Exhibit 99.2
THOMSON REUTERS CORPORATION
CONSOLIDATED INCOME STATEMENT
(unaudited)
Three months ended June 30, | Six months ended June 30, | |||||||||||||||||
(millions of U.S. dollars, except per share amounts) | Notes | 2010 | 2009 | 2010 | 2009 | |||||||||||||
Revenues | 3,216 | 3,293 | 6,356 | 6,424 | ||||||||||||||
Operating expenses | 5 | (2,377 | ) | (2,452 | ) | (4,789 | ) | (4,819 | ) | |||||||||
Depreciation | (105 | ) | (113 | ) | (243 | ) | (242 | ) | ||||||||||
Amortization of computer software | (133 | ) | (129 | ) | (274 | ) | (269 | ) | ||||||||||
Amortization of other intangible assets | (132 | ) | (124 | ) | (261 | ) | (243 | ) | ||||||||||
Other operating losses, net | 6 | (34 | ) | - | (33 | ) | - | |||||||||||
Operating profit | 435 | 475 | 756 | 851 | ||||||||||||||
Finance costs, net: | ||||||||||||||||||
Net interest expense | 7 | (95 | ) | (104 | ) | (188 | ) | (200 | ) | |||||||||
Other finance income (costs) | 7 | 39 | (34 | ) | (24 | ) | (57 | ) | ||||||||||
Income before tax and equity method investees | 379 | 337 | 544 | 594 | ||||||||||||||
Share of post tax earnings in equity method investees | 3 | - | 3 | 1 | ||||||||||||||
Tax expense | 8 | (79 | ) | (14 | ) | (110 | ) | (83 | ) | |||||||||
Earnings from continuing operations | 303 | 323 | 437 | 512 | ||||||||||||||
(Losses) earnings from discontinued operations, net of tax | (6 | ) | 2 | (6 | ) | 6 | ||||||||||||
Net earnings | 297 | 325 | 431 | 518 | ||||||||||||||
Earnings attributable to: | ||||||||||||||||||
Common shareholders | 290 | 315 | 417 | 505 | ||||||||||||||
Non-controlling interests | 7 | 10 | 14 | 13 | ||||||||||||||
Earnings per share: | 9 | |||||||||||||||||
Basic earnings per share: | ||||||||||||||||||
From continuing operations | $ | 0.36 | $ | 0.38 | $ | 0.51 | $ | 0.60 | ||||||||||
From discontinued operations | (0.01 | ) | - | (0.01) | 0.01 | |||||||||||||
Basic earnings per share | $ | 0.35 | $ | 0.38 | $ | 0.50 | $ | 0.61 | ||||||||||
Diluted earnings per share: | ||||||||||||||||||
From continuing operations | $ | 0.36 | $ | 0.38 | $ | 0.51 | $ | 0.60 | ||||||||||
From discontinued operations | (0.01 | ) | - | (0.01 | ) | - | ||||||||||||
Diluted earnings per share | $ | 0.35 | $ | 0.38 | $ | 0.50 | $ | 0.60 |
The related notes form an integral part of these consolidated financial statements.
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THOMSON REUTERS CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(unaudited)
Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||
(millions of U.S. dollars) | Notes | 2010 | 2009 | 2010 | 2009 | ||||||||||||||
Net earnings | 297 | 325 | 431 | 518 | |||||||||||||||
Other comprehensive (loss) income: | |||||||||||||||||||
Net (loss) gain on cash flow hedges | (110 | ) | 115 | (72 | ) | 73 | |||||||||||||
Net loss (gain) on cash flow hedges transferred to earnings | 81 | (135 | ) | 24 | (110 | ) | |||||||||||||
Foreign currency translation adjustments to equity | (291 | ) | 917 | (622 | ) | 591 | |||||||||||||
Foreign currency translation adjustments to earnings | (2 | ) | (6 | ) | (8 | ) | (14 | ) | |||||||||||
Actuarial losses on defined benefit pension plans, net of tax(1) | 13 | (270 | ) | (54 | ) | (273 | ) | (14 | ) | ||||||||||
Other comprehensive (loss) income | (592 | ) | 837 | (951 | ) | 526 | |||||||||||||
Total comprehensive (loss) income | (295 | ) | 1,162 | (520 | ) | 1,044 | |||||||||||||
Comprehensive (loss) income for the period attributable to: | |||||||||||||||||||
Common shareholders | (302 | ) | 1,152 | (534 | ) | 1,031 | |||||||||||||
Non-controlling interests | 7 | 10 | 14 | 13 |
(1) | The related tax benefit was $136 million and $22 million for the three months ended June 30, 2010 and 2009, respectively, and $137 million and $5 million for the six months ended June 30, 2010 and 2009, respectively. |
The related notes form an integral part of these consolidated financial statements.
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THOMSON REUTERS CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(unaudited)
(millions of U.S. dollars) | Notes | June 30, 2010 | December 31, 2009 | ||||||||
ASSETS | |||||||||||
Cash and cash equivalents | 508 | 1,111 | |||||||||
Trade and other receivables | 1,620 | 1,742 | |||||||||
Other financial assets | 10 | 122 | 76 | ||||||||
Prepaid expenses and other current assets | 783 | 734 | |||||||||
Current assets | 3,033 | 3,663 | |||||||||
Computer hardware and other property, net | 1,434 | 1,546 | |||||||||
Computer software, net | 1,532 | 1,495 | |||||||||
Other identifiable intangible assets, net | 8,412 | 8,694 | |||||||||
Goodwill | 17,961 | 18,130 | |||||||||
Other financial assets | 10 | 314 | 383 | ||||||||
Other non-current assets | 11 | 617 | 649 | ||||||||
Deferred tax | 46 | 13 | |||||||||
Total assets | 33,349 | 34,573 | |||||||||
LIABILITIES AND EQUITY | |||||||||||
Liabilities | |||||||||||
Current indebtedness | 10 | 648 | 782 | ||||||||
Payables, accruals and provisions | 12 | 2,367 | 2,651 | ||||||||
Deferred revenue | 1,211 | 1,187 | |||||||||
Other financial liabilities | 10 | 191 | 92 | ||||||||
Current liabilities | 4,417 | 4,712 | |||||||||
Long-term indebtedness | 10 | 6,573 | 6,821 | ||||||||
Provisions and other non-current liabilities | 13 | 2,268 | 1,878 | ||||||||
Other financial liabilities | 10 | 75 | 42 | ||||||||
Deferred tax | 1,603 | 1,785 | |||||||||
Total liabilities | 14,936 | 15,238 | |||||||||
Equity | |||||||||||
Capital | 14 | 10,276 | 10,177 | ||||||||
Retained earnings | 10,221 | 10,561 | |||||||||
Accumulated other comprehensive loss | (2,149 | ) | (1,471 | ) | |||||||
Total shareholders’ equity | 18,348 | 19,267 | |||||||||
Non-controlling interests | 65 | 68 | |||||||||
Total equity | 18,413 | 19,335 | |||||||||
Total liabilities and equity | 33,349 | 34,573 |
Contingencies (note 17)
The related notes form an integral part of these consolidated financial statements.
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THOMSON REUTERS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOW
(unaudited)
Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||
(millions of U.S. dollars) | Notes | 2010 | 2009 | 2010 | 2009 | ||||||||||||||
Cash provided by (used in): | |||||||||||||||||||
OPERATING ACTIVITIES | |||||||||||||||||||
Net earnings | 297 | 325 | 431 | 518 | |||||||||||||||
Adjustments for: | |||||||||||||||||||
Depreciation | 105 | 113 | 243 | 242 | |||||||||||||||
Amortization of computer software | 133 | 129 | 274 | 269 | |||||||||||||||
Amortization of other intangible assets | 132 | 124 | 261 | 243 | |||||||||||||||
Deferred tax | (28 | ) | (75 | ) | (66 | ) | (66 | ) | |||||||||||
Loss from redemption of debt securities | 7 | - | - | 62 | - | ||||||||||||||
Other | 15 | 82 | 204 | 162 | 259 | ||||||||||||||
Changes in working capital and other items | 15 | 167 | 186 | (264 | ) | (208 | ) | ||||||||||||
Operating cash flows from continuing operations | 888 | 1,006 | 1,103 | 1,257 | |||||||||||||||
Operating cash flows from discontinued operations | - | - | (6 | ) | - | ||||||||||||||
Net cash provided by operating activities | 888 | 1,006 | 1,097 | 1,257 | |||||||||||||||
INVESTING ACTIVITIES | |||||||||||||||||||
Acquisitions, less cash acquired | 16 | (415 | ) | (25 | ) | (478 | ) | (45 | ) | ||||||||||
Proceeds from other disposals | 4 | 3 | 18 | 3 | |||||||||||||||
Capital expenditures, less proceeds from disposals | (248 | ) | (268 | ) | (462 | ) | (466 | ) | |||||||||||
Other investing activities | 4 | - | 3 | (1 | ) | ||||||||||||||
Investing cash flows from continuing operations | (655 | ) | (290 | ) | (919 | ) | (509 | ) | |||||||||||
Investing cash flows from discontinued operations | - | - | - | 22 | |||||||||||||||
Net cash used in investing activities | (655 | ) | (290 | ) | (919 | ) | (487 | ) | |||||||||||
FINANCING ACTIVITIES | |||||||||||||||||||
Proceeds from debt | 10 | 147 | - | 638 | 609 | ||||||||||||||
Repayments of debt | 10 | (442 | ) | (189 | ) | (913 | ) | (192 | ) | ||||||||||
Net (repayments) borrowings under short-term loan facilities | (14 | ) | 2 | (14 | ) | (8 | ) | ||||||||||||
Dividends paid on preference shares | - | - | (1 | ) | (1 | ) | |||||||||||||
Dividends paid on common shares | 14 | (232 | ) | (226 | ) | (463 | ) | (454 | ) | ||||||||||
Other financing activities | - | (3 | ) | (6 | ) | (5 | ) | ||||||||||||
Net cash used in financing activities | (541 | ) | (416 | ) | (759 | ) | (51 | ) | |||||||||||
Translation adjustments on cash and cash equivalents | (12 | ) | 21 | (22 | ) | 12 | |||||||||||||
(Decrease) increase in cash and cash equivalents | (320 | ) | 321 | (603 | ) | 731 | |||||||||||||
Cash and cash equivalents at beginning of period | 828 | 1,251 | 1,111 | 841 | |||||||||||||||
Cash and cash equivalents at end of period | 508 | 1,572 | 508 | 1,572 | |||||||||||||||
Supplemental cash flow information is provided in note 15 | |||||||||||||||||||
Interest paid | (55 | ) | (73 | ) | (204 | ) | (230 | ) | |||||||||||
Interest received | 3 | 4 | 4 | 7 | |||||||||||||||
Income taxes (paid) refunded | (33 | ) | 9 | (98 | ) | (19 | ) |
Amounts paid and received for interest and taxes are reflected as operating cash flows in the consolidated statement of cash flow. Interest paid is net of debt related hedges.
The related notes form an integral part of these consolidated financial statements.
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THOMSON REUTERS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(unaudited)
(millions of U.S. dollars) | Stated share capital | Contributed surplus | Total capital | Retained earnings | Unrecognized gain (loss) on cash flow hedges | Foreign currency translation adjustments | Total accumulated other comprehensive (loss) income (“AOCI”) | Non-controlling interests | Total | |||||||||||||||||||||||||||
Balance, December 31, 2009 | 9,957 | 220 | 10,177 | 10,561 | (33 | ) | (1,438 | ) | (1,471 | ) | 68 | 19,335 | ||||||||||||||||||||||||
Comprehensive income (loss) (1) | - | - | - | 144 | (48 | ) | (630 | ) | (678 | ) | 14 | (520 | ) | |||||||||||||||||||||||
Distributions to non-controlling interest | - | - | - | - | - | - | - | (17 | ) | (17 | ) | |||||||||||||||||||||||||
Dividends declared on preference shares | - | - | - | (1 | ) | - | - | - | - | (1 | ) | |||||||||||||||||||||||||
Dividends declared on common shares | - | - | - | (483 | ) | - | - | - | - | (483 | ) | |||||||||||||||||||||||||
Shares issued under Dividend Reinvestment Plan (“DRIP”) | 20 | - | 20 | - | - | - | - | - | 20 | |||||||||||||||||||||||||||
Effect of stock compensation plans | 47 | 32 | 79 | - | - | - | - | - | 79 | |||||||||||||||||||||||||||
Balance, June 30, 2010 | 10,024 | 252 | 10,276 | 10,221 | (81 | ) | (2,068 | ) | (2,149 | ) | 65 | 18,413 | ||||||||||||||||||||||||
(millions of U.S. dollars) | Stated share capital | Contributed surplus | Total capital | Retained earnings | Unrecognized gain (loss) on cash flow hedges | Foreign currency translation adjustments | AOCI | Non-controlling interests | Total | |||||||||||||||||||||||||||
Balance, December 31, 2008 | 3,050 | 6,984 | 10,034 | 10,650 | 21 | (2,289 | ) | (2,268 | ) | 72 | 18,488 | |||||||||||||||||||||||||
Comprehensive income (loss) (2) | - | - | - | 491 | (37 | ) | 577 | 540 | 13 | 1,044 | ||||||||||||||||||||||||||
Distributions to non-controlling interest | - | - | - | - | - | - | - | (15 | ) | (15 | ) | |||||||||||||||||||||||||
Dividends declared on preference shares | - | - | - | (1 | ) | - | - | - | - | (1 | ) | |||||||||||||||||||||||||
Dividends declared on common shares | - | - | - | (462 | ) | - | - | - | - | (462 | ) | |||||||||||||||||||||||||
Shares issued under DRIP | 8 | - | 8 | - | - | - | - | - | 8 | |||||||||||||||||||||||||||
Effect of stock compensation plans | 43 | 14 | 57 | - | - | - | - | - | 57 | |||||||||||||||||||||||||||
Balance, June 30, 2009 | 3,101 | 6,998 | 10,099 | 10,678 | (16 | ) | (1,712 | ) | (1,728 | ) | 70 | 19,119 |
(1) | Retained earnings for the six months ended June 30, 2010 includes actuarial losses of $273 million, net of tax. |
(2) | Retained earnings for the six months ended June 30, 2009 includes actuarial losses of $14 million, net of tax. |
The related notes form an integral part of these consolidated financial statements.
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THOMSON REUTERS CORPORATION
Notes to Consolidated Financial Statements (unaudited)
(unless otherwise stated, all amounts are in millions of U.S. dollars)
Note 1: Business description and basis of preparation
General business description
Thomson Reuters Corporation (the “Company” or “Thomson Reuters”) is an Ontario, Canada corporation with common shares listed on the Toronto Stock Exchange (“TSX”) and the New York Stock Exchange (“NYSE”) and Series II preference shares listed on the TSX.
Basis of preparation
The unaudited consolidated interim financial statements (“interim financial statements”) were prepared using the same accounting policies and methods as those used in the Company’s consolidated financial statements for the year ended December 31, 2009, except as described in note 2. The interim financial statements are in compliance with International Accounting Standard 34, Interim Financial Reporting (“IAS 34”). Accordingly, certain information and footnote disclosure normally included in annual financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board ("IASB"), have been omitted or condensed. The preparation of financial statements in accordance with IAS 34 requires the use of certain critical accounting estimates. It also requires management to exercise judgment in applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements have been set out in note 2 of the Company’s consolidated financial statements for the year ended December 31, 2009. These interim financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2009, which are included in the Company’s 2009 annual report.
References to “$” are to U.S. dollars and references to “C$” are to Canadian dollars.
Note 2: Changes in accounting policies
Pronouncements effective January 1, 2010
IAS 21, The Effects of Changes in Foreign Exchange Rates
Effective January 1, 2010, the Company adopted an amendment to IAS 21, The Effects of Changes in Foreign Exchange Rates, as a consequential amendment of IAS 27 (2008), Consolidated and Separate Financial Statements. The amendment requires that accumulated foreign exchange differences are reclassified from equity to the income statement upon loss of control, significant influence or joint control of an entity. Additionally, the amendment provides guidance on the reclassification of accumulated foreign exchange differences to the income statement when a partial disposal of an interest in a foreign entity occurs. As a result of this new guidance, the Company no longer reclassifies accumulated foreign exchange differences from equity to the income statement upon settlement of intercompany loan balances when there is no change in the Company’s ownership interest in the subsidiary.
IFRS 3, Revision to IFRS 3, Business Combinations
Effective January 1, 2010, the Company adopted IFRS 3, Revision to IFRS 3, Business Combinations. Most significantly, the revised standard requires:
· | directly attributable transaction costs to be expensed rather than included in the acquisition purchase price; |
· | the measurement of contingent consideration at fair value on the acquisition date, with subsequent changes in the fair value recorded through the income statement; and |
· | that upon gaining control in a step acquisition, an entity re-measures its existing ownership interest to fair value through the income statement. |
The revised standard did not have a material impact on the Company’s business combination-related activity for the six months ended June 30, 2010.
Certain other interpretations, amendments and improvements to existing standards were issued by the IASB or International Financial Reporting Interpretations Committee (“IFRIC”) that are mandatory for accounting periods beginning after January 1, 2010 or later periods. There was no material impact to the Company’s net earnings or financial position as at and for the six months ended June 30, 2010 as a result of adopting these pronouncements. See note 3 of the Company’s consolidated financial statements for the year ended December 31, 2009 for additional information.
33
Pronouncements effective January 1, 2011
Certain pronouncements were issued by the IASB or IFRIC that are mandatory for accounting periods beginning after January 1, 2011 or later periods. Many of these updates are not applicable or are not consequential to the Company and have been excluded from the table below. The following pronouncements are being assessed to determine their impact on the Company’s results and financial position.
Improvements to IFRS | The IASB’s improvements to IFRS contain 7 amendments that result in accounting changes for presentation, recognition or measurement purposes. The effective date for all of the amendments is January 1, 2011 although early application is permitted. Transitional requirements are set out on a standard by standard basis. | The most significant features of the IASB’s annual improvements project published in May 2010 are included under the specific revisions to standards discussed below. | ||
IFRS 3 | Revision to IFRS 3, Business Combinations | Clarification on the following areas: | ||
· | contingent consideration arrangements arising from business combinations with acquisition dates preceding the application of the new IFRS 3 (as revised in 2008) should continue to be accounted for in accordance with the previous IFRS 3 (as issued in 2004). | |||
· | the choice of measuring non-controlling interests at fair value or at the proportionate share of the acquiree’s net assets applies only to instruments that represent present ownership interests and entitle their holders to a proportionate share of the net assets in the event of liquidation. All other components of non-controlling interest are measured at fair value unless another measurement basis is required by IFRS. | |||
· | application guidance relating to the accounting for share-based payments in IFRS 3 applies to all share-based payment transactions that are part of a business combination, including un-replaced awards (i.e., unexpired awards over acquiree shares that remain outstanding rather than being replaced by the acquirer) and voluntarily replaced share-based payment awards. | |||
IFRS 7 | Amendment to IFRS7, Financial Instruments: Disclosure | Multiple clarifications related to the disclosure of financial instruments. | ||
IAS 1 | Amendment to IAS 1, Presentation of financial statements | Entities may present the analysis of the components of other comprehensive income either in the statement of changes in equity or within the notes to the financial statements. | ||
IAS 27 | Amendment to IAS 27, Consolidated and Separate Financial Statements | The 2008 revisions to this standard resulted in consequential amendments to IAS 21, The Effects of Changes in Foreign Exchange Rates, IAS 28, Investments in Associates, and IAS 31, Interests in Joint Ventures. IAS 27 now provides that these amendments are to be applied prospectively. | ||
IAS 34 | Amendment to IAS 34, Interim Financial Reporting | The amendments place greater emphasis on the disclosure principles for interim financial reporting involving significant events and transactions, including changes to fair value measurements and the need to update relevant information from the most recent annual report. |
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Note 3: Segment information
The Company provides intelligent information to businesses and professionals. Its offerings combine industry expertise with innovative technology to deliver critical information to decision makers.
The Company is organized in two divisions: Markets, which consists of financial and media businesses, and Professional, which is comprised of the Legal, Tax & Accounting, and Healthcare & Science segments. The reportable segments are strategic business groups that offer products and services to target markets, as described below. The accounting policies applied by the segments are the same as those applied by the Company.
Legal
The Legal segment provides critical information, decision support tools and services to legal, intellectual property, compliance, business and government professionals throughout the world. The Legal segment offers a broad range of products and services that utilize its electronic databases of legal, regulatory and business information.
Tax & Accounting
The Tax & Accounting segment provides technology and information solutions, as well as integrated tax compliance software and services, to accounting, tax and corporate finance professionals in accounting firms, corporations, law firms and government.
Healthcare & Science
The Healthcare & Science segment provides information, tools, analytics and decision support solutions that help organizations improve healthcare efficiency and quality and speed scientific discovery.
Markets
The Markets segment serves financial services and corporate professionals globally, with Reuters Media serving a broader professional and consumer media market. The Markets segment delivers intelligent information, supporting technology and infrastructure to a diverse set of customers. These solutions are designed to help its customers generate superior returns, improve risk management, increase access to liquidity and create efficient, reliable infrastructures in increasingly global, electronic and multi-asset class markets.
Three months ended June 30, 2010 | Three months ended June 30, 2009 | |||||||||||||||
Reportable segments | Revenues | Segment Operating Profit | Revenues | Segment Operating Profit | ||||||||||||
Legal | 936 | 306 | 934 | 341 | ||||||||||||
Tax & Accounting | 243 | 32 | 225 | 36 | ||||||||||||
Healthcare & Science | 214 | 48 | 228 | 53 | ||||||||||||
Professional | 1,393 | 386 | 1,387 | 430 | ||||||||||||
Markets | 1,825 | 319 | 1,908 | 424 | ||||||||||||
Segment totals | 3,218 | 705 | 3,295 | 854 | ||||||||||||
Corporate & Other (1) | - | (104 | ) | - | (255 | ) | ||||||||||
Eliminations | (2 | ) | - | (2 | ) | - | ||||||||||
Total | 3,216 | 601 | 3,293 | 599 |
Six months ended June 30, 2010 | Six months ended June 30, 2009 | |||||||||||||||
Reportable segments | Revenues | Segment Operating Profit | Revenues | Segment Operating Profit | ||||||||||||
Legal | 1,761 | 516 | 1,766 | 582 | ||||||||||||
Tax & Accounting | 505 | 67 | 470 | 77 | ||||||||||||
Healthcare & Science | 423 | 92 | 429 | 78 | ||||||||||||
Professional | 2,689 | 675 | 2,665 | 737 | ||||||||||||
Markets | 3,671 | 642 | 3,762 | 761 | ||||||||||||
Segment totals | 6,360 | 1,317 | 6,427 | 1,498 | ||||||||||||
Corporate & Other (1) | - | (267 | ) | - | (404 | ) | ||||||||||
Eliminations | (4 | ) | - | (3 | ) | - | ||||||||||
Total | 6,356 | 1,050 | 6,424 | 1,094 |
(1) | Corporate & Other operating profit includes corporate expenses, certain share-based compensation costs, certain fair value adjustments and integration programs expenses (including legacy transformational initiatives). |
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In accordance with IFRS 8, Operating Segments, the Company discloses information about its reportable segments based upon the measures used by management in assessing the performance of those reportable segments. The Company uses segment operating profit to measure the operating performance of its segments. The costs of centralized support services such as technology, accounting, procurement, legal, human resources and strategy are allocated to each segment based on usage or other applicable measures. Segment operating profit is defined as operating profit before (i) amortization of other intangible assets; (ii) other operating gains and losses; and (iii) asset impairment charges. Management uses this measure because amortization of other intangible assets, other operating gains and losses and asset impairment charges are not considered to be controllable operating activities for purposes of assessing the current performance of the segments. While in accordance with IFRS, the Company’s definition of segment operating profit may not be comparable to that of other companies.
The following table reconciles segment operating profit per the reportable segment information to operating profit per the consolidated income statement. Amounts below operating profit are not allocated to the segments.
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Segment operating profit | 601 | 599 | 1,050 | 1,094 | ||||||||||||
Amortization of other intangible assets | (132 | ) | (124 | ) | (261 | ) | (243 | ) | ||||||||
Other operating losses, net | (34 | ) | - | (33 | ) | - | ||||||||||
Operating profit | 435 | 475 | 756 | 851 |
Note 4: Seasonality
The Company’s consolidated revenues and operating profits do not tend to be significantly impacted by seasonality as it records a large portion of its revenues ratably over a contract term and its costs, excluding integration programs expenses, are generally incurred evenly throughout the year. However, non-recurring revenues can cause changes in the Company’s performance from quarter to consecutive quarter. Additionally, the release of certain print-based offerings can be seasonal as can certain product releases for the regulatory markets, which tend to be concentrated at the end of the year.
Note 5: Operating expenses
The components of operating expenses include the following:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Salaries, commission and allowances | 1,183 | 1,155 | 2,354 | 2,301 | ||||||||||||
Share-based payments | 34 | 30 | 60 | 57 | ||||||||||||
Post-employment benefits | 50 | 59 | 105 | 111 | ||||||||||||
Total staff costs | 1,267 | 1,244 | 2,519 | 2,469 | ||||||||||||
Goods and services (1) | 644 | 611 | 1,275 | 1,227 | ||||||||||||
Data | 239 | 253 | 483 | 509 | ||||||||||||
Telecommunications | 153 | 136 | 312 | 291 | ||||||||||||
Real estate | 110 | 121 | 227 | 235 | ||||||||||||
Fair value adjustments (2) | (36 | ) | 87 | (27 | ) | 88 | ||||||||||
Total operating expenses | 2,377 | 2,452 | 4,789 | 4,819 |
(1) | Goods and services include professional fees, consulting services, contractors, technology-related expenses, selling and marketing, and other general and administrative costs. |
(2) | Fair value adjustments primarily represent the impact from embedded derivatives. |
In 2008, the Company commenced integration programs directed at integrating the acquired Reuters business with the Thomson Financial business and capturing cost synergies across the new organization, including shared services and corporate functions. The Company also incurred expenses for legacy transformational initiatives pursued prior to the acquisition. Because these are corporate initiatives, incremental expenses directed at capturing cost savings are reported within the Corporate & Other segment. The various initiatives are expected to be completed in 2011. The Company will continue to incur restructuring costs, including severance and losses on lease terminations and other cancellations of contracts until the various initiatives are completed.
36
The total expenses incurred for the integration programs were as follows:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Integration programs expenses | 90 | 107 | 187 | 195 |
The costs incurred primarily related to severance, consulting expenses and technology initiatives as well as branding expenses in the 2009 period. Severance costs were included within the “Salaries, commissions and allowances” component of “Operating expenses”. Consulting, branding and technology-related expenses were included within the “Goods and services” component of “Operating expenses”.
Note 6: Other operating losses, net
Other operating losses, net, were $34 million and $33 million for the three and six months ended June 30, 2010, respectively. These amounts were principally comprised of a settlement in connection with a vendor dispute.
Note 7: Finance costs, net
The components of finance costs, net, include interest (expense) income and other finance (costs) income as follows:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Interest expense: | ||||||||||||||||
Debt | (107 | ) | (115 | ) | (216 | ) | (220 | ) | ||||||||
Derivative financial instruments - hedging activities | 13 | 9 | 27 | 16 | ||||||||||||
Other | (8 | ) | (2 | ) | (11 | ) | (3 | ) | ||||||||
Fair value gains (losses) on financial instruments: | ||||||||||||||||
Debt | 11 | 11 | 20 | 9 | ||||||||||||
Cash flow hedges, transfer from equity | (81 | ) | 135 | (24 | ) | 110 | ||||||||||
Fair value hedges | (107 | ) | 89 | (133 | ) | 33 | ||||||||||
Net foreign exchange gains (losses) on debt | 177 | (235 | ) | 137 | (152 | ) | ||||||||||
(102 | ) | (108 | ) | (200 | ) | (207 | ) | |||||||||
Interest income | 7 | 4 | 12 | 7 | ||||||||||||
Net interest expense | (95 | ) | (104 | ) | (188 | ) | (200 | ) |
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net gains (losses) due to changes in foreign currency exchange rates | 13 | (29 | ) | 8 | (37 | ) | ||||||||||
Net gains (losses) on derivative instruments | 24 | (4 | ) | 28 | (19 | ) | ||||||||||
Loss from redemption of debt securities | - | - | (62 | ) | - | |||||||||||
Other | 2 | (1 | ) | 2 | (1 | ) | ||||||||||
Other finance income (costs) | 39 | (34 | ) | (24 | ) | (57 | ) |
Net gains (losses) due to changes in foreign currency exchange rates
In all periods, net gains or net losses were realized from changes in foreign currency exchange rates on certain intercompany funding arrangements. Foreign currency gains and losses on intercompany arrangements are recognized in earnings when such arrangements are not considered permanent in nature.
Net gains (losses) on derivative instruments
In all periods, net gains or net losses were recognized on derivative instruments related to freestanding derivatives and ineffectiveness on certain hedging derivative instruments.
Loss from redemption of debt securities
This amount represents the loss incurred in connection with the early redemption of debt securities. The loss primarily represents premiums paid for early extinguishment and non-cash write-offs of transaction costs and discounts included in the carrying value of debt. See note 10 for additional information.
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Note 8: Taxation
Tax expense for the three and six months ended June 30, 2010 and 2009 reflected the mix of taxing jurisdictions in which pre-tax profits and losses were recognized. However, because the geographical mix of pre-tax profits and losses in interim periods may not be reflective of full year results, this distorts the Company’s interim period effective tax rate.
Note 9: Earnings per share
Basic earnings per share was calculated by dividing earnings attributable to common shares less dividends declared on preference shares by the sum of the weighted average number of shares outstanding during the period plus vested deferred share units (“DSUs”) and vested equity-based performance restricted share units (“PRSUs”). DSUs represent the amount of common shares that certain employees have elected to receive in the future in lieu of cash compensation.
Diluted earnings per share were calculated using the denominator of the basic calculation described above, adjusted to include the potentially dilutive effect of outstanding stock options and other securities. The denominator is: (1) increased by the total number of additional common shares that would have been issued by the Company assuming exercise of all stock options with exercise prices below the average market price for the period; and (2) decreased by the number of shares that the Company could have repurchased if it had used the assumed proceeds from the exercise of stock options to repurchase them on the open market at the average share price for the year. Other securities are comprised of unvested time-based restricted share units.
Earnings used in determining consolidated earnings per share and earnings per share from continuing operations are consolidated net earnings reduced by (1) earnings attributable to non-controlling interests and (2) dividends declared on preference shares as presented below:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net earnings | 297 | 325 | 431 | 518 | ||||||||||||
Less: Earnings attributable to non-controlling interests | (7 | ) | (10 | ) | (14 | ) | (13 | ) | ||||||||
Dividends declared on preference shares | - | - | (1 | ) | (1 | ) | ||||||||||
Earnings used in consolidated earnings per share | 290 | 315 | 416 | 504 | ||||||||||||
Less: Losses (earnings) from discontinued operations, net of tax | 6 | (2 | ) | 6 | (6 | ) | ||||||||||
Earnings used in earnings per share from continuing operations | 296 | 313 | 422 | 498 |
Earnings used in determining earnings per share from discontinued operations are the earnings from discontinued operations as reported within the income statement.
The weighted average number of shares outstanding, as well as a reconciliation of the weighted average number of shares outstanding used in the basic earnings per share computation to the weighted average number of shares outstanding used in the diluted earnings per share computation, is presented below:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Weighted average number of shares outstanding | 831,148,735 | 828,598,424 | 830,672,197 | 828,171,500 | ||||||||||||
Vested DSUs and PRSUs | 813,675 | 467,143 | 757,061 | 519,808 | ||||||||||||
Basic | 831,962,410 | 829,065,567 | 831,429,258 | 828,691,308 | ||||||||||||
Effect of stock and other incentive plans | 3,864,879 | 7,427,837 | 3,906,034 | 6,885,899 | ||||||||||||
Diluted | 835,827,289 | 836,493,404 | 835,335,292 | 835,577,207 |
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Note 10: Financial instruments
Financial assets and liabilities
Financial assets and liabilities in the statement of financial position were as follows:
June 30, 2010 | Cash, loans and receivables | Assets/ (liabilities) at fair value through earnings | Derivatives used for hedging | Available for sale | Other financial liabilities | Total | ||||||||||||||||||
Cash and cash equivalents | 508 | - | - | - | - | 508 | ||||||||||||||||||
Trade and other receivables | 1,620 | - | - | - | - | 1,620 | ||||||||||||||||||
Other financial assets – current | 28 | 88 | 6 | - | - | 122 | ||||||||||||||||||
Other financial assets – non-current | 155 | - | 143 | 16 | - | 314 | ||||||||||||||||||
Current indebtedness | - | - | - | - | (648 | ) | (648 | ) | ||||||||||||||||
Trade payables (see note 12) | - | - | - | - | (329 | ) | (329 | ) | ||||||||||||||||
Accruals (see note 12) | - | - | - | - | (1,564 | ) | (1,564 | ) | ||||||||||||||||
Other financial liabilities – current | - | (48 | ) | (128 | ) | - | (15 | ) | (191 | ) | ||||||||||||||
Long term indebtedness | - | - | - | - | (6,573 | ) | (6,573 | ) | ||||||||||||||||
Other financial liabilities ��� non current | - | - | (75 | ) | - | - | (75 | ) | ||||||||||||||||
Total | 2,311 | 40 | (54 | ) | 16 | (9,129 | ) | (6,816 | ) |
December 31, 2009 | Cash, loans and receivables | Assets/ (liabilities) at fair value through earnings | Derivatives used for hedging | Available for sale | Other financial liabilities | Total | ||||||||||||||||||
Cash and cash equivalents | 1,111 | - | - | - | - | 1,111 | ||||||||||||||||||
Trade and other receivables | 1,742 | - | - | - | - | 1,742 | ||||||||||||||||||
Other financial assets – current | 44 | 12 | 20 | - | - | 76 | ||||||||||||||||||
Other financial assets – non-current | 163 | - | 199 | 21 | - | 383 | ||||||||||||||||||
Current indebtedness | - | - | - | - | (782 | ) | (782 | ) | ||||||||||||||||
Trade payables (see note 12) | - | - | - | - | (422 | ) | (422 | ) | ||||||||||||||||
Accruals (see note 12) | - | - | - | - | (1,685 | ) | (1,685 | ) | ||||||||||||||||
Other financial liabilities – current | - | (26 | ) | (41 | ) | - | (25 | ) | (92 | ) | ||||||||||||||
Long term indebtedness | - | - | - | - | (6,821 | ) | (6,821 | ) | ||||||||||||||||
Other financial liabilities – non current | - | - | (42 | ) | - | - | (42 | ) | ||||||||||||||||
Total | 3,060 | (14 | ) | 136 | 21 | (9,735 | ) | (6,532 | ) |
Debt-related activity
Six months ended June 30, 2010
In March and April 2010, the Company repurchased its $700 million principal amount of outstanding 6.20% notes due January 2012. The repurchase of all the notes was funded by the net proceeds from the March 2010 issuance of $500 million principal amount of 5.85% notes due 2040 and from available cash resources.
The Company has issued approximately $1.6 billion principal amount of debt securities under its existing debt shelf prospectus, which expires in January 2011. Approximately $1.4 billion of additional debt securities may be issued under the prospectus.
The Company maintains a $2.5 billion unsecured revolving credit facility that expires in August 2012. The facility may be used to provide liquidity in connection with the Company’s commercial paper program and for general corporate purposes. In June 2010, the Company borrowed and repaid $147 million under the revolving credit facility. There were no amounts drawn against this credit facility as of June 30, 2010.
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Six months ended June 30, 2009
In March 2009, the Company issued C$750 million principal amount of 6.0% notes due in March 2016. Upon completion of this offering, the Company entered into two fixed-to-fixed cross-currency swap agreements which converted the notes to $610 million principal amount at an interest rate of 6.915%. These swaps were designated as cash flow hedges. The net proceeds from this issuance were used to repay the following notes upon their maturity:
· | C$250 million principal amount of 4.50% notes, in June 2009; |
· | $200 million principal amount of 4.25% notes, in August 2009; and |
· | C$300 million principal amount of 4.35% notes, in December 2009. |
Foreign exchange risk management
The Company’s operations are diverse and global in nature and therefore expose it to foreign exchange risk related to cash flows in currencies other than the U.S. dollar, in particular to the British pound sterling and the Euro.
In 2010, the Company implemented a program to mitigate its foreign exchange exposure by entering into a series of foreign exchange contracts to purchase or sell certain currencies in the future at fixed amounts. These instruments have not been designated as hedges for accounting purposes. As such, gains of $26 million and $28 million reflecting the change in the fair value of these contracts were recorded within “Other finance income (costs)” in the income statement for the three and six months ended June 30, 2010, respectively. The cumulative notional amounts of contracts outstanding at June 30, 2010 were $390 million to sell Euros, $274 million to buy British pounds sterling and $108 million to sell Japanese yen. These arrangements settle at various dates over the next 12 months and had a net asset fair value of $26 milli on at June 30, 2010, which was included within “Other financial assets – current” and “Other financial liabilities-current” in the statement of financial position. See note 20 of the Company’s 2009 annual financial statements for additional information.
Note 11: Other non-current assets
June 30, 2010 | December 31, 2009 | |||||||
Net defined benefit plan surpluses | 13 | 64 | ||||||
Cash surrender value of life insurance policies | 263 | 259 | ||||||
Investments in equity method investees | 315 | 298 | ||||||
Other non-current assets | 26 | 28 | ||||||
Total other non-current assets | 617 | 649 |
Note 12: Payables, accruals and provisions
June 30, 2010 | December 31, 2009 | |||||||
Trade payables | 329 | 422 | ||||||
Accruals | 1,564 | 1,685 | ||||||
Provisions | 179 | 277 | ||||||
Other current liabilities | 295 | 267 | ||||||
Total payables, accruals and provisions | 2,367 | 2,651 |
Note 13: Provisions and other non-current liabilities
June 30, 2010 | December 31, 2009 | |||||||
Net defined benefit plan obligations | 1,190 | 833 | ||||||
Deferred compensation and employee incentives | 193 | 192 | ||||||
Provisions | 121 | 144 | ||||||
Unfavorable contract liability | 237 | 290 | ||||||
Uncertain tax positions | 425 | 332 | ||||||
Other non-current liabilities | 102 | 87 | ||||||
Total provisions and other non-current liabilities | 2,268 | 1,878 |
Net defined benefit plan obligations increased due to lower discount rates applied to benefit obligations and a decline in the fair values of plan assets.
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Note 14: Capital
In September 2009, Thomson Reuters completed the unification of its dual listed company (“DLC”) structure that it previously operated under from April 2008 with shareholders in two listed entities, the Company and Thomson Reuters PLC. As a result of the unification, the Company is now the sole parent company. Unification had no impact on the number of shares outstanding, as Thomson Reuters PLC ordinary shares and Thomson Reuters PLC American Depositary Shares were exchanged for an equivalent number of common shares of the Company. Additionally, unification had no impact on total capital as the carrying values of the then outstanding Thomson Reuters PLC stated share capital and contributed surplus were transferred into the stated share capital of the Company.
In March 2010, the Company completed an intercompany reorganization that included the amalgamation of the Company and Thomson Reuters UK Limited (formerly known as Thomson Reuters PLC), which had become a wholly owned subsidiary of the Company upon unification. This placed creditors of the Company in the same position that they would have been in had Thomson Reuters previously operated under a single parent company structure. These changes in corporate structure had no impact on the Company’s global businesses, operations, strategy, financial position and employees.
Normal course issuer bid (“NCIB”) renewal
In May 2010, the Company renewed its NCIB share repurchase facility for an additional 12-month period. Under the NCIB, up to 15 million common shares (representing less than 2% of the total outstanding shares) may be repurchased in open market transactions on the TSX or the NYSE between May 13, 2010 and May 12, 2011. Although the Company has not repurchased any shares since 2008, it may buy back shares (and subsequently cancel them) from time to time as part of its capital management strategy.
Dividends
Dividends are declared in U.S. dollars. Details of dividends declared per share are as follows:
(U.S. per share amounts) | Three months ended June 30, | Six months ended June 30, | ||||||||||||||
Dividends declared per share | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Thomson Reuters Corporation common shares | $ | 0.29 | $ | 0.28 | $ | 0.58 | $ | 0.56 | ||||||||
Thomson Reuters PLC ordinary shares (1) | - | $ | 0.28 | - | $ | 0.56 |
(1) | On September 10, 2009, all Thomson Reuters PLC ordinary shares were exchanged for an equivalent number of common shares of the Company in connection with the unification of the DLC structure. |
In the statement of cash flow, dividends paid on shares are shown net of amounts reinvested through the Company’s dividend reinvestment plan. Details of dividend reinvestment are as follows:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Dividend reinvestment | 10 | 4 | 20 | 8 |
Note 15: Supplemental cash flow information
Details of “Other” in the statement of cash flow are as follows:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Non-cash employee benefit charges | 53 | 59 | 111 | 105 | ||||||||||||
Net (gains) losses on foreign exchange and derivative financial instruments | (40 | ) | 51 | (38 | ) | 62 | ||||||||||
Embedded derivatives fair value adjustments | (32 | ) | 71 | (27 | ) | 71 | ||||||||||
Other | 101 | 23 | 116 | 21 | ||||||||||||
82 | 204 | 162 | 259 |
Other is primarily comprised of movements in non-current liabilities.
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Details of “Changes in working capital and other items” are as follows:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Trade and other receivables | 75 | 100 | 56 | 100 | ||||||||||||
Prepaid expenses and other current assets | 52 | (37 | ) | (21 | ) | 37 | ||||||||||
Other financial assets | 1 | 18 | 14 | 9 | ||||||||||||
Payables, accruals and provisions | 164 | 252 | (245 | ) | (276 | ) | ||||||||||
Deferred revenue | (62 | ) | (142 | ) | 70 | (56 | ) | |||||||||
Other financial liabilities | 2 | (19 | ) | (5 | ) | (10 | ) | |||||||||
Income taxes | (5 | ) | 70 | (14 | ) | 96 | ||||||||||
Other | (60 | ) | (56 | ) | (119 | ) | (108 | ) | ||||||||
167 | 186 | (264 | ) | (208 | ) |
Note 16: Acquisitions
Acquisitions primarily relate to the purchase of business that contain information, products or services that are integrated into existing operations to broaden the range of offerings to customers and to extend the Company’s presence in global markets. The number of acquisitions completed during the three and six months ended June 30, 2010 and 2009 and the related cash consideration were as follows:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
Number of transactions | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Businesses and identifiable intangible assets acquired | 6 | 6 | 9 | 13 | ||||||||||||
Investments in businesses | - | - | 1 | - | ||||||||||||
6 | 6 | 10 | 13 |
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
Cash consideration | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Businesses and identifiable intangible assets acquired | 412 | 25 | 461 | 44 | ||||||||||||
Investments in businesses | 3 | - | 17 | 1 | ||||||||||||
415 | 25 | 478 | 45 |
All acquisitions have been accounted for using the purchase method and the results of acquired businesses are included in the consolidated financial statements from the dates of acquisition. Purchase price allocations related to certain acquisitions may be subject to adjustment pending completion of final valuations. The details of net assets acquired were as follows:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Cash and cash equivalents | 11 | 1 | 11 | 1 | ||||||||||||
Trade and other receivables | 19 | 1 | 23 | 2 | ||||||||||||
Prepaid expenses and other current assets | 25 | 1 | 26 | 1 | ||||||||||||
Current assets | 55 | 3 | 60 | 4 | ||||||||||||
Computer hardware and other property, net | 2 | - | 2 | - | ||||||||||||
Computer software, net | 24 | 7 | 33 | 8 | ||||||||||||
Other identifiable intangible assets | 131 | 14 | 159 | 29 | ||||||||||||
Other non-current assets | - | - | - | 1 | ||||||||||||
Total assets | 212 | 24 | 254 | 42 | ||||||||||||
Payables, accruals and provisions | (19 | ) | (1 | ) | (22 | ) | (3 | ) | ||||||||
Deferred revenue | (27 | ) | (2 | ) | (29 | ) | (3 | ) | ||||||||
Current liabilities | (46 | ) | (3 | ) | (51 | ) | (6 | ) | ||||||||
Provisions and other non-current liabilities | (2 | ) | - | (5 | ) | - | ||||||||||
Deferred tax | (44 | ) | - | (44 | ) | - | ||||||||||
Total liabilities | (92 | ) | (3 | ) | (100 | ) | (6 | ) | ||||||||
Net assets acquired | 120 | 21 | 154 | 36 | ||||||||||||
Goodwill | 303 | 5 | 318 | 9 | ||||||||||||
Total | 423 | 26 | 472 | 45 |
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The excess of the purchase price over the net tangible and identifiable intangible assets and assumed liabilities was recorded as goodwill and reflects the synergies and the value of the acquired workforce. For acquisitions made in 2010, the majority of acquired goodwill is not expected to be deductible for tax purposes, whereas for 2009 acquisitions, the majority of acquired goodwill is expected to be deductible.
The following provides a brief description of major acquisitions completed during 2010:
Date | Company | Acquiring segment | Description | |||
June 2010 | Complinet | Legal | A provider of global compliance information solutions for financial services institutions and their advisers | |||
June 2010 | Point Carbon | Markets | A provider of essential trading analytics, news and content for the energy and environmental markets | |||
May 2010 | Revista dos Tribunais | Legal | A leading Brazilian legal publisher |
As acquired businesses are integrated into the Company’s operations, it is impractical to separately disclose revenue and operating profit contributed by these businesses after acquisition.
Note 17: Contingencies
Lawsuits and legal claims
In November 2009, the European Commission initiated an investigation relating to the use of the Company’s Reuters Instrument Codes (“RIC symbols”), which is at a preliminary stage. RIC symbols help financial professionals retrieve news and information on financial instruments (such as prices and other data on stocks, bonds, currencies and commodities). The Company has responded to the Commission’s questionnaires and is fully cooperating with the investigation. The Company does not believe that it has engaged in any anti-competitive activity related to RIC symbols.
In February 2008, a purported class action complaint alleging violations of U.S. federal antitrust laws was filed in the United States District Court for the Central District of California against West Publishing Corporation, d/b/a BAR/BRI and Kaplan Inc. In April 2008, this case was dismissed with prejudice. The plaintiffs have appealed this dismissal.
In addition to the matters described above, the Company is engaged in various legal proceedings and claims that have arisen in the ordinary course of business. The outcome of all of the proceedings and claims against the Company, including those described above, is subject to future resolution, including the uncertainties of litigation. Based on information currently known to the Company and after consultation with outside legal counsel, management believes that the probable ultimate resolution of any such proceedings and claims, individually or in the aggregate, will not have a material adverse effect on the financial condition of the Company, taken as a whole.
Uncertain tax positions
The Company is subject to taxation in numerous jurisdictions. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Company maintains provisions for uncertain tax positions that it believes appropriately reflect its risk with respect to tax positions under discussion, audit, dispute, or appeal with tax authorities, or which are otherwise considered to involve uncertainty. These provisions are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. The Company regularly assesses the adequacy of these provisions at the end of the reporting period. However, it is possible that at some future date an additional liability could result from audits by, or litigation with, the relevant taxin g authorities.
In April 2008, upon the completion of a routine tax audit for the years 2003 to 2005, the Internal Revenue Service (“IRS”) notified the Company that it would challenge certain positions taken on its tax returns. Since notification, the Company has held ongoing discussions with the IRS relative to this challenge. The Company disagrees with the IRS position. Given that this challenge has not been resolved through the IRS administrative appeals process, the Company intends to initiate action in the United States Tax Court to contest the challenge. While the Company expects to initiate court action in the fourth quarter of 2010, it is likely to take multiple years to resolve the case. In June 2010, the IRS indicated it will challenge positions taken in the Company’s tax returns for the years 2006 and 2007 as well. If the IRS prevailed in all of these challenges, which the Company believes is unlikely, it is estimated that the tax, penalties and interest, net of federal tax relief, relative to the issues subject to these challenges would be approximately $500 million. Because the Company believes that its positions are supported by the weight of law, it does not believe that the resolution of these matters will have a material adverse effect on the Company’s financial statements. The Company is vigorously defending its positions.
Note 18: Related party transactions
As of June 30, 2010, The Woodbridge Company Limited (“Woodbridge”) beneficially owned approximately 55% of the Company’s shares.
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Transactions with Woodbridge
From time to time, in the normal course of business, Woodbridge and certain of its affiliates purchase some of the Company’s product and service offerings. These transactions are negotiated at arm’s length on standard terms, including price, and are not significant to the Company’s results of operations or financial condition either individually or in the aggregate.
In the normal course of business, certain of the Company’s subsidiaries charge a Woodbridge-owned company fees for various administrative services. The total amount charged to Woodbridge for these services was approximately $360,000 for the year ended December 31, 2009.
The Company purchases property and casualty insurance from third party insurers and retains the first $500,000 of each and every claim under the programs via the Company’s captive insurance subsidiary. Woodbridge is included in these programs and pays the Company a premium commensurate with its exposures. These premiums were approximately $73,000 for the year ended December 31, 2009, which would approximate the premium charged by a third party insurer for such coverage.
The Company maintained an agreement with Woodbridge until April 17, 2008 (the closing date of the Reuters acquisition) under which Woodbridge agreed to indemnify up to $100 million of liabilities incurred either by the Company’s current and former directors and officers or by the Company in providing indemnification to these individuals on substantially the same terms and conditions as would apply under an arm’s length, commercial arrangement. The Company was required to pay Woodbridge an annual fee of $750,000, which was less than the premium that would have been paid for commercial insurance. In 2008, the Company replaced this agreement with a conventional insurance agreement. The Company is entitled to seek indemnification from Woodbridge for any claims arising from events prior to April 17, 2008, so long as the claims a re made before April 17, 2014.
Transactions with affiliates and joint ventures
The Company enters into transactions with its investments in affiliates and joint ventures. These transactions involve providing or receiving services and are entered into in the normal course of business and on an arm’s length basis.
The Company and The Depository Trust & Clearing Corporation (“DTCC”) each have a 50% interest in Omgeo, a provider of trade management services. Omgeo pays the Company for use of a facility and technology and other services. For the six months ended June 30, 2010, these services were valued at approximately $4 million.
The Company and Shin Nippon Hoki Shuppan K.K. each own 50% of Westlaw Japan K.K., a provider of legal information and solutions to the Japanese legal market. The Company provides the joint venture with technology and other services, which were valued at approximately $1 million for the six months ended June 30, 2010.
The Company’s Tradeweb Markets business provides services, including use of its trading platform and various back office functions, to Tradeweb New Markets, in which it has a 20% ownership stake. The Company recognized revenues of approximately $10 million related to these services for the six months ended June 30, 2010.
The Company has a lease agreement with 3XSQ Associates for a facility located at 3 Times Square in New York, New York, which serves as its corporate headquarters and as a Markets division operating location. 3XSQ Associates, which is an entity owned by Thomson Reuters and Rudin Times Square Associates LLC, was formed to build and operate the 3 Times Square property. The Company follows the equity method of accounting for its investment in 3XSQ Associates. The lease provides the Company with over 690,000 square feet of office space until 2021 and includes provisions to terminate portions early and various renewal options. The Company’s costs related to 3XSQ Associates for the six months ended June 30, 2010 were approximately $19 million for rent, taxes and other expenses.
Other transactions
In February 2010, the Company acquired Super Lawyers from an entity controlled by Vance Opperman, one of the Company’s directors, for approximately $15 million. The acquisition helps expand FindLaw’s product offerings. Mr. Opperman’s son is the CEO of the acquired business and has agreed to stay on with the business until later this year. The Company’s board of directors reviewed and approved the transaction. Mr. Opperman refrained from deliberating and voting on the matter.
In February 2005, the Company entered into a contract with Hewitt Associates Inc. (“Hewitt”) to outsource certain human resources administrative functions in order to improve operating and cost efficiencies. Under the current contract terms, the Company expects to pay Hewitt an aggregate of approximately $165 million over a 10-year period that began in 2006. In 2009, the Company paid Hewitt $8 million for its services. Steven A. Denning, one of the Company’s directors and chairman of the board’s Human Resources Committee, was a director of Hewitt until February 2009. Mr. Denning has not participated in negotiations related to the contract and has refrained from deliberating and voting on any matters relating to Hewitt by the Human Resources Committee and the board of directors.
See note 32 in the Company’s consolidated financial statements for the year ended December 31, 2009 for additional information.
44