Recall that while issuance in the first half of 2011 was quite robust, it tapered off considerably in the second half of 2011, creating less difficult year-over-year comparisons in the second half of 2012. Nevertheless, the key drivers to the increase in transaction revenue were: one, worldwide corporate issuance, which increased 81%, with a 72% increase in U.S. corporate issuance and 126% increase in European corporate issuance; and secondly, the public finance issuance, which increased 9% and contributed to the growth as well.

Additionally, worldwide structured issuance was flat, with a 65% increase in the United States' structured finance issuance offset by a 33% decline in European structured finance issuance. The European weakness was driven by a 37% decline in European covered bond issuance as issuers funded through the European Central Bank long-term refinancing option.

Non-transaction revenue, which represented 57% of Standard & Poor's third quarter revenue, increased 3%. Now in periods of robust debt issuance, investors are frequently concerned about issuance being pulled forward. This is always a difficult point to determine until after the fact. However, a study by Standard & Poor's Global Fixed Income Research to analyze corporate refunding needs over the next few years may be instructive.

The study concluded that approximately $8 trillion in rated corporate debt will mature from 2012 to the end of 2016. Let me repeat that, that approximately $8 trillion in rated corporate debt will mature from 2012 to year-end 2016. Now the non-financial sector accounts for about $3.3 trillion of the $8 trillion in maturing debt, and financial companies, including banks and insurance companies, account for the remaining $4.8 trillion. Now this research clearly suggests that corporate debt needs will remain robust over the next several years.

Our success on the litigation front has been encouraging. The trends that we have discussed in the past quarterly conference calls continue. To date, 30 cases have been dismissed. Nine dismissals by lower courts have been reaffirmed by higher courts, and 10 cases have been voluntarily withdrawn. Again, we have said that the legal risk is low, and it's bearing that out.

While aiding and abetting and negligent misrepresentation claims have been dropped in the Abu Dhabi case, the trial over fraud claims is set to begin in May. And again, we continue to believe that the legal risk of pending litigation remains very low.

All right. With that, let me turn now to S&P Capital IQ and the S&P Dow Jones Indices. And again, this is the second largest segment within McGraw-Hill Financial, which delivered solid top line results with revenue growth of 13%. 72% of revenue came from subscriptions, the same as a year ago. International revenue increased 10% to $117 million, and that represents 30% of total segment revenue. Adjusted operating profit increased 5%, and there was a modest decline in the adjusted operating margin as the segment integrates and develops newly acquired technology and products into the S&P Capital IQ offerings.

Looking at S&P Capital IQ alone. Revenue increased 9%, with organic revenue growth of 5%. Two key products, S&P Capital IQ within Desktop Solutions and Global Data Solutions within Enterprise Solutions both delivered solid growth. S&P Capital IQ delivered double-digit client and subscriber growth, which reached 4,400 clients and 55,000 subscriber new growth, respectively. These results were offset somewhat by revenue weakness from equity research.

One of the top priorities at S&P Capital IQ is the execution of product innovation and driving integration of the newly acquired assets. On the innovation front, we believe that we are amassing considerable technical capabilities and are working to translate these into competitive advantage. We are pleased to have been recognized for the first time on Institutional Investors' annual 2012 Tech 50 List, coming in, in the 29th spot.

In addition to integrating the technology, our strategy is to deploy an integrated sales effort that can assemble any combination of S&P Capital IQ products in a customized offering. In fact, in August, we won our first combination sale with an offering that included S&P Capital IQ, Standard & Poor's Ratings data via express feed and CMA credit default swaps.

The big news is that the S&P Dow Jones Indices joint venture is up and is running. What a fantastic opportunity we have with this amazing collection of world-renowned brands. This business is all about building trusted and transparent brands, and we have some of the best.

Having a partner like the CME is also incredibly important. The relationships it maintains with exchanges around the world provides several of our businesses with important access. This access has already been -- or has already enabled us a new opportunity with the BM&FBOVESPA in Brazil. The S&P 500 is being made available to them via a sublicense from the CME Group and the S&P Dow Jones Indices. The launch of a U.S.-dollar-denominated S&P 500 index future settled in the Brazilian real is the first derivative of a U.S. stock index to trade on the Brazilian exchange, the very first.

S&P Indices reported revenue of $109 million in the third quarter, and excluding the addition of Dow Jones Indexes, revenue was $82 million and decreased 7%. Revenue from exchange-traded funds and mutual funds was very strong, with double-digit increases year-over-year. Assets under management in exchange-traded funds linked to S&P Indices grew 40% year-over-year to $390 billion, and that includes the Dow Jones Indexes. Their assets under management reached $454 billion. Revenue from derivatives declined due to incredibly difficult comparisons to the third quarter of 2011. This was driven by trading volume of exchange-traded derivatives that decreased 41% versus third quarter 2011.

This chart should put the difficult comparison into perspective. In the third quarter of 2011, derivative volumes reached a 5-year high as investors hedged their positions due to euro crisis concerns. Please note that with the formation of S&P Dow Jones Indices joint venture, there is no longer a direct correlation between the E-mini futures trading volumes and the S&P Indices revenues as in the past. We now receive a percentage of profits from the CME equity complex rather than being paid on a per-contract basis.

Let me now turn to the Commodities & Commercial markets segment, which delivered a year-over-year adjusted operating profit gain that, again, led all segments. Revenue growth was 5%, with international revenue up 15%. The leverage of the business is very evident. This leverage, coupled with a $5 million decrease in expenses, resulted in an adjusted operating margin that increased more than 500 basis points to 28%.

Within Commodities, petroleum market subscriptions continued to be the primary growth driver. However, derivative trading in BENTEK Energy also delivered double-digit revenue growth. And Kingsman, which I mentioned earlier, Kingsman leverages Platts' presence in biofuels to make our first foray into the agricultural commodities. The acquisition, which closed yesterday, expands Platts' biofuels position by providing additional coverage, price assessments and subscriber base for the biodiesel and ethanol markets.

In addition, agriculture is a natural extension from the biofuels market. It is large, it's sophisticated, it's a global commodity market like the others that Platts serves. Kingsman is a great first step into this marketplace, and Kingsman is not only a leader in biofuels, it is a leader in the sugar market, a key feedstock into the biofuels complex.

Within Commercial, revenue decreased 2%. J.D. Power's revenue growth was offset by modest declines in the remainder of the portfolio. But simply stated, J.D. Power is poised for its best year ever. This is driven in part by the continued expansion of China's domestic automotive industry as well as J.D. Power's Power Information Network, proprietary research and automotive consulting. And as J.D. Power continues to pursue business beyond the automotive industry, there's an interesting piece of new business with the National Football League that has contracted with J.D. Power to conduct their voice of the fan tracking.

With that, let me move over to McGraw-Hill Education. McGraw-Hill Education in the third quarter reported an 11% decline in revenue to $836 million. Revenue decreased at the Higher Education, Professional and International Group as well as the School Education Group. While both groups are operating in very difficult economic environments, the reported revenues are also impacted by increased deferred revenues resulting from growth in subscription products.

As the Education business develops and sells more digital solutions, the traditional revenue model is changing, and it's changing rapidly. Rather than booking revenue at the time of a sale, revenue is spread out and recognized over the life of the subscription. Largely because of the dramatic increases in McGraw-Hill Education subscription businesses, its third quarter deferred revenue balance increased 74% over the prior year. Excluding the impact of this increase in deferred revenue, the third quarter revenue decline was only 7%. To combat the difficult business environment, McGraw-Hill Education reduced expenses 9% versus the third quarter of 2011 and continues to look for additional cost-reduction opportunities.

The Higher Education, Professional and International Group reported a 6% decrease in revenue. Excluding the impact of increased deferred revenue, the decline was 5%. With difficult economic conditions around the globe, the vast majority of the revenue decline in this group was in international, with Higher Education revenue decreasing modestly. However, the continued migration to digital solution helps to mitigate these declines by offering growing revenue streams in all of its major markets.

Student usage of our homework study solutions in the higher education market has grown by 67%, boosted by usage of LearnSmart, which grew 115% and now has more than 890,000 registered students. We recently launched a direct-to-consumer website which makes LearnSmart available for purchase by students even if their professors don't utilize it as part of their course. This is a divergence from the business-to-business model that typically has been deployed.

The School Education Group reported a 16% decline in revenue from the prior year, and excluding the impact of increased deferred revenue, the decrease was 10%. K-12 revenue was down due to weak state funding, with 2012 expected to be the lowest funding year in the last decade. And according to the Association of American Publishers, the AAP, and their statistics, August year-to-date industry K-12 net sales were down 14%. McGraw-Hill Education captured a substantial share of 2012's 2 largest state adoption opportunities, and that's, of course, Florida's K-12 social studies and California's reading program, but could not overcome the overall decline in the rest of U.S. state funding.

As we look beyond the immediate challenge of state funding for K-12 education, it is important to remember that a strong and innovative education sector is critical for a healthy economy, whether in the United States or around the world, so these current issues should be kept in context. That is why McGraw-Hill Education, driven by new management, is focused on responding to the critical need for education by driving operational excellence, reimagining learning and capturing the new growth opportunities. Indeed, we have made impressive progress over the last few years in developing digital learning products, and we believe there is a long runway of opportunities both in the developed and emerging countries.

Our products are prime for the digital revolution in education. Virtually all of our content is available in digital form to enable personalized, adaptive learning solutions and improved outcomes. The education market will continue to grow meaningfully as digital devices of all kinds are becoming more prevalent around the world. Our Higher Education business, the CTB testing business and our Professional and International businesses are all well positioned to take advantage of this growth potential.

In the K-12 market, we are encouraged that the new Common Core State Standards assessments begin in 2014. This should drive demand for both teaching materials and assessments as 46 states have formally adopted the standards of Common Core. There is also a greater demand by parents and educators for improved performance, which should bode well for our adaptive -- digital learning programs that have demonstrated proven advancements in learning outcomes.

One major element that is out of our control but clearly impacts the U.S. K-12 market is home prices. We are encouraged by signs that U.S. housing prices may have finally bottomed, which eventually lead to a recovery in state revenue from property taxes. Through August 2012, the S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, showed that the average home price increases for both the 10-City Composite and the 20-City Composites for the fourth consecutive month and those were rising.

As we approach the separation of the Education company, I want to sincerely thank all of the Education employees for all of their extremely hard work and dedication. Helping to raise educational levels around the world is not only a noble calling, it's essential. And their hard work and dedication are to be commended. The past year, they have made very tough decisions on costs while building world-class products and services for future growth and success. With the digital footprint that they have created and the superb new management in place under President "Buzz" Waterhouse, I feel truly excited about how the Education company is positioned as it becomes a standalone company.

In summary, McGraw-Hill Financial continues to deliver solid top and bottom line growth. The separation of McGraw-Hill Education is approaching, and the business is becoming an attractive standalone company with highly talented employees, innovative and essential education products and services and an appropriate cost structure. In summation, McGraw-Hill is delivering on its Growth and Value Plan commitments, with the pending separation, exciting growth plans, multiple tuck-in acquisition, sizable cost reductions and aggressive share repurchase program.

With that, that completes my comments on the third quarter. I will now ask Jack Callahan, our Chief Financial Officer, to update you on some of the key financial performance, and then I'd look forward to going in any direction that you would like to go. Jack?

John F. Callahan

Thank you, Terry. This morning, I want to discuss several topics: our consolidated results, including cash flow; the financial impact of corporate development activities on the S&P Capital IQ Indices business; the progress of the Growth and Value Plan, including the primary drivers of cost reduction; and lastly, our increased guidance and outlook for the balance of the year.

Let me begin by discussing our results, which, as Terry mentioned, were quite different across the Financial and Education businesses. In the quarter, McGraw-Hill Financial delivered excellent growth, with a 15% increase in revenue and a 21% increase in pro forma operating profit. This resulted in a 170-basis-point improvement in the pro forma operating margins of 36%. Overall, an excellent quarter across the MHF businesses.

On the other hand, McGraw-Hill Education revenue decreased 11% and adjusted segment operating profit decreased 15%. As Terry just discussed, the market has proven even more challenging than our original expectations. Obviously, now that the all-important third quarter is behind us, MHE will not deliver on our initial financial guidance for this year. We now expect MHE revenues to decline 7% to 8% and operating income to be $20 million to $25 million below a year ago. Taken together, total consolidated McGraw-Hill, both revenue and expenses, increased approximately 2%. This resulted in adjusted operating profit growth of 3%.

Overall, we delivered double-digit earnings-per-share growth. However, there were substantive changes in below-the-line comparison due to the formation of the new S&P Dow Jones Indices joint venture, impacting both the tax rate and the net income attributable to noncontrolling interests. The reduction in the effective tax rate from the prior year was due primarily to the partnership structure of the joint venture with CME, combined with the modest improvement in our overall rate. Net income attributable to noncontrolling interest increased largely due to the new joint venture, which I will elaborate on in just a moment.

The impact of the accelerated share repurchase program was evident again this quarter. Year-over-year, we reduced shares outstanding by 90 [ph] million shares. This leveraged a 4% increase in adjusted net income to a 10% increase in adjusted diluted earnings or $1.33 per share. It should be noted that sequentially, our fully diluted shares outstanding remained unchanged at 285 million shares as stock option exercise activity largely offset share repurchases of approximately $300 million during the quarter.

Our share repurchase program is an important and ongoing part of the Growth and Value Plan. Since the beginning of 2011 through the third quarter of 2012, the company has repurchased nearly 42 million shares at a weighted average price of $43.22. This reduced shares outstanding by approximately 14%. We anticipate spending approximately $200 million on share repurchases in the fourth quarter.

Now I would like to provide additional detail regarding the significant business development impact to the S&P Capital IQ and S&P Dow Jones Indices to help you better understand the results. First, within S&P Capital IQ, we made several acquisitions during the year that added new capabilities. The additions of R2, QuantHouse and CME were -- and CMA were all accretive to revenue growth. However, these acquisitions and the work that we are undertaking to integrate these acquisitions are somewhat dilutive to profits. We have absorbed these costs and the related noncash amortization without any negative impact to guidance.

Secondly, the creation of S&P Dow Jones Indices joint venture has important accounting implications for the company. Since we own a majority of the joint venture, 73%, we record 100% of the revenue and expenses in the company's income statement. During the third quarter, this included $82 million in revenues from S&P Indices and $27 million from the Dow Jones Indexes. Of course, the 27% of the net income representing our partner's share is excluded from the bottom line results.

The increase in net income attributable to noncontrolling interest effectively removes our partner's share of the profits from our income statement. During the third quarter, our partner's share of the profits totaled $18 million. This $18 million is excluded from the company's taxes, and I will address the impact on our reported effective tax rate in more detail in just a moment.

Taken together, these acquisitions and the formation of the joint venture had a significant impact on the segment's revenue growth. Organic growth was 3%, in part due to difficult year-on-year comparisons in the index business. The joint venture and the 3 acquisitions increased revenue growth to 13%, with approximately 75% of the incremental revenue from the joint venture and 25% from the 3 acquisitions.

As I mentioned earlier, the joint venture has had an impact on the company's effective tax rate that merits further explanation. For tax purposes, the joint venture is treated as a partnership. The first column of this chart presents pretax income, provision for taxes and the after-tax income, which implies the reported effective tax rate of 33.7% for the third quarter. The middle column shows the partner's share of the joint venture income. Note the company does not make a provision for taxes for the partner's income. The last column shows the tax provision for taxes in the third quarter at a 34.6% rate, about 1 point higher than the reported effective tax rate. On a year-to-date basis, we record a 35.6% provision for taxes, and the reported effective tax rate is 35%. Full year 2012 results should be generally in line with the year-to-date performance.

Turning to the balance sheet and cash flow. We continue to have a very strong balance sheet, with approximately $1.2 billion in cash and short-term investments at quarter end. Year-over-year, our free cash flow is down approximately $200 million, due largely to the onetime cash outlays related to the Growth and Value Plan expenses and the timing of quarterly cash tax payments. On a full year basis, we expect to deliver approximately $750 million in free cash flow, excluding cash outlays associated with the Growth and Value Plan.

One additional point on our balance sheet. This month, about 1/3 of our debt is coming due. As a result, over the near term, it is likely that we will access the commercial paper market as the repayment of the $400 million of debt and the funding of our fourth quarter share repurchase program require domestic cash availability. We will reevaluate further actions related to the balance sheet once the choice of sale versus spin options for McGraw-Hill Education are clear.

Now let me provide some additional details related to the solid progress we are making in the execution of the Growth and Value Plan. First, all separation activities are either well under way or complete. Secondly, we continue to make progress on our target of at least $100 million in run rate cost savings by the end of 2012. Let me provide some color on the 4 major initiatives that drive the cost reduction program.

The first was the McGraw-Hill Education cost structure reductions that began in the fourth quarter of 2011 and continue into this quarter. Over 10% of the Education workforce has been reduced to resize the cost structure to market demand and to support the necessary technology investments to advance McGraw-Hill Education's digital offerings. The second was the realignment of our core benefit programs, including the pension and health care plans. The benefit plans across McGraw-Hill Financial and McGraw-Hill Education need to be increasingly tailored to their respective competitive environment.

The third was the partnering relationships to transition various accounting, information technology and human resource activities to world-class partners, including Genpact, Atos and Workday, that specialize in these operations. The transition of these activities is well under way, and the associated onetime transition costs stepped up in the third quarter. Lastly, we have targeted selected restructuring activities across McGraw-Hill Financial operations to streamline operations consistent with being a more focused operating company.

All in all, significant progress has been made already, and we fully expect to reduce at least $100 million in costs on a run-rate basis by the end of the year. During the third quarter, we incurred $99 million of onetime Growth and Value Plan expenses, largely related to professional fees and restructuring. These onetime expenses will continue into the fourth quarter.

In closing, 2012 is turning out to be a remarkable year for McGraw-Hill. We are exceeding EPS expectations despite a challenging year for McGraw-Hill Education and have increased our earnings per share guidance to a range of $3.35 to $3.40. McGraw-Hill Financial is delivering great performance, and we have expanded the McGraw-Hill Financial portfolio with tuck-in acquisitions and selective partnerships like CME.

We are positioned to make a decision on sale versus spin for McGraw-Hill Education in the coming weeks, and we are focused on making the right choice for both the business and our shareholders. And through countless efforts around the world, the work is on track to separate 2 leading companies, and we have been able to accomplish all of this while delivering cost reductions of at least $100 million. Now we are focused on a solid finish to 2012 and on finalizing the separation and standup of these 2 terrific industry-leading businesses.

Thank you for joining us today and your interest in McGraw-Hill. Now let me turn the call back over to Chip Merritt to moderate the Q&A session. Chip?

Robert S. Merritt

Thanks, Jack. Just a couple of instructions. [Operator Instructions] And now, operator, we'll take our first question.

Question-and-Answer Session

Operator

Our first question comes from William Bird with Lazard.

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

Two questions. One, what is the drop-dead deadline for a decision on sale or spin of Education? And then, second, can you talk a bit about what's happening in the index business? I know the comp was really tough, but with assets under management up 40%, revenues down 7%, I was just wondering if you could elaborate on what's driving that and maybe just kind of the context around some of the issues at MSCI.

Harold Whittlesey McGraw

Okay. Well, Bill, and look, as far as the separation process, we have been getting out an awful lot of information throughout the year as to where we are. We have literally worked tirelessly to look at all options in all of this, and we're coming to the conclusion, just like we said we would. And so literally, I think it would be inappropriate on my part to derail any element of the process at this point. But I will say that in the coming weeks, and, hopefully, sooner, we will have an announcement to make to you.

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

And then on the index business?

Harold Whittlesey McGraw

Yes. We're so excited about this, because we wondered very hard whether or not we could actually pull this off on this one. But to put the S&P Indices, which are largely institutional indices, together with Dow Jones Indices, which are largely retail, is just a -- it's just a fabulous combination. And as we see more and more index behavior and the growth in exchange-traded funds, both in the United States and around the world, it gives us huge opportunities as a platform to expand. And I gave one example of the Brazilian component. But I can tell you the growth of S&P Dow Jones Indices is just going to be phenomenal. It's a wonderful platform, and we're going to be able to do a lot of other things to add to this platform to grow it even faster. So we're very excited about the combination, that it's under way and that the growth prospects are so high.

John F. Callahan

And then, Bill, the one thing I'd also add, and it's really a third quarter issue, largely for the base S&P Indices business, is the comp versus a year ago was really difficult, largely driven because of the extensive activity in exchange-traded derivatives from a year ago. I think Terry had a chart on that during his comments. And that overlap is less onerous as we get into the fourth quarter. So I think we're more -- we think that's an easier overlap for us to manage as we head into the balance of the year.

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

So just to be clear, there's been a lot written just about the fee war going on in the ETF industry. I just wanted to get a sense of what you're seeing on pricing.

Harold Whittlesey McGraw

At this point, and I don't want to comment on MSCI, that's theirs to do, but we are not seeing that kind of pressure at this point. So from our standpoint, we're not overly concerned by that. And again, Bill, again, the quality of brands and the recognition of those trusted brands is really, really important on that one. And again, when you have markets that have a lot of uncertainty built into it, those trusted brands take on a lot more import.

Operator

Our next question comes from Manav Patnaik with Barclays.

Manav Patnaik - Barclays Capital, Research Division

First quick question on Platts. I guess what was the acquisition contribution for the Platts line item from BENTEK's steel business? And also, just maybe a little more color there, I mean I guess it was a little tougher comp, but it seemed like the growth decelerated a bit from the 20% in the first half of the year.

Harold Whittlesey McGraw

No, actually the Platts business has been strong all year, and the Kingsman acquisition, I think you're referring to, gives us strength in terms of a brand-new sector. They expanded into the agricultural markets, not only from biofuels, but also in terms of expanding in the commodity platform. But from our standpoint, Platts has exceeded its plans and is doing extremely well, and we expect that to hold up.

John F. Callahan

And back to the acquisition impact, so just keep in mind, the BENTEK deal closed early in 2011, and the SPD deal closed early in the third quarter of last year. So essentially, the third quarter, it's really apples to apples. So it's really -- it's year-on-year comparisons are now -- have the acquisition in it, and the only new piece is the Kingsman acquisition. But obviously, that just closed yesterday so that's more of a fourth quarter impact. I can tell you, at least within BENTEK, we're seeing double-digit growth for that enterprise, and we're quite excited about what that's adding to the portfolio.

Manav Patnaik - Barclays Capital, Research Division

All right. And then one more question, I guess, on the ratings side. Did the trial date, I guess the Abu Dhabi trial, get pushed to May? I guess that trial was initially Feb. And then just around the trial front, can you give us an update on how the Australia trial went or what the pending status there is?

Harold Whittlesey McGraw

Okay. Well, first of all, in terms of Abu Dhabi, we're actually quite pleased with the situation as it's unfolding. We have eliminated several components, and it's scheduled for trial in May of next year, and we'll see how that goes. But we're not concerned at all. As far as the Australian CPDO situation, we're waiting to hear the result on that. And from our standpoint, again, we feel very -- we feel like we're in a very good position. But we should get a result any day on that, and we'll be reporting that as others will as well. But again, the overall legal situation, Manav, has been one of you've got so much wait in these things. As you know, in the United States, we do everything at the federal court level. And literally, because of all the litigation out there, not just ours, I mean, all of the litigation out there, it takes 2, 2.5 years to get before a federal judge, and so you have to wait. And one of the things that we have said, and we're encouraged by the results, is that in many cases, once it gets before a judge, it's the same day that these cases get dismissed on all that. So we are -- we think that we're in a very good position. We're obviously well advised, and it's a wait-and-see game. But to date, with the 30 cases that have been dismissed, the number of cases that have been reaffirmed to be dismissed at the higher-court level over a lower-court decision, all of those kinds of things, you have to be focused on all of these kinds of things. But we think the risk here in terms of legal aspects are low.

Operator

Our next question comes from Peter Appert with Piper Jaffray.

George K. Tong - Piper Jaffray Companies, Research Division

This is George Tong for Peter Appert. Cost growth continued to slow in the Commodities & Commercial segment in the third quarter, which helped you generate some pretty good margins. Should that pattern replay, you think, in the fourth quarter and heading into 2013?

Harold Whittlesey McGraw

Well, George, again, I don't want to speculate here and other thing. But I have to tell you that given the strength of the digital offering and the subscription growth, our hope is that continued emphasis on the cost reduction part is doable. But I would just say at this point that we're very pleased with the results for year-to-date and for the third quarter, and you have my assurances that every focus is on continuing to find ways to reduce those costs. But we're very excited about the revenue growth here. It's a good picture, and it's getting better.

John F. Callahan

As you saw last quarter, we had some pretty good margins in the segment, and I think we'll be around sort of this high-20s -- mid- to high-20s range sort of going forward, nice margins in Platts. And we have, as Terry mentioned, a great year for J.D. Power and a stabilizing across the balance of the Commercial platform. So we should be in this range for the fourth quarter.

Harold Whittlesey McGraw

And by the way, George, having just come back from Beijing on a quick trip, J.D. Power's business ought to do really well. I've never seen so many cars in my entire life and traffic jams to go with them.

George K. Tong - Piper Jaffray Companies, Research Division

That's very helpful. Could you give us some -- sort of switching gears a bit. Could you give us some additional detail on your outlook for the Education business and when you might expect an inflection point in spending and budgets to occur?

Harold Whittlesey McGraw

Wow. I wish I could do so with some accuracy here. Look, the Education business, whether we're talking Higher Ed, whether we're talking Professional, International or the all-important K-12, these are essential businesses. I mean, you're talking about educating your future workforce. And the unfortunate part, we have seen in the United States a significant deterioration in educational funding, which has very dire consequences for student achievement and all of those kind of thing. We've got to get back onto that track. Now if your -- if everything is essentially based on property tax structures at local and state municipalities and all that, and you put the longest housing recession that we've ever seen together with that, you've got a very bad combination, plus the fact that you have so many states that are in deficit and all of those thing. Those aren't excuses. Those are realities and everything. So one, on improving housing market, getting states out of deficit positions and getting growth again is going to help this situation. But literally -- and this won't last. I mean, it can't. But this is the worst K-12 environment in a decade. And I think it should be, obviously, an outrage to everyone, but it won't last. And second part is, coupled with that environment, the positive here is the speed of the digital transformation part. We are seeing increased activity across the board here. We have been -- whether we're working with certain manufacturer -- device manufacturers or whether we're working with partners in terms of developing digital solution, we've been working aggressively on this for some time, and the receptivity of it is just moving at a very fast pace now. And so that's very encouraging. That's got serious implications for cost reduction, but also, very, very strong positives for our revenue growth on that part. But it's an essential business, it's our future workforce, and the Education agenda should be a priority for any country.

Operator

Our next question comes from Craig Huber with Huber Research Partners.

Craig Huber

Just a few questions. Terry, first, on the cost-cutting front, you talked of this $100 million annualized goal you're looking to get by end of this year. Can you -- I'm just curious. Why is that number at the end of the day not going to potentially be 2x to 3x that? I ask that in the context, last year, as you know, you had -- I think you had $4.8 billion costs to your company. Why only $100 million, my first question, please?

John F. Callahan

This is a Jack. Craig, look, what's unique about this situation is we're talking about cost reduction in the context of separation. I think there's very few companies that have ever talked about both of those things at the same time, and we're trying to put an end date on this cost program, because once we get into the early part of next year, these are 2 separate entities. Then it'll be my accountability to come back and talk what would the cost outlook is for McGraw-Hill Financial, and it'll be Patrick Milano's to do the same for McGraw-Hill Education. And I think it's, kind of given the separation right ahead of us now, it's premature to kind of go past that. But we certainly acknowledge that there's opportunity here, and I think some of the foundational things we have done this year give us opportunities to kind of extend some of the cost programs once we move into 2 separate entities. So more to come.

Harold Whittlesey McGraw

And Craig, I'd just echo that. Again, the most important thing in terms of separation is making sure that we've got the right options and we're on track and on target and all of those kind of thing. At the same time, as you start to decouple the shared services and all the other kind of capabilities to that, there's lots of opportunities here in all that. But I think to do, as Jack said, the separation correctly and to put out a $100 million number is very responsible. But we think that there's a lot more opportunity, and we look forward to, once the separation is completed, coming back with you with another number.

Craig Huber

Okay. And my second question, please, if you think about the backlogs in your Ratings business for the next 2 to 3 months, what are they looking like right now, and how much risk do you think there is just given the federal debt ceiling has to get raised? We know how that went 1.5 years ago, terrible. Secondly, also with the fiscal cliff issue for January 1 [ph] is that going to put issuers on hold here for a while? What do you think there, please?

Harold Whittlesey McGraw

Okay. Well, look. First of all, and not to talk about just the fourth quarter, to talk about the next 3, 5, 10 years, the capital demand needs are huge. And if you talk about infrastructure financing alone, between now and 2030, you're talking some $70 trillion. You're talking about $1 trillion of infrastructure financing in India alone over the next 5 years. The study that I gave you was on just refunding between now and 2016 of $8 trillion. So the demand here is absolutely huge on that part. So I'm not -- I mean, any given time, you're going to have some slowness or some pickup or whatever, but the overall demand for capital is only going to go up, and banks are not going to be able to satisfy all that kind of demand. And in fact, the reason that the capital markets and fixed income markets in particular are doing so well is because now the banks, in many ways, are stalled and the largest portion of the capital demand has got to come from the capital markets on that one. So from a backlog standpoint, we're doing really well. Now the second part to that question is, look, obviously, the European Central Bank made a decision that they were going to intervene in the sovereign bond market and provide a level of support. That, obviously, created some activity. When Ben Bernanke came out with the QE3, the real question was, "Is there going to be a QE4?" and anything. I don't know and all of that, but both of those caused global spreads to contract and, obviously, fueled a surge in September bond issuance. So then I get questions like, "Okay, well, is that just bringing moneys forward that were in the fourth quarter or the first quarter for next year or something like that?" How do I know and all of that, and we'll just have to wait and see what the facts are. But the capital demand load is huge on that one and it's worldwide on that part. And again, with 45% of our revenues coming from outside the United States, we're in a terrific position to be able to deal with that.

Craig Huber

And also, Terry, if I could ask, once you sell or spin off your Education, if you do actually sell it, would you use those proceeds most likely to buy back stock? Of course, a small piece of the refinancing you talked about, given your [ph] style to do large acquisitions, of course.

Harold Whittlesey McGraw

Yes. Well, first of all, I don't want to get ahead of ourselves, here. But let me give you 2 facts on that one that Jack was talking about. One, we are an extremely dividend-friendly company, and we have been since we created a dividend in 1936 and have been increasing it every year since '74. And so there's going to be no letup on that side. Number two, in terms of share repurchase, I think our track record is out there, and it's pretty solid. We're a very share-repurchase-friendly company. And we do anticipate we're back in the market in the third quarter. We bought back $295 million. We did the accelerated share repurchase of $1.5 billion last year, and I expect to have a strong share repurchase program going forward. But I think it's a little premature to talk about what level or all of those kind of things. But from a financial engineering standpoint, I think our track record is pretty solid.

Operator

The next question comes from David Reynolds with Jefferies.

David Reynolds - Jefferies & Company, Inc., Research Division

David Reynolds here from London. Just to say it's great to see New York is back on track, and our thoughts are with you. A question, though, just -- and I don't mean to labor the point, but if I can just address the coming decision process around the Education asset, and clearly, you've talked about it being on a timescale of the coming weeks. Are you able to describe what kind of decision you are now going through? Is it one of having received the bids, you're determining whether a price is acceptable? I know it's a difficult area to talk about, but if you could shed some light on that, that would be helpful

Harold Whittlesey McGraw

Okay. Thanks, David, and thanks for your comments about New York . I mean, as you know, from your own associates, I mean, it has really been hard hit, and it's probably going to be weeks in terms of getting total business continuity going again and all of that. But thanks for the comments on that. Now as far as the separation process and all that, look, we said from the very beginning that we're going to look at every single aspect in all of this, and that's exactly what we've done. We've given out timelines, and we are coming to a conclusion. And again, I think to skew this in any way is not appropriate from my standpoint at this point. So the best color I can give you is that you're not talking a long time frame here. You're talking, literally, coming weeks and maybe sooner.

David Reynolds - Jefferies & Company, Inc., Research Division

That's great. And perhaps just one follow-up, obviously, we noted your increase in the full year '12 guidance. Intuitively, that feels relatively conservative. Would you agree with that?

Harold Whittlesey McGraw

David, you're a great guy. Look, I thought the range $3.25 to $3.35 was a really, really solid number and range for us for 2012. The facts that things were a little bit better, that our cost reduction programs came in, all of those kinds of things, we started in the midyear giving guidance that it was more like $3.30 and maybe closer as we got on towards the upper end of the range. But given the third quarter and all of that and the way we expect to finish 2012, we think that improving the guidance from $3.35 to $3.40 is a good step. I mean, it's really there. Now would I like to be able to give more -- I'll get into a wrestling match with Jack here in a minute and all of that. But we're pleased with that guidance, and if things go the way we like it, we'll be very pleased.

John F. Callahan

We're pretty focused on delivering on the commitments that we make. But -- and then we're hopeful that we'll finish the year nicely to position us well for next year.

Operator

We will now take our final question from Bill Warmington with Raymond James.

William A. Warmington - Raymond James & Associates, Inc., Research Division

A question for you on how many cases are still outstanding for Standard & Poor's? And then, finally, when do you start to bump up against some of the statute of limitations for these claims?

Harold Whittlesey McGraw

Let's see. In terms of the outstanding issue, it's -- I'd have to get the exact number for you, but it's a few dozen. If you call Chip, he can get the exact number for you, but it's way down, obviously. But since the downturn in the markets and all of those kind of thing, it's been a solid 4-plus years in all of that. So the expectations that we had in terms of there's no merit to some of these and all of that has borne out to be true and all of that. But we've got a few dozen left.

William A. Warmington - Raymond James & Associates, Inc., Research Division

All right. And then for the EPS guidance for 2012, does that include the impact of the $200 million of share repurchases you're planning to do in the fourth quarter?

John F. Callahan

It's a consideration. But by the time we average those in, it's not going to have a big impact. As you saw in the third quarter, it's hard to predict what's going to happen with stock option exercises. So I wouldn't view our guidance as dependent on it at this point in time, but it's probably -- it'll have a bigger impact as we get into next year.

Harold Whittlesey McGraw

And again, based on market conditions and all of those kind of things, we'll keep everybody updated on exactly what we're doing.

John F. Callahan

One other point in your first question on the legal situation is I can tell you sort of our legal expense on a run-rate basis is coming down a bit. So I think we're -- so I think if that's any indicator of some of the issues facing the company, that is one thing we are looking at.

William A. Warmington - Raymond James & Associates, Inc., Research Division

Excellent. And then if you could comment on the competitive environment for Capital IQ, especially in light of Bloomberg putting through a 6% price increase. That would seem like it would be a positive for you.

Harold Whittlesey McGraw

Well, again, I don't want to talk about any of the other competitors. That's for them. We feel very, very good about where Capital IQ is. We talked about the addition of 4,400 clients and 55,000 subscribers and all of that. Our growth plan for Capital IQ is on target. And I think the other thing to focus in on at Capital IQ is the customization aspect of this, that we can -- we have multiple abilities to put more content packages together to create customized platforms for customers, and that's what we're focused on doing. But Capital IQ is on target.

Operator

That concludes this morning's call. A PDF version of the presenters' 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 1 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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