6-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of November 2017    Commission File Number: 1-31349

THOMSON REUTERS CORPORATION

(Translation of registrant’s name into English)

333 Bay Street, Suite 400

Toronto, Ontario M5H 2R2, Canada

(Address of principal executive office)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F  ☐            Form 40-F  ☒

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ☐

The information contained in Exhibits 99.1 and 99.2 of this Form 6-K is incorporated by reference into, or as additional exhibits to, as applicable, the registrant’s outstanding registration statements.

Thomson Reuters Corporation is voluntarily furnishing certifications by its Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 as Exhibits 99.3-99.6 of this Form 6-K. 


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

THOMSON REUTERS CORPORATION

(Registrant)

By:  

/s/ Marc E. Gold

  Name:   Marc E. Gold
  Title:   Assistant Secretary

Date: November 3, 2017


EXHIBIT INDEX

 

Exhibit
Number

  

Description

99.1    Management’s Discussion and Analysis
99.2    Unaudited Consolidated Financial Statements
99.3    Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
99.4    Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
99.5    Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.6    Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 99.1 - MANAGEMENT'S DISCUSSION AND ANALYSIS
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EXHIBIT 99.1

Management’s Discussion and Analysis

This management’s discussion and analysis is designed to provide you with a narrative explanation through the eyes of our management of our financial condition and results of operations. We recommend that you read this in conjunction with our consolidated interim financial statements for the three and nine months ended September 30, 2017, our 2016 annual consolidated financial statements and our 2016 annual management’s discussion and analysis. You can find those documents in the Investor Relations section of our website, www.thomsonreuters.com, the Canadian Securities Administrators’ SEDAR website, www.sedar.com, or in the EDGAR section of the U.S. Securities and Exchange Commission’s website, www.sec.gov.

This management’s discussion and analysis contains forward-looking statements, which are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. Forward-looking statements include, but are not limited to, our 2017 outlook and our expectations related to general economic conditions and market trends and their anticipated effects on our business segments. For additional information related to forward-looking statements and material risks associated with them, please see the “Outlook” and “Additional Information – Cautionary Note Concerning Factors That May Affect Future Results” sections of this management’s discussion and analysis. This management’s discussion and analysis is dated as of October 31, 2017.

We have organized our management’s discussion and analysis in the following key sections:

 

  Executive Summary – a brief overview of our business and key financial highlights     2  
  Results of Operations – a comparison of our current and prior-year period results     5  
  Liquidity and Capital Resources – a discussion of our cash flow and debt     13  
  Outlook – our current financial outlook for 2017     17  
  Related Party Transactions – a discussion of transactions with our principal and controlling shareholder, The Woodbridge Company Limited (Woodbridge), and others     18  
  Subsequent Events – a discussion of material events occurring after September  30, 2017 and through the date of this management’s discussion and analysis     18  
  Changes in Accounting Policies – a discussion of changes in our accounting policies and recent accounting pronouncements     18  
  Critical Accounting Estimates and Judgments – a discussion of critical estimates and judgments made by our management in applying accounting policies     19  
  Additional Information – other required disclosures     19  
  Appendix – supplemental information and discussion     21  

Unless otherwise indicated or the context otherwise requires, references in this discussion to “we,” “our,” “us” and “Thomson Reuters” are to Thomson Reuters Corporation and our subsidiaries.

Basis of presentation

We prepare our consolidated financial statements in U.S. dollars in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB). In this management’s discussion and analysis, we discuss our results from continuing operations on both an IFRS and non-IFRS basis. Both bases exclude the results of our former Intellectual Property & Science business, which was reported as a discontinued operation through the date of its sale in October 2016, and include the results of acquired businesses from the date of purchase.

Use of non-IFRS financial measures

We use non-IFRS measures as supplemental indicators of our operating performance and financial position as well as for internal planning purposes and our 2017 business outlook. We believe non-IFRS financial measures provide more insight into our performance. Non-IFRS measures do not have standardized meanings prescribed by IFRS and therefore are unlikely to be comparable to the calculation of similar measures used by other companies, and should not be viewed as alternatives to measures of financial performance calculated in accordance with IFRS.

 

 

 

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Our non-IFRS financial measures include:

 

    Adjusted EBITDA and the related margin;
    Adjusted EBITDA less capital expenditures and the related margin;
    Adjusted earnings and adjusted earnings per share (EPS);
    Net debt; and
    Free cash flow.

We also report changes in our revenues, operating expenses, adjusted EBITDA and related margin, and adjusted EPS before the impact of foreign currency or at “constant currency”. These measures remove distortion from the effects of foreign currency movements in order to provide better comparability of our business trends from period to period.

See Appendix A of this management’s discussion and analysis for a description of our non-IFRS financial measures, including an explanation of why we believe they are useful measures of our performance, including our ability to generate cash flow. Refer to Appendix B and the “Results of Operations-Continuing Operations” and “Liquidity and Capital Resources” sections of this management’s discussion and analysis for reconciliations of our non-IFRS financial measures to the most directly comparable IFRS measures.

Glossary of key terms

We use the following terms in this management’s discussion and analysis.

 

Term

  Definition

bp

  Basis points – one basis point is equal to 1/100th of 1%; “100 bp” is equivalent to 1%

Constant currency

  A measure derived by applying the same foreign currency exchange rates to the current and equivalent prior-year period

n/a

  Not applicable

n/m

  Not meaningful

Net sales

  New sales less cancellations

Organic or organically

  Our existing businesses

$ and US$

  U.S. dollars

Executive Summary

Our company

We are a leading source of news and information for professional markets. Our customers rely on us to deliver the intelligence, technology and expertise they need to find trusted answers. We have operated in more than 100 countries for more than 100 years.

We live at a time when the amount of data is overwhelming, the regulatory environment is complex, markets move at breakneck speed and connectivity is expanding around the world. Our customers count on the accuracy of our information, the reliability of our systems and the relevance of our insights to help them navigate the changing worlds of commerce and regulation. We believe our workflow solutions make our customers more productive, by streamlining how they operate. Reuters is renowned for the integrity of its news. The principles of freedom from bias and access to information govern everything that we do.

We derive the majority of our revenues from selling solutions to our customers, primarily electronically and on a subscription basis. Many of our customers utilize our solutions as part of their workflows. We believe this is a significant competitive advantage as it has led to strong customer retention. Over the years, our business model has proven to be capital efficient and cash flow generative, and it has enabled us to maintain leading and scalable positions in our chosen market segments.

 

 

 

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We are organized in three business units supported by a corporate center:

 

  

 

 

Third-Quarter 2017 Revenues

 

 

 

LOGO

 

     LOGO

 

  

Financial & Risk

A provider of critical news, information and analytics, enabling transactions and connecting communities of trading, investment, financial and corporate professionals. Financial & Risk also provides regulatory and operational risk management solutions.

 

  

     LOGO

 

  

 

Legal

A provider of critical online and print information, decision tools, software and services that support legal, investigation, business and government professionals around the world.

 

  

     LOGO

 

  

 

Tax & Accounting

A provider of integrated tax compliance and accounting information, software and services for professionals in accounting firms, corporations, law firms and government.

 

  

We also operate:

 

    Reuters, a leading provider of real-time, high-impact, multimedia news and information services to newspapers, television and cable networks, radio stations and websites around the globe.
    A Global Growth Organization (GGO) that works across our business units to combine our global capabilities and to expand our local presence and development in countries and regions where we believe the greatest growth opportunities exist. GGO supports our businesses in: Latin America, China, India, the Middle East, Africa, the Association of Southeast Asian Nations, North Asia, Russia and countries comprising the Commonwealth of Independent States and Turkey. We include the results of GGO within our business units.
    An Enterprise Technology & Operations group that drives the transformation of our company into a more integrated enterprise by unifying infrastructure across our organization, including technology platforms, data centers, real estate, products and services.

Seasonality

On a consolidated basis, our revenues and operating profit do not tend to be significantly impacted by seasonality as we record a large portion of our revenues ratably over a contract term and our costs are generally incurred evenly throughout the year. However, our performance from quarter to consecutive quarter can be impacted by transactions revenues as well as by the release of certain print-based offerings, which tend to be concentrated at the end of the year. As a consequence, the results of certain of our segments can be impacted by seasonality to a greater extent than our consolidated results.

 

 

 

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Key Financial Highlights

Below are financial highlights from our third-quarter 2017 results.

 

      Three months ended September 30,  
                   Change  
(millions of U.S. dollars, except per share amounts and margins)    2017      2016      Total      Constant
Currency
 

IFRS Financial Measures

           

Revenues

     2,792        2,744        2%     

Operating profit

     467        385        21%     

Diluted EPS (includes discontinued operations)

   $ 0.46      $ 0.36        28%     

Cash flow from operations (includes discontinued operations)

     808        758        7%     

Non-IFRS Financial Measures(1)

           

Revenues

     2,792        2,744        2%        1%  

Adjusted EBITDA

     849        814        4%        4%  

Adjusted EBITDA margin

     30.4%        29.7%        70bp        70bp  

Adjusted EPS

   $ 0.68      $ 0.54        26%        24%  

Free cash flow (includes discontinued operations)

     531        519        2%           

 

(1) Refer to Appendix A of this management’s discussion and analysis for additional information on non-IFRS financial measures.

Our third quarter results demonstrated that our simplification initiatives continue to deliver significant cost savings across our business. Revenue growth and sales performance, however, were lower than expected. The following summarizes our progress on our key financial priorities:

Accelerate Organic Revenue Growth

Revenues increased 2% in total. Revenues increased 1% in constant currency, all of which was organic, driven by our Legal and Tax & Accounting businesses. In Financial & Risk, organic revenues were essentially unchanged and net sales were positive. However, both of these measures were below our expectations. Recurring revenue growth was negatively impacted by weaker than expected net sales and longer lead times to convert sales to revenues. We plan to continue investing in our growth businesses as well as in key product improvements and customer service.

Continue to Drive Productivity Gains

We continued to control our operating expenses through our various simplification initiatives. In combination with higher revenue, this led to higher operating profit, adjusted EBITDA and adjusted EBITDA margin. While operating expenses were slightly higher in total, they were essentially unchanged in constant currency, as the benefits of our simplification initiatives offset investments in customer experience and real estate consolidation. Adjusted EBITDA increased 4% and the related margin increased 70bp to 30.4%, representing the third consecutive quarter that our adjusted EBITDA margin has been above 30%. We believe that cost savings from our simplification initiatives will enable us to increase investments in our growth initiatives, as well as achieve our 2017 full-year adjusted EBITDA margin and adjusted EPS outlook.

Deliver on Our Financial Objectives

Diluted EPS and adjusted EPS each increased over 25%, reflecting positive business performance, as well as lower interest and income tax expense and benefits from our share buyback program. We generated strong cash flow from operations and free cash flow, returning $467 million to shareholders through share repurchases and dividends.

We provide a detailed discussion of our financial performance in the “Results of Operations” section of this management’s discussion and analysis. We discuss share repurchases and dividends in the “Liquidity and Capital Resources” section of this management’s discussion and analysis.

 

 

 

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2017 Outlook:

We currently expect the following for our full-year 2017 business outlook:

 

    Low single digit revenue growth;
    Adjusted EBITDA margin between 29.3% and 30.3%;
    Adjusted EPS between $2.40 and $2.45 (now forecast to be at the top of this range); and
    Free cash flow between $0.9 billion and $1.2 billion.

Our 2017 outlook is unchanged from that communicated as part of our second quarter report, except for our current expectations related to adjusted EPS performance relative to the forecasted range. Our 2017 outlook assumes constant currency rates relative to 2016 and does not factor in the impact of any acquisitions or divestitures that may occur during the year.

For additional information regarding the material assumptions and material risks associated with our 2017 Outlook, refer to the “Outlook” section of this management’s discussion and analysis. The information in this section is forward-looking and should also be read in conjunction with the part of the “Additional Information” section of this management’s discussion and analysis entitled “Cautionary Note Concerning Factors That May Affect Future Results”.

Results of Operations – Continuing Operations

Consolidated results

 

     Three months ended September 30,     Nine months ended September 30,  
                Change                 Change  
(millions of U.S. dollars, except per share amounts and margins)   2017     2016     Total     Constant
Currency
    2017     2016     Total     Constant
Currency
 

IFRS Financial Measures

               

Revenues

    2,792       2,744       2%         8,389       8,306       1%    

Operating profit

    467       385       21%         1,310       1,096       20%    

Diluted EPS from continuing operations

  $ 0.46     $ 0.34       35%             $ 1.13     $ 0.99       14%          

Non-IFRS Financial Measures(1)

               

Revenues

    2,792       2,744       2%       1%       8,389       8,306       1%       2%  

Adjusted EBITDA

    849       814       4%       4%       2,563       2,319       11%       10%  

Adjusted EBITDA margin

    30.4%       29.7%       70bp       70bp       30.6%       27.9%       270bp       240bp  

Adjusted EBITDA less capital expenditures

    593       601       (1%)         1,853       1,661       12%    

Adjusted EBITDA less capital expenditures margin

    21.2%       21.9%       (70)bp         22.1%       20.0%       210bp    

Adjusted EPS

  $ 0.68     $ 0.54       26%       24%     $ 1.91       $1.47       30%       29%  

 

(1) See Appendix B of this management’s discussion and analysis for a reconciliation of earnings from continuing operations to adjusted EBITDA and adjusted EBITDA less capital expenditures.

Foreign currency effects

The following table sets forth the average foreign exchange rates of the significant foreign currencies that we transact in:

 

      Three months ended September 30,      Nine months ended September 30,  
(U.S. dollars per unit, except where noted)    2017      2016     

(Strengthened)/

Weakened

     2017      2016     

(Strengthened)/

Weakened

 

British pound sterling

     1.309        1.313        (0.3%)        1.276        1.393        (8.4%)  

Euro

     1.175        1.116        5.3%        1.114        1.116        (0.2%)  

Japanese yen (100)

     0.901        0.977        (7.8%)        0.894        0.924        (3.2%)  

Canadian dollar

     0.798        0.767        4.1%        0.766        0.757        1.2%  

Given our currency mix of revenues and expenses around the world, fluctuations in foreign exchange rates had a positive impact on our revenues and adjusted EPS, but had no impact on adjusted EBITDA growth or adjusted EBITDA margin in the third quarter compared to the prior-year period. In the nine-month period, currency fluctuations had a negative impact on our revenues, but a positive impact on our adjusted EBITDA growth, adjusted EBITDA margin and adjusted EPS compared to the prior-year period.

 

 

 

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Revenues

Revenues increased 2% in the third quarter and 1% in the nine-month period. In constant currency, third quarter revenues increased 1%, all from organic growth. On the same basis, revenues increased 2% in the nine-month period comprised of 1% organic growth and a 1% contribution from acquisitions. Our organic growth reflected increases in recurring revenues.

GGO revenues comprised approximately 9% and 8% of our 2017 revenues in the third quarter and nine-month period, respectively. On a constant currency basis, GGO revenues increased 1% in the third quarter and were essentially unchanged in the nine-month period.

Operating profit, adjusted EBITDA and adjusted EBITDA less capital expenditures

Operating profit increased in the third quarter as higher revenues and a gain on the sale of a portion of an investment were partly offset by the negative impact of fair value adjustments associated with foreign currency derivatives embedded in certain customer contracts. The increase in the nine-month period reflected the same factors as the third quarter, as well as benefits from lower operating expenses.

Adjusted EBITDA and the related margin increased in both periods in total and in constant currency. In the third quarter, the increases were driven by higher revenues, which were partly offset by higher operating expenses. The increases in the nine-month period were driven by higher revenues and lower operating expenses.

Adjusted EBITDA less capital expenditures and the related margin decreased in the third quarter as higher capital expenditures more than offset higher adjusted EBITDA. The increases in the nine-month period were driven by higher adjusted EBITDA, which more than offset the increase in capital expenditures.

We expect to increase investments to improve customer experience in the fourth quarter, which we believe will lead to slightly lower adjusted EBITDA margin during that period, and slightly higher capital expenditures for the full year compared to 2016.

Operating expenses

 

     Three months ended September 30,     Nine months ended September 30,  
                Change                 Change  
(millions of U.S. dollars)   2017     2016     Total     Constant
Currency
    2017     2016     Total     Constant
Currency
 

Operating expenses

    1,996       1,964       2%       -       5,997       6,064       (1%)       (2%)  

Remove fair value adjustments(1)

    (53)       (34)                       (171)       (77)                  

Operating expenses, excluding fair value adjustments

    1,943       1,930       1%       -       5,826       5,987       (3%)       (2%)  

 

(1) Fair value adjustments primarily represent mark-to-market impacts on embedded derivatives. In 2016, fair value adjustments also included the mark-to-market impacts on certain share-based awards. Please refer to the “Changes in Accounting Policies” section of this management’s discussion and analysis for additional information on our adoption of IFRS 2 amendments.

Operating expenses increased in the third quarter due to foreign currency, which included higher expense from unfavorable fair value adjustments associated with foreign currency derivatives embedded in certain customer contracts. On a constant currency basis, operating expenses were essentially unchanged as lower expenses from our ongoing simplification initiatives offset investments to consolidate real estate and improve customer experience. In the nine-month period, operating expenses decreased in total and on a constant currency basis, as lower expenses from our ongoing simplification initiatives more than offset the investments. Excluding fair value adjustments, operating expenses increased in the third quarter in total due to foreign currency, but decreased in the nine-month period, in total and on a constant currency basis.

Depreciation and amortization

 

      Three months ended September 30,      Nine months ended September 30,  
(millions of U.S. dollars)    2017      2016      Change      2017      2016      Change  

Depreciation

     73        78        (6%)        222        239        (7%)  

Amortization of computer software

     171        177        (3%)        519        518        -  

Subtotal

     244        255        (4%)        741        757        (2%)  

Amortization of other identifiable intangible assets

     115        128        (10%)        354        388        (9%)  

 

    Depreciation and amortization of computer software on a combined basis decreased in both periods, as expense related to new capital spending was more than offset by fully expensed assets acquired or developed in previous years.

 

 

 

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    Amortization of other identifiable intangible assets decreased in both periods as amortization of newly-acquired assets was more than offset by fully amortized identifiable intangible assets acquired in previous years. The decrease in the nine-month period also reflected the impact of foreign currency.

Other operating gains (losses), net

 

      Three months ended September 30,      Nine months ended September 30,  
(millions of U.S. dollars)    2017      2016      2017      2016  

Other operating gains (losses), net

     30        (12)        13        (1)  

In 2017, other operating gains (losses) in both periods included a gain from the sale of a portion of an investment.

Net interest expense

 

      Three months ended September 30,      Nine months ended September 30,  
(millions of U.S. dollars)    2017      2016      Change      2017      2016      Change  

Net interest expense

     84        108        (22%)        272        304        (11%)  

Net interest expense decreased in both periods due to lower interest from commercial paper borrowings and lower net pension obligations, the latter reflecting a $500 million contribution to our U.S. defined benefit pension plan in January 2017, as well as lower interest on certain tax liabilities. As substantially all of our long-term debt obligations paid interest at fixed rates (after swaps), the net interest expense on our term debt was essentially unchanged.

Other finance costs

 

      Three months ended September 30,      Nine months ended September 30,  
(millions of U.S. dollars)    2017      2016      2017      2016  

Other finance costs

     58        3        176        28  

Other finance costs included gains or losses related to changes in foreign exchange contracts and the impact of fluctuations of foreign currency exchange rates on certain intercompany funding arrangements.

Tax (benefit) expense

 

      Three months ended September 30,      Nine months ended September 30,  
(millions of U.S. dollars)    2017      2016      2017      2016  

Tax (benefit) expense

     (22)        8        (8)        (16)  

The tax (benefit) expense in each period reflected the mix of taxing jurisdictions in which pre-tax profits and losses were recognized. Because the geographical mix of pre-tax profits and losses in interim periods may be different from that for the full year, tax expense or benefit in interim periods is not necessarily indicative of tax expense for the full year. The third quarter and nine-month period of 2017 were favorably impacted by the reversal of tax reserves in connection with favorable developments regarding tax disputes.

 

 

 

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Additionally, the comparability of our tax (benefit) expense was impacted by various transactions and accounting adjustments during each period. The following table sets forth certain components within income tax (benefit) expense that impact comparability from period to period, including tax (benefit) expense associated with items that are removed from adjusted earnings:

 

      Three months ended September 30,      Nine months ended September 30,  
(millions of U.S. dollars)    2017      2016      2017      2016  
Tax expense (benefit)            

Tax items impacting comparability:

           

Corporate tax rates(1)

     5        3        6        5  

Other tax adjustments(2)

     (10)        4        (9)        8  

Subtotal

     (5)        7        (3)        13  

Tax related to:

           

Fair value adjustments

     (1)        (10)        (17)        (33)  

Amortization of other identifiable intangible assets

     (31)        (32)        (95)        (98)  

Other items

     13        (4)        4        (7)  

Subtotal

     (19)        (46)        (108)        (138)  

Total

     (24)        (39)        (111)        (125)  

 

(1) Relates to the net changes in deferred tax liabilities due to changes in U.S. state apportionment factors and changes in corporate tax rates that were substantively enacted in certain jurisdictions.

 

(2) Relates primarily to changes in the recognition of deferred tax assets in various jurisdictions due to earlier acquisitions, assumptions regarding future profitability, and adjustments for indefinite-lived assets and liabilities that are not expected to reverse.

Because the items described above impact the comparability of our tax (benefit) expense for each period, we remove them from our calculation of adjusted earnings, along with the pre-tax items to which they relate.

The computation of our adjusted tax expense is set forth below:

 

      Three months ended September 30,      Nine months ended September 30,  
(millions of U.S. dollars)    2017      2016      2017      2016  

Tax (benefit) expense

     (22)        8        (8)        (16)  

Remove: Items from above impacting comparability

     24        39        111        125  

Other adjustment:

           

Interim period effective tax rate normalization(1)

     13        (13)        15        -  

Total tax expense on adjusted earnings

     15        34        118        109  

 

(1) Adjustment to reflect income taxes based on estimated full-year effective tax rate, including normalization of benefits from favorable developments in regard to tax disputes. Earnings or losses for interim periods under IFRS generally reflect income taxes based on the estimated effective tax rates of each of the jurisdictions in which we operate. The non-IFRS adjustment reallocates estimated full-year income taxes between interim periods, but has no effect on full-year income taxes.

Earnings and diluted EPS from continuing operations

 

      Three months ended September 30,      Nine months ended September 30,  
(millions of U.S. dollars, except per share amounts)    2017      2016      Change      2017      2016      Change  

Earnings from continuing operations

     349        268        30%        867        782        11%  

Diluted EPS from continuing operations

   $ 0.46      $ 0.34        35%      $ 1.13      $ 0.99        14%  

 

 

 

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Earnings from continuing operations and the related per share amounts increased in both periods as higher operating profit and lower interest expense more than offset the negative impact of foreign currency related to fair value adjustments on financing costs. The third quarter also reflected lower income tax expense. Additionally, diluted EPS in both periods benefited from lower outstanding common shares due to share repurchases (see the “Liquidity and Capital Resources – Share Repurchases” section of this management’s discussion and analysis for additional information).

Adjusted earnings and adjusted EPS

 

     Three months ended September 30,     Nine months ended September 30,  
                Change                 Change  
(millions of U.S. dollars, except per share amounts and share data)   2017     2016     Total     Constant
Currency
    2017     2016     Total     Constant
Currency
 

Earnings attributable to common shareholders

    330       273       21%         819       872       (6%)    

Adjustments to remove:

               

Fair value adjustments

    53       34           171       77      

Amortization of other identifiable intangible assets

    115       128           354       388      

Other operating (gains) losses, net

    (30)       12           (13)       1      

Other finance costs

    58       3           176       28      

Share of post-tax (earnings) losses in equity method investments

    (2)       (2)           3       (2)      

Tax on above items(1)

    (19)       (46)           (108)       (138)      

Tax items impacting comparability(1)

    (5)       7           (3)       13      

Losses (earnings) from discontinued operations, net of tax

    1       (18)           (1)       (126)      

Interim period effective tax rate normalization(1)

    (13)       13           (15)       -      

Dividends declared on preference shares

    (1)       (1)                       (2)       (2)                  

Adjusted earnings

    487       403       21%         1,381       1,111       24%    

Adjusted EPS

    $0.68       $0.54       26%       24%       $1.91       $1.47       30%       29%  

Diluted weighted-average common shares (millions)

    716.9       745.8                       722.5       753.9                  

 

(1) See the “Tax (benefit) expense” section above for additional information.

Adjusted earnings and the related per share amount increased in both periods primarily due to higher adjusted EBITDA, as well as lower interest and tax expense. In both periods, adjusted earnings and adjusted EPS included a positive impact from foreign currency of $0.01 per share. Additionally, adjusted EPS in both periods benefited from lower outstanding common shares due to share repurchases.

Segment results

The following is a discussion of our three reportable segments for the three and nine months ended September 30, 2017: Financial & Risk, Legal and Tax & Accounting. We also report “Corporate & Other”, which includes expenses for corporate functions and the results of the Reuters News business. We discuss the results of our former Intellectual Property & Science business within the “Results of Operations – Results of Discontinued Operations” section of this management’s discussion and analysis.

In 2017, management changed the profitability measure that it uses to assess the performance of its reportable segments from segment operating profit, which it no longer uses, to adjusted EBITDA. These profitability measures are the same, except that adjusted EBITDA excludes depreciation of fixed assets and amortization of computer software. Management uses a number of measures to assess the performance of its segments internally. Adjusted EBITDA is reported externally, as it represents the internal profitability measure most closely aligned with the measurement of the consolidated income statement.

We present segment revenue growth at both actual foreign exchange rates and in constant currency. We assess revenue performance for each reportable segment, as well as the businesses within each segment, before the impact of currency (or at “constant currency”).

 

 

 

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Financial & Risk

 

      Three months ended September 30,      Nine months ended September 30,  
(millions of U.S. dollars, except margins)    2017      2016      Change      2017      2016      Change  

Revenues

     1,542        1,516        2%        4,561        4,549        -  

Revenue change at constant currency

           1%              1%  

Adjusted EBITDA

     495        460        8%        1,435        1,340        7%  

Adjusted EBITDA margin

     32.1%        30.3%        180bp        31.5%        29.5%        200bp  

In both periods, revenues increased 1% in constant currency due to the contribution from acquisitions, as organic revenues were essentially unchanged. Organic revenues benefited from Financial & Risk’s annual price increase and higher transactions revenues, but were negatively impacted by a prior-year period non-recurring benefit related to a customer subscription, a decline in recoveries revenues, and the impact of commercial pricing adjustments related to the migration of the remaining foreign exchange and buy-side customers onto new products on Financial & Risk’s unified platform.

By geographic area, third quarter revenues increased 3% in the Americas and 2% in Asia Pacific, but declined 1% in Europe, Middle East and Africa (EMEA). For the nine-month period, revenues increased 3% in the Americas, 1% in Asia Pacific and were essentially unchanged in EMEA.

In both periods, net sales were positive overall as positive net sales in the Americas more than offset negative net sales in EMEA. In Asia Pacific, net sales were slightly negative in the third quarter, but slightly positive in the nine-month period.

Financial & Risk’s organic revenue growth and net sales performance for the third quarter were below our expectations due to a variety of factors. We experienced unexpected delays in closing new sales opportunities, primarily in Europe and Asia. Elsewhere, longer free-of-charge periods and a changing mix in new sales negatively impacted revenue performance. Relative to mix, feeds and Risk Solutions, the largest proportion of new sales, have longer installation periods than desktop sales. As revenues from new sales are only earned after product installation, revenue recognition is delayed for these products.

Overall cancellations across Financial & Risk were at their lowest level since the first quarter of 2016, which was partly due to the completion of the product migration program in Financial & Risk’s Asset Management business. Despite the improvement in the quarter, Financial & Risk experienced higher than expected cancellations of sell-side desktops, particularly in Europe and Asia.

Finally, lower than expected trading volumes led to lower than expected transactions revenues.

 

Results by type in constant currency were as follows:

 

   Recurring revenues increased 1% in both periods due to the benefit of Financial & Risk’s 2017 annual price increase, which was partly offset by the negative impact of a prior-year period non-recurring benefit related to a customer subscription, and the commercial pricing adjustments on remaining legacy foreign exchange products. In the third quarter, Elektron Data Platform and Risk revenues grew 5% collectively while desktop revenues declined 4%. In the nine-month period, Elektron Data Platform and Risk revenues grew 7% collectively while desktop revenues declined 4%;

 

   Transactions revenues increased 7% in the third quarter and 6% in the nine-month period. The increases in both periods were primarily due to organic growth in Tradeweb and contributions from acquisitions, partly offset by lower foreign exchange trading revenues; and

 

   Recoveries revenues, which Financial & Risk collects from customers and largely passes through to a third-party provider, such as stock exchange fees, decreased 4% in the third quarter and 6% in the nine-month period. The decline in the nine-month period from these low-margin recoveries revenues partially reflected the transition of a small number of third-party information providers to direct billing arrangements with their customers.

  

 

Third-Quarter 2017 Revenues by Type

 

  

 

 

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Adjusted EBITDA and the related margin increased in both periods primarily due to the impact of higher revenues, as well as lower expenses. The lower expenses were driven by initiatives to simplify Financial & Risk’s business, which included benefits from severance actions in the fourth quarter of 2016. Foreign currency benefited adjusted EBITDA margin by 30bp and 40bp in the third quarter and nine-month period, respectively, compared to the prior-year periods.

Legal

 

      Three months ended September 30,      Nine months ended September 30,  
(millions of U.S. dollars, except margins)    2017      2016      Change      2017      2016      Change  

Revenues

     843        835        1%        2,509        2,503        -  

Revenue change at constant currency

           1%              1%  

Adjusted EBITDA

     338        328        3%        965        936        3%  

Adjusted EBITDA margin

     40.1%        39.3%        80bp        38.5%        37.4%        110bp  

Revenues increased 1% in constant currency in the third quarter as 3% growth in recurring revenues (76% of the Legal segment in the quarter) was partly offset by an 8% decline in transactions revenues (11% of the Legal segment in the quarter) and a 7% decline in U.S. Print revenues (13% of the Legal segment in the quarter). In the nine-month period, the increase in revenues reflected 4% growth in recurring revenues, which was partly offset by an 8% decline in transactions revenues and a 6% decline in U.S. Print revenues. Excluding U.S. Print, Legal’s revenues increased 2% in both the third quarter and nine-month period.

 

Results by line of business in constant currency were as follows:

 

   Solutions businesses revenues include non-U.S. legal information and global software and services businesses. Solutions businesses revenues increased 1% in the third quarter and 2% in the nine-month period driven by recurring revenues (80% of the Solutions business), which grew 4% and 5% in the third quarter and nine-month period, respectively. In both periods, revenue growth was partly offset by a 9% decline in transactions revenues. In both periods, revenues increased for U.K. Practical Law, FindLaw, Investigative & Public Records and Legal Tracker while revenues in Legal Managed Services and Latin America print were lower;

 

   U.S. Online Legal Information revenues increased 3% and 2% in the third quarter and nine-month period, respectively, driven by growth in U.S. Practical Law. Legal expects its U.S. Online Legal Information business will grow 2% for the full year; and

 

   U.S. Print revenues decreased 7% and 6% in the third quarter and nine-month period, respectively.

  

 

Third-Quarter 2017 Revenues

by Line of Business

 

  

 

 

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Adjusted EBITDA and the related margin increased in both periods due to higher revenues and lower expenses. The decline in expenses reflected simplification initiatives, including benefits from the severance actions in the fourth quarter of 2016 and cost management efforts. Foreign currency benefited adjusted EBITDA margins by 10bp and 20bp in the third quarter and nine-month period, respectively, compared to the prior-year periods.

Tax & Accounting

 

      Three months ended September 30,      Nine months ended September 30,  
(millions of U.S. dollars, except margins)    2017      2016      Change      2017      2016      Change  

Revenues

     341        323        6%        1,108        1,036        7%  

Revenue change at constant currency

           5%              6%  

Adjusted EBITDA

     95        87        9%        339        283        20%  

Adjusted EBITDA margin

     27.9%        26.9%        100bp        30.6%        27.3%        330bp  

Revenues increased 5% in constant currency in the third quarter, driven by a 2% increase in recurring revenues (87% of the Tax & Accounting segment in the quarter) and a 33% increase in transactions revenues (13% of the Tax & Accounting segment in the quarter). The increase in transactions revenues benefited from a favorable year over year comparison, as the Government business reported lower revenues in the prior-year period due to delays of go-live dates on two significant projects.

 

 

 

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Revenues increased 6% in constant currency in the nine-month period, driven by a 4% increase in recurring revenues and a 20% increase in transactions revenues.

 

 

Results by line of business in constant currency were as follows:

 

   Corporate includes revenues from a suite of global and local tax compliance, workflow and data management software and services. Corporate revenues increased 8% and 9% in the third quarter and nine-month period, respectively. The increases in both periods were primarily due to growth in ONESOURCE software and services;

 

   Professional includes revenues from tax, accounting, audit, payroll, document management, client portals and practice management applications and services. Professional revenues increased 7% and 10% in the third quarter and nine-month period, respectively, primarily due to growth in CS Professional Suite solutions for accounting firms and higher revenues in Latin America;

 

   Knowledge Solutions includes revenues from information, research, workflow tools and certified professional education. Knowledge Solutions revenues decreased 2% in both the third quarter and nine-month period due to lower print revenues; and

 

   Government, which represents only 3% of Tax & Accounting’s revenues, includes integrated property tax management and land registry solutions. Government revenues increased significantly in both periods as prior-year period revenues were lower due to delays of go-live dates on two significant projects.

  

Third-Quarter 2017 Revenues

by Line of Business

  

 

 

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Adjusted EBITDA and the related margin increased in both periods primarily due to the impact of higher revenues. Expenses were higher in both periods primarily due to higher allocations of technology expenses, partly offset by the benefits from simplification initiatives, including benefits from the severance actions in the fourth quarter of 2016, and lower expenses in the Government business. Foreign currency positively impacted adjusted EBITDA margin by 30bp in the third quarter, but had no impact in the nine-month period, compared to the prior-year periods.

Tax & Accounting is a seasonal business with a significant percentage of its adjusted EBITDA historically generated in the fourth quarter. Small movements in the timing of revenues and expenses can impact the quarterly margin. Full-year margin is more reflective of the segment’s performance.

Corporate & Other

 

      Three months ended September 30,      Nine months ended September 30,  
(millions of U.S. dollars)    2017      2016      2017      2016  

Revenues – Reuters News

     73        73        221        227  

Reuters News (adjusted EBITDA)

     7        6        29        18  

Core corporate expenses

     (86)        (67)        (205)        (258)  

Total

     (79)        (61)        (176)        (240)  

Revenues from Reuters News were unchanged in the third quarter. The decrease in revenues in the nine-month period was primarily due to the impact of foreign currency and lower news agency revenues. In both periods, the increases in Reuters News adjusted EBITDA were due to lower expenses.

Core corporate expenses increased in the third quarter due to investments to optimize real estate and improve customer experience. However, in the nine-month period corporate expenses decreased as these investments were more than offset by the elimination of certain overhead costs in connection with the sale of our former Intellectual Property & Science business, and the allocation of additional costs, primarily technology, to the Tax & Accounting segment.

Refer to the “Outlook” section of this management’s discussion and analysis for further information regarding our expectations for core corporate expenses.

 

 

 

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Results of Discontinued Operations

In October 2016, we sold our Intellectual Property & Science business, which was reported as discontinued operations. The results of discontinued operations were as follows:

 

      Three months ended September 30,      Nine months ended September 30,  
(millions of U.S. dollars)    2017      2016      2017      2016  

(Loss) earnings from discontinued operations, net of tax

     (1)        18        1        126  

The 2017 periods are comprised of residual income and expense items following the closing of the Intellectual Property & Science sale.

Liquidity and Capital Resources

Our principal sources of liquidity are cash on hand, cash provided by our operations, our $2.0 billion commercial paper programs and our $2.4 billion credit facility. From time to time, we also issue debt securities. Our principal uses of cash are for debt repayments, debt servicing costs, dividend payments, capital expenditures, share repurchases and acquisitions. Additionally, in the first quarter of 2017, we contributed $500 million to our U.S. defined benefit pension plan. We believe that our existing sources of liquidity will be sufficient to fund our expected cash requirements in the normal course of business for the next 12 months.

Cash flow

Summary of consolidated statement of cash flow

 

      Three months ended September 30,      Nine months ended September 30,  
(millions of U.S. dollars)    2017      2016      $ Change      2017      2016      $ Change  

Net cash provided by operating activities

     808        758        50        1,274        1,986        (712)  

Net cash used in investing activities

     (218)        (220)        2        (813)        (780)        (33)  

Net cash used in financing activities

     (468)        (394)        (74)        (1,945)        (1,299)        (646)  

Increase (decrease) in cash and bank overdrafts

     122        144        (22)        (1,484)        (93)        (1,391)  

Translation adjustments

     4        (2)        6        9        (3)        12  

Cash and bank overdrafts at beginning of period

     766        684        82        2,367        922        1,445  

Cash and bank overdrafts at end of period

     892        826        66        892        826        66  

Operating activities. Net cash provided by operating activities increased in the third quarter due to higher operating profit before the impact of non-cash items, particularly fair value adjustments. Net cash provided by operating activities decreased in the nine-month period primarily due to the $500 million contribution to pre-fund our U.S. pension plan in January 2017, $137 million of payments related to 2016 severance charges, and the loss of cash flows from our former Intellectual Property & Science business, which was sold in October 2016 ($237 million year on year reduction).

Investing activities. Net cash used in investing activities in the third quarter was essentially unchanged. The increase in net cash used in investing activities in the nine-month period reflected higher acquisition spending by our Financial & Risk business as well as higher capital expenditures. Our Financial & Risk business purchased REDI, a provider of a cross-asset trade execution management system for financial professionals and two smaller businesses, Clarient and Avox, which expanded the segment’s risk management footprint. Both periods included proceeds from the sale of a portion of an investment.

Financing activities. Net cash used in financing activities in the third quarter increased due to the repayment of term debt, which more than offset lower share repurchases and higher commercial paper borrowings. The increase in net cash used in financing activities in the nine-month period reflected higher repayments of term debt, partly offset by lower share repurchases. Additionally, net cash used in financing activities in 2016 included the proceeds received from the May 2016 term debt issuance. We returned $0.5 billion (2016 – $0.8 billion) and $1.5 billion (2016 – $2.0 billion) to our common shareholders through dividends and share repurchases in the third quarter and nine-month period, respectively.

Cash and bank overdrafts. During 2017, we utilized a portion of the proceeds from the sale of Intellectual Property & Science to pay down debt and make a contribution to our U.S. pension plan. As such, cash and cash equivalents declined from $2.4 billion at December 31, 2016 to $0.9 billion at September 30, 2017. The balance in cash and bank overdrafts was $892 million at September 30, 2017 compared to $826 million at September 30, 2016.

 

 

 

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Additional information about our debt, dividends and share repurchases is as follows:

 

    Commercial paper programs. Issuances under our $2.0 billion commercial paper programs reached a peak of $705 million during the nine-month period of 2017, all of which remained outstanding at September 30, 2017.

 

    Credit facility. There were no borrowings under our $2.4 billion credit facility during the nine-month period of 2017.

 

    Long-term debt. We have capacity to issue up to $2.5 billion principal amount of debt securities under our debt shelf prospectus, which expires in April 2018. The following table provides information regarding notes that we issued and repaid in the nine months ended September 30, 2017 and 2016:

 

MONTH/YEAR    TRANSACTION    PRINCIPAL AMOUNT (IN MILLIONS)
     Notes issued     

May 2016

   3.35% Notes, due 2026    US$500
     Notes repaid     

September 2017

   1.65% Notes, due 2017    US$550

February 2017

   1.30% Notes, due 2017    US$550

May 2016

   0.875% Notes, due 2016    US$500

The February 2017 notes were repaid principally from cash on hand, which included a portion of the proceeds from the sale of the Intellectual Property & Science business. The September 2017 notes were repaid principally from cash on hand. We used the net proceeds of our May 2016 debt issuance to repay the notes which matured that same month.

 

    Credit ratings. Our credit ratings have not changed in 2017. The table below reflects the credit ratings that we have received from rating agencies in respect of our outstanding securities as of the date of this management’s discussion and analysis.

 

         
      Moody’s    Standard & Poor’s    DBRS Limited    Fitch

Long-term debt

   Baa2    BBB+    BBB (high)    BBB+

Commercial paper

   P-2    A-2    R-2 (high)    F2

Trend/Outlook

   Stable    Stable    Stable    Stable

These credit ratings are not recommendations to purchase, hold, or sell securities and do not address the market price or suitability of a specific security for a particular investor. We cannot assure you that our credit ratings will not be lowered in the future.

 

    Dividends. Dividends on our common shares are declared in U.S. dollars. In our consolidated statement of cash flow, dividends paid on common shares are shown net of amounts reinvested in our company under our dividend reinvestment plan. Details of dividends declared per share and dividends paid on common shares are as follows:

 

      Three months ended September 30,      Nine months ended September 30,  
(millions of U.S. dollars, except per share amounts)    2017      2016      2017      2016  

Dividends declared per share

   $ 0.345      $ 0.34      $ 1.035      $ 1.02  

Dividends declared

     246        252        746        766  

Dividends reinvested

     (9)        (9)        (26)        (26)  

Dividends paid

     237        243        720        740  

 

    Share repurchases. We may buy back shares (and subsequently cancel them) from time to time as part of our capital strategy. In February 2017, we announced that we plan to repurchase up to an additional $1.0 billion of our common shares. As of September 30, 2017, we repurchased 18.5 million common shares for a cost of $808 million under this buyback program.

Under our normal course issuer bid (NCIB), which we renewed in the second quarter, we may repurchase up to 36 million common shares between May 30, 2017 and May 29, 2018 in open market transactions on the Toronto Stock Exchange (TSX), the New York Stock Exchange (NYSE) and/or other exchanges and alternative trading systems, if eligible, or by such other means as may be permitted by the TSX and/or NYSE or under applicable law, including private agreement purchases if we receive an issuer bid exemption order from applicable securities regulatory authorities in Canada for such purchases. In the nine months ended September 30, 2017, we privately repurchased 6.0 million common shares (2016 – 4.1 million common shares) at a discount to the then-prevailing market price.

 

 

 

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Details of share repurchases were as follows:

 

      Three months ended September 30,      Nine months ended September 30,  
      2017      2016      2017      2016  

Share repurchases (millions of U.S. dollars)

     230        542        808        1,232  

Shares repurchased (millions)

     5.0        13.2        18.5        31.2  

Share repurchases – average price per share

     $46.03        $41.40        $43.60        $39.56  

Decisions regarding any future repurchases will depend on factors, such as market conditions, share price and other opportunities to invest capital for growth. We may elect to suspend or discontinue our share repurchases at any time, in accordance with applicable laws.

Free cash flow

 

      Three months ended September 30,      Nine months ended September 30,  
(millions of U.S. dollars)    2017      2016      2017      2016  

Net cash provided by operating activities

     808        758        1,274        1,986  

Capital expenditures, less proceeds from disposals

     (256)        (213)        (710)        (658)  

Capital expenditures from discontinued operations

     -        (13)        -        (38)  

Other investing activities

     (1)        3        14        23  

Dividends paid on preference shares

     (1)        (1)        (2)        (2)  

Dividends paid to non-controlling interests

     (19)        (15)        (50)        (44)  

Free cash flow

     531        519        526        1,267  

The increase in free cash flow in the third quarter was primarily due to higher cash from operating activities, which more than offset higher capital expenditures. The decrease in the nine-month period reflected lower cash from operating activities, which included the $500 million pension contribution in January 2017, and higher capital expenditures. We expect to generate full-year 2017 free cash flow between $0.9 billion and $1.2 billion.

Financial position

Our total assets were $26.8 billion at September 30, 2017, a decrease of $1.1 billion from December 31, 2016. The decrease was primarily due to the $500 million contribution to our U.S. pension plan and the repayment of $550 million principal amount of notes in February 2017 with cash on hand at December 31, 2016.

At September 30, 2017, the carrying amounts of our total current liabilities exceeded the carrying amounts of our total current assets by $1.9 billion. Of this amount, $1.0 billion relates to debt which matures in July 2018, which we expect to refinance. Additionally, current liabilities include $935 million of deferred revenue, which arises from the sale of subscription based products and services that many customers pay for in advance. The cash received from these advance payments is used to currently fund the operating, investing and financing activities of our business. However, for accounting purposes, these advance payments must be deferred and recognized over the term of the subscription. As such, we typically reflect a negative working capital position in our consolidated statement of financial position. In the ordinary course of business, deferred revenue does not represent a cash obligation, but rather an obligation to perform services or deliver products. Therefore, we believe this portion of the negative working capital position at September 30, 2017 was not indicative of a liquidity issue, but rather an outcome of the required accounting for our business model.

 

 

 

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Net debt(1)

 

      September 30,      December 31,  
(millions of U.S. dollars)    2017      2016  

Current indebtedness

     1,723        1,111  

Long-term indebtedness

     5,383        6,278  

Total debt

     7,106        7,389  

Swaps

     253        327  

Total debt after swaps

     7,359        7,716  

Remove fair value adjustments for hedges(2)

     -        23  

Total debt after currency hedging arrangements

     7,359        7,739  

Remove transaction costs and discounts included in the carrying value of debt

     58        65  

Less: cash and cash equivalents(3)

     (898)        (2,368)  

Net debt

     6,519        5,436  

 

(1) Net debt is a non-IFRS financial measure, which we define in Appendix A of this management’s discussion and analysis.

 

(2) Represents the interest-related fair value component of hedging instruments that are removed to reflect net cash outflow upon maturity.

 

(3) Includes cash and cash equivalents of $119 million and $112 million at September 30, 2017 and December 31, 2016, respectively, held in subsidiaries, which have regulatory restrictions, contractual restrictions or operate in countries where exchange controls and other legal restrictions apply and are therefore not available for general use by our company.

The maturity dates for our debt are well balanced with no significant concentration in any one year. Our next scheduled term debt maturity occurs in July 2018. At September 30, 2017, the average maturity of our term debt was approximately eight years at an average interest rate (after swaps) of less than 5%.

Off-balance sheet arrangements, commitments and contractual obligations

For a summary of our other off-balance sheet arrangements, commitments and contractual obligations, please see our 2016 annual management’s discussion and analysis. There were no material changes to these arrangements, commitments and contractual obligations during the nine months ended September 30, 2017.

Contingencies

Lawsuits and legal claims

We are engaged in various legal proceedings, claims, audits and investigations that have arisen in the ordinary course of business. These matters include, but are not limited to, employment matters, commercial matters, defamation claims and intellectual property infringement claims. The outcome of all of the matters against us is subject to future resolution, including the uncertainties of litigation. Based on information currently known to us and after consultation with outside legal counsel, management believes that the ultimate resolution of any such matters, individually or in the aggregate, will not have a material adverse impact on our financial condition taken as a whole.

Uncertain tax positions

We are subject to taxation in numerous jurisdictions and we are routinely under audit by many different taxing authorities in the ordinary course of business. There are many transactions and calculations during the course of business for which the ultimate tax determination is uncertain, as taxing authorities may challenge some of our positions and propose adjustments or changes to our tax filings.

As a result, we maintain provisions for uncertain tax positions that we believe appropriately reflect our risk. These provisions are made using our best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. We review the adequacy of these provisions at the end of each reporting period and adjust them based on changing facts and circumstances. Due to the uncertainty associated with tax audits, it is possible that at some future date, liabilities resulting from such audits or related litigation could vary significantly from our provisions. However, based on currently enacted legislation, information currently known to us and after consultation with outside tax advisors, management believes that the ultimate resolution of any such matters, individually or in the aggregate, will not have a material adverse impact on our financial condition taken as a whole.

In June 2016, certain of our U.S. subsidiaries received a statutory notice of deficiency from the Internal Revenue Service (IRS) for the 2010 and 2011 tax years. In the notice, the IRS claimed that the taxable income of these subsidiaries should have been increased by an amount that would have created an aggregate potential additional income tax liability of approximately $250 million for the period, including interest. The IRS claim related to our intercompany transfer pricing practices. In October 2017, we settled this claim resulting in approximately $15 million in tax and interest. The settlement did not have a material impact on our consolidated financial statements.

For additional information, please see the “Risk Factors” section of our 2016 annual report, which contains further information on risks related to tax matters.

 

 

 

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Outlook

The information in this section is forward-looking and should be read in conjunction with the part of the “Additional Information” section below entitled “Cautionary Note Concerning Factors That May Affect Future Results”.

We originally communicated our 2017 full-year business outlook in February 2017. In August 2017, we raised our 2017 full-year adjusted EPS outlook from $2.35 to a range of $2.40 to $2.45. We currently expect adjusted EPS performance to be at the top end of this range. In August 2017, we also increased the range of our 2017 full-year adjusted EBITDA margin outlook by 50bp from a range of 28.8% to 29.8% to a range of 29.3% to 30.3%. We have not changed our outlook for revenue growth and free cash flow, as originally communicated.

We recently reaffirmed our 2017 full-year business outlook, as communicated in August 2017. Our current outlook:

    Assumes constant currency rates relative to 2016; and
    Does not factor in the impact of acquisitions or divestitures that may occur during the year.

The following table sets forth our current 2017 financial outlook, the material assumptions related to our financial outlook and the material risks that may cause actual performance to differ materially from our expectations.

 

 

   Revenues expected to grow low single digits

 

   Material assumptions

   Material risks

    Gross domestic product (GDP) growth in most of the countries where we operate

 

    Continued demand for products and services that help customers navigate changing geopolitical, economic and regulatory environments

 

    An increase in demand for information and workflow solutions

 

    The successful execution of sales initiatives, ongoing product release programs and our globalization strategy

  

    Global economic uncertainty due to factors including continued regulatory reform around the world, changes in the political environment and the U.K.’s plan to leave the European Union may limit business opportunities for our customers, lowering their demand for our products and services

 

    Demand for our products and services could be reduced by changes in customer buying patterns, or our inability to execute on key product or customer support initiatives

 

    Pressure on certain customers, in developed markets in particular, may constrain the number of professionals employed

 

    Competitive pricing actions could impact our revenues

 

    Our sales and product initiatives may be insufficient to retain customers or generate new sales

 

 

   Adjusted EBITDA margin expected to be between 29.3% and 30.3%

 

   Material assumptions

   Material risks

    Revenues expected to grow at low single digits

 

    Business mix continues to shift to higher-growth, but lower margin offerings

 

    Execution of transformation and efficiency initiatives

 

    Continue to invest in growth markets and customer service

  

    Same as the risks above related to the revenue outlook

 

    Revenues from higher margin businesses may be lower than expected; conversely, revenues from low-margin businesses could be higher than expected

 

    The costs of required investments, including those in growth markets, exceed expectations or actual returns are below expectations

 

    Acquisition and disposal activity may dilute margins

 

    Efficiency initiatives may cost more than expected, be delayed or may not produce the expected level of savings

 

 

 

 

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   Adjusted EPS expected to be between $2.40 and $2.45 (now forecast to be at the top of this range)

 

   Material assumptions

   Material risks

    Adjusted EBITDA margin expected to be between 29.3% and 30.3%

 

    Depreciation and software amortization expense expected to be between $1.0 billion and $1.05 billion, a slight increase to the bottom part of this range, which was originally communicated as $950 million in February 2017

 

    Interest expense expected to be between $400 and $425 million (now forecasted to be near the bottom of this range)

 

    Effective tax rate expected to be between 10% and 13% (now forecasted to be near the bottom of this range)

 

    Completion of $1.0 billion share buyback program announced in February 2017

 

  

    Same as the risks above related to the revenue outlook and adjusted EBITDA margin outlook

 

    Capital expenditures may be higher than currently expected, resulting in higher in-period depreciation and amortization

 

    Obsolescence of technology may require accelerated amortization or impairment of certain assets

 

    Higher than expected debt levels or an increase in rates could result in higher interest expense

 

    Material changes in current tax laws or treaties to which we are subject could adversely impact our income tax expense

 

    Higher common shares outstanding due to lower than expected share repurchases

 

 

   Free Cash Flow is expected to be between $0.9 billion and $1.2 billion

 

   Material assumptions

   Material risks

    Revenues expected to grow at low single digits

 

    Expected cash payments in 2017 relating to the fourth-quarter 2016 severance charges, the $500 million contribution to our U.S. defined benefit pension plan made in January 2017, and the loss of free cash flow following the sale of Intellectual Property & Science

 

    Adjusted EBITDA margin expected to be between 29.3% and 30.3%

 

    Capital expenditures expected to be approximately 9.0% of revenues, a slight increase from 8.5% of revenues, as originally communicated in February 2017

 

  

    Same as the risks above related to the revenue outlook and adjusted EBITDA margin outlook

 

    A weaker macroeconomic environment could negatively impact working capital performance

 

    Capital expenditures may be higher than currently expected resulting in higher cash outflows

 

    The timing and amount of tax payments to governments may differ from our expectations

Additionally, we expect full-year 2017 core corporate costs including depreciation and amortization of computer software to be approximately $290 million. This reflects cost reductions to realign the corporate center with the size of our business after the sale of Intellectual Property & Science, as well as $40 million to $50 million of higher overhead allocations, primarily technology, to our segments. We expect that the higher allocations will have a negative impact on the full-year 2017 adjusted EBITDA margin of Tax & Accounting, our smallest segment, while the impacts on our Financial & Risk and Legal segments for the full year are expected to be minimal.

Our Outlook contains various non-IFRS financial measures. For Outlook purposes only, we are unable to reconcile these non-IFRS measures to the most comparable IFRS measures because we cannot predict, with reasonable certainty, the 2017 impact of changes in foreign exchange rates which impact (i) the translation of our results reported at average foreign currency rates for the year, (ii) fair value adjustments associated with foreign currency derivatives embedded in certain customer contracts and (iii) other finance income or expense related to foreign exchange contracts and intercompany financing arrangements. Additionally, we cannot reasonably predict the occurrence or amount of other operating gains and losses, which generally arise from business transactions we do not anticipate.

Related Party Transactions

As of October 31, 2017, Woodbridge beneficially owned approximately 63% of our shares.

There were no new significant related party transactions during the nine months ended September 30, 2017. Please refer to the “Related Party Transactions” section of our 2016 annual management’s discussion and analysis, which is contained in our 2016 annual report, as well as note 29 of our 2016 annual consolidated financial statements for information regarding related party transactions.

Subsequent Events

There were no material events occurring after September 30, 2017 through the date of this management’s discussion and analysis.

Changes in Accounting Policies

Effective January 1, 2017, we prospectively adopted the amendments of IFRS 2, Classification and Measurement of Share-based Payment Transactions. Please refer to the “Changes in Accounting Policies” section of our 2016 annual management’s discussion and analysis, which is contained in our 2016 annual report, as well as note 1 of our consolidated interim financial statements for the three and nine months ended September 30, 2017.

 

 

 

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Critical Accounting Estimates and Judgments

The preparation of financial statements requires management to make estimates and judgments about the future. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Please refer to the “Critical Accounting Estimates and Judgments” section of our 2016 annual management’s discussion and analysis, which is contained in our 2016 annual report, for additional information. Since the date of our 2016 annual management’s discussion and analysis, there have not been any significant changes to our critical accounting estimates and judgments.

Additional Information

Disclosure controls and procedures

Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in applicable U.S. and Canadian securities law) as of the end of the period covered by this management’s discussion and analysis, have concluded that our disclosure controls and procedures were effective to ensure that all information that we are required to disclose in reports that we file or furnish under the U.S. Securities Exchange Act and applicable Canadian securities law is (i) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and Canadian securities regulatory authorities and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Internal control over financial reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.

We are engaged in the following long-term efficiency initiatives which impact our financial reporting:

 

    We are enhancing our order-to-cash (OTC) applications and related workflow processes in phases over multiple years. Key elements of the OTC solutions are order management, billing, cash management and collections functionality. We expect to reduce the number of applications and to streamline processes across our organization through this initiative.
    We are automating manual processes and updating workflows associated with intercompany revenue and cost allocation.

As we are implementing these initiatives in phases over an extended period, the nature and extent of activity will vary by quarter. In certain quarters, we may have limited or no activity.

As these initiatives could result in material changes to our internal control over financial reporting depending on the nature and volume of work completed, we will continue to modify the design and documentation of the related internal control processes and procedures, as necessary. Except as described above, there was no change in our internal control over financial reporting during the last fiscal quarter of 2017 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Share capital

As of October 31, 2017, we had outstanding 711,559,704 common shares, 6,000,000 Series II preference shares, 9,180,937 stock options and a total of 6,125,334 time-based restricted share units and performance restricted share units. We have also issued a Thomson Reuters Founders Share which enables Thomson Reuters Founders Share Company to exercise extraordinary voting power to safeguard the Thomson Reuters Trust Principles.

Public securities filings and regulatory announcements

You may access other information about our company, including our 2016 annual report (which contains information required in an annual information form) and our other disclosure documents, reports, statements or other information that we file with the Canadian securities regulatory authorities through SEDAR at www.sedar.com and in the United States with the SEC at www.sec.gov.

 

 

 

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Cautionary note concerning factors that may affect future results

Certain statements in this management’s discussion and analysis are forward-looking, including, but not limited to, statements about our 2017 expectations in the “Executive Summary” and “Outlook” sections, statements regarding Thomson Reuters investments in the customer experience (and the impact of such investments), consolidated adjusted EBITDA margin, capital expenditures, debt refinancing, and U.S. online legal information revenues in our Legal segment. The words “expect”, “target” and “will” and similar expressions identify forward-looking statements. These forward-looking statements are based on certain assumptions and reflect our company’s current expectations. As a result, forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. Certain factors that could cause actual results or events to differ materially from current expectations are discussed in the “Outlook” section above. Additional factors are discussed in the “Risk Factors” section of our 2016 annual report and in materials that we from time to time file with, or furnish to, the Canadian securities regulatory authorities and the U.S. Securities and Exchange Commission. There is no assurance that any forward-looking statement will materialize. Our Outlook is provided for the purpose of providing information about current expectations for 2017. This information may not be appropriate for other purposes. You are cautioned not to place undue reliance on forward-looking statements, which reflect our expectations only as of the date of this management’s discussion and analysis. Except as may be required by applicable law, we disclaim any obligation to update or revise any forward-looking statements.

 

 

 

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Appendix A

Non-IFRS Financial Measures

We use non-IFRS financial measures as supplemental indicators of our operating performance and financial position. Additionally, we use non-IFRS measures as performance metrics as the basis for management incentive programs. These measures do not have any standardized meaning prescribed by IFRS and therefore are unlikely to be comparable to the calculation of similar measures used by other companies. Except for free cash flow, all our non-IFRS measures exclude the results of our Intellectual Property & Science business, which was reported as a discontinued operation through the closing date of the sale.

The following table sets forth our non-IFRS financial measures, including an explanation of why we believe they are useful measures of our performance. Reconciliations for the most directly comparable IFRS measure are reflected in our management’s discussion and analysis.

 

How We Define It    Why We Use It and Why It Is Useful to Investors   Most Directly Comparable
IFRS Measure/Reconciliation

Adjusted EBITDA and the related margin

Adjusted EBITDA represents earnings from continuing operations before tax expense or benefit, net interest expense, other finance costs or income, depreciation, amortization of software and other identifiable intangible assets, our share of post-tax earnings or losses in equity method investments, other operating gains and losses, certain asset impairment charges, fair value adjustments and corporate related items.

 

The related margin is expressed as a percentage of revenues.

  

Provides a consistent basis to evaluate operating profitability and performance trends by excluding items that we do not consider to be controllable activities for this purpose.

 

Represents a measure commonly reported and widely used by investors as a valuation metric. Additionally, this measure is used to assess our ability to incur and service debt.

  Earnings from continuing operations

Adjusted EBITDA less capital expenditures and the related margin

Adjusted EBITDA less capital expenditures, less proceeds from disposals. The related margin is expressed as a percentage of revenues.

   Provides a basis for evaluating the operating profitability and capital intensity of a business in a single measure. This measure captures investments regardless of whether they are expensed or capitalized.   Earnings from continuing operations

Adjusted earnings and adjusted EPS

Earnings attributable to common shareholders and per share:

     excluding the post-tax impacts of fair value adjustments, amortization of other identifiable intangible assets, other operating gains and losses, certain asset impairment charges, other net finance costs or income, our share of post-tax earnings or losses in equity method investments, discontinued operations and other items affecting comparability. We calculate the post-tax amount of each item excluded from adjusted earnings based on the specific tax rules and tax rates associated with the nature and jurisdiction of each item.

     We also deduct dividends declared on preference shares.

 

Adjusted EPS is calculated using diluted weighted-average shares.

   Provides a more comparable basis to analyze earnings and is also a measure commonly used by shareholders to measure our performance.   Earnings attributable to common
shareholders and diluted earnings
per share

 

 

 

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How We Define It    Why We Use It and Why It Is Useful to Investors   Most Directly Comparable
IFRS Measure/Reconciliation

Adjusted earnings and adjusted EPS (continued)

In interim periods, we also adjust our reported earnings and earnings per share to reflect a normalized effective tax rate. Specifically, the normalized effective rate is computed as the estimated full-year effective tax rate applied to pre-tax adjusted earnings of the interim period. The reported effective tax rate is based on separate annual effective income tax rates for each taxing jurisdiction that are applied to each interim period’s pre-tax income.

   Because the geographical mix of pre-tax profits and losses in interim periods may be different from that for the full-year, our effective tax rate computed in accordance with IFRS may be more volatile by quarter. Therefore, we believe that using the expected full-year effective tax rate provides more comparability among interim periods. The adjustment to normalize the effective tax rate reallocates estimated full-year income taxes between interim periods, but has no effect on full year tax expense or on cash taxes paid.    

Net debt

Total indebtedness, including the associated fair value of hedging instruments, but excluding the associated unamortized transaction costs and premiums or discounts and the interest-related fair value component of hedging instruments, less cash and cash equivalents.

  

Provides a commonly used measure of a company’s leverage.

 

Given that we hedge some of our debt to reduce risk, we include hedging instruments as we believe it provides a better measure of the total obligation associated with our outstanding debt. However, because we intend to hold our debt and related hedges to maturity, we do not consider the interest components of the associated fair value of hedges in our measurements. We reduce gross indebtedness by cash and cash equivalents.

  Total debt (current indebtedness
plus long-term indebtedness)

Free cash flow (includes free cash flow from continuing and discontinued operations)

Net cash provided by operating activities, and other investing activities, less capital expenditures, dividends paid on our preference shares, and dividends paid to non-controlling interests.

   Helps assess our ability, over the long term, to create value for our shareholders as it represents cash available to repay debt, pay common dividends and fund share repurchases and new acquisitions.   Net cash provided by operating
activities

Changes before the impact of foreign currency or at “constant currency”

Applicable measures where changes are

reported before the impact of foreign currency or at “constant currency”

 

IFRS Measures:

     Revenues

     Operating expenses

 

Non-IFRS Measures:

     Adjusted EBITDA and Adjusted EBITDA margin

    Adjusted EPS

  

Provides better comparability of business trends from period to period.

 

Our reporting currency is the U.S. dollar. However, we conduct a significant amount of our activities in currencies other than the U.S. dollar. We measure our performance before the impact of foreign currency (or at “constant currency”), which means that we apply the same foreign currency exchange rates for the current and equivalent prior period. To calculate the foreign currency impact between periods, we convert the current and equivalent prior period’s local currency results using the same foreign currency exchange rate.

  For each non-IFRS measure, refer
to the definitions above for most
directly comparable IFRS measure.

 

 

 

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Appendix B

This appendix provides reconciliations that are not presented elsewhere in this management’s discussion and analysis for certain non-IFRS measures to the most directly comparable IFRS measure for the three and nine months ended September 30, 2017 and 2016.

Reconciliation of earnings from continuing operations to adjusted EBITDA and adjusted EBITDA less capital expenditures

 

      Three months ended September 30,      Nine months ended September 30,  
(millions of U.S. dollars, except margins)    2017      2016      Change      2017      2016      Change  

Earnings from continuing operations

     349        268        30%        867        782        11%  

Adjustments to remove:

                 

Tax (benefit) expense

     (22)        8           (8)        (16)     

Other finance costs

     58        3           176        28     

Net interest expense

     84        108           272        304     

Amortization of other identifiable intangible assets

     115        128           354        388     

Amortization of computer software

     171        177           519        518     

Depreciation

     73        78                 222        239           

EBITDA

     828        770           2,402        2,243     

Adjustments to remove:

                 

Share of post-tax (earnings) losses in equity method investments

     (2)        (2)           3        (2)     

Other operating (gains) losses, net

     (30)        12           (13)        1     

Fair value adjustments

     53        34                 171        77           

Adjusted EBITDA

     849        814        4%        2,563        2,319        11%  

Deduct: Capital expenditures, less proceeds from disposals

     (256)        (213)                 (710)        (658)           

Adjusted EBITDA less capital expenditures

     593        601        (1%)        1,853        1,661        12%  

Adjusted EBITDA margin

     30.4%        29.7%        70bp        30.6%        27.9%        270bp  

Adjusted EBITDA less capital expenditures margin

     21.2%        21.9%        (70)bp        22.1%        20.0%        210bp  

 

 

 

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Reconciliation of changes in segment and consolidated revenues, adjusted EBITDA and the related margin, and consolidated operating expenses and adjusted EPS, excluding the effects of foreign currency

 

      Three months ended September 30,  
                   Change  
(millions of U.S. dollars)    2017      2016      Total      Foreign
Currency
     Constant
Currency
 

Revenues

              

Financial & Risk

     1,542        1,516        2%        1%        1%  

Legal

     843        835        1%        -        1%  

Tax & Accounting

     341        323        6%        1%        5%  

Corporate & Other (Reuters News)

     73        73        -        1%        (1%)  

Eliminations

     (7)        (3)                             

Consolidated revenues

     2,792        2,744        2%        1%        1%  

 

      Three months ended September 30,  
                   Change  
(millions of U.S. dollars, except margins)    2017      2016      Total      Foreign
Currency
     Constant
Currency
 

Adjusted EBITDA

              

Financial & Risk

     495        460        8%        2%        6%  

Legal

     338        328        3%        1%        2%  

Tax & Accounting

     95        87        9%        1%        8%  

Corporate & Other (includes Reuters News)

     (79)        (61)        n/a        n/a        n/a  

Consolidated adjusted EBITDA

     849        814        4%        -        4%  

Adjusted EBITDA Margin

              

Financial & Risk

     32.1%        30.3%        180bp        30bp        150bp  

Legal

     40.1%        39.3%        80bp        10bp        70bp  

Tax & Accounting

     27.9%        26.9%        100bp        30bp        70bp  

Corporate & Other (includes Reuters News)

     n/a        n/a        n/a        n/a        n/a  

Consolidated adjusted EBITDA margin

     30.4%        29.7%        70bp        -        70bp  

 

      Three months ended September 30,  
                   Change  
(millions of U.S. dollars, except per share amounts)    2017      2016      Total      Foreign
Currency
     Constant
Currency
 

Consolidated operating expenses

     1,996        1,964        2%        2%        -  

Consolidated adjusted EPS

     $0.68        $0.54        26%        2%        24%  

 

 

 

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Reconciliation of changes in segment and consolidated revenues, adjusted EBITDA and the related margin, and consolidated operating expenses and adjusted EPS, excluding the effects of foreign currency (continued)

 

      Nine months ended September 30,  
                   Change  
(millions of U.S. dollars)    2017      2016      Total      Foreign
Currency
     Constant
Currency
 

Revenues

              

Financial & Risk

     4,561        4,549        -        (1%)        1%  

Legal

     2,509        2,503        -        (1%)        1%  

Tax & Accounting

     1,108        1,036        7%        1%        6%  

Corporate & Other (Reuters News)

     221        227        (3%)        (1%)        (2%)  

Eliminations

     (10)        (9)           

Consolidated revenues

     8,389        8,306        1%        (1%)        2%  

 

      Nine months ended September 30,  
                   Change  
(millions of U.S. dollars, except margins)    2017      2016      Total      Foreign
Currency
     Constant
Currency
 

Adjusted EBITDA

              

Financial & Risk

     1,435        1,340        7%        -        7%  

Legal

     965        936        3%        -        3%  

Tax & Accounting

     339        283        20%        1%        19%  

Corporate & Other (includes Reuters News)

     (176)        (240)        n/a        n/a        n/a  

Consolidated adjusted EBITDA

     2,563        2,319        11%        1%        10%  

Adjusted EBITDA Margin

              

Financial & Risk

     31.5%        29.5%        200bp        40bp        160bp  

Legal

     38.5%        37.4%        110bp        20bp        90bp  

Tax & Accounting

     30.6%        27.3%        330bp        -        330bp  

Corporate & Other (includes Reuters News)

     n/a        n/a        n/a        n/a        n/a  

Consolidated adjusted EBITDA margin

     30.6%        27.9%        270bp        30bp        240bp  

 

      Nine months ended September 30,  
                   Change  
(millions of U.S. dollars, except per share amounts)    2017      2016      Total      Foreign
Currency
     Constant
Currency
 

Consolidated operating expenses

     5,997        6,064        (1%)        1%        (2%)  

Consolidated adjusted EPS

     $1.91        $1.47        30%        1%        29%  

Appendix C

Supplemental Information

Depreciation and amortization of computer software by segment

 

      Three months ended September 30,      Nine months ended September 30,  
(millions of U.S. dollars)    2017      2016      2017      2016  

Financial & Risk

     147        147        434        435  

Legal

     60        64        183        187  

Tax & Accounting

     31        28        95        86  

Corporate & Other (includes Reuters News)

     6        16        29        49  

Total

     244        255        741        757  

 

 

 

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Appendix D

Quarterly information (unaudited)

The following table presents a summary of our consolidated operating results for the eight most recent quarters.

 

     Quarter ended
March 31,
    Quarter ended
June 30,
    Quarter ended
September 30,
    Quarter ended
December 31,
 
(millions of U.S. dollars, except per share amounts)   2017     2016     2017     2016     2017     2016     2016     2015  

Revenues

    2,815       2,793       2,782       2,769       2,792       2,744       2,860       2,887  

Operating profit

    444       310       399       401       467       385       294       433  

Earnings from continuing operations

    317       210       201       304       349       268       274       358  

(Loss) earnings from discontinued operations, net of tax

    (3)       62       5       46       (1)       18       1,967       59  

Net earnings

    314       272       206       350       348       286       2,241       417  

Earnings attributable to common shareholders

    297       262       192       337       330       273       2,226       408  

Basic earnings per share

               

From continuing operations

    $0.41       $0.26       $0.26       $0.39       $0.46       $0.34       $0.35       $0.45  

From discontinued operations

    -       0.08       0.01       0.06       -       0.03       2.69       0.08  
      $0.41       $0.34       $0.27       $0.45       $0.46       $0.37       $3.04       $0.53  

Diluted earnings per share

               

From continuing operations

    $0.41       $0.26       $0.26       $0.39       $0.46       $0.34       $0.35       $0.45  

From discontinued operations

    -       0.08       0.01       0.06       -       0.02       2.68       0.08  
      $0.41       $0.34       $0.27       $0.45       $0.46       $0.36       $3.03       $0.53  

Our revenues and operating profit on a consolidated basis do not tend to be significantly impacted by seasonality as we record a large portion of our revenues ratably over a contract term and our costs are generally incurred evenly throughout the year. However, our performance from quarter to consecutive quarter can be impacted by transactions revenues as well as by the release of certain print-based offerings, which tend to be concentrated at the end of the year. As a consequence, the results of certain of our segments can be impacted by seasonality to a greater extent than our consolidated results.

Revenues — Foreign currency negatively impacted revenue performance in all periods, except for the third quarter of 2017 which was positively impacted.

On a constant currency basis, revenues grew by low single digits in each quarter as growth in recurring revenues exceeded declines in recoveries and U.S. print revenues. Additionally, transactions revenues increased in the first three quarters of 2017, but declined in the fourth quarter of 2016. Acquisitions contributed to revenue growth in the first two quarters of 2017, but did not have a meaningful impact on revenue performance in the third quarter of 2017 and the fourth quarter of 2016.

Operating profit — In the third quarter of 2017, operating profit increased due to higher revenues and a gain on the sale of a portion of an investment. While both the first and second quarters of 2017 benefited from higher revenues and lower operating expenses, which reflected the continuing simplification of our business, operating profit in the second quarter declined due to unfavorable fair value adjustments associated with foreign currency derivatives embedded in certain customer contracts. In the fourth quarter of 2016, operating profit decreased due to $212 million of severance charges.

Net earnings — In the third quarter of 2017, net earnings increased as higher operating profit and lower income tax expense more than offset higher finance costs. In the second quarter of 2017, net earnings decreased due to financing costs, as well as the loss of earnings from discontinued operations following the sale of Intellectual Property & Science in October 2016. In the first quarter of 2017, net earnings increased as higher operating profit more than offset the loss of earnings from discontinued operations. In the fourth quarter of 2016, net earnings increased due to the gain on the sale of Intellectual Property & Science.

 

 

 

Page 26

EXHIBIT 99.2 - UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

LOGO

 

EXHIBIT 99.2

THOMSON REUTERS CORPORATION

CONSOLIDATED INCOME STATEMENT

(unaudited)

 

              Three months ended September 30,      Nine months ended September 30,  
(millions of U.S. dollars, except per share amounts)    Notes      2017      2016      2017      2016  

CONTINUING OPERATIONS

              

Revenues

        2,792        2,744        8,389        8,306  

Operating expenses

     5        (1,996)        (1,964)        (5,997)        (6,064)  

Depreciation

        (73)        (78)        (222)        (239)  

Amortization of computer software

        (171)        (177)        (519)        (518)  

Amortization of other identifiable intangible assets

        (115)        (128)        (354)        (388)  

Other operating gains (losses), net

     6        30        (12)        13        (1)  

Operating profit

        467        385        1,310        1,096  

Finance costs, net:

              

Net interest expense

     7        (84)        (108)        (272)        (304)  

Other finance costs

     7        (58)        (3)        (176)        (28)  

Income before tax and equity method investments

        325        274        862        764  

Share of post-tax earnings (losses) in equity method investments

        2        2        (3)        2  

Tax benefit (expense)

     8        22        (8)        8        16  

Earnings from continuing operations

        349        268        867        782  

(Loss) earnings from discontinued operations, net of tax

     9        (1)        18        1        126  

Net earnings

              348        286        868        908  

Earnings attributable to:

              

Common shareholders

        330        273        819        872  

Non-controlling interests

        18        13        49        36  

Earnings per share:

     10              

Basic earnings per share:

              

From continuing operations

        $0.46        $0.34        $1.13        $0.99  

From discontinued operations

                     0.03               0.17  

Basic earnings per share

              $0.46        $0.37        $1.13        $1.16  

Diluted earnings per share:

              

From continuing operations

        $0.46        $0.34        $1.13        $0.99  

From discontinued operations

               0.02               0.16  

Diluted earnings per share

              $0.46        $0.36        $1.13        $1.15  

The related notes form an integral part of these consolidated financial statements.

 

 

 

Page 27


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THOMSON REUTERS CORPORATION

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(unaudited)

 

            Three months ended September 30,     Nine months ended September 30,  
(millions of U.S. dollars)   Notes     2017     2016     2017     2016  

Net earnings

            348       286       868       908  

Other comprehensive income (loss):

         

Items that have been or may be subsequently reclassified to net earnings:

         

Cash flow hedges adjustments to net earnings

    7       (53)       16       (97)       (74)  

Cash flow hedges adjustments to equity

      42       (3)       73       55  

Foreign currency translation adjustments to equity

            221       (63)       605       (162)  
              210       (50)       581       (181)  

Item that will not be reclassified to net earnings:

         

Remeasurement on defined benefit pension plans

      64       (42)       84       (266)  

Related tax (expense) benefit on remeasurement on defined benefit pension plans

            (11)       6       (22)       76  
              53       (36)       62       (190)  

Other comprehensive income (loss)

            263       (86)       643       (371)  

Total comprehensive income

            611       200       1,511       537  

Comprehensive income for the period attributable to:

         

Common shareholders:

         

Continuing operations

      594       167       1,461       397  

Discontinued operations

      (1)       20       1       104  

Non-controlling interests

            18       13       49       36  

Total comprehensive income

            611       200       1,511       537  

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)

 

              September 30,      December 31,  
(millions of U.S. dollars)    Notes      2017      2016  

Cash and cash equivalents

     11        898        2,368  

Trade and other receivables

        1,530        1,392  

Other financial assets

     11        106        188  

Prepaid expenses and other current assets

              724        686  

Current assets

        3,258        4,634  

Computer hardware and other property, net

        903        961  

Computer software, net

        1,411        1,394  

Other identifiable intangible assets, net

        5,429        5,655  

Goodwill

        15,019        14,485  

Other financial assets

     11        93        135  

Other non-current assets

     12        596        537  

Deferred tax

              56        51  

Total assets

              26,765        27,852  

LIABILITIES AND EQUITY

        

Liabilities

        

Current indebtedness

     11        1,723        1,111  

Payables, accruals and provisions

     13        2,219        2,448  

Deferred revenue

        935        901  

Other financial liabilities

     11        315        102  

Current liabilities

        5,192        4,562  

Long-term indebtedness

     11        5,383        6,278  

Provisions and other non-current liabilities

     14        1,680        2,258  

Other financial liabilities

     11        285        340  

Deferred tax

              987        1,158  

Total liabilities

              13,527        14,596  

Equity

        

Capital

     15        9,536        9,589  

Retained earnings

        6,920        7,477  

Accumulated other comprehensive loss

              (3,712)        (4,293)  

Total shareholders’ equity

        12,744        12,773  

Non-controlling interests

              494        483  

Total equity

              13,238        13,256  

Total liabilities and equity

              26,765        27,852  

Contingencies (note 18)

        

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 September 30,      Nine months ended September 30,  
(millions of U.S. dollars)    Notes      2017      2016      2017      2016  

Cash provided by (used in):

              

OPERATING ACTIVITIES

              

Earnings from continuing operations

        349        268        867        782  

Adjustments for:

              

Depreciation

        73        78        222        239  

Amortization of computer software

        171        177        519        518  

Amortization of other identifiable intangible assets

        115        128        354        388  

Net gains on disposals of businesses and investments

        (35)        (2)        (35)        (4)  

Deferred tax

        (121)        (46)        (194)        (130)  

Other

     16        164        129        601        354  

Pension contribution

        —          —          (500)        —    

Changes in working capital and other items

     16        97        37        (506)        (344)  

Operating cash flows from continuing operations

        813        769        1,328        1,803  

Operating cash flows from discontinued operations

              (5)        (11)        (54)        183  

Net cash provided by operating activities

              808        758        1,274        1,986  

INVESTING ACTIVITIES

              

Acquisitions, net of cash acquired

     17        (1)        —          (184)        (111)  

Proceeds from disposals of businesses and investments

        40        3        50        4  

Capital expenditures, less proceeds from disposals

        (256)        (213)        (710)        (658)  

Other investing activities

              (1)        3        14        23  

Investing cash flows from continuing operations

        (218)        (207)        (830)        (742)  

Investing cash flows from discontinued operations

              —          (13)        17        (38)  

Net cash used in investing activities

              (218)        (220)        (813)        (780)  

FINANCING ACTIVITIES

              

Proceeds from debt

     11        —          —          —          498  

Repayments of debt

     11        (550)        —          (1,100)        (503)  

Net borrowings under short-term loan facilities

     11        555        398        705        702  

Repurchases of common shares

     15        (230)        (542)        (808)        (1,232)  

Dividends paid on preference shares

        (1)        (1)        (2)        (2)  

Dividends paid on common shares

     15        (237)        (243)        (720)        (740)  

Dividends paid to non-controlling interests

        (19)        (15)        (50)        (44)  

Other financing activities

              14        9        30        22  

Net cash used in financing activities

              (468)        (394)        (1,945)        (1,299)  

Increase (decrease) in cash and bank overdrafts

        122        144        (1,484)        (93)  

Translation adjustments

        4        (2)        9        (3)  

Cash and bank overdrafts at beginning of period

              766        684        2,367        922  

Cash and bank overdrafts at end of period

              892        826        892        826  

Cash and bank overdrafts at end of period comprised of:

              

Cash and cash equivalents

        898        831        898        831  

Bank overdrafts

              (6)        (5)        (6)        (5)  
                892        826        892        826  

Supplemental cash flow information is provided in note 16.

              

Interest paid

        (53)        (75)        (218)        (240)  

Income taxes paid

     16        (43)        (60)        (99)        (158)  

Interest paid is reflected as an operating cash flow and is net of debt-related hedges.

Income taxes paid are reflected as either operating or investing cash flows depending on the nature of the underlying transaction.

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 (“AOCL”)
    Shareholders’
equity
   

Non-

controlling
interests

    Total
equity
 

Balance, December 31, 2016

    9,393       196       9,589         7,477       32       (4,325)       (4,293)       12,773       483       13,256  

Impact of IFRS 2 amendments (note 1)

    -       152       152               -       -       -       -       152       -       152  

Balance after IFRS 2 amendments

    9,393       348       9,741         7,477       32       (4,325)       (4,293)       12,925       483       13,408  

Net earnings

    -       -       -         819       -       -       -       819       49       868  

Other comprehensive
income (loss)

    -       -       -               62       (24)       605       581       643       -       643  

Total comprehensive
income (loss)

    -       -       -               881       (24)       605       581       1,462       49       1,511  

Change in ownership interest of subsidiary

    -       -       -         18       -       -       -       18       12       30  

Distributions to non-controlling interests

    -       -       -         -       -       -       -       -       (50)       (50)  

Dividends declared
on preference shares

    -       -       -         (2)       -       -       -       (2)       -       (2)  

Dividends declared
on common shares

    -       -       -         (746)       -       -       -       (746)       -       (746)  

Shares issued under Dividend
Reinvestment Plan (“DRIP”)

    26       -       26         -       -       -       -       26       -       26  

Repurchases of common shares

    (241)       -       (241)         (575)       -       -       -       (816)       -       (816)  

Pre-defined share repurchase plan

    (52)       -       (52)         (133)       -       -       -       (185)       -       (185)  

Stock compensation plans

    161       (99)       62               -       -       -       -       62       -       62  

Balance, September 30, 2017

    9,287       249       9,536               6,920       8       (3,720)       (3,712)       12,744       494       13,238  
                     
(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
    AOCL     Shareholders’
equity
   

Non-

controlling
interests

    Total
equity
 

Balance, December 31, 2015

    9,686       166       9,852         6,458       36       (3,733)       (3,697)       12,613       487       13,100  

Net earnings

    -       -       -         872       -       -       -       872       36       908  

Other comprehensive loss

    -       -       -               (190)       (19)       (162)       (181)       (371)       -       (371)  

Total comprehensive
income (loss)

    -       -       -               682       (19)       (162)       (181)       501       36       537  

Change in ownership interest of subsidiary

    -       -       -         15       -       -       -       15       3       18  

Distributions to non-
controlling interests

    -       -       -         -       -       -       -       -       (44)       (44)  

Dividends declared
on preference shares

    -       -       -         (2)       -       -       -       (2)       -       (2)  

Dividends declared
on common shares

    -       -       -         (766)       -       -       -       (766)       -       (766)  

Shares issued under DRIP

    26       -       26         -       -       -       -       26       -       26  

Repurchases of common
shares

    (339)       -       (339)         (729)       -       -       -       (1,068)       -       (1,068)  

Pre-defined share repurchase plan

    (26)       -       (26)         (59)       -       -       -       (85)       -       (85)  

Stock compensation plans

    97       17       114               -       -       -       -       114       -       114  

Balance, September 30, 2016

    9,444       183       9,627               5,599       17       (3,895)       (3,878)       11,348       482       11,830  

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. The Company is a major source of news and information for professional markets, operating in more than 100 countries.

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, 2016, except as described below. 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 consolidated financial statements have been set out in note 2 of the Company’s consolidated financial statements for the year ended December 31, 2016. These interim financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2016, which are included in the Company’s 2016 annual report.

The accompanying interim financial statements include all adjustments, composed of normal recurring adjustments, considered necessary by management to fairly state the Company’s results of operations, financial position and cash flows. The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.

References to “$” are to U.S. dollars and references to “C$” are to Canadian dollars.

Changes in accounting policy

Effective January 1, 2017, the Company prospectively adopted the amendments to IFRS 2, Classification and Measurement of Share-based Payment Transactions. The amendments clarified the accounting for (a) the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments; (b) share-based payment transactions with a net settlement feature for withholding tax obligations; and (c) a modification to the terms and conditions of a share-based payment that changes the classification of the transaction from cash-settled to equity-settled.

 

    Upon adoption on January 1, 2017, the Company reclassified $152 million of withholding tax obligations for share-based payments from liabilities to equity.
    The Company is no longer applying mark-to-market accounting on share-based payment transactions with a net settlement feature for withholding tax obligations. The impact was not material to the consolidated income statement and had no impact on the consolidated statement of cash flow for the three and nine months ended September 30, 2017.

 

 

 

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Note 2: Recent Accounting Pronouncements

Certain pronouncements were issued by the IASB or International Financial Reporting Interpretations Committee (“IFRIC”) that are effective for accounting periods beginning on or after January 1, 2017. Many of these updates are not applicable or consequential to the Company and have been excluded from the discussion below.

Pronouncements effective for annual periods beginning January 1, 2018:

 

IFRS 15    Revenue from Contracts with Customers   

IFRS 15 is the culmination of a joint project between the IASB and the Financial Accounting Standards Board, the accounting standard setter in the U.S., to create a single revenue standard. The core principle of IFRS 15 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard moves away from a revenue recognition model based on an earnings process to an approach that is based on transfer of control of a good or service to a customer. Additionally, the new standard requires disclosures as to the nature, amount, timing and uncertainty of revenues and cash flows arising from contracts with customers.

 

The Company expects that the standard will not have a material impact on its consolidated income, cash flow or financial position. The Company derives the majority of its revenues from selling electronic content and services on a subscription basis, and such revenue will continue to be recognized ratably over the term of the subscription under IFRS 15. The Company will make the following changes as a consequence of adopting IFRS 15, but these changes are not expected to have a material impact on its consolidated financial statements.

 

    Revenue for certain term licenses of intellectual property will be recognized at the time control is transferred to the customer, rather than over the license term.

 

    Certain contingent payouts will be recognized as a reduction of revenue, rather than as expense.

 

    Management expects to defer additional commission expense for sales employees of approximately $150 million, and to amortize a substantial portion of these deferrals over three years.

 

The Company will adopt the standard using the modified retrospective method. As such, the cumulative effect of adoption will be recognized as an adjustment to the opening balance of retained earnings. Prior-year period amounts will not be adjusted. The Company will provide additional disclosures as required by the new standard beginning with the first quarter of 2018. Management does not expect material changes to its business processes and controls to support recognition and disclosure under the new standard. The Company’s assessment remains subject to change, as it will continue to evaluate the new guidance through the adoption date.

 

IFRS 9    Financial Instruments   

IFRS 9 replaces IAS 39 – Financial Instruments: Recognition and Measurement. The new standard addresses classification and measurement, impairment and hedge accounting, and expands financial instrument related disclosures.

 

     

Classification and measurement

The new standard requires the classification of financial assets based on business model and cash flow characteristics measured at either (a) amortized cost; (b) fair value through profit or loss; or (c) fair value through other comprehensive income or loss. For financial liabilities, the standard retains most of the IAS 39 requirements, but where the fair value option is taken, the part of a fair value change due to an entity’s own credit risk is recorded in other comprehensive income or loss rather than the income statement.

 

         

Impairment

Under the forward looking impairment model, expected credit losses are recognized as soon as a financial asset is originated or purchased, rather than waiting for a trigger event to record a loss.

 

 

 

 

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Hedge accounting

The new standard more closely aligns hedge accounting with an entity’s risk management activities. Specifically, the new standard (a) no longer requires the use of a specific quantitative threshold to determine if the hedging relationship is highly effective in order to qualify for hedge accounting; (b) removes restrictions that prevented some economically rational hedging strategies from qualifying for hedge accounting; and (c) allows purchased options, forwards and non-derivative financial instruments to be hedging instruments in applicable circumstances.

 

IFRS 9 shall be applied retrospectively to each period presented, subject to the various transition provisions within IFRS 9. The Company does not expect a material impact from the adoption of this standard on its consolidated income, cash flow and financial position. The Company is assessing the impact on its disclosures.

 

IFRIC 22    Foreign Currency Transactions and Advance Consideration   

IFRIC 22 clarifies the exchange rate to be used upon recognition of an asset, liability, expense or income in situations when a related advanced payment is disbursed or received. The Company does not expect IFRIC 22 to have a material impact on its consolidated financial statements.

 

Pronouncements effective for annual periods beginning January 1, 2019:

 

IFRS 16

   Leases   

IFRS 16 introduces a single lease accounting model, eliminating the existing distinction between operating and finance leases for lessees. The standard requires a lessee to recognize right-of-use assets and lease liabilities on the statement of financial position for almost all leases having a term of more than 12 months. The Company is reviewing its lease portfolio to evaluate the impact of the standard and is considering changes to its processes and internal controls, including the implementation of a new lease accounting system in 2018. The Company continues to consider whether to apply the retrospective or modified retrospective adoption method.

 

While the assessment of the adoption impact is ongoing, the Company preliminarily expects that IFRS 16 will result in a material increase to assets and liabilities. For reference, the Company’s future aggregate minimum lease payments under non-cancellable operating leases were approximately $1.5 billion at December 31, 2016 (see note 28 to the consolidated financial statements for the year then ended). While the Company also expects a material impact from the reclassification of lease expense from operating expenses to depreciation and interest expense, it does not expect a material impact to net earnings. There will be no impact on consolidated cash flows, however, cash flows from operating activities will increase as cash payments from the principal portion of lease obligations are reclassified to cash flows from financing activities.

 

IFRIC 23

   Uncertainty over Income Tax Treatments   

IFRIC 23 adds to the requirements of IAS 12, Income Taxes, by specifying how to reflect the effects of uncertainty in the accounting for income taxes. An uncertainty arises when it is unclear how a tax law applies to a particular transaction, or whether a taxation authority will accept a company’s tax treatment. The Company is assessing the impact of IFRIC 23 on its consolidated financial statements.

 

Note 3: Segment Information

The Company is organized as three reportable segments reflecting how the businesses are managed: Financial & Risk, Legal and Tax & Accounting. The accounting policies applied by the segments are the same as those applied by the Company. Results from the Reuters News business are excluded from reportable segments as they do not qualify as a component of the Company’s three reportable segments, nor as a separate reportable segment. The reportable segments offer products and services to target markets as described below.

Financial & Risk

The Financial & Risk segment is a provider of critical news, information and analytics, enabling transactions and connecting communities of trading, investment, financial and corporate professionals. Financial & Risk also provides regulatory and operational risk management solutions.

 

 

 

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Legal

The Legal segment is a provider of critical online and print information, decision tools, software and services that support legal, investigation, business and government professionals around the world.

Tax & Accounting

The Tax & Accounting segment is a provider of integrated tax compliance and accounting information, software and services for professionals in accounting firms, corporations, law firms and government.

The Company also reports “Corporate & Other”, which includes expenses for corporate functions and the results of the Reuters News business. Neither Corporate & Other nor the Reuters News business qualify as a component of another reportable segment nor as a separate reportable segment.

 

      Three months ended September 30,      Nine months ended September 30,  
      2017      2016      2017      2016  

Revenues

           

Financial & Risk

     1,542        1,516        4,561        4,549  

Legal

     843        835        2,509        2,503  

Tax & Accounting

     341        323        1,108        1,036  

Corporate & Other (Reuters News)

     73        73        221        227  

Eliminations

     (7)        (3)        (10)        (9)  

Consolidated revenues

     2,792        2,744        8,389        8,306  

Adjusted EBITDA

           

Financial & Risk

     495        460        1,435        1,340  

Legal

     338        328        965        936  

Tax & Accounting

     95        87        339        283  

Corporate & Other (includes Reuters News)

     (79)        (61)        (176)        (240)  

Adjusted EBITDA

     849        814        2,563        2,319  

Fair value adjustments (see note 5)

     (53)        (34)        (171)        (77)  

Depreciation

     (73)        (78)        (222)        (239)  

Amortization of computer software

     (171)        (177)        (519)        (518)  

Amortization of other identifiable intangible assets

     (115)        (128)        (354)        (388)  

Other operating gains (losses), net

     30        (12)        13        (1)  

Consolidated operating profit

     467        385        1,310        1,096  

Net interest expense

     (84)        (108)        (272)        (304)  

Other finance costs

     (58)        (3)        (176)        (28)  

Share of post-tax earnings (losses) in equity method investments

     2        2        (3)        2  

Tax benefit (expense)

     22        (8)        8        16  

Earnings from continuing operations

     349        268        867        782  

In accordance with IFRS 8, Operating Segments, the Company discloses certain information about its reportable segments based upon measures used by management in assessing the performance of those reportable segments. These measures are defined below and may not be comparable to similar measures of other companies.

In 2017, management changed the profitability measure that it uses to assess the performance of its reportable segments from segment operating profit, which it no longer uses, to adjusted EBITDA. These profitability measures are the same, except that adjusted EBITDA excludes depreciation of fixed assets and amortization of computer software. Management uses a number of measures to assess the performance of its segments internally. Adjusted EBITDA is reported externally, as it represents the internal profitability measure most closely aligned with the measurement of the consolidated income statement.

 

 

 

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Adjusted EBITDA

 

    Adjusted EBITDA represents earnings from continuing operations before tax expense or benefit, net interest expense, other finance costs or income, depreciation, amortization of software and other identifiable intangible assets, the Company’s share of post-tax earnings or losses in equity method investments, other operating gains and losses, certain asset impairment charges, fair value adjustments and corporate related items.
    The Company does not consider these excluded items to be controllable operating activities for purposes of assessing the current performance of the reportable segments.
    Each segment includes an allocation of costs for centralized support services such as technology, editorial, real estate and certain global transaction processing functions that are based on usage or other applicable measures.

Note 4: Seasonality

The Company’s revenues and operating profit on a consolidated basis 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 are generally incurred evenly throughout the year. However, the Company’s performance from quarter to consecutive quarter can be impacted by transactions revenues as well as by the release of certain print-based offerings, which tend to be concentrated at the end of the year. As a consequence, the results of certain of the Company’s segments can be impacted by seasonality to a greater extent than its consolidated results.

Note 5: Operating Expenses

The components of operating expenses include the following:

 

      Three months ended September 30,      Nine months ended September 30,  
      2017      2016      2017      2016  

Salaries, commissions and allowances

     969        992        2,933        3,055  

Share-based payments

     23        29        68        80  

Post-employment benefits

     59        63        183        188  

Total staff costs

     1,051        1,084        3,184        3,323  

Goods and services(1)

     494        452        1,485        1,461  

Data

     211        206        619        630  

Telecommunications

     82        96        260        298  

Real estate

     105        92        278        275  

Fair value adjustments(2)

     53        34        171        77  

Total operating expenses

     1,996        1,964        5,997        6,064  

 

(1) Goods and services include professional fees, consulting and outsourcing services, contractors, selling and marketing, and other general and administrative costs.

 

(2) Fair value adjustments primarily represent mark-to-market impacts on embedded derivatives. In 2016, fair value adjustments also included the mark-to-market impacts on certain share-based awards. Refer to note 1 regarding the adoption of IFRS 2 amendments in 2017.

Note 6: Other Operating Gains (Losses), Net

Other operating gains (losses), net, were $30 million and $(12) million for the three months ended September 30, 2017 and 2016, respectively, and $13 million and $(1) million for the nine months ended September 30, 2017 and 2016, respectively. The 2017 periods included a gain from the sale of a portion of an investment.

 

 

 

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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 September 30,      Nine months ended September 30,  
      2017      2016      2017      2016  

Interest expense:

           

Debt

     82        88        244        256  

Derivative financial instruments - hedging activities

     -        1        4        4  

Other, net

     (5)        6        5        8  

Fair value (gains) losses on financial instruments:

           

Cash flow hedges, transfer from equity

     (53)        16        (97)        (74)  

Net foreign exchange losses (gains) on debt

     53        (16)        97        74  

Net interest expense - debt and other

     77        95        253        268  

Net interest expense - pension and other post-employment benefit plans

     8        14        24        40  

Interest income

     (1)        (1)        (5)        (4)  

Net interest expense

     84        108        272        304  

 

      Three months ended September 30,      Nine months ended September 30,  
      2017      2016      2017      2016  

Net losses (gains) due to changes in foreign currency exchange rates

     50        (6)        143