EX-99.1 2 ex99_1.htm EXHIBIT 99.1 - ANNUAL REPORT ex99_1.htm

Exhibit 99.1
 
 
ANNUAL REPORT 2012

MARCH 11, 2013
 
 
 
 
 

 
 
Information in this annual report is provided as of March 1, 2013, unless otherwise indicated.

Certain statements in this annual report are forward-looking. These forward-looking statements are based on certain assumptions and reflect our current expectations. As a result, forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. Some of the factors that could cause actual results to differ materially from current expectations are discussed in the “Risk Factors” section of this annual report as well as in materials that we from time to time file with, or furnish to, the Canadian securities regulatory authorities and the U.S. Securities and Exchange Commission. There is no assurance that any forward-looking statements will materialize. You are cautioned not to place undue reliance on forward-looking statements, which reflect expectations only as of the date of this annual report. Except as may be required by applicable law, we disclaim any intention or obligation to update or revise any forward-looking statements.

The following terms in this annual report have the following meanings, unless otherwise indicated:

 
“Thomson Reuters,” “we,” “us” and “our” each refers to Thomson Reuters Corporation and its consolidated subsidiaries, unless the context otherwise requires;

 
“Woodbridge” refers to The Woodbridge Company Limited and other companies affiliated with it; and

 
“$,” “US$” or “dollars” are to U.S. dollars.

For information regarding our disclosure requirements under applicable Canadian and U.S. laws and regulations, please see the “Cross Reference Tables” section of this annual report.

Information contained on our website or any other websites identified in this annual report is not part of this annual report. All website addresses listed in this annual report are intended to be inactive, textual references only. The Thomson Reuters logo and our other trademarks, trade names and service names mentioned in this annual report are the property of Thomson Reuters.

TABLE OF CONTENTS

2
Business
   
17
Risk Factors
   
24
Management’s Discussion and Analysis
   
78
Consolidated Financial Statements
   
134
Executive Officers and Directors
   
142
Additional Information
   
151
Cross Reference Tables
 
Thomson Reuters Annual Report 2012
 
 
1

 

BUSINESS

OVERVIEW

We are the leading source of intelligent information for the world’s businesses and professionals, providing customers with competitive advantage. Intelligent information is a unique synthesis of human intelligence, industry expertise and innovative technology that provides decision-makers with the knowledge to act, enabling them to make better decisions faster. Through approximately 60,000 employees across more than 100 countries, we deliver this must-have insight to the financial and risk, legal, tax and accounting, intellectual property and science and media markets, powered by the world’s most trusted news organization. Thomson Reuters shares are listed on the Toronto Stock Exchange and New York Stock Exchange (symbol: TRI) and our headquarters are located at 3 Times Square, New York, New York 10036. Our website is www.thomsonreuters.com.

We are organized in four business units:

 
Financial & Risk, a leading provider of critical news, information and analytics, enabling transactions and bringing together financial communities. Financial & Risk also provides leading regulatory and operational risk management solutions;

 
Legal, a leading provider of critical online and print information, decision support tools, software and services to support legal, investigation, business and government professionals around the world;

 
Tax & Accounting, a leading provider of integrated tax compliance and accounting information, software and services for professionals in accounting firms, corporations, law firms and government; and

 
·
Intellectual Property & Science, a leading provider of comprehensive intellectual property and scientific information, decision support tools and services that enable governments, academia, publishers, corporations and law firms to discover, develop and deliver innovations.

We also have a Global Growth & Operations organization which works across our business units to combine our global capabilities and to expand our local presence and development in countries and regions where we believe the greatest growth opportunities exist.

At our Corporate center, we manage Reuters, the world's largest international news agency, which is a leading provider of real-time, high-impact, multimedia news and information services to newspapers, television and cable networks, radio stations and websites around the globe.

BUSINESS MODEL AND KEY OPERATING CHARACTERISTICS

We derive the majority of our revenues from selling electronic content and services to professionals, primarily on a subscription basis.

Some of our business units, in particular Legal and Intellectual Property & Science, are evolving towards becoming greater providers of solutions to our customers as part of an ongoing transformation from focusing primarily on providing data and information. These solutions often are designed to integrate our core information with software and workflow tools. We believe that transitioning a greater part of our business to solutions will help us increase customer value, create growth, diversify business mix and differentiate us from competitors.

The table below describes some of our key operating characteristics.
 
Industry leader
 
      #1 or #2 in most of the market segments that we serve
      Deep and broad industry knowledge
      Products and services tailored for professionals
 
Balanced and diversified
 
      Four distinct core customer groups
      Geographical diversity – our 2012 revenues were 57% from the Americas, 31% from Europe, the Middle East and Africa (EMEA) and 12% from Asia
      Our largest single customer accounted for approximately 1% of our 2012 revenues
      Technology and operating platforms are built to address the global marketplace
 
 
Thomson Reuters Annual Report 2012
 
 
2

 
 
Attractive business model
     86% of our 2012 revenues were recurring
     91% of our 2012 revenues were from information delivered electronically, software and services
     Strong & consistent cash generation capabilities
 
 
2012 PERFORMANCE

In 2012, we reported the following results:*

   
2012
(millions of US dollars,
except EPS and margins)
   
Change from 2011
 
Revenues from ongoing businesses
  $12,899     3%  
Adjusted EBITDA
  $3,529     6%  
Adjusted EBITDA margin
  27.4%    
90 basis points
 
Adjusted EBITDA less capital expenditures
  $2,567     9%  
Adjusted EBITDA less capital expenditures margin
  19.9%    
110 basis points
 
Underlying operating profit
  $2,405     -4%  
Underlying operating profit margin
  18.6%    
-130 basis points
 
Adjusted earnings per share (EPS)
  $2.12     8%  
Free cash flow
  $1,737     8%  
Free cash flow from ongoing businesses
  $1,667     20%  

* Non-International Financial Reporting Standards (IFRS) measures, which are defined and reconciled to the most directly comparable IFRS measures in the “Management’s Discussion and Analysis” section of this annual report. Changes from 2011 are before currency for all results except for adjusted EPS and free cash flow.

Despite an economic environment that proved to be more challenging than we had anticipated, we achieved our 2012 financial targets for revenues, profit and free cash flow, and we also made significant progress executing our four key priorities for the year.
 
2012 Priority
 
2012 Progress
Restarting growth in our Financial & Risk business
     We simplified the business and improved product quality and customer service
     Customer satisfaction ratings and retention rates are improving
     We executed on the development and rollout of our foundational future platforms, Thomson Reuters Eikon and Thomson Reuters Elektron
     We have a robust product pipeline
 
Investing in higher growing market segments and adjacent market segments
     We continued to shift our investment towards what we believe are higher growth opportunities. We strengthened our positions in key market segments through the following acquisitions:
o     FXall – the leading independent global provider of electronic foreign exchange trading solutions to corporations and asset managers within our Financial & Risk segment
o     MarkMonitor – a provider of online brand protection within our Intellectual Property & Science segment
o     Practical Law Company (PLC) – a leading provider of legal know-how, current awareness and workflow tools within our Legal segment  
 
 
Thomson Reuters Annual Report 2012
 
 
3

 
 
2012 Priority
 
2012 Progress
Utilizing the strengths and advantages of our global businesses
     We continue to expand our position at the intersection of regulation and finance
     Our Governance, Risk & Compliance (GRC) business reported organic revenue growth of 17%. We believe that we have an opportunity to significantly expand our GRC business and we are continuing to invest in it
 
Accelerating development and expanding our position in faster growing geographic areas around the world
 
     Our Global Growth & Operations (GGO) business reported 19% revenue growth (10% organic)
     We are working to expand our position in faster-growing geographic areas
 
 
2013 PRIORITIES

Our key priorities for 2013 are to continue:

 
Focusing on execution, product quality and customer satisfaction;
 
 
Driving growth through new product development, further expansion into fast-growing geographies and continuing the transformation to software and workflow solutions; and
 
 
Engaging a talented and diverse workforce.
 
THREE-YEAR OVERVIEW

The table below provides a three-year overview of our business.
 
Three-Year Overview
   
2010
We focused on restarting growth and returned to revenue growth in the second half of 2010
 
We launched a number of new product platforms, including:
 
 
o      WestlawNext – our next generation legal research platform
   
o      Thomson Reuters Eikon – our flagship financial information desktop
   
o      ONESOURCE – our comprehensive global tax compliance solution
   
o      Thomson Reuters Elektron – our financial markets network and managed services environment
 
We completed 26 acquisitions to support new initiatives such as global expansion and our GRC business
 
We consolidated and integrated technology platforms to achieve cost savings and increase flexibility and scalability
     
2011
We continued to invest through a challenging economic cycle
 
Our 2011 revenue growth was 5% before currency
 
We completed 39 acquisitions, investing in faster growing international markets, with a particular emphasis on rapidly developing economies such as Brazil
 
We realigned our sales force more closely with our markets, customers and products
 
We completed our Reuters integration programs
     
2012
2012 was a year of change for our company. James C. Smith became our new CEO and Stephane Bello became our new CFO. We also collapsed our divisional structure (which previously consisted of Markets and Professional) into a group of strategic business units with a single corporate center to support them
 
Our 2012 revenue growth was 3% before currency
 
We completed 29 acquisitions to support higher growing market segments and adjacent market segments. We sold our Healthcare business, three Financial & Risk businesses and a Tax & Accounting business
 
We made further improvements in product quality, customer service and execution capabilities in our Financial & Risk business
     
 
Thomson Reuters Annual Report 2012
 
 
4

 
 
FINANCIAL & RISK

Financial & Risk provides critical news, information and analytics, enables transactions and brings together communities that allow trading, investing, financial and corporate professionals to connect. Financial & Risk also provides leading regulatory and operational risk management solutions.

We believe that Financial & Risk’s information, supporting technology and infrastructure help our customers generate superior returns, improve risk and compliance management, increase access to liquidity and create efficient, reliable infrastructures in increasingly global, electronic and multi-asset class markets.

Financial & Risk currently serves four end-user groups:

 
·
Trading;

 
·
Investors;

 
·
Marketplaces; and

 
·
Governance, Risk & Compliance (GRC).

86% of Financial & Risk’s 2012 revenues were from recurring sources, with the remainder primarily from transactions. Financial & Risk customers access our information, analytics and trading communities through our desktop solutions, datafeeds and mobile applications across a wide range of devices. Less than 45% of Financial & Risk’s 2012 revenues were derived from desktop products, with the remainder from sales of datafeeds, transactions and software.
 
In 2012, we began to transform our Financial & Risk business, and we believe that we are now halfway through that process. Operationally, Financial & Risk has been focused on improving product quality and customer service, simplifying its business by aligning sales and support operations, consolidating billing systems and rationalizing its product lineup. Technologically, Financial & Risk is simplifying its front and back-ends, which we believe will help the cost profile of the business and allow us to roll out new product releases faster. Financially, we are focused on optimizing the cost structure of the business to improve its profitability. Although we believe that Financial & Risk is moving in the right direction, many of its customers continue to face a challenging economic environment. The business will be focused on continuing operational improvement as part of its ongoing transformation.

TRADING

The Trading business serves the financial community by enabling market participants to connect, access rich content and trade. Trading provides customers with a combination of feeds, analytics, transactions, desktop tools and technology infrastructure via the Thomson Reuters Eikon desktop and Thomson Reuters Elektron data and networking infrastructure. This combination of solutions supports the trading activities of buy-side and sell-side customers in foreign exchange (FX), fixed income and derivatives, equities and other exchange-traded instruments, and in the commodities and energy markets. Effective January 1, 2013, we transferred our FX desktop solutions from our Trading to our Marketplaces business.

Our content, technology and solutions enable firms to efficiently obtain real-time and non-real-time content to make business and trading decisions and meet regulatory requirements. Our solutions enable users to develop and execute trading strategies quickly and efficiently and provide a combination of deep, global cross-asset news and content combined with sophisticated pre-trade decision-making, communication and trade connectivity tools.

In 2012, our Trading business continued to roll out, enhance and develop our flagship desktop, Thomson Reuters Eikon. Within Eikon, we made significant advances in areas such as search and visualization and added a wide range of new specialist content, analytics and tools, including our FX Buzz service. We also added specialist content for commodities such as energy research and forecasts weather insight, oil refinery data and launched Interactive Map, our innovative visualization tool for the commodities supply chain. Eikon mobile applications were also launched for iPhone and iPad users. Eikon desktops totaled nearly 34,000 as of December 31, 2012, an increase of 185% from the end of 2011.

In 2012, we continued to progress Thomson Reuters Elektron, our high performance trading and data infrastructure which enables both our next generation real-time feeds and managed service solutions. We also expanded Elektron hosting facilities with new locations announced in Hong Kong and Brazil. Our Elektron hosting infrastructure allows us to deploy specific client applications, offering access to our breadth of market data and data management capabilities in a managed service environment.

Thomson Reuters Autex, our FIX order routing network, continues to expand around the world. The network is one of the world's largest distributors of order indications and advertised trades, processing more than two million messages each day.
 
Thomson Reuters Annual Report 2012
 
 
5

 
 
The following table provides information about Trading’s major brands.

Major Brands
 
Type of Product/Service
 
Target Customers
Thomson Reuters Eikon,
Reuters 3000 Xtra*
 
Flagship desktop products providing pre-trade decision-making tools, news, real-time pricing, trading connectivity and collaboration tools
 
Trading professionals, salespeople, brokers, corporate treasurers and financial analysts
Thomson Reuters Elektron
 
Flexible, high performance, cross asset data and trading infrastructure
 
Investment banks, asset managers, custodians, liquidity centers and depositories, hedge funds, prime brokers, proprietary traders, inter-dealer brokers, multilateral trading facilities (MTFs), central banks and fund administrators
Thomson Reuters Elektron Real Time
 
Next generation real time datafeed
 
Financial institutions
Thomson Reuters Enterprise Platform
 
Scalable and robust technology platforms that enable financial institutions to control real time information flows
 
Financial institutions
Thomson Reuters Autex
 
Leading FIX order routing network
 
Buy and sell-side firms
Thomson Reuters Machine Readable News
 
Advanced analytics for automating the consumption of news for automated trading strategies and portals
 
Programmatic trading firms

* Reuters 3000 Xtra is scheduled to be discontinued in December 2013, with users upgraded to Eikon.

COMPETITION

Trading’s information products primarily compete with Bloomberg, SunGard, Telekurs and IDC as well as local, regional and niche competitors ranging from Markit and SuperDerivatives to Quick and Xinhua Finance. Trading’s real-time datafeeds primarily compete with Bloomberg, S&P, IDC and its market data delivery offerings primarily compete with specialty technology providers, exchanges such as NYSE Euronext and large IT vendors such as IBM.

INVESTORS

The Investors business provides our buy-side and off-trading floor customers with information, analytics, workflow and technology solutions. These solutions enable effective decision-making, drive performance and help meet regulatory requirements for our customers in investment management, investment banking, wealth management and hedge funds.

Investors’ customers have direct, real-time access to the global content sets needed for intelligent decision-making, such as fundamentals, estimates, economic indicators, ownership data, broker research, deals data, equity and fixed income pricing and reference data for their middle and back offices for trade matching and settlement, risk management and analysis and portfolio evaluation. In 2012, Investors solutions provided independent, accurate and timely pricing information on fixed income derivatives instruments and loans. Investors’ proprietary sources of content include I/B/E/S, Datastream, Lipper, StarMine, Extel, First Call, IFR and Reuters News.

To manage ongoing market and customer economic conditions, and to capitalize on growth opportunities in Asia and Europe, Middle East and Africa (EMEA) and an established customer segment in Europe, we realigned Investors in 2012 to focus on our key competencies. We addressed fixed income risk management needs and announced key product upgrades that added a range of market monitoring and decision support tools for wealth managers and other financial institutions to our Thomson Reuters Eikon flagship desktop. We also continued to grow our Thomson Reuters Indices business by expanding both the asset classes and regions covered, particularly in the growing Islamic finance and Asian real estate areas. In 2012, we also announced that we had signed a definitive agreement to sell Investors’ IR, PR and multimedia services business.

Thomson Reuters Annual Report 2012
 
 
6

 

The following table provides information about Investors’ major brands.

Major Brands and Product Categories
 
Type of Product/Service
 
Target Customers
Thomson Reuters Eikon
 
Flagship desktop product providing pre-trade decision-making tools, news, real-time pricing, trading connectivity and collaboration tools
 
Investment professionals, salespeople, brokers, corporate treasurers and financial analysts
Thomson ONE
 
Integrated access to information, analytics and tools delivered within workspaces designed specifically for each target customer’s workflow
 
Portfolio managers, buy-side research analysts and associates, investment bankers, consultants, lawyers, private equity professionals, wealth management and high net worth professionals
 
Corporate customers including investor relations officers, public relations officers, strategy and research professionals, treasurers and finance professionals
Thomson Reuters Datastream
 
Sophisticated historical time-series analysis that enables the visualization of economic and asset class trends and relationships
 
Economists, strategists, portfolio managers and research analysts
Thomson Reuters Deals Business Intelligence
 
Analysis and reporting tools for business planning, including performance, market share and targeting
 
Business management and strategy teams in investment banks
Lipper
 
Mutual fund information, benchmarking data, performance information and analysis
 
Asset management professionals including fund marketing, sales, product development, performance measurement, financial intermediaries and individual investors
Thomson Reuters DataScope
 
Data delivery platform for non-streaming cross asset class content globally
 
Custodians, banks, insurance companies,  fund administrators, pension firms, mutual funds, hedge funds, sovereign funds, underwriters, market makers, accounting firms and government institutions

COMPETITION

Our Investors business primarily competes with Bloomberg, FactSet, S&P/Capital IQ, Morningstar, SunGard Data Systems, Broadridge Financial Solutions, IDC, Telekurs, Dow Jones and other companies.

MARKETPLACES

The Marketplaces business operates electronic trading venues which provide access to liquidity in over-the-counter markets, trade execution and connections for market participants and communities of financial professionals worldwide. Marketplaces also provides post-trade services globally, enabling banks, brokers and electronic marketplaces to seamlessly connect with their counterparties.

The Marketplaces business provides execution venues, insight and workflow solutions to the foreign exchange and fixed income trading community. Marketplaces operates electronic trading venues which provide access to liquidity in over-the-counter markets, trade execution and connections for market participants and communities of financial professionals worldwide. Marketplaces also provides rich content, insight and connectivity to the community to enable market participants to make trading decisions through Thomson Reuters Eikon. Marketplaces also provides integrated workflow and order management solutions to manage pre and post-trade processes globally, enabling banks, brokers and electronic marketplaces to seamlessly connect with their counterparties.

The evolution of the FX market has seen a move towards electronic single dealer and new multi-dealer services that are providing alternative liquidity sources to traditional, primary liquidity venues for banks and active traders. In response to customer and market needs, Marketplaces acquired FXall in 2012 to serve the broader universe of institutions, expand its buy-side community and deepen its exposure to clients looking to take advantage of opportunities in FX.
 
Thomson Reuters Annual Report 2012
 
 
7

 
 
The following table provides information about Marketplaces’ major brands.

Major Brands
 
Type of Product/Service
 
Target Customers
Thomson Reuters Dealing
 
Peer-to-peer conversational trading product primarily related to FX and money markets
 
FX and money market traders, sales desks, hedge funds and voice brokers
Thomson Reuters Matching
 
Anonymous electronic FX trade matching system, providing trading in spot and forwards FX and prime brokerage capabilities
 
FX traders, sales desks and hedge funds
FXall
 
Global electronic foreign exchange trading platform enabling FX price discovery, trade execution and pre-trade and post-trade automated workflow
 
Traders, asset managers, corporate treasurers, market makers and intermediaries
Tradeweb
 
Global electronic multi-dealer-to-customer marketplace for trading fixed income, derivatives and money market products which connects major investment banks with institutional customers
 
Institutional traders

COMPETITION

On the foreign exchange side, Marketplaces primarily competes with the large inter-dealer brokers, such as ICAP’s EBS platform and Bloomberg. Tradeweb’s principal competitors include MarketAxess and Bloomberg. Marketplaces also competes with single-dealer and multi-dealer portals.

GOVERNANCE, RISK & COMPLIANCE

Our Governance, Risk & Compliance (GRC) business provides a comprehensive suite of solutions designed to help our customers achieve business objectives, address uncertainty and act with integrity in addressing regulatory compliance, reputational risk controls and operational risk controls. The Thomson Reuters Accelus suite combines powerful technology with trusted regulatory and risk intelligence to deliver integrated solutions for global regulatory intelligence, financial crime prevention, anti-bribery and anti-corruption, enhanced due diligence, compliance management, internal audit, e-learning, risk management and board of director and disclosure services.

We have been expanding GRC into the workflow of our Financial & Risk and Legal customers in particular. In 2012, GRC enhanced the Accelus suite of products through its acquisition of Avanon, which strengthened its operational risk offerings, and through its acquisition of Knowledge Platform, which extended its regulatory implementation offerings.

The following table provides additional information about GRC’s major flagship brand.

Major Brand
 
Type of Product/Service
 
Target Customers
Thomson Reuters Accelus
 
Information-based governance, risk and compliance products and services
 
Corporate compliance, audit and risk management professionals, corporate and company secretaries, general counsel, business leaders, boards of directors and law firms

COMPETITION

GRC’s products and services compete with a wide variety of global, regional and niche competitors. GRC’s compliance, audit and risk products primarily compete with Wolters Kluwer Compliance Resource Network, CCH Team Mate, Protiviti, BWise and MetricStream. In the financial crime and reputational risk market, key competitors include Dow Jones, LexisNexis and Actimize, while corporate governance and disclosure products primarily compete with Diligent, BoardVantage, WebFilings and RR Donnelley.

LEGAL

Legal is a leading provider of critical online and print information, decision support tools, software and services to support legal, investigation, business and government professionals around the world. Legal offers a broad range of products that utilize our electronic databases of legal, regulatory, news, public records and business information. In recent years, Legal has focused increasingly on a solutions orientation, creating connected workflow tools for its customers. Legal’s solutions products and services include legal research solutions, software-based workflow solutions, compliance solutions, marketing, finance and operations software, business development and legal process outsourcing services.

Thomson Reuters Annual Report 2012
 
 
8

 

Legal is currently organized in three customer-focused businesses:

 
·
U.S. Law Firm Solutions;

 
·
Corporate, Government & Academic; and

 
·
Global Businesses.

WestlawNext is Legal’s primary global online delivery platform. WestlawNext offers authoritative content, powerful search and research organization and team collaboration features and navigation tools that enable customers to find and share specific points of law, build tables of authorities and search for topically-related commentary. We believe this helps legal professionals work more efficiently and provide better service to their clients. WestlawNext is also available through an iPad application and a mobile site. As of the end of 2012, we had converted approximately 76% of legacy Westlaw revenue to WestlawNext. Our legacy Westlaw product is now known as Westlaw Classic.

We provide localized versions of Westlaw for legal professionals in Australia, Canada, Chile, China, Hong Kong, India, Ireland, Japan, Malaysia, the Middle East, New Zealand, Spain, the United Kingdom and other countries. Legal also has online legal research services, some of which are sold under brand names other than Westlaw, in Argentina, Brazil, France, New Zealand, South Korea and the United Kingdom.

Through Westlaw International, we offer our online products and services to customers in markets where we may not have an existing publishing presence or have not yet developed a fully customized Westlaw service.

In February 2013, Legal acquired Practical Law Company (PLC). PLC provides practical legal know-how, current awareness and workflow tools to law firms and corporate legal departments. PLC’s unique resources, such as its practice notes, standard documents, checklists and What’s Market tools, cover a wide variety of practice areas in the U.S. and the U.K., such as commercial, corporate, employment, intellectual property, finance and litigation.

Our Legal business also has products and services to support the client development and back office business functions of a law practice. These include online marketing and client development solutions for law firms, as well as integrated software applications to help professional service organizations with their financial and practice management, matter management, accounting and billing.

Our Legal business provides a complete suite of litigation solutions software, services and legal research tools that help lawyers work more efficiently and effectively during all phases of litigation, including case evaluation, document review, depositions, motion practice, expert witness selection and evaluation, and trial preparation.

Legal also offers customers in corporate legal departments leading matter management, e-billing, legal analytics and legal process outsourcing services.

Legal offers customers in law enforcement, law firms and legal departments, as well as other investigative professionals, a suite of research tools used to find information on people, assets and entities, drawing from publicly available information. This information can be integrated into customer and third-party applications to provide more efficient solutions for solving customers’ key challenges in areas like fraud prevention and revenue recovery.

The following table provides information about Legal’s major brands.

Major Brands
 
Type of Product/Service
 
Target Customers
WestlawNext
Westlaw Classic
 
Legal, regulatory and compliance information-based products and services
 
Lawyers, law students, law librarians and other legal professionals
Practical Law Company (PLC)
 
Legal know-how and workflow tools
 
Lawyers, law librarians and other legal professionals
West LegalEdcenter
 
Continuing legal education materials and seminars, as well as peer rating services
 
Lawyers and legal professionals
Sweet & Maxwell (U.K.)
Carswell (Canada)
Aranzadi (Spain)
Brookers (New Zealand)
La Ley (Argentina)
Lawtel (U.K. and E.U.)
Revista dos Tribunais (Brazil)
 
Legal information-based products and services
 
Lawyers, law students, law librarians, corporate legal professionals, government agencies and trademark professionals
 
Thomson Reuters Annual Report 2012
 
 
9

 
 
Major Brands
 
Type of Product/Service
 
Target Customers
Elite 3E
ProLaw
eBillingHub
MatterSphere
LawSoft
 
Suite of integrated software applications that assist with business management functions, including financial and practice management, matter management, document and email management, accounting and billing, timekeeping and records management
 
Professional services organizations, lawyers, law firm finance and technology professionals
FindLaw
Super Lawyers
 
Online legal directory, website creation and hosting services; law firm marketing solutions
 
Lawyers, legal professionals and consumers
Case Logistix
Case Notebook
Drafting Assistant
West km
Thomson Reuters Expert Witness Services
 
Online research tools, case analysis software and deposition technology. Expert witness, document review and document retrieval services and drafting tools to support each stage of the litigation workflow
 
Lawyers, paralegals and courts
Thomson Reuters ProView
 
Professional grade e-reader platform
 
Lawyers and legal professionals globally
CLEAR
PeopleMap
 
Public and proprietary records about individuals and companies with tools for immediately usable results
 
Fraud prevention and investigative professionals in government, law enforcement, law firms and businesses
Serengeti
 
Online matter management, e-billing and legal analytics services
 
Corporate counsel and law firm professionals
Pangea3
 
Legal process outsourcing services
 
Corporate and law firm legal professionals

COMPETITION

Legal’s primary global competitors are Reed Elsevier (which operates LexisNexis) and Wolters Kluwer. Legal also competes with other companies that provide legal and regulatory information, including Bloomberg (which acquired BNA in 2011), as well as practice and matter management software, client development and other services to support legal professionals.

TAX & ACCOUNTING

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

Tax & Accounting’s businesses are:
 
 
·
Professional, which provides a suite of tax, accounting, payroll, document management, and practice management software and services to accounting firms;

 
·
Corporate, which provides federal, state, local and international tax compliance, planning and management software and services to companies around the world;

 
·
Knowledge Solutions, which provides information, research and certified professional education tools for tax and accounting professionals; and

 
·
Government, which provides integrated property tax management and land registry solutions.

In 2012, Tax & Accounting continued its growth and global expansion through new product introductions, product line extensions for ONESOURCE and Checkpoint and by increasing its presence in Latin America through the acquisitions of FISCOSoft and Dofiscal.
 
Thomson Reuters Annual Report 2012

 
10

 

The following table provides information about Tax & Accounting’s major brands.

Major Brands
 
Type of Product/Service
 
Target Customers
ONESOURCE
 
Comprehensive global tax compliance solution with local tax tools in a growing number of countries to manage a company’s entire tax workflow. The software links an organization’s global staff, controllers and finance personnel with tax advisors and auditors on one system, supporting compliance across corporate income, indirect, property, trust, fringe benefits and other taxes and reporting requirements. ONESOURCE products and services, which can be sold separately or as a suite, include solutions for tax planning, tax provision, transfer pricing, tax return compliance, tax information reporting, accounts production, and overall workflow management
 
Corporate, legal, bank and trust market and large accounting firms
Checkpoint
 
 
Integrated information solution delivering research, expert guidance, applications and workflow tools as well as primary sources and third party content providers
 
Accounting firms, corporate tax, finance and accounting departments, international trade professionals, law firms and governments
Checkpoint Learning
 
Online platform for continuing professional education and training, integrating global research, courses and certification with credit-tracking capability for individuals and firms
 
Accounting firms, corporate tax, finance and accounting departments
Checkpoint World
 
Online offering combining global research, news and guidance on international tax and accounting practices to effectively manage cross-border transactions
 
Accounting firms, corporate tax, finance and accounting departments of multinational corporations
CS Professional Suite
 
Integrated suite of software applications, including leading products such as UltraTax CS and Practice CS, that encompass every aspect of a professional accounting firm’s operations - from collecting customer data and posting finished tax returns to the overall management of the accounting practice
 
Small to medium accounting firms
Enterprise Suite
 
Solutions for tax preparation, engagement, practice management and document and workflow management, including GoSystem Tax RS and GoFileRoom
 
Large accounting firms
Digita
 
U.K. tax compliance and accounting software and services
 
Accounting firms, corporate tax, finance and accounting departments, law firms and governments
Government Revenue Management (GRM)
 
End-to-end software and services that empower governments to manage revenue through automated land and property tax administration
 
National, state and local governments responsible for property registration, tax generation and collection

COMPETITION

Tax & Accounting’s primary competitor across all customer segments is Wolters Kluwer (which includes CCH). Other major competitors include Intuit in the professional software and services market and CORPTAX (owned by Corporation Services Company) and Vertex in the corporate software and services market. Tax & Accounting also competes with other providers of software and services.

Thomson Reuters Annual Report 2012
 
 
11

 

INTELLECTUAL PROPERTY & SCIENCE

Our Intellectual Property & Science business provides comprehensive intellectual property (IP) and scientific information, decision support tools and services that enable governments, academia, publishers, corporations and law firms to discover, develop and deliver innovations.

Intellectual Property & Science is organized in three businesses:

 
·
IP Solutions, which provides patent, trademark and brand content and services that help corporate and legal IP professionals drive new growth opportunities, manage and protect IP assets and create maximum value from their IP portfolio;

 
·
Life Sciences, which helps accelerate pharmaceutical research and development by providing decision support information and analytics and professional services to pharmaceutical and biotechnology companies; and

 
·
Scientific & Scholarly Research, which fosters collaboration and enables discovery by providing access to the world’s critical research, as well as analytics designed to maximize returns on research funding and tools to facilitate the peer-review and publishing process.

In 2012, Intellectual Property & Science acquired MarkMonitor, a global leader in online brand protection.

The following table provides information about Intellectual Property & Science’s major brands.

Major Brands
 
Type of Product/Service
 
Target Customers
Thomson IP Manager
 
Enterprise-level, highly configurable intellectual asset management solution for patents, trademarks, licensing agreements, invention disclosures and related IP matters
 
Business executives, IP portfolio managers, docketing administrators, IP counsel, attorneys, paralegals and licensing executives
Thomson Innovation
 
Leading IP intelligence and collaboration platform with comprehensive content, powerful analysis and visualization tools and market insight
 
IP counsel, attorneys, information professionals, heads of research and development, licensing executives, business strategists, business intelligence analysts and M&A executives
MarkMonitor
 
Online brand protection
 
Business executives, IP counsel, licensing executives, strategists, business developers and marketing executives
SERION
 
Suite of trademark research solutions within a web-based workflow environment for screening, searching and protecting brands globally
 
Trademark attorneys, paralegals, IP executives, marketing executives, name generators and competitive intelligence analysts in corporations and law firms
Thomson Reuters Web of Knowledge
 
Multidisciplinary platform
that provides access to scholarly literature along with tools to search, track, measure and collaborate
 
Scientists, researchers, scholars and librarians at government agencies, research institutions and universities
 
EndNote
 
Research management solution for searching, collecting, organizing and sharing research
 
Researchers, scholarly writers, students and librarians
Research Analytics
 
A suite of solutions to evaluate and measure research performance, locate experts, promote accomplishments, demonstrate impact, define research strategies and guide decisions
 
Academic and research institutions, governments, not-for-profits and funding agencies
ScholarOne
 
Peer-review workflow solutions that streamline and manage the submission, review, production, and publication processes
 
Publishers, organizations and associations
Thomson Reuters Cortellis
 
Integrated platform containing authoritative R&D drug pipeline information, patents, deals, company information, breaking industry news, conference coverage and global regulatory intelligence
 
Business development, licensing, investment and regulatory professionals at pharmaceutical and biotechnology companies
 
Thomson Reuters Annual Report 2012
 
 
12

 
 
Major Brands
 
Type of Product/Service
 
Target Customers
Life Sciences Professional Services
 
Analysts with deep pharmaceutical and life science knowledge who apply disease understanding and patient needs to discovery, clinical development and launch
 
Life science, pharmaceutical and biotechnology companies
Thomson Reuters Integrity
 
Detailed information for scientists and researchers that integrates biology, chemistry and pharmacology data to support drug discovery and development
 
R&D scientific professionals at pharmaceutical and biotechnology companies
Thomson Reuters MetaCore
 
Integrated software suite for analysis of microarray, metabolic, proteomics, siRNA, microRNA and screening data
 
Scientists, biologists and researches at biotechnology and pharmaceutical companies

COMPETITION

Primary competitors of the IP Solutions business include Wolters Kluwer’s Corsearch, CPA Global, LexisNexis, Google Patents, Minesoft and patent office sites. Primary competitors of the Life Sciences business are Reed Elsevier, Wolters Kluwer, Informa, and IMS. Primary competitors of the Scientific & Scholarly Research business are Reed Elsevier, Google Scholar, Mendeley, RefWorks, ProQuest, EBSCO and Aries.

GLOBAL GROWTH & OPERATIONS

We formed our Global Growth & Operations (GGO) organization at the beginning of 2012. GGO works with our Financial & Risk, Legal, Tax & Accounting and Intellectual Property & Science businesses to combine our global capabilities and to expand our local presence and development in countries and regions where we believe the greatest growth opportunities exist. GGO is not a separate business unit and we report financial results for GGO in our Financial & Risk, Legal, Tax & Accounting and Intellectual Property & Science businesses results. Geographic areas that GGO is currently focused on include Latin America, China, India, the Middle East, Africa, the Association of Southeast Asian Nations/North Asia, Russia and countries comprising the Commonwealth of Independent States (CIS) and Turkey. GGO also manages our nine global operations centers that provide services across Thomson Reuters.

In its first year, GGO closed nine acquisitions, launched a number of innovative products, delivered efficiencies through the operations centers and helped leverage capabilities across our business segments.

REUTERS NEWS

Powered by more than 2,800 journalists reporting from bureaus around the world, we deliver news in over 20 different languages that influences the world’s markets, media, companies and consumers globally. Our news has a reputation for speed, accuracy and fairness, as well as insight, depth and understanding. 

We provide exclusive interviews with business, political and economic leaders, in-depth coverage, agenda-setting commentary and analysis on company and industry trends, and other breaking news. In 2012, we delivered 2.1 million unique news stories, nearly one million alerts, 680,000 pictures/images and 100,000 video stories.

In 2012, we combined our editorial and media businesses into an integrated news organization. We believe that the newly combined unit allows us to provide greater value to our business segments, bolster our global brand and to strengthen our news agency and direct-to-customer products.

Primary competitors include the Associated Press, Agence France-Presse, Bloomberg and Dow Jones.

OTHER BUSINESSES

From time to time, we sell businesses that are no longer aligned with our strategic focus. We provide information on the performance of these “Other Businesses” separately from our reportable segments. Most notably, Other Businesses includes our Healthcare business. In 2012, we sold our Healthcare business, Financial & Risk’s Portia business, Trade and Risk Management business and eXimius business and Tax & Accounting’s Property Tax Services business. In the first quarter of 2013, we sold Legal’s Law School Publishing business (which had been announced for sale in 2012).

Thomson Reuters Annual Report 2012
 
 
13

 

CORPORATE HEADQUARTERS

Our corporate headquarters seeks to foster a group-wide approach to management while allowing our business units sufficient operational flexibility to serve their customers effectively. The corporate headquarters’ four primary areas of focus are strategy and capital allocation, technology and innovation, talent management and brand management. The corporate headquarters is also responsible for overall direction on communications, investor relations, tax, accounting, finance, treasury and legal, and administers certain human resources services, such as employee compensation, benefits administration, share plans and training and development.

Our corporate headquarters are located in New York, New York with key corporate operations around the world, including in the United Kingdom, India, Eagan, Minnesota and Stamford, Connecticut.

TECHNOLOGY

With the rapid pace of change in our industry, we seek to be innovative and agile, evolving our products, services and company to better meet our customers’ needs. Technology helps drive our next generation of solutions.

Behind our innovative products and technology is our expert-enriched content. We believe that the smart application of technology improves the relevance of information and speed of delivery to our customers. We continue to recognize the value in deeply understanding customer behaviors to help improve our products and grow our revenues. By leveraging shareable platforms and working across our business units, we are transforming the way we provide content, providing greater value to our customers in our product offerings. We are also working to find new ways to deliver our content, including by expanding our mobile offerings.
 
In 2012, technology-related capital expenditures represented approximately 91% of our total capital expenditures for the year. The centralization of our technology organization has helped us improve and simplify our internal technology processes and systems, while reducing our overall technology-related spend. We are transforming our technology infrastructure, driving toward more standardized and modern data centers, IT systems, business systems and networks. We are also focused on utilizing technology as part of our security programs to safeguard our assets and those of our customers.

INTELLECTUAL PROPERTY

Many of our products and services are comprised of information delivered through a variety of media, including online, software-based applications, smartphones, tablets, books, journals and dedicated transmission lines. Our principal IP assets include patents, trademarks, trade secrets, databases and copyrights in our content. We believe that our IP is sufficient to permit us to carry on our business as presently conducted. We also rely on confidentiality agreements to protect our rights. We continue to apply for and receive patents for our innovative technologies. Additionally, we continue to acquire patents through the acquisition of companies. We also obtain significant content and data through third party licensing arrangements with content providers. We have registered a number of website domain names in connection with our online operations.

RESEARCH AND DEVELOPMENT

Innovation is essential to our success and is one of our primary bases of competition.

We undertake significant R&D which is then incorporated into our products, services and technology. Our R&D team includes research scientists and software developers with backgrounds in mathematics, linguistics, psychology, computer science and artificial intelligence.

We have filed a number of patents on topics such as system ranking, information storage, data mining, information patterns, forecasting, valuation and routing trade orders. We have also published academic papers on topics such as machine learning algorithms and information retrieval. In addition to a dedicated corporate R&D team, our business units also use innovative technology to develop products and services. 

SALES AND MARKETING

We primarily sell our products and services directly to our customers. In addition, we have been successful in selling some of our products and services online directly to customers. Focusing some of our marketing and sales efforts online has allowed us to broaden our range of customers and reduce sales and marketing costs.

CORPORATE RESPONSIBILITY

Corporate Responsibility (CR) is an integral part of the way we do business. We have a CR policy that describes how we manage our impact in four areas: the community (the places and societies in which we operate), our workplace (employees), the environment and the marketplace (customers, suppliers and investors). By articulating focus areas, we are able to define our responses to global standards and charters in ways that are meaningful to our business.

Thomson Reuters Annual Report 2012
 
 
14

 

In 2012, we continued to refine our approach to CR, aligning it to the needs of our business, with the support of our CR governance committee (comprised of representatives from across our business), and making it more responsive to the expectations of our stakeholders. Additionally, with the publication of our first global CR report, we have made progress reporting on our activity to a wider audience of our stakeholders.

COMMUNITY

In 2012, we launched our new internal philanthropy platform, My Community, which our employees use for our volunteering, matching gifts and employee giving programs. Our employees exemplified a commitment to the community by volunteering over 35,000 hours in 2012, up from nearly 21,000 hours in 2011. In addition to these programs, we also recognize and reward employee community service efforts through our Community Champion Awards program with company donations to support personal charitable initiatives across the globe.

The Thomson Reuters Foundation, a not-for-profit organization supported by our company, leverages skills and expertise across our organization to increase trust in, and access to, the rule of law, saving lives through the provision of trusted information and improving standards of journalism. Additional information on their work can be found at www.trust.org.

WORKPLACE

Our business is founded on integrity, independence and freedom from bias which is codified through the Thomson Reuters Trust Principles and complemented by our Code of Business Conduct and Ethics alongside our anti-bribery and anti-corruption policy. All of our employees are required to acknowledge our Code of Business Conduct and Ethics, which reflects our values as a company and our approach to doing business.

ENVIRONMENT

We derived 91% of our 2012 revenues from information delivered electronically, software and services. We recognize that as a provider of electronic information, we have an increasing responsibility to operate our data centers and our global real estate portfolio as efficiently as possible. During 2012, we focused on improving our data collection methodology used to compute our annual environmental impact, or carbon footprint. In conjunction with this baseline work, we hope to develop an environmental sustainability strategy for carbon management across our business. To support this, we have established a “Green Council” to develop workstreams across our business.

We promote environmental best practices through our network of employee-driven “Green Teams” around the world, enabling them to share ideas and promote new initiatives, such as focusing on energy saving initiatives and promoting office recycling.

MARKETPLACE

We have a Supply Chain Ethical Code that is designed to ensure that our suppliers and vendors meet a specified set of standards. The code reflects anti-bribery and anti-corruption legislation and additional suppliers have agreed to comply with the code in operating their businesses and providing services to us. We also provide products and services which support our CR focus and in 2012 we launched a new website, sustainability.thomsonreuters.com, which brings together our work advising decision makers in the professional and business communities.

ACQUISITIONS AND DISPOSITIONS

During the last three years, we made a number of tactical acquisitions which complemented our existing businesses. For many of these acquisitions, we purchased information or a service that we integrated into our operations to broaden the range of our offerings. We have also directed our acquisition spending to broadening our product and service offerings in higher growth market segments and executing our global growth strategy, particularly in rapidly developing economies. Key tactical acquisitions in 2012 included FXall in Financial & Risk, MarkMonitor in Intellectual Property & Science and Dr. Tax Software in Tax & Accounting. In February 2013, we closed the acquisition of Practical Law Company in Legal.

In addition, as part of our continuing strategy to optimize our portfolio of businesses and ensure that we are investing in parts of our business that offer the greatest opportunities to achieve growth and returns, we also actively pursued the sale of a number of businesses during the last three years. In 2012, we sold our Healthcare business, Financial & Risk’s Portia business, Trade and Risk Management business and eXimius business and Tax & Accounting’s Property Tax Services business. In the first quarter of 2013, we sold Legal’s Law School Publishing business (which had been announced for sale in 2012). For more information on acquisitions and dispositions that we made in the last three years, please see the “Management’s Discussion and Analysis” section of this annual report.
 
Thomson Reuters Annual Report 2012
 
 
15

 
 
EMPLOYEES

The following table sets forth information about our employees as of December 31, 2012.

Thomson Reuters
    59,400
Americas
    27,600
Europe, Middle East and Africa
    12,100
Asia
    19,700
       
Financial & Risk
    20,700
Legal
    10,200
Intellectual Property & Science
    2,700
Tax & Accounting
    5,500
Global Growth & Operations
    6,900
News
    3,200
Corporate headquarters
    10,200

In February 2013, we announced that we plan to reduce the number of employees in our Financial & Risk business and GGO organization by approximately 2,500 during 2013.

We believe that we generally have good relations with our employees, unions and work councils, although we have had disputes from time to time with the various unions that represent some of our employees. Our senior management team is committed to maintaining good relations with our employees, unions and works councils.

PROPERTIES AND FACILITIES

We own and lease office space and facilities around the world to support our businesses. We believe that our properties are in good condition and are adequate and suitable for our present purposes. The following table provides summary information about our principal properties as of December 31, 2012.

Facility
 
Approx. sq. ft.
Owned/Leased
 
Principal use
610 Opperman Drive,
Eagan, Minnesota
 
2,792,000
Owned
 
Legal headquarters and operating facilities
3 Times Square,
New York, New York
 
481,700
Owned/Leased2
 
Thomson Reuters headquarters and Financial & Risk operating facilities
195 Broadway,
New York, New York
 
435,200
Leased
 
Financial & Risk and Tax & Accounting offices
2395 Midway Road,
Carrollton, Texas
 
409,150
Owned
 
Tax & Accounting headquarters and operating facilities
Boston, Massachusetts1
 
312,000
Leased
 
Financial & Risk operating facilities
Geneva, Switzerland
 
291,160
Owned
 
Financial & Risk operating facilities
Canary Wharf,
London, United Kingdom
 
282,700
Leased
 
Financial & Risk operating facilities
RMZ Infinity, Bangalore, India
 
248,000
Leased
 
Financial & Risk operating facilities
Blackwall Yard, London,
United Kingdom
 
240,000
Owned
 
Financial & Risk Dockland’s Technical Center

1
Consists of three addresses.

2
We lease this facility from 3XSQ Associates, an entity owned by one of our subsidiaries and Rudin Times Square Associates LLC. 3XSQ Associates 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. 481,700 sq. ft. represents the net amount of office space that we currently physically occupy. The main lease covers a total of 688,000 sq. ft., with an additional 30,500 sq. ft. that we occupy under sub-lease. Under the main lease, 223,000 sq. ft. has been sub-leased and 13,800 sq. ft. is used for storage.
 
Thomson Reuters Annual Report 2012

 
 
16

 
 
RISK FACTORS

The risks and uncertainties below represent the risks that our management believes are material. If any of the events or developments discussed below actually occurs, our business, financial condition or results of operations could be adversely affected. Other factors not presently known to us or that we presently believe are not material could also affect our future business and operations.

We may be adversely affected by uncertainty and future downturns in the markets that we serve, in particular in the financial services and legal industries.

Our performance depends on the financial health and strength of our customers, which in turn is dependent on the general economies in North America, Europe, Asia and Latin America. In 2012, we derived approximately 81% of our ongoing business revenues from our financial and legal businesses.

The economic environment in 2012 for our businesses was more challenging than we had anticipated. The United States recently grappled with the “fiscal cliff” and faces ongoing contentious discussions about debt levels and spending. The Eurozone has recently struggled to revive countries with weaker economies from the brink of default. Asia and Latin America, while more robust, have been challenged in trying to maintain recent gross domestic product (GDP) growth rates. These global challenges have also impacted governments which rely on individuals and companies for taxes and other revenues. Unemployment and underemployment in many parts of the world have experienced record or near-record highs.

In 2012, this uncertainty in global economic and market conditions continued to cause disruptions and volatility worldwide, particularly in the financial services industry. The financial services industry remains increasingly challenged with heightened regulatory scrutiny, increasing capital requirements, lower transaction volumes in certain markets and asset classes, consolidation among firms and low overall anticipated market growth. In 2012, the combination of these factors continued to put intense pressure on financial institutions’ profitability and returns, forcing many of them to reduce their staff and decrease hiring efforts. Continued global economic uncertainty and future downturns in the financial services industry in one or more of the countries in which we operate or significant trading market disruptions or suspensions could adversely affect our Financial & Risk business.

Uncertain and changing economic conditions also continue to impact the legal industry. Larger law firms in particular have experienced lower revenue growth as corporate counsels continue to limit increases in billing rates and hours. This has caused a number of law firms to increase their focus on reducing costs.

In our Tax & Accounting business, economic uncertainty, funding delays and pressures to reduce spending have caused some of our government customers in particular to extend the sales cycle and delay the signing of certain agreements. Customers of our Intellectual Property & Science business are also focused on controlling their discretionary and transaction-related spending.

Cost-cutting or reduced activity by any of our customer segments may decrease demand for some of our products and services. This could adversely affect our financial results by reducing our revenues, which could in turn reduce the profitability of some of our products and services. Cost-cutting by customers has also recently caused us to simplify our organization and take additional steps to optimize our own cost structure as a means to maintain or improve profitability.

We operate in highly competitive markets and may be adversely affected by this competition.

The markets for our information, services and news are highly competitive and are subject to rapid technological changes and evolving customer demands and needs. Many of our principal competitors are established companies that have substantial financial resources, recognized brands, technological expertise and market experience and these competitors sometimes have more established positions in certain product segments and geographic regions than we do. We also compete with smaller and sometimes newer companies, some of which may be able to adopt new or emerging technologies or address customer requirements more quickly than we can. We may also face increased competition from Internet service companies and search providers that could pose a threat to some of our businesses by providing more in-depth offerings, adapting their products and services to meet the demands of their customers or combining with one of their traditional competitors to enhance their products and services.
 
Thomson Reuters Annual Report 2012
 
 
17

 
 
Our competitors are also continuously enhancing and improving their products and services (such as by adding new content and functionalities), developing new products and services and investing in technology to better serve the needs of their existing customers and to attract new customers. Our competitors may also continue to acquire additional businesses in key sectors that will allow them to offer a broader array of products and services. Some of our competitors are also marketing their products as a lower cost alternative, though we believe that many of our customers continue to see the value reflected in our offerings that sometimes results in a higher price. As some of our competitors are able to offer products and services that may be viewed as more cost effective than ours or which may be seen as having greater functionality or performance than ours, the relative value of some of our products or services could be diminished. Some of our current or future products or services could also be rendered obsolete as a result of competitive offerings. Competition may require us to reduce the price of some of our products and services or make additional capital investments that would adversely affect profit margins. If we are unable or unwilling to do so, we may lose market share and our financial results may be adversely affected. In addition, some of our customers have in the past and may decide again to develop independently certain products and services that they obtain from us, including through the formation of consortia. To the extent that customers become more self-sufficient, demand for our products and services may be reduced. If we fail to compete effectively, our financial condition and results of operations could be adversely affected.

If we are unable to develop new products, services, applications and functionalities to meet our customers’ needs, attract new customers, expand into new geographic markets and identify areas of higher growth, our ability to generate revenues may be adversely affected.

Our growth strategy involves developing new products, services, applications and functionalities to meet our customers’ needs and maintaining a strong position in the sectors that we serve. Over the last few years, we made significant investments in the development, promotion and improvement of our products, such as WestlawNext, Thomson Reuters Eikon and Thomson Reuters Elektron. We are also focused on investing in areas that we believe will provide us with the highest levels of growth over the long term. Recent examples of this focus include our acquisitions of FXall (to connect the sell-side and buy-side in foreign exchange), Practical Law Company (to provide transactional lawyers with more know-how solutions) and MarkMonitor (to provide online brand protection to our Intellectual Property & Science customers). As the information and news services industries continue to undergo rapid evolution, we must be able to anticipate and respond in a timely and cost effective manner to our customers’ needs, industry trends and technological changes in order to maintain and improve our competitiveness.

In 2011, we experienced a number of challenges related to the launch and development of Thomson Reuters Eikon. While we believe that in 2012 we made significant progress improving the performance, stability and functionality of Thomson Reuters Eikon, if our Financial & Risk customers’ adoption rates for new products and services targeted to financial services professionals are lower than our expectations, our results of operations may be adversely affected.

Within our Legal business, while adoption rates for WestlawNext have been strong and we believe that lawyers recognize the product’s value, the law firm industry (particularly in the U.S.) continues to be challenging as law firms remain under pressure by their clients to control costs, including spending on legal research. As a result, we have experienced a slight decline in U.S. legal research revenues in the last two years. While we have been allocating greater amounts of capital to other parts of our Legal business that we believe present the highest growth opportunities, a further decline in our legal research revenues could adversely affect our results of operations.

Some of our businesses, in particular Legal and Intellectual Property & Science, are evolving towards becoming greater providers of solutions to our customers as part of an ongoing transformation from focusing primarily on providing data and information. These solutions often are designed to integrate our core information with software and workflow tools. While we believe that transitioning a greater part of our business to solutions will help us increase customer value, create growth, diversify business mix and differentiate us from competitors, operating a business with a greater percentage of solutions may result in lower profit margins.

In addition, we plan to grow by attracting new customers and continuing to expand into Asia, Latin America and the Middle East. It may take us a significant amount of time and expense to develop new products, services, applications and functionalities to meet needs of customers, attract new customers or expand into these markets. If we are unable to do so, our ability to generate revenues may be adversely affected.

Increased accessibility to free or relatively inexpensive information sources may reduce demand for our products and services.

In recent years, more public sources of free or relatively inexpensive information have become available, particularly through the Internet, and this trend is expected to continue. For example, some governmental and regulatory agencies have increased the amount of information they make publicly available at no cost. In addition, several companies and organizations have made certain legal and financial information publicly available at no cost. “Open source” software that is available for free may also provide some functionality similar to that in some of our products.

Thomson Reuters Annual Report 2012

 
18

 
 
Public sources of free or relatively inexpensive information may reduce demand for our products and services. Demand could also be reduced as a result of cost-cutting initiatives at certain companies and organizations. Although we believe our information is more valuable and enhanced through analysis, tools and applications that are embedded into customers’ workflows, our financial results may be adversely affected if our customers choose to use these public sources as a substitute for our products or services.

We rely heavily on network systems and the Internet and any failures or disruptions may adversely affect our ability to serve our customers.

Most of our products and services are delivered electronically and our customers depend on our ability to handle rapidly substantial quantities of data and transactions on computer-based networks and the continued capacity, reliability and security of our electronic delivery systems and websites and the Internet. A number of our customers also entrust us with storing and securing their own data and information.

While we have dedicated resources who are responsible for maintaining appropriate levels of cybersecurity and we utilize third party technology to help protect our company against security breaches and cyber incidents, our measures may not be effective and any security breaches and cyber incidents could adversely affect our business. Any significant failure, compromise, cyber-breach or interruption of our systems, including operational services, loss of service from third parties, sabotage, break-ins, war, terrorist activities, human error, natural disaster, power or coding loss and computer viruses, could cause our systems to operate slowly or could interrupt service for periods of time. Any breach of data security caused by one of these events could also result in unintentional disclosure of, or unauthorized access to, customer, vendor, employee or other sensitive data or information, which could potentially result in additional costs to our company to enhance security or to respond to occurrences, lost sales, violations of privacy or other laws, penalties or litigation. Our reputation could also be damaged and customers could lose confidence in our security measures, which would harm our business. Any of these could have a material adverse effect on our business and results of operations. In the past, we have had some security breaches and cyber incidents as well as occasional system interruptions that have made some of our services or websites unavailable for a limited period of time, but none of these have been material to our business. In addition, while we have disaster recovery plans that include back-up facilities for our primary data centers, our systems are not always fully redundant and our disaster planning may not always be sufficient or effective. While we maintain what we believe is sufficient insurance coverage that may (subject to certain policy terms and conditions including self-insured deductibles) cover certain aspects of third party security and cyber risks and business interruption, such insurance coverage might not always cover all losses.

Our ability to effectively use the Internet may also be impaired due to infrastructure failures, service outages at third party Internet providers or increased government regulation. In addition, we are facing significant increases in our use of power and data storage. We may experience shortage of capacity and increased costs associated with such usage. These events may affect our ability to store, handle and deliver data and services to our customers.

From time to time, update rates of market data have increased. This can sometimes impact product and network performance. Factors that have significantly increased the market data update rates include the emergence of proprietary data feeds from other markets, high market volatility, decimalization, reductions in trade sizes resulting in more transactions, new derivative instruments, increased automatically-generated algorithmic and program trading, market fragmentation resulting in an increased number of trading venues, and multiple listings of options and other securities.

Changes in legislation and regulation pertaining to market structure and dissemination of market information may also increase update rates. While we continue to implement a number of capacity management initiatives, there can be no assurance that our company and our network providers will be able to accommodate accelerated growth of peak traffic volumes or avoid other failures or interruptions.

We generate a significant percentage of our revenues from recurring subscription-based arrangements, and our ability to maintain existing revenues and to generate higher revenues is dependent in part on maintaining a high renewal rate.

In 2012, 86% of our revenues were derived from subscriptions or similar contractual arrangements, which result in recurring revenues. Our revenues are supported by a relatively fixed cost base that is generally not impacted by fluctuations in revenues. Our subscription arrangements are most often for a term of one year or renew automatically under evergreen arrangements. With appropriate notice, however, certain arrangements are cancelable quarterly, particularly within our Financial & Risk business. In addition, the renewals of longer-term arrangements are often at the customer’s option. In order to maintain existing revenues and to generate higher revenues, we are dependent on a significant number of our customers to renew their arrangements with us. In 2012, approximately 90% of our customers renewed their arrangements with us. In our Legal, Intellectual Property & Science and Tax & Accounting business units, our customers have increasingly been seeking products and services delivered electronically and continue to migrate away from higher margin print products. In 2012, our print-related revenues declined 3%. Our revenues could also be lower if a significant number of our customers renewed their arrangements with us, but reduced the amount of their spending.
 
Thomson Reuters Annual Report 2012
 
 
19

 
 
We are dependent on third parties for data, information and other services.

We obtain significant data and information through licensing arrangements with content providers, some of which may be viewed as competitors. In addition, we rely on third party service providers for telecommunications and certain human resources administrative functions. Some providers may seek to increase fees for providing their proprietary content or services and others may not offer our company an opportunity to renew existing agreements. If we are unable to renegotiate commercially acceptable arrangements with these content or service providers or find substitutes or alternative sources of equivalent content or service, our business could be adversely affected. Our revenues and margins could also be reduced if some of our competitors obtained exclusive rights to provide or distribute certain types of data or information that was viewed as critical by our customers.

We may be adversely affected by changes in legislation and regulation.

We may be impacted by legislative and regulatory changes that impact our customers’ industries, in particular customers of our Financial & Risk business. In 2010, the Dodd-Frank Act was adopted in the United States and similar laws and regulations may be adopted in the future in other countries. Legal and regulatory changes, including regulations to implement the Dodd-Frank Act, may impact how we provide products and services to our customers.

Existing and proposed legislation and regulations, including changes in the manner in which such legislation and regulations are interpreted by courts, may impose limits on our collection and use of certain kinds of information and our ability to communicate such information effectively to our customers. Laws relating to e-commerce, electronic and mobile communications, privacy and data protection, anti-money laundering, direct marketing and digital advertising and the use of public records have also become more prevalent in recent years. It is difficult to predict in what form laws and regulations will be adopted or how they will be construed by the relevant courts, or the extent to which any changes might adversely affect us. Existing and proposed legislation and regulation, some of which may be conflicting on a global basis (such as the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and similar laws), may also increase our cost of doing business or require us to change some of our existing business practices. Although we have implemented policies and procedures that are designed to ensure compliance, we could be subject to fines or penalties as well as reputational harm for any violations.

In addition, changes in tax laws and/or uncertainty over their application and interpretation may adversely affect our results. Changes in tax laws or tax rulings may also adversely affect our effective tax rate or require adjustments to our previously filed tax returns, which if unfavorable, may adversely affect our results. We operate in many countries worldwide and our earnings are subject to taxation in many different jurisdictions and at different rates. We seek to organize our affairs in a tax efficient manner, taking account of the jurisdictions in which we operate. Tax laws that apply to our company may also be amended by the relevant authorities due to changes in fiscal circumstances or priorities. These types of amendments, or their application to our company, may adversely affect our results.

If we are unable to successfully adapt to organizational changes, our reputation and results of operations could be impacted.

We experienced significant organizational changes over the last two years following the elimination of our two divisions and the restructuring of our business units. In January 2012, these changes included several senior leadership changes, including a new CEO and CFO of our company and new Presidents for each of our business units. We also realigned the salesforce for our Financial & Risk business to be closer to its customers, products and market segments. Our ability to successfully manage organizational changes is important for our future business success. In particular, our reputation and results of operations could be harmed if employee morale, engagement or productivity decline as a result of organizational changes.

If we do not continue to recruit, motivate and retain high quality management and key employees, we may not be able to execute our strategies.

The completion and execution of our strategies depends on our ability to continue to recruit, motivate and retain high quality management and employees across all of our businesses. We compete with many businesses that are seeking skilled individuals, including those with advanced technological abilities. Competition for professionals in our financial services and legal businesses in particular can be intense as other companies seek to enhance their positions in our market segments. In addition, our organizational changes could cause our employee attrition rate to increase. We may not be able to continue to identify or be successful in recruiting, motivating or retaining the appropriate qualified personnel for our businesses and this may adversely affect our ability to execute our strategies. As greater focus has been placed on executive compensation at public companies, in the future, we may be required to alter our compensation practices in ways that could adversely affect our ability to attract and retain talented employees.

Thomson Reuters Annual Report 2012

 
20

 
 
Operating globally involves challenges that we may not be able to meet and that may adversely affect our ability to grow.

We believe that there are advantages to operating globally, including a proportionately reduced exposure to the market developments of a single country or region. However, there are certain risks inherent in doing business globally which may adversely affect our business and ability to grow. These risks include difficulties in penetrating new markets due to established and entrenched competitors, difficulties in developing products and services that are tailored to the needs of local customers, lack of local acceptance or knowledge of our products and services, lack of recognition of our brands, unavailability of joint venture partners or local companies for acquisition, instability of international economies and governments, exposure to adverse government action in countries where we may conduct reporting activities, changes in laws and policies affecting trade and investment in other jurisdictions, and exposure to varying legal standards, including intellectual property protection laws. Adverse developments in any of these areas could cause our actual results to differ materially from expected results. Challenges associated with operating globally may increase for our company as we continue to expand into geographic areas that we believe present the highest growth opportunities. In 2012, approximately 44% of our revenues were derived outside of North America and we expect this percentage to increase in the future. As of December 31, 2012, approximately 60% of our employees were located outside of North America and 13% of our 2012 acquisition spending was outside of North America.

We may be unable to derive fully the anticipated benefits from our existing or future acquisitions, joint ventures, investments or dispositions.

Acquisitions and dispositions are an important part of our portfolio optimization strategy. In the last three years, we acquired 94 companies and sold 11 businesses. We expect acquisition and disposition activity to continue in the future.

Acquisitions have been an important part of our growth strategy over the last several years to expand and enhance our products, services and customer base and to enter new geographic areas. In the future, we may not be able to successfully identify attractive acquisition opportunities or make acquisitions on terms that are satisfactory to our company from a commercial perspective. In addition, competition for acquisitions in the industries in which we operate during recent years has escalated, and may increase costs of acquisitions or cause us to refrain from making certain acquisitions. We may also be subject to increasing regulatory scrutiny from competition and antitrust authorities in connection with acquisitions. Achieving the expected returns and synergies from past and future acquisitions will depend in part upon our ability to integrate the products and services, technology, administrative functions and personnel of these businesses into our segments in an efficient and effective manner. We cannot assure you that we will be able to do so, or that our acquired businesses will perform at anticipated levels or that we will be able to obtain these synergies. Management resources may also be diverted from operating our existing businesses to certain acquisition integration challenges. If we are unable to successfully integrate acquired businesses, our anticipated revenues and profits may be lower. Our profit margins may also be lower, or diluted, following the acquisition of companies whose profit margins are less than those of our existing businesses. Acquisition spending may also reduce our earnings per share in certain periods.

We have also historically decided from time to time to dispose of assets or businesses that are no longer aligned with strategic objectives or current business portfolio. We expend costs and management resources to complete divestitures. Any failures or delays in completing divestitures could have an adverse effect on our financial results and on our ability to execute our strategy.

Our brands and reputation are important company assets and are key to our ability to remain a trusted source of information and news.

The integrity of our brands and reputation is key to our ability to remain a trusted source of information and news and to attract and retain customers. Negative publicity regarding our company or actual, alleged or perceived issues regarding one of our products or services could harm our relationship with customers. Failure to protect our brands or a failure by our company to uphold the Thomson Reuters Trust Principles may adversely impact our credibility as a trusted supplier of content and may have a negative impact on our information and news business.

We may be required to take future impairment charges that would reduce our reported assets and earnings.

Goodwill and other identifiable intangible assets comprise a substantial portion of our total assets. We are required under IFRS to test our goodwill and identifiable intangible assets with indefinite lives for impairment on an annual basis. We also are required by IFRS to perform an interim or periodic review of our goodwill and all identifiable intangible assets if events or changes in circumstances indicate that impairment may have occurred. Impairment testing requires our company to make significant estimates about our future performance and cash flows, as well as other assumptions. Economic, legal, regulatory, competitive, contractual and other factors as well as changes in our company’s share price and market capitalization may affect these assumptions. If our testing indicates that impairment has occurred relative to current fair values, we may be required to record a non-cash impairment charge in the period the determination is made. Recognition of an impairment would reduce our reported assets and earnings.
 
Thomson Reuters Annual Report 2012
 
 
21

 
 
In 2011, we incurred a $3.0 billion goodwill impairment charge. This non-cash charge was due to weaker than expected performance by our former Markets division, which consisted largely of businesses now in our Financial & Risk segment. We cannot accurately predict whether we will have any future impairment charges. If we were required to record additional impairment charges in the future, our financial condition and results of operations could be adversely affected.

Our intellectual property rights may not be adequately protected, which may adversely affect our financial results.

Many of our products and services are based on information delivered through a variety of media, including online, software-based applications, smartphones, tablets, books, journals and dedicated transmission lines. We rely on agreements with our customers and employees and patent, trademark, copyright and other intellectual property laws to establish and protect our proprietary rights in our products and services. Third parties may be able to copy, infringe or otherwise profit from our proprietary rights without authorization and the Internet may facilitate these activities. We also conduct business in some countries where the extent of effective legal protection for intellectual property rights is uncertain. We cannot assure you that we have adequate protection of our intellectual property rights. If we are not able to protect our intellectual property rights, our financial results may be adversely affected.

Some of our competitors may also be able to develop new products or services that are similar to ours without infringing our intellectual property rights, which could adversely affect our financial condition and results of operations.

We operate in a litigious environment which may adversely affect our financial results.

We may become involved in legal actions and claims arising in the ordinary course of business, including litigation alleging infringement of intellectual property rights, employment matters, breach of contract and other commercial matters. Due to the inherent uncertainty in the litigation process, the resolution of any particular legal proceeding could result in changes to our products and business practices and could have a material adverse effect on our financial position and results of operations.

From time to time, we have been sued by other companies for allegedly violating their patents. We are significantly dependent on technology and the rights related to it, including rights in respect of business methods. This, combined with the recent proliferation of “business method patents” issued by the U.S. Patent Office, and the litigious environment that surrounds patents in general, has increased patent infringement litigation over the last few years. Increasingly, our company (as well as other companies) have experienced more alleged claims from third parties whose sole or primary business is to monetize patents. If an infringement suit against our company is successful, we may be required to compensate the third party bringing the suit either by paying a lump sum or ongoing license fees to be able to continue selling a particular product or service. This type of compensation could be significant, in addition to legal fees and other costs that we would incur defending such a claim. We might also be prevented or enjoined by a court from continuing to provide the affected product or service. We may also be required to defend or indemnify any customers who have been sued for allegedly infringing a third party’s patent in connection with using one of our products or services. Responding to intellectual property claims, regardless of the validity, can be time consuming for our technology personnel and management.

Antitrust/competition-related claims or investigations could result in changes to how we do business and could be costly.

We are subject to applicable antitrust and competition laws and regulations in the countries where we have operations. These laws and regulations seek to prevent and prohibit anti-competitive activity. From time to time, we may be subject to antitrust/competition-related claims and investigations. Following such a claim or investigation, we may be required to change the way that we offer a particular product or service and if we are found to have violated antitrust or competition laws or regulations, we may be subject to fines or penalties. Any antitrust or competition-related claim or investigation could be costly for our company in terms of time and expense and could have an adverse effect on our financial condition and results of operations.

Our credit ratings may be downgraded, which may impede our access to the debt markets or raise our borrowing rates.

Our access to financing depends on, among other things, suitable market conditions and the maintenance of suitable long-term credit ratings. Our credit ratings may be adversely affected by various factors, including increased debt levels, decreased earnings, declines in customer demands, increased competition, a further deterioration in general economic and business conditions and adverse publicity. Any downgrades in our credit ratings may impede our access to the debt markets or raise our borrowing rates.
 
Thomson Reuters Annual Report 2012
 
 
22

 
 
Currency and interest rate fluctuations and either the reintroduction of individual currencies within the Eurozone or the dissolution of the Euro may have a significant impact on our reported revenues and earnings.

Our financial statements are expressed in U.S. dollars and are, therefore, subject to movements in exchange rates on the translation of the financial information of businesses whose operational currencies are not U.S. dollars. We receive revenues and incur expenses in many currencies and are thereby exposed to the impact of fluctuations in various currency rates. To the extent that these currency exposures are not hedged, exchange rate movements may cause fluctuations in our consolidated financial statements. As our operations outside of the U.S. continue to expand, we expect this trend to continue. In particular, we have exposure to the British pound sterling and the Euro. We mitigate this exposure by entering into exchange contracts to purchase or sell certain currencies in the future at fixed amounts. Because these instruments have not been designated as hedges for accounting purposes, changes in the fair value of these contracts are recognized through the income statement with no offsetting impact. In addition, if the foreign currency hedging markets are negatively affected by clearing and trade execution regulations imposed by the Dodd−Frank Act, the cost of hedging our foreign exchange exposure could increase.

We monitor the financial stability of the foreign countries in which we operate. In particular, we continue to closely watch conditions in Europe relative to sovereign debt concerns. While our exposure to higher risk countries, such as Greece and Spain, is proportionately small relative to our European operations as a whole, currency and economic disruption stemming from other Eurozone countries could have a more significant impact on the economic environment. If economic conditions in Europe worsen, we expect there would be an adverse impact on our results as well as on our ability to collect trade receivables from our customers in the region. To mitigate risk of loss, we monitor the creditworthiness of our customers and have policies and procedures for trade receivables collection and global cash management to ensure adequate liquidity is available to us.

Substantially all of our non-U.S. dollar-denominated debt is in Canadian dollars and has been hedged into U.S. dollars. In addition, an increase in interest rates from current levels could adversely affect our results in future periods.

We have significant funding obligations for pension and post-retirement benefit arrangements that are affected by factors outside of our control.

We have significant funding obligations for various pension and other post-retirement benefit arrangements that are affected by factors outside of our control. The valuations of material plans are determined by independent actuaries. Long-term rates of return for pension plans and post-retirement benefit arrangements are based on evaluations of historical investment returns and input from investment advisors. These valuations and rates of return require assumptions to be made in respect of future compensation levels, expected mortality, inflation, the expected long-term rate of return on the assets available to fund the plans, the expected social security costs and medical cost trends, along with the discount rate to measure obligations. These assumptions are reviewed annually. While we believe that these assumptions are appropriate given current economic conditions, significant differences in results or significant changes in assumptions may materially affect pension plan and post-retirement benefit obligations and related future expenses.

Woodbridge controls our company and is in a position to affect our governance and operations.

Woodbridge beneficially owned approximately 55% of our shares as of March 1, 2013. For so long as Woodbridge maintains its controlling interest in our company, it will generally be able to approve matters submitted to a majority vote of our shareholders without the consent of other shareholders, including, among other things, the election of our board. In addition, Woodbridge may be able to exercise a controlling influence over our business and affairs, the selection of our senior management, the acquisition or disposition of our assets, our access to capital markets, the payment of dividends and any change of control of our company, such as a merger or take-over. The effect of this control may be to limit the price that investors are willing to pay for our shares. In addition, a sale of shares by Woodbridge or the perception of the market that a sale may occur may adversely affect the market price of our shares.

Changes in the tax residence of our company could cause us adverse tax consequences.

We expect our company will remain resident only in Canada for tax purposes. However, if our company were to cease to be resident solely in Canada for tax purposes (including as a result of changes in applicable laws or in Canadian regulatory practice), this could cause us adverse tax consequences.

Thomson Reuters Founders Share Company holds a Thomson Reuters Founders Share in our company and may be in a position to affect our governance and management.

Thomson Reuters Founders Share Company was established to safeguard the Thomson Reuters Trust Principles, including the independence, integrity and freedom from bias in the gathering and dissemination of information and news. The Founders Share Company holds a Thomson Reuters Founders Share in our company. The interest of the Founders Share Company in safeguarding the Trust Principles may conflict with our other business objectives, impose additional costs or burdens on us or otherwise affect the management and governance. In addition, the Founders Share enables the Founders Share Company to exercise extraordinary voting power to safeguard the Trust Principles and to thwart those whose holdings of voting shares of Thomson Reuters threaten the Trust Principles. As a result, the Founders Share Company may prevent a change of control (including by way of a take-over bid or similar transaction) of our company in the future. The effect of these rights of the Founders Share Company may be to limit the price that investors are willing to pay for our shares.

Thomson Reuters Annual Report 2012

 
23

 
 
THOMSON REUTERS CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS

This management’s discussion and analysis is designed to provide you with a narrative explanation through the eyes of our management of our financial condition and results of operations. We recommend that you read this in conjunction with our 2012 annual financial statements. This management’s discussion and analysis is dated as of March 6, 2013.

About Thomson Reuters - We are the leading source of intelligent information for businesses and professionals. We combine industry expertise with innovative technology to deliver critical information to leading decision-makers. Through approximately 60,000 employees in over 100 countries, we deliver this must-have insight to the financial and risk, legal, tax and accounting, intellectual property and science and media markets, powered by the world’s most trusted news organization.

We derive the majority of our revenues from selling electronic content and services to professionals, primarily on a subscription basis. Over the years, this has proven to be capital efficient and cash flow generative, and it has enabled us to maintain leading and scalable positions in our chosen markets. Within each of the market segments that we serve, we bring in-depth understanding of our customers’ needs, flexible technology platforms, proprietary content and scale. We believe our ability to embed our solutions into customers’ workflows is a significant competitive advantage as it leads to strong customer retention.

How this section is organized - We have organized our management’s discussion and analysis in the following key sections:

 
·
Overview – a brief discussion of our business;

 
·
Results of Operations – a comparison of our current and prior period results;

 
·
Liquidity and Capital Resources – a discussion of our cash flow and debt;

 
·
Outlook – our current financial outlook for 2013;

 
·
Related Party Transactions – a discussion of transactions with our principal and controlling shareholder, The Woodbridge Company Limited (Woodbridge), and others;

 
·
Subsequent Events – a discussion of material events occurring after December 31, 2012 and through the date of this management’s discussion and analysis;

 
·
Changes in Accounting Policies – a discussion of changes in our accounting policies and recent accounting pronouncements;

 
·
Critical Accounting Estimates and Judgments – a discussion of critical estimates and judgments made by our management in applying accounting policies;

 
·
Additional Information – other required disclosures; and

 
·
Appendices – supplemental information and discussion.

References in this discussion to “$” and “US$” are to U.S. dollars and references to “C$” are to Canadian dollars. In addition, “bp” means “basis points” and “na” and “n/m” refer to “not applicable” and “not meaningful”, respectively. Unless otherwise indicated or the context otherwise requires, references in this discussion to “we,” “our,” “us” and “Thomson Reuters” are to Thomson Reuters Corporation and our subsidiaries.

Forward-looking statements - This management's discussion and analysis also contains forward-looking statements, which are subject to risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements. Forward-looking statements include, but are not limited to, our expectations regarding:

 
·
General economic conditions and market trends and their anticipated effects on our business;

 
·
Our 2013 financial outlook;

 
·
Investments that we have made and plan to make and the timing for businesses that we expect to sell; and

 
·
Our liquidity and capital resources available to us to fund our ongoing operations, investments and returns to shareholders.

For additional information related to forward-looking statements and material risks associated with them, refer to the section of this management’s discussion and analysis entitled “Cautionary Note Concerning Factors That May Affect Future Results”.
 
Thomson Reuters Annual Report 2012
 
 
24

 
 
OVERVIEW

KEY HIGHLIGHTS

Despite an economic environment that proved to be more challenging than we had anticipated, we achieved our 2012 financial targets and we made significant progress executing our key priorities for the year.
 
 
·
Our 2012 revenues from ongoing businesses grew 3% (before currency)(1) to $12.9 billion. Tax & Accounting grew 16%, Intellectual Property & Science grew 6% and Legal grew 3%. Our Financial & Risk business grew 1%, as net sales performance was lower than expected. Acquisitions contributed 3% to revenue growth.
 
 
·
Adjusted EBITDA(1) increased 5% and the associated margin(1) expanded 100 basis points. Underlying operating profit(1) decreased 5% and the associated margin(1) decreased 130 basis points. Adjusted earnings per share (adjusted EPS)(1) increased 8% to $2.12.
 
 
·
Free cash flow and free cash flow from ongoing businesses(1) were $1.7 billion, growing 8% and 20%, respectively.
 
Our performance reflected the benefit of earlier investments in faster growing geographies as well as in higher growth market segments adjacent to our existing businesses, such as Governance, Risk & Compliance.

In 2012, we took steps to restart growth in our Financial & Risk business, and we believe we are now halfway through that process. We improved product quality, customer service, customer satisfaction ratings and retention rates and we continued to develop and enhance Thomson Reuters Eikon and Thomson Reuters Elektron. While Financial & Risk’s financial performance moved in the right direction in 2012, its customers still face significant challenges which we expect will continue to impact Financial & Risk’s results until economic conditions improve.

We continued to shift our investment towards what we believe are higher growth opportunities. We strengthened our positions in key market segments through the following acquisitions:
 
 
·
FXall, a leading global provider of electronic foreign exchange trading solutions to corporations and asset managers within Financial & Risk;
 
 
·
MarkMonitor, a provider of online brand protection within Intellectual Property & Science; and
 
 
·
Practical Law Company (PLC), a provider of practical legal know-how, current awareness and workflow solutions within Legal, which we acquired in the first quarter of 2013.
 
In 2012, we also disposed of businesses that no longer met our strategic objectives, including our Healthcare business and Financial & Risk’s Trade & Risk Management business.
 
With respect to our 2013 financial outlook(2), we expect low single digit revenue growth, primarily due to the lag effect of negative net sales in Financial & Risk in 2012. We expect adjusted EBITDA margin to be between 26% and 27%, and we expect free cash flow to be between $1.7 billion and $1.8 billion.
 
In 2013, our three key financial priorities are:
 
 
·
Driving for growth by prioritizing investments toward our highest growth opportunities and continuing to shift more of our revenue mix from mature businesses to higher growth opportunities;
 
 
·
Focusing on streamlining our costs and curbing our capital intensity; and
 
 
·
Simplifying our systems and processes across the organization.
 
(1)
Refer to Appendix A for additional information on non-IFRS financial measures.
 
(2)
Our 2013 outlook is on a different basis than our 2012 actual results. Refer to the section of this management’s discussion and analysis entitled “Outlook” for further information.
 
Thomson Reuters Annual Report 2012
 
 
25

 

OUR ORGANIZATIONAL STRUCTURE

Thomson Reuters is organized as a group of strategic business units: Financial & Risk, Legal, Tax & Accounting and Intellectual Property & Science, supported by a corporate center. We believe this structure allows us to best meet the complex demands of our customers, capture growth opportunities and achieve efficiencies. We also operate a Global Growth & Operations (GGO) organization which works across our business units to identify opportunities in faster growing geographic areas. We do not report GGO as a separate business unit, but rather include its results within our strategic business units. Our Reuters News business is managed at our corporate center.

REVENUES

We derive revenues from a diverse customer base. Our largest customer in 2012 and 2011 accounted for approximately 1% of our revenues from ongoing businesses.

Below, we provide information regarding our 2012 revenues from ongoing businesses(1) by media, type and geographic area.

 
Revenues from ongoing businesses(1)
 
by Media
by Type
by Geographic Area

(1)
Refer to Appendix A for additional information on this measure.

By media. We deliver most of our information electronically through the Internet and dedicated high-speed transmission lines to desktops and mobile devices such as smartphones and tablets. We also deliver information electronically over high-speed transmission lines to computer systems dedicated to high frequency or algorithmic trading. Electronic delivery improves our ability to rapidly provide additional products and services to our existing customers and to access new customers around the world. In addition, our offerings often combine software and services as integrated solutions to better serve the workflow needs of our customers. We also distribute some of our information in print format, primarily to customers of our legal business.

In 2012 and 2011, approximately 91% of our revenues were derived from information delivered electronically, software and services. We expect that most of our customers will continue to prefer electronic delivery and increasingly migrate from print, particularly as an increasing number of professional knowledge workers rely on information delivered to their desktops, smartphones and tablets and as rapidly developing economies increasingly incorporate technology into their workflows. We expect to continue to add more solutions-based and software-based businesses to our portfolio in response. The business mix of our products impacts our operating profit margins. Specifically, print products generally have the highest margins, followed by products which deliver information electronically. While our solutions-based software and services also have high margins, they are traditionally lower than the margins of our print products and electronically delivered information.

By type. We believe that one of the competitive advantages of our business is our recurring revenue model. By recurring, we mean that we derive a significant percentage of our revenues from subscription or similar contractual arrangements, which most customers renew from year to year. Recurring revenues were approximately 86% in both 2012 and 2011.

Because a high proportion of our revenues are recurring, we believe that our revenue patterns are generally more stable compared to other business models that primarily involve the sale of products in discrete or one-off arrangements. However, this also means that there is often a lag in realizing the impact of current sales or cancellations in our reported revenues, as we recognize revenues over the term of the arrangement. Because of this lag effect, our revenues are typically slower to decline when economic conditions worsen, but are also often slower to return to growth when economic activity improves, as compared to other businesses that are not subscription-based. We are experiencing this dynamic in our Financial & Risk business, where the lag effect of negative net sales (new sales less cancellations) in 2012 is expected to result in lower revenues for Financial & Risk in 2013 compared to 2012.
 
Thomson Reuters Annual Report 2012
 
 
26

 
 
The majority of our subscription arrangements have a term of one year or renew automatically under evergreen arrangements. The remaining portion is largely for two or three year terms, after which the arrangement renews automatically or is renewable at the customer’s option. With appropriate notice, certain arrangements are cancelable quarterly, particularly within our financial services businesses. Renewal dates are spread over the course of the year. In the case of some of our subscription arrangements, we realize additional fees based upon usage.

Recurring revenues for our financial services business include recoveries, which are low margin revenues we collect from customers and pass through to a third party provider, such as stock exchange fees. Revenue growth for our financial services businesses is impacted by trends in recoveries revenue, particularly as more third party providers move to direct billing of customers.

Non-recurring revenues are principally comprised of transaction revenues from our Financial & Risk segment’s trading platforms and discrete sales, including sales of software, across all of our businesses. We also refer to discrete sales as outright revenues. Non-recurring revenues comprised approximately 14% of revenues in each of 2012 and 2011. These revenues can fluctuate significantly from period to period and can also impact the comparability of operating profit margins.

By geography. We apportion our revenues geographically by origin of sale into the following geographic regions: Americas, EMEA (Europe, Middle East and Africa) and Asia. In 2012 and 2011, revenues were 59% and 57% from the Americas and 29% and 31% from EMEA, respectively. Revenues from Asia were 12% in both 2012 and 2011. Our GGO organization is focused on helping us identify growth opportunities in the world’s fastest growing markets, including Latin America, MAR (the Middle East, Africa and Russia and the Commonwealth of Independent States), China, India and ANA (the Association of Southeast Asian Nations and North Asia). GGO partners with our strategic business units by combining local capabilities with the company’s global assets and scale to expand our local presence in countries and regions where we believe the greatest growth opportunities exist. We expect our revenues from these GGO regions will increase at higher rates compared to more developed economies, as the GGO regions are expected to grow gross domestic product, the number of professionals, the rate of urbanization and the middle class at a comparably faster pace.

As part of our globalization, we have brought our global portfolio of products to local markets as well as modified existing products and services for local markets at relatively low incremental cost. However, some products and services need specific development for local markets or industry segments. While this may require higher incremental costs and result in initially lower margins, we try to maximize our global and regional scale and shared technology assets to improve margins over time. For example, for various products delivered globally to our customers, we use a common technology platform that supports multiple applications. This allows us to deploy products quickly and efficiently into numerous countries, especially where we provide country or industry-specific information that is combined with data that is used in other Thomson Reuters products. This represents an opportunity for us to earn incremental revenues.

EXPENSES

A majority of our expenses are fixed. As a result, when our revenues increase, we become more profitable and our margins increase, and when our revenues decline, we become less profitable and our margins decrease. Our most significant operating expense is staff costs, which represent 55% of our total expenses and is comprised of salaries, bonuses, commissions, benefits, payroll taxes and equity-based compensation awards. Goods and services represent 23% of our operating expenses.

In 2012, our operating expenses were $9.4 billion(1), unchanged compared to 2011. Expenses in 2011 included the final year of spending related to our Reuters integration programs.

Acquired businesses and investment initiatives increase our operating expenses, but we seek to mitigate these increases through cost management and efficiency initiatives. In particular, we leverage our technology infrastructure and source various operations from lower cost locations.

(1)
Excludes fair value adjustments and Other Businesses. Refer to “Consolidated Results – Operating expenses”.

SEASONALITY

Our revenues and operating profits do not tend to be significantly impacted by seasonality as we record a large portion of our revenues ratably over a contract term and our costs (other than expenses associated with the Reuters integration programs that were completed in 2011) are generally incurred evenly throughout the year. However, our non-recurring revenues can cause changes in our performance from quarter to consecutive quarter. Additionally, the release of certain print-based offerings can be seasonal as can certain product releases for the regulatory markets, which tend to be concentrated at the end of the year.

Thomson Reuters Annual Report 2012

 
27

 
 
ACQUISITIONS AND DISPOSITIONS

Acquisitions have always played a key role in our strategy. Our acquisitions are generally tactical in nature and primarily relate to the purchase of information, products or services that we integrate into our operations. We acquire other businesses in order to broaden the range of our offerings to better serve our customers, enter higher growth market segments adjacent to existing segments of our business, and expand our global presence. When integrating acquired businesses, we focus on eliminating cost redundancies and combining the acquired products and services with our existing offerings and capabilities to achieve revenue growth. Generally, the businesses that we acquire initially have lower margins than our existing businesses, largely reflecting the costs of integration.

Acquisition Activity
Cash Cost (1,2)
(millions of U.S. dollars)
Number / Location(2)
 

(1)
Cash consideration for acquisitions and investments in businesses, net of cash acquired.

(2)
Americas includes North America and South America and EMEA includes Europe, Middle East and Africa.

We completed 29 transactions in 2012 compared to 39 in 2011, and our spending increased slightly. The majority of our spending was in the U.S., however, we made numerous smaller acquisitions which expanded our global presence. We focused our acquisition spending on entering higher growth market segments adjacent to existing segments of our business, which we refer to as foundational acquisitions, and entering faster growing geographies. Newly acquired businesses increased our 2012 revenues by 3%. In 2012, our acquisitions included the following businesses, all of which were headquartered in North America:

Company
 
Acquirer
 
Description
FXall
 
Financial & Risk
 
A global provider of electronic foreign exchange trading solutions to corporations and asset managers
MarkMonitor
 
Intellectual Property & Science
 
A provider of online brand protection
Dr. Tax Software 
 
Tax & Accounting
 
A Canadian based developer of income tax software

In 2011, our acquisitions focused on global expansion with approximately two-thirds of our spending outside of the U.S. Our Financial & Risk segment added foundational assets in financial crime and corruption prevention in the United Kingdom (World-Check). Our Tax & Accounting segment acquired Mastersaf in Brazil and added foundational assets serving governments and municipalities with property tax automation and land registry software (Manatron).

As part of our continuing strategy to optimize our portfolio of businesses and to ensure that we are investing in the parts of our business that offer the greatest opportunities to achieve higher growth and returns, we sell businesses from time to time that are not fundamental to our strategy.

We completed the following key divestitures in 2012:

Business
 
Former segment
 
Description
Healthcare
 
Healthcare & Science
 
A provider of data analytics and performance benchmarking solutions and services to companies, government agencies and healthcare professionals
Trade and Risk Management
 
Financial & Risk
 
A provider of risk management solutions to financial institutions, including banks, broker-dealers and hedge funds
Portia
 
Financial & Risk
 
A provider of portfolio accounting and reporting applications
Property Tax Consulting
 
Tax & Accounting
 
A provider of property tax outsourcing and compliance services in the U.S.

Thomson Reuters Annual Report 2012

 
28

 
 
In December 2012, we accepted a binding offer to sell our Investor Relations, Public Relations and Multimedia Solutions business (Corporate Services) which was managed for the entire year as part of the Financial & Risk segment. This business provides tools and solutions that help companies communicate with investors and media. The transaction is expected to close in the first half of 2013.

USE OF NON-IFRS FINANCIAL MEASURES

In addition to our results reported in accordance with International Financial Reporting Standards (IFRS), we use certain non-IFRS financial measures as supplemental indicators of our operating performance and financial position and for internal planning purposes. These non-IFRS financial measures include:

 
·
Revenues from ongoing businesses;

 
·
Revenues at constant currency (before currency or revenues excluding the effects of foreign currency);

 
·
Underlying operating profit and the related margin;

 
·
Adjusted EBITDA and the related margin;

 
·
Adjusted EBITDA less capital expenditures and the related margin;

 
·
Adjusted earnings and adjusted earnings per share;

 
·
Net debt;

 
·
Free cash flow;

 
·
Free cash flow from ongoing businesses; and

 
·
Return on invested capital.

We report non-IFRS financial measures as we believe their use provides more insight into and understanding of our performance. Refer to Appendix A of this management’s discussion and analysis for a description of our non-IFRS financial measures, including an explanation of why we believe they are useful measures of our performance, including our ability to generate cash flow. Non-IFRS financial measures are unaudited. Refer to the sections of this management’s discussion and analysis entitled “Results of Operations”, “Liquidity and Capital Resources” and Appendices B, C and D for reconciliations of these non-IFRS financial measures to the most directly comparable IFRS financial measures.

RESULTS OF OPERATIONS

BASIS OF PRESENTATION

Within this management’s discussion and analysis, we discuss our results of operations on both an IFRS and non-IFRS basis. Both bases exclude discontinued operations and include the performance of acquired businesses from the date of purchase.

Consolidated results

We discuss our consolidated results from continuing operations on an IFRS basis, as reported in our income statement. Additionally, we discuss our consolidated results on a non-IFRS basis using the measures described within the “Use of Non-IFRS Financial Measures” section. Among other adjustments, our non-IFRS revenue and profitability measures as well as free cash flow from ongoing businesses exclude Other Businesses, which is an aggregation of businesses that have been or are expected to be exited through sale or closure that did not qualify for discontinued operations classification.

Segment results

We discuss the results of our four reportable segments as presented in our 2012 annual financial statements: Financial & Risk, Legal, Tax & Accounting and Intellectual Property & Science.

We also provide information on “Corporate & Other” and “Other Businesses”. The items in these categories neither qualify as a component of another reportable segment nor as a separate reportable segment.

 
·
Corporate & Other includes expenses for corporate functions, certain share-based compensation costs and the Reuters News business, which is comprised of the Reuters News Agency and consumer publishing.
 
 
·
Other Businesses is an aggregation of businesses that have been or are expected to be exited through sale or closure that did not qualify for discontinued operations classification. The results of Other Businesses are not comparable from period to period as the composition of businesses changes due to the timing of completed divestitures.

In December 2012, we accepted a binding offer to sell our Corporate Services business, and therefore classified the business as held for sale at December 31, 2012. The results of operations from businesses held for sale are normally reported within Other Businesses, however, because this business was managed for the entire year as part of the Financial & Risk segment, it has been included within the segment results for Financial & Risk, rather than within Other Businesses.
 
Thomson Reuters Annual Report 2012

 
29

 
 
Prior-period amounts have been reclassified to reflect the current presentation. Note 4 of our 2012 annual financial statements includes a reconciliation of results from our reportable segments to consolidated results as reported in our income statement.

In analyzing our revenues from ongoing businesses, at both the consolidated and segment levels, we separately measure the effect of foreign currency changes. We separately measure both the revenue growth of existing businesses and the impact of acquired businesses on our revenue growth, on a constant currency basis.

2012 - ACTUAL PERFORMANCE COMPARED TO OUTLOOK

The following table compares our actual 2012 performance to our outlook originally communicated in February 2012 and reaffirmed in the third quarter of 2012.

Financial Measure
Outlook
Actual Performance
Revenues from ongoing businesses
Grow low single digits (before currency)
+3%
ü
Adjusted EBITDA margin
Between 27% and 28%
27.4%
ü
Underlying operating profit margin
Between 18% and 19%
18.6%
ü
Free cash flow
Increase 5% to 10%
+8%
ü
Free cash flow from ongoing businesses
Increase 15% to 20%
+20%
ü

CONSOLIDATED RESULTS

   
Year ended December 31,
       
(millions of U.S. dollars, except per share amounts)
 
2012
   
2011
   
Change
 
IFRS Financial Measures
                 
Revenues
    13,278       13,807       (4 %)
Operating profit (loss)
    2,651       (705 )     n/m  
Diluted earnings (loss) per share
  $ 2.49     $ (1.67 )     n/m  
                         
Non-IFRS Financial Measures
                       
Revenues from ongoing businesses
    12,899       12,743       1 %
Adjusted EBITDA
    3,529       3,368       5 %
Adjusted EBITDA margin
    27.4 %     26.4 %     100 bp
Adjusted EBITDA less capital expenditures
    2,567       2,402       7 %
Adjusted EBITDA less capital expenditures margin
    19.9 %     18.8 %     110 bp
Underlying operating profit
    2,405       2,541       (5 %)
Underlying operating profit margin
    18.6 %     19.9 %     (130 )bp
Adjusted earnings per share
  $ 2.12     $ 1.96       8 %

Foreign currency effects. With respect to the average foreign exchange rates that we use to report our results, the U.S. dollar strengthened against the Euro and British pound sterling and was unchanged against the Japanese yen in 2012 compared to 2011. Given our currency mix of revenues and expenses around the world, these fluctuations had a negative impact on our revenues in U.S. dollars, a slightly positive impact on our EBITDA margin and no impact on our underlying operating profit margin.

Revenues.
 
   
Year ended December 31,
   
Percentage change:
 
(millions of U.S. dollars)
 
2012
   
 
2011
   
Existing
businesses
   
Acquired
businesses
   
Constant
currency
   
Foreign
currency
   
Total
 
Revenues from ongoing businesses
    12,899       12,743     -     3%     3%     (2%)     1%  
Other Businesses
    379       1,064     n/m     n/m     n/m     n/m     n/m  
Revenues
    13,278       13,807     n/m     n/m     n/m     n/m     (4%)  

Revenues from ongoing businesses increased on a constant currency basis led by our professional businesses: Tax & Accounting increased 16%, Intellectual Property & Science increased 6% and Legal increased 3%. Our Financial & Risk segment grew 1% as strong growth in its Governance, Risk & Compliance and Marketplaces businesses was offset by decreases in its Trading and Investors businesses. Acquisitions significantly contributed to revenue growth.

Revenues from our GGO organization represented nearly $1.0 billion (approximately 8%) of our revenues from ongoing businesses and grew 19% on a constant currency basis (10% from existing businesses).
 
Thomson Reuters Annual Report 2012
 
 
30

 
 
The following chart illustrates the diversity of our business:

Revenues from ongoing businesses
Year ended December 31, 2012

In 2012, 76% of our business recorded revenue growth. This performance included the benefit of acquisitions.
 
 
·
On a combined basis, our professional businesses, Legal, Tax & Accounting and Intellectual Property & Science, increased 6% in 2012, or 8% excluding our U.S. print business.
 
 
·
Our Financial & Risk segment increased 1% in 2012. While the five businesses that experienced revenue declines were all in our Financial & Risk segment, approximately 60% of its revenue increased 6%.
 
The diversity in our portfolio enabled our faster growing businesses such as Tax & Accounting, Intellectual Property & Science, Financial & Risk’s Marketplaces and Governance, Risk & Compliance, and certain parts of our Legal business to compensate for weaker performance in certain of our financial services business.

Operating profit, underlying operating profit, adjusted EBITDA and adjusted EBITDA less capital expenditures.
 
   
Year ended December 31,
       
(millions of U.S. dollars)
 
2012
   
2011
   
Change
 
Operating profit (loss)
    2,651       (705 )     n/m  
Adjustments to remove:
                       
Goodwill impairment
    -       3,010          
Amortization of other identifiable intangible assets
    619       612          
Integration programs expenses
    -       215          
Fair value adjustments
    36       (149 )        
Other operating gains, net
    (883 )     (204 )        
Operating profit from Other Businesses
    (18 )     (238 )        
Underlying operating profit
    2,405       2,541       (5 %)
Adjustment:
                       
Add: integration programs expenses
    -       (215 )        
Remove: depreciation and amortization of computer software (excluding Other Businesses)
    1,124       1,042          
Adjusted EBITDA (1)
    3,529       3,368       5 %
Remove: capital expenditures, less proceeds from disposals (excluding Other Businesses)
    962       966          
Adjusted EBITDA less capital expenditures
    2,567       2,402       7 %
                         
Underlying operating profit margin
    18.6 %     19.9 %     (130 )bp
Adjusted EBITDA margin
    27.4 %     26.4 %     100 bp
Adjusted EBITDA less capital expenditures margin
    19.9 %     18.8 %     110 bp

(1)
Refer to Appendix B for a reconciliation of earnings (loss) from continuing operations to adjusted EBITDA and adjusted EBITDA less capital expenditures.
 
Thomson Reuters Annual Report 2012
 
 
31

 
 
Operating profit increased in 2012 principally due to a $3.0 billion goodwill impairment charge in 2011. Higher operating profit in 2012 also reflected an increase in gains realized from the disposal of businesses and the elimination of Reuters integration expenses as the various programs were completed in 2011, partially offset by lower operating profit due to the sale of businesses and unfavorable fair value adjustments.

Underlying operating profit and the related margin decreased as higher revenues from ongoing businesses were offset by higher expenses in our Financial & Risk segment related to improving product offerings, customer service and customer administration and higher software amortization. Adjusted EBITDA and the related margin increased primarily due to the elimination of Reuters integration expenses. Adjusted EBITDA less capital expenditures and the related margin increased primarily due to the same factors impacting adjusted EBITDA, as capital expenditures from our ongoing businesses were largely unchanged.

Foreign currency had no impact on underlying operating profit margin and adjusted EBITDA less capital expenditures margin, but contributed 10bp to the increase in adjusted EBITDA margin.

In 2013, we expect to incur approximately $100 million in costs to reduce our workforce as part of our focus on cost controls. We expect to incur most of this charge in the first quarter of 2013, predominantly within Financial & Risk.

Operating expenses.
 
   
Year ended December 31,
       
(millions of U.S. dollars)
 
2012
   
2011
   
Change
 
Operating expenses
    9,762       9,997       (2 %)
Adjustments to remove:
                       
Fair value adjustments (1)
    (36 )     149          
Other Businesses
    (356 )     (771 )        
Operating expenses, excluding fair value adjustments and Other Businesses
    9,370       9,375       -  

(1)
Fair value adjustments primarily represent non-cash accounting adjustments from the revaluation of embedded foreign exchange derivatives within certain customer contracts due to fluctuations in foreign exchange rates and mark-to-market adjustments from certain share-based awards.

In 2012, operating expenses (excluding fair value adjustments and Other Businesses) decreased slightly as an increase in staff costs driven by acquisitions was more than offset by the elimination of Reuters integration expenses, as the various programs were completed in 2011, and from the impact of foreign currency. Efficiency initiatives and tight cost controls mitigated increases associated with recent acquisitions and spending related to improving product offerings, customer administration and customer service in the Financial & Risk segment.

Depreciation and amortization.
 
   
Year ended December 31,
       
(millions of U.S. dollars)
 
2012
   
2011
   
Change
 
Depreciation
    429       438       (2 %)
Amortization of computer software
    700       659       6 %
Subtotal
    1,129       1,097       3 %
Amortization of other identifiable intangible assets
    619       612       1 %

In the aggregate, depreciation and amortization of computer software increased as the amortization of investments in products such as Thomson Reuters Eikon, assets from recently acquired businesses and capital expenditures were partially offset by decreases in Other Businesses.

Amortization of other identifiable intangible assets increased slightly reflecting increases due to amortization of newly-acquired assets partially offset by decreases from the completion of amortization of identifiable intangible assets acquired in previous years and decreases in Other Businesses.

Goodwill impairment.

In the fourth quarter of 2011, we recorded a non-cash goodwill impairment charge of $3.0 billion. The impairment was due to weaker than expected performance by our former Markets division which consisted largely of businesses now in our Financial & Risk segment. The impairment charge is included in our IFRS financial measures for 2011, but excluded from our non-IFRS financial measures. See “Critical Accounting Estimates and Judgments”.

Other operating gains, net.

   
Year ended December 31,
 
(millions of U.S. dollars)
 
2012
   
2011
 
Other operating gains, net
    883       204  

Thomson Reuters Annual Report 2012
 
 
32

 
 
In 2012, other operating gains, net, included approximately:

Gains:
 
·
$743 million from the sale of the Healthcare business;
 
·
$40 million from the sale of the Portia business;
 
·
$37 million from the sale of the Trade and Risk Management business; and
 
·
$84 million from pension settlements.

Charges:
 
·
$41 million of acquisition-related costs; and
 
·
$10 million of disposal-related expenses associated with businesses held for sale.

In 2011, other operating gains, net, were primarily comprised of gains from the sales of businesses and subsidiaries, which were partially offset by losses from the termination of a vendor agreement, charges related to enhanced retirement benefits and charges associated with businesses held for sale. Gains from the sales of businesses included the BARBRI legal education business and the Scandinavian legal, tax and accounting business. Gains from the sales of subsidiaries reflected the sale of two Canadian wholly owned subsidiaries that only consisted of tax losses to a company affiliated with Woodbridge.

Net interest expense.
 
   
Year ended December 31,
       
(millions of U.S. dollars)
 
2012
   
2011
   
Change
 
Net interest expense
    390       396       (2 %)

The decrease in net interest expense was primarily attributable to the reduction of interest on certain tax liabilities which were reversed during the year. Because over 90% of our long-term debt obligations pay interest at fixed rates (after swaps) and because our level of long-term debt remained relatively constant, the balance of interest expense was relatively unchanged.

Other finance income (costs).

   
Year ended December 31,
 
(millions of U.S. dollars)
 
2012
   
2011
 
Other finance income (costs)
    40       (15 )

Other finance income (costs) included gains or losses realized from changes in foreign currency exchange rates on certain intercompany funding arrangements and gains or losses related to freestanding derivative instruments.

Share of post-tax earnings and impairment in equity method investees.

   
Year ended December 31,
 
(millions of U.S. dollars)
 
2012
   
2011
 
Share of post-tax earnings and impairment in equity method investees
    (23 )     13  

In 2012, an impairment of $24 million was recorded with respect to one equity method investee due to weaker than expected performance.

Tax expense.

   
Year ended December 31,
 
(millions of U.S. dollars)
 
2012
   
2011
 
Tax (expense)
    (157 )     (293 )

Our effective income tax rate on earnings from continuing operations was 6.9% in 2012. Our 2011 effective income tax rate was not meaningful due to the impact of the $3.0 billion goodwill impairment charge, most of which was non-deductible for tax purposes. Excluding the goodwill impairment charge, our 2011 effective income tax rate on earnings from continuing operations was 16.8%.

The comparability of our effective income tax rate on earnings from continuing operations is impacted by various transactions and non-cash accounting adjustments during each period. Furthermore, because of these and other factors, our effective income tax rate on earnings from continuing operations is not necessarily indicative of the tax that we pay.
 
Thomson Reuters Annual Report 2012
 
 
33

 

The following table sets forth significant components within our income tax expense that impact comparability from period to period:
 
Benefit (expense)
 
Year ended December 31,
 
(millions of U.S. dollars)
 
2012
   
2011
 
Discrete tax items:
           
Uncertain tax positions(1)
    175       72  
Adjustments related to the prior year(2)
    42       -  
Corporate tax rates(3)
    27       -  
Tax losses from sale of an investment to Woodbridge(4)
    -       46  
Other(5)
    10       (13 )
Subtotal
    254       105  
Tax related to:
               
Sale of businesses(6)
    (172 )     (112 )
Tax on operating profit of “Other Businesses”
    (5 )     (50 )
Tax on goodwill impairment(7)
    -       28  
Fair value adjustments
    5       (51 )
Other items
    (36 )     42  
Subtotal
    (208 )     (143 )
Total
    46       (38 )

(1)
Relates to the reversal of tax reserves in connection with favorable developments regarding tax disputes.

(2)
Relates to changes in estimates identified during the preparation of our income tax returns.
 
(3) 
Relates to the reduction of deferred tax liabilities due to lower effective U.S. state tax rates and other corporate tax rate changes that were substantively enacted in certain jurisdictions outside the U.S.

(4) 
Relates to the recognition of tax losses that arose in a prior year from the sale of an investment to Woodbridge.

(5) 
In 2012, relates to the recognition of deferred tax assets in connection with acquisitions and disposals. In 2011, relates to certain tax losses previously used to offset taxable income in a foreign subsidiary that could not, in fact, be used by that subsidiary.

(6)
In 2012, primarily relates to the sale of Healthcare; in 2011 primarily relates to the sale of BARBRI.
 
(7)
Relates to the $3.0 billion goodwill impairment charge.

Because the items described above impact the comparability of our tax expense each period, we remove them from our calculation of adjusted earnings, along with the pre-tax items to which they relate. Excluding these items, our 2012 tax expense on adjusted earnings was $203 million (2011 - $255 million). Our 2012 effective tax rate on adjusted earnings was 14.5% (2011 - 19.3%). For purposes of computing our effective tax rate on adjusted earnings, we deduct amortization from adjusted earnings.

On an IFRS basis and on an adjusted earnings basis, our effective income tax rates in both years were lower than the Canadian corporate income tax rate of 26.4% (2011 – 28%). As a global company, our income taxes depend on where we generate earnings around the world, the laws of numerous countries where we operate and applicable tax treaties between these countries. Specifically, we are impacted by the lower tax rates and differing tax rules applicable to certain of our operating and financing subsidiaries outside Canada. While we generate revenues in numerous jurisdictions, our tax provision on earnings is computed after taking account of intercompany interest and other charges and credits among our subsidiaries. Such amounts result from the capital structure of our subsidiaries as well as from the various jurisdictions in which operations, technology and content assets are owned. For these reasons, our effective tax rate differs from the Canadian corporate tax rate.

Because of the requirements of income tax accounting under IAS 12, income tax expense can differ significantly from taxes paid in any reporting period. We paid income taxes on our worldwide business as follows:

Taxes paid
 
Year ended December 31,
 
(millions of U.S. dollars)
 
2012
   
2011
 
Taxes paid on operations
    249       358  
Taxes paid on sales of businesses
    197       153  
Total taxes paid
    446       511  

The tax we pay on our operations is higher than either the tax expense we report in our income statement or the tax expense we compute on our adjusted earnings. This difference arises principally because of accounting rules regarding the taxes related to non-deductible identifiable intangible assets acquired through share acquisitions. Such taxes are not recorded in our income statement, as accounting rules require them to be recorded as a liability with an offset to goodwill.
 
Thomson Reuters Annual Report 2012
 
 
34

 

Our effective tax rate and our cash tax cost in the future will depend on the laws of numerous countries and the provisions of multiple income tax conventions between various countries in which we operate. Our ability to maintain our effective tax rate will be dependent upon such laws and conventions remaining unchanged or favorable, as well as the geographic mix of our profits. See the section entitled “Contingencies” for further discussion of income tax liabilities.
 
Net earnings and earnings per share.

   
Year ended December 31,
 
(millions of U.S. dollars, except per share amounts)
 
2012
   
2011
 
Net earnings (loss)
    2,123       (1,392 )
Diluted earnings (loss) per share
  $ 2.49     $ (1.67 )

Net earnings and the related per share amount increased in 2012 principally due to a $3.0 billion goodwill impairment charge in 2011. The increase in 2012 also reflected an increase in gains realized from the disposal of businesses, the elimination of Reuters integration expenses, as the various programs were completed in 2011, and lower tax expense. These changes were partially offset by lower operating profit due to the sale of businesses and unfavorable fair value adjustments.

Adjusted earnings and adjusted earnings per share.
 
   
Year ended December 31,
       
(millions of U.S. dollars, except per share amounts and share data)
 
2012
   
2011
   
Change
 
Earnings (loss) attributable to common shareholders
    2,070       (1,390 )     n/m  
Adjustments to remove:
                       
Goodwill impairment
    -       3,010          
Goodwill impairment attributable to non-controlling interests
    -       (40 )        
Operating profit from Other Businesses
    (18 )     (238 )        
Fair value adjustments
    36       (149 )        
Other operating gains, net
    (883 )     (204 )        
Other finance (income) costs
    (40 )     15          
Share of post-tax earnings and impairment in equity method investees
    23       (13 )        
Tax on above
    208       143          
Discrete tax items(1)
    (254 )     (105 )        
Amortization of other identifiable intangible assets
    619       612          
Discontinued operations
    (2 )     (4 )        
Dividends declared on preference shares
    (3 )     (3 )        
Adjusted earnings
    1,756       1,634       7 %
Adjusted earnings per share (adjusted EPS)
  $ 2.12     $ 1.96       8 %
Diluted weighted average common shares (millions)(2)
    829.6       835.8          

(1)
Refer to “Tax expense”.

(2)
Refer to Appendix B for reconciliation of diluted weighted average common shares at December 31, 2011.

Adjusted earnings and the related per share amounts increased due to the elimination of Reuters integration expenses, as the various programs were completed in 2011, and lower taxes, partially offset by lower underlying operating profit. Foreign currency negatively impacted the per share increase by $0.04.

SEGMENT RESULTS

A discussion of the operating results of each of our reportable segments follows. By definition, results from the Reuters News business and Other Businesses are excluded from our reportable segments as they do not qualify as a component of our four reportable segments, nor as a separate reportable segment. We use segment operating profit to measure the performance of our reportable segments. 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 (i) amortization of other identifiable intangible assets; (ii) other operating gains and losses; (iii) certain asset impairment charges; and (iv) corporate-related items (including corporate expense, expenses associated with the Reuters integration program that was completed in 2011 and fair value adjustments). We use this measure because we do not consider these excluded items to be controllable operating activities for purposes of assessing the current performance of our reportable segments. We also use segment operating profit margin, which we define as segment operating profit as a percentage of revenues. As a supplemental measure of segment performance, we add back depreciation and amortization of computer software to segment operating profit to arrive at each segment’s EBITDA and the related margin as a percentage of revenues. Refer to Appendix B.
 
Thomson Reuters Annual Report 2012
 
 
35

 

Financial & Risk

   
Year ended December 31,
         
Percentage change:
       
(millions of U.S. dollars)
 
2012
   
2011
   
Existing
businesses
   
Acquired
businesses
   
Constant
currency
   
Foreign
currency
   
Total
 
Trading
    3,345       3,537     (3%)     -     (3%)     (2%)     (5%)  
Investors
    2,416       2,472     (2%)     1%     (1%)     (1%)     (2%)  
Marketplaces
    1,213       1,134     1%     7%     8%     (1%)     7%  
Governance, Risk & Compliance (GRC)
    219       154     17%     26%     43%     (1%)     42%  
Revenues
    7,193       7,297     (1%)     2%     1%     (2%)     (1%)  
EBITDA
    1,842       1,972                                     (7%)  
EBITDA margin
    25.6 %     27.0 %                                   (140)bp  
Segment operating profit
    1,215       1,396                                     (13%)  
Segment operating profit margin
    16.9 %     19.1 %                                   (220)bp  

Revenues increased slightly on a constant currency basis as growth from acquired businesses was offset by a decline in revenues from existing businesses, which reflected the lagging impact of negative net sales. Growth in Marketplaces and GRC offset decreases in Trading and Investors.

Financial & Risk is executing on a strategy to improve products, platforms and simplify customer experience, and to invest in higher growth market segments. We launched Eikon 3.0 in January 2013 and we acquired FXall, a leading global provider of electronic foreign exchange trading solutions to corporations and asset managers, in 2012.
 
Results by type were:
 
2012 Revenues by Type
·      Subscription revenues were unchanged as the benefit from acquisitions and price increases was offset by desktop cancellations in Equities, Fixed Income and Investment Management. Excluding acquisitions, subscription revenues decreased 1% reflecting the impact of negative net sales. At the end of 2012, Thomson Reuters Eikon desktop users were nearly 34,000, a 33% increase from the third quarter of 2012.
 
·      Recoveries revenues (low-margin revenues that we collect and largely pass-through to a third party provider, such as stock exchange fees) increased 1%. Recoveries revenues are negatively impacted as more third party providers move to direct billing of customers.
 
·      Transaction revenues increased 6%, driven by the acquisition of Rafferty Capital and FXall. Transaction revenues from existing businesses declined 4% due to lower market volumes.
 
·      Outright revenues, which are primarily discrete sales of software and services, increased 4%.
 
 
 
 
By geographic area, revenues increased 3% in the Americas, were unchanged in Europe, Middle East and Africa (EMEA) and decreased 2% in Asia.

Results by line of business were:

 
Trading declined 3% as growth in Commodities & Energy, Data Feeds and Elektron Managed Services was more than offset by desktop cancellations in Equities, Fixed Income and Foreign Exchange. Lower revenues from Omgeo, due to lower market transaction volumes, also contributed to the decline.

 
Investors revenues declined 1% as growth from acquisitions was more than offset by decreases in existing businesses. Enterprise Content grew 10% driven by demand for pricing and reference data, but was offset by a 7% decline in Investment Management from desktop cancellations. Revenues from Corporate Services declined 2%, while Wealth Management increased 1% and Banking & Advisory was unchanged.

 
Marketplaces revenues increased 8% largely due to the acquisition of FXall and Rafferty Capital. Tradeweb increased 19%, of which 5% was from existing businesses and the remainder reflected the acquisition of Rafferty Capital.

 
GRC revenues increased significantly due to acquisitions, however revenues from existing businesses increased 17% due to strong demand for Financial Crime & Reputational Risk solutions.
 
Thomson Reuters Annual Report 2012
 
 
36

 
 
EBITDA, segment operating profit and the related margins decreased due to the impact of lower revenues from existing businesses and higher spending on product enhancements and improvements to customer service and support levels, partly offset by savings from cost controls and efficiency initiatives. Segment operating profit and the related margin was further impacted by an increase of $50 million in depreciation and amortization primarily related to new product launches and investments made in prior periods.

2013 Outlook

Operating Environment
In 2013, we expect the financial services industry to continue to be challenged by difficult macroeconomic conditions and regulations which are hindering growth and profitability among banks and other market participants. In particular, our global and European customers continue to reduce headcount and spend less on financial service offerings in reaction to uncertainty about global economic and market conditions. We believe that the macroeconomic and regulatory environment in rapidly developing countries such as China and Brazil provide a more favorable opportunity for growth. Negative net sales in 2012 are expected to result in lower revenues in 2013, compared to 2012, as we experience the lag effect of our largely subscription based model. We expect net sales to gradually improve and turn positive in the latter half of 2013 as the pace of customer upgrades to Thomson Reuters Eikon should accelerate and as we make progress on Elektron upgrades to enhance our Enterprise Platform Real Time Offering. However, our Financial & Risk business could be negatively impacted by further deterioration in macroeconomic conditions or unexpected impacts of regulations on banks which could lead to further cancellations and declining transaction volumes.

Regulatory Environment
Regulatory changes, led by the U.S. and Europe, will continue to impact the financial services industry in 2013. While it appears that regulators will move forward with the implementation of new requirements such as those in the Dodd-Frank Act relating to derivatives or the Basel Accords, uncertainty as to the reach and impact of these regulations remains. These regulatory changes present potential opportunities and risks for our business. Our GRC business may benefit from increasing regulation and compliance requirements. Other opportunities include an increase in activity associated with our transaction platforms and greater demand for our pricing data and analytics as well as for our post-trade messaging. However, these growth opportunities require significant investment to bring them to market and entail certain risks. Risks include restrictions on our customers’ trading activities, implementation of transaction based taxes that result in lower market volumes, higher capital requirements and other rules which may raise the costs of doing business for our customers.

Priorities
In 2013, Financial & Risk will continue to focus on operational simplification, improving customer experience, accelerating the pace of upgrades to Thomson Reuters Eikon and upgrading network customers to the global Thomson Reuters Elektron distribution platform. In this challenging environment, reducing our costs is also a priority. We plan to reduce costs by decommissioning legacy platforms and simplifying our commercial and operating structure. As part of the focus on costs, we have announced an intention to reduce Financial & Risk’s workforce by approximately 2,500 positions by the end of 2013.

Legal

   
Year ended December 31,
         
Percentage change:
       
(millions of U.S. dollars)
 
2012
   
2011
   
Existing
businesses
   
Acquired
businesses
   
Constant
currency
   
Foreign
currency
   
Total
 
Revenues
    3,286       3,221     1%     2%     3%     (1%)     2%  
EBITDA
    1,243       1,210                                     3%  
EBITDA margin
    37.8 %     37.6 %                                   20bp  
Segment operating profit
    964       941                                     2%  
Segment operating profit margin
    29.3 %     29.2 %                                   10bp  

Revenues increased on a constant currency basis reflecting contributions from both existing and acquired businesses. Our U.S. print business, which represents 18% of revenues, continued to negatively impact overall revenue growth. Excluding U.S. print revenue, the Legal segment grew 5%, with 3% growth from existing businesses.
 
Thomson Reuters Annual Report 2012
 
 
37

 
 
Results by type were:
 
2012 Revenues by Type
 
·      Subscription revenues increased 4% led by client development solutions and global businesses;
 
·      Transaction revenues increased 8% led by our back office, legal process outsourcing solutions and global businesses; and
 
·      U.S. print revenues declined 5%, as customers continued to control discretionary spending.
   
 
Results by line of business were:

 
·
U.S. Law Firm Solutions - these include businesses such as Westlaw, FindLaw and Elite that sell products and services to large, medium and small law firms. Revenues increased 1% largely from acquisitions. Revenues from Business of Law (FindLaw and Elite) increased 12% (7% from existing businesses), offset by a 2% decline in legal research which reflected the decline in U.S. Print;

 
·
Corporate, Government & Academic - these businesses serve general counsels/corporate legal departments, government customers and law schools as well as support the regulatory needs of our customers. Revenues increased 3% (2% from existing businesses) led by a 7% increase in Corporate Counsel solutions reflecting growth in legal process outsourcing solutions. The Government and Academic business grew 1%; and

 
·
Global Businesses - these are our legal businesses in Latin America, Asia and other countries outside of the United States. Revenues increased 8% (5% from existing businesses) led by an 18% increase in Latin America.

The following chart illustrates the growth dynamics and changing business mix in the Legal segment:

2012 Legal Revenues
3% constant currency revenue growth
(billions of U.S. dollars)

In 2012, growth in the U.S. legal market continued to be challenged. Law firms remained under pressure to limit increases in billing rates and hours, while other customers such as corporate counsels focused on reducing costs. Despite this backdrop, as of the end of 2012, we had converted 76% of Westlaw’s annual contract value to WestlawNext, representing almost 47,000 legal organizations.

We are continuing to diversify our legal business from a research-centric business to a solution business, in which our legal content is integrated with broader software and service offerings. We have accomplished this through deliberate allocation of our acquisition and investment spending. As a result, in 2012, we increased revenues in areas outside of Core Legal Research, with 60% of Legal’s revenues growing 6%. We continue to make acquisitions into higher growth segments, such as our recently closed acquisition of PLC, a provider of practical legal know-how, current awareness and workflow solutions to law firms and corporate law departments. Although market segments outside U.S. Core Legal Research provide higher growth opportunities, they have lower margins than U.S. Core Legal Research. However, Legal has maintained its EBITDA margins at a consistent level over the last three years by controlling costs while it invested and developed scale in higher growth areas.

EBITDA, segment operating profit and the related margins increased in 2012 due to the benefits of scale from higher revenues outside of U.S. Core Legal Research and from cost controls, partially offset by unfavorable business mix.
 
Thomson Reuters Annual Report 2012
 
 
38

 
 
2013 Outlook

Law firms in developed economies remain under significant pressure to reduce costs as their customers, primarily corporate counsels, continue to limit increases in billing rates and hours. Corporate counsels are also managing their activities more efficiently even as regulatory complexity increases. While this cost conscious environment continues to pressure our core legal research business, it also provides opportunities for our products that increase customer efficiency. By contrast, the legal profession in the rapidly developing economies of Latin America continues to experience good growth driven by faster growth rates in gross domestic product, the number of professionals, urbanization and the middle class.

In 2013, our Legal segment intends to evolve toward providing more integrated solutions. Key priorities include the integration of PLC, which we acquired in February 2013; launching new products, such as Concourse and Firm Central, which combine workflow software and legal research; investing in high-growth businesses such as FindLaw and Elite; and driving further customer adoption of WestlawNext. While, we expect growth in U.S. Core Legal Research to be challenged and that our U.S. print revenue will decline, we expect revenue growth in software and solutions products and in our non-U.S. businesses. In this environment, Legal will carefully manage its costs.

Tax & Accounting

   
Year ended December 31,
         
Percentage change:
       
(millions of U.S. dollars)
 
2012
   
2011
   
Existing
businesses
   
Acquired
businesses
   
Constant
currency
   
Foreign
currency
   
Total
 
Revenues
    1,206       1,050     5%     11%     16%     (1%)     15%  
EBITDA
    376       332                                    
13%
 
EBITDA margin
    31.2 %     31.6 %                                   (40)bp  
Segment operating profit
    261       237                                     10%  
Segment operating profit margin
    21.6 %     22.6 %                                   (100)bp  

Revenues increased on a constant currency basis reflecting contributions from both existing and acquired businesses.  Contributions from acquisitions reflected our 2012 acquisition of Dr. Tax, a Canadian based developer of income tax software, and our 2011 acquisitions of Mastersaf, which provided entry into Brazil, and Manatron, which provided entry into the government tax automation market.
 
Results by line of business were:
 
2012 Revenues by Line of Business
·      Professional revenues from small, medium and large accounting firms increased 18% (8% from existing businesses) primarily from our UltraTax CS web based software as a service solution and acquisitions;
 
·      Knowledge Solutions revenues increased 9% (4% from existing businesses) primarily from growth in international revenues and our U.S. Checkpoint business;
 
·      Corporate revenues increased 18% (10% from existing businesses) primarily from ONESOURCE software and services and strong growth of solutions revenue in Latin America; and
 
·      Government revenues increased 45% driven by the acquisition of Manatron in 2011. Revenues from existing businesses decreased 29% as the number of new government contracts slowed and because a large government software contract in the fourth quarter of 2011 did not recur in 2012. Revenues from the Government business can fluctuate significantly from period to period due to the unpredictable nature of contract negotiations and the timing of implementation programs.
 
 
Government was the only Tax & Accounting business where revenues from existing businesses decreased. Excluding Government, which represents approximately 5% of Tax & Accounting revenues, revenues grew 15% (7% from existing businesses). The long-term prospects for our government tax automation business remain positive and our long-term strategy for this market segment remains unchanged.

EBITDA and segment operating profit increased due to higher revenues. However, EBITDA and segment operating profit margins declined due to lower Government revenues. Excluding Government, both EBITDA and segment operating profit margins increased by over 100bp. Segment operating profit margin also included the dilutive effects of software amortization from acquired businesses.
 
Thomson Reuters Annual Report 2012
 
 
39

 

2013 Outlook

In 2013, we expect the macroeconomic environment for our Tax & Accounting business to continue to be impacted by softness in the global economy and sluggish spending on technology products, especially in Europe. We expect to continue to experience competitive pricing pressures and funding delays from government agencies. However, we believe that continued slow growth in developed economies will drive governments to look for ways to raise taxes, leading to changes in cross border tax rules and increased regulation and compliance burdens on corporations. Additionally, we expect increased globalization of companies, especially into rapidly developing economies, increased regulatory complexity, and heightened demand for technology solutions in corporate tax departments will lead to a steady demand for our Tax & Accounting segment’s information, software and workflow solutions.

Tax & Accounting’s key priorities in 2013 include product innovation in response to market conditions, expansion in the government tax automation market, pursuing opportunities for regional expansion of our global products and entry into adjacent, higher growth market segments.

Intellectual Property & Science

   
Year ended December 31,
         
Percentage change:
       
(millions of U.S. dollars)
 
2012
   
2011
   
Existing
businesses
   
Acquired
businesses
   
Constant
currency
   
Foreign
currency
   
Total
 
Revenues
    894       852     3%     3%     6%     (1%)     5%  
EBITDA
    303       296                                      2%  
EBITDA margin
    33.9 %     34.7 %                                   (80)bp  
Segment operating profit
    235       237                                     (1%)  
Segment operating profit margin
    26.3 %     27.8 %                                   (150)bp  

Revenues increased on a constant currency basis reflecting contributions from both existing businesses and the acquisition of MarkMonitor. Subscription revenues increased 9%. Transaction revenues, which represented about 25% of total revenues, decreased 4%, reflecting less spending by our customers given the weaker global economy.
 
By line of business:
 
2012 Revenues by Line of Business
·      IP Solutions revenues increased 10% led by the acquisition of MarkMonitor, Intellectual Property Management Services and Techstreet. These solutions provide support to business professionals and attorneys to defend, protect and manage their intellectual property rights, trademarks and brands.
 
·      Scientific & Scholarly Research solutions increased 2% led by higher subscriptions. These solutions support scholars and researchers and include offerings such as the Thomson Reuters Web of Knowledge database and our ScholarOne web-based manuscript submission and peer review workflow solutions.
 
·      Life Sciences revenues increased 5% from solutions that provide content and analytics to pharmaceutical, biotechnology and other life sciences companies to improve research and development productivity and lower the cost and time of bringing a product to market.
 
 
EBITDA increased due to higher revenues and cost controls. However, segment operating profit, as well as EBITDA and segment operating profit margins, declined largely due to the anticipated dilutive impact of the MarkMonitor acquisition.

2013 Outlook

We believe the challenging economic environment in developed economies will continue to pressure governments, academic institutions and corporations to limit spending for innovation, research and development and for the protection of brand and intellectual property. At the same time, across our Intellectual Property & Science businesses, competition is intensifying from traditional content providers, disruptive competitors offering new technology solutions and niche content and an increased number of free offerings. However, we believe that continued growth in global innovation driven by research and development investment, intellectual property rights, and increasing global collaboration will sustain the need for our solutions and services across our Intellectual Property & Science businesses. We expect customers of our Intellectual Property & Science segment will seek research solutions that improve productivity and simplify complex decision-making in order to accelerate innovation. As globalization continues to accelerate, we believe customers will seek offerings that support the assertion and protection of property rights. We believe that this strongly positions our MarkMonitor business, which we acquired in 2012. We also believe that shared needs across end user groups in the scientific community will create opportunities for further penetration of our solutions into their workflows.
 
Thomson Reuters Annual Report 2012
 
 
40

 
 
In 2013, the Intellectual Property & Science segment plans to focus on competitive differentiation through enhancing content and usability, improving customer service, and leveraging technology platforms across its businesses. Additionally, Intellectual Property & Science expects to extend existing products into new markets in rapidly developing economies.

Corporate & Other

   
Year ended December 31,
 
(millions of U.S. dollars)
 
2012
   
2011
 
Revenues - Reuters News
    331       336  
                 
Reuters News
    (16 )     -  
Core corporate expenses
    (254 )     (270 )
Total
    (270 )     (270 )

Revenues from our Reuters News business decreased from the negative impact of foreign currency, as an increase in Agency revenues, led by Reuters America was partially offset by lower advertising-based revenues. Before currency, revenues from our Reuters News business increased 1%.

Core corporate expenses decreased from lower compensation related costs and contributions from foreign currency.

Other Businesses

“Other Businesses” is an aggregation of businesses that have been or are expected to be exited through sale or closure that did not qualify for discontinued operations classification. The results of Other Businesses are not comparable from period to period, as the composition of businesses changes as businesses are identified for sale or closure. Further fluctuations are caused by the timing of the sales or closures.

The most significant businesses in “Other Businesses” for the period ending December 31, 2012 include:

Business
 
Status
Former segment
 
Description
Healthcare
 
Sold – Q2 012
Healthcare & Science
 
A provider of data analytics and performance benchmarking solutions and services to companies, government agencies and healthcare professionals
Trade and Risk Management
 
Sold – Q1 2012
Financial & Risk
 
A provider of risk management solutions to financial institutions, including banks, broker-dealers and hedge funds
Portia
 
Sold – Q2 2012
Financial & Risk
 
A provider of portfolio accounting and reporting applications
Property Tax Consulting
 
Sold – Q4 2012
Tax & Accounting
 
A provider of property tax outsourcing and compliance services in the U.S.

In December 2012, we accepted a binding offer to sell our Corporate Services business, and therefore classified it as held for sale at December 31, 2012. The results of operations from businesses held for sale are normally reported within Other Businesses, however, because the business was managed for the entire year as part of the Financial & Risk segment, it has been included within the segment results for Financial & Risk, rather than within Other Businesses. Refer to “Acquisitions and Dispositions”.

   
Year ended December 31,
 
(millions of U.S. dollars)
 
2012
   
2011
 
Revenues
    379       1,064  
Operating profit