1	2Q 2010 Earnings Call July 23, 2010 Presenters: Harold McGraw III Chairman, President and CEO Robert J. Bahash Executive Vice President and CFO Donald S. Rubin Senior Vice President, Investor Relations
2	Donald S. Rubin Senior Vice President, Investor Relations The McGraw-Hill Companies
3	“Safe Harbor” Statement Under The Private Securities Litigation Reform Act of 1995 This presentation includes certain forward-looking statements about our businesses and our prospects, new products, sales, expenses, tax rates, cash flows, prepublication investments and operating and capital requirements. Such forward-looking statements include, but are not limited to: the strength and sustainability of the U.S. and global economy; the duration and depth of the current recession; Educational Publishing’s level of success in 2010 adoptions and in open territories and enrollment and demographic trends; the level of educational funding; the strength of School Education including the testing market, Higher Education, Professional and International publishing markets and the impact of technology on them; the level of interest rates and the strength of the economy, profit levels and the capital markets in the U.S. and abroad; the level of success of new product development and global expansion and strength of domestic and international markets; the demand and market for debt ratings, including corporate issuance, CDO’s, residential and commercial mortgage and asset-backed securities and related asset classes; the continued difficulties in the credit markets and their impact on Standard & Poor’s and the economy in general; the regulatory environment affecting Standard & Poor’s; the level of merger and acquisition activity in the U.S. and abroad; the strength of the domestic and international advertising markets; the strength and the performance of the domestic and international automotive markets; the volatility of the energy marketplace; the contract value of public works, manufacturing and single-family unit construction; the level of political advertising; and the level of future cash flow, debt levels, manufacturing expenses, distribution expenses, prepublication, amortization and depreciation expense, income tax rates, capital, technology, restructuring charges and other expenditures and prepublication cost investment. Actual results may differ materially from those in any forward-looking statements because any such statements involve risks and uncertainties and are subject to change based upon various important factors, including, but not limited to, worldwide economic, financial, political and regulatory conditions; currency and foreign exchange volatility; the health of debt and equity markets, including interest rates, credit quality and spreads, the level of liquidity, future debt issuances including, corporate issuance, residential and commercial mortgage-backed securities and CDO’s backed by residential mortgages, related asset classes and other asset-backed securities; the implementation of an expanded regulatory scheme affecting Standard & Poor’s ratings and services; the level of funding in the education market (both domestically and internationally); the pace of recovery in advertising; continued investment by the construction, automotive, computer and aviation industries; the successful marketing of new products, and the effect of competitive products and pricing.
4	Harold McGraw III Chairman, President and CEO The McGraw-Hill Companies
5	MHP 2Q 2010 results 17.3% increase in 2Q EPS 2Q 2010: $0.61 2Q 2009: $0.52 (includes $0.06 total for a restructuring charge and a loss on a divestiture) 2Q revenue: $1.5 billion, a 0.6% increase Grew 2.7% excluding divestitures of BusinessWeek and Vista Research
6	Financial Services McGraw-Hill Education Information & Media
7	Gaining new clarity on regulatory and legal issues Signing of Dodd-Frank Act a welcomed development No surprises in the legislation We anticipated key provisions becoming law for some time New legislation calls for greater disclosure, accountability and oversight that we feel will increase confidence in ratings
8	How S&P is responding to new regulations Standard & Poor’s has been investing in systems, processes and people to prepare to: Operate effectively in the new regulated environment Produce ratings that are relevant to investors, issuers, and other market participants Compete effectively Comply with regulations in all jurisdictions Manage and mitigate risk
9	Key steps S&P has taken to meet regulatory commitments S&P’s Quality, Criteria, Compliance, Risk (QCCR) framework is key Established control groups independent of the ratings business Invested in staffing, training, technology and processes around the QCCR functions
10	Key steps S&P has taken to meet regulatory commitments Quality: Formal procedures to oversee the integrity, quality and transparency of S&P’s ratings Criteria: Oversees development and approval of criteria for our ratings. Includes new and revised economic stress scenarios Compliance: Monitors compliance with regulations through regular compliance examinations; provides training and guidance on policies and guidelines Risk Control: Assesses various risks that could affect the integrity and quality of the ratings process; assesses feasibility of rating new types of securities
11	Creating a leverageable framework to deal with new regulations S&P spending for QCCR-related items: 2009: $63 million 2010: Expect spending to increase by about $15 million Maintaining operating margin forecast for 2010 despite additional costs Still expect a decline of 100 basis points
12	Changes required by the Dodd-Frank Act Elimination of statutory references in U.S. laws to credit ratings We supported this action Ratings should continue to provide investors a common and transparent language and a fundamental credit risk benchmark
13	Changes required by the Dodd-Frank Act Repeal of rule 436(g) S&P will not consent to the inclusion of its ratings in registration statements and prospectuses S&P will explore mechanisms outside of registration statements to allow ratings to be disseminated S&P ratings on new issues and pre-sale reports are always available online to all market participants
14	Changes required by the Dodd-Frank Act Repeal of the exception to Regulation Fair Disclosure Under this exception issuers could share material non-public information with rating agencies without violating Reg FD S&P is evaluating other options to satisfy Reg FD so it can continue to receive confidential information
15	Assessing the new pleading standard in fraud suits Legislation permits lawsuits against a credit rating agency that knowingly or recklessly failed to conduct a reasonable investigation or obtain reasonable verification of the data it uses to determine a rating The new pleading standard will be tested at some point More litigation would be burdensome and motions to dismiss may be more difficult to achieve S&P will be ready to meet this new challenge
16	What doesn’t change: The fraud liability standard Crucial point: Current fraud liability standard still applies; no change New law changes what plaintiffs are required to allege in order to survive a motion to dismiss at the pleading stage The law does not change what plaintiffs must ultimately prove to a judge or jury in order for the credit rating agency to be held liable This is the same federal securities fraud liability standard to which all market participants are subject
17	Latest developments on litigation front 13 cases have been dismissed outright Five cases have been withdrawn We believe these constitute meaningful precedent Three important legal decisions involving S&P Two involve a subprime case Third relates to S&P’s index business and a grant of summary judgment that thwarts an assault on S&P’s intellectual property rights
18	Latest developments on litigation front Abu Dhabi subprime case Significant new ruling by Judge Scheindlin on June 15 that emphatically denied class action certification to the plaintiffs Judge Scheindlin wrote: “Defendants argue with considerable force against certifying the proposed class. As defendants point out, this action is a collection of a relatively small number of sophisticated institutional investors that acquired one of three different categories of rated notes, at different times, pursuant to different internal requirements and after conducting different due diligence inquires.”
19	Latest developments on litigation front Abu Dhabi subprime case (continued) On July 20th, Judge Scheindlin allowed the plaintiffs to reinstate one of the ten original claims against both the Credit Rating Agencies and Morgan Stanley The Judge concluded that she was mistaken in dismissing the aiding and abetting fraud claims because they are related to the allegations of fraud, the one claim that had been allowed to proceed
20	Latest developments on litigation front Three takeaways from latest development on Abu Dhabi subprime case: The decision does not affect the dismissal of the nine claims which were not based on fraud The court has made no finding of fraud or aiding and abetting fraud. At this early stage, the Court’s ruling must be based on accepting the plaintiffs’ assertions as true Key issue has not changed with restoration of the aiding and abetting claim. Plaintiffs must still prove fraud. We remain confident that neither claim can be sustained
21	Latest developments on litigation front Significant victory in Illinois Circuit Court: Judge William Maki ruled that index providers are entitled to protection against misappropriation of their indices Judge Maki observed: “It bears noting that ISE unabashedly admits it attempted to create a competitive product, the ISE 250, which was an index highly correlated to the S&P 500. After spending a large sum of money developing and promoting options on the ISE 250, ISE discontinued the project which had failed to garner significant trading volume. The court fails to understand how ISE’s failure somehow entitles it to profit for free from the efforts, skills and reputation of the index providers.”
22	2Q 2010 results at Financial Services Revenue +1.6% to $684.8 million S&P Credit Market Services: +0.1% to $457.9 million S&P Investment Services: +4.9% to $227 million Operating Profit (4.2%) to $264.7 million 2Q 2009 reflected a pre-tax loss of $13.8 million from divestiture of Vista Research and a net pre-tax benefit of $0.4 million from restructuring charges Operating Margin 38.7% compared to 41.0% in 2Q 2009
23	2Q 2010 results at Financial Services 2Q started strong but softened in May and June Growing doubts about the pace of economic recovery Uncertainty developed over European sovereigns and bank debt
24	Interest rate spreads: A key gating factor for issuance
25	Surge in U.S. bank loan ratings
26	Tracking worldwide corporate issuance: Softening in 2Q 2010
27	The outlook for maturing U.S. corporate debt
28	The outlook for maturing European corporate debt
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31	S&P rated 95% of the addressable U.S. market in 2009
32	S&P rated 89% of the addressable European market in 2009
33	S&P’s ratings track record: Meeting the test of time
34	S&P’s ratings track record: Meeting the test of time
35	S&P’s ratings track record: Meeting the test of time S&P conducted a comprehensive review of credit ratings—corporate, government, and structured finance debt “Default, Transition, and Recovery: A Global Cross-Asset Report Card of Ratings Performance In Times of Stress” published in June 2010 Demonstrated that except for U.S. RMBS and CDOs, ratings issued in the U.S., Europe, Japan and Australia for most asset classes generally performed as expected In contrast, the performance of ratings for U.S. RMBS and CDOs issued from 2005 through 2007 had been disappointing and below expectations Takeaway: Rated credits withstood the recent financial crisis with results in line with expectations for the economic environment
36	S&P Indices: Finding new ways to grow June 2010: Licensed Vanguard to launch eight new exchange-traded funds targeting growth and value segments of the S&P 500 and growth, value and blend segments of the S&P Midcap 400 and SmallCap 600 May 2010: Licensed seven major European exchange-traded fund sponsors to create and list S&P 500 ETFs on major European exchanges for real-time trading Spring of 2010: Licensed the National Stock Exchange of India to create and list Indian Rupee-denominated futures contracts based on the S&P 500
37	Finding new ways to grow S&P Indices S&P will be introducing new indices in: Commodities Fixed income Equities Strategy Custom Goal: An index for every type of investment
38	2010 outlook for Financial Services Summary New clarity on the regulatory and legal front New requirements are manageable Mid single-digit revenue growth versus previous estimate of high single-digit growth With improvement at S&P Credit Market Services and S&P Investment Services: Operating profit will grow Operating margin will decline approximately 100 basis points
39	Financial Services McGraw-Hill Education Information & Media
40	2Q 2010 segment results at McGraw-Hill Education Revenue +1.8% to $565.0 million School Education Group: (4.0%) to $324.9 million Higher Education, Professional and International Group: +10.8% to $240.1 million Operating Profit $51.6 million Compares to $21.0 million in 2Q 2009 (included $11.6 million net pre-tax restructuring charge) Operating Margin 9.1% vs. 3.8% in 2Q 2009
41	State new adoptions will grow in 2010 despite budget pressures Funding concerns drove reduced purchasing in Spring 2010 California: Fewer districts made new reading, literature, and math purchases South Carolina: Legislature did not provide funding which effectively cancelled the 9–12 math adoption Indiana: Many districts postponed math Limited activity in other states, i.e. Georgia and Oklahoma
42	New forecast for state new adoption market Now estimate 2010 state new adoption market to grow between $825 million and $875 million Versus earlier forecast of $875 million to $925 million Anticipate nearly 70% increase in state new adoption sales Expect market to decline in open territory and fall-off in residual sales Expect 4% to 6% growth for overall el-hi market Down from previous forecast of 6% to 7%
43	Still expect 30% share in state new adoption market Opportunities in Texas, Florida, and California Texas: Will capture about 40% of the K–5 reading and about 18% of 6–12 literature Some orders deferred; will ship in 3Q Florida: Anticipate winning 40% of the 6–8 math market, about 27% of the 9–12 market, and 5% of K–5 market California: Expect to capture more than 50% of K–5 reading with Treasures and Imagine It! programs
44	Expecting gains in smaller adoption states Mississippi: Expect to capture more than 40% of K–12 science West Virginia: Looking to capture more than 60% of K–12 math adoption Indiana and Oklahoma: Winning substantial share—particularly at the 6–12 grade level—despite math postponements Strong sales in non-academic subjects Good capture rates in family and consumer sciences, technical education, and business and computer education
45	Outlook for the testing market Gains in the formative testing market were offset by the planned phase out of statewide custom contracts in Florida and Arizona
46	Significant federal funding is being pumped into el-hi market Increase in federal funding remains a wildcard in this market We are tracking the availability and ultimate use of these funds
47	Federal funding and growth opportunities 2009: American Recovery and Reinvestment Act (ARRA) $11.5 billion available for distribution to the states in 2010 through Phase 2 of the State Fiscal Stabilization Fund Phase 1: Most of the funds were used to save teaching jobs Phase 2: Funds may be used similar to Phase 1
48	Federal funding and growth opportunities 2010: ARRA stimulus is funding: $4 billion in Race to the Top grants $350 million in Common Core Assessment grants $650 million in Investing for Innovation grants $3.5 billion in School Improvement Grants to the states 32 states and the District of Columbia have been approved for these grants, which are earmarked for low-performing schools
49	Potential funding for assessment and instructional materials Race to the Top proposals include formative testing and reporting States winning grants will require these products and services McGraw-Hill products are aligned with ARRA funding: Formative products: Acuity, Yearly ProgressPro, and Writing Roadmap Reporting services: The Parent Network Research-based instructional and intervention products: Number Worlds and Reading Mastery Some revenue from School Improvement and Investing in Innovation grants could begin to show up in 4Q
50	Potential funding for assessment and instructional materials States embracing Common Core Standards for K–12 math, reading, and language arts 23 states have adopted the standards; more expected in August More than 40 states expected to sign on by the end of 2010 Expect an expansion of digital delivery systems for instructional materials, professional development and classroom-level assessment
51	Growing digital opportunities in higher education Revenue is growing at double-digit pace More than 1.8 million registered students and instructors are using McGraw-Hill Connect™ and other homework management products New partnership with Blackboard is increasing access to our suite of digital products Blackboard reaches 70 to 80 percent of the U.S. college and university market Students and faculty will be able to use a single Blackboard log-on to gain access to our content and tools Grades for McGraw-Hill Connect assignments, quizzes and tests will post directly to the Blackboard grade book
52	Outlook for higher education We are off to a solid start this year in the U.S. college and university market Full-year results will be determined by the heavy ordering season we have just entered We expect the U.S. market to grow by 5% to 7% Last fall’s surge in enrollments carried into the spring semester Don’t expect another enrollment surge in the fall
53	New digital initiatives in professional markets Digital products are producing double-digit growth in professional markets We now have 5,000 e-books available Sales accelerated in April following the Apple’s iPad introduction e-book is becoming a staple of the Business-to-Consumer market
54	New digital initiatives in professional markets In the Business-to-Business market Content is accessed on a platform that is augmented with news feeds, video, and searchable information Growing family of Access products offers an array of professional resources in medicine, engineering, and business
55	2010 outlook for McGraw-Hill Education Growth in key education markets in 2010 4% to 6% in the elementary-high school market 5% to 7% in the U.S. college market Segment revenue: Low single-digit growth Down from previous guidance of 6% to 7% given more challenging el-hi market Operating margin: Unchanged from 2009
56	Financial Services McGraw-Hill Education Information & Media
57	2Q 2010 results at Information & Media Revenue (5.1%) to $224.2 million +7.4% excluding divestiture of BusinessWeek Business-to-Business Group: (7.8%) to $198.9 million (+5.6% excluding BusinessWeek) Broadcasting Group: +24.0% to $25.3 million Operating Profit Increased $33.1 million to $47.5 million Compared to $14.4 million in 2Q 2009 (which included a $4.0 million net pre-tax restructuring charge) Operating Margin 21.2% vs. 6.1% in 2Q 2009
58	Revenue growth at Business-to-Business Group Platts: Key driver in B2B’s 2Q results Growing demand for Platts’ data and information produced strong domestic and international growth Platts’ new price assessments for a changing marketplace: World’s first price assessment for crude oil produced from the U.S. Bakken Shale formation Daily price assessments for liquefied natural gas imported to Southwest and Northwest Europe
59	Broadcasting: Improvement in 2Q results 2Q: Revenue increased 24.0% vs. 2Q 2009 Improved national, local and political time sales Pick up in automotive advertising a key factor in national and local Benefitted from June 8th primary in California and the governor’s contest in that state 3Q: Political advertising should be strong Key drivers: August 10th Senate primary in Colorado Spending on propositions
60	Outlook for 2010: Information & Media Summary for 2010: 2009 sale of BusinessWeek having an impact on revenue and operating margin in 2010 Revenue: Expect mid single-digit decline Excluding BusinessWeek divestiture, revenue will increase in the mid single-digit range Operating margin: Expect to rebound into the mid-teens
61	Outlook for 2010: The McGraw-Hill Companies Previous earnings per diluted share guidance for 2010 was $2.55 to $2.65 Due to choppiness in some of our key markets, we now expect to finish the year at the low end of that range
62	Robert J. Bahash Executive Vice President and Chief Financial Officer The McGraw-Hill Companies
63	MHP enters 3Q in a strong financial position Free cash flow is building There is no short-term debt outstanding Long-term debt does not come due until 2012 Started repurchasing shares in 2Q 2010
64	Update on share repurchase program Repurchased 6.5 million shares for a total cost of $186.9 million Average price of $28.76 per share First share repurchases since 3Q 2008 10.6 million shares remain in the 2007 program authorized by the Board of Directors
65	Update on diluted weighted average shares outstanding (WASO) 2Q 2010: 313.2 million shares Relatively flat compared to 2Q 2009 Repurchases offset by issuance related to employee plans and stock price appreciation 3.1 million share decline from 1Q Reflects weighted impact of 2Q share repurchases Fully-diluted shares at end of 2Q 2010: Approximately 310 million shares
66	MHP’s debt position MHP is well capitalized Net debt of $53 million as of June 30 Shifted to a net debt position in 2Q, primarily driven by funding for share repurchases Cash and short-term investments at end of 2Q: $1.145 billion Gross debt: $1.198 billion Comprised of long-term unsecured senior notes No commercial paper outstanding
67	Outlook for free cash flow in 2010 First half 2010: $98 million $61 million increase from first half 2009 Primarily due to improved operating results and a focus on asset management 2010: Now expect free cash flow in the range of $600 million to $650 million Versus previous estimate of $550 million to $600 million Improvement driven by reduced capital investment projections and more favorable working capital 2009 full-year free cash flow was $770 million
68	Outlook for free cash flow in 2010 Majority of free cash flow is generated in the second half of the year Due to the seasonality of education business Guidance implies second half cash flow will roughly be $500 million to $550 million Lower than the prior year due to increased investment and more challenging working capital comparisons
69	Outlook for pension plan funding 2010: We do not anticipate any funding requirements for U.S. pension plan Pension expense is expected to increase roughly $15 million in 2010 versus previous estimate of $20 million
70	2Q expense savings at McGraw-Hill Education 2Q 2010: Adjusted expenses declined 1.8% First half 2010: Adjusted expenses declined 2.1% 3.1% decline at constant currencies Benefited from: 2Q 2009 merging of publishing operations Reduced expenses due to planned phase out of custom contracts in California, Florida and Arizona Savings partially offset by increases in selling and marketing costs in 2Q for robust state new adoption opportunities and continued digital investment
71	2010 expense guidance for McGraw-Hill Education Unchanged operating margin and low single-digit increase in expenses for 2010 Versus previous guidance of a 6% to 7% increase in expenses Implies a mid single-digit increase in expenses in the second half Higher selling and marketing expenses associated with robust state new adoption opportunities Cycling through phase-out of statewide custom contracts Increase in investments in technology and personnel to support digital initiatives
72	2Q expenses at Financial Services 2Q 2010: Adjusted expenses increased 9.4% Increased 10.8%, at constant currencies First half 2010: Adjusted expenses increased 8.5% Driven by increased salaries and occupancy costs, primarily due to international hires, and increased incentive compensation
73	2010 expense guidance for Financial Services Expect 7% to 8% increase Compared to previous guidance of roughly 9% to 10% increase versus 2009 adjusted expense Driven by: Continued investment in fast growing businesses Carry over impact of 2009 hires and planned hires in 2010 Additional investments to support regulatory and compliance efforts Expense guidance assumes approximately $15 million in additional regulatory and compliance initiatives, which will occur primarily in second half of 2010
74	2Q expense savings at Information & Media 2Q 2010: Adjusted expenses declined 18.9% First half 2010: Adjusted expenses declined 19.4% Factors influencing decline: 2Q 2010: Divestiture of BusinessWeek reduced 2Q revenue and expenses by $27.5 million and $38.5 million, respectively, for a positive profit impact of approximately $11 million First half 2010: BusinessWeek divestiture reduced revenue by $55 million and expenses by $78 million, for a positive profit impact of roughly $23 million Benefited from 2009 restructuring actions
75	2010 expense guidance for Information & Media 2010: Expect expenses to decline in the low teens versus 2009 Primarily reflects the $38 million in savings from the divestiture of BusinessWeek
76	2010 outlook for corporate expenses 2Q 2010: $37.6 million $8.3 million increase compared to 2Q 2009 Largely due to increased excess space, increased incentive compensation, and growth in selected support functions First half 2010: $73.4 million $10.6 million increase versus first half 2009 2010: Expect $25 million to $30 million increase Primarily due to increase in vacant space in New York resulting from BusinessWeek divestiture and restructuring actions at McGraw-Hill Education
77	Reduction in 2Q 2010 prepublication investments 2Q 2010: $30.1 million $12.2 million decrease versus 2Q 2009 First half 2010: $60 million $25.1 million decrease versus first half 2009 Decline is largely due to timing; we expect increased investments in second half
78	Outlook for prepublication investments 2010: Now expect $195 million to $205 million Increase of $18 million to $28 million versus 2009 $30 million less than previous estimate of $225 million to $235 million Reflects: Changes in many state adoption call schedules Delayed investments to better align with projected opportunities Continued savings from combining core basal publishing operations with alternative basal and supplemental publishing operations
79	Increasing property and equipment expenditures 2Q 2010: $14.5 million $5.6 million increase versus 2Q 2009 First half 2010: $22.1 million 2010: Expect $90 million to $100 million Expect increased investment in second half Full year compares to $68.5 million in 2009 Largely reflects increase in technology spending
80	Outlook for non-cash items: Amortization of prepublication costs 2Q 2010: $69.4 million $1.7 million decrease versus 2Q 2009 2010: Continue to expect $260 million to $265 million Compared to $270 million in 2009 Reflects lower level of investment in 2009
81	Outlook for non-cash items: Depreciation 2Q 2010: $26.2 million Compared to $28.8 million in 2Q 2009 2010: Continue to expect approximately $115 million Compared to $113 million in 2009
82	Outlook for non-cash items: Amortization of intangibles 2Q 2010: $13 million First half 2010: $23 million 2010: Continue to expect approximately $40 million
83	Outlook for net interest expense 2Q 2010: $20.8 million Compared to $18.5 million in 2Q 2009 and $22.0 million in 1Q 2010 2010: Expect net interest expense to be roughly comparable to 2009, which was $76.9 million
84	Outlook for effective tax rate 2Q 2010: 36.4% Unchanged from 2009 2010: Expect a comparable rate
85	Outlook for unearned revenue in 2010 2Q 2010: $1.1 billion 4.2% increase compared to 2Q 2009 7.0% increase, at constant foreign currency exchange rates and excluding impact of BusinessWeek divestiture, compared to 2Q 2009 Excluding the impact of a deferral of revenue at McGraw-Hill School Education Group, unearned revenue would have grown at approximately 3.5%
86	Outlook for unearned revenue in 2010 Financial Services represents approximately 73% of MHP’s unearned revenue 2Q 2010: Low single-digit growth Strong growth in ratings-related information, S&P Indices and Capital IQ Offset by declines at credit ratings and equity research products 2010: Expect mid single-digit growth
87	2Q 2010 Earnings Call July 23, 2010 Presenters: Harold McGraw III Chairman, President and CEO Robert J. Bahash Executive Vice President and CFO Donald S. Rubin Senior Vice President, Investor Relations
88	2Q 2010 Earnings Call July 23, 2010 Replay Options Internet replay available for one year Go to www.mcgraw-hill.com/investor_relations Click on the Earnings Announcement link under Investor Presentation Webcasts Telephone replay available through August 23, 2010 Domestic: 866-422-7922 International: +1-203-369-0827 No password required