TORSTAR - Management's Discussion and Analysis
For the three and six months ended June 30, 2017
The following management’s discussion and analysis (“MD&A”) comments on the financial condition and results of operations of Torstar Corporation (“Torstar”, "we", "our" or the “Company") for the three and six months ended June 30, 2017 and updates the MD&A for the fiscal year ended December 31, 2016 (the "Annual MD&A"). The information contained herein should be read in conjunction with the annual audited consolidated financial statements of Torstar for the year ended December 31, 2016 (the “2016 Consolidated Financial Statements”) and the Annual MD&A which are set forth in the Company's Annual Report for such fiscal year and incorporated by reference in the Company's renewal Annual Information Form dated March 21, 2017.
We report our financial results under International Financial Reporting Standards (“IFRS”) as set out in the CPA Canada Standards and Guidance Collection. All financial information contained in this MD&A and in the condensed consolidated financial statements for the three and six months ended June 30, 2017 (the "Condensed Consolidated Financial Statements") has been prepared in accordance with IFRS, except for certain “Non-IFRS Measures” as described in Section 11 of this MD&A. Per share amounts are calculated using the weighted average number of shares outstanding for the applicable period. In addition, during 2016, we reclassified the manner in which certain items are categorized including the exclusion of share based compensation from our definition of adjusted EBITDA. The results for the second quarter of 2016 have been restated on a comparative basis to reflect these changes.
This MD&A is dated August 1, 2017 and all amounts are denominated in Canadian dollars, unless otherwise noted.
The accounting policies applied in this interim MD&A are consistent with those disclosed in Note 2 to the annual consolidated financial statements for the year ended December 31, 2016.
Additional information relating to Torstar, including the 2016 Consolidated Financial Statements, Annual Report and Annual Information Form, are available on Torstar’s website at www.torstar.com and on SEDAR at www.sedar.com.
Forward-looking statements Certain statements in this MD&A and in the Company’s oral and written public communications may constitute forward-looking statements that reflect management’s expectations regarding the Company’s future growth, financial performance and business prospects and opportunities as of the date of this MD&A. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate”, “believe”, “plan”, “forecast”, “expect”, “estimate”, “intend”, “would”, “could”, “if”, “may” and similar expressions. This MD&A includes, among others, forward-looking statements regarding estimates and expectations relating to contingent liabilities in Section 3 of this MD&A, expected savings including savings from restructuring initiatives in Sections 3 and 4 of this MD&A, Torstar's outlook for 2017 including anticipated revenue trends, expected costs relating to the Toronto Star's new universal app and anticipated funding requirements in respect of our defined benefit pension plans in Section 4 of this MD&A, expectations regarding cash flows and forecasted cash requirements, and the impact of the Ontario Government's planned new pension funding framework in Section 5 of this MD&A, expectations regarding the costs, obligations, contributions, return on plan assets, discount rates, required funding, solvency liabilities and other expectations related to employee future benefit obligations and the potential impact of the Ontario Government's planned new pension funding framework in Section 6 of this MD&A, estimates and judgements in connection with critical accounting policies as described in Section 7 of this MD&A, expectations regarding the impact of accounting pronouncements in Section 8 of this MD&A, and expectations regarding risks and uncertainties in Section 12 of this MD&A. All such statements are made pursuant to the “safe harbour” provisions of applicable Canadian securities legislation. These statements reflect current expectations of management regarding future events and operating performance, and speak only as of the date of this MD&A. In addition, forward-looking statements are provided for the purpose of providing information about management’s current expectations and plans relating to the future. Readers are cautioned that reliance on such information may not be appropriate for other purposes.
By their very nature, forward-looking statements require management to make assumptions and are subject to inherent risks and uncertainties. There is a significant risk that predictions, forecasts, conclusions or projections will not prove to be accurate, that management’s assumptions may not be accurate and that actual results, performance or achievements may differ significantly from such predictions, forecasts, conclusions or projections expressed or implied by such forward-looking statements. We caution readers not to place undue reliance on the forward-looking statements in this MD&A as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, outlooks, expectations, goals, estimates or intentions expressed in the forward-looking statements.
These factors include, but are not limited to: -the Company’s ability to operate in highly competitive industries; -the Company’s ability to compete with digital media, other newspapers and other forms of media; -the Company’s ability to respond to the shift to digital media and the shift by advertisers to other digital platforms; -the Company’s ability to attract, grow and retain its digital audience and profitably develop its digital platforms; -the Company’s ability to attract and retain advertisers; -the Company’s ability to maintain adequate circulation/subscription levels; -the Company’s ability to attract and retain readers and traffic; -the Company’s ability to integrate the technology associated with new digital platforms; -general economic conditions and customer prospects in the principal markets in which the Company operates;
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 1 TORSTAR - Management's Discussion and Analysis
-the Company’s ability to reduce costs; -loss of reputation; -dependence on third party suppliers and service providers; -reliance on technology and information systems and risks of security breaches; -changes in employee future benefit obligations; -the Company’s ability to execute appropriate strategic growth initiatives including acquisitions; -unexpected costs or liabilities related to acquisitions and dispositions; -investments in other businesses; -labour disruptions; -reliance on printing operations; -newsprint costs; -litigation; -privacy, anti-spam, communications, e-commerce and environmental laws, health and safety regulations and other laws and regulations applicable generally to the Company’s businesses; -foreign exchange fluctuations and foreign operations; -availability of insurance; -dependence on key personnel; -intellectual property rights; -credit risk; -availability of capital and restrictions imposed by credit facilities; -income tax and other taxes; -dividend policy; -results of impairment tests and uncertainties associated with critical accounting estimates -holding company structure; and -control of the Company by the Voting Trust.
Torstar cautions that the foregoing list is not exhaustive of all possible factors, as other factors could adversely affect Torstar’s results. In addition, a number of assumptions, including those assumptions specifically identified throughout this MD&A, were applied in making the forward-looking statements set forth in this MD&A which the Company believes are reasonable as of the date of this MD&A. Some of the key assumptions include, without limitation, assumptions regarding the performance of the North American economies; tax laws; continued availability of printing operations; availability of financing on appropriate terms; exchange rates; market competition; rates of return and discount rates relating to pension expense and pension plan obligations; expected future revenues; expected future liabilities; expected future cash flows and discount rates relating to valuation of goodwill and intangible assets; and successful development and launch of new products. There is a risk that some or all of these assumptions may prove to be incorrect. There is no assurance regarding the amount and timing of future dividends. When relying on our forward-looking statements to make decisions with respect to the Company and its securities, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. The Company does not intend, and disclaims any obligation, to update any forward-looking statements, whether written or oral, or whether as a result of new information or otherwise, except as may be required by law.
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 2 TORSTAR - Management's Discussion and Analysis
Management’s Discussion and Analysis – Contents Section Page Overview 4 1 A summary of our business Highlights 2 5 Highlights for the second quarter of 2017 compared to the second quarter of 2016 Operating Results 3 6 A discussion of our operating results for the three and six months ended June 30, 2017 Outlook 13 4 The outlook for our business in the balance of 2017 Liquidity and Capital Resources 13 5 A discussion of our cash flow, liquidity and other disclosures Employee Benefit Obligations 15 6 A summary of our employee benefit obligations Critical Accounting Policies and Estimates 7 A description of accounting estimates and judgements that are critical to determining our financial results, and 16 changes to accounting policies Recent Accounting Pronouncements 16 8 A discussion of recent IFRS developments that will affect our business Controls and Procedures 16 9 A discussion of our disclosure controls and internal controls over financial reporting Summary of Quarterly Results 17 10 A summary view of our quarterly financial performance Reconciliation and Definition of Non-IFRS Measures 17 11 A description and reconciliation of certain non-IFRS and additional IFRS measures used by management Risks and Uncertainties 20 12 Risks and uncertainties facing our business
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 3 TORSTAR - Management's Discussion and Analysis
1. Overview A summary of our business
Torstar is a broadly based Canadian media company listed on the Toronto Stock Exchange (Symbol:TS.B). Torstar has three reportable operating segments: Metroland Media Group (“MMG”), Star Media Group (“SMG”) and Digital Ventures.
Metroland Media Group includes The Hamilton Spectator and the Waterloo Region Record daily newspapers and more than 100 weekly community newspapers, digital properties (including homefinder.ca, save.ca, travelalerts.ca, wagjag.com (“WagJag”) and the regional online sites, such as durhamregion.ca) and flyer distribution operations. Metroland Media Group also has a number of specialty publications, directories and consumer shows.
Star Media Group includes the daily Toronto Star newspaper and thestar.com. Star Media Group also includes Free Daily News Group Inc. (“Metro”), which publishes the English-language Metro free daily newspapers in several of Canada’s largest cities, and through a joint venture arrangement, Star Media Group owns an interest in the Chinese-language Sing Tao Daily and its related publications in Toronto, Vancouver and Calgary. Star Media Group also includes wheels.ca, toronto.com and other specialty publications and magazines and distribution services. Star Media Group also published Toronto Star Touch until July 31, 2017.
Digital Ventures includes our 56% interest in VerticalScope, eyeReturn Marketing Inc. (“eyeReturn”) and our joint venture interest in Workopolis. Our investment in VerticalScope is classified as an associated business rather than a consolidated subsidiary or joint venture as a result of certain terms in the applicable shareholders’ agreement. VerticalScope is a Toronto- based vertically focused digital media company with expertise in programmatic advertising and which has approximately 190 employees and services the North American market through its network of user forums and premium content sites offering advertisers access to large audiences in popular verticals including automotive, powersports, outdoors, home and health.
We also have several other investments in Associated Businesses, which at June 30, 2017 included a 19% equity investment in Black Press Ltd. (“Black Press”), a 16% equity investment in Blue Ant Media Inc. (“Blue Ant”) a 33% equity investment in Canadian Press Enterprises Inc. (“Canadian Press”) and an interest in Nest Wealth Inc. ("Nest Wealth").
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 4 TORSTAR - Management's Discussion and Analysis
2. Highlights Highlights for the second quarter of 2017 compared to the second quarter of 2016
Three months ended June 30 Six months ended June 30
Favourable Favourable (in $000’s, except per share amounts) 2017 2016 (Unfavourable) 2017 2016 (Unfavourable)
Net loss from continuing operations ($7,499) ($24,268) $16,769 ($31,896) ($77,800) $45,904 Per Share ($0.10) ($0.30) $0.20 ($0.40) ($0.96) $0.56
Net loss attributable to equity shareholders (6,988) (23,923) 16,935 ($31,266) ($77,446) $46,180 Per Share ($0.09) ($0.30) $0.21 ($0.39) ($0.96) $0.57
Adjusted loss Per Share2 ($0.03) ($0.13) $0.10 ($0.24) ($0.53) $0.29
Operating profit (loss)1,2 (8,052) (32,068) 24,016 (31,430) (106,825) 75,395
Adjusted EBITDA1,2 17,999 16,211 1,788 19,998 15,505 4,493
Revenues1,2 180,772 196,539 (15,767) 337,487 371,358 (33,871) 1 Includes proportionately consolidated share of joint venture operations and our 56% interest in VerticalScope. These include Non-IFRS or additional IFRS measures, refer to Section 11 of this MD&A. 2These are Non-IFRS or additional IFRS measures, refer to Section 11 of this MD&A.
Highlights:
• Ended the second quarter of 2017 with $48.4 million of cash and cash equivalents and $9.1 million of restricted cash; Torstar has no bank indebtedness.
• Our net loss attributable to equity shareholders was $7.0 million ($0.09 per share) in the second quarter of 2017. This compares to a net loss of $23.9 million ($0.30 per share) in the second quarter of 2016.
• Adjusted loss per share was $0.03 in the second quarter of 2017, an improvement of $0.10 from adjusted loss per share of $0.13 in the second quarter of 2016. Adjusted loss per share in 2017 and 2016 included $0.24 and $0.50 per share effects of amortization and depreciation.
• Our segmented operating loss was $8.1 million in the second quarter of 2017 which included $19.2 million of non-cash amortization and depreciation expense as well as $6.2 million of restructuring and other charges.
• Our segmented adjusted EBITDA was $18.0 million in the second quarter of 2017, up $1.8 million from the prior year. Segmented adjusted EBITDA in the Digital Ventures segment was $6.9 million in the quarter which benefitted from 32% growth in adjusted EBITDA at VerticalScope (27% growth in USD). In the newspaper operations, the segmented adjusted EBITDA at the Star Media Group was $0.8 million, an improvement of $1.5 million, while segmented adjusted EBITDA at the Metroland Media Group was $12.7 million, down $1.2 million in the quarter.
• Segmented revenue was $180.8 million in the second quarter of 2017, down $15.7 million (8%) from $196.5 million in the second quarter of 2016 which included revenue growth of $2.0 million or 22% (17% growth in USD) from VerticalScope.
The following chart provides a continuity of earnings per share from the second quarter and first six months of 2016 to the second quarter and first six months of 2017:
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 5 TORSTAR - Management's Discussion and Analysis
Three months ended June 30 Six months ended June 30
Adjusted Adjusted Earnings Earnings Earnings Earnings (Loss) Per (Loss) Per (Loss) Per (Loss) Per Share Share** Share Share**
Loss per share from continuing operations attributable to equity ($0.30) ($0.13) ($0.96) ($0.53) shareholders in 2016 Changes • Adjusted EBITDA* 0.02 0.02 0.06 0.06 • Amortization and depreciation* 0.27 0.27 0.57 0.57 • Operating earnings (loss)* (0.01) 0.16 (0.33) 0.10 • Restructuring and other charges* 0.01 0.34 • Impairment of assets* (0.04) • Operating profit (loss)* 0.00 0.16 (0.03) 0.10 • Non-cash foreign exchange 0.01 (0.02) • Loss from associated businesses (excluding VerticalScope) (0.01) (0.01) (0.02) (0.02) • Other income (0.02) • Change in current and future taxes (including associated businesses) (0.10) (0.18) (0.31) (0.32)
Loss per share from continuing operations attributable to equity ($0.10) ($0.03) ($0.40) ($0.24) shareholders in 2017 Earnings per share from discontinued operations attributable to equity $0.01 $0.01 shareholders in 2017
Loss per share attributable to equity shareholders in 2017 ($0.09) ($0.03) ($0.39) ($0.24) * Includes proportionately consolidated share of joint venture operations and VerticalScope's operations. These include Non-IFRS or additional IFRS measures, refer to Section 11 of this MD&A. ** Refer to Section 11 for a reconciliation of earnings (loss) per share to adjusted earnings (loss) per share and a definition of adjusted earnings (loss) per share.
3. Operating Results A discussion of our operating results for the three and six months ended June 30, 2017
Unless otherwise noted, the following is a discussion of our second quarter and year to date 2017 operating results relative to the comparable periods in 2016. As a result of the increasing significance of segmented financial results from our investment in VerticalScope relative to our total segmented financial results, during 2016 we revised our definition of adjusted EBITDA to exclude share based compensation. We made this change because of the relative significance and variability of this non-cash expense in our proportionate share of VerticalScope's financial results and we believe that the exclusion of this non-cash expense from adjusted EBITDA provides greater insight for investors, analysts and readers, in regards to our segmented earnings. Refer to Section 11 for more information.
Relevant comparative information has been restated to reflect these changes.
Overall Performance
We have three reportable operating segments to which Corporate costs have not been allocated. Management of the segments are accountable for the revenues, adjusted EBITDA, operating earnings and operating profit of the segments including our proportionate share of joint venture operations as well as our 56% interest in VerticalScope. When reported in the consolidated statement of income (loss), joint ventures and our 56% investment in VerticalScope (which, pursuant to certain terms in the shareholders agreement, is classified as an Associated Business rather than a consolidated subsidiary or joint venture), are accounted for using the equity method. The net income is included in “Income (loss) from joint ventures” and “Income (loss) from associated businesses”, as applicable. We own a significantly higher percentage of VerticalScope relative to our other Associated Businesses.
The following tables set out our segmented results which include our proportionate share of results from VerticalScope and our joint ventures for the three and six months ended June 30, 2017 and June 30, 2016 and provide a reconciliation to the consolidated statement of income (loss):
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 6 TORSTAR - Management's Discussion and Analysis
Three months ended June 30, 2017 Total Per Adjustments Consolidated Digital Total & Statement of (in $000’s) MMG SMG Ventures Corporate Segmented* Eliminations1 Loss Operating revenue $100,793 $61,621 $18,358 $180,772 ($19,015) $161,757 Salaries and benefits (43,821) (21,352) (5,649) ($1,562) (72,384) 5,928 (66,456) Other operating costs (44,227) (39,480) (5,763) (919) (90,389) 5,562 (84,827) Adjusted EBITDA** 12,745 789 6,946 (2,481) 17,999 (7,525) 10,474 Amortization & depreciation (3,793) (8,086) (7,317) (19,196) 6,779 (12,417) Share based compensation (206) (22) (491) 75 (644) 644 — Operating earnings (loss)** 8,746 (7,319) (862) (2,406) (1,841) (102) (1,943)
Restructuring and other charges (3,265) (2,604) (142) (200) (6,211) 141 (6,070) Operating profit (loss)** $5,481 ($9,923) ($1,004) ($2,606) ($8,052) $39 ($8,013) Loss from continuing operations ($7,499) Income from discontinued operations $500 Net loss ($6,999)
Six months ended June 30, 2017 Total Per Adjustments Consolidated Digital Total & Statement of (in $000’s) MMG SMG Ventures Corporate Segmented* Eliminations1 Loss Operating revenue $182,279 $121,035 $34,173 $337,487 ($37,054) $300,433 Salaries and benefits (85,324) (43,437) (11,226) ($3,047) (143,034) 11,835 (131,199) Other operating costs (82,380) (79,712) (10,904) (1,459) (174,455) 11,138 (163,317) Adjusted EBITDA** 14,575 (2,114) 12,043 (4,506) 19,998 (14,081) 5,917 Amortization & depreciation (7,553) (13,883) (14,930) (36,366) 13,884 (22,482) Share based compensation (336) (125) (611) 100 (972) 972 — Operating earnings (loss)** 6,686 (16,122) (3,498) (4,406) (17,340) 775 (16,565) Restructuring and other charges (6,202) (4,405) (283) (200) (11,090) 537 (10,553) Impairment of assets (3,000) (3,000) 3,000 — Operating profit (loss)** $484 ($20,527) ($6,781) ($4,606) ($31,430) $4,312 ($27,118) Loss from continuing operations ($31,896) Income from discontinued operations $500 Net loss ($31,396)
Three months ended June 30, 2016 Total Per Adjustments Consolidated Digital Total & Statement of (in $000’s) MMG SMG Ventures Corporate Segmented* Eliminations1 Loss Operating revenue $108,175 $71,155 $17,209 $196,539 ($18,627) $177,912 Salaries and benefits (47,995) (29,412) (5,706) ($1,770) (84,883) 6,104 (78,779) Other operating costs (46,223) (42,445) (6,126) (651) (95,445) 6,226 (89,219) Adjusted EBITDA** 13,957 (702) 5,377 (2,421) 16,211 (6,297) 9,914 Amortization & depreciation (3,293) (9,500) (27,887) (6) (40,686) 27,499 (13,187) Share based compensation (147) 82 (408) (178) (651) 651 — Operating earnings (loss)** 10,517 (10,120) (22,918) (2,605) (25,126) 21,853 (3,273)
Restructuring and other charges (4,282) (2,605) (55) (6,942) 50 (6,892) Operating profit (loss)** $6,235 ($12,725) ($22,918) ($2,660) ($32,068) $21,903 ($10,165)
Loss from continuing operations ($24,268) Income from discontinued operations $400 Net loss ($23,868)
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 7 TORSTAR - Management's Discussion and Analysis
Six months ended June 30, 2016 Total Per Adjustments Consolidated Digital Total & Statement of (in $000’s) MMG SMG Ventures Corporate Segmented* Eliminations1 Loss Operating revenue $197,240 $140,970 $33,148 $371,358 ($36,765) $334,593 Salaries and benefits (92,883) (60,385) (11,355) ($3,807) (168,430) 12,428 (156,002) Other operating costs (87,147) (87,487) (11,502) (1,287) (187,423) 11,925 (175,498) Adjusted EBITDA** 17,210 (6,902) 10,291 (5,094) 15,505 (12,412) 3,093 Amortization & depreciation (6,676) (19,019) (56,831) (13) (82,539) 56,087 (26,452) Share based compensation (265) (81) (653) (50) (1,049) 1,049 — Operating earnings (loss)** 10,269 (26,002) (47,193) (5,157) (68,083) 44,724 (23,359) Restructuring and other charges (6,544) (32,143) (55) (38,742) 50 (38,692) Operating profit (loss)** $3,725 ($58,145) ($47,193) ($5,212) ($106,825) $44,774 ($62,051)
Loss from continuing operations ($77,800) Income from discontinued operations $400 Net loss ($77,400) 1 Reflects eliminations of proportionate share of joint ventures and VerticalScope *Includes proportionately consolidated share of joint venture operations and VerticalScope **These are non-IFRS or additional IFRS measures, refer to Section 11 of this MD&A
Revenue Segmented revenue was down $15.7 million or 8% in the second quarter and down $33.9 million or 9.1% in the first six months of 2017 and included revenue growth of $2.0 million (22%) and $3.5 million (20%) in the respective periods from VerticalScope. Segmented revenue in the second quarter of 2017 reflected declines of 15% in print advertising revenues (17% - year to date), with particular softness in national advertising revenues, a 3.6% decrease in subscriber revenue (6.6% - year to date) and a 4.6% decrease in distribution revenues (2.3% - year to date).
Operating revenue (excluding our proportionate share of revenues from our joint ventures and our 56% interest in VerticalScope) was down $16.1 million or 9% in the second quarter and down $34.2 million or 10% in the first six months of 2017.
Digital revenue in the second quarter of 2017 was comparable to the second quarter of 2016 reflecting lower revenues at Workopolis, Toronto Star Touch and WagJag offset by continued strong growth at VerticalScope as well as in local digital advertising within the community websites at Metroland Media Group. Digital revenues declined 2.4% in the first six months of 2017 relative to the comparable period in 2016 reflecting the above noted factors. Digital revenues were 18% of total revenue in the second quarter and first six months of 2017 compared to 17% in the second quarter and first six months of 2016.
Salaries and benefits Segmented salaries and benefits costs were down $12.5 million (15%) in the second quarter of 2017 and $25.4 million (15%) in the first six months of 2017 reflecting the benefit of savings from restructuring initiatives, including the closure of the Vaughan Printing Facility as well as lower staffing costs associated with Toronto Star Touch.
Other operating costs Segmented other operating costs primarily include newspaper circulation and flyer distribution costs, production costs and newsprint costs which represented 41%, 13% and 12% respectively of segmented other operating costs for the second quarter of 2017 and 41%, 13% and 12% respectively of segmented other operating costs year to date.
Segmented other operating costs were down $5.0 million or 5.3% in the second quarter and down $12.9 million or 6.9% in the first six months of 2017 as a result of lower print volumes and the impact of other cost reductions partially offset by outsourcing costs related to printing of the Toronto Star effective the third quarter of 2016.
Adjusted EBITDA Our segmented adjusted EBITDA was $18.0 million in the second quarter of 2017 up $1.8 million from the prior year. Segmented adjusted EBITDA in the Digital Ventures segment was $6.9 million in the quarter which benefited from 32% growth in adjusted EBITDA at VerticalScope (27% growth in USD). In the newspaper operations, the segmented adjusted EBITDA at the Star Media Group was $0.8 million, an improvement of $1.5 million, while segmented adjusted EBITDA at
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 8 TORSTAR - Management's Discussion and Analysis the Metroland Media Group was $12.7 million, down $1.2 million in the quarter. Segmented adjusted EBITDA for the second quarter of 2017 included Corporate expenses of $2.5 million.
Year to date, segmented adjusted EBITDA was $20.0 million, up $4.5 million from the first six months of 2017. Segmented adjusted EBITDA in the Digital Ventures segment was $12.0 million in the first six months of 2017 reflecting growth of 27% in adjusted EBITDA at VerticalScope (26% growth in USD). In the newspaper operations, the segmented adjusted EBITDA loss at the Star Media Group was $2.1 million, an improvement of $4.8 million, while segmented adjusted EBITDA at the Metroland Media Group was $14.6 million, down $2.6 million in the first six months of 2017. Segmented adjusted EBITDA in the first six months of 2017 included Corporate expenses of $4.5 million.
Amortization and depreciation Total segmented amortization and depreciation of $19.2 million and $36.4 million in the second quarter and first six months of 2017 decreased $21.5 million and $46.1 million in the second quarter and first six months of 2017, respectively relative to the comparable periods in 2016, primarily the result of lower amortization associated with our investment in VerticalScope as well as the absence of accelerated amortization of equipment related to the transition of printing of the Toronto Star to Transcontinental Printing in the second quarter and first six months of 2016.
Operating earnings (loss) Segmented operating loss was $1.8 million in the second quarter and $17.3 million in the first six months of 2017 compared to segmented operating losses of $25.1 million and $68.1 million in the second quarter and first six months of 2016. These improvements were the result of increases in adjusted EBITDA combined with lower amortization and depreciation expense.
Restructuring and other charges Total segmented restructuring and other charges were $6.2 million and $11.1 million in the second quarter and first six months of 2017 compared to $6.9 million and $38.7 million in the second quarter and first six months of 2016. Restructuring charges in the first six months of 2016 included a charge of $22.4 million for severance and facility related expenses in respect of our decision to outsource printing of the Toronto Star.
Restructuring charges taken through the end of the second quarter of 2017 are expected to result in annualized net savings of $17.5 million and have resulted in the reduction of approximately 195 positions with $11.5 million of the savings expected to be realized in 2017 (including $2.7 million in the first six months) and $6.0 million in 2018.
Impairment of assets During the first six months of 2017, we incurred non-cash charges related to asset impairment of our joint venture investment in Workopolis totalling $3.0 million (2016 - $nil). This charge had no impact on cash flows and was the result of a further downward revision in longer term forecasted revenues reflecting further increased competition in the online recruitment and job search markets as well as general market conditions.
Operating profit (loss) Segmented operating loss decreased $24.0 million in the second quarter and $75.4 million in the first six months of 2017. Operating loss for the second quarter of 2017 included $19.2 million of non-cash amortization and depreciation expense ($36.4 million - year to date) as well as $6.2 million of restructuring and other charges ($11.1 million - year to date). Our loss in the second quarter of 2016 included $40.7 million of amortization and depreciation expense ($82.5 million - year to date) and $6.9 million of restructuring and other charges ($38.7 million - year to date).
Our operating loss excluding our proportionate share of operating profit (loss) from VerticalScope and our joint ventures decreased $2.2 million in the second quarter and $35.0 million in the first six months of 2017 compared to the comparable periods in 2016.
Interest and financing costs Interest and financing costs were $0.6 million and $1.1 million in the second quarter and first six months of 2017, down $0.2 million and $0.4 million from the second quarter and first six months of 2016 primarily reflecting lower net financing expense relating to employee benefit plans and higher interest earned on cash and cash equivalents.
Foreign exchange Non-cash foreign exchange gains were $1.0 million in the second quarter and $0.2 million in the first six months of 2017 compared to gains of $nil and $1.5 million in the second quarter and first six months of 2016. The gains in the second quarter and first six months of 2017 primarily reflected an increase in the fair value of the hedge of the original net investment in VerticalScope.
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 9 TORSTAR - Management's Discussion and Analysis
Income (loss) from joint ventures Our income from joint ventures was $0.4 million in the second quarter of 2017 compared to income of less than $0.1 million in the second quarter of 2016. Our loss from joint ventures was $2.4 million in the first six months of 2017 compared to income of $0.6 million in the first six months of 2016. The results of our joint ventures are included in our discussions of segmented revenue and segmented adjusted EBITDA below. The loss from joint ventures in the first six months of 2017 includes an impairment charge of $3.0 million related to our investment in Workopolis.
Loss from associated businesses Our loss from associated businesses was $0.3 million in the second quarter and $2.5 million in the first six months of 2017 compared to losses of $16.0 million in the second quarter and $33.2 million in the first six months of 2016.
The loss in the second quarter of 2017 included income of $1.9 million from Blue Ant and income of $1.1 million from our investment in Nest Wealth offset by a loss of $2.0 million from Black Press and a loss of $1.2 million from VerticalScope. The loss from VerticalScope included $6.3 million of amortization expense. The loss in the second quarter of 2016 included income of $1.7 million from Black Press and income of $0.3 million from Blue Ant, offset by a loss of $17.9 million from VerticalScope which included $26.6 million of amortization expense.
The loss in the first six months of 2017 included income of $2.2 million from Blue Ant and income of $1.1 million from NestWealth offset by a loss of $2.5 million from Black Press and a loss of $3.2 million from VerticalScope. The loss from VerticalScope included $13.0 million of amortization expense. The loss in the first six months 2016 included income of $2.5 million from Black Press and income of $0.5 million from Blue Ant, offset by a loss of $0.6 million from Shop.ca and a loss of $35.5 million from VerticalScope which included $54.2 million of amortization expense.
Investment in VerticalScope During 2015, we acquired a 56% interest in VerticalScope. During the second quarter and first six months of 2017, VerticalScope generated U.S. $4.4 million and U.S. $12.1 million of cash from operations and made acquisitions totalling U.S. $16.3 million and U.S. $17.6 million respectively. VerticalScope's debt, net of cash, was up U.S. $6.9 million from U.S. $74.4 million at December 31, 2016 to U.S. $81.3 million at June 30, 2017.
In connection with the investment in VerticalScope, during the second quarter and first six months of 2017 we recorded $6.3 million and $13.0 million of amortization and depreciation expense (2016 - $26.6 million and $54.2 million in the second quarter and first six months of 2016). Further details of our accounting for this investment is included in Section 3 of our annual MD&A and further details of the operating results for this investment during the second quarter and first six months of 2017 are outlined in our discussion of the operating results for the Digital Ventures segment below.
Other income Other income of $1.3 million in the first six months of 2016 primarily reflected a gain recognized on the sale of one of Metroland Media Group's real estate properties.
Income and other taxes We recorded tax recoveries of $nil and $1.1 million in the second quarter and first six months of 2017 compared to recoveries of $2.6 million and $15.6 million in the second quarter and first six months of 2016. Excluding the impact of deferred income tax assets not recognized, our effective tax rate was 25.3% in the second quarter and 20.3% in the first six months of 2017.
Net loss from continuing operations Our net loss was $7.5 million ($0.10 per share) in the second quarter of 2017. This compares to a net loss of $24.3 million ($0.30 per share) in the second quarter of 2016. The second quarter of 2017 included $6.3 million of non-cash amortization and depreciation expense associated with our investment in VerticalScope and $6.1 million of restructuring charges. The second quarter of 2016 included $26.6 million of non-cash amortization and depreciation expense associated with our investment in VerticalScope as well as $6.9 million of restructuring charges and $4.5 million of additional non-cash amortization and depreciation expense related to the transition of printing of the Toronto Star to Transcontinental Printing.
Our net loss was $31.9 million ($0.40 per share) in the first six months of 2017. This compares to a net loss of $77.8 million ($0.96 per share) in the first six months of 2016. The first six months of 2017 included $13.0 million of non-cash amortization and depreciation expense associated with our investment in VerticalScope and $11.1 million of restructuring charges. The first six months of 2016 included $54.2 million of non-cash amortization and depreciation expense associated with our investment in VerticalScope as well as $38.7 million of restructuring charges and $9.3 million of additional non-cash amortization and depreciation expense related to the transition of printing of the Toronto Star to Transcontinental Printing.
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 10 TORSTAR - Management's Discussion and Analysis
Income (loss) from discontinued operations On August 1, 2014 Torstar sold all of the shares of Harlequin Enterprises Limited ("Harlequin") to a division of HarperCollins Publishers L.L.C., a subsidiary of News Corp., for a purchase price of $455.0 million, subject to certain adjustments for working capital and other related items. In connection with the sale of Harlequin, Torstar indemnified the Purchaser for costs and fees related to certain matters including certain tax and pre-existing litigation matters and estimated the exposure under these indemnities and recorded a contingent liability in respect of these matters. The gains of $0.5 million and $0.4 million from discontinued operations in the second quarters of 2017 and 2016 reflect favourable revisions to estimates of the amounts of these provisions in respect of tax recoveries and insurance reserves.
Net loss attributable to equity shareholders Our net loss was $7.0 million ($0.09 per share) in the second quarter of 2017. This compares to a net loss of $23.9 million ($0.30 per share) in the second quarter of 2016.
Our net loss was $31.3 million ($0.39 per share) in the first six months of 2017. This compares to a net loss of $77.4 million ($0.96 per share) in the first six months of 2016.
Segment Operating Results – Metroland Media Group
Revenues Metroland Media Group revenues were down $7.4 million or 6.8% in the second quarter and down $14.9 million or 7.6% in the first six months of 2017. Local advertising revenues, on a combined print and digital basis, which represents the largest portion of Metroland Media Group's advertising revenues, were down 10% in the second quarter and first six months of 2017. Within the combined print and digital local advertising revenues, the real estate category although showing improvement through the quarter continued to be much weaker than the local retail category where declines were more moderate. National advertising revenues, on a combined print and digital basis, which represents a less significant portion of Metroland Media Group's overall revenue, were down 18% and 25% in the second quarter and first six months of 2017. Flyer distribution revenues which represented 33% and 32% of Metroland Media Group's total revenue in the second quarter and first six months of 2017 were relatively stable, down 2.5% and 0.8% in the second quarter and first six months of 2017.
Digital revenues at Metroland Media Group were down 4.2% and 6.1% in the second quarter and first six months of 2017 relative to the comparable periods in the prior year as a result of continued strong growth in local digital advertising revenue which was more than offset by lower revenues from WagJag and other digital properties.
Salaries and benefits costs Metroland Media Group’s salaries and benefits costs were down $4.2 million in the second quarter and down $7.6 million in the first six months of 2017, which included $3.6 million in the second quarter and $7.0 million in the first six months of 2017 of cost savings from restructuring initiatives.
Other operating costs Metroland Media Group’s other operating costs were down $2.0 million in the second quarter and down $4.7 million in the first six months of 2017, as a result of lower circulation, lower newsprint consumption and other cost reductions.
Adjusted EBITDA Metroland Media Group adjusted EBITDA was $12.7 million in the second quarter and $14.6 million in the first six months of 2017 down from adjusted EBITDA of $14.0 million in the second quarter and $17.2 million in the first six months of 2016 primarily reflecting the above noted revenue declines which were largely offset by cost reductions.
Operating profit Metroland Media Group operating profit was $5.5 million in the second quarter and $0.5 million in the first six months of 2017 compared to an operating profit of $6.2 million in the second quarter and $3.7 million in the first six months of 2016 reflecting lower adjusted EBITDA as well as lower restructuring and other charges relative to the second quarter of 2016 and lower adjusted EBITDA and higher amortization and depreciation relative to the first six months of 2016.
Segment Operating Results – Star Media Group
Revenue Star Media Group revenues were down $9.6 million or 13% in the second quarter and down $20.0 million or 14% in the first six months of 2017 primarily reflecting lower print advertising revenues. The decline in print advertising revenues in the second quarter and first six months was largely the result of weakness in national advertising revenues at both the Toronto
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 11 TORSTAR - Management's Discussion and Analysis
Star and at Metro as well as lower local advertising revenues at the Toronto Star. In addition, subscriber revenues at the Toronto Star declined 2.8% and 5.0% in the second quarter and first six months of 2017.
Star Media Group’s digital revenues were down 15.3% and 12.4% in the second quarter and first six months of 2017 largely reflecting lower revenues related to Toronto Star Touch, partially offset by growth in other properties including thestar.com.
Salaries and benefits costs Star Media Group salaries and benefits costs were down $8.0 million (27%) in the second quarter and down $17.0 million (28%) in the first six months of 2017 reflecting the benefit of savings from restructuring initiatives, including the closure of the Vaughan Printing Facility and lower staffing costs associated with Toronto Star Touch.
Other operating costs Star Media Group’s other operating costs were down $2.9 million in the second quarter and down $7.8 million in the first six months of 2017 reflecting lower costs for Toronto Star Touch, lower circulation and distribution costs, lower newsprint consumption and other cost reductions partially offset by incremental costs associated with outsourcing the printing of the Toronto Star effective the third quarter of 2016.
Adjusted EBITDA Star Media Group segmented adjusted EBITDA was $0.8 million in the second quarter of 2017, an improvement of $1.5 million from the second quarter of 2016. The improvement in adjusted EBITDA in the second quarter of 2017 reflects lower revenues which were more than offset by $1.2 million of lower net costs related to Toronto Star Touch, $3.5 million of net savings from restructuring initiatives and other cost reductions.
Star Media Group segmented adjusted EBITDA loss was $2.1 million in the first six months of 2017, an improvement of $4.8 million from the comparable period in 2016. The improvement in adjusted EBITDA reflects lower revenues which were more than offset by $4.9 million of lower net costs related to Toronto Star Touch, $7.7 million of net savings from restructuring initiatives and other cost reductions.
Operating profit (loss) Star Media Group operating loss was $9.9 million in the second quarter and $20.5 million in the first six months of 2017, compared to a operating losses of $12.7 million in the second quarter and $58.1 million in the first six months of 2016. These improvements were the result of higher adjusted EBITDA, lower restructuring and other charges and lower amortization and depreciation expenses.
Segment Operating Results – Digital Ventures
Revenues Digital Ventures revenues were up $1.2 million or 6.7% in the second quarter and up $1.1 million or 3.1% in the first six months of 2017, as revenue growth of $2.0 million in the second quarter and $3.5 million in the first six months of 2017 at VerticalScope was offset by lower revenues from Workopolis. Our proportionate share of VerticalScope's revenue in the second quarter and first six months of 2017 was $11.3 million and $21.1 million which represented growth of 22% and 20% (17% and 19% growth in USD) relative to the second quarter and first six months of 2016 resulting from a combination of organic revenue growth and growth from acquisitions.
Salaries and benefits costs Digital Ventures’ salaries and benefits costs were down $0.1 million in the second quarter and down $0.2 million in the first six months of 2017 reflecting lower salary and benefit costs at Workopolis, offset by increased salary and benefit costs at VerticalScope.
Other operating costs Digital Ventures' other operating costs were down $0.3 million in the second quarter and down $0.6 million in the first six months of 2017 reflecting lower costs at Workopolis and eyeReturn, partially offset by increased costs at VerticalScope reflecting organic and acquisition related growth in the business.
Adjusted EBITDA Digital Ventures adjusted EBITDA was up $1.5 million in the second quarter and up $1.7 million in the first six months of 2017 as growth of $1.6 million and $2.5 million at VerticalScope was partially offset by declines at Workopolis. Our proportionate share of VerticalScope's adjusted EBITDA was $6.4 million and $11.6 million in the second quarter and first six months of 2017 representing increases of 32% and 27% respectively (27% and 26% growth in USD) over the second quarter and first six months of 2016. Relative to the prior year, adjusted EBITDA at Workopolis decreased $0.2 million and TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 12 TORSTAR - Management's Discussion and Analysis
$0.6 million in the second quarter and first six months of 2017 while adjusted EBITDA at eyeReturn was consistent with the prior year in both the second quarter and year to date.
Operating profit (loss) Digital Ventures' operating loss was $1.0 million in the second quarter and $6.8 million in the first six months of 2017, compared to operating losses of $22.9 million in the second quarter and $47.2 million in the first six months of 2016. The improvement in 2017 was the result of the above noted improvements in adjusted EBITDA as well as significant decreases in amortization and depreciation expense.
4. Outlook The outlook for our business in the balance of 2017
Metroland Media Group and Star Media Group continued to face a challenging print advertising market in the quarter resulting from ongoing shifts in spending by advertisers, particularly in the national advertising category while declines were more moderate in the local advertising categories. It is difficult to predict if these trends will continue in the balance of 2017 although trends improved somewhat towards the end of the quarter. We currently expect that flyer distribution revenues will experience moderate declines in the balance of 2017. Subscriber revenues declined moderately in the first six months of 2017 and this trend is expected to continue in the balance of the year. Overall digital revenue at Metroland Media Group and Star Media Group in the balance of the year is expected to continue to benefit from continued growth at thestar.com and in local digital advertising at the Metroland community sites partially offset by expected continued declines in other areas.
Within the Digital Ventures segment, the quarter to quarter trend in revenue growth from a combination of acquisitions and organic revenue growth at VerticalScope experienced in the first six months of 2017 is expected to continue in the balance of the year. In addition, the revenue trends experienced at Workopolis and eyeReturn in the first six months of 2017 are expected to continue through the balance of the year.
Cost reduction will remain an important area of focus for us in the balance of 2017. Net savings related to restructuring initiatives undertaken through the end of the second quarter of 2017 were $18.0 million in the first six months of 2017 and included savings associated with the outsourcing of printing the Toronto Star as well as lower investment in Toronto Star Touch. The pace of year over year cost savings is expected to moderate in the second half of 2017 with net savings related to restructuring initiatives already undertaken expected to be $12.5 million in the balance of the year ($5.1 million in Metroland Media Group and $7.4 million in the Star Media Group). These savings include the benefit of our planned migration from Toronto Star Touch to the new universal app effective August 1, 2017 where development and operating costs are expected to be very modest.
In addition, from a cash flow perspective, we expect full year contributions to our registered defined benefit pension plans in 2017 to be reduced to $10 million down from our previous estimate of $18 million. Furthermore, we currently expect full year 2018 funding into these plans will remain at approximately $10 million. This expected lower level of funding is associated with the draft results of new pension plan valuations completed as at December 31, 2016 and the impact of new interim solvency relief measures concerning funding requirements announced by the Ontario Government on June 29, 2017.
5. Liquidity and Capital Resources A discussion of our cash flow, liquidity and other disclosures
We use cash and cash equivalents on hand and the cash generated by our operations to fund working capital, capital expenditures, distributions to shareholders, and acquisitions. Based on our current and anticipated level of operations, it is expected that our future cash flows from operating activities, combined with existing cash and cash equivalents, will be adequate to cover forecasted cash requirements through the end of 2018, acknowledging that beyond 2018, our cash requirements will likely be determined by the new defined benefit pension funding framework that the Ontario Government plans to introduce sometime in 2018 (refer to further discussion in Section 6- Employee Benefit Obligations).
In the second quarter of 2017 we used $6.2 million of cash in operating activities, we used $2.8 million of cash in investing activities and we used $2.1 million of cash in financing activities. Total cash and cash equivalents and restricted cash was $57.4 million at June 30, 2017.
Year to date we used $17.8 million of cash in operating activities, we used $5.1 million of cash from investing activities and we used $4.0 million of cash in financing activities.
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 13 TORSTAR - Management's Discussion and Analysis
At June 30, 2017 we had $9.1 million of restricted cash held as collateral for outstanding standby letters of credit ($7.7 million of which is in respect of a standby letter of credit supporting an unfunded executive retirement plan liability).
Operating Activities During the second quarter of 2017, we used $6.2 million of cash in operating activities including funding of $7.9 million of contributions to employee benefit plans and an increase of $6.5 million in non-cash working capital. [The increase in non-cash working capital in the first six months of 2017 was largely related to payments in respect of restructuring provisions.] In the second quarter of 2016, operating activities provided cash of $0.4 million including funding of $5.1 million of contributions to employee benefit plans partially offset by a $3.0 million decrease in non-cash working capital. The decrease in non-cash working capital in the second quarter of 2016 was positively impacted by the large restructuring provision related to the transition of printing of the Toronto Star.
During the first six months of 2017, we used $17.8 million of cash in operating activities including funding of $12.0 million of contributions to employee benefit plans and a $10.0 million increase non-cash working capital. The increase in non- cash working capital in the first six months of 2017 was largely related to payments in respect of restructuring provisions. In the first six months of 2016, we used $19.9 million of cash in operating activities including funding of $9.4 million of contributions to employee benefit plans and a $3.5 million increase in restricted cash. Non-cash working capital decreased by $13.7 million.
Investing Activities During the second quarter and first six months of 2017, we used $2.8 million and $5.1 million in investing activities substantially all of which was for additions to property, plant and equipment and intangible assets (excluding Torstar’s proportionate share of additions related to its joint ventures and 56% interest in VerticalScope).
During the second quarter of 2016, we used $3.5 million of cash in investing activities primarily in additions to property, plant and equipment and intangible assets (excluding Torstar’s proportionate share of additions related to its joint ventures and 56% interest in VerticalScope). In first six months of 2016, we generated $19.3 million of cash from investing activities. This included the receipt of $22.8 million in escrowed cash related to the sale of Harlequin, and the receipt of $5.5 million from the sale of a Metroland Media Group real estate property. These receipts were offset in part by $8.2 million in additions to property, plant and equipment and intangible assets (excluding Torstar’s proportionate share of additions related to its joint ventures and 56% interest in VerticalScope).
Financing Activities During the second quarter of 2017 and 2016 respectively, we used $2.1 million and $5.3 million of cash for financing activities which was primarily used for the payment of dividends. During the first six months of 2017 and 2016 respectively, we used $4.0 million and $10.4 million of cash for financing activities which was primarily used for the payment of dividends. In the second quarter and first six months, dividends per share per quarter were 2.5 cents in 2017 and 6.5 cents in 2016.
Outstanding Share and Share Option Information As at June 30, 2017 Torstar had 9,826,215 Class A voting shares and 70,985,336 Class B non-voting shares outstanding. More information on Torstar’s share capital is provided in Note 14 of the Condensed Consolidated Financial Statements.
As at June 30, 2017, Torstar had 7,411,675 options to purchase Class B non-voting shares outstanding to executives. More information on Torstar’s share option plan is provided in Note 15 of the Condensed Consolidated Financial Statements.
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 14 TORSTAR - Management's Discussion and Analysis 6. Employee Benefit Obligations A summary of our employee benefit obligations
During the second quarter of 2017, we recorded, through other comprehensive income, an actuarial loss of $35.1 million related to the defined benefit pension and the other post employment benefit plans. These losses were estimated by management and primarily reflect a combination of an increase in employee benefit liabilities resulting from a decrease in long-term interest rates only partially offset by higher than anticipated investment returns. Year to date, we recorded, through other comprehensive income, actuarial losses of $54.0 million resulting from a decrease in long-term interest rates partially offset by higher than anticipated investment returns.
Required funding of our registered defined benefit pension plans for 2015 through 2017 was based on actuarial reports for the most significant group of our registered defined benefit pension plans (in terms of assets and obligations) completed as of December 31, 2013. Based on these valuations, we had an estimated solvency deficit of $45.3 million. Based on the December 31, 2013 solvency report, a 100 basis point change in the discount rate used to calculate solvency liabilities would result in a change in liabilities of approximately $119 million. The blended discount rate of the most significant group of our registered defined benefit pension plans which management uses to calculate the estimated solvency deficit decreased by 0.11% to 2.95% at June 30, 2017 from December 31, 2016. Given the change in the discount rate, combined with asset returns from December 31, 2013 through to June 30, 2017, management estimates that the solvency deficit for these plans at June 30, 2017 was approximately $120 million.
Subsequent to December 31, 2013, we have taken steps to immunize approximately one quarter of the registered defined benefit pension plan liabilities and accordingly, management now estimates that a 100 basis point movement in the discount rate used to estimate solvency liabilities would result in an approximate $70 million change in the remaining solvency liabilities.
We are currently in the process of finalizing actuarial valuations for the most significant group of our registered defined benefit pension plans as of December 31, 2016. These valuations were to form the basis on which funding requirements for these plans were to be set for 2018 through 2020. However, there have been two key developments which will impact future funding of these plans. First, on May 19, 2017, the Ontario government announced that it is "implementing a new framework in respect of defined benefit pension plans" which will include a new funding framework. (http://www.fin.gov.on.ca/ en/pension/solvency/).
According to the announcement, highlights of the new funding framework for defined benefit pension plans include: requiring funding on enhanced going concern basis; changes to the going concern funding rules include shortening the amortization period from 15 years to 10 years for funding a shortfall in the plan and consolidating special payment requirements into a single schedule, requiring funding of a reserve within the plan, called a Provision for Adverse Deviation or PfAD and requiring funding on a solvency basis in the event that a plan's funded status falls below 85 per cent (and not requiring funding on a solvency basis where the plan's funded status is above 85 percent or higher).
While there can be no certainty as to the outcome of the Ontario Government's planned implementation of the new framework, it could significantly reduce our annual minimum required funding in respect of our defined benefit pension plans relative to the existing funding rules.
Second, in June 2017, the Ontario Government issued interim solvency relief measures applicable to December 31, 2016 actuarial valuations (https://www.ontario.ca/laws/regulation/r17225) which permit the implementation of new solvency funding schedules required as a result of these actuarial valuations to be deferred for 24 months from January 1, 2017 to January 1, 2019.
Based on the draft results of our actuarial valuations as at December 31, 2016, as well as the impact of interim solvency relief measures applicable to December 31, 2016 actuarial valuations, we currently anticipate that minimum required funding in respect of registered defined benefit pension plans will be approximately $10 million for the full year 2017, down $8 million from our previous estimate of $18 million. In addition we currently anticipate full year 2018 funding into our registered defined benefit pension plans to be approximately $10 million.
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 15 TORSTAR - Management's Discussion and Analysis 7. Critical Accounting Policies and Estimates A description of accounting estimates and judgements that are critical to determining our financial results, and changes to accounting policies
Accounting Policies The accounting policies adopted in the preparation of the Condensed Consolidated Financial Statements are consistent with those followed in the preparation of the annual consolidated financial statements for the year ended December 31, 2016, except for the adoption of minor amendments and interpretations effective January 1, 2017. These amendments and interpretations had little or no impact on our Condensed Consolidated Financial Statements. We have not early adopted any standard, interpretation or amendment that has been issued but is not yet effective.
Accounting Estimates and Judgements The Condensed Consolidated Financial Statements are prepared in accordance with IFRS, which require management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements. There have been no significant changes in our critical accounting estimates and judgements from what was previously disclosed in the Annual MD&A.
8. Recent Accounting Pronouncements A discussion of recent IFRS developments that will affect our business The International Accounting Standards Board (“IASB”) continues to issue new and revised IFRS. A listing of the changes in IFRS is included in Note 2(t) in Torstar’s December 31, 2016 Consolidated Financial Statements.
In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers which specifies how and when an entity will recognize revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The standard provides a single, principles based five-step model to be applied to all contracts with customers. We do not anticipate early adoption and we plan to adopt the standard on its effective date of January 1, 2018.
Through the end of the second quarter of 2017, we have reviewed substantially all of our internal sources of revenue and to date, we have not identified any areas for which the recognition of revenue will change significantly with the adoption of the new standard. We are currently performing a review of underlying contracts to confirm compliance with IFRS 15. We are currently continuing to assess the potential impact of IFRS 15 on our investments in joint ventures and our investments in associated businesses.
In July 2014, the IASB issued a finalized version of IFRS 9 Financial Instruments which contains accounting requirements for financial instruments. Through the end of the second quarter, we have evaluated the application of IFRS 9 to Torstar and we expect that our portfolio investments will be classified as fair value through other comprehensive income and our hedge of the net investment in VerticalScope will be treated as a continuing hedge.
In addition, we also will present additional disclosure upon adoption of both IFRS 9 and IFRS 15.
9. Controls and Procedures A discussion of our disclosure controls and internal controls over financial reporting
There have been no changes in our internal controls over financial reporting that occurred during the interim period ended June 30, 2017, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. Management, under the supervision of, and with the participation of the CEO and CFO, assessed the effectiveness of internal controls over financial reporting, using the 2013 Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework, and based on that assessment concluded that internal controls over financial reporting were effective as at June 30, 2017.
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 16 TORSTAR - Management's Discussion and Analysis
10. Summary of Quarterly Results A summary view of our quarterly financial performance
The following table presents selected financial information for each of the eight most recently completed quarters:
Quarter Ended (in $000’s - except per share Jun 30, Mar 31, Dec 31, Sep 30, Jun 30, Mar 31, Dec 31, Sept 30, amounts) 2017 2017 2016 2016 2016 2016 2015 2015 Revenue $161,757 $138,676 $188,408 $162,098 $177,912 $156,681 $213,749 $185,386 Net Income (loss) from continuing operations ($7,499) ($24,397) $683 $1,081 ($24,268) ($53,532) ($233,413) ($164,834)
Per Class A voting and Class B non-voting share Basic and Diluted ($0.10) ($0.30) $0.01 $0.01 ($0.30) ($0.66) ($2.90) ($2.04)
Net Income (loss) attributable to equity shareholders ($6,988) ($24,278) $1,264 $1,432 ($23,923) ($53,523) ($234,817) ($164,337)
Per Class A voting and Class B non-voting share Basic and Diluted ($0.09) ($0.30) $0.01 $0.02 ($0.30) ($0.66) ($2.91) ($2.05)
The summary of quarterly results includes the impact of the cyclical nature of revenues and operating profit. The second and fourth quarters are generally the strongest with the first and third quarter being the softest. Restructuring and other charges have also affected the level of net income for several quarters. Reported on a segmented basis, restructuring and other charges were $4.9 million and $6.2 million and in the first and second quarters of 2017 and $31.8 million, $6.9 million, $3.7 million and $4.4 million in the first, second, third and fourth quarters of 2016 respectively and, $4.2 million and $7.5 million in the third and fourth quarters of 2015, respectively. Additionally, losses on impairment of assets (reported on a segmented basis) of $3.0 million were recorded in the first quarter of 2017 and $7.5 million in the fourth quarter of 2016. In 2015, losses on impairment of assets of $147.8 million and $213.3 million were recorded in the third and fourth quarters respectively.
In the third quarter of 2015, we acquired a 56% interest in VerticalScope. In connection with the investment in VerticalScope, and consistent with the general methodology VerticalScope uses when making its acquisitions, we allocated the difference between the fair value of the purchase price paid and the book value of the net assets of VerticalScope to customer relationships, technology, domain names, acquired content and goodwill. The amortization periods for these intangible assets generally range from 5-10 years, with the exception of acquired content which, consistent with VerticalScope’s accounting policy, is amortized over one year. Given the relatively large value allocated to acquired content (U.S. $60.6 million) and the one year amortization period associated with it, we have incurred larger amortization charges related to these intangible assets through the end of July 2016.
11. Reconciliation and Definition of Non-IFRS Measures A description and reconciliation of certain non-IFRS and additional IFRS measures used by management In addition to operating profit, an additional IFRS measure, as presented in the consolidated statement of income (loss), management uses the following non-IFRS measures: segmented revenue, adjusted EBITDA (and where applicable segmented adjusted EBITDA), operating earnings (loss) (and where applicable segmented operating earnings (loss)) and adjusted earnings (loss) per share, as measures to assess the consolidated performance and the performance of the reporting units and business segments.
Segmented revenue Segmented revenue is calculated in the same manner as operating revenue in the Condensed Consolidated Financial Statements, except that it is calculated using total segment results which includes our proportionately consolidated share of revenues from joint ventures and our 56% interest in VerticalScope. Management of each segment is accountable for the revenues, including the proportionately consolidated share of revenues from joint venture operations. We believe that segmented revenue is a useful measure for investors as it is a measure of the revenues for which management of each segment is accountable. The intent of segmented revenue is to provide additional useful information to investors, analysts
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 17 TORSTAR - Management's Discussion and Analysis and readers of our financial statements. The measure does not have any standardized meaning under IFRS and accordingly may not be comparable to measures used by other companies.
Adjusted EBITDA/Segmented Adjusted EBITDA As a result of the increasing significance of segmented financial results from our investment in VerticalScope relative to our total segmented financial results, effective the third quarter of 2016 we have revised our definition of adjusted EBITDA to exclude share based compensation. We made this change because of the relative significance and variability of this non- cash expense in our proportionate share of VerticalScope's financial results and we believe that the exclusion of this non- cash expense from adjusted EBITDA provides greater insight for investors, analysts and readers in regards to our segmented earnings excluding non-cash expenses. We have accordingly restated prior period comparative figures.
Management believes that adjusted EBITDA is an important proxy for the amount of cash generated by our ongoing operations (or by a reporting unit or business segment) to generate liquidity to fund future capital needs and we use this metric for this purpose. Adjusted EBITDA is not the actual cash provided by operating activities and is not a recognized measure of financial performance under IFRS. We calculate adjusted EBITDA as operating revenue, less salaries and benefits and other operating costs, as presented on the consolidated statement of income (loss), and exclude share based compensation, restructuring and other charges and impairment of assets. Share based compensation is eliminated as it is a non-cash expense that fluctuates significantly from period to period, in particular for VerticalScope as a result of industry compensation practices. Restructuring and other charges and impairment of assets are eliminated as these activities are not related to ongoing operations as of the end of the period. The exclusion of impairment of assets also eliminates the non-cash impact. Adjusted EBITDA is also used by investors and analysts for valuation purposes. The intent of adjusted EBITDA is to provide additional useful information to investors, analysts and readers of our financial statements. The measure does not have any standardized meaning under IFRS and accordingly may not be comparable to measures used by other companies (including calculating EBITDA on an adjusted basis to exclude restructuring and other charges, impairment of assets and share based compensation). Segmented adjusted EBITDA is calculated in the same manner described above, except that it is calculated using total segment results including proportionately consolidated results for joint ventures and our 56% interest in VerticalScope for which management is accountable.
Operating earnings (loss)/Segmented operating earnings (loss) Operating earnings (loss) is used by management to represent the results of ongoing operations inclusive of amortization and depreciation. We use operating earnings (loss) as a measure of the amount of income (loss) generated by our ongoing operations (or by a reporting unit or business segment) after giving effect to amortization and depreciation. We believe this metric is also useful for investors for this purpose. We calculate operating earnings (loss) as operating revenue less salaries and benefits, other operating costs, share based compensation and amortization and depreciation. Operating earnings (loss) excludes restructuring and other charges and impairment of assets. Restructuring and other charges and impairment of assets are eliminated as these activities are not related to ongoing operations as of the end of the period. Our method of calculating operating earnings (loss) (including calculating operating earnings (loss) on an adjusted basis to exclude restructuring and other charges and impairment of assets) may differ from other companies and accordingly may not be comparable to measures used by other companies. The intent of operating earnings (loss) is to provide additional useful information to investors, analysts and readers of our financial statements. The measure does not have any standardized meaning under IFRS, is not a recognized measure of financial performance under IFRS, and accordingly may not be comparable to measures used by other companies. Segmented operating earnings (loss) is calculated in the same manner described above, except that it is calculated using total segment results including proportionately consolidated operating earnings for joint ventures and our 56% interest in VerticalScope for which management is accountable.
The following is a reconciliation of adjusted EBITDA and operating earnings (loss) (and segmented adjusted EBITDA/ segmented operating earnings (loss) - as applicable) with operating profit (loss) (segmented operating profit (loss) - as applicable). Adjusted EBITDA, segmented adjusted EBITDA, operating earnings (loss) and segmented operating earnings (loss) are regularly reported to the chief operating decision maker and correspond to the definitions used in our historical discussions.
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 18 TORSTAR - Management's Discussion and Analysis
Segmented Per Consolidated Statement of Loss Second Quarter Second Quarter Second Quarter Second Quarter 2017 2016 2017 2016 Operating loss ($8,052) ($32,068) ($8,013) ($10,165) Add: Restructuring and other charges 6,211 6,942 6,070 6,892 Operating earnings (loss) ($1,841) ($25,126) ($1,943) ($3,273) Add: Share based compensation 644 651 Add: Amortization and depreciation 19,196 40,686 12,417 13,187 Adjusted EBITDA $17,999 $16,211 $10,474 $9,914
Segmented Per Consolidated Statement of Loss
Six months ended Six months ended Six months ended Six months ended June 30, 2017 June 30, 2016 June 30, 2017 June 30, 2016 Operating loss ($31,430) ($106,825) ($27,118) ($62,051) Add: Restructuring and other charges 11,090 38,742 10,553 38,692 Add: Impairment of assets 3,000 Operating earnings (loss) ($17,340) ($68,083) ($16,565) ($23,359) Add: Share based compensation 972 1,049 Add: Amortization and depreciation 36,366 82,539 22,482 26,452 Adjusted EBITDA $19,998 $15,505 $5,917 $3,093
Adjusted earnings (loss) per share Adjusted earnings (loss) per share is used by management to represent the per share earnings of results of our ongoing operations (or by a reporting unit or business segment) and is not a recognized measure of financial performance under IFRS. We believe this metric is also useful for investors for this purpose. We calculate adjusted earnings (loss) per share as earnings (loss) per share from continuing operations less the per share effect of restructuring and other charges, impairment of assets, non-cash foreign exchange, other income (expense) and change in deferred taxes. Restructuring and other charges and impairment of assets are eliminated as these activities are not related to ongoing operations as of the end of the period. Non-cash foreign exchange, other income (expense) and changes in deferred taxes are eliminated as these are not related to routine operating activities. The intent of presenting adjusted earnings (loss) per share is to provide additional useful information to investors, analysts and readers of our financial statements. Our method of calculating adjusted earnings (loss) per share may differ from other companies and accordingly may not be comparable to measures used by other companies. The measure does not have any standardized meaning under IFRS, is not a recognized measure of financial performance under IFRS, and accordingly may not be comparable to measures used by other companies. The following is a reconciliation of adjusted earnings per share to earnings per share.
Three months ended June 30 Six months ended June 30 2017 2016 2017 2016 Adjusted earnings (loss) per share ($0.03) ($0.13) ($0.24) ($0.53)
• Restructuring and other charges (0.08) (0.08) (0.14) (0.47)
• Non-cash foreign exchange 0.01 0.02
• Other income (expense) 0.02
• Change in current and deferred taxes (0.09) 0.02
Earnings (loss) per share from continuing operations ($0.10) ($0.30) ($0.40) ($0.96)
Operating profit (loss)/Segmented operating profit (loss) Operating profit (loss) is an additional IFRS measure. Management uses operating profit (loss) to measure the results of operations inclusive of impairments and restructuring and other charges. Operating profit (loss) appears in our consolidated statement of income (loss). We believe that operating profit (loss) provides additional useful information to investors, analysts and readers of our financial statements. The measure does not have any standardized meaning under IFRS and accordingly may not be comparable to measures used by other companies. Our method of calculating operating profit (loss) may differ from other companies and accordingly may not be comparable to measures used by other companies. Segmented operating profit (loss) is calculated in the same manner described above, except that it is calculated using total segment results including proportionately consolidated results for joint ventures and our 56% interest in VerticalScope for which management is accountable.
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 19 TORSTAR - Management's Discussion and Analysis
12. Risks and Uncertainties Risks and uncertainties facing our business
We are subject to a number of risks and uncertainties, which are set forth in our Annual MD&A which is incorporated herein by reference, and a copy of which is available on our website at www.torstar.com and on SEDAR at www.sedar.com. A risk is the possibility that an event might happen in the future that could have a negative effect on our financial condition, financial performance or business. The actual effect of any event on our business could be materially different from what is anticipated. The description of risks in the Annual MD&A does not include all possible risks.
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 20 TORSTAR - Condensed Consolidated Financial Statements (Unaudited)
Torstar Corporation Consolidated Statement of Financial Position (Thousands of Canadian Dollars) (Unaudited) As at As at June 30, 2017 December 31, 2016 Assets Current: Cash and cash equivalents $48,379 $75,374 Restricted cash (note 4) 9,056 11,847 Receivables 95,792 116,487 Inventories 4,086 4,829 Prepaid expenses 7,338 4,467 Prepaid and recoverable income taxes 10,460 9,271 Total current assets 175,111 222,275 Investments in joint ventures (note 6) 23,200 27,463 Investments in associated businesses (note 7) 151,385 157,897 Property, plant and equipment (note 8) 58,071 61,969 Intangible assets (note 9) 41,303 55,945 Goodwill 8,133 8,133 Other assets 12,529 12,414 Employee benefits (note 13) 7,073 Deferred income tax assets (note 10) 11,432 11,322 Total assets $481,164 $564,491 Liabilities and Equity Current: Accounts payable and accrued liabilities $79,834 $101,133 Derivative financial instruments (note 11) 136 472 Provisions (note 12) 21,726 28,473 Income tax payable 7,252 7,212 Total current liabilities 108,948 137,290 Provisions (note 12) 7,440 11,104 Other liabilities 6,319 7,616 Employee benefits (note 13) 120,116 77,407 Deferred income tax liabilities 5,114 4,904 Equity: Share capital (note 14) 402,976 402,814 Contributed surplus 21,076 20,797 Accumulated deficit (191,913) (102,599) Accumulated other comprehensive income (note 16) 1,236 5,176 Total equity attributable to equity shareholders 233,375 326,188 Minority interests (148) (18) Total equity 233,227 326,170 Total liabilities and equity $481,164 $564,491 (see accompanying notes)
ON BEHALF OF THE BOARD
(Signed) (Signed) John Honderich Paul Weiss Director Director
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 1 TORSTAR - Condensed Consolidated Financial Statements (Unaudited)
Torstar Corporation Consolidated Statement of Loss (Thousands of Canadian Dollars except per share amounts) (Unaudited) Three months ended Six months ended June 30 June 30 2017 2016 2017 2016
Operating revenue $161,757 $177,912 $300,433 $334,593
Salaries and benefits (66,456) (78,779) (131,199) (156,002) Other operating costs (84,827) (89,219) (163,317) (175,498) Amortization and depreciation (notes 8 and 9) (12,417) (13,187) (22,482) (26,452) Restructuring and other charges (note 12) (6,070) (6,892) (10,553) (38,692) Operating loss (8,013) (10,165) (27,118) (62,051) Interest and financing costs (note 11) (575) (773) (1,137) (1,547) Foreign exchange 1,003 3 158 1,537 Income (loss) from joint ventures (note 6) 367 28 (2,449) 581 Loss from associated businesses (note 7) (302) (15,961) (2,497) (33,193) Other income (note 17) 21 47 1,273 (7,499) (26,868) (32,996) (93,400) Income and other taxes recovery (note 10) 2,600 1,100 15,600 Net loss from continuing operations (7,499) (24,268) (31,896) (77,800) Income from discontinued operations 500 400 500 400 Net loss ($6,999) ($23,868) ($31,396) ($77,400) Attributable to: Equity shareholders ($6,988) ($23,923) ($31,266) ($77,446) Minority interests ($11) $55 ($130) $46
Net loss attributable to equity shareholders per Class A (voting) and Class B (non-voting) share (note 14(b)): Basic and Diluted: From continuing operations ($0.10) ($0.30) ($0.40) ($0.96) From discontinued operations $0.01 $0.01 ($0.09) ($0.30) ($0.39) ($0.96) (see accompanying notes)
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 2 TORSTAR - Condensed Consolidated Financial Statements (Unaudited)
Torstar Corporation Consolidated Statement of Comprehensive Loss (Thousands of Canadian Dollars) (Unaudited) Three months ended Six months ended June 30 June 30 2017 2016 2017 2016
Net loss ($6,999) ($23,868) ($31,396) ($77,400)
Other comprehensive income (loss) (“OCI”) that are or may be reclassified subsequently to net income (loss): Unrealized foreign currency translation adjustment (“CTA”) (no income tax effect) 15 (3) 21 50 Unrealized foreign currency translation adjustment for associated businesses (no income tax effect) (note 7) (2,869) 163 (3,791) (8,992) Net movement on available-for-sale financial assets (no income tax effect) (130) 5 (170) (129)
Unrealized gain (loss) on hedge of net investment (87) 5,777 Income tax effect (800)
(2,984) 78 (3,940) (4,094)
Other comprehensive income (loss) (“OCI”) that will not be reclassified subsequently to net income (loss):
Actuarial loss on employee benefits (no income tax effect) (note 13) (35,110) (44,140) (54,027) (77,780) Actuarial gain (loss) on employee benefits for associated businesses (no income tax effect) (note 7) (366) (544) 17 (2,669) (35,476) (44,684) (54,010) (80,449)
Total other comprehensive loss, net of tax ($38,460) ($44,606) ($57,950) ($84,543)
Comprehensive loss, net of tax ($45,459) ($68,474) ($89,346) ($161,943) Attributable to: Equity shareholders ($45,448) ($68,529) ($89,216) ($161,989) Minority interests ($11) $55 ($130) $46 (see accompanying notes)
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 3 TORSTAR - Condensed Consolidated Financial Statements (Unaudited)
Torstar Corporation Consolidated Statement of Changes in Equity (Thousands of Canadian Dollars) (Unaudited) Accumulated other Total comprehensive attributable to Share Contributed Accumulated income (loss) equity Minority capital surplus deficit (“AOCI”) shareholders interests Total equity
At December 31, 2016 $402,814 $20,797 ($102,599) $5,176 $326,188 ($18) $326,170
Net loss for the period (31,266) (31,266) (130) (31,396)
Other comprehensive loss (54,010) (3,940) (57,950) (57,950)
Total comprehensive loss (85,276) (3,940) (89,216) (130) (89,346)
Dividends (note 14) 69 (4,038) (3,969) (3,969) Issue of share capital – other (note 14) 93 93 93 Share-based compensation expense 279 279 279
At June 30, 2017 $402,976 $21,076 ($191,913) $1,236 $233,375 ($148) $233,227
At December 31, 2015 $402,500 $19,858 ($7,560) $3,121 $417,919 $1,818 $419,737 Net income (loss) for the period (77,446) (77,446) 46 (77,400)
Other comprehensive loss (80,449) (4,094) (84,543) (84,543) Total comprehensive income (loss) (157,895) (4,094) (161,989) 46 (161,943)
Dividends (note 14) 135 (10,479) (10,344) (10,344) Issue of share capital – other (note 14) 145 145 145 Share of associate paid in capital (note 7) (1,614) (1,614) (1,614) Share-based compensation expense 378 378 378
Distribution (1,500) (1,500)
At June 30, 2016 $402,780 $20,236 ($177,548) ($973) $244,495 $364 $244,859 (see accompanying notes)
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 4 TORSTAR - Condensed Consolidated Financial Statements (Unaudited)
Torstar Corporation Consolidated Statement of Cash Flows (Thousands of Canadian Dollars) (Unaudited) Three months ended Six months ended June 30 June 30 2017 2016 2017 2016 Cash was provided by (used in) Operating activities ($6,160) $423 ($17,834) ($19,894) Investing activities (2,757) (3,475) (5,114) 19,276 Financing activities (2,085) (5,279) (4,047) (10,378) Decrease in cash (11,002) (8,331) (26,995) (10,996) Cash, beginning of period 59,381 32,476 75,374 35,141 Cash, end of period $48,379 $24,145 $48,379 $24,145 Operating activities: Net loss from continuing operations ($7,499) ($24,268) ($31,896) ($77,800) Amortization and depreciation (notes 8 and 9) 12,417 13,187 22,482 26,452 Deferred income taxes (note 10) (2,000) (11,500) Loss (income) from joint ventures (note 6) (367) (28) 2,449 (581) Distributions from joint ventures (note 6) 1,814 1,814 Loss from associated businesses (note 7) 302 15,961 2,497 33,193 Dividend from associated businesses (note 7) 194 194 Non-cash employee benefit expense (note 13) 3,816 4,509 7,782 9,721 Employee benefits funding (note 13) (7,888) (5,118) (12,029) (9,422) Gain on sale of assets (1,263) Other (note 18) (2,217) (4,835) (3,965) 937 378 (2,592) (10,672) (30,069) Decrease (increase) in restricted cash (note 4) 2,791 (3,540) Decrease (increase) in non-cash working capital (6,538) 3,015 (9,953) 13,715 Cash provided by (used in) operating activities ($6,160) $423 ($17,834) ($19,894) Investing activities: Additions to property, plant and equipment and intangible assets ($2,820) ($3,182) ($5,052) ($8,186) Received from (investment in) associated businesses (note 7) 63 63 (500) Investment in joint ventures (note 6) (293) (293) Acquisitions and portfolio investments (125) (5) Receipt of escrowed cash from the sale of Harlequin (note 4) 22,750 Proceeds from sale of assets (note 17) 5,509 Other 1 Cash provided by (used in) investing activities ($2,757) ($3,475) ($5,114) $19,276 Financing activities: Dividends paid ($1,983) ($5,199) ($3,969) ($10,344) Other (102) (80) (78) (34) Cash used in financing activities ($2,085) ($5,279) ($4,047) ($10,378) Cash represented by: Cash $15,342 $24,145 $15,342 $24,145 Cash equivalents – short-term deposits 33,037 33,037 Net cash, end of period $48,379 $24,145 $48,379 $24,145 (see accompanying notes)
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 5 TORSTAR - Condensed Consolidated Financial Statements (Unaudited)
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Tabular amounts in thousands of Canadian dollars except per share amounts) (Unaudited)
1. CORPORATE INFORMATION
Torstar Corporation (the "Company") is incorporated under the laws of Ontario, Canada and its Class B (non-voting) shares are publicly traded on the Toronto Stock Exchange. The registered office is located at One Yonge Street, Toronto, Canada. The principal activities of the Company and its subsidiaries are described in note 3.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Preparation
These condensed consolidated financial statements have been prepared in accordance with IFRS as issued by the International Accounting Standards Board (“IASB”) applicable to the preparation of consolidated interim financial statements, including International Accounting Standard (“IAS”) 34.
These condensed consolidated financial statements have been authorized for issue in accordance with a resolution from the Board of Directors on August 1, 2017.
The condensed consolidated financial statements do not include all the information and disclosures required in the annual consolidated financial statements, and accordingly should be read in conjunction with the Company’s annual consolidated financial statements for the year ended December 31, 2016.
Certain comparative figures for previous periods have been restated to conform to the current period presentation.
(b) Changes in accounting standards
The accounting policies adopted in preparation of the condensed consolidated financial statements are consistent with those followed in the preparation of the Company’s annual consolidated financial statements for the year ended December 31, 2016, except for the adoption of minor amendments and interpretations effective January 1, 2017. These amendments and interpretations had little or no impact on the consolidated financial statements. The Company has not early adopted any standard, interpretation or amendment that has been issued but is not yet effective.
3. SEGMENTED INFORMATION
The Company has identified three reportable segments: Metroland Media Group ("MMG"), Star Media Group ("SMG") and Digital Ventures to which Corporate costs have not been allocated. Management of each segment is accountable for the revenues and segment operating profit or loss which includes the proportionately consolidated share of joint venture operations and in the case of the Digital Ventures segment, the Company’s 56% interest in VerticalScope, which as a result of terms in the applicable shareholder’s agreement, is classified as an associated business (rather than being a consolidated subsidiary or classified as a joint venture). The Company owns a significantly higher percentage of VerticalScope relative to its other associated businesses.
Segment profit or loss has been defined as segmented operating profit or loss which corresponds to operating profit or loss as presented in the consolidated statement of income (loss) but includes the proportionately consolidated share of joint venture operations as well as the Company’s 56% interest in VerticalScope. All other income and expense items are managed on a Company basis and are not provided to the chief operating decision-maker (“CODM”) at the operating segment level. Also, assets and liabilities are not provided to the CODM at the operating segment level. These items are therefore not allocated to the operating segments.
MMG publishes The Hamilton Spectator and the Waterloo Region Record daily newspapers and has more than 100 weekly community newspapers, digital properties (including homefinder.ca, save.ca, travelalerts.ca, wagjag.com (“WagJag”) and the regional online sites, such as durhamregion.ca) and flyer distribution operations. MMG also has a number of specialty publications, directories and consumer shows. TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 6 TORSTAR - Condensed Consolidated Financial Statements (Unaudited)
SMG includes the daily Toronto Star newspaper and thestar.com. SMG also includes Free Daily News Group Inc. (“Metro”), which publishes the English-language Metro free daily commuter papers in several of Canada’s largest cities, and through a joint venture arrangement, SMG owns an interest in the Chinese-language Sing Tao Daily and its related publications in Toronto, Vancouver and Calgary. SMG also includes wheels.ca, toronto.com, other specialty publications and magazines and distribution services. SMG also included Toronto Star Touch until July 31, 2017.
Digital Ventures includes the Company's 56% interest in VerticalScope, eyeReturn Marketing Inc. and the Company’s 50% interest in workopolis.com (“Workopolis”).
Adjustments Per and Consolidated Three months ended Digital Eliminations Statement of June 30, 2017 MMG SMG Ventures Corporate Total ¹ Loss Operating revenue $100,793 $61,621 $18,358 $180,772 ($19,015) $161,757 Salaries and benefits (44,027) (21,374) (6,140) ($1,487) (73,028) 6,572 (66,456) Other operating costs (44,227) (39,480) (5,763) (919) (90,389) 5,562 (84,827) Amortization and depreciation (3,793) (8,086) (7,317) (19,196) 6,779 (12,417) Restructuring and other charges (3,265) (2,604) (142) (200) (6,211) 141 (6,070) Reportable segment operating profit (loss) $5,481 ($9,923) ($1,004) ($2,606) ($8,052) $39 ($8,013) Interest and financing costs (575) Foreign exchange 1,003 Income from joint ventures 367 Loss from associated businesses (302) Other income 21 Loss before taxes from continuing operations ($7,499)
Per Adjustments Consolidated Three months ended Digital and Statement of June 30, 2016 MMG SMG Ventures Corporate Total Eliminations¹ Loss Operating revenue $108,175 $71,155 $17,209 $196,539 ($18,627) $177,912 Salaries and benefits (48,142) (29,330) (6,114) ($1,948) (85,534) 6,755 (78,779) Other operating costs (46,223) (42,445) (6,126) (651) (95,445) 6,226 (89,219) Amortization and depreciation (3,293) (9,500) (27,887) (6) (40,686) 27,499 (13,187) Restructuring and other charges (4,282) (2,605) (55) (6,942) 50 (6,892) Reportable segment operating profit (loss) $6,235 ($12,725) ($22,918) ($2,660) ($32,068) $21,903 ($10,165)
Interest and financing costs (773) Foreign exchange 3 Loss from joint ventures 28 Loss from associated businesses (15,961) Loss before taxes from continuing operations ($26,868)
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 7 TORSTAR - Condensed Consolidated Financial Statements (Unaudited)
Adjustments Per and Consolidated Six months ended Digital Eliminations Statement of June 30, 2017 MMG SMG Ventures Corporate Total ¹ Loss Operating revenue $182,279 $121,035 $34,173 $337,487 ($37,054) $300,433 Salaries and benefits (85,660) (43,562) (11,837) ($2,947) (144,006) 12,807 (131,199) Other operating costs (82,380) (79,712) (10,904) (1,459) (174,455) 11,138 (163,317) Amortization and depreciation (7,553) (13,883) (14,930) (36,366) 13,884 (22,482) Restructuring and other charges (6,202) (4,405) (283) (200) (11,090) 537 (10,553) Impairment of assets (3,000) (3,000) 3,000 Reportable segment operating income (loss) $484 ($20,527) ($6,781) ($4,606) ($31,430) $4,312 ($27,118) Interest and financing costs (1,137) Foreign exchange 158 Loss from joint ventures (2,449) Loss from associated businesses (2,497) Other income 47 Loss before taxes from continuing operations ($32,996)
Per Adjustments Consolidated Six months ended Digital and Statement of June 30, 2016 MMG SMG Ventures Corporate Total Eliminations¹ Loss Operating revenue $197,240 $140,970 $33,148 $371,358 ($36,765) $334,593 Salaries and benefits (93,148) (60,466) (12,008) ($3,857) (169,479) 13,477 (156,002) Other operating costs (87,147) (87,487) (11,502) (1,287) (187,423) 11,925 (175,498) Amortization and depreciation (6,676) (19,019) (56,831) (13) (82,539) 56,087 (26,452) Restructuring and other charges (6,544) (32,143) (55) (38,742) 50 (38,692) Reportable segment operating income (loss) $3,725 ($58,145) ($47,193) ($5,212) ($106,825) $44,774 ($62,051) Interest and financing costs (1,547) Foreign exchange 1,537 Income from joint ventures 581 Loss from associated businesses (33,193) Other income 1,273 Loss before taxes from continuing operations ($93,400)
¹ Adjustments and eliminations represent the elimination of the proportionately consolidated results of, and transactions with joint ventures and VerticalScope.
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 8 TORSTAR - Condensed Consolidated Financial Statements (Unaudited)
The following chart provides a breakdown of total segmented operating revenue by percentage.
Three months ended Six months ended June 30 June 30 2017 2016 2017 2016 Print Advertising 40.1% 43.3% 39.8% 43.4% Digital Advertising 18.1% 16.8% 18.1% 16.9% Distribution 18.7% 18.1% 18.3% 17.0% Circulation/Subscriber 16.1% 15.4% 16.8% 16.4% Other 7.0% 6.4% 7.0% 6.3% Total 100.0% 100.0% 100.0% 100.0%
4. RESTRICTED CASH
At June 30, 2017, the Company had restricted cash totalling $9.1 million (December 31, 2016 – $11.8 million) which included $7.7 million (December 31, 2016 – $10.5 million) held as collateral for outstanding standby letters of credit in respect of an unfunded executive retirement plan liability (note 13).
In February 2016, the Company received $22.8 million related to the sale of Harlequin Enterprises Limited ("Harlequin") in August 2014 which had been held in an escrow account.
5. INVENTORIES
The Company expensed inventory costs of $10.7 million for the three months ended June 30, 2017 (2016 – $11.2 million) and $19.7 million for the six months ended June 30, 2017 (2016 – $21.4 million).
6. INVESTMENTS IN JOINT VENTURES
The Company’s joint ventures include investments in Workopolis (50%) and Sing Tao Daily (approximately 50%).
The table below provides a continuity of Investments in joint ventures:
Three months ended Six months ended June 30 June 30 2017 2016 2017 2016 Balance, beginning of period $24,647 $33,414 $27,463 $32,861 Income (loss) from joint ventures 367 28 (2,449) 581 Distributions from joint ventures (1,814) (1,814) Investment and other 293 293 Balance, end of period $23,200 $33,735 $23,200 $33,735
During the six month period ended June 30, 2017, the Company recorded a $3.0 million impairment charge (2016 – $nil) in respect of its joint venture investment in Workopolis. This charge had no impact on cash flows and was the result of a further downward revision in longer term forecasted revenues reflecting further increased competition in the online recruitment and job search markets as well as general market conditions.
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 9 TORSTAR - Condensed Consolidated Financial Statements (Unaudited)
Summarized Supplemental Financial Information
The following is summarized supplemental financial information based on the Company’s proportionate share of the joint ventures:
(i) Statement of Financial Position
As at As at June 30, 2017 December 31, 2016 Cash and cash equivalents $7,177 $7,880 Other current assets 5,463 6,049 Total current assets 12,640 13,929 Total non-current assets 17,374 21,227 Total assets $30,014 $35,156 Current liabilities $6,015 $6,825 Other non-current liabilities 799 868 Total equity 23,200 27,463 Total liabilities and equity $30,014 $35,156
(ii) Statements of Income (Loss) and Comprehensive Income (Loss)
Three months ended Six months ended June 30 June 30 2017 2016 2017 2016 Operating revenue $7,702 $9,382 $15,965 $19,232 Salaries and benefits (3,173) (3,744) (6,698) (7,866) Other operating costs (3,589) (4,459) (7,142) (8,494) Amortization and depreciation (457) (942) (933) (1,899) Restructuring and other charges (25) (50) (420) (50) Impairment of assets (3,000) Operating profit (loss) 458 187 (2,228) 923 Interest and financing costs (3) (6) (6) (13) Foreign exchange and other 2 (3) 2 21 457 178 (2,232) 931 Income and other taxes (90) (150) (217) (350) Net income (loss) and Comprehensive income (loss) from continuing operations $367 $28 ($2,449) $581
TORSTAR CORPORATION 2017 SECOND QUARTER REPORT 10 TORSTAR - Condensed Consolidated Financial Statements (Unaudited)
7. INVESTMENTS IN ASSOCIATED BUSINESSES
As of June 30, 2017, the Company’s Investments in associated businesses include a 56.4% equity investment in VerticalScope; a 19.4% equity interest in Black Press Ltd. (“Black Press”); a 16.1% equity interest in Blue Ant Media Inc. (“Blue Ant”); a 33.3% equity interest in Canadian Press Enterprises Inc. (“Canadian Press”) and an interest in Nest Wealth Inc. (Nest Wealth). The Company also had a 14.7% equity interest in Shop.ca Network Inc. (“Shop.ca”) until July 5, 2016.
The table below provides a continuity of Investments in associated businesses:
Three months ended Six months ended June 30 June 30 2017 2016 2017 2016 Balance, beginning of period $154,969 $172,383 $157,897 $202,203 Dividends received (194) (194) Investments during the period 500 Sale of investment (47) (47) Share of associate paid in capital (with minority interest) (1,614) Loss of associated businesses (302) (15,961) (2,497) (33,193) OCI – Actuarial gain (loss) on employee benefits (366) (544) 17 (2,669) OCI – Foreign currency translation adjustment (2,869) 163 (3,791) (8,992) Balance, end of period $151,385 $156,041 $151,385 $156,041
The tables below provide income and losses from associated businesses and other comprehensive income and losses from associated businesses:
Three months ended Six months ended June 30 June 30 Net income (loss) 2017 2016 2017 2016 VerticalScope ($1,185) ($17,918) ($3,233) ($35,452) Black Press (2,045) 1,676 (2,512) 2,453 Blue Ant 1,868 281 2,188 472 Shop.ca (613) Nest Wealth 1,060 1,060 (53) Total ($302) ($15,961) ($2,497) ($33,193)
Three months ended Six months ended June 30 June 30 Other comprehensive income (loss) 2017 2016 2017 2016 VerticalScope ($2,848) $251 ($3,759) ($8,889) Black Press (400) (667) (55) (2,868) Blue Ant 13 35 40 96 Total ($3,235) ($381) ($3,774) ($11,661)
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VerticalScope
Pursuant to certain terms in the shareholders agreement, the investment is accounted for as an associated business using the equity method.
The following is summarized supplemental financial information for 100% of VerticalScope as at June 30, 2017, including the Company’s fair value adjustments on acquisition of the investment:
(i) Statement of Financial Position
As at December 31, As at June 30, 2017 2016 Cash and cash equivalents $9,746 $24,310 Other current assets 14,125 16,716 Total current assets 23,871 41,026 Total non-current assets 311,210 319,149 Total assets $335,081 $360,175 Current portion long-term debt $6,294 $6,009 Other current liabilities 8,715 9,162 Total current liabilities 15,009 15,171 Long-term debt 107,169 115,692 Other non-current liabilities 18,768 23,840 Total equity 194,135 205,472 Total liabilities and equity $335,081 $360,175
(ii) Statements of Loss and Comprehensive Loss
Three months ended Six months ended June 30 June 30
2017 2016 2017 2016 Operating revenue $20,048 $16,461 $37,372 $31,187 Net loss ($2,100) ($31,753) ($5,729) ($62,824) Other comprehensive loss (5,048) 416 (6,662) (15,782) Total comprehensive loss ($7,148) ($31,337) ($12,391) ($78,606)
The Company’s comprehensive loss attributable to its interest in VerticalScope was $4.0 million and $7.0 million for the three and six month periods ended June 30, 2017 respectively (2016 – $17.7 million and $44.3 million respectively).
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8. PROPERTY, PLANT AND EQUIPMENT
Building and leasehold Machinery and Land improvements equipment Total Cost Balance at December 31, 2016 $1,407 $63,631 $112,669 $177,707 Additions 272 920 1,192 Disposals (613) (478) (1,091) Foreign exchange (1) (1) Balance at June 30, 2017 $1,407 $63,290 $113,110 $177,807 Depreciation and impairment Balance at December 31, 2016 $38,763 $76,975 $115,738 Additions 1,473 3,608 5,081 Disposals (613) (469) (1,082) Foreign exchange (1) (1) Balance at June 30, 2017 $39,623 $80,113 $119,736 Net book value At December 31, 2016 $1,407 $24,868 $35,694 $61,969 At June 30, 2017 $1,407 $23,667 $32,997 $58,071
9. INTANGIBLE ASSETS
Finite life Software 1 Other Total Cost Balance at December 31, 2016 $87,208 $52,518 $139,726 Additions – internally developed 2,020 2,020 Additions – purchased 739 739 Disposals (757) (757) Balance at June 30, 2017 $89,210 $52,518 $141,728 Amortization and Impairment Balance at December 31, 2016 $49,869 $33,912 $83,781 Amortization 14,582 2,819 17,401 Disposals (757) (757) Balance at June 30, 2017 $63,694 $36,731 $100,425 Net book value At December 31, 2016 $37,339 $18,606 $55,945 At June 30, 2017 $25,516 $15,787 $41,303
¹ These amounts include $0.4 million of software in development at June 30, 2017 for which amortization has not commenced.
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10. INCOME TAXES
Income tax recovery is made up of the following:
Three months ended Six months ended June 30 June 30 2017 2016 2017 2016 Current income tax expense (recovery): Current year $100 ($600) ($1,300) ($4,100) Adjustment for prior years (100) 200 (600) (1,100) (4,100)
Deferred income tax recovery: Origination and reversal of temporary differences (2,000) (11,500) Income tax recovery in the consolidated statement of loss (2,600) (1,100) (15,600)
Current income tax recovery in OCI 500 100 Deferred income tax expense in OCI (500) 700 Income tax expense in OCI 800
Total income taxes recovery ($2,600) ($1,100) ($14,800)
11. FINANCIAL INSTRUMENTS
Hedge activities
(a) Hedge of net investments in foreign operations
The Company’s primary exposure to foreign currency risk is through its investment in VerticalScope, which is denominated in the U.S. dollar. In order to offset the foreign exchange risk on its consolidated statement of financial position from its net investment in VerticalScope, the Company entered into collar arrangements totalling $137.0 million which were designated as a hedge of the original net investment in VerticalScope. Any fluctuations in fair value arising from fluctuations in the rate of exchange of Cdn. dollar per U.S. dollar within the collar range will be recorded in net income while any fluctuations outside this collar range will be recorded in OCI (to the extent of hedge effectiveness) to offset any gains or losses on translation of the net investment.
As at December 31, 2016, the collar arrangements for U.S. $137.0 million established a rate of exchange with a range of Cdn. $1.46 to Cdn. $1.19 for U.S. $1.00 in 2017.
During the three month period ended March 31, 2017, the Company rolled over the collar arrangements totalling $137.0 million and simultaneously entered into a new $137.0 million zero cost collar arrangement with a range of Cdn. $1.40 to Cdn. $1.20 for U.S. $1.00 in 2018.
The hedges were highly effective during the six month period ended June 30, 2017. The change in the fair value of the hedges was a gain of $0.3 million which has been included in foreign exchange in the consolidated statement of loss.
The net fair value of the collar options outstanding at June 30, 2017 was $0.1 million unfavourable (December 31, 2016 – $0.5 million unfavourable).
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(b) Interest and financing costs:
Three months ended Six months ended June 30 June 30 2017 2016 2017 2016 Interest earned on short-term investments $113 $84 $253 $172 Interest accretion costs (45) (80) (96) (164) Interest – other 14 (1) 24 (6) Net financing expense relating to employee benefit plans (657) (776) (1,318) (1,549) ($575) ($773) ($1,137) ($1,547)
12. PROVISIONS
Restructuring Other Total Balance at December 31, 2016 $37,130 $2,447 $39,577 Provisions made during the period 10,553 10,553 Discontinued operations (600) (600) Received (paid) during the period (20,565) 138 (20,427) Interest accretion 63 63 Balance at June 30, 2017 $27,181 $1,985 $29,166 Current $19,741 $1,985 $21,726 Non-current $7,440 $7,440 Balance at December 31, 2016 Current $26,026 $2,447 $28,473 Non-current $11,104 $11,104
Restructuring
During the six month period ended June 30, 2017, the Company recorded restructuring and other charges of $10.6 million. Restructuring charges of $6.2 million were recorded in the MMG Segment, $4.2 million in the SMG Segment and $0.2 million at Corporate. These charges largely related to ongoing efforts to reduce costs.
Other
In connection with the sale of Harlequin, the Company indemnified the Purchaser for costs and fees related to certain matters including certain tax and pre-existing litigation matters. The Company assessed the fees that it may incur as well as the probability of occurrence of any losses in respect of these matters, estimated the exposure under these indemnities and recorded a contingent liability in respect of these matters. The Company reviews the estimates at each reporting period and any required adjustments are included in the determination of Income (loss) from discontinued operations.
Other provisions also included provisions for contingent consideration, which is an estimate of the fair value of contingent consideration for acquisitions, which are primarily based on revenue and earnings levels estimated to be realized by the acquired businesses for specified periods following the acquisition.
The Company is also involved in various legal actions, which arise in the ordinary course of business. While the final outcome of these matters cannot be predicted with certainty, any additional liability that may arise from such contingencies is not expected to have a material adverse effect on the financial position or results of operations of the Company.
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13. EMPLOYEE BENEFITS
The Company maintains a number of defined benefit plans which provide pension benefits to its employees primarily in the Province of Ontario. Pension benefits are calculated based on a combination of years of service and compensation levels.
The Company also maintains capital accumulation plans in Canada.
Other post-employment benefits provide for various health and life insurance benefits to employees in the newspaper operations hired prior to August 23, 2000.
Changes to the net defined benefit obligation were as follows:
Pension plans Other post employment Funded Unfunded1 benefit plans Total At December 31, 2016 $12,661 $10,658 $47,015 $70,334
Expense recognized in the consolidated statement of loss: Salaries and benefits 6,212 152 100 6,464 Interest and financing costs 280 169 869 1,318 6,492 321 969 7,782 Amounts recognized in OCI 49,610 1,447 2,970 54,027 Contributions to plans / payments (7,580) (3,241) (1,208) (12,029) Other 2 2 At June 30, 2017 $61,185 $9,185 $49,746 $120,116 Recorded in: Liabilities $61,185 $9,185 $49,746 $120,116 At December 31, 2016 Recorded in: Assets $7,073 $7,073 Liabilities $19,734 $10,658 $47,015 $77,407 1 The unfunded pension plan includes an executive retirement plan liability, which is supported by an outstanding letter of credit of $7.7 million as at June 30, 2017 (December 31, 2016 – $10.5 million).
Capital accumulation plans The total amount expensed for capital accumulation plans for the three and six months ended June 30, 2017 was $0.5 million and $1.0 million respectively (2016 – $0.4 million and $0.9 million respectively).
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14. SHARE CAPITAL
(a) Summary of changes in the Company’s share capital:
Six months ended June 30 2017 2016 Shares Amount Shares Amount Class A shares (voting) Balance, beginning of period 9,826,215 $2,670 9,839,355 $2,673 Converted to Class B (2,340) Balance, end of period 9,826,215 $2,670 9,837,015 $2,673 Class B shares (non-voting) Balance, beginning of period 70,891,322 $400,144 70,707,063 $399,827 Converted from Class A 2,340 Dividend reinvestment plan 42,753 69 72,371 135 Issued under ESPP 50,911 92 76,868 144 Other 350 1 525 1 Balance, end of period 70,985,336 $400,306 70,859,167 $400,107 Total Class A and Class B shares 80,811,551 $402,976 80,696,182 $402,780
An unlimited number of Class B shares is authorized. While the number of Class A shares is unlimited, the issuance of further Class A shares, may under certain circumstances, require unanimous board approval.
(b) Earnings per share
Basic earnings per share amounts have been determined by dividing net income attributable to equity shareholders by the weighted average number of Class A and Class B shares outstanding during the period.
The treasury stock method is used for the calculation of the dilutive effect of share options and other dilutive securities. In calculating diluted per share amounts under the treasury stock method, the numerator remains unchanged from the basic per share calculation as the assumed exercise of the Company’s share options and the employee share purchase plan (“ESPP”) does not result in an adjustment to income. Outstanding share options totalling 7,411,675 (June 30, 2016 – 5,998,496), which are anti-dilutive, have been excluded from the calculation of dilutive securities.
The reconciliation of the denominator in calculating diluted per share amounts is as follows:
Three months ended Six months ended June 30 June 30 (thousands of shares) 2017 2016 2017 2016 Weighted average number of shares outstanding, basic and diluted 80,778 80,659 80,748 80,603
(c) Dividends The following dividends were declared and distributed by the Company per Class A (voting) share and Class B (non- voting) share, and in total:
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Three months ended Six months ended June 30 June 30 2017 2016 2017 2016 First quarter ended March 31: 2.5 cents (2016 – 6.5 cents) $2,018 $5,236 Second quarter ended June 30: 2.5 cents (2016 – 6.5 cents) $2,020 $5,243 2,020 5,243 Total dividends $2,020 $5,243 $4,038 $10,479
15. SHARE-BASED COMPENSATION PLANS
(a) Share option plan
A summary of changes in the share option plan is as follows:
Weighted average Share options exercise price December 31, 2016 5,686,932 $7.08 Granted 2,205,018 $1.70 Forfeited or expired (480,275) $8.78 June 30, 2017 7,411,675 $5.28
Options exercisable at June 30, 2017 were as follows:
Share options Weighted average Range of exercise price exercisable exercise price $2.78 – 5.85 1,452,459 $4.38 $6.33 – 7.81 2,023,056 $6.86 $8.28 – 18.78 1,084,797 $11.07 $2.78 – 18.78 4,560,312 $7.07
The fair value of the share options granted in 2017 (which will vest and be expensed over four years) was estimated to be within the range of $0.31 to $0.44 per option at the date of grant using the Black-Scholes option pricing model with the assumptions of a risk free interest rate of between 1.0% to 1.5%; expected annual dividend yield of 5.2% to 6.29% per share; expected volatility of between 37.4% to 40.5% and an expected time until exercise of 5 to 7 years. Volatility is calculated using the logarithmic share price returns approach based on historical Company share prices.
(b) Restricted share unit (“RSU”) plan
A summary of changes in the RSU plan is as follows:
Units At December 31, 2016 975,734 Vested and paid (284,468) Granted 794,372 Forfeited (84,538) Dividend equivalents 39,926 At June 30, 2017 1,441,026
As at June 30, 2017, 593,001 units have been accrued at a value of $0.9 million of which 233,812 units have been accrued in Accounts payable and accrued liabilities at a value of $0.4 million while 359,189 units have been accrued
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in Other liabilities at a value of $0.5 million (December 31, 2016 – 679,576 units were accrued at a value of $1.3 million of which 284,468 units were accrued in Accounts payable and accrued liabilities at a value of $0.5 million and 395,108 units were accrued in Other liabilities at a value of $0.8 million).
The Company has entered into a derivative instrument in order to lock in the expense for 345,300 RSUs. Changes in the fair value of this instrument are recorded as compensation expense and offset the impact of changes in the value of the RSUs that have been accrued. As the RSUs are accrued over the three-year period until the RSUs vest, there will not be an exact offset each period.
(c) For the three and six month periods ended June 30, 2017, the Company has recognized share-based compensation expense totalling $0.2 million and $0.4 million respectively (2016 – $0.2 million and $0.4 million respectively).
(d) Deferred share unit (“DSU”) plan
A summary of changes in the DSU plan is as follows:
Units At December 31, 2016 864,147 Granted 117,801 Directors’ mandatory retainer 3,059 Directors’ voluntary election 7,342 Dividends 27,702 At June 30, 2017 1,020,051
As at June 30, 2017, the 1,020,051 units outstanding were valued at $1.5 million (December 31, 2016 – 864,147 units valued at $1.7 million).
The Company has entered into a derivative instrument in order to offset its exposure to 490,000 units. Changes in the fair value of this instrument are recorded as compensation expense and offset the impact of changes in the value of the outstanding DSUs.
16. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following is a continuity for the components of Accumulated other comprehensive income:
Available-for-sale Net investment Foreign CTA 1 securities 2 hedge 3 Total December 31, 2016 $5,350 $2,856 ($3,030) $5,176 OCI (3,770) (170) (3,940) June 30, 2017 $1,580 $2,686 ($3,030) $1,236 1Net of deferred income tax asset/liability of $nil (December 31, 2016 – $nil). 2Net of deferred income tax liability of $400 (December 31, 2016 – deferred income tax liability of $400). 3Net of current income tax recovery of $500 (December 31, 2016 – current income tax recovery of $500).
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17. OTHER INCOME
Three months ended Six months ended June 30 June 30 2017 2016 2017 2016 Gain on sale of assets $1,263 Other $21 $47 10 $21 $47 $1,273
In February 2016, the Company sold a real estate property in Mississauga for net proceeds of $5.5 million and recorded a gain of $1.3 million.
18. OTHER NON-CASH ITEMS PROVIDED BY (USED IN) OPERATING ACTIVITIES
Three months ended Six months ended June 30 June 30 2017 2016 2017 2016 Share-based compensation plans $69 $480 ($71) ($591) Foreign exchange (1,003) (3) (158) (1,537) Non-current restructuring provisions (1,069) (4,349) (3,664) 4,370 Interest accretion 45 81 96 165 Other (259) (1,044) (168) (1,470) ($2,217) ($4,835) ($3,965) $937
19. RELATED PARTY TRANSACTIONS
The following summarizes the total value of sales to, purchases from and amounts owed to and by the Company’s joint ventures and associates for the three and six month periods ended June 30, 2017.
Three months ended Six months ended As at June 30, 2017 June 30, 2017 June 30, 2017 Purchases Purchases Amounts Amounts Sales to from Sales to from owed by owed to Joint Ventures $83 $39 $147 $108 $41 $11 Associates $9 $1,854 $9 $4,298 $114 $401
Sales to and purchases of goods and services from related parties are in the normal course of operations and are made on terms equivalent to those that prevail in arm's length transactions. The Company received in the six months ended June 30, 2017 $0.2 million (2016 – $nil) of rent from a joint venture. No provisions have been made for doubtful debts in respect of amounts owed by related parties.
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