Morning, welcome to The McGraw-Hill Companies 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 questions and answers after the presentation, and instructions will follow at that time. To access the webcast and slides, go to www.mcgraw-hill.com and click on the link for the third quarter earnings webcast. If you are listening by telephone, please note that there is an option available to synchronize the presenter slides to your telephone instead of the computer. After you log into the guest book, you will see two windows side by side 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. I'd now like to introduce Mr. Chip Merritt, Vice President of Investor Relations for The McGraw-Hill Companies. Sir, you may begin.
Good morning, 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'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 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.
This call is intended for investors. We would ask that questions from the media be directed to Patti Rockenwagner in our New York office at 212-512-3533. I would like to turn the call over to Harold McGraw III, Chairman, President, and CEO of The McGraw-Hill Companies. Harry?
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, then provide an outlook for the balance of the year. Like many other New York companies, we delayed our earnings report from Wednesday to today to accommodate employees and shareholders impacted by Hurricane Sandy. 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. 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. Let me begin by saying that we are pleased by the success of our growth and value plan and the strong results of McGraw Hill Financial businesses. 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.
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%. Due to our aggressive share repurchase program, we delivered 10% growth in adjusted diluted earnings per share. 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.
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 two industry-leading companies, McGraw Hill Financial and McGraw-Hill Education. We are on track to do so. Amendment number 2 to the Form 10 SEC registration statement for the potential spin-off of McGraw-Hill Education was filed with the Securities and Exchange Commission earlier this month. 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. 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. 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. Jack will provide some color on this in just a moment. We committed to aggressively repurchasing shares. After completing the $1.5 billion share repurchase program earlier this year, we re-entered 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 with some of the most widely followed and trusted brands in the index space.
We believe this joint venture will prove to be of 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 Limited. Most recently, we announced the acquisition of Kingsman SA, which I'll discuss in more detail in just a moment. Whether 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 three segments delivered revenue growth, it was Standard & Poor's Ratings 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 Reserve's 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.
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 U.S. 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%. 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.
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. 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. 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. 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. We continue to believe that the legal risk of pending litigation remains very low. With that, let me turn now to S&P Capital IQ and the S&P Dow Jones Indices. 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%, 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 in growth, respectively. These results were offset somewhat by revenue weakness from equity research. One of the top priorities of 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 Investor's 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 it's 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 provide several of our businesses with important access. This access 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, 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, 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 five-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 as 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 continue to be the primary growth driver. However, derivative trading and Bentek Energy also delivered double-digit revenue growth. 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. 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. As J.D.
Power continues to pursue business beyond the automotive industry, there is 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. 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, 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. 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 the 2012's two largest state adoption opportunities, 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. 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 primed 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 path. 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 CoreLogic 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 composite 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. In 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 Financial is delivering on its growth and value plan commitments with the pending separation, exciting growth plans, multiple tuck-in acquisitions, sizable cost reductions, and aggressive share repurchase program. With 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. I look forward to going in any direction that you would like to go. Jack?
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%-8% and operating income to be $20 million-$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 non-controlling 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 a modest improvement in our overall rate. Net income attributable to non-controlling 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 19 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. I'd 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 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 non-cash 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 non-controlling 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 three acquisitions increased revenue growth to 13%, with approximately 75% of the incremental revenue from the joint venture and 25% from the three 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 pre-tax income, the provision for taxes, and the after-tax income, which implies a 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 a point higher than the reported effective tax rate. On a year-to-date basis, we recorded 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 one-time 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 one-third 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 from McGraw-Hill Education are clear. I'm going to 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 underway 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 four 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 healthcare 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 underway, and the associated one-time transition costs stepped up in the third quarter. We are 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 one-time Growth and Value Plan expenses, largely related to professional fees and restructuring. These one-time expenses will continue into the fourth quarter. 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-$3.40. McGraw Hill Financial is delivering great performance. 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. We are focused on making the right choice for both the business and our shareholders. Through countless efforts around the world, the work is on track to separate two leading companies. We have been able to accomplish all of this while delivering cost reductions of at least $100 million. We are focused on a solid finish to 2012 and on finalizing the separation and stand-up of these two terrific industry-leading businesses.
Thank you for joining us today and your interest in McGraw-Hill. Let me turn the call back over to Chip Merritt to moderate the Q&A session. Chip?
Thank you, 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. If you've been listening through a speakerphone but would now like to 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. Now, operator, we'll take our first question.
Thank you. Our first question comes from William Bird with Lazard. You may ask your question.
Good morning. Two questions. One, what is the drop-dead deadline for a decision on sale or spin of Education? Two, 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%, revenue's down 7%. I was just wondering if you could elaborate on what's driving that and maybe just the context around some of the issues at MSCI. Thank you.
Okay. Well, good morning, Bill. Look, as far as the separation process, we have been giving 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. Literally, I think it would be inappropriate on my part to derail any element of the process at this point. I will say that in the coming weeks, and hopefully sooner, we will have an announcement to make to you.
Thank you. On the Index Business?
We're so excited about this because we wondered very hard whether or not we could actually pull this off on this one. To put the S&P Indices, which are largely institutional indices, together with Dow Jones Indexes, which are largely retail, it's just a fabulous combination. As we see more and more index behavior and the growth in ETFs, both in the U.S. and around the world, it gives us huge opportunities as a platform to expand. I gave 1 example of the Brazilian component. I can tell you the growth of S&P Dow Jones Indices is just going to be phenomenal. It's a wonderful platform. We're going to be able to do a lot of other things to add to this platform to grow it even faster.
We're very excited about the combination, that it's underway, and that the growth prospects are so high. Bill, the one thing I'd also add, it's really a third quarter issue, largely for the base S&P and CS businesses, the comp versus year-ago is 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, that overlap is less onerous as we get into the fourth quarter. I think we think that's an easier overlap for us to manage as we head into the balance of the year.
Thanks. Just to be clear, there's been a lot written about just the fee war going on in the ETF industry. I just wanted to get a sense of what you're seeing on pricing.
At this point, I don't want to comment on MSCI, that's their to do, we are not seeing that kind of pressure at this point. From our standpoint, we're not overly concerned by that.
Thank you, guys.
Bill, again, the quality of brands and the recognition of those trusted brands is really, really important on that one. Again, when you have markets that have a lot of uncertainty built into it, those trusted brands take on a lot more import.
Great. Thank you.
Thanks, Bill.
Our next question comes from Manav Patnaik with Barclays. Your line is open.
Hey, good morning, gentlemen. First quick question on Platts. I guess, what was the acquisition contribution for the Platts line item from Bentek Energy? Also, just maybe a little more color there. 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.
No, actually, the Platts business has been strong all year. The Kingsman acquisition, I think you were referring to gives us strength in terms of a brand new sector of expanding into the agricultural markets, not only from biofuels, but also in terms of expanding in the commodity platform. From our standpoint, Platts has exceeded its plans and is doing extremely well. We expect that to hold up.
Back to the acquisition impact. Just keep in mind, the Bentek deal closed early in 2011, and the SPV deal closed early in the third quarter of last year. Essentially the third quarter, it's really apples to apples. It's year-on-year comparisons are now have the acquisition in it, and the only new piece is the Kingsman acquisition. 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.
All right. 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 I thought it was initially February. Just around the trial front, can you give us an update on how the Australia trial went or what the pending status there is?
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, it's scheduled for trial in May of next year. We'll see how that goes. We're not concerned at all. As far as the Australian CPDO situation, we're waiting to hear the result on that. From our standpoint, again, we feel like we're in a very good position. We should get a result any day on that, and we'll be reporting that as others will as well. Again, the overall legal situation, Manav, has been one of, you've got so much weight in these things. As you know, in the United States., we do everything at the federal court level.
Literally, because of all the litigation out there, not just ours, I mean all of the litigation out there, it takes two and a half years to get before a federal judge. You have to wait. One of the things that we have said, and we're encouraged by the result, is that in many cases, once it gets before a judge, it's the same day that these cases get dismissed on all that. We think that we're in a very good position. We're obviously well advised, and it's a wait and see game. 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 lower court decision, all of those kind of thing, you have to be focused on all of these kind of things.
We think the risk here in terms of legal aspects are low.
All right. Thanks, guys. I'll get back in the queue.
Thanks, Manav.
Our next question comes from Peter Appert with Piper Jaffray. You may ask your question.
Hi, this is George Tong for Peter Appert. Cost growth continued to slow in the Commodities and 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?
Well, George, again, I don't want to speculate here and everything, but I have to tell you that given the strength, the digital offering and the subscription growth, our hope is that continued emphasis on the cost reduction part is doable. I would just say at this point that we're very pleased with the results for year to date and for the third quarter. You have my assurances that every focus is on continuing to find ways to reduce those costs. We're very excited about the revenue growth here. It's a good picture, and it's getting better.
Got it.
I think as you saw last quarter, we had some pretty good margins in this segment, and I think we'll be around this high 20s, mid-to-high 20s range, going forward. Nice margins in Platts, and we have, as Terry mentioned, a great year for J.D. Power and stabilizing across the balance of the commercial platform. We should be in this range for the fourth quarter.
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.
That's very helpful.
Yeah.
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?
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. You're talking about educating your future workforce. 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 things. We've got to get back onto that track. If everything is essentially based off property tax structures at local and state municipalities, and all that, 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 those things. Those aren't excuses. Those are realities and everything.
One, an improving housing market, getting states out of deficit positions and getting growth again is going to help this situation. Literally, and this won't last, it can't, but this is the worst K-12 environment in a decade. I think it should be obviously an outrage to everyone. It won't last. The 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 device manufacturers or whether we're working with partners in terms of developing digital solutions, we've been working aggressively on this for some time, the receptivity of it is just moving at a very fast pace now. That's very encouraging.
That's got serious implications for cost reduction, but also very, very strong positives for revenue growth on that part. It's an essential business. It's our future workforce, the education agenda should be a priority for any country.
Great. Thanks very much.
Yeah. Thanks.
Our next question comes from Craig Huber with Huber Research Partners. You may ask your question.
Yes. Good morning. Thanks for taking my question. I have a few questions. Terry, first, on the cost-cutting front, you've talked about this $100 million annualized goal you're looking to get to by the end of this year. I'm just curious, why is the number at the end of the day not going to potentially be two to three times that? I ask that in the context, last year, as you know, you had $4.8 billion of cost to your company. Why only $100 million? Is my first question, please.
This is 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 those things at the same time. 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 two separate entities. It'll be my accountability to come back and talk about what the cost outlook is for McGraw Hill Financial, and it'll be Patrick Milano's to do the same for McGraw Hill Education. I think it's kind of given separation right ahead of us now.
It's premature to go past that, we certainly acknowledge that there's opportunity here, and I think some of the foundational things we've done this year give us opportunities to extend some of the cost programs once we move into two separate entities. More to come.
Craig, I 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 things. 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. I think to do, as Jack said, the separation correctly, and to put out a $100 million number is very responsible. We think that there's a lot more opportunity, and we look forward to, once separation is completed, to coming back to you with another number.
Okay. My second question, please. As you think about the backlogs in your ratings business for the next two to three months, what are they looking like right now, and how much risk do you think there is, given the federal debt ceiling has to get raised? We know how that went a year and a half ago. Terrible.
Well-
I'm sorry. Secondly, also with the fiscal cliff issue for January 1st, is that going to put issuers on hold here for a while? What do you think there, please?
Okay. Well, look. First of all, not to talk about just the fourth quarter, to talk about the next three, five, 10 years, the capital demand needs are huge. If you talk about infrastructure financing alone, between now and 2030, you're talking some $70 trillion. You're talking about a trillion dollars of infrastructure financing in India alone over the next five years. The study that I gave you was on just refunding between now and 2016 of $8 trillion. The demand here is absolutely huge on that part. Any given time, you're going to have some slowness or some pickup or whatever, 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.
In fact, the reason that 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. From a backlog standpoint, we're doing really well. 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? You think, I don't know, and all that. Both of those caused global spreads to contract and obviously fueled a surge in September bond issuance.
I get questions like, okay, well, is that just bringing monies forward that were in the fourth quarter or the first quarter for next year, or something like that. How do I know, and all that. We'll just have to wait and see what the facts are. The capital demand load is huge on that one, and it's worldwide on that part. 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.
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 for the refinancing you talked about.
Okay.
You apply your style to do large acquisitions, of course.
First of all, I don't want to get ahead of ourselves here, let me give you two facts on that one that Jack was talking about. One, we are an extremely dividend-friendly company, we have been since we created a dividend in 1936 and been increasing it every year since 1974. 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 is pretty solid. We're a very share repurchase friendly company. We do anticipate we are 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. I expect to have a strong share repurchase program going forward.
I think it's a little premature to talk about what level or all of those kind of things. From a financial engineering standpoint, I think our track record is pretty solid.
Great. Thank you.
Thanks, Craig.
Our next question comes from David Reynolds with Jefferies. You may ask your question.
Morning, everyone. David Reynolds here from London. Just to say it's great to see that New York is back on track. Our thoughts are with you. A question, though, I don't mean to labor the point, if I can just address the coming decision process around the education asset. 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 a bid, you're determining whether a price is acceptable? I know it's a difficult area to talk about, if you could shed some light on that would be helpful.
Thanks, David, and thanks for your comments about New York. As you know from your own associates, 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. Thanks for the comments on that. 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're coming to a conclusion. Again, I think to skew this in any way is not appropriate from my standpoint at this point. The best color I can give you is that you're not talking a long timeframe here. You're talking literally coming weeks and maybe sooner.
That's great. Thank you. Perhaps just one follow-up. Obviously, we noted your increase in the full year 2012 guidance. Intuitively, that feels relatively conservative. Would you agree with that?
David, you're a great guy. Look, I thought the range $325-$335 was a really solid number and range for us for 2012. The fact that things were a little bit better, that our cost reduction programs came in, all of those kind of things. We started mid-year giving guidance that it was more like $330 and maybe closer as we got on towards the upper end of the range. Given the third quarter and all of that and the way we expect to finish 2012, we think that improving the guidance from $335-$340 is a good step. 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. All of that. We're pleased with that guidance.
If things go the way we like it, we'll be very pleased.
We're pretty focused on delivering on the commitments that we make. We're hopeful that we'll finish the year nicely to position us well for next year.
Thanks for the comments, guys. Appreciate it.
Yeah, thanks, David.
We will now take our final question from Bill Warmington with Raymond James. You may ask your question.
Good morning, everyone. A question for you on how many cases are still outstanding for Standard & Poor's. Finally, when do you start to bump up against some of the statute of limitations for these claims?
Let's see. In terms of the outstanding issue, 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 from you, but it's way down, obviously. Since the downturn in the markets and all of those kind of things, it's been a solid four-plus years-
Yeah
in all of that. The expectations that we had in terms of there's no merit to some of these and all of that, it has borne out to be true in all of that. We got a few dozen left.
Right. For the EPS guidance for 2012, does that include the impact of the $200 million in share repurchases you're planning to do in the fourth quarter?
It's a consideration, by the time you 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.
Yeah.
I wouldn't view our guidance as dependent on it at this point in time. It'll have a bigger impact as we get into next year.
Yeah. Again, based on market conditions and all those kind of things, we'll keep everybody updated on exactly what we're doing.
Yeah. One other point in your first question on the legal situation is I can tell you our legal expense on a run rate basis is coming down a bit. I think if that's any indicator of some of the issues facing the company, that is one thing we are looking at.
Excellent. 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.
Well, again, I don't want to talk about any of the other competitors. That's for them. We feel very good about where our 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. I think the other thing to focus in on with Capital IQ is the customization aspect of this, that we have multiple abilities to put more content packages together to create customized platforms for customers. That's what we're focused on doing. Capital IQ is on target.
Thank you very much.
Yeah. Thank you, Bill.
That concludes this morning's call. A PDF version of the presenter 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 two hours. The replay will be maintained on McGraw-Hill's website for 12 months from today and for one month from today by telephone. On behalf of The McGraw-Hill Companies, we thank you for participating and wish you good day.