COGECO ANNOUNCES STRONG FINANCIAL RESULTS FOR THE SECOND QUARTER OF FISCAL 2013
PRESS RELEASE
For immediate release
COGECO announces strong financial results for the second quarter of fiscal
2013
• 35.6% growth of its operating income before depreciation and amortization
(1)
• Profit from continuing operations improved by 91.9%
• Successful conclusion of the acquisition of Peer 1 Network Enterprises, Inc. by Cogeco Cable
Montréal, April 10, 2013 – Today, COGECO Inc. (TSX: CCA) (“COGECO” or the “Corporation”) announced its financial results
for the second quarter of fiscal 2013, ended February 28, 2013, in accordance with International Financial Reporting Standards
(“IFRS”).
For the second quarter and first six months of fiscal 2013, which include three month operating results of Atlantic Broadband
("ABB") and one month for Peer 1 Network Enterprises, Inc. (“PEER 1”):
• Revenue increased by 32.7% to reach $458.5 million, and by 19.3% to reach $825.1 million;
• Operating income before depreciation and amortization increased by 35.6% to $196.0 million when compared to the
second quarter of fiscal 2012, and by 23.8% to $352.5 million when compared to the first half of the prior year;
• Profit for the period from continuing operations amounted to $56.5 million in the second quarter when compared to
$29.4 million for the same period of the previous fiscal year. Profit progression for the quarter is mostly attributable to
the operating income before depreciation and amortization increase coming primarily from the acquisitions, in the
Cable segment, of ABB and PEER 1, partly offset by the acquisition costs and the financial expense increases both
related to ABB and PEER 1. For the first half of fiscal 2013, profit for the period from continuing operations amounted
to $103.6 million when compared to $74.0 million for the first half of fiscal 2012. The increase for the six-month period
ended February 28, 2013 is mostly attributable to the increase in operating income before depreciation and amortization
coming primarily from the acquisition of ABB, partly offset by the acquisition costs and the financial expense increases
both related to ABB and PEER 1 and income tax expense increase;
• Profit for the period amounted to $56.5 million in the second quarter when compared to $81.5 million for the same
period of the previous fiscal year. For the first half of fiscal 2013, profit for the period amounted to $103.6 million when
compared to $129.4 million for the comparable period of prior year. The decline for both periods is mostly attributable
to the last year’s profit from the Portuguese subsidiary, Cabovisão – Televisão por Cabo, S.A. (“Cabovisão”), reported
as discontinued operations and disposed of on February 29, 2012, partly offset by the increases of operating income
before depreciation and amortization, financial expense and acquisition costs all related to ABB and PEER 1 and the
income tax expense increase;
• Free cash flow
(1)
reached $34.4 million for the second quarter compared to $18.0 million in the comparable quarter of
the prior year. For the six months, free cash flow amounted to $53.0 million, compared to $44.3 million in the first half
of fiscal 2012. The increases in free cash flow over the prior year are due to the improvement of operating income
before depreciation and amortization, partly offset by the increase in financial expense, the acquisition costs related
to ABB and PEER 1 acquisitions as well as the increase in acquisition of property, plant and equipment;
(1) The indicated terms do not have standard definitions prescribed by IFRS and therefore, may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-IFRS financial measures" section of the Management's discussion and analysis.
• A quarterly dividend of $0.19 per share was paid to the holders of subordinate and multiple voting shares, an increase
of $0.01 per share, or 5.6%, when compared to a dividend of $0.18 per share paid in the second quarter of fiscal 2012.
Dividend payments in the first six months totaled $0.38 per share in fiscal 2013, compared to $0.36 per share in fiscal
2012;
• In the Cable segment, fiscal 2013 second-quarter primary service units (“PSU”)
(1)
grew by 7,463 and by 22,543 in the
first six months of fiscal 2013. At February 28, 2013, consolidated PSU amounted to 2,486,350 of which 1,984,555
comes from the Canadian cable services segment and 501,795 from the American cable services segment;
• On January 31, 2013, Cogeco Cable completed the acquisition of 96.57% of the issued and outstanding shares of
PEER 1 by way of takeover bid (the “offer”) valued at approximately $649 million. On April 3, 2013, Cogeco Cable
completed the acquisition of the remaining 3.43% of the issued and outstanding shares of PEER 1 for a cash
consideration of $17 million pursuant to the compulsory acquisition provisions in Section 300 of the Business
Corporations Act ("British Columbia"). In connection with the completion of the offer, Cogeco Cable has entered into
secured credit facilities in the amount of approximately $650 million and maturing in 2017, with a syndicate of lenders.
PEER 1 is one of the world’s leading internet infrastructure providers, specializing in managed hosting, dedicated
servers, cloud services and co-location. This acquisition enhances Cogeco Cable footprint and builds on its strategic
initiatives by increasing scale in an attractive industry segment with significant growth prospects in the state of the art
data center platforms. The Corporation will also serve additional businesses worldwide, in addition to approximately
11,000 customers currently served, through 23 data centres and 21 points-of-presence across North America and
Europe. PEER 1's primary network centre and head office remain located in Vancouver.
“We are satisfied with the favourable results obtained for the second quarter of fiscal 2013,” declared Louis Audet, President and
Chief Executive Officer of Cogeco Inc. “The cable subsidiary continues along a path of steady growth, both organic and through
acquisition. Results for ABB's first quarter as a part of Cogeco Cable had been in line with expectations. I am confident in this
subsidiary's ongoing ability to perform and contribute favourably to Cogeco's objectives,” continued Louis Audet.
“Regarding Cogeco Diffusion Inc., we are pleased with our radio business ratings confirming its leadership in the Montreal market
and good performance in most of our other markets across the province of Quebec. Furthermore, our transit advertising business,
Cogeco Métromédia, is delivering results according to plan,” concluded Louis Audet.
ABOUT COGECO
COGECO is a diversified communications corporation. Through its Cogeco Cable subsidiary, COGECO provides to its residential and business
customers Analogue and Digital Television, High Speed Internet («HSI») and Telephony services. Cogeco Cable operates in Canada under the
Cogeco Cable brand name in Quebec and Ontario, and in the United States through its subsidiary Atlantic Broadband in Western Pennsylvania,
Southern Florida, Maryland, Delaware and South Carolina. Through its subsidiaries Cogeco Data Services and PEER 1 Hosting, Cogeco Cable
provides to its commercial customers, a suite of IT hosting, information and communications technology services (Data Centre, Co-location,
Managed Hosting, Cloud Infrastructure and Connectivity), with 23 data centres, extensive fibre networks in Montreal and Toronto as well as
points-of-presence in North America and Europe. Through its subsidiary Cogeco Diffusion, COGECO owns and operates 13 radio stations across
most of Québec with complementary radio formats serving a wide range of audiences as well as Cogeco News, its news agency. Cogeco Diffusion
also operates Métromédia, an advertising representation house specialized in the public transit sector that holds exclusive advertising rights in
the Province of Québec where it also represents its business partners active across other Canadian markets. COGECO's subordinate voting
shares are listed on the Toronto Stock Exchange (TSX: CGO). The subordinate voting shares of Cogeco Cable are also listed on the Toronto
Stock Exchange (TSX: CCA).
(1) Represents the sum of Television, High Speed Internet ("HSI") and Telephony service customers.
- 30 -
Source: COGECO Inc.
Pierre Gagné
Senior Vice President and Chief Financial Officer
Tel.: 514-764-4700
Information: Media
René Guimond
Vice-President, Public Affairs and Communications
Tel.: 514-764-4700
Analyst Conference Call: Thursday, April 11, 2013 at 11:00 a.m. (Eastern Daylight Time) Media representatives may attend as
listeners only.
Please use the following dial-in number to have access to the conference call by dialing five minutes
before the start of the conference:
Canada/USA Access Number: 1 866-322-8032
International Access Number: + 1 416-640-3406
Confirmation Code: 4371097
By Internet at www.cogeco.ca/investors
A rebroadcast of the conference call will be available until July 11, 2013, by dialing:
Canada and US access number: 1 888-203-1112
International access number: + 1 647-436-0148
Confirmation code: 4371097
SHAREHOLDERS’ REPORT
Three and six-month periods ended February 28, 2013
COGECO INC. Q2 2013 2
FINANCIAL HIGHLIGHTS
Quarters ended Six months ended
(in thousands of dollars, except PSU growth, percentages and
per share data)
February 28,
2013
February 29,
2012 Change
February 28,
2013
February 29,
2012 Change
$ $ % $ $ %
Operations
Revenue 458,501 345,613 32.7 825,109
691,636
19.3
Operating income before depreciation and amortization
(1)
195,968 144,518 35.6 352,548
284,779
23.8
Operating income 102,464 58,931 73.9 185,741
133,573
39.1
Profit for the period from continuing operations 56,517 29,449 91.9 103,612 73,973 40.1
Profit for the period from discontinued operations — 52,047 — — 55,446 –
Profit for the period 56,517 81,496 (30.7) 103,612
129,419
(19.9)
Profit for the period attributable to owners of the Corporation 16,899 25,089 (32.6) 35,386 43,859 (19.3)
Cash Flow
Cash flow from operating activities 157,095 126,455 24.2 151,090
136,025
11.1
Cash flow from operations
(1)
140,413 105,153 33.5 242,203
209,892
15.4
Acquisitions of property, plant and equipment, intangible and
other assets 106,019 87,186 21.6 189,174
165,590
14.2
Free cash flow
(1)
34,394 17,967 91.4 53,029 44,302 19.7
Financial Condition
(2)
Property, plant and equipment — — — 1,752,195 1,343,904 30.4
Total assets — — — 5,406,525 3,103,919 74.2
Indebtedness
(3)
— — — 3,137,780 1,180,971 –
Equity attributable to owners of the Corporation — — — 430,130
397,799
8.1
Primary service units (“PSU”) growth
(4)
7,463 12,280 (39.2) 22,543 58,459 (61.4)
Per Share Data
(5)
Earnings per share attributable to owners of the Corporation
From continuing and discontinued operations
Basic 1.01 1.50 (32.7) 2.12 2.62 (19.1)
Diluted 1.00 1.49 (32.9) 2.10 2.61 (19.5)
From continuing operations
Basic 1.01 0.50 — 2.12 1.56 35.9
Diluted 1.00 0.50 — 2.10 1.55 35.5
From discontinued operations
Basic — 1.00 — — 1.07 –
Diluted — 0.99 — — 1.06 –
(1) The indicated terms do not have standardized definitions prescribed by International Financial Reporting Standards (“IFRS”) and therefore, may not be
comparable to similar measures presented by other companies. For more details, please consult the “Non-IFRS financial measures” section of the
Management’s discussion and analysis (“MD&A”).
(2) At February 28, 2013 and August 31, 2012.
(3) Indebtedness is defined as the total of bank indebtedness, principal on long-term debt, balance due on business combinations and obligations under derivative
financial instruments.
(4) Represents the sum of Television, High Speed Internet (“HSI”) and Telephony service customers.
(5) Per multiple and subordinate voting share.
MANAGEMENT’S DISCUSSION AND ANALYSIS (MD&A)
Three and six-month periods ended February 28, 2013
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2013 4
FORWARD-LOOKING STATEMENTS
Certain statements in this Management’s Discussion and Analysis (“MD&A”) may constitute forward-looking information within the meaning of
securities laws. Forward-looking information may relate to COGECO’s future outlook and anticipated events, business, operations, financial
performance, financial condition or results and, in some cases, can be identified by terminology such as "may"; "will"; "should"; "expect"; "plan";
"anticipate"; "believe"; "intend"; "estimate"; "predict"; "potential"; "continue"; "foresee", "ensure" or other similar expressions concerning matters
that are not historical facts. In particular, statements regarding the Corporation’s future operating results and economic performance and its
objectives and strategies are forward-looking statements. These statements are based on certain factors and assumptions including expected
growth, results of operations, performance and business prospects and opportunities, which COGECO believes are reasonable as of the current
date. While management considers these assumptions to be reasonable based on information currently available to the Corporation, they may
prove to be incorrect. The Corporation cautions the reader that the economic downturn experienced over the past few years makes forward-
looking information and the underlying assumptions subject to greater uncertainty and that, consequently, they may not materialize, or the results
may significantly differ from the Corporation’s expectations. It is impossible for COGECO to predict with certainty the impact that the current
economic uncertainties may have on future results. Forward-looking information is also subject to certain factors, including risks and uncertainties
(described in the “Uncertainties and main risk factors” section of the Corporation’s 2012 annual MD&A as well as in the present MD&A) that could
cause actual results to differ materially from what COGECO currently expects. These factors include risks pertaining to markets and competition,
technology, regulatory developments, operating costs, information systems, disasters or other contingencies, financial risks related to capital
requirements, human resources, controlling shareholder and holding structure, many of which are beyond the Corporation’s control. Therefore,
future events and results may vary significantly from what management currently foresees. The reader should not place undue importance on
forward-looking information and should not rely upon this information as of any other date. While management may elect to, the Corporation is
under no obligation and does not undertake to update or alter this information at any particular time, except as may required by law.
All amounts are stated in Canadian dollars unless otherwise indicated. This report should be read in conjunction with the Corporation’s condensed
interim consolidated financial statements and the notes thereto, prepared in accordance with the International Financial Reporting Standards
(“IFRS”) and the MD&A included in the Corporation’s 2012 Annual Report.
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2013 5
CORPORATE OBJECTIVES AND STRATEGIES
COGECO's objectives are to provide outstanding service to its customers and maximize shareholder value by increasing profitability and ensuring
continued revenue growth. The strategies employed to reach these objectives, supported by tight controls over costs and business processes,
are specific to each segment. The main strategies used to reach COGECO's objectives in the Cable segment focus on sustained corporate
growth and continuous improvement of networks and equipment. The radio activities focus on continuous improvement of its programming in
order to increase its market share and thereby its profitability. The Corporation measures its performance, with regard to these objectives by
monitoring operating income before depreciation and amortization
(1)
, PSU
(2)
growth and free cash flow
(1)
.
KEY PERFORMANCE INDICATORS
OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION
For the six-month period ended February 28, 2013, operating income before depreciation and amortization increased by 23.8% when compared
to the same period of fiscal 2012 to reach $352.5 million. As a result of the acquisition of Peer 1 Network Enterprises, Inc. (“PEER 1”) in the
Cable segment, management revised its January 14, 2013 projections for fiscal 2013. Operating income before depreciation and amortization is
now expected to reach $782 million from $750 million. For further details, please consult the fiscal 2013 revised projections in the “Fiscal 2013
financial guidelines” section.
FREE CASH FLOW
For the six-month period ended February 28, 2013, COGECO reports free cash flow of $53 million, compared to $44.3 million for the first six
months of the previous fiscal year, representing an increase of $8.7 million. This variance is mostly attributable to the improvement of operating
income before depreciation and amortization, partly offset by the increase in financial expense, the acquisition costs related to Atlantic Broadband
(“ABB”) and PEER 1 acquisitions as well as the increase in acquisition of property, plant and equipment. Giving effect to the acquisition of PEER 1,
management also revised its free cash flow projections from $175 million to $150 million as a result of acquisitions of property, plant and equipment,
intangible and other assets exceeding cash flow generated by PEER 1, additional integration, restructuring and acquisition costs of $9 million as
well as additional financial expense of $17 million both related to this acquisition. For further details, please consult the fiscal 2013 revised
projections in the “Fiscal 2013 financial guidelines” section.
CABLE SEGMENT
PSU growth and penetration of service offerings
During the six-month period ended February 28, 2013, PSU reach 2,486,350 of which 1,984,555 comes from the Canadian cable services segment
and 501,795 from the American cable services segment. In the American cable services segment, PSU increased by 7,121 in the quarter,
stemming primarily from the Television and HSI services. In the Canadian cable services segment, PSU increased at a lower pace to 342 when
compared to 12,280 PSU for the comparable period of the prior year, mainly as a result of service category maturity and more competitive
environment in the Television services. Cogeco Cable maintains targeted marketing initiatives to increase the penetration level of its services.
BUSINESS DEVELOPMENTS AND OTHER
BBM Canada's winter 2013 survey in the Montréal region, conducted with the Portable People Meter (“PPM”), reported that 98.5 FM is the leading
radio station in the Montreal French market amongst all listeners and men two years old and over (“2+”), while Rythme FM has maintained its
leadership position in the female 2+ segment among the musical stations. Regarding the Montreal English market, The Beat is the leading radio
station in the female 35-64 segment. In the other Quebec regions, our radio stations registered good ratings.
On January 31, 2013, Cogeco Cable completed the acquisition of 96.57% of the issued and outstanding shares of PEER 1 by way of takeover
bid (the “offer”) valued at approximately $649 million. On April 3, 2013, Cogeco Cable completed the acquisition of the remaining 3.43% of the
issued and outstanding shares of PEER 1 for a cash consideration of $17 million pursuant to the compulsory acquisition provisions in Section
300 of the Business Corporations Act ("British Columbia"). In connection with the completion of the offer, Cogeco Cable has entered into secured
credit facilities in the amount of approximately $650 million and maturing in 2017, with a syndicate of lenders. PEER 1 is one of the world’s leading
internet infrastructure providers, specializing in managed hosting, dedicated servers, cloud services and co-location. This acquisition enhances
Cogeco Cable footprint and builds on its strategic initiatives by increasing scale in an attractive industry segment with significant growth prospects
in the state of the art data center platforms. The Corporation will also serve additional businesses worldwide, in addition to approximately 11,000
customers currently served, through 23 data centres and 21 points-of-presence across North America and Europe. PEER 1's primary network
centre and head office remain located in Vancouver.
On November 30, 2012, Cogeco Cable completed the acquisition of ABB, an independent cable system operator formed in 2003, serving about
495,000 PSU’s and providing Analogue and Digital Television, as well as HSI and Telephony services. The acquisition is an attractive entry point
into the United States of America ("US") market, providing a significant increase in PSU base with further growth potential, a high quality network
infrastructure and the ability for the Corporation’s management to leverage its core knowledge and operational experience. The transaction,
valued at US$1.36 billion, was financed through a combination of cash on hand, a draw-down on the existing Term Revolving Facility of
approximately US$588 million and US$660 million of borrowings under a new committed non-recourse debt financing at ABB. Ranked the 12th-
largest cable television system operator in the US, ABB operates cable systems in Western Pennsylvania, Southern Florida, Maryland, Delaware
and South Carolina.
(1) The indicated terms do not have standardized definitions prescribed by IFRS and therefore, may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-IFRS financial measures" section.
(2) Represents the sum of Television, High Speed Internet ("HSI") and Telephony service customers.
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2013 6
OPERATING AND FINANCIAL RESULTS
OPERATING RESULTS
Quarters ended Six months ended
February 28,
2013
February 29,
2012 Change
February 28,
2013
February 29,
2012 Change
(in thousands of dollars, except percentages) $ $ % $ $ %
Revenue 458,501 345,613 32.7 825,109
691,636
19.3
Operating expenses 262,533 201,095 30.6 472,561
406,857
16.1
Operating income before depreciation and amortization 195,968 144,518 35.6 352,548
284,779
23.8
REVENUE
Fiscal 2013 second-quarter revenue increased by $112.9 million or 32.7%, to reach $458.5 million, when compared to the same period last year.
For the first six months, revenue amounted to $825.1 million, an increase of $133.5 million, or 19.3% when compared to the first six months of
fiscal 2012. Revenue increased for both periods mainly attributable to the operating results of the Cable segment and the revenue generated by
Métromédia CMR Plus Inc. ("Métromédia"), acquired during the second quarter of fiscal 2012.
In the Cable segment, fiscal 2013 second-quarter revenue increased by $111.9 million, or 35.2%, to reach $429.7 million, when compared to the
same period last year. For the first six months, revenue amounted to $757.6 million, an increase of $124.4 million, or 19.7% when compared to
the same period of fiscal 2012. For further details on the Cable segment's revenue, please refer to the “Cable segment” section.
OPERATING EXPENSES
For the second quarter of fiscal 2013, operating expenses increased by $61.4 million, to reach $262.5 million, an increase of 30.6% compared
to the prior year. For the first half of the fiscal year, operating expenses amounted to $472.6 million, an increase of $65.7 million, or 16.1%, when
compared to the same period of fiscal 2012. The increase in operating expenses is mainly attributable to the Cable segment operating results.
Operating expenses in the Cable segment for the second quarter, increased by $59.3 million, to reach $230.9 million, an increase of 34.5%
compared to the prior year. For the first half of the fiscal year, operating expenses amounted to $405.1 million, an increase of $57 million, or
16.4%, when compared to the same period of fiscal 2012. For further details on the Cable segment's revenue, please refer to the “Cable segment”
section.
OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION
Mainly as a result of higher growth from revenue than operating expenses stemming primarily from the Cable segment, operating income before
depreciation and amortization grew by $51.5 million, or 35.6%, to reach $196.0 million in the second quarter and by $67.8 million, or 23.8% to
reach $352.5 million for the first six months of fiscal 2013, when compared to the same periods of the previous year. For further details on
Cogeco Cable's operating results, please refer to the “Cable segment” section.
FIXED CHARGES
Quarters ended Six months ended
February 28,
2013
February 29,
2012 Change
February 28,
2013
February 29,
2012 Change
(in thousands of dollars, except percentages) $ $ % $ $ %
Depreciation and amortization 86,014 85,479 0.6 152,055 151,098 0.6
Financial expense 30,531 16,110 89.5 47,545 33,888 40.3
For the three and six-month periods ended February 28, 2013, depreciation and amortization expense was essentially the same at $86.0 million
and $152.1 million, respectively, compared to $85.5 million and $151.1 million for the same periods of the prior year, respectively, resulting mainly
from Cogeco Cable's recent acquisitions of ABB and PEER 1 ("recent acquisitions") and from additional acquisition of property, plant and
equipment offset by higher fiscal 2012 depreciation expense related to the reduction of useful lives for certain home terminal devices.
Fiscal 2013 second-quarter financial expense increased by $14.4 million, or 89.5%, at $30.5 million when compared to $16.1 million in fiscal
2012 second-quarter. For the first six months of fiscal 2013, financial expense increased by $13.7 million, or 40.3%, at $47.5 million, compared
to $33.9 million in the prior year. Financial expense increased in both periods as a result of the cost of financing related to the recent acquisitions.
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2013 7
INCOME TAXES
For the three and six-month periods ended February 28, 2013, income tax expense amounted to $15.4 million and $34.6 million, respectively,
compared to $13.4 million and $25.7 million, respectively, for the comparable periods in the prior year. These increases are mostly attributable
to the improvement in operating income before depreciation and amortization and by income taxes reductions, in fiscal 2012, from the
implementation of certain tax measures of the 2011 federal budget limiting the tax deferrals for corporations with a significant interest in a
partnership, partly offset by the increase in financial expense and by the efficient tax structure resulting from the recent acquisitions in the Cable
segment.
PROFIT FOR THE PERIOD FROM CONTINUING OPERATIONS
For the three-month period ended February 28, 2013, profit for the period from continuing operations amounted to $56.5 million of which $16.9
million, or $1.01 per share is attributable to owners of the Corporation, compared to a profit for the period from continuing operations of $29.4
million of which $8.4 million or $0.50 per share is attributable to owners of the Corporation for the comparable period. For the six-month period
ended February 28, 2013, profit for the period from continuing operations amounted to $103.6 million of which $35.4 million, or $2.12 per share
is attributable to owners of the Corporation, compared to a profit for the period from continuing operations of $74.0 million of which $26.0 million,
or $1.56 per share is attributable to owners of the corporation for the comparable period. Profit for the period from continuing operations progression
for the quarter and the first half of fiscal 2013 is mostly attributable to the increase in operating income before depreciation and amortization,
partly offset by the acquisition costs related to the recent acquisitions and the financial expense and income tax expenses increases explained
above.
PROFIT FOR THE PERIOD
For the three and six-month periods ended February 28, 2013, profit for the period amounted to $56.5 million and $103.6 million, respectively,
compared to $81.5 million and $129.4 million for the comparable periods. Fiscal 2013 second-quarter profit for the period attributable to owners
of the Corporation amounted to $16.9 million, or $1.01 per share, compared to $25.1 million, or $1.50 per share, in the second quarter of fiscal 2012.
For the six-month period ended February 28, 2013, profit for the period attributable to owners of the Corporation amounted to $35.4 million, or
$2.12 per share, compared to $43.9 million, or $2.62 per share for the comparable period of fiscal 2012.The decline for both periods is mostly
attributable to last year's profit from the Portuguese subsidiary, Cabovisão - Televisão por Cabo, S.A. (“Cabovisão”), reported as discontinued
operations and disposed of on February 29, 2012, partly offset by the increases of operating income before depreciation and amortization,
financial expense and acquisition costs all related to the recent acquisitions.
The non-controlling interest represents a participation of approximately 67.9% in Cogeco Cable's results. For the three and six-month periods
ended February 28, 2013, profit for the period attributable to non-controlling interest amounted to $39.6 million and $68.2 million, respectively,
when compared to $56.4 million and $85.6 million for the comparable periods of fiscal 2012.
CASH FLOW ANALYSIS
Quarters ended Six months ended
February 28,
2013
February 29,
2012
February 28,
2013
February 29,
2012
(in thousands of dollars)
$ $ $ $
Operating activities
Cash flow from operations 140,413 105,153
242,203 209,892
Changes in non-cash operating activities 12,757 9,905 (74,751) (64,781)
Amortization of deferred transaction costs and discounts on long-term debt (2,861) (914)
(3,717
)
(1,676
)
Income taxes paid (18,211) (19,093) (62,459) (57,077)
Current income tax expense 22,552 25,971 48,664 47,290
Financial expense paid (28,086) (10,677) (46,395) (31,511)
Financial expense 30,531 16,110 47,545 33,888
157,095 126,455
151,090 136,025
Investing activities (735,466) (118,470) (2,172,678) (196,669)
Financing activities 610,653 64,401 1,847,625 95,389
Effect of exchange rate changes on cash and cash equivalents denominated in a
foreign currencies 705 — 705 —
Net change in cash and cash equivalents from continuing operations 32,987 72,386 (173,258) 34,745
Net change in cash and cash equivalents from discontinued operations
(1)
— 47,237 — 49,597
Cash and cash equivalents from continuing and discontinued operations, beginning of
year 9,278 19,935
215,523
55,216
Cash and cash equivalents from continuing and discontinued operations, end of year 42,265 139,558 42,265
139,558
(1) For further details on the Corporation’s cash flows attributable to discontinued operations, please refer to the “Disposal of subsidiary and discontinued operations”
on note 14 of the condensed interim consolidated financial statements.
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2013 8
OPERATING ACTIVITIES
Fiscal 2013 second-quarter cash flow from operations reached $140.4 million compared to $105.2 million, an increase of $35.3 million or 33.5%,
compared to the same period of prior year. For the first six months, cash flow from operations reached $242.2 million compared to $209.9 million
for the same period last year, an increase of $32.3 million, or 15.4%. Increases for both periods are primarily due to the improvement of operating
income before depreciation and amortization, partly offset by financial expense increase and by the acquisition costs related to ABB and PEER 1
acquisitions. For the second quarter, changes in non-cash operating activities generated cash inflows of $12.8 million compared to $9.9 million
in the second quarter of fiscal 2012, mainly as a result of an increase in trade and other payables compared to a decrease in the prior year, partly
offset by an increase in trade and other receivables in the prior year. For the first six months, changes in non-cash operating activities generated
cash outflows of $74.8 million compared to $64.8 million for the same period in fiscal 2012, mainly as a result of a higher decrease in trade and
other payables and by a decrease in provisions compared to an increase in the prior year, partly offset by an increase in deferred and prepaid
revenue and other liabilities compared to a decrease in prior year.
INVESTING ACTIVITIES
BUSINESS COMBINATIONS IN FISCAL 2013
On January 31, 2013, the Corporation's subsidiary, Cogeco Cable, completed the acquisition of PEER 1 and on November 30, 2012, the acquisition
of ABB. These acquisitions were accounted for using the purchase method. In addition, Métromédia also completed the acquisition of a non-
controlling interest participation of 27.5% in one of its subsidiaries for a cash consideration of approximately $0.5 million.
The preliminary purchase price allocation of these acquisitions, pending the completion of the valuation of the net assets acquired as well as
Métromédia's non-controlling interest acquisition are as follows:
Métromédia PEER 1 ABB TOTAL
$ $ $ $
Consideration
Paid
Purchase of shares 462
477,834 337,779 816,075
Repayment of secured debts and settlement of options outstanding —
170,872
1,021,854 1,192,726
462
648,706
1,359,633 2,008,801
Net assets acquired
Cash and cash equivalents — 10,840
5,480 16,320
Restricted cash —
8,729 — 8,729
Trade and other receivables — 12,772
9,569 22,341
Prepaid expenses and other —
3,855 1,370 5,225
Income tax receivable — 672
— 672
Other assets —
3,328 — 3,328
Property, plant and equipment —
150,206 205,353 355,559
Intangible assets —
139,703 763,084 902,787
Goodwill —
421,986 602,690
1,024,676
Deferred tax assets —
8,355 33,835 42,190
Trade and other payables assumed — (26,330)
(27,620
)
(53,950
)
Provisions — —
(721
)
(721
)
Income tax liabilities assumed —
(4,716
)
— (4,716
)
Deferred and prepaid revenue and other liabilities assumed —
(3,315
)
(5,254
)
(8,569
)
Long-term debt assumed —
(1,735
)
— (1,735
)
Deferred tax liabilities — (58,682) (228,153) (286,835)
Non-controlling interest 462 (16,962)
— (16,500
)
462
648,706
1,359,633 2,008,801
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2013 9
FISCAL 2013 ADJUSTEMENT RELATED TO FISCAL 2012 BUSINESS COMBINATION
During the second quarter, the Corporation completed the purchase price allocation of Métromédia which was acquired on December 26, 2011.
The final purchase price allocation of Métromédia is as follows:
Preliminary Final
$ $
Consideration
Paid
Purchase of shares
36,860 36,860
Repayment of secured debt
2,140 2,140
39,000 39,000
Balance due on a business combination, bank prime rate plus 1% and payable in June 2013
2,000 2,000
41,000 41,000
Net assets acquired
Cash and cash equivalents
3,265 3,265
Trade and other receivables
7,242 7,364
Prepaid expenses and other
57 57
Income tax receivable
234 132
Property, plant and equipment
4,764 4,645
Intangible assets
14,747 14,747
Goodwill
20,171 20,540
Trade and other payables assumed
(4,615
)
(4,786
)
Income tax liabilities
(142
)
—
Deferred and prepaid revenue and other liabilities assumed
(374
)
(615
)
Deferred tax liabilities
(3,887
)
(3,887
)
Non-controlling interest
(462
)
(462
)
41,000 41,000
ACQUISITIONS OF PROPERTY, PLANT AND EQUIPMENT, INTANGIBLE AND OTHER ASSETS
For the three and six-month periods ended February 28, 2013, acquisition of property, plant an equipment amounted to $101.5 million and $180.0
million, respectively, compared to $84.5 million and $159.0 million for the comparable periods of fiscal 2012 mainly as a results of the following
factors in the Cable segment:
• A decrease in the quarter and an increase for the six-month period ended February 28, 2013 in scalable infrastructure and network
upgrade and rebuild to extend and improve network capacity and to deploy advanced technologies such as DOCSIS 3.0 and Switched
Digital Video in existing areas served;
• A decrease in customer premise equipment, mainly due to the achievement in fiscal 2012 of the first phase in the conversion of Television
service customers from analogue to digital and the lower PSU growth as a result of services category maturity in the Canadian operations;
and
• An increase in data centre facilities capital expenditures in the Montreal and Toronto areas in Canada and Portsmouth in England for
PEER 1 as well as expansion of the fibre in the Toronto area in order to fulfill orders from new customers.
Acquisition of intangible and other assets are mainly attributable to reconnect and additional service activation costs as well as other customer
acquisition costs. For the second quarter and the first six months of fiscal 2013, the acquisition of intangible and other assets amounted to $4.5
million and $9.1 million, compared to $2.6 million and $6.6 million for the same periods last year, respectively.
FREE CASH FLOW AND FINANCING ACTIVITIES
In the second quarter of fiscal 2013, free cash flow amounted to $34.4 million, $16.4 million higher than in the comparable period of fiscal 2012.
For the six-month period, free cash flow amounted to $53.0 million, $8.7 million, or 19.7%, higher than the same period of last year. Free cash
flow increase for both periods over the prior year are due to the improvement of operating income before depreciation and amortization, partly
offset by the increase in financial expense and acquisition costs both related to ABB and PEER 1 acquisitions, in the Cable segment, as well as
the increase in acquisition of property, plant and equipment.
In the second quarter of fiscal 2013, higher Indebtedness level provided for a cash increase of $636.1 million mainly due to drawings of $640.3 million
(net of transaction costs of $2.8 million) under new credit facilities amounting approximately to $650 million incurred to finance the acquisition of
PEER 1 in the Cable segment. In the second quarter of fiscal 2012, higher Indebtedness level provided a cash increase of $80.8 million mainly
due mainly due to the issuance, on February 14, 2012, of $200 million Senior Secured Debentures Series 3 (“Fiscal 2012 debentures”) for net
proceed of $198.1 million which was used to repay the $84.9 million Term Revolving Facility and $31.7 million of bank indebtedness.
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2013 10
For the six-month period of fiscal 2013, higher Indebtedness level provided for a cash increase of $1.9 billion, mainly due to the draw-down on
the existing Term Revolving Facility of $584.2 million (US$588 million) and the new Term Loan Facilities of $637.4 million (US$660 million for a
net proceed of US$641.5 million, net of transaction costs of US$18.5 million) to finance the acquisition of ABB as well as to drawings of $640.3 million
(net of transaction costs of $2.8 million) under new credit facilities amounting approximately to $650 million incurred to finance the acquisition of
PEER 1. In the first six months of fiscal 2012, Indebtedness affecting cash increased by $127.8 million mainly due to the issuance of Fiscal 2012
debentures previously described, which was used to repay the $103.7 million Term Revolving Facility.
During the second quarter of fiscal 2013, quarterly dividends of $0.19 per share were paid to the holders of subordinate and multiple voting shares,
totaling $3.2 million, compared to quarterly dividends of $0.18 per share for a total of $3.0 million the year before. Dividend payments in the first
six months totaled $0.38 per share, or $6.4 million, compared to $0.36 per share, or $6.0 million the year before. In addition, dividends paid by
a subsidiary to non-controlling interests in the second quarter amounted to $8.6 million and $17.1 million for the first six months, compared to
$8.2 million and $16.5 million, respectively, for the comparable periods of the prior year.
As at February 28, 2013, the Corporation had a working capital deficiency of $151.3 million compared to $18.5 million at August 31, 2012. The
increase of $132.8 million in the deficiency is mainly due to the decrease of $173.3 million million in cash and cash equivalents, primarily used
for the acquisition of ABB in the Cable segment. The deficiency was also impacted by an increase of $26.0 million in trade and other receivables
and by a decrease of $23.9 million in trade and other payables. As part of the usual conduct of its business, Cogeco Cable maintains a working
capital deficiency due to a low level of accounts receivable as a large portion of the Corporation’s customers pay before their services are rendered,
unlike trade and other payables, which are paid after products are delivered or services are rendered, thus enabling the Corporation to use cash
and cash equivalents to reduce Indebtedness.
At February 28, 2013, the Corporation had used $78.8 million of its $100 million Term Revolving Facility for a remaining availability of $21.2 million
and Cogeco Cable had used $626.5 million of its $750 million Term Revolving Facility for a remaining availability of $123.5 million. Cogeco Cable
also benefits, through its subsidiary ABB, from a Revolving Credit Facility of $51.6 million (US$50 million), of which $3.6 million (US$3.5 million)
was used at February 28, 2013 for a remaining availability of $48 million. At February 28, 2013, Cogeco Cable also benefits from additional
Revolving Credit Facilitiies of $250.9 million incurred as a result of the acquisition of PEER 1, of which $243.6 million was used at February 28,
2013 for a remaining availability of $7.3 million.
FINANCIAL POSITION
As a result of the acquisition of ABB and PEER 1 in the Cable segment, most financial position balances have changed significantly since
August 31, 2012. For further details on the preliminary allocation of the purchase price of the acquisitions, please refer to the investing activities
under the “Cash flow analysis” section.
OUTSTANDING SHARE DATA
A description of COGECO’s share data at March 31, 2013 is presented in the table below. Additional details are provided in note 10 of the
condensed interim consolidated financial statements.
Number of
shares
Amount
(in thousands
of dollars)
Common shares
Multiple voting shares 1,842,860
12
Subordinate voting shares 14,989,338
121,976
In the normal course of business, COGECO has incurred financial obligations, primarily in the form of long-term debt, operating and finance
leases and guarantees. COGECO’s obligations, as discussed in the 2012 Annual Report, have not materially changed since August 31, 2012,
except as mentioned below.
In connection with the acquisition of PEER 1 on January 31, 2013, the Corporation's subsidiary, Cogeco Cable, concluded Secured Credit Facilities
totaling approximately $650 million with a syndicate of lenders in four tranches for a net proceed of $640.3 million net of transaction costs of
$2.8 million. The first tranche, a Canadian Term Facility amounting to $175 million, the second tranche, a US Term Facility amounting to US$225
million, the third tranche, a Revolving Facility of $240 million and the fourth tranche, a UK Revolving Facility of £7 million. The Canadian and US
Term Facilities are available in Canadian and US dollars and interest rates are based on Bankers' Acceptance, LIBOR Loans, Prime Rate Loans
or US Base Rate Loans, plus the applicable margin. The Revolving Facility is available in Canadian dollars, US dollars, British Pounds and Euros
and interest rates are based on Bankers' Acceptance, LIBOR Loans in US dollars, British Pounds or Euros, Prime Rate Loans or US and British
Pounds Base Rate Loans, plus the applicable margin. The UK Revolving Facility is available in British Pounds and interest rates are based on
British Pounds Base Rate Loans or British Pounds LIBOR Loans. Starting on August 31, 2013, the Canadian and US Term Facilities are subject
to quarterly amortization of 1.25% in the first year, 1.875% in the second year, 3.125% in the third year and 3.75% in the fourth year, payable on
the last business day of each fiscal quarter. The Secured Credit Facilities will mature on January 31, 2017. The Secured Credit Facilities are
indirectly secured by a first priority fixed and floating charge on substantially all present and future real and personal property and undertaking
of every nature and kind of the Corporation and most of its subsidiaries except for ABB and its subsidiaries, and provides for certain permitted
encumbrances, including purchased money obligations, existing funded obligations and charges granted by any subsidiary prior to the date when
it becomes a subsidiary, subject to a maximum amount. The provisions under this facility provides for restrictions on the operations and activities
of the Corporation but does not cover ABB. Generally, the most significant restrictions relate to permitted investments and dividends on multiple
and subordinate voting shares, as well as incurrence and maintenance of certain financial ratios primarily linked to operating income before
amortization, financial expense and total indebtedness.
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2013 11
In connection with the acquisition of ABB on November 30, 2012, Cogeco Cable concluded, through two of its US subsidiaries, First Lien Credit
Facilities totaling US$710 million with a syndicate of banks and other institutional lenders in three tranche and draw down by an amount of US
$660 million of which US$641.5 million was used to repay ABB’s prior secured debt and US$18.5 million to pay for some of the transaction costs.
The first tranche, a Term Loan A Facility amounting to US$240 million, which will mature on November 30, 2017, the second tranche, a Term
Loan B Facility amounting to US$420 million, which will mature on November 30, 2019 and the third tranche, a Revolving Credit Facility of US
$50 million, including a swingline of US$15 million, which will mature on November 30, 2017. Interest rates on the First Lien Credit Facilities are
based on LIBOR plus the applicable margin, with a LIBOR floor of 1.00% for the Term Loan B Facility. Starting on December 31, 2013, the Term
Loan A Facility is subject to quarterly amortization of 1.25% in the first year, 2.5% in the second year and 3.0% in the third and fourth years.
Starting on December 31, 2012, the Term Loan B Facility is subject to quarterly amortization of 0.25% until its maturity date. In addition to the
fixed amortization schedule and commencing in the first quarter of fiscal 2015, loans under the Term Loan Facilities shall be prepaid according
to a Prepayment Percentage of excess cash flow generated during the prior fiscal year. The First Lien Credit Facilities are non-recourse to the
Corporation, its Canadian subsidiaries and PEER 1's subsidiaries and are indirectly secured by a first priority fixed and floating charge on
substantially all present and future real and personal property and undertaking of every nature and kind of ABB and its subsidiaries. The provisions
under these facilities provide for restrictions on the operations and activities of ABB and its subsidiaries. Generally, the most significant restrictions
relate to permitted indebtedness and investments, distributions and maintenance of certain financial ratios.
FINANCIAL MANAGEMENT
Cogeco Cable has entered into cross-currency swap agreements to set the liability for interest and principal payments on its US$190 million
Senior Secured Notes Series A maturing on October 1, 2015. These agreements have the effect of converting the U.S. interest coupon rate of
7.00% per annum to an average Canadian dollar interest rate of 7.24% per annum. The exchange rate applicable to the principal portion of the
debt has been fixed at $1.0625 per US dollar. Cogeco Cable elected to apply cash flow hedge accounting on these derivative financial instruments.
During the first half of fiscal 2013, amounts due under the US$190 million Senior Secured Notes Series A increased by $8.7 million due to the
US dollar’s appreciation relative to the Canadian dollar. The fair value of cross-currency swaps liability decreased by a net amount of $7.9 million,
of which a decrease of $8.7 million offsets the foreign exchange loss on the debt denominated in US dollars. The difference of $0.7 million was
recorded as a decrease of other comprehensive income. During the first half of fiscal 2012, amounts due under the US$190 million Senior Secured
Notes Series A increased by $1.9 million due to the US dollar’s appreciation over the Canadian dollar. The fair value of cross-currency swaps
liability decreased by a net amount of $1.9 million, of which $1.9 million offsets the foreign exchange loss on the debt denominated in US dollars.
Furthermore, Cogeco Cable’s net investment in foreign subsidiaries is exposed to market risk attributable to fluctuations in foreign currency
exchange rates, primarily changes in the values of the Canadian dollar versus the US dollar and British Pound. This risk was mitigated since the
major part of the purchase prices for ABB and PEER 1 were borrowed directly in US dollars and British Pounds. These debts were designated
as hedges of net investments in foreign operations. At February 28, 2013, the net investment for ABB amounted to US$472.6 million while long-
term debt was of US$323 million. At February 28, 2013, the net investment for PEER 1 amounted to US$368 million and £69.1 million while
long-term debt was of $US245 million and £69.1 million. The exchange rate used to convert the US dollar currency and British Pound currency
into Canadian dollars for the statement of financial position accounts at February 28, 2013 was $1.0314 per US dollar and $1.5645 per British
Pound. The impact of a 10% change in the exchange rate of the US dollar and British Pound into Canadian dollars would change other
comprehensive income by approximately $28.1 million.
The Corporation is also impacted by foreign currency exchange rates, primarily changes in the values of the US dollar relative to the Canadian
dollar with regards to purchases of certain equipment, as the majority of customer premise equipment is purchased and subsequently paid in US
dollars. Please consult the “Foreign Exchange Risk” section in Note 13 of the condensed interim consolidated financial statements for further
details.
DIVIDEND DECLARATION
At its April 10, 2013 meeting, the Board of Directors of COGECO declared a quarterly eligible dividend of $0.19 per share for multiple voting and
subordinate voting shares, payable on May 8, 2013, to shareholders of record on April 24, 2013. The declaration, amount and date of any future
dividend will continue to be considered and approved by the Board of Directors of the Corporation based upon the Corporation’s financial condition,
results of operations, capital requirements and such other factors as the Board of Directors, at its sole discretion, deems relevant. There is
therefore no assurance that dividends will be declared, and if declared, the amount and frequency may vary.
CABLE SEGMENT
CUSTOMER STATISTICS
Consolidated
Net additions (losses) Net additions (losses)
Consolidated US CANADA Quarters ended Six months ended
February 28, 2013
February 28,
2013
February 29,
2012
February 28,
2013
February 29,
2012
PSU 2,486,350 501,795
(1)
1,984,555 7,463 12,280 22,543 58,459
Television service customers 1,100,547 247,840
852,707
(4,896) (9,111)
(6,972
)
(4,659
)
HSI service customers 824,144 174,979
649,165
7,125 7,518 17,970 24,803
Telephony service customers 561,659 78,976
482,683
5,234 13,873 11,545 38,315
(1) Include 494,674 PSU (244,404 Television service, 171,640 HSI service and 78,630 Telephony service customers) from the acquisition of ABB on November 30, 2012.
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2013 12
Fiscal 2013 second-quarter and first six months, PSU net additions were lower than in the comparable period of the prior year mainly as a result
of service category maturity, competitive offers and tightening of our customer credit controls and processes. PSU progression comes mainly
from the US operations. For the second quarter net customer losses for Television service customers stood at 4,896 compared to 9,111 for fiscal
2012 second-quarter. Television service customer net losses are mainly due to the promotional offers of competitors for the video service combined
with the tightening of our customer credit controls. Fiscal 2013 second-quarter HSI service customers grew by 7,125 compared to 7,518 in the
second quarter of the prior year, and the number of net additions to the Telephony service stood at 5,234 customers compared to 13,873 customers
for the same period of the prior year. For the first six months of fiscal 2013, PSU net additions are the results of the recent acquisition of ABB at
the end of the first quarter of fiscal 2013.
Operating results
Quarters ended Six months ended
February
28, 2013
February
29, 2012 Change
February
28, 2013
February
29, 2012 Change
(in thousands of dollars, except percentages) $ $ % $ $ %
Revenue 429,672 317,735 35.2 757,583 633,159 19.7
Operating expenses 230,908 171,649 34.5 405,112 348,108 16.4
Management fees – COGECO Inc. 2,988 2,343 27.5 9,569 9,485
0.9
Operating income before depreciation and amortization 195,776 143,743 36.2 342,902 275,566 24.4
Operating margin 45.6% 45.2% 45.3% 43.5%
Revenue
Fiscal 2013 second-quarter revenue increased by $111.9 million, or 35.2%, to reach $429.7 million, when compared to the same period last year.
For the first six months, revenue amounted to $757.6 million, an increase of $124.4 million, or 19.7% when compared to the same period of fiscal
2012. Revenue increased for both periods is mainly attributable to the operating results of Cogeco Cable's recent acquisitions.
Operating expenses
For the second quarter of fiscal 2013, operating expenses increased by $59.3 million, to reach $230.9 million, an increase of 34.5% compared
to the prior year. For the first half of the fiscal year, operating expenses amounted to $405.1 million, an increase of $57.0 million, or 16.4%, when
compared to the same period of fiscal 2012. Operating expenses increased is mostly attributable to Cogeco Cable's recent acquisitions, partly
offset by cost reduction initiatives and by the reduction in operating expenses in the Canadian operations related to the deployment and support
costs incurred in fiscal 2012 for the migration of Television service customers from analogue to digital.
Operating income before depreciation and amortization and operating margin
Fiscal 2013 second-quarter operating income before depreciation and amortization increased by $52.0 million, or 36.2%, to reach $195.8 million,
and by $67.3 million, or 24.4% as a result of the recent acquisitions and the improvement in the Canadian operations. Cogeco Cable’s second-
quarter operating margin increased to 45.6% from 45.2% and to 45.3% from 43.5% for the first six months of fiscal 2013 when compared to the
comparable periods of the prior year.
FISCAL 2013 FINANCIAL GUIDELINES
As a result of revised projections in the Cable segment described below, the Corporation revised its consolidated projections for the 2013 fiscal
year. Revenue is now expected to reach $1.8 billion, an increase of $105 million when compared to the January 14, 2013 projections. Operating
income before depreciation and amortization should increase from $750 million to $782 million and financial expense should increase from
$101 million to $118 million. Acquisitions of property, plant and equipment, intangible and other assets should increase by approximately $31
million and free cash flow should reach $150 million, a decrease of $25 million from January 14, 2013 projections.
Revised
projections
April 10, 2013
Revised
projections
January 14, 2013
Fiscal 2013 Fiscal 2013
(in millions of dollars) $ $
Financial guidelines
Revenue 1,835
1,730
Operating income before depreciation and amortization 782 750
Integration, restructuring and acquisition costs
16
7
Financial expense 118 101
Current income tax expense
94 94
Profit for the year 207 227
Profit for the year attributable to owners of the Corporation
69 75
Acquisitions of property, plant and equipment, intangible and other assets 404 373
Free cash flow
(1)
150 175
(1) Free cash flow is calculated as operating income before depreciation and amortization less integration, restructuring and acquisition costs, financial expense,
current income tax expense and acquisitions of property, plant and equipment, intangible and other assets.
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2013 13
CABLE SEGMENT
Giving effect to the recent acquisition of PEER 1 on January 31, 2012, the Corporation revised its financial guidelines for the 2013 fiscal year
issued on January 14, 2013 to include a seven-month period of PEER 1’s financial projections. Management expects revenue to reach
$1.70 billion, representing a growth of $105 million, or 6.6%, when compared to those issued on January 14, 2013. Operating income before
depreciation and amortization should increase by $32 million to reach $767 million reflecting the PEER 1 acquisition. However, operating margin
should decrease from 46.2% to 45.2% as a result of lower margins business activities from PEER 1. Depreciation and amortization of property,
plant and equipment and intangible assets should increase from $330 million to $368 million and acquisition of property, plant and equipment,
intangible and other assets should increase by $31 million to take into consideration the PEER 1 seven-month operations. Financial expense
should amount to $113 million, an increase of $17 million, as a result of the cost of financing related to the PEER 1 acquisition. Fiscal 2013 free
cash flow is expected to amount to $145 million, a decrease of $25 million, or 14.7%, when compared to the free cash flow projection issued on
January 14, 2013 as a result of acquisitions of property, plant and equipment, intangible and other assets exceeding cash flow generated by
PEER 1, additional integration, restructuring and acquisition costs of $9 million as well as additional financial expense of $17 million both related
to PEER 1. Profit for the year is expected to amount to $205 million, $20 million lower than the January 14, 2013 projections, mainly as a result
of the PEER 1's expected financial results for the seven-month operations.
Fiscal 2013 revised financial guidelines are as follows:
Revised
projections
April 10, 2013
Revised
projections
January 14, 2013
Fiscal 2013 Fiscal 2013
(in millions of dollars, except net customer additions and operating margin) $ $
Financial guidelines
Revenue 1,695 1,590
Operating income before depreciation and amortization 767 735
Operating margin 45.2% 46.2%
Integration, restructuring and acquisition costs 16 7
Depreciation and amortization 368 330
Financial expense 113 96
Current income tax expense 92 92
Profit for the year 205 225
Acquisitions of property, plant and equipment, intangible and other assets 401 370
Free cash flow
(1)
145 170
Net customer addition guidelines
PSU growth 35,000 35,000
(1) Free cash flow is calculated as operating income before depreciation and amortization less integration, restructuring and acquisition costs, financial expense,
current income tax expense and acquisitions of property, plant and equipment, intangible and other assets.
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 National Instrument 52-109. Cogeco Cable’s internal control framework is based on the criteria published in the report Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
IFRS.
The CEO and CFO, supported by Management, evaluated the design of the Corporation’s disclosure controls and procedures and internal controls
over financial reporting as of February 28, 2013, and have concluded that they are adequate. Furthermore, no significant changes to the internal
controls over financial reporting occurred during the quarter ended February 28, 2013, except as described below with respect to ABB and PEER 1.
On November 30, 2012, the Corporation's subsidiary, Cogeco Cable, completed the acquisition of ABB and, subsequently on January 31, 2013
and April 3, 2013, the Corporation acquired 100% of the issued and outstanding shares of PEER 1. Due to the short period of time between those
acquisition dates and the certification date on April 10, 2013, management was unable to complete its review of the design of Internal Controls
Over Financial Reporting ("ICFR") for the newly acquired corporations. At February 28, 2013, risks were however mitigated as management was
fully apprised of any material events affecting these recent acquisitions. In addition, all the assets and liabilities acquired were valued and recorded
in the condensed interim consolidated financial statements as part of the preliminary purchase price allocation process and both ABB and PEER
1 results of operations were also included in the Corporation's consolidated results. ABB constitutes 10% of revenue, 7% of profit for the period,
31% of the total assets, 15% of the current assets, 32% of the non current assets, 11% of the current liabilities and 24% of the non current liabilities
of the consolidated condensed interim financial statements for the six-month period ended February 28, 2013. PEER 1 constitutes 2% of revenue,
-6% of profit for the period, 14% of the total assets, 16% of the current assets, 14% of the non current assets, 9% of the current liabilities and 2%
of the non current liabilities of the consolidated condensed interim financial statements for the six-month period ended February 28, 2013. In the
upcoming quarters, management will complete its review of the design of ICFR for ABB and PEER 1 and assess its effectiveness. The business
combinations of fiscal 2013 under the "Cash flow analysis" section of this MD&A presents summary financial information about the preliminary
purchase price allocation, assets acquired and liabilities assumed as well as other financial information about ABB and PEER 1 business impact
on the consolidated results of the Corporation. Other financial information can be found in the Business Acquisition Report filed by the Corporation
on www.sedar.com, on February 13, 2013.
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2013 14
UNCERTAINTIES AND MAIN RISK FACTORS
The uncertainties and main risk factors faced by the Corporation have not changed significantly for its Canadian Cable segment since August 31,
2012, except for the proposed Astral/Bell amended Arrangement Agreement described below. In addition, risks and uncertainties have been
updated to reflect the recent acquisitions of ABB and PEER 1. A detailed description of the uncertainties and main risk factors faced by COGECO
can be found in the 2012 Annual Report.
In Canada, following the denial by the CRTC on October 18, 2012 of an application by BCE Inc. (“Bell”) to acquire Astral Media Inc. (“Astral”),
Astral Bellamended their Arrangement Agreement with a view to submitting a revised proposal to the CRTC for approval of Bell's acquisition of
Astral. The closing date of the proposed transaction was extended to June 1, 2013, with Astral and Bell having a further right to postpone the
closing date to July 31, 2013. On March 4, 2013, the Commissioner of Competition and Bell announced the signing of a consent agreement and
the filing thereof with the Competition Tribunal. The consent agreement provides conditional clearance for the proposed transaction under the
Competition Act subject to, inter alia, the divestiture by Bell of Astral's joint venture ownership interests in certain television services and its
ownership interest certain additional French-language television services. Also on March 4, 2013, Bell announced that it had concluded an
agreement to sell the Astral joint venture ownership interests as well as two Ottawa FM radio stations to Corus Entertainment Inc. (“Corus”), and
that it was putting up for sale the remaining properties to be divested and 8 additional English-language radio stations through an auction process.
The sale of the joint venture properties to Corus was approved by the Commissioner of Competition on March 15, 2013. In Management's view,
if it is ultimately approved by the CRTC, the proposed transaction, as revised, would still significantly increase the level of vertical integration in
the Canadian broadcasting and communications industries and leave the opportunity as well as an incentive for Bell to abuse its dominant
position in the supply of programming for distribution in the downstream broadcasting distribution market in Canada by non-vertically integrated
distributors such as Cogeco Cable. Bell would end up controlling over forty percent (40 %) of Cogeco Cable's programming service affiliation
payments at current wholesale rates. The Corporation's businesses and results of operations could thus be adversely affected in the future as
affiliation agreements need to be renewed with Bell. In the event of future disputes concerning the terms of affiliation between Cogeco Cable and
Bell for services controlled by Bell, the CRTC may however set such terms at either party's request following a dispute resolution process, and
the services may not be interrupted by either party while such dispute resolution process is pending.
Uncertainties and risks subsequent to the acquisitions of PEER 1 or ABB
Cogeco Cable acquired PEER 1 and ABB with the expectation that the combination of its businesses and each of PEER 1 and ABB would result
in greater long-term potential and value creation than the individual corporations could achieve on their own. These anticipated benefits will
depend in part on whether the operations, systems, management and cultures of each of the Corporation's other businesses and those of PEER
1 and ABB can be combined in an effective manner and in part on whether the presumed bases for the combination produce the benefits
anticipated. Most operational and strategic decisions, and certain staffing decisions, with respect to the combined entity have not yet been made
and may not have been fully identified at this time.
There can be no assurance that the integration of Cogeco Cable's capital investment optimization and equipment purchases with those of PEER 1
and ABB will be timely or effectively accomplished, or ultimately will be successful in achieving the anticipated benefits. The integration process
may lead to greater than expected operating costs, customer loss and business disruption for Cogeco Cable's other businesses, PEER 1, ABB
or the combined businesses. Similarly, the integration process that may adversely affect the ability of the combined businesses to realize the
anticipated benefits of the combination or may materially and adversely affect Cogeco Cable's, PEER 1's, ABB's or the combined entity's
businesses, results of operations and/or financial condition.
There may be liabilities and contingencies that Cogeco Cable did not discover in its due diligence review prior to consummation of the PEER 1
and ABB acquisitions and the Corporation may not be indemnified for these liabilities and contingencies. The discovery of any material liabilities
or contingencies relating to the business of PEER 1 or ABB following the acquisitions could have a material adverse effect on the Corporation
businesses, financial condition and results of operations.
Cogeco Cable currently intends to retain key personnel of PEER 1 and ABB to continue to manage and operate each of PEER 1 and ABB. Cogeco
Cable will compete with other potential employers for employees, and may not be successful in keeping the services of executives and other
employees that PEER 1 or ABB need. The failure of key personnel to remain as part of the management team of PEER 1 and ABB in the period
following the PEER 1 and ABB acquisitions could have a material adverse effect on the Corporation businesses, financial condition and results
of operations.
Risks pertaining to markets and competition
In the US, the competition is fragmented and varies by geographical area. ABB's principal competitor for video services is Direct Broadcast
Satellite (“DBS”) and its principal competitor for High Speed Data (“HSD”) services is Direct Subscriber Line (“DSL”). Intensive marketing efforts
and aggressive pricing from its competitors and an increase in the presence of local telephone companies and electric utilities competing in its
market may have an adverse impact on the Corporation's ability to retain customers. Cogeco Cable's phone service faces competition from the
local incumbent local exchange carriers (“ILEC”), as well as other providers such as cellular and Voice over Internet Protocol (“VoIP”) providers
such as Vonage.
In the US, ABB also currently faces competition from over-the-top services such as Netflix, Google TV, and Apple TV, Hulu and Samsung, which
are gaining increased interest by consumers. The availability of these services could cause customers to view television content through their
broadband connection rather than through their traditional cable television subscription services, and view less on-demand television content on
the video-on-demand (“VOD”) or subscription-video-on-demand (“SVOD”) platforms of cable television service providers. We may not be able to
make up for the loss of revenue associated with this migration.
PEER 1's risks pertaining to markets and competition are similar to Cogeco Data Services risks which can be found in the 2012 Annual Report.
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2013 15
Risk pertaining to Third-Party Service Suppliers
In the US, ABB also depends on third-party suppliers and providers, such as Motorola and Cisco for certain specialized services, hardware and
equipment that are critical to their operations. These materials and services include set-top boxes, telephony, cable and telephony modems,
servers and routers, fiber-optic cable, telephony switches, inter-city links, support structures, software, the “backbone” telecommunications network
for the Internet access and telephony services; and construction services for expansion and upgrades of the cable and telephony networks. These
services and equipment are available from a limited number of suppliers.
In addition, ABB depends on third-party plant construction contractors in areas of new homes growth. If no supplier can provide ABB with the
equipment or services that it require or that comply with evolving internet and telecommunications standards or that are compatible with ABB's
other equipment and software, ABB's cable services businesses, financial condition and results of operations could be materially adversely
affected. In addition, if ABB is unable to obtain critical equipment, software, services or other items on a timely basis and at an acceptable cost,
its ability to offer its products and services and roll out its advanced services may be delayed, and ABB's businesses, financial condition and
results of operations could be materially adversely affected.
In addition, in recent years, the US cable industry has experienced a rapid escalation in the cost of programming, particularly sports programming
and retransmission of broadcast programming. This escalation may continue, and ABB may not be able to pass programming cost increases on
to its customers. The inability to pass these programming cost increases on to its customers would have an adverse impact on ABB's cash flow
and operating margins. In addition, as ABB upgrades the channel capacity of its systems and adds programming to its basic, expanded basic
and digital service offerings, ABB may face additional market constraints on its ability to pass programming costs on to its customers. The inability
to pass these costs increases on to its customers could materially adversely affect ABB's profitability. ABB is also subject to increasing financial
and other demands by broadcasters to obtain the required consent for the transmission of broadcast programming to its subscribers.
Financial risks - currency
Most of the Corporation's financial results are reported in Canadian dollars and a significant portion of its sales and operating costs are realized
in currencies other than Canadian dollars, most often US dollars, Euros and pounds sterling. For the purposes of financial reporting, any change
in the value of the Canadian dollar against the US dollar or pounds sterling during a given financial reporting period would result in a foreign
exchange gain or loss on the translation of any unhedged foreign currency denominated debt into Canadian dollars. Consequently, Cogeco Cable
reported earnings and indebtedness could fluctuate materially as a result of foreign-exchange gains or losses. Significant fluctuations in relative
currency values against the Canadian dollar could therefore have a significant impact on the Corporation's future profitability.
Risk pertaining to leased facilities
Certain of PEER 1's data centers are located in leased premises, and there can be no assurance that PEER 1 will remain in compliance with its
leases and that they will not be terminated or can be renewed at commercially reasonable terms. Termination of a lease could have a material
impact on its businesses, results of operations and financial condition.
Regulatory risks - US
US federal, state and local governments extensively regulate the video services industry and may increase the regulation of the Internet services
and VoIP phone industries. Current regulation of the cable industry imposes administrative and operational expenses and may limit the revenues
of cable systems. Cable operators are subject to, among other things:
• subscriber privacy regulations;
• limited rate regulation;
• requirements that, under specified circumstances, a cable system carry a local broadcast station or obtain consent to carry a local
or distant broadcast station;
• rules for franchise renewals and transfers;
• regulations concerning the content of programming offered to subscribers;
• the manner in which program packages are marketed to subscribers;
• the use of cable system facilities by local franchising authorities, the public and unrelated entities;
• cable system ownership limitations and program access requirements;
• payment of franchise fees to local franchising authorities;
• payment of federal universal service assessments for any end user revenues from interstate and international telecommunications
services and telecommunications provided to a third party for a fee, and other state and federal telecommunications fees; and
• regulations governing other requirements covering a variety of operational areas such as equal employment opportunity, technical
standards and customer service requirements.
Further US regulation could give rise to increases in cable rates. The Federal Communications Commission (“FCC”) and the US Congress
continue to be concerned that cable rate increases are exceeding inflation and as a result it is possible that either the FCC or the US Congress
will restrict the ability of cable system operators to implement rate increases. If ABB is unable to raise its rates in response to increasing costs,
its financial condition and results of operations could be materially adversely affected.
In addition, ABB could be materially disadvantaged if it remains subject to legal and regulatory constraints that do not apply equally to its competitors.
The FCC recently adopted rules to ensure that the local franchising process does not unreasonably interfere with competitive entry, and several
states have enacted legislation to ease the franchising obligations of new entrants. These changes in regulation by the FCC and several states
will benefit ABB's competitors. In addition, both the Congress and the FCC are considering various forms of “network neutrality” regulation which
may have the impact of restricting the ABB's ability to manage its network efficiently.
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2013 16
Human Resources
As of February 28, 2013, approximately 26.8% of ABB's employees are represented by several unions under collective bargaining agreements.
ABB can neither predict the outcome of current or future negotiations relating to labor disputes, union representation or renewal of collective
bargaining agreements, nor be able to avoid future work stoppages, strikes or other forms of labor protests pending the outcome of any current
of future negotiations. A prolonged work stoppage, strike or other form of labor protest could have a material adverse effect on its businesses,
operations and reputation. Even if ABB does not experience strikes or other forms of labor protests, the outcome of labor negotiations could
adversely affect its businesses and results of operations. In addition, its ability to make short-term adjustments to control compensation and
benefits costs is limited by the terms of its collective bargaining agreements.
ABB's and PEER 1's success are substantially dependent upon the retention and the continued performance of their executive officers. Many of
these executive officers are uniquely qualified in their areas of expertise, making it difficult to replace their services. The loss of the services of
any of these officers could adversely affect Cogeco Cable's growth, financial condition and results of operations. In addition, to implement and
manage its businesses and operating strategies effectively, ABB and PEER 1 must maintain a high level of efficiency, performance and content
quality, continue to enhance its operational and management systems, and continue to effectively attract, train, motivate and manage its employees.
If ABB and PEER 1 are not successful in their efforts, it may have a material adverse effect on the Corporation's businesses, prospects, results
of operations and financial condition.
FUTURE ACCOUNTING DEVELOPMENTS IN CANADA
A number of new standards, interpretations and amendments to existing standards were issued by the International Accounting Standard Board
(“IASB”) that are mandatory but not yet effective for the period ended February 28, 2013 and have not been applied in preparing the condensed
interim consolidated financial statements. These standards are described under “Future accounting developments in Canada” in the Corporation’s
2012 annual MD&A, available at www.sedar.com and www.cogeco.ca.
CHANGES IN CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There has been no significant change in COGECO’s accounting policies, estimates and future accounting pronouncements since August 31,
2012. A description of the Corporation’s policies and estimates can be found in the 2012 Annual Report, available at www.sedar.com and
www.cogeco.ca.
NON-IFRS FINANCIAL MEASURES
This section describes non-IFRS financial measures used by COGECO throughout this MD&A. It also provides reconciliations between these
non-IFRS measures and the most comparable IFRS financial measures. These financial measures do not have standard definitions prescribed
by IFRS and therefore, may not be comparable to similar measures presented by other companies. These measures include “cash flow from
operations”, “free cash flow” and “operating income before depreciation and amortization”.
CASH FLOW FROM OPERATIONS AND FREE CASH FLOW
Cash flow from operations is used by COGECO’s management and investors to evaluate cash flows generated by operating activities, excluding
the impact of changes in non-cash operating activities, amortization of deferred transaction costs and discounts on long-term debt, income taxes
paid, current income tax expense, financial expense paid and financial expense. This allows the Corporation to isolate the cash flows from
operating activities from the impact of cash management decisions. Cash flow from operations is subsequently used in calculating the non-IFRS
measure, “free cash flow”. Free cash flow is used, by COGECO’s management and investors, to measure its ability to repay debt, distribute
capital to its shareholders and finance its growth.
The most comparable IFRS measure is cash flow from operating activities. Cash flow from operations is calculated as follows:
Quarters ended Six months ended
February 28,
2013
February 29,
2012
February 28,
2013
February 29,
2012
(in thousands of dollars) $ $ $ $
Cash flow from operating activities 157,095 126,455
151,090 136,025
Changes in non-cash operating activities (12,757) (9,905) 74,751 64,781
Amortization of deferred transaction costs and discounts on long-term debt 2,861 914
3,717 1,676
Income taxes paid 18,211 19,093 62,459 57,077
Current income tax expense (22,552) (25,971) (48,664) (47,290)
Financial expense paid 28,086 10,677 46,395 31,511
Financial expense (30,531) (16,110) (47,545) (33,888)
Cash flow from operations 140,413 105,153
242,203 209,892
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2013 17
Free cash flow is calculated as follows:
Quarters ended Six months ended
February 28,
2013
February 29,
2012
February 28,
2013
February 29,
2012
(in thousands of dollars) $ $ $ $
Cash flow from operations 140,413 105,153 242,203
209,892
Acquisition of property, plant and equipment (101,526) (84,540) (180,040) (159,000)
Acquisition of intangible and other assets (4,493) (2,646)
(9,134
)
(6,590
)
Free cash flow 34,394 17,967 53,029 44,302
OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION
Operating income before depreciation and amortization is used by COGECO’s management and investors to assess the Corporation’s ability to
seize growth opportunities in a cost effective manner, to finance its ongoing operations and to service its debt. Operating income before depreciation
and amortization is a proxy for cash flows from operations excluding the impact of the capital structure chosen, and is one of the key metrics
used by the financial community to value the business and its financial strength.
The most comparable IFRS financial measure is operating income. Operating income before depreciation and amortization is calculated as
follows:
Quarters ended Six months ended
February 28,
2013
February 29,
2012
February 28,
2013
February 29,
2012
(in thousands of dollars, except percentages)
$ $ $ $
Operating income 102,464 58,931
185,741
133,573
Depreciation and amortization 86,014 85,479
152,055
151,098
Integration, restructuring and acquisitions costs 7,490 108 14,752 108
Operating income before depreciation and amortization 195,968 144,518
352,548
284,779
SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION
Quarters ended
February
28,
February
29,
November 30, August 31, May 31,
(in thousands of dollars, except percentages and per
share data)
2013 2012 2012 2011 2012 2011 2012 2011
$ $ $ $ $ $ $ $
Revenue 458,501 345,613
366,608 346,023 356,685 331,045 358,032 330,258
Operating income before depreciation and amortization 195,968 144,518
156,580 140,261 163,617 152,434 158,446 142,025
Operating income 102,464 58,931 83,277 74,642 95,943
101,304 95,473 90,242
Income taxes 15,416 13,372 19,168 12,340 33,625 21,804
22,278 19,252
Profit for the period from continuing operations 56,517 29,449 47,095 44,524 44,900 63,870
55,373 54,371
Profit (loss) for the period from discontinued operations — 52,047 —
3,399
—
6,219 —
(233,573)
Profit (loss) for the period 56,517 81,496 47,095 47,923 44,900 70,089
55,373
(179,202)
Profit (loss) for the period attributable to owners of the
Corporation 16,899 25,089 18,487 18,770 13,889 23,317
19,303 (56,303
)
Cash flow from operating activities 157,095 126,455
(6,005
)
9,570 203,193 217,792 109,546 141,106
Cash flow from operations 140,413 105,153
101,790 104,739 119,612 148,228 117,606 129,327
Acquisitions of property, plant and equipment, intangible
and other assets
106,019 87,186 83,155 78,404
124,638 122,441 88,141 63,807
Free cash flow 34,394 17,967 18,635 26,335
(5,026
) 25,787
29,465 65,520
Earnings (loss) per share
(1)
From continuing and discontinued operations
Basic 1.01 1.50 1.11 1.12 0.83 1.39 1.15
(3.36
)
Diluted 1.00 1.49 1.10 1.11 0.83 1.39 1.15
(3.36
)
From continuing operations
Basic 1.01 0.50 1.11 1.06 0.83 1.27 1.15 1.13
Diluted 1.00 0.50 1.10 1.05 0.83 1.27 1.15 1.13
From discontinued operations
Basic — 1.00 — 0.07 — 0.12
— (4.49
)
Diluted — 0.99 — 0.06 — 0.12
— (4.49
)
(1) Per multiple and subordinate voting share.
Management discussion and analysis (“MD&A”) COGECO INC. Q2 2013 18
SEASONAL VARIATIONS
Cogeco Cable’s operating results are not generally subject to material seasonal fluctuations except as follows. The customer growth in the
Television service customers and HSI service are generally lower in the second half of the fiscal year as a result of a decrease in economic activity
due to the beginning of the vacation period, the end of the television season, and students leaving their campuses at the end of the school year.
Cogeco Cable offers its services in several university and college towns such as Kingston, Windsor, St.Catharines, Hamilton, Peterborough,
Trois-Rivières and Rimouski in Canada.
ADDITIONAL INFORMATION
This MD&A was prepared on April 10, 2013. Additional information relating to the Corporation, including its Annual Information Form, is available
on the SEDAR website at www.sedar.com.
/s/ Jan Peeters /s/ Louis Audet
Jan Peeters Louis Audet
Chairman of the Board President and Chief Executive Officer
COGECO Inc.
Montréal, Québec
April 10, 2013