In
response to the investing public’s demand for greater disclosure of corporate
expectations for the future, safe harbour rules and legislation have been
passed to encourage and protect corporations that issue financial forecasts and
projections. Access the 2009 annual report for information publisher Thomson
Reuters Corporation from the company website (www.thomsonreuters.com).
Instructions
(a)
What general expectation did the company have for the industry in 2010 for each
of its divisions? How did the company plan to react to this expectation?
(b)
Give examples of hard data forecasts (if any) that the company disclosed for
the upcoming year (2010). What assumptions did the company use in preparing
this information? What risks are involved
in achieving these forecasts?
(c)
What is the difference between a financial forecast and a financial projection?
(a) The general expectations for the industries
where the company operates were noted as follows in the “Operating Results by
Business Segment” and “Outlook” sections of the 2009 MD&A.
·
Markets division (page 33):
Increased demand for its Enterprise solutions as customers continue to
concentrate on regulatory requirements and risk management. However, the other solutions in this division
will be slower to recover although China, India and Brazil are expected to
continue to increase demand. The company
will continue to invest in its next generation platform and infrastructure to
try to increase demand from developing economies.
·
Professional division (page 34) –
Expect growth in this division from accounting, health care and legal
professionals, but a reduction in the higher margin products related to print
and transactional offerings as the product mix of the division changes. The company will roll out its next generation
of legal service software, continue investments in its other platforms and
build on previous acquisitions. Due to
the change in the product mix and continued investment, margins are expected to
decline.
·
Legal (page 35) – Expect demand to
grow for legal solutions related to investment, trade and intellectual property
and from rapidly expanding economies.
The company continues to concentrate on the roll out of their next
generation platform (WestlawNext) and to ensure that solutions meet the needs
of their customers.
·
Tax and Accounting (page 35) – Expect higher demand for
accounting tax and solutions due to increasing regulatory complexity and
stringency in the market and a demand by customers for lower cost solutions and
greater tax savings. The company is
trying to expand their solutions to be acceptable in many geographic areas and
to better serve multinational customers working across borders. The company will launch OneSource in 2010 and
integrate recent acquisitions into their product offerings.
·
Healthcare and Science- Expect
continued growth in the company’s healthcare decision support solutions as they
provide customers with the ability to manage costs, reduce waste while still delivering
quality care. In addition the company expects to see an increase in demand from
rapidly developing economies.
(b) On
page 52, the company provides some overall guidance and predictions on 2010
results as follows:
|
|
Assumptions used
|
Risk factors
|
|
Revenues are expected to be
flat or slightly down for 2010
|
GDP, number of professionals
requiring the products; successful execution of new product releases
|
Slower growth and demand than
expected;
Changes in buying patterns and
competitive pressures;
Reduction in government
stimulus programs to support economic growth
|
|
Profit margins to be the same
of 2010 as for 2009 but investment in new products will impact margin by 1%.
|
Revenue projections to be flat
or slightly down;
Product mix changing to lower
profit margin items;
Continued investment in new
platforms and globally;
Expected savings to be realized
from efficiency and integration programs
|
Demand for higher margin
products may decline faster than expected;
Investment is higher or returns
on new investments are lower than expected
|
|
Free cash flow expected to be
lower in 2010 than in 2009
|
Revenue projections to be flat
or slightly down;
Margins to be flat;
Continued investments in
products and capital assets
|
See above factors
Higher than expected capital
additions and integration costs
|
|
Expect to achieve integration
savings for 2010 of $475 million ( run-rate savings of $1.4 million)
|
Can execute integration program
as planned
|
Benefits expected may not be
achieved in the time frame expected
|
|
Capital expenditures to be 8.5%
to 9% of revenues
Amortization and depreciation
of computer software will be 8% to 9% of revenues
|
|
These assumptions will impact
free cash flows forecasts
|
|
Interest costs to be $400 to
$425 million
|
As long as long term debt
levels stay unchanged
|
|
|
Effective tax rate to be 20% to
24%
|
Assuming no changes in tax laws
|
|
(c) The difference
between a financial forecast and a financial projection is that a financial
forecast is based on assumptions reflecting conditions which the preparer
expects to exist, and it is based on actions it expects to take while a
financial projection is based on more hypothetical assumptions. A forecast is what is “expected” to happen
while a projection is what “might” happen.
As a result, one must be very careful to closely scrutinize the
hypothetical assumption(s) on which a projection is based and assess the
likelihood of such assumptions being realized as part of the analysis of such
information.
