UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-1023

(Exact name of registrant as specified in its charter)

New York		13-1026995
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1221 Avenue of the Americas, New York, New York		10020
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 212-512-2000

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES þ NO o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES þ NO o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o NO þ

     On October 14, 2011 there were 293.4 million shares of common stock (par value $1.00 per share) outstanding.

 

 

The McGraw-Hill Companies, Inc.

INDEX

		Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Report of Independent Registered Public Accounting Firm			3
Consolidated Statements of Income for the three and nine months ended September 30, 2011 and 2010			4
Consolidated Balance Sheets as of September 30, 2011, December 31, 2010 and September 30, 2010			5
Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010			6
Notes to the Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Unaudited)			16
Item 3. Quantitative and Qualitative Disclosures About Market Risk			30
Item 4. Controls and Procedures			30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			31
Item 1a. Risk Factors			31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			31
Item 6. Exhibits			32
Signatures			33
EX-15
EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of The McGraw-Hill Companies, Inc.

We have reviewed the consolidated balance sheet of The McGraw-Hill Companies, Inc., as of September 30, 2011, and the related consolidated statements of income for the three-month and nine-month periods ended September 30, 2011 and 2010, and the consolidated statements of cash flows for the nine-month periods ended September 30, 2011 and 2010. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of The McGraw-Hill Companies, Inc. as of December 31, 2010, and the related consolidated statements of income, equity, and cash flows for the year then ended, not presented herein, and in our report dated February 23, 2011, we expressed an unqualified opinion on those consolidated financial statements. As discussed in Note 2 to the consolidated financial statements, The McGraw-Hill Companies, Inc. has classified its Broadcasting Group as a discontinued operation resulting in revisions to its December 31, 2010 consolidated balance sheet. We have not audited the revised balance sheet reflecting this change.

/s/ ERNST & YOUNG LLP

New York, New York
October 21, 2011

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

The McGraw-Hill Companies, Inc.

Consolidated Statements of Income

(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(in millions, except per share data)		2011				2010				2011				2010
Revenue:
Product		$	940.5			$	1,058.4			$	1,761.4			$	1,914.2
Service			967.5				897.8				2,965.0				2,662.4
Total revenue			1,908.0				1,956.2				4,726.4				4,576.6
Expenses:
Operating-related expenses:
Product			374.5				408.4				785.9				840.4
Service			336.6				299.6				1,021.6				879.9
Total operating-related expenses			711.1				708.0				1,807.5				1,720.3
Selling and general expenses			552.2				597.6				1,635.1				1,619.5
Depreciation			23.1				23.3				73.5				72.2
Amortization of intangibles			14.8				8.4				43.4				30.3
Total expenses			1,301.2				1,337.3				3,559.5				3,442.3
Other income			—				(11.1	)			(13.2	)			(11.1	)
Operating Income			606.8				630.0				1,180.1				1,145.4
Interest expense, net			18.1				19.3				56.8				62.2
Income from continuing operations before taxes on income			588.7				610.7				1,123.3				1,083.2
Provision for taxes on income			213.7				221.7				407.8				393.2
Income from continuing operations			375.0				389.0				715.5				690.0
(Loss) income from discontinued operations, net of tax			(1.1	)			0.7				(1.7	)			0.9
Net income			373.9				389.7				713.8				690.9
Less: net income attributable to noncontrolling interests			(8.3	)			(9.8	)			(17.2	)			(16.7	)
Net income attributable to The McGraw-Hill Companies, Inc.		$	365.6			$	379.9			$	696.6			$	674.2
Amounts attributable to The McGraw-Hill Companies, Inc. common shareholders:
Income from continuing operations		$	366.7			$	379.2			$	698.3			$	673.3
(Loss) income from discontinued operations, net of tax			(1.1	)			0.7				(1.7	)			0.9
Net income		$	365.6			$	379.9			$	696.6			$	674.2
Earnings per share attributable to The McGraw-Hill Companies, Inc. common shareholders:
Basic:
Income from continuing operations		$	1.23			$	1.23			$	2.31			$	2.17
(Loss) income from discontinued operations, net of tax			—				0.01				—				—
Net income		$	1.23			$	1.24			$	2.31			$	2.17
Diluted:
Income from continuing operations		$	1.21			$	1.23			$	2.27			$	2.15
(Loss) income from discontinued operations, net of tax			—				—				—				—
Net income		$	1.21			$	1.23			$	2.27			$	2.15
Average number of common shares outstanding:
Basic			297.8				307.2				302.2				310.6
Diluted			303.6				309.3				307.4				312.9
Dividend declared per common share		$	0.25			$	0.235			$	0.75			$	0.705

See accompanying Notes to the Consolidated Financial Statements

The McGraw-Hill Companies, Inc.

Consolidated Balance Sheets

		September 30,				December 31,				September 30,
		2011				2010				2010
(in millions)		(Unaudited)								(Unaudited)
ASSETS
Current assets:
Cash and equivalents		$	1,437.6			$	1,525.6			$	1,322.8
Short-term investments			36.2				22.2				32.8
Accounts receivable, net			1,133.3				972.8				1,106.9
Inventories			285.3				275.1				295.1
Deferred income taxes			281.5				281.2				291.4
Prepaid and other current assets			215.6				297.7				209.7
Total current assets			3,389.5				3,374.6				3,258.7
Prepublication costs, net			304.9				365.0				352.4
Property and equipment, net			488.3				521.3				515.7
Goodwill			2,037.8				1,887.0				1,865.5
Other intangible assets, net			621.3				616.3				608.2
Other non-current assets			311.9				282.4				283.8
Total assets		$	7,153.7			$	7,046.6			$	6,884.3
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable		$	333.5			$	391.8			$	332.6
Accrued royalties			101.1				114.5				103.0
Accrued compensation and contributions to retirement plans			429.4				498.3				415.4
Income taxes currently payable			249.9				22.7				160.3
Unearned revenue			1,244.6				1,204.2				1,124.4
Other current liabilities			401.7				449.8				452.0
Total current liabilities			2,760.2				2,681.3				2,587.7
Long-term debt			1,198.0				1,198.0				1,197.9
Pension and other postretirement benefits			470.0				436.5				493.6
Other non-current liabilities			437.4				439.4				390.6
Total liabilities			4,865.6				4,755.2				4,669.8
Commitments and contingencies (Note 13)
Equity:
Common stock			411.7				411.7				411.7
Additional paid-in capital			147.9				67.0				65.7
Retained income			7,525.1				7,056.6				6,975.5
Accumulated other comprehensive loss			(372.9	)			(367.4	)			(330.9	)
Less: common stock in treasury			(5,503.6	)			(4,957.6	)			(4,991.9	)
Total equity — controlling interests			2,208.2				2,210.3				2,130.1
Total equity — noncontrolling interests			79.9				81.1				84.4
Total equity			2,288.1				2,291.4				2,214.5
Total liabilities and equity		$	7,153.7			$	7,046.6			$	6,884.3

See accompanying Notes to the Consolidated Financial Statements

The McGraw-Hill Companies, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

		Nine Months Ended
		September 30,
(in millions)		2011				2010
Operating Activities:
Net income		$	713.8			$	690.9
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation (including amortization of technology projects)			95.0				91.3
Amortization of intangibles			45.1				32.0
Amortization of prepublication costs			164.5				207.2
Provision for losses on accounts receivable			4.9				11.5
Deferred income taxes			(4.8	)			(23.4	)
Stock-based compensation			64.8				44.8
Other			12.9				(4.5	)
Changes in operating assets and liabilities, net of effect of acquisitions and dispositions:
Accounts receivable			(146.9	)			(165.3	)
Inventories			(11.9	)			6.6
Prepaid and other current assets			(3.4	)			5.8
Accounts payable and accrued expenses			(174.2	)			(4.2	)
Unearned revenue			23.7				2.2
Other current liabilities			(50.6	)			(9.8	)
Net change in prepaid/accrued income taxes			288.4				181.5
Net change in other assets and liabilities			16.3				(13.3	)
Cash provided by operating activities			1,037.6				1,053.3
Investing Activities:
Investment in prepublication costs			(105.1	)			(99.3	)
Capital expenditures			(69.6	)			(65.3	)
Acquisitions, including contingent payments, net of cash acquired			(198.9	)			(325.0	)
Proceeds from dispositions			21.4				30.6
Changes in short-term investments			(14.0	)			(8.2	)
Cash used for investing activities			(366.2	)			(467.2	)
Financing Activities:
Dividends paid to shareholders			(224.7	)			(221.3	)
Dividends paid to noncontrolling interests			(10.9	)			(16.8	)
Repurchase of treasury shares			(635.6	)			(255.8	)
Exercise of stock options			115.0				28.6
Excess tax benefits from share-based payments			3.3				1.3
Cash used for financing activities			(752.9	)			(464.0	)
Effect of exchange rate changes on cash			(6.5	)			(9.2	)
Net change in cash and equivalents			(88.0	)			112.9
Cash and equivalents at beginning of period			1,525.6				1,209.9
Cash and equivalents at end of period		$	1,437.6			$	1,322.8

See accompanying Notes to the Consolidated Financial Statements

The McGraw-Hill Companies, Inc.

Notes to the Consolidated Financial Statements
(Unaudited)

(Dollars in millions, except per share amounts or as noted)

1.		Basis of Presentation
		The accompanying unaudited financial statements of The McGraw-Hill Companies, Inc. (together with its consolidated subsidiaries, the “Company,” “we,” “us” or “our”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Therefore, the financial statements included herein should be read in conjunction with the financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2010 (our “Annual Report”).
		In the opinion of management all normal recurring adjustments considered necessary for a fair statement of the results of the interim periods have been included. The operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the full year, partially due to the seasonal nature of some of our businesses. As a result, we have included the Consolidated Balance Sheet as of September 30, 2010 for comparative purposes. Certain prior-year amounts have been reclassified to conform to the current presentation.
		We have reported our Broadcasting Group within our McGraw-Hill Information & Media (“I&M”) segment, as a discontinued operation as of September 30, 2011. Accordingly, the results of operations for all periods presented have been reclassified to reflect the business as a discontinued operation and the assets and liabilities of the business have been reclassified as held for sale for the periods presented. See Note 2 for further discussion.
		On September 12, 2011, we announced that our Board of Directors have unanimously approved a comprehensive Growth and Value Plan that includes separation into two public companies: McGraw-Hill Markets (the working name for this company), primarily focused on capital and commodities markets, and McGraw-Hill Education, focused on education services and digital learning. Management is developing detailed separation plans, which will be subject to approval by the Board of Directors. We expect to complete the transaction by the end of 2012 through a tax-free spin-off of the education business to the Company’s shareholders, subject to various conditions including final Board approval and a tax ruling from the Internal Revenue Service.
		Our critical accounting estimates are disclosed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, allowance for doubtful accounts and sales returns, inventories, prepublication costs, accounting for the impairment of long-lived assets (including other intangible assets), goodwill and indefinite-lived intangible assets, retirement plans and postretirement healthcare and other benefits, stock-based compensation, income taxes and contingencies. Since the date of our Annual Report, there have been no material changes to our critical accounting policies and estimates.

2.		Acquisitions and Divestitures
		Acquisitions
		During the nine months ended September 30, 2011, we completed acquisitions aggregating approximately $199 million. None of our acquisitions were material either individually or in the aggregate, including the pro forma impact on earnings, and primarily included the following:

	•		In July, we acquired the issued and outstanding shares of Steel Business Briefing Group (the “SBB Group”), a privately held U.K. company and leading provider of news, pricing and analytics to the global steel market. The SBB Group provides subscription-based, electronic products to the steel industry and its participants through two principal businesses, Steel Business Briefing and The Steel Index. The SBB Group is included within Platts, part of our I&M segment. In connection with the preliminary purchase price allocation, estimates of the fair values of long-lived and intangible assets have been determined utilizing currently available information and are subject to finalization.
	•		In March, we acquired the assets of Bookette Software Company (“Bookette”). Bookette engages in the development of software and algorithms that are used to score and report educational tests for schools, districts, and states and other various educational systems and entities worldwide. Bookette is included within McGraw-Hill Education’s California Testing Board’s assessment business.
	•		In January, we acquired all of the issued and outstanding membership interest units of Bentek Energy LLC (“Bentek”), which is included as part of our I&M segment. Bentek offers its customers a comprehensive portfolio of data, information and analytics products in the natural gas and liquids sector. The primary purpose of the acquisition was to

acquire Bentek’s knowledge, skill and expertise in gathering high-quality detailed data and their ability to identify key relationships within the data critical to industry participants.

During the nine months ended September 30, 2010, we completed acquisitions aggregating approximately $325 million. None of our acquisitions were material either individually or in the aggregate, including the pro forma impact on earnings, and primarily included the following:

	•		In September 2010, we acquired substantially all of the assets and certain liabilities of TheMarkets.com LLC, a company focused on providing real-time investment information to brokers and institutional investors. This acquisition is consistent with McGraw-Hill Financial’s focus on creating strategic value through providing access to investment research, data and analytics to customers that facilitates informed investment decisions.
	•		In August 2010, we acquired a 1.3% interest in Ambow Education Holding Ltd. (“Ambow”), an education company headquartered and publicly traded in China that provides e-learning technologies and education services. Our investment in Ambow is part of our effort to expand our presence into emerging markets by strategically partnering with local businesses. This investment is accounted for as an available-for-sale security.
	•		In April 2010, we made a $5.0 million contingent payment related to an acquisition in 2008, which is part of our McGraw-Hill Financial segment.

		Divestitures
		During the nine months ended September 30, 2011, we recorded a pre-tax gain of $13.2 million within other income in the Consolidated Statements of Income, which related to the sale of our interest in LinkedIn Corporation in their initial public offering. This investment was held within our I&M segment.
		On October 3, 2011 we announced a definitive agreement to sell the Broadcasting Group to The E.W. Scripps Company for approximately $212 million in cash. We expect this transaction will close following the receipt of regulatory approvals and completion of customary closing conditions. This agreement followed our previously announced plan to pursue the divestiture of our Broadcasting Group, which is part of our I&M segment.
		As a result of the definitive agreement, the results of operations for all periods presented have been reclassified to reflect the Broadcasting Group as a discontinued operation and the assets and liabilities of the business have been reclassified as held for sale. The key components of income (loss) from discontinued operations consist of the following for the periods ended September 30:

		Three Months								Nine Months
		2011				2010				2011				2010
Revenue		$	22.4			$	23.6			$	66.8			$	67.6
Costs and expenses			23.2				21.5				67.7				64.5
(Loss) income before taxes on income			(0.8	)			2.1				(0.9	)			3.1
Provision for taxes on income			0.3				1.4				0.8				2.2
(Loss) income from discontinued operations, net of tax		$	(1.1	)		$	0.7			$	(1.7	)		$	0.9

The components of assets and liabilities classified as discontinued operations and included in prepaid and other current assets and other current liabilities in the Consolidated Balance Sheets consist of the following:

		September 30,				December 31,				September 30,
		2011				2010				2010
Accounts receivable, net		$	18.5			$	17.8			$	16.3
Property and equipment, net			24.5				27.5				26.5
Other intangible assets, net			45.9				47.6				48.2
Other assets			11.8				10.2				12.4
Assets held for sale		$	100.7			$	103.1			$	103.4
Accounts payable and accrued expenses		$	6.2			$	9.4			$	5.9
Other liabilities			8.4				9.3				9.5
Liabilities held for sale		$	14.6			$	18.7			$	15.4

During the nine months ended September 30, 2010, we recorded a pre-tax gain of $11.1 million within other income in the Consolidated Statements of Income, which was primarily comprised of the following:

•

In September 2010, we sold certain equity interests which were a part of our S&P segment, and recognized a pre-tax gain of $7.3 million. The gain was primarily from the sale of an equity interest in an Indian commodity exchange that was made to comply with local regulations discouraging foreign-based entities from owning an interest in local Indian exchanges in excess of 5%.

•

In August 2010, we sold our Australian secondary education business and recognized a pre-tax gain of $3.8 million. The divestiture was part of McGraw-Hill Education’s strategic initiative to divest from slow growth or retracting markets.

3.

Supplementary Balance Sheet Data

		September 30,				December 31,				September 30,
		2011				2010				2010
Accounts receivable — allowance for doubtful accounts		$	63.7			$	78.0			$	74.1
Accounts receivable — allowance for sales returns			233.2				197.3				241.8
Prepublication costs — accumulated amortization			1,038.4				1,089.3				1,057.8
Property and equipment — accumulated depreciation			1,056.8				1,009.2				997.2

4.

Fair Value Measurements

		In accordance with authoritative guidance for fair value measurements, certain assets and liabilities are required to be recorded at fair value and classified within a fair value hierarchy based on inputs used when measuring fair value. We have investments in equity securities classified as available-for-sale and an immaterial amount of forward exchange contracts that are adjusted to fair value on a recurring basis. The fair values of our investments in available-for-sale securities were determined using quoted market prices from daily exchange traded markets and are classified within Level 1 of the valuation hierarchy. The fair values of our available-for-sale securities are $13.5 million and $22.6 million as of September 30, 2011 and December 31, 2010, respectively, and are included in other non-current assets in the Consolidated Balance Sheets.
		Other financial instruments, including cash and equivalents and short-term investments, are recorded at cost, which approximates fair value. The fair value of our long-term borrowings is $1.3 billion as of September 30, 2011 and December 31, 2010, and was estimated based on quoted market prices.

5.

Income Taxes

		For the three and nine months ended September 30, 2011 and 2010, the effective tax rate for continuing operations was 36.3%. Including discontinued operations, the effective tax rate was 36.4% for the three and nine months ended September 30, 2011 and 2010.
		At the end of each interim period, we estimate the annual effective tax rate and apply that rate to our ordinary quarterly earnings. The tax expense or benefit related to significant, unusual or extraordinary items that will be separately reported or reported net of their related tax effect, and are individually computed, are recognized in the interim period in which those items occur. In addition, the effect of changes in enacted tax laws or rates or tax status is recognized in the interim period in which the change occurs.
		As of September 30, 2011 and December 31, 2010, the total amount of federal, state and local, and foreign unrecognized tax benefits was $63.1 million and $52.9 million, respectively, exclusive of interest and penalties. We recognize accrued interest and penalties related to unrecognized tax benefits in interest expense and operating expense, respectively. In addition to the unrecognized tax benefits, as of September 30, 2011 and December 31, 2010, we had $15.5 million and $14.3 million, respectively, of accrued interest and penalties associated with uncertain tax positions.

6.

Debt

		September 30,				December 31,				September 30,
		2011				2010				2010
5.375% Senior Notes, due 2012 1		$	399.9			$	399.9			$	399.9
5.9% Senior Notes, due 2017 2			399.4				399.3				399.3
6.55% Senior Notes, due 2037 3			398.6				398.6				398.6
Note payable			0.1				0.5				0.1
Total debt			1,198.0				1,198.3				1,197.9
Less: short-term debt including current maturities			0.0				0.3				0.0
Long-term debt		$	1,198.0			$	1,198.0			$	1,197.9

		Currently, we have the ability to borrow $1.2 billion in additional funds through our commercial paper program, which is supported by our $1.2 billion three-year credit agreement (our “credit facility”) that will terminate on July 30, 2013. We pay a commitment fee of 15.0 to 35.0 basis points for our credit facility, depending on our credit rating, whether or not amounts have been borrowed and currently pay a commitment fee of 20.0 basis points. The interest rate on borrowings under our credit facility is, at our option, calculated using rates that are primarily based on either the prevailing London Inter-Bank Offer Rate, the prime rate determined by the administrative agent or the Federal funds rate. For certain borrowings under this credit facility there is also a spread based on our credit rating added to the applicable rate. As of September 30, 2011, we have not utilized our credit facility for additional funds.
		Our credit facility contains certain covenants. The only financial covenant requires that our indebtedness to cash flow ratio, as defined in our credit facility, is not greater than 4 to 1, and this covenant has never been exceeded.
		Historically, we have also had the ability to borrow additional funds through Extendible Commercial Notes and a promissory note with one of our providers of banking services, however, effective April of 2011, we have canceled these notes since there is no current market for them.

7.

Employee Benefits

		We have a number of defined benefit pension plans and defined contribution plans covering substantially all employees. Our primary pension plan is a noncontributory plan under which benefits are based on employee career employment compensation. We also have unfunded non-U.S. benefit plans and supplemental benefit plans. The supplemental benefit plans provide senior management with supplemental retirement, disability and death benefits. In addition, we sponsor voluntary 401(k) plans under which we may match employee contributions up to certain levels of compensation as well as profit-sharing plans under which we contribute a percentage of eligible employees’ compensation to the employees’ accounts.
		We also provide certain medical, dental and life insurance benefits for retired employees and eligible dependents. The medical and dental plans are contributory, while the life insurance plan is noncontributory. We currently do not prefund any of these plans.
		The components of net periodic benefit cost for our retirement plans and post-retirement plans for the periods ended September 30 are as follows:

		Three Months								Nine Months
		2011				2010				2011				2010
Retirement Plans
Service cost		$	16.7			$	15.2			$	50.2			$	45.8
Interest cost			24.9				23.5				74.5				70.4
Expected return on plan assets			(31.8	)			(27.9	)			(95.5	)			(83.6	)
Amortization of prior service credit			(0.1	)			—				(0.3	)			(0.1	)
Amortization of actuarial loss			7.7				3.7				23.0				11.1
Net periodic benefit cost		$	17.4			$	14.5			$	51.9			$	43.6
Post-Retirement Plans
Service cost		$	0.6			$	0.7			$	2.0			$	1.9
Interest cost			1.2				1.8				4.6				5.5
Amortization of prior service credit			(0.3	)			(0.3	)			(0.9	)			(0.9	)
Amortization of actuarial gain			(0.1	)			—				—				—
Net periodic benefit cost		$	1.4			$	2.2			$	5.7			$	6.5

		As discussed in our Annual Report, we changed certain discount rate assumptions on our retirement and post-retirement plans, which became effective on January 1, 2011. The effect of the assumption changes on retirement and post-retirement expense for the three and nine months ended September 30, 2011 did not have a material impact to our financial position, results of operations or cash flows.
		In the first nine months of 2011, we contributed $21.8 million to our retirement plans and expect to make additional required contributions of approximately $6 million to our retirement plans during the remainder of the year. We may elect to make additional non-required contributions depending on investment performance and the pension plan status in the fourth quarter of 2011.

8.

Stock-Based Compensation

		We issue stock-based incentive awards to our eligible employees and Directors under two employee stock ownership plans (the 1993 and 2002 Employee Stock Incentive Plans) and a Director Deferred Stock Ownership Plan. No further awards may be granted under the 1993 Employees Stock Incentive Plan, although awards granted under this plan remain outstanding in accordance with their terms. The 2002 Employee Stock Incentive Plan permits the granting of nonqualified stock options, stock appreciation rights, performance stock, restricted stock and other stock-based awards.
		Stock-based compensation for the periods ended September 30 is as follows:

		Three Months								Nine Months
		2011				2010				2011				2010
Stock option expense		$	6.0			$	5.8			$	17.6			$	16.0
Restricted stock and unit awards expense			17.3				15.7				46.3				28.2
Total stock-based compensation expense		$	23.3			$	21.5			$	63.9			$	44.2

As of September 30, 2011 and December 31, 2010, we issued 3.6 million and 1.8 million common shares, respectively, upon exercise of certain stock options outstanding.

9.

Equity

		Stock Repurchases
		In 2007 the Board of Directors approved a stock repurchase program authorizing the purchase of up to 45.0 million shares (the “2007 Repurchase Program”). On June 29, 2011, the Board of Directors approved a new stock repurchase program authorizing the purchase of up to 50.0 million shares (the “2011 Repurchase Program”), which was approximately 17% of the total shares of our outstanding common stock at that time. Share repurchases under both the 2007 and the 2011 Repurchase Programs for the periods ended September 30 were as follows:

		2011												2010
		Total												Total
		number of				Average								number of				Average
		shares				price paid				Total cash				shares				price paid				Total cash
		purchased				per share1				utilized2				purchased				per share				utilized
Three months			9.0			$	39.40			$	354.7				2.2			$	31.14			$	69.0
Nine months			16.7			$	39.20			$	655.0				8.7			$	29.37			$	255.8

Our purchased shares may be used for general corporate purposes, including the issuance of shares for stock compensation plans and to offset the dilutive effect of the exercise of employee stock options. During the three and nine months ended September 30, 2011, we repurchased 0.7 and 8.4 million shares, respectively, under the 2007 Repurchase Program. As of September 30, 2011, there were no remaining shares available under the 2007 Repurchase Program. During the three and nine months ended September 30, 2011, we repurchased 8.3 million shares under the 2011 Repurchase Program. As of September 30, 2011, 41.7 million shares remained available under the 2011 Repurchase Program. The 2011 Repurchase Program has no expiration date and purchases under this program may be made from time to time on the open market and in private transactions, depending on market conditions.

		Comprehensive Income
		The following table is a reconciliation of net income to comprehensive income, including comprehensive income attributable to our noncontrolling interests (“NCI”), for the periods ended September 30:

		Three Months								Nine Months
		2011				2010				2011				2010
Net income		$	373.9			$	389.7			$	713.8			$	690.9
Other comprehensive income, net of tax:
Foreign currency translation adjustment			(57.1	)			24.1				(23.3	)			4.1
Pension and other postretirement benefit plans			4.6				2.1				19.1				10.8
Unrealized loss on investment and forward exchange contracts			(0.1	)			(0.1	)			(6.2	)			(0.3	)
Comprehensive income			321.3				415.8				703.4				705.5
Less: comprehensive income attributable to NCI			(1.8	)			(10.0	)			(12.3	)			(19.2	)
Comprehensive income attributable to the Company		$	319.5			$	405.8			$	691.1			$	686.3

10.

Earnings Per Share

Basic earnings per common share (“EPS”) is computed by dividing net income attributable to the common shareholders of the Company by the weighted-average number of common shares outstanding. Diluted EPS is computed in the same manner as basic EPS, except the number of shares is increased to include additional common shares that would have been outstanding if potential common shares with a dilutive effect had been issued. Potential common shares consist primarily of stock options, restricted stock and restricted stock units calculated using the treasury stock method. The calculation for basic and diluted EPS for the periods ended September 30 is as follows:

		Three Months								Nine Months
		2011				2010				2011				2010
Amounts attributable to The McGraw-Hill Companies, Inc. common shareholders:
Income from continuing operations		$	366.7			$	379.2			$	698.3			$	673.3
Loss from discontinued operations, net of tax			(1.1	)			0.7				(1.7	)			0.9
Net income attributable to the Company		$	365.6			$	379.9			$	696.6			$	674.2
Basic weighted-average number of common shares outstanding			297.8				307.2				302.2				310.6
Effect of stock options and other dilutive securities			5.8				2.1				5.2				2.3
Diluted weighted-average number of common shares outstanding			303.6				309.3				307.4				312.9
Basic EPS:
Income from continuing operations		$	1.23			$	1.23			$	2.31			$	2.17
Loss from discontinued operations, net of tax			—				0.01			$	—				—
Net income		$	1.23			$	1.24			$	2.31			$	2.17
Diluted EPS:
Income from continuing operations		$	1.21			$	1.23			$	2.27			$	2.15
Loss from discontinued operations, net of tax			—				—				—				—
Net income		$	1.21			$	1.23			$	2.27			$	2.15

		Restricted performance shares outstanding of 1.6 million and 3.2 million as of September 30, 2011 and September 30, 2010, respectively, were not included in the computation of diluted EPS because the necessary vesting conditions had not been met.
		The effect of the potential exercise of stock options is excluded from the computation of diluted EPS when the average market price of our common stock is lower than the exercise price of the related option during the period because the effect would have been antidilutive. For the three months ended September 30, 2011 and 2010, the number of stock options excluded from the computation was 9.9 million and 24.4 million, respectively, and 10.2 million and 23.9 million for the nine months ended September 30, 2011 and 2010, respectively.

11.

Restructuring

		During the fourth quarter of 2010, we initiated a restructuring plan within our I&M segment as a result of business conditions at that time, as well as continuing process improvements. We recorded a pre-tax restructuring charge of $10.6 million, consisting primarily of employee severance costs related to a workforce reduction of approximately 230 positions. For the three and nine months ended September 30, 2011, we have reduced the reserve related to the 2010 restructuring by $1.3 million and $6.6 million, respectively, primarily relating to cash payments for employee severance costs. The remaining reserve as of September 30, 2011 is $2.2 million and is included in other current liabilities in the Consolidated Balance Sheet.
		As of September 30, 2011, our 2008 and 2006 restructuring initiatives still have remaining reserves relating to facilities costs of $0.4 million and $4.0 million, respectively.

12.

Segment and Related Information

We have four reportable segments: Standard & Poor’s (“S&P”), McGraw-Hill Financial (“MH Financial”), McGraw-Hill Education (“MHE”) and McGraw-Hill Information & Media (“I&M”).

	•		S&P is the world’s foremost provider of credit ratings providing investors with information and independent ratings benchmarks for their investment and financial decisions.
	•		MH Financial is a leading global provider of digital and traditional research and analytical tools for investment advisors, wealth managers and institutional investors.
	•		MHE is a leading global provider of educational materials, information and solutions serving the elementary and high school, college, professional, international and adult education markets.
	•		I&M consists of business-to-business and business-to-consumer companies, each an expert in its industry, that deliver their customers access to actionable data and analytics. The Broadcasting Group has historically been part of the I&M segment. In accordance with the presentation of the Broadcasting Group as discontinued operations, the results of operations for all periods presented have been reclassified to reflect this change. See Note 2 for further discussion.

The Executive Committee, consisting of our principal corporate executives, is our chief operating decision-maker and evaluates performance of our segments and allocates resources based primarily on operating income. A summary of operating results by segment for the periods ended September 30 is as follows:

		2011								2010
						Operating								Operating
Three Months		Revenue				Income				Revenue				Income
S&P		$	409.9			$	169.1			$	417.5			$	187.3
MH Financial			348.5				112.6				294.3				85.8
MHE			937.3				314.7				1,054.7				357.5
I&M			228.5				51.3				204.1				43.8
Intersegment elimination			(16.2	) 1			—				(14.4	) 1			—
Total operating segments			1,908.0				647.7				1,956.2				674.4
General corporate expense			—				(40.9	)			—				(44.4	)
Total		$	1,908.0			$	606.8			$	1,956.2			$	630.0

		2011								2010
						Operating								Operating
Nine Months		Revenue				Income				Revenue				Income
S&P		$	1,333.1			$	572.2			$	1,223.8			$	557.5
MH Financial			1,005.9				306.7				866.8				240.3
MHE			1,776.6				281.4				1,936.9				347.3
I&M			657.6				139.1				590.4				118.0
Intersegment elimination			(46.8	)1			—				(41.3	)1			—
Total operating segments			4,726.4				1,299.4				4,576.6				1,263.1
General corporate expense			—				(119.3	)			—				(117.7	)
Total		$	4,726.4			$	1,180.1			$	4,576.6			$	1,145.4

See Note 2 — Acquisitions and Divestitures, and Note 11 — Restructuring for actions that impacted the segment operating results.

13.

Commitments and Contingencies

		Rental Expense and Lease Obligations
		As of September 30, 2011, the remaining deferred gain related to our sale-leaseback transaction with Rock-McGraw, Inc. was $139.0 million as $3.0 million and $8.8 million was amortized during the three and nine months ended September 30, 2011, respectively. Interest expense associated with this operating lease for the three and nine months ended September 30, 2011 was $1.6 million and $5.0 million, respectively.
		Legal Matters
		The following amends the disclosure in Note 13 — Commitments and Contingencies to the Consolidated Financial Statements of our Annual Report.

	•		In connection with the Parmalat matter, on June 29, 2011, the Court issued its final decision dismissing in its entirety Parmalat’s main damages claim which was based on the value of the bonds issued. The Court ordered S&P to pay Parmalat the sum of approximately euros 784,000 (approximately $1.1 million), representing the amount of ratings fees paid to S&P by Parmalat, plus interest from the date of service of the Writ of Summons. The Court also ordered S&P to reimburse Parmalat for euros 47,390 (less than $0.1 million) in trial costs. The deadline for any party to file an appeal is the earlier of one year and 45 days from the date the judgment was issued or 30 days after any party serves a copy of the judgment on another party.
	•		In connection with the Reed matter, on May 31, 2011 the Court granted Reed’s motion to file a Second Amended Complaint that, among other things, adds a false advertising claim under the Lanham Act, including a demand for treble damages and attorneys’ fees. The Second Amended Complaint also contains allegations purporting to further support Reed’s existing tort and antitrust claims. On June 3, 2011, the Court granted the Company’s motion to file a counterclaim against Reed alleging, among other things, that Reed misappropriated the Company’s trade secrets and engaged in unfair competition as a result of Reed’s recruitment of former employees of the Company and use of information about the Company’s customers obtained from the former employees to solicit those customers.
	•		The Company and Standard & Poor’s Ratings Services, together with other credit rating agencies, have been named in numerous lawsuits in U.S. State and Federal Courts, as well as in foreign jurisdictions, relating to the ratings activity of Standard & Poor’s Ratings Services brought by alleged purchasers and issuers of rated securities, many of which include novel claims that Standard & Poor’s Ratings Services is an “underwriter” or “seller” of such securities under the Securities Act of 1933. The Company and Standard & Poor’s Ratings Services have also received numerous subpoenas and other government inquiries concerning the rating activity of Standard & Poor’s Ratings Services in these areas and continue to respond to all such requests. Additional actions, investigations or proceedings may be initiated from time to time in the future.
	•		In connection with the Sullivan and Gearren matters, on October 19, 2011, the Court of Appeals for the Second Circuit affirmed the dismissal of those cases in their entirety.
	•		As previously reported in the Company’s Form 8-K filed on September 26, 2011 the Company received on September 22, 2011 a “Wells Notice” from the staff of the U.S. Securities and Exchange Commission (the “Commission”) stating that the staff is considering recommending that the Commission institute a civil injunctive action against Standard & Poor’s Ratings Services, then a division of the Company (“S&P”), alleging violations of federal securities laws with respect to S&P’s ratings for a particular 2007 offering of collateralized debt obligations, known as “Delphinus CDO 2007-1”. The Wells Notice is neither a formal allegation nor a finding of wrongdoing. It allows its recipients the opportunity to provide their perspective and to address the issues raised by the staff before any decision is made by the Commission on whether to authorize the commencement of an enforcement proceeding against its recipients. S&P has responded to the staff presenting its position on the issues raised and why the Commission should not commence enforcement proceedings.

The Company believes that the claims asserted in the proceedings described above have no basis and they will be vigorously defended by the Company and/or the subsidiaries involved.

In view of the inherent difficulty of predicting the outcome of legal matters, particularly where the claimants seek very large or indeterminate damages, or where the cases present novel legal theories, involve a large number of parties or are in early stages of discovery, we cannot state with confidence what the eventual outcome of these pending matters will be, what the timing of the ultimate resolution of these matters will be or what the eventual loss, fines, penalties or impact related to each pending matter may be. We believe, based on our current knowledge, the outcome of the legal actions, proceedings and investigations currently pending should not have a material, adverse effect to the Company’s financial position, results of operations or cash flows.

14.

Recently Issued or Adopted Accounting Standards

Recently Issued

In September 2011, the Financial Accounting Standards Board (“FASB”) issued guidance that simplified how an entity tests goodwill for impairment. The revised guidance provides an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment. Under the revised guidance, an entity is permitted to first assess qualitative factors to determine whether goodwill impairment exists prior to performing analyses comparing the fair value of a reporting unit to its carrying amount. If,

		after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The guidance will be effective for us beginning January 1, 2012; however, early adoption is permitted. We intend on adopting the FASB’s guidance early and do not believe the adoption of the guidance will have a significant impact on our financial position, results of operations or cash flows.
		In May 2011, the FASB issued new guidance for fair value measurements intended to achieve common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards. The amended guidance provides a consistent definition of fair value to ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. The amended guidance changes certain fair value measurement principles and enhances the disclosure requirements, particularly for Level 3 fair value measurements. The amended guidance will be effective for us beginning January 1, 2012. We do not anticipate that these changes will have a significant impact on our financial position, results of operations or cash flows.
		In June 2011, the FASB issued guidance that modified how comprehensive income is presented in an entity’s financial statements. The guidance issued requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements and eliminates the option to present the components of other comprehensive income as part of the statement of equity. The revised financial statement presentation for comprehensive income will be effective for us beginning January 1, 2012, with early adoption permitted.
		Recently Adopted
		In December 2010, the FASB revised its guidance for disclosure requirements of supplementary pro forma information for business combinations. The objective of the revised guidance is to address diversity in practice regarding proforma disclosures for revenue and earnings of an acquired entity and specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments, which went into effect on January 1, 2011, will be adhered to any future material business combinations.
		On January 1, 2011, we adopted guidance issued by the FASB on revenue recognition. Under the new guidance, when vendor specific objective evidence or third party evidence of the selling price for a deliverable in a multiple element arrangement cannot be determined, a best estimate of the selling price is required to allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing of when revenue is recognized. Adoption of the new guidance did not have a material impact to our financial position, results of operations or cash flows.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Unaudited)

(Dollars in millions, except per share amounts or as noted)

The following Management Discussion and Analysis (“MD&A”) provides a narrative of the results of operations and financial condition of The McGraw-Hill Companies, Inc. (together with its consolidated subsidiaries, the “Company,” “we,” “us” or “our”) for the three and nine months ended September 30, 2011. The MD&A should be read in conjunction with the Consolidated Financial Statements, accompanying notes and MD&A included in our Annual Report on Form 10-K for the year ended December 31, 2010 (our “Annual Report”). The MD&A includes the following sections:

•

Overview

•

Results of Operations — Comparing Three and Nine Months Ended September 30, 2011 and 2010

•

Liquidity and Capital Resources

•

Reconciliation of Non-GAAP Financial Information

•

Critical Accounting Estimates

•

Recently Issued or Adopted Accounting Standards

•

Forward-Looking Statements

OVERVIEW

We are a leading global information services provider serving the financial services, education and business information markets with the information they need to succeed in the “Knowledge Economy”. Our operations consist of four business segments: Standard & Poor’s (“S&P”), McGraw-Hill Financial (“MH Financial”), McGraw-Hill Education (“MHE”) and McGraw-Hill Information & Media (“I&M”).

•

S&P is the world’s foremost provider of credit ratings providing investors with information and independent ratings benchmarks for their investment and financial decisions.

•

MH Financial is a leading global provider of digital and traditional research and analytical tools for investment advisors, wealth managers and institutional investors.

•

MHE is a leading global provider of educational materials, information and solutions serving the elementary and high school, college, professional, international and adult education markets.

•

I&M consists of business-to-business companies, each an expert in its industry, that deliver their customers access to actionable data and analytics.

On October 3, 2011 we announced a definitive agreement to sell the Broadcasting Group to The E.W. Scripps Company for approximately $212 million in cash. We expect this transaction will close following the receipt of regulatory approvals and completion of customary closing conditions. This agreement followed our previously announced plan to pursue the divestiture of our Broadcasting Group, which is part of our I&M segment. As a result of the definitive agreement, the results of operations for all periods presented have been reclassified to reflect the Broadcasting Group as a discontinued operation and the assets and liabilities of the business have been reclassified as held for sale.

On September 12, 2011, we announced that our Board of Directors have unanimously approved a comprehensive Growth and Value Plan that includes separation into two public companies: McGraw-Hill Markets (the working name for this company), primarily focused on capital and commodities markets, and McGraw-Hill Education, focused on education services and digital learning. Management is developing detailed separation plans, which will be subject to approval by the Board of Directors. We expect to complete the transaction by the end of 2012 through a tax-free spin-off of the education business to the Company’s shareholders, subject to various conditions including final Board approval and a tax ruling from the Internal Revenue Service.

Key results for the periods ended September 30 are as follows:

		Three Months												Nine Months
		2011				2010				% Change1				2011				2010				% Change1
Revenue		$	1,908.0			$	1,956.2				(2.5	%)		$	4,726.4			$	4,576.6				3.3	%
Operating income		$	606.8			$	630.0				(3.7	%)		$	1,180.1			$	1,145.4				3.0	%
Operating margin %			31.8	%			32.2	%							25.0	%			25.0	%
Diluted earnings per share		$	1.21			$	1.23				(2.0	%)		$	2.27			$	2.15				5.2	%

As the customers of our businesses vary, we manage and assess the performance of our operations based on the performance of our business segments and use operating income as a key measure. Based on this approach and the nature of our operations, the

discussion of results generally focuses around our four business segments and their related operating groups versus distinguishing between products and services.

Revenue and operating income increased in our MH Financial and I&M segments, while results weakened in our MHE and S&P segments as compared to the third quarter of 2010. As compared to the first nine months of 2010, results increased at all of our segments except MHE.

•

S&P revenue and operating income for the third quarter decreased 1.8% and 9.7%, respectively and for the first nine months increased 8.9% and 2.6%, respectively. Decreases for the quarter were primarily driven by decreases in transaction revenue as a result of declines in global high-yield issuance, structured finance and public finance, partially offset by growth in bank loan ratings. The increases for the first nine months were primarily driven by increases in our transaction revenue as a result of significant global high-yield corporate bond issuance and increased bank loan ratings, partially offset by declines in U.S. municipal bond issuance. Also impacting income were higher expenses primarily from compliance and regulatory costs and personnel costs driven by global staff increases, including India. In addition, foreign exchange rates contributed to the increase in expenses for the quarter and nine months.

•

MH Financial revenue and operating income for the third quarter increased 18.4% and 31.2%, respectively and for the first nine months increased 16.0% and 27.6%, respectively. These increases were primarily driven by Integrated Desktop Solutions driven by growth at Capital IQ, revenue from TheMarkets.com acquired in September 2010, and our subscription base for the Global Credit Portal, which includes RatingsDirect; Benchmarks due to growth in our exchange-traded fund products; and increases at Enterprise Solutions driven by growth at Global Data Solutions, which includes RatingsXpress. Also impacting income were higher expenses primarily from personnel costs and additional costs to further develop infrastructure.

•

MHE revenue and operating income for the third quarter decreased 11.1% and 12.0%, respectively and for the first nine months decreased 8.3% and 19.0%, respectively. These results were primarily due to decreases in the adoption states as well as open territory sales at School Education Group and increased costs mainly in Higher Education, primarily due to technology requirements and the continuing investment in digital product development.

•

I&M revenue and operating income for the third quarter increased 11.9% and 17.1%, respectively and for the first nine months increased 11.4% and 17.9%, respectively. These increases were primarily driven by strong demand for Platts’ proprietary content and growth in our syndicated studies and consulting services in the automotive and non-automotive sectors, partially offset by decreases in our construction businesses. Additional costs from our acquisition of Bentek Energy LLC and the Steel Business Briefing Group partially offset the growth in the segment. Also impacting operating income for the first nine months of 2011 were a number of nonrecurring items as discussed in more detail in the segment review discussion within “Results of Operations”.

Foreign exchange rates had favorable impacts of $21.8 million on revenue and $21.2 million on operating income for the third quarter, and favorable impacts of $51.4 million on revenue and $12.1 million on operating income for the first nine months. This impact refers to constant currency comparisons and the remeasurement of monetary assets and liabilities. Constant currency impacts are estimated by re-calculating current year results of foreign operations using the average exchange rate from the prior year. Remeasurement impacts are based on the variance between current-year and prior-year foreign exchange rate fluctuations on assets and liabilities denominated in currencies other than the individual businesses functional currency.

For the remainder of 2011, we plan to continue our focus on the following strategies to increase our growth and relevance and to maintain our position as a leading “Knowledge Economy” company:

•

Leveraging existing capabilities to grow organically, particularly through developing a broad range of digital products and services

•

Growing globally by leveraging our position in developed markets and by pursuing opportunities in key developing countries

•

Continuing to consider selective acquisitions that complement our existing business capabilities

•

Expanding and refining the use of technology in all segments to improve performance, market penetration and productivity

•

Continuing to contain costs

Further projections and discussion on our consolidated expense outlook and 2011 outlook for our segments can be found within “Results of Operations”.

RESULTS OF OPERATIONS — COMPARING THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

Consolidated Review

		Three Months												Nine Months
		2011				2010				% Change1				2011				2010				% Change1
Revenue
Product		$	940.5			$	1,058.4				(11.1	%)		$	1,761.4			$	1,914.2				(8.0	%)
Service			967.5				897.8				7.8	%			2,965.0				2,662.4				11.4	%
Operating-related expenses
Product			374.5				408.4				(8.3	%)			785.9				840.4				(6.5	%)
Service			336.6				299.6				12.4	%			1,021.6				879.9				16.1	%
Selling and general expenses			552.2				597.6				(7.6	%)			1,635.1				1,619.5				1.0	%
Total expenses			1,301.2				1,337.3				(2.7	%)			3,559.5				3,442.3				3.4	%
Other income			—				(11.1	)			N/M				(13.2	)			(11.1	)			19.8	%
Interest expense, net			18.1				19.3				(6.0	%)			56.8				62.2				(8.6	%)
Net income attributable to the Company			365.6				379.9				(3.8	%)			696.6				674.2				3.3	%

Product revenue and expenses consist of educational and information products, primarily books, magazine circulations and syndicated study programs in our MHE and I&M segments. Service revenue and expenses consist of our S&P and MH Financial segments, service assessment contracts in our MHE segment and information-related services and advertising in our I&M segment.

Revenue

Three Months

Product revenue decreased primarily due to decreases at MHE for adoption state and open territory sales, partially offset by syndicated studies at I&M and increases at International within MHE, primarily driven by the favorable impact of foreign exchange rates. Service revenue increased primarily due to growth in our global commodities products, revenue from TheMarkets.com acquired in September 2010, growth at Capital IQ, higher sales of our exchange-traded fund products and non-transaction revenue growth at CRISIL. This was partially offset by a decline in our corporate industrial ratings, construction business, structured finance, public finance and custom testing revenue at MHE.

Nine Months

Product revenue decreased primarily due to decreases at MHE for adoption state sales, decreases at International from lower sales in Asia, the Middle East and Africa and decreases in book sales at Professional. Service revenue increased primarily due to similar factors noted above for the three months. In addition, increases were due to growth in our corporate industrial ratings.

Expenses

Three Months

Product operating expenses decreased compared to the third quarter of 2010 due to a reduction in plant amortization, lower manufacturing costs and lower direct expenses associated with the decrease in the adoption states sales at MHE. This was partially offset by increased costs at MHE as a result of technology requirements and the continuing investment in digital product development, primarily in Higher Education. Service operating expenses increased primarily as a result of increased personnel costs. Selling and general expenses decreased primarily due to lower costs associated with decreased sales and reduced stock-based compensation. Foreign exchange rates also contributed to the increase in expenses for the quarter.

Net interest expense decreased primarily due to higher international interest income from our investments in the third quarter of 2011 compared to the third quarter of 2010.

Nine Months

Product operating expenses decreased compared to the first nine months of 2010 due to similar factors as noted above for the three months. In addition, product operating expenses were impacted by lower costs related to inventory at MHE. Service operating expenses increased primarily as a result of increased personnel costs. In addition to the factors noted above for the three months, selling and general expenses increased slightly as a result of incremental compliance and regulatory costs as compared to the first nine months of 2010. Foreign exchange rates also contributed to the increase in expenses for the nine months.

Net interest expense decreased primarily due to reduced interest expense related to uncertain tax positions and a refund on interest relating to a tax overpayment, as well as higher international interest income from our investments in the first nine months of 2011 compared to the first nine months of 2010.

Other Income

Three Months

During the three months ended September 30, 2010, we recorded a pre-tax gain of $11.1 million from dispositions, which was comprised of the following:

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In September 2010, we sold certain equity interests in India which were part of our S&P segment, and recognized a pre-tax gain of $7.3 million.

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In August 2010, we sold our Australian secondary education business which was part of our MHE segment, and recognized a pre-tax gain of $3.8 million.

Nine Months

During the nine months ended September 30, 2011, we sold our interest in LinkedIn Corporation in their initial public offering. This investment was held within our I&M segment and as a result of the sale we recorded a pre-tax gain of $13.2 million.

Selective Outlook for 2011

We expect prepublication investment for the year to be approximately $175 million versus $150.8 million in 2010. In addition, amortization of prepublication costs is projected to decline in 2011, which reflects the lower level of investment we made in 2010.

We are projecting capital expenditures for the year of approximately $125 million versus $115.4 million in 2010, largely due to increased digital and technology spending.

We expect free cash flow for the year of approximately $750 million. Free cash flow is a non-GAAP financial measure and reflects our cash flow provided by operating activities less capital expenditures, investment in prepublication costs and dividends. Further detail can be found within “Reconciliation of Non-GAAP Financial Information”.

Interest expense is expected to be relatively flat versus 2010.

Our effective tax rate for continuing operations was 36.3% for the three months and nine months ended September 30, 2011 and 2010. Including discontinued operations, the effective tax rate was 36.4% for the three and nine months ended September 30, 2011 and 2010. The tax rate is not expected to vary significantly throughout the remainder of the year absent the potential impact of numerous factors including intervening audit settlements, changes in federal, state or foreign law and changes in the geographical mix of our income.

Segment Review

Standard & Poor’s

Credit ratings are one of several tools that investors can use when making decisions about purchasing bonds and other fixed income investments. They are opinions about credit risk and our ratings express our opinion about the ability and willingness of an issuer, such as a corporation or state or city government, to meet its financial obligations in full and on time. Our credit ratings can also speak to the credit quality of an individual debt issue, such as a corporate or municipal bond, and the relative likelihood that the issue may default.

S&P differentiates its revenue between transactional and non-transactional. Transaction revenue primarily includes fees associated with:

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ratings related to new issuance of corporate and government debt instruments, and structured finance debt instruments;

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bank loan ratings; and

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corporate credit estimates, which are intended, based on an abbreviated analysis, to provide an indication of our opinion regarding creditworthiness of a company which does not currently have an S&P credit rating.

Non-transaction revenue primarily includes fees for surveillance of a credit rating, annual fees for customer relationship-based pricing programs and fees for entity credit ratings.

		Three Months												Nine Months
		2011				2010				% Change				2011				2010				% Change
Revenue:
Transaction		$	131.2			$	163.1				(19.5	%)		$	503.2			$	462.4				8.8	%
Non-transaction			278.7				254.4				9.5	%			829.9				761.4				9.0	%
Total revenue		$	409.9			$	417.5				(1.8	%)		$	1,333.1			$	1,223.8				8.9	%
% of total revenue:
Transaction			32.0	%			39.1	%							37.7	%			37.8	%
Non-transaction			68.0	%			60.9	%							62.3	%			62.2	%
Revenue:
Domestic		$	207.3			$	231.8				(10.6	%)		$	692.4			$	669.3				3.5	%
International			202.6				185.7				9.1	%			640.7				554.5				15.5	%
Total revenue		$	409.9			$	417.5				(1.8	%)		$	1,333.1			$	1,223.8				8.9	%
Operating income		$	169.1			$	187.3				(9.7	%)		$	572.2			$	557.5				2.6	%
Operating margin %			41.3	%			44.9	%							42.9	%			45.6	%