Today, COGECO Inc. (TSX:CGO) ("COGECO" or the "Corporation") announced its
financial results for the second quarter of fiscal 2014, ended February 28,
2014, in accordance with International Financial Reporting Standards ("IFRS").
For the second quarter and first six months of fiscal 2014:
-- Second quarter revenue increased by $60.0 million, or 13.1%, to reach
$518.5 million driven by the Cable segment mainly as a result of the
full quarter impact of the acquisition of Peer 1 Hosting(1) ("PEER 1")
which was acquired on January 31, 2013, combined with favorable foreign
exchange rates compared to last year as well as the organic growth from
all of our operating units. For the six-month period ended February 28,
2014, revenue reached $1,035.4 million, an increase of $210.3 million or
25.5%. Revenue increased is mainly attributable to the full impact of
the acquisitions, in the Cable segment, of Atlantic Broadband and PEER 1
("the recent acquisitions") which both occurred in fiscal 2013 combined
with the favorable foreign exchange rates and the organic growth from
all of our operating units;
-- Adjusted EBITDA(2) increased by 13.0% to $221.8 million compared to the
second quarter of fiscal 2013, and by 26.2% to $445.8 million when
compared to the first half of the prior year. The rapid progression for
both periods result mainly from the recent acquisitions as well as the
favorable foreign exchange rates compared to the same period of last
year in the Cable segment;
-- Profit for the period amounted to $58.5 million in the second quarter of
which $17.4 million, or $1.04 per share, is attributable to owners of
the Corporation compared to profit for the period of $49.0 million for
the same period of previous fiscal year period of which $14.7 million,
or $0.88 per share, is attributable to owners of the Corporation. For
the first half of fiscal 2014, profit for the period amounted to $115.3
million of which $40.4 million, or $2.42 per share, is attributable to
owners of the Corporation compared to profit for the period of $96.1
million for the first half of fiscal 2013 of which $33.2 million, or
$1.99 per share is attributable to owners of the Corporation. Profit
progression for both periods is mostly attributable to the improvement
of the adjusted EBITDA stemming from the Cable segment recent
acquisitions and organic growth as well as the decrease in integration,
restructuring and acquisition costs, partly offset by the increases in
financial expense and depreciation and amortization expense all related
to the recent acquisitions;
-- Second quarter free cash flow(2) reached $91.4 million compared to $34.1
million in the comparable quarter of the prior year. For the six-month
period, free cash flow amounted to $164.1 million, compared to $52.5
million in the first half of fiscal 2013. The increase for both periods
is attributable to the improvement of adjusted EBITDA explained above,
the decrease in acquisitions of property, plant and equipment,
intangible and other assets due to the timing of certain initiatives as
well as the decrease in integration, restructuring and acquisition
costs, partly offset by the increase in financial expense as a result of
higher indebtedness;
-- Fiscal 2014 second-quarter cash flow from operating activities reached
$187.6 million compared to $157.1 million, an increase of $30.5 million
or 19.4%, compared to the same period of prior year. For the first six
months of fiscal 2014, cash flow from operating activities reached
$247.8 million compared to $151.1 million, an increase of $96.8 million,
or 64.0%, compared to the same period in fiscal 2013. The increase for
both periods is mainly explained by an increase in profit for the period
and depreciation and amortization expense;
-- A quarterly dividend of $0.22 per share was paid to the holders of
subordinate and multiple voting shares, an increase of $0.03 per share,
or 15.8%, when compared to a dividend of $0.19 per share paid in the
second quarter of fiscal 2013. Dividend payments in the first six-months
totaled $0.44 per share in fiscal 2014, compared to $0.38 per share in
fiscal 2013; and
-- On March 5, 2014, the Corporation completed, pursuant to a private
placement, the issuance of $50 million of Senior Unsecured Notes for net
proceeds of $49 million, net of transaction costs of approximately $1
million. These unsecured notes bear interest at 6.00% per annum payable
semi-annually and mature on March 5, 2020. The net proceeds of the
Senior Unsecured Notes was used to reimburse a portion of the
Corporation's Term Revolving Facility of $100 million which facility was
consequently reduced to $50 million.
(1) Peer 1 hosting refers to Peer 1 Network (USA) Holdings Inc., Peer (UK)
Ltd. and Peer 1 Network Enterprises, Inc.
(2) 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.
"We are satisfied with our financial results for the second quarter of fiscal
year 2014," declared Louis Audet, President and Chief Executive Officer of
COGECO Inc." "This quarter we have well demonstrated our ability to grow
profitability, with the gain in profit compared to the same period last year,
exceeding the comparable gain in revenue. Solid cost management is a strength
shared among all of our business units." added Louis Audet. "In our media
business activities, both our radio and out-of-home advertising businesses
continue to progress," continued Louis Audet.
"I am confident our business is well positioned to continue delivering solid
results for our shareholders," concluded Louis Audet.
ABOUT COGECO
COGECO is a diversified holding corporation. Through its Cogeco Cable Inc.
("Cogeco Cable") subsidiary, COGECO provides to its residential and business
customers Analogue and Digital Television, High Speed Internet and Telephony
services. Cogeco Cable operates in Canada through its subsidiary Cogeco Cable
Canada in Quebec and Ontario, and in the United States through its subsidiary
Atlantic Broadband in Western Pennsylvania, South Florida, Maryland/Delaware and
South Carolina. Through its subsidiaries Cogeco Data Services and Peer 1 Network
(USA) Holdings, Peer (UK) and Peer 1 Network Enterprises (all together as "PEER
1 Hosting" or "PEER 1"), Cogeco Cable provides to its commercial customers, a
suite of IT hosting, information and communications technology services (data
centre, colocation, managed hosting, cloud infrastructure and connectivity),
with 20 data centres, extensive fibre networks in Montreal and Toronto as well
as points-of-presence in North America and Europe. 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 as well as Cogeco
News, its news agency. Through its subsidiary Metromedia, COGECO operates an
advertising representation house specialized in the public transit sector that
holds exclusive advertising rights in the Province of Quebec where it also
represents its business partners active across other Canadian markets. 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). For more information about COGECO and its subsidiaries
visit www.cogeco.ca, cogecodiffusion.com and cogecometromedia.com.
Analyst Conference Thursday, April 10, 2014 at 11:00 a.m. (Eastern
Call: Daylight Time) Media representatives may attend as
listeners only.
Please use the following dial-in number to have access
to the conference call by dialing five minutes before
the start of the conference:
Canada/USA Access Number: 1 800-820-0231 International
Access Number: + 1 416-640-5926
Confirmation Code: 8125587
By Internet at www.cogeco.ca/investors
A rebroadcast of the conference call will be available
until April 16, 2014, by dialing:
Canada and US access number: 1 888-203-1112
International access number: + 1 647-436-0148
Confirmation code: 8125587
FINANCIAL HIGHLIGHTS
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Quarters ended Six months ended
(in thousands of
dollars, except February February February February
percentages and 28, 28, 28, 28,
per share data) 2014 2013(2) Change 2014 2013(2) Change
$ $ % $ $ %
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Operations
Revenue 518,477 458,501 13.1 1,035,448 825,109 25.5
Adjusted
EBITDA(1) 221,807 196,272 13.0 445,847 353,156 26.2
Profit for the
period 58,467 48,950 19.4 115,306 96,056 20.0
Profit for the
period
attributable to
owners of the
Corporation 17,391 14,676 18.5 40,446 33,206 21.8
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Cash Flow
Cash flow from
operating
activities 187,611 157,095 19.4 247,846 151,090 64.0
Cash flow from
operations(1) 173,415 140,124 23.8 332,637 241,625 37.7
Acquisitions of
property, plant
and equipment,
intangible and
other assets 81,997 106,019 (22.7) 168,577 189,174 (10.9)
Free cash
flow(1) 91,418 34,105 - 164,060 52,451 -
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Financial
Condition(3)
Property, plant
and equipment - - - 1,859,939 1,874,866 (0.8)
Total assets - - - 5,551,769 5,453,835 1.8
Indebtedness(4) - - - 3,109,509 3,054.275 1.8
Equity
attributable to
owners of the
Corporation - - - 493,902 456,905 8.1
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Per Share
Data(5)
Earnings per
share
Basic 1.04 0.88 18.2 2.42 1.99 21.6
Diluted 1.03 0.87 18.4 2.40 1.97 21.8
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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 ("MD&A").
(2) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note 2
of the condensed interim consolidated financial statements.
(3) At February 28, 2014 and August 31, 2013.
(4) Indebtedness is defined as the aggregate of bank indebtedness,
principal on long-term debt, balance due on a business combination and
obligations under derivative financial instruments.
(5) Per multiple and subordinate voting share.
MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)
Three and six-month periods ended February 28, 2014
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 section of the Corporation's 2013 annual MD&A) that could
cause actual results to differ materially from what COGECO currently expects.
These factors include namely risks pertaining to markets and competition,
technology, regulatory developments, operating costs, information systems,
disasters or other contingencies, financial risks related to capital
requirements, human resources, controlling shareholder and holding structure,
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 does not undertake to
update or alter this information at any particular time, except as may be
required by law.
All amounts are stated in Canadian dollars unless otherwise indicated. This
report should be read in conjunction with the Corporation's condensed interim
consolidated financial statements and the notes thereto for the three and
six-month periods ended February 28, 2014, prepared in accordance with the
International Financial Reporting Standards ("IFRS") and the MD&A included in
the Corporation's 2013 Annual Report.
CORPORATE OBJECTIVES AND STRATEGIES
COGECO's objectives are to provide outstanding service to its customers and
maximize shareholder value by increasing profitability and ensuring continued
revenue growth. The strategies employed to reach these objectives, supported by
tight controls over costs and business processes, are specific to each segment.
The main strategies used to reach COGECO's objectives in the Cable segment focus
on expanding its service offering, enhancing its existing services and bundles,
improving customer experience and business processes as well as keeping a sound
capital management and a strict control over spending. The radio activities
focus on continuous improvement of its programming in order to increase its
market share and thereby its profitability. The Corporation measures its
performance, with regard to these objectives by monitoring adjusted EBITDA(1)
and free cash flow(1).
(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.
KEY PERFORMANCE INDICATORS
ADJUSTED EBITDA
For the six-month period ended February 28, 2014, adjusted EBITDA increased by
26.2% to reach $445.8 million compared to the same period of fiscal 2013. The
improvement in adjusted EBITDA is mainly attributable to the acquisitions, in
the Cable segment, of Atlantic Broadband and PEER 1(2) (the "recent
acquisitions") which occurred at the end of the first quarter and in the second
quarter of fiscal 2013, respectively, combined with the favorable foreign
exchange rates compared to last year and the financial results improvement from
organic growth. As a result of the overall performance of all of our operating
units as well as the appreciation of the US dollar and British Pound currency
compared to the Canadian dollar, the Corporation revised its financial
guidelines for the 2014 fiscal year issued on October 30, 2013. Adjusted EBITDA
is now expected to reach $915 million from $900 million. For further details,
please consult the fiscal 2014 revised projections in the "Fiscal 2014 financial
guidelines" section.
(2) PEER 1 refers to Peer 1 Network (USA) Holdings Inc., Peer (UK) Ltd. and
Peer 1 Network Enterprises, Inc.
FREE CASH FLOW
For the six-month period ended February 28, 2014, COGECO reports free cash flow
of $164.1 million, an increase of $111.6 million compared to $52.5 million for
the same period of the previous fiscal year. This variance is mostly
attributable to the improvement of adjusted EBITDA explained above, the decrease
in acquisitions of property, plant and equipment, intangible assets due to the
timing of certain initiatives as well as the decrease in integration,
restructuring and acquisition costs, partly offset by the increase in financial
expense due to higher level of indebtedness. As a result of the improvement in
adjusted EBITDA explained above, the Corporation also revised its free cash
projections from $235 million to $245 million. For further details, please
consult the fiscal 2014 revised projections in the "Fiscal 2014 financial
guidelines" section.
BUSINESS DEVELOPMENTS AND OTHER
BBM Canada's winter 2014 survey in the Montreal region, conducted with the
Portable People Meter ("PPM"), reported that 98.5 FM is the leading radio
station in the Montreal French market amongst all listeners as well as men two
years old and over ("2+"), while Rythme FM has maintained its leadership
position in the female 2+ segment among the musical stations. Regarding the
Montreal English market, The Beat is the leading radio station in the female
35-64 segment. In the other Quebec regions, our radio stations registered good
ratings.
On March 5, 2014, the Corporation completed, pursuant to a private placement,
the issuance of $50 million of Senior Unsecured Notes for net proceeds of $49
million, net of transaction costs of approximately $1 million. These unsecured
notes bear interest at 6.00% per annum payable semi-annually and mature on March
5, 2020. Half of the Senior Unsecured Notes are guaranteed on a senior unsecured
basis, jointly and severally, by its subsidiaries except for the unrestricted
subsidiaries. The net proceeds of the Senior Unsecured Notes was used to
reimburse a portion of the Corporation's Term Revolving Facility of $100 million
which facility was consequently reduced to $50 million.
OPERATING AND FINANCIAL RESULTS
OPERATING RESULTS
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Quarters ended Six months ended
February February February February
28, 28, 28, 28,
2014 2013(1) Change 2014 2013(1) Change
(in thousands of
dollars, except
percentages) $ $ % $ $ %
----------------------------------------------------------------------------
Revenue 518,477 458,501 13.1 1,035,448 825,109 25.5
Operating
expenses 296,670 262,229 13.1 589,601 471,953 24.9
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Adjusted EBITDA 221,807 196,272 13.0 445,847 353,156 26.2
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(1) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note 2
of the condensed interim consolidated financial statements.
REVENUE
Fiscal 2014 second-quarter revenue increased by $60.0 million or 13.1%, to reach
$518.5 million. For the first six months, revenue amounted to $1,035.4 million,
an increase of $210.3 million, or 25.5% compared to the first six months of
fiscal 2013. The increase for both periods is mainly attributable to the Cable
segment as explained below and the improvement of the media business activities.
In the Cable segment, fiscal 2014 second-quarter revenue increased by $56.3
million, or 13.1%, to reach $486.0 million compared to the same period of last
year. For the first six months of fiscal 2014, revenue amounted to $961.0
million, an increase of $203.4 million, or 26.8% compared to the same period of
fiscal 2013. Revenue increases for both period are mainly from the full impact
of the recent acquisitions combined with the favorable foreign exchange rates
compared to last year and the organic growth generated by all of our operating
units. For further details on the Cable segment's revenue, please refer to the
"Cable segment" section.
OPERATING EXPENSES
For the second quarter of fiscal 2014, operating expenses increased by $34.4
million, to reach $296.7 million, an increase of 13.1% compared to the prior
year. For the first half of the fiscal year, operating expenses amounted to
$589.6 million, an increase of $117.6 million, or 24.9%, compared to the same
period of fiscal 2013. The increase in operating expenses is mainly attributable
to the Cable segment operating results.
Operating expenses in the Cable segment for the second quarter of fiscal 2014
increased by $33.4 million, to reach $264.2 million, an increase of 14.5%
compared to the prior year. For the first half of the fiscal year, operating
expenses amounted to $518.2 million, an increase of $113.2 million, or 27.9%,
compared to the same period of fiscal 2013. Operating expenses increase is
mostly attributable to the full impact of the recent acquisitions and the
appreciation of the US dollar and British Pound currency compared to the
Canadian dollar, partly offset by cost reduction initiatives and restructuring
activities which occurred in the fourth quarter of fiscal 2013 in Canada.
ADJUSTED EBITDA
Fiscal 2014 second-quarter adjusted EBITDA increased by $25.5 million, or 13.0%,
to reach $221.8 million, of which the Cable segment contributed $221.6 million
to the consolidated adjusted EBITDA. For the first six months of fiscal 2014,
the adjusted EBITDA increased by $92.7 million, or 26.2%, to reach $445.8
million, of which $433.1 million was contributed by the Cable segment. For
further details on Cogeco Cable's operating results, please refer to the "Cable
segment" section.
FIXED CHARGES
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Quarters ended Six months ended
February February February February
28, 28, 28, 28,
2014 2013(1) Change 2014 2013(1) Change
(in thousands of
dollars, except
percentages) $ $ % $ $ %
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Depreciation and
amortization 114,455 93,923 21.9 231,549 159,964 44.8
Financial expense 34,392 30,820 11.6 68,414 48,123 42.2
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(1) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note 2
of the condensed interim consolidated financial statements.
For the three and six-month periods ended February 28, 2014, depreciation and
amortization expense amounted to $114.5 million and $231.5 million,
respectively, compared to $93.9 million and $160.0 million for the same periods
of last year, as a result of the full impact of the recent acquisitions, in the
Cable segment, which occurred at the end of the first quarter and in the second
quarter of fiscal 2013 and by the appreciation of the US dollar and the British
Pound currency compared to the Canadian dollar.
Fiscal 2014 second-quarter financial expense increased by $3.6 million, or
11.6%, amounting to $34.4 million compared to $30.8 million in fiscal 2013
second-quarter. For the first six months of fiscal 2014, financial expense
increased by $20.3 million, or 42.2%, at $68.4 million, compared to $48.1
million in the prior year. Financial expense increased in both periods as a
result of the cost of financing related to the recent acquisitions in the Cable
segment.
INCOME TAXES
For the three and six-month periods ended February 28, 2014, income tax expense
amounted to $14.1 million and $30.0 million, respectively, compared to $15.1
million and $34.3 million, respectively, for the comparable periods in the prior
year. The decrease is mostly attributable to the increase in fixed charges
explained above as well as the favorable impact of the tax structure that
resulted from the recent acquisitions in the Cable segment, partly offset by the
improvement in adjusted EBITDA.
PROFIT FOR THE PERIOD
For the three and six-month periods ended February 28, 2014, profit for the
periods amounted to $58.5 million and $115.3 million, of which $17.4 million and
$40.4 million, or $1.04 and $2.42 per share, are attributable to owners of the
Corporation. For the comparable periods of fiscal 2013, profit for the periods
amounted to $49.0 million and $96.1 million, of which $14.7 million and $33.2
million, or $0.88 and $1.99 per share, was attributable to owners of the
Corporation. Profit progression for both periods is mostly attributable to the
improvement of the adjusted EBITDA explained above and the decrease in
integration, restructuring and acquisition costs, partly offset by the increase
of the fixed charges.
The non-controlling interest represents a participation of approximately 68% in
Cogeco Cable's results. For fiscal 2014 three and six-month periods, the profit
for the periods attributable to non-controlling interest amounted to $41.1
million and $74.9 million compared to $34.3 million and $62.9 million in fiscal
2013.
CASH FLOW ANALYSIS
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Quarters ended Six months ended
February February February February
28, 28, 28, 28,
2014 2013(1) 2014 2013(1)
(in thousands of dollars) $ $ $ $
----------------------------------------------------------------------------
Cash flow from operations 173,415 140,124 332,637 241,625
Changes in non-cash
operating activities 246 12,757 (95,719) (74,751)
Amortization of deferred
transaction costs and
discounts on long-term debt (1,971) (2,861) (3,849) (3,717)
Income taxes paid (20,052) (18,211) (39,216) (62,459)
Current income tax expense 20,519 22,552 48,685 48,664
Financial expense paid (18,938) (28,086) (63,106) (46,395)
Financial expense 34,392 30,820 68,414 48,123
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Cash flow from operating
activities 187,611 157,095 247,846 151,090
Cash flow from investing
activities (81,846) (735,466) (167,997) (2,172,678)
Cash flow from financing
activities (79,250) 610,653 (70,795) 1,847,625
Effect of exchange rate
changes on cash and cash
equivalents denominated in
foreign currencies 1,726 705 1,925 705
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Net change in cash and cash
equivalents 28,241 32,987 10,979 (173,258)
Cash and cash equivalents,
beginning of the period 26,531 9,278 43,793 215,523
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Cash and cash equivalents,
end of the period 54,772 42,265 54,772 42,265
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(1) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note 2
of the condensed interim consolidated financial statements.
OPERATING ACTIVITIES
Fiscal 2014 second-quarter cash flow from operating activities reached $187.6
million compared to $157.1 million, an increase of $30.5 million or 19.4%,
compared to the same period of prior year. The increase in mainly explained by
an increase of $9.5 million in profit for the period and of $20.5 million in
depreciation and amortization expense, a decrease of $9.1 million in financial
expense paid, partly offset by a decrease in changes in non-cash operating
activities of $12.5 million mainly as a result of a higher increase in trade and
other receivables and a lower increase in trade and other payables compared to
the prior year. For the first six months of fiscal 2014, cash flow from
operating activities reached $247.8 million compared to $151.1 million, an
increase of $96.8 million, or 64.0%, compared to the same period in fiscal 2013.
The increase is mainly attributable to an increase of $19.3 million in profit
for the period, of $71.6 million in depreciation and amortization expense, of
$20.3 million in financial expense as well as a decrease of $23.2 million in
income taxes paid, partly offset by an increase of $16.7 million in financial
expense paid and of $21.0 million in non-cash operating activities mainly as a
result of higher increase in trade and other receivables, a higher decrease in
trade and other payables and an increase in prepaid expenses and other compared
to a decrease in the prior year.
For the three and six-month periods ended February 28, 2014, cash flow from
operations amounted to $173.4 million and $332.6 million, respectively, compared
to $140.1 million and $241.6 million for the comparable periods in fiscal 2013.
Increases for both periods are primarily due to the improvement in adjusted
EBITDA as well as the decrease in integration, restructuring and acquisition
costs, partly offset by an increase in financial expense as a result of higher
indebtedness levels from the recent acquisitions.
INVESTING ACTIVITIES
For the three and six-month periods ended February 28, 2014, investing
activities amounted to $81.8 million and $168.0 million, respectively, mainly
due to the acquisitions of property, plant and equipment, intangible and other
assets. For the comparable periods of fiscal 2013, investing activities amounted
to $735.5 million and $2.2 billion explained below.
BUSINESS COMBINATIONS IN FISCAL 2013
On January 31, 2013 and on April 3, 2013, the Corporation's subsidiary, Cogeco
Cable Inc., acquired 100% of the issued and outstanding shares of PEER 1 one of
the world's leading internet infrastructure providers, specializing in managed
hosting, dedicated servers, cloud services and colocation. During the second
quarter of fiscal 2014, Cogeco Cable finalized the purchase price allocation of
PEER 1 which had no impact on the statement of profit or loss and comprehensive
income for three and six-month periods ended February 28, 2013. The impact of
the finalization on the statement of financial position at August 31, 2013,
increased income tax receivable by $0.7 million, increased deferred tax assets
by $4.4 million, decreased intangibles assets by $0.9 million, decreased
goodwill by $2.8 million, increased deferred tax liabilities by $2.5 million,
decreased accumulated other comprehensive income by $0.4 million and decreased
non-controlling interest by $0.8 million.
On November 30, 2012, the Corporation's subsidiary, Cogeco Cable Inc., completed
the acquisition of all the outstanding shares of Atlantic Broadband, an
independent cable system operator formed in 2003, providing Analogue and Digital
Television, as well as HSI and Telephony services to residential and small and
medium business customers. During the first quarter of fiscal 2014 Cogeco Cable
finalized the purchase price allocation of Atlantic Broadband which remained
unchanged since the last adjustments made in the fourth quarter of fiscal 2013.
The final purchase price allocations of Atlantic Broadband and PEER 1 are as
follows:
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As
previously
presented February 28, 2014
Atlantic
PEER 1 PEER 1 Broadband TOTAL
Preliminary Final Final
$ $ $ $
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Consideration
Paid
Purchase of shares 494,796 494,796 337,779 832,575
Working capital
adjustments - - 5,415 5,415
Repayment of secured debts
and settlement of options
outstanding 170,872 170,872 1,021,854 1,192,726
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665,668 665,668 1,365,048 2,030,716
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Net assets acquired
Cash and cash equivalents 10,840 10,840 5,480 16,320
Restricted cash 8,729 8,729 - 8,729
Trade and other receivables 12,772 12,772 12,012 24,784
Prepaid expenses and other 3,855 3,855 1,370 5,225
Income tax receivable 2,160 2,797 3,907 6,704
Other assets 2,462 2,462 - 2,462
Property, plant and
equipment 150,013 150,013 302,211 452,224
Intangible assets 144,671 144,231 711,418 855,649
Goodwill 412,347 410,454 522,215 932,669
Deferred tax assets 4,727 8,872 98,592 107,464
Trade and other payables
assumed (26,512) (26,512) (27,620) (54,132)
Provisions - - (721) (721)
Deferred and prepaid revenue
and other liabilities
assumed (3,388) (3,388) (7,697) (11,085)
Long-term debt assumed (1,735) (1,735) - (1,735)
Deferred tax liabilities (55,273) (57,722) (256,119) (313,841)
----------------------------------------------------------------------------
665,668 665,668 1,365,048 2,030,716
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ACQUISITIONS OF PROPERTY, PLANT AND EQUIPMENT, INTANGIBLE AND OTHER ASSETS
For the three and six-month periods ended February 28, 2014, acquisition of
property, plant an equipment amounted to $77.4 million and $159.8 million,
respectively, compared to $101.5 million and $180.0 million for the comparable
periods of fiscal 2013 mainly as a result of the following factors in the Cable
segment:
-- A decrease in the quarter and for the six-month period ended February
28, 2014 in scalable infrastructure and network upgrades and rebuild due
to the deployment in fiscal 2012 and early fiscal 2013 of advanced
technologies such as DOCSIS 3.0 and Switched Digital
Video in existing areas served; and
-- An increase in customer equipment for the three and six-month period
ended February 28, 2014 mainly due to the launch of TiVo's digital
entertainment services in the United States.
For the second quarter and the first six months of fiscal 2014, the acquisition
of intangible and other assets amounted to $4.6 million and $8.7 million,
compared to $4.5 million and $9.1 million for the same periods last year,
respectively.
FREE CASH FLOW AND FINANCING ACTIVITIES
In the second quarter of fiscal 2014, free cash flow amounted to $91.4 million,
$57.3 million higher than in the comparable period of fiscal 2013. For the
six-month period, free cash flow amounted to $164.1 million, $111.6 million,
higher than the same period of last year. Free cash flow increase for both
periods over the prior year stemmed mostly from the Cable segment and due to the
improvement in adjusted EBITDA as well as the decrease in acquisitions of
property, plant and equipment, intangible and other assets and in integration,
restructuring and acquisition costs, partly offset by an increase in the
financial expense as a result of higher indebtedness level from the recent
acquisitions.
In the second quarter of fiscal 2014, a lower Indebtedness level provided for a
cash decrease of $66.6 million mainly due to a decrease in bank indebtedness of
$10.1 million and repayments of $51.8 million under the revolving facilities. In
the second quarter of fiscal 2013, a higher Indebtedness level provided a cash
increase of $636.1 million mainly due to drawings of $640.3 million (net of
transaction costs of $2.8 million) under new credit facilities amounting to
approximately to $650 million incurred to finance the acquisition of PEER 1 in
the Cable segment.
For the six-month period of fiscal 2014, a lower Indebtedness level provided for
a cash decrease of $37.8 million, mainly due to a decrease in bank indebtedness
of $9.3 million and repayments of $22.5 million under the revolving facilities.
For the six-month period of fiscal 2013, a higher Indebtedness level provided
for a cash increase of $1.9 billion, mainly due to the draw-down on the Term
Revolving Facility of $584.2 million (US $588 million) and the Term Loan
Facilities of $637.4 million (US$660 million for a net proceed of US$641.5
million, net of transaction costs of US $18.5 million) to finance the
acquisition of Atlantic Broadband as well as to drawings of $640.3 million (net
of transaction costs of $2.8 million) under credit facilities amounting to
approximately to $650 million incurred to finance the acquisition of PEER 1.
During the second quarter of fiscal 2014, quarterly dividend of $0.22 per share
was paid to the holders of subordinate and multiple voting shares, totaling $3.7
million, compared to a dividend of $0.19 per share, or $3.2 million in the
second quarter of fiscal 2013. Dividend payments in the first six months totaled
$0.44 per share, or $7.4 million, compared to $0.38 per share, or $6.4 million
the year before. In addition, dividends paid by a subsidiary to non-controlling
interests in the second quarter amounted to $9.9 million and $19.8 million for
the first six months, compared to $8.6 million and $17.1 million, respectively,
for the comparable periods of the prior year.
As at February 28, 2014, the Corporation had a working capital deficiency of
$122.6 million compared to $223.1 million at August 31, 2013. The reduction of
$100.5 million in the deficiency is mainly due to the decrease of $83.8 million
in trade and other payables, the increases of $11.3 million in trade and other
receivables and of $11.0 million in cash and cash equivalents as a result of
generated free cash flow of $164.1 million. 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 Corporation'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
Corporation to use cash and cash equivalents to reduce Indebtedness.
At February 28, 2014, the Corporation had used $67.0 million of its $100 million
Term Revolving Facility for a remaining availability of $33.0 million and Cogeco
Cable had used $574.8 million of its $800 million amended and restated Term
Revolving Facility for a remaining availability of $225.2 million. In addition,
two subsidiaries of Cogeco Cable also benefit from a Revolving Facility of
$110.7 million (US$100 million) related to its acquisition of Atlantic
Broadband, of which $23.3 million (US$21.1 million) was used at February 28,
2014 for a remaining availability of $87.4 million (US$78.9 million).
FINANCIAL POSITION
Since August 31, 2013, the following balances have changed significantly: "cash
and cash equivalents", "intangible assets", "property, plant and equipment",
"goodwill", "trade and other payables" and "long-term debt".
The increase of $11.0 million in cash and cash equivalents and the increase of
$69.6 million in long-term debt are due to the appreciation of the US dollar and
British Pound currency compared to the Canadian dollar, partly offset by the
factors previously discussed in the "Cash flow analysis" section. The decrease
of $14.9 million in property, plant and equipment is mainly related to the
excess of depreciation expense over acquisitions discussed in the "Cash flow
analysis" section, partly offset by the impact of the appreciation of the US
dollar and British Pound currency compared to the Canadian dollar. Intangible
assets and goodwill increased by $20.3 million and $48.1 million, respectively,
due to the appreciation of the US dollar and the British Pound against the
Canadian dollar during the first six months of fiscal 2014. The decrease of
$83.8 million in trade and other payables is related to the timing of payments
made to suppliers.
OUTSTANDING SHARE DATA
A description of COGECO's share data at March 31, 2014 is presented in the table
below. Additional details are provided in note 11 of the condensed interim
consolidated financial statements.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Amount
Number of (in thousands
shares of dollars)
----------------------------------------------------------------------------
Common shares
Multiple voting shares 1,842,860 12
Subordinate voting shares 14,989,338 121,976
----------------------------------------------------------------------------
----------------------------------------------------------------------------
FINANCING
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, as discussed in the 2013 Annual Report, have
not materially changed since August 31, 2013, except as mentioned below.
On December 20, 2013, the Corporation amended its Term Revolving Facility. Under
the terms of the amendment, the maturity was extended by an additional year
until February 1, 2018. In addition, the amendment reduced the margin for the
calculation of the interest rate and reduced restrictions on some covenants
including financial ratios.
On November 22, 2013, the Corporation's subsidiary, Cogeco Cable, amended and
restated its Term Revolving Facility of $800 million with a syndicate of
lenders. The maturity was extended until January 22, 2019 and can be further
extended annually. The amendments reduced the margin for the calculation of the
interest rate and reduced restrictions on some covenants. The amended and
restated Term Revolving Facility also replaced Cogeco Cable's Secured Credit
Facilities coming to maturity on January 27, 2017 which was fully repaid on
November 22, 2013. This amended and restated Term Revolving Facility is
comprised of two tranches: a first tranche, a Canadian tranche, amounting to
$788 million and the second tranche, a UK tranche, amounting to $12 million.
Both Cogeco Cable and Peer 1 (UK) Ltd. can borrow under the UK tranche. The
Canadian tranche is available in Canadian dollars, US dollars, Euros and British
Pound and interest rates are based on banker's acceptance, US dollar base rate
loans, LIBOR loans in US dollars, Euros or British Pound, plus the applicable
margin. The UK tranche is available in British Pounds and interest rates are
based on British Pounds base rate loans and British Pounds LIBOR loans. The Term
Revolving Facility is indirectly secured by first priority fixed and floating
charges and a security interest on substantially all present and future real and
personal properties 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. The provisions under this facility provide for
restrictions on the operations and activities of Cogeco Cable. Generally, the
most significant restrictions relate to permitted investments and dividends on
multiple and subordinate voting shares, as well as incurrence and maintenance of
certain financial ratios primarily linked to operating income before
amortization, financial expense and total indebtedness.
FINANCIAL MANAGEMENT
The Corporation's subsidiary, Cogeco Cable Inc., had 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. Cogeco Cable elected to apply cash flow hedge accounting
on these derivative financial instruments. During the first half of fiscal 2014,
amounts due under the US$190 million Senior Secured Notes Series A increased by
$10.3 million due to the US dollar's appreciation relative to the Canadian
dollar. The fair value of cross-currency swaps asset increased by a net amount
of $11.1 million, of which an increase of $10.3 million offsets the foreign
exchange loss on the debt denominated in US dollars. The difference of $0.8
million was recorded as an increase of other comprehensive income. During the
first half of fiscal 2013, amounts due under the US$190 million Senior Secured
Notes Series A increased by $8.7 million due to the US dollar's appreciation
over the Canadian dollar. The fair value of cross-currency swaps liability
decreased by a net amount of $7.9 million, of which a decrease of $8.7 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.
In addition, on July 22, 2013, the Corporation's subsidiary, Cogeco Cable Inc.,
had entered into interest rate swap agreements to fix the interest rate on
US$200 million of its LIBOR based loans. These agreements have the effect of
converting the floating US LIBOR base rate at an average fixed rate of 0.39625%
under the Term Revolving Facility until July 25, 2015. Cogeco Cable elected to
apply hedge accounting on these derivative financial instruments. During the
first half of fiscal 2014, the fair value of interest rate swaps asset decreased
by a net amount of $0.9 million which was recorded as a decrease of other
comprehensive income.
Furthermore, Cogeco Cable's investment in foreign operations is exposed to
market risk attributable to fluctuations in foreign currency exchange rates,
primarily changes in the values of the Canadian dollar versus the US dollar and
British Pounds. This risk was mitigated since the major part of the purchase
prices for Atlantic Broadband and PEER 1 were borrowed directly in US dollars
and British Pounds. At February 28, 2014, the investments for Atlantic Broadband
and PEER 1 amounted to US$1.1 billion and GBP 65.5 million while long-term debt
hedging these investments were US$859.5 million and GBP 56.9 million.The
exchange rates used to convert the US dollar currency and British Pounds
currency into Canadian dollars for the statement of financial position accounts
at February 28, 2014 were $1.1074 per US dollar and $1.8543 per British Pound
compared to $1.0530 per US dollar and $1.6318 per British Pound at August 31,
2013. The impact of a 10% change in the exchange rates of the US dollar and
British Pound into Canadian dollars would change other comprehensive income by
approximately $28.0 million.
Cogeco Cable's condensed interim consolidated financial statements are expressed
in Canadian dollars, however a portion of its business is conducted in US dollar
and British Pound therefore, exchange rate fluctuations can increase or decrease
Cogeco Cable's operating results. For the three and six-month periods ended
February 28, 2014, the average rates prevailing used to convert the operating
results of the Cable segment were as follows:
----------------------------------------------------------------------------
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Quarters ended Six months ended
February February February February
28, 28, 28, 28,
2014 2013 Change 2014 2013 Change
$ $ % $ $ %
----------------------------------------------------------------------------
US dollar vs
Canadian dollar 1.0879 0.9971 9.1 1.0639 0.9924 7.2
British Pound vs
Canadian dollar 1.7917 1.5623 14.7 1.7294 1.5623 10.7
----------------------------------------------------------------------------
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The following table highlights in Canadian dollars, the impact of a 10% increase
in US dollar or British Pound against the Canadian dollar as the case may be, of
Cogeco Cable's operating results for the three and six-month period ended
February 28, 2014:
----------------------------------------------------------------------------
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Cable segment
Quarter ended Six months ended
Exchange rate Exchange rate
As reported impact As reported impact
(in thousands of
dollars) $ $ $ $
----------------------------------------------------------------------------
Revenue 486,008 13,606 960,988 26,536
Operating expense 264,227 8,856 518,176 17,268
Management fees - COGECO
Inc. 165 - 9,674 -
----------------------------------------------------------------------------
Adjusted EBITDA 221,616 4,750 433,138 9,268
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Acquisitions of
property, plant and
equipment, intangible
and other assets 80,806 3,769 165,895 8,685
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DIVIDEND DECLARATION
At its April 9, 2014 meeting, the Board of Directors of COGECO declared a
quarterly eligible dividend of $0.22 per share for multiple voting and
subordinate voting shares, payable on May 7, 2014, to shareholders of record on
April 23, 2014. 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, the amount and
frequency may vary.
CABLE SEGMENT
CUSTOMER STATISTICS
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Consolidated UNITED STATES CANADA
February 28,
2014
----------------------------------------------------------------------------
PSU(1) 2,454,627 492,550 1,962,077
Television service customers 1,044,611 228,759 815,852
HSI service customers 857,786 184,805 672,981
Telephony service customers 552,230 78,986 473,244
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Consolidated
------------------------
Net additions (losses) Net additions (losses)
Quarters ended Six months ended
February February February February
28, 28, 28, 28,
2014 2013 2014 2013
----------------------------------------------------------------------------
PSU(1) (10,305) 6,074 (13,030) 21,862
Television service customers (13,248) (10,660) (22,341) (12,736)
HSI service customers 8,889 11,184 19,341 22,737
Telephony service customers (5,946) 5,550 (10,030) 11,861
----------------------------------------------------------------------------
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(1) Represents the sum of Television, High Speed Internet ("HSI") and
Telephony service customers.
At February 28, 2014, PSU reached 2,454,627 of which 1,962,077 come from Canada
and 492,550 come from the United States. For the three and six-month periods
ended February 28, 2014, PSU net losses stood at 10,305 and 13,030,
respectively, compared to net additions of 6,074 and 21,862 for the comparable
periods of fiscal 2013. Fiscal 2014 second-quarter and first six months net
losses for Television service customers stood at 13,248 and 22,341 compared to
10,660 and 12,736, HSI service customers grew by 8,889 and 19,341 compared to
11,184 and 22,737 and the Telephony service customers net losses stood at 5,946
and 10,030 compared to net additions of 5,550 and 11,861 for the comparable
periods of fiscal 2013. HSI net additions continue to stem from the enhancement
of the product offering and the impact of the bundle offer.
In Canada, PSU decreased by 13,425 for the second-quarter of fiscal 2014,
compared to an increase of 2,314 for the comparable period last year. For the
first six months of fiscal 2014, PSU decreased by 18,045, compared to an
increase of 18,102 for the comparable period in 2013. The decrease is explained
by service category maturity and a much more competitive environment in all
services.
In the United States, PSU increased by 3,120 for the second-quarter of fiscal
2014, compared to an increase of 3,760 for the same period of prior year. For
the first six months of fiscal 2014, PSU increased by 5,015, compared to an
increase of 3,760 for the comparable period in 2013. The increase is explained
by additional HSI and Telephony services, offset by losses in the Television
service.
OPERATING RESULTS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Six months ended
February February February February
28, 28, 28, 28,
2014 2013(1) Change 2014 2013(1) Change
(in thousands of
dollars, except
percentages) $ $ % $ $ %
----------------------------------------------------------------------------
Revenue 486,008 429,672 13.1 960,988 757,583 26.8
Operating expenses 264,227 230,858 14.5 518,176 405,012 27.9
Management fees -
COGECO Inc. 165 2,988 (94.5) 9,674 9,569 1.1
--------------------------------------- ---------------------
Adjusted EBITDA 221,616 195,826 13.2 433,138 343,002 26.3
----------------------------------------------------------------------------
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(1) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note 2
of the condensed interim consolidated financial statements.
REVENUE
Fiscal 2014 second-quarter revenue increased by $56.3 million, or 13.1%, to
reach $486.0 million. Revenue increase results mainly from the full quarter
impact of the acquisition of PEER 1 compared to one month of operating results
for the same period of fiscal 2013. The favorable foreign exchange rates
compared to last year and the organic growth from all of our operating units
also contributed to the increase of the revenue in the quarter. For the first
six months of fiscal 2014, revenue amounted to $961.0 million, an increase of
$203.4 million, or 26.8% compared to the same period of fiscal 2013. The
increase is mainly attributable to the full impact of the recent acquisitions
compared to fiscal 2013 combined with the favorable foreign exchange rates as
well as the organic growth from all of the operating units.
OPERATING EXPENSES AND MANAGEMENT FEES
For the second quarter of fiscal 2014, operating expenses increased by $33.4
million, to reach $264.2 million, an increase of 14.5% compared to the prior
year. For the first half of the fiscal year, operating expenses amounted to
$518.2 million, an increase of $113.2 million, or 27.9%, compared to the same
period of fiscal 2013. Operating expenses increase is mostly attributable to the
full impact of the recent acquisitions and the appreciation of the US dollar and
British Pound currency compared to the Canadian dollar, partly offset by cost
reduction initiatives and restructuring activities which occurred in the fourth
quarter of fiscal 2013 in the Canadian Cable operations.
For the second quarter of fiscal 2014, management fees paid to COGECO Inc.
amounted to $0.2 million, 94.5% lower compared to $3.0 million for the same
period in fiscal 2013. For the first half of the fiscal year 2014, management
fees paid to COGECO Inc. amounted to $9.7 million, 1.1% higher compared to $9.6
million in the comparable period of fiscal 2013. For fiscal year 2014,
management fees have been set at a maximum of $9.7 million ($9.6 million in
2013), which were paid within the first half of the fiscal year. For fiscal year
2013, management fees were also fully paid in the first half of the year.
ADJUSTED EBITDA
For the three and six-month periods ended February 28, 2014, adjusted EBITDA
increased by $25.8 million, or 13.2%, to reach $221.6 million, and by $90.1
million, or 26.3%, to reach $433.1 million, respectively, compared to the
comparable periods of the prior year. The increases for both periods are mainly
attributable to the full impact of the recent acquisitions, the favorable
foreign exchange rates compared to the same periods of last year as well as the
improvement in the Canadian cable operations.
FISCAL 2014 FINANCIAL GUIDELINES
As a result of revised projections in the Cable segment described below as well
as the improvement in the radio and advertising transit businesses activities,
the Corporation revised its consolidated projections for the 2014 fiscal year as
issued on October 30, 2013. Revenue is now expected to reach $2,105 million, an
increase of $30 million compared to the October 30, 2013 projections. Adjusted
EBITDA should increase from $900 million to $915 million and profit for the year
from $233 million to $240 million. Acquisitions of property, plant and
equipment, intangible and other assets should remain the same as a result of
lower capital expenditures which should be offset by the Canadian dollar
depreciation and consequently, free cash flow should reach $245 million, an
increase of $10 million from October 30, 2013 projections.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revised Revised
projections projections
April 9, 2014 October 30, 2013
Fiscal 2014 Fiscal 2014
(in millions of dollars) $ $
----------------------------------------------------------------------------
Financial guidelines
Revenue 2,105 2,075
Adjusted EBITDA 915 900
Financial expense 137 134
Current income tax expense 103 101
Profit for the year 240 233
Profit for the year attributable to
owners of the Corporation 77 75
Acquisitions of property, plant and
equipment, intangible and other assets 430 430
Free cash flow(1) 245 235
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(1) Free cash flow is calculated as adjusted EBITDA less financial expense,
current income tax expense and acquisitions of property, plant and
equipment, intangible and other assets.
CABLE SEGMENT
Giving effect to the overall performance of all of our operating units as well
as the appreciation of the US dollar and British Pound currency compared to the
Canadian dollar, the Corporation revised its financial guidelines for the 2014
fiscal year issued on October 30, 2013. Management expects revenue to reach
$1,955 million, representing a growth of $20 million, or 1.0%, compared to those
issued on October 30, 2013. Adjusted EBITDA should increase by$10 million to
reach$895 million and consequently, operating margin should improve to
approximately45.8% compared to 45.7%. Acquisitions of property, plant and
equipment, intangible and other assets as well as the depreciation and
amortization expense should remain the same as a result of lower capital
expenditures which should be offset by the Canadian dollar depreciation. Free
cash flow is expected to increase by $10 million to reach $240 million and
profit for the year is expected to amount to $235 million, representing a growth
of $5 million or 2.2% compared to the October 30, 2013 projections.
Fiscal 2014 revised financial guidelines are as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revised Revised
projections projections
April 9, 2014 October 30, 2013
Fiscal 2014 Fiscal 2014
(in millions of dollars, except
operating margin and capital intensity) $ $
----------------------------------------------------------------------------
Financial guidelines
Revenue 1,955 1,935
Adjusted EBITDA 895 885
Operating margin 45.8% 45.7%
Depreciation and amortization 470 470
Financial expense 130 130
Current income tax expense 100 100
Profit for the year 235 230
Acquisitions of property, plant and
equipment, intangible and other
assets 425 425
Free cash flow(1) 240 230
Capital intensity 21.7% 22.0%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Free cash flow is calculated as adjusted EBITDA less, financial
expense, current income tax expense and acquisitions of property, plant
and equipment, intangible and other assets.
CONTROLS AND PROCEDURES
Internal control over financial reporting ("ICFR") is a process designed to
provide reasonable, but not absolute, assurance regarding the reliability of
financial reporting and of the preparation of financial statements for external
purposes in accordance with IFRS. 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 ("DC&P") and ICFR, as defined in
National Instrument 52-109. COGECO's internal control framework is based on the
criteria published in the updated version released in May 2013 of the report
Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
The CEO and CFO, supported by Management, evaluated the design of the
Corporation's DC&P and ICFR as at February 28, 2014, and concluded that, as
described below, there exists a material weakness in ICFR at PEER 1. A material
weakness in ICFR exists if there exists a deficiency or combination of
deficiencies in ICFR such that there is a reasonable possibility that a material
misstatement of the annual or interim consolidated financial statements will not
be prevented or detected on a timely basis.
The Corporation's subsidiary, Cogeco Cable, acquired 96.57% of the issued and
outstanding shares of PEER 1 on January 31, 2013 pursuant to the public offer
made by Cogeco Cable, through its indirectly wholly-owned subsidiary 0957926
B.C. LTD. The remaining shares of PEER 1 were acquired on April 3, 2013.
Management has been working diligently since the acquisition to complete its
review of the design of ICFR at PEER 1. Despite these efforts, Management has
not to date completed its review. During the course of the portion of the review
that has been completed, Management identified certain deficiencies in ICFR at
PEER 1 principally relating to the financial statements close, procurement and
sales processes.
Management has committed additional resources in order to complete the review of
PEER 1's ICFR and bring them in line with COGECO's design standards by August
31, 2014, and has commenced the implementation of a number of measures to
address the deficiencies described above. More specifically, Management has
implemented a number of remediations related to the financial statements close
process, transitioned to a new procurement system with appropriate embedded
approval controls and introduced a series of corporate policies to enhance PEER
1's overall control environment. The Corporation cannot currently assess the
potential impact of any further design deficiencies which may be identified
during the completion of its review of PEER 1's ICFR.
Based on the review completed to date, the CEO and the CFO believe that (i) the
Corporation's interim filings for the three and six-month periods ended February
28, 2014 do not contain any untrue statement of a material fact or omit to state
a material fact required to be stated or that is necessary to make a statement
not misleading in light of the circumstances under which it was made, and (ii)
the interim financial report together with the other financial information
included in the interim filings fairly present, in all material respects, the
financial condition, financial performance and cash flows of COGECO for the
three and six-month periods ended February 28, 2014.
PEER 1 represents 10% of revenue, -14% of profit for the period, 15% of total
assets, 16% of current assets, 15% of non current assets, 5% of current
liabilities and 16% of non current liabilities of the condensed consolidated
interim financial statements for the six-month period ended February 28, 2014.
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, 2013 except as mentioned below. A
detailed description of the uncertainties and main risk factors faced by COGECO
can be found in the 2013 Annual Report available at www.sedar.com and
www.cogeco.ca.
On October 24, 2013, the Canadian Radio-Television and Telecommunications
Commission ("CRTC") issued a broadcasting notice inviting Canadians to express
their views on the future of the television system in Canada. The first phase of
that public proceeding was completed in December 2013 and the second phase will
take place in the winter of 2014. This public consultation is likely to lead to
changes in regulatory policy respecting significant aspects of the production,
funding and distribution of television programming content in Canada. On the
heels of the CRTC's invitation for comments from the public, the Canadian
Government issued on November 14, 2013 a direction to the CRTC under the
authority of section 15 of the Broadcasting Act requesting that the CRTC report
on television channel choice by no later than April 30, 2014. The requested
report will focus specifically on the issue of unbundling of television
channels, including the steps the CRTC intends to take in that regard. At this
time, it is not known what steps or measures the CRTC will recommend in its
report, or how and when these steps or measures would be implemented. They could
have a major impact on wholesale and retail pricing of television services
distributed by Cogeco Cable and other Canadian terrestrial and satellite
broadcasting distributors as, if and when they are eventually implemented.
On November 26, 2013, Rogers Communications and the National Hockey League
("NHL") announced that they had concluded a twelve-year comprehensive broadcast
and multimedia licensing agreement respecting all national rights to NHL games
on all platforms in all languages in Canada, beginning with 2014-2015 season.
Rogers Communications also announced that it had selected CBC and TVA for
separate sublicensing deals for English-language broadcasts of "Hockey Night in
Canada" and all national French-language multimedia rights, respectively. At
this time, the impact of this long-term agreement on wholesale and retail rates
for linear subscription and on-demand television programming services involving
NHL hockey games distributed by Cogeco Cable and other terrestrial and satellite
broadcasting distributors cannot be assessed, nor the extent to which the
consumption of Canadian premium sports programming will change over the next
twelve years as a result of future distribution sublicensing terms for NHL
hockey games.
FUTURE ACCOUNTING DEVELOPMENTS IN CANADA
A number of new standards, interpretations and amendments to existing standards
issued by the International Accounting Standard Board ("IASB") are effective for
annual periods starting on or after January 1, 2013 and have been applied in
preparing the condensed interim consolidated financial statements for the three
and six-month periods ended February 28, 2014.
NEW ACCOUNTING STANDARDS
The Corporation adopted the following new accounting standards on September 1,
2013. The impacts of the application of this standard are described in Note 2 of
the condensed interim consolidated financial statements.
-- Amendment to IAS 19, Employee Benefits : The principal difference in the
amended standard is that the expected long-term rate of return on plan
assets will no longer be used to calculate the defined benefit pension
costs. The defined benefit pension costs concepts of "interest cost" and
"expected return on plan assets" are replaced by the concept of "net
interest" calculated by applying the discount rate to the net liability
or asset. The net interest cost takes into account the change any
contributions and benefit payments have on the net defined benefit
liability or asset during the period.
The Corporation also adopted the following standards on September 1, 2013 which
had no impact on the condensed interim consolidated financial statements.
-- Amendments to IFRS 7 Financial Instruments: Disclosures
-- IFRS 10 Consolidated Financial Statements
-- IFRS 12 Disclosure of Interest in Other Entities
-- IFRS 13 Fair Value Measurement
CHANGES IN CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There has been no significant change in COGECO's accounting policies, estimates
and future accounting pronouncements since August 31, 2013. A description of the
Corporation's policies and estimates can be found in the 2013 Annual Report,
available at www.sedar.com and www.cogeco.ca.
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" and "adjusted EBITDA".
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, 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 measure is cash flow from operating activities. Cash
flow from operations is calculated as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Six months ended
February February February February
28, 28, 28, 28,
2014 2013(1) 2014 2013(1)
(in thousands of dollars) $ $ $ $
----------------------------------------------------------------------------
Cash flow from operating
activities 187,611 157,095 247,846 151,090
Changes in non-cash
operating activities (246) (12,757) 95,719 74,751
Amortization of deferred
transaction costs and
discounts on long-term debt 1,971 2,861 3,849 3,717
Income taxes paid 20,052 18,211 39,216 62,459
Current income tax expense (20,519) (22,552) (48,685) (48,664)
Financial expense paid 18,938 28,086 63,106 46,395
Financial expense (34,392) (30,820) (68,414) (48,123)
----------------------------------------------------------------------------
Cash flow from operations 173,415 140,124 332,637 241,625
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note 2
of the condensed interim consolidated financial statements.
Free cash flow is calculated as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Six months ended
February February February February
28, 28, 28, 28,
2014 2013(1) 2014 2013(1)
(in thousands of dollars) $ $ $ $
----------------------------------------------------------------------------
Cash flow from operations 173,415 140,124 332,637 241,625
Acquisition of property,
plant and equipment (77,384) (101,526) (159,848) (180,040)
Acquisition of intangible
and other assets (4,613) (4,493) (8,729) (9,134)
----------------------------------------------------------------------------
Free cash flow 91,418 34,105 164,060 52,451
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note 2
of the condensed interim consolidated financial statements.
ADJUSTED EBITDA
Adjusted EBITDA 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. Adjusted EBITDA 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.
The most comparable IFRS financial measure is profit for the period. Adjusted
EBITDA is calculated as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Six months ended
February 28, February 28, February 28, February 28,
2014 2013(1) 2014 2013(1)
(in thousands of
dollars) $ $ $ $
----------------------------------------------------------------------------
Profit for the
period 58,467 48,950 115,306 96,056
Income taxes 14,147 15,089 29,984 34,261
Financial expense 34,392 30,820 68,414 48,123
Depreciation and
amortization 114,455 93,923 231,549 159,964
Integration,
restructuring and
acquisitions costs 346 7,490 594 14,752
----------------------------------------------------------------------------
Adjusted EBITDA 221,807 196,272 445,847 353,156
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note 2
of the condensed interim consolidated financial statements.
SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended February 28, November 30,
(in thousands of dollars,
except per share data) 2014 2013(2) 2013 2012(2)
$ $ $ $
----------------------------------------------------------------------------
Revenue 518,477 458,501 516,971 366,608
Adjusted EBITDA 221,807 196,272 224,040 156,884
Income taxes 14,147 15,089 15,837 19,172
Profit for the period 58,467 48,950 56,839 47,106
Profit for the period
attributable to owners of
the Corporation 17,391 14,676 23,055 18,530
Cash flow from operating
activities 187,611 157,095 60,235 (6,005)
Cash flow from operations 173,415 140,124 159,222 101,501
Acquisitions of property,
plant and equipment,
intangible and other assets 81,997 106,019 86,580 83,155
Free cash flow (deficit) 91,418 34,105 72,642 18,346
Earnings per share(1)
Basic 1.04 0.88 1.38 1.11
Diluted 1.03 0.87 1.37 1.10
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended August 31, May 31,
(in thousands of dollars,
except per share data) 2013(2) 2012 2013(2) 2012
$ $ $ $
----------------------------------------------------------------------------
Revenue 504,714 356,685 504,434 358,032
Adjusted EBITDA 224,608 163,617 220,878 158,446
Income taxes 10,374 33,625 19,080 22,278
Profit for the period 43,770 44,900 49,995 55,373
Profit for the period
attributable to owners of
the Corporation 13,869 13,889 17,185 19,303
Cash flow from operating
activities 233,464 203,193 167,641 109,546
Cash flow from operations 162,138 119,612 158,172 117,606
Acquisitions of property,
plant and equipment,
intangible and other assets 108,756 124,638 113,492 88,141
Free cash flow (deficit) 53,382 (5,026) 44,680 29,465
Earnings per share(1)
Basic 0.83 0.83 1.03 1.15
Diluted 0.82 0.83 1.02 1.15
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Per multiple and subordinate voting share.
(2) These figures have been adjusted to comply with the adoption of IAS 19
- Employee Benefits.
SEASONAL VARIATIONS
Cogeco Cable's operating results are not generally subject to material seasonal
fluctuations except as follows. In the Cable segment, the number of customers in
the Television service and HSI service 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 season, 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
in the Pennsylvania region, and to a lesser extent in South Carolina,
Maryland/Delaware in the United States. In the United States, the Miami region
is also subject to seasonal fluctuations due to the winter season residents
returning home from late Spring through the Fall.
ADDITIONAL INFORMATION
This MD&A was prepared on April 9, 2014. 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
April 9, 2014
FOR FURTHER INFORMATION PLEASE CONTACT:
Source:
COGECO Inc.
Pierre Gagne
Senior Vice President and Chief Financial Officer
514-764-4700
Information:
Media
Rene Guimond
Vice-President, Public Affairs and Communications
514-764-4700
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