Today, COGECO Inc. (TSX:CGO) ("COGECO" or the "Corporation") announced its
financial results for the first quarter of fiscal 2012, ended November 30, 2011,
in accordance with the newly adopted International Financial Reporting Standards
("IFRS").
For the first quarter of fiscal 2012:
-- Revenue increased by 13.4% to reach $387.5 million;
-- Operating income before depreciation and amortization(1) increased by
5.6% to reach $145 million when compared to the first quarter of fiscal
2011;
-- Operating margin(1) decreased to 37.4% from 40.2% in the first quarter
when compared to the same period of the previous fiscal year, mainly as
a consequence of the expenditures incurred to migrate Cogeco Cable's
Television service customers from analog to digital distribution and by
the growth from the radio activities for which the operating margin is
generally lower than for the cable sector;
-- Profit for the period increased by 20.4% to reach $47.9 million when
compared to $39.8 million in the first quarter of the prior year;
-- In the first quarter of the year, a positive free cash flow(1) of $27.6
million was generated compared to a negative free cash flow of $24.3
million for the same period of the prior year. This variance is mostly
attributable to the difference in the recognition of current income tax
expense for both periods combined with the improvement of operating
income before depreciation and amortization, partly offset by the
increase in acquisition of property, plant and equipment;
-- A quarterly dividend of $0.18 per share was paid to the holders of
subordinate and multiple voting shares, an increase of $0.06 per share,
or 50%, when compared to a dividend paid of $0.12 per share in the first
quarter of fiscal 2011;
-- In the cable sector, primary service units ("PSU")(2) grew by 45,129 net
additions in the first quarter, for a total of 2,609,683 PSU as at
November 30, 2011.
"COGECO Inc. reported very favorable results for the first quarter. Cogeco Cable
improved on last year's first-quarter performance, adding a total of 45,129 PSU.
Although our quarterly performance was even better than last year's, we must
stay the course with our vigilant and disciplined approach to operating controls
given the economic uncertainty in world markets," stated COGECO President and
CEO Louis Audet.
"With regards to our radio operations, we successfully integrated our newly
acquired radio stations. The latest survey results for fall 2011 show that we've
adopted winning strategies, as most of our stations scored excellent performance
ratings, particularly in Montreal and Quebec City, where we're market leaders,"
added Mr. Audet.
(1) The indicated terms do not have standard definitions prescribed by
IFRS and therefore, may not be comparable to similar measures
presented by other companies. For more details, please consult the
"Non-IFRS financial measures" section of the Management's Discussion
and Analysis.
(2) Represents the sum of Television, High Speed Internet ("HSI") and
Telephony service customers.
ABOUT COGECO
COGECO is a diversified communications Corporation. Through its Cogeco Cable
subsidiary, COGECO provides its residential customers with Audio, Analogue and
Digital Television, as well as HSI and Telephony services using its two-way
broadband cable networks. Cogeco Cable also provides, to its commercial
customers, through its subsidiary Cogeco Data Services, data networking,
e-business applications, video conferencing, hosting services, Ethernet, private
line, VoIP, HSI access, data storage, co-location services, managed IT services,
cloud services and other advanced communication solutions. Through its
subsidiary, Cogeco Diffusion, COGECO owns and operates 13 radio stations across
most of Quebec with complementary radio formats serving a wide range of
audiences. Cogeco Diffusion also operates Cogeco News, its news agency, feeding
24 independent and community radio stations across Quebec. COGECO's subordinate
voting shares are listed on the Toronto Stock Exchange (TSX:CGO). The
subordinate voting shares of Cogeco Cable are also listed on the Toronto Stock
Exchange (TSX:CCA).
Analyst Conference Call: Thursday, January 26, 2012 at 9:30 a.m. (EST)
Media representatives may attend as listeners
only.
Please use the following dial-in number to have
access to the conference call by dialling five
minutes before the start of the conference:
Canada/USA Access Number: 1 888 820-0231
International Access Number: + 1 416 640-5926
Confirmation Code: 8378457
By Internet at www.cogeco.ca/investors
A rebroadcast of the conference call will be
available until April 26, 2012, by dialling:
Canada and USA access number: 1 888 203-1112
International access number: + 1 647 436-0148
Confirmation code: 8378457
SHAREHOLDERS' REPORT
First quarter ended November 30, 2011
FINANCIAL HIGHLIGHTS
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Quarters ended November 30,
2011 2010 Change
($000, except percentages andper share
data) $ $ %
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(unaudited) (unaudited)
Operations
Revenue 387,538 341,714 13.4
Operating income before depreciation and
amortization(1) 145,009 137,267 5.6
Operating margin(1) 37.4% 40.2% -
Operating income 78,102 75,287 3.7
Profit for the period 47,923 39,808 20.4
Profit for the period attributable to the
owners of the Corporation 18,770 16,391 14.5
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Cash Flow
Cash flow from operating activities 15,702 57,615 (72.7)
Cash flow from operations(1) 109,397 42,542 -
Acquisitions of property, plant and
equipment and intangible assets 81,838 66,842 22.4
Free cash flow(1) 27,559 (24,300) -
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Financial condition(2)
Property, plant and equipment 1,287,081 1,272,251 1.2
Total assets 2,840,309 2,871,648 (1.1)
Indebtedness(3) 1,103,343 1,056,214 4.5
Shareholders' Equity 1,075,323 1,040,680 3.3
Equity attributable to owners of the
Corporation 355,259 342,525 3.7
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Primary service units(4) growth 45,129 49,220 (8.3)
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Per Share Data(5)
Earnings per share
Basic 1.12 0.98 14.3
Diluted 1.11 0.97 14.4
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(1) The indicated terms do not have standardized definitions prescribed by
International Financial Reporting Standards ("IFRS") and therefore,
may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-IFRS financial
measures" section of the Management's Discussion and Analysis.
(2) At November 30, 2011 and August 31, 2011.
(3) Indebtedness is defined as the total of bank indebtedness, promissory
note payable, principal on long-term debt, balance due on a business
acquisition and obligations under derivative financial instruments.
(4) Represents the sum of Television, High Speed Internet ("HSI") and
Telephony service customers.
(5) Per multiple and subordinate voting share.
MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)
First quarter ended November 30, 2011
TRANSITION TO IFRS
On January 1, 2011, the Canadian generally accepted accounting principles
("GAAP"), as used by publicly accountable enterprises, were fully converged to
International Financial Reporting Standards ("IFRS"). Accordingly, the
Corporation has prepared its first condensed interim consolidated financial
statements for the three-month period ended November 30, 2011 in accordance with
IFRS. Prior to the adoption of IFRS, for all periods up to and including the
year ended August 31, 2011, the Corporation's consolidated financial statements
were prepared in accordance with Canadian GAAP. IFRS uses a conceptual framework
similar to Canadian GAAP, but there are significant differences related to
recognition, measurement and disclosures.
The date of the opening balance sheet under IFRS and the date of transition to
IFRS are September 1, 2010. The financial data for fiscal 2011 have therefore
been restated. The Corporation is also required to apply IFRS accounting
policies retrospectively to determine its opening statement of financial
position, subject to certain exemptions. However, the Corporation is not
required to restate figures for periods prior to September 1, 2010 that were
previously prepared in accordance with Canadian GAAP.
The new significant accounting policies under IFRS are disclosed in Note 2 to
the condensed interim consolidated financial statements for the three-month
period ended November 30, 2011, while Note 17 explains adjustments made by the
Corporation in preparing its IFRS opening consolidated balance sheet as of
September 1, 2010 and in restating its previously published Canadian GAAP
condensed interim consolidated financial statements for the three-month period
ended November 30, 2010 and the year ended August 31, 2011. Note 17 also
provides details on exemption choices made by the Corporation with respect to
the general principle of retrospective application of IFRS. The changes to
critical accounting policies as a result of IFRS, and their impacts on
accounting estimates, are described under "Changes in critical accounting
policies and estimates" below.
FORWARD-LOOKING STATEMENTS
Certain statements in this Management's Discussion and Analysis ("MD&A") may
constitute forward-looking information within the meaning of securities laws.
Forward-looking information may relate to COGECO's future outlook and
anticipated events, business, operations, financial performance, financial
condition or results and, in some cases, can be identified by terminology such
as "may"; "will"; "should"; "expect"; "plan"; "anticipate"; "believe"; "intend";
"estimate"; "predict"; "potential"; "continue"; "foresee", "ensure" or other
similar expressions concerning matters that are not historical facts. In
particular, statements regarding the Corporation's future operating results and
economic performance and its objectives and strategies are forward-looking
statements. These statements are based on certain factors and assumptions
including expected growth, results of operations, performance and business
prospects and opportunities, which COGECO believes are reasonable as of the
current date. While management considers these assumptions to be reasonable
based on information currently available to the Corporation, they may prove to
be incorrect. The Corporation cautions the reader that the economic downturn
experienced over the past few years makes forward-looking information and the
underlying assumptions subject to greater uncertainty and that, consequently,
they may not materialize, or the results may significantly differ from the
Corporation's expectations. It is impossible for COGECO to predict with
certainty the impact that the current economic uncertainties may have on future
results. Forward-looking information is also subject to certain factors,
including risks and uncertainties (described in the "Uncertainties and main risk
factors" section of the Corporation's 2011 annual MD&A) that could cause actual
results to differ materially from what COGECO currently expects. These factors
include technological changes, changes in market and competition, governmental
or regulatory developments, general economic conditions, the development of new
products and services, the enhancement of existing products and services, and
the introduction of competing products having technological or other advantages,
many of which are beyond the Corporation's control. Therefore, future events and
results may vary significantly from what management currently foresees. The
reader should not place undue importance on forward-looking information and
should not rely upon this information as of any other date. While management may
elect to, the Corporation is under no obligation (and expressly disclaims any
such obligation), and does not undertake to update or alter this information
before the next quarter.
All amounts are stated in Canadian dollars unless otherwise indicated. This
report should be read in conjunction with the Corporation's consolidated
financial statements and MD&A for the fiscal year ended August 31, 2011 included
in the Corporation's 2011 Annual Report. It should also be read in conjunction
with the information on the adjustments to the fiscal 2011 financial figures
upon adoption of IFRS, explained in Note 17 of the condensed interim
consolidated financial statements for the three-month period ended November 30,
2011.
Corporate strategies and objectives
COGECO Inc.'s ("COGECO" or the "Corporation") objectives are to maximize
shareholder value by increasing profitability and ensuring continued growth. The
strategies employed to reach these objectives, supported by tight controls over
costs and business processes, are specific to each sector. For the cable sector,
sustained corporate growth and the continuous improvement of networks and
equipment are the main strategies used. The radio activities focus on continuous
improvement of programming in order to increase market share, and, thereby,
profitability. COGECO uses operating income before depreciation and
amortization(1), operating margin(1), free cash flow(1) and primary service
units ("PSU")(2) growth in order to measure its performance against these
objectives for the cable sector.
Cable sector
During the first three months of fiscal 2012, the Corporation's subsidiary,
Cogeco Cable Inc. ("Cogeco Cable" or the "Cable subsidiary"), invested
approximately $33 million in its network infrastructure and equipment to upgrade
its capacity, improve its robustness and extend its territories in order to
better serve and increase its service offerings for new and existing clientele.
PSU growth and service offerings in the cable sector
During the first quarter ended November 30, 2011, the number of PSU in the Cable
subsidiary increased by 45,129, or 1.8%, to reach 2,609,683 PSU, mainly as a
result of targeted marketing initiatives in the Canadian operations and of the
continuing interest for high definition ("HD") television service which offset
the loss in the European operations resulting primarily from a decreased demand
for services. As of fiscal 2012, Cogeco Cable has modified its key performance
indicator for growth to a PSU concept instead of a revenue-generating units
("RGU") concept. Cogeco Cable expects a PSU growth of 90,000 net additions for
the 2012 fiscal year which amounts in terms of RGU to 225,000 net additions for
fiscal 2012 year as presented in the Fiscal 2012 financial guidelines of the
2011 Annual Report.
Operating income before depreciation and amortization and operating margin
First-quarter operating income before depreciation and amortization increased by
5.6% when compared to the first quarter of fiscal 2011 to reach $145 million and
operating margin decreased to 37.4% from 40.2%.
Free cash flow
For the three-month period ended November 30, 2011, COGECO reports positive free
cash flow of $27.6 million, compared to negative free cash flow of $24.3 million
for the first quarter of the previous fiscal year, representing an increase of
$51.9 million. This variance is mostly attributable to the difference in the
recognition of current income tax expense for both periods combined with the
improvement of operating income before depreciation and amortization, partly
offset by the increase in acquisition of property, plant and equipment.
Other
BBM Canada's fall 2011 survey in the Montreal region, conducted with the
Portable People Meter ("PPM"), shows that 98.5 FM is the leading radio station
in the Montreal francophone market with listeners and men two years old and over
("2+"), while Rythme FM has maintained its leadership position in the female 2+
segment. In the other Quebec regions, our radio stations registered good
ratings.
On December 6, 2011, COGECO Inc. concluded an agreement to acquire Metromedia
CMR Plus Inc. ("Metromedia"), subject to customary closing adjustments and
conditions. Metromedia is a Quebec company that operates an advertising rep
house in the public transit sector. Metromedia represents over 100 public
transit markets notably in Montreal, in other Quebec regions as well as in major
cities and numerous markets in the rest of Canada. The transaction was completed
on December 26, 2011.
On February 1, 2011, a subsidiary of the Corporation, Cogeco Diffusion
Acquisitions Inc. ("Cogeco Diffusion"), completed the acquisition of 11 radio
stations in the province of Quebec ("Quebec Radio Stations Acquisition"), which
was originally announced on April 30, 2010 and then subject to the Canadian
Radio-television and Telecommunications Commission ("CRTC") approval. When the
CRTC approved the Quebec Radio Stations Acquisition, there was an order to
divest three radio stations in order to comply with the common ownership policy
in the Quebec City and Sherbrooke markets.
On November 30, 2011, Cogeco Diffusion concluded an agreement for the sale of
two of its four Quebec City FM radio stations, CJEC-FM and CFEL-FM, subject to
CRTC approval and customary closing adjustments and conditions. On December 6,
2011, Cogeco Diffusion closed its Sherbrooke radio station, CJTS-FM. On January
19, 2012, the CRTC approved the sale of CJEC-FM and CFEL-FM which should be
completed on January 30, 2012 and marked the end of the process established with
the CRTC for the divestiture of these three radio stations.
(1) The indicated terms do not have standardized definitions prescribed by
IFRS and therefore, may not be comparable to similar measures
presented by other companies. For more details, please consult the
"Non-IFRS financial measures" section.
(2) Represents the sum of Television, High Speed Internet ("HSI") and
Telephony service customers.
OPERATING RESULTS - CONSOLIDATED OVERVIEW
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Quarters ended November 30,
2011 2010 Change
($000, except percentages) $ $ %
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(unaudited) (unaudited)
Revenue 387,538 341,714 13.4
Operating costs(1) 242,529 204,447 18.6
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Operating income before depreciation and
amortization 145,009 137,267 5.6
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Operating margin 37.4% 40.2% -
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(1) Represents the sum of salaries, employee benefits and outsourced
services as well as other external purchases included in the Interim
Consolidated Statements of Profit or Loss.
Revenue
Fiscal 2012 first-quarter revenue rose by $45.8 million, or 13.4% to reach
$387.5 million primarily due to the cable sector and the results of the Quebec
Radio Stations Acquisition.
Cable revenue rose by $26.5 million, or 8%, to reach $356.9 million, when
compared to the prior year. For further details on the Cogeco Cable's operating
results, please refer to the "Cable sector" section.
Revenue from the radio activities improved by $19.4 million in the first quarter
to reach $30.6 million, mainly as a result of the Quebec Radio Stations
Acquisition.
Operating costs
For the first quarter of fiscal 2012, operating costs increased by $38.1 million
to reach $242.5 million, an increase of 18.6% compared to the first quarter of
the prior year.
Operating costs in the Cable sector increased by $18.9 million, or 9.7%, for the
first quarter when compared to the same periods of the prior year. For further
details on Cogeco Cable's operating results, please refer to the "Cable sector"
section.
Operating costs from the other sector, including radio activities, grew by $19.2
million in the first, mainly from the Quebec Radio Stations Acquisition.
Operating income before depreciation and amortization and operating margin
Mainly as a result of the growth in the cable sector and Quebec Radio Stations
Acquisition, operating income before depreciation and amortization grew by $7.7
million, or 5.6%, in the first-quarter to reach $145 million, when compared to
the same period of the previous year. COGECO's first-quarter operating margin
decreased to 37.4%, from 40.2% in the first quarter of the previous year. This
variation is mostly attributable to the incremental deployment and support costs
related to the migration of Television service customers from analog to digital
in the cable sector and from the growth in the radio activities for which the
operating margin is generally lower than the cable sector. For further details
on the Corporation's operating results, please refer to the "Cable sector"
section.
FIXED CHARGES
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Quarters ended November 30,
2011 2010 Change
($000, except percentages) $ $ %
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(unaudited) (unaudited)
Depreciation and amortization 66,907 61,980 7.9
Financial expense 17,667 16,862 4.8
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First-quarter 2012 depreciation and amortization amounted to $66.9 million,
compared to $62 million for the same period of the prior year. The increase is
mainly due to additional acquisitions of property, plant and equipment in the
Cogeco Cable's Canadian operations arising mainly from customer premise
equipment acquisitions to support PSU growth as well as reduction of the
depreciation period for some home terminal devices in Canada, partly offset by
the write-down of property, plant and equipment in Portugal in the third quarter
of 2011.
First-quarter financial expense amounted to $17.7 million, compared to $16.9
million in the prior year. The increase is mainly due to the new financing
related to the Quebec Radio Stations Acquisition.
INCOME TAXES
Fiscal 2012 first-quarter income tax expense amounted to $12.5 million, compared
to $18.6 million in the prior year. Fiscal 2012 first quarter income tax expense
decrease is mainly due to the implementation of certain tax measures of the 2011
federal budget limiting the tax deferrals for corporations with a significant
interest in a partnership. Under the transitional relief measures, some income
will be taxed over a period of five years rather than being taxed all in fiscal
2012 and, with the effect of the decrease in income tax rates over the five
years, resulted in a tax expense reduction of $3.5 million in the first quarter
of fiscal 2012 in the cable sector.
The changes limiting the tax deferrals described above will have an additional
cash outflow impact of approximately $13 million for Cogeco Cable during the
fiscal 2012, none of which have been disgorged during the quarter.
PROFIT FOR THE PERIOD
Fiscal 2012 first quarter profit for the period amounted to $47,9 million
compared to $39,8 million for the same period in fiscal 2011. Profit progression
for the period has resulted mainly from the operating income before depreciation
and amortization growth and the decrease in income tax expense in the first
three months of the 2012 fiscal year.
Fiscal 2012 first quarter profit for the period attributable to the owners of
the Corporation amounted to $18.8 million, or $1.12 per share, compared to $16.4
million, or $0.98 per share, for the same period in fiscal 2011. Profit
progression for the period has resulted mainly from the operating income before
depreciation and amortization growth and the decrease in income tax expense in
the first three months of the 2012 fiscal year.
The non-controlling interest represents a participation of approximately 67.9%
in Cogeco Cable's results. During the first quarter of fiscal 2012, the profit
attributable to non-controlling interest amounted to $29.2 million due to the
cable sector's positive results, compared to $23.4 million in the first quarter
of fiscal 2011.
CASH FLOW AND LIQUIDITY
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Quarters ended November
30,
2011 2010
($000) $ $
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(unaudited) (unaudited)
Operating activities
Cash flow from operations 109,397 42,542
Changes in non-cash operating activities (75,341) (62,762)
Amortization of deferred transaction costs and
discounts on long-term debt (762) (778)
Income taxes received (paid) (36,027) 2,077
Current income tax expense 21,491 80,143
Financial expense paid (20,723) (20,469)
Financial expense 17,667 16,862
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15,702 57,615
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Investing activities (81,633) (66,842)
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Financing activities 30,988 171,267
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Effect of exchange rate changes on cash and cash
equivalents denominated in a foreign currency (338) (229)
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Net change in cash and cash equivalents (35,281) 161,811
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Cash and cash equivalents, beginning of period 55,216 35,842
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Cash and cash equivalents, end of period 19,935 197,653
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Fiscal 2012 first-quarter cash flow from operations reached $109.4 million
compared to $42.5 million for the same period last year. This increase of $66.9
million is primarily due to the reduction in current income tax recovery, partly
offset by the increase in operating income before depreciation and amortization.
Changes in non-cash operating activities generated cash outflows of $75.3
million compared to $62.8 million for the same period in fiscal 2011, mainly as
a result of a decrease in trade and other payables for both periods.
In the first quarter of fiscal 2012, investing activities, including mainly
acquisitions of property, plant and equipment and intangible assets, amounted to
$81.6 million, an increase of $14.8 million, or 22.1% when compared to $66.8
million for the corresponding period of last year. The most significant
variations are in the cable sector and are due to the following factors:
-- An increase in customer premise equipment spending mainly due to the
timing of equipment purchases to support PSU and Digital Television
growth in the Canadian operations and conversion from analog to digital
distribution. This increase was partly offset by the decrease in
customer premise equipment spending reflecting PSU loss in the European
operations;
-- An increase in scalable infrastructure in the Canadian operations to
improve network capacity in existing areas served;
-- An increase in support capital spending stemming from the construction
and acquisition of new facilities in the Canadian operations.
In the first quarter, positive free cash flow amounted to $27.6 million,
compared to negative free cash flow of $24.3 million in the comparable period of
fiscal 2011, representing an increase of $51.9 million. The growth in free cash
flow over the prior year is due to the increase in operating income before
depreciation and amortization combined with the current income tax expense
reduction, partly offset by the increase in property, plant and equipment
acquisitions.
In the first three months of fiscal 2012, Indebtedness affecting cash increased
by $46.9 million mainly due to the cash outflows of $75.3 million from the
changes in non-cash operating activities, to $14.5 million and $3.1 million of
income tax and financial expense payments made during the quarter but recorded
in 2011 fiscal year and dividend payment of $11.3 million, partly offset by the
positive free cash flow of $27.6 million and the decrease in cash and cash
equivalents of $35.3 million. In the first three months of fiscal 2011,
Indebtedness affecting cash increased by $182.1 million mainly due to the cash
outflows of $62.8 million from the changes in non-cash operating activities,
increase in cash and cash equivalents of $161.8 million, negative free cash flow
of $24.3 million and the dividend payment of $7.6 million, partly offset by
$80.1 million of income tax expense recorded in the first quarter of fiscal 2011
but not paid due to modifications made to Cogeco Cable's corporate structure.
Indebtedness in 2011 mainly increased through the issuance of $200 million
Senior Secured Debentures Series 2 by Cogeco Cable Inc., partly offset by a net
repayment of $13.8 million on the Cogeco Cable Term Revolving Facility.
During the first quarter of fiscal 2012, a dividend of $0.18 per share was paid
by the Corporation to the holders of subordinate and multiple voting shares,
totalling $3 million, compared to a dividend of $0.12 per share, or $2 million
the year before. In addition, dividends paid by a subsidiary to non-controlling
interests in the first quarter of fiscal 2012 amounted to $8.2 million, for
consolidated dividend payments of $11.3 million, compared to $5.6 million for
consolidated dividend payments of $7.6 million in the first quarter of the prior
year.
As at November 30, 2011, the Corporation had a working capital deficiency of
$155.6 million compared to $188.7 million as at August 31, 2011. The decrease in
the deficiency is mainly attributable to the cable sector and caused by a
decrease in trade and other payables and income tax liabilities, partly offset
by decreases in cash and cash equivalents and in income taxes receivable and by
an increase in bank indebtedness. As part of the usual conduct of its business,
COGECO maintains a working capital deficiency due to a low level of accounts
receivable as a large portion of the Cogeco Cable's customers pay before their
services are rendered, unlike trade and other payables, which are paid after
products are delivered or services are rendered, thus enabling the cable
subsidiary to use cash and cash equivalents to reduce Indebtedness.
At November 30, 2011, the Corporation had used $39 million of its $100 million
Term Revolving Facility for a remaining availability of $61 million and Cogeco
Cable had used $151.2 million of its $750 million Term Revolving Facility for a
remaining availability of $598.8 million.
Transfers of funds from non-wholly owned subsidiaries to COGECO are subject to
approval by the subsidiaries' Boards of Directors and may also be restricted
under the terms and conditions of certain debt instruments. In accordance with
applicable corporate and securities laws, significant transfers of funds from
COGECO may be subject to approval by minority shareholders.
FINANCIAL POSITION
Since August 31, 2011, there have been significant changes to the balances of,
"trade and other payables", "property, plant and equipment", "income taxes
receivable", "income tax liabilities", "future income tax liabilities",
"long-term debt", "cash and cash equivalents", "bank indebtedness" and
"non-controlling interest".
The $73 million decrease in trade and other payables is related to the timing of
payments made to suppliers. The $14.8 million increase in property, plant and
equipment reflects the acquisitions discussed in the "Cash flow and Liquidity"
section net from the depreciation expense. The decrease of $24.3 million in
income taxes receivable, of $38.8 million in income tax liabilities and of $7.8
million in future income tax liabilities primarily reflect the timing of the
recognition of income tax liabilities as a result of modifications made to the
corporate structure combined with the increase in operating income before
depreciation and amortization. The increase of $31.7 million in bank
indebtedness, of $23.5 million in long-term debt and the decrease of $35.3
million in cash and cash equivalents are due to the factors previously discussed
in the "Cash Flow and Liquidity" section. The $18.9 million increase in
non-controlling interest is due to improvements in the cable subsidiary's
operating results in the current fiscal year.
A description of COGECO's share data as at December 31, 2011 is presented in the
table below:
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Number of Amount
shares/options ($000)
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Common shares
Multiple voting shares 1,842,860 12
Subordinate voting shares 14,989,338 121,976
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In the normal course of business, COGECO has incurred financial obligations,
primarily in the form of long-term debt, operating and finance leases and
guarantees. COGECO's obligations, discussed in the 2011 Annual Report, have not
materially changed since August 31, 2011, except as mentioned below.
On November 30, 2011, the Corporation renewed its credit agreement for a $100
million credit facility in the form of a four-year Term Revolving Facility. The
renewed Term Revolving Facility will mature on February 1, 2016, but may be
extended by additional one-year periods on an annual basis, subject to lenders'
approval. The Term Revolving Facility is indirectly secured by a first priority
fixed and floating charge on substantially all present and future real and
personal property and undertaking of every nature and kind of the Corporation
and certain of its subsidiaries, excluding the capital stock and assets of the
Corporation's subsidiary, Cogeco Cable Inc., and guaranteed by its subsidiaries,
excluding Cogeco Cable.
On November 7, 2011, the Corporation completed, pursuant to a private placement,
the issue of 6.50 % Unsecured Notes for a total of $35 million maturing November
7, 2021. Interest on these Notes is payable semi-annually in arrears on November
7 and May 7 of each year commencing May 7, 2012. Net proceeds of approximately
$35 million was used to reduce COGECO Inc.'s bank indebtedness.
On November 22, 2011, Cogeco Cable renewed its credit agreement for a $750
million credit facility, with an option to increase to a total amount of up to
$1 billion, subject to lenders' participation, in the form of a five year Term
Revolving Facility. The renewed Term Revolving Facility was arranged by a group
of financial institutions led by Canadian Imperial Bank of Commerce and Bank of
Montreal. The renewed Term Revolving Facility will mature on November 22, 2016,
but may be extended by additional one-year periods on an annual basis, subject
to lenders' approval. The Term Revolving Facility is indirectly secured by a
first priority fixed and floating charge on substantially all present and future
real and personal property and undertaking of every nature and kind of Cogeco
Cable and certain of its subsidiaries, and provides for certain permitted
encumbrances, including purchased money obligations, existing funded obligations
and charges granted by any subsidiary prior to the date when it becomes a
subsidiary, subject to a maximum amount.
DIVIDEND DECLARATION
At its January 25, 2012 meeting, the Board of Directors of COGECO declared a
quarterly eligible dividend of $0.18 per share for multiple voting and
subordinate voting shares, payable on February 22, 2012, to shareholders of
record on February 8, 2012. The declaration, amount and date of any future
dividend will continue to be considered and approved by the Board of Directors
of the Corporation based upon the Corporation's financial condition, results of
operations, capital requirements and such other factors as the Board of
Directors, at its sole discretion, deems relevant. There is therefore no
assurance that dividends will be declared, and if declared, their amount and
frequency may vary.
FINANCIAL MANAGEMENT
The Corporation has established guidelines whereby swap agreements can be used
to manage risks associated with fluctuations in interest and foreign currency
exchange rates related to its long-term debt. All such agreements are
exclusively used for hedging purposes. In order to minimize the risk of
counter-party default, Cogeco Cable completes transactions with financial
institutions that carry a credit rating equal or superior to its own credit
rating.
Cogeco Cable has entered into cross-currency swap agreements to set the
liability for interest and principal payments on its US$190 million Senior
Secured Notes Series A maturing on October 1, 2015. These agreements have the
effect of converting the U.S. interest coupon rate of 7.00% per annum to an
average Canadian dollar interest rate of 7.24% per annum. The exchange rate
applicable to the principal portion of the debt has been fixed at $1.0625 per US
dollar. During the first three months of fiscal 2012, amounts due under the
US$190 million Senior Secured Notes Series A increased by $7.8 million due to
the US dollar's appreciation relative to the Canadian dollar. The fair value of
cross-currency swaps increased by a net amount of $7 million, of which an
increase of $7.8 million offsets the foreign exchange loss on the debt
denominated in US dollars. The difference of $0.7 million was recorded as a
decrease of other comprehensive income, net of income taxes. In the first
quarter of fiscal 2011, amounts due under the US$190 million Senior Secured
Notes Series A decreased by $7.6 million due to the US dollar's depreciation
over the Canadian dollar. The fair value of cross-currency swaps decreased by a
net amount of $6.3 million, of which $7.6 million offsets the foreign exchange
gain on the debt denominated in US dollars. The difference of $1.2 million was
recorded as an increase of other comprehensive income, net of income taxes.
Furthermore, Cogeco Cable's net investment in self-sustaining foreign
subsidiaries is exposed to market risk attributable to fluctuations in foreign
currency exchange rates, primarily changes in the values of the Canadian dollar
versus the Euro. The Corporation recorded a foreign exchange loss of $0.3
million in the first quarter, compared to a foreign exchange loss of $1.9
million in the comparable period of the prior year, which was deferred and
recorded in the interim consolidated statement of comprehensive income, net of
income taxes. The exchange rate used to convert the Euro currency into Canadian
dollars for the balance sheet accounts as at November 30, 2011 was $1.3706 per
Euro compared to $1.4071 per Euro as at August 31, 2011. The average exchange
rate prevailing during the first quarter of fiscal 2012 used to convert the
operating results of the European operations was $1.3891 per Euro compared to
$1.3833 per Euro in the first quarter of fiscal 2011. Since the Corporation's
condensed interim consolidated financial statements are expressed in Canadian
dollars but a portion of its business is conducted in the Euro currency,
exchange rate fluctuations can increase or decrease revenue, operating income
before depreciation and amortization, profit for the period and the carrying
value of assets and liabilities.
The following table shows the Canadian dollar impact of a 10% fluctuation in the
average exchange rate of the Euro currency into Canadian dollars on European
operating results in the cable sector for the first three months ended November
30, 2011:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended November 30, 2011 Exchange rate
As reported impact
($000) $ $
----------------------------------------------------------------------------
(unaudited) (unaudited)
Revenue 41,515 4,152
Operating income before depreciation and
amortization 4,748 475
Profit for the period 3,399 340
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----------------------------------------------------------------------------
The Corporation is also impacted by foreign currency exchange rates, primarily
changes in the values of the US dollar relative to the Canadian dollar with
regards to purchases of certain equipment, as the majority of customer premise
equipment in the cable sector is purchased and subsequently paid in US dollars.
Please consult the "Fixed charges" section of this MD&A and the "Foreign
Exchange Risk" section in note 14 of the consolidated financial statements for
further details.
CABLE SECTOR
CUSTOMER STATISTIC
----------------------------------------------------------------------------
----------------------------------------------------------------------------
November 30,
2011 Net additions % of Penetration(1)
Quarters ended
November 30, November 30,
2011 2010 2011 2010
----------------------------------------------------------------------------
PSU 2,609,683 45,129 49,220
Television service
customers(2) 1,137,219 3,457 7,626 44.9 45.6
HSI service
customers 780,723 17,073 20,464 30.8 29.6
Telephony service
customers 691,741 24,599 21,130 27.3 24.9
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(1) As a percentage of Homes Passed
(2) The number of Television service customers includes 886,861 Digital
Television service customers.
In the cable sector, first quarter PSU net additions amounted to 45,129,
compared to 49,220 PSU in the comparable period of the previous fiscal year.
Fiscal 2012 first-quarter PSU net additions were lower than in the comparable
period of the prior year, as the strong PSU growth generated by the Canadian
operations, despite higher penetration rates, category maturity and aggressive
competition, was offset by PSU losses in the European operations reflecting the
continuing difficult economic conditions in Portugal. The Portuguese government
has implemented financial reforms which include increases in sales and income
taxes combined with reductions in government spending on social programs, thus
reducing consumer disposable income. These measures have generated consumer
spending constraints while the intensity of the competitive environment
remained. The rate of growth for our services has diminished in this
environment, with net customer losses in Television and HSI service customers.
The net customer additions for Television service customers stood at 3,457 for
the first quarter, compared to 7,626 for the same period of the prior year.
Television service customers net additions in fiscal 2012 is mainly due to the
back to school period for college and university students, to network expansions
and the bundling effect of continued growth in HSI and Telephony services. In
the quarter, Telephony service customers grew by 24,599 compared to 21,130 for
the same period last year, and the number of net additions to the HSI service
stood at 17,073 customers compared to 20,464 customers in the first quarter of
the prior year. HSI and Telephony net additions continue to stem from the
enhancement of the product offering, the impact of the bundled offer (Cogeco
Complete Connection) of Television, HSI and Telephony services, and promotional
activities which was offset by the economic environment in Portugal. For the
three month period ended November 30, 2011, additions to the Digital Television
service which are included in the Television service customers, stood at 43,955
compared to 41,649 for the comparable periods of the prior year. Digital
Television service net additions are due to targeted marketing initiatives to
improve penetration, the launch of new HD channels, the continuing interest for
HD television service and the deployment of Digital Terminal Adapters technology
to migrate customer from analog to digital services.
OPERATING RESULTS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended November 30,
2011 2010 Change
($000, except percentages) $ $ %
----------------------------------------------------------------------------
(unaudited) (unaudited)
Revenue 356,939 330,467 8.0
Operating costs(1) 213,226 194,316 9.7
Management fees - COGECO Inc. 7,142 6,644 7.5
--------------------------------------------------------------
Operating income before
depreciation and amortization 136,571 129,507 5.5
--------------------------------------------------------------
Operating margin 38.3% 39.2%
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(1) Represents the sum of salaries, employee benefits and outsourced
services as well as other external purchases included in the Interim
Consolidated Statements of Profit or Loss.
Revenue
Fiscal 2012 first-quarter revenue rose by $26.5 million, or 8%, to reach $356.9
million, when compared to the prior year.
Revenue for the Canadian operations grew by $28.2 million, or 9.8%, to reach
$315.4 million. The increase in revenue was driven by PSU growth, rate increases
implemented in October 2011 and April 2011 combined with the acquisitions of MTO
Telecom Inc. ("MTO") and Quiettouch Inc. ("QTI").
In the first quarter of fiscal 2012 European operation's revenue decreased by
$1.7 million, or 4%, at $41.5 million as a result of a decreased demand for
services, partly offset by a higher value of the Euro over the Canadian dollar
when compared to prior year. Revenue from the European operations in the local
currency for the 2012 first quarter amounted to EUR29.9 million, a decrease of
EUR1.4 million, or 4.4%, when compared to the same period of the prior year.
Operating costs
For the first quarter of fiscal 2012, operating costs increased by $18.9
million, to reach $213.2 million, an increase of 9.7% compared to the prior
year.
In the Canadian operations, for the three months ended November 30, 2011,
operating costs increased by $21.1 million, or 13.6%, at $176.5 million. The
increase in operating costs is mainly attributable to servicing additional PSU,
the launch of new HD channels, additional programming costs, deployment and
support costs related to the migration of Television service customers from
analog to digital and the acquisitions of MTO and QTI.
As for the European operations, fiscal 2012 first-quarter operating costs
decreased by $2.2 million, or 5.7%, at $36.8 million, mainly due to the PSU
losses and timing of marketing initiatives partly offset by a higher value of
the Euro over the Canadian dollar when compared to prior year. Operating costs
of the European operations for the first quarter in the local currency amounted
to EUR26.5 million, a decrease of EUR1.7 million, or 6.1% when compared to the
corresponding period of the prior year.
Operating income before depreciation and amortization and operating margin
Fiscal 2012 first-quarter operating income before depreciation and amortization
increased by 5.5% to reach $136.6 million. Cogeco Cable's first-quarter
operating margin decreased to 38.3% from 39.2% in the comparable period of the
prior year.
Operating income before depreciation and amortization in the Canadian operations
rose by $6.6 million, or 5.3%, to reach $131.8 million in the first quarter,
mainly due to the increased revenue exceeding the increase in operating costs.
Cogeco Cable's Canadian operations' operating margin decreased to 41.8% in the
first quarter compared to 43.6% for the same period of the prior year mainly due
to the incremental deployment and support costs for the migration of Television
service customers from analog to digital.
For the European operations, operating income before depreciation and
amortization increased to $4.7 million in the first quarter from $4.3 million
for the same period of the prior year, representing an increase of $0.5 million,
or 11.2%, mainly due to decreases in operating costs which outpaced the
decreases in revenue. European operations' operating margin increased to 11.4%
from 9.9% in the first quarter of fiscal 2012. Operating income before
depreciation and amortization in the local currency amounted to EUR3.4 million
compared to EUR3.1 million in the first quarter of the prior year, representing
an increase of 10.7%.
CONTROLS AND PROCEDURES
The President and Chief Executive Officer ("CEO") and the Senior Vice President
and Chief Financial Officer ("CFO"), together with Management, are responsible
for establishing and maintaining adequate disclosure controls and procedures and
internal controls over financial reporting, as defined in NI 52-109. COGECO's
internal control framework is based on the criteria published in the report
"Internal Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission and is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with IFRS.
The CEO and CFO, supported by Management, evaluated the design of the
Corporation's disclosure controls and procedures and internal controls over
financial reporting as at November 30, 2011, and have concluded that they were
adequate. Furthermore, no significant changes to the internal controls over
financial reporting occurred during the quarter ended November 30, 2011.
UNCERTAINTIES AND MAIN RISK FACTORS
There has been no significant change in the uncertainties and main risk factors
faced by the Corporation since August 31, 2011. A detailed description of the
uncertainties and main risk factors faced by COGECO can be found in the 2011
Annual Report.
CHANGES IN CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Corporation adopted the IFRS conceptual framework for its accounting
policies on September 1, 2011 (see "Transition to IFRS" above"). Accordingly,
the following paragraphs provide an analysis of accounting policies considered
to be critical for which changes required under the adoption of IFRS were
determined to be material. This "Changes in critical accounting policies and
estimates" section should be read in conjunction with the Corporation's annual
MD&A for the 2011 year, which provides a description of other accounting
policies considered to be critical but for which the adoption of IFRS did not
have a significant impact.
A. IMPAIRMENT OF NON FINANCIAL ASSETS
At the end of each reporting period, the Corporation reviews the carrying value
of its property, plant and equipment and intangible assets with finite useful
lives to determine whether there is any indication that those assets have
suffered an impairment loss. If any such indication exists, the recoverable
amount of the asset is estimated in order to determine the extent of the
impairment loss, if any.
Goodwill and intangible assets with indefinite useful lives are tested for
impairment at least annually, and whenever there is an indication that the asset
may be impaired.
The recoverable amount is the higher of fair value less costs to sell and value
in use. In assessing value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate that reflects
current market assessments of the time value of money and the risks specific to
the asset for which the estimates of future cash flows have not been adjusted.
For the purpose of impairment testing, assets that cannot be tested on an
individual basis are grouped together into the smallest identifiable group of
assets that generates cash inflows that are largely independent of the cash
inflows from other assets ("cash-generating unit" or "CGU"). Where a reasonable
and consistent basis of allocation can be identified, corporate assets are also
allocated to individual CGU, or otherwise they are allocated to the smallest
group of CGU for which a reasonable and consistent allocation basis can be
identified.
An impairment loss is recognized when the carrying amount of an asset or a CGU
exceeds its recoverable amount for the amount of this excess. Impairment losses
recognized in respect of CGUs are allocated first to reduce the carrying amount
of any goodwill allocated to the CGU and then to reduce the carrying amounts of
the other assets in the CGU on a pro rata basis. The impairment loss is
recognized immediately in profit or loss in the period in which the loss is
incurred.
Impairment losses recognized in prior periods are assessed at each reporting
date for any indications that the loss has decreased or no longer exists. An
impairment loss is reversed if there has been a change in the estimates used to
determine the recoverable amount. An impairment loss is reversed only to the
extent that the asset's carrying amount does not exceed the carrying amount that
would have been determined, net of depreciation or amortization, if no
impairment loss had been recognized. A reversal of an impairment loss is
recognized immediately in profit or loss.
For the purpose of impairment testing, goodwill is allocated to each of the
Corporation's CGUs that are expected to benefit from the synergies of the
related business combination. An impairment loss recognized for goodwill cannot
be reversed.
B. PROVISIONS
Provisions represent liabilities of the Corporation for which the amount or
timing is uncertain. A provision is recorded when the Corporation has a legal or
constructive present obligation as a result of a past event and it is probable
that an outflow of economic benefits will be required to settle the obligation,
and a reliable estimate can be made of the amount of the obligation. The amount
recognized represents management's best estimate of the amount required to
settle the obligation at the end of the reporting period, taking into account
the risks and uncertainties surrounding the obligation. When the effect of the
time value of money is material, the amount of a provision is determined by
discounting the expected future cash flows at a pre-tax rate that reflects
current market assessments of the time value of money and the risks specific to
the liability. When discounting is used, the increase in the provision due to
the passage of time is recognized as financial expense.
When some or all of the economic benefits required to settle a provision are
expected to be recovered from a third party, a receivable is recognized as an
asset if it is virtually certain that reimbursement will be received and the
amount of the receivable can be measured reliably.
C. EMPLOYEE BENEFITS
DEFINED BENEFIT PENSION PLANS
Pension costs for defined benefit pension plans are determined using the
projected unit credit method (sometimes known as the accrued benefit method
pro-rated on service), with actuarial valuations being carried out at the end of
each reporting period and are funded through contributions determined in
accordance with this method. The Corporation's net obligation in respect of
defined benefit pension plans is calculated separately for each plan.
Pension expense is charged to salaries, employee benefits and outsourced
services and includes:
-- The cost of pension benefits provided in exchange for employees'
services rendered during the period;
-- Vested past service costs which are recognized immediately;
-- Unvested past service costs which are amortized on a straight-line basis
over the vesting period; and
-- The interest cost of pension obligations less the expected return on
pension fund assets. The Corporation uses the fair value of plan assets
to evaluate plan assets for the purpose of calculating the expected
return on plan assets.
The retirement benefit obligation recognized in the statement of financial
position represents the present value of the defined benefit obligation as
adjusted for unrecognized past service cost, and as reduced by the fair value of
plan assets.
The Corporation recognizes actuarial gains or losses in other comprehensive
income in the period in which they arise.
FUTURE ACCOUNTING DEVELOPMENTS IN CANADA
A number of new standards, interpretations and amendments to existing standards
were issued by the International Accounting Standard Board ("IASB") that are
mandatory but not yet effective for the period ended November 30, 2011 or year
ended August 31, 2012, and have not been applied in preparing these condensed
interim consolidated financial statements. The following standards may have a
material impact on the consolidated financial statements of the Corporation:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Effective for annual
periods
starting on or after
----------------------------------------------------------------------------
Early adoption
IFRS 9 Financial Instruments January 1, 2015 permitted
IFRS 10 Consolidated Financial Early adoption
Statements January 1, 2013 permitted
IFRS 12 Disclosure of Interests in Early adoption
Other Entities January 1, 2013 permitted
Early adoption
IFRS 13 Fair Value Measurement January 1, 2013 permitted
Amendments to IAS 1 Presentation of Early adoption
Financial Statements January 1, 2013 permitted
Amendment to IAS 19 Employee Early adoption
Benefits January 1, 2013 permitted
----------------------------------------------------------------------------
----------------------------------------------------------------------------
IFRS 9 replaces the guidance in IAS 39 Financial Instruments: Recognition and
Measurement on the classification and measurement of financial assets and
financial liabilities. The replacement of IAS 39 is a three-phase project with
the objective of improving and simplifying the reporting for financial
instruments. This is the first phase of that project.
IFRS 10 replaces the consolidation requirements in IAS 27 Consolidated and
Separate Financial Statements and SIC-12 Consolidation - Special Purpose
Entities. It provides a single model to be applied in the control analysis for
all investees.
IFRS 12 establishes disclosure requirements for entities that have interests in
subsidiaries, joint arrangements, associates and/or unconsolidated structures
entities.
IFRS 13 replaces the fair value measurement guidance contained in individual
IFRS with a single source of fair value measurement guidance. The standard
clarifies the definition of fair value, establishes a framework for measuring
fair value and sets out disclosure requirements for fair value measurements.
The amendments to IAS 1 require that an entity present separately the items of
other comprehensive income ("OCI") that may be reclassified to profit or loss in
the future from those that would never be reclassified to profit or loss.
The amendments to IAS 19 requires the recognition of actuarial gains and losses
immediately in other comprehensive income, full recognition of past service
costs immediately in profit or loss, recognition of expected return on plan
assets in profit or loss to be calculated based on the rate used to discount the
defined benefit obligation and additional disclosures explaining the
characteristics of the Corporation's defined benefit pension plans.
The Corporation is in the process of determining the extent of the impact of
these standards on its consolidated financial statements.
FISCAL 2012 FINANCIAL GUIDELINES
The Corporation has not modified its 2012 guidance with the recently announced
acquisition of Metromedia. Since this transaction was completed late December
2011, the Corporation will include the projected financial results in its 2012
revised guidance upon announcement of the 2012 second quarter results.
NON-IFRS FINANCIAL MEASURES
This section describes non-IFRS financial measures used by COGECO throughout
this MD&A. It also provides reconciliations between these non-IFRS measures and
the most comparable IFRS financial measures. These financial measures do not
have standard definitions prescribed by IFRS and therefore, may not be
comparable to similar measures presented by other companies. These measures
include "cash flow from operations", "free cash flow", "operating income before
depreciation and amortization" and "operating margin".
Cash flow from operations and free cash flow
Cash flow from operations is used by COGECO's management and investors to
evaluate cash flows generated by operating activities, excluding the impact of
changes in non-cash operating activities, amortization of deferred transaction
costs and discounts on long-term debt, income taxes paid or received, current
income tax expense, financial expense paid and financial expense. This allows
the Corporation to isolate the cash flows from operating activities from the
impact of cash management decisions. Cash flow from operations is subsequently
used in calculating the non-IFRS measure, "free cash flow". Free cash flow is
used, by COGECO's management and investors, to measure its ability to repay
debt, distribute capital to its shareholders and finance its growth.
The most comparable IFRS financial measure is cash flow from operating
activities. Cash flow from operations is calculated as follows:
----------------------------------------------------------------------------
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Quarters ended November 30,
2011 2010
($000) $ $
----------------------------------------------------------------------------
(unaudited) (unaudited)
Cash flow from operating activities 15,702 57,615
Changes in non-cash operating activities 75,341 62,762
Amortization of deferred transaction costs
and discounts on long-term debt 762 778
Income taxes paid (received) 36,027 (2,077)
Current income tax expense (21,491) (80,143)
Financial expense paid 20,723 20,469
Financial expense (17,667) (16,862)
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Cash flow from operations 109,397 42,542
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Free cash flow is calculated as follows:
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----------------------------------------------------------------------------
Quarters ended November 30,
2011 2010
($000) $ $
----------------------------------------------------------------------------
(unaudited) (unaudited)
Cash flow from operations 109,397 42,542
Acquisition of property, plant and equipment (77,894) (63,350)
Acquisition of intangible assets (3,944) (3,492)
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Free cash flow 27,559 (24,300)
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Operating income before depreciation and amortization and operating margin
Operating income before depreciation and amortization is used by COGECO's
management and investors to assess the Corporation's ability to seize growth
opportunities in a cost effective manner, to finance its ongoing operations and
to service its debt. Operating income before depreciation and amortization is a
proxy for cash flows from operations excluding the impact of the capital
structure chosen, and is one of the key metrics used by the financial community
to value the business and its financial strength. Operating margin is a measure
of the proportion of the Corporation's revenue which is available, before income
taxes, to pay for its fixed costs, such as interest on Indebtedness. Operating
margin is calculated by dividing operating income before depreciation and
amortization by revenue.
The most comparable IFRS financial measure is operating income. Operating income
before depreciation and amortization and operating margin are calculated as
follows:
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Quarters ended November 30,
2011 2010
($000, except percentages) $ $
----------------------------------------------------------------------------
(unaudited) (unaudited)
Operating income 78,102 75,287
Depreciation and amortization 66,907 61,980
----------------------------------------------------------------------------
Operating income before depreciation and
amortization 145,009 137,267
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Revenue 387,538 341,714
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Operating margin 37.4% 40.2%
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SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended November 30, August 31,
($000, except percentages
and per share data) 2011 2010 2011 2010(1)
(unaudited) (unaudited) (unaudited) (unaudited)
----------------------------------------------------------------------------
Revenue 387,538 341,714 374,531 333,671
Operating income before
depreciation and
amortization 145,009 137,267 159,912 137,785
Operating margin 37.4% 40.2% 42.7% 41.3%
Operating income 78,102 75,287 107,545 73,942
Impairment of goodwill and
intangible assets - - - -
Profit (loss) for the period 47,923 39,808 70,089 12,265
Profit (loss) for the period
attributable to the owners
of the Corporation 18,770 16,391 23,317 -
Adjusted profit for the
period attributable to the
owners of the
Corporation(2) 18,770 16,391 21,694 12,265
Cash flow from operating
activities 15,702 57,615 226,804 198,492
Cash flow from operations 109,397 42,542 154,838 127,230
Acquisitions of property,
plant and equipment and
intangible assets 81,838 66,842 130,960 108,515
Free cash flow 27,559 (24,300) 23,878 18,715
Earnings (loss) per share(3)
Basic 1.12 0.98 1.39 0.73
Diluted 1.11 0.97 1.38 0.73
Adjusted earnings per
share(2)(3)
Basic 1.12 0.98 1.30 0.73
Diluted 1.11 0.97 1.29 0.73
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Quarters ended May 31, February 28,
($000, except percentages
and per share data) 2011 2010(1) 2011 2010(1)
(unaudited) (unaudited) (unaudited) (unaudited)
----------------------------------------------------------------------------
Revenue 373,905 330,933 349,593 329,087
Operating income before
depreciation and
amortization 148,035 127,928 123,064 124,363
Operating margin 39.6% 38.7% 35.2% 37.8%
Operating income 82,612 64,008 58,627 58,370
Impairment of goodwill and
intangible assets 225,873 - - -
Profit (loss) for the period (179,202) 10,740 22,433 10,511
Profit (loss) for the period
attributable to the owners
of the Corporation (56,303) - 634 -
Adjusted profit for the
period attributable to the
owners of the
Corporation(2) 16,376 10,740 11,009 10,511
Cash flow from operating
activities 147,398 110,756 83,519 117,498
Cash flow from operations 135,315 119,140 107,530 120,331
Acquisitions of property,
plant and equipment and
intangible assets 71,741 69,511 72,539 74,549
Free cash flow 63,574 49,629 34,991 45,782
Earnings (loss) per share(3)
Basic (3.36) 0.64 0.04 0.63
Diluted (3.36) 0.64 0.04 0.63
Adjusted earnings per
share(2)(3)
Basic 0.98 0.64 0.66 0.63
Diluted 0.97 0.64 0.65 0.63
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(1) The numbers relating to fiscal year 2010 have not been restated to
comply with the adoption of IFRS since the transition date for the
Corporation is September 1, 2010.
(2) In addition to the adjustments described in the "Non-IFRS financial
measures" section, profit for the period attributable to the owners of
the Corporation for the second and the fourth quarter of fiscal 2011
has been adjusted to remove the integration, restructuring and
acquisition costs, net of related income taxes, of $10.4 million and
$1.6 million respectively. Loss for the period attributable to the
owners of the Corporation for the third quarter of fiscal 2011 has
been adjusted to remove the impairment of goodwill and property, plant
and equipment, net of related income taxes, of $72.7 million.
(3) Per multiple and subordinate voting share.
SEASONAL VARIATIONS
Cogeco Cable's operating results are not generally subject to material seasonal
fluctuations except as follows. The customer growth in the Television and HSI
services are generally lower in the second half of the fiscal year as a result
of a decrease in economic activity due to the beginning of the vacation period,
the end of the television seasons, and students leaving their campuses at the
end of the school year. Cogeco Cable offers its services in several university
and college towns such as Kingston, Windsor, St. Catharines, Hamilton,
Peterborough, Trois-Rivieres and Rimouski in Canada, and Aveiro, Covilha, Evora,
Guarda and Coimbra in Portugal. Furthermore, the operating margin in the third
and fourth quarters is generally higher as the maximum amount payable to COGECO
under the management agreement is usually reached in the second quarter of the
year. As part of the management agreement between Cogeco Cable and COGECO,
Cogeco Cable pays management fees to COGECO equivalent to 2% of its revenue
subject to an annual maximum amount. As the maximum amount is expected to be
reached in the second quarter of fiscal 2012, Cogeco Cable will not pay
management fees in the second half of fiscal 2012. Similarly, as the maximum
amount was paid in the first six months of fiscal 2011, Cogeco Cable did not pay
management fees in the second half of the previous fiscal year.
ADDITIONAL INFORMATION
This MD&A was prepared on January 25, 2012. Additional information relating to
the Corporation, including its Annual Information Form, is available on the
SEDAR website at www.sedar.com.
/s/ Jan Peeters /s/ Louis Audet
----------------------------------------------------------------------
Jan Peeters Louis Audet
Chairman of the Board President and Chief Executive
Officer
COGECO Inc.
Montreal, Quebec
January 26, 2012
CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
First quarter ended November 30, 2011
INTERIM CONSOLIDATED STATEMENTS OF PROFIT OR LOSS
(unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended November 30,
2011 2010
(In thousands of Canadian dollars, except
per share data) $ $
----------------------------------------------------------------------------
Revenue 387,538 341,714
Salaries, employee benefits and outsourced
services 77,850 58,312
Other external purchases 164,679 146,135
Depreciation and amortization (note 5) 66,907 61,980
----------------------------------------------------------------------------
Operating income 78,102 75,287
Financial expense (note 6) 17,667 16,862
----------------------------------------------------------------------------
Profit before income taxes 60,435 58,425
Income taxes (note 7) 12,512 18,617
----------------------------------------------------------------------------
Profit for the period 47,923 39,808
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Profit for the period attributable to:
Owners of the Corporation 18,770 16,391
Non-controlling interest 29,153 23,417
----------------------------------------------------------------------------
47,923 39,808
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings per share (note 8)
Basic 1.12 0.98
Diluted 1.11 0.97
----------------------------------------------------------------------------
----------------------------------------------------------------------------
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended November 30,
2011 2010
(In thousands of Canadian dollars) $ $
----------------------------------------------------------------------------
Profit for the period 47,923 39,808
----------------------------------------------------------------------------
Other comprehensive income (loss)
Cash flow hedging adjustments
Net change in fair value of hedging
derivative financial instruments 7,044 (5,833)
Net change in fair value of hedging
derivative financial instruments
reclassified to financial expense (7,771) 7,581
Income tax recovery (expense) on cash flow
hedging adjustments (245) 49
----------------------------------------------------------------------------
(972) 1,797
----------------------------------------------------------------------------
Foreign currency translation adjustments
Net foreign currency translation
differences on translation of a net
investment in foreign operations (272) (3,143)
Net change in unrealized gains on
translation of long-term debts designated
as hedges of a net investment in foreign
operations - 1,227
----------------------------------------------------------------------------
(272) (1,916)
----------------------------------------------------------------------------
Defined benefit plans actuarial gains
(losses) adjustments
Net change in defined benefit plans
actuarial gains (losses) (1,826) 1,712
Income tax recovery (expense) on defined
benefit plans actuarial gains (losses)
adjustments 491 (461)
----------------------------------------------------------------------------
(1,335) 1,251
----------------------------------------------------------------------------
Other comprehensive income (loss) for the
period (2,579) 1,132
----------------------------------------------------------------------------
Comprehensive income for the period 45,344 40,940
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Comprehensive income for the period
attributable to:
Owners of the Corporation 17,034 17,604
Non-controlling interest 28,310 23,336
----------------------------------------------------------------------------
45,344 40,940
----------------------------------------------------------------------------
----------------------------------------------------------------------------
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Equity attributable to owners
Contributed Accumulated
surplus - other
(In thousands of Canadian Share share-based comprehensi Retained
dollars) capital compensation -ve income earnings
----------------------------------------------------------------------------
(note 10) (note 11)
Balance at September 1,
2010 119,527 3,452 6,508 240,499
----------------------------------------------------------------------------
Profit for the period - - - 16,391
Other comprehensive income
(loss) for the period - - 1,213 -
----------------------------------------------------------------------------
Total comprehensive income
for the period - 1,213 16,391
----------------------------------------------------------------------------
Share-based compensation - 317 - -
Issuance of subordinate
voting shares by a
subsidiary to non-
controlling interest - (28) - -
Dividends on multiple
voting shares - - - (221)
Dividends on subordinate
voting shares - - - (1,786)
Effect of changes in
ownership of a subsidiary
on non-controlling
interest - - - 5
Acquisition of subordinate
voting shares held in
trust under the Incentive
Share Unit Plan (1,282) - -
Acquisition by a subsidiary
from non-controlling
interests of subordinate
voting shares held in
trust under the Incentive
Share Unit Plan - - - -
Distribution to employees
of subordinate voting
shares held in trust under
the Incentive Share Unit
Plan 458 (503) - 45
----------------------------------------------------------------------------
Total contributions by and
distributions to
shareholders (824) (214) - (1,957)
----------------------------------------------------------------------------
Balance at November 30,
2010 118,703 3,238 7,721 254,933
----------------------------------------------------------------------------
Loss for the period - - - (32,352)
Other comprehensive income
(loss) for the period - - (4,713) -
----------------------------------------------------------------------------
Total comprehensive loss
for the period - - (4,713) (32,352)
----------------------------------------------------------------------------
Issuance of subordinate
voting shares under the
employee stock option plan 629 - - -
Share-based compensation - 1,203 - -
Issuance of subordinate
voting shares by a
subsidiary to non-
controlling interest - (376) - -
Dividends on multiple
voting shares - - - (700)
Dividends on subordinate
voting shares - - - (5,660)
Effect of changes in
ownership of a subsidiary
on non-controlling
interest - - - 55
Acquisition of subordinate
voting shares held in
trust under the Incentive
Share Unit Plan (14) - - -
Acquisition by a subsidiary
from non-controlling
interests of subordinate
voting shares held in
trust under the Incentive
Share Unit Plan - - - -
Distribution to employees
by a subsidiary of
subordinate voting shares
held in trust under the
Incentive Share Unit Plan - (153) 11
----------------------------------------------------------------------------
Total contributions by and
distributions to
shareholders 615 674 - (6,294)
----------------------------------------------------------------------------
Balance at August 31, 2011 119,318 3,912 3,008 216,287
Profit for the period - - - 18,770
Other comprehensive loss
for the period - - (1,736) -
----------------------------------------------------------------------------
Total comprehensive income
(loss) for the period - - (1,736) 18,770
----------------------------------------------------------------------------
Share-based compensation - 438 - -
Issuance of subordinate
voting shares by a
subsidiary to non-
controlling interest - (121) - -
Dividends on multiple
voting shares - - - (332)
Dividends on subordinate
voting shares - - - (2,684)
Effect of changes in
ownership of a subsidiary
on non-controlling
interest - - - 109
Acquisition of subordinate
voting shares held in
trust under the Incentive
Share Unit Plan (1,710) - - -
Acquisition by a subsidiary
from non-controlling
interests of subordinate
voting shares held in
trust under the Incentive
Share Unit Plan - - - -
Distribution to employees
of subordinate voting
shares held in trust under
the Incentive Share Unit
Plan 325 (442) - 117
----------------------------------------------------------------------------
Total contributions by and
distributions to
shareholders (1,385) (125) - (2,790)
----------------------------------------------------------------------------
Balance at November 30,
2011 117,933 3,787 1,272 232,267
----------------------------------------------------------------------------
----------------------------------------------------------------------------
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total
(In thousands of Canadian Equity attributable to non- shareholders'
dollars) controlling interests equity
----------------------------------------------------------------------------
Balance at September 1,
2010 750,878 1,120,864
----------------------------------------------------------------------------
Profit for the period 23,417 39,808
Other comprehensive income
(loss) for the period (81) 1,132
----------------------------------------------------------------------------
Total comprehensive income
for the period 23,336 40,940
----------------------------------------------------------------------------
Share-based compensation 253 570
Issuance of subordinate
voting shares by a
subsidiary to non-
controlling interest 318 290
Dividends on multiple
voting shares - (221)
Dividends on subordinate
voting shares (5,582) (7,368)
Effect of changes in
ownership of a subsidiary
on non-controlling
interest (5) -
Acquisition of subordinate
voting shares held in
trust under the Incentive
Share Unit Plan - (1,282)
Acquisition by a subsidiary
from non-controlling
interests of subordinate
voting shares held in
trust under the Incentive
Share Unit Plan (2,258) (2,258)
Distribution to employees
of subordinate voting
shares held in trust under
the Incentive Share Unit
Plan -
----------------------------------------------------------------------------
Total contributions by and
distributions to
shareholders (7,274) (10,269)
----------------------------------------------------------------------------
Balance at November 30,
2010 766,940 1,151,535
----------------------------------------------------------------------------
Loss for the period (54,328) (86,680)
Other comprehensive income
(loss) for the period 381 (4,332)
----------------------------------------------------------------------------
Total comprehensive loss
for the period (53,947) (91,012)
----------------------------------------------------------------------------
Issuance of subordinate
voting shares under the
employee stock option plan - 629
Share-based compensation 1,132 2,335
Issuance of subordinate
voting shares by a
subsidiary to non-
controlling interest 4,826 4,450
Dividends on multiple
voting shares - (700)
Dividends on subordinate
voting shares (17,773) (23,433)
Effect of changes in
ownership of a subsidiary
on non-controlling
interest (55) -
Acquisition of subordinate
voting shares held in
trust under the Incentive
Share Unit Plan - (14)
Acquisition by a subsidiary
from non-controlling
interests of subordinate
voting shares held in
trust under the Incentive
Share Unit Plan (110) (110)
Distribution to employees
by a subsidiary of
subordinate voting shares
held in trust under the
Incentive Share Unit Plan 142 -
----------------------------------------------------------------------------
Total contributions by and
distributions to
shareholders (11,838) (16,843)
----------------------------------------------------------------------------
Balance at August 31, 2011 701,155 1,043,680
Profit for the period 29,153 47,923
Other comprehensive loss
for the period (843) (2,579)
----------------------------------------------------------------------------
Total comprehensive income
(loss) for the period 28,310 45,344
----------------------------------------------------------------------------
Share-based compensation 391 829
Issuance of subordinate
voting shares by a
subsidiary to non-
controlling interest 1,416 1,295
Dividends on multiple
voting shares - (332)
Dividends on subordinate
voting shares (8,244) (10,928)
Effect of changes in
ownership of a subsidiary
on non-controlling
interest (109) -
Acquisition of subordinate
voting shares held in
trust under the Incentive
Share Unit Plan - (1,710)
Acquisition by a subsidiary
from non-controlling
interests of subordinate
voting shares held in
trust under the Incentive
Share Unit Plan (2,855) (2,855)
Distribution to employees
of subordinate voting
shares held in trust under
the Incentive Share Unit
Plan -
----------------------------------------------------------------------------
Total contributions by and
distributions to
shareholders (9,401) (13,701)
----------------------------------------------------------------------------
Balance at November 30,
2011 720,064 1,075,323
----------------------------------------------------------------------------
----------------------------------------------------------------------------
INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
November 30, August 31, September 1,
2011 2011 2010
(In thousands of Canadian dollars) $ $ $
----------------------------------------------------------------------------
Assets
Current
Cash and cash equivalents (note
12 b)) 19,935 55,216 35,842
Trade and other receivables
(note 14) 111,178 100,297 74,560
Income taxes receivable 14,183 38,480 45,400
Prepaid expenses and other 14,792 14,020 14,189
Assets held for sale (note 15) 7,148 1,365 -
----------------------------------------------------------------------------
167,236 209,378 169,991
Non-current
Other assets 7,377 6,422 7,886
Property, plant and equipment 1,287,081 1,272,251 1,323,161
Intangible assets 1,124,469 1,125,519 1,046,944
Goodwill 226,573 225,802 144,695
Derivative financial instruments - - 5,085
Deferred tax assets 27,573 26,390 27,992
Assets held for sale (note 15) - 5,886 -
----------------------------------------------------------------------------
2,840,309 2,871,648 2,725,754
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Shareholders'
equity
Liabilities
Current
Bank indebtedness 31,688 - 2,328
Trade and other payables 197,243 270,246 235,830
Provisions 20,162 15,558 12,945
Income tax liabilities 21,120 59,935 558
Deferred and prepaid revenue 43,680 43,520 45,602
Promissory note payable, non-
interest bearing and due on
February 1, 2012 5,000 5,000 -
Derivative financial instrument - - 1,189
Current portion of long-term
debt (note 9) 1,790 2,119 2,329
Liabilities related to assets
held for sale (note 15) 2,153 1,747 -
----------------------------------------------------------------------------
322,836 398,125 300,781
Non-current
Long-term debt (note 9) 1,040,179 1,016,663 952,741
Balance due on a business
acquisition, bank prime rate
plus 1% and payable in February
2013 11,400 11,400 -
Derivative financial instruments 7,364 14,408 -
Deferred and prepaid revenue and
other liabilities 19,698 19,390 12,234
Pension plan liabilities and
accrued employees benefits 37,517 33,718 24,335
Deferred tax liabilities 325,992 333,746 314,799
Liabilities related to assets
held for sale (note 15) - 518 -
----------------------------------------------------------------------------
1,764,986 1,827,968 1,604,890
----------------------------------------------------------------------------
Shareholders' equity
Equity attributable to owners
Share capital (note 10) 117,933 119,318 119,527
Contributed surplus 3,787 3,912 3,452
Accumulated other comprehensive
income (note 11) 1,272 3,008 6,508
Retained earnings 232,267 216,287 240,499
----------------------------------------------------------------------------
355,259 342,525 369,986
Non-controlling interest 720,064 701,155 750,878
----------------------------------------------------------------------------
1,075,323 1,043,680 1,120,864
----------------------------------------------------------------------------
2,840,309 2,871,648 2,725,754
----------------------------------------------------------------------------
----------------------------------------------------------------------------
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended November 30,
2011 2010
(In thousands of Canadian dollars) $ $
----------------------------------------------------------------------------
Cash flow from operating activities
Profit for the period 47,923 39,808
Adjustments for:
Depreciation and amortization (note 5) 66,907 61,980
Income taxes 12,512 18,617
Financial expense (note 6) 17,667 16,862
Share-based compensation (note 10) 1,014 679
Loss (gain) on disposals and write-offs of
property, plant and equipment (19) 320
Other 1,789 503
----------------------------------------------------------------------------
147,793 138,769
Changes in non-cash operating activities
(note 12 a)) (75,341) (62,762)
Income taxes received (paid) (36,027) 2,077
Financial expense paid (20,723) (20,469)
----------------------------------------------------------------------------
15,702 57,615
----------------------------------------------------------------------------
Cash flow from investing activities
Acquisition of property, plant and equipment (77,894) (63,350)
Acquisition of intangible assets (3,944) (3,492)
Other 205 -
----------------------------------------------------------------------------
(81,633) (66,842)
----------------------------------------------------------------------------
Cash flow from financing activities
Increase (decrease) in bank indebtedness 31,688 (1,588)
Net repayments under the Term Revolving
Facilities (18,767) (13,800)
Issuance of long-term debt, net of discounts
and transaction costs 34,641 198,320
Repayments of long-term debt (614) (826)
Increase in deferred transaction costs (1,430) -
Acquisition of subordinate voting shares
held in trust under the Incentive Share
Unit Plan (note 10) (1,710) (1,282)
Dividends paid on multiple voting shares (332) (221)
Dividends paid on subordinate voting shares (2,684) (1,786)
Issuance of subordinate voting shares by a
subsidiary to non-controlling interest 1,295 290
Acquisition by a subsidiary from non-
controlling interest of subordinate voting
shares held in trust under the Incentive
Share Unit Plan (note 10) (2,855) (2,258)
Dividends paid on subordinate voting shares
by a subsidiary to non-controlling interest (8,244) (5,582)
----------------------------------------------------------------------------
30,988 171,267
----------------------------------------------------------------------------
Effect of exchange rate changes on cash and
cash equivalents denominated in a foreign
currency (338) (229)
----------------------------------------------------------------------------
Net change in cash and cash equivalents (35,281) 161,811
Cash and cash equivalents, beginning of the
period 55,216 35,842
----------------------------------------------------------------------------
Cash and cash equivalents, end of the period 19,935 197,653
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2011
(unaudited)
(amounts in tables are in thousands of Canadian dollars, except number of shares
and per share data)
NATURE OF OPERATIONS
COGECO Inc. (the "Corporation" or the "Parent Corporation") is a Canadian public
corporation whose shares are listed on the Toronto Stock Exchange ("TSX"). The
Corporation is engaged in Cable Television, High Speed Internet ("HSI"),
Telephony, managed information technology and infrastructure, and other
telecommunications services to its residential and commercial customers in
Canada and in Portugal through Cogeco Cable Inc. and in Radio broadcasting
through Cogeco Diffusion Acquisitions Inc.
The Corporation's registered office is located at 5 Place Ville Marie, Suite
1700, Montreal, Quebec, H3B 0B3.
1. BASIS OF PREPARATION
These condensed interim consolidated financial statements have been prepared in
accordance with International Accounting Standards ("IAS") 34 Interim Financial
Reporting and do not include all of the information required for full annual
financial statements. Certain information and footnote disclosure normally
included in annual financial statements were omitted or condensed where such
information is not considered material to the understanding of the Corporation's
interim financial information. As such, these condensed interim consolidated
financial statements should be read in conjunction with the Corporation's 2011
annual financial statements.
These are the Corporation's first condensed interim consolidated financial
statements prepared in conformity with IAS 34 and International financial
reporting standards ("IFRS") 1 First-time Adoption of International Financial
Reporting Standards has been applied. An explanation of how the transition to
IFRS has affected the reported financial position, financial performance and
cash flows of the Corporation is provided in note 17.
The condensed interim consolidated financial statements have been prepared on a
going concern basis using historical cost except for derivative financial
instruments, assets held for sale (see note 15) and cash-settled share-based
payment arrangements, which are measured at fair value.
Financial information is presented in Canadian dollars, which is the functional
currency of COGECO Inc.
The results of operations for the interim period are not necessarily indicative
of the results of operations for the full year. The Corporation does not expect
seasonality to be a material factor in quarterly results.
The condensed interim consolidated financial statements were approved by the
Board of Directors of COGECO Inc. at its meeting held on January 25, 2012.
2. SIGNIFICANT ACCOUNTING POLICIES
These condensed interim consolidated financial statements have been prepared
with the accounting policies the Corporation expects to adopt in its annual
August 31, 2012 consolidated financial statements.
The accounting policies set out below have been applied consistently to all
periods presented in the condensed interim consolidated financial statements and
in preparing the opening consolidated statement of financial position as at
September 1, 2010 for the purposes of the transition to IFRS, unless otherwise
indicated.
A. BASIS OF CONSOLIDATION
These condensed interim consolidated financial statements include the accounts
of the Corporation and its subsidiaries.
Subsidiaries are entities controlled by the Corporation. Control is achieved
where the Corporation has the power to govern the financial and operating
policies of an entity so as to obtain benefits from its activities. The
financial statements of subsidiaries are included in the consolidated financial
statements from the date that control commences until the date that control
ceases. The accounting policies of subsidiaries have been changed when necessary
to align them with the policies adopted by the Corporation. Business segments
and percentage of interest in the principal operating subsidiaries are as
follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Percentage of
Principal equity interest Voting rights
Segment subsidiaries % %
----------------------------------------------------------------------------
Cable Cogeco Cable Inc. 32.1 82.6
Other Cogeco Diffusion
Acquisitions Inc. 100.0 100.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Corporation and its cable subsidiary, Cogeco Cable Inc., have established
special purpose entities ("SPEs") for the purpose of mitigating the impact of
stock price fluctuations in connection with its Incentive Share Unit Plans. A
SPE is consolidated if, based on an evaluation of the substance of its
relationship with the Corporation and the SPEs' risks and rewards, the
Corporation concludes that it controls the SPEs. SPEs controlled by the
Corporation and Cogeco Cable Inc. were established under terms that impose
strict limitations on the decision-making powers of the SPEs' management,
resulting in the Corporation receiving the majority of the benefits related to
the SPEs' operations and net assets, being exposed to the majority of risks
incident to the SPEs' activities, and retaining the majority of the residual or
ownership risks related to the SPEs or their assets.
All inter-company transactions and balances and any unrealized revenue and
expenses are eliminated in preparing the interim consolidated financial
statements.
B. BUSINESS COMBINATIONS
Acquisitions on or after September 1, 2010
Business acquisitions are accounted for using the acquisition method. Goodwill
is measured as the excess of the fair value of the consideration transferred
including the recognized amount of any non-controlling interest in the acquiree
over the net recognized amount of the identifiable assets acquired and
liabilities assumed, all measured at the acquisition date.
The consideration transferred is measured as the sum of the fair values of
assets transferred, liabilities incurred, and equity instruments issued by the
Corporation at the acquisition date, including any asset or liability resulting
from a contingent consideration arrangement, in exchange for control of the
acquiree.
An obligation to pay contingent consideration is classified as an asset or a
liability or as equity. Contingent consideration classified as equity is not
re-measured. Contingent consideration classified as an asset or a liability is
measured either as a financial instrument or as a provision. Changes in fair
values that qualify as measurement period adjustments for preliminary purchase
price allocations are adjusted in the current period against the cost of
acquisition and such changes are applied on a retroactive basis.
Transaction costs, other than those associated with the issue of debt or equity
securities and integration and restructuring costs, that the Corporation incurs
in connection with a business acquisition are recognized in profit or loss as
incurred.
Acquisitions prior to September 1, 2010
As part of its transition to IFRS, the Corporation elected not to restate those
business combinations that occurred prior to September 1, 2010. In respect of
acquisitions prior to that date, assets and liabilities are included in the
statement of financial position on the basis of their deemed cost at the date of
acquisition, which represents the amounts recognized under previous Canadian
Generally Accepted Accounting Principles ("GAAP") immediately after the date of
acquisition.
C. REVENUE RECOGNITION
Revenue is measured at the fair value of the consideration received or
receivable, net of returns and discounts. The Corporation recognizes revenue
from the sale of products or the rendering of services when the following
conditions are met:
-- The amount of revenue and related costs can be measured reliably;
-- The significant risks and rewards of ownership have been transferred to
customers and there is no continuing management involvement with the
goods; and
-- The recovery of the consideration is probable.
More specifically, the Corporation's principal sources of revenue are recognized
as follows:
-- Monthly subscription revenue received for Cable Television, HSI and
Telephony services and rental of equipment are recognized as the
services are provided;
-- Revenue from data services, long-distance and other pay-per-use services
are recorded as the services are provided;
-- Revenue generated from the sale of home terminal devices or other
equipment are recorded when the equipment is delivered and accepted by
the customers; and
-- Revenue generated from the sale of advertising airtime are recognized
when the advertisement has been aired.
MULTIPLE-ELEMENT ARRANGEMENTS
The Corporation offers certain products and services as part of multiple
deliverable arrangements. The Corporation evaluates each deliverable in an
arrangement to determine whether such deliverable would represent a separate
component. Components are accounted separately when:
-- The delivered elements have stand-alone value to the customers; and
-- There is objective and reliable evidence of fair value of any
undelivered elements.
Consideration is measured and allocated amongst the components based upon their
relative fair values and the relevant revenue recognition policy is applied to
them.
The Corporation considers that installation and activation fees are not separate
components because they have no stand-alone value. Accordingly, they are
deferred and amortized into revenue at the same pace as the related
telecommunications services are earned, which is the average life of a
customer's subscription for residential customers and the term of the agreement
for commercial customers.
Unearned revenue, such as payments for goods and services received in advance of
delivery, are recorded as deferred and prepaid revenue until the service is
provided or the product is delivered to the customer.
D. BARTER TRANSACTIONS
In the normal course of its business, the Corporation enters into barter
transactions under which goods, advertising and other services are acquired in
exchange for advertising services. Such revenues and expenses are recorded at
the estimated fair value of goods and services received when goods and other
services are received and at the estimated fair value of advertising provided
when advertising services are received.
E. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost, less accumulated depreciation
and accumulated impairment losses.
During construction of new assets, direct costs plus a portion of direct
overhead costs directly attributable to the asset are capitalized. Borrowing
costs directly attributable to the acquisition or construction of qualifying
assets, which require a substantial amount of time to get ready for their
intended use or sale, are capitalized until such time as the assets are
substantially ready for their intended use or sale. All other borrowing costs
are recorded as financial expense in the period in which they are incurred.
Depreciation is recognized from the date the asset is ready for its intended use
so as to write off the cost of assets, other than freehold land and properties
under construction, less their residual values over their useful lives, using
the straight-line method. Assets held under finance leases are depreciated over
their expected useful lives on the same basis as owned assets or, where shorter,
the term of the relevant lease. The depreciation periods are as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
BUILDINGS 10 TO 40 YEARS
CABLE SYSTEMS 5 TO 20 YEARS
BROADCASTING, PROGRAMMING AND PRODUCTION EQUIPMENT 3 TO 10 YEARS
HOME TERMINAL DEVICES 3 TO 5 YEARS
ROLLING STOCK AND EQUIPMENT 5 YEARS
OTHER EQUIPMENT 2 TO 10 YEARS
LEASEHOLD IMPROVEMENTS LEASE TERM
----------------------------------------------------------------------------
----------------------------------------------------------------------------
When significant parts of an item of property, plant and equipment have
different useful lives, they are accounted for as separate items (major
components) of property, plant and equipment.
The estimated useful lives, residual values and depreciation method are reviewed
at the end of each annual reporting period, with the effect of any changes in
estimate accounted for on a prospective basis.
The gain or loss arising on the disposal or retirement of an item of property,
plant and equipment is determined as the difference between the sale proceeds
and the carrying amount of the asset and is recognized in profit or loss.
The Corporation does not record decommissioning obligations in connection with
its cable distribution network. The Corporation expects to renew all of its
agreements with utility companies to access their support structures in the
future, thus the resulting present value of the obligation is not significant.
F. INTANGIBLE ASSETS
Intangible assets acquired separately are measured on initial recognition at
cost. Intangible assets acquired in a business combination and recognized
separately from goodwill are initially recognized at their fair value at the
acquisition date. Subsequent to initial recognition, intangible assets are
carried at cost less accumulated amortization and accumulated impairment losses.
The useful lives of intangible assets are assessed as either finite or indefinite.
Intangible assets with finite useful lives are amortized over their useful life.
The estimated useful lives are reviewed at the end of each annual reporting
period, with the effect of any changes in estimate being accounted for on a
prospective basis. Intangible assets with finite useful lives are amortized as
follows:
-- Customer relationships are amortized on a straight-line basis over the
estimated useful life, defined as the average life of a commercial
customer's subscription, not exceeding eight years;
-- Reconnect and additional service activation costs are capitalized up to
a maximum amount not exceeding the revenue generated by the reconnect
activity and are amortized over the average life of a customer's
subscription, not exceeding four years; and
-- Direct and incremental costs associated with the acquisition of
commercial customers are capitalized and amortized over the term of the
agreement.
Intangible assets with indefinite useful lives are those for which there is no
foreseeable limit to their useful economic life as they arise from contractual
or other legal rights that can be renewed without significant cost. They
comprised Cable Distribution Undertaking Broadcasting Licenses ("Cable
Distribution Licenses") and Broadcasting Licenses. Cable Distribution Licenses
are comprised of broadcast authorities licenses and exemptions from licensing
that allow access to homes and subscribers in a specific area. Broadcasting
Licenses are broadcast authorities licenses that allow access to a radio
frequency in a specific market. The Corporation has concluded that the Cable
Distribution and Broadcasting Licenses have indefinite useful lives since there
are no legal, regulatory, contractual, economic or other factors that would
prevent their renewals or limit the period over which they will contribute to
the Corporation's cash flows. The Corporation reviews at the end of each
reporting period whether event and circumstances continue to support indefinite
useful life assessment for these licenses. Intangible assets with indefinite
useful lives are not amortized, but tested for impairment at least annually, or
more frequently if there is any indication of impairment.
Goodwill represents the future economic benefits arising from a business
combination that are not individually identified and separately recognized. It
is not amortized but tested for impairment at least annually, or whenever there
is an indication of possible impairment.
G. IMPAIRMENT OF NON FINANCIAL ASSETS
At the end of each reporting period, the Corporation reviews the carrying value
of its property, plant and equipment and intangible assets with finite useful
lives to determine whether there is any indication that those assets may be
impaired. If any such indication exists, the recoverable amount of the asset is
estimated in order to determine the extent of the impairment loss, if any.
Goodwill and intangible assets with indefinite useful lives are tested for
impairment at least annually, or whenever there is an indication that the asset
may be impaired.
The recoverable amount is the higher of fair value less costs to sell and value
in use. In assessing value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate that reflects
current market assessments of the time value of money and the risks specific to
the asset for which the estimates of future cash flows have not been adjusted.
For the purpose of impairment testing, assets that cannot be tested on an
individual basis are grouped together into the smallest identifiable group of
assets that generates cash inflows that are largely independent of the cash
inflows from other assets ("cash-generating unit" or "CGU"). When a reasonable
and consistent basis of allocation can be identified, corporate assets are also
allocated to individual CGU, or otherwise they are allocated to the smallest
group of CGU for which a reasonable and consistent allocation basis can be
identified.
An impairment loss is recognized when the carrying amount of an asset or a CGU
exceeds its recoverable amount for the amount of this excess. Impairment losses
recognized in respect of CGUs are allocated first to reduce the carrying amount
of any goodwill allocated to the CGU and then to reduce the carrying amount of
the other assets in the CGU on a pro rata basis. The impairment loss is
recognized immediately in profit or loss in the period in which the loss is
incurred.
Impairment losses recognized in prior periods are assessed at each reporting
date for any indications that the loss has decreased or no longer exists. An
impairment loss is reversed if there has been a change in the estimates used to
determine the recoverable amount. An impairment loss is reversed only to the
extent that the asset's carrying amount does not exceed the carrying amount that
would have been determined, net of depreciation or amortization, if no
impairment loss had been recognized. A reversal of an impairment loss is
recognized immediately in profit or loss.
For the purpose of impairment testing, goodwill is allocated to each of the
Corporation's CGUs that are expected to benefit from the synergies of the
related business combination. An impairment loss recognized for goodwill cannot
be reversed.
H. LEASES
LESSEE
Leases are classified as finance leases whenever the terms of the lease transfer
substantially all the risks and rewards incidental to ownership of the asset to
the lessee. All other leases are classified as operating leases.
Assets held under finance leases are recognized as assets of the Corporation at
their fair value at the inception of the lease or, if lower, at the present
value of the minimum lease payments as determined at the inception of the lease.
Subsequent to initial recognition, the asset is accounted for in accordance with
the accounting policy applicable to that asset. The corresponding liability is
included in the statement of financial position as a finance lease obligation.
Lease payments are apportioned between financial expense and reduction of the
lease obligation so as to achieve a constant rate of interest on the remaining
balance of the liability. Financial expense and depreciation of the assets are
recognized in profit or loss in the period they occur.
Rentals payable under operating leases are charged to the profit or loss
statement on a straight line basis over the term of the relevant lease.
LESSOR
The Corporation leases certain telecommunication equipment, primarily home
terminal devices, to its customers. These leases are classified as operating
leases and rental revenue is recognized on a straight-line basis over the term
of the relevant lease.
I. INCOME TAXES
Income tax expense represents the sum of the tax currently payable and deferred.
Current and deferred taxes are recognized in profit or loss, except when they
relate to a business combination or to items that are recognized in other
comprehensive income or directly in equity.
CURRENT TAX
The tax currently payable is based on taxable profit for the year. The
Corporation's liability for current tax is calculated using tax rates that have
been enacted or substantively enacted at the end of the reporting period.
DEFERRED TAX
Deferred tax is recognized in respect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for taxation purposes. Deferred tax assets and liabilities are
not recognized if the temporary difference arises from the initial recognition
of goodwill or assets or liabilities in a transaction that is not a business
combination and that affects neither the taxable profit nor the accounting
profit or is related to investments in subsidiaries to the extent that the
Corporation is able to control the reversal and it is probable that the
temporary differences will not reverse in the foreseeable future.
Deferred tax assets are generally recognized for unused tax losses and
deductible temporary differences to the extent that it is probable that taxable
profits will be available against which, those deductible temporary differences
can be utilized. Deferred tax assets are reviewed at each reporting date and are
reduced to the extent that it is no longer probable that the related tax benefit
will be realized.
Deferred tax assets and liabilities are measured at the tax rates that are
expected to apply in the period in which the liability is settled or the asset
realized, based on tax rates that have been enacted or substantively enacted at
the end of the reporting period. The measurement of deferred tax liabilities and
assets reflects the tax consequences that would follow from the manner in which
the Corporation expects, at the end of the reporting period, to recover or
settle the carrying amount of its assets and liabilities.
Deferred tax assets and liabilities are offset when there is a legally
enforceable right to set off current tax assets against current tax liabilities
and when they relate to income taxes levied by the same taxation authority on
the same taxable entity, or on different tax entities, but the Corporation
intends to settle its current tax assets and liabilities on a net basis.
J. PROVISIONS
Provisions represent liabilities of the Corporation for which the amount or
timing is uncertain. A provision is recorded when the Corporation has a legal or
constructive present obligation as a result of a past event and it is probable
that an outflow of economic benefits will be required to settle the obligation,
and a reliable estimate can be made of the amount of the obligation. The amount
recognized represents management's best estimate of the amount required to
settle the obligation at the end of the reporting period, taking into account
the risks and uncertainties surrounding the obligation. When the effect of the
time value of money is material, the amount of a provision is determined by
discounting the expected future cash flows at a pre-tax rate that reflects
current market assessments of the time value of money and the risks specific to
the liability. When discounting is used, the increase in the provision due to
the passage of time is recognized as financial expense.
When some or all of the economic benefits required to settle a provision are
expected to be recovered from a third party, a receivable is recognized as an
asset if it is virtually certain that reimbursement will be received and the
amount of the receivable can be measured reliably.
K. SHARE-BASED PAYMENTS
EQUITY SETTLED AWARDS
The Corporation measures stock options granted to employees that vest rateably
over the service period based on the fair value of each tranche on grant date by
using the Black-Scholes pricing model and a compensation expense is recognized
on a straight-line basis over the vesting period applicable to the tranche, with
a corresponding increase in contributed surplus. Granted options vest equally
over a period of five years beginning one year after the day such options are
granted. At the end of each reporting period, the Corporation revises its
estimate of the number of equity instruments expected to vest. The impact of the
revision of the original estimates, if any, is recognized in profit or loss such
that the cumulative expense reflects the revised estimate, with a corresponding
adjustment in contributed surplus. When the stock options are exercised, share
capital is credited by the sum of the consideration paid and the related portion
previously recorded in contributed surplus.
The Corporation measures incentive share units ("ISUs") granted to employees
based on the fair value of the Corporation's subordinate voting shares at the
date of grant and a compensation expense is recognized over the vesting period,
with a corresponding increase in contributed surplus. The total vesting period
of each grant is three years less one day.
CASH SETTLED AWARDS
The fair value of the amount payable to Board directors in respect of share
appreciation rights under the Deferred Share Unit Plans of the Corporation,
which are settled in cash, is recognized as a compensation expense with a
corresponding increase in pension plan liabilities and accrued employee benefits
as of the date units are awarded to Board directors. The accrued liability is
re-measured at the end of each reporting period, until settlement, using the
average closing price of the subordinate voting shares on the Toronto Stock
Exchange for the twenty consecutive trading days immediately preceding by one
day the closing date of the reporting period. Any changes in the fair value of
the liability are recognized in profit or loss.
L. EMPLOYEE BENEFITS
SHORT-TERM EMPLOYEE BENEFITS
Short-term employee benefits include wages, salaries, compensated absences,
profit-sharing and bonuses. They are measured on an undiscounted basis and are
expensed as the related service is provided. A liability is recognized for the
amount expected to be paid under short-term cash bonus or profit sharing plans
if the Corporation as a present legal or constructive obligation to pay this
amount as a result of past service provided by the employee and the obligation
can be estimated reliably.
DEFINED CONTRIBUTION PENSION PLANS
A defined contribution plan is a post-employment benefit plan under which an
entity pays fixed contributions into a separate entity and will have no legal or
constructive obligation to pay further amounts. Obligations for contributions to
defined contribution pension plans are recognized as an expense in the periods
during which services are rendered by employees.
DEFINED BENEFIT PENSION PLANS
Pension costs for defined benefit pension plans are determined using the
projected unit credit method (sometimes known as the accrued benefit method
pro-rated on service), with actuarial valuations being carried out at the end of
each reporting period, when necessary, and are funded through contributions
determined in accordance with this method. The Corporation's net obligation in
respect of defined benefit pension plans is calculated separately for each plan.
Pension expense is charged to salaries, employee benefits and outsourced
services and includes:
-- The cost of pension benefits provided in exchange for employees'
services rendered during the period;
-- Vested past service costs which are recognized immediately;
-- Unvested past service costs which are amortized on a straight-line basis
over the vesting period; and
-- The interest cost of pension obligations less the expected return on
pension fund assets. The Corporation uses the fair value of plan assets
to evaluate plan assets for the purpose of calculating the expected
return on plan assets.
The retirement benefit obligation recognized in the statement of financial
position represents the present value of the defined benefit obligation as
adjusted for unrecognized past service costs and as reduced by the fair value of
plan assets.
The Corporation recognizes actuarial gains or losses in other comprehensive
income in the period in which they arise.
M. FOREIGN CURRENCY TRANSLATION
FOREIGN CURRENCY TRANSACTIONS
For the purpose of the consolidated financial statements, the profit or loss and
financial position of each group entity are expressed in Canadian dollars, which
is the functional and presentation currency of the Corporation for the
consolidated financial statements.
Transactions in foreign currencies are translated to the respective functional
currency of the Corporation's entities at the exchange rate in effect at the
transaction date. Monetary assets and liabilities denominated in foreign
currencies at the reporting date are translated to the functional currency at
the exchange rate at that date. Foreign currency differences arising on
translation are recognized as financial expense in profit or loss, except for
those arising on the translation of financial instruments designated as a hedge
of a net investment in foreign operations, and financial instruments designated
and effective as hedging items in a cash-flow hedge, which are recognized in
other comprehensive income until the instruments are settled. Non-monetary items
that are measured in terms of historical cost are translated at historical rates
at the date of the transaction.
FOREIGN OPERATIONS
The assets and liabilities of foreign operations, including goodwill and fair
value adjustment arising on acquisition, are translated to Canadian dollars
using exchange rates prevailing at the end of the reporting period. Goodwill and
fair value adjustments arising on the acquisition of a foreign operation are
treated as assets and liabilities of the foreign operation and translated at the
rate prevailing at the end of the reporting period.
Revenue and expense items are translated at the average exchange rates for the
period, unless exchange rates fluctuated significantly or significant
transactions occurred during that period, in which case the exchange rates at
the date of the transactions are used. Exchange differences arising, if any, are
recognized as foreign currency translation adjustment in other comprehensive
income and accumulated in equity.
The Corporation applies hedge accounting to foreign currency differences arising
between the functional currency of the foreign operation and the parent entity's
functional currency (Canadian dollars). Foreign currency differences arising on
the translation of the long-term debt designated as a hedge of a net investment
in foreign operations are recognized in other comprehensive income to the extent
that the hedge is effective, and are presented within equity in the foreign
currency translation adjustment balance. To the extent that the hedge is
ineffective, such differences are recognized in profit or loss. When the hedged
part of a net investment is disposed of, the relevant amount in the cumulative
amount of foreign currency translation adjustment is transferred to profit or
loss as part of the profit or loss on disposal.
N. FINANCIAL INSTRUMENTS
CLASSIFICATION AND MEASUREMENT
All financial instruments, including derivatives, are included in the statement
of financial position initially at fair value when the Corporation becomes a
party to the contractual obligations of the instrument.
Subsequent to initial recognition, non-derivative financial instruments are
measured in accordance with their classification as described below:
-- Loans and receivables are financial assets with fixed or determinable
payments that are not quoted on an open market. Cash and cash
equivalents and trade and other receivables are classified as loans and
receivables. They are measured at amortized cost using the effective
interest method, less any impairment loss;
-- Transaction costs that are directly attributable to the acquisition or
issue of financial assets and financial liabilities (other than
financial assets and financial liabilities at fair value through profit
or loss) are added to or deducted from the fair value of the financial
assets or financial liabilities, as appropriate, on initial recognition.
Transaction costs directly attributable to the acquisition of financial
assets or financial liabilities at fair value through profit or loss are
recognized immediately in profit or loss; and
-- Trade and other payables and loans and borrowings are classified as
other liabilities. They are measured at amortized cost using the
effective interest method. Directly attributable transaction costs are
added to the initial fair value of financial instruments except for
those incurred in respect of the Term Revolving Facilities, which are
amortized over the term of the related financing on a straight-line
basis.
Financial assets are derecognized only when the Corporation no longer holds the
contractual rights to the cash flows of the asset or when the Corporation
transfers substantially all the risks and rewards of ownership of the financial
asset to another entity. Financial liabilities are derecognized only when the
Corporation's obligations are discharged, cancelled or expire.
Financial assets and financial liabilities are offset and the net amount
reported in the statement of financial position if, and only if, there is a
currently enforceable legal right to offset the recognized amounts and there is
an intention to settle on a net basis, or to realize the assets and settle the
liabilities simultaneously.
DERIVATIVE FINANCIAL INSTRUMENTS, INCLUDING HEDGE ACCOUNTING
The Corporation uses cross-currency swaps as derivative financial instruments to
manage foreign exchange risk related to its foreign denominated long-term debt.
The Corporation does not hold or use any derivative financial instruments for
speculative trading purposes.
Derivatives are recognized initially at fair value and related transaction costs
are recognized in profit or loss as incurred. Subsequent to initial recognition,
derivatives are measured at fair value, and changes therein are accounted for as
described below. Net receipts or payments arising from derivative agreements are
recognized as financial expense.
On initial designation of the hedge, the Corporation formally documents the
relationship between the hedging instrument(s) and hedged item(s), including the
risk management objectives and strategy in undertaking the hedge transaction,
together with the methods that will be used to assess the effectiveness of the
hedging relationship. The Corporation makes an assessment, both at the inception
of the hedge relationship as well as on an ongoing basis, whether the hedging
instruments are expected to be "highly effective" in offsetting the changes in
the cash flows of the respective hedged items during the period for which the
hedge is designated and whether the actual results of each hedge are within a
range of 80-125 percent. For a cash flow hedge of a forecasted transaction, the
transaction should be highly probable to occur and should present an exposure to
variations in cash flows that could ultimately affect reported profit or loss.
Cash flow hedge accounting
When a derivative is designated as the hedging instrument in a hedge of the
variability in cash flows attributable to a particular risk associated with a
recognized asset or liability or a highly probable forecast transaction that
could affect profit or loss, the effective portion of changes in the fair value
of the derivative is recognized in accumulated other comprehensive income and
presented in unrealized gains or losses on cash flow hedges in equity. The
amount recognized in accumulated other comprehensive income is removed and
included in profit or loss in the same period as the hedged cash flows affect
profit or loss and in the same line item as the hedged item. Any ineffective
portion of changes in the fair value of the derivative is recognized immediately
in profit or loss.
If the hedging instrument no longer meets the criteria for hedge accounting,
expires, is sold, terminated, exercised, or the designation is revoked, then
hedge accounting is discontinued prospectively. The cumulative gain or loss
previously recognized in accumulated other comprehensive income and presented in
unrealized gains or losses on cash flow hedges in equity, remains there until
the forecasted hedged item affects profit or loss. If the forecasted hedged item
is no longer expected to occur, then the balance in accumulated other
comprehensive income is recognized immediately in profit or loss.
In other cases the amount recognized in accumulated other comprehensive income
is transferred to profit or loss in the same period in which the hedged item
affects profit or loss.
EMBEDDED DERIVATIVES
Embedded derivatives are separated from the host contract and accounted for
separately if the economic characteristics and risks of the host contract and
the embedded derivative are not closely related. A separate instrument with the
same terms as the embedded derivative would meet the definition of a derivative,
and the combined instrument is not measured at fair value through profit or
loss. At November 30, 2011 and 2010, August 31, 2011 and September 1, 2010,
there were no significant embedded derivatives or non-financial derivatives that
require separate fair value recognition on the consolidated statements of
financial position.
IMPAIRMENT OF FINANCIAL ASSETS
Trade and other receivables ("receivables") are assessed at each reporting date
to determine whether there is objective evidence that they are impaired. A
financial asset is impaired if objective evidence indicates that a loss event
has occurred after the initial recognition of the asset, and that the loss event
had a negative effect on the estimated future cash flows of that asset that can
be estimated reliably.
Objective evidence that receivables are impaired can include default or
delinquency by a debtor or indications that a debtor will enter bankruptcy.
The Corporation considers evidence of impairment for receivables at both a
specific asset and aggregate basis. All individually significant receivables are
assessed for specific impairment. Those found not to be specifically impaired
are then collectively assessed for any impairment that has been incurred but not
yet identified. Receivables that are not individually significant are assessed
on an aggregate basis for impairment by grouping together receivables with
similar risk characteristics.
An impairment loss in respect of receivables is calculated as the difference
between its carrying amount and the present value of the estimated future cash
flows. Losses are recognized in profit or loss and reflected in an allowance
account presented in reduction of receivables. Interest on the impaired asset
continues to be recognized through the unwinding of the discount. When a
subsequent event causes the amount of impairment loss to decrease, the decrease
in impairment loss is reversed through profit or loss.
O. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and highly liquid investments that have
an original maturity of three months or less.
P. EARNINGS PER SHARE
The Corporation presents basic and diluted earnings per share data for its
multiple and subordinate voting shares. Basic earnings per share is calculated
by dividing the profit or loss attributable to owners of the Corporation by the
weighted average number of multiple and subordinate voting shares outstanding
during the period, adjusted for subordinate voting shares held in trust under
the ISU Plan. Diluted earnings per share is determined by adjusting the weighted
average number of multiple and subordinate voting shares outstanding for the
effects of all dilutive potential subordinate voting shares, which comprise
stock options and ISUs granted to employees.
Q. SEGMENT REPORTING
An operating segment is a component of the Corporation that engages in business
activities from which it may earn revenue and incur expenses, including revenue
and expenses that relate to transaction with any of the Corporation's other
components. All operating segments' operating results are reviewed regularly by
the Corporation's Chief Operating Decision Maker ("CODM") to make decision about
resources to be allocated to the segment and to assess its performance, and for
which discrete financial information is available. Segment results that are
directly reported to the CODM include items directly attributable to a segment
as well as those that can be allocated on a reasonable basis.
R. ACCOUNTING JUDGEMENT AND USE OF ESTIMATES
The preparation of condensed interim consolidated financial statements in
accordance with IFRS requires management to make judgments, estimates and
assumptions that affect the application of accounting policies and the reported
amounts of assets and liabilities, revenue and expenses.
Significant areas requiring the use of management judgements and estimates
relate to the following items:
-- Allowance for doubtful accounts is established based on specific credit
risk of the Corporation's customers by examining such factors as the
number of overdue days of the customer's balance outstanding as well as
the customer's collection history;
-- Fair value of assets acquired and liabilities assumed in a business
combination is estimated based on information available at date of
acquisition and involves considerable judgement in determining the fair
values assigned to the property, plant and equipment and intangible
assets acquired and liabilities assumed on acquisition. Among other
things, the determination of these fair values involves the use of
discounted cash flow analyses, estimated future margins and estimated
future customer counts;
-- Measurement of property, plant and equipment and intangible assets with
finite useful lives requires estimates for determining the asset's
expected useful lives and residual values. Management judgement is
required to determine the components and the depreciation method used;
-- Management judgement is used to determine the timing of expected cash
outflows related to decommissioning provisions;
-- The fair value of derivative financial instruments is estimated using
valuation techniques based on several inputs such as interest rates and
volatilities and foreign exchange rates;
-- The defined benefit pension plans liability is determined using
actuarial calculations that are based on several assumptions. The
actuarial valuation uses the Corporation's assumptions for the discount
rate, expected long-term rate of return on plan assets, rate of
compensation increase and expected average remaining years of service of
employees;
-- The impairment of non-financial assets requires the use of management
judgement to identify the existence of indicators of impairment and the
determination of CGUs. Furthermore, when determining the recoverable
amount of a CGU, the Corporation uses significant estimates such as the
estimation of future cash flows and discount rates applicable; and
-- Deferred tax assets and liabilities require estimates about the nature
and timing of future permanent and temporary differences, the expected
timing of reversals of those temporary differences and the future tax
rates that will apply to those differences. Judgment is also required in
determining the tax basis of indefinite life intangible assets and the
resulting tax rate used to measure deferred taxes.
Such judgments and estimates are based on the facts and information available to
the management of the Corporation. Changes in facts and circumstances may
require the revision of previous estimates, and actual results could differ from
these estimates.
3. NEW ACCOUNTING STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE
A number of new standards, interpretations and amendments to existing standards
were issued by the International Accounting Standard Board ("IASB") that are
mandatory but not yet effective for the period ended November 30, 2011 or year
ended August 31, 2012, and have not been applied in preparing these condensed
interim consolidated financial statements. The following standards may have a
material impact on the consolidated financial statements of the Corporation:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Effective for annual
periods
starting on or after
----------------------------------------------------------------------------
IFRS 9 Financial
Instruments January 1, 2015 Early adoption permitted
IFRS 10 Consolidated
Financial
Statements January 1, 2013 Early adoption permitted
IFRS 12 Disclosure
of Interests in
Other Entities January 1, 2013 Early adoption permitted
IFRS 13 Fair Value
Measurement January 1, 2013 Early adoption permitted
Amendments to IAS 1
Presentation of
Financial
Statements January 1, 2013 Early adoption permitted
Amendment to IAS 19
Employee Benefits January 1, 2013 Early adoption permitted
----------------------------------------------------------------------------
----------------------------------------------------------------------------
IFRS 9 replaces the guidance in IAS 39 Financial Instruments: Recognition and
Measurement on the classification and measurement of financial assets and
financial liabilities. The replacement of IAS 39 is a three-phase project with
the objective of improving and simplifying the reporting for financial
instruments. This is the first phase of that project.
IFRS 10 replaces the consolidation requirements in IAS 27 Consolidated and
Separate Financial Statements and SIC-12 Consolidation - Special Purpose
Entities. It provides a single model to be applied in the control analysis for
all investees.
IFRS 12 establishes disclosure requirements for entities that have interests in
subsidiaries, joint arrangements, associates and/or unconsolidated structures
entities.
IFRS 13 replaces the fair value measurement guidance contained in individual
IFRS with a single source of fair value measurement guidance. The standard
clarifies the definition of fair value, establishes a framework for measuring
fair value and sets out disclosure requirements for fair value measurements.
The amendments to IAS 1 require that an entity present separately the items of
other comprehensive income ("OCI") that may be reclassified to profit or loss in
the future from those that would never be reclassified to profit or loss.
The amendments to IAS 19 requires the recognition of actuarial gains and losses
immediately in other comprehensive income, full recognition of past service
costs immediately in profit or loss, recognition of expected return on plan
assets in profit or loss to be calculated based on the rate used to discount the
defined benefit obligation and additional disclosures explaining the
characteristics of the Corporation's defined benefit pension plans.
The Corporation is in the process of determining the extent of the impact of
these standards on its consolidated financial statements.
4. OPERATING SEGMENTS
The Corporation's activities are divided into two operating segments: Cable and
other. The Cable segment is comprised of Cable Television, HSI, Telephony,
managed information technology and infrastructure and other telecommunications
services, and the other segment is comprised of radio, head office activities as
well as eliminations. The Cable segment's activities are carried out in Canada
and in Europe.
The principal financial information per operating segment is presented in the
tables below:
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----------------------------------------------------------------------------
Cable Other Consolidated
----------------------------------------------------------------------------
Three months
ended November
30, 2011 2010 2011 2010 2011 2010
$ $ $ $ $ $
----------------------------------------------------------------------------
Revenue 356,939 330,467 30,599 11,247 387,538 341,714
Salaries,
employee
benefits and
outsourced
services 59,374 51,675 18,476 6,637 77,850 58,312
Other external
purchases 153,852 142,641 10,827 3,494 164,679 146,135
Management fees-
COGECO Inc. 7,142 6,644 (7,142) (6,644) - -
Depreciation and
amortization 66,112 61,831 795 149 66,907 61,980
Operating income 70,459 67,676 7,643 7,611 78,102 75,287
Financial
expense 16,718 16,657 949 205 17,667 16,862
Income taxes 10,775 16,429 1,737 2,188 12,512 18,617
Profit for the
period 42,966 34,590 4,957 5,218 47,923 39,808
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Total assets(1) 2,671,900 2,712,679 168,409 158,969 2,840,309 2,871,648
Property, plant
and
equipment(1) 1,268,721 1,254,217 18,360 18,034 1,287,081 1,272,251
Intangible
assets(1) 1,044,551 1,045,601 79,918 79,918 1,124,469 1,125,519
Goodwill(1) 208,993 208,796 17,580 17,006 226,573 225,802
Acquisition of
property, plant
and equipment 76,773 63,252 1,121 98 77,894 63,350
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----------------------------------------------------------------------------
(1) At November 30, 2011 and August 31, 2011.
The principal following tables set out certain geographic market information
based on clients' locations:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended November 30,
2011 2010
$ $
----------------------------------------------------------------------------
Revenue
Canada 346,023 298,451
Europe 41,515 43,263
----------------------------------------------------------------------------
387,538 341,714
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
November 30,
2011 August 31, 2011
$ $
----------------------------------------------------------------------------
Property, plant and equipment
Canada 1,251,243 1,237,657
Europe 35,838 34,594
----------------------------------------------------------------------------
1,287,081 1,272,251
----------------------------------------------------------------------------
Intangible assets
Canada 1,124,469 1,125,519
Europe - -
----------------------------------------------------------------------------
1,124,469 1,125,519
----------------------------------------------------------------------------
Goodwill
Canada 226,573 225,802
Europe - -
----------------------------------------------------------------------------
226,573 225,802
----------------------------------------------------------------------------
----------------------------------------------------------------------------
5. DEPRECIATION AND AMORTIZATION
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended November 30,
2011 2010
$ $
----------------------------------------------------------------------------
Property, plant and equipment 61,913 58,101
Intangible assets 4,994 3,879
----------------------------------------------------------------------------
66,907 61,980
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6. FINANCIAL EXPENSE
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended November 30,
2011 2010
$ $
----------------------------------------------------------------------------
Interest on long-term debt 14,894 15,892
Net foreign exchange losses (gains) 1,458 (332)
Amortization of deferred transaction costs 475 489
Capitalized borrowing costs (372) (43)
Other 1,212 856
----------------------------------------------------------------------------
17,667 16,862
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7. INCOME TAXES
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended November 30,
2011 2010
$ $
----------------------------------------------------------------------------
Current 21,491 80,143
Deferred (8,979) (61,526)
----------------------------------------------------------------------------
12,512 18,617
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table provides the reconciliation between income tax expense at
the Canadian statutory federal and provincial income tax rates and the
consolidated income tax expense:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended November 30,
2011 2010
$ $
----------------------------------------------------------------------------
Profit before income taxes 60,435 58,425
Combined income tax rate 27.03% 28.91%
Income tax expense at combined income tax
rate 16,336 16,891
Adjustment for losses or profit subject to
lower or higher tax rates 258 (953)
Decrease in income taxes from changes in tax
legislation on partnership income (3,450) -
Income taxes arising from non-deductible
expenses 56 170
Effect of foreign income tax rate
differences - 2,461
Other (688) 48
----------------------------------------------------------------------------
Income tax expense at effective income tax
rate 12,512 18,617
----------------------------------------------------------------------------
----------------------------------------------------------------------------
8. EARNINGS PER SHARE
The following table provides the reconciliation between basic and diluted
earnings per share:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended November 30,
2011 2010
$ $
----------------------------------------------------------------------------
Profit for the period attributable to owners 18,770 16,391
----------------------------------------------------------------------------
Weighted average number of multiple voting
and subordinate voting shares outstanding 16,737,638 16,728,184
Effect of dilutive stock options - 10,970
Effect of dilutive incentive share units 102,704 74,014
----------------------------------------------------------------------------
Weighted average number of diluted multiple
voting and subordinate voting shares
outstanding 16,840,342 16,813,168
----------------------------------------------------------------------------
Earnings per share
Basic 1.12 0.98
Diluted 1.11 0.97
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9. LONG-TERM DEBT
----------------------------------------------------------------------------
----------------------------------------------------------------------------
November
Interest 30, August 31,
Maturity rate 2011 2011
% $ $
----------------------------------------------------------------------------
Parent Corporation
Term Revolving Facility
Revolving loans February 2016(1) 3.30(2) 30,963 69,849
Unsecured Notes(3) November 2021 6.50 34,641 -
Finance lease November 2013 9.29 47 52
Subsidiaries
Term Revolving Facility
Revolving loans November 2016(4) 3.50(2) 130,000 110,000
Senior Secured Notes
Series A -
US$190,000,000 October 2015 7.00(5) 192,876 185,049
Series B October 2018 7.60 54,655 54,646
Senior Secured Debentures
Series 1 June 2014 5.95 298,186 298,016
Senior Secured Debentures
Series 2 November 2020 5.15 198,435 198,400
Senior Unsecured Debenture March 2018 5.94 99,833 99,827
6.73 -
Finance leases October 2013 9.93 2,333 2,939
Other October 2011 - - 3
----------------------------------------------------------------------------
1,041,969 1,018,782
Less current portion 1,790 2,119
----------------------------------------------------------------------------
1,040,179 1,016,663
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) On November 30, 2011, the Corporation renewed its credit agreement for
a $100 million credit facility in the form of a four-year Term
Revolving Facility. The renewed Term Revolving Facility will mature
on February 1, 2016, but may be extended by additional one-year
periods on an annual basis, subject to lenders' approval. The Term
Revolving Facility is indirectly secured by a first priority fixed
and floating charge on substantially all present and future real and
personal property and undertaking of every nature and kind of the
Corporation and certain of its subsidiaries, excluding the capital
stock and assets of the Corporation's subsidiary, Cogeco Cable Inc.,
and guaranteed by its subsidiaries, excluding Cogeco Cable Inc.
(2) Interest rate on debt at November 30, 2011, including applicable
margin.
(3) On November 7, 2011, the Corporation completed, pursuant to a private
placement, the issue of 6.50 % Unsecured Notes for a total of $35
million maturing November 7, 2021. Interest on these Notes is payable
semi-annually in arrears on November 7 and May 7 of each year
commencing May 7, 2012. Net proceeds of approximately $35 million
have been used to reduce COGECO Inc.'s bank indebtedness.
(4) On November 22, 2011, the Corporation's subsidiary, Cogeco Cable Inc.,
renewed its credit agreement for a $750 million credit facility, with
an option to increase to a total amount of up to $1 billion, subject
to lenders' participation, in the form of a five year Term Revolving
Facility. The renewed Term Revolving Facility was arranged by a group
of financial institutions led by Canadian Imperial Bank of Commerce
and Bank of Montreal. The renewed Term Revolving Facility will mature
on November 22, 2016, but may be extended by additional one-year
periods on an annual basis, subject to lenders' approval. The Term
Revolving Facility is indirectly secured by a first priority fixed
and floating charge on substantially all present and future real and
personal property and undertaking of every nature and kind of Cogeco
Cable Inc. and certain of its subsidiaries, and provides for certain
permitted encumbrances, including purchased money obligations,
existing funded obligations and charges granted by any subsidiary
prior to the date when it becomes a subsidiary, subject to a maximum
amount.
(5) Cross-currency swap agreements have resulted in an effective interest
rate of 7.24% on the Canadian dollar equivalent of the US denominated
debt.
10. SHARE CAPITAL
Authorized
Unlimited number of:
Preferred shares of first and second rank, issuable in series and non-voting,
except when specified in the Articles of Incorporation of the Corporation or in
the Law.
Multiple voting shares, 20 votes per share.
Subordinate voting shares, 1 vote per share.
Issued
----------------------------------------------------------------------------
----------------------------------------------------------------------------
November 30,
2011 August 31, 2011
$ $
----------------------------------------------------------------------------
1,842,860 multiple voting shares 12 12
14,989,338 subordinate voting shares 121,976 121,976
----------------------------------------------------------------------------
121,988 121,988
112,921 subordinate voting shares held in
trust under the Incentive Share Unit Plan
(95,733 at August 31, 2011) (4,055) (2,670)
----------------------------------------------------------------------------
117,933 119,318
----------------------------------------------------------------------------
----------------------------------------------------------------------------
During the first three months, subordinate voting shares held in trust under the
ISU Plan transactions were as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Number of
shares Amount
$
----------------------------------------------------------------------------
Balance at August 31, 2011 95,733 2,670
Subordinate voting shares acquired 34,890 1,710
Subordinate voting shares distributed to
employees (17,702) (325)
----------------------------------------------------------------------------
Balance at November 30, 2011 112,921 4,055
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Dividends
For the three-month period ended November 30, 2011, a dividend of $0.18 per
share was paid to the holders of multiple and subordinate voting shares,
totalling $3 million, compared to a dividend of $0.12 per share, or $2 million
the year before.
Share-based payment plans
The Corporation and its subsidiary, Cogeco Cable Inc., offer for certain
executives Stock Option Plans, which are described in the Corporation's annual
consolidated financial statements. For the three-month periods ended November
30, 2011 and 2010, no stock options were granted to employees by COGECO Inc.
Under the Stock Option Plan of the Corporation, no options were outstanding at
November 30, 2011 and August 31, 2011. However, for the three-month period ended
November 30, 2011, the Corporation's subsidiary, Cogeco Cable Inc., granted
87,400 stock options (66,700 in 2010) with an exercise price of $48.02 ($39.00
in 2010) of which 46,400 stock options (35,800 in 2010) were granted to the
Corporation's employees. These options vest equally over a period of five years
beginning one year after the day such options are granted and are exercisable
over ten years. During the three-month period ended November 30, 2011, Cogeco
Cable Inc. charged COGECO Inc. an amount of $74,000 ($49,000 in 2010) with
respect to the options granted to COGECO Inc.'s employees. As a result, a
compensation expense of $162,000 ($167,000 in 2010) was recorded for the
three-month period ended November 30, 2011.
The weighted average fair value of stock options granted by Cogeco Cable Inc.
for the three-month period ended November 30, 2011 was $11.34 ($10.62 in 2010)
per option. The weighted average fair value of each option granted was estimated
at the grant date for purposes of determining stock-based compensation expense
using the Black-Sholes option pricing model based on the following assumptions:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2011 2010
% %
----------------------------------------------------------------------------
Expected dividend yield 1.65 1.44
Expected volatility 26.84 29
Risk-free interest rate 1.76 2.25
Expected life in years 6.1 6.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Under the Stock Option Plan, the following options were granted by Cogeco Cable
Inc. and are outstanding at November 30, 2011:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average
Options exercise price
----------------------------------------------------------------------------
Outstanding at August 31, 2011 564,377 32.30
Granted 87,400 48.02
Exercised(1) (43,852) 29.52
----------------------------------------------------------------------------
Outstanding at November 30, 2011 607,925 34.76
----------------------------------------------------------------------------
Exercisable at November 30, 2011 406,191 31.61
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The weighted average share price for options exercised during the
period was $49.48.
The Corporation and its subsidiary, Cogeco Cable Inc., also offers senior
executive and designated employee Incentive Share Unit Plans ("ISU Plans"),
which are described in the Corporation's annual consolidated financial
statements. For the three-month period ended November 30, 2011, 34,890 (36,085
in 2010) and 57,943 (58,088 in 2010) ISUs were granted by the Corporation and
its subsidiary, respectively. The Corporation and its subsidiary establish the
value of the compensation related to the ISUs granted based on the fair value of
the subordinate voting shares at the date of grant and a compensation expense is
recognized over the vesting period, which is three years less one day. Two
trusts were created for the purpose of purchasing these shares on the stock
market in order to protect against stock price fluctuation. The Corporation and
its subsidiary instructed the trustees to purchase 34,890 (36,085 in 2010) and
57,821 (57,203 in 2010) subordinate voting shares on the stock market. These
shares were purchased for cash consideration aggregating $1,710,000 ($1,282,000
in 2010) and $2,855,000 ($2,258,000 in 2010) and are held in trusts for the
participants until they are fully vested. The trusts, considered as special
purpose entities, are consolidated in the Corporation's financial statements
with the value of the acquired shares presented as subordinate voting shares
held in trust under the ISU Plans in reduction of share capital or
non-controlling interest. A compensation expense of $667,000 ($403,000 in 2010)
was recorded for the three-month period ended November 30, 2011 related to these
plans. During the three-month period ended November 30, 2011, Cogeco Cable Inc.
charged COGECO Inc. an amount of $76,000 ($39,000 in 2010) with respect to the
ISUs granted to COGECO Inc.'s employees.
Under the ISU Plan of the Corporation, the following ISUs were granted and are
outstanding at November 30, 2011:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Outstanding at August 31, 2011 95,733
Granted 34,890
Distributed (17,702)
Forfeited (1,102)
----------------------------------------------------------------------------
Outstanding at November 30, 2011 111,819
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Under the ISU Plan of Cogeco Cable Inc, the following ISUs were granted and are
outstanding at November 30, 2011:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Outstanding at August 31, 2011 105,064
Granted 57,943
----------------------------------------------------------------------------
Outstanding at November 30, 2011 163,007
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Corporation and its subsidiary, Cogeco Cable Inc., also offer Deferred Share
Unit Plans ("DSU Plans") for members of the Board of directors which are
described in the Corporation's annual consolidated financial statements. For the
three-month periods ended November 30, 2011 and 2010, the Corporation did not
issue any deferred share units ("DSUs") to the participants in connection with
the DSU Plans. A compensation expense of $185,000 ($109,000 in 2010) was
recorded for the three-month period ended November 30, 2011 for the liability
related to these plans.
Under the DSU Plan of the Corporation, the following DSUs were issued and are
outstanding at November 30, 2011:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Outstanding at August 31, 2011 22,415
Dividend equivalents 80
----------------------------------------------------------------------------
Outstanding at November 30, 2011 22,495
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Under the DSU Plan of Cogeco Cable Inc., the following DSUs were issued and are
outstanding at November 30, 2011:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Outstanding at August 31, 2011 15,608
Dividend equivalents 80
----------------------------------------------------------------------------
Outstanding at November 30, 2011 15,688
----------------------------------------------------------------------------
----------------------------------------------------------------------------
11. ACCUMULATED OTHER COMPREHENSIVE INCOME
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Defined
Foreign benefit
Cash flow currency pension
hedges translation plans Total
$ $ $ $
----------------------------------------------------------------------------
Balance at September 1, 2010 941 5,567 - 6,508
Other comprehensive income
(loss) 581 (619) 1,251 1,213
----------------------------------------------------------------------------
Balance at November 30, 2010 1,522 4,948 1,251 7,721
Other comprehensive income
(loss) (874) 1,694 (5,533) (4,713)
----------------------------------------------------------------------------
Balance at August 31, 2011 648 6,642 (4,282) 3,008
Other comprehensive loss (313) (88) (1,335) (1,736)
----------------------------------------------------------------------------
Balance at November 30, 2011 335 6,554 (5,617) 1,272
----------------------------------------------------------------------------
----------------------------------------------------------------------------
12. STATEMENTS OF CASH FLOWS
a) Changes in non-cash operating activities
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended November 30,
2011 2010
$ $
----------------------------------------------------------------------------
Trade and other receivables (11,066) (5,112)
Prepaid expenses and other (829) 3,293
Trade and other payables (67,725) (60,356)
Provisions 4,604 (649)
Deferred and prepaid revenue and other
liabilities (325) 62
----------------------------------------------------------------------------
(75,341) (62,762)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
b) Cash and cash equivalents
----------------------------------------------------------------------------
----------------------------------------------------------------------------
November 30,
2011 August 31, 2011
$ $
----------------------------------------------------------------------------
Cash 15,823 50,995
Cash equivalents(1) 4,112 4,221
----------------------------------------------------------------------------
19,935 55,216
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) At November 30, 2011, term deposit of EUR3,000,000, bearing interest
at 2%, maturing on December 27, 2011.
13. EMPLOYEE BENEFITS
The Corporation and its Canadian subsidiaries offer their employees contributory
defined benefit pension plans, defined contribution pension plans or collective
registered retirement savings plans, which are described in the Corporation's
annual consolidated financial statements. The total expense related to these
plans is as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended November 30,
2011 2010
$ $
----------------------------------------------------------------------------
Contributory defined benefit pension plans 2,073 915
Defined contribution pension plans and
collective registered retirement savings
plans 1,386 1,277
----------------------------------------------------------------------------
3,459 2,192
----------------------------------------------------------------------------
----------------------------------------------------------------------------
14. FINANCIAL INSTRUMENTS
a) Financial risk management
Management's objectives are to protect COGECO Inc. and its subsidiaries against
material economic exposures and variability of results, and against certain
financial risks including credit, liquidity, interest rate and foreign exchange
risk.
Credit risk
Credit risk represents the risk of financial loss for the Corporation if a
customer or counterparty to a financial asset fails to meet its contractual
obligations. The Corporation is exposed to credit risk arising from the
derivative financial instruments, cash and cash equivalents and trade accounts
receivable, the maximum exposure of which is represented by the carrying amounts
reported on the statement of financial position.
Credit risk from derivative financial instruments arises from the possibility
that counterparties to the cross-currency swaps may default on their obligations
in instances where these agreements have positive fair values for the
Corporation. The Corporation reduces this risk by completing transactions with
financial institutions that carry a credit rating equal to or superior to its
own credit rating. The Corporation assesses the creditworthiness of the
counterparties in order to minimize the risk of counterparties default under the
agreements. At November 30, 2011, management believes that the credit risk
relating to its derivative financial instruments is minimal, since the lowest
credit rating of the counterparties to the agreements is "A".
Cash and cash equivalents consist mainly of highly liquid investments, such as
term deposits. The Corporation has deposited the cash and cash equivalents with
reputable financial institutions, for which management believes the risk of loss
to be remote.
The Corporation is also exposed to credit risk in relation to its trade accounts
receivable. In the current global economic environment, particularly in
Portugal, the Corporation's credit exposure is higher than usual but it is
difficult to predict the impact this could have on the Corporation's account
receivable balances. To mitigate such risk, the Corporation continuously
monitors the financial condition of its customers and reviews the credit history
or worthiness of each new large customer. At November 30, 2011 and August 31,
2011, no customer balance represented a significant portion of the Corporation's
consolidated trade accounts receivable. The Corporation establishes an allowance
for doubtful accounts based on specific credit risk of its customers by
examining such factors as the number of overdue days of the customer's balance
outstanding as well as the customer's collection history. The Corporation
believes that its allowance for doubtful accounts is sufficient to cover the
related credit risk. The Corporation has credit policies in place and has
established various credit controls, including credit checks, deposits on
accounts and advance billing, and has also established procedures to suspend the
availability of services when customers have fully utilized approved credit
limits or have violated existing payment terms. Since the Corporation has a
large and diversified clientele dispersed throughout its market areas in Canada
and in Portugal, there is no significant concentration of credit risk. The
following table provides further details on the Corporation's accounts
receivable balances:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
November 30,
2011 August 31, 2011
$ $
---------------------------------------------------------------------------
Trade accounts receivable 109,772 98,950
Allowance for doubtful accounts (9,472) (8,725)
---------------------------------------------------------------------------
100,300 90,225
Other accounts receivable 10,878 10,072
---------------------------------------------------------------------------
111,178 100,297
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table provides further details on trade accounts receivable, net
of allowance for doubtful accounts. Trade accounts receivable past due is
defined as amount outstanding beyond normal credit terms and conditions for the
respective customers. A large portion of the Corporation's customers are billed
in advance and are required to pay before their services are rendered. The
Corporation considers amount outstanding at the due date as trade accounts
receivable past due.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
November 30,
2011 August 31, 2011
$ $
----------------------------------------------------------------------------
Net trade accounts receivable not past due 63,042 57,790
Net trade accounts receivable past due 37,258 32,435
----------------------------------------------------------------------------
100,300 90,225
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liquidity risk
Liquidity risk is the risk that the Corporation will not be able to meet its
financial obligations as they become due. The Corporation manages liquidity risk
through the management of its capital structure and access to different capital
markets. It also manages liquidity risk by continuously monitoring actual and
projected cash flows to ensure sufficient liquidity to meet its obligations when
due. At November 30, 2011, the available amount of the Corporation's Term
Revolving Facilities was $659.7 million. Management believes that the committed
Term Revolving Facilities will, until their maturities in February and November
2016, provide sufficient liquidity to manage its long-term debt maturities and
support working capital requirements.
The following table summarizes the contractual maturities of the financial
liabilities and related capital amounts:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contractual cash flows
Carrying
amount 2012 2013 2014
$ $ $ $
----------------------------------------------------------------------------
Bank indebtedness 31,688 31,688 - -
Trade and other payables(1) 183,802 183,802 - -
Provisions 20,162 20,162 - -
Promissory note payable 5,000 5,000 - -
Long-term debt(2) 1,039,589 - - 300,000
Balance due on a business
acquisition 11,400 - 11,400 -
Other liabilities 5,434 516 1,315 1,314
Derivatives financial instruments 7,364 - - -
Finance leases(3) 2,380 1,620 890 13
----------------------------------------------------------------------------
1,306,819 242,788 13,605 301,327
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Contractual cash flows
2015 2016 Thereafter Total
$ $ $ $
----------------------------------------------------------------------------
Bank indebtedness - - - 31,688
Trade and other payables(1) - - - 183,802
Provisions - - - 20,162
Promissory note payable - - - 5,000
Long-term debt(2) - 224,857 520,000 1,044,857
Balance due on a business
acquisition - - - 11,400
Other liabilities 1,305 1,304 2,608 8,362
Derivatives financial instruments - 8,018 - 8,018
Finance leases(3) - - - 2,523
----------------------------------------------------------------------------
1,305 234,179 522,608 1,315,812
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Excluding accrued interest.
(2) Principal excluding finance leases.
(3) Including interest.
The following table is a summary of interest payable on long-term debt
(excluding interest on finance leases) that is due for each of the next five
years and thereafter, based on the principal amount and interest rate prevailing
on the outstanding debt at November 30, 2011 and their respective maturities:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2012 2013 2014 2015
$ $ $ $
----------------------------------------------------------------------------
Interest payments on long-
term debt 40,160 59,684 59,684 41,834
Interest payments on
derivative financial
instruments 7,307 14,614 14,614 14,614
Interest receipts on
derivative financial
instruments (6,785) (13,570) (13,570) (13,570)
----------------------------------------------------------------------------
40,682 60,728 60,728 42,878
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2016 Thereafter Total
$ $ $
----------------------------------------------------------------------------
Interest payments on long-
term debt 34,452 82,323 318,137
Interest payments on
derivative financial
instruments 7,307 - 58,456
Interest receipts on
derivative financial
instruments (6,785) - (54,280)
----------------------------------------------------------------------------
34,974 82,323 322,313
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest rate risk
The Corporation is exposed to interest rate risks for both fixed interest rate
and floating interest rate instruments. Fluctuations in interest rates will have
an effect on the valuation and collection or repayment of these instruments. At
November 30, 2011, all of the Corporation's long-term debt was at fixed rate,
except for the Corporation's Term Revolving Facilities. The sensitivity of the
Corporation's annual financial expense to a variation of 1% in the interest rate
applicable to the Term Revolving Facility is approximately $1.6 million based on
the current debt at November 30, 2011.
Foreign exchange risk
The Corporation is exposed to foreign exchange risk related to its long-term
debt denominated in US dollars. In order to mitigate this risk, the Corporation
has established guidelines whereby currency swap agreements can be used to fix
the exchange rates applicable to its US dollar denominated long-term debt. All
such agreements are exclusively used for hedging purposes. Accordingly, on
October 2, 2008, the Corporation's subsidiary, Cogeco Cable Inc., entered into
cross-currency swap agreements to set the liability for interest and principal
payments on its US$190 million Senior Secured Notes Series A issued on October
1, 2008. These agreements have the effect of converting the US interest coupon
rate of 7.00% per annum to an average Canadian dollar interest rate of 7.24% per
annum. The exchange rate applicable to the principal portion of the debt has
been fixed at $1.0625. The Corporation elected to apply cash flow hedge
accounting on these derivative financial instruments.
The Corporation is also exposed to foreign exchange risk on cash and cash
equivalents, bank indebtedness and trade and other payables denominated in US
dollars or Euros. The Corporation's exposure to foreign currency risk is as
follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
November 30, 2011 August 31, 2011
--------------------------------------------------- ------------------------
US Euro US Euro
$ $ $ $
--------------------------------------------------- ------------------------
Cash and cash equivalents 821 514 8,649 497
Trade and other payables 16,432 - 30,309 -
--------------------------------------------------- ------------------------
17,253 514 38,958 497
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Due to their short-term nature, the risk arising from fluctuations in foreign
exchange rates is usually not significant. The impact of a 10% fluctuation in
the foreign exchange rates (US dollar and Euro) would change financial expense
by approximately $1.5 million.
Furthermore, the Corporation's net investment in a foreign operation is exposed
to market risk attributable to fluctuations in foreign currency exchange rates,
primarily changes in the values of the Canadian dollar versus the Euro. At
November 30, 2011, the net investment amounted to EUR8.6 million (EUR6.1 million
at August 31, 2011). The exchange rate used to convert the Euro currency into
Canadian dollars for the statement of financial position accounts at November
30, 2011 was $1.3706 per Euro compared to $1.4071 per Euro at August 31, 2011.
The impact of a 10% fluctuation in the exchange rate of the Euro into Canadian
dollars would change other comprehensive income by approximately $1.2 million.
b) Fair value of financial instruments
Fair value is the amount at which willing parties would accept to exchange a
financial instrument based on the current market for instruments with the same
risk, principal and remaining maturity. Fair values are estimated at a specific
point in time, by discounting expected cash flows at rates for debts of the same
remaining maturities and conditions. These estimates are subjective in nature
and involve uncertainties and matters of significant judgement, and therefore,
cannot be determined with precision. In addition, income taxes and other
expenses that would be incurred on disposition of these financial instruments
are not reflected in the fair values. As a result, the fair values are not
necessarily the net amounts that would be realized if these instruments were
settled. The Corporation has determined the fair value of its financial
instruments as follows:
a. The carrying amount of cash and cash equivalents, trade and other
receivables, trades and other payables, provisions, promissory note
payable and balance due on a business acquisition approximates fair
value because of the short-term nature of these instruments.
b. Interest rates under the terms of the Corporation's Term Revolving
Facilities are based on bankers' acceptance, LIBOR, EURIBOR, bank prime
rate loan or US base rate loan plus applicable margin. Therefore, the
carrying value approximates fair value for the Term Revolving
Facilities, since the Term Revolving Facilities have conditions similar
to those currently available to the Corporation.
c. The fair value of the Senior Secured Debentures Series 1 and 2, Senior
Secured Notes Series A and B, Senior Unsecured Debenture and Unsecured
Notes are based upon current trading values for similar financial
instruments.
d. The fair values of finance leases are not significantly different from
their carrying amounts.
The carrying value of all the Corporation's financial instruments approximates
fair value, except as otherwise noted in the following table:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
November 30, 2011 August 31, 2011
Carrying Carrying
value Fair value value Fair value
$ $ $ $
----------------------------------------------------------------------------
Long-term debt 1,041,969 1,124,283 1,018,782 1,096,987
----------------------------------------------------------------------------
----------------------------------------------------------------------------
All financial instruments recognized at fair value on the consolidated statement
of financial position must be measured based on the three fair value hierarchy
levels, which are as follows:
-- Level 1: quoted prices (unadjusted) in active markets for identical
assets or liabilities;
-- Level 2: inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly (i.e., as prices)
or indirectly (i.e., derived from prices); and
-- Level 3: inputs for the asset or liability that are not based on
observable market data (unobservable inputs).
The Corporation considers that its derivative financial instruments are
classified as Level 2 under the fair value hierarchy. The fair value of
derivative financial instruments are estimated using valuation models that
reflect projected future cash flows over contractual terms of the derivative
financial instruments and observable market data, such as interest and currency
exchange rate curves.
c) Capital management
The Corporation's objectives in managing capital are to ensure sufficient
liquidity to support the capital requirements of its various businesses,
including growth opportunities. The Corporation manages its capital structure
and makes adjustments in light of general economic conditions, the risk
characteristics of the underlying assets and the Corporation's working capital
requirements. Management of the capital structure involves the issuance of new
debt, the repayment of existing debts using cash generated by operations and the
level of distribution to shareholders.
The capital structure of the Corporation is composed of shareholders' equity,
cash and cash equivalents, bank indebtedness, promissory note payable, long-term
debt, balance due on a business acquisition and assets or liabilities related to
derivative financial instruments.
The provisions of the Term Revolving Facilities provide for restrictions on the
operations and activities of the Corporation. Generally, the most significant
restrictions relate to permitted investments and dividends on multiple and
subordinate voting shares, as well as the maintenance of certain financial
ratios primarily linked to the operating income before depreciation and
amortization, financial expense and total indebtedness. At November 30, 2011 and
2010, August 31, 2011 and September 1, 2010, the Corporation was in compliance
with all of its debt covenants and was not subject to any other externally
imposed capital requirements.
The following table summarizes certain of the key ratios used to monitor and
manage the Corporation's capital structure:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
November 30,
2011 August 31, 2011
----------------------------------------------------------------------------
Net senior indebtedness(1) / operating
income before depreciation and
amortization(2) 1.7 1.5
Net indebtedness(3) / operating income
before depreciation and amortization(2) 1.9 1.7
Operating income before amortization(2) /
financial expense(2) 7.7 7.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Net senior indebtedness is defined as the total of bank indebtedness,
principal on long-term debt and obligations under derivative financial
instruments, less cash and cash equivalents and principal on Senior
Unsecured Debenture and Unsecured Notes.
(2) Calculation based on operating income before depreciation and
amortization and financial expense for the twelve-month periods ended
November 30, 2011 and August 31, 2011.
(3) Net indebtedness is defined as the total of bank indebtedness,
promissory note payable, principal on long-term debt, balance due on a
business acquisition and obligations under derivative financial
instruments, less cash and cash equivalents.
15. ASSETS HELD FOR SALE
Pursuant to the acquisition of 11 radio stations in the province of Quebec by
Cogeco Diffusion Acquisitions Inc. ("Cogeco Diffusion"), and the decision by the
Canadian Radio-Television and Telecommunications Commission ("CRTC") regarding
the Corporation's transfer application, the Corporation put for sale two radio
stations acquired in the transaction, CFEL-FM in the Quebec City market and
CJTS-FM in the Sherbrooke market. In addition to the two acquired radio stations
above, and also as part of the CRTC's decision, the Corporation put for sale
radio station CJEC-FM, which it owned prior to the acquisition, in the Quebec
City market. Radio stations for which divestiture has been required by the CRTC,
and the sale process, are managed by a trustee approved by the CRTC pursuant to
a voting trust agreement. Accordingly, the assets and liabilities of the three
radio stations put for sale have been classified as assets held for sale as of
February 1, 2011 in the Corporation's consolidated statement of financial
position (see note 16).
The estimated fair value of assets and liabilities related to the three radio
stations held for sale at November 30, 2011 and August 31, 2011, are as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
November 30,
2011 August 31, 2011
$ $
----------------------------------------------------------------------------
Trade and other receivables 1,676 1,360
Prepaid expenses 5 5
Property, plant and equipment 1,752 2,171
Broadcasting licences 3,267 3,267
Goodwill 448 448
----------------------------------------------------------------------------
Assets held for sale 7,148 7,251
----------------------------------------------------------------------------
Trade and other payables 1,171 1,456
Income tax liabilities 415 247
Deferred and prepaid revenue 68 44
Other liabilities 19 38
Deferred tax liabilities 480 480
----------------------------------------------------------------------------
Liabilities related to assets held for sale 2,153 2,265
----------------------------------------------------------------------------
Net assets held for sale 4,995 4,986
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Financial statements presentation:
Current assets held for sale 7,148 1,365
Non-current assets held for sale - 5,886
Current liabilities related to assets held
for sale (2,153) (1,747)
Non-current liabilities related to assets
held for sale (518)
----------------------------------------------------------------------------
Net assets held for sale 4,995 4,986
----------------------------------------------------------------------------
----------------------------------------------------------------------------
16. SUBSEQUENT EVENTS
Acquisition of Metromedia CMR Plus Inc.
On December 6, 2011, COGECO Inc. concluded an agreement to acquire Metromedia
CMR Plus Inc. ("Metromedia"), subject to customary closing adjustments and
conditions. Metromedia is a Quebec corporation that operates an advertising rep
house in the public transit sector. Metromedia represents over 100 public
transit markets notably in Montreal, in other Quebec regions as well as in major
cities and numerous markets in the rest of Canada. The transaction was completed
on December 26, 2011. The Corporation is currently in the process of determining
the preliminary purchase price allocation.
Divestiture of the three radio stations to comply with the common ownership policy
On February 1, 2011, a subsidiary of the Corporation, Cogeco Diffusion,
completed the acquisition of 11 radio stations in the province of Quebec, which
was originally announced on April 30, 2010 and then subject to the CRTC
approval. When the CRTC approved the acquisition, there was an order to divest
three radio stations in order to comply with the common ownership policy in the
Quebec City and Sherbrooke markets.
On November 30, 2011, Cogeco Diffusion concluded an agreement for the sale of
two of its four Quebec City FM radio stations, CJEC-FM and CFEL-FM, subject to
CRTC approval and customary closing adjustments and conditions. On December 6,
2011, Cogeco Diffusion closed its Sherbrooke radio station, CJTS-FM. On January
19, 2012, the CRTC approved the sale of CJEC-FM and CFEL-FM which should be
completed on January 30, 2012 and marked the end of the process established with
the CRTC for the divestiture of the three radio stations.
17. TRANSITION TO IFRS
As mentioned in note 1, these are the first condensed interim consolidated
financial statements prepared in accordance with IFRS.
The significant accounting policies set out in note 2 have been applied in
preparing the condensed interim consolidated financial statements for the three
months ended November 30, 2011, the comparative information presented in the
three months ended November 30, 2010 and in the preparation of the opening IFRS
statement of financial position as at September 1, 2010 (the Corporation's
transition date).
IFRS 1 elective exemptions and mandatory exceptions
IFRS 1 permits some exemption from full retrospective application of IFRS at the
transition date. The Corporation elected the following elective exemptions in
preparing its opening IFRS financial statements:
a) Business combinations
A first-time adopter may elect not to apply IFRS 3, Business combinations,
retrospectively to business acquisitions completed before the transition date.
The retrospective basis would require restatement of all business combinations
that occurred prior to the transition date. The Corporation has elected not to
retrospectively apply IFRS 3 to business combinations completed prior to its
transition date and such business combinations have not been restated. Any
assets or liabilities arising on business combinations completed before the
transition date have not been adjusted from the carrying value previously
determined under Canadian GAAP as a result of applying this exemption.
b) Employee benefits
The Corporation has elected to recognize all cumulative actuarial gains and
losses that existed at its transition date in opening retained earnings for all
of its employee defined benefit pension plans. The Corporation also elected to
prospectively disclose required defined benefit pension plans amounts under IAS
19 Employee Benefits as the amounts are determined for each accounting period
from the date of transition instead of the current annual period and previous
four annual periods.
c) Share-based payments
The Corporation has elected to apply the requirements of IFRS 2, Share-based
payments, only to equity instruments granted after November 7, 2002 and which
vested after the date of transition to IFRS.
d) Borrowing costs
The Corporation has elected to apply the requirements of IAS 23 Borrowing Costs
only to borrowing costs relating to assets for which the commencement date for
capitalisation was on or after the date of transition. Borrowing costs incurred
before the date of transition were expensed.
e) Financial assets and financial liabilities
At the date of transition, the Corporation has elected to reclassify cash and
cash equivalents from held-for-trading to loans and receivables.
The Corporation applied the following mandatory exceptions in preparing its
opening IFRS financial statements:
a) Hedge accounting
Hedge accounting can only be applied prospectively from the transition date to
transactions that satisfy the hedge accounting criteria in IAS 39 at that date.
Hedging relationships cannot be designated retrospectively and the supporting
documentation cannot be created retrospectively. As a result, only hedging
relationships that satisfied the hedge accounting criteria as of its transition
date are reflected as hedges in the Corporation's results under IFRS.
b) Estimates
Hindsight is not used to create or revise estimates. The estimates previously
made by the Corporation under Canadian GAAP were not revised for application of
IFRS except where necessary to reflect any difference in accounting policies.
The Corporation has adjusted amounts reported previously in financial statements
prepared in accordance with previous Canadian GAAP. An explanation of how
transition from previous Canadian GAAP to IFRS has affected the Corporation's
financial position and financial performance is set out in the following tables
and the notes that accompany the tables.
Reconciliation of statement of financial position at September 1, 2010:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
IFRS IFRS
Canadian adjust- reclass-
Notes GAAP ments ifications IFRS
Assets
Current
Cash and cash
equivalents 35,842 - - 35,842
Trade and
other
receivables 74,560 - - 74,560
Income taxes
receivable 45,400 - - 45,400
Prepaid
expenses and
other 14,189 - - 14,189
Deferred tax
assets 6,133 - (6,133) -
----------------------------------------------------------------------------
176,124 - (6,133) 169,991
Non-current
Investments 739 - (739) -
Property,
plant and
equipment 3 1,328,866 (5,705) - 1,323,161
Deferred
charges 27,960 - (27,960) -
Other assets - - 7,886 7,886
Intangible
assets 1,4 1,042,998 (16,867) 20,813 1,046,944
Goodwill 144,695 - - 144,695
Derivative
financial
instruments 5,085 - - 5,085
Deferred tax
assets 5 18,189 3,670 6,133 27,992
----------------------------------------------------------------------------
2,744,656 (18,902) - 2,725,754
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and
Shareholders'
equity
Liabilities
Current
Bank
indebtedness 2,328 - - 2,328
Trade and
other
payables 248,775 - (12,945) 235,830
Provisions - - 12,945 12,945
Income tax
liabilities 558 - - 558
Deferred and
prepaid
revenue 45,602 - - 45,602
Derivative
financial
instrument 1,189 - - 1,189
Current
portion of
long-term
debt 2,329 - - 2,329
Deferred tax
liabilities 78,267 - (78,267) -
----------------------------------------------------------------------------
379,048 - (78,267) 300,781
Non-current
Long-term debt 952,741 - - 952,741
Deferred and
prepaid
revenue and
other
liabilities 12,234 - - 12,234
Pension plan
liabilities
and accrued
employees
benefits 5 10,568 13,767 - 24,335
Deferred tax
liabilities 1,3,4,7 238,699 (2,167) 78,267 314,799
----------------------------------------------------------------------------
1,593,290 11,600 - 1,604,890
----------------------------------------------------------------------------
Shareholders'
equity
Equity
attributable to
owners
Share capital 119,527 - - 119,527
Contributed
surplus 2 3,005 447 - 3,452
Accumulated
other
comprehensive
income 5,934 574 - 6,508
Retained
earnings 1,2,3,4,5,7 253,169 (12,670) - 240,499
----------------------------------------------------------------------------
381,635 (11,649) - 369,986
Non-controlling
interest 1,2,3,4,5,7 769,731 (18,853) - 750,878
----------------------------------------------------------------------------
1,151,366 (30,502) - 1,120,864
----------------------------------------------------------------------------
2,744,656 (18,902) - 2,725,754
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Reconciliation of statement of financial position at November 30, 2010:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
IFRS IFRS
Canadian adjust- reclass-
Notes GAAP ments ifications IFRS
Assets
Current
Cash and cash
equivalents 197,653 - - 197,653
Trade and
other
receivables 79,534 - - 79,534
Income taxes
receivable 43,362 - - 43,362
Prepaid
expenses and
other 10,869 - - 10,869
Deferred tax
assets 4,799 - (4,799) -
----------------------------------------------------------------------------
336,217 - (4,799) 331,418
Non-current
Investments 739 - (739) -
Property,
plant and
equipment 3,6 1,329,837 (4,503) - 1,325,334
Deferred
charges 28,277 - (28,277) -
Other assets - - 7,651 7,651
Intangible
assets 1,4 1,041,805 (16,867) 21,365 1,046,303
Goodwill 144,297 - - 144,297
Deferred tax
assets 5 9,562 3,146 4,799 17,507
----------------------------------------------------------------------------
2,890,734 (18,224) - 2,872,510
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and
Shareholders'
equity
Liabilities
Current
Bank
indebtedness 740 - - 740
Trade and
other
payables 182,671 - (12,296) 170,375
Provisions - - 12,296 12,296
Income tax
liabilities 80,767 - - 80,767
Deferred and
prepaid
revenue 45,361 - - 45,361
Derivative
financial
instrument 674 - - 674
Current
portion of
long-term
debt 177,339 - - 177,339
Deferred tax
liabilities 15,257 - (15,257) -
----------------------------------------------------------------------------
502,809 - (15,257) 487,552
Non-current
Long-term debt 953,206 - - 953,206
Derivative
financial
instruments 1,263 - - 1,263
Deferred and
prepaid
revenue and
other
liabilities 12,532 - - 12,532
Pension plan
liabilities
and accrued
employees
benefits 5 11,417 11,818 - 23,235
Deferred tax
liabilities 1,3,4,6,7 229,787 (1,857) 15,257 243,187
----------------------------------------------------------------------------
1,711,014 9,961 - 1,720,975
----------------------------------------------------------------------------
Shareholders'
equity
Equity
attributable to
owners
Share capital 118,703 - - 118,703
Contributed
surplus 2 2,784 454 - 3,238
Accumulated
other
comprehensive
income 5,896 1,825 - 7,721
Retained
earnings 1,2,3,4,5,6,7 267,182 (12,249) - 254,933
----------------------------------------------------------------------------
394,565 (9,970) - 384,595
Non-controlling
interest 1,2,3,4,5,6,7 785,155 (18,215) - 766,940
----------------------------------------------------------------------------
1,179,720 (28,185) - 1,151,535
----------------------------------------------------------------------------
2,890,734 (18,224) - 2,872,510
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Reconciliation of statement of financial position at August 31, 2011:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
IFRS IFRS
Canadian adjust- reclass-
Notes GAAP ments ifications IFRS
Assets
Current
Cash and cash
equivalents 55,216 - - 55,216
Trade and
other
receivables 100,297 - - 100,297
Income taxes
receivable 38,480 - - 38,480
Prepaid
expenses and
other 14,020 - - 14,020
Deferred tax
assets 5,350 - (5,350) -
Assets held
for sale 1,365 - - 1,365
----------------------------------------------------------------------------
214,728 - (5,350) 209,378
Non-current
Investments 539 - (539) -
Property,
plant and
equipment 3,6 1,272,610 (359) - 1,272,251
Deferred
charges 26,847 - (26,847) -
Other assets - - 6,422 6,422
Intangible
assets 1,4 1,121,422 (16,867) 20,964 1,125,519
Goodwill 1 239,664 (13,862) - 225,802
Deferred tax
assets 5 15,558 5,482 5,350 26,390
Assets held
for sale 5,886 - - 5,886
----------------------------------------------------------------------------
2,897,254 (25,606) - 2,871,648
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and
Shareholders'
equity
Liabilities
Current
Trade and
other
payables 285,804 - (15,558) 270,246
Provisions - - 15,558 15,558
Income tax
liabilities 59,935 - - 59,935
Deferred and
prepaid
revenue 43,520 - - 43,520
Promissory
note payable 5,000 - - 5,000
Current
portion of
long-term
debt 2,119 - - 2,119
Deferred tax
liabilities 85,201 - (85,201) -
Liabilities
related to
assets held
for sale 1,747 - - 1,747
----------------------------------------------------------------------------
483,326 - (85,201) 398,125
Non-current
Long-term debt 1,016,663 - - 1,016,663
Balance due on
a business
acquisition 11,400 - - 11,400
Derivative
financial
instruments 14,408 - - 14,408
Deferred and
prepaid
revenue and
other
liabilities 19,390 - - 19,390
Pension plan
liabilities
and accrued
employees
benefits 5 13,215 20,503 - 33,718
Deferred tax
liabilities 1,3,4,6,7 252,958 (4,413) 85,201 333,746
Liabilities
related to
assets held
for sale 518 - - 518
----------------------------------------------------------------------------
1,811,878 16,090 - 1,827,968
----------------------------------------------------------------------------
Shareholders'
equity
Equity
attributable to
owners
Share capital 119,318 - - 119,318
Contributed
surplus 2 3,488 424 - 3,912
Accumulated
other
comprehensive
income 5 6,716 (3,708) - 3,008
Retained
earnings 1,2,3,4,5,6,7 235,879 (19,592) - 216,287
----------------------------------------------------------------------------
365,401 (22,876) - 342,525
Non-controlling
interest 1,2,3,4,5,6,7 719,975 (18,820) - 701,155
----------------------------------------------------------------------------
1,085,376 (41,696) - 1,043,680
----------------------------------------------------------------------------
2,897,254 (25,606) - 2,871,648
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Reconciliation of profit or loss for the three months ended November 30, 2010:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Canadian IFRS
Notes GAAP adjustments IFRS
----------------------------------------------------------------------------
Revenue 342,766 (1,052) 341,714
Salaries, employee benefits
and outsourced services(1) 58,312 - 58,312
Other external purchases(1) 2,5 147,423 (1,288) 146,135
Depreciation and
amortization 3 63,139 (1,159) 61,980
----------------------------------------------------------------------------
Operating income 73,892 1,395 75,287
Financial expense 6 16,905 (43) 16,862
----------------------------------------------------------------------------
Profit before income taxes 56,987 1,438 58,425
Income taxes 5,6 18,244 373 18,617
Gains on dilution resulting
from issuance of shares by
a subsidiary (5) 5 -
Non-controlling interest 22,773 (22,773) -
----------------------------------------------------------------------------
Profit for the period 15,975 23,833 39,808
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Profit for the period
attributable to:
Owners of the Corporation 15,975 416 16,391
Non-controlling interest - 23,417 23,417
----------------------------------------------------------------------------
15,975 23,833 39,808
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings per share
Basic 0.95 0.02 0.98
Diluted 0.95 0.02 0.97
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Previously reported as operating costs under previous Canadian GAAP.
Reconciliation of comprehensive income for the three months ended November 30, 2010:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
IFRS IFRS reclass-
Canadian GAAP adjustments ifications IFRS
----------------------------------------------------------------------------
Profit for the
period 15,975 23,833 - 39,808
----------------------------------------------------------------------------
Other
comprehensive
loss
Cash flow
hedging
adjustments
Net change in
fair value of
hedging
derivative
financial
instruments (1,571) (3,296) (966) (5,833)
Net change in
fair value of
hedging
derivative
financial
instruments
reclassified
to financial
expense 2,152 4,512 917 7,581
Income tax
recovery on
cash flow
hedging
adjustments - - 49 49
----------------------------------------------------------------------------
581 1,216 - 1,797
----------------------------------------------------------------------------
Foreign currency
translation
adjustments
Net foreign
currency
translation
differences
on
translation
of a net
investment in
foreign
operations (1,015) (2,128) - (3,143)
Net change in
unrealized
gains on
translation
of long-term
debts
designated as
hedges of a
net
investment in
foreign
operations 396 831 - 1,227
----------------------------------------------------------------------------
(619) (1,297) - (1,916)
----------------------------------------------------------------------------
Defined benefit
plans actuarial
gains
adjustments
Net change in
defined
benefit plans
actuarial
gains - 1,712 - 1,712
Income tax
expense on
defined
benefit plans
actuarial
gains
adjustments - (461) - (461)
----------------------------------------------------------------------------
- 1,251 - 1,251
----------------------------------------------------------------------------
Other
comprehensive
income (loss)
for the period (38) 1,170 - 1,132
----------------------------------------------------------------------------
Comprehensive
income for the
period 15,937 25,003 - 40,940
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Comprehensive
income for the
period
attributable
to:
Owners of the
Corporation 15,937 1,667 - 17,604
Non-controlling
interest - 23,336 - 23,336
----------------------------------------------------------------------------
15,937 25,003 - 40,940
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Reconciliation of profit or loss for the year ended August 31, 2011:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(In thousands of
dollars, except IFRS
per share data) Notes Canadian GAAP adjustments IFRS
----------------------------------------------------------------------------
Revenue 1,443,769 (4,206) 1,439,563
Salaries,
employee
benefits and
outsourced
services(1) 271,079 - 271,079
Integration,
restructuring
and acquisition
costs 1 - 12,332 12,332
Other external
purchases(1) 2,5 593,100 (5,226) 587,874
Depreciation and
amortization 3 249,012 (4,805) 244,207
----------------------------------------------------------------------------
Operating income 330,578 (6,507) 324,071
Financial
expense 6 74,080 (541) 73,539
Impairment of
goodwill and
property, plant
and equipment 225,873 - 225,873
----------------------------------------------------------------------------
Profit before
income taxes 30,625 (5,966) 24,659
Income taxes 1,5,6 71,992 (461) 71,531
Gains on
dilution
resulting from
issuance of
shares by
subsidiary (60) 60 -
Non-controlling
interest (32,328) 32,328 -
----------------------------------------------------------------------------
Loss for the
year (8,979) (37,893) (46,872)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Loss for the
year
attributable
to:
Owners of the
Corporation (8,979) (6,982) (15,961)
Non-controlling
interest - (30,911) (30,911)
----------------------------------------------------------------------------
(8,979) (37,893) (46,872)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Loss per share
Basic (0.54) (0.42) (0.95)
Diluted (0.54) (0.42) (0.95)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Previously reported as operating costs under previous Canadian GAAP.
Reconciliation of comprehensive loss for the year ended August 31, 2011:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
IFRS adjust- IFRS reclass-
Canadian GAAP ments ifications IFRS
----------------------------------------------------------------------------
Loss for the
year (8,979) (37,893) - (46,872)
----------------------------------------------------------------------------
Other
comprehensive
income (loss)
Cash flow
hedging
adjustments
Net change in
fair value of
hedging
derivative
financial
instruments (4,943) (10,410) (2,953) (18,306)
Net change in
fair value of
hedging
derivative
financial
instruments
reclassified
to financial
expense 4,650 9,775 2,124 16,549
Income tax
recovery on
cash flow
hedging
adjustments - - 829 829
----------------------------------------------------------------------------
(293) (635) - (928)
----------------------------------------------------------------------------
Foreign currency
translation
adjustments
Net foreign
currency
translation
differences
on
translation
of a net
investment in
foreign
operations 2,330 4,918 - 7,248
Net change in
unrealized
losses on
translation
of long-term
debts
designated as
hedges of a
net
investment in
foreign
operations (1,255) (2,648) - (3,903)
----------------------------------------------------------------------------
1,075 2,270 - 3,345
----------------------------------------------------------------------------
Defined benefit
plans actuarial
losses
adjustments
Net change in
defined
benefit plans
actuarial
losses - (7,684) - (7,684)
Income tax
recovery on
defined
benefit plans
actuarial
losses
adjustments - 2,067 - 2,067
----------------------------------------------------------------------------
- (5,617) - (5,617)
----------------------------------------------------------------------------
Other
comprehensive
income (loss)
for the year 782 (3,982) - (3,200)
----------------------------------------------------------------------------
Comprehensive
loss for the
year (8,197) (41,875) - (50,072)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Comprehensive
loss for the
year
attributable
to:
Owners of the
Corporation (8,197) (11,264) - (19,461)
Non-controlling
interest - (30,611) - (30,611)
----------------------------------------------------------------------------
(8,197) (41,875) - (50,072)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Reconciliation of the Statements of Cash Flows
In addition to the adjustments described above resulting from the accounting
policy differences on adoption of IFRS, financial expense paid and income taxes
paid have been moved into the body of the consolidated statements of cash flows
while they were disclosed as supplementary information under Canadian GAAP.
There were no other material changes to the statements of cash flows on adoption
of IFRS.
NOTES TO THE RECONCILIATIONS
1. BUSINESS COMBINATIONS
As described above, the Corporation has elected not to restate business
combinations completed prior to the date of transition.
The requirements of IFRS 3 were applied prospectively to business combinations
completed after the date of transition. As part of the application of those
requirements to business combinations completed in 2011, integration,
restructuring and acquisition costs were expensed when incurred in accordance
with IFRS, while they were capitalized under Canadian GAAP.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated statements of
financial position November 30, September 1,
Increase (decrease) August 31,2011 2010 2010
----------------------------------------------------------------------------
Goodwill (10,237) - -
Retained earnings (8,752) - -
Non-controlling interest (1,485) - -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated statements of profit or loss November 30,
Increase (decrease) August 31, 2011 2010
----------------------------------------------------------------------------
Integration, restructuring and acquisition
costs 12,332 -
Deferred tax expense (2,095) -
Profit or loss for the period (10,237) -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Also as a result of the IFRS 1 election on business combinations described
above, any assets or liabilities arising on business combinations completed
before the transition date have not been adjusted from the carrying value
previously determined at the dates of the business acquisitions under previous
Canadian GAAP. As a result, the amount of intangible assets stemming from the
recognition of deferred income taxes upon application of CICA Handbook section
3465, Income taxes, which occurred after the date of the business combinations,
has been reversed.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated statements of
financial position November 30, September 1,
Increase (decrease) August 31, 2011 2010 2010
----------------------------------------------------------------------------
Intangible assets (74,823) (74,823) (74,823)
Deferred tax liabilities (63,096) (63,096) (63,096)
Retained earnings (3,922) (3,922) (3,922)
Non-controlling interest (7,805) (7,805) (7,805)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2. SHARE-BASED COMPENSATION
The Corporation's share options granted vest in tranches over a specified
vesting period. Under IFRS, when the only vesting condition is service from the
grant date to the vesting date of each tranche granted, then each tranche should
be accounted for as a separate share-based payment arrangement (i.e. graded
vesting method). Canadian GAAP permitted an accounting policy choice with
respect to graded vesting awards. As such, the Corporation treated arrangement
as a single award and the share-based payment was amortized on a straight-line
basis over the vesting period. This difference resulted in an accelerated
recognition of the expense for the Corporation.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated statements of
financial position November 30, September 1,
Increase (decrease) August 31, 2011 2010 2010
----------------------------------------------------------------------------
Contributed surplus - share-
based compensation 424 454 447
Retained earnings (742) (743) (736)
Non-controlling interest 318 289 289
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated statements of profit or loss November 30,
Increase (decrease) August 31, 2011 2010
----------------------------------------------------------------------------
Salaries, employee benefits and outsource
services (72) 1
Profit or loss for the period 72 (1)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3. PROPERTY, PLANT AND EQUIPMENT
IAS 16 Property, Plant and Equipment requires that each significant component of
an asset be depreciated separately over their respective useful lives which
resulted in a more detailed approach to determining the useful lives for certain
asset components under IFRS than those that were used under previous Canadian
GAAP. The impact of the retroactive application of IAS 16 is as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated statements of
financial position November 30, September 1,
Increase (decrease) August 31, 2011 2010 2010
----------------------------------------------------------------------------
Property, plant and
equipment (900) (4,546) (5,705)
Deferred tax liabilities (229) (1,171) (1,470)
Retained earnings (217) (1,089) (1,368)
Non-controlling interest (454) (2,286) (2,867)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated statements of profit or loss November 30,
Increase (decrease) August 31, 2011 2010
----------------------------------------------------------------------------
Depreciation and amortization (4,805) (1,159)
Deferred tax expense 1,241 299
Profit or loss for the period 3,564 860
----------------------------------------------------------------------------
----------------------------------------------------------------------------
4. INTANGIBLE ASSETS
Under IFRS, intangible assets with indefinite useful lives are not amortized but
tested at least annually for impairment. IAS 38, Intangible assets, requires
retrospective application of those requirements. Under Canadian GAAP, those
assets were amortized until September 1, 2001 and transitional provisions did
not require the reversal of amortization previously recorded. Therefore, on the
date of transition, the Corporation reversed all amortization recorded in
respect of intangible assets with indefinite lives. The impact of thechange is
as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated statements of
financial position November 30, September 1,
Increase (decrease) August 31, 2011 2010 2010
----------------------------------------------------------------------------
Intangible assets 57,956 57,956 57,956
Deferred tax liabilities 8,844 8,844 8,844
Retained earnings 19,846 19,846 19,846
Non-controlling interest 29,266 29,266 29,266
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5. EMPLOYEE BENEFITS
IAS 19 Employee Benefits permits an accounting policy choice with respect to the
recognition of actuarial gains and losses. The Corporation has elected to
recognize all actuarial gains and losses immediately in other comprehensive
income while under Canadian GAAP they were accounted for using the corridor
method. At the date of transition, all previously unrecognized actual gains and
losses, including the unamortized transitional obligation, were recognized in
retained earnings. Also, the unrecognized actuarial gains and losses exceeding
the corridor that were recognized for the quarter ended November 30, 2010 under
Canadian GAAP were reversed.
In addition, under IFRS, all unrecognized past service costs that were vested
were recognized in retained earnings at the date of transition whereas under
Canadian GAAP past service costs were deferred and amortized on a straight-line
basis over the remaining service period of active employees at the date of
employee benefit plan amendments. At the date of transition, all previously
unrecognized past service costs were fully vested and therefore were recognized
in retained earnings.
The impact from those changes is summarised as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated statements of
financial position November 30, September 1,
Increase (decrease) August 31, 2011 2010 2010
----------------------------------------------------------------------------
Deferred tax assets 5,482 3,146 3,670
Pension plan liabilities and
accrued employee benefits 20,503 11,818 13,767
Accumulated other
comprehensive income (4,282) 1,251 -
Retained earnings (7,324) (7,740) (7,879)
Non-controlling interest (3,415) (2,183) (2,218)
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----------------------------------------------------------------------------
----------------------------------------------------------------------------
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Consolidated statements of profit or loss November 30,
Increase (decrease) August 31, 2011 2010
----------------------------------------------------------------------------
Salaries, employee benefits and outsourced
services (948) (237)
Deferred tax expense 255 63
Profit or loss for the period 693 174
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----------------------------------------------------------------------------
6. BORROWING COSTS
IFRS requires that borrowing costs be capitalized on qualifying assets whereas
Canadian GAAP permitted an accounting policy choice to capitalize or expense
these costs, which the Corporation elected to expense.
As described above, the Corporation has elected to apply those requirements only
to borrowing costs relating to assets for which the commencement date for
capitalisation is on or after the date of transition. Therefore, there is no
impact at the date of transition since those costs were already expensed. The
impact of that change in respect of assets which commencement date for
capitalization is after the date of transition is as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated statements of
financial position November 30, September 1,
Increase (decrease) August 31, 2011 2010 2010
----------------------------------------------------------------------------
Property, plant and
equipment 541 43 -
Deferred tax liabilities 138 11 -
Retained earnings 130 10 -
Non-controlling interest 273 22 -
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----------------------------------------------------------------------------
----------------------------------------------------------------------------
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Consolidated statements of profit or loss November 30,
Increase (decrease) August 31, 2011 2010
----------------------------------------------------------------------------
Financial expense (541) (43)
Deferred tax expense 138 11
Profit or loss for the period 403 32
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----------------------------------------------------------------------------
7. INCOME TAXES
The expected manner of recovery of intangible assets with indefinite useful
lives for purposes of calculating deferred taxes is different under IFRS than
under Canadian GAAP. The impact of applying IAS 12 on a retroactive basis is as
follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Consolidated statements of
financial position November 30, September 1,
Increase (decrease) August 31, 2011 2010 2010
----------------------------------------------------------------------------
Goodwill (3,625) - -
Deferred tax liabilities 49,930 53,555 53,555
Retained earnings (18,037) (18,037) (18,037)
Non-controlling interest (35,518) (35,518) (35,518)
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----------------------------------------------------------------------------
In addition, IFRS also requires that temporary differences relating to current
assets and current liabilities be presented as non-current liabilities and
non-current assets.
8. ADDITIONAL ANNUAL DISCLOSURE UNDER IFRS
As these interim consolidated financial statements are the first financial
statements prepared using IFRS, certain additional annual disclosures required
under IFRS have been provided below for the year ended August 31, 2011, having
taken into consideration the adjustments made from Canadian GAAP to reconcile
with IFRS as discussed above. Certain disclosures normally included in a set of
annual financial statements have been intentionally omitted or condensed as the
Corporation does not consider such information material to the understanding of
the impact of IFRS on the consolidated financial statements.
i) GOODWILL AND OTHER INTANGIBLE ASSETS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
September 1,
August 31, 2011 2010
----------------------------------------------------------------------------
Intangible assets with finite useful lives
Reconnect and additional service
activation costs 20,964 20,813
Customer relationships 57,637 28,106
Intangible assets with indefinite useful
lives
Cable Distribution Licences 967,000 967,000
Broadcasting Licences 79,918 31,025
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1,125,519 1,046,944
Goodwill 225,802 144,695
----------------------------------------------------------------------------
1,351,321 1,191,639
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----------------------------------------------------------------------------
At September 1, 2010 and August 31, 2011, the Corporation tested the value of
goodwill and intangible assets with indefinite useful lives for impairment. The
recoverable amount of each CGU is based on value in use calculations. The value
in use was determined using cash flow projections derived from financial budgets
covering a five year period submitted to the Board of directors. They reflect
management's expectation of revenue growth, expenses and margin for each CGU
based on past experience. Cash flows beyond the five year period have been
extrapolated using an estimated terminal growth rate determined with regard to
projected growth rates for the specific markets in which the CGUs participate
and are not considered to exceed the long-term average growth rates for those
markets. Discount rates applied to the cash flow forecasts are derived from the
Corporation's pre-tax weighted average cost of capital, adjusted for the
different risk profile of the individual CGUs. The recoverable amount of each
CGU was determined to be higher than its carrying amount and no impairment loss
has been recognized at the transition date and at August 31, 2011.
ii) OTHER ASSETS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
September 1,
August 31, 2011 2010
----------------------------------------------------------------------------
Transaction costs 5,258 6,701
Other 1,164 1,185
----------------------------------------------------------------------------
6,422 7,886
----------------------------------------------------------------------------
----------------------------------------------------------------------------
iii) PROVISIONS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
September 1,
August 31, 2011 2010
----------------------------------------------------------------------------
Withholding and stamp taxes 7,383 7,494
Programming costs 7,428 1,671
Other 747 3,780
----------------------------------------------------------------------------
15,558 12,945
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The provisions for withholding and stamp taxes relate to contingent liabilities
for withholding and stamp taxes relating to fiscal years prior to the
acquisition of the Portuguese subsidiary by Cogeco Cable Inc.
The provisions for programming costs include provision for increases as well as
additional royalties or content costs as a result of periodical audits from
service providers.
The other provisions include provisions for contractual obligations, renewal of
the collective bargaining agreement and other legal obligations.
iv) DEFERRED TAXES
----------------------------------------------------------------------------
----------------------------------------------------------------------------
September 1,
August 31, 2011 2010
----------------------------------------------------------------------------
Property, plant and equipment (88,515) (86,218)
Intangible assets (154,519) (138,824)
Deferred and prepaid revenue 5,682 5,659
Share issuance costs - 858
Partnerships income (86,801) (78,258)
Non-capital loss and other tax credit
carryforwards, net of valuation allowance 4,848 2,833
Other 11,949 7,143
----------------------------------------------------------------------------
Net deferred tax liabilities (307,356) (286,807)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Financial statement presentation
Deferred tax assets 26,390 27,992
Deferred tax liabilities (333,746) (314,799)
----------------------------------------------------------------------------
Net deferred tax liabilities (307,356) (286,807)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
v) EMPLOYEE BENEFITS
The following table presents a reconciliation of the net defined benefit
liability recognized in the consolidated statement of financial position at the
transition date and August 31, 2011:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
September 1,
August 31, 2011 2010
----------------------------------------------------------------------------
Defined benefit obligations 54,463 44,276
Plan assets at fair value 22,951 21,729
----------------------------------------------------------------------------
Net defined benefit liability 31,512 22,547
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table presents a reconciliation of the net benefit cost components
recognized in the consolidated statement of profit or loss at August 31, 2011:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
September 1,
2010
----------------------------------------------------------------------------
Net benefit costs
Current service cost 2,019
Past service cost 99
Interest cost 2,533
Expected return on plan assets (1,292)
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Net benefit costs 3,359
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cable Sector Customer Statistics
(unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
November 30,
2011 August 31, 2011
----------------------------------------------------------------------------
Primary service units(1)
Canada 1,943,648 1,897,469
Portugal 666,035 667,085
Total 2,609,683 2,564,554
----------------------------------------------------------------------------
Digital Television service customers
Canada 727,219 678,326
Portugal 159,642 164,580
Total 886,861 842,906
----------------------------------------------------------------------------
Analog Television service customers
Canada 155,218 199,659
Portugal 95,140 91,197
Total 250,358 290,856
----------------------------------------------------------------------------
Total Television service customers
Canada 882,437 877,985
Portugal 254,782 255,777
Total 1,137,219 1,133,762
----------------------------------------------------------------------------
High Speed Internet service customers
Canada 618,499 601,214
Portugal 162,224 162,436
Total 780,723 763,650
----------------------------------------------------------------------------
Telephony service customers
Canada 442,712 418,270
Portugal 249,029 248,872
Total 691,741 667,142
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----------------------------------------------------------------------------
(1) Represents the sum of Television, High Speed Internet ("HSI") and
Telephony service customers.
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