Interim Management Discussion & Analysis

Transcription

1 June 30, 2003

2 Interim Management Discussion & Analysis Certain statements in this report may constitute forward-looking statements. Such forwardlooking statements involve risks, uncertainties and other factors which may cause actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements CONSOLIDATED OPERATING RESULTS Net income for the second quarter was $38.3 million, up $3.2 million from $35.1 million in Earnings per share increased 9% in the quarter from $0.46 in 2002 to $0.50 in We had a good quarter, said Robert Prichard, Torstar s President and Chief Executive Officer. Harlequin produced excellent growth and is well on its way to a record year. Metroland is on budget and on track for another record year. The Regional newspaper group is ahead of plan with strong revenue and profit growth. Our only softness was at the Toronto Star as the impact of SARS on the Toronto economy hurt linage in key advertising categories. However, the Toronto Star is positioned to benefit from its strong line rate strategy in the second half of the year as the economy recovers from the impact of SARS. Consolidated revenues grew 3% in the quarter and 4% year to date. The Newspaper segment s revenues were up 4.5% in the quarter and year to date due to strong revenue growth in the Community and Regional newspapers. In Book Publishing, unit sales were up but the strengthening of the Canadian dollar relative to the U.S. dollar resulted in revenues being flat in the quarter and up 2% year to date. Operating profit of $59.8 million was 4% or $2.4 million higher than the $57.4 million reported in the second quarter of Book Publishing profits were up $4.1 million due to strong North American retail sales. Newspaper profits were down $1.0 million due to higher newsprint, labour and pension costs. Year to date, operating profit of $101.8 million was up $4.7 million from $97.1 million in Book Publishing profits were up $6.1 million year to date. Newspaper profits were flat for the first six months year over year while corporate expenses increased $1.0 million. Most of this increase arose from the expense related to new cash based compensation plans which replaced stock options granted to directors and reduced the number of stock options granted to senior management. Torstar incurred a $2.8 million non-cash foreign exchange loss on the translation of its net U.S. dollar asset position in the second quarter, bringing the year to date loss to $4.0 million. This foreign exchange loss arose from the unprecedented 17% strengthening of the Canadian dollar relative to the U.S. dollar during the first half of Although Torstar has U.S. dollar denominated debt providing a hedge against its U.S. dollar assets, the offset is not exact as the U.S. dollar assets are primarily working capital and therefore fluctuate daily. During the second quarter, Torstar reported unusual gains of $5.0 million. This was the net of a gain of $5.8 million realized on a sale of community newspapers including Napanee, Barry s Bay and Kingston to Osprey Media Group Inc. and a provision of $0.8 million for restructuring of existing newspaper operations. Year to date, Torstar has reported unusual gains of $7.1 million which also includes the 1

3 Interim Management Discussion & Analysis net gain of $6.3 million realized on the sale of an investment in Miles Kimball Company, $2.9 million of write-downs on the remaining interactive portfolio, and a $1.3 million provision for costs arising from a realignment of distribution and finance functions in the daily newspaper group that was made in the first quarter. On an earnings per share basis, the impact of the foreign exchange loss on the translation of the balance sheet offsets almost exactly the unusual gains for both the quarter and year to date. Year to date, net income was $63.4 million, up $5.0 million from $58.4 million in Earnings per share, year to date, were up 6% from $0.77 in 2002 to $0.82 in On June 6, 2003, Torstar announced that it had purchased the Brabant and Fairway weekly newspaper groups, the Orangeville Banner and the printing operations of the Hamilton Printing Group from Osprey Media Group Inc. The Brabant and Fairway groups include nine weekly papers and three other publications located in the Hamilton and Kitchener areas. These publications and the Hamilton Printing Group will be managed by the Regional newspaper group and reported with the daily newspaper results. The Orangeville Banner will be managed by and reported with Metroland s community newspapers. Also in the second quarter, Torstar acquired the remaining 49% of Transit Television Network. Subsequent to the end of the quarter, Torstar announced that it had signed a letter of intent to purchase the outdoor advertising business assets of Olifas Marketing Group Inc. ( OMG Media ). NEWSPAPERS Newspaper revenues were $234.1 million in the second quarter, up $10.0 million from $224.1 million in Year to date revenues were $437.4 million, up $18.6 million from $418.7 million in This 4.5% increase in the quarter and year to date came from strong advertising and distribution results in the Community and Regional newspapers along with increased commercial printing revenues at all of the newspapers. Metroland s community newspapers ROP linage was up 5.6% over the second quarter of 2002 and up 5.5% year to date. Local advertising continued to grow during the second quarter with real estate linage up almost 19%. The commuter newspaper, Metro continued to show significant revenue growth with revenues up 62% for the quarter and 54% year to date from the same periods in Distribution revenues were up 8% in the quarter and 9% year to date from increased volumes. The Daily newspapers showed revenue gains of 2% in the quarter from strong advertising and commercial printing performance by the Regional newspapers, including the recently acquired Brabant newspapers. The Toronto Star s advertising revenues were flat year over year in the second quarter as the SARS outbreak continued to impact key advertising categories. In total, the Toronto Star s linage was off 4.6% in the second quarter with travel and employment linage down 24 and 26 percent respectively. Year to date, the Toronto Star s linage was down 3.6% with travel and employment linage both down 21%. Offsetting the linage 2

4 Interim Management Discussion & Analysis declines was the impact of the Toronto Star s strong line rate strategy (up 5.6% in the quarter and 4.3% year to date). The Hamilton Spectator s advertising linage was up 5.3% in the quarter and 4.4% year to date. At the Grand River Valley, newspapers advertising revenues increased 9% over the second quarter and first six months of 2002 with both The Record and The Guelph Mercury showing improvement. Circulation revenues were constant in the second quarter and year to date across the daily newspaper group. Newsprint costs were up $4.3 million in the quarter for the newspaper segment. Increases in newsprint prices of 11% in the second quarter were only partially offset by reduced consumption. Labour costs were up $1.6 million in the quarter for the Daily newspapers as higher pension costs offset savings from lower staff counts. At the Community newspapers, labour costs were up $2.4 million due to increased wages and higher sales commissions, both related to the growth in revenue. Other costs, including those related to the startup of Transit Television Network, were up $2.8 million in the second quarter. The newspaper segment s operating profit before depreciation and amortization ( EBITDA see note 9) was $46.6 million in the quarter, down $1.2 million from the second quarter in The Community newspapers had EBITDA of $21.4 million, up $0.4 million from $21.0 million in The Daily newspapers EBITDA was down $1.3 million in the second quarter. The Regional Dailies were up $1.6 million, while the Toronto Star was down $2.9 million. Other newspaper operations EBITDA, including ShopTV and Transit Television Network, was down $0.3 million in the quarter, reflecting the increased ownership of Transit Television Network. Year to date, the newspaper segment s EBITDA was $73.8 million, down $1.3 million from $75.1 million in the first six months of The newspaper segment will face increased newsprint and higher labour costs, particularly pension costs, in the second half of The impact of these cost increases on operating profit will depend on the level of revenue growth that can be attained. The Toronto advertising market continues to be challenging and while the Toronto Star continues to hold its position in the market, any significant increase in results is dependent on an improvement in the Toronto economy. The Community and Regional newspapers are dependent on the Southern Ontario economy, but not as closely tied to Toronto. As such, their revenue growth should be maintained in the second half of the year. BOOK PUBLISHING Harlequin s Women s Fiction revenue, excluding the impact of foreign exchange, rose 5.5% in the second quarter and year to date. Net unit sales were up 2% in the quarter and 1.3% for the first six months of However, lower Creativity division sales and a strong Canadian dollar offset these revenue increases. Total Book Publishing revenues were flat in the quarter at $145 million and up 2.3% to $295 million year to date. EBITDA grew 16% to $31.1 million in the quarter, up $4.3 million from $26.8 million in North American results were up $4.1 million while Overseas was down $1.2 million. A strong Euro and the gain from the U.S. dollar earnings hedge contributed $1.4 million to the second quarter EBITDA gain. 3

5 Interim Management Discussion & Analysis The North America Retail single title business continued its strong performance through the second quarter of More single titles were published in the second quarter of 2003, contributing to higher gross and net units. The North America Direct-To-Consumer division continues to be challenged by lower volumes. In the second quarter of 2003 operating profit was flat to 2002 as lower volumes were offset by higher revenues from a price increase in mid 2002 and lower Internet costs. Overseas operations produced mixed results in the second quarter of 2003 as several of these markets continue to face challenges. The U.K. and Japan continue to experience declining unit sales, while the Latin American economy is having a negative impact on the Spanish market results. Year to date, EBITDA was $62.8 million, up $6.5 million or 12%, from $56.3 million in the first six months of North American results were up $6.1 million, Overseas was down $2.4 million and positive foreign exchange contributed $2.8 million ASSOCIATED BUSINESS In the second quarter of 2003, Torstar reported income from associated business of $0.2 million from its equity investment in Black Press Ltd. Torstar made a 19.35% equity investment in Black Press Ltd. in the fourth quarter of INTEREST EXPENSE Interest expense was $3.3 million in the second quarter, consistent with the second quarter of Year to date, interest expense was $6.3 million, $0.4 million lower than the $6.7 million in the first six months of Net debt at the end of the second quarter was $396 million compared with $456 million at June 30, LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents, net of bank overdraft, increased by $1.2 million during the second quarter to $36.2 million compared with a decrease of $6.0 million in the second quarter of Operating activities Cash provided by operating activities in the second quarter of 2003 was $32.4 million compared with $55.1 million in This decrease reflected an increase in non-cash working capital in 2003 of $21.3 million related to higher receivables from increased revenues and the timing of payments, including author royalties. For the six months year to date, cash of $67.4 million was provided by operating activities, compared with $62.6 million for the same period last year. Investing activities Cash of $44.0 million was used by investing activities during the second quarter of $41.3 million was used for acquisitions during the quarter, primarily for the acquisition of the newspaper and printing operations from Osprey Media Group Inc. Additions to property, plant and equipment were $18.3 million of which, $10.3 million related to Metroland s new printing press. Cash of $15.6 million was received during the quarter from the sale of community newspapers and the collection of the proceeds from the sale of Miles Kimball Company that occurred in the first quarter. In the second quarter of 2002, $9.9 million was used for additions to property, plant and equipment. 4

6 Interim Management Discussion & Analysis Financing activities Cash of $13.7 million was provided by financing activities during the second quarter, compared with a use of cash of $51.3 million in This change reflected net borrowing of $13.3 million in the second quarter of 2003 versus the repayment of $48.4 million of long-term debt in the second quarter of Dividends of $12.4 million were paid in the quarter, up $1.4 million from 2002 reflecting the increased dividend rate. Cash of $12.0 million was provided from the exercise of stock options during the second quarter. Year to date, financing activities have used $6.4 million of cash compared with $87.9 million in the same period in This difference reflects the significant repayments of long-term debt that were made in At June 30, 2003, the company had cash and cash equivalents net of bank overdraft of $36.2 million and unused credit facilities of $200 million. Cash balances, operating cash flow, existing credit facilities and the borrowing capacity of the company are considered to be adequate to cover forecasted financing requirements. On behalf of the Board John R. Evans Chairman Toronto, Canada, July 30, J. Robert S. Prichard President & Chief Executive Officer 5

7 Torstar Corporation Consolidated Statements of Income (thousands of dollars) Operating revenue (unaudited) Three months ended June 30 (unaudited) Six months ended June 30 Newspapers $234,083 $224,053 $437,365 $418,747 Book publishing 145, , , ,431 $379,256 $368,932 $732,429 $707,178 Operating profit (loss) Newspapers $34,549 $35,472 $50,020 $50,484 Book publishing 29,159 25,066 59,056 52,928 Corporate (3,863) (3,168) (7,264) (6,274) 59,845 57, ,812 97,138 Interest (3,286) (3,445) (6,284) (6,737) Exchange (loss) gain (2,752) 869 (3,974) 823 Unusual items (note 8) 5,049 7,115 Income before taxes 58,856 54,794 98,669 91,224 Income and other taxes (20,700) (19,700) (35,000) (32,800) Income before income (loss) of associated business 38,156 35,094 63,669 58,424 Income (loss) of associated business 174 (224) Net income $38,330 $35,094 $63,445 $58,424 Earnings per Class A and Class B share (note 3(b)): Net income - Basic $0.50 $0.46 $0.82 $0.77 Net income - Diluted $0.49 $0.45 $0.81 $0.76 For additional business segment information see note 9. (See accompanying notes) 6

8 Torstar Corporation Consolidated Balance Sheets (unaudited) (audited) June 30 December 31 (thousands of dollars) Assets Current: Cash and cash equivalents $38,764 $39,966 Receivables 232, ,374 Inventories 38,592 43,607 Prepaid expenses 74,339 77,537 Prepaid and recoverable income taxes 6,022 5,474 Future income tax assets 22,897 26,210 Total current assets 413, ,168 Property, plant and equipment (net) 402, ,521 Investment in associated business 21,009 21,233 Goodwill (net) 444, ,903 Other assets (note 7) 119,577 91,118 Future income tax assets 71,778 85,778 Total assets $1,472,133 $1,480,721 Liabilities and Shareholders Equity Current: Bank overdraft $2,577 $2,432 Accounts payable and accrued liabilities 187, ,046 Income taxes payable 23,729 30,081 Total current liabilities 214, ,559 Long-term debt (note 2) 432, ,390 Other liabilities 83,696 81,277 Future income tax liabilities 49,489 50,989 Shareholders equity: Share capital (note 3) 335, ,690 Retained earnings 360, ,992 Foreign currency translation adjustment (3,491) 3,824 Total shareholders equity 692, ,506 Total liabilities and shareholders equity $1,472,133 $1,480,721 (See accompanying notes) 7

9 Torstar Corporation Consolidated Statements of Cash Flows (unaudited) Three months ended June 30 (unaudited) Six months ended June 30 (thousands of dollars) Cash was provided by (used in) Operating activities $32,350 $55,078 $67,386 $62,621 Investing activities (44,039) (9,926) (60,192) (17,277) Financing activities 13,747 (51,315) (6,437) (87,936) Increase (decrease) in cash 2,058 (6,163) 757 (42,592) Effect of exchange rate changes (885) 180 (2,104) (88) Cash, beginning of period 35,014 26,157 37,534 62,854 Cash, end of period $36,187 $20,174 $36,187 $20,174 Operating activities: Net income $38,330 $35,094 $63,445 $58,424 Depreciation 13,447 13,580 26,425 27,050 Amortization ,142 1,063 Future income taxes 1,600 3,200 3,400 7,100 (Income) loss of associated business (174) 224 Other (147) (468) (1,054) 838 Operating cash flow 53,635 51,938 93,582 94,475 (Increase) decrease in non-cash working capital (21,285) 3,140 (26,196) (31,854) Cash provided by operating activities $32,350 $55,078 $67,386 $62,621 Investing activities: Acquisitions (note 7) ($41,285) ($2) ($41,285) ($382) Additions to property, plant and equipment (18,321) (9,931) (34,073) (16,853) Proceeds on sale of businesses (note 8) 15,602 15,602 Other (35) 7 (436) (42) Cash used in investing activities ($44,039) ($9,926) ($60,192) ($17,277) Financing activities: Repayment of long-term debt ($53,716) ($10,976) ($88,150) Issuance of long-term debt $13,260 5,261 13,260 5,261 Dividends paid (12,380) (10,978) (24,626) (21,451) Exercise of stock options (note 3) 12,028 7,361 14,235 14,909 Other ,670 1,495 Cash provided by (used in) financing activities $13,747 ($51,315) ($6,437) ($87,936) Cash represented by: Cash and cash equivalents $38,764 $32,686 $38,764 $32,686 Bank overdraft (2,577) (12,512) (2,577) (12,512) $36,187 $20,174 $36,187 $20,174 (See accompanying notes) 8

10 Torstar Corporation Consolidated Statements Of Retained Earnings (unaudited) Six months ended June 30 (thousands of dollars) Retained earnings, beginning of period $321,992 $240,975 Net income 63,445 58,424 Dividends (24,727) (22,068) Retained earnings, end of period $360,710 $277,331 (See accompanying notes) Torstar Corporation Notes to the Interim Consolidated Financial Statements (Dollar amounts in thousands unless otherwise stated) 1. Accounting policies The accounting policies used in the preparation of these unaudited interim consolidated financial statements conform with those presented in Torstar Corporation s December 31, 2002 audited annual consolidated financial statements. These interim financial statements do not include all of the disclosures included in the annual consolidated financial statements and accordingly should be read in conjunction with the annual consolidated financial statements. 2. Long-term debt As at June 30 As at December Commercial paper: Cdn. Dollar denominated $151,935 $133,481 U.S. Dollar denominated 60,204 48, , ,659 Medium Term Notes: Cdn. dollar denominated 150, ,000 U.S. dollar denominated 70,053 81, , ,731 $432,192 $448,390 All commercial paper and medium term notes with a term of less than one year have been classified as long-term debt as the company has the ability to refinance these amounts under its existing credit facilities. The fair values of the various long-term debt instruments exceed their related carrying values by $3.5 million at June 30, The fair value of the interest rate component in the company s swap agreements was $1.7 million favourable at June 30, In the quarter, the company has entered into a U.S. interest rate swap arrangement that will fix the interest rate on U.S. $80 million of borrowings at 3.5% for four years beginning December

11 3. Share Capital a) A summary of changes to the company s share capital is as follows: Class A shares (voting) At June 30, 2003 there were 9,930,145 Class A shares outstanding with a stated value of $2,698. The only changes in the Class A shares since December 31, 2002 were the conversion to Class B shares of 18,690 shares with a stated value of $5. Class B shares (non-voting) Shares Amount December 31, ,827,434 $314,987 Converted from Class A 18,690 5 Issued under Employee Share Purchase Plan 176,579 3,262 Share options exercised 828,092 14,235 Stock dividends issued 4, Other June 30, ,855,410 $332,603 Total Class A and Class B shares 77,785,555 $335,301 b) Earnings per share Basic per share amounts have been determined by dividing net income by the weighted average number of shares outstanding during the period. Diluted per share amounts have taken into consideration the dilutive effect of stock options and the employee share purchase plan. The weighted average number of Class A and Class B shares outstanding (in thousands) were: Three months ended June 30 Six months ended June Basic 77,401 75,364 77,123 75,958 Diluted 78,649 77,696 78,267 77,070 During the six months ended June 30, 2003, no Class B shares were issued to or sold by controlling shareholders. 4. Stock-based compensation The company has two stock-based compensation plans for employees: an executive share option plan and an employee share purchase plan. A summary of changes in the executive share option plan is as follows: Shares Weighted average exercise price December 31, ,446,817 $19.91 Granted 620, Exercised (828,092) (17.19) Cancelled (41,375) (21.49) June 30, ,197,975 $20.82 Options exercisable at June 30, 2003 are as follows: Range of exercise price Number exercisable Weighted average exercise price $ ,900 $11.03 $ ,397,500 $17.10 $ ,185,781 $20.80 $ ,000 $25.05 $ ,294,181 $

12 Had compensation cost for the company s stock-based compensation plans been determined based on the fair value method of accounting for stock-based compensation, the company s net income and earnings per share would have been reduced to the pro forma amounts indicated below: Three months Six months ended June 30 ended June Net income - As reported $38,330 $35,094 $63,445 $58,424 - Pro forma $37,465 $34,648 $61,916 $57,534 Earnings per share Basic - As reported $0.50 $0.46 $0.82 $ Pro forma $0.48 $0.45 $0.80 $0.76 Earnings per share Diluted - As reported $0.49 $0.45 $0.81 $ Pro forma $0.48 $0.45 $0.79 $0.75 The fair value of the executive stock options granted in 2003 and 2002 was $5.28 and $4.98 respectively and was estimated at the date of grant using the Black Scholes option pricing model with the following assumptions: Risk free interest rate 4.1% 4.7% Expected dividend yield 2.5% 2.6% Expected volatility 23.2% 24.7% Expected time until exercise 5 yrs. 5 yrs. With respect to the Employee Share Purchase Plan, the fair value of the plan is estimated each period based on the excess of the current stock price over the opening price, in accordance with the terms that would apply if the plan had currently matured. The fair value estimate is adjusted to actual in the year the specific plan matures. 5. Deferred Share Unit Plan In the second quarter of 2003 the company received approval from the Canada Customs and Revenue Agency for the company to adopt a Deferred Share Unit (DSU) Plan for executives whereby an executive may elect to receive certain cash incentive compensation in the form of DSUs. A DSU is equal in value to one Class B non-voting share of the company. The units are issued on the basis of the closing sale price per share of Torstar Class B non-voting shares on the Toronto Stock Exchange on the date of issue. The units also accrue dividend equivalents payable in additional units in an amount equal to dividends paid on Torstar Class B non-voting shares. DSUs mature upon termination of employment, whereupon an executive is entitled to receive the fair market value of the equivalent number of Class B nonvoting shares, net of withholdings, in cash. The company has also adopted a DSU Plan for non-employee directors. Each non-employee director receives an award of DSUs as part of his or her annual Board retainer. In addition, a non-employee director holding less than 8,000 Class B non-voting shares, Class A voting shares, DSUs, or a combination thereof of the company receives the cash portion of his or her annual Board retainer in the form of DSUs. Any non-employee director may elect to participate in the DSU Plan in respect of part or all of his or her retainer and attendance fees. The terms of the director DSU Plan are substantially the same as the executive DSU Plan. The company records the cost of the DSU Plans as compensation expense. As at June 30, 2003, 9,987 units were outstanding at a value of $0.3 million. 6. Forward Foreign Exchange Contracts and Options As described in Note 13 of the company s December 31, 2002 annual financial statements, the company has entered into various forward foreign exchange contracts and option contracts. 11

13 During the second quarter of 2003, the company has entered into forward foreign exchange contracts which will establish a rate of exchange of Canadian Dollar per Euro of $1.65 for 6 million Euro for 2004, $1.67 for 6 million Euro for 2005 and $1.68 for 4 million Euro for Acquisitions On June 6, 2003 the company acquired, for $40.5 million, the assets of the Brabant and Fairway weekly newspaper groups, the printing operations of the Hamilton Printing Group and the Orangeville Banner. The final allocation of the purchase price was not completed as at the end of the second quarter and $35.5 million related to intangible assets has been included in Other Assets. Also in the second quarter, the company acquired the remaining 49% of Transit Television Network for $0.8 million plus a contingent purchase price based on future operating results. The purchases are accounted for by the purchase method. 8. Unusual items For the six months ended June 30, 2003, the company has recognized an unusual gain of $7.1 million. This includes a gain of $5.8 million from the second quarter sale of eight of Metroland s weekly newspapers and a gain of $6.3 million realized on the sale of an investment in Miles Kimball Company. The company also recorded a $2.9 million write-down of its remaining investment portfolio and a $2.1 million provision ($0.8 million in the second quarter) for restructuring charges in the Newspaper group. The consolidated statement of Cash Flows reflects in investing activities for the second quarter of 2003, $15.6 million of proceeds from the sale of Metroland s newspapers and the Miles Kimball investment noted above ($9.3 million and $6.3 million, respectively). The proceeds from the first quarter sale of Miles Kimball were received early in the second quarter. Operating cash flow and non-cash working capital for the first quarter have been restated to be consistent with the presentation for the six month period ended June 30, Additional business segment information The company reports its financial results under Canadian generally accepted accounting principles ( GAAP ). However, management believes that many of the company s shareholders, creditors, other stakeholders and analysts prefer to assess the company s performance using earnings before interest, taxes, depreciation and amortization ( EBITDA ) in addition to the GAAP measures. The company s method of calculating EBITDA may differ from other companies and accordingly, may not be comparable to measures used by other companies. Business segment EBITDA, calculated as operating profit before depreciation and amortization, is as follows: Three months ended June 30 Six months ended June Newspapers $ 46,622 $ 47,864 $ 73,829 $75,137 Book publishing 31,082 26,760 62,755 56,336 Corporate (3,833) (3,142) (7,205) (6,222) $73,871 $71,482 $129,379 $125,251 12

14 CORPORATE OFFICE ONE YONGE STREET TORONTO, ONTARIO M5E 1P9 (416) SHARES LISTED TORSTAR CLASS B SHARES ARE TRADED ON THE TORONTO STOCK EXCHANGE UNDER THE SYMBOL TS.B TRANSFER AGENT AND REGISTRAR CIBC MELLON TRUST COMPANY AUDITORS ERNST & YOUNG LLP, TORONTO