6-K 1 a18-18698_16k.htm 6-K

Table of Contents

 

 

 

FORM 6-K

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

REPORT OF FOREIGN PRIVATE ISSUER

 

PURSUANT TO RULE 13a-16 OR 15d-16 OF THE

SECURITIES EXCHANGE ACT OF 1934

 

FOR THE MONTH OF AUGUST 2018

 

VIDEOTRON LTD./VIDÉOTRON LTÉE

(Name of Registrant)

 

612 St-Jacques, Montreal, Canada, H3C 4M8

(Address of principal executive offices)

 

[Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.]

 

Form 20-F                                        x                                                                                   Form 40-F                                                                                        o

 

[Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g 3-2(b) under the Securities Exchange Act of 1934.]

 

Yes                                                                             o                                                                                     No                                                                                                                                 x

 

[If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g 3-2(b): 82-            .]

 

 

 


Table of Contents

 

Quarterly Report for the Period Ending

June 30, 2018

VIDEOTRON LTD.

Filed in this Form 6-K

 

Documents index

 

1-

 

Quarterly report for the period ended June 30, 2018 of Videotron Ltd.

 


Table of Contents

 

 

QUARTERLY REPORT

2018 FISCAL YEAR

 

VIDEOTRON LTD.

 

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Six-month Period

January 1, 2018 — June 30, 2018

 

August 15, 2018

 


Table of Contents

 

VIDEOTRON LTD.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the three-month and six-month periods ended June 30, 2018 and 2017

(unaudited)

 

Condensed consolidated financial statements

 

Management discussion and analysis

3

 

 

Consolidated statements of income

22

 

 

Consolidated statements of comprehensive income

23

 

 

Consolidated statements of equity

24

 

 

Consolidated statements of cash flows

25

 

 

Consolidated balance sheets

27

 

 

Notes to condensed consolidated financial statements

29

 

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FINANCIAL REVIEW

 

CORPORATE PROFILE

 

We, Videotron Ltd. (“Videotron” or the “Corporation”), are a wholly owned subsidiary of Quebecor Media Inc. (“Quebecor Media”), incorporated under the Business Corporations Act (Québec).  We are the largest cable operator in the Province of Québec and the third-largest in Canada, in each case based on the number of cable customers, as well as being the largest cable Internet service provider and a major provider of cable and mobile telephony and OTT video in the province of Québec. Our cable network covers approximately 79% of the Province of Québec’s approximately 3.6 million residential and commercial premises. The deployment of our LTE network and our enhanced offering of mobile communication services for residential and business customers allow us to consolidate our position as a provider of integrated telecommunication services.

 

Videotron Business is a premier full-service telecommunications provider and data center operator servicing small, medium-sized and large-sized businesses, as well as telecommunications carriers. Products and services for small and medium-sized businesses are supported by extensive coaxial, fibre-optic and LTE wireless networks.

 

Videotron’s primary sources of revenue include: subscriptions for Internet access, cable television, cable and mobile telephony services, over-the-top video services (“Club illico”) and business services.

 

The following Management Discussion and Analysis (“MD&A”) covers the Corporation’s main activities in the second quarter of 2018 and the major changes from the previous financial year.

 

All amounts are stated in Canadian dollars unless otherwise indicated. This MD&A should be read in conjunction with the information in the Corporation’s Annual Report for the financial year ended December 31, 2017 (Form 20-F), which is available on the website of the U.S. Securities and Exchange Commission at <www.sec.gov>. Due to rounding, minor differences may exist between amounts shown in this MD&A and the condensed consolidated financial statements.

 

On January 1, 2018, the Corporation adopted on a fully retroactive basis the new rules under IFRS 15, Revenue from Contracts with Customers, which specify how and when an entity should recognize revenue. The adoption of IFRS 15 had significant impacts on the consolidated financial statements with regards to the timing of the recognition of its revenues, the classification of its revenues, as well as the capitalization of costs. Among other impacts, the adoption of IFRS 15 resulted in an increase in the revenue from the device sale and in a decrease in the mobile service revenue recognized over the contract term. As well, costs to obtain a contract and connection costs are now fully amortized as operating expenses over the contract term or over the period of time the customer is expected to maintain his services. A description of the new rules, along with the detail retroactive adjustments to comparative data, is presented under “Changes in Accounting Policies” below. As well, to clarify the impact of IFRS 15 on non-IFRS measures, columns presenting the non-IFRS measures without application of IFRS 15 have been added to the tables showing the calculation and reconciliation of the non-IFRS measures, as presented under “Non-IFRS Financial Measures.”

 

Following adoption of IFRS 15, and to reflect changes in its activities and services, including the growth of its mobile telephony services, the Corporation reviewed the nature and definition of its key performance indicators. Accordingly, average monthly revenue per user (“ARPU”) has been abandoned and replaced by a new metric, average billing per unit (“ABPU”). ABPU will be used henceforth to measure the performance of mobile activities and the performance of all activities combined. The definition of the new ABPU metric is provided under “Key Performance Indicators” below. The definition of revenue-generating unit (“RGU”) has also been added in the same section; the nature and calculation of the metric are unchanged.

 

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HIGHLIGHTS SINCE MARCH 31, 2018

 

·                                During the second quarter of 2018, revenues grew 2.5% (or 3.1% without the impact of IFRS 15 adoption), adjusted EBITDA grew by 6.2% (or 7.9% without the impact of IFRS 15 adoption) and ABPU grew by 3.8%, all compared to the second quarter of 2017.

 

·                                As of June 30, 2018, 1,079,200 lines were activated on our mobile telephony service, an increase of 31,900 (3.0%) in the quarter and a year-over-year increase of 125,900 (13.2%). Furthermore, wireless ABPU grew by $0.38 (0.7%) year-over-year.

 

NON-IFRS FINANCIAL MEASURES

 

The financial measures not standardized under International Financial Reporting Standards (“IFRS”) that are used by the Corporation to assess its financial performance, such as adjusted EBITDA, cash flows from segment operations and free cash flows from continuing operating activities, are not calculated in accordance with, or recognized by IFRS. The Corporation’s method of calculating these non-IFRS financial measures may differ from the methods used by other companies and, as a result, the non-IFRS financial measures presented in this document may not be comparable to other similarly titled measures disclosed by other companies.

 

On a transitional basis, to clarify the impact of retroactive adoption of IFRS 15, as described under “Changes in accounting policies”, columns have been added to the calculation and reconciliation tables for non-IFRS financial measures, where applicable. Accordingly, those tables also show the calculation and reconciliation of non-IFRS measures in 2018 and 2017, based on the former accounting policies with respect to revenue recognition, i.e. without the adjustments required by adoption of IFRS 15.

 

Adjusted EBITDA (formerly “Adjusted operating income”)

 

In its analysis of operating results, the Corporation defines adjusted EBITDA, as reconciled to net income under IFRS, as net income before depreciation and amortization, financial expenses, gain (loss) on valuation and translation of financial instruments, restructuring of operations, litigation and other items, gain on sale of spectrum licences, loss on debt refinancing and income taxes. Adjusted EBITDA as defined above is not a measure of results that is consistent with IFRS. It is not intended to be regarded as an alternative to other financial operating performance measures or to the statement of cash flows as a measure of liquidity. It should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS. The Corporation’s management and Board of Directors use this measure in evaluating its consolidated results as well as the results of its operating segments. This measure eliminates the significant level of impairment and depreciation/amortization of tangible and intangible assets and is unaffected by the capital structure or investment activities of the Corporation and its business segments. Adjusted EBITDA is also relevant because it is a significant component of the Corporation’s annual incentive compensation programs. A limitation of this measure, however, is that it does not reflect the periodic costs of tangible and intangible assets used in generating revenues. The Corporation’s definition of adjusted EBITDA may not be the same as similarly titled measures reported by other companies.

 

Adjusted EBITDA Margin

 

The Corporation defines adjusted EBITDA margin as the adjusted EBITDA expressed as a percentage of revenues under IFRS.

 

KEY PERFORMANCE INDICATOR

 

Revenue-generating unit (“RGU”)

 

The Corporation uses RGU, an industry metric, as a key performance indicator. An RGU represents, as the case may be, subscriptions to the cable Internet, cable television and Club illico services, and subscriber connections to the mobile telephony and cable telephony services. RGU is not a measurement that is consistent with IFRS and the Corporation’s definition and calculation of RGU may not be the same as identically titled measurements reported by other companies.

 

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Average billing per unit (“ABPU”)

 

The Corporation uses ABPU, an industry metric, as a key performance indicator. This indicator is used to measure monthly average subscription billing per RGU. ABPU is not a measurement that is consistent with IFRS and the Corporation’s definition and calculation of ABPU may not be the same as identically titled measurements reported by other companies.

 

Mobile ABPU is calculated by dividing the average subscription billing for mobile telephony services by the average number of mobile RGUs during the applicable period, and then dividing the resulting amount by the number of months in the applicable period.

 

Total ABPU is calculated by dividing the combined average subscription billing for cable Internet, cable television, Club illico, mobile telephony and cable telephony services, by the total average number of RGUs from cable Internet, cable television, mobile telephony and cable telephony services during the applicable period, and then dividing the resulting amount by the number of months in the applicable period.

 

Table 1 below presents a reconciliation of adjusted EBITDA to net income as disclosed in our condensed consolidated financial statements.

 

Table 1

Reconciliation of the adjusted EBITDA measure used in this report to the net income measure used in the condensed consolidated financial statements

(in millions of dollars)

 

 

 

Three months ended June 30

 

Six months ended June 30

 

 

 

With IFRS151

 

Excluding IFRS152

 

With IFRS151

 

Excluding IFRS 152

 

 

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

2018

 

2017

 

Adjusted EBITDA

 

$

422.3

 

$

397.7

 

$

419.4

 

$

388.7

 

$

832.4

 

$

780.9

 

$

837.0

 

$

765.1

 

Depreciation and amortization

 

(166.3

)

(158.8

)

(166.3

)

(158.8

)

(331.9

)

(314.3

)

(331.9

)

(314.3

)

Financial expenses

 

(41.6

)

(38.8

)

(41.6

)

(38.8

)

(81.8

)

(76.0

)

(81.8

)

(76.0

)

Gain (loss) on valuation and translation of financial instruments

 

0.7

 

(1.2

)

0.7

 

(1.2

)

(0.7

)

(1.6

)

(0.7

)

(1.6

)

Restructuring of operations, litigation and other items

 

(1.0

)

(6.4

)

(1.0

)

(6.4

)

(3.7

)

6.0

 

(3.7

)

6.0

 

Gain on sale of spectrum licences

 

—

 

87.8

 

—

 

87.8

 

—

 

87.8

 

—

 

87.8

 

Loss on debt refinancing

 

—

 

—

 

—

 

—

 

—

 

(5.2

)

—

 

(5.2

)

Income taxes

 

(41.4

)

(33.1

)

(41.4

)

(33.1

)

(89.7

)

(81.1

)

(89.7

)

(81.1

)

Impact of IFRS 15

 

—

 

—

 

2.9

 

9.0

 

—

 

—

 

(4.6

)

15.8

 

Net income

 

$

172.7

 

$

247.2

 

$

172.7

 

$

247.2

 

$

324.6

 

$

396.5

 

$

324.6

 

$

396.5

 

 

1              Non-IFRS measures presented in these columns are calculated based on IFRS 15 new rules, adopted by the Corporation on a retroactive basis and described under “Changes in Accounting Policies”.

2              Non-IFRS measures presented in these columns are calculated Based on the Corporation’s former accounting policies with respect to revenue recognition, i.e. without the impact of IFRS 15 adoption.

 

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Analysis of Consolidated Results of Videotron

 

2018/2017 Second Quarter Comparison

 

Customer statistics

 

Revenue-generating units — As of June 30, 2018, the total number of revenue-generating units stood at 5,899,400 a decrease of 1,000 in the second quarter of 2018, compared with an increase of 400 in the same period last year. RGUs increased by 103,600 (1.8%) over the last twelve months.

 

Mobile telephony services — As of June 30, 2018, 1,079,200 lines were activated on our mobile telephony network, an increase of 31,900 (3.0%) in the quarter, compared with an increase of 32,400 (3.5%) in the same quarter of 2017. Mobile telephony lines increased by 125,900 (13.2%) over the last twelve months.

 

Cable Internet access services — The number of subscribers to cable Internet access services stood at 1,674,100 as at the end of the second quarter of 2018, a decrease of 500 (0.0%) in the quarter, compared with a decrease of 900 (0.1%) in the same quarter of 2017. Cable Internet access customers increased by 46,900 (2.9%) over the last twelve months. As of June 30, 2018, the household penetration rate (number of subscribers as a proportion of the 2,891,700 total homes passed) for our cable Internet access services was 57.9%, compared with 56.9% as of June 30, 2017.

 

Cable television services —Our cable television subscribers decreased by 19,500 (1.2%) in the second quarter of 2018, compared with a decrease of 23,900 (1.4%) in the same period of 2017 and by 50,700 (3.1%) over the last twelve months. As at the end of the second quarter of 2018, we had 1,606,000 subscribers to our cable television services. The household and business penetration rate was 55.5% versus 57.9% a year earlier.

 

·                                As of June 30, 2018, the number of subscribers to our illico Digital TV service stood at 1,606,000, a decrease of 19,500 (1.2%) in the second quarter of 2018, compared with an increase of 1,700 (0.1%) in the same quarter of 2017. Illico Digital subscribers increased by 9,200 (0.6%) over the last twelve months. As of June 30, 2018, illico Digital TV had a household and business penetration rate of 55.5% versus 55.8% a year earlier.

 

·                                As of June 30, 2018, substantially all subscribers to the analog cable television service had migrated to digital service.

 

Cable telephony services — The number of cable telephony lines stood at 1,148,200 as at the end of the second  quarter of 2018, a decrease of 21,400 (1.8%) in the quarter, compared with a decrease of 20,300 (1.6%) in the same quarter of 2017. Cable telephony lines decreased by 72,800 (6.0%) over the last twelve months. As of June 30, 2018, our cable telephony service household penetration rate was 39.7%, compared with 42.7% as of June 30, 2017.

 

Club illico  — The number of subscribers to Club illico stood at 391,900 as at the end of the second quarter of 2018, an increase of 8,500 (2.2%) in the quarter, compared with an increase of 13,100 (4.0%) in the second quarter of 2017. Club illico customers increased by 54,300 (16.1%) over the last twelve months.

 

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Table 2

Quarter-end RGUs

(in thousands of units)

 

 

 

June 18

 

Mar. 18

 

Dec. 17

 

Sept. 17

 

June 17

 

Mar. 17

 

Dec. 16

 

Sept. 16

 

Mobile telephony

 

1,079.2

 

1,047.3

 

1,024.0

 

990.3

 

953.3

 

920.9

 

893.9

 

867.7

 

Cable Internet

 

1,674.1

 

1,674.6

 

1,666.5

 

1,654.1

 

1,627.2

 

1,628.1

 

1,612.8

 

1,596.1

 

Cable television:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Analog

 

—

 

—

 

—

 

45.1

 

59.9

 

85.5

 

103.8

 

124.9

 

Digital

 

1,606.0

 

1,625.5

 

1,640.5

 

1,603.9

 

1,596.8

 

1,595.1

 

1,587.1

 

1,570.8

 

 

 

1,606.0

 

1,625.5

 

1,640.5

 

1,649.0

 

1,656.7

 

1,680.6

 

1,690.9

 

1,695.7

 

Cable telephony

 

1,148.2

 

1,169.6

 

1,188.5

 

1,205.4

 

1,221.0

 

1,241.3

 

1,253.1

 

1,265.1

 

Club illico

 

391.9

 

383.4

 

361.6

 

347.4

 

337.6

 

324.5

 

314.7

 

278.5

 

Total

 

5,899.4

 

5,900.4

 

5,881.1

 

5,846.2

 

5,795.8

 

5,795.4

 

5,765.4

 

5,703.1

 

 

Revenues: $845.9 million, an increase of $20.8 million (2.5%) compared with the second quarter of 2017.

 

Revenues from mobile telephony services increased by $14.9 million (12.9%) to $130.7 million, essentially due to customer growth.

 

Revenues from Internet access services increased by $14.9 million (5.8%) to $271.6 million. The favourable variance was mainly due to rates increases on some packages, subscriber plans mix, and by subscriber growth, partially offset by lower revenues from excess usage.

 

Combined revenues from cable television services decreased by $1.4 million (0.6%) to $251.5 million. This decrease was primarily due to the net customer base erosion, lower video-on-demand orders, partially offset by rates increases and higher revenues from the leasing of digital set-top boxes.

 

Revenues from cable telephony services decreased by $7.5 million (7.5%) to $92.7 million, mainly due to the net customer base erosion and lower long-distance revenues, partially offset by a favourable plan mix.

 

Revenues from Club illico increased by $1.8 million (18.4%) to 11.6 million, essentially due to customer growth.

 

Revenues from business segment increased by $0.2 million (0.6%) to $31.7 million.

 

Revenues from customer equipment sales decreased by $1.9 million (3.4%) to $54.0 million, mainly due to lower revenues from the sale of digital set-top boxes.

 

Other revenues decreased by $0.1 million to 2.2 million.

 

Monthly combined Total ABPU: $49.68 in the second quarter of 2018, compared with $48.12 in the same quarter of 2017, an increase of $1.56 (3.2%). This growth is mainly explained by an increase in revenues from mobile telephony and Internet access services, as detailed above.

 

Adjusted EBITDA: $422.3 million in the second quarter of 2018, an increase of $24.6 million (6.2%) compared to the same quarter of 2017.

 

·                                This increase was primarily due to:

 

·                  revenue net growth, as detailed above; and

 

·                  decrease of mobile roaming charges following a CRTC decision made in the first quarter of 2018.

 

Partially offset by:

 

·                 increase in operating expenses mainly related to administration, advertising and marketing costs; and

 

·                 increase in losses on sale of mobile devices, partially offset by the growing popularity of our “bring your own device” plans.

 

Employee costs, expressed as a percentage of revenues: 11.5% in 2018, compared with 11.8% in 2017.

 

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Purchase of goods and services, expressed as a percentage of revenues: 38.6% in 2018, compared with 40.0% in 2017.

 

Depreciation and amortization charge: $166.3 million, an increase of $7.5 million (4.7%) compared with the same quarter of 2017. The increase was mainly due to an increase in assets related to our wireless and wireline networks and our IT systems.

 

Financial expenses (primarily comprised of interest on long-term debt): $41.6 million in the second quarter of 2018, an increase of $2.8 million (7.2%) compared with the same quarter of 2017.

 

·                                This increase was primarily due to:

 

·                  $4.2 million in interest revenue in 2017 from our subordinated loan to our parent corporation issued during the quarter.

 

Partially offset by:

 

·                 $0.9 million increase in interest on long-term debt, mainly due to higher average indebtedness; and

 

·                 $2.8 million increase in other interest revenues and other items.

 

Gain or loss on valuation and translation of financial instruments: Gain of $0.7 million in the second quarter of 2018, compared with a loss of $1.2 million in the same quarter of 2017, a favourable variance of $1.9 million.

 

Restructuring of operations, litigation and other special items: $1.0 million charge recorded in the second quarter of 2018, compared with a $6.4 million charge in the same quarter of 2017, a decrease of $5.4 million, mainly due to charges incurred in 2017 related to the decommissioning of our analog network.

 

Gain on sale of spectrum licences: Nil in the second quarter of 2018, compared with a gain of $87.8 million in the same quarter of 2017. On June 20, 2017, the Corporation sold its AWS spectrum licence in the Toronto region to Rogers Communications Canada inc. for a cash consideration of $184.2 million, pursuant to the transfer option held since 2013.

 

Income tax expense: $41.4 million (effective tax rate of 19.3%) in the second quarter of 2018, compared with $33.1 million (effective tax rate of 11.3%) in the same quarter of 2017.

 

·                                The increase of $8.3 million was mainly due to:

 

·                  $26.6 million related to an increase in taxable income.

 

Partially offset by:

 

·                  $12.1 million decrease due to the effect of non-deductible charges and non-taxable income; and

 

·                  $11.4 million decrease due to changes in tax consolidation arrangements with our parent corporation.

 

Net income attributable to shareholder: $172.7 million, a decrease of $74.6 million (30.2%).

 

·                                The decrease was mainly due to:

 

·                  $87.8 million gain on sale of spectrum licences in 2017, including $43.9 million without any tax consequences;

 

·                  $8.3 million increase in income taxes;

 

·                  $7.5 million increase in amortization charge; and

 

·                  $2.8 million increase in financial expenses.

 

Partially offset by:

 

·                  $24.6 million increase in adjusted EBITDA;

 

·                  $5.4 million favourable variance in restructuring of operations, litigation and other special items; and

 

·                  $1.9 million favourable variance in gain or loss on valuation and translation of financial instruments.

 

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2018/2017 Year-to-date Comparison

 

Revenues: $1,667.8 million, an increase of $39.4 million (2.4%) compared with the same period of 2017.

 

Revenues from mobile telephony services increased by $29.8 million (13.1%) to $256.6 million, essentially due to customer growth.

 

Revenues from Internet access services increased by $26.1 million (5.1%) to $533.2 million. The favourable variance was mainly due to subscriber plans mix, rates increases on some packages and by subscriber growth, partially offset by lower revenues from excess usage and higher discounts.

 

Combined revenues from cable television services decreased by $4.0 million (0.8%) to $500.1 million. This decrease was primarily due to the net customer base erosion and lower video-on-demand orders, partially offset by higher revenues from the leasing of digital set-top boxes and rates increases.

 

Revenues from cable telephony services decreased by $15.0 million (7.4%) to $187.8 million. This decrease was primarily due to the net customer base erosion and lower long-distance revenues partially offset by a favourable plan mix.

 

Revenues from Club illico increased by $3.9 million (20.7%) to $22.7 million, essentially due to customer growth.

 

Revenues from business segment increased by $0.5 million (0.8%) to $63.4 million mainly due to revenues growth from Fibrenoire, partially offset by non-recurring equipment revenues from 4Degrees in 2017.

 

Revenues from customer equipment sales decreased by $1.5 million (1.5%) to $99.5 million, mainly due to lower revenues from the sale of digital set-top boxes.

 

Other revenues decreased by $0.2 (4.3%) million to $4.5 million.

 

Monthly combined Total ABPU: $49.25 for the first six months of 2018, compared with $47.76 in the same period of 2017, an increase of $1.49 (3.1%).This growth is mainly explained by an increase in revenues from mobile telephony and Internet access services, as detailed above.

 

Adjusted EBITDA: $832.4 million for the first six months of 2018, an increase of $51.5 million (6.6%) compared to the same period of 2017.

 

·                                This increase was primarily due to:

 

·                 revenue net growth, as detailed above; and

 

·                 a favourable retroactive adjustment of mobile roaming charges following a CRTC decision made in the first quarter of 2018.

 

Partially offset by:

 

·                 increase in operating expenses mainly related to engineering, advertising and administration costs.

 

Employee costs, expressed as a percentage of revenues: 11.9% for the first six months of 2018, compared with 12.1% in the same period of 2017.

 

Purchase of goods and services, expressed as a percentage of revenues: 38.2% for the first six months of 2018, compared with 39.9% in the same period of 2017.

 

Depreciation and amortization charge: $331.9 million in the first six months of 2018, an increase of $17.6 million (5.6%) compared with the same period of 2017. The increase was mainly due to an increase in assets related to our wireless and wireline networks and IT systems.

 

Financial expenses (primarily comprised of interest on long-term debt): $81.8 million in the first six months of 2018, an increase of $5.8 million (7.6%) compared with the same period of 2017.

 

·                                The increase was mainly due to:

 

·                 $7.7 million increase in interest on long-term debt, mainly due to higher average indebtedness;

 

·                  $3.4 million decrease in interest revenue from our subordinated loan to our parent corporation issued during the quarter; and

 

·                 $1.5 million increase in loss on foreign currency translation of short-term monetary items.

 

Partially offset by:

 

·                 $6.6 million increase in interest revenues on cash-on-hand.

 

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Gain or loss on valuation and translation of financial instruments: Loss of $0.7 million in the first six months of 2018, compared with a $1.6 million loss in the same period of 2017.

 

Restructuring of operations, litigation and other special items: $3.7 million charge recorded in the first six months of 2018, compared with a gain of $6.0 million in the same period of 2017, an unfavourable variance of $9.7 million.

 

·                                In the first six months of 2018, a $3.7 million charge was recognized in connection with charges related to the decommissioning of our analog network and labour-cost reduction initiatives.

 

·                                In the first six months of 2017, a $6.0 million net gain was recognized in connection with developments in legal disputes, labour-cost reduction initiatives, and charges related to the decommissioning of our analog network.

 

Gain on sale of spectrum licences: Nil in the first six months of 2018, compared with a gain of $87.8 million in the same period of 2017. On June 20, 2017, the Corporation sold its AWS spectrum licence in the Toronto region to Rogers Communications Canada inc. for a cash consideration of $184.2 million, pursuant to the transfer option held since 2013.

 

Loss on debt refinancing: Nil in the first six months of 2018, compared to $5.2 million in the same period of 2017.

 

·                                In accordance with a notice issued on March 31, 2017, the Corporation redeemed, on May 1, 2017, all of its outstanding 6.875% Senior Notes issued on July 5, 2011 and maturing on July 15, 2021, in an aggregate principal amount of $125.0 million, at a redemption price of 103.438% of their principal amount. A $5.2 million loss was recorded in the consolidated statement of income of the first six months of 2017 in connection with this redemption.

 

Income tax expense: $89.7 million (effective tax rate of 21.7%) in the first six months of 2018, compared with $81.1 million (effective tax rate of 16.7%) in the same period of 2017.

 

·                                The increase of $8.6 million was mainly due to:

 

·                  $33.7 million related to an increase in taxable income; and

 

·                  $3.8 million increase due to changes in tax consolidation arrangements with our parent corporation.

 

Partially offset by:

 

·                  $17.6 million decrease due to non-taxable items and non-deductible charges.

 

Net income attributable to shareholder: $324.6 million, a decrease of $71.8 million (18.1%).

 

·                  The decrease was mainly due to:

 

·                 $87.8 million gain on sale of spectrum licences in 2017, including $43.9 million without any tax consequences;

 

·                 $17.6 million increase in amortization charge;

 

·                 $9.7 million unfavourable variance in restructuring of operations, litigation and other special items;

 

·                 $8.6 million increase in income taxes; and

 

·                 $5.8 million increase in financial expenses.

 

Partially offset by:

 

·                 $51.5 million increase in adjusted EBITDA;

 

·                 $5.2 million loss on debt refinancing in 2017; and

 

·                 $0.9 million favourable variance in gain or loss on valuation and translation of financial instruments.

 

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CASH FLOWS AND FINANCIAL POSITION

 

This section provides an analysis of sources and uses of cash flows, as well as a financial position analysis as of the balance sheet date.

 

Operating Activities

 

Second quarter 2018

 

Cash flows provided by operating activities: $385.9 million in the second quarter of 2018, compared with $371.1 million in the same quarter of 2017, an increase of $14.8 million (4.0%).

 

·                                The increase was mainly due to:

 

·                  $28.5 million favourable variance in non-cash balances related to operations, mainly due to a favourable net variation in income taxes payables, in inventories and in accounts receivables, partially offset by an unfavourable net variation in accounts payable and accrued charges; and

 

·                  $24.6 million increase in adjusted EBITDA.

 

Partially offset by:

 

·                  $38.5 million increase in current income tax expenses, due to recognition of tax benefits in the second quarter of 2017;

 

Year to date

 

Cash flows provided by operating activities: $695.2 million in the first half of 2018, compared with $552.0 million in the same period of 2017, an increase of $143.2 million (25.9%).

 

·                                The increase was mainly due to:

 

·                  $205.4 million favourable variance in non-cash balances related to operations, mainly due a favourable net variation in income taxes payable, inventories and payable and accrued charges, partially offset by an unfavourable net variation in accounts receivable; and

 

·                  $51.5 million increase in adjusted EBITDA.

 

Partially offset by:

 

·                  $95.2 million increase in current income tax expenses, due to recognition of tax benefits in the first semester of 2017;

 

·                  $9.7 million unfavourable variance in restructuring of operations, litigation and other items, as explained above; and

 

·                  $4.9 million unfavourable variance in cash financial expenses.

 

Working capital: $191.5 million as of June 30, 2018, compared with $630.0 million as of December 31, 2017. The difference is mainly explained by a reduction of paid-up capital of the Corporation paid in part with cash on hand.

 

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Investing Activities

 

Second quarter 2018

 

Additions to fixed assets: $122.7 million in the second quarter of 2018, compared with $147.2 million in the same quarter of 2017. The decrease is mainly explained by lower investments in our wireline and wireless network.

 

Additions to intangible assets: $36.6 million in the second quarter of 2018, compared with $24.8 million in the same quarter of 2017. The increase is mainly explained by significant investments made on our IPTV project.

 

Proceeds from the disposal of assets: $1.3 million in the second quarter of 2018, compared with $184.7 million in the same quarter of 2017. On June 20, 2017, the Corporation sold its AWS spectrum licence in the Toronto region to Rogers Communications Canada inc. for a cash consideration of $184.2 million, pursuant to the transfer option held since 2013. The sale resulted in a gain on disposal of $87.8 million.

 

Year to date

 

Additions to fixed assets: $262.5 million in the first half of 2018 compared with $308.9 million in the same period of 2017. The decrease is mainly explained by lower investments in our wireline and wireless network as well as a reduction in capital expenditures related to our set-top box rental program.

 

Additions to intangible assets: $91.6 million in the first half of 2018, compared with $58.4 million in the same period of 2017. The increase is mainly explained by significant investments made on our IPTV project and IT systems.

 

Proceeds from the disposal of assets: $1.7 million in the first six months of 2018, compared with $185.2 million in the same period of 2017. On June 20, 2017, the Corporation sold its AWS spectrum licence in the Toronto region to Rogers Communications Canada inc. for a cash consideration of $184.2 million, pursuant to the transfer option held since 2013. The sale resulted in a gain on disposal of $87.8 million.

 

Business acquisition: $1.3 million received in the first half of 2018, compared with $5.6 million payment in the same period of 2017.

 

Financing Activities

 

Consolidated debt (long-term debt plus bank indebtedness): $938.9 million increase during the first half of 2018.

 

·                                Summary of debt increases during the first half of 2018:

 

·                  $816.1 million increase in drawings under our revolving credit facilities;

 

·                  $108.6 million unfavourable impact of exchange rate fluctuations. This increase in long-term debt is offset by an increase in the asset (or a decrease in the liability) related to cross-currency interest rate swaps, recorded under “Derivative financial instruments”; and

 

·                  $18.1 million net change in bank indebtedness.

 

·                                Summary of debt decreases during the same period:

 

·                 repayment of $5.4 million of borrowings under our export financing facility; and

 

·                 $6.6 million change in the fair value related to hedged interest rate risk.

 

Assets and liabilities related to derivative financial instruments: Net asset of $330.5 million as of June 30, 2018, compared with a net asset of $259.0 million as of December 31, 2017, a $71.5 million favourable variance. The variance was mainly due to the favourable net impact of exchange rate.

 

Dividends: Net decrease of $127.0 million in common dividends to our parent corporation in the first six months of 2018 compared with the same period of 2017.

 

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Financial Position as of June 30, 2018

 

Net available liquid assets: $134.5 million for the Corporation and its wholly owned subsidiaries, consisting of $152.6 million in unused availabilities under credit facilities, less bank indebtedness of $18.1 million.

 

Consolidated debt (long-term debt plus bank indebtedness): $4,203.9 million as of June 30, 2018, an increase of $933.6 million; $71.5 million favourable net variance in assets and liabilities related to derivative financial instruments (see “Financing Activities” above).

 

As of June 30, 2018, mandatory debt repayments on the Corporation’s long-term debt in the coming years are as follows:

 

Table 3

Mandatory debt repayments on Videotron’s long-term debt

Twelve-month period ending June 30

(in millions of dollars)

 

2019

 

$

—

 

2020

 

—

 

2021

 

—

 

2022

 

812.4

 

2023

 

1,050.6

 

2024 and thereafter

 

2,351.0

 

Total

 

$

4,214.0

 

 

We may (but are under no obligation to) from time to time seek to retire or purchase our outstanding senior notes in open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on our liquidity position and requirements, prevailing market conditions, contractual restrictions and other factors. The amounts involved may be material.

 

The weighted average term of Videotron’s consolidated debt was approximately 5.8 years as of June 30, 2018 (7.0 years as of December 31, 2017). As of June 30, 2018, after taking into account the hedging instruments, the debt consisted of approximately 74.4% fixed-rate debt (94.1% as of December 31, 2017) and 25.6% floating-rate debt (5.9% as of December 31, 2017).

 

Videotron’s management believes that cash flows from continuing operations and available sources of financing should be sufficient to cover committed cash requirements for capital investments, including investments required for our wireline and wireless networks, working capital, interest payments, debt repayments, pension plan contributions, and dividends and distributions in the future. Videotron has access to cash flows generated by its subsidiaries through dividends and cash advances paid by its wholly owned subsidiaries. Videotron believes it will be able to meet future debt maturities, which are fairly staggered over the coming years.

 

Pursuant to its financing agreements, the Corporation is required to maintain certain financial ratios. The key indicators listed in these financing agreements include debt service coverage ratio and debt ratio (long-term debt over adjusted EBITDA). As of June 30, 2018, the Corporation was in compliance with all required financial ratios.

 

Distributions to our shareholder: We paid $38.0 million in common dividends to our shareholder, Quebecor Media, in the first half of 2018, compared with total common dividends of $165.0 million in the same period of 2017. We expect to make cash distributions to our shareholder in the future, as determined by our Board of Directors, and within the limits set by the terms of our indebtedness and applicable laws.

 

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Corporate reorganization

 

On January 3, 2018, Quebecor Media Inc. transferred all of its 172,516,829 shares in the Corporation in the amount of $132.4 million to a newly fully owned subsidiary, 9370-5762 Québec Inc. in exchange for i) a convertible promissory note for a value of $3,908.6 million that is convertible into 3,908,569.822 common shares of 9370-5762 Québec Inc and ii) 6,636,391 common shares of 9370-5762 Quebec inc. The following day, the Corporation was merged with 9370-5762 Québec Inc. The new merged Corporation continues to operate under the name of Videotron Ltd.  Since this transaction resulted in no substantive changes in the parent corporation reporting group, the transaction was accounted for using the continuity of interest method. Under this method, all figures of the Corporation reflect the carrying values of the two merged entities.

 

On January 8, 2018, the convertible promissory note was converted into 3,908,569.822 common shares of the Corporation.

 

This corporate reorganization resulted in an increase of $3,776.2 million of capital stock and a decrease of retained earnings by the same amount.

 

Reduction of paid-up capital

 

During the six-month period ended June, 30, 2018, the Corporation made reductions of its paid-up capital for a total cash consideration of $2,292.0 million.

 

Subsequent event on July 23, 2018, the Corporation reduced its paid-up capital for an additional cash consideration of $87.1 million.

 

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Analysis of Consolidated Balance Sheets as of June 30, 2018

 

Table 4

Consolidated Balance Sheets of Videotron

Analysis of significant variances between June 30, 2018 and December 31, 2017

(in millions of dollars)

 

 

 

June 30, 2018

 

December 31, 2017

 

Variance

 

Variance detail

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

0.7

 

$

815.8

 

$

(815.1

)

Reduction of paid-up capital of the Corporation paid in part with cash on hand

 

 

 

 

 

 

 

 

 

 

 

Investments

 

2,390.0

 

—

 

2,390.0

 

Investment in preferred shares of an affiliated corporation for tax consolidation purposes

 

 

 

 

 

 

 

 

 

 

 

Fixed assets

 

3,197.0

 

3,257.4

 

(60.4

)

Amortization expense less capital expenditure

 

 

 

 

 

 

 

 

 

 

 

Intangible assets

 

941.0

 

908.0

 

33.0

 

Investments made on our IPTV project

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments1

 

330.5

 

259.0

 

71.5

 

See “Financing Activities” above

 

 

 

 

 

 

 

 

 

 

 

Subordinated loan to parent corporation

 

—

 

342.0

 

(342.0

)

Reimbursement by the parent corporation

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued charges

 

407.2

 

491.9

 

(84.7

)

Impact of current variances in activity

 

 

 

 

 

 

 

 

 

 

 

Income taxes payable (receivable)

 

80.4

 

(27.2

)

107.6

 

Recognition of tax benefits in 2017

 

 

 

 

 

 

 

 

 

 

 

Long-term debt, including short-term portion and bank indebtedness

 

4,203.9

 

3,270.3

 

933.6

 

See “Financing Activities” above

 

 

 

 

 

 

 

 

 

 

 

Subordinated loan from parent corporation

 

2,390.0

 

—

 

2,390.0

 

Loan payable to the parent corporation for tax consolidation purposes

 

 

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

703.4

 

719.3

 

(15.9

)

Deferred income tax recovery recorded in net income

 

 

 

 

 

 

 

 

 

 

 

Capital stock

 

1,616.6

 

132.4

 

1,484.2

 

Corporate reorganization

 

 

 

 

 

 

 

 

 

 

 

(Deficit) retained earnings

 

(1,644.6

)

1,844.9

 

(3,489.5

)

Corporate reorganization

 

 

1   Long-term assets less long-term liabilities

 

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ADDITIONAL INFORMATION

 

Contractual Obligations and Other Commercial Commitments

 

As of June 30, 2018, material contractual obligations included: capital repayment and interest payments on long-term debt, obligations related to derivative financial instruments, less estimated future receipts on derivative financial instruments, operating lease arrangements and capital asset purchases and other commitments.

 

Table 5 below shows a summary of our contractual obligations.

 

Table 5

Contractual obligations of the Corporation

Payments due by period as of June 30, 2018

(in millions of dollars)

 

 

 

Total

 

Less than
1 year

 

1-3 years

 

3-5 years

 

5 years
or more

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual obligations1

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued charges

 

$

407.2

 

$

407.2

 

$

—

 

$

—

 

$

—

 

Amounts payable to affiliated corporations

 

34.3

 

34.3

 

—

 

—

 

—

 

Bank credit facilities

 

812.4

 

—

 

—

 

812.4

 

—

 

5% Senior Notes due July 15, 2022

 

1,050.6

 

—

 

—

 

1,050.6

 

—

 

5 3/8% Senior Notes due June 15, 2024

 

788.0

 

—

 

—

 

—

 

788.0

 

5 5/8% Senior Notes due June 15, 2025

 

400.0

 

—

 

—

 

—

 

400.0

 

5 3/4% Senior Notes due January 15, 2026

 

375.0

 

—

 

—

 

—

 

375.0

 

5 1/8% Senior Notes due April 15, 2027

 

788.0

 

—

 

—

 

—

 

788.0

 

Interest payments2

 

1,139.3

 

145.9

 

379.8

 

313.4

 

300.2

 

Derivative financial instruments3

 

(360.4

)

—

 

—

 

(251.1

)

(109.3

)

Operating lease commitments

 

140.7

 

41.3

 

45.6

 

21.1

 

32.7

 

Services and capital equipment commitments

 

626.4

 

106.1

 

162.0

 

135.7

 

222.6

 

Total contractual cash obligations

 

$

6,201.5

 

$

734.8

 

$

587.4

 

$

2,082.1

 

$

2,797.2

 

 

1              Excludes obligations under subordinated loans due to Quebecor Media, our parent corporation, the proceeds of which are used to invest in preferred shares of an affiliated corporation for tax consolidation purposes for the Quebecor Media group.

2              Estimated interest payable on long-term debt, based on interest rates, hedging of interest rates and hedging of foreign exchange rates as of June 30, 2018.

3              Estimated future receipts, net of disbursements, related to foreign exchange hedging using derivative financial instruments.

 

Material commitments included in Table 5

 

The Corporation leases sites for its LTE wireless network under operating lease contracts, and it has signed a set of service sharing and exchange agreements with Rogers Communications Inc., including a 20-year agreement to build out and operate a shared LTE wireless network in the Province of Québec and in the Ottawa Region. Also, the Corporation has signed an agreement with Comcast Corporation to deploy an innovative IP television service.  As of June 30, 2018, a total commitment of $602.1 million was outstanding under those agreements.

 

Related Party Transactions

 

The following describes transactions in which the Corporation and its directors, executive officers and affiliates are involved. We believe that each of the transactions described below was on terms no less favourable to Videotron than could have been obtained from independent third parties.

 

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Operating transactions

 

In the second quarter of 2018, the Corporation and its subsidiaries incurred various expenses, including rent charges, from the parent and affiliated corporations in the amount of $26.6 million ($26.5 million in the same quarter of 2017), which are included in purchase of goods and services. The Corporation and its subsidiaries generated revenues from the parent and affiliated corporations in the amount of $1.4 million ($1.4 million in the same quarter of 2017).

 

During the first six months of 2018, the Corporation and its subsidiaries incurred various expenses, including rent charges, from the parent and affiliated corporations in the amount of $55.6 million ($62.7 million in the same period of 2017), which are included in purchase of goods and services. The Corporation and its subsidiaries generated revenues from the parent and affiliated corporations in the amount of $2.9 million ($3.3 million in the first six months of 2017). These transactions were concluded and accounted for at the consideration agreed between parties.

 

Management arrangements

 

Videotron has entered into management arrangements with its parent corporation. Under these management arrangements, the parent corporation provides management services on a cost-reimbursement basis.

 

In the second quarter of 2018, Videotron incurred management fees of $13.3 million ($13.3 million in the second quarter of 2017) with its parent corporation. During the first six months of 2018, Videotron incurred management fees of $26.5 million ($26.5 million in the first six months of 2017).

 

Financial Instruments

 

The Corporation uses a number of financial instruments, mainly cash and cash equivalents, accounts receivable, bank indebtedness, accounts payable and accrued charges, provisions, long-term debt, and derivative financial instruments.

 

In order to manage its foreign exchange and interest rate risks, the Corporation uses derivative financial instruments (i) to set in Canadian dollars future payments on debts denominated in U.S. dollars (interest and principal) and certain purchases of inventories and other capital expenditures denominated in a foreign currency and (ii) to achieve a targeted balance of fixed and floating rate debts. The Corporation does not intend to settle its derivative financial instruments prior to their maturity as none of these instruments is held or issued for speculative purposes.

 

Certain cross-currency interest rate swaps entered into by the Corporation include an option that allows each party to unwind the transaction on a specific date at the then settlement amount.

 

The carrying value and fair value of long-term debt and derivative financial instruments as of June 30, 2018 and December 31, 2017 were as follows:

 

Table 6

Fair value of long-term debt and derivative financial instruments

(in millions of dollars)

 

 

 

June 30, 2018

 

December 31, 2017

 

 

 

Carrying
value

 

Fair
value

 

Carrying
value

 

Fair
value

 

Long-term debt1

 

$

(4,214.0

)

$

(4,260.5

)

$

(3,294.6

)

$

(3,492.1

)

Derivative financial instruments

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

4.3

 

4.3

 

(4.5

)

(4.5

)

Cross-currency interest rate swaps

 

326.2

 

326.2

 

263.5

 

263.5

 

 

1              The carrying value of long-term debt excludes adjustments to record changes in the fair value of long-term debt related to hedged interest rate risk and financing fees.

 

The fair value of long-term debt in table 6 is estimated based on quoted market prices when available or on valuation models. When the Corporation uses valuation models, the fair value is estimated using discounted cash flows using period-end market yields or the market value of similar instruments with the same maturity.

 

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The fair value of derivative financial instruments recognized in the consolidated balance sheet is estimated as per the Corporation’s valuation models. These models project future cash flows and discount the future amounts to a present value using the contractual terms of the derivative financial instrument and factors observable in external market data, such as period-end swap rates and foreign exchange rates. An adjustment is also included to reflect non-performance risk impacted by the financial and economic environment prevailing at the date of the valuation, in the recognized measure of the fair value of the derivative financial instruments by applying a credit default premium estimated using a combination of observable and unobservable inputs in the market, to the net exposure of the counterparty or the Corporation.

 

The gain or loss on valuation and translation of financial instruments for the three months and six months ended June 30, 2018 and 2017 is summarized in the following table.

 

Table 7

Gain or loss on valuation and translation of financial instruments

(in millions of dollars)

 

 

 

Three months ended June 30

 

Six months ended June 30

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

(Gain) loss on the ineffective portion of fair value hedge

 

$

(0.7

)

$

1.2

 

$

0.7

 

$

1.5

 

Loss on embedded derivatives related to long-term debt

 

—

 

—

 

—

 

0.1

 

 

 

$

(0.7

)

$

1.2

 

$

0.7

 

$

1.6

 

 

A loss of $1.4 million was recorded under other comprehensive income in the second quarter of 2018 in relation to cash flow hedging relationships (gain of $28.2 million in the same quarter of 2017). For the six months ended June 30, 2018, a loss of $29.8 million was recorded (gain of $20.9 million in the corresponding period of 2017).

 

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CHANGES IN ACCOUNTING POLICIES

 

·             IFRS 9 — Financial Instruments

 

On January 1, 2018, the Corporation adopted the new rules under IFRS 9, Financial Instruments, which simplify the measurement and classification of financial assets by reducing the number of measurement categories in IAS 39, Financial Instruments: Recognition and Measurement. The new standard also provides for a fair value option in the designation of a non-derivative financial liability and its related classification and measurement, as well as for a new hedge accounting model more closely aligned with risk-management activities undertaken by entities.

 

Under the new rules, all financial assets and liabilities of the Corporation are now classified as subsequently measured at amortized cost. The Corporation is also using the IFRS 9 expected credit losses method to estimate the provision for expected credit losses on its financial assets.

 

The adoption of IFRS 9 had no impact on the consolidated financial statements.

 

·             IFRS 15 — Revenue from Contracts with Customers

 

On January 1, 2018, the Corporation adopted on a fully retroactive basis the new rules under IFRS 15, Revenue from Contracts with Customers, which specify how and when an entity should recognize revenue, and which also require the entity to provide users of financial statements with more informative disclosures. The standard provides a single, principles-based, five-step model under which the Corporation now only accounts for a contract with a customer when all of the following criteria are met:

 

·                                the parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are committed to perform their respective obligations;

 

·                                the entity can identify each party’s rights regarding the goods or services to be transferred;

 

·                                the entity can identify the payment terms for the goods or services to be transferred;

 

·                                the contract has commercial substance (i.e. the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract); and

 

·                                it is probable that the entity will collect the consideration to which it is entitled in exchange for the goods or services to be transferred to the customer.

 

The adoption of IFRS 15 had significant impacts on the consolidated financial statements of the Corporation with regards to the timing of the recognition of its revenues, the classification of its revenues, as well as the capitalization of costs, such as the costs to obtain a contract and connection costs.

 

Under IFRS 15, the total consideration from a contract with multiple deliverables is now allocated to all performance obligations in the contract based on the stand-alone selling price of each obligation, without being limited to a non-contingent amount. The Corporation provides mobile devices and services under contracts with multiple deliverables and for a fixed period of time. Under IFRS 15, promotional offers related to the sale of mobile devices previously accounted for as a reduction in related equipment sales on activation, are now considered in the total consideration to be allocated to all performance obligations. Among other impacts, the adoption of IFRS 15 results in an increase in the revenue from the device sale and in a decrease in the mobile service revenue recognized over the contract term. The timing of the recognition of these revenues therefore changes under IFRS 15. However, the total revenue recognized over a contract term relating to all performance obligations within the contract remains the same as under the previous rules. The portion of revenues that is earned without having been invoiced is now presented as contract assets in the consolidated balance sheets, which asset is realized during the term of the contract. The long-term portion of contract assets is included in “Other Assets” in the consolidated balance sheets. All other types of revenue have not been impacted by the adoption of IFRS 15.

 

In addition, under IFRS 15, certain costs to obtain a contract, mainly sales commissions, are capitalized and amortized as operating expenses over the contract term or over the period of time the customer is expected to maintain his services. Previously, such costs were expensed as incurred. Also, the capitalization of connection costs is no longer limited to the related connection revenues as under the previous rules. These capitalized costs are included in “Other Assets” as contract costs in the consolidated balance sheets.

 

The retroactive adoption of IFRS 15 had the following impacts on the comparative consolidated financial figures:

 

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Consolidated statements of income and comprehensive income

 

Increase (decrease)

 

Three months ended
June 30, 2017

 

Six months ended
June 30, 2017

 

 

 

 

 

 

 

Revenues

 

$

6,550

 

$

11,597

 

Purchase of goods and services

 

(2,471

)

(4,174

)

Deferred income tax expenses

 

2,390

 

4,179

 

Net income and comprehensive income attributable to shareholders

 

6,631

 

11,592

 

 

Consolidated balance sheets

 

Increase

 

December 31, 2017

 

December 31, 2016

 

 

 

 

 

 

 

Contract assets1

 

$

183,611

 

$

155,790

 

Contract costs2

 

92,528

 

85,457

 

Deferred income tax liability

 

73,176

 

63,930

 

Retained earnings

 

202,963

 

177,317

 

 

1 The current portion of contract assets is $132.8 million as of December 31, 2017 and $106.6 million as of December 31, 2016.

2 The current portion of contract costs is $55.9 million as of December 31, 2017 and $49.4 million as of December 31, 2016.

 

The adoption of IFRS 15 had no impact on cash flows from operating, investing or financing activities.

 

20


Table of Contents

 

Cautionary Statement Regarding Forward-Looking Statement

 

This quarterly report contains forward-looking statements with respect to our financial condition, results of operations, our business, and certain of our plans and objectives. These forward-looking statements are made pursuant to the “Safe Harbor” provisions of the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate as well as beliefs and assumptions made by our management. Such statements include, in particular, statements about our plans, prospects, financial position and business strategies. Words such as “may,” “will,” “expect,” “continue,” “intend,” “estimate,” “anticipate,” “plan,” “foresee,” “believe” or “seek,” or the negatives of those terms or variations of them or similar terminology are intended to identify such forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements, by their nature, involve risks and uncertainties and are not guarantees of future performance. Such statements are also subject to assumptions concerning, among other things: our anticipated business strategies; anticipated trends in our business; anticipated reorganizations of any of our businesses, and any related restructuring provisions or impairment charges; and our ability to continue to control costs. We can give no assurance that these estimates and expectations will prove to have been correct. Actual outcomes and results may, and often do, differ from what is expressed, implied or projected in such forward-looking statements, and such differences may be material. Some important factors that could cause actual results to differ materially from those expressed in these forward-looking statements include, but are not limited to:

 

·             our ability to successfully continue developing our network and facilities-based mobile offering;

 

·             general economic, financial or market conditions;

 

·             the intensity of competitive activity in the industries in which we operate;

 

·             new technologies that would change consumer behaviour towards our product suite;

 

·             unanticipated higher capital spending required for developing our network or to address continued development of competitive alternative technologies, or the inability to obtain additional capital to continue the development of our business;

 

·             our ability to implement successfully our business and operating strategies and to manage our growth and expansion;

 

·             disruptions to the network through which we provide our digital television, Internet access, mobile and cable telephony services, and Club illico services and our ability to protect such services from piracy, unauthorised access or other security breaches;

 

·             labour disputes or strikes;

 

·             changes in our ability to obtain services and equipment critical to our operations;

 

·             changes in laws and regulations, or in their interpretation, which could result, among other things, in the loss (or reduction in value) of our licences or markets or in an increase in competition, compliance costs or capital expenditures;

 

·             our substantial indebtedness, the tightening of credit markets, and the restrictions on our business imposed by the terms of our debt; and

 

·             interest rate fluctuations that affect a portion of our interest payment requirements on long-term debt.

 

We caution you that the above list of cautionary statements is not exhaustive. These and other factors are discussed in further detail in the annual report on Form 20-F, under “Item 3. Key information — Risk Factors.” Each of these forward-looking statements speaks only as of the date of this report. We disclaim any obligation to update these statements unless applicable securities laws require us to do so. We advise investors and others to consult any documents we may file with or furnish to the U.S. Securities and Exchange Commission (SEC).

 

21


Table of Contents

 

VIDEOTRON LTD.

CONSOLIDATED STATEMENTS OF INCOME

 

(in thousands of Canadian dollars)

(unaudited)

 

 

 

 

 

Three months ended June 30

 

Six months ended June 30

 

 

 

Note

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

(restated, note 2)

 

 

 

(restated, note 2)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

Cable television

 

 

 

$

251,469

 

$

252,888

 

$

500,130

 

$

504,148

 

Internet

 

 

 

271,562

 

256,676

 

533,201

 

507,147

 

Mobile telephony

 

 

 

130,745

 

115,755

 

256,559

 

226,828

 

Cable telephony

 

 

 

92,654

 

100,208

 

187,812

 

202,762

 

Over-the-top video

 

 

 

11,566

 

9,802

 

22,713

 

18,836

 

Business

 

 

 

31,670

 

31,540

 

63,420

 

62,904

 

Equipment sales

 

 

 

54,023

 

55,886

 

99,514

 

100,996

 

Other

 

 

 

2,197

 

2,308

 

4,455

 

4,746

 

 

 

 

 

845,886

 

825,063

 

1,667,804

 

1,628,367

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee costs

 

3

 

97,138

 

97,676

 

198,782

 

197,689

 

Purchase of goods and services

 

3

 

326,457

 

329,838

 

636,530

 

649,776

 

Depreciation and amortization

 

 

 

166,265

 

158,758

 

331,900

 

314,306

 

Financial expenses

 

4

 

41,615

 

38,765

 

81,813

 

76,010

 

(Gain) loss on valuation and translation of financial instruments

 

 

 

(715

)

1,212

 

709

 

1,642

 

Restructuring of operations, litigation and other items

 

6

 

1,048

 

6,360

 

3,729

 

(5,983

)

Gain on sale of spectrum licences

 

9

 

—

 

(87,846

)

—

 

(87,846

)

Loss on debt refinancing

 

 

 

—

 

—

 

—

 

5,201

 

Income before income taxes

 

 

 

214,078

 

280,300

 

414,341

 

477,572

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes (recovery)

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

43,024

 

4,507

 

104,014

 

8,768

 

Deferred

 

 

 

(1,627

)

28,563

 

(14,314

)

72,315

 

 

 

 

 

41,397

 

33,070

 

89,700

 

81,083

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

$

172,681

 

$

247,230

 

324,641

 

396,489

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to

 

 

 

 

 

 

 

 

 

 

 

Shareholder

 

 

 

$

172,666

 

$

247,226

 

324,645

 

396,478

 

Non-controlling interests

 

 

 

15

 

4

 

(4

)

11

 

 

See accompanying notes to condensed consolidated financial statements.

 

22


Table of Contents

 

VIDEOTRON LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(in thousands of Canadian dollars)

(unaudited)

 

 

 

 

 

Three months ended June 30

 

Six months ended June 30

 

 

 

Note

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

(restated, note 2)

 

 

 

(restated, note 2)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

$

172,681

 

$

247,230

 

$

324,641

 

$

396,489

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

Items that may be reclassified to income :

 

 

 

 

 

 

 

 

 

 

 

Cash flows hedges:

 

 

 

 

 

 

 

 

 

 

 

(Loss) gain on valuation of derivative financial instruments

 

 

 

(1,397

)

28,220

 

(29,839

)

20,895

 

Deferred income taxes

 

 

 

(1,098

)

8,782

 

1,639

 

10,826

 

 

 

 

 

(2,495

)

37,002

 

(28,200

)

31,721

 

Comprehensive income

 

 

 

$

170,186

 

$

284,232

 

$

296,441

 

428,210

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to

 

 

 

 

 

 

 

 

 

 

 

Shareholder

 

 

 

$

170,171

 

$

284,228

 

296,445

 

428,199

 

Non-controlling interests

 

 

 

15

 

4

 

(4

)

11

 

 

See accompanying notes to condensed consolidated financial statements.

 

23


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VIDEOTRON LTD.

CONSOLIDATED STATEMENTS OF EQUITY

 

(in thousands of Canadian dollars)

(unaudited)

 

 

 

Equity attributable to shareholder

 

Equity

 

 

 

 

 

Capital
stock
(note 10)

 

Retained
earnings
(deficit)

 

Accumulated
other
comprehensive
loss (note 12)

 

attributable
to non-
controlling
interests

 

Total equity
(deficit)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2016, as previously reported

 

$

132,401

 

$

1,022,737

 

$

(83,907

)

$

509

 

$

1,071,740

 

Changes in accounting policies (note 2)

 

—

 

177,317

 

—

 

—

 

177,317

 

Balance as of December 31, 2016 , as restated

 

132,401

 

1,200,054

 

(83,907

)

509

 

1,249,057

 

Net income

 

—

 

396,478

 

—

 

11

 

396,489

 

Other comprehensive income

 

—

 

—

 

31,721

 

—

 

31,721

 

Dividends

 

—

 

(165,000

)

—

 

—

 

(165,000

)

Balance as of June 30, 2017

 

132,401

 

1,431,532

 

(52,186

)

520

 

1,512,267

 

Net income

 

—

 

543,351

 

—

 

41

 

543,392

 

Other comprehensive income

 

—

 

—

 

10,358

 

—

 

10,358

 

Dividends

 

—

 

(130,000

)

—

 

—

 

(130,000

)

Balance as of December 31, 2017

 

132,401

 

1,844,883

 

(41,828

)

561

 

1,936,017

 

Net income

 

—

 

324,645

 

—

 

(4

)

324,641

 

Other comprehensive loss

 

—

 

—

 

(28,200

)

—

 

(28,200

)

Corporate reorganization (note 10)

 

3,776,170

 

(3,776,170

)

—

 

—

 

—

 

Reduction of paid-up capital (note 10)

 

(2,292,000

)

—

 

—

 

—

 

(2,292,000

)

Dividends

 

—

 

(38,000

)

—

 

(155

)

(38,155

)

Balance as of June 30, 2018

 

$

1,616,571

 

$

(1,644,642

)

$

(70,028

)

$

402

 

$

(97,697

)

 

See accompanying notes to condensed consolidated financial statements.

 

24


Table of Contents

 

VIDEOTRON LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands of Canadian dollars)

(unaudited)

 

 

 

 

 

Three months ended June 30

 

Six months ended June 30

 

 

 

Note

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

(restated, note 2)

 

 

 

(restated, note 2)

 

Cash flows related to operating activities

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

$

172,681

 

$

247,230

 

$

324,641

 

$

396,489

 

Adjustments for:

 

 

 

 

 

 

 

 

 

 

 

Depreciation of fixed assets

 

 

 

144,654

 

137,820

 

288,427

 

273,115

 

Amortization of intangible assets

 

 

 

21,611

 

20,938

 

43,473

 

41,191

 

(Gain) loss on valuation and translation of financial instruments

 

 

 

(715

)

1,212

 

709

 

1,642

 

Gain on sale of spectrum licences

 

9

 

—

 

(87,846

)

—

 

(87,846

)

Amortization of financing costs

 

4

 

1,038

 

1,097

 

2,147

 

2,086

 

Deferred income taxes

 

 

 

(1,627

)

28,563

 

(14,314

)

72,315

 

Loss on debt refinancing

 

 

 

—

 

—

 

—

 

5,201

 

Other

 

 

 

—

 

2,306

 

1,599

 

4,664

 

 

 

 

 

337,642

 

351,320

 

646,682

 

708,857

 

Net change in non-cash balances related to operating activities

 

 

 

48,282

 

19,770

 

48,499

 

(156,874

)

Cash flows provided by operating activities

 

 

 

385,924

 

371,090

 

695,181

 

551,983

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows related to investing activities

 

 

 

 

 

 

 

 

 

 

 

Additions to fixed assets

 

 

 

(122,683

)

(147,191

)

(262,517

)

(308,942

)

Additions to intangible assets

 

 

 

(36,558

)

(24,785

)

(91,581

)

(58,388

)

Proceeds from disposal of assets

 

9

 

1,340

 

184,737

 

1,744

 

185,207

 

Business acquisition

 

 

 

1,305

 

—

 

1,305

 

(5,553

)

Acquisition of preferred shares of an affiliated corporation

 

7

 

—

 

(3,600,000

)

(2,390,000

)

(3,600,000

)

Net change in subordinated loan to the parent corporation

 

8

 

—

 

(342,000

)

342,000

 

(342,000

)

Cash flows used in investing activities

 

 

 

(156,956

)

(3,929,239

)

(2,399,049

)

(4,129,676

)

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows related to financing activities

 

 

 

 

 

 

 

 

 

 

 

Net change in bank indebtedness

 

 

 

18,076

 

(45,224

)

18,076

 

(10,118

)

Net change under revolving credit facility

 

 

 

816,127

 

(400,009

)

816,127

 

(209,323

)

Issuance of long-term debt, net of financing costs

 

 

 

—

 

794,580

 

—

 

794,580

 

Repayment of long-term debt

 

 

 

(5,357

)

(134,654

)

(5,357

)

(315,671

)

Settlement of hedging contracts

 

 

 

—

 

(2,323

)

—

 

(2,323

)

Issuance of a subordinated loan from the parent corporation

 

7

 

—

 

3,600,000

 

2,390,000

 

3,600,000

 

Reduction in paid-up capital

 

10

 

(1,950,000

)

—

 

(2,292,000

)

—

 

Dividends

 

 

 

(13,000

)

(140,000

)

(38,000

)

(165,000

)

Other

 

 

 

—

 

—

 

(154

)

—

 

Cash flows (used in) provided by financing activities

 

 

 

(1,134,154

)

3,672,370

 

888,692

 

3,692,145

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

 

(904,826

)

114,221

 

(815,176

)

114,452

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at the beginning of the period

 

 

 

905,498

 

1,192

 

815,848

 

961

 

Cash and cash equivalents at the end of the period

 

 

 

$

672

 

$

115,413

 

$

672

 

$

115,413

 

 

25


Table of Contents

 

VIDEOTRON LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

 

(in thousands of Canadian dollars)

(unaudited)

 

 

 

Three months ended June 30

 

Six months ended June 30

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

(restated, note 2)

 

 

 

(restated, note 2)

 

Additional information on the consolidated statements of cash flows

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents consist of

 

 

 

 

 

 

 

 

 

Cash

 

$

222

 

$

114,014

 

$

222

 

$

114,014

 

Cash equivalents

 

450

 

1,399

 

450

 

1,399

 

 

 

$

672

 

$

115,413

 

$

672

 

$

115,413

 

 

 

 

 

 

 

 

 

 

 

Interest and taxes reflected as operating activities

 

 

 

 

 

 

 

 

 

Cash interest payments

 

$

48,839

 

$

32,280

 

$

84,093

 

$

69,409

 

Cash income tax payments (net of refunds)

 

385

 

6,857

 

1,047

 

56,346

 

 

See accompanying notes to condensed consolidated financial statements.

 

26


Table of Contents

 

VIDEOTRON LTD.

CONSOLIDATED BALANCE SHEETS

 

(in thousands of Canadian dollars)
(unaudited)

 

 

 

Note

 

June 30, 2018

 

December 31, 2017

 

December 31, 2016

 

 

 

 

 

 

 

(restated, note 2)

 

(restated, note 2)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

$

672

 

$

815,848

 

$

961

 

Accounts receivable

 

 

 

351,645

 

337,768

 

329,037

 

Contract assets

 

2

 

131,817

 

132,795

 

106,592

 

Amounts receivable from affiliated corporations

 

 

 

10,498

 

7,021

 

2,657

 

Income taxes

 

 

 

—

 

27,158

 

—

 

Inventories

 

 

 

83,467

 

89,590

 

86,064

 

Prepaid expenses

 

 

 

60,351

 

46,163

 

38,242

 

Other current assets

 

2

 

58,146

 

55,894

 

49,387

 

Total current assets

 

 

 

696,596

 

1,512,237

 

612,940

 

 

 

 

 

 

 

 

 

 

 

Non-current assets

 

 

 

 

 

 

 

 

 

Investments

 

7

 

2,390,000

 

—

 

—

 

Fixed assets

 

 

 

3,196,999

 

3,257,388

 

3,261,883

 

Intangible assets

 

 

 

940,957

 

907,972

 

1,123,257

 

Goodwill

 

 

 

534,628

 

535,932

 

535,932

 

Derivative financial instruments

 

 

 

347,568

 

293,157

 

417,788

 

Subordinated loan to parent corporation

 

8

 

—

 

342,000

 

—

 

Other assets

 

2

 

94,166

 

100,856

 

102,132

 

Total non-current assets

 

 

 

7,504,318

 

5,437,305

 

5,440,992

 

Total assets

 

 

 

$

8,200,914

 

$

6,949,542

 

$

6,053,932

 

 

27


Table of Contents

 

VIDEOTRON LTD.

CONSOLIDATED BALANCE SHEETS (continued)

 

(in thousands of Canadian dollars)

(unaudited)

 

 

 

Note

 

June 30, 2018

 

December 31, 2017

 

December 31, 2016

 

 

 

 

 

 

 

(restated, note 2)

 

(restated, note 2)

 

Liabilities and Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

Bank indebtedness

 

 

 

$

18,076

 

$

—

 

$

10,118

 

Accounts payable and accrued charges

 

 

 

407,180

 

491,910

 

456,437

 

Amounts payable to affiliated corporations

 

 

 

34,300

 

54,675

 

66,534

 

Provisions

 

 

 

19,444

 

17,508

 

60,321

 

Deferred revenue

 

 

 

328,688

 

312,772

 

309,910

 

Income taxes

 

 

 

80,366

 

—

 

33,370

 

Current portion of long-term debt

 

5

 

—

 

5,357

 

10,714

 

Total current liabilities

 

 

 

888,054

 

882,222

 

947,404

 

 

 

 

 

 

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

 

 

 

 

Long-term debt

 

5

 

4,185,778

 

3,264,973

 

3,152,394

 

Subordinated loan from parent corporation

 

7

 

2,390,000

 

—

 

—

 

Derivative financial instruments

 

 

 

17,092

 

34,129

 

—

 

Deferred income taxes

 

2

 

703,381

 

719,334

 

589,465

 

Other liabilities

 

 

 

114,306

 

112,867

 

115,612

 

Total non-current liabilities

 

 

 

7,410,557

 

4,131,303

 

3,857,471

 

Total liabilities

 

 

 

8,298,611

 

5,013,525

 

4,804,875

 

 

 

 

 

 

 

 

 

 

 

Equity (deficit)

 

 

 

 

 

 

 

 

 

Capital stock

 

10

 

1,616,571

 

132,401

 

132,401

 

(Deficit) retained earnings

 

 

 

(1,644,642

)

1,844,883

 

1,200,054

 

Accumulated other comprehensive loss

 

12

 

(70,028

)

(41,828

)

(83,907

)

(Deficit) equity attributable to shareholder

 

 

 

(98,099

)

1,935,456

 

1,248,548

 

Non-controlling interests

 

 

 

402

 

561

 

509

 

Total (deficit) equity

 

 

 

(97,697

)

1,936,017

 

1,249,057

 

Subsequent event

 

14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

 

 

$

8,200,914

 

$

6,949,542

 

$

6,053,932

 

 

See accompanying notes to condensed consolidated financial statements.

 

28


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VIDEOTRON LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the three-month and six-month periods ended June 30, 2018 and 2017

(tabular amounts in thousands of Canadian dollars, except for option data)

(unaudited)

 

Videotron Ltd. (the “Corporation”) is incorporated under the laws of Québec and is a wholly owned subsidiary of Quebecor Media Inc. (the parent corporation) and is a subsidiary of Quebecor Inc. (the ultimate parent corporation).  The Corporation’s head office and registered office is located at 612, rue Saint-Jacques, Montreal (Quebec), Canada.

 

The Corporation offers television distribution, Internet access, business solutions (including data centers), cable and mobile telephony and over-the-top video services in Canada and is engaged in the rental of movies and televisual products through its video-on-demand services.

 

1.                BASIS OF PRESENTATION

 

These condensed consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”), except that they do not include all disclosures required under IFRS for annual consolidated financial statements. In particular, these consolidated financial statements were prepared in accordance with IAS 34, Interim Financial Reporting, and accordingly, they are condensed consolidated financial statements. These condensed consolidated financial statements should be read in conjunction with the Corporation’s 2017 annual consolidated financial statements, which contain a description of the accounting policies used in the preparation of these consolidated financial statements.

 

These condensed consolidated financial statements were approved for issue by the Board of Directors of the Corporation on August 8, 2018.

 

Comparative figures for the three-month and six-month periods ended June 30, 2017 have been restated to conform to the presentation adopted for the three-month and six-month periods ended June 30, 2018.

 

2.                  CHANGES IN ACCOUNTING POLICIES

 

(i)            IFRS 9 — Financial Instruments

 

On January 1, 2018, the Corporation adopted the new rules under IFRS 9, Financial Instruments, which simplify the measurement and classification of financial assets by reducing the number of measurement categories in IAS 39, Financial Instruments: Recognition and Measurement. The new standard also provides for a fair value option in the designation of a non-derivative financial liability and its related classification and measurement, as well as for a new hedge accounting model more closely aligned with risk-management activities undertaken by entities.

 

Under the new rules, all financial assets and liabilities of the Corporation are now classified as subsequently measured at amortized cost. The Corporation is also using the IFRS 9 expected credit losses method to estimate the provision for expected credit losses on its financial assets.

 

The adoption of IFRS 9 had no impact on the consolidated financial statements.

 

(ii)         IFRS 15 — Revenue from Contracts with Customers

 

On January 1, 2018, the Corporation adopted, on a fully retrospective basis the new rules under IFRS 15, Revenue from Contracts with Customers, which specifiy how and when an entity should recognize revenue, and which also require the entity to provide users of financial statements with more informative disclosures. The standard provides a single, principles-based, five-step model under which the Corporation now only accounts for a contract with a customer when all of the following criteria are met:

 

·                 the parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are committed to performing their respective obligations;

 

·                 the entity can identify each party’s rights regarding the goods or services to be transferred;

 

29


Table of Contents

 

VIDEOTRON LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

For the three-month and six-month periods ended June 30, 2018 and 2017

(tabular amounts in thousands of Canadian dollars, except for option data)

(unaudited)

 

2.                CHANGES IN ACCOUNTING POLICIES (continued)

 

(ii)         IFRS 15 — Revenue from Contracts with Customers (continued)

 

·                 the entity can identify the payment terms for the goods or services to be transferred;

 

·                 the contract has commercial substance (i.e. the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract); and

 

·                 it is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.

 

The adoption of IFRS 15 had significant impacts on the consolidated financial statements of the Corporation with regards to the timing of the recognition of its revenues, the classification of its revenues, as well as the capitalization of costs, such as the costs to obtain a contract and connection costs.

 

Under IFRS 15, the total consideration from a contract with multiple deliverables is now allocated to all performance obligations in the contract based on the stand-alone selling price of each obligation, without being limited to a non-contingent amount. The Corporation provides mobile devices and services under contracts with multiple deliverables and for a fixed period of time. Under IFRS 15, promotional offers related to the sale of mobile devices, previously accounted for as a reduction in related equipment sales on activation, are now considered in the total consideration to be allocated to all performance obligations. Among other impacts, the adoption of IFRS 15 results in an increase in the revenue from the device sale and in a decrease in the mobile service revenue recognized over the contract term. The timing of the recognition of these revenues therefore changes under IFRS 15. However, the total revenue recognized over a contract term relating to all performance obligations within the contract remains the same as under the previous rules. The portion of revenues that is earned without having been invoiced is now presented as contract assets in the consolidated balance sheets, which asset is realized during the term of the contract. The long-term portion of contract assets is included in “Other Assets” in the consolidated balance sheets. All other types of revenue have not been impacted by the adoption of IFRS 15.

 

In addition, under IFRS 15, certain costs to obtain a contract, mainly sales commissions, are capitalized and amortized as operating expenses over the contract term or over the period of time the customer is expected to maintain his services. Previously, such costs were expensed as incurred. Also, the capitalization of connection costs is no longer limited to the related connection revenues as under the previous rules. These capitalized costs are included in “Other Assets” as contract costs in the consolidated balance sheets.

 

The retroactive adoption of IFRS 15 had the following impacts on the comparatives consolidated financial figures:

 

Consolidated statements of income and comprehensive income

 

Increase (decrease)

 

Three months ended
June 30, 2017

 

Six months ended
June 30, 2017

 

 

 

 

 

 

 

Revenues

 

$

6,550

 

$

11,597

 

Purchase of goods and services

 

(2,471

)

(4,174

)

Deferred income tax expenses

 

2,390

 

4,179

 

Net income and comprehensive income attributable to shareholders

 

$

6,631

 

$

11,592

 

 

30


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VIDEOTRON LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

For the three-month and six-month periods ended June 30, 2018 and 2017

(tabular amounts in thousands of Canadian dollars, except for option data)

(unaudited)

 

2.                CHANGES IN ACCOUNTING POLICIES (continued)

 

Consolidated balance sheets

 

Increase

 

December 31, 2017

 

December 31, 2016

 

 

 

 

 

 

 

Contract assets1

 

$

183,611

 

$

155,790

 

Contract costs2

 

92,528

 

85,457

 

Deferred income tax liability

 

73,176

 

63,930

 

Retained earnings

 

202,963

 

177,317

 

 

1          The current portion of contract assets is $132.8 million as of December 31, 2017 and $106.6 million as of December 31, 2016.

2          The current portion of contract costs is $55.9 million as of December 31, 2017 and $49.4 million as of December 31, 2016.

 

The adoption of IFRS 15 had no impact on cashflows from operating, investing, or financing activities.

 

3.                EMPLOYEE COSTS AND PURCHASE OF GOODS AND SERVICES

 

 

 

Three months ended June 30

 

Six months ended June 30

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

(restated, note 2)

 

 

 

(restated, note 2)

 

 

 

 

 

 

 

 

 

 

 

Employee costs

 

$

147,241

 

$

147,310

 

$

296,140

 

$

294,566

 

Less employee costs capitalized to fixed assets and intangible assets

 

(50,103

)

(49,634

)

(97,358

)

(96,877

)

 

 

97,138

 

97,676

 

198,782

 

197,689

 

Purchase of goods and services

 

 

 

 

 

 

 

 

 

Royalties and rights

 

104,995

 

104,689

 

211,177

 

213,832

 

Cost of retail products

 

77,813

 

77,811

 

147,210

 

145,461

 

Subcontracting costs

 

24,854

 

28,547

 

50,438

 

58,010

 

Marketing and distribution expenses

 

15,126

 

14,084

 

28,510

 

26,092

 

Other

 

103,669

 

104,707

 

199,195

 

206,381

 

 

 

326,457

 

329,838

 

636,530

 

649,776

 

 

 

 

 

 

 

 

 

 

 

 

 

$

423,595

 

$

427,514

 

$

835,312

 

$

847,465

 

 

31


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VIDEOTRON LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

For the three-month and six-month periods ended June 30, 2018 and 2017

(tabular amounts in thousands of Canadian dollars, except for option data)

(unaudited)

 

4.                FINANCIAL EXPENSES

 

 

 

Three months ended June 30

 

Six months ended June 30

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Third parties:

 

 

 

 

 

 

 

 

 

Interest on long-term debt

 

$

42,375

 

$

41,462

 

$

84,165

 

$

76,498

 

Amortization of financing costs

 

1,038

 

1,097

 

2,147

 

2,086

 

Loss (gain) on foreign currency translation on short-term monetary items

 

411

 

(286

)

887

 

(622

)

Other

 

(2,438

)

422

 

(5,451

)

1,117

 

 

 

41,386

 

42,695

 

81,748

 

79,079

 

Affiliated corporations (note 8):

 

 

 

 

 

 

 

 

 

Interest expense

 

56,607

 

61,101

 

77,135

 

61,101

 

Dividend income

 

(57,203

)

(61,683

)

(77,947

)

(61,683

)

Interest income

 

—

 

(4,209

)

(773

)

(4,209

)

 

 

(596

)

(4,791

)

(1,585

)

(4,791

)

 

 

 

 

 

 

 

 

 

 

Interest on net defined benefit liability

 

825

 

861

 

1,650

 

1,722

 

 

 

$

41,615

 

$

38,765

 

$

81,813

 

$

76,010

 

 

5.                LONG-TERM DEBT

 

Components of the long-term debt are as follows:

 

 

 

June 30, 2018

 

December 31, 2017

 

 

 

 

 

 

 

Bank credit facilities

 

$

812,357

 

$

5,357

 

Senior Notes

 

3,401,600

 

3,289,200

 

Total long-term debt

 

4,213,957

 

3,294,557

 

 

 

 

 

 

 

Change in fair value related to hedged interest rate risk

 

(845

)

5,789

 

Financing cost, net of amortization

 

(27,334

)

(30,016

)

 

 

(28,179

)

(24,227

)

 

 

 

 

 

 

Less current portion

 

—

 

(5,357

)

 

 

$

4,185,778

 

$

3,264,973

 

 

32


Table of Contents

 

VIDEOTRON LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

For the three-month and six-month periods ended June 30, 2018 and 2017

(tabular amounts in thousands of Canadian dollars, except for option data)

(unaudited)

 

6.                RESTRUCTURING OF OPERATIONS, LITIGATION AND OTHER ITEMS

 

During the respective three-month and six-month periods ended June 30, 2018, net charge of $1.0 million and $3.7 million were recorded relating mainly to various cost reduction initiatives across the organization (a net charge of $6.4 million and a net reversal of the charge of $6.0 million in 2017 which were related to cost reduction initiatives, developments in certain litigations and the migration of subscribers from analog to digital services).

 

7.                  INVESTMENTS AND SUBORDINATED LOAN FROM PARENT CORPORATION

 

On May 3, 2017, the Corporation contracted a subordinated loan of $3.6 billion from Quebecor Media Inc., bearing interest at a rate of 10.5%, payable every six months on June 20 and December 20 and maturing on May 3, 2047. On the same day, the Corporation invested the total proceeds of $3.6 billion into 3,600,000 preferred shares, Series C, of 9346-9963 Québec Inc., a subsidiary of Quebecor Media Inc. These shares carry the right to receive an annual dividend of 10.6%, payable semi-annually.

 

On November 6, 2017, 9346-9963 Québec Inc., a subsidiary of Quebecor Media Inc., redeemed 3,600,000 preferred shares, Series C for a total cash consideration of $3.6 billion, and settled cumulative unpaid dividends of $145.3 million. On the same day, the Corporation used the total proceeds of $3.6 billion to repay its subordinated loans contracted from Quebecor Media Inc.

 

On February 27, 2018, the Corporation contracted a subordinated loan of $2.39 billion from Quebecor Media Inc., bearing interest at a rate of 9.5%, payable every six months on June 20 and December 20, and maturing on February 27, 2048. On the same day, the Corporation invested the total proceeds of $2.39 billion into 2,390,000 preferred shares, Series C, of 9346-9963 Québec Inc. These shares carry the right to receive an annual dividend of 9.6%, payable semi-annually.

 

These transactions were carried out for tax consolidation purposes of Quebecor Media Inc. and its subsidiaries

 

8.                SUBORDINATED LOAN TO PARENT COPORATION

 

On April 12, 2017, the Corporation made to Quebecor Media Inc. a $342.0 million subordinated loan, bearing interest at 5.5%, payable every six months on April 12 and October 12, and maturing on April 12, 2019.

 

On January 16, 2018, Quebecor Media Inc. reimbursed its subordinated loan of $342.0 million to the Corporation.

 

9.                GAIN ON SALE OF SPECTRUM LICENCES

 

On June 20, 2017, The Corporation sold its AWS spectrum licence in the greater Toronto region to Rogers Communications Canada Inc. for a cash consideration of $184.2 million, pursuant to the transfer option held by Videotron since 2013. The sale resulted in a gain on disposal of $87.8 million.

 

On July 24, 2017, The Corporation sold its seven 2500 MHz and 700 MHz wireless spectrum licences outside Québec to Shaw Communications Inc. for a cash consideration of $430.0 million. The sale resulted in a gain on disposal of $243.0 million in the third quarter of 2017.

 

As a result of these transactions, tax benefits of $44.4 million, on previous years’ capital losses, were recognized in the consolidated statement of income in the second quarter of 2017.

 

33


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VIDEOTRON LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

For the three-month and six-month periods ended June 30, 2018 and 2017

(tabular amounts in thousands of Canadian dollars, except for option data)

(unaudited)

 

10.         CAPITAL STOCK

 

(a)           Authorized capital stock

 

An unlimited number of common shares, without par value, voting and participating.

 

An unlimited number of preferred shares, Series B, Series C, Series D, Series E, Series F, and Series H, without par value, ranking prior to the common shares with regards to payment of dividends and repayment of capital, non-voting, non-participating, a fixed monthly non-cumulative dividend of 1%, retractable and redeemable.

 

An unlimited number of preferred shares, Series G, ranking prior to all other shares with regards to payment of dividends and repayment of capital, non-voting, non-participating carrying the rights and restrictions attached to the class as well as a fixed annual cumulative preferred dividend of 11.25%, retractable and redeemable.

 

(b)           Issued and outstanding capital stock

 

 

 

Common Shares

 

 

 

Number

 

Amount

 

Balance as of December 31, 2017

 

172,516,829

 

$

132,401

 

Corporate reorganization

 

 

 

 

 

Cancellation of shares due to merger

 

(172,516,829

)

(132,401

)

Issuance of shares

 

10,544,961.822

 

3,908,571

 

Reduction in paid-up capital

 

—

 

(2,292,000

)

Balance as of June 30, 2018

 

10,544,961.822

 

$

1,616,571

 

 

Corporate reorganization

 

On January 3, 2018, Quebecor Media Inc. transferred all of its 172,516,829 shares in the Corporation in the amount of $132.4 million to a newly fully owned subsidiary, 9370-5762 Québec Inc. in exchange for i) a convertible promissory note for a value of $3,908.6 million that is convertible into 3,908,569.822 common shares of 9370-5762 Québec Inc. and ii) 6,636,391 common shares of 9370-5762 Québec Inc. The following day the Corporation was merged with 9370-5762 Québec Inc. The new merged Corporation continues to operate under the name of Videotron Ltd. Since this transaction resulted in no substantive changes in the parent corporation reporting group, the transaction was accounted for using the continuity of interest method. Under this method, all figures of the Corporation reflect the carrying values of the two merged entities.

 

On January 8, 2018, the convertible promissory note was converted into 3,908,569.822 common shares of the Corporation.

 

This corporate reorganization resulted in an increase of $3,776.2 million of capital stock and a decrease of retained earnings by the same amount.

 

Reduction of paid-up capital

 

During the respective three-month and six-month periods ended June 30, 2018, the Corporation made reductions of its paid up capital for total cash considerations of $1,950.0 million and $2,292.0 million.

 

34


Table of Contents

 

VIDEOTRON LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

For the three-month and six-month periods ended June 30, 2018 and 2017

(tabular amounts in thousands of Canadian dollars, except for option data)

(unaudited)

 

11.         STOCK-BASED COMPENSATION PLAN

 

Outstanding options

 

The following table provides details of changes to outstanding options in the principal stock-based compensation plans in which management of the Corporation participates, for the six-month period ended June 30, 2018:

 

 

 

Outstanding options

 

 

 

Number

 

Weighted average
exercise price

 

 

 

 

 

 

 

Quebecor Inc.

 

 

 

 

 

As of December 31, 2017

 

100,000

 

$

12.75

 

Exercised

 

(100,000

)

$

12.75

 

As of June 30, 2018

 

—

 

—

 

 

 

 

 

 

 

Quebecor Media Inc.

 

 

 

 

 

As of December 31, 2017

 

158,227

 

$

65.08

 

Transferred

 

9,300

 

64.31

 

Exercised

 

(62,927

)

62.33

 

As of June 30, 2018

 

104,600

 

$

66.67

 

Vested options as of June 30, 2018

 

40,000

 

$

64.15

 

 

During the three-month period ended June 30, 2018, 139,927 of the Corporation’s stock options were exercised for a cash consideration of $2.9 million (11,250 stock options for $0.05 million in 2017). During the six-month period ended June 30, 2018, 162,927 of the Corporation’s stock options were exercised for a cash consideration of $3.1 million (16,500 stock options for $0.1 million in 2017).

 

Deferred share units (“DSU”) and performance share units (“PSU”) plans

 

Under the DSU and PSU plans, based on Quebecor Class B Subordinate Shares (“Quebecor Class B Shares”), the DSUs vest over six years and will be redeemed for cash only upon the participant’s retirement or termination of employment, as the case may be and the PSUs vest over three years and will be redeemed for cash at the end of this period subject to the achievement of financial targets. DSUs and PSUs entitle the holders to receive additional units when dividends are paid on Quebecor Class B Shares. No treasury shares will be issued for the purposes of these plans. As of June 30, 2018, 98,390 DSUs and 121,052 PSUs awarded to employees of the Corporation were outstanding under these plans.

 

Stock-based compensation expense

 

For the three-month period ended June 30, 2018 a net consolidated charge related to the stock-based compensation plan was recorded in the amount of $0.9 million (a net charge of $1.7 million in 2017). For the six-month period ended June 30, 2018, a net consolidated charge related to the stock-based compensation plans was recorded in the amount of $1.9 million (a net charge of $2.4 million in 2017).

 

35


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VIDEOTRON LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

For the three-month and six-month periods ended June 30, 2018 and 2017

(tabular amounts in thousands of Canadian dollars, except for option data)

(unaudited)

 

12.         ACCUMULATED OTHER COMPREHENSIVE LOSS

 

 

 

Cash flow hedges

 

Defined
benefit plans

 

Total

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2016

 

$

(51,192

)

$

(32,715

)

$

(83,907

)

Other comprehensive income

 

31,721

 

—

 

31,721

 

Balance as of June 30, 2017

 

(19,471

)

(32,715

)

(52,186

)

Other comprehensive income (loss)

 

15,491

 

(5,133

)

10,358

 

Balance as of December 31, 2017

 

(3,980

)

(37,848

)

(41,828

)

Other comprehensive loss

 

(28,200

)

—

 

(28,200

)

Balance as of June 30, 2018

 

$

(32,180

)

$

(37,848

)

$

(70,028

)

 

No significant amount is expected to be reclassified in income over the next 12 months in connection with derivatives designated as cash flow hedges. The balance is expected to reverse over a 8 ¾-year period.

 

13.           FAIR VALUE OF FINANCIAL INSTRUMENTS

 

In accordance with IFRS 13, Fair value measurement, the Corporation considers the following fair value hierarchy which reflects the significance of the inputs used in measuring its other financial instruments accounted for at fair value in the consolidated balance sheets:

 

·                 Level 1:         quoted prices (unadjusted) in active markets for identical assets or liabilities;

 

·                Level 2:           inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices); and

 

·                Level 3:          inputs that are not based on observable market data (unobservable inputs).

 

The fair value of long-term debt is estimated based on quoted market prices when available or on valuation models using Level 1 and Level 2 inputs. When the Corporation uses valuation models, the fair value is estimated using discounted cash flows using year-end market yields or the market value of similar instruments with the same maturity.

 

The fair value of cash equivalents and bank indebtedness, classified as held for trading and accounted for at their fair value in the consolidated balance sheets, is determined using Level 2 inputs.

 

The fair value of derivative financial instruments recognized in the consolidated balance sheets is estimated as per the Corporation’s valuation models. These models project future cash flows and discount the future amounts to a present value using the contractual terms of the derivative instrument and factors observable in external market data, such as period-end swap rates and foreign exchange rates (Level 2 inputs). An adjustment is also included to reflect non-performance risk impacted by the financial and economic environment prevailing at the date of the valuation in the recognized measure of the fair value of the derivative instruments by applying a credit default premium, estimated using a combination of observable and unobservable inputs in the market (Level 3 inputs), to the net exposure of the counterparty or the Corporation. Derivative financial instruments are classified as Level 2.

 

The fair value of early settlement options recognized as embedded derivatives is determined by option pricing models using Level 2 market inputs, including volatility, discount factors, and the underlying instrument’s adjusted implicit interest rate and credit premium.

 

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Table of Contents

 

VIDEOTRON LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

For the three-month and six-month periods ended June 30, 2018 and 2017

(tabular amounts in thousands of Canadian dollars, except for option data)

(unaudited)

 

13.           FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

 

The carrying value and fair value of long-term debt and derivative financial instruments as of June 30, 2018 and December 31, 2017 are as follows:

 

 

 

June 30, 2018

 

December 31, 2017

 

Asset (liability)

 

Carrying value

 

Fair value

 

Carrying value

 

Fair value

 

 

 

 

 

 

 

 

 

 

 

Long-term debt1

 

$

(4,213,957

)

$

(4,260,500

)

$

(3,294,557

)

$

(3,492,100

)

Derivative financial instruments

 

 

 

 

 

 

 

 

 

Foreign exchange forward contracts

 

4,275

 

4,275

 

(4,502

)

(4,502

)

Cross-currency interest rate swaps

 

326,201

 

326,201

 

263,530

 

263,530

 

 

1          The carrying value of long-term debt excludes adjustments to record changes in the fair value of long-term debt related to hedged interest risk and financing costs.

 

14.         SUBSEQUENT EVENT

 

On July 23, 2018, the Corporation reduced its paid-up capital for a cash consideration of $87.1 million.

 

37

 


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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

VIDEOTRON LTD.

 

 

/s/ Philippe Cloutier

 

 

 

 

 

By:

Philippe Cloutier

 

 

Senior Vice President and Chief Financial Officer

 

 

 

Date: August 15, 2018