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TRANSCONTINENTAL
TRANSCONTINENTAL
2011 ANNUAL REPORT
www.tc.tc
2011 ANNUAL REPORT
ACTIVATING
CHANGE
TABLE OF CONTENTS
1
2
4
6
8
10
11
12
16
20
22
24
55
91
92
94
Financial Highlights
At a Glance
Marketing Activation
Executive Chairman of the Board and Founder Letter
President and CEO Letter
Executive Management Committee of the Corporation
“Innovation Challenge”
Printing Sector
Media and Interactive Sectors
Sustainable Development
Financial Performance
Management’s Discussion and Analysis
Consolidated Financial Statements and Notes
Shareholder Information
Board of Directors
Corporate Information
• FINANCIAL HIGHLIGHTS
For fourth quarters and fiscal years ended October 31 (unaudited)
(in millions of dollars, except per share data)
Operations
Revenues
Adjusted operating income before amortization (1)
Operating income
Adjusted operating income (1)
Net income applicable to participating shares
Adjusted net income applicable to participating shares (1)
Cash flow from operating activities before changes
in non-cash operating items (1)
Cash flow related to operating activities of continuing operations
Investments
Acquisitions of property, plant and equipment
Business acquisitions (2)
Per share data (basic)
Adjusted net income applicable to participating shares (1)
Cash flow from operating activities before changes
in non-cash operating items (1)
Dividends on participating shares
Average number of participating shares outstanding (in millions)
For fiscal years ended October 31
2011
2010
Variation
in %
$2,043.6
373.0
182.1
252.7
77.8
161.7
$2,028.3
373.2
222.5
249.9
166.6
155.9
1%
0%
-18%
1%
-53%
4%
311.0
304.7
311.1
156.0
0%
n/a
47.4
35.8
125.0
14.0
-62%
n/a
0.96
2.00
2.06
1.93
-53%
4%
3.84
3.76
0.49
3.85
1.93
0.35
0%
95%
40%
81.0
80.8
As at
October 31
2011
Financial condition
Total assets
Net indebtedness (1)
Shareholders’ equity
Net indebtedness ratio (1)
Shareholders’ equity per participating share
Number of participating shares at end of period (in millions)
(1)
(2)
As at
October 31
2010
$2,453.6
489.4
1,329.0
1.31x
$2,594.7
698.8
1,247.0
1.87x
$ 15.17
$ 14.16
81.0
81.0
Please refer to the section “Reconciliation of non-GAAP Financial Measures” on page 41.
Total consideration in cash or otherwise for businesses acquired through the purchase of shares or assets.
TRANSCONTINENTAL
2011 Annual Report
1
At a Glance
ACTIVATING
CHANGE
PROFILE TC Transcontinental creates marketing products and services that allow
businesses to attract, reach and retain their target customers. The Corporation is the largest
printer in Canada and the fourth-largest in North America. As the leading publisher of consumer
magazines and French-language educational resources, and of community newspapers in Quebec
and the Atlantic provinces, it is also one of Canada’s top media groups. TC Transcontinental is also
the leading door-to-door distributor of advertising material in Canada through its celebrated Publisac
network in Quebec and Targeo in the rest of Canada. Thanks to a wide digital network of more
than 1,000 websites, the Corporation reaches over 13 million unique visitors per month in Canada.
TC Transcontinental also offers interactive marketing products and services that use new
communication platforms supported by marketing strategy and planning services, database
analytics, premedia, e-flyers, email marketing, custom communications and mobile solutions.
Transcontinental Inc. (TSX : TCL.A, TCL.B, TCL.PR.D), known by the brands TC Transcontinental,
TC Media and TC Transcontinental Printing, has approximately 10,000 employees in Canada and
the United States, and reported revenues of C$2.0 billion in 2011. For more information about
the Corporation please visit www.tc.tc
OUR MISSION
Help companies and advertisers attract, reach
and retain their target customers.
OUR VISION
Become a Canadian leader in marketing activation.
OUR VALUES
Innovation, Teamwork, Respect and Performance.
TRANSCONTINENTAL
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PRINTING
MEDIA
OUR PILLARS
Customers, Employees, Shareholders and Communities.
OUR CORE COMPETENCIES
Leadership, Critical Thinking, Building Expertise and Delivering Results.
MARKETING ACTIVATION
Marketing Activation is the method used to bring a brand message to life
through a strategic, integrated campaign that leverages the full potential of
a wide range of marketing communications tools (print, media, interactive,
mobile and more) in order to maximize results and provide the greatest
return on marketing investment of companies and advertisers.
MARKETING
ACTIVATION
OFFER
TRANSCONTINENTAL
A MARKETING ACTIVATION COMPANY
PRINTING:
FLYERS
TRANSCONTINENTAL
PRINTING
PRINTING:
MAGAZINES,
BOOKS
PRINTING:
MARKETING &
COMMUNICATION
PRODUCTS
ONE-TO-ONE
DIGITAL PRINTING
MEDIA
DIRECT
MARKETING
PRINTING:
NEWSPAPERS
PRINTING
PRODUCTS
PRE-MEDIA
PRINTING:
CATALOGUES
SMS & MMS
MOBILE
ADVERTISING
AND COUPONS
MOBILE
APPLICATIONS
& SERVICES
CUSTOMER
MOBILE
INTERNET
DOOR-TO-DOOR
ADDRESSING
& DISTRIBUTION
MOBILE
APPLICATIONS
DISTRIBUTION
SERVICES
GEOLOCALIZATION
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2011 Annual Report
TRANSCONTINENTAL
STRATEGIC
PLANNING &
ANALYSIS
CREATION &
STRATEGIC
PLANNING
PERSONALIZED
CONTENT
CREATION
PHOTOGRAPHY,
VIDEO,
GRAPHIC DESIGN
CONFERENCES
& SEMINARS
MAGAZINES
NEWSPAPERS
BRANDED
WEBSITES &
COMMUNITIES
OF INTEREST
PROMO &
SPECIAL EVENTS
BOOKS
CONTENT
& MEDIA
DRIVERS
SOCIAL MEDIA
DATABASE
MANAGEMENT
AND CREATION
DIGITAL
PROMOTION
SOCIAL
MEDIA
DATABASE
ANALYTICS
E-COUPONS
MARKET
& CLIENT
SEGMENTATION
INTERACTIVE
& DIGITAL
PRODUCTS
DIGITAL
REP HOUSE
AD WORDS
INTERACTIVE
DIRECT
MARKETING
TRANSCONTINENTAL
AD BUYING
MICRO
PROMOTIONAL
WEBSITES
DATA
SEGMENTATION;
(PROFILING,
TARGETING,
GEOTARGETING,
COMMUNITIES
OF INTERESTS)
QUANTITATIVE
AND QUALITATIVE
ANALYSIS
LOYALTY
PROGRAMS,
DEVELOPMENT
PERFORMANCE
REPORTS AND
MEASUREMENTS
WEB REPUTATION
MANAGEMENT
E-FLYERS
E-MAIL
MARKETING
ONLINE
DIRECTORIES
2011 Annual Report
5
• EXECUTIVE CHAIRMAN OF THE BOARD AND FOUNDER LETTER
Letter to Shareholders
My message to shareholders is very
special this year, since it is my last
as Executive Chairman of the Board
of Directors. In September 2011, the
Board of Transcontinental Inc. ratified
my decision to step down as Executive
Chairman at the Annual Meeting of
Shareholders on February 16, 2012.
It also announced the appointment
of Isabelle Marcoux as Chair of the Board
as of that date. I will, however, continue
to sit on the Board.
Ms. Marcoux has played an active role in the
development of TC Transcontinental since she
joined the company in 1997. At the time of her
appointment in September she had been Vice
Chair of the Board since 2007 and Corporate
Vice President, Development since 2004. In the
latter position she had entire responsibility for
our strategic planning process. This change thus
reflects a well-structured and orderly transition,
one which clearly demonstrates our commitment
to developing Transcontinental Inc. in a spirit of
continuity and sound progress.
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2011 Annual Report
TRANSCONTINENTAL
Cutting edge approach to marketing
To penetrate and remain in a market, a company must be in business
for a reason that differentiates it from its competitors and makes
sense to its customers. At TC Transcontinental, we have always
defined ourselves as a business partner whose mission is to help
companies and advertisers attract, reach and retain their target
customers. Our actions have always been driven by two premises:
to make life easier for our customers and to anticipate their new
marketing communication needs with respect to their own customers.
Our service offering was initially built around a broad line of mass
marketing and targeted products in print, as well as door-to-door
distribution and the opportunity to advertise in our newspapers and
magazines; it gradually grew to include personalized advertising
made possible by data analytics and data management, interactive
marketing solutions like mobile applications and digital promotions,
and the creation of branded content. This significant transformation
was a natural progression that flowed from our commitment to helping our clients meet the emerging needs of their target consumers.
Today, we have business relationships with many major corporations,
particularly in book, magazine and newspaper publishing, in retail
sales and in the production of consumer goods. This constantly
evolving and integrated marketing service offering gives us a unique
position in the marketplace.
A winning formula
When I founded Transcontinental in 1976, I dreamt of creating
a company built on strong values. Being an investor, customer or
employee of TC Transcontinental means being associated with a
company which adheres every day to a set of values that includes
respect, innovation, performance and teamwork. Thanks to these
values, we have been able for many years to remain relevant to our
customers. To do so, we had to adjust, anticipate trends, innovate
and transform ourselves. Our success at doing so is now an integral
part of who we are and a source of inspiration for the future.
To ensure our methods matched our ambitions and to protect the
future of the company, I also established disciplined financial management based on a careful balance between profits and expenses,
debt and investments. This solid financial foundation has allowed us
to continually and judiciously invest in the development of our print
and media operations, and in our digital platforms and interactive
marketing solutions.
These investments have also strengthened and revitalized our customer relations. Clients appreciate our ability to effectively leverage
their communications with their customers through multiplatform
campaigns that combine new media, interactive marketing tools
and print. Indeed, it is not surprising that the most recent statistics
on advertising spending in Canada* show that print is still the
primary vehicle of communication. By providing our customers
TRANSCONTINENTAL
with our proven printed products and our cutting edge digital and
interactive solutions, we offer them the best of both worlds. This
allows them to get the most out of their marketing dollar while also
taking advantage of new communication channels. This is the spirit
in which we will continue our transformation.
Teamwork
In business, teamwork and the quality of one’s partners are the
primary factors in success. It is vital to have people who are motivated,
dedicated and share a common culture of continuous improvement
and innovation. These have always been our strengths, as demonstrated with my first associates, then with our managers and then
with all of our employees. Today I would like to express my special
thanks to everyone over the past 35 years who has helped build
our company.
I’d also like to take this opportunity to express my total confidence
in our management team under the leadership of François Olivier,
and my confidence in our approximately 10,000 employees who
are fully committed to ensuring the development and growth of
TC Transcontinental.
Our teamwork extends to our Board of Directors, which has done an
excellent job of actively protecting the interests of all our shareholders
over many years. I would like to thank past and present members
for their commitment. I also note the addition of two new
members in 2011: Nathalie Marcoux, Vice President Finance of
Capinabel Inc., and Anna Martini, President of Groupe Dynamite Inc.
Their corporate management skills and strategic visions have benefited TC Transcontinental in this period of major transformations.
We have long been recognized for the quality and independence of our
governance and there is no doubt in my mind that this will continue
under Isabelle Marcoux.
Lastly, I wish to thank our customers—businesses, advertisers and
consumers—and all our shareholders, for their loyalty. I am certain
that our industry will continue to offer TC Transcontinental excellent
opportunities for development and investment going forward.
We have the right strategy, the culture of innovation, the financial
foundation and the leaders we need to succeed. We will continue to
tackle challenges and merit the trust of our partners.
Rémi Marcoux
Executive Chairman of the Board and Founder
December 23, 2011
*Source: TVB Canada/TD Newcrest
2011 Annual Report
7
• PRESIDENT AND CEO LETTER
EVOLVING MARKET DYNAMICS
Fiscal 2011 was one of the most fruitful for the development of TC Transcontinental. The Corporation embarked
on a number of promising projects for the future:
announcement of the acquisition of Quad/Graphics
Canada, Inc. (subject to the approval of the Canadian
Competition Bureau); the amalgamation of the Media
and Interactive sectors to make it easier to promote and
market our multiplatform offerings; the growth of our
network of websites and digital sales; the expansion of
our network of community newspapers; the updating
of our values; and the launch of a new branding and
positioning: TC Transcontinental, a marketing activation
company. These multiple achievements will help us
actively pursue our transformation in a rapidly
changing world.
At TC Transcontinental, this world is defined by the printing, media
and interactive marketing industries in which approximately 80%
of our revenues are generated directly or indirectly from the
advertising and marketing budgets of our customers. As a result,
advertising and marketing spending trends have an effect on
our business. Over the past several years, the multiplication of
communication platforms has caused audience fragmentation,
which in turn is increasingly making integrated offerings more
appealing to our customers.
This new playing field has redefined the competitive landscape.
Print markets are now suffering from overcapacity and more intense competitive pressures in certain niches. Conventional media
businesses have been under pressure due to the greater volatility
in national advertising spending as a result of technological
change, but also unstable economic conditions. On the other hand,
many new online products and services are being introduced in
the local and national advertising market.
These evolving market dynamics do not change our mission, but it
does mean we need to adjust our strategy to continue to fulfill our
customers’ needs. This playing field is essentially presenting us
with both challenges and opportunities going forward.
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2011 Annual Report
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Continuously adjusting
our way of doing business
with our customers is
the key to success.
ADAPTING OUR STRATEGY
A few years ago TC Transcontinental put forward a “Two-Prong” strategy:
• Strengthen its existing assets by leveraging the credibility built in
the marketplace over the years, its strong competitive position
and its current products and services.
• Build new marketing services in conventional business as well as
new digital and interactive communication platforms by leveraging
its strong balance sheet and strong customer relationships.
So far, this strategy has proven to be quite successful. On the Printing
side we leveraged the over $700 million we invested over the past
few years in our printing platform; we gained new contracts
with The Globe and Mail and Canadian Tire, among others; and
we divested non-core businesses such as our Mexican operations.
We also announced the indirect acquisition of all the shares of
Quad/Graphics Canada, Inc. On the Media and Interactive side, we
increased our access to audiences by significantly increasing our
web traffic which now reaches 50% of the Canadian web audience. We
also strengthened our community newspaper footprint and grew our
marketing communication service offering. And we did all this
by continuing to exert financial discipline. In 2011, we reduced our
debt, optimized our debt portfolio and increased our dividends
to participating shareholders.
The market continues to evolve at a fast pace. As new technologies
enter the market, our customers’ needs are changing. Customers
want closer relationships with premium suppliers that understand
their needs and can provide strategic solutions. They increasingly
want integrated offers combining both print and digital solutions as
well as mass and one-to-one offerings. In order to keep our appeal
for our customers, and provide them with a product and service
offering that reflects their evolving needs, we activated change a
step further this past year.
ACTIVATING CHANGE
We took steps to position ourselves for the future by adjusting
three fundamental elements of our strategy: our positioning, the
way we develop our business and our go-to-market approach.
Continuously adjusting our way of doing business with our customers
is the key to success.
First, we refreshed our brand image by changing it to TC Transcontinental
and we introduced a new positioning focused on marketing activation.
The new brand is more contemporary but remains linked to our past
and is evocative of our future. It is as much about change as continuity.
It reflects what we are striving to become: a leading player in the
marketing communications arena.
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Second, we reviewed and actualized our values and competencies
in the context of our new market reality. Our values now center
around Innovation, Teamwork, Respect and Performance and our
competencies focus on Leadership, Critical Thinking, Building
Expertise and Delivering Results. We started to re-iterate these
values and competencies in our corporate culture this year through
the “Innovation Challenge”, a company-wide business competition
that was designed to strengthen the culture of innovation internally.
Finally, in order to become more agile at meeting the multiplatform
marketing communication needs of our customers, we adjusted our
go-to-market strategy by combining the Interactive and Media
sectors starting November 1, 2011. This reorganization will make
it easier to communicate strategically with our clients, market our
products and services and emphasize our offer on the various
communication platforms, while continuing to deploy our other
media and printing products.
The evolution of our market positioning, corporate culture and organizational structure represents yet another step in our disciplined
development that will continue to support our future growth.
We have now laid the ground work to accelerate our development.
PROMISING FUTURE
We have evolved alongside our customers from the beginning,
always one step ahead. We listened to them and adapted our strategy
to better respond to their needs. We have always been rooted in the
present, in what works now, while keeping our eyes wide-open on
what the future holds. And today we can deliver efficient solutions
through an integrated marketing activation offering.
TC Transcontinental is very well positioned to be a Canadian leader
in marketing activation, helping our customers attract, reach and
retain their target consumers. We have unique customer relationships and custom offerings including a state-of-the-art printing
network, distribution capabilities, outstanding media content,
brands and reach, as well as a strong digital and interactive offering.
With TC Transcontinental, customers get the best of both worlds,
the proven and the upcoming.
François Olivier
President and Chief Executive Officer
December 23, 2011
2011 Annual Report
9
EXECUTIVE MANAGEMENT
COMMITTEE OF THE CORPORATION
Nelson Gentiletti
Chief Financial and Development Officer
François Olivier
Katya Laviolette
Corporate Vice President, Human Resources
Natalie Larivière
President, TC Media
Brian Reid
President, TC Transcontinental Printing
Christine Desaulniers
Vice President, Chief Legal Officer
and Corporate Secretary
Isabelle Marcoux(1)
Vice Chair of the Board and Vice President,
Corporate Development
Sylvain Morissette
Vice President, Corporate Communications
(1) Ms. Isabelle Marcoux will remain a member of the Corporate Senior Management team
until February 16, 2012 when she becomes Chair of the Board of Transcontinental Inc.
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2011 Annual Report
TRANSCONTINENTAL
• “INNOVATION CHALLENGE”
“INNOVATION CHALLENGE”
The market dynamics of the industries in which we
operate are changing at an increasingly rapid pace.
In order to stay a market leader in our current product
and services offering as well as evolve into a company
increasingly integrating interactive and digital solutions, we determined that we needed to reinforce
a culture of innovation and teamwork. To do this,
we decided to think outside the box and harness the
brainpower and knowledge of our most valuable asset,
our approximately 10,000 employees, by launching
an internal competition.
The Innovation Challenge is a company-wide business event that
was designed to strengthen the culture of innovation. It was set up
to develop a common language, improve employee ability to generate
innovative ideas and move them through the organization, help
create new products, services and solutions, develop new markets
and improve operations. The Challenge was set up in the form of a
competition with elimination rounds in front of a jury.
All Transcontinental employees were eligible to participate. Teams
of 8 people were formed in each business group. They were multifunctional and multi-level with a mix of background, gender and age.
In all there were 168 teams which mobilized over 1,500 employees.
Each team presented its idea in an elimination round before a jury.
Each idea was evaluated on three criteria: fit with strategy or brand,
potential for revenue and profitability, feasibility-ease of execution.
In addition, two million dollars were set aside to fund the winning
ideas. The Challenge produced four winning ideas. Feasibility
studies are now being carried out on these ideas.
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While the Innovation Challenge was a formal approach to innovation,
we have been innovating continuously for over 35 years: we were the
first to launch a door-to-door distribution network across Quebec,
we developed a unique model for newspaper outsourcing in North
America and we were the first, in Montreal, to publish a free daily,
to name just a few.
The Innovation Challenge was a first step in establishing an
enhanced innovation culture, one that pushes back the limits of
our imaginations. Our customers already know that we can quickly
find solutions to all kinds of challenges. The Innovation Challenge
is thus the embryo of this new way of developing our creativity.
It is part of the groundwork of finding new ways to develop leading
products, services and solutions, to the benefit of our four pillars:
customers, employees, shareholders and communities.
OUR FOUR PILLARS
customers
employees
shareholders
communities
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11
TC Transcontinental is the largest printer in Canada and the fourth-largest in North America. We mainly
print recurring high volume printed materials for large retailers and publishers and we also produce
personalized marketing products. The Printing Sector has over 5,500 employees and represents
66% of consolidated revenues and 74% of the adjusted operating profit. It is characterized by a national
network of 29 printing plants across Canada including some in the United States. Over the past several
years, we invested over $700 million in our printing network rendering it essentially state-of-the-art.
Over 50% of the print business is under multi-year contracts.
Our Printing
sector strategy
is focused on
“manufacturing
efficiency”.
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2011 Annual Report
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We print five major types of products:
Retail flyers
represent 34% of Printing revenues
with the majority of revenues generated
from customers representing large food
retailers and drug stores. This business
is characterized by contracts typically
ranging from three to five years.
Magazines
represent 18% of Printing revenues
with the two largest customers being
Transcontinental’s Media (TC Media)
sector as well as Rogers. This business
is characterized by contracts typically
ranging from three to five years.
Books
Marketing products
represent 16% of Printing revenues with
products including direct mail, marketing
brochures, annual reports and point-of-purchase
products, among others. This business typically
does not have any long-term contracts.
Our Printing sector strategy is focused
on “manufacturing efficiency”. Our objective
is to drive growth through synergies by
leveraging our most productive assets.
In order to achieve this, we are concentrating
on three drivers:
1) consolidating plants
2) leveraging our new hybrid newspaper
and retail platform and
3) growing market share.
represent 10% of Printing revenues, most
of it generated by educational books and
“trade” books. This business typically does
not have any long-term contracts.
Newspapers
represent 22% of Printing revenues with
the four largest customers being Gesca,
The Globe and Mail, Hearst and TC Media with
the printing of our own community newspapers.
The outsourcing business is characterized by
contracts typically ranging from 15 to 18 years.
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2011 Annual Report
13
2011 OPERATIONAL HIGHLIGHTS
• Consolidated five printing plants namely, Transcontinental
Boucherville, Transcontinental Moncton, Transcontinental Spot Graphics,
Transcontinental TR Offset and Transcontinental Litho Acme.
The Printing sector
has generated organic
revenue growth fairly
consistently over the
past several quarters.
• Sold our Mexican operations (about $63 million in revenues
in 2010) and our black and white book printing business destined
for U.S. export (about $25 million in revenues in 2010) to
Quad/Graphics.
• Announced the indirect acquisition of all the shares of Quad/
Graphics Canada, Inc. This transaction is subject to the approval
of the Competition Bureau. The transaction includes seven of
Quad/Graphics’ facilities across Canada, including six printing plants
and one premedia facility. These operations employ approximately
1,500 people and were forecasted to generate approximately
US$310 million of revenues in fiscal 2011. The combination of the
divestiture of our Mexican operations and black and white book
printing business destined for U.S. export and the acquisition of
Quad/Graphics Canada, is expected to generate at least $40 million
in net incremental EBITDA for TC Transcontinental, over the next
12 to 24 months following the closing of the Canadian transaction.
• Deployed the expanded printing contract with The Globe and Mail,
representing about $25 million of incremental revenues per year,
on our new hybrid platform across Canada. We also started to shift
existing retail work from our retail platform to the new hybrid
platform. Our Western plants have completed the transfer of work
to our most productive assets while our Eastern plants are still
in the process of executing the transfers, given the large volume
of work in this region.
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2011 Annual Report
• Concluded a four-year agreement with Canadian Tire, worth
several hundred million dollars, starting in January 2012. This new
agreement expands services to cover Canadian Tire’s flyer printing
needs on a national scale, for all of its banners, and the printing
of marketing materials as well as distribution service in Eastern
Canada. In addition, Canadian Tire will be able to draw on our other
services, such as data analytics, Canada-wide distribution, e-flyer
production, direct marketing programs via print, mobile and email
channels, and advertising campaigns in our consumer magazines,
newspapers and media websites. This new agreement will add
about $30 to $40 million in incremental revenues on an annual
basis and makes us Canadian Tire’s leading provider of marketing
solutions across Canada.
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2011 FINANCIAL RESULTS
We delivered results that reflect the successful execution of our
strategy. We gained new customers because of our offering and disciplined delivery, we focused on our core businesses and leveraged
our most productive assets. This winning combination significantly
improved our margins and positioned us well for the future.
PRINTING SECTOR AJUSTED OPERATING INCOME (1, 2)
(in millions of dollars)
2010
2011
PRINTING SECTOR REVENUES (1)
$200.9
2010
2011
$1,400.8
$179.6
$1,379.4
$1,350
$165
(1) Excluding the Mexican operations, which are presented as discontinued operations.
(2) For additional information regarding the specific items and non-GAAP measures,
please refer to the section entitled “Reconciliation of non-GAAP financial measures”
in the Management’s Discussion and Analysis for fiscal 2011.
Generating Organic Revenue Growth
The Printing sector has generated organic revenue growth fairly
consistently over the past several quarters. Organic revenues do
not take into account acquisitions, divestitures and closures, the
impact from the exchange rate and the paper component variance.
This measure gives a more adequate portrait of the health of the
underlying business. In 2011, we generated $16 million of organic
growth or 1%, as the non-recurring revenue from the printing
contract for the Canadian Census in the fourth quarter last year
partially offset the gains realized in the first nine months of the
year. These results demonstrate that although we are operating
in a mature industry, we can still grow our top line by gaining
market share.
PRINTING SECTOR ORGANIC REVENUE GROWTH (3, 4)
$13.2
$16.6
$15.8
$7.0
$0
–$13.2
$0.3
Q1-10
Q2-10
–$4.5
Q3-10
Q4-10
–$14.5
Q1-11
Q2-11
Q3-11 (1)
Q4-11 (1)
(3) Growth in revenues excluding the effect of acquisitions, divestitures, closures,
the exchange rates and paper.
(4) As initially reported.
(2) For additional information regarding the specific items and non-GAAP measures, please refer to the section entitled
“Reconciliation of non-GAAP financial measures” in the Management’s Discussion and Analysis for fiscal 2011.
(3) Growth in revenues excluding the effect of acquisitions, divestitures, closures, the exchange rates and paper.
TRANSCONTINENTAL
2011 Annual Report
15
TC Media is one of Canada’s top Media groups. We mainly produce content for three communities
of interest namely, local, women and business and we deploy this content on different platforms
such as, magazines, newspapers and digital. We also create and manage content for our clients
on different platforms. Until October 31, 2011, the Media and Interactive sectors operated
independently but in order to become more agile at meeting the multiplatform marketing
communication needs of our customers, we merged them starting November 1, 2011.
We are one
of Canada’s top
Media groups.
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2011 Annual Report
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The Media sector has over 3,000 employees
and represents 29% of consolidated revenues
and 26% of the adjusted operating profit while
the Interactive sector has over 600 employees
and represents 6% of consolidated revenues.
Our Media sector reaches over 20.8 million
consumers in Canada through its various
platforms. It also publishes educational
books principally for the Quebec market. Our
Interactive sector provides marketing services
and solutions by unifying strategy, content
and multi-channel delivery systems. Over the
past several years, we have significantly
invested in the development of our digital
media properties and interactive solutions.
Community Daily and Weekly Newspapers
Our Media and Interactive content and
delivery solutions can be summarized
as follows:
Content creation and content management
represent 57% of Interactive revenues.
We create custom content for leading
corporations including visual, text and video.
Magazines
represent 25% of Media revenues. With more
than 30 titles reaching over 11 million readers
a month in English and French our titles are
leaders in their respective markets and give
advertisers access to top quality communities of interest: fashion, beauty and lifestyle;
food & cooking, health & wellness; home &
garden; senior living; West of Canada; sports;
and business & finance.
Digital Properties
represent 8% of Media revenues. We have
websites for all our publications as well as
web only brands. We reach over 13 million
unique monthly visitors through a combination of our own digital network and the
networks we represents.
TRANSCONTINENTAL
represent 36% of Media revenues. We publish
about 180 community newspapers in Quebec,
the Atlantic provinces and in Saskatchewan
and reach over 3.5 million readers every week.
Distribution
represents 23% of Media revenues. We deliver
to 3.4 million households in Quebec, primarily
through Publisac, and to 9.3 million households
in the rest of Canada through our Targeo division.
Educational Book Publishing
represents 8% of media revenues. We publish
over 2,400 authors and our books our used
in over 5,000 educational institutions.
Content Solutions
Digital / Interactive Marketing Services
One-to-one marketing, digital promotions,
mobile and digital printing represent 43%
of Interactive revenues. We develop emails,
e-flyers, mobile programs and technologies
and a full range of personalized direct
mail services.
Our new Media sector strategy will be to
produce relevant content for our brands
and our customers’ brands, reach audiences
by deploying this content on different
platforms and continue to grow our audiences.
Essentially, we will focus on paid, owned
and earned media.
2011 Annual Report
17
2011 OPERATIONAL HIGHLIGHTS
• Expanded our digital advertising representation by signing
numerous deals which has led us to triple our digital network
audience. We are now reaching over 13 million unique monthly
visitors per month in Canada through more than 1,000 websites,
bringing our global reach to almost 1 in 2 Canadian Internet users.
• Acquired the publishing assets of Groupe Le Canada Français,
both print publications and websites. Print publications have a
combined weekly circulation of more than 155,000 copies.
• Acquired the majority of the assets of Avantage Consommateurs
de l’Est du Québec inc., including print publications, which have a
combined weekly circulation of 60,000 copies, as well as digital
and distribution activities.
18
2011 Annual Report
• Acquired the community newspapers Journal Nouvelles Hebdo
in Dolbeau-Mistassini.
• Acquired Vortex, a leading provider of integrated mobile solutions
located in Toronto.
• Launched several community newspapers in the following regions
of Quebec: Abitibi, Saguenay, Laurentians, and the Montérégie.
• Launched BidGO.ca, a site dedicated entirely to local online
auctions and themegacatch.com, a group buying website.
TRANSCONTINENTAL
2011 FINANCIAL RESULTS
On the Media sector side, we delivered results that reflect continued
investments for the development of our digital properties, a
heightened competitive landscape in community newspapers in
the province of Quebec, a volatile national advertising market
and the end of the educational reform in Quebec. While we are
experiencing some margin pressure from these investments, we are
gaining traction on our top line as our revenues are growing. On the
Interactive sector side, we delivered mixed results. While our content
solutions performed very well, our Digital/Interactive Marketing
Services underperformed as we are scaling some of them, such as
email marketing, and investing in others, such as mobile.
MEDIA AND INTERACTIVE SECTORS REVENUES
2010
2011
$612.4
$608.3
$125.4
$123.3
$0
Media
Interactive
MEDIA AND INTERACTIVE SECTORS ADJUSTED OPERATING INCOME (1)
2010
2011
$92.5
$71.3
–$10.3
–$3.6
$0
Media
Interactive
(1) For additional information regarding the specific items and non-GAAP measures, please refer
to the section entitled “Reconciliation of non-GAAP financial measures” in the Management’s
Discussion and Analysis for fiscal 2011.
Increasing Our New Revenue Streams
In 2011, Transcontinental increased its new revenue streams 6%, from
$183 million to $194 million. New revenue streams are comprised
of the revenues from the Interactive sector, digital media and
personalized direct mail program. Our goal is to reach $300 million in
revenues by the end of 2013, through a combination of acquisitions
and organic growth.
DIGITAL AND INTERACTIVE REVENUES (2)
$170.3
$183.0
$193.7
$78.0
$0
2008
2009
2010
2011
(2) Includes revenues of digital media, the Interactive sector and personalized direct mail program.
(1) For additional information regarding the specific items and non-GAAP measures, please refer to the section entitled
“Reconciliation of non-GAAP financial measures” in the Management’s Discussion and Analysis for fiscal 2011.
(2) Includes revenues of digital media, the Interactive sector and personalized direct mail program.
TRANSCONTINENTAL
2011 Annual Report
19
• SUSTAINABLE DEVELOPMENT
Since its foundation in 1976, Transcontinental has
put many sustainable development practices in action.
However, it was about 20 years ago that we officially
formalized it with the adoption of our Environmental Policy.
Since then we have worked continuously to improve our
social, environmental and financial performance. In 2009,
we officially put together a Sustainable Development
Steering Committee which was made up of employees
from across the organization, characterized by various
expertise and talent. The role of the Committee is to lead the
organization in the next steps of its sustainability journey.
We release an annual Sustainability Report since 2009, in line with
the Global Reporting Initiative (GRI) standards. The report highlights
our sustainability journey and includes the result of stakeholder
engagement initiatives as well as the progress against our sustainable
development objectives and targets. We are committed to sustainable
development and plan to continue to embed it going forward by
mobilizing stakeholders, supporting innovation, connecting words
to action and communicating progress on objectives and targets.
SOCIALLY RESPONSIBLE CORPORATION
For the third year in a row, TC Transcontinental has been included in
the Maclean’s/Jantzi-Sustainalytics ranking of the 50 most socially
responsible corporations in Canada. Launched jointly in 2007 by
Maclean’s magazine and the research firm Jantzi-Sustainalytics,
the top 50 companies are evaluated based on a broad range of
environmental, social and governance criteria.
Since 2004 we have been listed on the Jantzi Social Index® (JSI),
a market capitalization-weighted common stock index of socially
responsible companies, modeled on the S&P-TSX 60. The JSI
consists of 60 Canadian companies that satisfy a set of broadly
based environmental, social and governance rating criteria.
For the fifth consecutive year, we have been ranked by the independent Canadian media corporation Corporate Knights as one of the
Best 50 Corporate Citizens in 2011. Corporations are selected based
on their community involvement, labour relations, environmental
practices, occupational health & safety and governance practices.
GOVERNANCE
This year we improved the representation of women on our Board of
Directors. We announced the nomination of two new members
to the Corporation’s Board of Directors, Ms. Nathalie Marcoux,
Vice President, Finance of Capinabel Inc., and Ms. Anna Martini,
F.C.A., President of Groupe Dynamite Inc. bringing the representation
of women on the Board to 27% in fiscal 2011 from 15% in fiscal 2010.
In addition, our Corporate Senior Management team boasts close
to 45% of women.
Furthermore, the Board nominated Ms. Isabelle Marcoux as
Chair of the Board, starting February 16, 2012, following the decision
by our founder, Mr. Rémi Marcoux, to officially leave his position as
Executive Chair of the Board at the next shareholders’ meeting.
Mr. Marcoux will remain a member of the Board.
In addition, Isabelle Marcoux was the recipient of the prestigious
2010 Canada’s Most Powerful Women: Top 100TM Awards, in the
Corporate Executives category. This is Canada’s most visible award
for the country’s highest achieving female leaders in the private,
public and not-for-profit sectors. Isabelle Marcoux joins a community
of 522 women across Canada who have received this recognition.
1
4
Mobilize stakeholders
(employees, audiences, customers,
suppliers and partners)
2
Support innovation
Communicate progress
3
Connect words to actions
(internal and external)
20
2011 Annual Report
TRANSCONTINENTAL
OUR VALUES
PROSPERITY
This year Transcontinental improved its return on net assets
versus last year. We continued to leverage the over $700 million of
investment we made to our printing network over the past few years
by using our most productive assets and gaining market share. We
consolidated a number of printing facilities and media assets. We
also started to reap the benefits from the transfer of retail printing
production to our new hybrid retail and newspaper platform. In
addition, we started to print our new expanded contract with
The Globe and Mail, gained new printing contracts and significantly
increased our digital media revenues.
As a result, our return on net assets increased from 8.0% in fiscal
2010 to 8.7% in fiscal 2011, close to our cost of capital of 9%. This
demonstrates that our recent investments and efficiency improvement initiatives are delivering results. This trend should continue in
the next few years as we continue to consolidate plants, monetize
new communication platforms and benefit from market share gains.
PEOPLE
This year we focused on our people by looking at how we want to
conduct business going forward. We thus reviewed and actualized
our values in the context of our new market reality. Our values now
center around Innovation, Teamwork, Respect and Performance.
We create a workplace that offers exciting challenges, promotes
collaboration, trust and creativity. We develop people’s potential
and ensure their professional growth by working in partnership
with them.
Continuous learning and knowledge sharing are what allow us
to succeed and create value for our pillars. This year we added
communities as a fourth pillar of the organization which already
included employees, shareholders and customers. We are a responsible and active player in the communities where we do business
and we have set this as a priority area of focus. Employees at all
levels are involved in many charity donations throughout the year
and we are one of fifty corporations in the greater Montreal area
that gives the most to Centraide.
TRANSCONTINENTAL
innovation
teamwork
respect
performance
ENVIRONMENT
This year we continued to make some significant headway with
regards to our numerous objectives and targets to protect and
restore ecosystems and optimize the use of resources. In fact, we
achieved our paper purchasing, energy savings and greenhouse
gas reduction targets ahead of schedule. We also implemented a
waste management program at several of our printing facilities
and improved our Environmental Management System (EMS)
implementation score.
In addition, Métro Montreal, a free daily newspaper we own in
partnership with Gesca and Metro International, started printing on
paper certified by the Forest Stewardship Council® (FSC®). Métro
has thus become the first newspaper in North America to guarantee
that it is printed on FSC®-certified paper.
We develop people’s
potential and ensure
their professional
growth by working
in partnership
with them.
2011 Annual Report
21
• FINANCIAL PERFORMANCE
In fiscal 2011 we grew organic revenues and profit,
gained new customers, improved our operating margins,
invested in our digital and interactive strategies for future
growth, generated significant free cash flow, made
acquisitions, divested less core businesses, reduced our
capital expenditures, optimized our debt portfolio and
increased our dividends to participating shareholders.
Media and Interactive sectors in order to position ourselves for the
future. Over the next 24 months our EBITDA should continue to trend
upwards given new contract wins, including Canadian Tire, our focus
on leveraging our most productive assets, and expected net
incremental EBITDA of at least $40 million over 12 to 24 months
following the closing of the Quad/Graphics Canada acquisition, which
is subject to the approval of the Competition Bureau.
GROWING OUR REVENUES ORGANICALLY
Our revenues in absolute terms can vary significantly due to
acquisitions, divestitures and closures as well as the impact from
the exchange rates and the paper component variance. In 2011
our consolidated revenues increased 1%, from $2,028 million to
$2,044 million, primarily due to a number of new contracts, most
notably from the expanded relationship with The Globe and Mail.
However, the most important metric to measure is the organic
revenue growth because it gives a better indication of the health
of the underlying business. We generated fairly consistent organic
revenues over the past several quarters, primarily driven by the
Printing sector. The weakness in the fourth quarter was primarily
driven by the non-recurring revenue from the printing contract for
the Canadian Census in the fourth quarter last year.
ADJUSTED OPERATING INCOME BEFORE AMORTIZATION (5, 6)
CONSOLIDATED ORGANIC REVENUE GROWTH (1, 2)
$16.2
$16.0
$10.3
$0
$13.7
$7.4
$11.6
–$17.0
Q1-10
–$20.7
Q2-10
Q3-10
Q4-10
Q1-11
Q2-11
Q3-11 (3)
$373 $375 $373 $373 $374 $376 $375 $373
$343
$326
$339
$300
Q4-08(4) Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10(3) Q4-10(3) Q1-11(3) Q2-11(3) Q3-11(3) Q4-11(3)
(11) Last twelve month basis and as initially reported.
REDUCING CAPITAL EXPENDITURES
Over the past few years we invested over $700 million in new
printing equipment. These investments were made to execute
two major contract wins with the San Francisco Chronicle and
The Globe and Mail as well as to increase the overall efficiency of our
network. In 2011, we only spent $47 million in capital expenditures
of which half was for the Printing sector. Going forward, we believe
we will only require about $75 million on average to continue to run,
grow and transform our business. As a result, our free cash flow
will increase significantly.
CAPITAL EXPENDITURES AND FREE CASH FLOW (7)
INCREASING EBITDA
Our consolidated earnings before interest, tax, depreciation and
amortization (EBITDA), on a rolling basis, has trended upward since
2008, driven primarily by new contract wins coupled with synergies
associated with the use of our most productive assets and continued
efficiency initiatives in the Printing sector. This growth has however
been partially mitigated by continued strategic investments in the
503.333473
CAPEX
2011 Annual Report
$327
Q4-11 (3)
22
$320
406.666779
FREE CASH FLOW
$229
$130
$20
$100
$30
2007
2008
310.000084
$257
$138
$229
$125
$47
2010
2011
–$27
2009
213.333389
116.666695
20.000000
(7) Free cash flow is adjusted operating income before amortization less the sum
of capital expenditures, dividends on participating shares, dividends on preferred shares,
interest paid and income taxes paid (recovered).
TRANSCONTINENTAL
INCREASING OUR DIVIDENDS MORE AGRESSIVELY
We have increased our dividends to participating shareholders once
per year, for the past ten years, except in 2009 where we maintained
our dividend considering the prevailing market conditions at that
time. Recently, we decided to increase the dividend more aggressively given that we are generating significant free cash flow. In fact,
this fiscal year we announced two dividend increases, representing
an increase of 50%. On an annual basis, this represents a cash
outflow of $43.7 million or a dividend of $0.54 per share.
DIVIDENDS ON PARTICIPATING SHARES (8)
OPTIMIZING OUR DEBT PORTFOLIO
Given our free cash flow position, we decided to optimize our debt
portfolio. First, we set up a new two-year $200 million securitization
program with a Canadian bank, which is currently unused. Second,
we repaid more expensive debt ($100 million term credit facility
with Caisse de dépôt et placement du Québec and its five-year term
loan of $50 million with SGF Rexfor Inc.) by drawing on our line
of credit, which boasts a much lower interest cost. Therefore we
succeeded in reducing the cost of borrowing of the Corporation.
PRINCIPAL DEBTS – MATURITY SCHEDULE
(in cents)
(in millions of dollars, as at October 31, 2011)
54¢
54¢
Private Placement
Securitization Program (2 years; undrawn)
Revolving credit facility (undrawn)
Revolving credit facility (drawn)
HVB (amortized 5 years)
Solidarity Fund Debenture (5 years)
Solidarity Fund Debenture (10 years)
$218
32¢
32¢
Q4-09
Q1-10
36¢
36¢
36¢
Q2-10
Q3-10
Q4-10
44¢
44¢
Q1-11
Q2-11
30¢
Q3-11
$400
Q4-11
$200
$182
(8) On an annualized basis.
REDUCING OUR LEVERAGE
We are in a sound financial position. Over the past two years we
have reduced our leverage significantly, moving from a peak of
3.4x net indebtedness ratio in the middle of 2009 to 1.4x adjusted
ratio at the end of 2011. In fact, Standard and Poor’s raised our credit
rating from BBB- (stable) to BBB (stable), reflecting our disciplined
approached to financial management, the continued improvement
in our financial position and our cash flow generating ability.
NET INDEBTEDNESS RATIO (2, 5)
$14
$74
$14
$74
$14
$50
$14
$15
$0
(including securitization)
$50
2012
2013
2014
$50
$10
2015
2016 & thereafter
3.3x 3.4x 3.2x
2.6x
1.9x
2.1x
2.6x
2.4x
2.1x
1.9x 1.9x 1.8x
1.7x 1.6x
1.4x
0
Q4-06 Q4-07 Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10 Q1-11 Q2-11 Q3-11 Q4-11(9)
(14) Adjusted.
TRANSCONTINENTAL
(4) Excluding the US Direct Marketing operations.
(5) For additional information regarding the specific items and non-GAAP measures,
please refer to the section entitled “Reconciliation of non-GAAP financial measures”
in the Management’s Discussion and Analysis for fiscal 2011.
(6) Last twelve-month basis and as initially reported.
(7) Free cash flow is adjusted operating income before amortization less the sum
of capital expenditures, dividends on participating shares, dividends on preferred shares,
interest paid and income taxes paid (recovered).
(8) On an annualized basis.
(9) Adjusted.
2011 Annual Report
23
MANAGEMENT’S
DISCUSSION
AND ANALYSIS
CONSOLIDATED
FINANCIAL STATEMENTS
AND NOTES
24
2011 Annual Report
TRANSCONTINENTAL
MEDIA – INTERACTIVE - PRINTING
M
MANAGEMENT
T’S DISCUSSIION AND ANA
ALYSIS
FFor the fiscal year ennded October 31, 2011
he purpose of this Management’s
M
Discussion
D
and A
Analysis is to expplain managemennt’s point of view
w on the past
perrformance and fu
uture outlook of Transcontinenta
T
l Inc. More specifically, it outlinees our developmeent strategy,
perrformance in relaation to objectives, future expecctations and how
w Management aaddresses risk and manages
finaancial resourcess. This report also
a
provides innformation to im
mprove the reader’s understannding of the
con
nsolidated financcial statements and related nottes. It should thherefore be readd in conjunctionn with those
doccuments.
Inn this document, unless otherwisee indicated, all financial data are prepared
p
in accorddance with Canadian Generally A
Accepted Accounting Principles
(G
GAAP). All amounnts are in Canadian dollars, and thhe term “dollar”, as
a well as the sym
mbols “$” and “C$$”, designate Canadian dollars unleess otherwise
inndicated. In this Management’s
M
Disscussion and Anaalysis we also usee non-GAAP finanncial measures. P
Please refer to thee section of this rreport entitled
“R
Reconciliation of Non-GAAP
N
Financcial Measures” for a complete descrription of these meeasures, on page 440.
TThe consolidated financial
f
statemennts include the acccounts of the Corpporation and thosse of its subsidiariees and joint ventuures. Business acquisitions are
aaccounted for undeer the acquisition method and the results
r
of operatioons of these businnesses are includeed in the consoliddated financial staatements from
thhe acquisition datee. Investments in joint
j
ventures are accounted for using the proportionaate consolidation m
method. Other invvestments are recoorded at cost.
TTo facilitate the reading of this repoort, the terms “Traanscontinental”, “C
Corporation”, “we” , “our” and “us” aall refer to Transcoontinental Inc. toggether with its
ssubsidiaries.
2011 A
Annual Report
TRANSCONTINENTAL
25
2011 Annual Report
25
M
MANAGEMENT
ALYSIS
DEFINITION OF TERMS
T
USED IN THIS
T
REPORT
TTo make it easier to
t read this report,, some terms havee been shortened. The following aree the full definitions of the shortenedd terms used in thiis report:
Terms Used
Defin
nitions
Adjusted net indeebtedness
wn on the
Total of long-term deebt plus current portion of long-tterm debt plus tthe amount draw
securritization program plus bank overdrraft, less cash, caash equivalents aas well as the amount to be
paid to Quad/Graphics following thee closing of thhe transaction too acquire the shares of
Quadd/Graphics Canadaa, subject to approoval by Canadian regulatory authorrities
Adjusted net indeebtedness ratio
Adjussted net indebtedness divided bby the last 12 m
months’ adjusted operating incom
me before
amorrtization
Adjusted operatinng income
m continuing opeerations before im
mpairment of asseets, restructuring costs and
Operating income from
impaiirment of goodwill and intangible asssets
Adjusted operatinng income before
amortization
m continuing operaations before amoortization, impairm
ment of assets, restructuring
Operating income from
o goodwill and inttangible assets
costss and impairment of
Adjusted net incoome applicable to
participating sharres
Net inncome from continuing operations applicable to partticipating shares bbefore impairmentt of assets
and restructuring
r
costss, impairment of ggoodwill and intanngible assets as w
well as expenses related to
long-debt prepayment (net of related inco
come taxes) and u nusual adjustmennts to income taxess
Net income applicable to participatting
shares
Net inncome minus dividdends on preferredd shares
Net income from continuing operattions
applicable to partticipating shares
Net income from coontinuing operatioons minus dividends on preferrred shares and excluding
discoontinued operations
Net indebtednesss
wn on the
Total of long-term deebt plus current portion of long-tterm debt plus tthe amount draw
securritization program plus bank overdraaft, less cash and cash equivalents
Net indebtednesss ratio
mortization
Net inndebtedness dividded by the last 12 months’ adjusted income before am
Organic growth
Grow
wth in revenues, adjusted operatinng income or neet income applicaable to participating shares
excluuding the effect of acquisitions, divesstitures, closures, the exchange ratees and paper
CAUTION REGARRDING FORWARD-LOOKING STAATEMENTS
FFrom time to timee, we make writteen or oral forwardd-looking statemeents within the m
meaning of certainn securities laws, including the “saafe harbour”
pprovisions of the Securities
S
Act (Ontario). We may make such stateements in this doccument, in other filings with Canaadian regulators, iin reports to
sshareholders or in other communicaations. These forw
ward-looking statements include, am
mong others, stateements with respeect to our medium
m-term goals,
oour outlook, busineess project and sttrategies to achievve those objectivees and goals, as w
well as statementts with respect to our beliefs, planss, objectives,
eexpectations, anticcipations, estimatees and intentions. The words “mayy,” “could,” “shouuld,” “would,” “outllook,” “believe,” “plan,” “anticipate,,” “estimate,”
“eexpect,” “intend,” “objective,” the use
u of the conditioonal tense, and words
w
and expresssions of similar nnature are intended to identify forw
ward-looking
sstatements.
B
By their very naturre, forward-lookingg statements involve inherent risks and uncertaintiess, both general and specific, which give rise to the poossibility that
ppredictions, forecaasts, projections and other forward-looking statementts will not be achiieved. We cautionn readers not to pplace undue reliannce on these
sstatements, as a number of imporrtant factors couldd cause our actuual results to difffer materially from
m the beliefs, plaans, objectives, eexpectations,
aanticipations, estim
mates and intentioons expressed in such forward-loooking statements. These factors incclude, but are noot limited to: crediit risks, data
ssecurity and utilizaation, market dynaamics, liquidity, finnancing and operaational risks; the sstrength of the Noorth American ecoonomies in which we conduct
bbusiness; the impaact of the movemeent of the Canadiaan dollar relative to
t other currenciess, more particularrly the U.S. dollar and the euro; the impact from
raaw material and energy
e
prices; the seasonal and cyclical nature of ceertain businesses,, notably the bookk publishing activities, the effects oof changes in
226
26
2011 Annual Report
2011 Annual Report
TRANSCONTINENTAL
M
MANAGEMENT
ALYSIS
innterest rates; the effects
e
of competiition in the marketts in which we opeerate; the effects oof new media andd the correspondinng shift of advertissing revenue
too new platforms; judicial
j
judgmentss and legal proceedings; our abilityy to develop new opportunities throough our strategyy; our ability to hirre and retain
qqualified personneel and maintain a good reputation; our ability to complete and integ rate strategic trannsactions; changees in accounting policies and
m
methods we use to
t report our finanncial condition, inccluding uncertaintties associated wiith critical accounnting assumptionss and estimates; infrastructure
riisks; the possiblee impact on our businesses from public health em
mergencies, internnational conflicts and other develoopments; and ourr success in
aanticipating and managing the foreggoing risks; other factors
f
may affectt future results inccluding, but not lim
mited to, timely deevelopment and introduction of
nnew products and services, changes in tax laws, chaanges in environm
mental regulations, changes in the U
U.S. and Canadiann postal systems policies or a
ppostal strike, technnological changes and new regulatioons.
W
We caution that the foregoing list off important factors that may affect fuuture results is noot exhaustive. Wheen relying on our forward-looking statements to
m
make decisions with respect to the Corporation,
C
invesstors and others shhould carefully co nsider the foregoiing factors and othher uncertainties aand potential
eevents. Assumptioons used to derivee forward-looking information could vary materially o ne at a time or inn conjunction. Varriation in one assuumption may
aalso result in changges in another, whhich might magnifyy or counteract thee effect on forwardd-looking informattion. Unless otherw
wise required by the securities
aauthorities, we do not undertake to update any forwaard-looking statem
ment, whether writtten or oral, that m
may be made from
m time to time by us or on our
bbehalf. See “Riskss and Uncertaintiees” of this report for a descriptionn of the most impportant risks idenntified by the Corpporation. The forw
ward-looking
sstatements containned herein are bassed on current exppectations and infoormation availablee as of December 8, 2011.
TTC TRANSCONTTINENTAL PROFIILE
TTC Transcontinenttal creates marketting products and services that allow
w businesses to aattract, reach and retain their target customers. The C
Corporation is
thhe largest printer in Canada, and fourth-largest
f
in North
N
America. It is also one of Caanada’s top media groups as the leading publisher of consumer
m
magazines and Freench-language edducational resources, and of commuunity newspapers in Quebec and thee Atlantic provincees. TC Transcontiinental is also
thhe leading door-too-door distributor of
o advertising mateerial in Canada through its celebrateed Publisac netwoork in Quebec andd Targeo in the rest of Canada.
TThanks to a wide digital networkk of more than 1000 websites, the company reeaches over 13 m
million unique vissitors per month in Canada.
TTC Transcontinenttal also offers interactive marketing products and serrvices that use neew communicationn platforms supporrted by marketing strategy and
pplanning services, database analyticcs, premedia, e-flyyers, email marketiing, custom comm
munications and m
mobile solutions.
TTranscontinental Inc. (TSX: TCL.A, TCL.B, TCL.PR.D), known by thee brands TC Tra nscontinental, TC
C Media and TC Transcontinental Printing, has
aapproximately 10,0000 employees inn Canada and thee United States, and reported reveenues of C$2.0 bbillion in 2011. Foor more information about the
C
Corporation, please visit www.tc.tc.
PREAMBLE
TThe consolidated financial statements and all financcial data in this reeport have been restated to preseent net results off discontinued opeerations. The
financial informatioon disclosed hereein thus represennts the Corporatioon's continuing opperations and, exxcept for net incoome applicable too participating
sshares, excludes thhe results for printting operations in Mexico.
SUMMARY OF ACCTIVITIES IN FISCCAL 2011
Inn fiscal 2011, Traanscontinental repported increased organic growth inn revenues and aadjusted operating income compared to fiscal 20100. All sectors
ccontributed to the higher revenues, with the greatest contribution coming from the Printiing Sector, which benefited from neew printing contraacts, including
thhe contract to prinnt The Globe and Mail daily paper. Growth
G
in adjusted operating incom
me derives mainly from the Printing Sector, as indicatted above, as
w
well as the significcant improvement in operational effficiency and equippment optimizatio n. However, this increase was parrtially offset by thee decrease in
aadjusted operatingg income in the Media
M
and Interacttive sectors. The Media Sector expperienced the advverse impact of the acceleration oof its strategic
innvestments in its digital
d
platforms annd stiffer competition in some of its more traditional n iches while the Interactive Sector ccontinued its integrration and the
ddevelopment of its interactive marketing solutions during the year.
TThe Corporation entered into an agrreement with Quad/Graphics, subject to obtaining reggulatory clearancees, for the indirectt acquisition of all the shares of
Q
Quad/Graphics Caanada. With this trransaction, the Priinting Sector shouuld be able to leveerage its investmeents of more than $700 million overr the past few
yyears to set up its Canada-wide hybrid printing platfoorm, among otherr things. The Corpporation expects tthe Quad/Graphiccs transaction to bbe finalized in
eearly 2012. Also, inn a separate transsaction, Transcontinental inked an agreement
a
to sell Q
Quad/Graphics itss Mexican printing operations and trransfer to it its
bblack and white boook printing businness destined for U.S. export. Upoon approval by Meexican regulators, this transaction closed in fourth qquarter 2011.
TThese transactionss represent an exchange of assets. Transcontinental believes that theese transactions sshould generate an additional amouunt of at least
$$40 million in operating income beefore depreciation and amortizationn, on an annualizzed basis, in the 12 to 24 monthhs following the cclosing of the
Q
Quad/Graphics Caanada transaction. The Printing Secctor also benefited from new printingg contracts in 201 1, as noted abovee, and signed new
w agreements
dduring fiscal 2011 that will contribuute primarily in fisscal 2012, such as
a the agreement with Canadian TTire which should increase revenues by $30 to
$$40 million as of Jaanuary 2012.
TThe Media Sector actively strengthened its core operations
o
during the year with thhe acquisitions oof Groupe Le Caanada Français aand Avantage
C
Consommateurs de l’Est du Québecc, as well as the laaunch of communnity papers to counnter greater comppetition in its newsspaper publishing operations in
Q
Quebec. The sector also accelerateed the developmeent of new produccts by considerabbly expanding its C
Canadian digital rrepresentation seervice through
aagreements with Ziff
Z Davis and Thee New York Timess Company. In thee past year, with tthese new agreem
ments and the devvelopment of its eexisting digital
pportfolio, it has trippled the audience for its digital netw
work. The uncertainty in the North A
American economyy in fiscal 2011 resulted in greater ffluctuations in
sspending by national advertisers, which
w
particularly affected the Bussiness and Consuumer Solutions G
Group. The Educaational Book Publlishing Group
2011 Annual Report
TRANSCONTINENTAL
27
2011 Annual Report
27
M
MANAGEMENT
ALYSIS
reecorded a significcant adverse imppact related to coompletion of the Quebec educatioonal reform and pprovincial government cutbacks inn budgets for
eeducational materials. This group did,
d however, impplement a strateggy to develop new
w products to paartially offset this unfavourable imppact in future
qquarters.
G
Given the multipliccity of communicaation channels annd the Corporation’s development plan to strengtheen its core operattions and build neew marketing
sservices, Transconntinental announceed that since Noveember 1, 2011, the Media and Interractive sectors havve been combinedd into a single secctor. The goal
iss to make the com
mpany more agilee in its response to
t the multiplatforrm marketing com
mmunications needds of customers. The newly combiined sector is
reesponsible for publishing products and services, disstribution, data annalytics, productioon and managemeent of marketing content, as well aas interactive
m
marketing and digital media solutions.
TThe Corporation’s financial situationn considerably impproved in fiscal 20011, with a significcant decrease in nnet indebtedness. The decrease steems primarily
frrom a smaller cappital spending proggram, which was limited to less thaan $50 million in 22011, and significaant cash flows gennerated by operattions. In fiscal
22011, the adjustedd net indebtednesss ratio fell from 1.87x
1
to 1.44x at October 31, 20111. Furthermore, inn December 2010, the Standard & Poor’s credit
raating agency raise Transcontinentaal’s rating from BBBB
(stable) to BBB
B (stable) as a result of the Coorporation’s improoved financial possition and the
ccontinued improvement in its financial risk profile. In addition
a
to reducinng its net indebteddness, Transcontinnental greatly optimized its debt portfolio. Firstly,
thhe Corporation seet up a new twoo-year securitizatioon program of $2200.0 million. Seccondly, the Corpooration repaid, thhree years beforee maturity, its
$$100.0 million term
m credit with the Caisse
C
de dépôt et
e placement du Québec
Q
and its $550.0 million term loan with SGF Reexfor. These repaayments were
m
made using the revvolving term creditt facility, which currrently bears intereest at a much low
wer rate.
HIGHLIGHTS OF FISCAL 2011

Revenuues for fiscal 2011 were up 0.8% oveer 2010, from $2,0028.3 million to $22,043.6 million.
o The increase stems mainly from new Printing Sector
S
contracts, iincluding the con tract to print The Globe and Mail. The positive
impact of papeer prices also conttributed partially offset by the adversse effect of the risse in the Canadiann dollar.

Adjusted operating incom
me rose from $249.9 million in fiscal 2010 to $252.7 m
million in fiscal 201 1.
o The increase stems
s
primarily froom the Printing Seector, which signifficantly improved iits operational efficiency and benefiited from new
printing contraacts. This increasee was partially offfset by an increasse in strategic invvestments in the Media and Interactive sectors,
stiffer competiition in some tradditional Media Secctor niches, and thhe adverse $5.0 m
million impact of tthe rise of the Caanadian dollar
versus the U.S
S. dollar. As a resuult, operating income margin rose frrom 12.3% to 12.44%.

Adjusted net income applicable to participaating shares increaased by $5.8 millioon, or 3.7%, from $155.9 million in 22010 to $161.7 million in 2011.
o The increase is
i mainly due to hiigher adjusted opeerating income in cconjunction with loower financial exppenses and income taxes. On a
per-share basis, it rose from $1..93 to $2.00.

Net incoome applicable to participating shares went from $1666.6 million in 20110 to $77.8 millionn in 2011. The deccrease is due to uunusual items
almost all
a of which have no
n impact on cashh flow:
o In 2010, a gainn on the sale of direct mail assets inn the United Statess of $39.2 million was recorded, net of related incomee taxes.
o In 2011, an im
mpairment of gooddwill and intangiblee assets as well aas a net loss relateed to the discontinnuance of the Mexican printing
operations, resspectively of $45.11 million and $22.7 million (net of reelated income taxees), were recordedd.
Onn a per-share basis, it declined from
m $2.06 to $0.96.
228
28

Transcoontinental’s adjusted net indebtedneess ratio was 1.44xx at October 31, 22011, compared too 1.87x at Octoberr 31, 2010.
o The improvem
ment stems mainly from the cash flow
ws generated andd the considerablee reduction in capittal spending, whicch was limited
to less than $50 million in 20011; this broughtt adjusted net inndebtedness dow n from $698.8 m
million at Octoberr 31, 2010 to
$489.4 million at October 31, 20011.

The Coorporation announced that the Board of Directors haad confirmed the decision of its foounder, Rémi Marrcoux, to give up his duties as
Executivve Chair of the Booard. Mr. Marcouxx will, however, rem
main a board mem
mber. The Board aalso nominated Isabelle Marcoux ass Chair of the
Board. This
T change will taake effect at the next shareholders meeting.
m

t Corporation h ad a new operatinng structure that w
would make it moore agile in its
The Corporation announcced that as of Novvember 1, 2011, the
responsse to the multiplatfform marketing neeeds of its custom
mers. The Media aand Interactive secctors were combinned to form a single sector with
Natalie Larivière as its preesident.

After the close of its 2011 fiscal year, the Corporation annoounced the appoinntment of Nelson Gentiletti to the pposition of Chief FFinancial and
Developpment Officer. Mr. Gentiletti joined the Corporation onn December 5, 20 11.

The quaarterly dividend onn a per-participating-share basis waas increased twicee during the year . It was raised froom $0.090 to $0.110 in the first
quarter and, raised again in the third quarteer to its current levvel of $0.135, for a total increase of 50%.
2011 Annual Report
2011 Annual Report
TRANSCONTINENTAL
M
MANAGEMENT
ALYSIS
STRATEGY
TTranscontinental’s ultimate goal is too ensure its growtth and profitabilityy while promoting the common interrests of its employyees, customers, shareholders
aand communities, the four pillars of the organization. The strategy is based on several ffundamental princciples: to be the leeader in the markeets served, to
hhave a disciplined approach to acquisitions and financcial management, and to foster a cuulture of innovationn and customer saatisfaction.
H
Having said this, Transcontinental’s
T
s mission is to heelp its customers identify, reach annd retain their target consumers. It does so by offfering printing
which its customeers are increasinggly choosing for thheir marketing
pproducts and serviices, media content, media vehicless and many new online
o
platforms, w
ccampaigns. The Corporation
C
will continue to developp and adjust to new customer realitties in order to heelp them maximizee the return on thheir marketing
ddollar. Its vision is to remain Canada’s leader in a nuumber of its nichess, but also to carvve out a leading pposition as a proviider of marketing products and
sservices.
TTranscontinental’s transformation coontinues as it guides the customer’ss marketing activattion process, draw
wing on both its traaditional and its innteractive and
ddigital products and services. The coompany’s approacch is two-pronged: 1) leverage its eexisting operationss and 2) develop nnew avenues in innteractive and
ddigital marketing solutions.
s
Consequently, in additionn to conducting itts existing operattions more effectiively, it is ramping up the developpment of new
aavenues on new digital platforms. Trranscontinental is also gradually shifting from a moree general offering tto one that is morre differentiated, innnovative and
taailored to each cllient, activated through all of its prrint and digital prroducts and servicces. The Corporaation believes thaat this will maximize its growth
ppotential over the medium
m
and long-term.
11) Leverage itss existing opeerations
FFrom the very begginning, Transconttinental has takenn calculated risks to support growthh in its operations . Whether this invvolves investmentts in property,
pplant and equipmeent, or the acquisiition of other businesses, the comppany has always hhad a single goall: to serve its custtomers better whiile generating
aattractive returns foor its shareholderss. These decisionss have resulted inn a solid base of w
what could be calleed conventional print, content and m
media vehicle
ooperations. In these traditional activities, Transcontineental is characterizzed by the quality of its workforce, itts strong and loyal customer base, iits position as
a Canadian leaderr, its strong brandss and its network of
o state-of-the-art printing plants. Thhe Corporation alsso has key advanttages that can help it grow new
sservices: outstandiing expertise in thhe printing of communication produccts, top-quality coontent production, effective distributtion of such conteent through its
taargeted multi-channnel platforms, and the fact that it coontinues to be a customer-focused oorganization serviing both advertiseers and consumerss.
H
Here are some of Transcontinental’s
T
s achievements in fiscal 2011:

Signing of an agreement to acquire all sharres of Quad/Graphhics Canada; the aagreement is subjject to approval byy Canadian regulaators.

Higher revenues
r
in the Loocal Solutions Grooup
o Acquisition of the assets of Grouupe Le Canada Frrançais: 11 weeklyy papers and a seeries of web portals
Québec: three weekly papers and a regional informattion portal
o Acquisition of the assets of Avantage Consommaateurs de l’Est du Q
o Launch of sevveral weekly paperrs in Quebec
o Increase in disstribution revenuess

New agreements were siggned in fiscal 2011, bringing to more than a dozen thee number of publi cations printed at its Fremont, Califfornia plant.
O
Over the next yeaar, as the leader in several of its niches
n
and given its enviable financcial position, the Corporation will ccontinue to strenggthen its core
ooperations in orderr to maintain its grross profit marginss and preserve its market share.
22) Develop new
w directions in
n interactive and
a digital maarketing soluti ons
TTranscontinental derives
d
most of its revenues from thhe marketing budggets of its clients. In recent years, too meet their changing needs, Transscontinental’s
ooffering has greatlyy evolved and it has
h integrated onee-to-one marketingg and new platform
ms for interactive marketing communications into its broad line of
pprint products and media content foor both its own braands and for custtomers. The follow
wing is a selectedd list of the Corpooration’s achievem
ments in fiscal
22011:

Acquisittion of Vortxt Interractive, a Canadiaan leader in mobilee solutions. This aacquisition, in conjunction with that oof Lipso Systems in April 2010,
enhances Transcontinenttal’s mobile solutioons offering.

d
audience byy, among other thi ngs, winning new
w major contracts aand rolling out new
w websites:
In fiscal 2011, the Media Sector tripled its digital
o
o
o
Online advertising representatioon for Ziff Davis annd The New York Times Company,, to represent Cannadian advertisingg inventory for
their respective brands
Launch of them
megacatch.com site to meet the neeeds of local adverrtisers and commuunities
Launch of BidG
Go.ca, an innovative site dedicated entirely to local a uctions

Canada.
The Inteeractive Sector waas named by Red Pill Email as the leeading supplier off email and messaaging solutions in C

The Inteeractive Sector woon more than 30 major
m
awards at thhe 2011 Magnum O
Opus Awards, whhich recognizes exxcellence in publishing, concept
and straategy in custom media.
m

The Caanadian Bookselleers Association (C
CBA) chose the Printing
P
Sector ass its official suppliier of ebook soluutions for distributtion by online
bookstoores.
2011 Annual Report
TRANSCONTINENTAL
29
2011 Annual Report
29
M
MANAGEMENT
ALYSIS
Inn short, Transconntinental plans to leverage its unique marketing prooducts and servicees to accelerate development of its new integratedd services for
aadvertisers. The Corporation’s
C
solidd foundation builtt up over time byy its existing opeerations, its nichee strategy and itss positioning in new emerging
m
marketing and meedia trends will allow it to take advvantage of opportuunities that will arrise in the medium
m and long term.. Implementation of these new
sservices should acccelerate in the nexxt few years.
H
However, certain challenges
c
must bee overcome to enssure the Corporatiion maximizes thee integration and ddevelopment of itss new activities. Thhe focus must
bbe on developing interactive
i
marketting strategies for customers, while further integratingg existing productts and services. G
Given the sweepinng changes in
thhe print and publishing industries,, Transcontinental aims to achievee an integrated aapproach that alloows it to respondd to the evolving needs of its
ccustomers as well as new consumerr behaviours.
o
across thee Corporation, a nnew operating struucture was introduuced effective
Inn order to accelerrate the implemenntation of the markketing activation offering
N
November 1, 2011. The purpose off the new structurre is to group all digital and interaactive marketing ssolutions in orderr to ramp up the integration of
TTranscontinental’s marketing activation offering.
TTrends in the Marketplace
M
TThe Corporation dooes business in inndustries that are transforming
t
at a rapid
r
rate. In fact, unprecedented chhanges are sweepping the publishingg and printing
inndustries, presentting both opportunnities and risks. Marketing is increassingly based on a one-to-one apprroach and the cusstomers who use ssuch services
aare focusing more and more on retuurn on investmentt and measurabilitty. As such, camppaigns are becom
ming increasingly targeted as adverttisers seek to
eestablish and deveelop a relationshiip with their custoomer base. Conccurrently, the rise of new media, ddigital platforms aand changing consumer habits
ccoupled with the inncreasing availability of data and teechnology to makke better use of thhis data, is increaasing audience fraagmentation, personalization of
ccontent, user-geneerated content and web-based com
mmunities. The veelocity of a numbeer of trends has i ncreased. This iss especially true foor the rate of
aadoption of digital technologies
t
and the ensuing migraation of advertisingg dollars toward onnline platforms.
TThe ongoing transsformation of the media and markketing industries is having a profoound impact on thhe printing industtry. Print productss remain key
ccomponents in the media mix, but thheir growth is limiteed due to the grow
wing impact of thee trends noted aboove. The printers w
who will be able too benefit from
thhis fast-evolving market
m
are those who
w have the lateest technology and can offer a full line of multiplatfoorm solutions. Theese new technologgies enable a
bbetter response to customers’ needss, while simultaneoously enhancing printers’
p
operationaal efficiency
Inn addition, macrooeconomic factors such as the economic
e
slowdow
wn, the volatility of the Canadiann dollar, the rise of environmentaal and social
cconsciousness andd globalization of markets
m
all have an
a effect on Transccontinental’s businness.
TTaken as a whole, these new trendss have started to have
h
an impact onn the demands annd expectations off customers. In fact, they have driveen customers
too increasingly expperiment with one--to-one marketing, new platforms annd an integrated s ervice offering froom their suppliers. The Corporation has therefore
ddesigned its strateggy to profit from thhese trends.
ENVIRONMENT AND
A SUSTAINAB
BLE DEVELOPME
ENT
TTranscontinental reecognizes the crittical nature of envvironmental issuess, and takes extennsive precautionss to protect the ennvironment. The C
Corporation is
nnot a major contribbutor to greenhouuse gases (GHG). However, we arre concerned abouut the impact of its activities on air quality. Striving every day to
im
mprove its environnmental performannce, the Corporatee policies and proocedures are founnded on three main guiding principlees: (1) protect thee environment
foor present and futuure generations, (2) reduce risks annd improve efficienncies, and (3) introoduce advanced teechnology and proocesses.
A
Also, in February 2011,
2
the Corporaation tabled its Suustainability Repoort 2010 – Conneccting Words to Acctions, based on tthe Global Reportting Initiative
(G
GRI) standard. Thhis report articulatees Transcontinental’s commitment to the path of sustaainable developm
ment around four thhemes:

Engagemeent and ownersh
hip: Mobilize employees at all levelss of the organizatioon, as well as supppliers, customers and partners.

Innovation
n is the key driveer, internally and externally: Suppporting and rewardding initiative as a key component off the strategy

Connectin
ng words to actio
ons: Setting targetts and key perform
mance indicators tto measure progreess.

Shared journey: Communiccating challenges and progress at each
e
step of the waay.
FFor more information, please see thee Sustainability Reeport 2010 – Connnecting Words to A
Actions, at www.trranscontinental-eccodev.com
Inn fiscal 2011, Transcontinental disttinguished itself inn the environmentaal arena and in thhe community. Firrst, for the third yeear in a row, Trannscontinental
w
was included in thee Maclean’s/Jantzzi Sustainalytics raanking of the 50 most
m responsible coompanies in Canaada. This ranking is established by measuring a
bbroad range of envvironmental, sociaal and governancee (ESG) indicators. Also, once agaain, the Corporatioon was ranked byy Corporate Knighhts as one of
C
Canada's best 50 corporate citizenss. This is the fifth consecutive yearr that Transcontineental has been inncluded in this rannking. Corporate K
Knights is an
inndependent Canaadian-based mediaa company which annually evaluates corporations bbased on their com
mmunity engagem
ment, occupationaal health and
ssafety and governaance practices.
TTranscontinental has
h introduced envvironmental policiees to minimize its environmental im
mpacts. See Transscontinental’s Annnual Information FForm for more
innformation.
330
30
2011 Annual Report
2011 Annual Report
TRANSCONTINENTAL
M
MANAGEMENT
ALYSIS
SELECTED FINAANCIAL DATA
FFor fourth quaarters and fisccal years endeed October 31
(unaudited)
Three months ended October 31
( millions of dollars, except
(in
e
per share data))
2011
Operations
O
Revenues
$
Adjusted operating income
i
before amortizzation (1)
Operating income
(1)
Adjusted operating income
i
Net income applicabble to participating shaares
Adjusted net incomee applicable to particippating shares (1)
Cash flow from operating activities beforee changes in non-cashh
operating items (11)
Cash flow related too operating activities of continuing operations
Investments
Acquisitions of propperty, plant and equipm
ment
Business acquisitionns
(2)
Per share data (basicc)
P
Net income applicabble to participating shaares
537.5
116.7
2010
$
3
For fiscal years ended October 31
Variation
in %
556.4
118.8
-3%
25.9
86.3
66.9
88.9
-61%
8.0
60.2
44.5
62.7
-82%
2011
$
2,043.6
373.0
Variation
in %
2010
2,028.3
373.2
1%
182.1
252.7
222.5
249.9
-18%
166.6
155.9
-53%
-4%
77.8
161.7
-2%
-3%
$
0%
1%
4%
103.7
111.8
-7%
311.0
311.1
0%
118.7
43.7
n/a
304.7
156.0
n/a
10.2
30.4
16.0
7.1
-36%
125.0
14.0
-62%
n/a
47.4
35.8
n/a
0.10
0.55
-82%
0.96
2.06
-53%
Adjusted net incomee applicable to particippating shares (1)
Cash flow from operating activities beforee changes
0.74
0.78
-5%
2.00
1.93
4%
in non-cash operaating items (1)
Cash flow related too operating activities of continuing operations
1.28
1.38
-7%
3.84
3.85
0%
1.47
0.14
0.54
0.09
n/a
56%
3.76
0.49
1.93
0.35
95%
40%
81.0
80.9
81.0
80.8
A
Average
number of paarticipating shares outsstanding (in millions)
As at
October 31
2011
F
Financial
condition
$
Total assets
2,453.6
As at
October 31
2010
$
2,594.7
(1)
489.4
698.8
Shareholders' equityy
1,329.0
1,247.0
1.31x
1.87x
Net indebtedness
Net indebtedness raatio (1)
Shareholders' equityy per participating shaare
N
Number
of participating shares at end of perriod (in millions)
(11)
Please refer to the section "Reconciliation of non-GAAP Financcial Measures" on pagge 41 of this Managem
ment's Discussion and Analysis.
(22)
Total consideration in cash or otherwise for
f businesses acquireed through the purchaase of shares or assetss.
$
15.17
81.0
$
14.16
81.0
2011 Annual Report
TRANSCONTINENTAL
31
2011 Annual Report
31
M
MANAGEMENT
ALYSIS
DETAILED ANALLYSIS OF FISCALL 2011 OPERATTING RESULTS
A
Analysis of Maain Variances - Consolidateed Results
FFor the fiscal year
y ended Occtober 31, 2011
(unaudited)
Neet income applicable
((in millions of dollars)
Results - For fiscall 2010
Revenues
$
%
$
2,028.3
0.9
Acquisitions/Divestittures/Closures
Adjussted operating income
%
to participating shares
249.9
$
%
166.6
0.0 %
(2.1)
(0.8) %
(1.6)
(1.0) %
Existing operations
Paper effect
19.3
1.0 %
(1.8)
(0.7) %
(1.4)
(0.8) %
Exchange ratees effect
(11.0)
(0.5) %
(5.0)
(2.0) %
(4.0)
(2.4) %
6.1
0.3 %
11.7
4.7 %
12.8
7.7 %
-
- %
-
- %
(50.6)
(30.4) %
and unusual adjustm
ments to income taxes
-
- %
-
- %
(39.8)
(23.9) %
Expenses related to debt prepayment
-
- %
-
- %
(4.2)
(2.5) %
2,043.6
0.8 %
252.7
1.1 %
77.8
(53.3) %
Organic growthh
Discontinued operatioons
Impairment of assetss, restructuring costs
impairment of goodw
will and intangible assetts and
Results - For fiscall 2011
$
$
$
A
As shown in the abbove table, a numbber of factors conttributed to the variiation between ressults in fiscal 20111 and fiscal 2010.

The net effect of acquissitions, divestituress and closures inncreased revenuees by $0.9 million and decreased adjusted operatinng income by
a income taxess, the negative efffect on net earnnings amounted tto $1.6 million. TThis decrease
$2.1 million. Net of finanncial expenses and
d
costss and integrating aacquisitions in the Interactive Sectorr, partially offset bby the positive
comparred to 2010 stems mainly from the development
impact of
o Media Sector acquisitions in fiscaal 2011.

The papper effect increaseed revenues by $19.3 million. This figure includes vaariations in the priice of paper, papeer supplied and chhanges in the
type of paper used by customers
c
of its printing operationns. Note that for its printing operaations, these elem
ments affect reveenues without
impactinng adjusted operaating income. For the Media Sectorr, the variation in tthe price of paperr had a $1.8 millioon negative impacct on adjusted
operatinng income and a $1.4
$ million negativve impact on net income.

The risee in the Canadian dollar versus the U.S. dollar had an impact on fiscall 2011 results, deccreasing revenuess by $11.0 million and adjusted
operatinng income by $5.0 million. The neggative variation inn average spot exxchange rates in fiscal 2011 versuus fiscal 2010 waas 5.4%. With
respect to revenues, the conversion of salees of the U.S. unitts had a negative impact of about $$5.7 million. The nnegative impact off export sales,
net of currency
c
hedging,, was $5.3 million. The conversion U.S. units activitties had a negativve impact of $0.66 million on adjustted operating
income. The negative im
mpact of export saales, net of currenncy hedging and ppurchases in U.S.. dollars, was $5.88 million on adjusted operating
c
of balaance sheet items related to the opeeration of Canadiaan units denominaated in foreign
income. Finally, the posittive impact of the conversion
currenccy was $1.4 millionn on adjusted operrating income. Takking into consideraation the operationns, financial expennses and income ttaxes, the net
negativee effect was $4.0 million.

Organicc growth in revenuues amounted to $6.1
$ million, or 0.3%, in fiscal 2011. The increase stem
ms largely from thhe contribution of nnew contracts
in the Printing
P
Sector, particularly the conntract to print Thee Globe and Maiil, to higher saless in the Media Seector’s New Media and Digital
Solutionns Group, and to higher revenues in distribution and newspaper pubblishing operationss of the Local Soolutions Group. Thhe Interactive
Sector contributed to revvenue growth in fiscal 2011, prim
marily through its premedia and cuustom communicaations divisions. H
However, this
me decrease in magazine,
m
book annd catalogue prinnting, and, for thee Educational Boook Publishing
increasee was partially offfset by the volum
Group, completion of the educational reform in Quebec, as well
w as a decline i n national advertissing which affecteed the Business annd Consumer
million in fiscal 20111, stems mainly from greater
Solutionns Group. Organicc growth in adjussted operating inccome, which rose 4.7% to $11.7 m
operatioonal efficiency andd new printing conntracts. These elem
ments were, howeever, partially offseet by the acceleraation of strategic innvestments in
the Meddia and Interactivee sectors in order to further developp digital solutions and interactive m
marketing servicess, stiffer competitioon in some of
the morre traditional nichees and the adversee impact of the com
mpletion of the edducational reform iin Quebec.
Im
mpairment of Assets and Restructuring
R
Costs
C
Inn fiscal 2011, an amount of $18.4 million before taxx ($13.4 million aftter tax) was accoounted for separattely in the consoliidated statement of income as
im
mpairment of asseets and restructuring costs. Of that amount, $12.1 million is due to worrkforce reductionss across the Corpooration, $3.9 millioon stems from
aasset impairment and
a $2.4 million too other costs, all mainly
m
related to plaant closures in thee Printing Sector.
332
32
2011 Annual Report
2011 Annual Report
TRANSCONTINENTAL
M
MANAGEMENT
ALYSIS
im
mpairment of asseets and restructuriing costs. Of that amount, $12.1 miillion is due to wo rkforce reductionss and $2.8 million to asset impairmeent and other
ccosts in the Printing and Media sectoors.
mpairment of Goodwill and
d Intangible Asssets
Im
FFor fiscal 2011, ann amount of $52.22 million before tax ($45.1 million affter tax) was accoounted for separaately in the consolidated statement of income as
im
mpairment of goodwill and intangibble assets. Most of
o this impairment stems from the iimpairment of gooodwill, primarily reelated to one-to-oone marketing
aactivities in the Inteeractive Sector, annd trade-name write-downs for some publications in tthe Media Sector.
im
mpairment of gooddwill and intangiblee assets. Most of this impairment sttems from trade-n ame write downs for some publications in the Media Sector.
FFinancial Expeenses, Expensses Related to
o Debt Prepayment and Disccount on Salee of Accounts Receivable
C
Combined, financial expenses, expenses related to debt prepayment and discount on sale of accountss receivable rose by $1.6 million, oor 3.7%, from
$$43.5 million for fisscal 2010 to $45.1 million for fiscal 2011.
2
This increasse comes mainly ffrom expenses related to early repaayment of the term
m credit facility
w
with the Caisse de dépôt et placemeent du Québec andd to the early repaayment of the term
m loan from SGF R
Rexfor.
H
However, excludinng these non-recuurring expenses of
o $5.8 million ($44.2 million after taax) of which $1.4 million had no im
mpact on cash floows, financial
eexpenses amounteed to $39.3 millioon for fiscal 20111, down 9.7% coompared to 2010.. The decrease is mainly due to a significant reduction in the
C
Corporation's net inndebtedness in fisscal 2011 and a loower weighted aveerage interest rate compared to last year.
Inncome Taxes
Inncome taxes decrreased by $3.8 million, from $34.1 million
m
in fiscal 2010 to $30.3 millio n in fiscal 2011. E
Excluding income taxes on impairm
ment of assets
aand restructuring costs,
c
on impairmeent of goodwill andd intangible assetss, on expenses re lated to early paym
ment of long-term debt and unusuaal adjustments
too income taxes, inncome taxes wouldd have amounted to $44.0 million, or
o a tax rate of 20. 6%, compared to $42.8 million, or 220.7%, in fiscal 20010.
D
Discontinued Operations
O
Inn the third quarterr 2011, the Corporration signed an agreement to sell itts Mexican printingg operations to Quuad/Graphics. Thiis transaction wass approved by
M
Mexican regulatorss and closed in fourth
f
quarter 20111. For fiscal 2011, the net loss frrom these disconttinued operationss, net of related inncome taxes,
aamounted to $21.22 million. This loss is composed of a:
a

Net losss on divestiture of $22.7 million, relaated mainly to a noon-cash item relatted to the currencyy translation of its investment in Mexxico.

Gain of $1.5 million relateed to operations off discontinued opeerations.
Inn fiscal 2010, net income from discoontinued operationns of $29.4 million, net of related inccome taxes, was rrecorded. Net incoome was compriseed of a:

Gain froom discontinuancee of operation of $39.2
$
million, net of
o related income taxes, following thhe sale of almost all direct mail opeerations in the
United States
S
in April 20110 for net proceeds of $105.7 millionn

Net losss in 2010 of $11.8 million related to the operation of discontinued
d
operaations, net of relateed income taxes.
Net incoome of $ 2.0 millioon in 2010 regardinng the operation of
o Mexican printingg operations, net oof related income taxes.

N
Net income ap
pplicable to paarticipating sh
hares
N
Net income applicaable to participatinng shares went froom $166.6 million in fiscal 2010 to $$77.8 million in fisscal 2011. This deecrease is mainly due to a gain
reelated to the discoontinuance of direct mail operationss in the United Staates in 2010, to a lloss related to thee discontinuance oof printing operatioons in Mexico
inn 2011 and to ann increase in impairment of goodw
will and intangible assets expense in fiscal 2011. O
On a per-share baasis, net income applicable to
pparticipating shares was down, from $2.06 to $0.96.
A
Adjusted net incom
me applicable to participating
p
sharees rose $5.8 millionn, or 3.7%, from $$155.9 million in ffiscal 2010 to $1661.7 million in fiscaal 2011. On a
pper-share basis, it rose $0.07, from $1.93
$
to $2.00.
2011 Annual Report
TRANSCONTINENTAL
33
2011 Annual Report
33
M
MANAGEMENT
ALYSIS
R
Revenues Gen
nerated in U.S. dollars
FFor fiscal yearrs ended Octo
ober 31
(unaudited)
((in millions of US dollars)
2011
Exports from Canada to
t the U.S.
$
142.9
$
247.5
104.6
Revenues generated inn the U.S by U.S. busineess units
Total revenues
Breakdown
2010
57.7 %
$
42.3
146.3
106.3
100.0 %
$
252.6
Change $
2011 vs 2010
Breakdown
57.9 %
$
(3.4)
(2.3) %
(1.7)
(1.6)
$
(5.1)
(2.0) %
42.1
100.0 %
Change %
2011 vs 2010
G
Geographic Diistribution of Total
T
Revenuees in Canadian
n Dollars
ober 31
(unaudited)
((in millions of Canadian dollars)
d
Canada
U.S.
2011
$
1,787.5
Breakdown
87.5 %
2010
$
1,756.7
Breakdown
86.6 %
Change $
Change %
2011 vs 2010
2 vs 2010
2011
$
30.8
1.8 %
Imports from Canadda
152.3
7.5
160.4
7.9
(8.1)
(5.0)
Domestic market
103.8
5.0
111.2
5.5
(7.4)
(6.7)
256.1
12.5
271.6
13.4
(15.5)
(5.7)
15.3
0.8 %
Total U.S.
Total revenues
$
2,043.6
100.0 %
$
2,028.3
100.0 %
$
A
As shown in the toop table above, reevenues generatedd in U.S. dollars were
w down slightlyy in fiscal 2011 coompared to 2010. This decrease is due to lower
U
U.S. exports by Caanadian business units, expressed in U.S. dollars, which were down 22.3%, from US$1446.3 million in 2010 to US$142.9 million in 2011.
TThe decrease stem
ms mainly from thhe sale of Transcoontinental’s black and white printingg destined for U.S
S. export to Quadd/Graphics in Septtember 2011.
R
Revenues generatted by U.S. busineess units were alsso down, from US
S$106.3 million in 2010 to US$104. 6 million in 2011, or 1.6%, mainly due to higher
reevenues at the Frremont printing plan in California; these were more than
t
offset by thee decrease in digi tal printing and direct marketing acctivities in the
Innteractive Sector’ss operations in thee United States. As
A shown in the tabble directly above,, after conversion into Canadian doollars the decreasee increases to
$$7.4 million, or 6.7%, illustrating the negative impact of
o the rise of the Canadian dollar ag ainst the U.S. dolllar in fiscal 2011 ccompared to fiscal 2010.
TThe increase in revvenues generated in Canada stemss mainly from new printing contractss, including the conntract to print Thee Globe and Mail, aas well as the
ccontribution from acquisitions
a
and thhe launch of weekkly papers in Quebbec, partially offseet by the lower voolume of magazinee, book and cataloogue printing.
W
With respect to revvenues in the U.S. domestic markett expressed in Cannadian dollars, thee decrease is maiinly due to the risee in the Canadian dollar versus
thhe U.S. dollar. Thee average exchange rate in 2011 was 0.9898 CAD/USD compared to 11.0460 CAD/USD in 2010.
334
34
2011 Annual Report
2011 Annual Report
TRANSCONTINENTAL
M
MANAGEMENT
ALYSIS
REVIEW OF OPEERATING SECTO
ORS FOR FISCAL
L 2011
A
Analysis of Maain Variances – Sector Resu
ults
FFor the fiscal year
y ended Occtober 31, 2011
(unaudited)
Revenues - For Fiscal 2010
Printing Seector
$
1,379.4
Media Secctor
$
608.33
$
Interactivve
Inter-seegment
Eliminationss and Other
Sectorr
acitivvities
1223.3
$
Consoolidated Results
(82.7)
$
2,028.3
(5.2)
3.55
2.6
-
0.9
Paper effect
19.3
-
-
-
19.3
Exchange rattes effect
(9.1)
-
((1.9)
-
(11.0)
Acquisitions/Divesttitures/Closures
Existing operations
16.4
Organic grow
wth (negative)
1.4
0.66
6.1
(12.3)
Revenues - For Fiscal 2011
$
1,400.8
$
612.44
$
1225.4
$
(95.0)
$
2,043.6
Adjusted operatin
ng income (loss) - Fo
or fiscal 2010
$
179.6
$
92.55
$
((3.6)
$
(18.6)
$
249.9
Acquisitions/Divesttitures/Closures
(0.4)
0.33
((2.0)
-
(2.1)
-
(1.88)
-
-
(1.8)
Existing operations
Paper effect
Exchange rattes effect
(5.1)
-
0.1
-
(5.0)
Organic grow
wth (negative)
26.8
(19.77)
((4.8)
9.4
11.7
Adjusted operatin
ng income (loss) - Fo
or fiscal 2011
$
200.9
$
71.33
$
(110.3)
$
(9.2)
$
252.7
TThis review of opeerating sectors shhould be read in conjunction
c
with the
t information prresented in the abbove table and thhe information dissclosed in the
S
Segmented Information note (note 28) to the Consoliddated Financial Staatements for the fiiscal year ended O
October 31, 2011.
M
Management believes that adjusted operating income by business segm
ment used in this ssection is a meaniingful measure of its financial perforrmance.
P
Printing Secto
or
P
Printing Sector revvenues grew by $221.4 million, or 1.66%, from $1,379.44 million in fiscal 22010 to $1,400.8 m
million in 2011. Exxcluding divestiturres, closures
aand variations in thhe paper and exchhange rates, revennues grew $16.4 million,
m
or 1.2%. TThe growth resulted mainly from new
w printing contractts, especially
thhe contract to prinnt The Globe and Mail. Revenues frrom new contractss more than offsett the difficult markket conditions thatt affected magazinne, book and
ccatalogue printing.
A
Adjusted operatingg income was up 11.9%, from $1799.6 million in fiscal 2010 to $200.9 m
million in fiscal 20011. As a result, the adjusted operaating income
m
margin rose from 13.0%
1
in 2010 to 14.3% in fiscal 20011. Excluding divvestitures, closurees and exchange rrate impact, adjussted operating incoome rose by
$$26.8 million, or 144.9%. This positivee organic growth was
w mainly due too increased revennues and the conssolidation of operaations in certain plants, as well
aas the use of the new hybrid printingg platform, which prints
p
both newspaapers and flyers.
Q
to indirectly acquire all shares of Quadd/Graphics Canadda, including six prrinting plants
Inn third quarter 20111, an agreement was signed with Quad/Graphics
aand a premedia seervice centre. Thiss transaction is beeing reviewed by Canadian regulattors and the Corpporation believes tthat it will be finalized in early
22012. In a separaate transaction, Transcontinental
T
sold
s
the Printing Sector’s Mexicann assets to Quadd/Graphics. This ssecond transactioon has been
aapproved by Mexiccan regulators andd closed in the fourth quarter.
N
New revenues will be generated in fiscal
f
2012 from new printing contraacts signed in fisccal 2011, like the oone with Canadiann Tire in second qquarter 2011,
w
which should add $30
$ to $40 million to revenues annuually starting in Jaanuary 2012. This contract indicatess the effectivenesss of the Corporatioon’s strategy
too integrate its marrketing activation offering
o
by combinning new interactivve marketing soluttions with traditionnal products and sservices. In additioon, given the
ssignificant investm
ment in its print neetwork in recent years,
y
and more efficient
e
equipmennt operation, the C
Corporation believves that the transsactions with
Q
Quad/Graphics could result in additional income befoore depreciation of at least $40 mill ion on an annualiized basis in the 12 to 24 months ffollowing the
ccompletion of the Quad/Graphics
Q
Caanada transactionn. The Sector will also
a benefit of thee Interactive Sectoor’s digital printingg operations in 2012, following
thhe merge of the Interactive and Meedia Sector. Finally, building on thee positive impactss of its efforts to ooptimize use of itss top-performing eequipment in
reecent years, the Printing
P
Sector will continue these effforts going forwarrd.
2011 Annual Report
TRANSCONTINENTAL
35
2011 Annual Report
35
M
MANAGEMENT
ALYSIS
M
Media Sector
M
Media Sector reveenues were up $44.1 million, from $6608.3 million in fisscal 2010 to $6122.4 million in fiscaal 2011. Excludingg acquisitions, divvestitures and
cclosures, revenuess increased $0.6 million, or 0.1%. The increase com
mes mainly from tthe launch of new
w weekly papers in Quebec in fisccal 2011, and
reecent strategic invvestments in the New
N Media and Digital
D
Solutions Group.
G
However, thhe revenue increaase was partially offset by the com
mpletion of the
five-year educationnal reform in Quebbec in which all higgh schools were reequired to purchasse new textbooks , and provincial goovernment cutbaccks in budgets
mer Solutions
foor educational maaterials, which hadd benefited the Edducational Book Puublishing Group inn fiscal 2010. Revvenues in the Business and Consum
G
Group, which was affected by volatility in national advertising throughouut the year, were aalso down in fiscall 2011.
A
Adjusted operatingg income was dow
wn $21.2 million, froom $92.5 million for
f fiscal 2010 to $$71.3 million in 20 11. Excluding acqquisitions, divestituures, closures
aand the paper effeect, the decreasee was $19.7 millioon. The decrease was mainly from
m investments in its digital platform
ms made in 2011. Also, stiffer
ccompetition and the initiatives rolled-out to counter it had a negative im
mpact on adjusted operating incomee in fiscal 2011. The above-mentionned decline in
E
Educational Book Publishing Group revenues also coontributed to the deecrease. Furtherm
more, a change in accounting policyy led to a $5.3 million decrease
inn operating costs in the Educationnal Book Publishinng Group in fiscaal 2011 versus fisscal 2010. Conse quently, the Media Sector’s adjustted operating
inncome margin deccreased, to 11.6% in fiscal 2011 com
mpared to 15.2% in
i 2010.
mmunity newspapeers, and its digital offering. The
Inn fiscal 2011, the Media Sector conntinued its strategiic investments in its traditional offerring, such as com
LLocal Solutions Grroup launched several new weeklyy papers in Quebeec and made seveeral acquisitions, purchasing the ppublishing assets oof Groupe Le
C
Canada Français on
o Montreal’s Souuth Shore, which comprise
c
several print titles and a series of regional online portals, ass well as most of the assets of
l’Avantage Consom
mmateurs de l’Est du Québec, com
mposed of three weekly
w
papers annd a regional inforrmation portal. Foor its part, the Neew Media and
D
Digital Solutions Group
G
signed onlinne advertising reprresentation agreements with The N
New York Times C
Company and Ziff Davis. With thesee agreements
aand the strategic innvestments of receent quarters, the sector
s
tripled the audience
a
for its diggital network in lesss than a year.
E
Effective Novembeer 1, 2011, the Corporation implemeented a new operaating structure thaat combined the Interactive Sector w
with the Media secctor. The aim
iss to ramp up the development
d
of thee sector’s marketinng activation offerring, particularly buuilding on its digitaal platforms and innteractive marketing solutions,
thhereby retaining itts position as the Canadian
C
leader inn a number of its niches.
n
w continue in fisccal 2012 with furthher strategic investments in digital aand print platformss. To capitalize on the recent successs of the New
Innitiatives in 2011 will
M
Media and Digital Solutions Group, the sector will acccelerate its effortss to monetize its ddigital offering andd develop its new digital representaation house in
oorder to take advantage of the new markets; this shouuld have a positivee impact on revennues and profitabi lity in fiscal 2012. The revenues of the Business
aand Consumer Solutions Group will continue to be afffected by volatilityy in the advertisingg spending of natioonal clients, and iit will continue to aadjust its cost
sstructure and prodduct offering to market
m
realities. Lastly,
L
since the educational reforrm in Quebec haas now been com
mpleted, the Educcational Book
P
Publishing Group will
w continue to foccus its educationall content developm
ment efforts on peenetrating new nichhes in coming yeaars.
Innteractive Secctor
Innteractive Sector revenues rose froom $123.3 million in 2010 to $125.44 million in 2011, up $2.1 million. TThe increase is mainly due to the aacquisition of
V
Vortxt Interactive, a provider of inteegrated mobile maarketing solutionss. The appreciatioon of the Canadiaan dollar versus thhe U.S. dollar hadd a negative
im
mpact of $1.9 million on revenues. Excluding acquisitions and the impact of the exchangge rate, organic ggrowth of $1.4 milllion derives mainlyy from major
nnew contracts in the
t Premedia Division and the Cusstomer Communiccations Division, ppartially offset by lower revenues in the One to Onne Marketing
S
Solutions Division.
A
Adjusted operatingg loss rose from $3.6 million in 20100 to $10.3 million in 2011, an increaase of $6.7 millionn. Excluding the im
mpact of business acquisitions
aand the exchange rate, the adjustedd operating loss increased by $4.8 million.
m
The negat ive variance is larrgely due to strateegic investments too develop its
m
marketing activatioon offering. The opperating income margin
m
was also doown, from a negatiive margin of 2.9%
% in 2010 to a neggative margin of 8..2% in 2011.
Inn fiscal 2011, Redd Pill Email namedd the Interactive Sector
S
as the leadding supplier of em
mail and messagiing solutions in Canada. The Interaactive Sector
aalso did well at thee Magnum Opus Awards,
A
where itss excellent work inn the areas of pubblication in generaal and for the quallity of its online coontent won it
nnumerous awards. These accoladess are the result of ongoing
o
and targeeted investments iin the sector to ennsure it remains ann expert provider oof interactive
m
marketing solutionss in North Americaa.
Innter-segment Eliminations and Other Activities
E
Eliminations of inteer-segment revenuues and other activities went from a negative total off $82.7 million in 22010 to a negativee total of $95.0 million in 2011.
TThe change is mainly due to an increease in inter-segm
ment transactions. Adjusted operatinng income went froom a negative totaal of $18.6 million in fiscal 2010
too a negative total of $9.2 million in 2011,
2
stemming mainly
m
from a decrease in the expennse related to execcutive and directors’ compensation,, a favourable
vvariance in connecction to the definedd benefit plan provvision and a decreease in Head Officce costs in 2011.
336
36
2011 Annual Report
2011 Annual Report
TRANSCONTINENTAL
M
MANAGEMENT
ALYSIS
DETAILED ANALLYSIS OF OPERAATING RESULTSS FOR FOURTH QUARTER 2011
A
Analysis of Maain Variances - Consolidateed Results
FFor the fourth quarter ended
d October 31, 2011
(unaudited)
Results - Fourth Quarter
Q
2010
Revenues
$
%
$
556.4
1.8
Acquisitions/Divestittures/Closures
Addjusted operating
income
%
88.9
Nett income applicable
to participating
p
shares
$
%
44.5
0.3 %
0.1
0.1 %
0.1
0.2 %
Existing operations
Paper effect
1.8
0.3 %
(0.3)
(0.3) %
(0.2)
(0.4) %
Exchange ratees
(1.8)
(0.3) %
(0.3)
(0.3) %
(0.2)
(0.4) %
(20.7)
(3.7) %
(2.1)
(2.4) %
(2.2)
(4.9) %
-
- %
-
- %
(0.1)
(0.2) %
Organic growthh (negative)
Discontinued operatioons
Impairment of assetss, restructuring costs
impairment of goodw
will and intangible assetts and
and unusual adjustm
ments to income taxes
Results - Fourth Quarter
Q
2011
$
-
- %
537.5
(3.4) %
$
-
- %
86.3
(2.9) %
$
(33.9)
(76.2) %
8.0
(82.0) %
A
As shown in the abbove table, a numbber of factors conttributed to the variiance in results forr fourth quarter 20011 and fourth quaarter 2010.

The nett impact of acquissitions, divestitures and closures raaised revenues byy $1.8 million, mainly due to recentt acquisitions in thhe Interactive
and Meedia sectors, partiaally offset by plantt closures in the Printing
P
Sector. Thhe same factors hhad a positive imppact of $0.1 millionn on adjusted
operatinng income. Net of
o financial expensses and income taxes, the positivve impact on net income applicable to participatingg shares was
$0.1 million.

The paper effect had a positive $1.8 milliion impact on revvenues. This effecct includes variattions in the price of paper, paper supplied and
changes in the type of paaper used by custtomers of its printing operations. Noote that for its prinnting operations, these elements afffect revenues
without impacting adjusteed operating incom
me. For the Mediaa Sector, the variaation in the price oof paper had a neegative effect of $0.3 million on
adjustedd operating incom
me and $0.2 millionn on net income.

The varriations in the exchhange rate betweeen the Canadian and
a U.S. dollars deecreased revenuees by $1.8 million and adjusted operating income
by $0.3 million. The negaative variation in average
a
spot exchange rates in fourrth quarter 2011 ccompared to fourthh quarter 2010 waas 4.5%. With
b U.S. units had a negative impactt of about $1.1 milllion. The negativee impact of exportt sales, net of
respect to revenues, conversion of sales by
currenccy hedging, was $00.7 million. The coonversion of resultts for U.S. units haad a negative impaact of $0.1 million on adjusted operrating income.
The neggative impact of export
e
sales, net of
o currency hedging and purchasess in U.S. dollars, was $2.1 million on adjusted operaating income.
Finally, the positive impacct of the conversioon of balance sheet items related too the operation of Canadian units deenominated in foreeign currency
was $1..9 million on adjussted operating incoome. Taking into consideration
c
the operations, financcial expenses andd income taxes deenominated in
foreign currencies, the neet negative effect was
w $0.2 million.

Base business revenuess decreased 3.7%
% to $20.7 million in fourth quarter 2011, largely duee to the terminatioon of a major conntract to print
Canadaa census forms; thhe forms are printted every five yeaars. Operations in the Media and Innteractive sectors generated a leveel of revenues
similar to
t that for the sam
me period in 2010. The decrease inn adjusted operati ng income, whichh stood at $2.1 million, or 2.4%, in ffourth quarter
2011, stems mainly from strategic investm
ments by both the Interactive and M
Media sectors relaated to the launch of new weekly newspapers in
Quebecc and the development of digital offferings; this was partially
p
offset by tthe impact of equuipment optimizatioon and the contribbution of new
contractts in the Printing Sector.
S
Im
mpairment of assets and reestructuring costs
Inn fourth quarter 20011, an amount off $8.2 million before tax (5.9 million after tax) was acccounted for separaately in the consoolidated statement of income as
im
mpairment of asseets and restructuriing costs. Of that amount, $7.7 million is due to workkforce reductions across the Corpooration and $0.5 m
million to other
ccosts.
o $9.5 million befoore tax ($6.7 millioon after tax) was aaccounted for sepparately in the connsolidated statemeent of income
Inn fourth quarter 20010, an amount of
aas impairment of assets
a
and restruccturing costs. Of that
t amount, $7.6 million stems from
m workforce reduuctions, $1.4 millioon to impairment oof assets and
reestructuring costs and $0.5 million to
t other costs.
2011 Annual Report
TRANSCONTINENTAL
37
2011 Annual Report
37
M
MANAGEMENT
ALYSIS
Im
mpairment of Goodwill and
d Intangible Asssets
Inn fourth quarter 20011, an amount off $52.2 million befoore tax ($45.1 milllion after tax) was accounted for sepparately in the connsolidated statemeent of income
aas impairment of goodwill
g
and intanngible assets. Moost of this impairm
ment stems from i mpairment of gooodwill, primarily reelated to one-to-oone marketing
aactivities in the Inteeractive Sector, annd trade-name write-downs for some publications in tthe Media Sector.
Inn fourth quarter 20010, an amount off $12.5 million befoore tax ($10.4 milllion after tax) was accounted for sepparately in the connsolidated statemeent of income
aas impairment of goodwill and intanggible assets. Most of this impairmennt stems from tradee-name write dow
wns for some publiccations in the Meddia Sector.
FFinancial Expeenses
FFinancial expenses were down $1.8 million, from $111.7 million in 20110 to $9.9 million in 2011. The deecrease is due too a significant redduction in the
C
Corporation’s net inndebtedness and its weighted averaage interest rate versus
v
last year.
Inncome Taxes
Inncome taxes deccreased by $2.3 million,
m
from $7.3 million in fourth quarter 2010 to $5.0 million in fourth quarter 20111. Excluding incoome taxes on
im
mpairment of asseets and restructuring costs, and on impairment
i
of gooodwill and intangibble assets, incomee taxes would havee amounted to $14.4 million, or
a tax rate of 18.8%
%, compared to $12.2 million, or 155.8%, in fourth quaarter 2010. This inncrease is due too the geographic ddistribution of pre--tax earnings,
aamong other factorrs.
D
Discontinued Operations
O
Inn the third quarterr 2011, the Corporration signed an agreement to sell itts Mexican printingg operations to Quuad/Graphics. Thiis transaction wass approved by
M
Mexican regulators and closed in fourth quarter 2011. The net loss from these discoontinued operatioons, net of related income taxes, amounted to
$$1.2 million.
Inn fourth quarter 2010, a net loss reelated to the operaation of discontinuued operations of $0.9 million, net oof related income taxes, was recorrded following
thhe sale of almostt all direct mail opperations in the United
U
States in April
A 2010. Also, a net loss relatedd to the operationn of the Mexican discontinued
ooperations of $0.2 million, net of relaated income taxes was recorded in fourth
f
quarter 201 0.
N
Net Income Ap
pplicable to Paarticipating Sh
hares
N
Net income applicable to participating shares went from
f
net income of
o $44.5 million inn fourth quarter 20010 to $8.0 million for fourth quartter 2011. The
ddecrease is mostlyy due to the increaase in the impairm
ment of goodwill and intangible asseets for fourth quarrter 2011. On a per-share basis, thhe net income
aapplicable to particcipating share decreased, from net income of $0.55 too $0.10.
A
Adjusted net incom
me applicable to participating
p
shares was down $2.5 million, or 4.0%, ffrom $62.7 millionn in fourth quarterr 2010 to $60.2 million in fourth
qquarter 2011. On a per-share basis, it went from $0.788 to $0.74.
338
38
2011 Annual Report
2011 Annual Report
TRANSCONTINENTAL
M
MANAGEMENT
ALYSIS
REVIEW OF OPEERATING SECTO
ORS - FOURTH QU
UARTER 2011
A
Analysis of Maain Variances – Sector Resu
ults
FFor the fourth quarter ended
d October 31, 2011
(unaudited)
Inter-seegment
Interactivv e
Rev enues - Fourtth Q uarter 2010
e
Printing S ector
$
Acquisitions/Div esttitures/C losures
380. 2
M edia Secctor
$
169.22
(2. 3)
3.88
Paper effect
1. 8
Ex change rattes effect
(1. 6)
Eliminationss and O ther
S ector
$
acitivv ities
333.4
$
C onsolidated Results
(26.4)
$
556.4
0.3
-
-
-
-
1.8
-
((0.2)
-
(1.8)
1.8
Ex isting operations
O rganic grow
w th (negativ e)
(14. 5)
0.44
((0.5)
Rev enues - Fourtth Q uarter 2011
$
363. 6
$
173.44
$
Adjusted operatin
ng incom e (loss) - Fo
or fiscal 2010
$
57. 4
$
30.1
$
Acquisitions/Div esttitures/C losures
(0. 4)
0.77
(0. 4)
(20.7)
(6.1)
333.0
$
(32.5)
$
537.5
((1.2)
$
2.6
$
88.9
((0.2)
-
0.1
(0.33)
-
-
(0.3)
-
0.1
-
(0.3)
Ex isting operations
Paper effect
Ex change rattes effect
O rganic grow
w th (negativ e)
Adjusted operatin
ng incom e (loss) - Fo
or fiscal 2011
4. 0
$
60. 6
(5.1 )
$
25.44
((0.8)
$
((2.1)
(0.2)
$
2.4
(2.1)
$
86.3
M
Management believes that adjusted operating income by business segm
ment used in this ssection is a meaniingful measure of its financial perforrmance.
P
Printing Secto
or
P
Printing Sector revvenues were downn $16.6 million, or 4.4%, from $380.2 million in fourthh quarter 2010 to $$363.6 million in ffourth quarter 2011. Excluding
ddivestitures, closurres and variationss in the paper andd exchange rates, revenues were ddown $14.5 millionn, or 3.8%. Negattive growth stems mainly from
thhe difficult markett conditions that continue
c
to affect the
t Magazine, Book and Cataloguee Group as well aas to the completioon of a major conntract to print
C
Canada census forrms; which takes place
p
every five yeears. This contract started in fourth quarter 2010 and terminated in third quarter 2011. Thhis decrease
w
was augmented byy lower sales in thhe Magazine, Boook and Catalogue Group, partially ooffset by new prinnting contracts for some of its businness groups,
pparticularly the conntract to print The Globe and Mail.
A
Adjusted operatingg income was up,, from $57.4 millioon in fourth quarteer 2010 to $60.6 million for the same period in 2011, an increase off 5.6%. As a
reesult, the adjustedd operating incom
me margin rose froom 15.1% for fourrth quarter 2010 too 16.7% for fourthh quarter 2011. Exxcluding divestiturres, closures
aand the impact of the exchange ratee, adjusted operatting income rose $4.0 million, or 7. 0%. Positive grow
wth in adjusted opperating income coomes mainly
frrom greater operaational efficiency, combined with thhe consolidation of
o work in some pplants and optimizzed use of top-performing equipmeent, offset by
loower sales.
Q
to indirectly acquire all shares of Quadd/Graphics Canadda, including six prrinting plants
Inn third quarter 20111, an agreement was signed with Quad/Graphics
aand a premedia seervice centre. Thiss transaction is beeing reviewed by Canadian regulattors and the Corpporation believes tthat it will be finalized in early
22012. In a separaate transaction, Transcontinental
T
sold
s
the Printing Sector’s Mexicann assets to Quadd/Graphics. This ssecond transactioon has been
aapproved by Mexiccan regulators andd closed in the fourth quarter.
M
Media Sector
M
Media Sector reveenues were up $4.2 million, from $1169.2 million in fouurth quarter 2010 to $173.4 million in fourth quarter 2011. Excluding the impact of
aacquisitions, divestitures and closurees, revenues rosee $0.4 million, or 0.2%.
0
The increasse is the result of higher sales volum
me in all Media S
Sector groups,
eexcept the Business and Consumer Solutions Groupp, which was affeccted by lower nattional advertising spending. The Loocal Solutions Grooup benefited
frrom the launch of new weekly papeers in Quebec in reecent quarters, whhile the New Mediaa and Digital Soluutions Group saw higher revenues ffrom its digital
reepresentation houuse activities, beneefiting from ongoinng strategic investments and develoopment efforts of rrecent months.
A
Adjusted operatingg income was dow
wn $4.7 million, froom $30.1 million inn fourth quarter 20010 to $25.4 millioon in fourth quarteer 2011. Excludingg acquisitions,
ddivestitures, closurres and the paper effect, the decreaase was $5.1 millioon. This decrease stems primarily frrom investments inn its digital platforms and stiffer
ccompetition in new
wspaper publishingg operations in Quuebec. The Mediaa Sector’s adjusteed operating incom
me margin was doown, at 14.6% in ffourth quarter
22011 compared to 17.8% in fourth quarter 2010.
2011 Annual Report
TRANSCONTINENTAL
39
2011 Annual Report
39
M
MANAGEMENT
ALYSIS
ments through its LLocal Solutions G roup, which madee two acquisitions:: it purchased
Inn fourth quarter 20011, the Media Seector continued itss strategic investm
thhe publishing asseets of Groupe Le Canada
C
Français on
o Montreal’s Souuth Shore, comprissed of several prinnt titles and a seriees of regional online portals, as
w
well as most of thee assets of l’Avantaage Consommateurs de l’Est du Quuébec, composed of three weekly paapers and a regional information poortal.
Innteractive Secctor
Innteractive Sector revenues were low
wer by 1.2%, from
m $33.4 million in fourth
f
quarter 201 0 to $33.0 million in fourth quarter 2011. This decreaase is due in
ppart to the appreciaation of the Canaddian dollar versus the U.S. dollar, which
w
lowered reveenues by $0.2 milllion compared to 22010. Despite possitive organic
ggrowth in the prem
media and digital prrinting solutions diivisions, the sectoor reported negativve growth of $0.5 m
million.
TThe adjusted operaating loss went froom $1.2 million in fourth quarter 2010 to $2.1 million in fourth quarter 22011, an increasee of $0.9 million. C
Consequently,
thhe adjusted operaating income marggin went from a negative
n
margin off 3.6% in fourth qquarter 2010 to a negative margin oof 6.4% in 2011. The adjusted
ooperating loss, exccluding acquisitions and the impact of
o the exchange raate, rose $0.8 mill ion, principally duue to strategic inveestments.
Innter-segment Eliminations and Other Activities
E
Eliminations of intter-segment revennues and other activities
a
went from
m a negative totaal of $26.4 millionn in fourth quarteer 2010 to a neggative total of
$$32.5 million in fouurth quarter 2011. The change is mainly due to an increase in inter-seggment transactionns. Adjusted operaating income was stable, going
frrom $2.6 million inn fourth quarter 20010 to $2.4 million in fourth quarter 2011,
2
stemming m
mainly from a decreease in Head Officce costs in 2011.
440
40
2011 Annual Report
2011 Annual Report
TRANSCONTINENTAL
M
MANAGEMENT
ALYSIS
RECONCILIATIONN OF NON-GAA
AP FINANCIAL MEASURES
FFinancial data havve been prepared in conformity withh Canadian Generally Accepted Acccounting Principlees (GAAP). Howeever, certain meassures used in
thhis discussion andd analysis do not have
h
any standarddized meaning under GAAP and coould be calculated differently by otheer companies. Thee Corporation
bbelieves that certain non-GAAP finanncial measures, when
w
presented in conjunction with ccomparable GAAP
P financial measures, are useful to investors and
oother readers becaause that information is an appropriaate measure for evaluating the Corpporation’s operatinng performance. Internally, the Corpporation uses
thhis non-GAAP finaancial information as an indicator of business perform
mance, and evaluaates management’s effectiveness w
with specific refereence to these
inndicators. These measures should be considered inn addition to, not as a substitute foor or superior to, measures of financial performancee prepared in
aaccordance with GAAP.
G
Below is a table reconciling GAAP
G
financial meeasures to non-GA
AAP financial measures.
((unaudited)
Three m oonths ended O c tobber 31
2 011
(in m illions of d ollars , ex c ept perr s hare am ounts )
N et in co m e ap
p p licab le to p artticip atin g sh aress
$
8.0
F or fis c al y ears ended O c tober 31
2011
2010
$
44.5
$
77.8
2010
$
166.6
D iv idends on preferred
p
s hares
1.7
1.7
6.8
6.8
N et los s (inc om
m e) from dis c ontin ued operations (affter tax )
1.2
1.1
21.2
(29.4)
N on-c ontrolling interes t
0.1
0.6
0.9
0.9
Inc om e tax es
5.0
7.3
30.3
34.1
D is c ount on s a le of ac c ounts recc eiv able
F inanc ial ex pe ns es
E x pens es rela ted to long-term deebt prepay m ent
Im pairm ent of goodw
g
ill and intanggible as s ets
-
-
0.9
11.7
39.3
42.6
-
-
5.8
-
552.2
12.5
52.2
12.5
8.2
Im pairm ent of as
a s ets and res trucc turing c os ts
A d ju sted o p e ratin g in co m e
9.9
$
886.3
330.4
A m ortiz ation
A d ju sted o p e ratin g in co m e b efo re am o rtiz ati o n
$
N et in co m e ap
p p licab le to p artticip atin g sh aress
$
88.9
120.3
249.9
123.3
1118.8
$
373.0
$
373.2
8.0
$
44.5
$
77.8
$
166.6
21.2
(29.4)
-
-
(2.4)
-
4.2
-
445.1
10.4
45.1
10.4
5.9
6.7
13.4
10.7
-
E x pens es rela ted to long-term deebt prepay m ent (aafter tax )
-
Im pairm ent of goodw
g
ill and intanggible as s ets (after tax )
Im pairm ent of as
a s ets and res trucc turing c os ts (after tax )
660.2
$
881.0
A v erage num b er of partic ipating s hares outs tandin g
14.9
$
$
U nus ual adjus tm
t ents to inc om e tax
t es
$
252.7
1116.7
1.1
A d ju sted n et in co m e ap p licab
b le to p articip ati n g sh ares
$
29.9
1.2
N et los s (inc om
m e) from dis c ontin ued operations (affter tax )
18.4
9.5
$
62.7
$
161.7
$
155.9
81.0
80.9
80.8
A d ju sted n et in co m e ap p licab
b le to p articip ati n g sh ares p er sh
h are
$
00.74
$
0.78
$
2.00
$
1.93
C ash flo w rel ated to co n tin u i n g o p eratio n s
$
1118.7
$
43.7
$
304.7
$
156.0
115.0
C hanges in no n-c as h operating item s
C ash flo w fro m co n tin u in g o p eratio n s b efo ree ch an g es in n o n -cash
o p eratin g item
ms
Long-term debt
$
1003.7
(6.3)
(68.1)
$
1111.8
(155.1)
$
311.0
$
311.1
$
292.5
$
712.9
C urrent portion of long-term debt
271.9
17.8
C as h and c as h equiv alents
(75.0)
(31.9)
N et in d eb ted n ess
$
489.4
$
698.8
A djus ted opera ting inc om e beforee am ortiz ation
$
373.0
$
373.2
N et in d eb ted n ess ratio
1.31x
1.87x
2011 Annual Report
TRANSCONTINENTAL
41
2011 Annual Report
41
M
MANAGEMENT
ALYSIS
SUMMARY OF QUARTERLY RESSULTS
S
Selected Quarrterly Financiaal Results
(unaudited)
2011
Q4
((in millions of dollars, except
e
per share amouunts)
R
Revenues
$
537
A
Adjusted operating incoome before amortizationn
117
A
Adjusted operating incoome margin before amoortization
21.8 %
O
Operating income
$
A
Adjusted operating incoome margin
P
Per share
A
Adjusted net income appplicable to participatingg shares
P
Per share
% of fiscal year
Q3
$
8
Q2
$
$
56
$
56
33
Q4
$
$
44
$
67
45
Q2
$
$
566
$
55
15.8 %
$
67
45
46
9.3 %
11.5 %
$
495
78
57
11.99 %
299
Q1
$
18.0 %
577
$
495
89
18.11 %
16.0 %
$
4811
877
89
9.5 %
26
Q3
$
21.4 %
49
$
556
119
15.5 %
12.0 %
$
515
80
60
111.6 %
11
Q1
$
18.0 %
57
$
499
90
177.6 %
16.0 %
$
4
493
87
86
A
Adjusted operating incoome
N
26
2010
$
26
0.10
0..13
0.41
0.32
0.55
0.366
0.83
0.32
60
33
39
29
63
333
34
26
0.74
0..40
0.49
0.37
0.78
0.411
0.42
0.32
37 %
21 %
24 %
18 %
40 %
211 %
22 %
17 %
TThe above table shhows changes in Transcontinental's
T
s quarterly results.. New printing conntracts raised the C
Corporation's reveenues in the first three quarters
oof fiscal 2011, year over year. Howeever, this increase was reduced by, among other factoors, lower revenuees in the Magazinne, Book and Cataalogue Group,
thhe negative impacct of the exchangee rate, and divesttitures and closurees. Also, fourth-quuarter results are higher than the oother quarters sincce advertising
sspending is usuallyy higher in the fall..
442
42
2011 Annual Report
2011 Annual Report
TRANSCONTINENTAL
M
MANAGEMENT
ALYSIS
FINANCIAL CONDDITION, LIQUIDITTY AND CAPITALL RESOURCES
P
Principal Cash
h Flows and Financial Cond
dition
ober 31
(unaudited)
2011
Operating acttivities
Cash flow from
m continuing operaations before channges in non-cash operating
o
items
Changes in noon-cash operating items
$
311.0
2010
$
311.1
(6.3)
(155.1)
304.7
156.0
Business acquuisitions, net of dissposals
(35.8)
(14.0)
Acquisitions off property, plant annd equipment, nett of disposals
(44.8)
(114.1)
Other
(21.1)
(24.1)
(101.7)
(152.2)
-
40.5
(168.0)
(10.1)
Increase (decrrease) in revolvingg term credit facilitty
4.5
(95.4)
Issuance of paarticipating shares
0.2
2.1
Dividends on participating
p
sharees
(39.7)
(28.3)
Dividends on preferred
p
shares
(6.8)
(7.0)
Bond forward
(6.0)
-
Other
(1.2)
(0.2)
(217.0)
(98.4)
489.4
698.8
1,329.0
11,247.0
1.31x
1.87x
BBB high
BB high
BB
Stable
Stable
BBB
BBB-
Stable
Stable
Cash flow relaated to operating activities of continuuing operations
Investing activities
Cash flow relaated to investing activities of continuuing operations
Financing acttivities
Increase in lonng-term debt
Reimbursemennt of long-term debbt
Cash flow relaated to financing acctivities of continuing operations
Other relevan
nt information
Net indebtedneess
Shareholders’ equity
Net indebtedneess ratio
Credit rating
DBRS
Standard annd Poor’s
C
Cash Flow Rellated to Contin
nuing Operations
C
Cash flow from opperating activitiess before changes in non-cash opeerating items weree stable, from $3311.1 million in 20010 to $311.0 million in 2011.
C
Changes in non-caash operating item
ms led to a cash ouutflow of $6.3 million in 2011, comppared to a cash ouutflow of $155.1 m
million in 2010. Thee difference is
m
mainly due to the complete repaym
ment of the securitization program
m during the fiscaal 2010. Consequuently, cash flow from operations increased, to
$$304.7 million in 20011, compared to $156.0 million in 2010.
2
2011 Annual Report
TRANSCONTINENTAL
43
2011 Annual Report
43
M
MANAGEMENT
ALYSIS
C
Cash Flow Rellated to Investting Activitiess of Continuing
g Operations
Inn fiscal 2011, thee Corporation connsiderably reducedd its investments in property, plannt and equipment to $44.8 million net of disposals, compared to
$$114.1 million in 20010, primarily because the project too print The Globe and Mail was com
mpleted in 2010.
TThe acquisitions made
m
in 2011 in thee Media and Interractive Sector led to a cash outflow of $35.8 million, ccompared to $14.0 million in 2010. The increase
iss mainly due to larrger acquisitions compared
c
to 2010.
C
Cash Flow Rellated to Financing Activitiess of Continuin
ng Operationss
TThe Corporation paaid $39.7 million inn dividends on participating shares in fiscal 2011, com
mpared to $28.3 m
million in 2010, up 40.3% due to twoo increases in
reecent quarters whhich raised the quaarterly dividend froom 9.0 cents to 13.5 cents per shaare. In addition, in fiscal 2011, the C
Corporation paid $$6.8 million in
ddividends on preferred shares, an am
mount similar to laast year.
D
Dividends paid by Transcontinental to
t Canadian residents are eligible dividends as per prrovincial and federal income tax law
ws.
Shares Issued and
a Outstanding
Class A
(Subordinate Votting Shares)
Class B
(Multiple Voting Shares)
S
Series D Preferrred
(with cumulative rate reset)
As at Octobber 31, 2011
As att November 30, 20011
65,8733,182
65,878,382
15,15 1,235
15,151,235
4,0000,000
4,000,000
D
Debt Instruments
A
As at October 31, 2011, the adjustted net indebtednness ratio stood at
a 1.44x (1.87x aas at October 31,, 2010). The decrease stems mainly from the
ssignificant reductioon in net indebteddness related to cash
c
flows from operating
o
activitiess and a significannt reduction in speending on propertty, plant and
eequipment.
TThe Corporation's $400 million revoolving credit faciliity, of which $181.7 million was u sed as at Octobeer 31, 2011, matuures in Septembeer 2012. The
aapplicable interest rate on the term
m revolving credit is based on the credit
c
rating assiggned by Standardd & Poor's Ratinggs Services. In adddition, senior
uunsecured notes denominated
d
in U.S. dollars for the amount of C$74..4 million will also mature in fiscal 22012. Preliminaryy approaches havee been made
aand there is no indication at the mom
ment that the Corpporation will have any
a difficulty replaacing these financiing sources at attrractive market connditions.
A
As at October 31, 2011,
2
letters of creedit amounting to C$0.4 million andd US$2.3 million w
were drawn on the term revolving crredit, in addition too the amounts
ppresented in the abbove paragraph.
maining to be
Inn January 2011, the Corporation beegan reimbursing its six-year loan frrom a European bbank. As at Octobber 31, 2011, the ccapital amount rem
ppaid is €39.3 millioon ($55.5 million). On December 1,
1 2009, the Corpporation arranged a cross-currencyy swap, which maatures in six yearrs, to set the
eexchange rate at 1.5761 and the inteerest rate on this facility
f
at bankers’ acceptance ratess plus 3.36%
O
On February 1, 2011, the Corporatioon entered into an agreement settingg the interest rate on a $50 million ddebenture with thee Solidarity Fund Q
QFL at 5.58%
foor the eight yearss remaining on thhe debenture’s 100-year term. The bond forward co ntract entered intto to lock the porrtion of the rate bbased on the
C
Canadian Governm
ment Bonds rate at
a 4.34%, came to maturity on Noveember 5, 2010 andd resulted in a cassh disbursement w
which will increasee the effective
raate by 1.50% for the remaining term
m of the debenturee.
O
On February 17, 2011, the Corporattion repaid, more than three years before
b
the end of its term its five-yeear $100.0 million term credit facilityy with Caisse
dde dépôt et placem
ment du Québec which
w
bore interesst at the bankers’ acceptance rate + 6.375% by usinng its revolving terrm credit which cuurrently bears
innterest at much loower rate. Althoughh this debt prepayyment currently opptimizes the Corpooration’s debt porttfolio by reducing its average interesst rate cost, it
leed to a non-recurring charge of $4.55 million, of which $1.1 million will haave no effect on ccash flows.
O
On July 4, 2011, the
t Corporation pre-paid its $50 miillion term loan froom SGF Rexfor, w
which would havee matured in July 2014. This term loan, with an
aannual interest ratee of 8.25%, was reepaid early using the term revolvingg credit facility whiich currently bearss interest at muchh lower rate. Although this early
reepayment optimizzed the Corporatioon's debt portfolio, it generated a non-recurring expeense of $1.3 millioon, of which $0.3 million had no im
mpact on cash
flows.
A
Apart from its longg-term debt, the Corporation’s comm
mitments are mainnly comprised of ooperating leases. The table below sshows the breakddown of these
oobligations and com
mmitments for futuure years.
444
44
2011 Annual Report
2011 Annual Report
TRANSCONTINENTAL
M
MANAGEMENT
ALYSIS
C
Contractual Ob
bligations and
d Business Co
ommitments
FFor years endiing October 31
C
Contract type (in miillions of dollars)
2012
2013
2014
2015
2017 and
thereafter
2016
Total
LLong term debt
O
Other commitments
$
271.9
36.5
$
90.0
28.0
$
80.7
26.1
$
64.0
20.4
$
10.4
17.1
$
50.2
68.8
$
567.2
196.9
TTotal commitmen
nts
$
308.4
$
118.0
$
106.8
$
84.4
$
27.5
$
119.0
$
764.1
O
Off-Balance-Sh
heet Arrangem
ments (Securitization)
O
On February 16, 2011,
2
the Corporation set up a new
w two-year securitization program w
with a trust whose agent of financiaal services is a Caanadian bank.
TThe maximum net consideration perrmitted under the program is $200.0 million, with up to 20% of U.S. d ollar accounts recceivable. The term
ms of the new
pprogram take the current market conditions
c
into acccount and are faavourable compa red to other sources of financing. As at October 331, 2011, no
ssecuritization program was in effect. The retained inteerest is recorded in
i the Corporationn's accounts receivable at the lower of cost and fair m
market value.
U
Under the program
m, no discount wass recorded on the sale of accounts receivable
r
for fiscaal 2011, comparedd to $0.9 million inn 2010.
PRINCIPAL ACCOUNTING ESTIM
MATES
TThe Corporation prrepares its consolidated financial sttatements in Canaadian dollars and iin accordance wit h Canadian GAAP
P. A summary of tthe significant
aaccounting policiess is presented in Note
N 1 of the Conssolidated Financial Statements for thhe fiscal year endded October 31, 20010. Some of the Corporation’s
aaccounting policiess require estimatees and judgmentss. The most significant areas requuiring the use of management estimates and judgm
ments include
ggoodwill, intangiblee assets, accounting for future empployee benefits annd income taxes. Management revviews its estimatess on an on-going basis, taking
innto account historrical data and other factors, including the current ecconomic situation. Given that futuree events or changges in circumstances and their
eeffects cannot be determined accurrately, actual results could differ maaterially from Mannagement’s estimaates. Changes in these estimates rresulting from
oon-going change inn the economic sittuation will be refleected in the financcial statements of ssubsequent periodds.
G
Goodwill
G
Goodwill representts the excess of acquisition
a
cost ovver fair value of net
n assets of acquuired businesses. Goodwill has an indefinite useful life and is not
aamortized, but it is tested annually foor impairment or more
m frequently if impairment indicattors arise.
Inntangible Asssets
Inntangible assets are
a accounted for at
a cost and amortiized as follows:
C
Customer relationsships
E
Educational book prepublication
p
cossts
E
Educational book titles
t
P
Printing contracts
N
Non-competition aggreements
LLong-term technoloogy project costs
Term
m
M
Method
12 years
Maximum 7 years
y
6-9 years
Conttract term
2-5 years
y
5 years
Sttraight-line
O
On historical sales patterns
O
Sttraight-line
Sttraight-line
Sttraight-line
N
Non-amortizable inntangible assets consist
c
of acquiredd trade names, maainly magazines aand newspapers, and their related circulation. Thesee assets have
aan indefinite useful life and are not amortized,
a
but testted annually for im
mpairment or moree frequently if impaairment indicators arise.
P
Pension Planss
TThe accrued beneefit obligation is determined
d
by independent actuaries using the prrojected benefit m
method prorated on services and is based on
m
management’s besst economic and demographic esttimates. The Corpporation amortizess the unrecognizeed net aggregate actuarial gains aand losses in
eexcess of 10% of the greater of the accrued
a
benefit obbligation or the fairr value of plan asssets, and past servvice costs, over thhe expected averaage remaining
sservice life (EARSL) of the employeee group covered by the plans, whiich ranges from 1 0 to 12 years. Thhe transitional obliigation resulting frrom the initial
aapplication of Secttion 3461 of the Caanadian Institute of
o Chartered Accoountants’ (CICA) H
Handbook in Noveember 2000 is alsoo amortized over tthe EARSL of
thhe employee grouup covered by the plans. Fair markett value is used to calculate the expeected return on plaan assets.
Inncome Taxes
TThe Corporation reecords income taxxes using the liabillity method of acccounting. Under thhis method, future income tax assetts and liabilities arre determined
bbased on the differrences between thhe carrying amounnt and the tax basis of the assets annd liabilities and arre measured usingg tax rates in effecct when these
2011 Annual Report
TRANSCONTINENTAL
45
2011 Annual Report
45
M
MANAGEMENT
ALYSIS
ddifferences are exppected to reverse in accordance with
w enacted laws or those substanttively enacted at tthe date of the finnancial statementss. A valuation
aallowance is recordded as a reductionn of the carrying vaalue of future tax assets
a
when it is m
more likely than noot that these asseets will not be realized.
CHANGES IN ACCOUNTING
C
POLLICIES
S
Section 3064 of thhe CICA Handbook, Goodwill and intangible assetss, allows for the capitalization of eemployee salariess, wages and benefits directly
aattributable to an internally generaated intangible assset. The Corporaation had not beeen capitalizing itss educational boook prepublication costs, as its
innformation system
ms could not allocate this informatioon per book. On November
N
1, 20100, the Company m
modified its inform
mation systems soo that it could
ccompile employee salaries, wages and
a benefits on a per-book basis annd decided to chaange its accountingg policy. Consequuently, for the fiscaal year ended
O
October 31, 2011, this change in acccounting policy reesulted in a $5.3 million
m
increase inn intangible assetss and a $1.5 millioon increase in lonng-term future
inncome tax liability as well as lower operating
o
costs $55.3 million and an increase in the inccome tax of $1.5 m
million. These intaangible assets will be amortized
aas operating costss over a maximum of 7 years, baased on historical sales patterns. The application oof this accountingg policy is prospeective as the
C
Corporation cannot generate the infoormation for prior periods
p
to apply thhis change retrosppectively.
EFFECT OF NEW
W ACCOUNTING STANDARDS NOT
O YET IMPLEMENTED
Innternational Financial
F
Repo
orting Standarrds (IFRS)
Inn February 2008, Canada's Accounnting Standards Board
B
(AcSB) conffirmed that Canaddian GAAP, as ussed by publicly acccountable enterprises, will be
ssuperseded by Inteernational Financiaal Reporting Standdards (IFRS) for fiscal years beginnning on or after Jannuary 1, 2011.
FFor the Corporation, the conversion to IFRS will be reequired for interim and annual financcial statements foor the year ending October 31, 20122. IFRS uses
a conceptual frameework similar to Caanadian GAAP, buut there are signifiicant differences oon recognition, meeasurement and disclosures.
TThe Corporation set
s up an organizzational project management
m
team
m composed of m
members from difffferent levels and positions to oveersee project
ccoordination and monitoring.
m
Staff with
w the appropriaate qualifications and
a experience h ave been assigneed to the project. Senior managem
ment and the
A
Audit Committee reeceive regular stattus updates.
TThe Corporation’s conversion plan consists
c
of three phases: evaluatioon, conversion andd implementation of the IFRS. Thee Corporation com
mmenced the
im
mplementation phase in early 2011 and the conversioon is proceeding as
a planned.
446
46
2011 Annual Report
2011 Annual Report
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M
MANAGEMENT
ALYSIS
P
Preliminary Co
onsolidated Opening
O
Balance Sheet as att November 1 , 2010
(non audited)
TThe Corporation haas completed the preliminary quanttification of the expected impact of ddifferences betweeen Canadian GAA
AP and IFRS and the table on
thhe next page show
ws these differencces on the openingg balance sheet ass at November 1, 22010.
Canadian
GAAP
C
Current assets
Future income taxess
Other current assetss
A
B
C
D
E
F
G
16.6
616.4
633.0
P
Property, plant and equipment
G
Goodwill
Intangible assets
FFuture income taxes
O
Other assets
A
Assets from discontinueed operations
C
Current liabilities
Accounts payable and accrued liabilities
Future income taxess
Other current liabilitiees
$
$
871.6
678.1
179.1
145.3
39.2
48.4
2,594.7
(16.7)
(102.44)
(13.2)
18.66
(83.88)
11.44
(6.99)
(13.2)
4.55
0.6
(3.3)
(16.1)
(3.3)
IFRS
0.1
0.0
616.4
616.4
-
-
0.6
16.33
16.7
1.2
-
1.33
(2.7)
(16.1)
Other
16.33
345.4
2.5
98.0
445.9
712.9
137.4
50.0
0.7
1,346.9
LLong-term debt
FFuture income taxes
O
Other liabilities
LLiabilities from discontinnued operations
H
3.9
35.00
35.00
-
-
3.9
2.7
-
-
$
772.3
678.1
179.1
193.8
32.3
48.4
2,520.4
(0.2) $
0.2
(0.33)
5.77
5.4
345.2
98.0
443.2
712.9
124.3
90.7
0.7
1,371.8
0.8
N
Non-controlling interesst
S
Shareholders' equity
Share capital
Contributed surplus
0.8
478.6
13.7
Retained earnings
Accumulated other comprehensive
c
incomee (loss)
$
784.0
(29.3)
754.7
1,247.0
2,594.7
477.9
3.2
(0.7)
(10.5)
(67.88)
(9.9)
(30.55)
11.2
(24.99)
24.99
(3.3)
16.33
(67.88)
(83.88)
(9.9)
(13.2)
(30.55)
4.55
-
-
(3.3)
0.6
16.33
16.33
(4.1)
-
(4.1)
1.33 $
671.1
(4.4)
666.7
1,147.8
2,520.4
Corporation must aapply in preparingg its opening
IFFRS 1, “First-timee Adoption of International Financiaal Reporting Standdards” is the stanndard which the C
IFFRS statement of financial position. The purpose of this
t standard is too provide a startingg point for IFRS-ccompliant accountting without spendding more on
thhe process than the benefits warrant. Thus certain relief measures, caalled exemptions and exceptions, aare permitted to aavoid retroactive aapplication of
ssome standards. The
T exemptions arre optional and thee exceptions are required.
r
The folloowing list presentss some exemptionns that could have a significant
im
mpact for the Corpporation.
Exemption
A) Deemed Costss
(IAS 16)
B) Borrowing Cossts
(IAS 23)
Descriptioon and Status
IFRS 1 allows for assets to be evaluated at thheir fair value at thhe transition date and to use this faair value as the deeemed cost
at that daate. The deemed cost is then useed instead of the cost or amortizeed cost, and the subsequent amortization is
calculatedd using the deemeed cost.
IAS 23 reequires the capitalization of borrowing costs directly attributable to thee acquisition, connstruction or produuction of a
qualifying asset. Under Canadian GAAP, an entity has the opption of capitalizin g borrowing costss or recognizing thhem as an
expense. The Corporation’ss accounting policyy is to capitalize bborrowing costs.
IFRS offers more direct guiidance than Canaadian GAAP regarrding the nature off capitalizable borrrowing costs. An exemption
2011 Annual Report
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47
2011 Annual Report
47
M
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ALYSIS
under IFR
RS 1 allows IAS
S 23 requirementts to be applied prospectively foor all qualifying aassets where capitalization
commencces on a date earlier than the transittion date or on thee transition date.
C) Employee
Benefits
(IAS 19)
mployee Benefits requires actuarial gains and losses to be measured i n accordance withh IFRS from plan start dates
IAS 19 Em
to the date of transition to IFRS. IFRS 1 allow
ws recognition of aaccumulated actuarial gains and lossses in retained eearnings as
at the trannsition date and prrospective applicaation of IAS 19.
D) Share-based
Compensation
(IFRS 2)
RS, every grant, with the same veesting period shaall be assessed sseparately. Compeensation expensee should be
Under IFR
recognizeed over the vesting period specific portion of the graant. In addition, thhe Corporation must estimate the fforfeiture of
stock options and exclude them
t
from the com
mpensation expensse recorded.
E) Cumulative
Translation
Differences
(IAS 21)
IAS 21 Efffects of Changes in Foreign Exchaange Rates requirees that translationn differences be caalculated in compliance with
IFRS from
m the acquisition date
d or from the daate of creation of the foreign operattion. IFRS 1 allow
ws the cumulative translation
differencees for all foreign operations to be seet to zero at the ddate of transition. TThe gain or loss oon subsequent dissposal of a
foreign opperation will thereffore only include fooreign exchange ddifferences arisingg subsequent to thhe date of transition to IFRS.
o the Corporationn’s financial statem
ments although theey do not affect thhe opening balancee sheet at
Inn addition, the folloowing items couldd have an impact on
thhe transition date.
Subject
Items thaat could have an impact on the Co
orporation’s finanncial statements


Impairment of
Assets
(IAS 36)



Business
Combinations
(IFRS 3)
Estimates
(IFRS 1)
448
48
Asset
A
impairment testing is done att the lowest cash generating unit (C
CGU) level. A CGU is defined as thhe smallest
identifiable
i
group of assets that gennerates cash infloows that are largelly independent of the cash inflows from other
assets
a
or groups of
o assets. According to Canadian G
GAAP, asset impaiirment testing is ddone at the level oof the asset
group,
g
which is noot necessarily the same
s
as a CGU.
Goodwill
G
is allocaated to the CGU
U or groups of C
CGUs that shouldd benefit from the synergies of a business
combination,
c
whille under Canadiaan GAAP, goodw
will is allocated too operating unitss that are equivalent to an
operating
o
sector or
o to one level beloow. Given that thee impairment test could be performed at the level of a group of
assets
a
that is sm
maller than that for
f Canadian GAA
AP, asset impairrment may be recognized at diffeerent times
depending
d
on the IFRS.
To
T determine wheether an asset imppairment should bbe recognized, thee carrying amount of the asset is coompared to
its
i recoverable am
mount, which is the higher of fair vaalue less costs to sell and value in use (present valuue of future
cash
c
flows). Under Canadian GAA
AP, a two-step ttest is conductedd: first, the carrying amount of thee asset is
compared
c
to undiiscounted future cash
c
flows; then, if an impairment is required, the aamount of the imppairment is
determined
d
by com
mparing the carrying amount of the asset to its fair vaalue.
Asset
A
impairmentss other than goodwill impairments ccan be reversed uunder certain circuumstances. Canaddian GAAP
did
d not permit reveersals.
The
T Corporation conducted
c
an impaairment test as at tthe transition datee and no impairmeent of goodwill is reequired.

IFRS 1 allows thee prospective appplication of the bu siness combinatioons standard. Thuus, there is no im
mpact to the
Corporation
C
at thee transition date.

Estimates made by
b the Corporatioon in accordance with Canadian G
GAAP are consisteent with the estim
mates under
IFRS. Only estimaates related to chaanges in accountinng policies have been revised.
2011 Annual Report
2011 Annual Report
TRANSCONTINENTAL
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ALYSIS
D
Differences beetween the IFR
RS and the Co
orporation's Acccounting Pollicies
TThe following item
ms have been idenntified as possiblyy having an impacct on the Corporaation’s financial sttatements. This iss not an exhaustivve list of the
im
mpacts of the transition to IFRS.
Subject

Under Canadian GAAP and IFRS, future income taaxes are calculatted on temporaryy differences, i.e. differences
between
b
the tax basis
b
of an asset or
o liability and its ccarrying amount oon the balance sheet. Under Canadda’s Income
Tax
T Act, the maxximum deductible for “eligible capitaal expenditures” iis 75% of the cosst incurred. Canadian GAAP
addresses
a
this paarticular situation and
a specifies thatt the tax basis muust be increased by 25%, thus elim
minating the
temporary
t
differennce. IFRS does not
n address this specific situation,, and therefore a temporary differeence exists
between
b
the tax basis
b
and the carrrying amount of aassets that must bbe recognized in tthe case of eligible business
combination
c
transsactions.

Under IFRS, a deeferred tax asset should
s
be recognnized for all taxablle temporary diffeerences, except too the extent
that
t the deferred tax asset arises from
f
initial recognnition of an asset or liability in a traansaction that wheen it affects
neither
n
the accounnting profit nor taxxable profit.

Under IFRS, asseets and future tax liabilities are preseented as long-term
m items.
F) Income Taxes
(IAS 12)
G) Income Taxess
(IAS 12)
H) Income Taxess
(IAS 12)
R
Recent develo
opments of new
w IFRS not yeet applied
TThe following itemss were assessed as likely to have an
a impact on the financial
f
statemennts of the Companny. These items do not represent ann exhaustive
list of impacts of neew IFRS not yet applied and changees could be made before their adopption.
Subject

Employee Benefiits
(IAS 19)

Financial
Instruments:
Recognition and
Measurement
(IAS 39)



Interests in Joint
Ventures
(IAS 31)

Under
U
the IFRS, an
a entity may elecct to recognize acctuarial gains and losses using a ccorridor approach (which the
Corporation
C
uses) or recognize thhem immediately in other compreehensive income. The Corporationn plans to
continue
c
using thee corridor approacch to recognition off actuarial gains aand losses.
IAS
I 19 was howevver amended in Juune 2011 and now
w allows only one option, which is tthe immediate reccognition of
actuarial
a
gains annd losses in otheer comprehensivee income and the presenting of service costs andd financial
expenses
e
in the income statemennt. This amendm ent to IAS 19 w
will take effect forr fiscal years staarting from
January
J
1, 2013; the
t Corporation is currently evaluatiing the impact of tthis change.
Under
U
IFRS, an entity may dereccognize a financiial asset under ccertain conditionss based on the cconcept of
transferring
t
risks and
a benefits. Undeer Canadian GAA
AP, the conditions ffor derecognizing a financial asset are based,
instead,
i
on the nootion of transfer of
o control of the assset. For the Corrporation, accountts receivable sold under the
securitization
s
arrangement may no longer satisfy the conditions for beinng derecognized uunder IFRS.
As
A at the IFRS transition date, this
t
difference wiill have no impacct on the financiial statements beecause no
securitization
s
proggram was in effectt as at October 31 , 2010.
IFRS
I
allows the recognition
r
of inteerests in joint venntures using the pproportionate consolidation methodd (which is
used
u
by the Corrporation) or the equity method. The Corporation plans to continuue using the prooportionate
consolidation
c
methhod.
A new standard, IFRS 11 Joint Arrrangements was issued in May 22011 and now allows only one connsolidation
method
m
in certain situations, that off equity accountinng. The new standdard takes effect ffor fiscal years staarting from
January
J
1, 2013 and
a the Corporatioon is currently asseessing the impact of this change.
2011 Annual Report
TRANSCONTINENTAL
49
2011 Annual Report
49
M
MANAGEMENT
ALYSIS
RISKS AND UNCCERTAINTIES
TThe Corporation coontinually managees its exposure to risks and uncertaiinties that it may eencounter in its opperating sectors orr financial situationn. As a result,
M
Management continually reviews oveerall controls and preventive measuures to ensure theyy are better matchhed to significant rrisks to which the Corporation’s
ooperating activitiess are exposed. A reeport on its risk-m
management program is reviewed reegularly by the Auddit Committee.
M
Managing the Corporation’s risks is a major factor in the decisions takken by Managemeent with regard too acquisitions, cappital investments, divestiture of
aassets, grouping of
o plants, or effortss to create synerggies among operaating sectors. Thiss focus also guidees decisions regarrding cost-reductioon measures,
pproduct diversificattion, new market penetration,
p
and certain
c
treasury moovements. Below is a list of the maain risks the Corpooration is exposedd to that could
hhave a significant impact on its finanncial situation and the strategies it iss taking to mitigatee them.
O
Operational Riisks
E
Economic Cyclees
A significant risk thhat the Corporation faces, and whicch it has difficulty controlling, is relaated to economic ccycles, including tthe risk of econom
mic recession.
A
As well, more thann 80% of the Corpporation’s operatinng revenues depeend, directly or inddirectly, on retailerrs’ advertising buddgets. Advertisingg spending by
aadvertisers tends to be cyclical, reeflecting the globbal economic clim
mate and consum
mers’ buying habits. However, due to the implemeentation of a
ddevelopment strateegy based on beccoming a leader in its niches, and because it is welll diversified, the Corporation believves it can limit itss exposure to
eeconomic cycles without,
w
however, eliminating their occurrence
o
or conntrolling their mag nitude. The Corpooration believes itt mitigates this risk by the very
ccomposition of its operations, sincce a substantial segment
s
of the client
c
base operaates in less cycliccal markets, suchh as food and peersonal care.
FFurthermore, in thee Media Sector, Trranscontinental reelies on a good balance between loccal and national addvertising. It should be noted that inn recent years
cclose to half the addvertising revenuee in this sector hass come from local advertising, whicch is less affected than national advvertising in periodss of economic
sslowdown.
C
Competition
C
Competition is bassed on price, quality of products annd services and thhe range of servicces offered. Somee of the printing niches in which thee Corporation
ooperates are highlly competitive; in addition, new competitors have arrrived in the pastt year. To reduce this risk, the Coorporation continuaally strives to
im
mprove operationaal efficiency whilee maximizing the use of its most productive
p
equipm
ment. The Corporaation also believess that this risk is limited by its
pposition as Canadian leader, and byy the fact that it has a diversified client base in whicch more than half the revenues are generated underr medium and
loong-term agreemeents ranging from one to 18 years.
O
On the media sidee, some of its moree traditional niches experienced greeater competition in 2011. Magazinnes and newspapeers, whether of geeneral interest
oor with a speciall focus, as well as other mediaa (television, radio, Internet and other communiccation or advertissing platforms) ccompete with
TTranscontinental’s magazines, new
wspapers, Interneet sites and complementary comm
munication platforrms for sale of advertising spacee as well as
ssubscription and newsstand
n
sales inn some cases. In addition, the avaailability in Canadaa of a number of magazines publisshed by U.S. andd international
ppublishers also creeates competition for Transcontinental’s magazines. To
T mitigate this rissk, the Corporationn continues to foccus on continuous improvement
pprograms, cost-redduction initiatives and
a developing neew digital and prinnt products and seervices in order too broaden its integgrated service offeer to local and
nnational businessees.
M
Moreover, with connsumers having raapidly adopted diggital communicatioons, more and morre content is beingg produced and aaimed at a target aaudience, and
thhere is increasing competition among digital and mobile solutions. Althhough this situatioon could well geneerate business oppportunities, these new realities
aare evolving very quickly and if Traanscontinental doesn’t offer its cusstomers an attract
ctive return on invvestment, the effeect on its bottom line could be
nnegative. Also, thee market for interaactive marketing solutions
s
is fragmeented, competitivee and evolving rapidly. With the inttroduction of new technologies
aand the influx of new market players, there is a risk that
t competition could
c
become entrrenched and evenn intensify, which could hinder the Corporation’s
aability to increase sales
s
and maintain its prices. It is also
a possible that new companies, including major w
well-established ouutfits, could enter iits markets. If
ssuch companies were
w to decide to develop, market orr resell competing interactive markeeting products or sservices, or to acquire or form a straategic alliance
w
with an existing competitor, Transcontinental’s operating results could be
b affected.
N
New Media
TThe industries in which
w
the Corporration operates arre subject to the impact of new m
media, which are driving major devvelopments in tecchnology and
cchanges in consum
mer behaviours. Technological
T
chaange continues too improve the quaality and accessibbility of alternativees to print media. As a result,
aadvertisers now haave a more diverse selection of media products in whhich to spend theiir advertising dollaars. Although this migration from coonventional to
nnew media could pose
p
a risk for som
me of its niches, thhe Corporation cannot accurately prredict what effect these rapid changges will have on ddemand for its
pproducts and services. In particular, these changes coould reduce demand, increase pricee pressure, and reequire investmentss in equipment and technology.
A
As well, the Corpooration needs to bee aware of custom
mer needs and to respond by continnually developing new solutions. Thhis development ccan be costly,
hhowever, and theree is no guarantee that the solutions will be accepted by
b customers.
N
Nevertheless, busiiness opportunitiees also exist to reccover advertising budgets investedd in other media pplatforms. To limitt the risk and capitalize on this
oopportunity, Transccontinental has beeen shifting its focuus towards the diggital market througgh its Interactive aand Media sectorss. The Corporationn has targeted
ddevelopment areass in its strategy foor digital media and interactive soluutions in order to position itself as a content creator and to deliver oon new media
pplatforms and otheer digital solutions.
550
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M
MANAGEMENT
ALYSIS
S
Success depends on the quality off the Corporation’s products and services. Consequuently, Transconti nental must contiinue to invest in research and
ddevelopment to im
mprove its digital platforms
p
as well as
a introduce new high-potential prooducts and servicees. On the other hand, these invesstments could
aaffect operating ressults.
O
Operational Effficiency
G
Given its very com
mpetitive markets, the Corporation must
m continually im
mprove operationaal efficiency in ordder to maintain or improve profitabillity. However,
thhere is no guaranttee that the Corpooration will be ablee to do this in the future.
f
As well, thee need to reduce oongoing operating expenses could rresult in costs
too downsize the woorkforce, close or consolidate
c
facilities, or upgrade eqquipment and techhnology.
R
Regulation
TThe Corporation iss subject to manyy regulations that may be amendedd by municipal, prrovincial or federaal authorities. Anyy changes to thesse regulations
ccould result in a material
m
increase in costs for the Corporation
C
if it must
m comply by inncreasing its workkforce, enhancingg compensation aand employee
bbenefits, or investinng in raw materials or new or improvved equipment.
G
Geographic Disstribution and Exchange
E
Ratee
Inn fiscal 2011, reveenues generated outside
o
Canada acccounted for 12.5%
% of consolidated revenues, compaared to 13.4% in 2010. This drop is due mainly to
thhe rise of the Cannadian dollar againnst its U.S. counteerpart during the fiiscal year since thhe volume of expoorts to the United S
States and revenuues from U.S.
eentities was relatively stable in compparison to 2010.
TThe currency-hedgging program usess derivatives to prrotect the Corporaation from the riskk of short-term currency fluctuationss. Moreover, Trannscontinental
aattempts to match cash inflows and outflows in the saame currency. Thee policy approved by the Corporatioon’s Board of Direectors permits heddging of 50%
too 100% of net cassh flows for a periood of one to 12 moonths, 25% to 50%
% for the subsequeent 12 months andd up to 33% for thee following 12 months.
A
As at October 31, 2011,
2
using forwaard contracts to maanage the exchannge rate related too its exports to thee United States, thhe Corporation hadd contracts to
ssell US$92.5 millioon (US$107 millionn as at October 311, 2010), of which $56.5million and $36 million will bee sold in fiscal 20112 and 2013, resppectively. The
teerms of these forw
ward contracts range from one montth to 30 months, with
w rates varying ffrom 0.9846 to 1.11474.
D
Dependence onn Information Systems
S
TThe Corporation reelies heavily on information technology systems. If thhese systems expperience disruptionns or breakdowns due to a system crash, power
ooutage, virus, unauuthorized access, human error, sabootage or other succh events, it couldd have a negative effect on its operaations and earninggs. The media
inndustry is still in the
t grip of massive technological change. The ever-growing popularrity of the Interneet has increased tthe number of coontent options
ccompeting with traditional media. Traanscontinental muust also manage the changes in theese new technologgies and be able tto acquire, develop or integrate
thhem. Its ability to successfully
s
manaage the implementtation of new technologies could haave a material impaact on the Corporaation’s future com
mpetitiveness.
R
Recruiting and Keeping Talennt
S
Social and demographic trends are making it more challenging
c
to hiree and retain qualiffied personnel. Thhere is a diminishhing pool of qualiffied talent, an
inncrease in professsional mobility, ann increase in technnology use and a high demand for emerging skill seets. There is a riskk that the Corporaation will have
ddifficulty hiring andd retaining qualifiedd personnel. As a result, the Corporation establishedd development plaans for high-potenttial and promotablle executives,
aas part of the semi-annual Leadershhip Review processs. To ensure execcution, each senioor leader establishhed specific objecctives and committted to provide
ooperational growth opportunities andd challenges to furrther accelerate eaach person’s deveelopment. In additiion, senior managgers are now evaluuated on their
im
mplementation of succession planss for key positionss. The Corporationn continually asseesses its leadershhip depth to meet organizational chhallenges and
eensure on-going iddentification of succcessors and acquuisition of new skillls.
Im
mpairment Tessts
TThe Corporation coonducts impairmeent tests that couldd lead to reductions in asset valuess and as a result have an unfavourable impact on sshareholders’
eequity. Under Canadian generally accepted
a
accounting principles, the Corporation musst regularly test the impairment of long-term assets tto determine
w
whether the value of the asset in queestion has decreased. In accordancce with these accoounting principles, the Corporation ccompleted its impaairment tests
inn the fourth quartter 2011. Consequently, the Corpooration recorded a non-cash chargge of $52.2 millionn before tax ($455.1 million after taxx) related to
im
mpairment of goodd will and intangibble assets. This assset devaluation reduces
r
the net inncome applicable tto participating shhares but has no m
major impact
oon conformity with the debt ratio the Corporation mustt respect under thee terms of its curreent credit facilitiess, nor on its borrow
wing power.
E
Exchange of Coonfidential Information and Prrivacy
TThis risk involves the use and mannipulation of confidential information provided by Traanscontinental’s ccustomers. The ppotential dissemination of such
innformation to the wrong individualss could cause siggnificant damage to customers’ reelationships with ttheir clients and tthus to the Corpooration’s own
reelationships with its customers andd could result in leegal actions. To mitigate
m
this risk, various measurees to improve prevvention and contrrol have been
im
mplemented. In fisscal 2011, securityy measures were strengthened,
s
speecifically with respeect to information systems.
2011 Annual Report
TRANSCONTINENTAL
51
2011 Annual Report
51
M
MANAGEMENT
ALYSIS
FFurthermore, it is possible
p
that some of the Corporatiion’s operations innfringe on the privvacy of users and others. While it hhas introduced strrict controls in
thhis area, practicess with respect to thhe collection, use, disclosure or seccurity of personal i nformation or otheer related confidenntiality issues could damage its
reeputation.
Inntegration of Acquisitions
A
A
Acquisitions have been
b
and continuee to be a key elem
ment in the Corporaation’s growth straategy. However, thhe integration of aacquisitions is alwaays a risk and
thhis risk increases with the size of the
t acquisition. Integrating businesses could cause temporary disrupttions to operationns, to labour retenntion, to client
reelationships and/oor potential loss of business. In adddition, the identifieed synergies may not be fully realizzed or may take longer to realize than originally
aanticipated.
a
with Quad/Graphics
Q
too indirectly acquirre all shares of Q
Quad/Graphics C
Canada. This
Inn third quarter 20011, Transcontineental signed an agreement
trransaction is, how
wever, subject to obtaining
o
regulatorry clearances; the Corporation belieeves that it will be finalized in early 22012. The integraation of these
ooperations could reesult in the potential loss of contractts and/or customeer relationships, too temporary disrupptions in productioon or to problems rretaining key
eemployees. Also, the
t anticipated syynergies could fail to completely maaterialize, or couldd take more time than expected to materialize. How
wever, to limit
thhis risk, the Corpooration has experieenced due diligencce teams and rigoorous integration m
methods and belieeves that it is in a pposition to generaate synergies
frrom the integrationn of these operatioons because of the major investmennts made in recen t years in its Printting Sector.
LLoss of Reputation
TThe Corporation currently enjoys a good reputation. The risk of losingg or tarnishing thiss reputation couldd have an importaant impact on the affairs of the
C
Corporation or its valuation in the stock
s
market. Also, its ability to maintain its existingg customer relatioonships and geneerate new custom
mers depends
ggreatly on the quaality of its servicess, reputation and business continuuity. Dissatisfactioon with its servicees, damage to its reputation, or changes to key
eemployees could leead to a loss of business.
b
Since itss creation, the Corporation has takeen important stepss to mitigate this risk, mainly by ennsuring strong
ccorporate governannce and establishing policies, includding a Code of Ethhics.
P
Participating Shhares and Prefferred Shares
S
Share prices may fluctuate and shaareholders may noot be able to sell participating sharres at the issue pprice or a higher pprice. The price off participating
sshares could fluctuuate due to a num
mber of factors reelated to the Corpporation’s businesss, including new
w announcements,, changes in the Corporation’s
ooperating results, sales of participaating shares on thhe market, not meeeting analysts’ eexpectations, the general situation in the printing annd publishing
inndustries or in thee North American economy. In recent years, participaating shares, the sshares of other coompanies operatinng in the same seectors and the
sstock market in general have expeerienced quite substantial price fluuctuations that weere not necessariily related to the operating perform
mance of the
ccompanies concerrned. It would bee realistic to expeect that the pricee of participating shares will conti nue to fluctuate significantly in thhe future, not
nnecessarily relatedd to the Corporatioon’s performance.
H
Holders of preferreed shares may noot be able to sell their shares at the issue price orr a higher price. TThe price of prefeerred shares could fluctuate in
reesponse to real or anticipated fluctuuations in their creedit rating and inteerest rates, whichh would also havee an impact on thee cost at which thee Corporation
ccould carry out trannsactions or obtainn financing, and thherefore on its liquuidity, financial situuation or operatingg results.
FFinancial Riskks
A
Availability of Capital
C
and Usee of Financial Leverage
L
A
At October 31, 2011, an amount off $181.7 million was
w drawn on the $400.0 million reevolving credit faccility which maturees in September 2012. Senior
uunsecured notes foor C$74.4 million will also mature inn fiscal 2012. How
wever, preliminaryy approaches havve been made andd there is no indiccation that the
C
Corporation will haave any difficulty replacing these finnancing sources att attractive markett conditions. This risk is mitigated bby the fact that thee Corporation
iss in a very good financial position, with
w an adjusted net
n indebtedness ratio
r
of 1.44x and the Corporation’ss financial positionn should improve ffurther due to
thhe considerable cash flows generatted in the next fisccal year, since capital expendituress will be limited to $75 million. Also,, the $200.0 million receivables
ssecuritization progrram arranged in February
F
2011 wass unused at Octobber 31, 2011, whicch gives the Corpooration additional fflexibility.
TThere is no assuraance that the Corporation will be able to increase distrributions to sharehholders by way of dividends.
Innterest Rate
TTranscontinental iss exposed to markket risks related too interest-rate flucctuations. At the eend of fiscal 2011,, considering the dderivative financiaal instruments
uused, the fixed ratte portion of the Corporation’s
C
long-term debt repressented 81% of thee total, while the ffloating rate portioon represented 199% (70% and
330%, respectively, in 2010). The fixeed rate portion of the debt increaseed due to pre-paym
ment in fiscal 201 1 of fixed-rate debt, i.e., its term crredit facility of
$$100.0 million with the Caisse de déépôt et placement du Québec and itts $50.0 million terrm loan with SGF Rexfor. The repaayments were madde by drawing
oon the term revolving credit facility which
w
has a floatinng interest rate. The interest rate sw
wap hedges otherr floating rate debtts, which explainss the increase
inn the fixed rate poortion of the long-teerm debt as at Occtober 31, 2011. The
T floating rate poortion of the debt, considering the dderivative financial instruments,
bbears interest at raates based on LIB
BOR or bankers’ acceptance
a
rates. In order to mitigaate this risk the C
Corporation tries too keep a good ballance of fixed
vversus floating ratee debt.
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M
MANAGEMENT
ALYSIS
C
Credit
TThe volatile economic conditions coould have an impaact on the availability of capital in geeneral, but also m
more specifically inn certain vulnerabble niches. To
limit this risk, the Corporation is maintaining
m
its stricct controls on recceivables and sennior managementt is putting greateer emphasis on aanalyzing and
reeviewing the finanncial health of its customers; rigoroous evaluation proocedures are appllied to all new cusstomers. A speciffic credit limit is esstablished for
eeach customer and reviewed perioddically by the Corrporation. As well, the Corporation is protected agaainst any concentrration of credit rissk through its
pproducts, clientele and geographic diversity.
d
As at Occtober 31, 2011, the
t maximum expposure to credit rissk related to receiivables is the carrrying amount.
TThe Corporation also has a credit innsurance policy coovering most of itss major customerss, for a maximum aamount of $20.0 m
million, which ends on April 30,
22011. The policy coontains the usual clauses and limitss regarding the am
mounts that can bee claimed by eventt and year of coveerage.
P
Pension Plans
O
On June 1, 2010, the Corporation replaced its hybrrid and defined benefit
b
(DB) pens ion plans with deefined contributionn (DC) plans. As a result, the
C
Corporation has lim
mited its risk with respect to past seervice under the hybrid
h
and DB plaans since there is no risk associated with future servvice under the
D
DC plans.
P
Pension funding iss based on actuaarial estimates annd is subject to lim
mitations under aapplicable incomee tax and other reegulations. Actuarrial estimates
pprepared during thhe year were baseed on assumptionns related to projeected employee ccompensation leveels to the time of retirement and thhe anticipated
loong-term rate of reeturn on pension plan
p assets. Accruued benefit obligattion, fair value of pplan assets and pplan asset compossition are measureed at the date
oof the annual finanncial statements. The
T most recent actuarial valuationn of the pension pplans for funding purposes was maade as of Decembber 31, 2010.
FFrom now on, valluations must be performed annuaally. The actuariaal funding valuatioon report determines the amount of cash contributtions that the
C
Company is required to make to the registered retirem
ment plans. The December
D
31, 20100 funding report sshowed the registeered retirement plaans to be in a
ssolvency deficit poosition. Consequeently, the Corporaation will be required to increase iits cash funding contributions duriing the next fiscaal year. If the
financial markets or
o interest rates droop significantly aggain, the Corporation would likely bee required to furtheer increase its cassh funding contribuutions.
E
Environmental Risks
TThe Corporation operates in two inddustries, printing and
a publishing, whhich use large qu antities of paper ffor their day-to-daay operations. Connsumers are
eexpressing mounting concern overr the protection of
o the environment as well as suustainable developpment. Also, on June 10, 2011, the Quebec
ggovernment passeed Bill 88 amendinng the Environment Quality Act andd the Regulation respecting compeensation for municcipal services, whhich received
aassent on June 13, 2011. The perceentage of the recyccling costs covereed by Quebec munnicipalities, to whicch businesses currrently contribute, will increase
frrom 80% in 2011 to 100% in 2013. This legislative amendment
a
could have an adverse impact on the Meedia Sector, and more specifically on the Local
S
Solutions Group annd the Business and
a Consumer Sollutions Group. To mitigate this risk, the Corporation trries to be at the foorefront of its induustry in terms
oof commitment to the environment and, in collaboraation with its supppliers, is looking on an ongoing basis to reduce iits costs. Please refer to the
E
Environment sectioon of this Managem
ment’s Discussionn and Analysis for further details.
R
Raw Materials and Postal Risk
R
Raw Materials and
a Energy Pririces
TThe primary raw materials
m
the Corpporation uses in itss printing sector are
a paper, ink andd plates. These acctivities consume energy, i.e., electtricity, natural
ggas and oil. Fluctuaations in raw mateerials and energy prices
p
affect its opperations.
W
While paper costs are a pass througgh for the Printing Sector, the increaase in the price off raw materials cann have a negativee effect on printingg operations if
itt changes the purcchasing habits of customers, in term
ms of number of pages
p
printed for example. Moreovver, the increase in the price of papper negatively
aaffects the profitabbility of the Media Sector. In order to
t mitigate this rissk, the Corporationn does not rely onn any one supplieer and has agreem
ments with its
m
most important supppliers in order to ensure a stable flow
f of resources. In addition, somee supply agreemeents contain escalaation clauses thatt index selling
pprices to fluctuationns in raw material costs and currency. Finally, fluctuaations in the price of oil have an imppact on ink and onn gasoline prices. Any increase
inn gasoline prices would negatively affect distributionn activities in the Media Sector. H owever, the Corpporation continuess to seek new waays to reduce
eenergy costs.
FFuture Policies of the Canadiaan and U.S. Poostal Systems
P
Postal rates are ann important compoonent of the cost structure
s
of the Coorporation’s printinng customers (direect mail in Canadaa, catalogues andd magazines).
P
Postal rate changees can influence thhe number of piecces that Transconttinental’s customeers are willing to m
mail. In order to mitigate this risk, thee Corporation
hhas increased its investment in posttal optimization caapabilities which can offer customerrs a reduction in thheir postal costs. A significant increease in postal
ccosts would affect not only the cuustomers of its printing operationss, but also the M
Media Sector, parrticularly with respect to magazinee distribution.
FFurthermore, Canaadian print magaziines and non-dailyy newspapers bennefit from the Aid too Publishers program offered by thee Canada Periodiccal Fund. Any
ssignificant reductioon or loss in these subsidies could have
h
a negative im
mpact on the Corpooration’s obligationns.
maining alert to anny new risks that could affect its opperations and
Inn conclusion, the Corporation continues its stringent approach to risk management, rem
eensuring that its cuurrent control meaasures are effectivee. Management also continues its sstructured approacch to risk prevention and control and to business
ccontinuity planningg, which establisshes measures too encourage bussiness units to pprevent risk, mannage organizationnal change and recover from
uunforeseeable events more effectiveely.
2011 Annual Report
TRANSCONTINENTAL
53
2011 Annual Report
53
M
MANAGEMENT
ALYSIS
DISCLOSURE CONTROLS
O
AND PROCEDURES
TTranscontinental’s President and Chhief Executive Officer and its Chief Financial
F
and Devvelopment Officer are responsible foor establishing and maintaining
thhe Corporation’s disclosure
d
controlss and procedures.
O
Our disclosure controls and proceddures are designeed to provide reaasonable assurancce that informatioon required to bee disclosed by uss is recorded,
pprocessed, summaarized and reporteed within the timee periods specifieed under Canadiaan securities lawss, and include conntrols and procedures that are
ddesigned to ensuree that information is accumulated annd communicated to management too allow timely deccisions regarding rrequired disclosuree.
TThe President andd Chief Executivee Officer and the Chief Financial and
a Developmentt Officer, after evvaluating the effecctiveness of the Corporation’s
ddisclosure controlss and procedures as at October 31, 2011, have conccluded that the Coorporation’s disclosure controls and procedures are aadequate and
eeffective to ensure that material inforrmation relating too the Corporation and
a its subsidiariees would have beeen known to them.
INNTERNAL CONTTROL OVER FINAANCIAL REPORTTING
M
Management is ressponsible for estaablishing and mainntaining adequate internal control ovver financial repo rting to provide reeasonable assurannce regarding
thhe reliability of finaancial reporting annd the preparationn of financial statem
ments for externall purposes in accoordance with GAA
AP.
TThe President and Chief Executivve Officer and the Chief Financiaal and Developmeent Officer have supervised the evaluation of thee design and
eeffectiveness of internal controls witth respect to the Corporation’s finaancial reporting, uusing the integrateed framework for internal controls iissued by the
C
Committee of Sponsoring Organizattions of the Treaddway Commission (COSO). Based on this evaluationn, they concluded that the Corporation’s internal
ssystem for controlliing financial reporrting is effective ass at October 31, 20011.
TThe President andd Chief Executivee Officer and the Chief Financial and
a Development Officer have evaaluated whether thhere were changees to internal
ccontrol over financcial reporting during the year endeed October 31, 20011 that have maaterially affected, or are reasonablyy likely to materiaally affect, its
innternal control oveer financial reportinng. No such changges were identifiedd through their ev aluation.
SUBSEQUENT EVVENTS
S
Structural change
O
On November 1, 2011, the Compaany implemented a new operating structure in ordeer to better meet the actual needss in companies’ m
multi-platform
m
marketing communnications, combining the majority of the Interactive Seector activities withh those of the Meddia Sector into a ssingle sector. For their part, the
ddigital printing operations established in the United Staates will completee the offer of the P
Printing Sector. Th is new operating sstructure will be reeflected in the
cconsolidated financcial statements of the first quarter off fiscal 2012.
OUTLOOK
A
As fiscal 2012 getss underway, Transscontinental’s finaancial condition is sound. This puts it in a good positiion to further its trransformation andd keep a solid
foooting in the unceertain North American economy. Coonsiderable cash flows will be geneerated in fiscal 20012 and capital exxpenditures will be limited to a
m
maximum of $75 million
m
to ensure thhe Corporation hass extra flexibility when
w
assessing vaalue-generating oppportunities.
W
With the combination of the Media and
a Interactive secctors on November 1, 2011, in comi ng quarters the C
Corporation shouldd be able to ramp uup integration
oof its marketing prooducts and servicees and increase thhe profitability of itss digital platforms . The new Media S
Sector will focus oon integration and its marketing
aactivation offering by developing itss digital platforms and interactive platforms.
p
Given tthe stiffer compettition in some of iits more traditionaal niches, the
ssector will pursue its initiatives to seecure its market share. Lastly, any slowdown in the eeconomy could haave an impact on national advertising expenses,
w
which would have an adverse impacct on the sector, paarticularly in the Business and Conssumer Solutions G
Group.
FFor the Printing Seector, the focus in coming quarters will be the integraation of Quad/Graaphics Canada’s ooperations, subjecct to clearances froom Canadian
reegulators; it is now
w expected that thhese will be obtainned in early 2012. With the contribuution from this trannsaction, and giveen the important innvestments in
itts print network annd its Canada-widee hybrid press plaatform in recent years, the Printing S
Sector could generate additional adjjusted operating inncome before
aamortization of at least $40 million on
o an annualized basis
b
over a 12 too 24-month period after the closure of the transaction. Also, new contraacts signed in
fiscal 2011, particularly the new long-term agreemeent with Canadiann Tire, should enaable the Corporation to generate additional revenuues of $30 to
$$40 million annually as of January 2012, much of itt benefiting the Printing
P
Sector. Ini tiatives will be im
mplemented to maake the printing nnetwork more
eefficient, including accelerated integrration of flyer printting on the hybrid press platform.
O
On behalf of Management,
N
Nelson Gentiletti
C
Chief Financial andd Development Offficer
D
December 8, 2011
554
54
2011 Annual Report
2011 Annual Report
TRANSCONTINENTAL
MANAGEMENT'S RESPONSIBILITY FOR CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements of Transcontinental Inc. are the responsibility of Management and have been approved by the Board of Directors of the
Corporation. The financial statements include some amounts that are based on Management’s best estimates using reasonable judgement. The financial statements have
been prepared by Management in accordance with Canadian generally accepted accounting principles.
In fulfilling their responsibilities, Management of Transcontinental Inc. and its subsidiaries develop and aim to improve accounting and management systems designed to
provide reasonable assurance that assets are safeguarded from loss or unauthorized use and that the financial records are reliable for preparing the financial statements.
The Board of Directors of the Corporation fulfills its responsibility for the financial statements principally through its Audit Committee. The Audit Committee meets with
management and the independent auditors every quarter to discuss the results of the audit, internal controls and financial reporting matters. The independent auditors
appointed by the shareholders have unrestricted access to the Audit Committee, with or without the presence of management.
The financial statements have been audited by KPMG LLP, Chartered Accountants, and their report follows.
François Olivier
Nelson Gentiletti
2011 Annual report
TRANSCONTINENTAL
55
2011 Annual Report
55
AUDITORS' REPORT TO THE SHAREHOLDERS OF TRANSCONTINENTAL INC.
We have audited the accompanying consolidated financial statements of Transcontinental Inc. (the “Corporation”), which comprise the consolidated balance sheets as at
October 31, 2011 and 2010, the consolidated statements of income, comprehensive income, retained earnings and cash flows for the years then ended, and notes,
comprising a summary of significant accounting policies and other explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting
principles, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally
accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected
depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making
those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also
includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Corporation as at October 31, 2011 and
2010, and its consolidated results of operations and its consolidated cash flows for the years then ended in accordance with Canadian generally accepted accounting
principles.
Chartered Accountants
Montreal, Canada
December 8, 2011
*CA Auditor permit no 10892
56 2011 Annual report
56
2011 Annual Report
TRANSCONTINENTAL
CONSOLIDATED STATEMENTS OF INCOME
For the years ended October 31
2011i
Notes
$
Revenues
Operating costs
Selling, general and administrative expenses
Operating income before amortization, impairment of assets, restructuring costs
and impairment of goodwill and intangible assets
Amortization
Impairment of assets and restructuring costs
Impairment of goodwill and intangible assets
Operating income
Financial expenses
Expenses related to long-term debt prepayments
Discount on sale of accounts receivable
Income before income taxes and non-controlling interest
Income taxes
Non-controlling interest
Net income from continuing operations
Net income (loss) from discontinued operations
Net income
Dividends on preferred shares, net of related income taxes
2,043.6
1,441.7
228.9
2010ii
$
2,028.3
1,420.6
234.5
373.0
120.3
18.4
52.2
373.2
123.3
14.9
12.5
6
15
182.1
39.3
5.8
-
222.5
42.6
0.9
7
137.0
30.3
0.9
179.0
34.1
0.9
105.8
(21.2)
84.6
6.8
77.8
144.0
29.4
173.4
6.8
166.6
4
5
12 & 13
8
$
$
Net income (loss) per participating share - basic and diluted
Continuing operations
Discontinued operations
18
Weighted average number of participating shares outstanding - basic (in millions)
18
81.0
80.8
Weighted average number of participating shares outstanding - diluted (in millions)
18
81.1
80.9
$
$
1.22
(0.26)
0.96
$
$
1.70
0.36
2.06
The notes are an integral part of the consolidated financial statements.
2011 Annual report
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57
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57
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
2011i
Notes
Net income
$
84.6
2010ii
$
173.4
Other comprehensive income (loss):
Net change in fair value of derivatives designated as cash flow hedges, net of income taxes of $1.5 million
for the year ended October 31, 2011 ($(4.0) million for the year ended October 31, 2010)
3.8
(13.7)
Reclassification adjustments for net change in fair value of derivatives designated as cash flow hedges
in prior periods, transferred to net income in the current period, net of income taxes of $(2.0) million
for the year ended October 31, 2011 ($1.8 million for the year ended October 31, 2010)
Net change in fair value of derivatives designated as cash flow hedges
(5.6)
(1.8)
8.5
(5.2)
50.5
(5.7)
43.0
127.6
(4.0)
(9.2)
164.2
Reclassification of a realized foreign exchange loss to net income of discontinued operations,
related to the reduction of net investment in self-sustaining foreign operations
Net losses on translation of financial statements of self-sustaining foreign operations
Other comprehensive income (loss)
Comprehensive income
8
21
$
$
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
2011i
Balance, beginning of year
Net income
Dividends on preferred shares
Balance, end of year
$
$
784.0
84.6
868.6
(39.7)
(6.8)
822.1
2010ii
$
$
645.9
173.4
819.3
(28.3)
(7.0)
784.0
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2011 Annual Report
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CONSOLIDATED BALANCE SHEETS
As at October 31
2011i
Notes
Current assets
Cash and cash equivalents
Accounts receivable
Income taxes receivable
Inventories
Prepaid expenses and other current assets
Future income taxes
Assets from discontinued operations
Goodwill
Intangible assets
Future income taxes
Other assets
Assets from discontinued operations
8&9
$
10
7
8
11
12
13
7
14
8
Current liabilities
Income taxes payable
Deferred subscription revenues and deposits
Future income taxes
Current portion of long-term debt
Liabilities from discontinued operations
7
15
8
Long-term debt
Future income taxes
Other liabilities
Liabilities from discontinued operations
15
7
16
8
$
$
Non-controlling interest
Commitments, guarantees and contingent liabilities
25
Shareholders' equity
Share capital
Contributed surplus
17
20
Retained earnings
Accumulated other comprehensive income (loss)
21
$
75.0
436.3
14.7
80.2
21.6
16.8
644.6
787.1
682.5
150.8
144.9
43.7
2,453.6
303.7
33.5
32.5
2.0
271.9
643.6
2010ii
$
$
$
31.9
440.6
19.5
77.6
19.3
16.6
27.5
633.0
871.6
678.1
179.1
145.3
39.2
48.4
2,594.7
345.4
29.0
38.4
2.5
17.8
12.8
445.9
292.5
140.5
47.2
1,123.8
712.9
137.4
50.0
0.7
1,346.9
0.8
0.8
478.8
14.4
478.6
13.7
822.1
13.7
835.8
1,329.0
2,453.6
784.0
(29.3)
754.7
1,247.0
2,594.7
$
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59
CONSOLIDATED STATEMENTS OF CASH FLOWS
2011i
Notes
Operating activities
Net income
Less: Net income (loss) from discontinued operations
Items not affecting cash and cash equivalents
Amortization
Impairment of assets
Impairment of goodwill and intangible assets
Net gains on disposal of assets
Future income taxes
Stock option compensation
Other
Cash flow from operating activities before changes in non-cash operating items
Changes in non-cash operating items
Cash flow related to operating activities of discontinued operations
Investing activities
Business acquisitions
Disposals of property, plant and equipment
Increase in intangible assets and other assets
Cash flow related to investing activities of continuing operations
Cash flow related to investing activities of discontinued operations
Financing activities
Increase in long-term debt
Reimbursement of long-term debt
Increase (decrease) in revolving term credit facility
Dividends on preferred shares
Issuance of participating shares
Bond forward contract
Other
Cash flow related to financing activities of continuing operations
Cash flow related to financing activities of discontinued operations
8
$
$
173.4
29.4
144.0
147.5
3.9
52.2
(3.8)
(1.1)
0.7
5.8
311.0
(6.3)
304.7
3.4
308.1
147.9
1.7
12.5
(8.2)
10.4
0.8
2.0
311.1
(155.1)
156.0
8.2
164.2
23
(35.8)
(47.4)
2.6
(21.1)
(101.7)
49.0
(52.7)
(14.0)
(125.0)
10.9
(24.1)
(152.2)
90.8
(61.4)
15
15
15
(168.0)
4.5
(39.7)
(6.8)
0.2
(6.0)
(1.2)
(217.0)
(217.0)
40.5
(10.1)
(95.4)
(28.3)
(7.0)
2.1
(0.2)
(98.4)
(1.3)
(99.7)
0.3
(1.5)
38.7
36.3
75.0
1.6
34.7
36.3
4
5
12 & 13
7
19
22
17
Effect of exchange rate changes on cash and cash equivalents denominated in foreign currencies
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
84.6
(21.2)
105.8
2010ii
$
$
Cash and cash equivalents include an amount from discontinued operations of $4.4 million as at October 31, 2010.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the years ended October 31, 2011 and 2010
1
SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”) in Canada, as established in
Part V of the Canadian Institute of Chartered Accountants’ (“CICA”) Handbook, and include the following significant accounting policies:
a) Consolidation
The consolidated financial statements include the accounts of the Corporation and those of its subsidiaries and joint ventures. Business acquisitions are accounted for under
the acquisition method, in accordance with Section 1581 "Business Combinations" of the CICA Handbook, and their operating results are included in the consolidated
financial statements from the acquisition date. Investments in joint ventures are accounted for using the proportionate consolidation method. Other investments are recorded
at cost.
b) Use of estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions which are based on subjective or complexe
judgments, that affect the amounts reported in the consolidated financial statements of the Corporation. Although management regularly reviews its estimates, actual results
could differ from them. The most significant areas requiring the use of management estimates are: provisions, including provisions for bad debts, for inventory obsolescence
and for legal contingencies, impairment of assets, restructuring costs, amortization periods of property, plant and equipment and intangible assets, valuation of goodwill and
intangible assets, stock-based compensation costs and accounting for income taxes and pension plans.
c) Revenue recognition
The Corporation recognizes revenues when the following criteria are met:
• there is persuasive evidence of the existence of an agreement for exchange of products or services;
• the products were shipped or delivered, or services provided;
• the selling price is fixed or determinable;
• the collection of the sale is reasonably assured.
i) In the Printing sector, printing is the main source of revenues. These revenues are recognized when products are shipped or delivered, in accordance with the customer
agreement. Most sales are promptly delivered to customers; consequently, the Corporation does not have significant finished goods in inventory.
ii) Interactive sector revenues are recognized as follows:
Printing revenues:
Printing revenues are recognized when products are shipped or delivered, in accordance with the customer agreement.
Content preparation revenues:
Content preparation revenues are recognized based on the percentage of completion method, in accordance with the customer agreement.
Custom publication revenues:
Custom publication revenues are recognized when products are shipped or delivered, or when services are provided, in accordance with the customer agreement.
Revenues for updating digital publications are recognized based on the percentage of completion method.
Revenues for the use of computerized tools:
Revenues for the use of computerized tools are recognized based on usage, storage space or reports generated, in accordance with the customer agreement. Revenues
billed also consider volume discounts.
Marketing project revenues:
Marketing project revenues are recognized based on the percentage of completion method, in accordance with the customer agreement.
iii) Media sector revenues are recognized as follows:
Advertising revenues:
Advertising revenues are recognized at the publication date in the case of a daily or weekly publication, and at the date of issue in the case of a monthly publication.
Subscription revenues:
Subscription revenues are recognized using the straight-line method, based on subscription terms, which represent the period during which the services are provided.
These amounts received are therefore recorded in deferred subscription revenues when collected, and subsequently transferred to income based on the subscription
terms.
Distribution revenues:
Door-to-door distribution revenues are recognized at the delivery date of the advertising material.
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1
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Newsstand revenues:
Newsstand revenues are recognized at the time of delivery, net of a provision for returns and delivery costs.
Educational books revenues:
Educational books revenues are recognized when the books are shipped to customers, in accordance with the customer agreement.
Publishing revenues:
Revenues from government programs related to publishing are recognized based on the percentage of completion method, in accordance with the customer agreement.
d) Non-monetary transactions
In the normal course of business, the Corporation offers advertising in exchange for goods or services. The related revenues are accounted for based on the fair value of the
goods and services received or given. For the year ended October 31, 2011, the Corporation recognized an amount of $9.5 million as non-monetary transactions ($7.4 million
for the year ended October 31, 2010).
e) Income taxes
The Corporation records income taxes using the liability method of accounting. Under this method, future income tax assets and liabilities are determined based on the
differences between the carrying amount and the tax basis of the assets and liabilities, and are measured using tax rates in effect when these differences are expected to
reverse, in accordance with enacted laws or those substantively enacted at the date of the financial statements. A valuation allowance is recorded as a reduction of the
carrying value of future tax assets when it is more likely than not that these assets will not be realized.
f) Government assistance
Government assistance, including investment tax credits related to the purchase of property, plant and equipment or intangible assets, is recorded as a reduction in the cost
of the underlying asset. Government assistance, including investment tax credits related to operating costs, is recorded as a reduction of these costs.
g) Cash and cash equivalents
Cash and cash equivalents include cash, bank overdraft and highly liquid investments with original maturities of less than three months. Cash and cash equivalents are
presented at fair value.
h) Inventories
Inventories are valued at the lower of cost and net realizable value. Cost is determined using the first in, first out method, and includes the acquisition costs of raw materials
and manufacturing costs, such as direct labor and a portion of manufacturing overhead.
i) Vendor rebates
The Corporation records vendor rebates as a reduction in the price of vendor's products or services received, and reduces operating costs and related inventory in the
consolidated statements of income and balance sheets. These rebates are estimated based on anticipated purchases.
j) Property, plant and equipment
Property, plant and equipment are stated at cost, and amortized using the straight-line method over their estimated useful lives, as follows:
Buildings
Machinery and equipment
Machinery and equipment under capital leases
Other equipment
Leasehold improvements
20-40 years
3-15 years
3-15 years
2-5 years
Term of the lease
Costs, such as interest, directly incurred for the acquisition or construction of property, plant and equipment are capitalized and amortized over the useful life of the
corresponding asset. Assets under construction are not amortized until they are ready for their intended use.
k) Leases
The Corporation accounts for capital leases as a property, plant and equipment and long-term debt when substantially all the benefits and risks incident to ownership of the
property are transferred. The cost of assets under capital leases represents the present value of future minimum lease payments, and is amortized on a straight-line basis
over the lease term.
Leases that do not transfer substantially all the benefits and risks incident to ownership of the property are accounted for as operating leases, under which the rental costs are
recorded to income on a straight-line basis over the term of the lease.
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l) Disposal of long-lived assets and discontinued operations
Long-lived assets held for sale are presented separately in the consolidated balance sheets and are measured at their carrying value or fair value less selling costs,
whichever is less, and they are not amortized while they are presented as available for sale. The net results related to items that were disposed of by sale, or classified as
held for sale, are presented as discontinued operations when the results and cash flows associated to these items have been or will be eliminated from continuing operations
as a result of the sale, and if the Corporation no longer participate significantly in the operation of the item after the sale. Part of a business means an item whose net income
and cash flows can be clearly distinguished from the rest of the net results and cash flows of the Corporation for both operating purposes and presentation of financial
information.
m) Goodwill
Goodwill represents the excess of acquisition cost over fair value of net assets of acquired businesses. Goodwill has an indefinite useful life, and is not amortized but tested
annually for impairment or more frequently if changes in circumstances indicate a potential impairment.
In assessing whether or not there is an impairment, the Corporation uses a combination of approaches to determine the fair value of a reporting unit, including both the
market and the discounted future cash flows approaches. Under the market approach, the Corporation estimates the fair value of the reporting unit by multiplying normalized
earnings before amortization, interest and income taxes by multiples based on market inputs. If there is an indication of impairment, the Corporation uses a discounted future
cash flow model in estimating it, and compares it with the fair value of the net identifiable assets. The future cash flows are based on the Corporation’s estimates and include
consideration for expected future operating results, economic conditions and a general outlook for the industry in which the reporting unit operates.
n) Intangible assets
Intangible assets are stated at cost and amortized as follows:
Customer relationships
Educational books prepublication costs
Educational books titles
Acquired printing contracts
Non-compete agreements
Long-term technology project costs
Term
12 years
Maximum 7 years
6-9 years
Term of the contract
2-5 years
5 years
Method
Straight-line
Straight-line
Straight-line
Straight-line
Non-amortizable intangible assets consist of trade names, mainly from acquired magazines and newspapers, and their related circulation. These intangible assets have an
indefinite useful life and are not amortized but tested annually for impairment, or more frequently if changes in circumstances indicate a potential impairment.
o) Contract acquisition costs
Contract acquisition costs are amortized as reductions of revenues using the straight-line method over the related contract term or on sales volumes. Whenever changes
occur that impact the related contract, including significant declines in anticipated profitability, the Corporation evaluates the carrying value of the contract acquisition costs to
determine whether impairment has occured. These costs are included in other assets in the consolidated balance sheets.
p) Asset retirement obligations
Legal obligations linked to removal obligations on certain buildings are recorded in the period in which they are contracted, when they can be reasonnably evaluated. The
obligations are initially measured at fair value using the discounted cash flow technique, and are subsequently adjusted for any changes in the initial timing or amounts of the
expected cash flow. Initially, these obligations are capitalized as capital assets, and then amortized over their remaining useful life. A liability related to the asset retirement
obligation is also established over time, due to accretion, and recorded as operating costs.
q) Impairment of long-lived assets
Long-lived assets are tested for recoverability whenever changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is
recognized when their carrying amount exceeds the total undiscounted cash flows expected from their use and potential disposition. The amount of the impairment loss is
determined as the excess of the carrying value of the asset over its fair value.
r) Pension and post-retirement benefits
The Corporation offers various contributory and non-contributory defined benefit pension plans, defined contribution pension plans and registred savings plans to its
employees and those of its participating subsidiaries. Since June 1, 2010, most employees participate only in defined contribution pension plans.
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63
1
i) Defined benefits pensions plans
The accrued benefit obligation is determined by independent actuaries, using the projected benefit method prorated on services and is based on management’s best
economic and demographic assumptions. The Corporation amortizes the unrecognized net aggregate actuarial gains and losses in excess of 10% of the greater of the
accrued benefit obligation or the fair value of plan assets, and past service costs, over the expected average remaining service life (“EARSL”) of the employee group
covered by the plans which ranges from 10 to 12 years. The transitional obligation resulting from the initial application of Section 3461 of the CICA Handbook in
November 2000 is also amortized over the EARSL of the employee group covered by the plans. For the purpose of calculating the expected return on plan assets, the fair
value is used.
ii) Defined contributions pensions plans
Under the defined contributions pension plans, the Corporation makes contributions to the participating employees pension plans using a predetermined percentage of
the employees salary and has no legal or implicit obligation to pay additionnal amounts. The cost for these plans is recorded when services are rendered by employees,
which is generally at the same time the contributions are made.
s) Stocks based compensation
The Corporation offers stock option plan and share unit plans for the benefit of senior executives and directors.
i) Stock option plan
Stock options are valued at fair value at the time of their issuance using the Black-Scholes model. Compensation costs related to stock options are recognized to income
on a straight-line basis at a rate of 25% per year, which is the period over which the rights on the options are acquired, and an equal amount is recorded to contributed
surplus included in shareholders' equity. When senior executives exercise their stock options, the amounts received from them are credited to share capital. For stock
options granted since November 1, 2002, the amount previously accounted for as an increase to contributed surplus is also transferred to share capital.
ii) Share unit plan for senior executives
Compensation costs related to share units plan for senior executives are recognized on a straight-line basis over the three-year vesting period, either on the achievement
of performance targets for the units related to performance, or on tenure for other units. The liability for these units is adjusted to the intrinsic value at the end of each
reporting period, using the trading price of Class A Subordinate Voting Shares of the Corporation, until settlement. Any changes in the intrinsic value is recognized to
income. At the end of each reporting period, the Corporation reviews its estimate of the number of units for which vesting is forecasted, and recognizes the impact of this
revision to income, if any.
iii) Share unit plan for directors
Compensation costs related to share units for directors are recognized at the time of grant. These units are initially measured at fair value based on the trading price of
Class A Subordinate Voting Shares of the Corporation, and are revalued at the end of each reporting period, until settlement. Any changes in fair value are recognized to
income.
t) Foreign currency translation
Operating foreign subsidiaries, with the exception of foreign sales offices of the Canadian operations, are considered self-sustaining foreign operations and the current rate
method is used to translate their financial statements into Canadian dollars. The resulting translation adjustments are reported under “Accumulated other comprehensive loss”
in the consolidated balance sheets and recognized in income only when a reduction of the investment in these foreign operations has been realized. Integrated foreign
operations, including foreign sales offices and foreign currency transactions, are translated using the temporal method and the foreign exchange gains or losses are
recognized to income.
u) Financial instruments
Financial assets and liabilities are classified and valued as follows:
Cash and cash equivalents
Accounts receivable and other financial assets
Investments
Accounts payable and other financial liabilities
Long-term debt
Derivative financial instruments
Category
Held for trading
Loans and receivables
Available for sale
Other financial liabilities
Other financial liabilities
Held for trading
Subsequent evaluation
Fair value
Amortized costs
Fair value or cost if there is no quoted market
Amortized costs
Amortized costs
Fair value
Transactions costs are capitalized to the cost of financial assets and liabilities when they are not classified as held for trading. Thus, issuance costs of long-term debt are
classified as a reduction in long-term debt, and amortized using the effective rate method.
Changes in fair value of financial instruments held for trading are recorded in the consolidated statement of income in the approriate period. Changes in fair value of financial
instruments designated as cash flow hedges are recorded, for the efficient portion, in the consolidated statement of comprehensive income in the approriate period until their
realization, after which they are recorded in the consolidated statement of income.
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1
v) Derivative financial instruments and hedge accounting
The Corporation identifies, evaluates and manages financial risks related to changes in interest rates and foreign exchange rates in order to minimize the effect on its results
and financial position, using derivative financial instruments for which parameters have been defined and approved by the Board of Directors. If the Corporation did not use
derivative financial instruments, exposure to market volatility would be greater.
When applying hedge accounting, the Corporation documents relationship between the derivatives and hedged items, as well as its objective and risk management strategy
underlying its hedging activities. This process includes linking all derivatives designated as a hedge to specific assets and liabilities, firm commitments or specific anticipated
transactions.
When a hedging relationship is put in place and throughout its duration, the Corporation must have a reasonable assurance that the relationship will remain effective and in
accordance with its risk management objective and strategy as initially documented. The effectiveness of the hedging relationship must be confirmed in each quarter. The
effective portion of the hedge is recognized in other comprehensive income and the ineffective portion is recognized in the consolidated statement of income. The effective
portion of the currency risk hedging related to future purchases of production equipment, deferred in accumulated other comprehensive income, is reclassified against the
production equipment at its initial recognition. The effective portion of the currency risk hedging related to interest and capital payments is reclassified to income during the
period in which the hedged item affects earnings.
When hedging instruments mature or become ineffective before their maturity and are not replaced within the Corporation’s documented hedging strategy, any gains, losses,
revenues or expenses associated with the hedging instrument that had previously been recognized in other comprehensive income as a result of applying hedge accounting
are carried forward to be recognized in net income in the same period or periods during which the asset acquired or liability incurred affects net income. If the hedged item
ceases to exist due to its maturity, expiry, cancellation or exercise before the hedging instrument expires, any gains, losses, revenues or expenses associated with the
hedging instrument that had previously been recognized in other comprehensive income (loss) as a result of applying hedge accounting are recognized in the reporting
period's net income along with the corresponding gains, losses, revenues or expenses recognized on the hedged item.
Derivative financial instruments offering economic hedging without being eligible to hedge accounting are accounted for at fair value with change in fair value recorded in the
statements of income. The Corporation does not use derivative financial instruments for speculative or transactional purposes.
2
CHANGE IN ACCOUNTING POLICIES
Section 3064 of the CICA Handbook, Goodwill and intangible assets, allows the capitalization of employee salaries and benefits directly attributable to an internally generated
intangible asset. The Corporation was not capitalizing the books prepublication costs as its information systems could not allocate these costs per book. On November 1,
2010, the Corporation modified its information systems in order to compile employee salaries and benefits per book, and decided to change its accounting policy.
Consequently, for the year ended October 31, 2011, this change in accounting policy resulted in an increase in intangible assets of $5.3 million and in long-term future income
tax liability of $1.5 million, as well as a decrease in operating costs of $5.3 million and an increase in income tax expense of $1.5 million. These intangible assets are now
amortized as operating costs over a maximum of 7 years, based on historical sales patterns. The application of this accounting policy is prospective, as the Corporation
cannot generate the information for prior periods to apply this change retrospectively.
3
EFFECT OF NEW ACCOUNTING STANDARDS NOT YET IMPLEMENTED
International Financial Reporting Standards
In February 2008, Canada's Accounting Standards Board ("AcSB") confirmed that Canadian GAAP, as used by publicly accountable enterprises, will be superseded by
International Financial Reporting Standards ("IFRS") for fiscal years beginning on or after January 1, 2011. For the Corporation, the conversion to IFRS will be required for
interim and annual financial statements for the year ended October 31, 2012.
IFRS uses a conceptual framework similar to Canadian GAAP, but there are significant differences on recognition, measurement and disclosures.
The Corporation is currently completing the analysis of the impact that the adoption of these new standards will have on the consolidated financial statements. The
consolidated financial statements of the first quarter of fiscal 2012 will be prepared according to these new standards.
4
AMORTIZATION
2011i
Intangible assets
Intangible assets and other assets, presented in revenues, operating costs and financial expenses
$
$
104.1
16.2
120.3
27.2
147.5
2010ii
$
$
105.8
17.5
123.3
24.6
147.9
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5
IMPAIRMENT OF ASSETS AND RESTRUCTURING COSTS
Over the last fiscal years, the Corporation initiated restructuring plans as follows:
a) During the second quarter of fiscal 2009, the Corporation announced major rationalization measures to address the recession, including substantive cost-cutting measures
throughout Canada and the United States. The deterioration of the economy had reduced the communication and marketing investments of a number of customers of the
Corporation. Therefore, commercial printing projects and magazine and newspaper advertising placements were cancelled or postponed by companies also affected by the
recession. These measures were completed during fiscal 2010 and final disbursements occured during fiscal 2011.
b) The Corporation is currently carrying rationalization measures aimed at all its operating sectors. These measures aim, among others, to deal with excess production
capacity in some specialized plants of the Printing sector, due to important structural changes in the printing industry which result in lower demand in certain niche markets.
These measures also aim the implementation of a new operating structure from November 1, 2011, combining the majority of Interactive sector activities with those of the
Media sector to form a single sector, in order to better meet the multi-platform marketing communication needs of the customers. For their part, the digital printing activities
established in the United States will complete the product offering of the Printing sector. It is expected that these measures will be completed over fiscal 2012.
The following table provides details of these plans:
Total
Charged
to income
a) Rationalization Measures 2009 - 2010
Printing
Workforce reduction costs $
27.2
Other costs
4.3
Interactive
Workforce reduction costs
2.1
Other costs
0.2
Media
10.4
44.2
Printing
16.5
Media
1.6
$
62.3
b) Rationalization Measures 2011 - 2012
Printing
Workforce reduction costs $
13.7
Other costs
2.4
Interactive
1.7
Media
2.2
20.0
Printing
4.6
$
24.6
Total
Other costs
$
$
57.3
6.9
22.7
86.9
Forecasted
$
$
$
27.2
4.3
$
$
$
-
Paid
$
2.9
-
$
-
Charged
to income
$
4.3
1.1
Paid
$
10.2
1.2
0.6
-
-
0.6
-
-
0.9
-
1.1
-
10.4
44.2
0.4
3.9
-
0.4
3.9
-
1.4
7.7
4.7
17.2
16.5
n/a
-
n/a
n/a
0.9
n/a
1.6
62.3
13.7
3.2
$
$
4.6
25.4
57.3
7.7
22.7
87.7
n/a
3.9
5.5
-
$
$
-
2.2
20.8
$
2.9
-
Charged
to income
2010
Liability as at
October 31,
2011
2.1
0.2
1.7
$
2011
Liability as at
October 31,
2010
5.5
$
$
$
n/a
5.5
9.4
n/a
9.4
$
$
$
-
8.2
2.4
$
$
n/a
3.9
8.0
2.4
$
$
n/a
-
5.7
-
$
$
0.1
8.7
5.5
-
$
$
n/a
17.2
-
1.7
0.7
1.0
-
-
2.2
14.5
1.3
12.4
0.9
7.6
5.5
-
3.9
18.4
12.1
2.4
3.9
18.4
$
$
$
n/a
12.4
13.9
2.4
n/a
16.3
$
$
$
n/a
7.6
7.6
n/a
7.6
$
$
$
0.7
6.2
12.1
1.1
1.7
14.9
$
$
$
n/a
-
16.0
1.2
n/a
17.2
66
2011 Annual Report
TRANSCONTINENTAL
6
FINANCIAL EXPENSES
2011i
Financial expenses on long-term debt
Other expenses
Foreign exchange gain
7
$
$
34.6
5.0
(0.3)
39.3
2010ii
$
$
39.7
3.6
(0.7)
42.6
INCOME TAXES
2011i
Income taxes at statutory tax rate
Effect of differences in tax rates in other jurisdictions
Effect of Ontario corporate income tax rate reductions (a)
Income taxes on non-deductible expenses and non-taxable portion of capital gain
Changes in valuation allowance on capital losses
Other
Income taxes at effective tax rate
$
$
39.2
(9.6)
9.0
(3.4)
(4.9)
30.3
2010ii
$
$
53.7
(12.2)
(2.4)
4.7
(6.6)
(3.1)
34.1
Income taxes include the following items:
Income taxes before the following items:
Income taxes on impairment of assets and restructuring costs
Income taxes on impairment of goodwill and intangible assets
Income taxes on expenses related to long-term debt prepayments
Effect of Ontario corporate income tax rate reductions (a)
Income taxes at effective tax rate
$
$
44.0
(5.0)
(7.1)
(1.6)
30.3
$
$
42.8
(4.2)
(2.1)
(2.4)
34.1
(a) Corporate tax rate reductions announced in the March 26, 2009 Ontario budget were adopted on December 15, 2009. These reductions in corporation tax rates have
reduced the income tax expense and net future income tax liabilities by $2.4 million in the first quarter of fiscal 2010.
Income tax expense for the years ended October 31 is as follows:
Current
Future
Reduction of future income taxes related to impairment of assets and restructuring costs
Reduction of future income taxes related to impairment of goodwill and intangible assets
Income taxes on expenses related to long-term debt prepayments
Reduction of future income taxes related to the reduction of the Ontario corporate income tax rate
Increase in future income tax expense due to other temporary differences
2011i
$
31.4
$
(5.0)
(7.1)
(1.6)
12.6
30.3
2010ii
$
23.7
$
(4.2)
(2.1)
(2.4)
19.1
34.1
The tax impact of the temporary differences resulting in future income tax assets and liabilities are as follows as at October 31:
2011i
Losses carried forward
Property, plant and equipment, net of tax credits
Other assets (liabilities)
Non-deductible provisions
Pension plans
Goodwill and intangible assets
Other
Total future income taxes
$
$
130.1
(96.0)
10.2
(1.9)
(33.1)
9.9
19.2
2010ii
$
$
120.2
(77.6)
5.2
2.3
(34.7)
6.6
22.0
2011 Annual report
TRANSCONTINENTAL
AT
67
2011 Annual Report
67
7
INCOME TAXES (CONTINUED)
2011i
Future income taxes include the following:
Future income tax assets - short-term
Future income tax assets - long-term
Future income tax liabilities - short-term
Future income tax liabilities - long-term
Total future income taxes
$
$
16.8
144.9
(2.0)
(140.5)
19.2
2010ii
$
$
16.6
145.3
(2.5)
(137.4)
22.0
The Corporation has capital losses of $34.4 million that can be carried forward indefinitely, and for which the benefits arising therefrom have not been recognized. In addition,
the Corporation has losses carried forward in certain U.S. states, which expire between 2013 and 2031, and for which the value after federal tax deduction is $5.3 million.
Considering that some limitations may apply to the use of these losses, the Corporation recorded a valuation allowance of $4.1 million against them, leaving a net value of
$1.2 million in the consolidated balance sheet as at October 31, 2011.
8
DISCONTINUED OPERATIONS
On July 12, 2011, the Corporation has entered into a definitive agreement with Quad/Graphics, Inc. to sell its Mexican printing operations, for net proceeds of $81.8 million.
The Corporation received an amount of $50.0 million and recorded an amount of $32.8 million in its accounts receivable. This transaction resulted in a net loss on disposal of
$22.7 million, including an amount of $50.5 million relating to the reversal of losses accumulated under "Foreign currency translation adjustment" in "Accumulated other
comprehensive income (loss)", that the Corporation was required to consider in the book value of net assets related to Mexican printing operations. Mexican printing
operations generated revenues of approximately $63.3 million in 2010 and employed about 900 people in three locations. The closing of the transaction took place on
September 8, 2011.
On February 10, 2010, the Corporation signed an agreement with IWCO Direct, a U.S.-company headquartered in Minnesota, to sell substantially all of its high-volume direct
mail assets in the United States, for net proceeds of $105.7 million. The closing of the transaction took place on April 1, 2010.
The following table presents the results of discontinued operations:
2011i
Revenues
Expenses
Income (loss) before income taxes
Income taxes (recovered)
Income (loss) related to the operation of discontinued operations
Gain (loss) related to the discontinuance of operations, net of related income taxes of nil in 2011 and $24.1 in 2010
Net income (loss) from discontinued operations
9
$
$
55.3
53.3
2.0
0.5
1.5
(22.7)
(21.2)
2010ii
$
$
140.9
153.9
(13.0)
(3.2)
(9.8)
39.2
29.4
ACCOUNTS RECEIVABLE
On February 16, 2011, the Corporation put in place a new two-year securitization program with a trust whose financial services agent is a Canadian bank, to sell, from time
to time, certain accounts receivable of its subsidiaries. The maximum net consideration permitted under this program is $200.0 million, of which up to 20% of accounts
receivable denominated in U.S. dollars.
As at October 31, 2011, no amount has been drawn from this source of financing.
10
INVENTORIES
2011i
Raw materials
Work in progress and finished goods
$
$
43.8
36.4
80.2
2010ii
$
$
40.9
36.7
77.6
68
2011 Annual Report
TRANSCONTINENTAL
11
PROPERTY, PLANT AND EQUIPMENT
2011
Cost
$
Land
Buildings
Other equipment
Assets under construction and deposits on equipment
$
46.1
305.6
1,149.5
14.8
162.7
46.4
10.4
1,735.5
Net book
value
Accumulated
amortization
$
$
97.8
690.8
8.4
128.8
22.6
948.4
$
$
46.1
207.8
458.7
6.4
33.9
23.8
10.4
787.1
2010
Land
Buildings
Other equipment
Assets under construction and deposits on equipment
$
$
47.5
307.2
1,222.0
19.5
163.9
44.6
13.9
1,818.6
$
$
87.3
708.1
7.8
122.7
21.1
947.0
$
$
47.5
219.9
513.9
11.7
41.2
23.5
13.9
871.6
Interest capitalized to property, plant and equipment.
For the year ended October 31, 2011, negligible amounts of interest were capitalized on property, plant and equipment ($2.2 million for the year ended October 31, 2010).
12
GOODWILL
The changes in book value of goodwill are as follows:
2011
Acquisitions (Note 23)
Impairment
$
$
129.7
129.7
Other activities
Media and unallocated
Sector
amounts
Interactive
Sector
Printing
Sector
$
$
38.6
3.5
(29.5)
12.6
$
$
508.9
31.9
(1.5)
539.3
$
507.9
1.8
(0.3)
(0.5)
508.9
$
$
0.9
0.9
Consolidated
$
$
678.1
35.4
(31.0)
682.5
2010
Acquisitions (Note 23)
Disposals
Foreign currency translation and other
$
$
131.4
(1.4)
(0.3)
129.7
$
$
33.2
5.6
(0.2)
38.6
$
$
$
0.9
0.9
$
$
673.4
7.4
(1.7)
(1.0)
678.1
During fiscal 2011, the Corporation has conducted its annual impairment test of goodwill. This test is carried in two steps. In the first step, the Corporation estimates the fair
value of the reporting unit by multiplying normalized earnings before amortization, interest and income taxes by multiples based on market inputs. If at the conclusion of this
first step there is an indication of impairment, the Corporation carries the second step to determine the amount of the impairment. In the second step, the Corporation
estimates the fair value of the reporting unit using discounted future cash flows, considering expected future operating results, economic conditions and a general outlook for
the industry in which the reporting unit operates, and compares it with the fair value of the net identifiable assets in order to evaluate the fair value of the goodwill.
Considering the major changes in the communications marketing industry, the Corporation recorded, in fiscal 2011, an amount of $31.0 as impairment of goodwill, mostly
related to personalized marketing activities of the Interactive sector, due to lower profitability than what was originally forecasted. No charge for impairment of goodwill was
recorded in fiscal 2010.
2011 Annual report
TRANSCONTINENTAL
69
2011 Annual Report
69
13
INTANGIBLE ASSETS
2011
Cost
Amortizable intangible assets
Other
Non-amortizable intangible assets
Trade names and circulation
$
$
23.8
71.6
20.0
11.2
2.4
36.2
1.0
166.2
91.0
257.2
Net book
value
Accumulated
amortization
$
$
7.9
50.3
19.1
7.0
1.2
20.4
0.5
106.4
106.4
$
$
15.9
21.3
0.9
4.2
1.2
15.8
0.5
59.8
91.0
150.8
2010
Other
Non-amortizable intangible assets
Trade names and circulation
$
$
32.2
60.3
20.0
11.1
2.0
40.1
0.9
166.6
103.0
269.6
$
$
7.0
41.1
15.1
6.2
0.8
19.9
0.4
90.5
90.5
$
$
25.2
19.2
4.9
4.9
1.2
20.2
0.5
76.1
103.0
179.1
For the year ended October 31, 2011, the Corporation capitalized costs directly attributable to the creation of internally generated intangible assets amounting to $17.5 million
($19.0 million for the year ended October 31, 2010).
For the year ended October 31, 2011, the Corporation recorded an impairment charge of $12.0 million on trade names and circulation of certain publications in the Local
Solutions Group in the Media sector, specifically in the Newspaper Division of the Atlantic Provinces and Saskatchewan ($8.0 million for the year ended October 31, 2010). In
addition, the Corporation recorded an impairment charge of $6.6 million on customer relationships and an impairment charge of $2.6 million on long-term technology project
costs, primarily related to one to one marketing and digital printing activities in the Interactive sector (no impairment charge for the year ended October 31, 2010). For the year
ended October 31, 2010, the Corporation recorded an impairment charge of $4.5 million on various other intangible assets.
14
OTHER ASSETS
2011i
Contract acquisition costs
Investments
Accrued pension benefit asset (Note 24)
Fair value of derivative financial instruments
Other
$
$
13.4
0.6
23.6
0.2
5.9
43.7
2010ii
$
$
20.4
0.8
8.4
2.5
7.1
39.2
70
2011 Annual Report
TRANSCONTINENTAL
15
LONG-TERM DEBT
Effective interest
rate as of
October 31, 2011
Unsecured Senior Notes
Series 2002 A - Tranche 1 - 5.62% (US$75.0)
Series 2002 A - Tranche 2 - 5.73% (US$50.0)
Series 2004 A - LIBOR + 0.70% (US$37.5)
Series 2004 B - LIBOR + 0.70% (US$37.5)
Series 2004 C - LIBOR + 0.80% (US$15.0)
Series 2004 D - LIBOR + 0.90% (US$10.0)
Loans secured by property, plant and equipment
Obligations under capital leases secured by property, plant and equipment having
a net book value of $6.4
Revolving credit facility in Canadian dollars
Revolving credit facility in U.S. dollars (2011 - US$37.0; 2010 - US$12.0)
Unsecured Debentures - Solidarity Fund QFL
Series 1 - 8.06%
Series 2 - 5.58%
Term loan - SGF Rexfor Inc. - 8.25%
Term credit facility - Caisse de dépôt et placement du Québec
Banker's acceptance rate + 6.375%
Term loan - EURIBOR + 1.60% (2011 - €39.3; 2010 - €49.2)
Other loans at contractual rates of 0.00% to 8.00%
Issuance costs of long-term debt at amortized
Total long-term debt
Current portion
2011i
Maturity
$
74.4
49.6
37.2
37.2
14.9
9.9
-
2010ii
5.89 %
5.83 %
1.28 %
1.28 %
1.16 %
1.25 %
-
2013
2015
2012
2012
2014
2016
-
5.43% to 8.07 %
1.75 %
0.71 %
2012-2016
2012
2012
4.2
145.0
36.7
5.2
166.0
12.2
8.16 %
5.61 %
-
2014
2019
-
50.0
50.0
-
50.0
50.0
50.0
5.40 %
3.27% to 8.00 %
2015
2012-2017
55.5
2.6
567.2
2.8
564.4
271.9
292.5
100.0
69.6
3.8
736.9
6.2
730.7
17.8
712.9
$
$
$
76.5
51.0
38.3
38.3
15.3
10.2
0.5
The Series 2002 A Unsecured Senior Notes are redeemable at the greater of par value and the discounted value of future cash flows, if redeemed before scheduled maturity,
using an interest rate based on U.S. Treasury Securities, having similar maturities. Series 2004 A, 2004 B, 2004 C and 2004 D Unsecured Senior Notes are redeemable at
their nominal value, except for Series 2004 D, which is redeemable at a premium of 0.5% as at October 31, 2011.
The Corporation has a line of credit in the form of a term revolving credit facility amounting to $400.0 million or the U.S. dollar equivalent, which matures in September 2012.
The applicable interest rate on the term revolving credit facility is based on the credit rating assigned by Standard & Poor’s. According to the current credit rating and the form
of borrowing chosen by the Corporation, it is either the bank prime rate, bankers’ acceptance rate or LIBOR, plus 0.44%. Facility fees of 0.11% are applicable on the facility,
whether it is drawn or not, and utilization fees of 0.05% are applicable if the amount drawn is over 66 2/3% of the facility.
As at October 31, 2011, letters of credit amounting to C$0.4 million and US$2.3 million were drawn on the committed line of credit, in addition to the amount presented above.
The financing of $100.0 million from the Solidarity Fund QFL is comprised of two unsecured debentures of $50.0 million each. The first bears interest at a rate of 8.06%,
payable every six months. The second bears interest at a rate of 5.58%, payable every six months. In the case of a change of control of the Corporation, the terms and
conditions of the loans state that the principal and accrued interest could become due.
On February 17, 2011, the Corporation prepaid its $100.0 million term credit facility granted by Caisse de dépôt et placement du Québec during fiscal 2009. This five-year
financing bore interest at bankers' acceptance rate + 6.375%. This debt prepayment was made using the revolving credit facility, and resulted in costs of $4.5 million in fiscal
2011, of which $1.1 million had no effect on cash flows.
On July 4, 2011, the Corporation prepaid its term loan of $50.0 million granted by SGF Rexfor Inc. during fiscal 2009. This five-year financing bore interest at 8.25% per year.
This debt prepayment was made using the revolving credit facility, and resulted in costs of $1.3 million that were recorded in fiscal 2011, of which $0.3 million had no effect on
cash flows.
2011 Annual report
TRANSCONTINENTAL
71
2011 Annual Report
71
15
LONG-TERM DEBT (CONTINUED)
The financing of €39,3 million ($55.5 million) from a European bank, which was used to acquire various production equipments, bears interest at EURIBOR + 1.60%. It is
payable in equal instalments including principal plus interest, every six months until July 2015. On December 1, 2009, the Corporation entered into a six-year cross currency
swap agreement, maturing in July 2015, to lock the exchange rate at 1.5761 and to convert the interest rate to banker's acceptance rate plus 3.36%.
The Corporation must comply with certain restrictive covenants, including the requirement to maintain certain financial ratios. For the years ended October 31, 2011 and
2010, the Corporation has not been in default under any of its obligations.
Principal payments to be made by the Corporation in forthcoming years are as follows:
Principal
payments
$
2012
2013
2014
2015
2016
2017 and thereafter
$
271.9
90.0
80.7
64.0
10.4
50.2
567.2
Minimum payments required under capital leases, for which the principal is included in the amounts presented above, are as follows:
Principal
$
2012
2013
2014
2015
2016
16
$
1.3
1.0
1.4
0.3
0.2
4.2
Minimum
payments
Interest
$
$
0.2
0.1
0.1
0.4
$
$
1.5
1.1
1.5
0.3
0.2
4.6
OTHER LIABILITIES
2011i
Deferred subscription revenues
Long-term accrued liabilities
Accrued pension benefit liability (Note 24)
Asset retirement obligations
Fair value of derivative financial instruments
$
$
6.5
16.0
15.9
0.8
8.0
47.2
2010ii
$
$
7.2
16.0
14.8
0.8
11.2
50.0
72
2011 Annual Report
TRANSCONTINENTAL
17
SHARE CAPITAL
Authorized (unlimited number)
Class A Subordinate Voting Shares:
Class B Shares:
Preferred Shares:
subordinate participating voting shares carrying one vote per share, no par value;
participating voting shares carrying 20 votes per share, convertible into Class A Subordinate Voting Shares, no par value;
first and second preferred shares, issuable in series in numbers limited by the Articles of Incorporation, carrying no voting
rights except as provided by law or in the Corporation's Articles of Incorporation, entitling the holder to cumulative dividends.
2011
Number of
shares
Issued and paid
Participating shares
Class A Subordinate Voting Shares
Class B Shares
Preferred Shares
Cumulative 5-Year Rate Reset First Preferred Shares, Series D
65,873,182
15,151,235
81,024,417
4,000,000
$
$
Amount
2010
Number of
shares
361.5
20.5
382.0
65,806,497
15,196,840
81,003,337
96.8
478.8
4,000,000
$
$
Amount
361.2
20.6
381.8
96.8
478.6
The Series D Preferred Shares have a fixed cumulative annual dividend of 6.75% for the first five years, payable quarterly in January, April, July and October. Effective
October 15, 2014, the cumulative annual dividend will be equivalent to the 5-Year Canadian Government Bonds Yield, plus 4.16% for the next five years. These Series D
Preferred Shares are redeemable by the Corporation every five years and convertible (under certain conditions), to the holder's option, in Cumulative Floating Rate First
Preferred Shares (the "Series E Preferred Shares"), effective October 15, 2014, and every five years thereafter on that date. The Series E Preferred Shares will have a
cumulative quarterly dividend equivalent to the yield of Treasury Bills of the Government of Canada maturing within three months plus 4.16%. These Series E Preferred
Shares will be redeemable by the Corporation after five years and will be convertible (under certain conditions), to the holder's option, into Series D Preferred Shares,
effective October 15, 2019, and every five years subsequently on that date.
For the years ended October 31, 2011 and 2010, the share capital of the Corporation changed as follows:
2011
Number of
shares
Class A Subordinate Voting Shares
Conversion of Class B Shares into Class A Subordinate Voting Shares
Exercise of stock options
65,806,497
45,605
21,080
65,873,182
$
Class B Shares
Conversion of Class B Shares into Class A Subordinate Voting Shares
15,196,840
(45,605)
15,151,235
$
4,000,000
Cumulative 5-Year Rate Reset First Preferred Shares, Series D
Balance, beginning and end of year
Amount
2010
Number of
shares
Amount
361.2
0.1
0.2
361.5
64,749,030
848,867
208,600
65,806,497
$
16,045,707
(848,867)
15,196,840
$
$
20.6
(0.1)
20.5
$
21.8
(1.2)
20.6
$
96.8
4,000,000
$
96.8
$
$
357.9
1.2
2.1
361.2
Exercise of stock options
When holders exercise their stock options, the amounts received from them are credited to share capital. For stock options granted since November 1, 2002, the amount
previously accounted for as an increase to contributed surplus is also transferred to share capital. For the years ended October 31, 2011 and 2010, no amount was
transferred from contributed surplus to share capital.
2011 Annual report
TRANSCONTINENTAL
73
2011 Annual Report
73
18
NET INCOME PER PARTICIPATING SHARE
The following table is a reconciliation of the components used in the calculation of basic and diluted net income from continuing operations per participating share for years
ended October 31:
2011i
Numerator
Dividends on preferred shares, net of related income taxes
Net income from continuing operations, applicable to participating shares
$
$
Denominator (in millions)
Weighted average number of participating shares - basic
Weighted average number of dilutive options
Weighted average number of participating shares - diluted
105.8
6.8
99.0
2010ii
$
$
81.0
0.1
81.1
144.0
6.8
137.2
80.8
0.1
80.9
In the calculation of the diluted net income per share, 1,242,340 stock options were considered anti-dilutive as at October 31, 2011 (1,010,960 as at October 31, 2010), since
their exercise price was greater than the average value of Class A Subordinate Voting Shares during the period. Therefore, these stock options were excluded from the
calculation.
19
STOCK-BASED COMPENSATION PLANS
Stock option plan
The Corporation offers a stock option plan for the benefit of certain of its senior executives. The number of Class A Subordinate Voting Shares authorized for issuance and
the balance of shares that could be issued under this plan as at October 31, 2011 were 6,078,562 and 4,572,478, respectively. The stock options granted before March 31,
2005 start to vest after one year at a rate of 20% per year and must be exercised no later than ten years after the grant date. The stock options granted after March 30, 2005
start to vest after one year at a rate of 25% per year and must be exercised no later than seven years after the grant date. Under the plan, each stock option entitles its holder
to receive one share upon exercise and the exercise price is determined using the weighted average price of all trades for the five days immediately preceding the grant of
the stock option.
Stock-based compensation costs of $0.7 million and $0.8 million were charged to income and as an increase to contributed surplus of shareholders’ equity for the years
ended October 31, 2011 and 2010, respectively.
The following table summarizes the changes in outstanding stock options for the years ended October 31:
2011
Number of
options
Granted
Exercised
Cancelled
Options exercisable as at October 31
1,542,490
164,672
(21,080)
(113,442)
1,572,640
1,118,885
2010
Weighted
average
exercise
price
$
$
$
16.76
16.20
10.36
18.38
16.67
18.10
Number of
options
2,006,575
173,100
(208,600)
(428,585)
1,542,490
1,044,640
$
$
$
Weighted
average
exercise
price
17.23
13.09
9.88
20.84
16.76
18.95
As at October 31, 2011 the balance of stock options available for grant under the plan was 2,999,838.
74
2011 Annual Report
TRANSCONTINENTAL
19
STOCK-BASED COMPENSATION PLANS (CONTINUED)
The following table summarizes information regarding outstanding stock options as at October 31:
Exercise price
range
2011
2010
Options outstanding
Weighted
average
remaining
Number of contractual life
options
(years)
Options exercisable
Weighted
average
exercise
price
$ 9.64 - 13.09
$ 15.51 - 22.41
490,400
1,082,240
1,572,640
4.3
2.6
3.1
$
$ 8.85 - 13.09
$ 15.51 - 22.41
531,530
1,010,960
1,542,490
5.2
3.0
3.8
$
$
$
Weighted
average
exercise
price
Number of
options
10.85
19.31
16.67
220,375
898,510
1,118,885
$
10.87
19.86
16.76
124,205
920,435
1,044,640
$
$
$
10.47
19.98
18.10
10.09
20.15
18.95
The following table summarizes the assumptions used to calculate the weighted average fair value of stock options granted on the date of grant using the Black-Scholes
model for the years ended October 31:
$
Fair value of stock options
Assumptions:
Dividend rate
Expected volatility
Risk-free interest rate
Expected life
2011i
5.40
$
1.6 %
39.8 %
2.51 %
5 years
2010ii
4.31
1.5 %
38.6 %
2.74 %
5 years
Share unit plan for senior executives
The Corporation offers a share unit plan to its senior executives under which deferred share units (“DSU”) and restricted share units (“RSU”) are granted. A portion of share
units will vest based on performance targets and another portion of share units will vest based on tenure. Vested DSUs and RSUs will be paid, at the Corporation’s option, in
cash or with Class A Subordinate Voting Shares of the Corporation purchased on the open market.
The following table provides details of this plan:
Number of units
Units granted
Units cancelled
Units paid
Units converted
Dividends paid in units
2011i
DSU
121,110
40,123
(31,431)
66,139
6,040
201,981
2010ii
127,870
53,240
(58,141)
(4,290)
2,431
121,110
2011i
RSU
676,627
233,383
(110,163)
(53,824)
(66,139)
679,884
2010ii
548,808
277,013
(136,765)
(12,429)
676,627
The expense reversal recorded in the consolidated statement of income for the year ended October 31, 2011 was $0.4 million. The expense recorded in the consolidated
statement of income for the year ended October 31, 2010 was $4.0 million. Amounts of $1.3 million and $0.2 million were paid under the plan for the years ended October 31,
2011 and 2010, respectively.
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19
STOCK-BASED COMPENSATION PLANS (CONTINUED)
Share unit plan for directors
The Corporation offers a deferred share unit plan for its directors. Under this plan, directors may elect to receive either cash, deferred share units, or a combination of both for
their compensation.
The following table provides details of this plan:
Number of units
Directors compensation
Units paid
Dividends paid in units
2011i
2010ii
159,803
35,497
5,957
201,257
167,783
29,396
(40,923)
3,547
159,803
The expenses recorded in the consolidated statements of income for the years ended October 31, 2011 and 2010 were $0.2 million and $0.9 million, respectively. No amount
has been paid under the plan for the year ended October 31, 2011 ($0.5 million for the year ended October 31, 2010).
20
CONTRIBUTED SURPLUS
2011i
$
Compensation costs relating to stock option plan (Note 19)
21
$
13.7
0.7
14.4
2010ii
$
$
12.9
0.8
13.7
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Foreign
currency
translation
adjustment
Balance as at November 1, 2009
Net change in gains (losses), net of income taxes
Balance as at October 31, 2010
$
Balance as at November 1, 2010
Reclassification of a realized foreign exchange loss to net income of discontinued operations,
related to the reduction of net investment in self-sustaining foreign operations (Note 8)
Net change in gains (losses), net of income taxes
Balance as at October 31, 2011
Cash
flow
hedges
$
$
(20.8)
(4.0)
(24.8)
$
(24.8)
$
Accumulated
other comprehensive
income (loss)
$
$
0.7
(5.2)
(4.5)
$
(20.1)
(9.2)
(29.3)
$
(4.5)
$
(29.3)
50.5
(5.7)
20.0
$
(1.8)
(6.3)
$
50.5
(7.5)
13.7
2015
2016
and thereafter
As at October 31, 2011, the amounts expected to be reclassified to net income are as follows:
2012
Losses on derivatives designated as cash flow hedges
Income taxes
$
$
(1.6)
0.6
(1.0)
2013
$
$
(2.2)
0.6
(1.6)
2014
$
$
(1.6)
0.4
(1.2)
$
$
(0.9)
0.2
(0.7)
$
$
(2.5)
0.7
(1.8)
Total
$
$
(8.8)
2.5
(6.3)
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CASH FLOWS
The changes in non-cash operating items are as follows:
2011i
Accounts receivable
Income taxes receivable
Inventories
Prepaid expenses and other current assets
Income taxes payable
Deferred subscription revenues and deposits
Net change in accrued pension benefit asset and liability (Note 24)
Additional Information
Interest paid
Income taxes paid
23
$
2010ii
$
$
37.7
5.0
(2.7)
(3.8)
(26.0)
4.5
(6.9)
(14.1)
(6.3)
$
(146.2)
(15.6)
(6.6)
(0.3)
13.9
2.1
3.8
(6.2)
(155.1)
$
$
30.5
19.5
$
$
39.2
33.4
BUSINESS ACQUISITIONS
On July 12, 2011, the Corporation and Quad/Graphics, Inc. have entered into a definitive agreement under which the Corporation will acquire all the shares of Quad/Graphics
Canada, Inc., subject to regulatory approval, including the approval under the Canadian Competition Act, and an agreement to sell to Quad/Graphics, Inc. its Mexican printing
operations, and to transfer its black and white book printing business for U.S. export. Essentially, these transactions represent an exchange of assets of a net value of
approximately $85.0 million, including $80.0 million, before adjustment for working capital and transaction costs, for the Mexican printing operations, and $5.0 million for the
black and white book printing business for U.S. export. The Canadian transaction is expected to close in early 2012, and will be settled in cash totaling $50.0 million, and by
compensation the amount related to the sale of the Mexican printing operations and the black and white book printing business for U.S. export. The Mexican transaction was
approved under the Mexican Federal Law on Economic Competition, and was completed in the fourth quarter of fiscal 2011.
During the year ended October 31, 2011, the Corporation has made the following acquisitions:
Operating sector
Acquisitions
Date of acquisition
Interactive
100% of the shares of Vortxt Interactive Inc., a company operating in mobile solutions.
November 1, 2010
Media
Assets of Journal Nouvelles Hebdo , a weekly newspaper in the Dolbeau-Mistassini area.
April 28, 2011
Assets of Groupe Le Canada Français, representing 11 weekly and monthly titles, and a series of Web
portals, serving Saint-Jean-sur-Richelieu and Granby areas.
August 1, 2011
Assets of Avantage Consommateurs de l'Est du Québec, representing three weekly and monthly
publications, and their Web portals, serving the territory between St-Simon and Gaspé.
August 29, 2011
The purchase price allocation related to other acquisitions completed in the year ended October 31, 2011 are preliminary and subject to change following the final valuation of
the assets acquired and the final determination of the costs related to these acquisitions. The excess of purchase price over book value of assets acquired has been fully
allocated to goodwill, consequently the acquired intangible assets and depreciation related on these assets were not included in the consolidated financial statements for the
year ended October 31, 2011. The Corporation will finalize the purchase price allocation over fiscal 2012.
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23
BUSINESS ACQUISITIONS (CONTINUED)
The fair value of assets acquired as well as adjustments to current and prior period acquisitions are summarized as follows:
2011i
Assets acquired
Working capital
Goodwill (tax basis of $23.9)
$
Liabilities assumed
Future income taxes
Consideration
Cash paid
Bank overdraft in acquired operations
$
3.0
0.2
35.4
0.4
39.0
$
0.1
38.9
$
Short-term liabilities
$
35.2
0.1
35.3
3.6
38.9
For the year ended October 31, 2011, the Corporation paid an amount of $0.5 million, included in short-term liabilities as at October 31, 2010, relating to a business
acquisition completed in prior periods.
During the year ended October 31, 2010, the Corporation has made the following acquisitions:
Operating sector
Acquisitions
Date of acquisition
Interactive
10% additional shares of ThinData, Canada's leading permission-based email marketing services firm.
The Corporation holds 100% of the shares of ThinData as of that date.
October 29, 2010
25% additional shares of Totem (formerly Redwood Custom Communications), a North America's
leading custom communications provider. The Corporation holds 100% of the shares of Totem as of
that date.
October 29, 2010
100% of the shares of LIPSO Systems Inc., a Canadian leader in integrated mobile solutions.
April 30, 2010
100% of the shares of Journal Le Nord (Groupe Média-Business Inc.), a weekly newspaper serving the
city of St-Jérôme.
September 13, 2010
Media
Conversys
For the year ended October 31, 2010, adjustments were made to the purchase price allocation of Conversys, acquired January 21, 2009, to reflect the final valuation of the
assets acquired and the final determination of the costs related to this acquisition. The table on the next page includes these adjustments.
Totem (formerly Redwood Custom Communications)
For the year ended October 31, 2010, adjustments were made to the purchase price allocation of Totem (formerly Redwood Custom Communications), acquired
November 18, 2008, to reflect the final valuation of the assets acquired and the final determination of the costs related to this acquisition. The table on the next page includes
these adjustments.
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BUSINESS ACQUISITIONS (CONTINUED)
The fair value of assets acquired as well as adjustments to current and prior period acquisitions are summarized as follows:
2010ii
Assets acquired
Goodwill (no tax basis)
Future income taxes
$
$
Liabilities assumed
Other liabilities
Future income taxes
$
$
Consideration
Cash paid
Short-term liabilities
Long-term liabilities
$
$
0.1
6.6
6.1
0.2
13.0
(0.1)
1.8
1.7
11.3
11.6
1.3
(1.6)
11.3
For the year ended October 31, 2010, the Corporation paid an amount of $2.4 million relating to business acquisitions completed in prior years. Of this amount, $1.6 million
was included in short-term liabilities and $0.8 million was allocated to goodwill.
24
PENSION PLANS
The Corporation offers various contributory and non-contributory defined benefit pension plans, defined contribution pension plans and registred savings plans to its
employees and those of its participating subsidiaries. Since June 1, 2010, most employees participate only in defined contribution pension plans. For defined benefit pension
plans, retirement benefits are generally based on years of service and employees’ compensation. Pension funding is based on actuarial estimates and is subject to limitations
under applicable income tax and other regulations. Actuarial estimates prepared during the year were based on assumptions related to projected employee compensation
levels to the time of retirement and the anticipated long-term rate of return on pension plan assets. For defined contribution pension plans and registered retirement savings
plans, the only obligation of the Corporation and its subsidiaries is to remit the monthly contribution of the employer.
Accrued benefit obligation, fair value of plan assets and plan asset composition are measured at the date of the annual financial statements. The most recent actuarial
valuation of the pension plans for funding purposes was made as of December 31, 2010. From now, the valuations will be performed annually.
The composition of the pension plan assets is as follows:
2011
Canadian and foreign stocks
Government and corporate bonds
Cash and temporary investments
2010
68 %
29
3
100 %
69 %
29
2
100 %
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24
PENSION PLANS (CONTINUED)
The following table presents the changes in the accrued benefit obligation and the fair value of plan assets, as well as the funded status of the defined benefit plans for the
years ended October 31:
2011i
Accrued benefit obligation
Change in exchange rate
Current service cost
Interest on accrued benefit obligation
Actuarial losses
Benefits paid
Plans curtailment
Impact of settlement
Employee contributions
Accrued benefit obligation, end of year
Fair value of plan assets
Actual return on plan assets
Benefits paid
Employer contributions
Employee contributions
Impact of settlement
Fair value of plan assets, end of year
Plan deficit
Unamortized net actuarial losses
Unamortized past service costs
Unamortized transitional obligation
Accrued benefit asset (liability)
$
$
$
$
$
$
2010ii
394.7
1.1
20.8
1.7
(19.6)
0.1
398.8
$
346.5
(0.8)
(19.6)
12.2
0.1
338.4
$
(60.4)
68.2
0.1
(0.2)
7.7
$
$
$
$
343.2
(0.1)
10.9
21.8
46.8
(19.2)
(10.5)
(4.6)
6.4
394.7
307.0
36.7
(19.2)
20.2
6.4
(4.6)
346.5
(48.2)
42.1
0.1
(0.4)
(6.4)
The accrued benefit asset (liability) is included in the Corporation’s balance sheets as follows:
2011i
Other assets
Other liabilities
$
$
23.6
(15.9)
7.7
2010ii
$
$
8.4
(14.8)
(6.4)
Accrued benefit obligation and fair value of plan assets as at October 31 are as follows with respect to plans that are not fully funded:
2011i
Fair value of plan assets
Accrued benefit obligation
Funded status - plan deficit
$
$
320.0
380.6
(60.6)
2010ii
$
$
327.5
377.4
(49.9)
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PENSION PLANS (CONTINUED)
The major assumptions used are as follows:
2011
2010
Accrued benefit obligation as at October 31
Discount rate, at year-end
Rate of compensation increase
5.50 %
3.00 - 4.00 %
5.50 %
3.00 - 4.00 %
Benefit cost for years ended October 31
Discount rate, at previous year-end
Expected long-term rate of return on plan assets
Rate of compensation increase
5.50 %
7.00 %
3.00 - 4.00 %
6.50 %
7.25 %
3.50 - 4.50 %
The cost of the defined benefit pension plans recorded for the years ended October 31 is as follows:
2011i
$
Current service cost
Interest on accrued benefit obligation
Actual return on plan assets
Actuarial losses on accrued benefit obligation
Effect of plans curtailment
Cost of defined benefit pension plans before adjustments to recognize the long-term nature
of employee future benefit cost
Adjustments to recognize the long-term nature of employee future benefit cost:
Difference between expected return and actual return on plan assets for the year
Difference between actuarial losses recognized for the year and actual actuarial losses on accrued benefit obligation for the year
Difference between amortization of past service costs for the year and actual plan amendments effective for the year
Amortization of the transitional obligation
Defined benefit cost recognized
$
The cost and total cash amount paid for the defined contribution pension plans for the years ended October 31 are as follows:
$
$
10.9
21.8
(36.7)
46.8
(10.5)
24.4
32.3
(24.6)
(1.5)
(0.2)
(1.9)
14.0
(35.4)
(0.1)
3.2
14.0
$
2011i
Employer contributions
25
1.1
20.8
0.8
1.7
-
2010ii
17.7
2010ii
$
8.6
COMMITMENTS, GUARANTEES AND CONTINGENT LIABILITIES
Commitments
The Corporation is commited, under various leases of premises and contracts to acquire production equipment, to make payments until 2029. The Corporation is also
committed, under contracts with certain customers, to make payments covering contract acquisition costs until 2017. Minimum payments required over the following years for
these commitments are as follows:
2012
Premises lease contracts
Production equipment acquisition contracts
Contract acquisition costs
$
$
27.6
1.1
7.8
36.5
2013
$
$
24.7
0.5
2.8
28.0
2014
$
$
21.3
0.3
4.5
26.1
2015
$
$
20.0
0.4
20.4
2016
$
$
16.8
0.3
17.1
2017
and thereafter
$
$
68.8
68.8
Total
$
$
179.2
1.9
15.8
196.9
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25
COMMITMENTS, GUARANTEES AND CONTINGENT LIABILITIES (CONTINUED)
Guarantees
In the normal course of business, the Corporation has provided the following significant guarantees to third parties:
a) Sub-lease agreements
The Corporation has entered into sub-lease agreements for some of its locations under operating leases, with expiry dates between 2012 and 2015. If the sub-lessee defaults
under any of these agreements, the Corporation must compensate the lessor for the default. The maximum exposure in respect of these guarantees is estimated at
$2.1 million. As at October 31, 2011, the Corporation has not recorded any liability associated with these guarantees, since it is not probable that the sub-lessee will default
under the agreement.
b) Indemnification of third parties
Under the terms of its debt agreements, the Corporation has agreed to indemnify the holders of such debt instruments against any increase in their costs or reduction in the
amounts otherwise payable to them resulting from changes in laws and regulations. These indemnification agreements extend for the term of the agreements and do not
have any limit. Given the nature of these indemnifications, the Corporation is unable to reasonably estimate its maximum potential liability payable to third parties. Historically,
the Corporation has never made any indemnification payments, and as at October 31, 2011 the Corporation has not recorded a liability associated with these
indemnifications.
c) Business disposals
As a result of the sale of business operations or assets, the Corporation may agree to provide indemnity against claims from previous business activities. The nature of these
indemnification agreements prevents the Corporation from estimating the maximum potential liability that it could be required to pay to guaranteed parties. Historically, the
Corporation has not made any significant indemnification payments, and as at October 31, 2011, the Corporation has not recorded any liability associated with these
indemnifications.
Contingent liabilities
In the normal course of business, the Corporation is involved in various claims and legal proceedings. Although the resolution of these various cases pending as at
October 31, 2011 cannot be determined with certainty, the Corporation believes that their outcome would likely not have a material adverse effect on its financial position and
operating results, given the provisions on its books or insurance covering certain claims or legal proceedings.
26
FINANCIAL INSTRUMENTS
Credit risk
Credit risk is the risk that the Corporation will incur losses due to non-payment of contractual obligations by third parties. The Corporation is exposed to credit risk with respect
to trade receivables. It is also exposed to credit risk as part of its ongoing activities relative to its cash and cash equivalents and derivative assets.
The Corporation analyzes and reviews the financial health of its current customers on an ongoing basis and applies specific evaluation procedures to all new customers. A
specific credit limit is established for each customer and reviewed periodically by the Corporation.
Due to the diversification of its products, its customers and its geographic coverage, the Corporation is protected against any concentration of credit risk. As at October 31,
2011, no single customer accounts for more than 5% of consolidated accounts receivable and the Corporation's 20 largest customers account for less than 25% of its
consolidated accounts receivable. As at October 31, 2011, the maximum credit risk exposure for receivables corresponds to their carrying value. In addition, the Corporation
has a credit insurance policy covering most of its major customers for a maximum of $20.0 million. The conditions of the policy include the usual clauses and limits regarding
the amounts that can be claimed per event and per year of coverage.
The Corporation determines past due receivables by considering the type of clients, historical payment terms and in which sector the clients conduct business. On a quarterly
basis, allowance for doubtful accounts and past due receivables are reviewed by management. The Corporation records impairment only on receivables for which the
recoverability is not reasonably certain.
The Corporation is exposed to credit risk arising from derivative financial instruments if a counterparty fails to meet its obligations; however, it does not foresee such an
occurrence since it deals only with recognized financial institutions with superior credit ratings. As at October 31, 2011, the maximum exposure to credit risk is $4.3 million
($7.8 million as at October 31, 2010), which represents the carrying value of the financial instruments recorded as assets on the balance sheet of the Corporation.
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FINANCIAL INSTRUMENTS (CONTINUED)
Past due accounts receivable:
As at
October 31,
2011
Trade receivables
$
Not past due
Past due 1-30 days
Past due 31-60 days
Past due more than 60 days
Allowance for doubtful
Other receivables
$
241.5
88.7
25.4
22.7
378.3
(7.5)
65.5
436.3
As at
October 31,
2010
$
285.9
82.8
23.3
21.1
413.1
(10.9)
38.4
440.6
$
Allowance for doubtful accounts:
Bad debt expense
Amounts written off
$
$
10.9
1.8
(5.2)
7.5
$
10.2
3.4
(2.7)
10.9
$
Based on the historical payment trend of the customers, the Corporation believes that this allowance for doubtful accounts is sufficient to cover the risk of default.
Liquidity risk
Liquidity risk is the risk that the Corporation will not be able to meet its financial obligations as they come due. The Corporation is exposed to liquidity risk with respect to
accounts payable, long-term debt, derivative financial instruments and contractual obligations.
The table below presents the contractual maturities of financial liabilities as at October 31, 2011:
Carrying
amount
2011
Non-derivative financial liabilities
Accounts payable and accrued liabilities (1)
Long-term debt
Long-term accounts payable (2)
$
Derivative financial liabilities
Foreign exchange forward contracts
Outflow
Inflow
Interest rate swaps
Cross currency swap
$
(297.4)
(564.4)
(2.2)
Contractual
cash flows
$
(297.4)
(623.5)
(2.2)
Less than
1 year
$
(297.4)
(290.9)
-
1 - 3 years
$
(193.3)
(2.2)
More than
5 years
3 - 5 years
$
(82.0)
-
$
(57.3)
-
(864.0)
(923.1)
(588.3)
(195.5)
(82.0)
(57.3)
3.8
(5.2)
(8.7)
(10.1)
(91.7)
96.7
(5.8)
(9.4)
(10.2)
(56.0)
60.5
(4.2)
(2.8)
(2.5)
(35.7)
36.2
(1.6)
(4.7)
(5.8)
(1.9)
(1.9)
-
(874.1)
$
(933.3)
$
(590.8)
$
(201.3)
$
(83.9)
$
(57.3)
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26
The table below presents the contractual maturities of financial liabilities as at October 31, 2010:
Carrying
amount
2010
Non-derivative financial liabilities
Accounts payable and accrued liabilities (1)
Long-term debt
Long-term accounts payable (2)
$
Derivative financial liabilities
Outflow
Inflow
Commodity swap agreements
Interest rate swaps
Bond forward
Cross currency swap
$
(334.6)
(730.7)
(0.5)
Contractual
cash flows
$
(334.6)
(863.5)
(0.5)
Less than
1 year
$
(334.6)
(50.2)
-
1 - 3 years
$
(420.1)
(0.5)
More than
5 years
3 - 5 years
$
(320.4)
-
$
(72.8)
-
(1,065.8)
(1,198.6)
(384.8)
(420.6)
(320.4)
(72.8)
8.5
(0.1)
(6.5)
(6.1)
(10.1)
(14.3)
(109.7)
119.4
(0.1)
(7.3)
(6.1)
(10.9)
(14.7)
(63.8)
70.3
(0.1)
(3.9)
(6.1)
(1.7)
(5.3)
(45.9)
49.1
(3.5)
(4.7)
(5.0)
0.1
(3.7)
(3.6)
(0.8)
(0.8)
(1,080.1)
$
(1,213.3)
$
(390.1)
$
(425.6)
$
(324.0)
$
(73.6)
(1) Excludes derivative financial instruments
(2) Excludes non-financial liabilities
The Corporation believes that future cash flows generated by operations and access to additional liquidity through capital and banking markets will be adequate to meet its
financial obligations. In addition, the Corporation has concluded long-term contracts with most of its major customers. These contracts contain cost-escalation clauses
equivalent to those required by the Corporation's suppliers.
Market risk
Market risk is the risk that the Corporation will incur losses resulting from adverse changes in underlying factors of the market, primarily interest rates and exchange rates.
a) Interest rate risk
The Corporation is exposed to market risks related to interest rate fluctuations. In order to mitigate this risk, the Corporation aims to maintain an adequate balance of fixed
versus floating rate debt. As at October 31, 2011, the floating rate portion of long-term debt represents 59% (61% as at October 31, 2010) of the total while the fixed rate
portion represents 41% (39% as at October 31, 2010).
As at October 31, 2011, in order to mitigate the interest rate risk, the Corporation entered into interest rate swap agreements on long-term debt denominated in Canadian
dollars, on a notional amount of $225.0 million, including $125.0 million maturing in September 2012 and $100.0 million maturing in May 2014. The latter are the only swaps
designated as hedging derivative financial instruments as at October 31, 2011. The swap agreements convert the variable interest rate based on bankers' acceptance rate
into a fixed rate of 6.16%, including the applicable margin. Considering the economic effect of these derivatives, the floating rate portion of long-term debt represents 19% of
total debt (30% as at October 31, 2010), while the fixed rate portion represents 81% (70% as at October 31, 2010).
As at October 31, 2011, the Corporation entered into a six-year cross currency swap agreement, maturing in July 2015, to convert the interest rate of the €39.3 million debt
($55.5 million), which bears an interest of rate of EURIBOR + 1.60%, to bankers' acceptance rate plus 3.36%. This derivative financial instrument also locks the exchange
rate at 1.5761.
84
2011 Annual Report
TRANSCONTINENTAL
26
For the years ended October 31, 2011 and 2010, all things being equal, a hypothetical increase of 0.5% in interest rates would have had the following impact on net income
and on other comprehensive income (loss):
Year ended
October 31, 2011
Year ended
October 31, 2010
Other
Net comprehensive
income income (loss)
$
(0.4)
$
Net
income
1.1
$
(0.8)
Other
comprehensive
income (loss)
$
2.0
A hypothetical decrease of 0.5% in interest rates would have an opposite impact on net income and on other comprehensive income (loss).
b) Foreign exchange risk
The Corporation has operations in the United States, exports its products to the United States and purchases machinery and equipment in U.S. dollars and Euros. In addition,
as at October 31, 2011, the Corporation has long-term debt in U.S. dollars and Euros for a total amount of US$263.5 million and €39.3 million (US$238.5 million and €49.2 as
at October 31, 2010). The Corporation is therefore exposed to foreign exchange risk.
To mitigate the foreign exchange risk related to its exports to the United States, the Corporation enters into foreign exchange forward contracts. As at October 31, 2011, the
Corporation entered into foreign exchange forward contracts to sell US$92.5 million (US$107.0 million as at October 31, 2010), of which US$56.5 million and US$36.0 million
will be sold in fiscal years 2012 and 2013, respectively. The terms of these forward contracts range from 1 to 21 months, with rates varying from 0.9846 to 1.1474. Hedging
relationships were effective and in accordance with the risk management objectives and strategies throughout fiscal 2011.
For the years ended October 31, 2011 and 2010, all things being equal, an hypothetical strengthening of 10.0% of the U.S. dollar and Euro against the Canadian dollar would
have had the following impact on net income and on other comprehensive income (loss):
Year ended
October 31, 2011
Year ended
October 31, 2010
Other
Net comprehensive
income income (loss)
$
U.S. dollar
Euro
1.5
-
$
(5.6)
2.2
Net
income
$
1.5
-
Other
comprehensive
income (loss)
$
(7.0)
2.3
A hypothetical weakening of 10.0% of the U.S. dollar and Euro against the Canadian dollar would have had an opposite impact on net income and other comprehensive
income (loss).
Fair value
The book value of certain financial instruments maturing in the short-term approximates their fair value. These financial instruments include cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities. The table below shows the fair value and the book value of other financial instruments as at October 31, 2011
and 2010. The fair value is determined essentially by discounting cash flows or quoted market prices. The fair values calculated approximate the amounts for which the
financial instruments could be settled between consenting parties, based on current market data for similar instruments. Consequently, as estimates must be used to
determine fair value, they must not be interpreted as being realizable in the event of an immediate settlement of the instruments.
2011
Fair value
Book value
Long-term debt
Interest rate swap agreements
Bond forward
Cross currency swap agreement
$
586.7
3.8
(5.2)
(8.7)
$
564.4
3.8
(5.2)
(8.7)
2010
Fair value
Book value
$
769.9
8.5
(0.1)
(6.5)
(6.1)
(10.1)
$
730.7
8.5
(0.1)
(6.5)
(6.1)
(10.1)
2011 Annual report
TRANSCONTINENTAL
85
2011 Annual Report
85
26
Fair value hierarchy
The table below presents financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2 - Inputs other than quoted prices included within Level 1, that are observable for the asset or liability, either directly (prices) or indirectly (derived from prices)
Level 3 - Inputs for the asset or liability that are not based on observable market data
2011
Level 1
Level 2
Level 3
Total
$
-
$
3.8
(5.2)
(8.7)
$
-
$
3.8
(5.2)
(8.7)
$
-
$
(10.1)
$
-
$
(10.1)
$
-
$
8.5
(0.1)
(6.5)
(6.1)
(10.1)
$
-
$
8.5
(0.1)
(6.5)
(6.1)
(10.1)
$
-
$
(14.3)
$
-
$
(14.3)
2010
Bond forward
27
CAPITAL MANAGEMENT
The Corporation’s primary objectives in managing capital are to:
• Maintain an investment grade credit rating;
• Preserve its financial flexibility in order to benefit from potential opportunities as they arise.
The Corporation manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets.
The Corporation relies on the net debt ratio (including, if any, utilization of the securitization program) to operating income from continuing operations before amortization,
impairment of assets, restructuring costs and impairment of goodwill and intangible assets as the main indicator of financial leverage. For calculation purposes, net debt
refers to long-term debt, current portion of long-term, bank overdraft and utilization of the securitization program, less cash and cash equivalents.
As at October 31, 2011, the net debt ratio was 1.31x. As at October 31, 2010, the same ratio was 1.87x. The decrease of this ratio in fiscal 2011 is primarily due to a
significant reduction in net debt, which decreased from $698.8 million as at October 31, 2010 to $489,4 million as at October 31, 2011, primarily due to cash flows generated
by operations and significant reduction in capital expenditures.
For the year ended October 31, 2011, the Corporation has not been in default under any of its obligations.
86
2011 Annual Report
TRANSCONTINENTAL
28
SEGMENTED INFORMATION
Sales between sectors of the Corporation are measured at the exchange amount. Transactions other than sales are measured at carrying amount.
2011i
Revenues
Printing sector
Interactive sector
Media sector
Other activities and unallocated amounts
Inter-segment sales
Printing sector
Interactive sector
Media sector
Total inter-segment sales
$
$
Operating income (loss) before amortization, impairment of assets, restructuring costs
and impairment of goodwill and intangible assets
Printing sector
Interactive sector
Media sector
Operating income (loss)
Printing sector
Interactive sector
Media sector
Printing sector
Interactive sector
Media sector
$
$
$
(92.2)
(3.3)
(7.6)
(103.1)
2,043.6
$
$
287.6
(1.0)
90.2
(3.8)
373.0
$
181.5
(52.2)
51.3
1.5
182.1
$
16.7
4.1
8.9
3.4
33.1
$
86.7
9.3
18.9
5.4
120.3
$
$
$
1,379.4
123.3
608.3
7.8
(82.3)
(2.8)
(5.4)
(90.5)
2,028.3
270.3
6.7
109.5
(13.3)
373.2
164.6
(5.7)
82.9
(19.3)
222.5
(1)
Amortization of property, plant and equipment and intangible assets
Printing sector
Interactive sector
Media sector
(1)
$
1,400.8
125.4
612.4
8.1
2010ii
$
$
$
$
$
$
101.5
7.3
6.4
3.4
118.6
90.7
10.3
17.0
5.3
123.3
These amounts represent total expenditures for additions to property, plant and equipment, whether they are paid or not.
2011 Annual report
TRANSCONTINENTAL
87
2011 Annual Report
87
28
SEGMENTED INFORMATION (CONTINUED)
As at
October 31,
2011
Operating sectors
Assets
Printing sector
Interactive sector
Media sector
Assets from discontinued operations (Note 8)
$
$
Geographical regions
Revenues
Canada
Within Canada
Exports
United States
Operating income before amortization, impairment of assets,
restructuring costs and impairment of goodwill and intangible assets
Canada
United States
Operating income
Canada
United States
1,284.4
99.4
859.9
209.9
2,453.6
As at
October 31,
2010
$
$
2011i
$
$
$
$
$
$
1,787.5
152.3
1,939.8
103.8
2,043.6
2010ii
$
$
343.1
29.9
373.0
$
180.1
2.0
182.1
$
$
$
As at
October 31,
2011
Assets
Canada
United States
Assets from discontinued operations (Note 8)
$
$
Canada
United States
$
Goodwill
Canada
United States
$
$
$
2,080.1
373.5
2,453.6
1,397.5
131.5
845.6
144.2
75.9
2,594.7
1,756.7
160.4
1,917.1
111.2
2,028.3
339.8
33.4
373.2
210.9
11.6
222.5
As at
October 31,
2010
$
$
588.6
198.5
787.1
$
682.5
682.5
$
$
$
2,111.6
407.2
75.9
2,594.7
654.2
217.4
871.6
674.1
4.0
678.1
88
2011 Annual Report
TRANSCONTINENTAL
29
SUBSEQUENT EVENTS
Reorganization of operating structure
On November 1, 2011, the Corporation implemented a new operating structure, combining the majority of Interactive sector activities with those of the Media sector to form a
single sector, in order to better meet the multi-platform marketing communication needs of the customers. For their part, the digital printing activities established in the United
States will complete the product offering of the Printing sector. This new operating structure will be reflected in the consolidated financial statements for the first quarter of the
fiscal year ended October 31, 2012.
30
COMPARATIVE INFORMATION
Certain prior period information has been reclassified to conform with the current period presentation.
2011 Annual report
TRANSCONTINENTAL
89
2011 Annual Report
89
90
2011 Annual Report
TRANSCONTINENTAL
• SHAREHOLDER INFORMATION
Key investment considerations
• Investment grade credit rating
• Free cash flow profile improving significantly
• Leader in most of the markets we serve
• Solid relationships with our customers
• Balanced portfolio of businesses
• Track record of dividend growth
• Family-controlled business with long-term vision
• Long-term contracts ranging from 3-18 years with customers
who generate 50-60% of printing revenues
• Close to 40% of consolidated revenues are less exposed
to cyclical changes in the economy
• Good balance between local and national advertising revenues
in the Media Sector
• Approximately $200 million in digital and interactive revenues
Stock listing: Class A Subordinate Voting Shares, Class B Shares
and Cumulative 5-Year Rate Reset First Preferred Shares, Series D
are listed on the Toronto Stock Exchange under the trading
symbols:
Symbol on the TSX: TCL.A, TCL.B, TCL.PR.D
Participating shares outstanding: 81.0 million
Public float: 71.8 million
Market capitalization: $1.0 billion
Dividend yield: 4.3%
Corporate credit ratings: DBRS: BBB high, stable; S&P: BBB, Stable
Total volume in 2011: 30,625,634
Intraday high in 2011: $17.25
Intraday low in 2011: $9.96
Fiscal year-end: October 31
Fiscal quarter-end: January 31, April 30, July 31 and October 31
TRANSCONTINENTAL INC. (TCL.A) FISCAL 2011 SHARE PRICE AND VOLUME
Volume (in thousands)
Closing Price ($)
1,200
$18
$17
1,000
$16
800
$15
600
$14
$13
400
$12
200
0
Nov
2010
Shareholders, Investors and Analysts
For further financial information or to
order supplementary documentation about
the Corporation, please contact the Investor
Relations Department or visit the “Investors”
section of TC Transcontinental’s web site
at www.tc.tc
$11
$10
Dec
2010
Jan
2011
Feb
2011
TRANSCONTINENTAL
Mar
2011
Apr
2011
May Jun
2011 2011
Jul
2011
Aug
2011
Sep
2011
Oct
2011
Notice of Annual Meeting of Shareholders
Transcontinental Inc.’s Annual Meeting
of Shareholders will be held at 10:00 a.m.
on February 16, 2012, at Salon Windsor of
the Le Windsor building, 1170 Peel Street,
Montreal, Quebec, Canada.
2011 Annual Report
91
BOARD OF DIRECTORS
1 • André Tremblay
Managing Partner, Trio Capital Inc.
2 • Harold “Sonny” Gordon, Q.C.
Chairman of the Board, Dundee Corporation
3
92
Nathalie Marcoux
Vice President, Finance, Capinabel Inc.
2011 Annual Report
4 • Lino A. Saputo, Jr.
and Vice Chairman of the Board, Saputo Inc.
5 •• Richard Fortin
Corporate Director
6
François Olivier
President and Chief Executive Officer,
Transcontinental Inc.
7 • Anna Martini, F.C.A.
President, Groupe Dynamite Inc.
8
Rémi Marcoux, C.M., O.Q., F.C.A.(1)
Executive Chairman of the Board,
9 • Claude Dubois
President, Gestion Phila Inc.
TRANSCONTINENTAL
“Here I’d like to salute Rémi, the entrepreneur,
visionary, leader and friend who has always managed
to convey, to every person he worked or associated
with, the fundamental values that guide his every
business decision and action.
And I’d also like to very sincerely thank this man
of integrity and generosity for the friendship he
has so faithfully demonstrated throughout his long
business career.”
– Claude Dubois
10
Isabelle Marcoux(2)
Corporate Development, Transcontinental Inc.
11 • Lucien Bouchard, G.O.Q.
Partner, Davies Ward Phillips & Vineberg LLP
12 • Pierre Fitzgibbon
President and Chief Executive Officer,
Atrium Innovations Inc.
13 • Monique Lefebvre, C.Q.
Psychologist, Executive Coaching and
Chair of Héma-Québec Foundation
14
Pierre Marcoux
Senior Vice President, Business
and Consumer Solutions Group,
Transcontinental Media G.P.
15 • François R. Roy
Corporate Director
• Member of the Audit Committee
• Member of the Human Resources and Compensation Committee
• Member of the Corporate Governance Committee
• Lead Director
(1) Mr. Rémi Marcoux will leave the position of Executive Chairman of the Board on February 16, 2012,
but will remain a member of Transcontinental’s Inc. Board.
(2) Ms. Isabelle Marcoux will become Chair of the Board as of February 16, 2012.
TRANSCONTINENTAL
2011 Annual Report
93
• CORPORATE INFORMATION
CORPORATE SENIOR MANAGEMENT
François Olivier
Nelson Gentiletti
Martin Longchamps
Corporate Vice President, Mergers and Acquisitions
Isabelle Marcoux(1)
Corporate Development
Isabelle Lamarre
Assistant General Counsel and Assistant Corporate
Secretary
Jennifer F. McCaughey
Senior Director, Investor Relations and Financial
Communications
André Bolduc
Director of Internal Audit
Natalie Larivière
President, TC Media
Sylvain Morissette
Vice President, Corporate Communications
Philippe Bonin
Corporate Treasurer
Katya Laviolette
Corporate Vice President, Human Resources
Brian Reid
President, TC Transcontinental Printing
Christine Desaulniers
Vice President, Chief Legal Officer and Corporate
Secretary
Donald LeCavalier
Vice President, Finance
(1) Ms. Isabelle Marcoux will remain a member
of the Corporate Senior Management team
until February 16, 2012 when she becomes
Chair of the Board of Transcontinental Inc.
David Galarneau
Corporate Controller
PRODUCTION OF ANNUAL REPORT
Project management:
Corporate Communications Department
of TC Transcontinental
Writer:
Jennifer F. McCaughey
Mathieu Hébert
Jean Blouin Strategic Communications Inc.
Graphic design and artistic direction:
CGCOM
Photography:
Pierre Charbonneau
Translation:
Sylvain Turner, Jessy Lapointe and Lucille Nelson
Printing:
Transcontinental Acme Direct Montréal
This annual report is printed on Astrolite PC 100®, 100%
post consumer recycled paper that is certified by the
Forest Stewardship Council® (FSC®). Note also that the
Transcontinental Acme Direct Montréal printing plant
is FSC®-certified.
Printed in Canada
94
2011 Annual Report
Brigitte Lépine
Vice President, Innovation and Strategy
CONTACTS AND OTHER INFORMATION
Media: For general information about
the Corporation, please contact the
Corporate Communications Department
at 514 954-4000
Investor Relations Department:
514 954-4000, investorrelations@tc.tc
Transfer agent and registrar: Canadian
Stock Transfer Company Inc. (CST) as
administrative agent for CIBC Mellon Trust
Company (CIBC Mellon), 2001 University Street,
Suite 1600, Montreal, Quebec H3A 2A6,
1 800 387-0825
Duplicate Communications
Some shareholders may receive more than one
copy of publications such as quarterly financial
statements and the Annual Report. Every effort
is made to avoid such duplication. Shareholders
who receive duplicate mailings should advise
Canadian Stock Transfer Company Inc. (CST)
as administrative agent for CIBC Mellon Trust
Company (CIBC Mellon) at 1 800 387-0825.
MAIN ADDRESSES
Head Office TC Transcontinental
1 Place Ville Marie
Suite 3315
Montreal, Quebec, Canada H3B 3N2
Telephone: 514 954-4000
Fax: 514 954-4016
www.tc.tc
Sector General Management Offices
TC Transcontinental Printing
100 B Royal Group Crescent
Vaughan, Ontario, Canada L4H 1X9
Telephone: 905 663-0050
Fax: 905 663-6268
TC Media
1100 René-Lévesque Blvd. West
24th Floor
Montreal, Quebec, Canada H3B 4X9
Telephone: 514 392-9000
Fax: 514 392-1489
Information
This annual report is also available in the
“Investors” section of TC Transcontinental’s Web
site. The list of TC Transcontinental’s business
units is available on the Corporation’s Web site.
Des exemplaires en français du rapport annuel,
de la notice annuelle, des rapports de gestion et
des états financiers trimestriels sont disponibles
sur demande en communiquant avec le Service
des relations avec les investisseurs. www.tc.tc.
TRANSCONTINENTAL
ACTIVATING
CHANGE
TABLE OF CONTENTS
1
2
4
6
8
10
11
12
16
20
22
24
55
91
92
94
Financial Highlights
At a Glance
Marketing Activation
Executive Chairman of the Board and Founder Letter
President and CEO Letter
Executive Management Committee of the Corporation
“Innovation Challenge”
Printing Sector
Media and Interactive Sectors
Sustainable Development
Financial Performance
Management’s Discussion and Analysis
Consolidated Financial Statements and Notes
Shareholder Information
Board of Directors
Corporate Information
TRANSCONTINENTAL
TRANSCONTINENTAL
2011 ANNUAL REPORT
www.tc.tc
2011 ANNUAL REPORT

View the 2011 Annual Report

Transcription

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