Cogeco

Press release details

Solid results and higher dividend for COGECO stemming from continuous growth in Canadian cable operations despite a write-off of Cogeco Cable’s Cabovisão investment

PRESS RELEASE
For immediate release
Solid results and higher dividend for COGECO stemming from continuous growth in
Canadian cable operations despite a write-off of Cogeco Cable’s Cabovisão investment
Montréal, July 7, 2011 Today, COGECO Inc. (TSX: CGO) (“COGECO” or the “Company”) announced its financial results
for the third quarter and first nine months of fiscal 2011, ended May 31, 2011.
For the third quarter and first nine months of fiscal 2011:
Revenue increased by 13.3% to reach $375 million in the quarter, and by 8.1% to reach $1,068.4 million in the first
nine months;
Operating income before amortization
(1)
grew by 15.5% to reach $147.8 million in the quarter and by 10.3% to reach
$420.8 million in the first nine months when compared to the same periods of fiscal 2010;
Operating margin
(1)
increased to 39.4% in the third quarter and first nine months, compared to 38.7% and 38.6%,
respectively, in the third quarter and first nine months of fiscal 2010;
In the third quarter of fiscal 2011, a write-off of Cogeco Cable Inc.’s net investment in Cabovisão was recorded
through a non-cash impairment loss in the amount of $225.9 million as a result of the severe decline in the economic
environment in Portugal, with the Country ultimately requiring financial assistance from the International Monetary
Fund and the European Central Bank, combined with subscriber losses in the third quarter despite additional
marketing initiatives designed to generate RGU growth in the near term. Net of non-controlling interest, the
impairment loss reduced the Company’s net income by an amount of $72.7 million in the third quarter and first nine
months of fiscal 2011;
In the first nine months, Cogeco Cable Inc. redeemed its $175 million Senior Secured Notes Series B, bearing
interest at 7.73%, from the net proceeds of the issuance, in the first quarter of fiscal 2011, of the $200 million Senior
Secured Debentures Series 2, bearing interest at 5.15%. A one-time make-whole premium of $8.8 million was paid
on the redemption, which increased financial expense;
Net loss amounted to $56.7 million in the third quarter, compared to net income of $10.7 million for the same period
of the previous fiscal year. The net loss in the third quarter of fiscal 2011 was due to the write-off of Cogeco Cable’s
net investment in Cabovisão described above. Excluding this amount, adjusted net income
(1)
would have amounted
to $16 million, an increase of $5.3 million, or 49% when compared to the third quarter of the prior year;
For the first nine months of fiscal 2011, net loss amounted to $30.1 million, also as a result of the write-off of Cogeco
Cable Inc.’s net investment in Cabovisão described above. In the first nine months of fiscal 2010, net income
amounted to $44 million, which included a favourable income tax adjustment, net of non-controlling interest, of
$9.6 million related to the reduction of Ontario provincial corporate income tax rates for the Company’s Canadian
operations. Excluding these adjustments, adjusted net income
(1)
of $42.6 million in the first nine months of fiscal 2011
represents a progression of $8.2 million, or 24% when compared to $34.4 million in the first nine months of fiscal
2010;
Free cash flow
(1)
of $63.6 million was posted in the third quarter, $13.9 million, or 28.1% higher than $49.6 million in
the comparable period of the prior year. In the first nine months, free cash flow amounted to $87.5 million, compared
to $162.5 million in the first nine months of fiscal 2010. This reduction is primarily due to the recognition of current
income tax expense relating to the modifications to the cable subsidiary’s corporate structure which reduced the
future income tax expense accordingly and to the increase in financial expense;
Quarterly dividends of $0.12 per share were paid to the holders of subordinate and multiple voting shares, a quarterly
increase of $0.02 per share, or 20%, when compared to quarterly dividends of $0.10 per share in the first nine
months of fiscal 2010. Dividend payments in the first nine months totalled $0.36 per share in fiscal 2011, compared to
$0.30 per share in fiscal 2010. In addition, the Board of Directors declared a dividend of $0.14 per share payable in
the fourth quarter of fiscal 2011, an increase of 40% when compared to the prior year, reflecting the continued strong
financial performance;
(1) The indicated terms do not have standard definitions prescribed by Canadian Generally Accepted Accounting Principles (“GAAP”) and therefore, may not be
comparable to similar measures presented by other companies. For more details, please consult the “Non-GAAP financial measures” section of the
Management’s Discussion and Analysis.
On February 1, 2011, the Company concluded its acquisition of Corus Entertainment Inc.’s Québec radio stations
(the “Québec Radio Stations Acquisition”) for $80 million, subject to customary closing adjustments and conditions;
In the cable sector, revenue-generating units (“RGU”)
(2)
grew by 41,819 net additions in the quarter and 189,767 net
additions in the first nine months, for a total of 3,369,116 RGU at May 31, 2011.
“COGECO’s solid results in the third quarter of fiscal 2011 are mainly attributable to the performance of Cogeco Cable’s
Canadian operations, which generated continued RGU and revenue growth,” declared Louis Audet, President and CEO of
COGECO. “However, in the European operations, customer losses and service reductions have become more significant and
persistent than Cogeco Cable’s management expected. This situation is due to economic measures taken by the Portuguese
government to reform the economy and reduce the deficit, which led to a decrease in customer spending capacity. Under
these prevailing circumstances Cogeco Cable wrote-off its investment in its Portuguese subsidiary, Cabovisão.”
“As for our Canadian business activities, Cogeco Cable has concluded in the past weeks an agreement to acquire all of the
shares of Quiettouch Inc., a leading independent provider of outsourced managed information technology and infrastructure
services to mid-market and larger enterprises in Canada. We expect the transaction, which will boost our business offering, to
close during the last quarter of fiscal 2011,” continued Mr. Audet.
“On the radio front, Cogeco Diffusion completed its first full quarter since the acquisition Corus Entertainment Inc.’s Québec
radio stations was completed on February 1
st
, 2011. The integration of the newly acquired radio stations, which contributed
positively to our quarterly results, continues to go according to plan. COGECO now has a stronger position in the Québec
radio market, with 13 stations in five regions. Cogeco Diffusion has also submitted to the CRTC a licence request to operate
two AM stations in the Montréal market, which would be entirely dedicated to weather and traffic. A decision is expected in the
coming months,” added Mr. Audet.
“Despite the Cabovisão situation, we expect to meet most of fiscal 2011 financial targets. Our results and future outlook
remain positive, which is why the quarterly dividend has been increased from $0.12 to $0.14 per share. As for our fiscal 2012
preliminary guidelines, we expect to continue to generate growth for most of our key performance indicators, with operating
income before amortization growing by 6.3% and free cash flow, by 31.3%”, said Mr. Audet.
ABOUT COGECO
COGECO (www.cogeco.ca) is a diversified communications company. Through its Cogeco Cable subsidiary, COGECO provides its residential
customers with Audio, Analogue and Digital Television, as well as HSI and Telephony services using its two-way broadband cable networks.
Cogeco Cable also provides, to its commercial customers, through its subsidiary Cogeco Data Services, data networking, e-business
applications, video conferencing, hosting services, Ethernet, private line, VoIP, HSI access, data storage, data security and co-location
services and other advanced communication solutions. Through its Cogeco Diffusion subsidiary, COGECO owns and operates 13 radio
stations across most of Québec with complementary radio formats serving a wide range of audiences. 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).
– 30 –
Source:
C
OGECO
Pierre Gagné
Senior Vice President and Chief Financial Officer
Tel.: 514-764-4700
Information:
Media
René Guimond
Vice President, Public Affairs and Communications
Tel.: 514-764-4746
Analyst Conference Call:
Thursday
,
July
7
,
2011
at 11:00 a.m. (EDT)
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: 1 866 321-8231
International Access Number: + 1 416 642-5213
Confirmation Code: 3298006
By Internet at www.cogeco.ca/investors
A rebroadcast of the conference call will be available until July 14, 2011, by dialing:
Canada and USA access number: 1 888 203-1112
International access number: + 1 647 436-0148
Confirmation code: 3298006
(2) Represents the sum of Basic Cable, High Speed Internet (“HSI”), Digital Television and Telephony service customers.
SHAREHOLDERS’ REPORT
Third quarter ended May 31
,
SHAREHOLDERS’ REPORT
,
2011
FINANCIAL HIGHLIGHTS
Quarters ended May 31, Nine months ended May 31,
2011
2010
Change
2011
2010
Change
($000, except percentages and per share data)
$
$
%
$
$
%
Operations (unaudited)
(unaudited)
(unaudited)
(unaudited)
Revenue
374,957
330,933
13.3
1,068,367
988,023
8.1
Operating income before amortization
(1)
147,807
127,928
15.5
420,790
381,554
10.3
Operating margin
(1)
39.4%
38.7%
39.4%
38.6%
Operating income
81,535
64,008
27.4
225,952
185,940
21.5
Impairment of goodwill and fixed assets
225,873
225,873
Net income (loss)
(56,672)
10,740
(30,052)
43,999
Adjusted net income
(1)
16,007
10,740
49.0
42,627
34
,379
24.0
Cash Flow
Cash flow from operating activities
147,244
110,756
32.9
301,480
226,844
32.9
Cash flow from operations
(1)
135,161
119,140
13.4
298,335
374,989
(20.4)
Capital expenditures and increase in deferred charges
71,587
69,511
3.0
210,848
212,447
(0.8)
Free cash flow
(1)
63,574
49,629
28.1
87,487
162,542
(46.2)
Financial Condition
(2)
Fixed assets
1,168,001
1,328,866
(12.1)
Total assets
2,707,787
2,744,656
(1.3)
Indebtedness
(3)
1,033,075
961,354
7.5
Shareholders’ equity
346,745
381,635
(9.1)
RGU growth 41,819
64,241
(34.9)
189,767
222,808
(14.8)
Per Share Data
(4)
Earnings (loss) per share
Basic
(3.39)
0.64
(1.80)
2.63
Diluted
(3.39)
0.64
(1.80)
2.62
Adjusted earnings per share
(1)
Basic
0.96
0.64
50.0
2.55
2.06
23.8
Diluted
0.95
0.64
48.4
2.53
2.05
23.4
(1) The indicated terms do not have standardized definitions prescribed by Canadian
Generally Accepted Accounting Principles (“GAAP”) and therefore, may not
be comparable to similar measures presented by other companies. For more details, please consult the “Non-
GAAP financial measures” section of the
Management’s Discussion and Analysis.
(2) At May 31, 2011 and August 31, 2010.
(3) Indebtedness is defined as the total of bank indebtedness, promissory note payable, principal on long-
term debt and obligations under derivative financial
instruments.
(4) Per multiple and subordinate voting share.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Third quarter ended May 31
,
MANAGEMENT’S DISCUSSION AND ANALYSIS
,
2011
MANAGEMENT’S DISCUSSION AND ANALYSIS
(MD&A)
Management’s Discussion and Analysis COGECO INC. Q3 2011 3
FORWARD-LOOKING STATEMENTS
Certain statements in this report 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 Company’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 Company, they may prove to be incorrect. The
Company cautions the reader that the economic downturn experienced over the past two 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 Company’s expectations. It is impossible for COGECO to predict with certainty the impact that the current economic downturn may
have on future results. Forward-looking information is also subject to certain factors, including risks and uncertainties (described in the
“Uncertainties and main risk factors” section of the Company’s 2010 annual Management’s Discussion and Analysis (MD&A)) that could cause
actual results to differ materially from what COGECO currently expects. These factors include technological changes, changes in market and
competition, governmental or regulatory developments, general economic conditions, the development of new products and services, the
enhancement of existing products and services, and the introduction of competing products having technological or other advantages, many of
which are beyond the Company’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 Company is under no obligation (and expressly disclaims any such obligation), and does not
undertake to update or alter this information before the next quarter.
This report should be read in conjunction with the Company’s consolidated financial statements, and the notes thereto, prepared in
accordance with Canadian GAAP and the MD&A included in the Company’s 2010 Annual Report. Throughout this discussion, all amounts are
in Canadian dollars unless otherwise indicated.
Management’s Discussion and Analysis COGECO INC. Q3 2011 4
CORPORATE STRATEGIES AND OBJECTIVES
COGECO Inc.’s (“COGECO” or the “Company”) objectives are to maximize shareholder value by increasing profitability and ensuring
continued growth. The strategies employed to reach these objectives, supported by tight controls over costs and business processes, are
specific to each sector. For the cable sector, sustained corporate growth and the continuous improvement of networks and equipment are the
main strategies used. The radio activities focus on continuous improvement of programming in order to increase market share, and, thereby,
profitability. COGECO uses operating income before amortization
(1)
, operating margin
(1)
, free cash flow
(1)
and revenue-generating units
(“RGU”)
(2)
growth in order to measure its performance against these objectives for the cable sector.
Cable sector
During the first nine months of fiscal 2011, the Company’s subsidiary, Cogeco Cable Inc. (“Cogeco Cable” or the “Cable subsidiary”), invested
approximately $100 million in its network infrastructure and equipment to upgrade its capacity, improve its robustness and extend its territories
in order to better serve and increase its service offerings for new and existing clientele.
RGU growth and service offerings in the cable sector
During the first nine months ended May 31, 2011, the number of RGU in the Cable subsidiary increased by 189,767, or 6%, to reach
3,369,116 RGU, mainly as a result of targeted marketing initiatives in the Canadian operations and to the continuing interest for high definition
(“HD”) television service, which offset the lower customer growth in the European operations resulting primarily from the impact of further
austerity measures announced by the Portuguese government in recent months which adversely impact consumer spending. In light of the
lower RGU growth in the European operations during the first nine months of fiscal 2011, Cogeco Cable has revised its guidelines from
275,000 as issued on January 12, 2011 to 250,000 net additions, or approximately 7.9% when compared to August 31, 2010. RGU growth is
expected to stem primarily from the Canadian operations of the cable subsidiary and reflect the continued strong interest in Digital Television
services, enhanced service offerings and promotional activities. Please consult the “Fiscal 2011 financial guidelines” section for further details.
Operating income before amortization and operating margin
For the first nine months of fiscal 2011, operating income before amortization grew by $39.2 million, or 10.3%, to reach $420.8 million, in line
to achieve management’s revised projection of $560 million in operating income before amortization for fiscal 2011. Operating margin
increased to 39.4%, from 38.6% in the first nine months of the year.
Free cash flow
For the nine-month period ended May 31, 2011, COGECO achieved free cash flow of $87.5 million, compared to $162.5 million for the
comparable period of the previous fiscal year, a decrease of $75.1 million. The decrease in free cash flow in the first nine months of
fiscal 2011 reflects the timing of the recognition of income tax liabilities as a result of modifications made to Cogeco Cable’s corporate
structure in fiscal 2009. As a result of an increase in capital expenditures expected in the last quarter of fiscal 2011, management maintains its
revised free cash flow guideline of $80 million for the 2011 fiscal year.
Other
BBM Canada’s spring 2011 survey and radio broadcast week measures from February 28, 2011 to May 29, 2011, conducted with the Portable
People Meter (“PPM”), show that Rythme FM has maintained its leadership position in the competitive Montréal region market.
On June 27, 2011, Cogeco Cable concluded an agreement to acquire all of the shares of Quiettouch Inc. (the “Quiettouch acquisition”), a
leading independent provider of outsourced managed information technology and infrastructure services to mid-market and larger enterprises
in Canada. Quiettouch offers a full suite of differentiated services that allow customers to outsource their mission-critical information
technology infrastructure and application requirements, including managed infrastructure and hosting, virtualization, firewall services, data
backup with end-to-end monitoring and reporting, and enhanced and traditional colocation services. Quiettouch operates three data centres in
Toronto and Vancouver, as well as a fibre network within key business areas of downtown Toronto. The transaction is subject to certain
arrangements and commercial approvals, and is expected to close during the last quarter of fiscal 2011.
On April 30, 2010, the Company concluded an agreement with Corus Entertainment Inc. (“Corus”) to acquire its Québec radio stations
(“Québec Radio Stations Acquisition”) for $80 million, subject to customary closing adjustments and conditions, which was concluded on
February 1, 2011.
(1) The indicated terms do not have standardized definitions prescribed by Canadian Generally Accepted Accounting Principles (“GAAP”) and therefore, may not
be comparable to similar measures presented by other companies. For more details, please consult the “Non-GAAP financial measures” section.
(2) Represents the sum of Basic Cable, High Speed Internet (“HSI”), Digital Television and Telephony service customers.
Management’s Discussion and Analysis COGECO INC. Q3 2011 5
OPERATING RESULTS – CONSOLIDATED OVERVIEW
Quarters ended May 31, Nine months ended May 31,
2011
2010
Change
2011
2010
Change
($000, except percentages)
$
$
%
$
$
%
(unaudited)
(unaudited)
(unaudited)
(unaudited)
Revenue
374,957
330,933
13.3
1,068,367
988,023
8.1
Operating costs
227,150
203,005
11.9
647,577
606,469
6.8
Operating income before amortization
147,807
127,928
15.5
420,790
381,554
10.3
Operating margin
39.4%
38.7%
39.4%
38.6%
Revenue
Fiscal 2011 third-quarter revenue improved by $44 million, or 13.3%, to reach $375 million primarily due to the cable sector and the results of
the Québec Radio Stations Acquisition. Revenue amounted to $1,068.4 million in the first nine months of fiscal 2011, $80.3 million, or 8.1%,
higher than in the same period of fiscal 2010.
Cable revenue increased by $23.6 million, or 7.4%, for the third quarter and by $53.9 million, or 5.6%, in the first nine months when compared
to the same periods of the prior year. For further details on Cogeco Cable’s operating results, please refer to the “Cable sector” section.
Revenue from the radio activities improved by $20.4 million in the third quarter and by $26.4 million in the first nine months, mainly as a result
of the Québec Radio Stations Acquisition.
Operating costs
For the third quarter and first nine months of fiscal 2011, operating costs amounted to $227.2 million and $647.6 million, increases of
$24.1 million, or 11.9%, and of $41.1 million, or 6.8%, when compared to the prior year, mainly from the Québec Radio Stations Acquisition
combined with increases in the cable sector.
Operating costs in the Cable sector increased by $6.2 million, or 3.2%, for the third quarter and by $17.8 million, or 3.1%, in the first nine
months when compared to the same periods of the prior year. For further details on Cogeco Cable’s operating results, please refer to the
“Cable sector” section.
Operating costs from the other activities, including radio activities, grew by $17.9 million in the third quarter and $23.1 million in the first nine
months, mainly from the Québec Radio Stations Acquisition.
Operating income before amortization and operating margin
Mainly as a result of the Québec Radio Stations Acquisition and growth in the cable sector, operating income before amortization grew by
$19.9 million, or 15.5%, in the third quarter to reach $147.8 million, and by $39.2 million, or 10.3%, at $420.8 million for the first nine months of
fiscal 2011, when compared to the same periods the previous year. COGECO’s operating margin increased to 39.4% in the three and
nine-month periods ended May 31, 2011, from 38.7% in the third quarter and 38.6% in the first nine months of the previous year. For further
details on the Company’s operating results, please refer to the “Cable sector” section.
FIXED CHARGES
Quarters ended May 31, Nine months ended May 31,
2011
2010
Change
2011
2010
Change
($000, except percentages)
$
$
%
$
$
%
(unaudited)
(unaudited)
(unaudited)
(unaudited)
Amortization
66,272
63,920
3.7
194,838
195,614
(0.4)
Financial expense
16,766
16,824
(0.3)
58,172
48,288
20.5
Third-quarter 2011 amortization amounted to $66.3 million, compared to $63.9 million for the same period of the prior year. The increase is
mainly due to additional capital expenditures in Cogeco Cable’s Canadian operations arising from customer premise equipment acquisitions to
support RGU growth, partly offset by a reduction in amortization in the European operations stemming from certain acquired assets that are
now fully amortized. For the first nine months, amortization was essentially the same at $194.8 million when compared to $195.6 million in the
first nine months of the prior year.
Financial expense amounted to $16.8 million in the third quarter essentially the same when compared to the prior year. In the first nine months
of fiscal 2011, financial expense amounted to $58.2 million, compared to $48.3 million in the first nine months of the prior year. Financial
expense in the first nine months includes the payment, in the Cable sector, of a make-whole premium amounting to $8.8 million on the early
repayment, on December 22, 2010, of the $175 million Senior Secured Notes Series B due on October 31, 2011. The remaining variance is
mainly attributable to the financial expense impact of fluctuations in the level of bank indebtedness, combined with the impact of the lower
interest rate on the $200 million Senior Secured Debentures Series 2 issued by Cogeco Cable on November 16, 2010.
Management’s Discussion and Analysis COGECO INC. Q3 2011 6
IMPAIRMENT OF GOODWILL AND FIXED ASSETS
During the third quarter of fiscal 2011, the economic environment in Portugal continued to deteriorate, with the Country ultimately requiring
financial assistance from the International Monetary Fund and the European Central Bank. As part of the negotiated financial assistance
package, the Portuguese government has committed to financial reforms which include increases in sales and income taxes combined with
reductions in government spending on social programs. These measures are expected to put further downwards pressure on consumer
spending capacity. The rate of growth for Cogeco Cable’s services has diminished in this environment, with net customer losses and service
downgrades by customers in the European operations in the third quarter of fiscal 2011. Please refer to the “Cable sector” section for further
details. In accordance with current accounting standards, Cogeco Cable’s management considered that this situation combined with net
customer losses in the third quarter, which were significantly more important and persistent than expected, will continue to negatively impact
the financial results of the European operations and indicate a decrease in the value of Cogeco Cable’s investment in its Portuguese
subsidiary. As a result, Cogeco Cable tested goodwill and all long-lived assets for impairment at May 31, 2011.
Goodwill is tested for impairment using a two step approach. The first step consists of determining whether the fair value of the reporting unit
to which goodwill is assigned exceeds the net carrying amount of that reporting unit, including goodwill. In the event that the net carrying
amount exceeds the fair value, a second step is performed in order to determine the amount of the impairment loss. The impairment loss is
measured as the amount by which the carrying amount of the reporting unit’s goodwill exceeds its fair value. Cogeco Cable completed its
impairment test on goodwill and concluded that goodwill was impaired at May 31, 2011. As a result, a non-cash impairment loss of
$29.3 million was recorded in the third quarter of the 2011 fiscal year. Fair value of the reporting unit was determined using the discounted
cash flow method. Future cash flows were based on internal forecasts and consequently, considerable management judgement was
necessary to estimate future cash flows.
Long-lived assets with finite useful lives, such as fixed assets, are tested for impairment by comparing the carrying amount of the asset or
group of assets to the expected future undiscounted cash flows to be generated by the asset or group of assets. The impairment loss is
measured as the amount by which the asset’s carrying amount exceeds its fair value. Accordingly, Cogeco Cable completed its impairment
test on the fixed assets of the Portuguese subsidiary at May 31, 2011, and determined that the carrying value of these assets exceeded the
expected future undiscounted cash flows to be generated by these assets. As a result, a non-cash impairment loss of $196.5 million was
recognized in the third quarter of the 2011 fiscal year.
The impairment of goodwill and fixed assets (the “impairment loss”), which effectively wrote-off Cogeco Cable’s net investment in Cabovisão
affected the Company’s financial results as follows for the third quarter and first nine months of fiscal 2011:
($000)
Impairment of goodwill 29,344
Impairment of fixed assets 196,529
Impairment loss
225,873
Income taxes
Non-controlling interest (153,194)
Impairment loss net of income taxes and non-controlling interest 72,679
INCOME TAXES
Fiscal 2011 third-quarter income tax expense amounted to $19 million, compared to $15.3 million in the prior year. The increase of
$3.7 million, or 24%, is mainly due to operating income before amortization growth, partly offset by the previously announced declines in the
enacted Canadian federal and provincial income tax rates.
For the first nine months, income tax expense amounted to $51.5 million, compared to $14 million in the prior year. The income tax expense in
the first nine months of the prior year included the impact, in the cable sector, of the reduction in corporate income tax rates announced on
March 26, 2009 by the Ontario provincial government and considered substantively enacted on November 16, 2009 (the “reduction of Ontario
provincial corporate income tax rates”), which reduced future income tax expense by $29.8 million. Excluding this prior year impact, income
tax expense would have amounted to $43.8 million for the first nine months of fiscal 2010. Fiscal 2011 income tax expense increase is mainly
due to operating income before amortization growth, partly offset by the increase in financial expense and the previously announced declines
in the enacted Canadian federal and provincial income tax rates.
NON-CONTROLLING INTEREST
The non-controlling interest represents a participation of approximately 67.8% in Cogeco Cable’s results. During the third quarter of fiscal 2011
the loss attributable to non-controlling interest amounted to $123.4 million, and $79.5 million for the nine months ended May 31, 2011, due to
the impairment loss recorded in the cable sector. The income attributable to non-controlling interest for the comparable periods of the prior
year amounted to $21.1 million and $79.6 million, respectively.
NET INCOME (LOSS)
For the three and nine-month periods ended May 31, 2011, net losses amounted to $56.7 million, or $3.39 per share, and $30.1 million, or
$1.80 per share, respectively, as a result of the previously described impairment loss of $72.7 million, net of income tax and non-controlling
interest. For the comparable periods of fiscal 2010, net income amounted to $10.7 million, or $0.64 per share in the quarter, and $44 million,
or $2.63 per share in the first nine months. Fiscal 2010 first nine months net income included the reduction of Ontario provincial corporate
income tax rates described in the “Income Taxes” section, which increased net income by an amount of $9.6 million net of non-controlling
interest.
Management’s Discussion and Analysis COGECO INC. Q3 2011 7
Excluding the impairment loss in the current year and the reduction of income tax rates in the prior year, fiscal 2011 adjusted net income
(1)
amounted to $16 million, or $0.96 per share
(1)
in the third quarter, representing growth of $5.3 million, or 49%, and of $0.32 per share, or 50%,
when compared to $10.7 million, or $0.64 per share in the prior year. Adjusted net income in the first nine months of fiscal 2011 grew by
$8.2 million, or 24%, and $0.49 per share, or 23.8%, to reach $42.6 million or $2.55 per share when compared to $34.4 million or $2.06 per
share in the comparable period of the prior year. Net income progression for both periods has resulted mainly from the growth in operating
income before amortization, partly offset in the first nine months by the make-whole premium on early repayment of debt of $2 million, net of
income taxes and non-controlling interest.
CASH FLOW AND LIQUIDITY
Quarters ended May 31, Nine months ended May 31,
2011
2010
2011
2010
($000)
$
$
$
$
(unaudited)
(unaudited)
(unaudited)
(unaudited)
Operating activities
Cash flow from operations
135,161
119,140
298,335
374,989
Changes in non-cash operating items
12,083
(8,384)
3,145
(148,145)
147,244
110,756
301,480
226,844
Investing activities
(1)
(71,371)
(69,488)
(286,515
)
(212,161)
Financing activities
(1)
(12,147)
(36,043)
39,489
(31,284)
Effect of exchange rate changes on cash and cash equivalents denominated in a
foreign currency 573
(846)
438
(1,746)
Net change in cash and cash equivalents 64,299
4,379
54,892
(18,347)
Cash and cash equivalents, beginning of period
26,435
16,732
35,842
39,458
Cash and cash equivalents, end of period 90,734
21,111
90,734
21,111
(1) Excludes assets acquired under capital leases.
Fiscal 2011 third quarter cash flow from operations reached $135.2 million, compared to $119.1 million in the third quarter of the prior year.
The increase of $16 million, or 13.4%, is mainly attributable to the increase in operating income before amortization, partly offset by the
decrease in current income tax recovery. Changes in non-cash operating items generated cash inflows of $12.1 million, mainly as a result of
an increase in accounts payable and accrued liabilities and a decrease in income taxes receivable, partly offset by a decrease in income tax
liabilities. In the prior year, changes in non-cash operating items required cash outflows of $8.4 million, mainly as a result of an increase in
income taxes receivable and a decrease in accounts payable and accrued liabilities.
In the first nine months of fiscal 2011, cash flow from operations reached $298.3 million, $76.7 million, or 20.4%, lower than the comparable
period last year. This reduction is primarily due to the recognition of current income tax expense relating to the modifications to Cogeco
Cable’s corporate structure which reduced the future income tax expense accordingly and to the payment of a make-whole premium
amounting to $8.8 million on the early repayment of the Senior Secured Notes Series B, also in the cable sector, partly offset by the increase
in operating income before amortization. Changes in non-cash operating items generated cash inflows of $3.1 million, mainly as a result of an
increase in income tax liabilities and a decrease in income taxes receivable, partly offset by a decrease in accounts payable and accrued
liabilities and an increase in accounts receivable. In the prior year, changes in non-cash operating items required cash outflows of $148.1
million, mainly as a result of decreases in accounts payable and accrued liabilities and in income tax liabilities, combined with increases in
income taxes receivable and accounts receivable, partly offset by an increase in deferred and prepaid revenue and other liabilities.
In the third quarter of fiscal 2011, investing activities, including mainly capital expenditures and the increase in deferred charges, amounted to
$71.4 million, an increase of $1.9 million, or 2.7% when compared to $69.5 million for the corresponding period of last year. The most
significant variations are in the cable sector and are due to the following factors:
An increase in customer premise equipment spending mainly due to the timing of equipment purchases to support RGU growth in
the Canadian operations. This increase was partly offset by the decrease in customer premise equipment spending reflecting lower
RGU growth in the European operations, net of the impact of the higher value of the Euro relative to the Canadian dollar when
compared to the third quarter of the prior year;
A decrease in support capital spending since there were prior year acquisitions of new facilities in the Canadian operations.
In the first nine months of fiscal 2011, investing activities amounted to $286.5 million as a result of the net outflows related to the Québec
Radio Stations Acquisition for an amount of $75.9 million described below, capital expenditures and the increase in deferred charges. This
represents an increase of $74.4 million, or 35% when compared to $212.2 million for the corresponding period of last year.
On April 30, 2010, the Company concluded an agreement with Corus to acquire its Québec radio stations for $80 million, subject to customary
closing adjustments and conditions, including approval by the Canadian Radio-television and Telecommunications Commission (“CRTC”). On
June 30, 2010, the Company submitted its application for approval of the Québec Radio Stations Acquisition to the CRTC. On
December 17, 2010, the CRTC approved the transaction essentially as proposed. On January 11, 2011, the Company was served with an
application by Astral to the Court for leave to appeal the CRTC decision approving the transaction, and a related application by Astral for a
stay of execution of that decision until final judgement of the Court. On February 21, 2011 the Court has rejected applications filed by Astral in
the matter of the Québec Radio Stations Acquisition. The transaction with Corus was concluded on February 1, 2011.
(1) The indicated terms do not have standardized definitions prescribed by Canadian GAAP and therefore, may not be comparable to similar measures presented
by other companies. For more details, please consult the “Non-GAAP financial measures” section.
Management’s Discussion and Analysis COGECO INC. Q3 2011 8
Pursuant to this acquisition, and as part of the CRTC’s decision on the Company’s transfer application, the Company has put up for sale two
radio stations acquired in the transaction, CFEL-FM in the Québec City market and CJTS-FM in the Sherbrooke market. Accordingly, the
assets and liabilities of the two acquired radio stations put up for sale have been classified as held for sale in the preliminary purchase price
allocation presented below. In addition to the two acquired radio stations above, and also as part of the CRTC’s decision, the Company has
put up for sale radio station CJEC-FM, which it owned prior to the Québec Radio Stations Acquisition, in the Québec City market. Radio
stations for which divestiture has been required by the CRTC, and the sale process, are managed by a trustee approved by the CRTC
pursuant to a voting trust agreement.
This acquisition was accounted for using the purchase method. The results have been consolidated as of the acquisition date. The preliminary
allocation of the purchase price of the acquisition, pending the completion of the valuation of the net assets acquired, is as follows:
$
(unaudited)
Consideration
Paid
Purchase of shares
75,000
Acquisition costs
1,530
76,530
Promissory note payable, non-interest bearing and due on February 1, 2012
5,000
Investment previously accounted for
200
Acquisition costs previously recorded as deferred charges
435
Preliminary working capital adjustment payable
4,000
86,165
Net assets acquired
Cash and cash equivalents
647
Accounts receivable
14,132
Income tax receivable
92
Prepaid expenses and other
527
Current future income tax assets
1,018
Fixed assets
11,497
Deferred charges and other
99
Broadcasting licenses
48,193
Goodwill
27,227
Non-current future income tax assets
2,272
Non-current assets held for sale
9,531
Accounts payable and accrued liabilities assumed
(9,058)
Income tax liabilities assumed
(194)
Current liabilities related to assets held for sale
(797)
Deferred and prepaid revenue and other liabilities
(7,390)
Non-current future income tax liabilities
(10,656)
Non-current liabilities related to assets held for sale
(975)
86,165
In the first nine months of fiscal 2011, capital expenditures amounted to $202.3 million, a decrease of $1.9 million, or 0.9%, when compared to
$204.2 million in the first nine months of the prior fiscal year. The most significant variations are in the cable sector and are due to the
following factors:
An increase in customer premise equipment spending mainly due to the timing of equipment purchases to support RGU growth in
the Canadian operations. This increase was partly offset by the decrease in customer premise equipment spending reflecting lower
RGU growth in the European operations combined with the impact of the lower value of the Euro relative to the Canadian dollar
when compared to the same period of the prior year;
An increase in scalable infrastructure in the Canadian operations to improve network capacity in existing areas served;
Decreases in upgrades and rebuilds and in line extensions stemming from the timing of the various initiatives undertaken by Cogeco
Cable in order to expand its network and improve its capacity;
A decrease in support capital spending since there were prior year acquisitions of new facilities in the Canadian operations.
In the third quarter, free cash flow amounted to $63.6 million, compared to $49.6 million in the comparable period of fiscal 2010, representing
an increase of $13.9 million, or 28.1%. The growth in free cash flow over the prior year is due to the increase in operating income before
amortization, partly offset by the decrease in current income tax recovery.
In the first nine months, free cash flow amounted to $87.5 million, a decrease of $75.1 million, or 46.2%, when compared to $162.5 million in
the first nine months of fiscal 2010. The decline in free cash flow over the prior year is due to an increase of $109.3 million in current income
tax expense in the cable sector stemming primarily from modifications to Cogeco Cable’s corporate structure and the increase in financial
expense, which offset the increase in operating income before amortization and the decrease in capital expenditures in the first nine months of
fiscal 2011.
Management’s Discussion and Analysis COGECO INC. Q3 2011 9
In the third quarter of fiscal 2011, Indebtedness affecting cash decreased by $5.1 million mainly due to the free cash flow of $63.6 million and
the cash inflows of $12.1 million from the changes in non-cash operating items, offset by the increase in cash and cash equivalents of
$64.3 million and the dividend payment of $7.6 million described below. Indebtedness mainly decreased through a net repayment of
$4.4 million on the Company’s Term Revolving Facilities. In the third quarter of the prior year, Indebtedness affecting cash decreased by
$29.5 million mainly due to the free cash flow of $49.6 million, partly offset by the cash outflows of $8.4 million from the changes in non-cash
operating items, the dividend payment of $6.3 million described below and the increase in cash and cash equivalents of $4.4 million.
Indebtedness mainly decreased through a net repayment of $33.2 million on Cogeco Cable’s Term Facility.
During the third quarter of fiscal 2011, a dividend of $0.12 per share was paid by the Company to the holders of subordinate and multiple
voting shares, totalling $2 million, compared to a dividend of $0.10 per share, or $1.7 million the year before. In addition, dividends paid by a
subsidiary to non-controlling interests in the third quarter of fiscal 2011 amounted to $5.6 million, for consolidated dividend payments of
$7.6 million, compared to $4.6 million, for consolidated dividend payments of $6.3 million in the third quarter of the prior year.
In the first nine months of fiscal 2011, Indebtedness affecting cash increased by $60.5 million mainly due to the Québec Radio Stations
Acquisition for a net amount of $75.9 million, the increase in cash and cash equivalents of $54.9 million and the dividend payments totalling
$22.8 million described below. The increase was partly offset by the free cash flow of $87.5 million generated in the first nine months of the
fiscal year and the cash inflows of $3.1 million from the changes in non cash operating items. Indebtedness mainly increased through the
issuance, on November 16, 2010, of Senior Secured Debentures Series 2 (“Fiscal 2011 debentures”) for net proceeds of $198.3 million and a
net increase of $41.7 million on the Company’s Term Revolving Facilities. The increase was partly offset by the repayment, on
December 22, 2010, of Cogeco Cable’s $175 million Senior Secured Notes Series B due on October 31, 2011 and the related make-whole
premium on early repayment. For the comparable period of fiscal 2010, Indebtedness affecting cash decreased by $10.1 million mainly due to
the free cash flow of $162.5 million and the decrease in cash and cash equivalents of $18.3 million, partly offset by the cash outflows of
$148.1 million from the changes in non-cash operating items and the dividend payment of $18.8 million described below. Indebtedness mainly
decreased through net repayments totalling $61.2 million on the Company’s Term Facilities, including net repayments of $54.7 million by the
cable subsidiary, partly offset by an increase of $54.1 million in bank indebtedness.
During the first nine months of fiscal 2011, quarterly dividends of $0.12 per share, for a total of $0.36 per share, were paid to the holders of
subordinate and multiple voting shares, totalling $6 million, compared to quarterly dividends of $0.10 per share, for a total of $0.30 per share,
or $5 million the year before. In addition, dividends paid by a subsidiary to non-controlling interests in the first nine months of fiscal 2011
amounted to $16.8 million, for consolidated dividend payments of $22.8 million, compared to $13.8 million for consolidated dividend payments
of $18.8 million in the first nine months of the prior year.
As at May 31, 2011, the Company had a working capital deficiency of $135.3 million compared to $202.9 million as at August 31, 2010. The
decrease in the deficiency is mainly attributable to the cable sector and caused by increases in cash and cash equivalents and accounts
receivable and decreases in accounts payable and accrued liabilities and future income tax liabilities. The decrease was partly offset by an
increase in income tax liabilities and a decrease in income taxes receivable. 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 Cogeco Cable’s customers pay before their services
are rendered, unlike accounts payable and accrued liabilities, which are paid after products are delivered or services are rendered, thus
enabling the cable subsidiary to use cash and cash equivalents to reduce Indebtedness.
At May 31, 2011, the Company had used $72.9 million of its $100 million Term Revolving Facility for a remaining availability of $27.1 million.
Cogeco Cable had used $112.5 million of its $750 million Term Revolving Facility for a remaining availability of $637.5 million.
Transfers of funds from non-wholly owned subsidiaries to COGECO are subject to approval by the subsidiaries’ Boards of Directors and may
also be restricted under the terms and conditions of certain debt instruments. In accordance with applicable corporate and securities laws,
significant transfers of funds from COGECO may be subject to approval by minority shareholders.
FINANCIAL POSITION
Since August 31, 2010, there have been significant changes to the balances of “fixed assets”, “income tax liabilities”, “future income tax
liabilities”, “income taxes receivable”, “cash and cash equivalents”, “long-term debt”, “intangible assets”, “assets held for sale”, “accounts
payable and accrued liabilities”, “accounts receivable”, “derivative financial instruments”, “deferred and prepaid revenue and other liabilities”,
“promissory note payable”, “goodwill” and “non-controlling interest”.
The $160.9 million decrease in fixed assets reflects the impairment loss recorded in the third quarter of the fiscal year, partly offset by the
assets acquired in the Québec Radio Stations Acquisition and the capital expenditures discussed in the “Cash Flow and Liquidity” section
which surpassed the amortization expense and the impact of the depreciation of the Euro in relation to the Canadian dollar. The increase of
$68.2 million in income tax liabilities and the decreases of $18.7 million in future income tax liabilities, $6.6 million in income taxes receivable
primarily reflect the timing of the recognition of income tax liabilities as a result of modifications made to Cogeco Cable’s corporate structure,
combined with the impact of the Québec Radio Stations Acquisition and the increase in operating income before amortization. The increases
of $54.9 million in cash and cash equivalents and $49.7 million in long-term debt are due to the factors previously discussed in the “Cash Flow
and Liquidity” section combined with the fluctuations in foreign exchange rates. The increases of $44.6 million in intangible assets and
$11.6 million in assets held for sale mainly stem from the Québec Radio Stations Acquisition. The $44 million decrease in accounts payable
and accrued liabilities is related to the timing of supplier payments, partly offset by the Québec Radio Stations Acquisition. The
$28.5 million increase in accounts receivable is due to the Québec Radio Stations acquisition combined with the increase in revenue and the
timing of payments received from customers. The $19.4 million decrease in derivative financial instruments is due to the factors discussed in
the “Financial management” section. The increases of $10 million in deferred and prepaid revenue and other liabilities and $5 million in
promissory note payable are mainly due to the Québec Radio Stations acquisition. The decrease of $1.2 million in goodwill also reflects the
Québec Radio Stations Acquisition, entirely offset by the impairment loss recorded in the cable sector. The $89.6 million decrease in non-
controlling interest is due to the impairment loss recorded in the European operations of the cable sector, partly offset by improvements in the
operating results of the cable subsidiary’s Canadian operations in the current fiscal year.
Management’s Discussion and Analysis COGECO INC. Q3 2011 10
A description of COGECO’s share data as at June 30, 2011 is presented in the table below:
Number of
shares/options
Amount
($000)
Common shares
Multiple voting shares
1,842,860
12
Subordinate voting shares
14,989,338
121,976
In the normal course of business, COGECO has incurred financial obligations, primarily in the form of long-term debt, operating and capital
leases and guarantees. COGECO’s obligations, discussed in the 2010 Annual Report, have not materially changed since August 31, 2010,
except as mentioned below.
On November 16, 2010, Cogeco Cable completed, pursuant to a public debt offering, the issue of $200 million Senior Secured Debentures
Series 2 for net proceeds of $198.3 million, net of discounts and transaction costs. These debentures mature on November 16, 2020 and bear
interest at 5.15% per annum, payable semi-annually. These debentures are indirectly secured by a first priority fixed and floating charge and a
security interest on substantially all present and future real and personal property and undertaking of every nature and kind of Cogeco Cable
and certain of its subsidiaries. The net proceeds of sale of the debentures were used to redeem in full, on December 22, 2010, Cogeco
Cable’s Senior Secured Notes Series B due October 31, 2011 for an amount of $175 million plus accrued interest and make-whole premium,
and the remainder for working capital and general corporate purposes.
The Company benefits from Term Revolving Facility of up to $100 million with a group of financial institutions led by a large Canadian bank,
which acts as agent for the banking syndicate. The Term Revolving Facility of up to $100 million includes a swingline limit of $7.5 million, is
extendable by additional one-year periods on an annual basis, subject to lenders’ approval, and if not extended, matures three years after its
issuance or the last extension, as the case may be. The Term Revolving Facility is composed of two tranches of $50 million each, one of
which was subject to the completion of the Québec Radio Stations Acquisition and which became available on February 1, 2011 with the
conclusion of the transaction. The Term Revolving Facility was extended at that same date and currently matures on February 1, 2014. The
Term Revolving Facility can be repaid at any time without penalty. The Term Revolving Facility is indirectly secured by a first priority fixed and
floating charge and a security interest on substantially all present and future real and personal property and undertaking of every nature and
kind of the Company and certain of its subsidiaries, excluding the capital stock and assets of the Company’s subsidiary, Cogeco Cable, and
guaranteed by its subsidiaries excluding Cogeco Cable. Under the terms and conditions of the credit agreement, the Company must comply
with certain restrictive covenants. Generally, the most significant restrictions are related to permitted investments, dividends on multiple and
subordinate voting shares and reimbursement of long-term debt as well as incurrence and maintenance of certain financial ratios primarily
linked to the operating income before amortization, financial expense and total indebtedness. The Term Revolving Facility bears interest, at
the Company’s option, on bankers’ acceptance, LIBOR in Euros or in US dollars, bank prime rate or US base rate plus the applicable margin,
and commitment fees are payable on the unused portion.
DIVIDEND DECLARATION
At its July 6, 2011 meeting, the Board of Directors of COGECO declared a quarterly eligible dividend of $0.14 per share for subordinate and
multiple voting shares, payable on August 3, 2011, to shareholders of record on July 20, 2011, an increase of 40% compared to the dividend
of $0.10 per share declared last year. The increased dividend mainly reflects the strong financial performance of Cogeco Cable’s Canadian
operations. The declaration, amount and date of any future dividend will continue to be considered and approved by the Board of Directors of
the Company based upon the Company’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.
FINANCIAL MANAGEMENT
Cogeco Cable has entered into a swap agreement with a financial institution to fix the floating benchmark interest rate with respect to a portion
of the Euro-denominated loans outstanding under the Term Revolving Facility, and previously the Term Facility, for a notional amount of
€111.5 million, which has been reduced to €95.8 million on July 28, 2009, and to €69.6 million on July 28, 2010. The interest rate swap to
hedge these loans has been fixed at 2.08% until the settlement of the swap agreement on June 28, 2011. In addition to the interest rate swap
of 2.08%, Cogeco Cable continued to pay the applicable margin on these loans in accordance with its Term Revolving Facility. In the first nine
months of fiscal 2011, the fair value of the interest rate swap increased by $1.1 million, which is recorded as an increase of other
comprehensive income (loss), net of income taxes and non-controlling interest, compared to an increase of $0.6 million in the prior year.
Cogeco Cable has also 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. In the first nine months of fiscal 2011, amounts due under the
US$190 million Senior Secured Notes Series A decreased by $18.6 million due to the US dollar’s depreciation relative to the Canadian dollar.
The fair value of cross-currency swaps decreased by a net amount of $20.4 million, of which a decrease of $18.6 million offsets the foreign
exchange gain on the debt denominated in US dollars. The difference of $1.8 million was recorded as a decrease of other comprehensive
income (loss), net of income taxes and non-controlling interest. In the first nine months of the prior year, amounts due under the
US$190 million Senior Secured Notes Series A decreased by $9.8 million due to the US dollar’s depreciation over the Canadian dollar. The
fair value of cross-currency swaps decreased by a net amount of $3.2 million, of which $9.8 million offsets the foreign exchange gain on the
debt denominated in US dollars. The difference of $6.5 million was recorded as an increase of other comprehensive income (loss), net of
income taxes and non-controlling interest.
Furthermore, Cogeco Cable’s net investment in self-sustaining foreign subsidiaries was exposed to market risk attributable to fluctuations in
foreign currency exchange rates, primarily changes in the values of the Canadian dollar versus the Euro. This risk was mitigated since the
major part of the purchase price for Cabovisão was borrowed directly in Euros. This debt was designated as a hedge of a net investment in
self-sustaining foreign subsidiaries and, accordingly, Cogeco Cable recorded a foreign exchange gain of $3.9 million in the first nine months of
Management’s Discussion and Analysis COGECO INC. Q3 2011 11
fiscal 2011, compared to a foreign exchange loss of $13.4 million in the comparable period of the prior year, which was deferred and recorded
in the consolidated statement of comprehensive income (loss), net of income taxes and non-controlling interest. The exchange rate used to
convert the Euro currency into Canadian dollars for the balance sheet accounts as at May 31, 2011 was $1.3939 per Euro compared to
$1.3515 per Euro as at August 31, 2010. The average exchange rates prevailing during the third quarter and first nine months of fiscal 2011
used to convert the operating results of the European operations were $1.3809 per Euro and $1.3670 per Euro, respectively, compared to
$1.3472 per Euro and $1.4703 per Euro in the comparable periods of fiscal 2010. Since Cogeco Cable’s consolidated financial statements are
expressed in Canadian dollars but a portion of its business is conducted in the Euro currency, exchange rate fluctuations can increase or
decrease revenue, operating income before amortization, net income and the carrying value of assets and liabilities.
The following table shows the Canadian dollar impact of a 10% fluctuation in the average exchange rate of the Euro currency into Canadian
dollars on European operating results for the nine month period ended May 31, 2011:
Nine months ended May 31, 2011
As reported
Exchange rate
impact
($000)
$
$
(unaudited)
(unaudited)
Revenue
128,971
12,897
Operating income before amortization
14,427
1,443
The Company is also impacted by foreign currency exchange rates, primarily changes in the values of the US dollar relative to the Canadian
dollar with regards to purchases of equipment, as the majority of customer premise equipment in the cable sector is purchased and
subsequently paid in US dollars. Please consult the “Fixed charges” section of this MD&A and the “Foreign Exchange Risk” section in note 15
of the consolidated financial statements for further details.
CABLE SECTOR
CUSTOMER STATISTICS
Net additions (losses)
% of Penetration
(1)
Quarters ended May 31, Nine months ended May 31, May 31,
May 31, 2011 2011
2010
2011
2010
2011
2010
RGU
3,369,116 41,819
64,241
189,767
222,808
Basic Cable service customers
1,137,481 (3,374
)
900
2,709
8,463
HSI service customers
758,460 4,760
12,320
36,216
51,896
68.2
64.6
Digital Television service customers
818,624 28,039
30,167
99,354
88,630
72.6
61.6
Telephony service customers
654,551 12,394
20,854
51,488
73,819
60.9
55.1
(1) As a percentage of Basic Cable service customers in areas served.
In the cable sector, third quarter and first nine-month RGU net additions amounted to 41,819 and 189,767 RGU, respectively, compared to
64,241 and 222,808 RGU in the comparable periods of the previous fiscal year.
Fiscal 2011 third-quarter and first nine month RGU net additions were lower than in the comparable periods of the prior year, as the strong
RGU growth generated by the Canadian operations, despite higher penetration rates, category maturity and aggressive competition, was
offset by RGU losses in the European operations reflecting the continuing difficult economic conditions in Portugal. During the third quarter of
fiscal 2011, and as part of the negotiated financial assistance package, the Portuguese government has committed to financial reforms which
include increases in sales and income taxes combined with reductions in government spending on social programs. Please consult the
“Impairment of goodwill and fixed assets” section for further details. These measures are expected to put further downwards pressure on
consumer spending. The rate of growth for our services has diminished in this environment, with net customer losses across all of Cogeco
Cable’s services in the European operations in the third quarter of fiscal 2011.
Basic Cable service customers net losses stood at 3,374 for the quarter, compared to growth of 900 in the third quarter of the prior year. For
the first nine months, Basic Cable service customers increased by 2,709, compared to 8,463 in the prior year. In the quarter, Telephony
service customers grew by 12,394 compared to 20,854 for the same period last year, and the number of net additions to the HSI service stood
at 4,760 customers compared to 12,320 customers in the third quarter of the prior year. For the first nine months, net additions of Telephony
service customers amounted to 51,488 compared to 73,819 for the same period last year, and the number HSI service customers grew by
36,216 compared to 51,896 in the first nine months of the prior year. HSI and Telephony net additions continue to stem from the enhancement
of the product offering, the impact of the bundled offer (Cogeco Complete Connection) of Television, HSI and Telephony services and
promotional activities in the Canadian operations. For the three and nine month periods ended May 31, 2011, additions to the Digital
Television service stood at 28,039 and 99,354 customers, compared to 30,167 and 88,630 for the comparable periods of the prior year. Digital
Television service net additions are due to targeted marketing initiatives to improve penetration, the launch of new HD channels and the
continuing interest for HD television service.
Management’s Discussion and Analysis COGECO INC. Q3 2011 12
OPERATING RESULTS
Quarters ended May 31, Nine months ended May 31,
2011
2010
Change
2011
2010
Change
($000, except percentages)
$
$
%
$
$
%
(unaudited)
(unaudited)
(unaudited)
(unaudited)
Revenue
342,910
319,291
7.4
1,010,998
957,053
5.6
Operating costs
198,825
192,591
3.2
593,941
576,115
3.1
Management fees - COGECO Inc.
9,172
9,019
1.7
Operating income before amortization
144,085
126,700
13.7
407,885
371,919
9.7
Operating margin
42.0%
39.7%
40.3%
38.9%
Revenue
Fiscal 2011 third-quarter revenue improved by $23.6 million, or 7.4%, to reach $342.9 million, when compared to the prior year. For the first
nine months of fiscal 2011, revenue amounted to $1,011 million, $53.9 million, or 5.6%, higher when compared to $957.1 million in the
comparable period of fiscal 2010.
Driven by RGU growth combined with an increase in rentals of home terminal devices stemming from the strong growth in Digital Television
services and rate increases implemented in April 2011 and in the second half of fiscal 2010, the Canadian operations’ third-quarter revenue
rose by $23.6 million, or 8.6%, to reach $299.3 million, and first nine-month revenue increased by $70.6 million, or 8.7%, at $882 million.
In the third quarter of fiscal 2011 revenue from the European operations remained essentially the same at $43.6 million when compared to the
same period of the prior year as a result of the higher value of the Euro in relation to the Canadian dollar in the third quarter of the year when
compared to the prior year, partly offset by lower revenue in local currency as a result of a decreased demand for services. First nine-month
European operations revenue amounted to $129 million, $16.6 million, or 11.4%, less than in the prior year. The decline in revenue in the first
nine months was mainly due to RGU losses combined with the lower value of the Euro in relation to the Canadian dollar. Revenue from the
European operations in the local currency for the three and nine-month periods ended May 31, 2011 amounted to €31.6 million and
€94.3 million, decreases of €0.8 million, or 2.3%, and €4.6 million, or 4.6%, respectively, when compared to the same periods of the prior year.
Operating costs
For the third quarter of fiscal 2011, operating costs increased by $6.2 million, to reach $198.8 million, an increase of 3.2% compared to the
prior year. For the first nine months, operating costs amounted to $593.9 million, $17.8 million, or 3.1% higher than in the same period of
fiscal 2010.
In the Canadian operations, for the three and nine month periods ended May 31, 2011, operating costs increased by $5.9 million, or 3.8%, at
$161.2 million, and by $24.4 million, or 5.4%, to reach $479.4 million, respectively. The increases in operating costs are mainly attributable to
servicing additional RGU, the launch of new HD channels and additional marketing initiatives.
As for the European operations, fiscal 2011 third-quarter operating costs remained essentially the same at $37.6 million when compared to
$37.3 million in the third quarter of the prior year, primarily due to the higher value of the Euro in relation to the Canadian dollar in the third
quarter of the 2011 fiscal year. 2011 first nine-months operating costs decreased by $6.5 million, or 5.4%, at $114.5 million, mainly reflecting
RGU losses combined with the lower value of the Euro in relation to the Canadian dollar. These decreases in operating costs offset increases
related to additional marketing initiatives and the launch of new HD channels by Cabovisão. Operating costs of the European operations for
the third quarter and first nine months in the local currency amounted to €27.3 million, essentially the same when compared to €27.7 million,
and €83.8 million, an increase of €1.4 million, or 1.7%, respectively, when compared to the corresponding periods of the prior year.
Operating income before amortization and operating margin
Fiscal 2011 third-quarter operating income before amortization increased by $17.4 million, or 13.7%, to reach $144.1 million. Cogeco Cable’s
third-quarter operating margin increased to 42% from 39.7% in the comparable period of the prior year. For the first nine months of fiscal 2011,
operating income before amortization amounted to $407.9 million, an increase of $36 million, or 9.7%, when compared to the first nine months
of fiscal 2010. The operating margin increased to 40.3% in the first nine months of fiscal 2011 from 38.9% in the same period of the prior year.
Operating income before amortization in the Canadian operations rose by $17.7 million, or 14.7%, to reach $138.1 million in the third quarter,
mainly due to revenue growth exceeding the increase in operating costs. Cogeco Cable’s Canadian operations’ operating margin increased to
46.1% in the third quarter compared to 43.7% for the same period of the prior year. In the first nine months of fiscal 2011, operating income
before amortization amounted to $393.5 million, $46.1 million, or 13.3%, higher than in the same period of the prior year. The operating margin
increased to 44.6% from 42.8% when compared to the first nine months of fiscal 2010. The growth in the operating margin stems from rate
increases and RGU growth.
For the European operations, operating income before amortization amounted to $6 million in the third quarter, compared to $6.3 million for
the same period of the prior year. In the first nine months, operating income before amortization decreased by $10.1 million, or 41.1%, at
$14.4 million. The reductions are mainly due to decreases in revenue which outpaced the decreases in operating costs. European operations’
operating margin decreased to 13.8% in the third quarter and 11.2% in the first nine months of fiscal 2011 from 14.5% and 16.8%,
respectively, in the third quarter and first nine months of fiscal 2010. Operating income before amortization in the local currency amounted to
€4.4 million compared to €4.7 million in the third quarter of the prior year, representing a decrease of 7.1%, and €10.5 million compared to
€16.5 million in the first nine months, representing a decrease of 36.2%.
Management’s Discussion and Analysis COGECO INC. Q3 2011 13
FISCAL 2011 FINANCIAL GUIDELINES
In the third quarter of fiscal 2011, a non-cash impairment loss of Cogeco Cable’s investment in Cabovisão was recorded in the amount of
$225.9 million as a result of the severe decline in the economic environment in Portugal, with the Country ultimately requiring financial
assistance from the International Monetary Fund and the European Central Bank. As part of the negotiated financial assistance package, the
Portuguese government has committed to financial reforms which are expected to put further downwards pressure on consumer spending due
to increases in taxes. The rate of growth for Cogeco Cable’s services has diminished, with net customer losses and service downgrades by
customers in the European operations in the third quarter of fiscal 2011. In order to reflect the impact of this unfavourable economic
environment and the impairment loss recorded by Cogeco Cable, the cable subsidiary has revised its net income guideline for the 2011 fiscal
year to a net loss of approximately $85 million, from net income of $140 million as issued on January 12, 2011. As a result of this revision in
Cogeco Cable, COGECO now expects a net loss of approximately $20 million for fiscal 2011.
Additionally, net customer additions in the cable sector are now expected to amount to approximately 250,000 RGU, or 7.9% when compared
to August 31, 2010, from 275,000 RGU as issued by Cogeco Cable on January 12, 2011. RGU growth in the fourth quarter of fiscal 2011 will
stem primarily from the growth in Digital Television service customers and promotional activities in the Canadian operations. The decrease in
revenue stemming from the revision of the RGU growth guideline is expected to be offset by strong continuing interest for HD television
services in the Canadian operations, and an increase in operating costs attributable to the launch of new HD channels and increased
marketing initiatives. Accordingly, management has not revised its other financial projections for the 2011 fiscal year.
FISCAL 2012 PRELIMINARY FINANCIAL GUIDELINES
Consolidated
For fiscal 2012, COGECO expects revenue of approximately $1,530 million and operating income before amortization should amount to
approximately $595 million, as a result of Cogeco Cable’s 2012 preliminary guidelines and the full year impact of the Québec Radio Stations
Acquisition. Free cash flow should generate approximately $105 million and net income of $80 million should be earned. The fiscal 2012
financial guidelines exclude the Quiettouch acquisition by Cogeco Cable, which is subject to customary closing adjustments and conditions.
Preliminary
projections
Fiscal 2012
Revised
projections
January 12, 2011
(in millions of dollars, except operating margin) $ $
Financial guidelines
Revenue 1,530 1,442
Operating income before amortization 595 560
Financial expense 63 75
Current income taxes 76 64
Net income (loss)
(1)
80 (20)
Capital expenditures and increase in deferred charges 351 341
Free Cash Flow 105 80
(1) The net loss guideline for fiscal 2011 was revised on July 6, 2011.
Cable sector
For fiscal 2012, Cogeco Cable expects to achieve revenue of $1,420 million, representing growth of $60 million, or 4.4% when compared to
the revised fiscal 2011 guidelines issued on January 12, 2011. The preliminary guidelines take into consideration the current uncertain global
economic environment. In Canada, while the recovery phase seems sustainable, recent reforms to the mortgage market and further tightening
from the Bank of Canada will nonetheless constrain housing market activity and should coincide with a contraction in consumer spending. In
previous recessionary periods, demand for cable telecommunications services has generally proven to be resilient, however there is no
assurance that demand would remain resilient in a prolonged difficult economic environment. In Portugal, during the third quarter of
fiscal 2011, the unfavourable economic environment continued to deteriorate, with the Country ultimately requiring financial assistance from
the International Monetary Fund and the European Central Bank. As part of the negotiated financial assistance package, the Portuguese
government has committed to financial reforms which include increases in sales and income taxes combined with reductions in government
spending on social programs. These measures are expected to put further downwards pressure on consumer spending and the rate of growth
for our services has diminished and is expected to continue to slowdown in this environment. These preliminary guidelines also take into
consideration the competitive environment that prevails in Portugal and, in Canada, the deployment of new technologies such as Fibre to the
Home (“FTTH”), Fibre to the Node (“FTTN”) and Internet Protocol Television (“IPTV”) by the incumbent telecommunications providers.
Revenue from the Canadian operations should increase as a result of RGU growth stemming from targeted marketing initiatives to improve
penetration rates of the Digital Television, HSI and Telephony services. Furthermore, the Digital Television service should continue to benefit
from the customers’ ongoing strong interest in Cogeco Cable’s growing HD service offerings. Canadian operations revenue will also benefit
from the impact of rate increases implemented in April 2011 in Ontario and Québec, averaging $2 per Basic Cable service customer. Cogeco
Cable’s strategies include consistently effective marketing, competitive product offerings and superior customer service, which combined, lead
to the expansion and loyalty of the Canadian operations’ Basic Cable Service clientele. As the penetration of HSI, Telephony and Digital
Television services increase, the new demand for these products should slow, reflecting early signs of maturity.
Cogeco Cable anticipates that the decline in the customer base of the European operations, which began during the second half of
fiscal 2011, is likely to continue in the next year. Net losses are expected in Basic Cable and Digital Television service customers partly offset
by net additions coming from HSI and Telephony service customers. Management is expected to maintain its retention strategies and
marketing initiatives implemented over the last few years, but the economic difficulties being experienced by the European market at large and
Management’s Discussion and Analysis COGECO INC. Q3 2011 14
the competitive environment which has plagued the Portuguese telecommunications industry for the past years are continuing to negatively
impact the financial results of the European operations. As a result of the economic environment in Portugal, revenue in local currency is
expected to decrease in fiscal 2012. For fiscal 2012, it is anticipated that the Euro should be converted at a rate of approximately $1.35 per
Euro, essentially the same when compared to the revised fiscal 2011 guidelines issued on January 12, 2011.
As a result of increased costs to service additional RGU, inflation and manpower increases, as well as the continuation of the marketing
initiatives and retention strategies launched in Portugal in the past few years, consolidated operating costs are expected to expand by
approximately $25 million, or 3.1% in the 2012 fiscal year when compared to the revised projections for fiscal 2011.
For fiscal 2012, Cogeco Cable expects operating income before amortization of $580 million, an increase of $35 million, or 6.4% when
compared to the revised fiscal 2011 projections issued on January 12, 2011. The operating margin is expected to reach approximately 40.8%
in fiscal 2012, compared to revised projections of 40.1% for the 2011 fiscal year, reflecting revenue growth which is expected to exceed the
increase in operating costs.
Cogeco Cable expects the amortization of capital assets and deferred charges to decrease by $45 million for fiscal 2012, mainly from the
impairment loss in the third quarter of fiscal 2011 in the European operations, partly offset by capital expenditures and deferred charges
related to RGU growth and other initiatives of fiscal 2012 in the Canadian operations and by the full year impact of those of fiscal 2011. Cash
flows from operations should finance capital expenditures and the increase in deferred charges amounting to $350 million, an increase of
$10 million when compared to the revised fiscal 2011 projections. Capital expenditures projected for the 2012 fiscal year are mainly due to
customer premise equipment required to support RGU growth, scalable infrastructure for product enhancements and the deployment of new
technologies, line extensions to expand existing territories, and support capital to improve business information systems and support facility
requirements.
Fiscal 2012 free cash flow is expected to amount to $95 million, an increase of $25 million, or 35.7% when compared to the projected free
cash flow of $70 million for fiscal 2011, resulting from the growth in operating income before amortization. Generated free cash flow should be
used primarily to reduce Indebtedness, thus improving Cogeco Cable’s leverage ratios. Financial expense will be reduced to $60 million from
the projected $72 million in fiscal 2011 revised projections, as a result of an anticipated decrease in Indebtedness and the one-time make-
whole premium on the early repayment, in fiscal 2011, of the Senior Secured Notes Series B, partly offset by a slight increase in Cogeco
Cable’s cost of debt reflecting current market conditions. As a result, net income of approximately $225 million should be achieved compared
to a net loss of $85 million for the revised fiscal 2011 projections. Fiscal 2012 projected net income represents an increase of $85 million when
compared to the revised fiscal 2011 projection when the impact of the non-cash impairment loss of $225.9 million in the European operations
is excluded.
The fiscal 2012 financial guidelines exclude the Quiettouch acquisition, which is subject to customary closing adjustments and conditions.
Preliminary
projections
Fiscal 2012
Revised
projections
January 12, 2011
(in millions of dollars, except net customer additions and operating margin) $ $
Financial guidelines
Revenue 1,420 1,360
Operating income before amortization 580 545
Operating margin 40.8% 40.1%
Amortization
220 265
Financial expense 60 72
Current income taxes 75 63
Net income (loss)
(1)
225 (85)
Capital expenditures and increase in deferred charges 350 340
Free Cash Flow 95 70
Net customer addition guidelines
RGU
(1)
225,000 250,000
(1) Net loss and net customer addition guidelines for fiscal 2011 were revised on July 6, 2011.
CONTROLS AND PROCEDURES
The President and Chief Executive Officer (“CEO”) and the Senior Vice President and Chief Financial Officer (“CFO”), together with
management, are responsible for establishing and maintaining adequate disclosure controls and procedures and internal controls over
financial reporting, as defined in NI 52-109. COGECO’s internal control framework is based on the criteria published in the report “Internal
Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission and is designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with Canadian GAAP.
The CEO and CFO, supported by management, evaluated the design of the Company’s disclosure controls and procedures and internal
controls over financial reporting as at May 31, 2011, and have concluded that they were adequate. Furthermore, no significant changes to the
internal controls over financial reporting occurred during the quarter ended May 31, 2011.
However, in the first quarter of fiscal 2011, the Company introduced a new financial suite under an integrated Oracle platform. This project
was required in order to adequately support the implementation of the International Financial Reporting Standards (“IFRS”) and to remain
Management’s Discussion and Analysis COGECO INC. Q3 2011 15
current with the operational platform used by the Company. Following the introduction of this new financial suite, internal controls over
financial reporting have been updated in order to support adequate disclosure controls and procedures.
UNCERTAINTIES AND MAIN RISK FACTORS
There has been no significant change in the uncertainties and main risk factors faced by the Company since August 31, 2010. A detailed
description of the uncertainties and main risk factors faced by COGECO can be found in the 2010 Annual Report.
ACCOUNTING POLICIES AND ESTIMATES
There has been no significant change in COGECO’s accounting policies, estimates and future accounting pronouncements since
August 31, 2010, except as described below. A description of the Company’s policies and estimates can be found in the 2010 Annual Report.
Future accounting pronouncements
Adoption of International accounting standards
In March 2006, the Canadian Accounting Standards Board (“AcSB”) of the Canadian Institute of Chartered Accountants (“CICA”) released its
new strategic plan, which proposed to abandon Canadian GAAP and effect a complete convergence to the IFRS for Canadian publicly
accountable entities. This plan was confirmed in subsequent exposure drafts issued in April 2008, March 2009 and October 2009. The
changeover will occur no later than fiscal years beginning on or after January 1, 2011. Accordingly, the Company’s first interim consolidated
financial statements presented in accordance with IFRS will be for the quarter ending November 30, 2011, and its first annual consolidated
financial statements presented in accordance with IFRS will be for the year ending August 31, 2012.
IFRS uses a conceptual framework similar to Canadian GAAP, but there are significant differences in recognition, measurement and
disclosure requirements. The Company has established a project team including representatives from various areas of the organization to plan
and complete the transition to IFRS. This team reports periodically to the Audit Committee, which oversees the IFRS implementation project
on behalf of the Board of Directors. The Company is assisted by external advisors as required.
The implementation project consists of three primary phases, which may occur concurrently as IFRS are applied to specific areas of
operations:
Phase Area of impact Key activities Status
Scoping and
diagnostic
Pervasive Perform a high-level impact assessment to identify key areas that are expected to be impacted
by the transition to IFRS.
Completed
Rank IFRS impacts in order of priority to assess the timing and complexity of transition efforts
that will be required in subsequent phases.
Impact analysis,
evaluation and
design
For each area
identified in the
scoping and
diagnostic phase
Identify the specific changes required to existing accounting policies. Completed
Analyse policy choices permitted under IFRS.
Present analysis and recommendations on accounting policy choices to the Audit Committee.
Pervasive Identify impacts on information systems and business processes. Completed
Prepare draft IFRS consolidated financial statement template.
Identify impacts on internal controls over financial reporting and other business processes.
Implementation
and review
For each area
identified in the
scoping and
diagnostic phase
Test and execute changes to information systems and business processes. Completed
Obtain formal approval of required accounting policy changes and selected accounting policy
choices.
In progress - to be
completed in fiscal
2011
Communicate impact on accounting policies and business processes to external stakeholders.
To be completed during
fiscal 2011
Pervasive Gather financial information necessary for opening balance sheet and comparative IFRS
financial statements.
In progress - to be
completed in fiscal
2011
Update and test internal control processes over financial reporting and other business
processes.
Collect financial information necessary to compile IFRS-compliant financial statements. In progress - to be
completed during fiscal
2012
Provide training to employees and end-users across the organization.
Prepare IFRS compliant financial statements.
Obtain the approval from the Audit Committee of the IFRS consolidated financial statements.
Continually review IFRS and implement changes to the standards as they apply to the
Company.
To be completed
throughout transition
and post-conversion
periods
The Company has completed all activities included in the scoping and diagnostic and impact analysis, evaluation and design phases. The
Company has also completed its implementation of a new financial suite under an integrated Oracle platform in order to adequately support
Management’s Discussion and Analysis COGECO INC. Q3 2011 16
the implementation of IFRS. This financial suite will facilitate the completion of the Company’s transition project and the conversion of the
results of operations for fiscal 2011 to be presented as comparative figures to the fiscal 2012 IFRS financial statements. The effects on other
information technology, data systems, and internal controls have also been assessed, no significant modifications are necessary on
conversion.
The Company’s project for the transition from Canadian GAAP to IFRS is progressing according to the established plan and the Company
expects to meet its target date for migration.
Upon conversion to IFRS, an entity is required to apply the guidance contained in these standards retrospectively without limitation unless
there is a specific exemption which modifies this requirement. IFRS 1 First-time adoption of international financial reporting standards
applies only for first-time adopters of IFRS and contains several mandatory exceptions and optional exemptions to be applied to these entities’
first IFRS financial statements. Management has completed its analysis of the impact of most of the significant transitional optional
exemptions, and Cogeco Cable’s elections to be applied at the date of transition to IFRS for these exemptions are as follows:
International
standard Summary of the optional IFRS 1 exemption Application and impact for the Company
IFRS 3 – Business
combinations
A first-time adopter may elect not to apply IFRS 3 retrospectively to
past business combinations.
The Company has elected not to restate business combinations
completed prior to September 1, 2010.
IFRS 2 – Share-
based payments
A first-time adopter may elect to apply IFRS 2 only to equity
instruments that were granted after November 7 2002 and which
vested after the date of transition to IFRS.
The Company has elected to apply the requirements of IFRS 2 only to
equity instruments granted after November 7, 2002 and which vested
after the date of transition to IFRS.
IAS 16 – Property,
plant and
equipment
A first-time adopter may elect to measure an item of property, plant
and equipment at its fair value at the date of transition to IFRS and
use that fair value as its deemed cost at that date.
The Company has elected not to use the fair value of any of its property,
plant and equipment as their deemed cost at the date of transition to
IFRS.
IAS 19 – Employee
benefits
A first-time adopter may elect to recognise all cumulative actuarial
gains and losses at the date of transition to IFRS.
The Company has elected to recognise all actuarial gains and losses at
the date of transition to IFRS.
IAS 23 – Borrowing
costs
A first-time adopter may elect to apply IAS 23 only to borrowing
costs relating to qualifying assets for which the commencement
date for capitalisation is on or after the date of transition to IFRS.
The Company has elected to apply the requirements of IAS 23 only to
borrowing costs relating to assets for which the commencement date for
capitalisation is on or after the date of transition to IFRS.
The Company is currently completing the evaluation of the differences between IFRS and Canadian GAAP. The most significant differences in
accounting policies adopted on and after transition to IFRS with respect to the recognition, measurement, presentation and disclosure of
financial information, along with the related expected financial statement impacts, are expected to be in the following key accounting areas:
International
standard Summary of the difference between IFRS and Canadian GAAP Application and impact for the Company
IAS 16 – Property,
plant and
equipment
IFRS requires that each significant component of an asset be
depreciated separately.
The Company will apply IAS 16 retroactively to all items of property,
plant and equipment. The impact of the retroactive application on the
Company’s opening IFRS balance sheet at the date of transition will
reduce property, plant and equipment and retained earnings by an
amount of approximately $6 million before the impact of related income
taxes and non-controlling interest. Depreciation expense is also
expected to be different under IFRS.
IAS 19 – Employee
benefits
IAS 19 requires an entity to recognize the expense related to past
service cost on an accelerated basis compared to Canadian GAAP.
Furthermore, IAS 19 allows an entity a policy choice for the
recognition of actuarial gains and losses on defined benefit pension
plans. One of these choices permits the immediate recognition of
actuarial gains and losses as a component of other comprehensive
income, which was not permitted under Canadian GAAP.
The Company has elected to recognize actuarial gains and losses
immediately as a component of other comprehensive income. The
impact of this policy choice will depend on the future fluctuations in
market interest rates and actual returns on plan assets.
In addition, at the date of transition, the IFRS 1 optional election
described above will result in a decrease in opening retained earnings
and an increase in pension plan liabilities and accrued employee
benefits of approximately $14 million before the impact of related
income taxes and non-controlling interest.
IFRS 2 – Share-
based payment
IFRS 2 requires the graded-vesting method for the recognition of
stock-based compensation awards, while Canadian GAAP
permitted the straight-line method. IFRS 2 also requires that an
entity measure cash-settled stock-based payments at their fair
value based on an option pricing model.
The requirement to use the graded-vesting method for the recognition of
stock-based compensation awards will result in an accelerated
recognition of the expense for the Company. At the date of transition to
IFRS, and reflecting the IFRS 1 exemption described above, this
difference in accounting policies will result in a decrease in opening
retained earnings and an increase in contributed surplus (equity settled
employee compensation reserve in the Company’s IFRS financial
statements) by an amount of approximately $1 million before the impact
of non-controlling interest. As a result of this adjustment, operating
expense related to employee benefits are expected to be slightly lower
in the Company’s first IFRS financial statements.
Management’s Discussion and Analysis COGECO INC. Q3 2011 17
International
standard Summary of the difference between IFRS and Canadian GAAP Application and impact for the Company
IAS 36 –
Impairment of
assets
For the purposes of impairment testing, IFRS requires that assets
be grouped into cash generating units (“CGU”s). IFRS then
requires a one-step approach whereby the carrying value of the
CGU is compared to the higher of fair value less costs to sell and
the value in use. Canadian GAAP required grouping at the lowest
level of independent cash flows and used a two-step approach for
impairment testing whereby the carrying values were first compared
to the undiscounted future cash flows in order to determine the
existence of an impairment, and subsequently compared to the fair
value to determine the amount of the impairment.
IFRS also requires the reversal of a previous impairment loss on
assets other than goodwill in the event a change in circumstances
indicates that the impairment no longer exists or has decreased.
The reversal of prior impairment losses is not permitted under
Canadian GAAP.
The Company has identified and tested its CGUs for impairment at the
date of the opening IFRS balance sheet and no impairment was
identified.
IAS 38 – Intangible
assets
Intangible assets with indefinite lives are not amortized under IFRS
or Canadian GAAP. However, IFRS requires full retrospective
application, including the reversal of amortization which was not
reversed under the transitional provisions of Canadian GAAP.
On transition to IFRS, the Company will reverse all amortization
recorded on intangible assets with indefinite lives. The impact will
increase opening retained earnings and increase intangible assets by a
n
amount of approximately $58 million, before the impact of related
income taxes and non-controlling interest, on the opening IFRS balance
sheet.
IFRS 3 – Business
combinations
Acquisition-related costs, which the Company capitalized under
Canadian GAAP, are expensed under IFRS.
In accordance with the IFRS 1 election described above, the Company
will apply the requirements of IFRS 3 prospectively from the date of
transition. As part of the application of IFRS 3, the Company will be
required to expense acquisition-related costs capitalized on acquisitions
completed since the date of transition to IFRS.
Also as a result of the IFRS 1 election described above, the Company
will be required to reverse the retroactive adjustment to intangible assets
acquired in prior business acquisition stemming from the recognition of
deferred income taxes upon application of CICA Handbook section
3465, Income taxes. The impact will decrease intangible assets by an
amount of approximately $73 million, deferred income tax liabilities by
an amount of approximately $62 million and retained earnings by an
amount of approximately $11 million, before the impact of related
income taxes and non-controlling interest, at the transition date.
IAS 39 – Financial
instruments:
recognition and
measurement
The criteria and method used for assessing hedge effectiveness
may be different under IFRS than Canadian GAAP.
Upon transition to IFRS, the Company will continue to apply hedge
accounting under IFRS to all hedging arrangements which the Company
recorded under Canadian GAAP. The hedging documentation and
hedge effectiveness tests have been updated to conform to the
requirements of IAS 39.
IAS 23 – Borrowing
costs
IFRS requires that borrowing costs be capitalized on qualifying
assets purchased or constructed by the entity. Canadian GAAP
permitted a policy choice to capitalize or expense these costs,
which the Company elected to expense.
In light of the Company’s election under IFRS 1, this difference will have
no impact on the Company’s opening IFRS balance sheet. Borrowing
costs will be capitalized on any qualifying assets purchased or
constructed after the date of transition to IFRS.
IAS 12 – Income
taxes
Recognition and measurement criteria for deferred tax assets and
liabilities may differ. IFRS also requires that temporary differences
relating to current assets and current liabilities be presented as
non-current liabilities and non-current assets, whereas these were
classified as current under Canadian GAAP.
The differences related to the recognition and measurement of income
taxes are expected to have a material impact on the Company’s opening
IFRS balance sheet. The Company is currently assessing the impact of
these differences. The impact on income taxes of other IFRS differences
are also being assessed.
IAS 37 –
Provisions,
contingent
liabilities and
contingent assets
The threshold for the recognition of a provision is different under
IFRS than Canadian GAAP. Presentation differences also exist
between the two sets of accounting standards.
The Company is currently assessing the impact of these differences.
IAS 1 –
Presentation of
financial
statements
Additional disclosures are required under IFRS. Presentation
differences also exist between IFRS and Canadian GAAP, the most
notable of which are presentation choices for the Statement of
income and the Statement of comprehensive income and
Statement of cash flows.
The Company has elected to present items of revenue and expense on
its Consolidated statement of income according to the nature of the
item. The Consolidated statement of comprehensive income will be
presented separately from the Consolidated statement of income.
Multiple deliverable revenue arrangements
In December 2009, the Emerging Issues Committee (“EIC”) of the Canadian AcSB issued a new abstract concerning multiple deliverable
revenue arrangements, EIC-175, Multiple deliverable revenue arrangements, which amended EIC-142, Revenue arrangements with multiple
deliverables. EIC-175 requires a vendor to allocate arrangement consideration at the inception of the arrangement to all deliverables using the
relative selling price method, thereby eliminating the use of the residual value method. The amendment also changes the level of evidence of
the standalone selling price required to separate deliverables when more objective evidence of the selling price is not available. EIC-175
should be adopted prospectively to revenue arrangements entered into or materially modified in the first annual fiscal period beginning on or
after January 1, 2011, with early adoption permitted. The Company has elected not to early-adopt this EIC, and in light of the adoption of
International accounting standards taking effect at that same date, this EIC will not be applicable to the Company.
Management’s Discussion and Analysis COGECO INC. Q3 2011 18
NON-GAAP FINANCIAL MEASURES
This section describes non-GAAP financial measures used by COGECO throughout this MD&A. It also provides reconciliations between these
non-GAAP measures and the most comparable GAAP financial measures. These financial measures do not have standard definitions
prescribed by Canadian GAAP and may not be comparable with similar measures presented by other companies. These measures include
“cash flow from operations”, “free cash flow”, “operating income before amortization”, “operating margin”, “adjusted net income”, and “adjusted
earnings per share”.
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 items. This allows the Company 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-GAAP measure “free cash
flow”. Free cash flow is used by COGECO’s management and investors to measure COGECO’s ability to repay debt, distribute capital to its
shareholders and finance its growth.
The most comparable Canadian GAAP financial measure is cash flow from operating activities. Cash flow from operations is calculated as
follows:
Quarters ended May 31, Nine months ended May 31,
2011
2010
2011
2010
($000)
$
$
$
$
(unaudited)
(unaudited)
(unaudited)
(unaudited)
Cash flow from operating activities 147,244
110,756
301,480
226,844
Changes in non-cash operating items
(12,083)
8,384
(3,145
)
148,145
Cash flow from operations 135,161
119,140
298,335
374,989
Free cash flow is calculated as follows:
Quarters ended May 31, Nine months ended May 31,
2011
2010
2011
2010
($000)
$
$
$
$
(unaudited)
(unaudited)
(unaudited)
(unaudited)
Cash flow from operations 135,161
119,140
298,335
374,989
Acquisition of fixed assets
(68,806)
(66,963)
(202,313
)
(204,239)
Increase in deferred charges
(2,781)
(2,548)
(8,535
)
(8,067)
Assets acquired under capital leases
– as per note 13 c)
(141)
Free cash flow 63,574
49,629
87,487
162,542
Operating income before amortization and operating margin
Operating income before amortization is used by COGECO’s management and investors to assess the Company’s ability to seize growth
opportunities in a cost effective manner, to finance its ongoing operations and to service its debt. Operating income before amortization is a
proxy for cash flows from operations excluding the impact of the capital structure chosen, and is one of the key metrics used by the financial
community to value the business and its financial strength. Operating margin is a measure of the proportion of the Company's revenue which
is available, before taxes, to pay for its fixed costs, such as interest on Indebtedness. Operating margin is calculated by dividing operating
income before amortization by revenue.
The most comparable Canadian GAAP financial measure is operating income. Operating income before amortization and operating margin
are calculated as follows:
Quarters ended May 31, Nine months ended May 31,
2011
2010
2011
2010
($000, except percentages)
$
$
$
$
(unaudited)
(unaudited)
(unaudited)
(unaudited)
Operating income 81,535
64,008
225,952
185,940
Amortization
66,272
63,920
194,838
195,614
Operating income before amortization 147,807
127,928
420,790
381,554
Revenue
374,957
330,933
1,068,367
988,023
Operating margin 39.4%
38.7%
39.4%
38.6%
Management’s Discussion and Analysis COGECO INC. Q3 2011 19
Adjusted net income and adjusted earnings per share
Adjusted net income and adjusted earnings per share are used by COGECO’s management and investors to evaluate what would have been
the net income and earnings per share from ongoing operations without the impact of certain adjustments, net of income taxes and non-
controlling interest, which could affect the comparability of the Company’s financial results. The exclusion of these adjustments does not
indicate that they are non-recurring.
The most comparable Canadian GAAP financial measures are net income and earnings per share. These above-mentioned non-GAAP
financial measures are calculated as follows:
Quarters ended May 31, Nine months ended May 31,
2011
2010
2011
2010
($000, except numbers of shares and per share data)
$
$
$
$
(unaudited)
(unaudited)
(unaudited)
(unaudited)
Net income (loss) (56,672)
10,740
(30,052
)
43,999
Adjustments:
Impairment of goodwill and fixed assets, net of non-controlling interest
72,679
72,679
Reduction of Ontario provincial corporate income tax rates, net of non-controlling interest
(9,620)
Adjusted net income 16,007
10,740
42,627
34,379
Weighted average number of multiple voting and subordinate voting shares outstanding
16,736,587
16,730,336
16,726,302
16,724,720
Effect of dilutive stock options
9,300
7,835
10,969
Effect of dilutive subordinate voting shares held in trust under the Incentive Share Unit Plan
95,611
71,862
88,329
66,480
Weighted average number of diluted multiple voting and subordinate voting shares
outstanding
16,832,198
16,811,498
16,822,466
16,802,169
Adjusted earnings per share
Basic
0.96
0.64
2.55
2.06
Diluted
0.95
0.64
2.53
2.05
SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION
Quarters ended
(1)
May 31, February 28, November 30, August 31,
($000, except percentages and per share
data)
2011
2010
2011
2010
2010
2009 2010 2009
$
$
$
$
$
$ $ $
(unaudited)
(unaudited)
(unaudited)
(unaudited)
(unaudited)
(unaudited) (unaudited) (unaudited)
Revenue
374,957
330,933
350,644
329,087
342,766
328,003 333,671 316,284
Operating income before amortization
147,807
127,928
135,952
124,363
137,031
129,263 137,785 144,654
Operating margin
39.4%
38.7%
38.8%
37.8%
40.0%
39.4% 41.3% 45.7%
Operating income
81,535
64,008
70,525
58,370
73,892
63,562 73,942 76,244
Impairment of goodwill and fixed assets
225,873
Income taxes
19,007
15,334
14,277
12,525
18,244
(13,818)
17,623 22,306
Net income (loss)
(56,672)
10,740
10,645
10,511
15,975
22,748 12,265 14,631
Adjusted net income
16,007
10,740
10,645
10,511
15,975
13,128 12,265 7,647
Cash flow from operating activities
147,244
110,756
96,664
117,498
57,572
(1,410)
198,492 177,032
Cash flow from operations
135,161
119,140
120,675
120,331
42,499
135,518 127,230 108,744
Capital expenditures and increase in
deferred charges
71,587
69,511
72,462
74,549
66,799
68,387 108,515 94,002
Free cash flow
63,574
49,629
48,213
45,782
(24,300)
67,131 18,715 14,742
Earnings (loss) per share
(2)
Basic
(3.39)
0.64
0.64
0.63
0.95
1.36 0.73 0.87
Diluted
(3.39)
0.64
0.63
0.63
0.95
1.35 0.73 0.87
Adjusted earnings per share
(2)
Basic
0.96
0.64
0.64
0.63
0.95
0.79 0.73 0.46
Diluted
0.95
0.64
0.63
0.63
0.95
0.78 0.73 0.46
(1) The addition of quarterly information may not correspond to the annual total due to rounding.
(2) Per multiple and subordinate voting share.
ADDITIONAL INFORMATION
This MD&A was prepared on July 6, 2011. Additional information relating to the Company, including its Annual Report and Annual Information
Form, is available on the SEDAR website at www.sedar.com.
Management’s Discussion and Analysis COGECO INC. Q3 2011 20
SEASONAL VARIATIONS
Cogeco Cable’s operating results are not generally subject to material seasonal fluctuations. However, the customer growth in the Basic Cable
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 seasons, and students leaving their campuses at the end of the school year. Cogeco Cable offers
its services in several university and college towns such as Kingston, Windsor, St. Catharines, Hamilton, Peterborough, Trois-Rivières and
Rimouski in Canada, and Aveiro, Covilhã, Evora, Guarda and Coimbra in Portugal. Furthermore, the third and fourth quarter operating
margins are usually higher as no management fees are paid to COGECO Inc. Under the management Agreement, Cogeco Cable pays a fee
equal to 2% of its total revenue subject to a maximum amount. As the maximum amount has been reached in the second quarter of fiscal
2011, Cogeco Cable will not pay management fees in the second half of fiscal 2011. Similarly, as the maximum amount was paid in the first
six months of fiscal 2010, Cogeco Cable paid no management fees in the second half of the previous fiscal year.
/s/ Jan Peeters
/s/ Louis Audet
Jan Peeters
Chairman of the Board
Louis Audet
President and Chief Executive Officer
COGECO Inc.
Montréal, Québec
July 7, 2011
INTERIM FINANCIAL STATEMENTS
Third quarter ended May 31
,
INTERIM FINANCIAL STATEMENTS
,
2011
COGECO INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(unaudited)
Interim Financial Statements COGECO INC. Q3 2011 22
Three months ended May 31,
Nine months ended May 31,
2011
2010
2011
2010
(In thousands of dollars, except per share data)
$
$
$
$
Revenue 374,957
330,933
1,068,367
988,023
Operating costs
227,150
203,005
647,577
606,469
Operating income before amortization 147,807
127,928
420,790
381,554
Amortization (note 4)
66,272
63,920
194,838
195,614
Operating income 81,535
64,008
225,952
185,940
Financial expense (note 5)
16,766
16,824
58,172
48,288
Impairment of goodwill and fixed assets (note 6)
225,873
225,873
Income (loss) before income taxes and the following items (161,104)
47,184
(58,093
)
137,652
Income taxes (note 7)
19,007
15,334
51,528
14,041
Loss (gain) on dilution resulting from the issuance of shares by a subsidiary
1
(60
)
(18)
Non-controlling interest
(123,440)
21,110
(79,509
)
79,630
Net income (loss) (56,672)
10,740
(30,052
)
43,999
Earnings (loss) per share (note 8)
Basic
(3.39)
0.64
(1.80
)
2.63
Diluted
(3.39)
0.64
(1.80
)
2.62
COGECO INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
Interim Financial Statements COGECO INC. Q3 2011 23
Three months ended May 31,
Nine months ended May 31,
2011
2010
2011
2010
(In thousands of dollars)
$
$
$
$
Net income (loss) (56,672)
10,740
(30,052
)
43,999
Other comprehensive income (loss)
Unrealized gains (losses) on derivative financial instruments designated as cash flow hedges,
net of income tax expense of $183,000 and income tax recovery of $3,117,000 (income
tax expense of $622,000 and income tax recovery of $1,852,000 in 2010) and non-
controlling interest of $328,000 and $11,018,000 ($2,802,000 and $531,000 in 2010)
155
1,338
(5,232
)
(253)
Reclassification to financial expense of unrealized losses on derivative financial instruments
designated as cash flow hedges, net of income tax recovery of $72,000 and $2,400,000
($230,000 and $1,316,000 in 2010) and non-controlling interest of $312,000 and
$10,979,000 ($1,002,000 and $5,733,000 in 2010)
148
478
5,222
2,736
Unrealized gains (losses) on translation of a net investment in self-sustaining foreign
subsidiaries, net of non-controlling interest of $6,070,000 and $4,885,000 ($17,159,000
and $33,128,000 in 2010)
2,882
(8,190)
2,314
(15,811)
Unrealized gains (losses) on translation of long-term debt designated as hedges of a net
investment in self-sustaining foreign subsidiaries, net of non-controlling interest of
$2,530,000 and $2,259,000 ($11,479,000 and $24,052,000 in 2010)
(1,201)
5,479
(1,071
)
11,479
1,984
(895)
1,233
(1,849)
Comprehensive income (loss) (54,688)
9,845
(28,819
)
42,150
COGECO INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(unaudited)
Interim Financial Statements COGECO INC. Q3 2011 24
Nine months ended May 31,
2011
2010
(In thousands of dollars)
$
$
Balance at beginning, as previously reported
253,169
211,922
Changes in accounting policies
(7,894)
Balance at beginning, as restated
253,169
204,028
Net income (loss)
(30,052
)
43,999
Excess of the value attributed to the incentive share units at issuance (price paid for the acquisition of the subordinate voting
shares) over the price paid for the acquisition of the subordinate voting shares (value attributed to the incentive share units at
issuance)
56
(430)
Dividends on multiple voting shares
(663
)
(553)
Dividends on subordinate voting shares
(5,360
)
(4,467)
Balance at end
217,150
242,577
COGECO INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
Interim Financial Statements COGECO INC. Q3 2011 25
May 31, 2011
August 31, 2010
(In thousands of dollars)
$
$
Assets
Current
Cash and cash equivalents (note 13 b))
90,734
35,842
Accounts receivable (note 15)
103,011
74,560
Income taxes receivable
38,805
45,400
Prepaid expenses and other
16,106
14,189
Future income tax assets
5,541
6,133
Assets held for sale (note 16)
1,639
255,836
176,124
Investments
539
739
Fixed assets
1,168,001
1,328,866
Deferred charges
27,051
27,960
Intangible assets (note 9)
1,087,610
1,042,998
Goodwill (note 9)
143,470
144,695
Derivative financial instruments
5,085
Future income tax assets
15,369
18,189
Assets held for sale (note 16)
9,911
2,707,787
2,744,656
Liabilities and Shareholders’ equity
Liabilities
Current
Bank indebtedness
2,328
Accounts payable and accrued liabilities
204,805
248,775
Income tax liabilities
68,776
558
Deferred and prepaid revenue
47,577
45,602
Derivative financial instrument
132
1,189
Promissory note payable, non-interest bearing and due on February 1, 2012 (note 2)
5,000
Current portion of long-term debt (note 10)
2,349
2,329
Future income tax liabilities
60,356
78,267
Liabilities related to assets held for sale (note 16)
2,153
391,148
379,048
Long-term debt (note 10)
1,002,462
952,741
Derivative financial instruments
15,339
Deferred and prepaid revenue and other liabilities
20,242
12,234
Pension plan liabilities and accrued employees benefits
12,866
10,568
Future income tax liabilities
237,882
238,699
Liabilities related to assets held for sale (note 16)
971
1,680,910
1,593,290
Non-controlling interest
680,132
769,731
Shareholders’ equity
Capital stock (note 11)
119,318
119,527
Contributed surplus
3,110
3,005
Retained earnings
217,150
253,169
Accumulated other comprehensive income (note 12)
7,167
5,934
346,745
381,635
2,707,787
2,744,656
COGECO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Interim Financial Statements COGECO INC. Q3 2011 26
Three months ended May 31,
Nine months ended May 31,
2011
2010
2011
2010
(In thousands of dollars)
$
$
$
$
Cash flow from operating activities
Net income (loss)
(56,672)
10,740
(30,052
)
43,999
Adjustments for:
Amortization (note 4)
66,272
63,920
194,838
195,614
Amortization of deferred transaction costs and discounts on long-term debt
1,141
772
2,902
2,314
Impairment of goodwill and fixed assets (note 6)
225,873
225,873
Future income taxes
20,507
21,264
(21,961
)
49,900
Non-controlling interest
(123,440)
21,110
(79,509
)
79,630
Loss (gain) on dilution resulting from the issuance of shares by a subsidiary
1
(60
)
(18)
Stock-based compensation (note 11)
994
450
2,987
2,014
Loss on disposals and write-offs of fixed assets
231
2,443
1,635
2,505
Other
254
(1,559)
1,682
(969)
135,161
119,140
298,335
374,989
Changes in non-cash operating items (note 13 a))
12,083
(8,384)
3,145
(148,145)
147,244
110,756
301,480
226,844
Cash flow from investing activities
Acquisition of fixed assets (note 13 c))
(68,806)
(66,963)
(202,313
)
(204,239)
Increase in deferred charges
(2,781)
(2,548)
(8,535
)
(8,067)
Business acquisition, net of cash and cash equivalents acquired (note 2)
(75,883
)
Other
216
23
216
145
(71,371)
(69,488)
(286,515
)
(212,161)
Cash flow from financing activities
Increase (decrease) in bank indebtedness
4,444
(2,328
)
54,073
Net repayments under the Term Facilities and Term Revolving Facilities
(4,424)
(33,150)
41,679
(61,220)
Issuance of long-term debt, net of discounts and transaction costs
198,295
Repayments of long-term debt
(660)
(821)
(177,189
)
(2,907)
Issuance of subordinate voting shares (note 11)
629
353
Acquisition
of subordinate voting shares held in trust under the Incentive Share Unit Plan
(note 11)
(14)
(1,296
)
(1,049)
Dividends on multiple voting shares
(221)
(187)
(663
)
(553)
Dividends on subordinate voting shares
(1,788)
(1,479)
(5,360
)
(4,467)
Issuance of shares by a subsidiary to non-controlling interest
561
4,740
283
Acquisition by a subsidiary from non
-controlling interest of subordinate voting shares held in
trust under the Incentive Share Unit Plan (note 11)
(264)
(2,258
)
(2,008)
Dividends paid by a subsidiary to non-controlling interest
(5,601)
(4,586)
(16,760
)
(13,789)
(12,147)
(36,043)
39,489
(31,284)
Effect of exchange rate changes on cash and cash equivalents denominated in a
foreign currency 573
(846)
438
(1,746)
Net change in cash and cash equivalents 64,299
4,379
54,892
(18,347)
Cash and cash equivalents at beginning
26,435
16,732
35,842
39,458
Cash and cash equivalents at end 90,734
21,111
90,734
21,111
See supplemental cash flow information in note 13.
COGECO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2011
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
Interim Financial Statements COGECO INC. Q3 2011 27
1. Basis of presentation
In the opinion of management, the accompanying unaudited interim consolidated financial statements, prepared in accordance with
Canadian generally accepted accounting principles, present fairly the financial position of COGECO Inc. (“the Company”) as at
May 31, 2011 and August 31, 2010 as well as its results of operations and its cash flows for the three and nine-month periods ended
May 31, 2011 and 2010.
While management believes that the disclosures presented are adequate, these unaudited interim consolidated financial statements and
notes should be read in conjunction with COGECO Inc.’s annual consolidated financial statements for the year ended August 31, 2010.
These unaudited interim consolidated financial statements have been prepared using the same accounting policies and methods as the
most recent annual consolidated financial statements.
Future accounting pronouncements
Multiple deliverable revenue arrangements
In December 2009, the Emerging Issues Committee (“EIC”) of the Canadian Accounting Standards Board issued a new abstract
concerning multiple deliverable revenue arrangements, EIC-175, Multiple deliverable revenue arrangements, which amended EIC-142,
Revenue arrangements with multiple deliverables. EIC-175 requires a vendor to allocate arrangement consideration at the inception of
the arrangement to all deliverables using the relative selling price method, thereby eliminating the use of the residual value method. The
amendment also changes the level of evidence of the standalone selling price required to separate deliverables when more objective
evidence of the selling price is not available. EIC-175 should be adopted prospectively to revenue arrangements entered into or
materially modified in the first annual fiscal period beginning on or after January 1, 2011, with early adoption permitted. The Company
has elected not to early-adopt this EIC, and in light of the adoption of International accounting standards taking effect at that same date,
this EIC will not be applicable to the Company.
2. Business acquisition
On April 30, 2010, the Company concluded an agreement with Corus Entertainment Inc. (“Corus”) to acquire its Québec radio stations for
$80 million, subject to customary closing adjustments and conditions, including approval by the Canadian Radio-television and
Telecommunications Commission (“CRTC”). On June 30, 2010, the Company submitted its application for approval of the acquisition to
the CRTC. On December 17, 2010, the CRTC approved the transaction essentially as proposed. On January 11, 2011, the Company
was served with an application by Astral Media Radio Inc. (“Astral”) to the Federal Court of Appeal (“Court”) for leave to appeal the CRTC
decision approving the transaction, and a related application by Astral for a stay of execution of that decision until final judgement of the
Court. On February 21, 2011 the Court rejected applications filed by Astral in the matter of COGECO’s acquisition of the Corus radio
stations in Québec. The transaction with Corus was concluded on February 1, 2011.
Pursuant to this acquisition, and as part of CRTC’s decision on the Company’s transfer application, the Company has put up for sale two
radio stations acquired, CFEL-FM in the Québec City market and CJTS-FM in the Sherbrooke market. Accordingly, the assets and
liabilities of the two acquired radio stations put up for sale have been classified as held for sale in the preliminary purchase price
allocation presented below. In addition to the two acquired radio stations above, and also as part of the CRTC’s decision, the Company
has put up for sale radio station CJEC-FM, which it owned prior to the acquisition, in the Québec City market. Radio stations for which
divestiture has been required by the CRTC, and the sale process, are managed by a trustee approved by the CRTC pursuant to a voting
trust agreement.
COGECO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2011
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
Interim Financial Statements COGECO INC. Q3 2011 28
2. Business acquisition (continued)
This acquisition was accounted for using the purchase method. The results have been consolidated as of the acquisition date. The
preliminary allocation of the purchase price of the acquisition, pending the completion of the valuation of the net assets acquired, is as
follows:
$
Consideration
Paid
Purchase of shares
75,000
Acquisition costs
1,530
76,530
Promissory note payable, non-interest bearing and due on February 1, 2012
5,000
Investment previously accounted for
200
Acquisition costs previously recorded as deferred charges
435
Preliminary working capital adjustment payable
4,000
86,165
Net assets acquired
Cash and cash equivalents
647
Accounts
receivable
14,132
Income taxes receivable
92
Prepaid expenses and other
527
Current future income tax assets
1,018
Fixed assets
11,497
Deferred charges and other
99
Broadcasting licenses
48,193
Goodwill
27,227
Non-current future income tax assets
2,272
Non-current assets held for sale
9,531
Accounts payable and accrued liabilities assumed
(9,058)
Income tax liabilities assumed
(194)
Current liabilities related to assets held for sale
(797)
Deferred and prepaid revenue and other liabilities
(7,390)
Non-current future income tax liabilities
(10,656)
Non-current liabilities related to assets held for sale
(975)
86,165
COGECO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2011
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per share data)
Interim Financial Statements COGECO INC. Q3 2011 29
3. Segmented information
The Company’s activities are divided into two business segments: Cable and other. The Cable segment is comprised of Cable
Television, High Speed Internet, Telephony and other telecommunications services, and the other segment is comprised of radio and
head office activities, as well as eliminations. The Cable segment’s activities are carried out in Canada and in Europe.
The principal financial information per business segment is presented in the tables below: