Good morning, and welcome to McGraw Hill Financial's third quarter 2014 earnings conference call. I'd like to inform you that this call is being recorded for broadcast. All participants are on a listen-only mode. We will open the conference to question and answers after the presentation, and instructions will follow at that time. To access the webcast and slides, go to www.mhfi.com. That's M-H-F-I for McGraw Hill Financial Inc.com and click on the link for the third quarter earnings webcast. If you are listening by telephone, please note that there is a live phone option available to synchronize the timing of the webcast slides to the audio from your telephone. To do so, log in to the webcast. After completing the guestbook screen, you will see two windows in the webcast viewer. Along the bottom of the left-hand window, click the gear icon and select Live Phone from the list.
A line will appear over the sound icon, indicating that sound has been disabled through your computer speakers. If you need any additional technical assistance, press star zero and I will assist you momentarily. Now I would like to introduce Mr. Chip Merritt, Vice President of Investor Relations for McGraw Hill Financial. Sir, you may begin.
Thank you and good morning. Thanks for joining us for McGraw Hill Financial's third quarter 2014 earnings call. Presenting on this morning's call are Doug Peterson, our President and CEO, and Jack Callahan, our Chief Financial Officer. This morning we issued a news release with our results. I trust you have all had a chance to read and review the release. If you need a copy of the release and financial schedules, they can be downloaded at www.mhfi.com. In today's earnings release and during the conference call, we're 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 difference between the non-GAAP measures and the comparable financial measures calculated in accordance with U.S. GAAP.
Before we begin, I need to provide certain cautionary remarks about forward-looking statements. Except for historical information, the matters discussed in the teleconference may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including projections, estimates, and descriptions of future events. Any such statements are based on current expectations and current economic conditions and are subject to risks and uncertainties that may cause actual results to differ materially from results anticipated in these forward-looking statements. In this regard, we direct listeners to the cautionary statements contained in our Forms 10-Ks, 10-Qs, and other periodic reports filed with the U.S. Securities and Exchange Commission. I would also like to call to your attention a recent European regulation.
Any investor who has or expects to obtain ownership of 5% or more of McGraw Hill Financial should give me a call to better understand the impact of this legislation on the investor and potentially the company. 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 Jason Feuchtwanger in our New York office at 212-512-3151. At this time, I would like to turn the call over to Doug Peterson. Doug?
Thank you, Chip. Good morning, everyone, and welcome to the call. The company delivered a terrific quarter with 10% revenue and 32% adjusted EPS growth. More broadly, in creating McGraw Hill Financial, we have made sweeping changes to the company. In the third quarter of 2014, we continued to take actions designed to position our company for innovation and profitable growth. Before reviewing our financial performance, I'd like to highlight three matters including in our press release. First, during the quarter, we announced the sale of McGraw Hill Construction to Symphony Technology Group for $320 million. The sale positions us as a more growth-oriented and profitable company. Second, we took a number of restructuring actions in the quarter, which impacted almost 400 employees. We remain committed to our growth and performance objectives we outlined at Investor Day, including our productivity goals.
Third, Standard & Poor's Ratings Services is in active discussions to resolve matters pending before the Securities and Exchange Commission, including with respect to the previously disclosed Wells notice received in July, as well as related to investigations by the Attorneys General of New York and Massachusetts. Although definitive settlements have not been reached, a charge of $60 million related to these matters was recorded in the third quarter. Because we remain in active discussions with these parties, I am unable to provide additional information regarding these matters at this time. Separately, I am pleased to report that the SEC recently notified us that it had completed its investigation of Delphinus' matter. This was subject to a Wells notice issued in September 2011. The SEC has indicated that no enforcement action will be taken with respect to this matter. Let's turn to our results.
We're pleased to report excellent operating performance in the third quarter. Revenues, margins, and profitability on an adjusted basis all improved versus the third quarter of last year. Leading the revenue growth during the quarter were Standard & Poor's Ratings Services and S&P Dow Jones Indices, each delivering double-digit growth. S&P Capital IQ and Commodities and Commercial reported single-digit revenue growth and record adjusted operating profit. Adjusted diluted EPS increased 32% to $1.02. If we look at performance in the third quarter on a consolidated basis, revenue increased 10% year-on-year, adjusted operating profit increased 24%, and we achieved a 420 basis point improvement in the adjusted operating margin. All very impressive accomplishments. For our year-to-date figures, revenue increased 8% year-on-year and 9% organically. Adjusted operating profit increased 14%, and the adjusted operating margin improved 200 basis points.
Our year-to-date growth in revenue, adjusted operating margins, and diluted adjusted EPS are all consistent with our 2014 guidance. The company has converted high single-digit revenue growth into double-digit diluted adjusted EPS growth. Year-to-date, the company has delivered free cash flow of $737 million. Our global footprint continues to expand as international revenue growth of 12% outpaced domestic revenue growth of 8%. In this chart, you can see that most of our business units delivered double-digit international revenue growth. Let me turn to the individual businesses, I'll start with Standard & Poor's Ratings Services. During the quarter, revenues increased 12%, adjusted operating profit jumped 24%, and the adjusted operating margins increased 430 basis points to 44% in what has been a seasonally weak quarter. Revenue growth was primarily the result of strong market demand for ratings associated with bond issuance, bank loans, and new entities.
Adjusted expenses increased almost entirely from additional legal expenses. In an effort to streamline our operations, Standard & Poor's Ratings initiated a voluntary severance program during the quarter. This program accounts for much of the restructuring charge in the business unit. Standard & Poor's Ratings delivered exceptional margin expansion during the quarter. In this seasonally slow quarter for issuance, the adjusted operating margin increased 430 basis points. We're always interested in making investments to augment our portfolio of leading brands. On October 1st, we acquired BRC Investor Services S.A. BRC has 16 years of experience as a leading provider of credit ratings based in Bogotá. BRC provides approximately 300 ratings in Colombia covering corporate bonds, counterparty risk, securitizations, and public sector entities. This is a welcome addition to our ratings capabilities.
You'll see, moving to this next slide, that non-transaction growth in the quarter, which in aggregate grew 7%, was driven primarily by annual fees and growth at CRISIL. Annual fees increased as we continued to expand our client coverage. In addition, they increased from a recent focus on better realization from frequent issuer programs. CRISIL delivered 13% growth, primarily driven by Irevna, which increased revenue almost 20%. Irevna provides global research and analytics services. Transaction revenue was up 18% due to strong growth in financial services bond rating, as banks continued to rebuild capital structures to meet regulatory requirements. While many of these large customers have signed up for frequent issuer programs, issuance that exceeds certain stipulated thresholds results in excess issuance fees, these excess issuance fees are recorded as transaction revenue and contributed to growth during the quarter.
Driving transaction revenue growth was a 19% increase in bank loan ratings revenue. This is a continuation of a trend that we've seen for several quarters now. As you see in these graphs, total issuance decreased in the U.S. by 2%, while increase in Europe by 9%. Excluding the $49 billion bond issuance by Verizon in the third quarter of 2013, issuance in the U.S. actually grew. In the U.S., structured finance issuance increased 37%, and this is primarily a result of collateralized loan obligations, or CLOs, with year-to-date 2014 issuance surpassing the previous annual issuance record. In addition, CMBS had its strongest quarter of issuance since 2007. In Europe, corporate issuance grew 10%, driven by investment-grade issuance, particularly in financial services. High yield decreased 21%, following a record second quarter, and structured finance grew 8%, driven by ABS, which increased 89%, primarily as a result of auto issuance.
Before leaving the topic of Standard & Poor's Ratings, I want to provide a couple of regulatory and legal updates. First, in late August, the SEC published final rules under Dodd-Frank relating to NRSROs. Standard & Poor's Ratings is undertaking a comprehensive review of the new rules and related adopting release, which are over 700 pages long. As with all regulations applicable to our businesses, we will continue to take the steps we believe are necessary to be in compliance within the required time frames. Second, Standard & Poor's Ratings continues to work through a number of legal and regulatory matters, including the matters I referred to earlier that resulted in the $60 million charge in the third quarter. Starting with this quarter's Form 10-Q, which will be on file later today, we'll provide a comprehensive update of material pending matters and developments in each of our quarterly filings.
I would direct you to those filings for more information. Let me move on to S&P Capital IQ, which delivered top-line growth of 6% this quarter. Excluding the lost revenue from ongoing portfolio rationalization of several small products, organic growth was approximately 7%. The largest contributors to this growth were S&P Capital IQ Desktop and RatingsXpress, which both delivered double-digit growth. Top-line growth in S&P Capital IQ is particularly impressive in light of the ongoing revenue and employment declines across the financial services industry. This revenue growth has enabled the business to report record adjusted operating profit and the highest adjusted operating margin since the second quarter of 2012. Let me add a bit more color on revenue growth in our three business lines. In S&P Capital IQ, Desktop and Enterprise Solutions, revenue increased 8%, principally driven by a 13% increase in desktop revenue.
In S&P Credit Solutions, revenue increased 6%. This was driven by 11% growth in RatingsXpress. In S&P Capital IQ Markets Intelligence, revenue decreased 3%. While Leveraged Commentary & Data in Global Markets Intelligence continued to deliver double-digit growth, declines due to the shutdown of FMR Europe more than offset those gains. Let me turn to S&P Dow Jones Indices. This business delivered a 15% increase in revenue with an 18% increase in adjusted operating profit. Revenue growth was achieved across all businesses, ETF AUMs, mutual fund AUMs, derivatives, and data subscriptions. Adjusted expenses increased 10% year-over-year, due primarily to headcount additions. If we turn to the key business drivers, ETF AUMs associated with our indices increased 25% to a record $733 billion from the end of the third quarter 2013. Importantly, 10% of this growth was a result of new inflows.
Derivative trading volumes picked up in the quarter, with daily volumes based on the S&P Dow Jones Indices increasing 7%. The trading volumes of two key products, SPX and VIX, increased 10% and 12%, respectively. S&P Dow Jones Indices continues to expand its product offerings and partner relationships around the world. During the quarter, the business announced an agreement with the Bolsa Mexicana de Valores, BMV, for index licensing distribution and management of BMV indices. This includes their flagship index, IPC, the broadest indicator of the BMV's overall performance. S&P Dow Jones Indices also announced an agreement with the Bolsa de Valores de Lima, BVL, for index licensing, distribution, and management of the BVL indices. All BVL indices will be co-branded S&P, including a new version of the flagship IGBVL index and a new blue-chip index soon to be launched.
Interest in passive investing through index-based investment products is just beginning to take shape in Latin America. With more ETF assets based on our indices than any other index provider in the world, S&P Dow Jones Indices is in a unique position to help facilitate the growth of index-based investing in Mexico and Peru by offering a deeper and more prolific lineup of benchmarks. By aligning to these premier exchanges, international and domestic investors will have new tools to measure and potentially access investment opportunities in Latin America. Lastly, S&P Dow Jones Indices, in conjunction with Research Affiliates, a global leader in innovative indexing and asset allocation strategies, launched the Dow Jones RAFI Commodity Index. There's been a lot of talk about alternative beta indices lately.
This is another example of an alternative beta index offering from S&P Dow Jones Indices, and the Dow Jones RAFI Commodity Index offers a factor-based approach that uses certain criteria to under and overweight commodities, but with typical index merits like liquidity, governance, and transparency. Now let me turn to commodities and commercial markets. With the sale of McGraw Hill Construction expected to close in the fourth quarter of 2014, we moved McGraw Hill Construction to discontinued operations, thus restating our financials for 2014 and 2013 to reflect this. On a continuing operations basis, revenue grew 7% in the quarter, and adjusted operating profit increased approximately 9%. Importantly, the segment's adjusted operating margin has been materially enhanced. The divestiture of Aviation Week and McGraw Hill Construction, coupled with the elimination of the commodities and commercial management layer, has improved adjusted margins by approximately 400 basis points.
If you go back and look at last year's third quarter results, you will see that this business unit reported adjusted operating margins of 32.3% versus 36.7% this quarter. I want to point out that since commodities and commercial markets now includes only Platts and J.D. Power, on a going-forward basis, we will no longer be breaking out revenue for the two components. Now turning to Platts in the third quarter. Platts delivered high single revenue growth as strength in price assessments, market data subscriptions, and a modest benefit from the recent Eclipse acquisition were partially offset by the weakness in global trading services. Global trading service licensing revenue continued to be impacted by weak trading volumes. Metals and agriculture, building on recent investments, delivered the greatest rate of revenue growth at 27%.
On September 9th, IOSCO released its initial report on the implementation of its principles for oil price reporting agencies or PRAs. They concluded that, quote, "During the first year of implementation, the four PRAs have made good progress with regard to the PRA principles." Unquote. Platts continues to launch new products and services. This slide shows the increasing breadth of the Platts business. Platts leadership has worked steadily over the past few years to build an agriculture group capable of growing beyond sugar and biofuels. Platts recently embarked on its first foray into new agricultural sector, formally launching its inaugural publication for the grain markets. Daily Grains features daily price assessments for FOB Black Sea wheat, Azov Sea wheat, Black Sea corn, and CIF Marmara wheat, as well as market commentary and price rationale.
The new offerings introduces the concept of price discovery into the Black Sea grains market and frees market participants from gathering news and prices from multiple sources. The liberalization of Turkey's power industry was a driving force behind our July 2nd launch of new price assessments for the Turkish market and a new supplement to Platts European Power Daily. The new assessments and new publication, Platts Turkish Power Weekly, reflect nearly 2 years of deep market engagement in Turkey with key market participants. On August 15th, Platts launched a weekly spot price assessment for Europe-delivered industrial-grade wood pellets, known as i2, and a suite of U.K. wood pellet profitability spreads at different fuel efficiencies. The move was spurred by an emerging trend in Europe of fueling power plants with i2 pellets alone or in combination with coal to cut down on greenhouse gas emissions. Turning to J.D. Power.
The business delivered double-digit revenue growth in the third quarter, driven by gains in the auto business. Auto business growth was fueled primarily by the U.S. PIN, and PIN is the Power Information Network. The business as well as consulting. PIN provides real-time automotive information and decision support tools based on the collection analysis of daily new and used vehicle retail transaction data from thousands of automotive franchises. Details from these transactions are evaluated to create products that focus on key measures, including price, cost, profit, finance terms, lease, and trade-in values. Revenue from global service industries, which includes financial services, insurance, telecommunications, travel, and other non-auto related customers, increased modestly in the quarter, as did revenue from advertising licensing revenues from customers' usage of J.D. Power brand.
In summary, I'm pleased with the excellent operating results we saw in the third quarter as we continue to create growth and drive performance across the company. Total revenue increased 10%, notably with 12% international revenue growth. We continued to launch new products and establish licensing agreements. We rationalized our portfolio with the sale of McGraw Hill Construction, and we initiated additional restructuring efforts. Financially, the company delivered 32% adjusted diluted EPS growth and year-to-date free cash flow of $737 million. I want to thank all of you for joining the call this morning. Now I'm going to hand it over to Jack Callahan, our Chief Financial Officer. Thank you, Doug.
Thank you, Doug. Good morning to everyone joining us on the call. I want to briefly add a bit more color to several items related to the third quarter performance. First, I will discuss the impact to our financial results due to the reclassification of McGraw Hill Construction as a discontinued operation. Second, I will review certain adjustments to earnings that were recorded in the quarter. Third, I will recap key consolidated financial results in the quarter. Fourth, I'll provide updates on the balance sheet, free cash flow, and return of capital. Finally, I will review our updated guidance, which is directly impacted by the elimination of McGraw Hill Construction. The sale of McGraw Hill Construction to Symphony Technology Group is expected to close in the fourth quarter. With the sale pending, we have reclassified the business as a discontinued operation.
It is important to understand the impact on our financial results from this change. All of the financial periods presented today exclude McGraw Hill Construction results from continuing operations. This includes the current quarter results, as well as both year-to-date and prior year results. This change reduced our reported revenue as well as our earnings per share from continuing operations. This has an impact on 2014 guidance, as construction represented approximately $0.10 of earnings per share. I will provide more detail on our updated guidance shortly. Now let me turn to adjustments to earnings to help you better assess underlying performance of the business. In total, pre-tax adjustments to earnings from continuing operations totaled $110 million during the quarter. The first of these, as Doug already discussed, is a $6 million charge related to certain regulatory matters.
As we stated in the earnings release, there can be no assurance that this amount will be sufficient to resolve these matters or that definitive agreements will be reached. As Doug mentioned, we are actively working with these parties to resolve these matters. You should review our Form 10-Q, which will be filed shortly, for additional information regarding legal and regulatory matters generally. Next was a $46 million charge related to restructuring actions taken across the company. Consistent with our efforts to achieve productivity gains, we undertook numerous actions to streamline operations. Most of the charges recorded in the quarter were related to severance. We currently expect approximately half of the savings associated with these actions will flow to the bottom line in 2015, while the balance is aimed at reallocating costs to fund longer-term growth initiatives.
As Doug stated, we remain committed to pursuing the growth and performance goals we outlined earlier this year during our Investor Day. Lastly, there was also a $4 million adjustment to S&P Dow Jones Indices for professional fees related to corporate development activities. Now let's turn to the third quarter income statement. Overall, these are just terrific results. Revenue grew 10%. Adjusted segment operating profit grew 20%, with all four business units contributing to this growth. Standard & Poor's Ratings and S&P Capital IQ led the way, as each delivered adjusted operating profit growth of 24%. Most notably, after cycling through a period of stepped-up investments, S&P Capital IQ delivered record adjusted quarterly operating profit. Adjusted unallocated expense decreased $6 million, primarily due to lower corporate costs. The tax rate on an adjusted basis was 33.5%, consistent with our previous guidance.
Please note that on a GAAP basis, the tax rate was approximately 39%, largely due to the $60 million charge related to certain regulatory matters, which we have assumed is nondeductible. Adjusted net income increased 31%, and adjusted diluted earnings per share increased 32% to $1.02. The average diluted shares outstanding decreased by 3.4 million shares versus a year ago, driven by both share repurchase activity and a reduction in the number of stock options outstanding. Now let's turn to the balance sheet. As of the end of the third quarter, we had $1.9 billion of cash and cash equivalents, of which almost $1 billion is held outside of the United States. We continue to have approximately $800 million of long-term debt. Our free cash flow during the first nine months of the year was $737 million.
Going forward, we believe our balance sheet positions us well to make investments that strengthen the portfolio, including acquisitions, maintain our long history of dividend growth, and as appropriate, continue our share repurchase activity. Let me update you on our return of capital activity. During 2014, we have repurchased a total of 4.4 million shares at an average price of $79.06 for a total of $350 million. The total year-to-date return of capital in dividends and share repurchases is $607 million. We did not repurchase any shares in the third quarter. In the near term, we decided to maintain the availability of domestic cash for potential acquisitions and other considerations. Over the long term, we intend to continue repurchasing shares after taking into account the other uses of cash that I just mentioned.
I'd like to turn to our 2014 guidance, which we are updating due to both the sale of Construction and strong third quarter performance. First, we are increasing our revenue guidance from mid-single digit growth to mid-to-high single digit growth as all of our businesses are performing well. Second, our previous adjusted operating profit margin was an increase of at least 100 basis points. In light of the excellent progress we have made year to date, we are increasing this guidance to approximately 200 basis points. Third, we have adjusted our guidance for earnings per share from continuing operations to reflect the reclassification of McGraw Hill Construction as a discontinued operation. This removed all of their earnings from our income from continuing operations. As I mentioned earlier, from an EPS perspective, this resulted in an elimination of approximately $0.10 on a full year basis.
Based on the continued strength in our results, we can offset some of this elimination. Our new 2014 adjusted earnings per share guidance from continuing operations is a range of $3.78 to $3.83. Finally, we are slightly lowering our capital expenditure guidance to approximately $100 million. The remaining elements of our 2014 guidance remain unchanged. In closing, we continue to focus on creating growth and driving performance. Strong year-to-date results across our business units and the restructuring actions highlighted today are examples of our efforts to deliver on these goals. We remain very much on track for a strong year of growth and performance in 2014, our first full year as McGraw Hill Financial. With that, I'll turn the call back over to Chip.
Thanks, Jack. Just a couple of instructions for our phone participants. Please press star one to indicate that you wish to enter the queue to ask a question. To cancel or withdraw your question, simply press star two. I would kindly ask you that you limit yourself to two questions. That's two questions, in order to allow time for other callers during today's Q&A session. If you've been listening through a speakerphone but would like to now ask a question, we ask that you lift your handset prior to pressing star one and remain on the handset until your question has been answered. This will ensure better sound quality. Operator, we'll now take our first question.
Thank you. Our first question comes from Patrick O'Shaughnessy with Raymond James.
Hey, good morning, guys.
Morning.
Good morning.
I was wondering if you could provide a little bit more detail on the go-forward impact of your restructuring efforts. If you can talk about what sort of expense reduction implications or operating margin implications that's going to have in 2015.
Patrick, it's a little early to provide too much detail on 2015. Just to give you a bit more detail. In general, the restructuring charge was $46 million. On average, for every dollar of restructuring, we save a dollar, just to keep it simple. I think in our current forward look, I think you should expect that about half of that restructuring amount would contribute to margin expansion and profit growth in 2015. The other half, we are selectively reinvesting in growth initiatives to really support longer-term top-line performance as we go into next year.
All right, great. Thanks. For my second question.
Also, Patrick, this is just one part of our ongoing commitment to deliver at least $100 million of productivity by the end of 2016.
Got it, thanks. For my second question, just talking about your capital return strategy. Obviously, you didn't do any share repurchases this quarter. As you're thinking about your usage of cash, and you talked about it for acquisitions or potentially other matters. For acquisitions specifically, historically, I know you guys have been looking to use your outside the U.S. cash for that. Have you changed your thought process there? Are you more inclined to try to reserve some of your U.S. cash at this point for M&A?
Your observation is right on. Ideally, we'd love to be able to deploy some of our offshore cash for acquisitions. It's just that not necessarily all of the interesting properties are offshore. From time to time, if there is a domestic opportunity, we'll want to be sure we have the adequate flexibility to consider it.
All right, thank you.
Our next question comes from Manav Patnaik with Barclays. You may ask your question.
Hi, this is actually Greg calling on for Manav. I just wanted to ask around the new risk retention rules that have just been formalized. I was wondering if I could get your thoughts on the puts and takes around issuance after these regulations, and how you think the rules will impact the market.
This is Doug. Those are going to be very important rules that are coming out of the financial crisis and Dodd-Frank. As you know, these rules required 6 different agencies to put them in place. They had a lot of input. They went through 2 different rounds. The final rules themselves will take 2 years before they're going to be implemented. In particular, there's 2 areas which I think the most questions are going to be coming up around. The first is on mortgage securities and understanding what is going to be in or not in, and what are the rules going to be around mortgage securities. Exemptions have been given for certain types of retail mortgages which had not been expected, which actually might give more impetus to see more active RMBS markets.
On the other hand, the provisions related to CLOs are something that are new because of the 2 aspects. One is that there were rules about the hold back period, or they call it skin in the game. I call it eat what you cook. The new rules on skin in the game apply to arrangers, not just necessarily underwriters and originators. Getting that right and how that's going to be applied, the 5% holdback could have some impacts, in particular on the CLO market. That's the one people are watching carefully. It will take 2 years for that to go into place. The second aspect also relates to what will be potential differences between European skin in the game rules and the U.S. rules in the case of any kind of multinational or international placement. Anyway, short answer, the rules just came out.
They're going to be 2 years before they're implemented, we will obviously watch that very closely. No specific impacts that we've defined so far.
Okay, thanks. I guess with all the news around falling oil prices, could you talk about how lower prices or decreased production could impact Platts revenues?
Yeah. There's two aspects to that. On the first hand, because of the drop in oil prices, because there are so many new types of oil wells and oil products which are being developed, it actually increases needs for us to have very specific oil well delivery-related price assessments. On the one hand, with things like shale oil, shale gas, new fields coming on place, this is something that's valuable for us to have the assessments and the information for those types of new services.
Where we see some impact is that as you've seen the banks retreating from the commodities markets, and in particular oil trading, and they've been selling their businesses or reducing their risk related to that. We have seen some lower levels of trading. As you saw, our growth estimates for the last quarter results in the trading part of our business were not as strong as in our information side of the business. There is some impact depending on what trading is, but usually the higher the volatility, as that goes up, there's usually also more trading. We don't see any direct impact on Platts revenue just because the prices are going lower.
In fact, with all of the new sources of oil products coming on stream and with some of the uncertainty, we expect that there will be just as much demand as ever for our oil pricing services.
Okay. Thanks for the color.
Yeah. Thank you.
Our next question comes from Alex Kramm with UBS. You may ask your question.
Hey, good morning. Just coming back to the Ratings business. Wondering how kind of the current outlook here impacted that guidance or being more specific, like what you see out there. Obviously the quarter has been a little bit soft, but might be opening up a little bit now that this volatility has gone away. Maybe you can just give us a little bit of color what you expect here in the near term on the Ratings side.
First of all, just a little bit of color from last quarter. Last quarter, the issuance in the markets was basically quite strong, as you can see from our results. If you look at the growth numbers, you'd actually think that there had been a big drop in activity. There was a lot of impact in the size of the markets and the growth, given that the prior year there had been a $40-plus billion Verizon issuance that skewed some of the numbers. Really, if you go into the numbers, there was a big mix shift. In prior quarters, there had been a lot of issuance of industrials, of public finance, and in particular of high yield in issuers both in Europe and the U.S.
Last quarter, industrials, corporates, and high yield actually were a little bit lower than they had been in prior quarters, and it was made up by financial services. Banks, broker-dealers, and others in the financial services industry increased their issuance dramatically in order to continue to raise capital in this very low interest rate environment, diversify their funding sources. We saw a big increase in financial services issuance last quarter. In the structured finance market, CLOs continued to be very strong. There was a lot of growth there. CMBS was strong. RMBS continues to be anemic. Basically, in the U.S., it's been a small market. Traditional ABS, which is things like credit cards and others, has chugged along on kind of a normal level. In Europe, there was a very large increase in traditional ABS, which was receivables and credit cards.
Some, there's a little bit of RMBS growth, based off of a low base. The Europeans would like to see more private sector bonds in the market so they have more tools at the ECB to do quantitative easing and have ways to manage the money supply and stimulate the economies. For October, issuance on October continued along the kind of a mixed path that I mentioned. It's something where the October issuance continued on the same path for corporates and high yield, which was low, lower than last year. On the other hand, financial institutions had continued to go to the markets. ABS issuance was strong in October. It was up in traditional ABS. CMBS continued to be strong. CLOs have been a little bit patchy.
There's kind of deals week by week, RMBS, as I mentioned, throughout the entire year, has still been pretty anemic. We're going to watch carefully what is the mix shift during the end of the year. As I said, results so far in October were mixed.
All right, great. That's helpful. Just quickly switching back to the margin here, particularly on the Capital IQ side. That one jumped pretty substantially, not only year-over-year, also sequentially. Any more color that you can give? I know there were product launches. I know some of the investment phases are over. There's been some management changes. Any more color you can give in terms of how near-term sustainable these margins are? Or if there was maybe something that was a little bit more one time than we should think about for the next near term. Thanks.
As we mentioned before, we've sort of cycled through a period of stepped up investment. The business now has generated profit growth now I think for five straight quarters. I don't know if they're going to be at this margin for every quarter over the next two or three, but I think we've moved to a little bit of a higher range here, and we're going to look to kind of build on that over the next year or so. I wouldn't say it's going to be a straight line from here, maybe back and forth a bit. I do think we're sort of moving to a little bit of a higher, more sustainable level over the medium term.
All right. Very good. Thank you.
Thanks.
Our next question comes from Andre Benjamin with Goldman Sachs. You may ask your question.
Thank you. Good morning. My first question is maybe if we could talk a bit about what drove the double-digit increase in Capital IQ Desktop, how much of that is volume versus pricing. I was wondering, are you taking share from others, given most other companies that have been reporting are not growing as fast, or is it simply narrowing the price gap versus some of the peers with more expensive desktops?
Yes. Let me take that. On the first part of it, we've had double-digit growth in the S&P Capital IQ platform for a few quarters now. It's driven by a few things. First of all, it's driven by broader sources of customers. Don't just think about Cap IQ going into on the desktops of investment banks and trading floors. It's broader going into middle office and back office risk management, different types of users within financial institutions. It's being used more broadly and widely at asset management firms and insurance companies. There's been an expansion of the types of users that we've been targeting and working with to ensure that our services and solutions meet their needs. In addition to that, we've been able to add some functionality, which is valuable for analytics purposes, and through that, we can also increase some of our pricing.
The main driver of this is actually volume as opposed to pricing. This is the way that we're looking at it. We are working with a lot with Imogen Dillon Hatcher, who is the acting president, to ensure that we're very closely focused and targeted on our customer needs and products and service needs. It's actually been chugging along quite well with this double-digit revenue growth as we become much more targeted on the sale. Much more customer and volume driven than price driven so far. Later this year and early next year, we'll give you more guidance for 2015 on Cap IQ and all of our businesses.
Andre Benjamin, one thing I would add, too, is I think with maybe a modestly, let's just call it modestly improving environment out there in some of the customer segments that we serve with the product are not only having good sales results, but the rate of cancellations that we've had has dropped down. Our retention has actually improved a bit, too. I think that's also supporting this nice growth that we've seen.
Thanks. For my follow-up, I was wondering if you could maybe talk about investment for growth in the indices business. Maybe talk about how attractive you're thinking about, or how attractive you would think it is to build it organically or via M&A. Maybe the thoughts around expanding beyond your core equities indices where you're strongest, and how comfortable you'd be doing a large deal to expand that business versus a series of small ones.
When we look at that business, it's really driven by taking a step back and thinking about the strategy that's going to fit what are the trends. The big trend that we talk about and we look at, and we can see it, this is something you can actually measure, is the growth of investable assets around the world from a combination of retirement assets building up in the developed markets and investment assets, whether they're for savings, for education, for retirement, et cetera, as the emerging markets and other markets around the world have growing populations. We look at the broad trend, and we know that we have a very strong platform in equities, as well as having a very strong platform in commodities. We also have the ability for custom indices and strategic indices that we're always investing in and growing.
If you look across that, we would like to continue to build into that mix, both across global expansion. You've heard in the last few quarters that we've done business in Africa. We started doing more African indices. We've done in Taiwan this quarter, in Mexico and Peru. We're doing expansion globally. These are all fill-ins and allow us either through partnerships or acquisitions to fill in our indices space. We're very interested in continuing to expand our fixed income growth. This is an area that for us is quite strategic, so international and fixed income are both really important elements to the business for us for expansion. We would look very carefully at any sort of property that was available in the market, whether it was large or small. If it was going to fit our strategy and fit our business model, we would look at it.
There's no comments that we can make on any specific transactions or anything that's going on in the market. For us right now, going back to where I started, S&P Dow Jones Indices is a great performer. We have a great team there, and it fits very well in our portfolio, especially in light of all of this very significant secular trend that we believe we're responding to.
Thank you.
Our next question comes from Peter Appert with Piper Jaffray. You may ask your question.
Thanks. Good morning. Tragically, I'm going to have to waste my question with a point of clarification here. Is the full year guidance meant to imply fourth quarter EPS of $0.85 to $0.90? That's question one.
I think it's $0.01 or $0.02 better than that, in that range, Peter. I think that's accurate. I think that is based, going back to some of the comments that Doug made earlier about this sort of, let's say, let's call it a mixed start in terms of issuance in October. That combined, if you just look at our trends over the last few years, we tend to run a little bit heavier in expense in the fourth quarter. There's a bit of pressure in the range business with legal expense. The one other consideration I'd point you towards, too, is we really as yet have not had a full quarter impact in the index business
Of the lost UBS contract that we had, I think this will be the first quarter we'll see that full impact. There's a number of considerations that where I think we've positioned, given the strong results of the third quarter, a fairly conservative outlook for the fourth quarter right now.
Okay. That's very helpful. Thank you. In terms of the restructuring efforts at S&P Ratings and very impressive margin upside you saw in the current quarter, what should we expect going forward in terms of either additional restructuring efforts or potential to drive margin improvement there? How big do you think the upside is in terms of the margin leverage at S&P Ratings specifically?
Well, we've talked about it in the past, and the way we've been thinking about it with Neeraj Sahai, who is the new President, there are different categories of expenses that we're looking at. There's some of these that are very clearly ongoing permanent costs that we've built into the organization, things from compliance, from control, from our international network. Those we think are very important for us strategically, and to run our business. We have another set of topics which relate to, I call them changes, which will eventually go away. Very importantly, legal expenses. I see that as a temporary expense increase. As I've said before, once they're normalized, that will help significantly with our margins.
There's efficiency opportunities that we're working on, which, as an example, our recent voluntary retirement program allows us to reposition some of our labor force with different profile, with some younger talent. We've got some opportunities to really work on efficiency. It's a combination of some permanent expenses we're going to absorb, and really, we can talk to you about those in the future. We've got our opportunities for overtime, eliminating some of our expenses, then we'll see those. We've got some restructuring and efficiency opportunities that we'll be working on. We'll provide more guidance for 2015, early next year, and at that time, we'll have more clarity on all of this and give you some more precision.
Great. Thank you, Doug.
Thanks.
Our next question comes from Craig Huber with Huber Research. You may ask your question.
Yes, good morning. My first line of questions just has to do with the lack of share buyback in the quarter, also along those lines, I wanted to ask, was there any restricted or material information that prevented you guys from buying back any stock in the quarter? Obviously, first half of the year, you bought almost four and a half million shares, but nothing this quarter.
Craig, even if there was, I don't think we could comment on it. Let's just say we thought it was prudent at this moment in time, just to have some more flexibility and the availability of domestic cash due to some possible corporate development activities combined with other considerations. We'll come back. Share repurchase is part of our financial algorithm, we anticipate that will continue. I think we've been pretty aggressive in the past in this area. I just think for now, we thought it was just appropriate to take a pause.
Is that to say then down the road, you would be open to using the flexibility of your balance sheet, have a very clean balance sheet, taking on some leverage to buy back stock down the road? My follow-on question, if I could sneak one in here is, what is your backlog for-
Craig Huber, we'll keep it to two questions today, please.
Fair enough, Chip.
Thank you. I would just take you back to where we'd like to deploy cash. First, we're going to invest back in our businesses to drive organic growth. Secondly, if we think there's value creating acquisitions to help us build out our global portfolio, that's our second place we'd like to deploy capital. Third, we want to continue to maintain the growth in our dividend to keep up the wonderful history we have now of over 40 years of sustained dividend growth. That all being said, once we exhaust those opportunities, given the strong cash flow of this business, we are quite likely to have some balance sheet flexibility, and we have and we will continue to look to repurchase shares, assuming that we believe that we're making those decisions at the right time in the market.
You should expect that to be part of our go-forward plans.
Great. Thank you.
Thanks.
Our next question comes from Tim McHugh with William Blair. You may ask your question.
Yes, thanks. Just on the restructuring program with S&P Ratings, some of the headlines there or news articles we'd seen related to it suggest it was basically pretty broad-based for just anyone over a certain kind of experience level. That may be unfair, but I guess, just trying to understand, I guess, was it broad-based? Was it targeted in particular spots of the organization where you saw room for more efficiency? I guess just maybe what were you willing to try and cut out as part of that program?
Well, this program was designed to, maybe as opposed to the first word you used, broad, it was much more narrowly focused. It was U.S.-based only, and it was targeted to only directors, which is a more senior level of management and above. This was a targeted reduction. If you think about it was a way to help us think more about the organization in a little broader way, more of a pyramid. It was more focused, more narrow, and it was U.S. domestic based.
Okay. I guess the reason you, or the conclusion you came to that you thought there was room for that is, do you feel there's room for less managerial or more, I guess as you said, a wider pyramid? I guess I'm just trying to understand the logic behind it.
Yeah. Think of it as an opportunity. I used the term when I talked before about how we think about our margin, that we have some permanent areas that we're going to figure out. Things that we want to keep, we'll look at them carefully. We've got these temporary blip in expenses, things like legal expenses, which eventually normalize. Then we've got these efficiency opportunities that we're looking at, whether it's through technology or, in this case, looking at our workforce and how we can have the right type of workforce to respond to the markets that we have. So we looked at this in a way that was really narrowly focused on what kind of workforce do we have and how we can look at the right kind of pyramid and the right resources against our market opportunities. This was narrow.
Okay, thank you.
Our next question comes from Joseph Foresi with Janney Montgomery Scott. You may ask your question.
Hi, good morning. This is Joseph Foresi on for Joe. Just a quick question on the fourth quarter margin guidance, if I could. I think year-to-date, if I have it correct, the margins are up about 160 basis points, and I think you were guiding for about a 200 basis point improvement. I just wanted to see what, kind of by the segments, what you might be expecting to improve. I think the index business might have a good comparison, but just wanted to get your thoughts on the fourth quarter margins and how they might be settling out.
Look, I wouldn't want to get too into the weeds in terms of by segment. Overall, I think we would, consistent with the guidance now of a full year of margin expansion of 200 basis points or better, that we're going to need to exceed that in the fourth quarter to make that work, kind of given your observation on the year-to-date results. Obviously part of that will be aided by the overlap that we have in the index business when we took a write-down last year in the fourth quarter. Beyond that, I think we continue to expect solid contributions across the business lines like we have in this quarter.
Okay, thanks. That's all I had.
Our next question comes from Vincent Hung with Autonomous. Your line is open.
Oh, hi. Good morning. Just on the increase to the operating margin guidance by 200 basis points, how much of that is just due to moving the construction business to discontinued operations?
It has a modest impact, but it's trivial relative to the performance of the business. It's fairly modest. Keep in mind, it's only on a full year basis, around the $170 million revenue business. In the overall mix, it's quite insignificant.
Let me just go back a second and give you a little bit of thoughts about our philosophy on this. When we had our earnings call earlier this year, I'm sorry, our Investor Day earlier this year, we talked about some goals that we have for productivity. As we think about productivity for the company, it's a combination of scale and how we're able to take advantage of the kinds of, if you want to call it punch power that we have in our businesses for sales, for customer focus, for innovation, and how we can drive higher growth in our top line.
One of the areas we really want to look at for our margin, it's not just about expenses, it's also about helping drive our growth in the top line, and that's really one of the most important messages that we want to get across, that this is about the top line. At the same time, we also want to ensure that we're running the company in a way that is effective and efficient. Programs like the ones that we were talking about before in the ratings business, where we've done a very selective opportunity for us to look at a restructuring of senior employees in a very specific way.
Those are the types of things that we're looking at that we can do across the company, they're very selective, and it's not something that we're doing in a way that is always going to be visible. It's a mindset about high growth, top line growth, and then very selective approach to ensuring that we're efficient with the bottom line, and we think that we would like to deliver both of them and get an increase in margin. Over time, we're going to try to track both sides of that. Higher growth, better sales, better approach to customers, and then ensuring that when we use our assets and we deploy our resources, that we're doing it in a way that it's the best way to drive growth and also efficient so that we can be driving our margins.
Okay, great. Just my other question is, you said that half of the restructuring cost is likely to fall to the bottom line next year. How should I relate that to the $100 million cost cutting initiative that you laid out at Investor Day?
You should view it as part of that overall initiative.
Okay. Thank you.
Our final question comes from William Warmington with Wells Fargo Securities. You may ask your question.
Hi, it's Bill Johnson on for William Warmington.
Hey, Bill.
Hey. Just a quick question. For the pending sale of McGraw Hill Construction, what sort of tax rate should we use on the $320 million in proceeds you're getting there?
Unfortunately, because this was a kind of a business that grew up within McGraw Hill, there's not a lot of basis here. I think in your modeling, you should probably assume after-tax cash contribution of maybe around $200 million just to be conservative.
Got it. Just to be clear, going forward, this was probably the last major change to the portfolio of McGraw Hill Companies?
Well, as Doug mentioned earlier, this really kind of concludes the portfolio rationalization that we have stepped out over the last few years. At this point in time, I think we'd like to be able to perhaps now see if we can add to the portfolio moving forward and build on the top-line growth that Doug was just discussing.
Yeah, let me add to that when we think about this top-line growth, there are a lot of very compelling secular trends that I just talked about one of them before related to the asset management industry and the increase in passive index-oriented investing. We mentioned a little bit earlier about the opportunities in the oil markets, the commodity markets. We highlighted some of these opportunities for you with the wood pellets, the i2 biofuels that is starting to grow in Europe. It's a very important area.
We're looking across all the different markets where it's research, it's data, it's analytics, it's benchmarks, it's all of the different areas which we already play in, that we have a strong position in, we have strong brands in, that we would look at both organic investment, as Jack talked about before, and then also selective acquisitions for us to ensure that we have great positions in these businesses, whether it's through product expansion, its capabilities expansion, or its geographic and international expansion. Right now, our focus has shifted to growth, and that's really what for us is exciting about being in this company is how we're positioning for the future.
Got it. Thank you, guys.
That concludes this morning's call. A PDF version of the presenter slides is available now for downloading from www.mhfi.com. A replay of this call, including the Q&A session, will be available in about two hours. The replay will be maintained on McGraw Hill Financial's website for 12 months from today and for one month from today by telephone. On behalf of McGraw Hill Financial, we thank you for participating and wish you good day.