COGECO Inc. reports Second Quarter 2014 financial results
PRESS RELEASE
For immediate release
COGECO Inc. reports Second Quarter 2014 financial results
• Revenue from the period increased by 13.1% compared to the same period last year while profit for
the period increased by 19.4% compared to the same period last year;
• Quarterly dividend of $0.22 per share, an increase of 15.8% compared to the same period last year.
Montréal, April 9, 2014 – 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;
(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.
• 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.
"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 Québec with
complementary radio formats serving a wide range of audiences as well as Cogeco News, its news agency. Through its subsidiary Métromédia,
COGECO operates an advertising representation house specialized in the public transit sector that holds exclusive advertising rights in the
Province of Québec 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.
- 30 -
Source: COGECO Inc.
Pierre Gagné
Senior Vice President and Chief Financial Officer
Tel.: 514-764-4700
Information: Media
René Guimond
Vice-President, Public Affairs and Communications
Tel.: 514-764-4700
Analyst Conference Call: Thursday, April 10, 2014 at 11:00 a.m. (Eastern 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
COGECO INC. Q2 2014 2
FINANCIAL HIGHLIGHTS
Quarters ended Six months ended
(in thousands of dollars, except percentages and per share
data)
February 28,
2014
February 28,
2013
(2)
Change
February 28,
2014
February 28,
2013
(2)
Change
$ $ % $ $ %
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
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 —
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
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
(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
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2014 4
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.
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2014 5
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)
.
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.
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 Montréal 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
Quarters ended Six months ended
February 28,
2014
February 28,
2013
(1)
Change
February 28,
2014
February 28,
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
Adjusted EBITDA 221,807
196,272
13.0 445,847
353,156
26.2
(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.
(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) PEER 1 refers to Peer 1 Network (USA) Holdings Inc., Peer (UK) Ltd. and Peer 1 Network Enterprises, Inc.
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2014 6
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
Quarters ended Six months ended
February 28,
2014
February 28,
2013
(1)
Change
February 28,
2014
February 28,
2013
(1)
Change
(in thousands of dollars, except percentages) $ $ % $ $ %
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
(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.
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2014 7
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
Quarters ended Six months ended
February 28,
2014
February 28,
2013
(1)
February 28,
2014
February 28,
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
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
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
Cash and cash equivalents, end of the period 54,772 42,265 54,772 42,265
(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.
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2014 8
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:
As previously
presented February 28, 2014
PEER 1 PEER 1
Atlantic
Broadband TOTAL
Preliminary Final Final
$ $ $ $
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
665,668
665,668 1,365,048 2,030,716
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
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.
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2014 9
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.
Number of
shares
Amount
(in thousands
of dollars)
Common shares
Multiple voting shares 1,842,860
12
Subordinate voting shares 14,989,338
121,976
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2014 10
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 £65.5 million while long-term debt hedging these investments
were US$859.5 million and £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:
Quarters ended Six months ended
February 28,
2014
February 28,
2013 Change
February 28,
2014
February 28,
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
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2014 11
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:
Cable segment
Quarter ended Six months ended
As reported
Exchange rate
impact
As reported
Exchange rate
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
Acquisitions of property, plant and equipment, intangible and other assets 80,806 3,769
165,895 8,685
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
Consolidated
Net additions (losses) Net additions (losses)
Consolidated UNITED STATES CANADA Quarters ended Six months ended
February 28, 2014
February 28,
2014
February 28,
2013
February 28,
2014
February 28,
2013
PSU
(1)
2,454,627 492,550 1,962,077 (10,305) 6,074 (13,030) 21,862
Television service customers 1,044,611 228,759
815,852
(13,248) (10,660) (22,341) (12,736)
HSI service customers 857,786 184,805
672,981
8,889 11,184 19,341 22,737
Telephony service customers 552,230 78,986
473,244
(5,946) 5,550 (10,030) 11,861
(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.
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2014 12
OPERATING RESULTS
Quarters ended Six months ended
February 28,
2014
February 28,
2013
(1)
Change
February 28,
2014
February 28,
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
(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.
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2014 13
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
projections
April 9, 2014
Revised
projections
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
(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 approximately 45.8% 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
projections
April 9, 2014
Revised
projections
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.
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2014 14
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.
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2014 15
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 28,
2014
February 28,
2013
(1)
February 28,
2014
February 28,
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.
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2014 16
Free cash flow is calculated as follows:
Quarters ended Six months ended
February 28,
2014
February 28,
2013
(1)
February 28,
2014
February 28,
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,
2014
February 28,
2013
(1)
February 28,
2014
February 28,
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.
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2014 17
SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION
Quarters ended February 28, November 30, August 31, May 31,
(in thousands of dollars, except per share data)
2014 2013
(2)
2013 2012
(2)
2013
(2)
2012 2013
(2)
2012
$ $ $ $ $ $ $ $
Revenue 518,477 458,501 516,971 366,608 504,714 356,685
504,434 358,032
Adjusted EBITDA 221,807 196,272 224,040 156,884 224,608 163,617
220,878 158,446
Income taxes 14,147 15,089 15,837 19,172 10,374 33,625 19,080 22,278
Profit for the period 58,467 48,950 56,839 47,106 43,770 44,900 49,995 55,373
Profit for the period attributable to owners of the
Corporation 17,391 14,676 23,055 18,530 13,869 13,889 17,185 19,303
Cash flow from operating activities 187,611 157,095 60,235 (6,005) 233,464 203,193
167,641 109,546
Cash flow from operations 173,415 140,124 159,222 101,501 162,138 119,612
158,172 117,606
Acquisitions of property, plant and equipment,
intangible and other assets
81,997 106,019 86,580 83,155 108,756 124,638
113,492
88,141
Free cash flow (deficit) 91,418 34,105 72,642 18,346 53,382 (5,026) 44,680 29,465
Earnings per share
(1)
Basic 1.04 0.88 1.38 1.11 0.83 0.83 1.03 1.15
Diluted 1.03 0.87 1.37 1.10 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-Rivières 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.
Montréal, Québec
April 9, 2014