THOMSON REUTERS PLC /ADR/ 6-K 2008
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The following management's discussion and analysis is intended to assist you in understanding and evaluating changes in our financial condition and operations for the three-month and six-month periods ended June 30, 2008, compared to the same periods in the preceding year. We recommend that you read this management's discussion and analysis in conjunction with our consolidated financial statements for each of the three-month and six-month periods ended June 30, 2008 and the year ended December 31, 2007, the related notes to those financial statements, and our management's discussion and analysis for the year ended December 31, 2007. Our financial statements are prepared in accordance with accounting principles generally accepted in Canada, or Canadian GAAP. References in this discussion to "$" are to U.S. dollars, references to "£" are to British pounds sterling, references to "€" are to the Euro, references to "¥" are to the Japanese yen and references to "C$" are to Canadian dollars. Unless otherwise indicated or the context otherwise requires, references in this discussion to "we," "our," "us" and "Thomson Reuters" are to Thomson Reuters Corporation, Thomson Reuters PLC and their respective subsidiaries which operate as a unified group under a dual listed company (DLC) structure. In addition to historical information, this management's discussion and analysis contains forward-looking statements. Readers are cautioned that these forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. Some of these factors include those identified in the section entitled "Cautionary Note Concerning Factors That May Affect Future Results" at the end of this management's discussion and analysis and in the "Risk Factors" section of Thomson Reuters PLC's annual report on Form 20-F for the year ended December 31, 2007 filed with the U.S. Securities and Exchange Commission and the Canadian securities regulatory authorities. This management's discussion and analysis is dated as of August 11, 2008.
On April 17, 2008, The Thomson Corporation (Thomson) acquired Reuters Group PLC (Reuters) and Thomson Reuters was formed. Thomson Reuters is organized in two divisions:
By combining Thomson's strength in North America with Reuters strength in Europe, the Middle East and Asia, we created a business that we believe will allow us to grow faster than either Thomson or Reuters could have on its own. We expect to achieve this by:
Thomson Reuters operates under a DLC structure, which means that we have two parent companies, both of which are publicly listed:
Thomson Reuters Corporation and Thomson Reuters PLC operate as a unified group pursuant to contractual arrangements as well as provisions in their organizational documents. Under the DLC structure, shareholders of Thomson Reuters Corporation and Thomson Reuters PLC both have a stake in Thomson Reuters, with cash dividend, capital distribution and voting rights that are comparable to the rights they would have if they were holding shares in one company carrying on the Thomson Reuters business. The boards of the two parent companies comprise the same individuals, as do the companies' executive management teams.
Our Business and Strategy
What Thomson Reuters does We are the world's leading source of intelligent information for businesses and professionals. We define intelligent information as information that organizes itself, suggests connections and fits into professionals' workflows. We combine industry expertise with innovative technology to deliver critical information to decision makers in the financial, legal, tax and accounting, scientific, healthcare and media markets, powered by the world's most trusted news organization, Reuters. We believe that our intelligent information provides our customers with a competitive advantage by enabling them to make better decisions faster.
How Thomson Reuters makes money We generate revenues by supplying knowledge workers with business-critical information solutions and services. We make our information more valuable by adding expert analysis, insight and commentary, and couple it with software tools and applications that our customers can use to search, compare, synthesize and communicate the information. To further enhance our customers' workflows, we deliver information and services electronically, integrate our solutions with our customers' own data and tailor the delivery of information to meet specific customer needs. As we integrate critical information with analysis, tools and applications, we place greater focus on the way our customers use our content, instead of simply selling the content itself and are moving from just informing our customers to enabling their decisions. We believe our ability to embed our solutions into customers' workflows is a significant competitive advantage as it leads to strong customer retention.
Thomson Reuters business environment and trends As a global organization, we are affected by economic and market dynamics, governmental regulations and business conditions of each market and country in which we operate. Currently, global markets are being impacted by a variety of factors, and the mortgage and credit markets within the financial services markets are being hit particularly hard. While we are not immune to economic cycles, the professional markets that we serve have historically been resilient. Further, our business has increasingly become subscription-based with more customers entering into multi-year commitments for our critical workflow tools and applications, which we believe will help mitigate the impact of a downturn in global markets.
Relative to the financial services industry, while we have observed the industry softening in the Americas, we also see the industry growing in other parts of the world due to the international nature of the banking businesses. Against this backdrop, our Markets Division revenues from Asia increased 15% and from the Middle East increased 30%. The downturn is not impacting all banks or geographic regions equally, and we are not experiencing widespread cancellations or downgrades in service. Within the industry, the fixed income asset class continues to make headlines for significant losses. While this situation has impacted our business, this area comprises only 10% of Markets Division revenue. More than offsetting the impact from the fixed income asset class was the strong continued growth in the remaining 90% of the Markets Division revenue base, including areas such as foreign exchange and other exchange-traded instruments, commodities and energy and corporate.
We have traditionally encountered competition in each of our markets from both large information providers and smaller niche market businesses. However, we now face an evolving competitive landscape. Certain of our traditional competitors are implementing solutions strategies of their own. In the future, other competitors could come from outside our traditional competitive set. For instance, Internet service companies and search providers could pose a threat to some of our businesses by providing more in-depth offerings than are currently available from such services. In response to this, we are continuing to move forward aggressively in segmenting our markets and developing solutions that will allow us to remain embedded in our customers' workflows.
Thomson Reuters operational structure Thomson Reuters manages its operations through its two divisions: Professional and Markets. The reportable segments of Thomson Reuters are Markets, Legal, Tax & Accounting, Scientific and Healthcare, as well as a Corporate and Other category. The Corporate and Other category principally includes corporate expenses, certain costs associated with stock-related compensation, costs associated with corporate integration and synergy programs and costs
associated with the Reuters acquisition. We began reporting for these segments with our results for the three and six months ended June 30, 2008.
Consolidated financial statements and accounting standards Our primary financial statements beginning with the three and six months ended June 30, 2008 are the consolidated financial statements of Thomson Reuters Corporation. Those statements account for Thomson Reuters PLC as a subsidiary and have been prepared in accordance with Canadian GAAP. We are seeking exemptive relief to present Thomson Reuters Corporation's financial statements in accordance with International Financial Reporting Standards (IFRS) in 2009. We have provided a voluntary reconciliation to IFRS in this management's discussion and analysis. See the section entitled "Recently Issued Accounting Standards" for more information.
Results for Reuters are included in our consolidated financial statements beginning April 17, 2008, as we are accounting for the acquisition under the purchase method. For informational purposes, we have also included Thomson Reuters pro forma results in this management's discussion and analysis, which present the hypothetical performance of our business as if Thomson had acquired Reuters on January 1, 2007. See the sections of this management's discussion and analysis entitled "Acquisition of Reuters" and "Unaudited Pro Forma Results" for more information.
Acquisition of Reuters
On April 17, 2008, Thomson acquired Reuters for approximately $17 billion. Under the terms of the acquisition:
One Thomson Reuters PLC ordinary share is equivalent to one Thomson Reuters Corporation common share under the DLC structure. As part of the transaction, Thomson shareholders continued to hold their shares of Thomson, renamed as Thomson Reuters Corporation.
Subject to certain exceptions, all options and awards outstanding under Reuters share-based employee compensation plans vested and became fully exercisable prior to the closing of the acquisition.
Thomson Reuters PLC issued 194,107,278 of its ordinary shares to Reuters shareholders when the transaction closed on April 17, 2008. These shares were valued at approximately $8.2 billion, or $42.38 per share using the average Thomson share price a few days before and after May 15, 2007, the date of the announcement of the acquisition. The par value of Thomson Reuters PLC ordinary shares was changed from £10 to 25 pence shortly after the acquisition closed.
On May 1, 2008, Thomson Reuters paid $8.45 billion in cash to former Reuters shareholders to satisfy the cash consideration component of the transaction. Thomson Reuters funded this cash consideration using proceeds from the sale of its Thomson Learning businesses as well as borrowings under an acquisition credit facility. See the section entitled "Financial Position" for further discussion on acquisition-related borrowings and repayments.
A total of 33,670,064 Reuters options were outstanding as of April 17, 2008. These options will expire during the fourth quarter of 2008. Upon exercise, holders will be entitled to consideration of 352.5 pence in cash and 0.16 Thomson Reuters PLC ordinary shares for each share of Reuters that would have been received. The fair value of outstanding options, determined using the Black-Scholes pricing model, was $195 million and was included in the purchase consideration.
The purchase consideration was as follows (millions of U.S. dollars):
We have not yet completed the allocation of the purchase price to the Reuters assets acquired and liabilities assumed, but we have included a preliminary purchase price allocation in note 4 of our consolidated financial statements for the six months ended June 30, 2008. We expect to finalize our purchase price allocation within 12 months from the closing date of the acquisition.
Under the DLC structure, shareholders of Thomson Reuters Corporation and Thomson Reuters PLC ordinarily vote together as a single decision-making body, including in the election of directors, and in that sense have voting interests in Thomson Reuters. Following the acquisition, the controlling shareholder of Thomson Reuters is The Woodbridge Company Limited and other companies affiliated with it (Woodbridge). As of the date of this management's discussion and analysis, Woodbridge had a voting interest in Thomson Reuters of approximately 55% based on the aggregate issued share capital of Thomson Reuters Corporation and Thomson Reuters PLC. See the section entitled "Related Party Transactions" for additional information about our relationship with Woodbridge.
In order to obtain antitrust clearance for the transaction, we agreed to sell a copy of the Thomson Fundamentals (Worldscope), Reuters Estimates, Reuters Aftermarket Research and Reuters Economics (EcoWin) databases. The sales include copies of the databases, source data and training materials, as well as certain contracts and selected employees connected to the databases. We do not expect the required sales to have any material adverse effect on our revenues or profitability or to have any material impact on the synergies expected to be generated by the transaction. See the section entitled "Subsequent Events" for additional information.
Selected Historical and Pro Forma Financial Information
The following table summarizes selected financial information for Thomson Reuters for the three and six-month periods ended June 30, 2008 and 2007.
Please see the "Results of Operations" section of this management's discussion and analysis for commentary on these results. The 2008 results are not directly comparable to 2007 results due to the inclusion of financial results from Reuters beginning with the date of acquisition and certain one-time items. Therefore, we have provided supplemental information and analysis in the section entitled "Unaudited Pro Forma Results" to further explain our operating performance.
Historically, Thomson's revenues and operating profits from continuing operations were proportionately the smallest in the first quarter and the largest in the fourth quarter, as certain product releases were concentrated at the end of the year, particularly in the regulatory and healthcare markets. As costs were incurred more evenly throughout the year, its operating margins historically increased as the year progressed. For these reasons, the performance of its businesses were not comparable quarter to consecutive quarter and were best considered on the basis of results for the whole year or by comparing results in a quarter with the results in the same quarter for the previous year. As Reuters revenues and profits have not historically fluctuated significantly throughout the year, we anticipate that the seasonality of Thomson Reuters revenues and operating profits will be slightly less pronounced.
USE OF NON-GAAP FINANCIAL MEASURES
In addition to our results reported in accordance with Canadian GAAP, we use certain non-GAAP financial measures as supplemental indicators of our operating performance and financial position and for internal planning purposes. We have historically reported non-GAAP financial results as we believe their use provides more insight into our performance.
The following is a description of our non-GAAP financial measures, including an explanation of why we believe they are useful measures of our performance, including our ability to generate cash flow.
Non-GAAP measures do not have any standardized meaning prescribed by Canadian GAAP and, therefore, are unlikely to be comparable with the calculation of similar measures used by other companies. You should not view these measures as alternatives to measures of financial performance calculated in accordance with Canadian GAAP. Due to the significant impact of the Reuters acquisition on our results, we included pro forma results as if we had acquired Reuters on January 1, 2007 to provide a more meaningful analysis of our performance compared to the prior year. Pro forma results do not reflect the actual results of our business. See the section entitled "Unaudited Pro Forma Results."
INTEGRATION AND SYNERGY PROGRAMS
Prior to the Reuters acquisition, Thomson and Reuters were individually pursuing a series of transformational initiatives called THOMSONplus and Core Plus, respectively. THOMSONplus was a series of initiatives, announced in 2006, designed to allow Thomson to become a more integrated operating organization by leveraging assets and infrastructure across all segments of its business. Core Plus was a growth and transformation program, announced by Reuters in 2005, designed to invest in new revenue and transformation initiatives, including content and development transformation, and the consolidation of common platforms, customer administration and data centers.
As a consequence of the Reuters acquisition, we announced an integration and synergy program directed at integrating Thomson and Reuters and capturing cost synergies. Its primary objective is the integration of Thomson Financial with Reuters, which now comprise the new Markets Division, but also includes efforts to integrate both shared services across the whole of Thomson Reuters and corporate departments. Because the objectives of the program are similar to those of the THOMSONplus and Core Plus programs, we are managing these initiatives as a single program beginning in the three month period ended June 30, 2008. Because these are corporate initiatives, incremental expenses associated with these programs are reported within the Corporate and Other segment. The integration and synergy initiatives are expected to be completed in 2011 at a total cash cost of $1.2 billion, which excludes expenses associated with THOMSONplus and Core Plus incurred prior to 2008. We will incur restructuring costs associated with these efforts, including severance and losses on lease terminations and other cancellations of contracts. Certain costs will qualify to be recorded as part of goodwill and the remainder will be expensed.
We expect the program will generate run-rate savings of approximately $1.2 billion by 2011. In addition to realizing synergies from the creation of the Markets Division, we also expect to realize efficiencies and improve effectiveness across Thomson Reuters, including in areas such as technology procurement, third-party data suppliers, real estate and data center infrastructure. Further savings will be realized by eliminating duplicative corporate functions, consolidating shared service centers, and improving our effectiveness by extending common platforms in back office business systems.
In the three-month period ended June 30, 2008, we incurred $141 million of expenses associated with integration and synergy programs primarily related to severance and consulting costs associated with technology initiatives. In the six-month period
ended June 30, 2008, we incurred $154 million of expenses, including legacy spending in THOMSONplus as a stand-alone program. These legacy expenses primarily related to consulting fees and severance costs related to efforts to deploy SAP as a company-wide enterprise resource planning (ERP) system.
For the three and six-month periods ended June 30, 2007, we incurred $27 million and $61 million, respectively, of expenses associated with THOMSONplus consisting primarily of consulting fees and severance. The consulting costs primarily related to efforts to deploy SAP. In the three months ended June 30, 2007, severance costs principally related to the elimination of certain finance positions in conjunction with the establishment of centralized service centers. For the six months ended June 30, 2007, severance costs also reflected efforts to streamline the operations of Thomson Financial.
THOMSONplus, as a stand-alone program, achieved annualized run-rate savings of approximately $160 million upon its completion at June 30, 2008. These savings were primarily due to the elimination of certain positions and the relocation of others to lower cost locations, including those resulting from the establishment of a facility in Hyderabad, India to perform certain finance functions.
RESULTS OF OPERATIONS
The following discussion compares our results for the three and six-month periods ended June 30, 2008 and 2007 and provides analyses of results from ongoing businesses and discontinued operations.
Basis of Analysis
Our results from continuing operations include the performance of acquired businesses from the date of their purchase and exclude results from operations classified as discontinued. Our results from ongoing businesses exclude discontinued operations and other business sold or held for sale.
The financial results of Reuters are reflected in our consolidated financial statements beginning April 17, 2008. Given the significance of the Reuters acquisition to Thomson Reuters, and the Markets Division of our business, the fluctuations in consolidated results from 2007 to 2008 and changes in our financial position since December 31, 2007, were generally a result of the acquisition. We have provided an analysis of results on a pro forma basis as though Reuters had been acquired on January 1, 2007 in the section of this management's discussion and analysis entitled "Unaudited Pro Forma Results."
Results from operations that qualify as discontinued operations have been reclassified to that category for all periods presented. Please see the section below entitled "Discontinued Operations" for a discussion of these operations. In analyzing the results of our operating segments, we measure the performance of existing businesses and the impact of acquired businesses and foreign currency translation.
The following table summarizes our consolidated results for the periods indicated:
Revenues. For the three-month and six-month periods ended June 30, 2008, revenues increased 73% and 43%, respectively. The increases in revenues largely reflected the addition of Reuters, which was acquired on April 17, 2008. Contributions from acquired businesses also included results from our Property Tax Services business and, for the six-month period, CrossBorder Solutions in the Tax & Accounting segment.
For our existing businesses, revenue growth was exhibited in all of our segments, reflecting customer demand for our integrated solutions, particularly in the legal and tax and accounting markets. Our breadth of offerings, coupled with our geographic diversification, has enabled us to continue to increase revenues despite softness in certain markets and products.
Operating profit. In the three-month and six-month periods ended June 30, 2008, operating profit decreased 16% and 11%, respectively, and our margins declined. The declines occurred as additional profit from our existing businesses and from the acquisition of Reuters was more than offset by costs associated with the Reuters acquisition and our integration and synergy program, as well as from an impairment on assets held for sale.
Depreciation and amortization. Depreciation expense increased $75 million and $81 million in the three-month and six-month periods ended June 30, 2008, respectively, compared to the prior year periods, primarily because of the acquisition of Reuters. The increases also reflected capital expenditures from our existing businesses. Amortization expense increased $79 million and $80 million in the three-month and six-month periods ended June 30, 2008, respectively, compared to the prior year periods. The increases in amortization were due to acquired Reuters assets. Relative to our existing businesses, amortization approximated the prior year as increases from newly acquired assets were offset by decreases from the completion of amortization for certain identifiable intangible assets acquired in previous years.
Impairment on assets held for sale. In conjunction with our decision to sell our Dialog business, we recognized a charge of $72 million for the impairment of its intangible assets. This business was not classified as a discontinued operation as we will continue to receive royalty payments associated with its operations.
Net other expense/income. Net other expense in the three-month and six-month periods ended June 30, 2008 was $38 million and $64 million, respectively. These amounts primarily consisted of losses from changes in foreign currency exchange rates associated with the cash consideration for the Reuters acquisition. See the section entitled "Hedging Program for Reuters Consideration" for a related discussion of the effects of foreign exchange on the Reuters acquisition cash consideration. Net other expense in both periods also included losses from changes in foreign currency exchange rates on intercompany funding arrangements. These amounts were required to be expensed as the arrangements are not considered permanent in nature. Net other income in the three-month and six-month periods ended June 30, 2008 and 2007 of $6 million and $12 million, respectively, primarily consisted of income from, and gains on the sales of, certain equity investments.
Net interest income/expense and other financing costs. Net interest expense in the three-month period ended June 30, 2008 was $54 million compared to $51 million in the prior year period. The increase in interest expense was primarily due to higher borrowings from utilizing our acquisition credit facility, which were subsequently replaced with long-term debt. See the section entitled "Financial Position" for further discussion. Net interest expense in the six-month period ended June 30, 2008 was $15 million compared to $104 million in the prior year period. The lower interest expense in the current year period reflected interest income from the investment of the proceeds from the sale of Thomson Learning's higher education, careers and library reference businesses in money market funds. These proceeds contributed toward the funding of our acquisition of Reuters in the second quarter of 2008.
Income taxes. Income taxes for the three-month and six-month periods ended June 30, 2008 and 2007 reflected the mix of taxing jurisdictions in which pre-tax profits and losses were recognized. The seasonality in our businesses affects our geographic mix of pre-tax profits and losses in interim periods and, therefore, distorts our reported tax rate. Consequently, our effective tax rate in interim periods is not indicative of our estimated effective tax rate for the full year. For the three-month and six-month periods ended June 30, 2008, income taxes included a $26 million benefit associated with an impairment of assets held for sale. During the first quarter of 2007, our provision reflected benefits of $35 million resulting from a change in Australian tax law and the recognition of Canadian tax losses. In the second quarter of 2007, the tax provision reflected $14 million of additional benefits related to the recognition of Canadian tax losses. The Canadian tax losses were recognized in anticipation of using them against taxable income from the sale of Thomson Learning's Canadian education business later in the year.
Tradeweb ownership interests. See the section entitled "Tradeweb Partnership" for a discussion of a recent transaction involving Tradeweb. For the three and six-month periods ended June 30, 2008, we consolidated the results of Tradeweb Markets and recorded minority interest expense, net of tax, of $4 million and $6 million, respectively. For the three and six-month periods ended June 30, 2008, our share of the earnings of Tradeweb New Markets was not significant. Amounts related to Tradeweb Markets and Tradeweb New Markets were reflected in Tradeweb ownership interests in our consolidated statement of earnings for the six months ended June 30, 2008.
Earnings attributable to Thomson Reuters Corporation common shares and Thomson Reuters PLC ordinary shares (collectively, "common and ordinary shares") and earnings per share. For the three months ended June 30, 2008, earnings attributable to common and ordinary shares of $172 million decreased 54% compared to that of the prior year period of $375 million. Diluted earnings per common share were $0.22 in the three months ended June 30, 2008 compared to $0.58 in the prior year period. For the six months ended June 30, 2008, earnings attributable to common and ordinary shares of $364 million decreased 39% compared to that of the prior year period of $598 million. Diluted earnings per share were $0.51 in the six months ended June 30, 2008 compared to $0.93 in the prior year period.
For both periods, the decreases in reported earnings and diluted earnings per share were the result of a decrease in operating profit, certain non-operating losses due to changes in foreign currency exchange rates and lower earnings from discontinued operations. The decline in operating profit and foreign exchange losses were directly attributable to the Reuters acquisition and included the costs associated with our integration and synergy programs, as well as higher amortization and depreciation associated with the acquired assets. Additionally, operating profit in 2008 included an impairment of assets held for sale.
While in accordance with Canadian GAAP, our definition of segment operating profit as reflected below may not be comparable to that of other companies. We define segment operating profit as operating profit before the amortization of identifiable intangible assets and impairment of assets held for sale. We use this measure for our segments because we do not consider amortization and impairments to be a controllable operating cost for purposes of assessing the current performance of our segments. We also use segment operating profit margin, which we define as segment operating profit as a percentage of revenues.
Beginning April 17, 2008, the Markets Division includes the results of Thomson Financial and Reuters, operating as a single unit. Given the significance of the Reuters acquisition to the Markets Division, the changes in results for the three months and six months ended June 30, 2008 compared to the comparable prior year periods were generally due to the acquisition. We have provided an analysis of results on a pro forma basis, including revenues by subsegment which encompass legacy Reuters products, as though Reuters had been acquired on January 1, 2007 in the section entitled "Unaudited Pro Forma Results."
While certain sectors of the financial services market have experienced declines, these have primarily been in the mortgage and credit markets, where we do not have a significant presence. Revenues from existing businesses increased as a result of higher transaction revenues and higher revenues from Thomson ONE products. Revenues from Omgeo's straight-through-processing services increased due to continued customer demand. Thomson Transaction Services revenues increased due to higher volumes. Tradeweb's overall revenues increased due to higher transaction fees from new asset classes, particularly dollar and Euro-denominated interest rate swaps. Revenues from Thomson ONE products increased across all customer sectors, especially in the investment management, investment banking and corporate services markets, due to new sales and migrations from legacy offerings. Revenue growth from existing businesses was slightly tempered by increased customer credits.
Segment operating profit increased primarily due to higher revenues attributable to the Reuters acquisition. The segment operating profit margin decreased due to a less profitable product mix.
The Professional Division consists of our Legal, Tax & Accounting, Scientific and Healthcare segments. A discussion of the operating results of each segment follows this divisional summary.
n/m = not meaningful.
For the three-month and six-month periods ended June 30, 2008, revenues for our Professional Division increased 10% and 11%, respectively. These revenues include those from our Dialog business that was sold in July 2008. Because we will continue
to receive royalties from Dialog, it could not be classified as a discontinued operation. In order to present the performance of our ongoing businesses, the Dialog results, net of the royalty revenues we will continue to receive, were removed. For both the three-month and six-month periods ended June 30, 2008, revenues from ongoing businesses increased 10% and 11%, respectively, comprised of the following:
For both periods, revenues from existing businesses increased primarily due to increased revenues from our online services and solutions, as well as from software and services. Results from acquired businesses primarily reflected contributions from our Property Tax Services business, acquired in October 2007, and TaxStream, acquired in January 2008.
The increase in operating profit was primarily the result of higher revenues described above. These results also reflected continued investments in localizing content and technology for Asian markets, as well as the impact of lower initial margins for certain acquired businesses due to acquisition accounting adjustments. The segment operating profit margin was consistent with that of the prior year period as the effects of scale in our existing businesses were offset by the impact of our Asian investments and acquisition accounting adjustments in our Tax & Accounting segment.
Results for Legal reflected continued demand for our online services in the United States, United Kingdom and other international markets. For the three-month and six-month periods ended June 30, 2008, revenues increased 8% and 9%, respectively, compared to the prior year periods comprised of the following:
For both the three-month and six-month periods ended June 30, 2008, growth within Legal's existing businesses reflected the performance of online services, consisting primarily of Westlaw and our international online services, which increased 7% compared to the prior year periods. Revenue from sales of software and services increased 6% and 9% for the three-month and six-month periods, respectively, as a result of higher sales of website development, design and hosting services. Print and CD revenues increased 4% in both periods as a result of the timing of shipments.
Within the North American legal businesses, revenues increased primarily due to higher online, software and services revenues. Westlaw revenue increased in the law firm, government and corporate segments, although revenues from ancillary database usage decreased from lower volumes. Revenues from the Westlaw Litigator suite of online products continued to increase due to our expansion of content and functionality of the offerings. Revenues from services increased primarily due to higher sales at FindLaw reflecting, in part, new product introductions. However, our North American legal businesses experienced a decline in new sales in the government and small law firms segments as a result of budgetary constraints and the slowing economy. Outside North America, online revenues increased due to higher customer demand for our products, particularly in the United Kingdom and other markets and, to a lesser extent, the continued migration of our international customers from CD and print formats to online products.
The increase in segment operating profit was primarily the result of higher revenues described above. These results also reflected continued investments in localizing content and technology for Asian markets, particularly Japan and China. The segment
operating profit margin was consistent with that of the prior year period as the effects of scale in our existing businesses were offset by the impact of our Asian investments.
Tax & Accounting
Results for Tax & Accounting reflected continuing customer demand for our online solutions and software products and services. For the three-month and six-month periods, revenues increased 22% and 25%, respectively, comprised of the following:
Revenues from Tax & Accounting's existing businesses increased as a result of higher online, software and services sales, as well as improved retention. In the research and guidance sector, Checkpoint online revenue continued to increase significantly as a result of new sales and continued migration of customers from print to online products. Print revenues were also impacted by the timing of shipments. Revenues in the professional software and services sector increased due to higher tax transaction revenues and increased sales of product suites derived from additional offerings, particularly document management systems. Within the corporate software and services sector, revenues increased primarily as a result of higher sales of income and trust tax products and services. These revenues were tempered by lower interest income on funds held for clients due to lower interest rates.
Results from newly acquired businesses primarily reflected contributions from our Property Tax Services business, a provider of property tax compliance outsourcing and consulting services, acquired in October 2007; TaxStream, a provider of income tax provision software, acquired in January 2008; and, for the six-month period, CrossBorder Solutions, a tax software provider specializing in international tax compliance areas such as transfer pricing that was purchased in March 2007.
Growth in segment operating profit compared to the prior year period reflected the increase in revenues. The segment operating profit margin decreased as the impact of lower initial margins for certain acquired businesses due to acquisition accounting adjustments, as well as effect of the decrease in interest income, more than offset the benefits from the effects of scale. Relative to these acquisitions, we anticipate that the impacts of the accounting adjustments will normalize and the operating profit margin will return to historical averages by the end of 2008.
n/m = not meaningful.
Results for Scientific reflected continuing customer demand for our solutions. For the three-month and six-month periods revenues increased 7% and 8%, respectively. These revenues included those from our Dialog business that was sold in July 2008. Because we will continue to receive royalties from Dialog, it could not be classified as a discontinued operation. In order to present the performance of our ongoing businesses, the Dialog results, net of the royalties we will continue to receive, were removed. For both the three-month and six-month periods, revenues from ongoing businesses increased 10%, comprised of the following:
Growth in revenues from existing businesses was due to higher subscription revenues for Web of Science and ISI Web of Knowledge and our Thomson Pharma solution. Thomson Pharma revenues increased primarily due to an increase in customers from new sales and migrations. Revenues from corporate information solutions benefited from continued demand for engineering standards information. Revenues for legacy products declined as a result of migrations and cancellations. Revenues from newly acquired businesses reflected contributions from Prous Science, a provider of life sciences solutions and services that was acquired in September 2007.
Segment operating profit and the related margin increased compared to the prior year primarily as the effects of scale on higher revenues, as well as realized benefits from prior efficiency programs, more than offset the impact of additional investments associated with efforts to localize content in Asian markets.
Results for Healthcare reflected customer demand for our management decision support offerings. For the three-month and six-month periods, revenues increased 9% and 6%, respectively, attributable to growth from existing businesses. For both the three and six-month periods ended June 30, 2008, revenues from Healthcare's existing businesses increased as a result of continuing demand for its decision support offerings, particularly in the payer market. Decision support revenues in the provider market increased modestly as a result of new offerings. Revenues for our clinical decision support solutions also increased primarily due to higher renewals for Micromedex's electronic offerings. For the six-month period, these increases were partially offset by a decline in PDR custom project revenues.
For the second quarter of 2008, segment operating profit and its related margin increased compared to the prior year period. These increases were primarily due to higher revenues and the effects of scale. For the six months ended June 30, 2008, segment operating profit increased as higher revenues more than offset the effect of unfavorable timing on expenses, particularly product development costs. The segment operating profit margin declined slightly compared to the prior year period due to the increase in expenses.
First half performance for Healthcare is not indicative of the anticipated full-year results, as historically approximately 35% of the segment's revenues and 67% of its operating profit have been generated in the fourth quarter. This is largely a result of the annual shipment of the PDR in December.
Corporate and Other
We began reporting on our integration and synergy program, including THOMSONplus and Core Plus, on a combined basis starting with the three-month period ended June 30, 2008 as these legacy efforts no longer exist as separate initiatives but are part of a company-wide program. See the section entitled "Integration and Synergy Programs" for further discussion.
For the three and six-month periods ended June 30, 2008, Corporate and Other expenses increased $115 and $155 million, respectively, compared to the prior year periods. Expenses excluding integration and synergy costs and Reuters transaction costs increased as a result of the addition of certain legacy Reuters corporate overhead costs as of the acquisition closing date, April 17, 2008. Costs associated with our integration and synergy programs increased largely reflecting severance and consulting services associated with integrating information into our ERP system. We analyze these program costs in terms of those incurred to effect future synergies, such as severance, and those that are considered one-time costs of integration such as branding.
The Reuters transaction costs were incurred prior to the closing date of April 17, 2008 and primarily consisted of consulting costs for integration planning and expenses associated with retention programs, as well as closing date communications.
Integration and synergy costs for the six-month period include $13 million of THOMSONplus expenses associated with our efforts to deploy SAP as our company-wide ERP system and create shared service centers as well as severance costs. The severance primarily related to efforts to relocate certain activities to lower cost locations at our Scientific segment.
As part of our continuing strategy to optimize our portfolio of businesses to ensure that we are investing in parts of our business that we believe have the greatest potential for growth and returns, we sell certain businesses from time to time. Results for certain of these businesses were reflected as discontinued operations within our consolidated financial statements for all periods presented. The most significant of these businesses were those that comprised Thomson Learning. In 2007, we completed the sale of Thomson Learning through three independent processes, as follows:
For more information on other discontinued operations, see note 11 to our consolidated financial statements for the period ended June 30, 2008.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2008, our total assets were approximately $38 billion, an increase of $15 billion, or 65%, compared to approximately $23 billion at December 31, 2007. This increase primarily reflected the acquired Reuters assets, partially offset by a decline in cash and cash equivalents resulting from the cash consideration paid.
The following table presents comparative information related to net debt, shareholders' equity and the ratio of net debt to shareholders' equity.
We guarantee certain obligations of our subsidiaries, including their borrowings under our revolving credit facility. Under our credit facility, we must maintain a ratio of total debt as of the last day of each fiscal quarter to adjusted EBITDA (earnings before interest, income taxes, depreciation and amortization and other modifications described in the guarantee) for the last four quarters ended of not more than 4.5:1. As of June 30, 2008, we were in compliance with this covenant.
Effective April 17, 2008, Thomson Reuters Corporation and Thomson Reuters PLC each guarantee all contractual obligations of the other company, and those of other parties to the extent they are guaranteed by the other company, and other obligations as agreed. Thomson Reuters PLC guarantees all contractual obligations of Reuters existing as of April 17, 2008 and, as a result, those obligations are covered by Thomson Reuters Corporation's guarantee of Thomson Reuters PLC's obligations.
In June 2008, we completed two separate offerings of debt securities. The issuer of the notes was Thomson Reuters Corporation and the guarantor of the notes was Thomson Reuters PLC. The first offering was for $1.75 billion comprised of $750 million of 5.95% notes due 2013 and $1.0 billion of 6.50% notes due 2018. The second offering was for C$1.2 billion comprised of C$600 million of 5.25% notes due 2011 and C$600 million of 5.70% notes due 2015. Upon completion of these offerings, we entered into cross-currency swap agreements whereby the notes due 2015 will pay 6.25% on US$593 million. We also entered into cross-currency interest rate swap agreements whereby the notes due 2011 will pay a floating interest rate on US$593 million.
We used the net proceeds from these offerings and other resources available to us to fully repay borrowings under an acquisition credit facility drawn to finance a portion of the cash consideration for the Reuters acquisition. See the section below entitled "Credit facilities and commercial paper program" for further discussion regarding the acquisition credit facility.
Included with the acquired Reuters assets was $465 million of cash. Additionally, we assumed certain financial obligations of Reuters, which included the following:
In February 2008, we repaid $400 million of notes upon their maturity.
The following table displays the recent changes in our shareholders' equity:
Creditors of Thomson Reuters Corporation and Thomson Reuters PLC that are entitled to the benefit of the guarantees mentioned above have been, to the extent possible, placed in the same position as if the obligation were owed by Thomson Reuters. In light of these guarantees, each of Thomson Reuters Corporation and Thomson Reuters PLC is exposed to the credit risk of the other. Accordingly, both companies share the same credit rating.
The following table sets forth the ratings that we have received from rating agencies in respect of our outstanding securities as of June 30, 2008:
You should be aware that a rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organization. We cannot assure you that our credit ratings will not be lowered in the future or that rating agencies will not issue adverse commentaries regarding our securities.
The maturity dates for our long-term debt are well balanced with no significant concentration in any one year. The aggregate $2.9 billion of notes issued in June 2008 to repay borrowings under the acquisition credit facility include maturities of three, five, seven and 10 years. The long-term debt assumed as part of our acquisition of Reuters includes $398 million of debt securities maturing in November 2008, which we intend to repay with available resources, and $757 million of debt securities maturing in 2010.
At June 30, 2008, the carrying amounts of our total current liabilities exceeded the carrying amounts of our total current assets because current liabilities include deferred revenue. Deferred revenue does not represent a cash obligation, however, but rather an obligation to perform services or deliver products in the future. The costs to fulfill these obligations are included in our operating costs. As of March 31, 2008, current assets had exceeded current liabilities as our current assets included the proceeds from the sale of Thomson Learning. During the three months ended June 30, 2008, the Thomson Learning proceeds were used to finance a portion of the cash consideration related to the Reuters acquisition.
In November 2007, we entered into two treasury lock agreements with a total notional amount of $800 million, in anticipation of the issuance of debt securities during 2008. The treasury lock agreements originally set to expire in May 2008 were extended to June 2008. The agreements were intended to offset changes in future cash flows attributable to fluctuations in interest rates and were designated as cash flow hedges. Upon the issuance of debt securities in June 2008, we settled the agreements for a loss of approximately $5 million, which will be amortized to interest over the 10 year term of the related debt. See the section above entitled "Financial Position" for discussion of long-term debt issuances.
As the funding of the cash consideration paid to former Reuters shareholders fluctuated based on the $/£ exchange rate, in July 2007 we commenced a hedging program to mitigate exposure to changes in the $/£ exchange rate. In the third quarter of 2007, we paid $76 million for the purchase of several sterling call options with a cumulative notional value of £2.3 billion and various strike prices approximating $2.05/£1.00. These options expired at various dates from February to April 2008.
Throughout April 2008, we entered into multiple short-term forward foreign exchange contracts to mitigate exposures to changes in the $/£ exchange rate. We recognized a gain of $9 million in net other (expense) income in our consolidated statement of earnings associated with these agreements.
Additionally, after completion of the sale of Thomson Learning's higher education, careers and library reference businesses in July 2007, we invested a portion of the proceeds in sterling-denominated money market funds and in sterling term bank deposits. These funds were utilized to fund a portion of the cash consideration paid to former Reuters shareholders.
Share Repurchase Program
Prior to the closing of the acquisition, Thomson and Reuters each had share repurchase programs in effect from time to time. In April 2008, we commenced a new $500 million share repurchase program. As part of this program, we repurchased approximately 15.6 million Thomson Reuters PLC ordinary shares for a total cost of $479 million during the second quarter of 2008. There were no repurchases of Thomson Reuters Corporation shares during the first half of 2008.
The following table summarizes recent repurchase activities.
For more information on our share repurchase program, see the section entitled "Subsequent Events."
Shares that we repurchase are cancelled. We will continue to repurchase shares from time to time as part of our capital management strategy. Decisions regarding any future repurchases will be based on market conditions, share price and other factors including opportunities to invest capital for growth. We may repurchase shares in open market transactions on the Toronto Stock Exchange, London Stock Exchange or the New York Stock Exchange. We may elect to suspend or discontinue our share repurchases at any time, in accordance with applicable laws. From time to time, when we do not possess material nonpublic information about ourselves or our securities, we may enter into a pre-defined plan with our broker to allow for the repurchase of shares at times when we ordinarily would not be active in the market due to our own internal trading blackout periods, insider trading rules or otherwise. Any such plans entered into with our broker will be adopted in accordance with applicable Canadian and English securities laws and the requirements of Rule 10b5-1 under the U.S. Securities Exchange Act of 1934, as amended.
In January 2008, we formed a partnership with a consortium of nine global securities dealers to seek to further expand Tradeweb, our electronic trading unit that is now within the Markets Division. The partnership utilizes Tradeweb's established market position in creating a global multi-asset class execution venue for clients. Additional information about this partnership is provided in note 17 to our financial statements for the six months ended June 30, 2008.
In connection with the formation of the partnership, we realized and deferred a net gain of $96 million associated with the sale of our 15% interest and our contribution of assets to Tradeweb New Markets. Additionally, we recorded a minority interest of $64 million. As of June 30, 2008, we reflected in our consolidated balance sheet a minority interest balance of $73 million associated with the consortium's ownership of Tradeweb Markets and an equity investment of $60 million associated with our ownership of Tradeweb New Markets.
Our principal sources of liquidity are cash provided by our operations, borrowings under our revolving bank credit facility and our commercial paper program and the issuance of public debt. Our principal uses of cash have been to finance the acquisition of Reuters, working capital and debt servicing costs, repay debt, and finance dividend payments, capital expenditures and other acquisitions. Additionally, as discussed in the section entitled "Share Repurchase Program," we have also used our cash to repurchase outstanding shares in open market transactions.
Operating activities. For the three months ended June 30, 2008, cash provided by our operating activities was $880 million compared to $443 million for the prior year period. Cash provided by our operating activities in the six months ended June 30, 2008 was approximately $1.16 billion compared to $730 million in the prior year period. These increases primarily reflected a significant change in the composition of our businesses as the 2008 periods included Reuters, which provided net cash inflows from operations, compared to the 2007 periods which included Thomson Learning, which produced net cash outflows in the first half of the year.
Investing activities. For the three months ended June 30, 2008, cash used in our investing activities was $8.4 billion compared to cash provided by our investing activities of $199 million for the prior year period. For the six-months period ended June 30, 2008, cash used in our investing activities was $8.5 billion compared to $117 million for the prior year period. The increased use of cash reflected the consideration for Reuters. Capital expenditures increased compared to the prior year periods due to the higher spending in our Markets Division as a result of the acquired Reuters operations. For the six months ended June 30, 2008, we had proceeds from disposals as a result of our sale of a minority interest in Tradeweb Markets. See the section entitled "Tradeweb Partnership" for further discussion. For the three months and six months ended June 30, 2007, results included proceeds from the sale of various businesses, including NETg.
Financing activities. For the three months ended June 30, 2008, cash used in our financing activities was $841 million compared to $570 million in the prior year period. The outflows of cash reflected greater repayments of debt due to repayments of assumed Reuters obligations. These were partially offset by the inflows resulting from our issuances of long-term debt. See the section entitled "Financial Position" for further discussion. For the six months ended June 30, 2008, cash provided from financing activities was $666 million compared to $525 million used in such activities in the prior year. Results for 2008 reflected cash inflows resulting from increased borrowings under our credit facilities. Both periods of 2008 reflected an increase in our repurchases of shares (see "Share Repurchase Program" above). Additionally, both periods of 2008 included an assumed dividend payment to former Reuters shareholders representing the accrued/pro-rated dividends from January 1, 2008 through April 16, 2008. These periods also included proceeds from the settlement of acquired Reuters derivative instruments.
The following table sets forth our dividend activity related to common shares of Thomson Reuters Corporation and ordinary shares of Thomson Reuters PLC:
A discussion of other significant financing activities from each period is noted under the section entitled "Financial Position".
Free cash flow. The following table sets forth a calculation of our free cash flow for the three months and six months ended June 30, 2008 and 2007:
For the three months and six months ended June 30, 2008, our free cash flow increased due to a significant change in the composition of our businesses, as previously described above. These effects were partially offset by increased capital expenditures associated with the acquired Reuters operations.
Credit facilities and commercial paper program. We have a syndicated credit agreement which consists of a $2.5 billion unsecured revolving credit facility that currently expires in 2012. Under the terms of the agreement, we may request an increase (subject to approval by applicable lenders) in the amount of the lenders' commitments up to a maximum amount of $3.0 billion. The financial covenant related to this agreement is described in the "Financial Position" section above. As of June 30, 2008, there were no outstanding borrowings from this facility.
Until June 30, 2008, we also had a £2.5 billion acquisition credit facility related to the Reuters transaction. The credit agreement was terminated following the repayment of all borrowings, which we financed using proceeds from the debt securities issued in June 2008 and other available resources. See "Financial Position" above for discussion of the newly-issued notes.
Debt shelf registration. We completed our offerings of notes in June 2008 under a shelf prospectus that allows us to issue up to $3 billion of debt securities from time to time. The shelf prospectus is valid until December 2009. As of June 30, 2008, we had approximately $65 million of debt securities available for issuance under this shelf prospectus. See "Financial Position" above for discussion of the newly-issued notes. We intend to amend our shelf prospectus to allow us to issue additional securities from time to time.
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 management's discussion and analysis for the year ended December 31, 2007. We assumed Reuters commitments with our acquisition. As noted in the Thomson Reuters PLC annual report on Form 20-F for the year ended December 31, 2007 filed with the SEC and the Canadian securities regulatory authorities, Reuters had material contractual commitments associated with operating leases, capital expenditures and an outsourcing arrangement with Fujitsu Services Limited.
For the foreseeable future, we believe that cash from our operations and available credit facilities will be sufficient to fund our future cash dividends, debt service, projected capital expenditures and acquisitions that we pursue in the normal course of business and share repurchases.
Lawsuits and Legal Claims
In July 2008, the U.S. Court of Appeals for the Federal Circuit ruled in our favor by reversing a decision in a patent infringement case related to a business formerly owned by Thomson Financial. Following the initial court's decision, we had posted a $95 million letter of credit in connection with our appeal. The letter of credit represented the amount of the court's judgment, plus fees and interest.
In February 2007, we entered into a settlement agreement related to a lawsuit involving our BAR/BRI business that alleged violations of antitrust laws (Rodriguez v. West Publishing Corp. and Kaplan Inc.). Our part of the settlement was $36 million, which was accrued for in the fourth quarter of 2006 and paid in June 2007. We are a defendant in a separate lawsuit involving our BAR/BRI business, Park v. The Thomson Corporation and Thomson Legal & Regulatory Inc., which was filed in the U.S. District Court for the Southern District of New York. The Park lawsuit alleges primarily violations of the U.S. federal antitrust laws. In the third quarter of 2007, we accrued $13 million in connection with this matter. We have entered into a settlement
agreement which has been preliminarily approved by the court. In February 2008, another purported class action complaint alleging violations of U.S. federal antitrust laws was filed in the United States District Court for the Central District of California against West Publishing Corporation, d/b/a BAR/BRI and Kaplan Inc. In April 2008, this case was dismissed with prejudice. The plaintiffs have appealed this dismissal.
In addition to the matters described above, we are engaged in various legal proceedings and claims that have arisen in the ordinary course of business. Some of these matters are described in our management's discussion and analysis for the three months ended March 31, 2008 and for the year ended December 31, 2007 as well as in Thomson Reuters PLC's annual report on Form 20-F for the year ended December 31, 2007. Except as updated and supplemented above, there have been no material developments to these matters. The outcome of all of the proceedings and claims against us including, without limitation, those described above, and in our management's discussion and analysis for the three months ended March 31, 2008 and the year ended December 31, 2007 as well as in the Thomson Reuters PLC's annual report on Form 20-F for the year ended December 31, 2007, is subject to future resolution, including the uncertainties of litigation. Based on information currently known by us and after consultation with outside legal counsel, management believes that the probable ultimate resolution of any such proceedings and claims, individually or in the aggregate, will not have a material adverse effect on our financial condition, taken as a whole.
We maintain contingent liabilities that we believe appropriately reflect our risk with respect to tax positions under discussion, audit, dispute or appeal with tax authorities, or otherwise considered to involve uncertainty (commonly referred to as uncertain tax positions). We regularly assess the adequacy of these liabilities. In April 2008, upon the completion of a routine tax audit for the years 2003 to 2005, the Internal Revenue Service notified us that it would challenge certain positions taken on our tax returns. We do not believe that any material impact will result from this challenge. Contingent tax liabilities are reversed to income in the period in which we assess that they are no longer required, when they are no longer required by statute, or when they are resolved through the normal tax dispute process. Our contingency reserves principally represent liabilities in respect of the years 2000 to 2007.
Please see our management's discussion and analysis for the year ended December 31, 2007 for a summary of our tax contingencies and market risks.
UNAUDITED PRO FORMA RESULTS
We have prepared certain unaudited pro forma financial information for Thomson Reuters to illustrate the effect of the acquisition of Reuters and to provide comparable results to measure our performance. These pro forma results for the three-month and six-month periods ended June 30, 2008 and 2007 have been prepared as if the acquisition had occurred on January 1, 2007. This pro forma information:
Pro Forma Results
The following tables set forth the pro forma results for Thomson Reuters for the three-month and six-month periods ended June 30, 2008 and 2007:
n/m = not meaningful.
Pro forma revenues. For the three-month and six-month periods ended June 30, 2008, pro forma revenues increased 11% and 13%, respectively. These increases include the effects of revenues from a disposal that could not be classified as a discontinued operation, as well as the impact of a pro forma purchase accounting adjustment on 2007 revenues. In order to present the performance of our ongoing businesses, the effects of the disposals and purchase accounting adjustment, were removed. Total pro forma revenues from ongoing businesses for both the three-month and six-month periods ended June 30, 2008 increased 12%. The primary components of the increase compared to the prior year periods were as follows:
As revenues in both periods for our Professional Division were not impacted by the Reuters acquisition, its pro forma results correspond to the analysis provided in the section entitled "Results of Operations." For both the three months and six months ended June 30, 2008, pro forma revenues in our Markets Division increased 12%. These increases were largely a result of higher revenues from existing businesses and were exhibited in each major geographic area, particularly Asia, and in all the Markets Division's subsegments.
In the three months and six months ended June 30, 2008, Sales & Trading revenues increased 11% and 10%, respectively. Excluding the effects of foreign currency translation, Sales & Trading revenues increased 5% and 6%, respectively. These increases were primarily a result of higher Treasury, Commodity & Energy and cross-asset class trading, offset by slower growth in Fixed Income and Equities. Treasury revenues were driven by foreign exchange volatility and higher transaction volumes. Commodity & Energy revenues increased due to higher demand for our information products resulting from sector activity. Tradeweb's revenues increased due to higher transaction fees from new asset classes, particularly dollar and Euro-denominated interest rate swaps.
In the three months and six months ended June 30, 2008, Investment & Advisory revenues increased 9% and 11%, respectively. Excluding the effects of foreign currency translation, Investment & Advisory revenues increased 8% and 10%, respectively. These increases were primarily a result of increased desktops and datafeed sales, particularly in the investment management and corporate sectors. Investment management revenues benefited from higher sales of advanced analytics. Revenues from the corporate sector increased primarily due to demand in Europe and Asia.
Enterprise revenues increased 23% and 20% for the three months and six months ended June 30, 2008, respectively. Excluding the effects of foreign currency translation, Enterprise revenues increased 14% and 15%, respectively. These increases primarily reflected higher data feed revenues. Trade & Risk Management revenues increased as a result of higher sales of our Kondor+ solution. Additionally, revenues for PORTIA, our portfolio accounting solution, increased due to greater activity for our customers, upgrade releases and demand for new modules.
Media revenues increased 12% and 13% for the three months and six months ended June 30, 2008, respectively. Excluding the effects of foreign currency translation, Media revenues increased 2% and 4%, respectively. These increases were primarily due to the favorable impact of foreign exchange. Additionally, revenues from agency services increased due to higher demand offset by timing of expenses and weakness in the Consumer business.
Pro forma operating profit. For the three months ended June 30, 2008, pro forma operating profit decreased 18%. The decrease was primarily the result of spending on our integration and synergy programs, as well as an impairment on assets held for sale. For the six months ended June 30, 2008, pro forma operating profit increased 38%. The increase was largely due to a purchase accounting adjustment that reduced revenues in the prior year period.
In both periods, we experienced certain unusual or one-time items that impacted comparability. The following table provides an analysis of our profitability excluding those items to derive our underlying operating profit.
For the three months and six months ended June 30, 2008, pro forma underlying operating profit increased 15% and 23%, respectively. Pro forma underlying operating profit in both periods benefited significantly from the favorable effect of foreign currency translation. These increases also reflected the higher revenues in each period, savings attributable to certain spending which was deferred prior to the Reuters acquisition, and initial synergy savings in the post-acquisition period. Our pro forma underlying operating margin increased in both periods as a result of the impact of foreign exchange translation, effects of scale and the impact of synergy initiatives.
For the three months and six months ended June 30, 2008, pro forma operating profit for the Markets Division increased 30% and 42%, respectively. These increases largely reflected the factors discussed above, including a significant benefit from the effect of foreign currency translation.
Pro forma adjusted earnings and pro forma adjusted earnings per share from continuing operations. The table below presents a reconciliation of pro forma underlying operating profit to pro forma adjusted earnings from continuing operations for the three-month and six-month periods ended June 30, 2008.
Our adjusted earnings from continuing operations for the three-month and six-month periods ended June 30, 2008 were $377 million, or $0.45 per share, and $751 million, or $0.90 per share, respectively. These measures are presented to allow an analysis of our performance on the same basis as our Business Outlook contained in this management's discussion and analysis, which assumes the acquisition of Reuters had occurred on January 1, 2007. We derived our pro forma adjusted earnings by deducting from pro forma underlying operating profit certain normally recurring items appearing below operating profit on the statements of earnings: interest expense, income taxes, Tradeweb ownership interests and dividends declared on preference
shares. Additionally, we deduct costs associated with our integration and synergy programs, but exclude "other income and expense" and amortization.
Pro forma interest expense and income taxes reflect assumptions in the "Business Outlook" section. Specifically, interest expense was derived by reflecting in the period a proportional amount of the pro forma full year run rate. Income taxes reflect an estimated pre-amortization effective tax rate. These amounts do not represent the actual amounts in the consolidated financial statements of Thomson Reuters for the three-month and six-month periods ended June 30, 2008.
Pro forma basic weighted average common and ordinary shares outstanding reflected the actual reported weighted average common and ordinary shares outstanding adjusted as if the approximately 194 million Thomson Reuters PLC shares issued to Reuters shareholders on April 17, 2008 were outstanding from the beginning of the period presented, as well as the effect of the approximately 34 million Reuters Group PLC share options assumed. Pro forma adjusted earnings per share from continuing operations do not represent actual earnings per share attributable to shareholders.
Pro Forma Information Calculation
The calculation of pro forma information for the six-months ended June 30, 2008 is set forth below:
The calculation of pro forma information for the six-months ended June 30, 2007 is set forth below:
Basis of Presentation
The unaudited pro forma information for the six-month periods ended June 30, 2008 and 2007 were calculated in a manner consistent with the preparation of the unaudited pro forma consolidated statement of earnings for the year ended December 31, 2007, unless otherwise noted, included in the Thomson Reuters PLC annual report on Form 20-F for the year ended December 31, 2007 filed with the SEC and the Canadian securities regulatory authorities. This unaudited pro forma information has been compiled from financial statements prepared in accordance with Canadian GAAP as previously applied by Thomson and which continue to apply to Thomson Reuters. The underlying financial information of Thomson and Thomson Reuters is included in the Thomson Reuters Corporation interim financial statements for the six-month period ended June 30, 2008 accompanying this management's discussion and analysis. The underlying financial information of Reuters was compiled from its internal financial records. The acquisition was reflected with Thomson as the acquirer and Reuters as the acquiree, assuming that the acquisition had been completed on January 1, 2007. No account has been taken of the trading activity or other transactions of Thomson Reuters for the period since June 30, 2008.
The pro forma information has been compiled in a manner consistent with the accounting policies previously adopted by Thomson, and which continue to apply to Thomson Reuters, since the acquisition of Reuters. These accounting polices differ in certain respects from those of Reuters. The adjustments made to reconcile Reuters financial information were consistent with those described in the reconciliations summarizing the material differences between IFRS and Canadian GAAP as applied by Thomson set out in Note 7 "Reconciliation to Canadian GAAP as applied by The Thomson Corporation" in the unaudited pro forma financial statements in the Thomson Reuters PLC annual report on Form 20-F for the year ended December 31, 2007.
Pro Forma Adjustments
The pro forma adjustments for the six-month periods ended June 30, 2008 and 2007 reflected adjustments made in the unaudited pro forma financial statements in the Thomson Reuters PLC annual report on Form 20-F for the year ended December 31, 2007, as follows, except as noted in a) below due to additional information made available to us following completion of the acquisition:
In the Thomson Reuters consolidated financial statements for the six-month period ended June 30, 2008, the first reporting period after the Reuters acquisition, reported revenues were reduced by $35 million. For purposes of the pro forma results, the revenue reduction was reversed, as it is assumed to have occurred in 2007, and therefore should not be recognized again in 2008 pro forma results.
There was no adjustment taken to reverse integration and synergy program expenses incurred beginning from April 17, 2008, the acquisition date.
The adjustments to amortization, depreciation and rent expense described in d) and e) below relate to pre-acquisition periods. The adjustments reflect the effects of purchase accounting on operating profit as if the Reuters acquisition had occurred on January 1, 2007. These adjustments were not required from April 17, 2008, the closing date of the acquisition, and after the closing as the Thomson Reuters Corporation consolidated financial statements for the six-month period ended June 30, 2008 reflect application of purchase accounting to the Reuters acquisition beginning from April 17, 2008.
The following table details pro forma depreciation expense by segment and disposals for the three and six-month periods ended June 30, 2008 and 2007:
The information in this section is forward-looking and should be read in conjunction with the sections below entitled "Material Assumptions" and "Cautionary Note Concerning Factors That May Affect Future Results."
In our management's discussion and analysis for the period ended March 31, 2008, we provided a business outlook for 2008 on a pro forma basis that assumes Thomson acquired Reuters on January 1, 2007. Based on our first-half results and continued positive sales momentum across the company, we are confident in confirming this outlook.
Our material assumptions related to the "Outlook" discussed above were as follows:
RELATED PARTY TRANSACTIONS
As of August 11, 2008, based on the issued share capital of Thomson Reuters Corporation and Thomson Reuters PLC, Woodbridge had a voting interest in Thomson Reuters of approximately 55%.
Transactions with Woodbridge
From time to time, in the normal course of business, Woodbridge purchases some of our products and service offerings. These transactions are negotiated at arm's length on standard terms, including price, and are not significant to our results of operations or financial condition individually or in the aggregate.
In the normal course of business, a Woodbridge-owned company rents office space from one of our subsidiaries. Additionally, a number of our subsidiaries charge a Woodbridge-owned company fees for various administrative services. In 2007, the total amount charged to Woodbridge for these rentals and services was approximately $1 million.
The employees of Jane's Information Group (Jane's) participated in our pension plans in the United States and United Kingdom, as well as the defined contribution plan in the United States, until June 2007. We had owned Jane's until we sold it to Woodbridge in April 2001. As part of the original purchase from us, Woodbridge assumed the pension liability associated with the active employees of Jane's. As a consequence of the sale of Jane's by Woodbridge in June 2007, Jane's employees ceased active participation in our plans. From April 2001 until June 2007, Jane's made proportional contributions to these pension plans as required, and made matching contributions in accordance with the provisions of the defined contribution plan. Coincident with the sale of Jane's by Woodbridge in June 2007, Jane's ceased to be a participating employer in any Thomson benefit plan.
We purchase property and casualty insurance from third party insurers and retain the first $1 million of each and every claim under the programs via our captive insurance subsidiary. Woodbridge is included in these programs and pays us a premium commensurate with its exposures. In 2007, these premiums were about $50,000, which would approximate the premium charged by a third party insurer for such coverage.
We have in the past maintained an agreement with Woodbridge under which Woodbridge agreed to indemnify up to $100 million of liabilities incurred either by our current and former directors and officers or by our company in providing indemnification to these individuals on substantially the same terms and conditions as would apply under an arm's length, commercial arrangement. In 2007, we paid Woodbridge a fee of $750,000, which was less than the premium that we would have paid for commercial insurance. This agreement has been replaced by a conventional insurance agreement. Thomson Reuters Corporation is nevertheless entitled to seek indemnification from Woodbridge in respect of claims arising from events prior to April 17, 2008 and made within a six-year run-off period following that date.
Transactions with Investments in Affiliates and Joint Ventures
We enter into transactions with our investments in affiliates and joint ventures. These transactions involve providing or receiving services and are entered into in the normal course of business and on an arm's length basis.
We and The Depository Trust & Clearing Corporation each have a 50% interest in Omgeo, a provider of trade management services. Omgeo pays us for use of facility and technology and other services. For the six months ended June 30, 2008, these services were valued at approximately $5 million.
We and Shin Nippon Hoki Shuppan K.K. each own 50% of Westlaw Japan K.K., a provider of legal information and solutions to the Japanese legal market. We provide the venture with technology and other services, which were valued at $3 million for the six months ended June 30, 2008.
Our Tradeweb Markets business provides services, including use of its trading platform and various back office functions, to Tradeweb New Markets, in which we have a 20% ownership stake. For the six months ended June 30, 2008, we recognized revenues of $1 million related to these services.
With the acquisition of Reuters, we assumed a lease agreement with 3XSQ Associates, an entity now owned by Thomson Reuters and Rudin Times Square Associates LLC that was formed to build and operate the 3 Times Square property and building in New York, New York that now serves as our corporate headquarters. We follow the equity method of accounting for our investment in 3XSQ Associates. The lease provides us with over 690,000 square feet of office space until 2021 and includes provisions to terminate portions early and various renewal options. In the year ended December 31, 2007, Reuters paid 3XSQ Associates approximately $32 million for rent, taxes, insurance and other expenses.
Also as a result of the acquisition of Reuters, we have an investment in a joint venture with the Chicago Mercantile Exchange to create a centrally-cleared, global foreign exchange trading system named FXMarketSpace. Among various other services, we provide trading access to and trade notification services for, and distribute market data from, FXMarketSpace. The total cost of these services provided by Reuters to FXMarketSpace in the year ended December 31, 2007 was approximately $20 million.
In February 2005, we entered into a contract with Hewitt Associates Inc. to outsource certain human resources administrative functions in order to improve operating and cost efficiencies. Under the current contract terms, we expect to pay Hewitt an aggregate of approximately $165 million over a 10 year period beginning in 2006. In 2007, we paid Hewitt $11 million for its services. Steven A. Denning, one of our directors and chairman of the board's Human Resources Committee, is also a director of Hewitt. Mr. Denning has not participated in negotiations related to the contract and has refrained from deliberating and voting on the matter by the Human Resources Committee and the board of directors.
In July 2008, we completed the sale of Dialog, an online provider of aggregated content databases used for research in such fields as business, science, engineering, finance and law. Dialog was previously part of the Scientific segment. The disposal did not qualify to be presented as a discontinued operation because we will continue to receive royalties from the distribution of Scientific content through Dialog.
In July 2008, we completed our previously announced $500 million share repurchase program. We repurchased and subsequently cancelled 825,000 Thomson Reuters PLC shares for approximately $21 million in July 2008.
In July 2008, we sold a copy of the Thomson Fundamentals (Worldscope) database to FactSet. We have received regulatory approval to sell a database copy of Reuters Economics (Ecowin) and that sale is expected to close during the third quarter of 2008. Database copy sales of Reuters Estimates and Reuters Aftermarket Research are progressing. These sales were required in order to satisfy antitrust obligations relative to the Reuters acquisition.
Financial Instruments and Comprehensive Income
As of December 31, 2007, Thomson adopted Canadian Institute of Chartered Accountants (CICA) Handbook Section 1535, Capital Disclosures, and CICA Handbook Section 3862, Financial Instruments Disclosures. The required disclosures were included in Thomson's annual report on Form 40-F for the year ended December 31, 2007.
Effective January 1, 2007, we voluntarily adopted a new accounting policy for uncertain income tax positions. As a result of this change in accounting policy, we recorded a non-cash charge of $33 million to our opening retained earnings as of January 1, 2007 with an offsetting increase to non-current liabilities.
Under our previous policy, we would reserve for tax contingencies if it was probable that an uncertain position would not be upheld. Under our new policy, we evaluate a tax position using a two-step process:
We were not able to retroactively apply this new policy as the data to determine the amounts and probabilities of the possible outcomes of the various tax positions that could be realized upon ultimate settlement was not collected in prior periods. Further, significant judgments are involved in assessing these tax positions and we concluded that it is not possible to estimate the effects of adopting the policy at an earlier date.
CRITICAL ACCOUNTING POLICIES
Please refer to the "Critical Accounting Policies" section of our management's discussion and analysis for the year ended December 31, 2007 for information on accounting policies that we consider critical in preparing our consolidated financial statements. Since the date of our annual management's discussion and analysis, there have not been any significant changes to these policies, nor have there been any new accounting policies that we would consider critical.
RECENTLY ISSUED ACCOUNTING STANDARDS
Transition to IFRS from Canadian GAAP
In 2008, the Canadian Accounting Standards Board confirmed that Canadian publicly accountable enterprises will be required to adopt International Financial Reporting Standards (IFRS) by 2011 in replacement of Canadian GAAP. We applied for exemptive relief from the Canadian securities regulatory authorities to adopt IFRS early and our application is currently under review. If permitted by the regulatory authorities, we intend to adopt IFRS in 2009. Comparative periods for 2008 would be restated. The following discussion provides further information about our proposed adoption.
Estimated Impact of IFRS on 2008 Financial Results
IFRS employs a conceptual framework that is similar to Canadian GAAP. In accordance with our agreement with the United Kingdom Listing Authority, we have provided a reconciliation of shareholders equity and net earnings from Canadian GAAP to IFRS as of and for the three and six-month periods ended June 30, 2008 and 2007, respectively in the section entitled "Voluntary reconciliation from Canadian GAAP to IFRS". While this reconciliation does not represent an official adoption of IFRS, it provides an indication of the major differences identified to date, relative to our historical financial statements. With respect to our intended official adoption of IFRS in 2009, we have not quantified the impact that IFRS 1 "First Time Adoption of International Reporting Standards" (IFRS 1) will have on our financial statements, nor have we definitively concluded if we will elect different policies in selected circumstances under IFRS. However, we do not expect the adoption of IFRS to impact the overall revenue and underlying profitability trends of our operating performance.
Voluntary Reconciliation from Canadian GAAP to IFRS
Thomson Reuters consolidated financial statements are prepared in accordance with Canadian GAAP. The following reconciliation presents the material differences between Canadian GAAP and IFRS, relative to our financial statements. However, this reconciliation does not constitute an adoption of IFRS by Thomson Reuters. In preparing the reconciliation, Thomson Reuters applied the principles and elections of IFRS 1, with a transition date of January 1, 2004, consistent with those assumed in its Business Acquisition Report dated May 15, 2008. If we are permitted to adopt IFRS, effective January 1, 2009, we will apply the provisions of IFRS 1 as described under the section entitled "Initial Adoption IFRS 1", with a January 1, 2008 transition date. We will also apply IFRS standards in effect at December 31, 2009 as required by IFRS 1 and may elect accounting policies which differ from those applied in this reconciliation.
The following describes the differences presented in the reconciliation of net earnings and shareholders' equity.
1. Business Combinations
Canadian GAAP Shares issued as consideration are measured at their market price a few days before and after the date the parties reach an agreement on the purchase price and proposed transaction is announced.
IFRS Shares issued as consideration are measured at their market price on the acquisition closing date.
Canadian GAAP Contingent consideration is recognized as part of the cost of an acquisition, but only at the point when the amount can be reasonably estimated and the outcome is determined beyond reasonable doubt.
IFRS Contingent consideration is recognized as part of the cost of an acquisition, at the date of acquisition, if it is probable that the contingency will be met and the amount can be reliably measured at fair value. Changes to the initial amount recognized are recognized through income and discounts on future cash payments are accreted through interest expense.
Acquisition Related Costs
Canadian GAAP Costs of the acquirer such as (1) exiting an activity, (2) involuntarily terminating an employee, or (3) relocating employees of an acquired company are recognized as part of the cost of an acquisition.
IFRS These costs are expensed, unless they are part of an existing restructuring by the acquiree, in which case they may be recognized as part of the cost of an acquisition.
2. Employee Benefits
Canadian GAAP The measurement date of defined benefit obligations and plan assets may be up to three months prior to the date of the financial statements.
IFRS The measurement date generally coincides with the date of the financial statements, because the measurement date must not result in a materially different outcome than if the balance sheet date had been used.
Past Service Cost
Canadian GAAP Past service costs arising from plan amendments are amortized on a straight-line basis over the average remaining service period of active employees expected to benefit from the amendment.
IFRS These costs are amortized on a straight-line basis over the average period until the benefits become vested. To the extent that the amended benefits are already vested, past service costs are recognized immediately.
Actuarial Gains and Losses
Canadian GAAP Actuarial gains and losses are recognized on a systematic and consistent basis, subject to a minimum required amortization based on a "corridor" approach. Unrecognized actuarial gains and losses below the corridor are deferred.
IFRS In accordance with our IFRS 1 election, actuarial gains and losses are recognized immediately into equity.
Fair value of Plan Assets
Canadian GAAP The expected return on plan assets is calculated using a market-related fair value, which recognizes changes in the fair value of plan assets over a five-year period.
IFRS The expected return on plan assets is based on market expectations, at the beginning of the period, for returns over the entire life of the related obligation and reflects changes due to actual contributions made and actual benefits paid during the period.
3. Stock-based Compensation
Recognition of expense
Canadian GAAP The fair value of a stock-based award with graded vesting is recognized on a straight-line basis over the vesting period.
IFRS Each tranche of an award is considered a separate grant with a different vesting date and fair value, and each is accounted for separately.
Canadian GAAP Forfeitures of awards may be recognized as they occur.
IFRS Forfeiture estimates are recognized in the current period and revised for actual experience in subsequent periods.
Cash-settled share-based payments
Canadian GAAP The liability for cash-settled share-based payments is accrued based upon the intrinsic value of the award.
IFRS The liability for cash-settled share-based awards is measured at fair value, using an option pricing model. Changes in fair value are recognized over the remaining vesting period until the liability is settled. Changes in fair value of vested awards are recognized in income immediately.
Recognition of deferred tax assets
Canadian GAAP Deferred tax asset for share-based awards are based upon the cumulative amount of compensation cost recognized.
IFRS Deferred tax assets for share-based awards are based upon the estimated tax deduction, which is generally the intrinsic value of the vested award at the balance sheet date. If the estimated deduction exceeds the cumulative compensation expense, the excess is recognized in equity. If no tax deduction is anticipated because the fair value of the shares has declined, then the deferred tax asset is reversed to income or equity as appropriate, depending on how the asset was originally recorded.
Canadian GAAP Employer taxes on share-based compensation are recognized upon exercise of the instrument.
IFRS Employer taxes on share-based compensation are recognized over the vesting period based upon the fair value of the awards at each balance sheet date.
4. Impairments of Long-Term Assets
Canadian GAAP Assets held for sale are measured at the lower of their carrying amount or fair value less costs to sell, where the carrying amount for purposes of determining impairment includes cumulative translation adjustments.
IFRS Assets held for sale are measured at the lower of their carrying amount or fair value less costs to sell, where the carrying amount excludes cumulative translation adjustments.
5. Financial Instruments
Canadian GAAP Effectiveness for compound derivative instruments that hedge currency and interest rate risk is assumed provided the critical terms of the derivative instrument are consistent with the hedged instrument.
IFRS Effectiveness for compound derivative instruments must be assessed retrospectively and prospectively each reporting period As a result, certain hedge relationships had to be prospectively discontinued as of the date of adoption of IAS 32 and IAS 39.
Canadian GAAP An obligation for an entity to purchase its own equity instruments is accounted for as an equity-transaction upon completion of each purchase.
IFRS A liability must be recognized currently through equity for an obligation when the entity has no discretion to cancel its instructions to repurchase shares. Subsequent adjustments to the present value of the liability are reflected within earnings. If the contract expires without delivery, the liability is reversed against equity.
6. Income Taxes
Canadian GAAP Prohibits the recognition of deferred tax for a temporary difference arising from intercompany transactions. Further, taxes paid or recovered as a result of an intercompany asset transfer are recorded as an asset or liability and recognized as tax expense when the asset leaves the group or is otherwise utilized.
IFRS Deferred taxes are recognized for temporary differences arising from intercompany transactions. Taxes paid or recovered as a result of an intercompany asset transfer are recognized in the period incurred.
Business Combinations: Deferred tax assets not previously recognized
Canadian GAAP Previously unrecognized income tax assets of an acquired company are recognized as part of the cost of the acquisition when such assets are more likely than not to be realized as a result of a business combination. If an unrecognized deferred tax asset becomes realizable subsequent to the acquisition date, such benefit will also be recognized through goodwill. The acquirer recognizes its own tax benefits which become realizable as a result of the acquisition as part of the cost of the acquisition.
IFRS Previously unrecognized income tax assets of an acquired company are recognized as part of the cost of the acquisition if realization is more likely than not as a result of the business combination. If an unrecognized deferred tax asset becomes realizable subsequent to the acquisition date, the tax benefit is recognized through income, and a corresponding amount of goodwill is written off to operating expense. The acquirer recognizes its own tax benefits which become realizable as a result of the acquisition through income.
Accounting for uncertainty in income taxes in business combinations
Canadian GAAP Changes to income tax contingencies relating to pre-acquisition periods are adjusted through the purchase price allocation, first reducing goodwill, intangible assets associated with the business combination, and only after exhausting those amounts, reducing income tax expense.
IFRS Changes to pre-acquisition tax uncertainties beyond twelve months of the acquisition date are recorded to the income statement.
Income tax effect of other reconciling differences between Canadian GAAP and IFRS
Differences from income taxes include the deferred tax effect on earnings of pre-tax differences between Canadian GAAP and IFRS described above. These amounts were $21 million and $1 million for the three-month periods ended June 30, 2008 and 2007, respectively and $16 million and $12 million for the six-month periods ended June 30, 2008 and 2007, respectively.
Initial Adoption of International Accounting Standards
IFRS 1 "First Time Adoption of International Accounting Standards" sets forth guidance for the initial adoption of IFRS. As required, we will restate our comparative 2008 financial statements for annual and interim periods to be consistent with our
new IFRS basis. Further, we will reconcile equity and net earnings from the previously reported 2008 Canadian GAAP amounts to the 2008 IFRS amounts.
IFRS 1 generally requires that first-time adopters consistently apply all effective IFRS standards retrospectively from the reporting date. IFRS 1 provides for certain optional exemptions and certain mandatory exceptions to this general principle. While we have not finalized our conclusions with respect to the optional exemptions, we expect to make the following elections:
Further optional exemptions are provided under IFRS 1. However, we do not believe these exemptions will impact our adoption of IFRS.
Hindsight is not permitted to create or revise estimates. The estimates previously made by us under Canadian GAAP will not be revised for application of IFRS except where necessary to reflect any difference in accounting policies.
IFRS Impact on Our Organization
The conversion to IFRS will impact the way we present our financial results. We have obtained an understanding of IFRS from intensive training and preparation of reconciliations of historical Canadian GAAP financial statements to IFRS. Further, our accounting staff includes former Reuters employees who prepared financial statements under IFRS for the past three years.
We are still evaluating the impact of the conversion on our accounting systems. However, based on the differences identified to date, we believe our systems can accommodate the required changes. We believe our internal and disclosure control processes, as currently designed, will not need significant modifications as a result of our conversion to IFRS.
We have assessed the impacts of adopting IFRS on our debt covenants and other contractual arrangements, and have not identified any material compliance issues. We are considering the impacts that the transition will have on our internal planning process and compensation arrangements.
CICA 3064, Goodwill and Intangible Assets
In February 2008, the CICA adopted CICA 3064, Goodwill and Intangible Assets, which replaces CICA 3062 and establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. The new standard applies to internally generated intangible assets and rights under licensing agreements and is effective for us in the fourth quarter of 2008. We believe there will not be a significant impact on our financial statements upon adoption.
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 are effective to ensure that all information required to be disclosed by Thomson Reuters in reports that it files or furnishes 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
As a result of our acquisition of Reuters in the second quarter of 2008, we have expanded our internal controls over financial reporting to include consolidation of the Reuters results of operations, as well as, acquisition related accounting and disclosures. We have also migrated certain Reuters financial systems and related work flows to our SAP solution with effect from August 1, 2008 as part of our integration and synergy program. In connection with the SAP implementation and transfer of workflows from the legacy Reuters systems, we have modified the design and documentation of our internal control processes and procedures. Changes to our control environment are incorporated into our annual assessment of internal control over financial reporting. We anticipate that as we execute our integration and synergy program across Thomson Reuters over the next three years that additional business information systems will be consolidated and related workflow processes migrated as legacy Thomson and Reuters shared service center environments mature into a Thomson Reuters global business services organization. Except as described above, there was no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
As of August 11, 2008, Thomson Reuters had outstanding 642,591,896 common shares of Thomson Reuters Corporation, 180,093,188 ordinary shares of Thomson Reuters PLC, 6,000,000 Series II preference shares, 4,461,781 restricted share units and 15,013,630 stock options. Also outstanding were 18,129,247 options previously granted by Reuters Group PLC prior to the closing that upon exercise will entitle the holders to receive 0.16 ordinary shares of Thomson Reuters PLC, plus 352.5 pence per share for each share of Reuters Group PLC that would have been received.
A Reuters Founders Share has also been issued by each of Thomson Reuters Corporation and Thomson Reuters PLC which enables the Reuters Founders Share Company to exercise extraordinary voting power to safeguard the Reuters Trust Principles. Thomson Reuters Corporation and Thomson Reuters PLC have also each issued a special voting share to a special voting trust so that shareholders of the two companies can ordinarily vote together as a single decision-making body. Thomson Reuters Corporation has issued an equalization share to Thomson Reuters PLC in connection with Thomson Reuters Corporation's support obligations under the DLC structure.
Public Securities Filings and Regulatory Announcements
You may access other information about Thomson Reuters, including our 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 through EDGAR at www.sec.gov. Information that we announce in the United Kingdom through RNS, a Regulatory Information Service, (including this management's discussion and analysis and our financial statements) is available on our website, www.thomsonreuters.com, as well as on SEDAR and EDGAR.
The following table presents a summary of consolidated operating results for Thomson Reuters eight most recent quarters:
Historically, Thomson's revenues and operating profits from continuing operations were proportionately the smallest in the first quarter and the largest in the fourth quarter, as certain product releases were concentrated at the end of the year, particularly in the regulatory and healthcare markets. Costs were incurred more evenly throughout the year. Its operating margins historically increased as the year progressed. In general, Thomson's year-over-year performance reflected increased operating profit driven by higher revenues from existing businesses and contributions from acquired businesses. As Reuters revenues and profits have not historically fluctuated significantly throughout the year, we anticipate that the seasonality of Thomson Reuters revenues and operating profits will be slightly less pronounced.
In the quarter ended September 30, 2007, earnings from discontinued operations reflected a gain on the sale of Thomson Learning's higher education, careers and library reference businesses. In the quarter ended March 31, 2008, operating profit and earnings reflected expenses associated with the Reuters transaction.
Results for Reuters are included in our consolidated financial statements for the quarter ended June 30, 2008 beginning from April 17, 2008, the closing date of the acquisition. All prior periods reflect the results of Thomson only. In the quarter ended June 30, 2008, operating profit and earnings from continuing operations reflected an impairment on assets held for sale.
This management's discussion and analysis, in particular the section under the heading "Outlook," includes forward-looking statements that are based on certain assumptions and reflect our current expectations. Forward-looking statements are those that are not historical facts and also include our expectations about future prospects. 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. Some of the factors that could cause actual results to differ materially from current expectations include risks related to our ability to achieve the anticipated benefits from the Reuters transaction and our integration and synergy program (including within the time periods currently expected); changes in the general economy; actions of competitors; changes to legislation and regulations; increased accessibility to free or relatively inexpensive information sources; failure to derive fully anticipated benefits from future or existing acquisitions, joint ventures, investments or dispositions; failure to develop new products, services, applications and functionalities to meet customers' needs, attract new customers or expand into new geographic markets; failure of electronic delivery systems, network systems or the Internet; detrimental reliance on third parties for information; failure to meet the challenges involved in the expansion of international operations; failure to protect our reputation; impairment of goodwill and identifiable intangible assets; failure of significant investments in technology to increase revenues or decrease operating costs; increased self-sufficiency of customers; inadequate protection of intellectual property rights; downgrading of credit ratings; threat of legal actions and claims; changes in foreign currency exchange and interest rates; failure to recruit and retain high quality management and key employees; funding obligations in respect of pension and post-retirement benefit arrangements; and actions or potential actions that could be taken by Woodbridge. Additional factors are discussed in our materials filed with the securities regulatory authorities in Canada and the United States from time to time, including Thomson Reuters Corporation's annual report on Form 40-F for the year ended December 31, 2007 and Thomson Reuters PLC's annual report on Form 20-F for the year ended December 31, 2007. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, other than as required by law, rule or regulation.
THOMSON REUTERS MANAGEMENT'S DISCUSSION AND ANALYSIS