標普全球 (SPGI) 2006 Q3 法說會逐字稿

Good morning and welcome to the McGraw-Hill Company's third quarter 2006 earnings call. At this time, I'd like to inform you that the call is being recorded for broadcast and that all participants are in a listen-only mode. At the request of the company, we will open the conference to question and answers after the presentation and instructions will follow at that time.

To enhance the call for today's participants, McGraw-Hill has made the presenter slides available on the Internet. To do that, go to http://www.mymeetings.com/mc/join. (Operator Instructions). You will be prompted to enter your name. The net conference meeting number is PG4795818. The password is MCGRAW HILL, all caps, with a space between MCGRAW and HILL, and the event type is conference.

This call is also being webcast live from McGraw-Hill's investor relations web site and will be available for replay about two hours after the meeting ends both by phone and on the web for seven days. (Operator Instructions).

I will now turn the call over to Donald Rubin, Senior Vice President of Investor Relations for the McGraw-Hill Companies. Sir, you may begin.

Thank you and good morning and thank everyone for joining us here at the McGraw-Hill Company's third-quarter 2006 earnings conference call. I'm Donald Rubin, Senior Vice President for Investor Relations for the McGraw-Hill Companies. With me today are Harold McGraw III, Chairman, President and CEO and Robert Bahash, Executive Vice President and Chief Financial Officer of the Corporation. This morning, we issued a news release with our third quarter 2006 results. We trust you have all had a chance to review the release. If you need a copy of it and financial schedules, they can be downloaded at www.mcgraw-hill.com/investor_relations. (Operator Instructions).

Before we begin this morning, 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 (multiple speakers) 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 the other periodic reports filed with the U.S. Securities and Exchange Commission.

We are aware that we do have some media representatives with us on the call. However, this call is for investors, and we would ask that questions from the media be directed to Mr. Steve Weiss in our New York office at area code 212-512-2247 subsequent to this call. Today's update will last approximately an hour. After the presentations, we will open the meeting to questions and answers. Now my pleasure to introduce the Chairman, President and CEO of the McGraw-Hill Companies, Terry McGraw.

Okay, thank you very much, Don, and good morning everyone and thank you for joining us for our review today of McGraw-Hill Company's third quarter results. As Don mentioned, joining us on the conference call today is Bob Bahash, Executive Vice President and Chief Financial Officer of the Company, and we will start today's call by reviewing the performance of our businesses and take a look at the outlook for the rest of the year. Then, Bob Bahash will review our financial performance and also talk about expectations for completing the year 2006. And as Don said, afterwards as always, we will answer any questions, and we can go in any direction that you would like.

Earlier this morning, we announced third quarter results. Diluted earnings per share increased 6% to $1.06, and that included $0.03 for incremental stock-based compensation and $0.03 for restructuring business operations. I will chat about that in a moment a little bit more and Bob Bahash will also address that. Net income for the third quarter was $382.3 million and revenue rose to $2 billion for the quarter. As a result of this performance, we are again increasing our guidance for the year. Our previous earnings guidance called for earnings per share of $2.44 to $2.49, and that excluded the incremental impact of all stock-based compensation. That excluded $0.13 for the stock-based compensation and $0.04 for the onetime charge for the elimination of the restoration stock option program.

Our new guidance for 2006 calls for earnings per share of $2.53 to $2.55, and that excludes again the incremental impact of all stock-based compensation and restructuring charges. The incremental impact of the stock-based compensation has been revised to $0.11, down from the estimate of $0.13 earlier this year. And as we previously stated and for the full year 2007, we fully expect to achieve double-digit earnings growth.

With that, let's take a closer look at how we achieved our third quarter results and the steps we're taking to prepare for 2007. Let's begin with the McGraw-Hill Education. In this year's softer market, we worked very hard to protect the bottom line. Two major swing factors -- more limited opportunities in 2006 after last year's robust growth and stringent cost controls -- are reflected in the segment's third quarter results. Revenue decreased by 6.3%, operating profit declined by 7%, and that includes $3.4 million for incremental stock-based compensation, but our operating margin at 33.1% was virtually unchanged from last year's, which was 33.3%. That achievement reflects our determination to manage costs in a weaker state new adoption market this year.

For the Education segment in the third quarter, cost declined by 6% compared to last year, and that is after a pre-tax restructuring charge of $5.6 million, primarily for the integration of our elementary and secondary [basal] publishing businesses and $3.4 million for the incremental stock-based compensation expenses that I just mentioned a moment ago.

We took a number of steps to manage costs in the third quarter. In anticipation of the restructure of our basal publishing businesses, we sharply curtailed hiring. We also cut marketing and sampling costs in anticipation of this year's softer state new adoption market, and we also worked very hard to achieve a higher level of operational efficiency. The benefits of the new global transformation platform should be greater in periods of peak activity, and they were in 2006. As we pointed out, the year-to-year market shift is pronounced in the McGraw-Hill School Education Group. In 2005, the McGraw-Hill School Education Group increased third quarter revenue by 18.9% in a very strong market. One of the keys to last year's successes was an outstanding performance in Texas, which accounted for $46 million in third quarter new adoption revenue. There is no adoption this year in Texas, and that clearly was an important factor in the 12% decline in third quarter revenue this year at the McGraw-Hill School Education Group.

There were other factors as well. This is an off year in the state new adoption cycle. In 2006, it is off 30%, or approximately 250 million, which obviously limits the potential. We also fell short of expectations with our Elementary products in the Florida Science and the California Social Studies adoption. We took only 4% of the Elementary market in Florida and 15% of the market in California, but that's not the whole story. Our Secondary Science programs took 39% of the Florida market and they were also very successful in Alabama, New Mexico, Oklahoma and West Virginia.

In California, we captured 32% of the Middle School and 43% of the High School market for Social Studies. We successfully introduced Treasures. This is our new elementary reading program designed for this year in the open territory. Spotlight on Music, an Elementary program, was the market leader in Indiana and Oregon. Our alternative basal program math program, which is Everyday Mathematics, also demonstrated year-over-year growth with particular strength in the open territory.

Still, this is going to be a soft year in the School Education business. Through eight months, industry sales were down 0.6%, and that's according to the Association of American Publishers, AAP. We think the industry at best will match last year's sales, but could be off as much as 4%. Texas will be an important factor in year-over-year comparisons because the state placed substantial orders in the third and fourth quarters last year. And as I said, there is no Texas adoption in 2006.

Of course, comparisons do get easier next year with about a 15% increase in the state new adoption market in 2007. We took another step to gear up for those new opportunities in August by integrating our Elementary and Secondary Basal Publishing businesses. That new combination improves our efficiency, leverages our talent and will enhance our new product development, and those procedures are all well underway and doing well.

There is a growing market demand for greater continuity in terms of curriculum design of instructional materials across all grade levels. We will be in a better position to respond to this demand because there will be a more comprehensive approach and greater continuity in our product development efforts at our newly integrated publishing centers. We are creating a very good pipeline of new products in anticipation of the new opportunities. I've already mentioned the success this year in the open territory of our new Elementary Reading program, Treasures. That is a very good record to build on as we prepare for major new adoptions in reading.

We are also encouraged by the reception of Real Math. This is our new skills-oriented math program. It has already won a number of small and medium-size adoptions. Also, two new literature products -- Reading with Purpose for the middle school, and the Reader's Choice for high school -- were completed in the spring for submission to adoption states for purchase in 2007. These programs have already captured some business in the Open Territory and we are excited about their prospects going into next year. Jamestown Reading Navigator, which is a new online intervention program for Secondary School students, was not fully released until May of this year, but is already capturing new business because many students are still entering middle and high school without achieving a reading proficiency. And of course, Jamestown Reading Navigator can adjust reading capabilities to any level of student proficiency.

Intervention products like this represent an important new category. The market for them has broadened as educators seek to meet the early progress goals, and these are the goals created by the No Child Left Behind Act. The fact is that many children, especially from urban districts, start school without the vocabulary, or for that matter, the number skills needed to deal with standard primary grade instruction. Efforts to address these needs, often known as response to intervention, or RTI programs, have developed around the country. Our School Group is offering a growing array of solutions to help educators deal with these kinds of issues. A new K-8 math program, Mathematics Connects, is well along, and we will have a national as well as state-specific editions ready for next year as we know that Georgia is going to be having a very large K to 12 math adoption, Texas in the 6 to 12 math as well for next year. Most adoptions for next year will not be official until they receive state Board of Education approval, which usually comes next month. However, many state evaluation committees have already announced their recommendations, so while we don't have the final word, we believe that our products which are key to next year's sales will be approved without difficulty.

In short, we have the new organizational structure in place, we have an extensive list of new and revised products to address these emerging trends for this K-12 market.

In Educational Testing, we continue to see pressure on operating margins, even as we invest in technology to improve efficiency. In the third quarter, we saw a decrease in our off-the-shelf sales of norm reference tests and reduced custom contract work. Partially offsetting this softness were our innovative personalized study guides which have been adopted in Texas and Arizona, this coming by way of the acquisition of the Grow Network. Our Higher Education, Professional and International Group grew by 2.2% in the third quarter and it was up by 3% after nine months.

In the U.S. College and University market, revenue in the third quarter was up for only one major imprint; that was the Science, Engineering and Math. But, this is also our largest list for this year. We expect only modest growth from our Business and Economics Group because this is an off-cycle revision year for that imprint. The Humanities, Social Science and Languages imprint was off modestly for the third quarter. It now appears likely that the U.S. College and University market will grow about 3% this year, instead of the 5% originally anticipated. We still expect to outperform the market. A key factor will be our fall release of new products.

We're also encouraged by the growth of our digital products for Professional markets. India's largest technical university association will make our online digital engineering library available to 88 engineering schools. In Australia, a consortium of university libraries added Access Medicine for 17 universities. These web-based subscription products clearly are growing global opportunities.

Okay, summing up for the McGraw-Hill Education, stringent cost controls protected the bottom line in a soft Education market, and we're very pleased about the progress that we made there. Our Secondary School products captured significant share in key adoption states this year. We have strengthened in the [L-high] organization by restructuring our basal business, and that is for the most part complete. Comparisons will be challenging again in the fourth quarter. Again, last year, the School Education Group had the benefit of $44 million of Texas revenue and grew by 23.6%. Margins in the Testing business remain under pressure as we move more into the formative side from the summative side where the new growth opportunities exist. And the U.S. College and University market now looks like it will grow about 3% this year, and we expect to outperform that.

Okay, let's move onto the Financial Services segment. In Financial Services, solid performances across our diversified portfolio of fixed income and equity products and services produced another record quarter in Financial Services. Revenue increased 11.4%, but excluding $33 million from Corporate Value Consulting, which was sold at the end of September in 2005, revenue was up 17.9% on a non-GAAP basis. Operating profits grew by 17.3%, and that includes $8 million for incremental stock-based compensation. The operating margin for the third quarter expanded to 43.8%, up from 41.6% for the comparable quarter last year, and our operating margin for the nine months is 44.1, up from 41.9 last year. Now this expansion this year stems from a higher drop-through from increased revenue and ratings, improvement in our data and information products and services where -- and acquisitions like Capital IQ have performed so well and are ahead of schedule, expansion of our index products and services and cost controls and timing of expenditures.

Creating a diversified and resilient portfolio that is not dependent on any one asset class or market has been our strategical goal as we have been talking about for many, many years. We will continue to work on that objective, but the progress we have already made is apparent in the results in the face of declining dollar issuance in the U.S. residential mortgage-backed securities and the public finance market, and only a modest increase in the U.S. asset-backed securities.

There were many global growth drivers in the third quarter. Structured Finance and Corporate, very strong. Rating products and services that are not tied to new issuance continues to grow and as a percentage of revenues continues to go up. Data and information products and services is doing quite well. Index services and products also. International credit ratings and services accounted for 39% of ratings revenue in the third quarter, and that's up from 36.7% last year. And as we have stated many times, our non-U.S. revenues are growing at a faster rate obviously than our U.S. growth, and we're very encouraged by that.

Structured Finance was the global pacesetter. We saw strong investor demand for cash flow and synthetic collateralized debt obligations. Dollar volume issuance was up 118.7% in the U.S. and 122.9% in Europe, tremendous growth. In the United States, growth in the cash flow sector of CDOs was driven by high-yield collateralized loan obligations and collateralized debt obligations of asset-backed security transaction. Hybrid transaction -- this is a combination now of cash flow and synthetics -- are driving the synthetic issuance. In Europe, there is a strong investor appetite for cash collateralized debt obligations, particularly the leverage loan collateralized debt obligation products. It's worth noting that an increasing number of deals in Europe are coming from the U.S.-based managers who are targeting a European loan market. They believe the European loan market offers more attractive spreads than the United States.

We also saw strength in the U.S. commercial mortgage-backed securities markets. Issuance has been strong due to the historically low interest rate environment, which is driving commercial originations and refinancing of maturing deals. There is demand for these instruments, especially among life insurance companies and foreign investors. We started noting that is about 1.5 years ago with the increases on the commercial side, and it has been quite strong and it has done quite well.

As we pointed out earlier, the United States residential mortgage-backed securities market is starting to slow down. These are the year-over-year comparisons now. Dollar volume issuance declined about 11.2% in the third quarter and is up 6.6% through the nine months of this year. The number of deals that came to market in the third quarter was up 1.7% from the same period last year and for nine months, the number of deals is up 18.8%. Activity in the United States is being driven primarily by the Alt-A sector and the refinancing of adjustable-rate mortgages. We continue to benefit from the increased number and the mix of deals issued in the non-agency market.

In Europe, residential mortgage-backed securities dominated the securitization market. In the third quarter, residential mortgage-backed security dollar issuance grew by 190.5% versus the same period last year -- very, very strong. A buoyant European housing market is obviously a key to the continued strong deal flow there.

In the asset-backed securities market, it's the same area that we have been seeing strength for the last several years. Autos, credit card receivables, student loans remain the primary drivers. As auto manufacturers have recognized their businesses in recent months or rather reorganized their businesses in recent months, they have curtailed securitization. That will continue to be a factor in this market.

In Europe, the asset-backed securities market is far less mature than the United States, and new issuers are still entering that market. The corporate market was strong in the United States and it was very strong overseas. International markets were up solidly in the third quarter, and this is coming from booming M&A activity and strong financing activity that have been driving this.

In the United States, insurance companies and pension funds have been snapping up new issues as five- and 10-year bonds in their portfolios are maturing. Foreign investor, also active here. Many are from nations flush with cash from oil markets. They're looking for a safe place to put their funds. The speculative grade market has been very weak, but a combination of historically low interest rates, an active merger and acquisition market and multimillion dollar buyout has stimulated leveraged financing in the bank loan market. Leveraged loans are replacing high-yield bonds and taking a bigger piece of the capital structure. The growth of the bank loan market is one important reason ratings and services not tied to the new issue market continue to expand, and in the third quarter, it represented 23.4% of ratings revenue, up from 21.6 last year. And this is a trend that we expect to see to continue and we will continue to push very aggressively to offer products and services in this non-traditional area, and that number will continue to grow.

The growth of global financial markets is also stimulating new demand for our data and information products in both fixed income and equity markets. We are attracting new customers and selling more capabilities to existing customers. This is basically a subscription business, so growth here adds to the stability of the revenue stream.

We're continuing to add information and functionality to the Web-based platform developed by Capital IQ. Very pleased with the progress here. In the past few months, we have added real-time data, credit research and global corporate issuer ratings from S&P and macroeconomic timeseries. And again, we're very pleased with our progress here and we can talk about that a little more. The revenue growth is well ahead of where we were expecting.

We are also continuing to build our Index Products and Services. Assets under management in exchange traded funds based on S&P indexes grew to $147.1 billion by the end of September. That is a 23.5% increase compared to the same period last year. 25 new exchange traded funds have been launched in the United States market so far this year with four different sponsors, and there are more coming.

We forecasted double-digit top- and bottom-line growth for Financial Service operations for the year and for the second half. That excludes the revenue from the divestiture of Corporate Value Consulting and the impact of the incremental stock-based compensation and we're on course to achieve those results.

In looking at the fourth quarter, the structured finance pipeline still looks very healthy. We expect strength in the collateralized debt obligation, a very large market and getting better, and the commercial mortgage-backed securities markets, which we have seen for the last couple of years now gaining strength. U.S. residential mortgage-backed security issuance in the fourth quarter is expected to decline, the year-over-year comparisons. The absolute volume is still quite high. Corporates still looks very solid, and again, both here and outside of the United States. And the leveraged loan market will continue to be strong and international issuance looks very good.

Let me also comment for a moment on the current regulatory outlook for the credit rating agencies. We have said all along that we expected no material adverse reaction on our business, and that is certainly the case now that President Bush has signed into law this Credit Rating Agency Reform Act. The next step is obviously for the SEC to engage in rule-making and implement the legislation part. S&P will continue to work with the SEC. We have very good relationships there. We believe that the version that was (technical difficulty) areas here that were we're very pleased with. The SEC has not injected first into the analytical process or criteria or the methodology that credit agencies use to arrive at their opinion, and that's good. The second one is that the new legislation does not diminish rights, including First Amendment protection, SEC already possesses under applicable laws.

A third one is that new firms now registering to become the -- quote -- NRSRO, the Nationally Recognized Statistical Ratings Organization -- they must provide evidence that capital market participants regard them as issuers of quality credit (indiscernible). And finally, the law preempts regulation by individual states. So it's a very clean and clear posture.

Okay, so let me sum up then for Financial Services overall. Another double-digit growth year is taking shape. Solid growth overseas and we're going to continue to see that in the years ahead. Strong performances in the structured and corporate markets, excellent growth in the data and information businesses, continued strength in indexes and the expansion of the operating margin.

Okay, let's move now to be Information and Media segment. In the Information and Media segment, growth in higher value-added information products and services and a pickup in business-to-business advertising were evident in the third quarter results for this segment. Revenue was up 8%, operating profits improved 10.3%, and that includes $2.7 million for incremental stock-based compensation. The segment incurred a pre-tax restructuring charge in the third quarter of $5.7 million, and this was for employee severance costs for the elimination of 100 positions across the segment. Nevertheless, we managed a modest increase in the operating margin for the quarter, increasing it to 5.5%.

Revenue from the Business-to-Business Group was up 9.9%. JD Power & Associates was a major factor here, producing top-line growth in both domestic and international products. Again, about 25% of their business is revenue -- is outside the United States, where two-thirds of that is in the all-important Asia-Pacific region. Both the automotive and the Financial Service products were strong performers.

We're continuing to grow in the energy market. For many years, Platts' products have successfully served the physical energy market. In recent years, we have been adding customers who are focused on the financial aspects of the energy market. Like the energy producers and traders, they want real-time information on volatile markets and they want Platts' price assessments. Today, four major energy exchanges -- that would be the New York Mercantile Exchange, the Intercontinental Exchange, the Tokyo Commodities Exchange and the Singapore Exchange, all use Platts' prices and price assessments to clear trades. Platts' prices are used to settle $15 billion in global petroleum transactions every day.

The ad picture was mixed in the third quarter. We saw pickup in business-to-business advertising which helped offset a decline in national and local time sales at Broadcasting. Revenue at Broadcasting was off 5.9% to %26 million in the third quarter. That was primarily due to the loss of Monday Night Football in all of our markets and also Oprah in San Diego and in Denver, which is affecting fourth-quarter pacing. As of October 13th, fourth-quarter pacing is up just about 1%, but we expect some improvement as political advertising is booked. That number looks to be somewhere around -- political advertising number for this year about 12 million. Typically, political advertising is placed late, so stay tuned.

Ad pages at Business Week were up 7.6% in the third quarter as measured by Publishers Information Bureau -- PIB. After nine months, Business Week's ad pages were essentially flat. They were off about 1.7%. Businessweek.com continues to build traffic and contributed 13.1% of Business Week's total advertising revenue in the third quarter. We're very pleased with that. Ad Week's hot list of web sites listed Businessweek.com as one of the top 10 performers in 2006. Business Week also recently launched a mobile edition. The URL is businessweek.mobi.

Summing up for the Information and Media segment, growth in higher value-added information products, JD Power & Associates continues to perform exceptionally well, Platts is showing very strong performance and a pickup in business-to-business advertising.

And, therefore, summing up for the Company overall now, as I pointed out earlier, we increased -- we're increasing earnings guidance again for 2006. Our new range now is $2.53 to $2.55, and I want to spend just a moment and I will point out what is excluded and included in this new guidance. That guidance excludes now the, again, all of the incremental impact of the stock-based compensation and a $0.06 restructuring charge of which we'll have $0.03 in the third quarter and $0.03 in the fourth quarter. Those are the components that are excluded. Now in the incremental impact of the stock-based compensation, a revised $0.11 estimate for the incremental stock-based compensation in 2006, which is $0.02 less than the original $0.13, and also the $0.04 for the onetime charge of the elimination of the restoration grant. But it's the (indiscernible) it excludes all of the incremental impact of stock-based compensation and a $0.06 restructuring charge -- again, $0.03 in the third, $0.03 in the fourth.

Several important factors are also influencing our expectations of earnings per share for the fourth quarter where we're estimating $0.53 to $0.55 per share. First and foremost, we still expect double-digit top- and bottom-line growth in Financial Services in the fourth quarter, but there also will be the onetime $0.04 impact for transforming suites from a print catalog business to a subscription-based business, obviously which will benefit 2007. That shift involves a change in revenue recognition, but the impact is somewhat larger than the $0.02 to $0.03 we originally estimated.

We also faced challenging comparisons again in the McGraw-Hill Education. Fourth-quarter revenue last year from McGraw-Hill School Education Group as we said earlier grew by 23.6%, and that was because of the $44 million in late orders from Texas. We had recognized the costs associated with that Texas order earlier in 2005, so the drop-through was significant in the fourth quarter.

We also expect the pressure on operating margins in our Educational Testing business to continue as the whole nature of the business shifts from the high stakes to the low stakes, or the summative to the formative, testing business. And, we will be making some investments in Education that will have an impact on expenses as we prepare for a much bigger 2007. So in short, we're taking some important actions to position us for more rapid growth starting in 2007, but we are pleased with the performance in the third quarter, and therefore, the ability to raise earnings guidance.

So let me leave it with that, and we can go in any direction you'd like. Let me go to Bob Bahash now, our CFO, and he has some further information for us on the financial side.

Thank you, Terry. I will begin this morning with a discussion of cash flow, which was stronger than expected in the third quarter.

At the end of the second quarter, we've projected a return to a net surplus cash position by the end of this year. But, with cash flow stronger than we thought, we're ahead of schedule and actually reached a net surplus cash position in the third quarter.

Our net cash position was $74.3 million, consisting of debt of $235 million, which is primarily in commercial paper borrowings in the U.S., offset by approximately $310 million in foreign cash holdings. Given our strong cash flow, we'll probably pay down all commercial paper borrowings by the end of the year.

Net interest expense was $7.5 million in the third quarter, compared to about $3 million for the same period last year. The increase resulted from more commercial paper borrowings at higher interest rates to fund the stepped-up share repurchases, compared with the prior year. Strong cash flow has enabled the Company to reduce commercial paper borrowings during the quarter and we now expect the full-year interest expense to range from $17 to $19 million.

Now for share repurchases. We did not purchase any shares during the third quarter. During the first half of the year, we did acquire or 26.1 million shares at a cost of $1.4 billion. We expect to buy back 2.3 million shares during the fourth quarter to achieve our previously announced 28.4 million share target for this year. When we complete this purchase, 20 million shares will remain from the 45 million share repurchase program approved by the Board in January 2006. This program represents in total 12.1% of the corporation's outstanding 372.7 million shares as of the end of 2005. Share repurchases will benefit earnings per share this year by approximately $0.03 and is reflected in the earnings guidance that Terry discussed earlier.

With the buyback and dividend programs, we have returned increasing amounts of cash back to our shareholders. In 2004, we returned over $630 million. In 2005, we ramped that up to over $920 million, and so far into 2006, we have returned nearly $1.6 billion. Together, these represent a return of more than $3.1 billion to our shareholders.

The diluted weighted average shares outstanding for the third quarter of 2006 was 360.9 million shares, a 20.2 million share decrease compared to the third quarter of 2005 and a 4.6 million share decrease compared to the second quarter of this year.

In the earnings release this morning, we reviewed the impact of restructuring a number of business operations in the third and fourth quarters. In the third quarter, the restructuring charge was $15.4 million, or about $0.03 per share, primarily for employee severance at McGraw-Hill Education, Information and Media and at Corporate. All told, we eliminated about 600 positions -- 400 at McGraw-Hill Education, 100 at Information and Media and 100 in our Corporate business support areas. We will complete the restructuring this year in the fourth quarter. We anticipate an additional $0.03 restructuring charge in the fourth quarter for actions we contemplate but have not yet taken. The $16 million pretax restructuring charge in the fourth quarter relates primarily to vacating some facilities and eliminating another 100 positions in McGraw-Hill Education, Information and Media and at Corporate. The fourth-quarter action will bring our total restructuring charge for the year to $31.4 million, or $0.06 per share, primarily from the elimination of approximately 700 positions.

Earlier this year, we reported we were transforming suites the McGraw-Hill Construction Group's popular building products database, from a print catalog to a fully integrated Internet-based sales and marketing solution. This move has led to changes in our revenue recognition for the suite's product sales. We estimated last year that the impact of the suite's transformation would be $15 million, or approximately $0.02 to $0.03 per share. We now expect the impact to be in the range of $24 million, or approximately $0.04. We're increasing our estimate because all of the suite's customers have contracted to purchase a bundled product, consisting of both print and online editions. This swift migration from stand-alone print to bundled contracts was not anticipated in our earlier estimate. Accounting standards require us to recognize revenue for subscription products over the contract period, rather than solely in the fourth quarter, which is how we recognized suite's revenue in the past when only the stand-alone print product was delivered to customers in December. We will cycle through this change in 2007.

There is another change I want to bring to your attention. When the Company began expensing stock options at the beginning of this year, we had expected an incremental charge of $0.13 per share as a result of this accounting change. However, as the result of lower-than-expected incremental stock-based compensation activity, the company now expects the full year incremental charge to be $0.11 per share. In the third quarter, the Company incurred incremental stock-based compensation expense of $14.6 million, or $0.03 per share, which brings us to a year-to-date incremental expense of $54.1 million, or $0.09 per share.

Now let's take a look our corporate expenses. In the third quarter, corporate expenses increased $11.9 million, including $4.1 million of restructuring charges. The balance of the remaining increase is due primarily to increased compensation-related expenses. In 2006, we expect dilution of approximately $0.04 from the acquisitions made in 2004 and 2005. They will be approximately cash-neutral. In 2007, we expect these acquisitions will be cash-positive. The Company did not make any material acquisitions or dispositions in the first nine months of 2006.

The effective tax rate in the quarter was 37.2% and we continue to project this rate for the balance of the year.

Let's take a look at capital expenditures, which include prepublication investments and purchases of property and equipment. In the third quarter, our prepublication investments were $64 million, compared to $67 million for the same period last year. For 2006, our current estimate for pre-pub investments is approximately $300 million. This level of investment is driven mainly for products we are currently developing to realize significant opportunities in the [L-high] market in 2007, 2008 and 2009. However, through continued efficiencies, technology and global sourcing, we anticipate a reduction in spending from our earlier projection of 315 million.

Purchases of property and equipment were about $25 million in the third quarter compared to $29 million for the same period last year. We're decreasing our projection of capital expenditures for 2006 from $200 million to $150 million. We're making this change because of the delay in the timing of expenditures associated with the construction of our new data center and other expenditures related to the implementation of digital technology initiatives until 2007.

Now for some non-cash items. In the third quarter, amortization of prepublication costs was $103 million compared to $99 million in the same period last year. We now expect $240 million for the full year, down slightly from our previous estimates of $250 million. Depreciation was $27 million in the third quarter, compared to about $23 million in the same period last year. We continue to expect it to be about $130 million in 2006, reflecting the higher level of capital expenditures and a full year of depreciation of capital expenditures made in 2005. Amortization of intangibles was $12 million in the third quarter compared to $12.4 million in the same period last year, virtually flat. For 2006, we expect $50 million, up from $44.2 million in 2005. The increase is driven by 2005 acquisitions.

Thanks, and now back to Terry.

Okay, thanks, Bob. As we came into 2006, we knew that we were facing from a market cycle standpoint a weaker education market. And given that, we are very pleased with the earnings performance across the board and the cost controls and the growth that we've been able to see. And we obviously are pleased to have the ability to raise our earnings guidance. And as we complete the year now and we start to focus on 2007 and beyond, we look forward to achieving that double-digit earnings growth and we fully expect to be able to do that.

Let me turn it back to Don, and then let's go in any direction anybody would like.

Thank you. Just a couple of instructions for phone participants. (Operator Instructions). We will now get ready to take our first question.

Frederick Searby, JP Morgan.

Terry, could you give us some color on credit derivatives in terms of the growth rates in the U.S. and Europe and what percent of revenues they were for the quarter? And then just secondly, any thoughts on coming into a strong adoption year next year? What's going to prevent what looks like somewhat of a share loss in Florida, even though you had a nice -- I guess in the secondary market. Can you just talk about your positioning from a share competitive perspective and (indiscernible)? Thank you.

Yes, thanks, Fred. In the structured finance market, obviously, it has been strong for the last several years and it's going to continue to be strong. And the good part is that it continues to gain strength outside the United States. As we were saying in just some of the issuance numbers, the issuance for collateralized debt obligations, which is very large and in a big area, was up almost 120%, and it was up -- new issue dollar volume in Europe was up roughly 52%. So it's very, very strong. We continue to benefit, obviously, from the shift there.

Now remember, on the residential mortgage-backed securities market, even though we're seeing year-over-year declines a little bit in the third and fourth quarter, it is still very large. Overall, in 2006 in the residential mortgage-backed market, we sold $1.2 trillion of new issuance, and that's in the U.S. alone. So it is very large and it continues to grow very strong, and the residential mortgage-backed market in Europe is also doing -- is growing very nicely and is doing really well. So that, overall, the structured finance market is strong and it's going to continue to stay strong. We'll see the year-over-year comparisons in residential start to decline a little bit, actually for the full year. I expect it to be flat to probably even positive, given where we see the pipeline.

On the commercial mortgage-backed market, you're going to see the continued strong increases that we have been seeing since last year. On the asset-backed, a little bit softer on the asset-backed, but again, the CDO market and the collateralized loan obligation market are going to continue strong.

Fred, on the K-12 side, in terms of the state adoption markets for next year, again, 2007, 2008, 2009 are going to be really very, very good markets for the K-12 publishing business. Some of the major adoptions for next year, you're going to see California K-12 Science. You have Florida with Health, K-12 Health, World Languages, Applied subjects. You have Georgia with K-12 Math, Texas 6 to 12 Math, and then we start getting into major reading adoption, especially the Florida K-12 reading adoption in 2008. So the pipeline there is going to be strong, and it's going to be in the major disciplines. And we're pleased where we are this point, especially because on the reading side, Treasures, which we launched this year, and really focused on the open territories, is doing so well.

Great, thanks a lot, guys.

Peter Appert, Goldman, Sachs.

Thank you, good morning. Terry or Bob, is it possible to quantify the cost savings you expect to achieve from the headcount reductions that you've implemented, particularly when we think about the Education segment? And then related to that, I'm wondering if these cost reductions cause you to rethink the timing of your 20% margin target within the Education [event], and maybe even this implies there could be some upside to that target?

Okay, thanks, Peter. Yes, there is cost savings associated with all of the restructuring, and some of the combination initiatives that we have taken, like the global transformation project, like the global resource management project and so forth. For the most part, the restructuring was associated with the combination of the Elementary and Secondary School operations. I'm very excited about that. This is something that is very new in the industry and it gives us a lot of continuity and product development, and it gives us a higher level of focus in some of the sales and marketing areas. So we're pleased with that. But, again, when we start talking about the margin improvement that we expect to see in 2007, 2008 and 2009 as we approach 2010, the GTP, the global resource management, these restructurings are all about getting to a higher margin level. And so from a target standpoint, I think we'd leave it where it is right now, at 20%. But, obviously, we're going to be working very aggressively to be able to achieve that.

After that, as we become more online focused and as the market accepts more online participation, obviously you're cutting 25% of your cost structure in terms of paper, binding and printing and all of those kind of things. So we'll see beyond 2010. We will work hard to get to the margin goal that we have there.

But no specific estimate, in terms of the dollar magnitude of the costs you're taking out in context of these specific tests?

Not at this point. We'll be able to do that as we go forward, but obviously, we're looking at a very good 2007 and the double-digit earnings guidance. And we have taken the opportunity to make sure that we're in a good position to do that. So the cost savings are obviously a factor in doing that and are why we took the actions that we have taken.

Just one follow-up then. I think Bob mentioned or you mentioned, Terry, that you would cut the marketing and sampling costs in the Education segment this year. Is there any risk associated with cutting the marketing expense, in terms of implications for your share performance next year?

Oh, no. It really has to do with the fact that there's -- the schedule was so light for 2006 that we were able to obviously save on the variable costs associated with a lower schedule. So as we see the demand pick up coming into next year, those variable expenses obviously come back in all of that, but with the higher revenue and the better return on that one. But, again, we were just being able to take advantage of really good cost savings.

I would also add one other thing, Peter. It's also the efficiencies here in terms of how we look at the whole production and design process and how we have been able to save cost there by doing some outsourcing and doing some pickup on that side, and we'll continue to look at that. That's coming out of not only global transformation, but also the global resource management capability.

Peter, in addition to Terry's comments here, when he talked about the fourth quarter, we are seeing a step-up clearly in some of our sales and marketing promotion costs because of the big opportunities in 2007. So that's another factor entering into what our forecast is looking at the fourth quarter, to really help to ensure the sales objectives that we have for 2007.

Thank you.

Brian Shipman, UBS.

A couple of questions. First, Bob, could you tell us what the Financial Services division operating profit growth was, excluding CVC? Second, Terry, I was wondering if you could give us a better idea as to your expectations for revenue growth from the Schools Education Group in the fourth quarter. Is it going to be worse -- given the comparisons, is it going to be worse than what we saw in the third quarter or better or comparable? And then I may have a follow-up. Thanks.

Okay. Just getting that specific information, excluding CVC, I'll have it for you in just a moment.

On the revenue growth in the fourth quarter, remember, in the fourth quarter for Education, it's much more of a higher education market. The only reason that we had such strong growth in the fourth quarter of 2005 was because of the timing associated with the Texas spending on that one. Usually, you don't see that kind of K-12 spend in the fourth quarter. So for the Higher Education Group, which is doing quite well, my sense is that you're going to see better revenue growth because of that. But it's going to be less on the K-12 side.

With regard to third quarter revenue growth, revenue growth excluding CVC from the previous year was almost 18% -- 17.9%.

And the operating profit? I'm sorry, that's actually what I was after.

Okay. Operating profit was in excess of 20%.

And then, Terry, one other follow-up if you will, please. If I recall, you ran into trouble a few years ago in Florida again I believe on the Math side. Can you talk more about McGraw's positioning in Florida, please? Is there some kind of legacy issue going on there that's affecting your performance?

No. Again now, the Middle School and the Secondary School, which are under the Glencoe imprint, have -- are clearly number one. They are so strong in all of that, and our problem has been on the Elementary side. Now one of the -- and here again, remember now, we are talking programs, and bigger programs. The issue this year and with the Elementary Science program had to do with the state-specific guidelines. They wanted a very detailed state-specific program. Now what you have to look at very carefully here is the cost benefit of developing a program that would be so state-specific that it might not get you any kind of return. We made a conscious decision coming out of North Carolina with this science program that did so well, we made a conscious decision to make it state-specific to Florida, but only to a point on that one. And in hindsight, that was a decision that did bode well for us on it. But, we did overall, on Science for example in Florida, we did very well, but that was because we had such huge performances in the Middle School and the Secondary School on that side.

Okay, thanks Terry.

Lisa Monaco, Morgan Stanley.

On the amortization of pre-pub costs, if you could give us a number for '07, and then I have a follow-up.

Actually, it's a bit early because we're not even into the benching process for 2007. But, clearly, it's going be a higher number because we have increased our spending. So it's hard to predict at this point in time what it's going to be, Lisa, but there's no question it's going to be a higher number because of the additional ramp-up in spending with regard to the significant programs that will be released. But will have that for you probably by the next call, clearly.

And just to add onto that, Lisa, again, you know, remember with these larger programs, especially in Reading and Math, these are -- it takes two, 2.5 years to develop these programs. So, we are really finishing up now on the cost for 2007, and we're really working on 2008-2009 product on that one. So you will see that continue to ramp up a little.

And is there any way to give us some color -- not to harp on this, but in terms of the margins for next year, in any general year for L-high, what percentage of the current costs that you would recognize in that given year are for the programs which you realize revenue for that given year, and generally, what percentage is [for its] years?

In a major release year for any given program, you are going to have a higher cost element relating to that release. Combination of sampling costs (indiscernible) with order cost depending upon the type of program, and of course your amortization costs. In the K-12 space, we amortize our costs generally over five years some of the digits, so a major piece of your amortization goes out in that very first year. So there is a front loading of costs in one sense -- of course, front loading and revenue as well, but it does have a margin impact. You have very significant benefits as you go out into the future years. You're getting nice benefits in that year, but you have very nice benefits as you go out because your cost structure is lower, you have residual revenue coming in without sampling (indiscernible) order costs as well.

And then just two unrelated questions. Is there any way for you give a little bit more color on what the revenue growth pro forma for JD Power was, and what I guess the profit growth was? And secondly, if you could just elaborate again on what's driving the strength in the bank loan issuance. And I think you mentioned that the strength continued into 4Q -- what's holding that up? Thanks.

Lisa, on the acquisitions that we completed in 2005, are all doing really well. We talked about Capital IQ. We talked about -- well, actually, we didn't talk about CRISIL in India. They're doing exceptionally well on that one. But for JD Power, we don't give out specific unit information on that one. But those acquisitions and JD Power are seating the base plan that we had for them. They're doing really well, and they are doing well because -- JD Power now is doing well because of what we were talking about with the non-automotive side. The automotive side is doing exceptionally well, and you would expect that. But the non-automotive areas, especially in Financial Services, including insurance, brokerage, is doing very well, and we expect that to continue. The global part is also quite exciting. As we have said -- all roads go online, all roads go to Asia. The Asia-Pacific region increasingly becomes a more and more important for us, and two-thirds of their non-U.S. growth is coming out of that region, and expect that to continue as well.

And then the bank loan market, again, bank loan market is, again, a big piece of our nontraditional ratings activities, activities not tied to the new issuance market, and it is now up, getting close to 24% of total ratings revenue, and we expect that to continue.

Okay, thanks.

Michael Meltz, Bear Stearns.

Great, thank you. Two quick questions on Information and Media. Bob, I saw on one of the slides, you got a benefit in the quarter. Can you just talk a little bit about that and quantify that? And then, secondly, the suites -- just so I understand the suite's migration, I understand the concept. I just thought it would've been impacting you all year already. And now, it sounds like you're saying it's more an '07 event. Can you just talk a little bit about that? And then I have a follow-up.

Okay, let me deal with the suites item first. The product previously that we used to produce was a book that came out once a year; a collection of marketing promotion pieces for a number of major building suppliers. This product would be sold during the course of the year. The advertising and promotional types of material and such would be bound and put together during the fourth quarter, and the product would be shipped in December. So it was a fourth-quarter event, revenue recognition event. That's how it has always had been historically. No different -- no difference in previous years. As we went into this year, when we gave you guidance earlier, clearly, with the Web, many of the suppliers have their own web site so that they would question -- is a single bound book really the right way to spend some of their marketing dollars, as -- where right now, they have a very robust web site. What we have tried to communicate to these individuals is that there is a tremendous opportunity, not only part of the Suites.com offering here, but also to be part of the construction network. With their web-based product offerings as we have it packaged, not only would they be reaching their particular customers that they want to reach -- the builders, the architects, but those individuals would then be able to input that data into their specifications as they are bidding on particular sites. So there is a greater connection to not only accessing the information, but also specifying that information with a particular building project.

So when we entered into the year, we thought there would be a different mixture of individuals purchasing either just the electronic product, individuals [that is] purchasing the print product, or a bundled product. What we found, and we are very pleased to see this, is that virtually every customer wanted the electric product in addition to the print product. So as a result, it just simply is a revenue recognition issue. The customer penetration that we had thought we were going to reach in the beginning of the year is about exactly where we are, it's just that the mix of revenue is going to be much more recognized over a 12 month period than a split between some being recognized in the fourth quarter of this year and the balance being recognized more broadly. So that is why we have increased the estimate from $15 million to $24 million.

On the other item, it's just simply a business item that was in dispute, and we reversed the reserve. And I don't really want to get into the specifics of it, but it was large enough in terms of an impact on the quarter that we wanted to point it out to you.

How big was that?

The net impact of that was $8 million.

And is that solely at the EBIT line, or is that in revenues as well?

Both -- revenue and EBIT line.

Two quick ones. At S&P on the index side, do you expect any benefit from the Chicago exchange mergers? And then I have one follow-up there.

Yes -- no. I think that's very exciting. I think we're going to see a lot of activity in terms of exchanges and the coordination of exchanges doing more together, and I think that it makes for bigger markets and it gives us more opportunity to work with them. We have a terrific relationship with both and I see nothing that would create an impediment for us. I look at it just the other way. It's a way to extend those relationships. But we're going to see that again throughout Europe and Asia as well as you see more cooperation between exchanges and combinations that way.

And last question. Do you expect any impact near-term on your Education business from this Reading First situation?

No, and again, I'm not sure what you know about it or whatever, but some of the comments that we were steering Reading First dollars by having access to expert panels and all -- that is all nonsense. The fact of the matter is that we've got an extremely successful program, and that is the Open Court phonics-based reading program coming out of the McGraw-Hill Learning Group, which is our No Child Left Behind group. And if some people have competitive problems with that, so be it. But just because you have an extremely successful program, I get a little exercised on that one. We will compete in the market on merit, and we'll stay with that.

Okay, thank you.

Brandon Dobell, Credit Suisse.

Terry, maybe you could give us a little bit of color on the S&P business, the U.S. versus international. Any major or significant differences in margins between the two geographies? And I guess in particular, in terms of pricing on similar types of deals, so the structure or a CDO Europe and Asia, for example, versus a U.S. -- any differences there? And then, Bob, also on S&P, you also mentioned a little bit of timing of expenses, of that being an issue here in Q3. Wondering if we could get an order of magnitude on what that might have been, and then I'll have one follow-up. Thanks.

Brandon, on the Structured Finance market here and in Europe, again, the trend is what's important. As the structured market, as the securitized world gains increasing acceptance, most institutional investors are looking for that kind of product. Financial institutions like it a lot, obviously because they're offloading that risk. And so you're going to see that trend just absolutely continue and we're going to see more growth outside of the United States as that ramps up. It has been -- it's a more sophisticated market in one sense here in the United States because we've been at it longer, and that trend is going to continue as we get through Europe, but also into Japan and the rest of the Asia-Pacific region. Even in Latin America, even in Mexico, we're seeing some nice representation there, especially in the housing market. But it really has a -- when you start talking about margins, the revenue growth is going to be very strong on the non-U.S. side. When you start talking about margins, it's really a question of size and scale. As you start to build up that size and scale, the margins are going to obviously increase on that one. So in parts of Europe, you have very competitive margins and very competitive pricing to the United States. As you go into certain other markets, newer markets, it's a ramp-up on that one, but eventually there will be no difference in terms of the pricing and the margin expectation that way. It's really a size and scale as you ramp up.

Brandon, could you elaborate on your question about expense timing -- what area were you talking about?

I think it was within S&P. It sounded like that was some of the driver for the year-over-year margin change. I want to get a sense of if it was material, or then if we expect those expenses to show up in Q4, or if it was pushed [from Q2 into] Q3? Just trying to get a better sense of kind of what you guys meant there.

There's nothing significant there. The only thing I can tell you is that just like the other segments, S&P, the financial services segment, is looking at efficiencies, looking at offshoring, outsourcing for a number of different initiatives. They are focusing on more of the captive approach to offshoring versus the other segments using third parties. Because of the relationships that they currently have with Capital IQ, as well as CRISIL -- Capital IQ leveraging some of the data information, the [data-type] collection opportunities that are creating initiatives for them, CRISIL more from a standpoint of the analytic support. So there's activities going on there, some timing of expenses in terms of where those things may be ramping up, but nothing of any significance here, Brandon.

Okay.

And I would just add, Brandon, that when you exclude the $33 million from CVC which we divested last year, revenue growth was up 17.9% and that is what is driving us.

Then one final one. With the stock now at a year/all-time high, maybe your perspective or philosophy on continued share repurchases is that the best use for capital, given what the stock continues to do -- I want to get your thoughts on how you think about the value of buying stock, or [whatever] makes the most sense?

Again, that is an ongoing judgment call. And how does one use your free cash flow between dividends and share repurchases, acquisitions, organic growth. We will continue to be looking hard at tuck-in acquisitions that will support either a platform that exists or creates a platform and component acquisitions that strengthen a platform. And we will continue on that.

The problem I have, Brandon, is that with a lot of the excess liquidity still in the market, you see some people that are looking for really high returns and taking enormous risks to get them. I don't think this is a great environment to be paying four or five times revenues for some of these acquisitions. So I think we will see an improved environment as we get into the latter part of 2007 and '08. And I am just not going to seek some of those very, very high valuations. That doesn't make sense. We will never get a return on that one.

So we focus a lot in this kind of environment on organic growth. And again, given the strength of the markets that we have and the expectations we have for '07 and beyond, we are focusing really hard on being able to satisfy those kinds of needs. And we will continue to analyze all of those kinds of things. But we think the stock repurchase program and the return that we have given back to the shareholder -- we think that has been a very, very good program for us, and we like it.

Great, thanks a lot.

Karl Choi, Merrill Lynch.

A couple of questions here. The first one is, I wonder if you can talk about whether -- going back to Florida for a second -- whether you're seeing an increase in demand for customization from a different space? And if so whether that will have an impact on how you compete in margin overall? And I have a follow-up question.

Okay, terms of mass customization, help me with that, Karl.

In terms of customization of specific programs, are you seeing an increase in demand and as a result does that have an impact on your margins overall over the longer period of time?

No, I think the -- really, the part that impacted revenues from the elementary side was the lack of revenue on that one. The mass customization -- really, I would put it a little bit differently to you. You're going to see more bundling of capabilities because as people are really focused on performance, student achievement and school performance, and you are benchmarking them, you're going to provide more capabilities to be able to ensure that they are getting that kind of performance. Therefore, you're going to see much more push in the online market. You're going to see more push in remedial, more push in intervention products for people that are falling behind.

So one of the things that we are excited about with the reorganization of our elementary and secondary market school operations is the continuity. We think that in terms of being able to put together a more continuous product that takes into account a building process, especially in reading, especially in math, is going to be very important. Testing in science takes place in 2007. And we're going to see more activity on that side as well. But I think it is going to be important to have a continuous product there.

And second question is, you previously have stated that you expect operating income for your education division to fall by as much as 10% in [fiscal '06]. Just wondering whether you have any update on that outlook, either with or without restructuring costs?

We have indicated that we would have a decline in our profits in that range. We are still forecasting to be in that general zone.

And that is before or after the restructuring charges?

That is before.

And actually last question is to clarify the fourth quarter guidance of $0.53 to $0.54 -- that is before the restructuring charge as well, right?

That is correct. It's before -- the $0.53 to $0.55 is similar to the forecasted that Terry had given -- $2.53 to $2.55 before the incremental stock-based compensation, both the $0.11, the revised $0.11 and the $0.04 reload, as well as the restructuring charge that occurred in the third and fourth quarters.

Great, thank you.

Drew Crum, Stifel Nicolaus.

Good morning everyone. Terry, my first question for you pertains to the mid-term elections that are coming. Any potential concerns, state or federal level? Any changes to education policy as a result of that? And then secondly maybe for Bob, it looks like you're recognizing some efficiencies as well as some timing issues in terms of your investment in prepub and CapEx. How should we think about those in 2007 relative to your original guidance? Thanks.

Drew, on the mid-term elections -- boy, I better stay out of that one in terms of forecasting it. But as it relates to No Child Left Behind, no -- I mean, No Child Left Behind is bipartisan. One can always have issues as to, we ought to fund it more, we ought to put more weight on this versus that and whatever. The important thing is the education reform movement in America is so strong, and it is clearly underway. It has taken time for the No Child Left Behind to get into the states and get administered that way. And it has taken time for the Department of Education as well on that one. But that would be expected with something as major as that.

But you have got alignment now between federal, state and local that you have never had before. The focus is all on performance -- again, student achievement and school performance. And therefore I see no retreat from that. In fact, we're going to be working with the DOE for obviously reauthorization of No Child Left Behind for next year.

And we're going to see more emphasis now on the secondary. I mean, a lot of the early emphasis has been on the early childhood learning --obviously the urban markets and that push for reading in particular. And then you saw it with the early reading and the reading first areas. We're going to see the push in not only reading, but math and science in particular as we get into the middle and secondary school. And you're going to see more emphasis placed on that -- teacher training and development as well.

We're also going to start to see a lot more discussion about higher education. And you are going to see something in the reauthorization bill on that as well, on that one. But I see no reversal on the education side of the momentum in terms of building on the reform movement.

With regard to your question about prepub and CapEx, let me take prepub first. Clearly we are experiencing benefits from the efficiencies not only of the offshoring side, but we expect to generate efficiencies from the combination of McMillan and Glencoe. And let me talk about each one.

We are using all of the most current technologies in the development of products, where it is not necessarily a linear handoff but a number of editorial individuals can be working on projects collectively together, which is very, very helpful. Using offshoring vendors to help us in the page layout, the digitization, is helping us tremendously. And as we're going through we weren't exactly certain how quickly and how deeply we would be penetrating this work effort with these individuals. And that is why, quite frankly, we have been coming down a little bit each quarter with regard to how much we were expecting to spend. So no question we're getting efficiencies and that will help us as we go out into the future.

As I indicated earlier, it is a little bit -- it is really too soon to be forecasting where our prepub investments are for next year. All I can say to you, though, if they are clearly going to be lower than where we had originally thought they were going to be simply because of the efficiencies that have been proven and will continue to generate these operating efficiencies.

I think also with regard to the centers of excellence being created with school solutions, we will say clear efficiencies there in that development process.

On the CapEx side that is more simply a timing thing. Next year should be a higher year. Again, not knowing exactly how that will fall, but the development of the new data center to support the digital nature of company is significant. That is underway. We were just I think probably being a little bit too aggressive in terms of how we were thinking we were going to proceed with that development, in terms of the timing of expenditures. The completion of the program in early 2008 is still on target. But the expenditure side is a little bit slower. So you will see bigger spending on that initiative in 2007. A little bit too early to call how much that is, but it will be up there in that range, probably in the 200 range.

Thanks guys.

William Bird, Citigroup.

Yes, just a follow-on related to prepublication investment. It seems that your level of prepub investment has been lower than your competitor Pearson and the gap also seems to be widening. You mentioned offshoring as one explanation, and some of the efficiencies you're gathering. Maybe you could talk a little bit about maybe some other things that might explain differences and what you would expect going forward? Thank you.

We're using a number of very significant and very, very -- well, quite frankly, excellent workflow tools. We have been implementing a number of new technology initiatives in that process. And it has helped us tremendously. I really cannot comment where all our competitors are in the use of electronic workflow tools or where they may be on the offshoring side. But I can only talk from our standpoint that the editorial teams have done a great deal of work in this effort.

This is not simply -- first of all, we have been outsourcing this type of work for many, many years. So the thought of outsourcing to a different location was not foreign to our individuals. We've had a number of individuals of the development side traveling to India, meeting with our vendors offshore, not just the vendors but meeting with their colleagues that they are going to be working with on a day-to-day basis. They are traveling here as well.

We've gotten a high level of comfort and we have pushed more and more work in that direction. Again I can't really comment where our competitors might be. But we see this as a very significant competitive advantage to permit us to do more of the customization work -- a question that was raised earlier -- where we can do a heck of a lot more on the customization side in the development of these programs so we can be hopefully create a competitive advantage versus [technical difficulty] our competitors.

I would only add to that, Bill, that a lot of this began early on with the global transformation project. But the whole global resource management capability -- it is not just in education. This is straight across the board in terms of process improvements and efficiencies on that. We have launched a significant six sigma capability. And that process has benefited us. And I expect that to continue.

Just as a follow-on, Terry, you touched on uses of cash a little bit earlier. I was just wondering if you could just speak a little bit to your cash build in the context of acquisitions? And what kind of acquisition strategy you would expect to be following?

Again as Bob indicated, we will be in a very good cash position by the end of the year. And once again we will be thinking through the allocation of that. As far as acquisitions go, again, we have to take a look at what valuations are. We have a very full pipeline and all of that.

They are focused on the core growth areas. When he is talking about especially outside the United States, the continued development of the growth of the capital markets and the specifics within, we're looking very aggressively at building on those kinds of relationships. CRISIL is a good example, and the follow-on acquisitions that CRISIL has been able to make to bring more transparency to that developing market.

You're going to see more in the Asia-Pacific region. We're spending a lot of time there. You're seeing tremendous growth in the [ASEAN] base. We have got initiatives in Korea, Malaysia and Taiwan and obviously China on that one. So you're going to see continued push on that part.

On the education side, we're developing obviously very strong online development programs and we want to continue to focus on that, and anything that brings transparency, via content, to a particular market -- we're looking at all of those.

Thank you.

Stephen Barlow, Prudential Equity Group.

Thank you. Two quick ones here. On the education side you did not have any success on a couple of the states with a couple of the books. Does that mean that you would have to go back to the drawing board, retool those books, to get yourself in better position for the next couple years of adoptions? Or is it just really a sales issue in that particular state, and then you basically have fixed sales process in that state? Secondly, can you just talk a little bit Capital IQ again? What is the number of people you have there versus when you started? And an update, really, on the dilution or non-dilution of that for a full-year 2006?

Okay. Steve, on the education side, no, it is not a product problem. The decision that we made in Florida on the elementary science really was one to go with a national edition with some state-specific. And we didn't go to a detailed level.

Again, when you take a look at overall, we're right up at the top when you talk about the entire science or social studies in California for that matter. Again, in the Florida secondary market we took a 39% share, 4% in the elementary and 39% in the secondary. So it's clearly -- (indiscernible) it wasn't flawed product. I think it was the approach that we took towards state-specific.

Same thing in social studies. In California It did very well. So from that standpoint it is not a product issue. And so there's no redesign that way. But what we will do with the new combination is, we will be selling a more -- with more continuity a K-12 product that will build through the elementary into the middle school and into the secondary school market. And I look forward to that. You will see some design implications associated with that as we go forward.

On Capital IQ, Capital IQ remember now is a platform acquisition. And we have now [catenated] onto that platform [Compustat] and some other data component. And we will continue to build data components onto that platform. So when you take a look at the employment base there, it has obviously increased a lot. But that is also because of the growth of it. Capital IQ in terms of an acquisition, just looking apples to apples at its existing operations, is way ahead of the acquisition plan that we had put together, and is doing exceptionally well. As a product it is so well-accepted in the market on that part. And we expect that to continue. And you can expect that we are going to be very aggressive in developing additional data components for it.

You asked about the headcount of Capital IQ. And Capital IQ I think specifically probably where you were going was with regard to our India headcount. And that is right now approaching 1900 employees. And this growing, one, because of capital IQ and the roughly 40% growth in client penetration, but more importantly the leveraging across the S&P franchise to move more and more work into that particular business.

So as Terry points out, not only is Capital IQ meeting and exceeding the particular targets that we have, but across the board we are leveraging the capabilities of Capital IQ to help to reduce costs and hopefully grow revenues in other parts of the enterprise. So there is multiple benefits to the enterprise as a result of the Capital IQ acquisition.

Thank you.

Thanks Steve.

That concludes this morning call. On behalf of the McGraw-Hill Companies, we thank you for your participation and wish you a good day.