6-K 1 d6k.htm FORM 6-K Form 6-K

 

 

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 2010

 

 

QUEBECOR MEDIA INC.

(Name of Registrant)

 

 

612 St-Jacques Street, 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              

 

[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                       No      X    

 

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

 

 

 


LOGO

 

MANAGEMENT DISCUSSION AND ANALYSIS

 

 

COMPANY PROFILE

Quebecor Media Inc. (“Quebecor Media” or the “Company”), a subsidiary of Quebecor Inc. (“Quebecor”) incorporated under Part 1A of the Companies Act (Québec) in August 2000, is one of Canada’s largest media companies. Quebecor Media’s subsidiaries operate in the following business segments: Telecommunications, News Media, Broadcasting, Leisure and Entertainment and Interactive Technologies and Communications. Quebecor Media is pursuing a convergence strategy to capture synergies among all of its media properties.

The following Management Discussion and Analysis covers the main activities of the Company in the second quarter of 2010 and the major changes from the last financial year. The financial statements of the Company have been prepared in accordance with accounting principles generally accepted in Canada (“Canadian GAAP”) and all amounts are in Canadian dollars unless otherwise indicated. For a discussion of the principal differences between Canadian GAAP and the accounting principles generally accepted in the United States (“U.S. GAAP”) as they relate to our financial statements, see Note 9 to our unaudited consolidated financial statements for the three-month and six-month periods ended June 30, 2010. This Management Discussion and Analysis should be read in conjunction with the information in the Annual Report of the Company for the financial year ended December 31, 2009 (Form 20F), which is available on the Web site of the U.S. Securities and Exchange Commission at <www.sec.gov>.

HIGHLIGHTS SINCE END OF FIRST QUARTER 2010

 

Ø Quebecor Media’s operating income was $355.4 million in the second quarter of 2010, an increase of $38.9 million (12.3%) compared with the same period of 2009. The Telecommunications and News Media segments were responsible for the bulk of the increase.

 

Ø Videotron Ltd. (“Videotron”) marked several key milestones in the build-out of its Advanced Wireless Services (“AWS”) network. As of June 30, 2010, all switching services and platforms had been installed and were operational. Siting and tower-sharing agreements had been signed for more than 95% of the antenna sites and the equipment had been installed or was being installed at all those sites. Videotron had also conducted multi-phase testing to maintain the flexibility of its platforms. Videotron is still planning to launch services on its AWS network in summer 2010.

 

Ø The News Media segment’s operating income increased by $4.0 million (7.2%) in the second quarter of 2010 compared with the same period of 2009, the third consecutive quarter of significant growth. The cost-restructuring measures introduced at the end of 2008 generated additional savings estimated at $24.0 million during the first half of 2010 compared with the same period of the previous year, for total annualized savings of $90.0 million since the program began.

 

Ø On June 16, 2010, Videotron launched its illico web service (illicoweb.tv), an Internet television service that will deliver a vast selection of content via the Web at no additional cost to subscribers to Videotron’s Digital TV and Internet access services. illicoweb provides Videotron customers with computer access to hundreds of French- and English-language titles from 32 television channels. The service will gradually be expanded to include all the channels in the customer’s existing Digital TV package. illico web also lets Videotron subscribers control their Personal Video Recorder (“PVR”) remotely and consult the full TV schedule online.

 

Ø On June 15, 2010, Quebecor Media announced the launch of The Sun News Channel (“Sun TV News”), a new English-language news and opinion specialty channel which should begin broadcasting in the first quarter of 2011. Sun TV News will offer comprehensive coverage of the events that impact Canadian society and the country’s political and economic life. TVA Group Inc. (“TVA Group”), acting on behalf of a partnership it has formed with Sun Media Corporation, has filed an application with the Canadian Radio-television and Telecommunications Commission (“CRTC”) for a specialty service licence.

 

2


Ø In May 2010, Osprey Media Publishing Inc. (“Osprey Media”) paid down the $114.8 million balance of its term credit facility. On June 30, 2010, all of Osprey Media’s credit facilities were cancelled and replaced by a $10.0 million operating line of credit.

 

Ø On June 19, 2010, TVA Group management signed an agreement in principle with the union representing TVA Group’s employees in Montréal to renew the collective agreement. The agreement was approved by the members on July 7, 2010. The new collective agreement expires on December 31, 2012.

NON-GAAP FINANCIAL MEASURES

We use certain supplemental financial measures that are not calculated in accordance with or recognized by Canadian GAAP or U.S. GAAP to assess our financial performance. We use these non-GAAP financial measures, such as operating income, cash flows from segment operations, free cash flows from continuing operating activities and average monthly revenue per user (“ARPU”), because we believe that they are meaningful measures of our performance. Our method of calculating these non-GAAP financial measures may differ from the methods used by other companies and, as a result, the non-GAAP financial measures presented in this quarterly report may not be comparable to other similarly titled measures disclosed by other companies.

Operating Income

We define operating income, as reconciled to net income under Canadian GAAP, as net income before amortization, financial expenses, (loss) gain on valuation and translation of financial instruments, restructuring of operations, impairment of assets and other special items, loss on debt refinancing, impairment of goodwill and intangible assets, income taxes and non-controlling interest. Operating income as defined above is not a measure of results that is recognized under Canadian GAAP or U.S. GAAP. 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 and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with Canadian GAAP or U.S. GAAP. Our parent company, Quebecor, considers the media segment as a whole and uses operating income in order to assess the performance of its investment in Quebecor Media. Our management and Board of Directors use this measure in evaluating our consolidated results as well as the results of our operating segments. As such, this measure eliminates the effect of significant levels of non-cash charges related to depreciation of tangible assets and amortization of certain intangible assets, and it is unaffected by the capital structure or investment activities of Quebecor Media and its segments. Operating income is also relevant because it is a significant component of our annual incentive compensation programs. A limitation of this measure, however, is that it does not reflect the periodic costs of capitalized tangible and intangible assets used in generating revenues in our segments. Quebecor Media uses other measures that do reflect such costs, such as cash flows from segment operations and free cash flows from continuing operating activities. In addition, measures like operating income are commonly used by the investment community to analyze and compare the performance of companies in the industries in which we are engaged. Our definition of operating income may not be the same as similarly titled measures reported by other companies.

Table 1 below provides a reconciliation of operating income to net income as disclosed in the consolidated financial statements.

 

3


Table 1

Reconciliation of the operating income measure used in this report to the net income measure used in the consolidated financial statements

(in millions of Canadian dollars)

 

     Three months ended
June  30
    Six months ended
June  30
 
     2010     2009     2010     2009  

Operating Income (loss):

        

Telecommunications

   $ 264.0      $ 232.7      $ 515.7      $ 456.3   

News Media

     59.6        55.6        99.6        85.3   

Broadcasting

     26.2        25.1        33.0        37.5   

Leisure and Entertainment

     4.2        4.8        4.1        5.6   

Interactive Technologies and Communications

     1.3        1.3        2.3        1.7   

Head office

     0.1        (3.0     (0.8     2.6   
                                
     355.4        316.5        653.9        589.0   

Amortization

     (91.3     (84.5     (180.3     (168.4

Financial expenses

     (64.3     (57.9     (130.8     (112.5

(Loss) gain on valuation and translation of financial instruments

     (4.6     13.7        (9.3     27.9   

Restructuring of operations, impairment of assets and other special items

     (1.0     (0.8     (3.4     (4.2

Loss on debt refinancing

     (1.9     —          (12.3     —     

Impairment of goodwill and intangible assets

     —          (13.6     —          (13.6

Income taxes

     (54.4     (37.4     (77.4     (74.0

Non-controlling interest

     (5.4     (7.5     (6.2     (10.5
                                

Net income

   $ 132.5      $ 128.5      $ 234.2      $ 233.7   
                                

Cash Flows from Segment Operations

We use cash flows from segment operations as a measure of the liquidity generated by our segment operations. Cash flows from segment operations represents funds available for interest and income tax payments, disbursements related to restructuring programs, business acquisitions, the payment of dividends and the repayment of long-term debt. Cash flows from segment operations is not a measure of liquidity that is consistent with Canadian GAAP or U.S. GAAP. 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. Cash flows from segment operations is considered to be an important indicator of liquidity and is used by our management and Board of Directors to evaluate cash flows generated by our segment operations. This measure is unaffected by the capital structure of Quebecor Media and its segments. Cash flows from segment operations represents operating income as defined above, less additions to property, plant and equipment and additions to intangible assets (excluding initial amount disbursed for the acquisition or renewal of licenses), plus proceeds from the disposal of assets. When cash flows from segment operations is reported, a reconciliation to operating income is provided in the same section.

Free Cash Flows from Continuing Operating Activities

We use free cash flows from continuing operating activities as a measure of total liquidity generated on a consolidated basis. Free cash flows from continuing operating activities represents funds available for business acquisitions, the payment of dividends and the repayment of long-term debt. Free cash flows from continuing operating activities is not a measure of liquidity that is consistent with Canadian GAAP or U.S. GAAP. 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. Free cash flows from continuing operating activities is considered to be an important indicator of our liquidity and is used by our management and Board of Directors to evaluate cash flows generated by our consolidated operations.

Table 2 provides a reconciliation of free cash flows from continuing operating activities to cash flows provided by operating activities measure reported in the consolidated financial statements.

 

4


Table 2

Reconciliation of the free cash flows from continuing operating activities to the cash flows provided by operating activities measure reported in the financial statements

(in millions of Canadian dollars)

 

     Three months ended
June  30
    Six months ended
June  30
 
     2010     2009     2010     2009  

Free cash flows from continuing operating activities (see Table 3)

   $ 72.7      $ 68.9      $ 84.9      $ 61.0   

Additions to property, plant and equipment

     164.4        113.8        299.9        232.7   

Additions to intangible assets

     32.9        29.2        61.5        53.1   

Proceeds from disposal of assets1

     (45.9     (0.5     (47.3     (1.0
                                

Cash flows provided by operating activities

   $ 224.1      $ 211.4      $ 399.0      $ 345.8   
                                

 

1

2010 figures include sale of certain tangible assets in the News Media segment.

Average Monthly Revenue per User

ARPU is an industry metric that the Company uses to measure its monthly cable television, Internet access, cable telephone and wireless telephone revenues per average basic cable customer. ARPU is not a measurement that is consistent with Canadian GAAP and the Company’s definition and calculation of ARPU may not be the same as identically titled measurements reported by other companies. The Company calculates ARPU by dividing its combined cable television, Internet access, cable telephone and wireless telephone revenues by the average number of basic customers during the applicable period, and then dividing the resulting amount by the number of months in the applicable period.

ANALYSIS OF CONSOLIDATED RESULTS

2010/2009 SECOND QUARTER COMPARISON

Revenues: $994.0 million, an increase of $47.6 million (5.0%).

 

Ø Revenues increased in Telecommunications (by $55.7 million or 11.4% of segment revenues), mainly due to customer growth for all services.

 

Ø Revenues decreased in News Media (by $4.3 million or -1.6%), mainly because of lower advertising revenues at the community newspapers and lower circulation revenues, and in Leisure and Entertainment ($2.2 million or -3.2%).

Operating income: $355.4 million, an increase of $38.9 million (12.3%).

 

Ø Operating income increased in Telecommunications (by $31.3 million or 13.5% of segment operating income), News Media ($4.0 million or 7.2%) and Broadcasting ($1.1 million or 4.4%).

 

Ø Operating income decreased in Leisure and Entertainment ($0.6 million or -12.5%).

 

Ø Excluding the impact of the stock-based compensation charge, and if the figures for prior periods were restated to retroactively reflect the reversal in the fourth quarter of 2009 of the accumulated CRTC Part II licence fee provision, the increase in operating income in the second quarter of 2010 would have been 10.5%, compared with 4.7% in the same period of 2009.

Net income: $132.5 million compared with $128.5 million in the second quarter of 2009, an increase of $4.0 million (3.1%).

 

Ø The increase was mainly due to:

 

   

$38.9 million increase in operating income;

 

   

favourable variance in 2010 related to recognition in the second quarter of 2009 of a $13.6 million non-cash charge for impairment of goodwill and intangible assets.

 

5


Partially offset by:

 

   

$18.3 million unfavourable variance in gains and losses on valuation and translation of financial instruments;

 

   

$17.0 million increase in income tax expense;

 

   

$6.8 million increase in amortization charge;

 

   

$6.4 million increase in financial expenses.

Amortization charge: $91.3 million, an increase of $6.8 million.

 

Ø The increase was mainly due to significant capital expenditures in 2009 and in the first half of 2010 in the Telecommunications segment.

Financial expenses: $64.3 million, an increase of $6.4 million.

 

Ø The increase was mainly due to:

 

   

$6.3 million unfavourable variance in exchange rates on operating items;

 

   

impact of increase in average indebtedness.

Partially offset by:

 

   

an additional $1.8 million in interest now capitalized to property, plant and equipment and intangible assets, reflecting the larger proportion of debt allocated to investment in the AWS network due to the growth of that investment in the second quarter.

Loss on valuation and translation of financial instruments: $4.6 million in the second quarter of 2010 compared with a $13.7 million gain in the same quarter of 2009, an unfavourable variance of $18.3 million.

 

Ø This unfavourable variance was due primarily to:

 

   

variance in gains and losses on the ineffective portion of fair value hedges;

 

   

re-measurement of other financial instruments, including early settlement options, due to interest rate fluctuations.

Charge for restructuring of operations, impairment of assets and other special items: $1.0 million in the second quarter of 2010 compared with $0.8 million in the same period of 2009.

 

Ø During the second quarter of 2010, the Company announced the creation of Sun TV News, a new partnership in which TVA Group will hold a 51% interest and Sun Media Corporation a 49% interest. The partnership will launch an English-language news and opinion specialty channel in the first quarter of 2011. The Company has also decided to terminate the operations of its Sun TV conventional television station as soon as the new specialty channel is on air. In light of this repositioning, the Broadcasting segment recorded a $5.7 million impairment charge on certain equipment and broadcasting rights.

 

Ø In the second quarter of 2010, a $0.7 million charge for restructuring of operations was recorded in the News Media segment in connection with new staff-reduction programs. Some assets were also sold in the segment as part of the restructuring initiatives, resulting in a net gain of $2.5 million.

 

Ø A $2.9 million gain related to the disposal of certain assets was also recorded in other segments in the second quarter of 2010.

 

Ø A $0.8 million charge for restructuring of operations was also recorded in the second quarter of 2009 in other segments.

Loss on debt refinancing: $1.9 million in the second quarter of 2010.

 

Ø In May 2010, Osprey Media paid down the balance of its term credit facility and settled related hedge agreements for a total cash consideration of $116.3 million. This transaction led to the reclassification to income of a $1.9 million loss (excluding income tax) previously recorded under other comprehensive income. Osprey Media’s credit facilities were cancelled on June 30, 2010.

 

6


Non-cash charge for impairment of goodwill and intangible assets: Nil in the second quarter of 2010 compared with $13.6 million in the second quarter of 2009.

 

Ø An additional non-cash goodwill impairment charge of $5.6 million, without any tax consequences, was recorded in the second quarter of 2009 as an adjustment to the non-cash goodwill impairment charge recorded in the fourth quarter of 2008.

 

Ø The Company also recorded an $8.0 million charge in the second quarter of 2009 for impairment of mastheads of publications in the News Media segment following its annual impairment test.

Income tax expense: $54.4 million (effective tax rate of 28.3%) in the second quarter of 2010 compared with $37.4 million (effective tax rate of 21.6%) in the same period of 2009.

 

Ø The $17.0 million unfavourable variance, the effective tax rates and the fluctuation in those rates in 2010 compared with 2009 were due primarily to:

 

   

recognition in the second quarter of 2009 of tax benefits in the amount of $5.3 million related to tax consolidation transactions with the parent company, compared with nil in the second quarter of 2010;

 

   

impact of tax rate mix on the various components of the gains and losses on financial instruments and derivative financial instruments, and on translation of financial instruments;

 

   

increase in income before income taxes and non-controlling interest.

2010/2009 YEAR-TO-DATE COMPARISON

Revenues: $1.94 billion, an increase of $92.4 million (5.0%).

 

Ø Revenues increased in Telecommunications (by $106.5 million or 11.0% of segment revenues) mainly due to customer growth for all services, and in Interactive Technologies and Communications ($1.4 million or 3.0%).

 

Ø Revenues decreased in News Media (by $8.9 million or -1.7%), mainly because of lower advertising revenues at the community newspapers and lower circulation revenues, and in Leisure and Entertainment ($5.0 million or -3.8%).

Operating income: $653.9 million, an increase of $64.9 million (11.0%).

 

Ø Operating income increased in Telecommunications (by $59.4 million or 13.0% of segment operating income), News Media ($14.3 million or 16.8%) and Interactive Technologies and Communications ($0.6 million or 35.3%).

 

Ø Operating income decreased in Broadcasting (by $4.5 million or -12.0%) and in Leisure and Entertainment ($1.5 million
or -26.8%).

 

Ø The change in the fair value of Quebecor Media resulted in a $5.1 million unfavourable variance in the stock-based compensation charge in the first half of 2010 compared with the same period of 2009. The fair value of Quebecor Media, based on market comparables, increased during the first half of 2010, whereas it decreased in the same period of 2009. The increase in Quebecor’s stock price also resulted in a $4.2 million unfavourable variance in the stock-based compensation charge in the first half of 2010.

 

Ø Excluding the impact of the consolidated stock-based compensation charge and if the figures for prior periods were restated to retroactively reflect the reversal in the fourth quarter of 2009 of the accumulated CRTC Part II licence fee provision, the increase in operating income in the first half of 2010 would have been 11.2%, compared with 7.1% in the same period of 2009.

Net income: $234.2 million compared with $233.7 million in the first half of 2009, an increase of $0.5 million (0.2%).

 

Ø The following favourable factors:

 

   

$64.9 million increase in operating income;

 

   

favourable variance in 2010 related to recognition in the first half of 2009 of a $13.6 million non-cash charge for impairment of goodwill and intangible assets;

 

7


were offset by:

 

   

$37.2 million unfavourable variance in gains on valuation and translation of financial instruments;

 

   

$18.3 million increase in financial expenses;

 

   

recognition in the first half of 2010 of losses on debt refinancing totalling $12.3 million;

 

   

$11.9 million increase in amortization charge.

Amortization charge: $180.3 million, an increase of $11.9 million due essentially to the same factor as that noted above in the 2010/2009 second quarter comparison.

Financial expenses: $130.8 million, an increase of $18.3 million.

 

Ø The increase was mainly due to:

 

   

$14.1 million unfavourable variance in exchange rates on operating items;

 

   

increase in average indebtedness.

Partially offset by:

 

   

lower base interest rates;

 

   

an additional $1.5 million in interest now capitalized to property, plant and equipment and intangible assets, reflecting the larger proportion of debt allocated to investment in the AWS network due to the growth of that investment in the first half.

Loss on valuation and translation of financial instruments: $9.3 million in the first half of 2010 compared with a $27.9 million gain in the same period of 2009.

 

Ø The $37.2 million unfavourable variance was due primarily to:

 

   

variance in gains and losses on the ineffective portion of fair value hedges;

 

   

re-measurement of other financial instruments, including early settlement options.

Charge for restructuring of operations, impairment of assets and other special items: $3.4 million, compared with $4.2 million in the same period of 2009.

 

Ø A $5.7 million charge for impairment of assets was recorded in the first half of 2010 in the Broadcasting segment (for details, see “2010/2009 second quarter comparison” above).

 

Ø In the first half of 2010, a $3.1 million charge for restructuring of operations was recorded in the News Media segment in connection with new staff-reduction programs. Some assets were also sold in the segment as part of these initiatives, resulting in a net gain of $2.5 million. A $2.7 million charge for restructuring was recorded in the first quarter of 2009.

 

Ø A $2.9 million gain related to the disposal of assets was recorded in other segments in the first half of 2010.

 

Ø A $1.5 million charge for restructuring of operations was recorded in the first half of 2009 in other segments.

Loss on debt refinancing: $12.3 million in the first half of 2010 compared with nil in the same period of 2009.

 

Ø On January 14, 2010, Quebecor Media made a US$170.0 million early payment on drawings on its term loan “B” and settled a corresponding portion of its hedge agreements for the amount of $30.9 million, for a total cash disbursement of $206.7 million. This transaction generated a $10.4 million loss on debt refinancing (excluding income tax), including the $6.5 million loss already reported in other comprehensive income and reclassified in the statement of income.

 

Ø In May 2010, Osprey Media paid down the balance of its term credit facility and settled related hedge agreements for a total cash consideration of $116.3 million. This transaction led to the reclassification to income of a $1.9 million loss (excluding income tax) previously recorded under other comprehensive income. Osprey Media’s credit facilities were cancelled on June 30, 2010.

Non-cash charge for impairment of goodwill and intangible assets: Nil in the first half of 2010 compared with $13.6 million in the first half of 2009 (for details, see “2010/2009 second quarter comparison” above).

 

8


Income tax expense: $77.4 million (effective tax rate of 24.4%) in the first half of 2010 compared with $74.0 million (effective tax rate of 23.3%) in the same period of 2009.

 

Ø The effective tax rates and the variance in those rates in 2010 compared with 2009 were due primarily to:

 

   

reduction in future tax liabilities in the first half of 2010 in light of developments in tax audits, jurisprudence and tax legislation;

 

   

recognition in the first half of 2010 of tax benefits in the amount of $2.7 million related to tax consolidation transactions with the parent company, compared with $14.0 million in the same period of 2009;

 

   

impact of tax rate mix on the various components of the gains and losses on financial instruments and derivative financial instruments, and on translation of financial instruments.

FREE CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES

Free cash flows from continuing operating activities: $72.7 million in the second quarter of 2010 compared with $68.9 million in the same period of 2009 (Table 3).

 

Ø The $3.8 million increase was mainly due to:

 

   

$45.4 million favourable variance in proceeds from disposal of assets, essentially due to the sale of certain tangible assets in the News Media segment;

 

   

$38.9 million increase in operating income;

 

   

$8.2 million favourable variance in non-cash balances related to operations due primarily to the increase in income tax liabilities.

Partially offset by:

 

   

$50.6 million increase in additions to property, plant and equipment, mainly because of spending on the AWS network in the Telecommunications segment;

 

   

$32.6 million increase in current income taxes;

 

   

$5.9 million increase in the cash interest expense, including a $6.3 million increase related to the impact on short-term monetary items of unfavourable exchange rate variances.

Free cash flows from continuing operating activities: $84.9 million in the first half of 2010 compared with $61.0 million in the same period of 2009 (Table 3).

 

Ø The $23.9 million improvement was mainly due to:

 

   

$64.9 million increase in operating income;

 

   

$54.9 million favourable variance in non-cash balances related to operations due primarily to the increase in income tax liabilities and a smaller decrease in accounts payable in the first half of 2010 than in the same period of the previous year;

 

   

$46.3 million favourable variance in proceeds from disposal of assets, essentially due to the sale of certain tangible assets in the News Media segment.

Partially offset by:

 

   

$67.2 million increase in additions to property, plant and equipment and $8.4 million increase in acquisitions of intangible assets, due primarily to spending on the AWS network in the Telecommunications segment;

 

   

$54.2 million increase in current income taxes;

 

   

$16.9 million increase in the cash interest expense, including a $14.1 million increase related to the impact on short-term non-monetary items of unfavourable exchange rate variances.

 

9


Table 3

Free cash flows from continuing operating activities

(in millions of Canadian dollars)

 

     Three months ended
June  30
    Six months ended
June 30
 
     2010     2009     2010     2009  

Cash flows from segment operations:

        

Telecommunications

   $ 87.0      $ 106.0      $ 187.7      $ 207.9   

News Media

     97.6        48.9        132.7        66.2   

Broadcasting

     19.7        19.1        22.5        26.1   

Leisure and Entertainment

     (0.3     3.2        (2.6     2.1   

Interactive Technologies and Communications

     0.2        (0.1     0.7        (0.5

Head Office and other

     (0.2     (3.1     (1.2     2.4   
                                
     204.0        174.0        339.8        304.2   

Cash interest expense1

     (61.1     (55.2     (124.6     (107.7

Cash portion of charge for restructuring of operations,

impairment of assets and other special items

     (0.7     (0.8     (3.1     (4.2

Current income taxes

     (40.0     (7.4     (60.8     (6.6

Other

     0.2        (3.8     1.4        (2.0

Net change in non-cash balances related to operations

     (29.7     (37.9     (67.8     (122.7
                                

Free cash flows from continuing operating activities

   $ 72.7      $ 68.9      $ 84.9      $ 61.0   
                                

 

1

Interest on long-term debt, foreign currency translation of short-term monetary items and other interest expenses, less interest capitalized to cost of property, plant and equipment and intangible assets (See Note 2 to the Consolidated financial statements).

Table 4

Reconciliation of cash flows from segment operations to operating income

(in millions of Canadian dollars)

 

     Three months ended
June 30
    Six months ended
June 30
 
     2010     2009     2010     2009  

Operating income

   $ 355.4      $ 316.5      $ 653.9      $ 589.0   

Additions to property, plant and equipment

     (164.4     (113.8     (299.9     (232.7

Acquisitions of intangible assets

     (32.9     (29.2     (61.5     (53.1

Proceeds from disposal of assets1

     45.9        0.5        47.3        1.0   
                                

Cash flows from segment operations

   $ 204.0      $ 174.0      $ 339.8      $ 304.2   
                                

 

1

2010 figures include sale of certain tangible assets in the News Media segment.

 

10


SEGMENTED ANALYSIS

 

 

  Telecommunications

 

Second quarter 2010

Revenues: $543.1 million, an increase of $55.7 million (11.4%).

 

Ø Combined revenues from all cable television services increased $19.1 million (8.8%) to $235.5 million, due primarily to customer base growth, increases in some rates (reflecting, in part, the passing on to customers of CRTC fees for the Local Programming Improvement Fund), the migration from analog to digital service, increased video on demand and pay TV orders, and the success of high definition (“HD”) packages.

 

Ø Revenues from Internet access services increased $18.7 million (13.3%) to $159.1 million. The improvement was mainly due to customer growth, customer migration to higher speed services, increases in some rates and excess usage fees.

 

Ø Revenues from cable telephone service increased $15.2 million (17.7%) to $101.3 million, almost entirely due to customer growth. The increase would have been greater had there not been a decrease in average per-customer long-distance revenues.

 

Ø Revenues from wireless telephone service increased $2.2 million (22.4%) to $12.2 million, essentially due to customer growth.

 

Ø Revenues of Videotron Business Solutions increased $0.2 million (1.4%) to $14.7 million.

 

Ø Revenues of Le SuperClub Vidéotron ltée (“Le SuperClub Vidéotron”) decreased $1.6 million (-22.8%) to $5.5 million, mainly because of the franchising of 12 corporate stores between April 2009 and March 2010.

 

Ø Other revenues: $14.8 million, an increase of $1.8 million (13.8%) due mainly to increased sales of HD digital set-top boxes.

Monthly ARPU: $94.88 in the second quarter of 2010 compared with $87.15 in the same period of 2009, an increase of $7.73 (8.9%).

Customer statistics

Cable television – The combined customer base for all of Videotron’s cable television services decreased by 4,000 (-0.2%) in the second quarter of 2010 (compared with an increase of 3,400 in the second quarter of 2009) and increased by 48,900 (2.8%) during the 12-month period ended June 30, 2010 (Table 5). Because many people move in Québec during the second quarter, negative variances are not unusual. The 13.0% increase in moves in the second quarter of 2010 compared with the same period of 2009 accounts for the negative customer growth during the period. At the end of the second quarter of 2010, there were 1,781,500 subscribers to Videotron’s cable television services for a 68.7% household penetration rate (number of subscribers as a proportion of total homes passed by Videotron’s network, i.e., 2,594,500 homes as of the end of June 2010), compared with 67.6% a year earlier.

 

Ø At the end of the second quarter of 2010, the number of subscribers to the Digital TV service stood at 1,142,000, a quarterly increase of 22,100 or 2.0% (compared with a 27,100-subscriber increase in the second quarter of 2009) and a 12-month increase of 151,700 (15.3%). As of June 30, 2010, the Digital TV service had a household penetration rate of 44.0% versus 38.6% a year earlier.

 

Ø Migration from analog to digital service was the main reason for the 26,100 decrease (-3.9%) in subscribers to analog cable television services in the second quarter of 2010 (compared with a 23,700-subscriber decrease in the second quarter of 2009). Over a 12-month period, the number of subscribers to the analog service decreased by 102,800 (-13.9%).

Internet access – The number of subscribers to cable Internet access services was 1,201,700 at June 30, 2010, an increase of 10,100 (0.8%) from the previous quarter (compared with a 20,600-subscriber increase in the second quarter of 2009). During the 12-month period ended June 30, 2010, the cable Internet access service increased its subscriber base by 91,800 (8.2%) (Table 5). The household penetration rate for cable Internet access services was 46.3% at June 30, 2010 compared with 43.3% at June 30, 2009.

Cable telephone service – The number of subscribers to cable telephone service stood at 1,065,300 at the end of June 2010, an increase of 22,300 (2.1%) from the previous quarter (compared with a 43,900-customer increase in the second quarter of 2009)

 

11


and a 12-month increase of 130,500 (14.0%) (Table 5). At June 30, 2010, the IP telephone service had a household penetration rate of 41.1%, compared with 36.5% a year earlier.

Wireless telephone service – At June 30, 2010, there were 87,000 activated handsets on the wireless telephone service, an increase of 1,700 (2.0%) from the end of the second quarter of 2009 (compared with a 5,500-handset increase in the second quarter of 2009); during the 12-month period ended June 30, 2010, the number of activated handsets increased by 13,500 (18.4%) (Table 5).

Table 5

Telecommunications segment quarter-end customer numbers for the last eight quarters

(in thousands of customers)

 

     June 2010    Mar. 2010    Dec. 2009    Sept. 2009    June 2009    Mar. 2009    Dec. 2008    Sept. 2008

Cable television:

                       

Analog

   639.5    665.6    692.9    717.3    742.3    766.0    788.3    814.8

Digital

   1,142.0    1,119.9    1,084.1    1,042.4    990.3    963.2    927.3    876.7
                                       

Total cable television

   1,781.5    1,785.5    1,777.0    1,759.7    1,732.6    1,729.2    1,715.6    1,691.5

Cable Internet

   1,201.7    1,191.6    1,170.6    1,145.4    1,109.9    1,089.3    1,063.8    1,031.4

Cable telephone

   1,065.3    1,043.0    1,014.0    979.1    934.8    890.9    852.0    797.9

Wireless telephone1

   87.0    85.3    82.8    79.8    73.5    68.0    63.4    58.6
                                       

 

1

In thousands of handsets.

Operating income: $264.0 million, an increase of $31.3 million (13.5%).

 

Ø The increase was mainly due to:

 

   

customer growth for all services;

 

   

increases in some rates, primarily for the cable television and Internet access services;

 

   

increases in excess Internet usage fees and in operating income from HD packages and video on demand;

 

   

more favourable operating margins on digital set-top boxes.

Partially offset by:

 

   

increases in some operating costs, including costs related to the build-out of the AWS network and some regulatory fees.

 

Ø Excluding the variance in the stock-based compensation charge, and if the figures for prior periods were restated to retroactively reflect the reversal in the fourth quarter of 2009 of the accumulated CRTC Part II licence fee provision, the increase in operating income in the second quarter of 2010 would have been 11.7%, compared with 16.5% in the same period of 2009.

Cost/revenue ratio: Operating costs for all Telecommunications segment operations (expressed as a percentage of revenues) were 51.4% in the second quarter of 2010, compared with 52.3% in the same quarter of 2009. Operating costs as a proportion of revenues decreased for the following reasons:

 

Ø Significant fixed component of costs, which does not fluctuate in proportion to revenue growth.

 

Ø More favourable operating margins on digital set-top boxes.

 

Ø Marginal impact on costs of increases in some rates.

Year to date

Revenues: $1.07 billion, an increase of $106.5 million (11.0%) essentially due to the same factors as those noted above in the discussion of second quarter results.

 

Ø Combined revenues from all cable television services: $465.4 million, an increase of $37.3 million (8.7%).

 

12


Ø Revenues from Internet access services increased $39.8 million (14.4%) to $317.1 million.

 

Ø Revenues from cable telephone service increased $31.1 million (18.5%) to $199.7 million.

 

Ø Revenues from wireless telephone service increased $4.7 million (24.9%) to $23.8 million.

 

Ø Revenues of Videotron Business Solutions decreased $0.5 million (-1.7%) to $28.6 million

 

Ø Revenues of Le SuperClub Vidéotron decreased $6.8 million (-38.0%) to $11.1 million.

 

Ø Other revenues increased $0.8 million (3.2%) to $25.7 million.

Monthly ARPU: $94.00 in the first half of 2010 compared with $86.12 in the same period of 2009, an increase of $7.88 (9.2%).

Customer statistics

Cable television – The combined customer base for all of Videotron’s cable television services increased by 4,500 (0.3%) in the first half of 2010, compared with an increase of 17,000 in the same period of 2009.

 

Ø The number of Digital TV subscribers increased by 57,900 (5.3%) in the first half of 2010, compared with 63,000 in the same period of 2009.

 

Ø The customer base for analog cable television services decreased by 53,400 (-7.7%), compared with a decrease of 46,000 in the same period of 2009.

Internet access – The number of subscribers to cable Internet access services increased by 31,100 or 2.7%, compared with 46,100 in the same period of 2009.

Cable telephone service – The number of subscribers to cable telephone service increased by 51,300 (5.1%) in the first half of 2010, compared with 82,800 in the same period of 2009.

Wireless telephone service – The number of activated handsets increased by 4,200 or 5.1% in the first half of 2010, compared with 10,100 in the same period of 2009.

Operating income: $515.7 million, an increase of $59.4 million (13.0%).

 

Ø The increase was mainly due to:

 

   

customer growth for all services;

 

   

increases in some rates, primarily for the cable television and Internet access services;

 

   

increases in excess Internet usage fees and in operating income from HD packages and video on demand;

 

   

more favourable operating margins on digital set-top boxes.

Partially offset by:

 

   

increases in some operating costs, including costs related to the build-out of the AWS network and some regulatory fees;

 

   

$7.4 million non-recurring reduction in operating expenses in the first half of 2009;

 

   

$4.4 million unfavourable variance in the stock-based compensation charge.

 

Ø Excluding the variance in the stock-based compensation charge, and if the figures for prior periods were restated to retroactively reflect the CRTC Part II licence fee adjustment, the increase in the segment’s operating income in the first half of 2010 would have been 12.5%, compared with 16.4% in the same period of 2009.

Cost/revenue ratio: Operating costs for all Telecommunications segment operations (expressed as a percentage of revenues) were 51.9% in the first half of 2010 compared with 52.7% in the same period of 2009. The decrease was due to the same factors as those noted above in the discussion of second quarter 2010 operating results.

 

13


Cash flows from operations

Quarterly cash flows from segment operations: $87.0 million compared with $106.0 million in the same period of 2009 (Table 6), a decrease of $19.0 million.

 

Ø The $31.3 million increase in operating income was outweighed by a $53.2 million increase in additions to property, plant and equipment compared with the same period of 2009, due primarily to spending on the AWS network.

Year-to-date cash flows from segment operations: $187.7 million compared with $207.9 million in the same period of 2009 (Table 6), a $20.2 million decrease caused primarily by a $79.6 million increase in additions to property, plant and equipment, which was partially offset by the $59.4 million increase in operating income.

Table 6: Telecommunications

Cash flows from operations

(in millions of Canadian dollars)

 

     Three months ended
June 30
    Six months ended
June 30
 
     2010     2009     2010     2009  

Operating income

   $ 264.0      $ 232.7      $ 515.7      $ 456.3   

Additions to property, plant and equipment

     (155.3     (102.1     (283.5     (203.9

Acquisitions of intangible assets

     (24.8     (24.6     (48.9     (45.0

Proceeds from disposal of assets

     3.1        —          4.4        0.5   
                                

Cash flows from segment operations

   $ 87.0      $ 106.0      $ 187.7      $ 207.9   
                                

 

 

  News Media

 

Second quarter 2010

Revenues: $271.3 million, a decrease of $4.3 million (-1.6%).

 

Ø Circulation revenues decreased 3.3%, advertising revenues decreased 2.5%, essentially because of lower numbers at the community newspapers, and combined revenues from commercial printing and other sources increased 14.0%.

 

Ø Revenues increased 2.8% at the urban dailies and decreased 5.1% at the community newspapers in the second quarter of 2010.

 

Ø Portal revenues decreased by 8.3%. A 21.4% decline in revenues at the general-interest portals, due mainly to the distribution of some assets as part of a reorganization in June 2009 and the loss of a contract, was partially offset by a 3.7% increase in the revenues of the special-interest portals.

Operating income: $59.6 million, an increase of $4.0 million (7.2%).

 

Ø The increase was mainly due to:

 

   

impact of restructuring initiatives, which generated an additional $7.0 million in cost savings;

 

   

$3.8 million impact of decrease in newsprint prices;

 

   

synergies from operational integration of Canoe Inc. (“Canoe”).

Partially offset by:

 

   

impact of revenue decrease;

 

   

Quebecor Media Network startup costs.

 

Ø Excluding the impact of the stock-based compensation charge and Quebecor Media Network startup costs, operating income would have increased by 11.6% in the second quarter of 2010, compared with a 23.0% decrease in the same period of 2009.

 

14


The restructuring measures introduced in late 2008 in the News Media segment included staff cuts, consolidation of prepress, shipping and press room operations, centralization of administrative processes, consolidation of distribution networks, and other resource centralization and optimization efforts across the segment’s operations in all regions. While the restructuring proceeds, development of new revenue streams, such as revenues from the marketing of content produced by QMI Agency and the development of integrated, convergent solutions for customers, continues. These include marketing initiatives by the new QMI National Sales Office and Quebecor Media Network’s integrated offerings of products and services.

Cost/revenue ratio: Operating costs for all News Media segment operations (expressed as a percentage of revenues) were 78.0% in the second quarter of 2010, compared with 79.8% in the same period of 2009. The decrease was mainly due to the restructuring initiatives, which yielded significant cost reductions, lower newsprint prices, synergies, and improved profitability, partially offset by the unfavourable impact of the fixed component of costs, which does not fluctuate in proportion to revenue decreases, and Quebecor Media Network startup costs.

Year to date

Revenues: $519.4 million, a decrease of $8.9 million (-1.7%).

 

Ø Circulation revenues decreased 5.4%, advertising revenues decreased 2.7%, essentially because of lower numbers at the community newspapers, and combined revenues from commercial printing and other sources increased 20.4%.

 

Ø Revenues increased 1.3% at the urban dailies and decreased 5.2% at the community newspapers in the first half of 2010.

 

Ø Revenues decreased 7.5% at the portals, essentially because of a 23.2% decline at the general-interest portals due to the same factors as those noted in the discussion of second quarter 2010 results, partially offset by a 6.2% increase in revenues at the special-interest portals.

Operating income: $99.6 million, an increase of $14.3 million (16.8%).

 

Ø The increase was mainly due to:

 

   

impact of restructuring initiatives, which generated an additional $24.0 million in cost savings;

 

   

$9.5 million impact of decrease in newsprint prices;

 

   

synergies from operational integration of Canoe.

Partially offset by:

 

   

impact of revenue decrease;

 

   

unfavourable variance related to reversal of provisions for bonuses in the first half of 2009;

 

   

Quebecor Media Network startup costs;

 

   

$1.6 million unfavourable variance related to the stock-based compensation charge.

 

Ø Excluding the impact of the stock-based compensation charge and Quebecor Media Network startup costs, operating income would have increased by 24.6% in the first half of 2010, compared with a 27.0% decrease in the same period of 2009.

Cost/revenue ratio: Operating costs for all News Media segment operations (expressed as a percentage of revenues) were 80.8% in the first half of 2010, compared with 83.9% in the same period of 2009. The variance was due primarily to the same factors as those noted above in the discussion of second quarter 2010 results.

Cash flows from operations

Quarterly cash flows from segment operations: $97.6 million compared with $48.9 million in the same period of 2009 (Table 7).

 

Ø The $48.7 million increase was due primarily to a $41.5 million favourable variance in proceeds from disposal of assets, resulting primarily from the sale of certain tangible assets, the $4.0 million increase in operating income, and the $3.2 million decrease in additions to property, plant and equipment and intangible assets.

 

15


Year-to-date cash flows from segment operations: $132.7 million compared with $66.2 million in the same period of 2009 (Table 7).

 

Ø The $66.5 million increase mainly reflects the proceeds from the sale of certain tangible assets in the second quarter of 2010 as well as the $14.3 million increase in operating income and the $10.6 million decrease in additions to property, plant and equipment and intangible assets.

Table 7: News Media

Cash flows from operations

(in millions of Canadian dollars)

 

     Three months ended
June 30
    Six months ended
June 30
 
     2010     2009     2010     2009  

Operating income

   $ 59.6      $ 55.6      $ 99.6      $ 85.3   

Additions to property, plant and equipment

     (1.0     (6.3     (3.3     (16.8

Acquisitions of intangible assets

     (3.0     (0.9     (5.7     (2.8

Proceeds from disposal of assets1

     42.0        0.5        42.1        0.5   
                                

Cash flows from segment operations

   $ 97.6      $ 48.9      $ 132.7      $ 66.2   
                                

 

1

2010 figures include sale of certain tangible assets.

Other developments

On January 24, 2009, in view of the union’s refusal to recognize the urgency of the situation and the need for far-reaching changes to the Journal de Montréal’s business model, and in order to prevent pressure tactics from disrupting the newspaper’s publication, Le Journal de Montréal management decided to exercise its rights under the Labour Code and declared a lock-out of the approximately 250 editorial, office and classified ad employees covered by the Syndicat des travailleurs de l’information du Journal de Montréal (STIJM) bargaining certificate. Le Journal de Montréal has continued publishing despite the labour dispute.

On April 16, 2009, AbitibiBowater Inc. (“AbitibiBowater”) and some of its Canadian subsidiaries placed themselves under the protection of the Companies’ Creditors Arrangement Act in Canada. On the same date, AbitibiBowater and some of its U.S. and Canadian subsidiaries placed themselves under the protection of Chapter 11 of the United States Bankruptcy Code. AbitibiBowater is the main supplier of newsprint to the News Media segment. These proceedings have had no material impact on the operations of Quebecor Media to date. Quebecor Media continues to monitor the situation.

 

 

  Broadcasting

 

Second quarter 2010

Revenues: $110.9 million, a decrease of $0.6 million (-0.5%).

 

Ø Revenues from television operations decreased $0.8 million, mainly due to:

 

   

lower advertising revenues at the TVA Network, in part because of migration of advertising dollars to other networks during the 2010 hockey playoffs;

 

   

lower sponsorship and video on demand revenues at TVA Productions;

 

   

unfavourable variance in revenues from Canal Indigo due to the sale of the entity to Videotron on December 1, 2009.

Partially offset by:

 

   

increased advertising revenues at the specialty channels and Sun TV;

 

   

increased subscription revenues at the specialty channels;

 

   

increase in the TVA Network’s other revenues, including revenues from the Local Programming Improvement Fund.

 

16


Ø Publishing revenues increased $0.1 million.

Operating income: $26.2 million, an increase of $1.1 million (4.4%).

 

Ø Operating income from television operations increased $1.0 million, mainly due to:

 

   

impact of increased revenues at the specialty channels and Sun TV;

 

   

favourable variance in 2010 related to the recognition in the second quarter of 2009 of a $1.3 million allowance in the distribution division due to one customer’s precarious financial position;

 

   

decrease in selling and administrative expenses at the TVA Network.

Partially offset by:

 

   

impact of net decrease in the TVA Network’s revenues;

 

   

higher content costs at the TVA Network and the specialty channels as a result of the programming strategy.

 

Ø Operating income from publishing operations increased $0.4 million, mainly because of lower printing, editorial and graphics costs.

Cost/revenue ratio: Operating costs for all Broadcasting segment operations (expressed as a percentage of revenues) were 76.4% in the second quarter of 2010, compared with 77.5% in the same period of 2009. The decrease was mainly due to lower selling and administrative expenses at the TVA Network and recognition in the second quarter of 2009 of an allowance for bad debts in the distribution division.

Year to date

Revenues: $220.5 million, a decrease of $0.8 million (-0.4%).

 

Ø Revenues from television operations decreased $0.4 million, due primarily to the same factors as those noted above in the discussion of second quarter 2010 results as well as the unfavourable impact of the migration of advertising dollars to other networks during the Vancouver Olympics in the first quarter of 2010.

 

Ø Publishing revenues decreased $0.2 million.

Operating income: $33.0 million, a decrease of $4.5 million (-12.0%).

 

Ø Operating income from television operations decreased $5.0 million, mainly due to:

 

   

higher content costs at the TVA Network and the specialty channels as a result of the programming strategy;

 

   

impact of net decrease in the TVA Network’s revenues;

 

   

decreased profitability of distribution operations, mainly of video distribution.

Partially offset by:

 

   

impact of increased revenues at the specialty channels and Sun TV;

 

   

favourable variance in 2010 related to recognition in the first half of 2009 of a $1.3 million allowance for bad debts in the distribution division due to one customer’s precarious financial position.

 

Ø Operating income from publishing operations increased $0.6 million due to the same factors as those noted in the discussion of second quarter 2010 results.

Cost/revenue ratio: Operating costs for all Broadcasting segment operations (expressed as a percentage of revenues) were 85.0% in the first half of 2010, compared with 83.1% in the same period of 2009. The increase was mainly due to higher content costs, the declining profitability of distribution operations, and the general indexing of other costs, while revenues were flat or changed slightly.

 

17


Cash flows from operations

Quarterly cash flows from segment operations: $19.7 million compared with $19.1 million in the same period of 2009 (Table 8).

 

Ø The $0.6 million favourable variance was mainly due to the $1.1 million increase in operating income.

Year-to-date cash flows from segment operations: $22.5 million compared with $26.1 million in the same period of 2009, a $3.6 million decrease (Table 8).

 

Ø The negative variance was mainly due to the $4.5 million decrease in operating income.

Table 8: Broadcasting

Cash flows from operations

(in millions of Canadian dollars)

 

     Three months ended
June 30
    Six months ended
June 30
 
     2010     2009     2010     2009  

Operating income

   $ 26.2      $ 25.1      $ 33.0      $ 37.5   

Additions to property, plant and equipment

     (4.9     (3.5     (8.5     (8.5

Acquisitions of intangible assets

     (2.4     (2.5     (2.8     (2.9

Proceeds from disposal of assets

     0.8        —          0.8        —     
                                

Cash flows from segment operations

   $ 19.7      $ 19.1      $ 22.5      $ 26.1   
                                

Other developments

On March 17, 2010, the Board of Directors of TVA Group authorized a normal course issuer bid for up to 972,545 Class B shares, or approximately 5% of the issued and outstanding Class B shares. The purchases will be made at prevailing market prices, on the open market through the facilities of the Toronto Stock Exchange, and in accordance with the requirements of the Exchange. No Class B shares were repurchased in the first half of 2010.

 

 

  Leisure and Entertainment

 

Second quarter 2010

Revenues: $66.0 million, a decrease of $2.2 million (-3.2%).

 

Ø The revenues of Archambault Group Inc. (“Archambault Group”) decreased 5.1%, mainly because of:

 

   

8.1% drop in retail sales, mainly because of lower CD sales compared with the large number of successful new releases in the second quarter of 2009, and lower sales of books and musical instruments;

 

   

71.2% decrease in production sales due to the larger number of successful albums released in 2009, including the Star Académie CD.

 

Ø The Book Division’s revenues decreased by 2.0%, mainly because of fewer general literature titles distributed and published, partially offset by increased sales of textbooks for Québec high schools and community colleges in the academic segment.

Operating income: $4.2 million in the second quarter of 2010, a decrease of $0.6 million (-12.5%) due primarily to the impact of lower revenues at Archambault Group, which was partially offset by increased operating income in the Book Division generated by higher revenues at CEC Publishing Inc.

 

18


Year to date

Revenues: $127.3 million, a decrease of $5.0 million (-3.8%).

 

Ø Revenues decreased 4.6% at Archambault Group and 2.9% at the Book Division, essentially due to the same factors as those noted above in the discussion of second quarter 2010 results.

Operating income: $4.1 million in the first half of 2010 compared with $5.6 million in the same period of 2009. The $1.5 million
(-26.8%) decrease was essentially due to the same factors as those noted above in the discussion of second quarter results.

Cash flows from operations

Quarterly cash flows from segment operations: Negative $0.3 million compared with positive $3.2 million in the same period of 2009 (Table 9).

 

Ø The $3.5 million negative variance was mainly due to:

 

   

$1.5 million increase in acquisitions of intangible assets and $1.4 million increase in additions to property, plant and equipment;

 

   

$0.6 million unfavourable variance in operating income.

Year-to-date cash flows from segment operations: Negative $2.6 million compared with positive $2.1 million in the same period of 2009 (Table 9).

 

Ø The $4.7 million negative variance was mainly due to:

 

   

$1.7 million increase in acquisitions of intangible assets and $1.5 million increase in additions to property, plant and equipment;

 

   

$1.5 million decrease in operating income.

Table 9: Leisure and Entertainment

Cash flows from operations

(in millions of Canadian dollars)

 

     Three months ended
June 30
    Six months ended
June 30
 
     2010     2009     2010     2009  

Operating income

   $ 4.2      $ 4.8      $ 4.1      $ 5.6   

Additions to property, plant and equipment

     (1.8     (0.4     (2.6     (1.1

Acquisitions of intangible assets

     (2.7     (1.2     (4.1     (2.4
                                

Cash flows from segment operations

   $ (0.3   $ 3.2      $ (2.6   $ 2.1   
                                

 

 

  Interactive Technologies and Communications

 

Second quarter 2010

Revenues: $23.9 million, an increase of $0.3 million (1.3%).

 

Ø The increase was due primarily to increased volumes from customers in Europe, the United States and Asia, largely offset by unfavourable variances in currency translation.

Operating income: $1.3 million, flat in relation to the second quarter of 2009.

 

Ø The impact of increased volume was offset by higher labour costs.

 

19


Year to date

Revenues: $47.7 million, an increase of $1.4 million (3.0%).

 

Ø The increase was mainly due to:

 

   

increased volumes from customers in Europe, the United States and Asia;

 

   

impact of increased revenues from government customers.

Partially offset by:

 

   

unfavourable variances in currency translation.

Operating income: $2.3 million, an increase of $0.6 million (35.3%).

 

Ø The increase was mainly due to:

 

   

impact of increased revenues in the United States and Asia;

 

   

impact of restructuring initiatives and profitability improvements in Canada in 2009.

Partially offset by:

 

   

higher labour costs.

Cash flows from operations

Quarterly cash flows from segment operations: $0.2 million compared with negative $0.1 million in the same period of 2009 (Table 10).

Year-to-date cash flows from segment operations: $0.7 million compared with negative $0.5 million in the same period of 2009 (Table 10), an increase of $1.2 million.

 

Ø The favourable variance was mainly due to the $0.6 million decrease in additions to property, plant and equipment, and the $0.6 million increase in operating income.

Table 10: Interactive Technologies and Communications

Cash flows from operations

(in millions of Canadian dollars)

 

     Three months ended
June 30
    Six months ended
June 30
 
     2010     2009     2010     2009  

Operating income

   $ 1.3      $ 1.3      $ 2.3      $ 1.7   

Additions to property, plant and equipment

     (1.1     (1.4     (1.6     (2.2
                                

Cash flows from segment operations

   $ 0.2      $ (0.1   $ 0.7      $ (0.5
                                

 

20


CASH FLOWS AND FINANCIAL POSITION

Operating activities

Second quarter 2010

Cash flows provided by operating activities: $224.1 million in the second quarter of 2010 compared with $211.4 million in the same period of 2009.

 

Ø The $12.7 million increase was mainly due to:

 

   

$38.9 million increase in operating income;

 

   

$8.2 million favourable variance in non-cash balances related to operations due primarily to the increase in income tax liabilities.

Partially offset by:

 

   

$32.6 million increase in current income taxes;

 

   

$5.9 million increase in the cash interest expense, including a $6.3 million increase related to the impact on short-term monetary items of unfavourable exchange rate variances.

Year to date

Cash flows provided by continuing operating activities: $399.0 million in the first half of 2010 compared with $345.8 million in the same period of 2009.

 

Ø The $53.2 million increase was mainly due to:

 

   

$64.9 million increase in operating income;

 

   

$54.9 million favourable variance in non-cash balances related to operations due primarily to the increase in income tax liabilities and a smaller decrease in accounts payable in the first half of 2010 than in the same period of the previous year.

Partially offset by:

 

   

$54.2 million increase in current income taxes;

 

   

$16.9 million increase in the cash interest expense, including a $14.1 million increase related to the impact on short-term non-monetary items of unfavourable exchange rate variances.

Working capital of Quebecor Media: $41.7 million at June 30, 2010 compared with negative $1.2 million at December 31, 2009, a favourable variance of $42.9 million mainly reflecting a decrease in accounts payable and accrued charges recorded against cash flows from operations (Table 12).

Financing activities

Consolidated debt (long-term debt plus bank borrowings) of Quebecor Media: $3.2 million increase in the first half of 2010; favourable $144.0 million net variance in assets and liabilities related to derivative financial instruments.

 

Ø Summary of debt increases since the end of 2009:

 

   

issuance by Videotron on January 13, 2010 of $300.0 million aggregate principal amount of 7 1/8% Senior Notes maturing in 2020 for net proceeds of $293.9 million (net of financing fees);

 

   

$3.9 million net increase in drawings on TVA Group’s revolving bank credit facilities and bank borrowings;

 

   

$22.9 million increase in debt due to changes in fair value related to hedged interest rate risk and embedded derivatives, resulting mainly from interest rate fluctuations.

 

21


Debt reductions during the same period:

 

   

payments on debt totalling $290.6 million, including a total $175.8 million early payment by Quebecor Media on drawings on its term loan “B” in January 2010 and the pay down by Osprey Media of its credit facility in the amount of $114.8 million in May 2010;

 

   

current payments totalling $29.1 million on Quebecor Media’s credit facility and other debt.

Exchange rate fluctuations during the first half of the year had no material impact on debt.

 

Ø Assets and liabilities related to derivative financial instruments totalled a net liability of $229.4 million at June 30, 2010, compared with a net liability of $373.4 million at December 31, 2009, a favourable net variance of $144.0 million. The favourable variance was caused primarily by the impact of interest rate trends in Canada, compared with the United States, on the fair value of derivative financial instruments, as well as the settlement in January and in May 2010 of portions of the hedge agreements totalling $29.9 million.

 

Ø On January 14, 2010, Quebecor Media also extended the maturity date of its $100,0 million revolving credit facility from January 2011 to January 2013 and obtained certain other advantageous amendments to the covenants attached to its credit facilities.

Investing activities

Second quarter 2010

Additions to property, plant and equipment: $164.4 million in the second quarter of 2010 compared with $113.8 million in the same period of 2009.

 

Ø The $50.6 million increase was mainly due to spending on the AWS network in the Telecommunications segment in the first quarter of 2010, partially offset by a decrease in capital expenditures in the News Media segment.

Acquisitions of intangible assets: $32.9 million in the second quarter of 2010 compared with $29.2 million in the same period of 2009.

Business acquisitions (including buyouts of minority interests): $0.1 million in the second quarter of 2010 compared with $1.5 million in the same quarter of 2009, including a $1.0 million contingent consideration paid in connection with the acquisition of China Interactive Limited (“China Interactive”) in the Interactive Technologies and Communications segment.

Proceeds from disposal of assets: $45.9 million in the second quarter of 2010 compared with $0.5 million in the second quarter of 2009.

 

Ø Disposal of certain tangible assets in the News Media segment in the second quarter of 2010.

Year to date

Additions to property, plant and equipment: $299.9 million compared with $232.7 million in the same period of 2009. The variance was essentially due to the same factors as those noted above in the discussion of second quarter 2010 results.

Acquisitions of intangible assets: $61.5 million in the first half of 2010 compared with $53.1 million in the same period of 2009. The variance was due in part to expenditures related to the build-out of AWS network in the Telecommunications segment.

Business acquisitions (including buyouts of minority interests): $1.1 million in the first half of 2010 compared with $2.5 million in the same period of 2009.

 

Ø Contingent considerations of $1.0 million were paid in the first halves of 2010 and 2009 in connection with the acquisition of ASL Ltd. in the News Media segment.

 

Ø A contingent consideration totalling $1.0 million was paid in the first half of 2009 in connection with the acquisition of China Interactive in the Interactive Technologies and Communications segment.

Proceeds from disposal of assets: $47.3 million in the first half of 2010 compared with $1.0 million in the first half of 2009. The variance was essentially due to the same factor as that noted in the discussion of the second quarter of 2010.

 

22


Financial Position at June 30, 2010

Net available liquidity: $1.1 billion for the Company and its wholly owned subsidiaries, consisting of $321.9 million in cash and $775.6 million in available unused lines of credit.

Consolidated debt: total $3.77 billion at June 30, 2010, an increase of $3.2 million (see “Financing Activities” above).

 

Ø Consolidated debt essentially consisted of Videotron’s $1.92 billion debt ($1.59 billion at December 31, 2009), Sun Media Corporation’s $246.8 million debt ($248.9 million at December 31, 2009), TVA Group’s $93.7 million debt ($89.6 million at December 31, 2009) and Quebecor Media’s $1.50 billion debt ($1.72 billion at December 31, 2009). At December 31, 2009, consolidated debt also included Osprey Media’s $114.2 million debt.

As of June 30, 2010, the aggregate amount of minimum principal payments on long-term debt required in each of the next five years and thereafter, based on borrowing levels as at that date, is as follows:

Table 11

Minimum principal amount on Quebecor Media’s long-term debt

12 months period ending on June 30

(in millions of Canadian dollars)

 

2011

   $ 61.4

2012

     14.6

2013

     439.8

2014

     708.0

2015

     85.6

2016 and thereafter

     2,477.4
      

Total

   $ 3,786.8
      

The weighted average term of Quebecor Media’s consolidated debt was approximately 5.4 years as of June 30, 2010 (5.3 years as of December 31, 2009). The debt comprises approximately 74.5% fixed-rate debt (69.3% as of December 31, 2009) and 25.5% floating-rate debt (30.7% as of December 31, 2009).

Management believes that cash flows from continuing operating activities and available sources of financing should be sufficient to cover planned cash requirements for capital investments, working capital, interest payments, debt repayments, pension plan contributions and dividends (or distributions). The Company has access to cash flows generated by its subsidiaries through dividends (or distributions) and cash advances paid by its wholly owned subsidiaries and through the dividends paid by the publicly listed subsidiary TVA Group. The Company believes it will be able to meet future debt payments, which are fairly staggered over the coming years.

Pursuant to their financing agreements, the Company and its subsidiaries are required to maintain certain financial ratios. The key indicators listed in these agreements include debt service coverage ratio and debt ratio (long-term debt over operating income). At June 30, 2010, the Company was in compliance with all required financial ratios.

Dividends declared and paid

 

Ø On May 11, 2010, the Board of Directors of Quebecor Media declared an $18.75 million dividend, which was paid to shareholders on May 12, 2010.

 

Ø On August 10, 2010, the Board of Directors of Quebecor Media declared a $25.0 million dividend, which was paid to shareholders on August 11, 2010.

AWS network

Videotron still expects to finance future expenditures related to its AWS network from cash and cash equivalents, cash flows generated by operations and, if necessary, unused lines of credit.

 

23


Table 12

Consolidated balance sheet of Quebecor Media

Analysis of main variances between December 31, 2009 and June 30, 2010

(in millions of Canadian dollars)

 

     June 30,
2010
   Dec. 31,
2009
   Difference    

Main reasons for difference

Assets

          

Accounts receivable

   $ 475.8    $ 518.6    $ (42.8  

Impact of current and seasonal variances in activity

Property, plant and equipment

     2,553.1      2,439.8      113.3     

Additions to property, plant and equipment (see “Investing Activities” above), less amortization for the period

Liabilities

          

Accounts payable and accrued charges

     673.6      792.2      (118.6  

Impact of current and seasonal variances in activity

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

     3,765.4      3,762.2      3.2     

See “Financing Activities”

Net derivative financial instruments1

     229.4      373.4      (144.0  

See “Financing Activities”

Net future tax liabilities2

     393.1      353.0      40.1     

Use of tax benefits and capital cost allowance in excess of book amortization

 

1

Long-term liabilities less long-term assets.

2

Long-term liabilities less current and long-term assets.

ADDITIONAL INFORMATION

Contractual obligations

At June 30, 2010, material contractual obligations of operating activities included capital repayment and interest on long-term debt; operating lease arrangements; capital asset purchases and other commitments; and obligations related to derivative financial instruments, less estimated future receipts on derivative financial instruments. Table 13 below shows a summary of these contractual obligations.

 

24


Table 13

Contractual obligations of Quebecor Media as of June 30, 2010

(in millions of Canadian dollars)

 

     Total    Under
1 year
   1-3 years    3-5 years    5 years
or more

Long-term debt1

   $ 3,786.8    $ 61.4    $ 454.4    $ 793.6    $ 2,477.4

Interest payments2

     1,662.2      252.1      557.2      460.2      392.7

Operating leases

     370.4      61.6      88.2      62.2      158.4

Additions to property, plant and equipment and

other commitments

     146.2      78.9      59.7      4.0      3.6

Derivative financial instruments3

     356.6      0.4      119.7      136.2      100.3
                                  

Total contractual obligations

   $ 6,322.2    $ 454.4    $ 1,279.2    $ 1,456.2    $ 3,132.4
                                  

 

1

The carrying value of long-term debt excludes adjustments to recorded changes in the fair value of long-term debt related to hedged interest risk, embedded derivatives, or financing fees.

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, 2010.

3

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

Financial Instruments

Quebecor Media uses a number of financial instruments, mainly cash and cash equivalents, trade receivables, temporary investments, long-term investments, bank indebtedness, trade payables, accrued liabilities, long-term debt and derivative financial instruments.

As at June 30, 2010, Quebecor Media was using derivative financial instruments to manage its exchange rate and interest rate exposure. The Company has entered into foreign exchange forward contracts and cross-currency interest rate swap agreements to hedge the foreign currency risk exposure on the entirety of its U.S. dollar-denominated long-term debt. Quebecor Media also uses interest rate swaps in order to manage the impact of interest rate fluctuations on its long-term debt.

Quebecor Media has also entered into currency forward contracts in order to hedge, among other things, the planned purchase, in U.S. dollars, of digital set-top boxes, modems and other equipment in the Telecommunications segment, including equipment for the AWS network. As well, Quebecor Media has entered into currency forward contracts in order to hedge future contractual instalments payable in euros and Swiss francs.

The Company does not hold or use any derivative financial instruments for trading purposes.

Certain cross-currency interest rate swaps entered into by Quebecor Media and its subsidiaries include an option that allows each party to unwind the transaction on a specific date at the then settlement value.

The fair value of long-term debt and derivative financial instruments at June 30, 2010 is shown in Table 14.

 

25


Table 14

Fair value of long-term debt and derivative financial instruments

(in millions of Canadian dollars)

 

     June 30, 2010     December 31, 2009  
     Carrying
value
    Fair value
asset
(liability)
    Carrying
value
    Fair value
asset
(liability)
 

Long-term debt1

   $ (3,786.8   $ (3,870.2   $ (3,805.5   $ (3,869.8

Derivative financial instruments:

        

Early settlement options

     34.3        34.3        41.1        41.1   

Interest rate swaps

     (1.6     (1.6     (4.3     (4.3

Foreign exchange forward contracts

     2.3        2.3        (5.8     (5.8

Cross-currency interest swaps

     (228.7     (228.7     (363.3     (363.3

 

1

The carrying value of long-term debt excludes adjustments to recorded changes in the fair value of long-term debt related to hedged interest risk, embedded derivatives, or financing fees.

The fair value of long-term debt is estimated based on quoted market prices, when available, or on valuation models. When the Company 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 derivative financial instruments is estimated using models that 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. 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 fair value of the derivative instruments by applying a premium for risk of credit default due to a net exposure by the counterparty or by the Company.

The fair value of early settlement options recognized as embedded derivatives is determined by option pricing models, including volatility and discount factors.

Loss (gain) on valuation and translation of financial instruments for the second quarter and the first six months of 2010 are summarized in Table 15.

Table 15

Loss (gain) on valuation and translation of financial instruments

(in millions of Canadian dollars)

 

     Three months ended
June 30
    Six months ended
June 30
 
     2010    2009     2010     2009  

Loss (gain) on embedded derivatives and derivative financial instruments for which hedge accounting is not used

   $ 3.0    $ 9.1      $ 8.4      $ (2.4

Loss (gain) on foreign currency translation of financial instruments for which hedge accounting is not used

     1.4      (12.8     (2.2     (8.5

Loss (gain) on ineffective portion of fair value hedges

     0.2      (10.0     3.1        (17.0
                               
   $ 4.6    $ (13.7   $ 9.3      $ (27.9
                               

Gains of $76.3 million and $103.1 million on cash flow hedges were recorded under other comprehensive income in the second quarter and first half of 2010 respectively ($2.6 million loss and $3.8 million gain in the second quarter and first half of 2009 respectively).

 

26


Related Party Transactions

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

Operating transactions

During the second quarter ended June 30, 2010, the Company and its subsidiaries made purchases and incurred rent charges from the parent company, companies under common control and affiliated companies in the amount of $2.3 million ($3.1 million in the second quarter of 2009), which are included in cost of sales and selling and administrative expenses. The Company and its subsidiaries made sales to companies under common control and to an affiliated company in the amount of $0.1 million ($0.1 million in the second quarter of 2009). These transactions were concluded and accounted for at the exchange amount.

During the first six months of 2010, the Company and its subsidiaries made purchases and incurred rent charges from the parent company, companies under common control and affiliated companies in the amount of $4.4 million ($9.3 million in the first six months of 2009), which are included in cost of sales and selling and administrative expenses. The Company and its subsidiaries made sales to companies under common control and to an affiliated company in the amount of $0.6 million ($0.2 million in the first six months of 2009). These transactions were concluded and accounted for at the exchange amount.

Management arrangements

The parent company has entered into management arrangements with the Company. Under these management arrangements, the parent company and the Company provide management services to each other on a cost-reimbursement basis. The expenses subject to reimbursement include the salaries of the Company’s executive officers who also serve as executive officers of the parent company. In the second quarter of 2010, the Company received an amount of $0.5 million, which is included as a reduction in selling and administrative expenses ($0.5 million in the second quarter of 2009). For the six month period ended June 30, 2010, the Company received an amount of $1.0 million, which is included as a reduction in selling and administrative expenses ($1.0 million in the same period of 2009).

In the second quarter of 2010, Quebecor Media also paid management fees of $0.2 million and $0.1 million respectively to its shareholders Quebecor and CDP Capital d’Amérique Investissements inc. (“CDP Capital”), the same amounts as for the second quarter of 2009. For the first six months of 2010, Quebecor Media paid management fees of $0.3 million and $0.3 million respectively to its shareholders Quebecor and CDP Capital, the same amounts as for the first six months of 2009.

New partnership

During the second quarter of 2010, the Company announced the creation of Sun TV News, a new partnership in which TVA Group will hold a 51% interest and Sun Media Corporation a 49% interest. This partnership will launch an English-language news and opinion specialty channel in the first quarter of 2011. The Company has also decided to terminate the operations of its Sun TV conventional television station, in which TVA Group held a 75% interest and Sun Media Corporation a 25% interest, as soon as the all-news specialty channel is on the air.

Recent Accounting Developments in Canada

In February 2008, Canada’s Accounting Standards Board confirmed that Canadian GAAP, as used by publicly accountable enterprises, will be fully converged to IFRS, as issued by the International Accounting Standards Board (“IASB”). For its 2011 interim and annual financial statements, the Company will be required to report under IFRS and to provide IFRS comparative information for the 2010 financial year.

IFRS uses a conceptual framework similar to Canadian GAAP, but there are significant differences on recognition, measurement and disclosures. As part of the IFRS conversion project, the Company has established an implementation team that includes a project manager, senior levels of management from all relevant departments and subsidiaries, and a steering committee to oversee the project. An external expert advisor has also been hired to assist.

Regular progress reporting to senior management and to the Audit Committee on the status of the IFRS conversion project has been established.

 

27


The conversion project consists of four phases.

“Diagnostic” Phase – This phase involves a detailed review and initial scoping of accounting differences between Canadian GAAP and IFRS, a preliminary evaluation of IFRS 1 exemptions for first-time IFRS adopters, and a high-level assessment of potential consequences on financial reporting, business processes, internal controls, and information systems.

“Design and Solutions Development” Phase – This phase involves prioritizing accounting treatment issues and preparing a conversion plan, quantifying the impact of converting to IFRS, reviewing and approving accounting policy choices, performing a detailed impact assessment and designing changes to systems and business processes, developing IFRS training material, and drafting IFRS financial statement content.

“Implementation” Phase – This phase involves embedding changes to systems, business processes and internal controls, determining the opening IFRS transition balance sheet and tax impacts, parallel accounting in 2010 under Canadian GAAP and IFRS, and preparing detailed reconciliations of Canadian GAAP to IFRS of the 2010 comparatives figures in the 2011 financial statements.

“Post-Implementation” Phase – This phase involves conversion assessment, evaluating improvements for a sustainable operational IFRS model, and testing the internal controls environment.

The Company has completed the diagnostic phase and the project design, has developed solutions for all of the important topics, and is continuing to execute its project implementation strategy. Comprehensive training has been given to key employees throughout the organization who will be affected by the changeover to IFRS, and the progress of the Company’s changeover plan continues to be communicated to internal and external stakeholders.

Management has assessed the exemptions from full retrospective application available under IFRS 1, First-Time Adoption of International Financial Reporting Standards, and their potential impacts on the Company’s financial position.

On adoption of IFRS, the significant exemptions the Company intends to elect at transition with their related impacts in the opening balance sheet are as follows:

 

Exemption   Application of exemption
Business combinations     The Company expects to elect not to restate any business combinations that occurred prior to January 1, 2010. No impact is expected in the transitional balance sheet.
Employee benefits   On transition, the Company expects to elect to recognize immediately cumulative actuarial gains and losses arising from all of its defined benefit plans as at the transition date in opening retained earnings, with a corresponding increase in pension liabilities.
Borrowing costs   On transition, the Company may elect to capitalize borrowing costs as calculated under IFRS on qualifying assets prospectively beginning on the transition date or a designated date prior to transition. As a result, certain long-term asset balances and opening retained earnings may decrease in the transitional balance sheet.

In addition to the elective exemptions described above, IFRS does not permit the retrospective application of IFRS in the determination of prior period estimates and the designation of hedging arrangements. As such, assumptions used to calculate estimates under Canadian GAAP will be used for the purpose of preparing the IFRS transitional balance sheet. In addition, hedge accounting will only be applied on transition to previously designated hedging relationships.

Management is in the process of quantifying the expected material differences between IFRS and the current accounting under Canadian GAAP. Differences in accounting policies adopted on and after transition to IFRS with respect to the recognition, measurement, presentation and disclosure of financial information, along with the related financial statement impacts, are expected to be in the following key accounting areas:

 

28


Key accounting area         Differences with potential impact for the Company

Presentation of
financial statements
(IAS 1)

 

   Format variations and additional disclosures in the notes to financial statements are required under IFRS.

Property, plant and
equipment (IAS 16)

     No capitalization of start-up costs incurred on certain built-to-suit assets prior to substantial completion.
     As a result, depreciation expense is expected to be different under IFRS.

Impairment of assets
(IAS 36)

     Grouping of assets in cash generating units (CGUs) on the basis of independent cash inflows for impairment testing purposes, using a discounted cash flow valuation method in a single-step approach.
       The change in methodology may result in additional asset impairments recognized on transition and in the future under IFRS than those recognized under Canadian GAAP.
       Goodwill is allocated to, and tested in conjunction with its related CGU or group of CGUs that benefit from collective synergies.
       Under certain circumstances, impairment previously taken (other than goodwill) is required to be reversed.
       The Company has not yet concluded its assessment of asset impairment at transition.

Income taxes
(IAS 12)

     Recognition and measurement criteria for deferred tax assets and liabilities may differ.
     Subsequent changes to deferred income taxes in the balance sheet related to transactions previously recorded in equity or other comprehensive income are also recorded directly in equity or Other Comprehensive Income (“OCI”) under IFRS as compared to through earnings under Canadian GAAP.
       The opening balance sheet will also be adjusted for deferred tax consequences on IFRS differences arising from the conversion of other accounting standards.

Employee benefits
(IAS 19)

 

   Immediate recognition of vested past service costs to opening retained earnings at transition and to income subsequent to transition, whereas under Canadian GAAP, vested or unvested past service costs are recognized linearly over the estimated average remaining service lifetime of participating employees.
       After transition, the Company expects to recognize actuarial gains and losses as they occur in OCI, with no impact on income. Previously, under Canadian GAAP, actuarial gains and losses were amortized to income using the corridor method.
       This change in accounting policy will result in the recognition of pension costs potentially different than otherwise recognized under Canadian GAAP.
       The limit to which a net benefit asset can be recognized under certain circumstances (“asset ceiling”) under IFRS is calculated differently, which may result in the recognition of additional liabilities and a decrease in opening retained earnings at transition and in other comprehensive income in future reporting periods.

Business combinations
and minority interests
(IFRS 3R)

 

   Non-controlling interests are recorded at fair value at the date of acquisition and are presented as a separate component of shareholders’ equity.
     Acquisition-related and restructuring costs expensed as incurred and contingent consideration recorded at its fair value on acquisition date; subsequent changes in fair value of a contingent consideration classified as a liability recognized in earnings.
       Changes in ownership interests in a subsidiary that do not result in a loss of control accounted for as equity transactions.
       These differences may result in financial statement impacts prospectively from transition on the occurrence of a future acquisition.

Related party
transactions

     Recognition and measurement criteria for related party transactions may differ under IFRS.
     This may result in reclassifications within equity accounts in the opening balance sheet.

Share-based payment
(IFRS 2)

 

   Liabilities related to share-based payments made to employees that call for settlement in cash or other assets are recognized at fair value at the initial grant date and re-measured at fair value at the end of each subsequent reporting period, as opposed to at intrinsic value under Canadian GAAP. Each instalment is accounted for as a separate arrangement.
       This difference is expected to increase other liabilities and compensation costs on transition and in subsequent reporting periods.

 

29


Key accounting area         Differences with potential impact for the Company

Provisions and
contingencies
(IAS 37)

 

   A different threshold is used for the recognition of a contingent liability that could impact the timing of when a provision may be recorded. At transition, liabilities for severance payments and contract termination penalties may be adjusted, with a corresponding effect on opening retained earnings.

Hedge accounting
(IAS 39)

 

   The criteria used under IFRS in the assessment of hedge effectiveness are generally consistent with those under Canadian GAAP, except for some differences in specific cases, including the consideration of non-performance risk in hedge effectiveness tests.
       On transition, the Company intends to continue applying hedge accounting to all of its hedging arrangements.

Intangible Assets
(IAS 38)

 

   Accumulated amortization recorded on intangible assets with indefinite useful lives prior to 2002 under Canadian GAAP shall be reversed on the retrospective application of IAS 38 which does not permit such amortization.
       On transition, the Company expects to reverse accumulated amortization on its broadcasting licences to opening retained earnings.

This is not an exhaustive list of all the significant impacts that could occur during the conversion to IFRS.

Additionally, the Company has prepared a preliminary IFRS financial statement format in accordance with IAS 1, Presentation of Financial Statements, and is in the process of analyzing the contractual implications of new policy choices on financing arrangements and similar obligations.

The effects on information technology, data systems, and internal controls have also been assessed, and the Company does not expect that significant modifications will be necessary on conversion.

At this time, the comprehensive impact of the changeover on the Company’s future financial position and results of operations is not yet determinable. Management has implemented a system to accommodate parallel recording of financial information in accordance with IFRS as at the transition date and for each of the 2010 financial periods to be presented as comparative figures in its 2011 IFRS financial statements.

The Company will monitor and assess the impact of evolving differences between Canadian GAAP and IFRS, since the IASB is expected to continue issuing new accounting standards. As a result, the final impact of IFRS on the Company’s consolidated financial statements can only be measured once all the applicable IFRS at the conversion date are known.

The Company’s IFRS conversion project is progressing according to schedule. As the project advances, the Company could alter its intentions and the milestones communicated at the time of reporting as a result of changes to international standards currently in development, or in light of new information or other external factors that could arise between now and when the changeover has been completed.

 

30


Forward looking statements

This quarterly report contains forward-looking statements with respect to our financial condition, results of operations, 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 these 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; 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:

 

Ø our ability to successfully build and deploy our new wireless services network on the timeline that we are targeting, and to implement successfully our strategy of becoming a facilities-based wireless provider;

 

Ø general economic, financial or market conditions and variations in the businesses of our local, regional or national newspapers and broadcasting advertisers;

 

Ø the intensity of competitive activity in the industries in which we operate, including competition from other communications and advertising media and platforms;

 

Ø fragmentation of the media landscape;

 

Ø unanticipated higher capital spending required to address continued development of competitive alternative technologies or the inability to obtain additional capital to continue the development of our business;

 

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

 

Ø our ability to successfully restructure our newspapers operations to optimize their efficiency in the context of the changing newspapers industry;

 

Ø disruptions to the network through which we provide our digital television, Internet access and telephony services, and our ability to protect such services from piracy;

 

Ø labour disputes or strikes;

 

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

 

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

 

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

 

Ø 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 the annual report on Form 20-F, included under the section “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 you to consult any documents we may file or furnish with the U.S. Securities and Exchange Commission, or the SEC.

 

31


QUEBECOR MEDIA INC. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 

(in millions of Canadian dollars)

(unaudited)

   Three months ended
June 30
    Six months ended
June 30
 
   2010     2009     2010     2009  

Revenues

        

Telecommunications

   $ 543.1      $ 487.4      $ 1,071.4      $ 964.9   

News Media

     271.3        275.6        519.4        528.3   

Broadcasting

     110.9        111.5        220.5        221.3   

Leisure and Entertainment

     66.0        68.2        127.3        132.3   

Interactive Technologies and Communications

     23.9        23.6        47.7        46.3   

Inter-segment

     (21.2     (19.9     (44.2     (43.4
                                
     994.0        946.4        1,942.1        1,849.7   

Operating expenses

     638.6        629.9        1,288.2        1,260.7   

Amortization

     91.3        84.5        180.3        168.4   

Financial expenses (note 2)

     64.3        57.9        130.8        112.5   

Loss (gain) on valuation and translation of financial instruments (note 3)

     4.6        (13.7     9.3        (27.9

Restructuring of operations, impairment of assets and other special items (note 4)

     1.0        0.8        3.4        4.2   

Loss on debt refinancing (note 6)

     1.9        —          12.3        —     

Impairment of goodwill and intangible assets

     —          13.6        —          13.6   
                                

Income before income taxes and non-controlling interest

     192.3        173.4        317.8        318.2   

Income taxes:

        

Current

     40.0        7.4        60.8        6.6   

Future

     14.4        30.0        16.6        67.4   
                                
     54.4        37.4        77.4        74.0   
                                
     137.9        136.0        240.4        244.2   

Non-controlling interest

     (5.4     (7.5     (6.2     (10.5
                                

Net income

   $ 132.5      $ 128.5      $ 234.2      $ 233.7   
                                

See accompanying notes to consolidated financial statements.

 

32


QUEBECOR MEDIA INC. AND ITS SUBSIDIARIES

SEGMENTED INFORMATION

 

(in millions of Canadian dollars)

(unaudited)

   Three months ended
June 30
    Six months ended
June 30
   2010    2009     2010     2009

Net income before amortization, financial expenses, loss (gain) on valuation and translation of financial instruments, restructuring of operations, impairment of assets and other special items, loss on debt refinancing, impairment of goodwill and intangible assets, income taxes and non-controlling interest

         

Telecommunications

   $ 264.0    $ 232.7      $ 515.7      $ 456.3

News Media

     59.6      55.6        99.6        85.3

Broadcasting

     26.2      25.1        33.0        37.5

Leisure and Entertainment

     4.2      4.8        4.1        5.6

Interactive Technologies and Communications

     1.3      1.3        2.3        1.7

Head Office

     0.1      (3.0     (0.8     2.6
                             
   $ 355.4    $ 316.5      $ 653.9      $ 589.0
                             

Amortization

         

Telecommunications

   $ 69.0    $ 62.1      $ 136.2      $ 124.1

News Media

     14.8      15.2        29.5        29.9

Broadcasting

     3.7      3.5        7.4        7.1

Leisure and Entertainment

     2.5      2.4        4.8        4.8

Interactive Technologies and Communications

     1.0      1.1        1.9        2.2

Head Office

     0.3      0.2        0.5        0.3
                             
   $ 91.3    $ 84.5      $ 180.3      $ 168.4
                             

Additions to property, plant and equipment

         

Telecommunications

   $ 155.3    $ 102.1      $ 283.5      $ 203.9

News Media

     1.0      6.3        3.3        16.8

Broadcasting

     4.9      3.5        8.5        8.5

Leisure and Entertainment

     1.8      0.4        2.6        1.1

Interactive Technologies and Communications

     1.1      1.4        1.6        2.2

Head Office

     0.3      0.1        0.4        0.2
                             
   $ 164.4    $ 113.8      $ 299.9      $ 232.7
                             

Additions to intangible assets

         

Telecommunications

   $ 24.8    $ 24.6      $ 48.9      $ 45.0

News Media

     3.0      0.9        5.7        2.8

Broadcasting

     2.4      2.5        2.8        2.9

Leisure and Entertainment

     2.7      1.2        4.1        2.4
                             
   $ 32.9    $ 29.2      $ 61.5      $ 53.1
                             

Externally acquired intangible assets

   $ 16.9    $ 18.5      $ 30.8      $ 30.0

Internally generated intangible assets

     16.0      10.7        30.7        23.1
                             
   $ 32.9    $ 29.2      $ 61.5      $ 53.1
                             

See accompanying notes to consolidated financial statements.

 

33


QUEBECOR MEDIA INC. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(in millions of Canadian dollars)

(unaudited)

   Three months ended
June 30
    Six months ended
June 30
 
   2010     2009     2010     2009  

Net income

   $ 132.5      $ 128.5      $ 234.2      $ 233.7   

Other comprehensive income:

        

Unrealized gain (loss) on translation of net investments in foreign operations

     0.6        (1.2     (2.9     (1.3

Gain (loss) on valuation of derivative financial instruments

     76.3        (2.6     103.1        3.8   

Income taxes related to derivative financial instruments

     (16.1     25.4        (17.5     16.5   

Reclassification to income of other comprehensive loss related to derivative financial instruments, net of income taxes of $0.5 million and $2.5 million in the three and six-month periods ended June 30, 2010, respectively (note 6)

     1.4        —          5.9        —     
                                
     62.2        21.6        88.6        19.0   
                                

Comprehensive income

   $ 194.7      $ 150.1      $ 322.8      $ 252.7   
                                

See accompanying notes to consolidated financial statements.

 

34


QUEBECOR MEDIA INC. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

(in millions of Canadian dollars)

(unaudited)

   Capital stock
(note 7)
   Contributed
surplus
    Deficit     Accumulated other
comprehensive
income (loss)

(note 8)
    Total
shareholders’
equity
 

Balance as of December 31, 2008

   $ 1,752.4    $ 3,214.5      $ (2,974.7   $ (50.2   $ 1,942.0   

Net income

     —        —          233.7        —          233.7   

Dividends

     —        —          (37.5     —          (37.5

Related party transactions

     —        8.9        —          —          8.9   

Other comprehensive income

     —        —          —          19.0        19.0   
                                       

Balance as of June 30, 2009

     1,752.4      3,223.4        (2,778.5     (31.2     2,166.1   

Net income

     —        —          291.4        —          291.4   

Dividends

     —        —          (37.5     —          (37.5

Related party transactions

     —        (0.3     —          —          (0.3

Other comprehensive income

     —        —          —          11.1        11.1   
                                       

Balance as of December 31, 2009

     1,752.4      3,223.1        (2,524.6     (20.1     2,430.8   

Net income

     —        —          234.2        —          234.2   

Dividends

     —        —          (37.5     —          (37.5

Other comprehensive income

     —        —          —          88.6        88.6   
                                       

Balance as of June 30, 2010

   $ 1,752.4    $ 3,223.1      $ (2,327.9   $ 68.5      $ 2,716.1   
                                       

See accompanying notes to consolidated financial statements.

 

35


QUEBECOR MEDIA INC. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in millions of Canadian dollars)

(unaudited)

   Three months ended
June 30
    Six months ended
June 30
 
     2010     2009     2010     2009  

Cash flows related to operating activities

        

Net income

   $ 132.5      $ 128.5      $ 234.2      $ 233.7   

Adjustments for:

        

Amortization of property, plant and equipment

     78.1        72.4        154.4        144.5   

Amortization of intangible assets and other assets

     13.2        12.1        25.9        23.9   

Loss (gain) on valuation and translation of financial instruments (note 3)

     4.6        (13.7     9.3        (27.9

Amortization of financing costs and long-term debt discount (note 2)

     3.2        2.7        6.2        4.8   

Loss on debt refinancing (note 6)

     1.9        —          12.3        —     

Impairment of property, plant and equipment and other assets (note 4)

     5.7        —          5.7        —     

Impairment of goodwill and intangible assets

     —          13.6        —          13.6   

Future income taxes

     14.4        30.0        16.6        67.4   

Non-controlling interest

     5.4        7.5        6.2        10.5   

Other

     (5.2     (3.8     (4.0     (2.0
                                
     253.8        249.3        466.8        468.5   

Net change in non-cash balances related to operations

     (29.7     (37.9     (67.8     (122.7
                                

Cash flows provided by operating activities

     224.1        211.4        399.0        345.8   
                                

Cash flows related to investing activities

        

Business acquisitions, net of cash and cash equivalents

     (0.1     (1.5     (1.1     (2.5

Business disposals, net of cash and cash equivalents

     0.8        5.0        1.8        11.4   

Additions to property, plant and equipment

     (164.4     (113.8     (299.9     (232.7

Additions to intangible assets

     (32.9     (29.2     (61.5     (53.1

Proceeds from disposals of assets

     45.9        0.5        47.3        1.0   

Net change in temporary investments

     —          —          30.0        —     

Other

     —          (0.1     —          —     
                                

Cash flows used in investing activities

     (150.7     (139.1     (283.4     (275.9
                                

Cash flows related to financing activities

        

Net change in bank indebtedness

     2.6        (12.0     1.9        8.2   

Issuance of long-term debt, net of financing fees (note 6)

     (1.2     —          292.7        325.5   

Net change under revolving bank facilities

     (8.5     (14.4     2.6        (231.9

Repayments of long-term debt (note 6)

     (131.5     (9.9     (319.9     (23.9

Settlement of hedging contracts (note 6)

     (1.5     —          (32.4     —     

Dividends

     (18.7     (18.7     (37.5     (37.5

Dividends paid to non-controlling shareholders

     (1.2     (0.7     (1.2     (1.3

Other

     —          (0.5     —          (0.2
                                

Cash flows (used in) provided by financing activities

     (160.0     (56.2     (93.8     38.9   
                                

Net change in cash and cash equivalents

     (86.6 )     16.1        21.8        108.8   

Effect of exchange rate changes on cash and cash equivalents denominated in foreign currencies

     (0.3     (0.3     (1.0     (0.4

Cash and cash equivalents at beginning of period

     407.7        115.1        300.0        22.5   
                                

Cash and cash equivalents at end of period

   $ 320.8      $ 130.9      $ 320.8      $ 130.9   
                                

Cash and cash equivalents consist of

        

Cash

   $ 65.2      $ 38.2      $ 65.2      $ 38.2   

Cash equivalents

     255.6        92.7        255.6        92.7   
                                
   $ 320.8      $ 130.9      $ 320.8      $ 130.9   
                                

Non-cash investing activities

        

Additions to property, plant and equipment and intangible assets financed with accounts payable

   $ 25.3      $ 7.1      $ 115.3      $ 53.3   
                                

Cash interest payments

   $ 113.2      $ 103.9      $ 144.1      $ 141.9   

Cash income tax payments (net of refunds)

     9.5        3.7        27.2        8.8   
                                

See accompanying notes to consolidated financial statements.

 

36


QUEBECOR MEDIA INC. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

(in millions of Canadian dollars)

(unaudited)

   June 30,
2010
    December 31,
2009
 

Assets

    

Current assets

    

Cash and cash equivalents

   $ 320.8      $ 300.0   

Temporary investments

     —          30.0   

Accounts receivable

     475.8        518.6   

Income taxes

     4.7        1.3   

Amounts receivable from parent company

     3.6        8.2   

Inventories

     172.9        176.1   

Prepaid expenses

     47.5        28.7   

Future income taxes

     42.6        47.9   
                
     1,067.9        1,110.8   

Property, plant and equipment

     2,553.1        2,439.8   

Intangible assets

     1,084.4        1,052.7   

Derivative financial instruments

     99.0        49.0   

Other assets

     137.0        122.1   

Future income taxes

     14.1        12.5   

Goodwill

     3,505.4        3,506.1   
                
   $ 8,460.9      $ 8,293.0   
                

Liabilities and shareholders’ equity

    

Current liabilities

    

Bank indebtedness

   $ 2.9      $ 1.0   

Accounts payable and accrued charges

     673.6        792.2   

Deferred revenue

     241.1        234.7   

Income taxes

     47.2        16.3   

Current portion of long-term debt (note 6)

     61.4        67.8   
                
     1,026.2        1,112.0   

Long-term debt (note 6)

     3,701.1        3,693.4   

Derivative financial instruments

     328.4        422.4   

Other liabilities

     118.1        104.8   

Future income taxes

     449.8        413.4   

Non-controlling interest

     121.2        116.2   

Shareholders’ equity

    

Capital stock (note 7)

     1,752.4        1,752.4   

Contributed surplus

     3,223.1        3,223.1   

Deficit

     (2,327.9     (2,524.6

Accumulated other comprehensive income (loss) (note 8)

     68.5        (20.1
                
     2,716.1        2,430.8   
                
   $ 8,460.9      $ 8,293.0   
                

See accompanying notes to consolidated financial statements.

 

37


QUEBECOR MEDIA INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the three-month and six-month periods ended June 30, 2010

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

(unaudited)

Quebecor Media Inc. (“Quebecor Media” or the “Company”) operates in the following industry segments: Telecommunications, News Media, Broadcasting, Leisure and Entertainment, and Interactive Technologies and Communications. The Telecommunications segment offers television distribution, Internet, business solutions, telephony and wireless services in Canada and operates in the rental of movies or televisual products through its video on demand service or its distribution and rental stores. The News Media segment produces original content in Canada for all of Quebecor Media’s platforms. Its operations includes the printing, publishing and distribution of daily newspapers, weekly newspapers and directories in Canada and the operation of Internet sites in Canada, including French- and English-language portals and specialized sites. The Broadcasting segment operates general-interest television networks, specialized television networks, magazine publishing and movie distribution businesses in Canada. The Leisure and Entertainment segment combines book publishing and distribution, retail sales of CDs, books, DVD units, musical instruments and magazines in Canada, online sales of downloadable music and music production and distribution in Canada. The Interactive Technologies and Communications segment offers e-commerce solutions through a combination of strategies, technology integration, IP solutions and creativity on the Internet and is active in Canada, the United States, Europe and Asia.

 

1. BASIS OF PRESENTATION

These consolidated financial statements have been prepared in accordance with Canadian Generally Accepted Accounting Principles (“GAAP”). The same accounting policies have been used as described in the Company’s latest annual consolidated financial statements. However, these consolidated financial statements do not include all disclosures required under Canadian GAAP for annual consolidated financial statements and accordingly should be read in conjunction with the Company’s latest annual consolidated financial statements and the notes thereto. In the opinion of management, these consolidated financial statements contain all the adjustments considered necessary.

Some of the Company’s businesses experience significant seasonality due, among other factors, to seasonal advertising patterns and influences on people’s viewing, reading and listening habits. Because the Company depends on the sale of advertising for a significant portion of its revenue, operating results are also sensitive to prevailing economic conditions, including changes in local, regional and national economic conditions, particularly as they may affect advertising expenditures. In addition, in some of the Company’s segments, a component of sales is based on one-time retail transactions rather than subscriptions or long-term agreements, and therefore is influenced by vulnerability to seasonal weather changes. Accordingly, the results of operations for interim periods should not necessarily be considered indicative of full-year results due to the seasonality of certain operations.

Certain comparative figures for previous periods have been reclassified to conform to the presentation adopted for the three-month and six-month periods ended June 30, 2010.

 

38


QUEBECOR MEDIA INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three-month and six-month periods ended June 30, 2010

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

(unaudited)

 

2. FINANCIAL EXPENSES

 

     Three months ended
June 30
    Six months ended
June 30
 
     2010     2009     2010     2009  

Interest on long-term debt

   $ 70.0      $ 68.2      $ 141.2      $ 136.2   

Amortization of financing costs and long-term debt discount

     3.2        2.7        6.2        4.8   

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

     2.8        (3.5     5.7        (8.4

Other

     (0.1     0.3        (0.3     0.4   
                                
     75.9        67.7        152.8        133.0   

Interest capitalized to the cost of:

        

Property, plant and equipment

     (2.9     (1.6     (4.9     (4.3

Intangible assets

     (8.7     (8.2     (17.1     (16.2
                                
   $ 64.3      $ 57.9      $ 130.8      $ 112.5   
                                

 

3. LOSS (GAIN) ON VALUATION AND TRANSLATION OF FINANCIAL INSTRUMENTS

 

     Three months ended
June 30
    Six months ended
June 30
 
     2010    2009     2010     2009  

Loss (gain) on embedded derivatives and derivative financial instruments for which hedge accounting is not used

   $ 3.0    $ 9.1      $ 8.4      $ (2.4

Loss (gain) on foreign currency translation of financial instruments for which hedge accounting is not used

     1.4      (12.8     (2.2     (8.5

Loss (gain) on the ineffective portion of fair value hedges

     0.2      (10.0     3.1        (17.0
                               
   $ 4.6    $ (13.7   $ 9.3      $ (27.9
                               

 

39


QUEBECOR MEDIA INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three-month and six-month periods ended June 30, 2010

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

(unaudited)

 

4. RESTRUCTURING OF OPERATIONS, IMPAIRMENT OF ASSETS AND OTHER SPECIAL ITEMS

News Media

During the respective three-month and six-month periods ended June 30, 2010, restructuring costs of $0.7 million and $3.1 million were recorded for new restructuring initiatives in the News Media segment (none for the three-month period ended June 30, 2009 and $2.7 million for the six-month period ended June 30, 2009). The amounts primarily relate to severances for the elimination of positions at several publications.

Continuity of restructuring costs payable:

 

Balance as of December 31, 2009

   $ 32.0   

Workforce-reduction initiatives

     3.1   

Payments

     (8.8
        

Balance as of June 30, 2010

   $ 26.3   
        

As part of the restructuring initiatives, certain assets were also sold in the second quarter of 2010, resulting in a net gain of $2.5 million.

Broadcasting

In the second quarter of 2010, the Company announced the creation of The Sun TV News Channel (“Sun TV News”), a new partnership in which TVA Group Inc. (“TVA Group”) holds a 51% interest and Sun Media Corporation a 49% interest. This new partnership will launch an English-language news and opinion specialty channel in the first quarter of 2011. The Company also decided to terminate the operations of its general-interest television station, Sun TV, as soon as the new specialty channel is on the air. As a result of this repositioning, the Broadcasting segment recorded an impairment charge of $5.7 million on certain equipment and broadcasting rights.

Other segments

During the three-month and six-month periods ended June 30, 2010, restructuring and other special items included a net gain of $2.9 million primarily related to the sale of assets (expenses of $0.8 million and $1.5 million were recorded for the same respective periods in 2009).

 

5. PENSION PLANS AND POSTRETIREMENT BENEFITS

The Company maintains defined benefit plans and contribution benefit plans for its employees. The total costs were as follows:

 

     Three months ended
June 30
   Six months ended
June 30
     2010    2009    2010    2009

Defined benefit plans

   $ 5.8    $ 3.9    $ 12.1    $ 8.8

Defined contribution plans

     2.7      2.3      5.7      5.0
                           
   $ 8.5    $ 6.2    $ 17.8    $ 13.8
                           

 

40


QUEBECOR MEDIA INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three-month and six-month periods ended June 30, 2010

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

(unaudited)

 

6. LONG-TERM DEBT

On January 13, 2010, Videotron Ltd. (“Videotron”) issued $300.0 million in aggregate principal amount of Senior Notes for net proceeds of $293.9 million, net of financing fees of $6.1 million. The Senior Notes bear interest at 7.125%, payable every six months on June 15 and December 15, and will mature on January 15, 2020. These notes contain certain restrictions on Videotron, including limitations on its ability to incur additional indebtedness, pay dividends or make other distributions and are unsecured. These Senior Notes are guaranteed by specific subsidiaries of Videotron. These notes are redeemable at the option of Videotron, in whole or in part, at any time prior to January 15, 2015 at a price based on a make-whole formula and at a decreasing premium from January 15, 2015 and thereon.

On January 14, 2010, the Company prepaid drawings under its term loan “B” credit facility in an aggregate amount of US$170.0 million and settled a corresponding portion of its hedging contracts for an amount of $30.9 million, representing a total cash consideration of $206.7 million. This transaction resulted in a total loss of $10.4 million (before income taxes), including a loss of $6.5 million previously reported in accumulated other comprehensive loss.

On January 14, 2010, the Company also extended the maturity date of its $100.0 million revolving credit facility from January 2011 to January 2013 and obtained certain other favourable amendments to the covenants contained in its credit facilities.

In May 2010, Osprey Media Publishing Inc. (“Osprey Media”) paid the $114.8 million balance on its term credit facility and settled the related hedging contracts for $1.5 million, representing a total cash consideration of $116.3 million, resulting in a reclassification to income of a $1.9 million loss (before income taxes), previously reported in accumulated other comprehensive loss. On June 30, 2010, Osprey Media’s credit facilities were terminated.

Components of the long-term debt are as follows:

 

     June 30,
2010
    December 31,
2009
 

Long-term debt

   $ 3,786.8      $ 3,805.5   

Change in fair value related to hedged interest rate risks

     33.7        16.8   

Adjustment related to embedded derivatives

     (11.1     (17.1

Financing fees, net of amortization

     (46.9     (44.0
                
     3,762.5        3,761.2   

Less current portion

     61.4        67.8   
                
   $ 3,701.1      $ 3,693.4   
                

 

41


QUEBECOR MEDIA INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three-month and six-month periods ended June 30, 2010

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

(unaudited)

 

7. CAPITAL STOCK

 

  (a) Authorized capital stock:

An unlimited number of Common Shares, without par value;

An unlimited number of non-voting Cumulative First Preferred Shares, without par value; the number of preferred shares in each series and the related characteristics, rights and privileges are to be determined by the Board of Directors prior to each issue:

 

   

An unlimited number of Cumulative First Preferred Shares, Series A (“Preferred A Shares”), carrying a 12.5% annual fixed cumulative preferential dividend, redeemable at the option of the holder and retractable at the option of the Company;

 

   

An unlimited number of Cumulative First Preferred Shares, Series B (“Preferred B Shares”), carrying a fixed cumulative preferential dividend generally equivalent to the Company’s credit facility interest rate, redeemable at the option of the holder and retractable at the option of the Company;

 

   

An unlimited number of Cumulative First Preferred Shares, Series C (“Preferred C Shares”), carrying an 11.25% annual fixed cumulative preferential dividend, redeemable at the option of the holder and retractable at the option of the Company;

 

   

An unlimited number of Cumulative First Preferred Shares, Series D (“Preferred D Shares”), carrying an 11.00% annual fixed cumulative preferential dividend, redeemable at the option of the holder and retractable at the option of the Company;

 

   

An unlimited number of Cumulative First Preferred Shares, Series F (“Preferred F Shares”), carrying a 10.85% annual fixed cumulative preferential dividend, redeemable at the option of the holder and retractable at the option of the Company;

 

   

An unlimited number of Cumulative First Preferred Shares, Series G (“Preferred G Shares”), carrying a 10.85% annual fixed cumulative preferential dividend, redeemable at the option of the holder and retractable at the option of the Company;

An unlimited number of non-voting Preferred Shares, Series E (“Preferred E Shares”), carrying a non-cumulative dividend subsequent to the holders of Cumulative First Preferred Shares, redeemable at the option of the holder and retractable at the option of the Company.

 

  (b) Issued and outstanding capital stock

 

     Common Shares
     Number    Amount

Balance as of December 31, 2009 and June 30, 2010

   123,602,807    $ 1,752.4
           

 

42


QUEBECOR MEDIA INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three-month and six-month periods ended June 30, 2010

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

(unaudited)

 

7. CAPITAL STOCK—(Continued)

 

  (c) Stock-based compensation

The following table provides details of changes to outstanding options in the main stock-based compensation plans of the Company and its subsidiaries for the six-month period ended June 30, 2010:

 

           Outstanding
options
     Number     Weighted average
exercise price

Quebecor

    

As of December 31, 2009:

   463,160      $ 22.42

Granted

   39,221        34.72
            

As of June 30, 2010

   502,381      $ 23.38
            

Vested options as of June 30, 2010

   154,387      $ 22.42
            

Quebecor Media

    

As of December 31, 2009:

   3,326,069      $ 40.96

Granted

   1,096,500        46.50

Exercised

   (145,094     37.20

Cancelled

   (276,289     43.48
            

As of June 30, 2010

   4,001,186      $ 42.44
            

Vested options as of June 30, 2010

   582,470      $ 38.08
            

TVA Group

    

As of December 31, 2009:

   975,155      $ 16.16

Cancelled

   (105,386     15.14
            

As of June 30, 2010

   869,769      $ 16.28
            

Vested options as of June 30, 2010

   433,467      $ 17.71
            

In the second quarter of 2010, the Company finalized implementation of a new mid-term stock-based compensation plan for management. Under this new plan, at the end of a three-year period, participants will be entitled to receive a cash payment based on the appreciation of the Quebecor Class B share price, subject to the achievement of certain non-market performance criteria.

In the three-month period ended June 30, 2010 a net reversal of the consolidated compensation charge related to all stock-based compensation plans was recorded in the amount of $0.9 million (a net charge of $0.5 million in 2009), while a net consolidated compensation charge was recorded in the amount of $9.0 million in the six-month period ended June 30, 2010 (a net reversal of $0.3 million in 2009).

During the three-month period ended June 30, 2010, 49,159 stock options were exercised for a cash consideration of $0.5 million (none in 2009). During the six-month period ended June 30, 2010, 145,094 stock options were exercised for a cash consideration of $1.5 million (174,840 stock options for $2.2 million in 2009).

 

43


QUEBECOR MEDIA INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three-month and six-month periods ended June 30, 2010

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

(unaudited)

 

8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

     Translation of net
investments in
foreign operations
    Cash flow
hedges
    Total  

Balance as of December 31, 2008

   $ 1.9      $ (52.1   $ (50.2

Other comprehensive (loss) income

     (1.3     20.3        19.0   
                        

Balance as of June 30, 2009

     0.6        (31.8     (31.2

Other comprehensive (loss) income

     (2.0     13.1        11.1   
                        

Balance as of December 31, 2009

     (1.4     (18.7     (20.1

Other comprehensive (loss) income

     (2.9     91.5        88.6   
                        

Balance as of June 30, 2010

   $ (4.3   $ 72.8      $ 68.5   
                        

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 an 8-year period.

 

9. SIGNIFICANT DIFFERENCES BETWEEN GAAP IN CANADA AND IN THE UNITED STATES

The Company’s consolidated financial statements are prepared in accordance with Canadian GAAP, which differ in some respects from those applicable in the United States (“U.S. GAAP”). The following tables set forth the impact of the material differences between Canadian and U.S. GAAP on the Company’s consolidated financial statements of income, comprehensive income and balance sheets.

 

  (a) Consolidated statements of income

 

     Three months ended
June 30
    Six months ended
June 30
 
     2010     2009     2010     2009  

Net income as per Canadian GAAP

   $ 132.5      $ 128.5      $ 234.2      $ 233.7   

Non-controlling interest as per Canadian GAAP (viii)

     5.4        7.5        6.2        10.5   

Adjustments:

        

Pension and postretirement benefits (i)

     0.7        —          1.4        0.1   

Derivative financial instruments (ii)

     15.9        (9.3     11.7        (9.5

Stock-based compensation (iii)

     2.3        (2.2     1.2        (7.4

Rental costs (iv)

     (2.8     —          (4.5     —     

Income taxes (v)

     (1.3     (5.1     (3.4     (1.1
                                
     14.8        (16.6     6.4        (17.9
                                

Net income as adjusted per U.S. GAAP

   $ 152.7      $ 119.4      $ 246.8      $ 226.3   
                                

Attributable to (viii):

        

Equity shareholders

   $ 146.5      $ 111.9      $ 240.2      $ 213.6   

Non-controlling interest

     6.2        7.5        6.6        12.7   
                                

 

44


QUEBECOR MEDIA INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three-month and six-month periods ended June 30, 2010

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

(unaudited)

 

9. SIGNIFICANT DIFFERENCES BETWEEN GAAP IN CANADA AND IN THE UNITED STATES—(Continued)

 

  (b) Consolidated statements of comprehensive income

 

     Three months ended
June 30
    Six months ended
June 30
 
     2010     2009     2010     2009  

Comprehensive income as per Canadian GAAP

   $ 194.7      $ 150.1      $ 322.8      $ 252.7   

Non-controlling interest as per Canadian GAAP (viii)

     5.4        7.5        6.2        10.5   

Other adjustments to net income as per (a) above

     14.8        (16.6     6.4        (17.9

Adjustments:

        

Pension and postretirement benefits (i)

     0.7        0.1        1.5        0.2   

Derivative financial instruments (ii)

     (8.1     3.5        (5.2     (1.7

Income taxes (v)

     (0.8     2.1        (0.9     2.8   
                                
     (8.2     5.7        (4.6     1.3   
                                

Comprehensive income as per U.S. GAAP

   $ 206.7      $ 146.7      $ 330.8      $ 246.6   
                                

Attributable to (viii):

        

Equity shareholders

   $ 200.4      $ 139.0      $ 323.9      $ 233.6   

Non-controlling interest

     6.3        7.7        6.9        13.0   
                                

 

45


QUEBECOR MEDIA INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three-month and six-month periods ended June 30, 2010

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

(unaudited)

 

9. SIGNIFICANT DIFFERENCES BETWEEN GAAP IN CANADA AND IN THE UNITED STATES—(Continued)

 

  (c) Consolidated balance sheets

 

     June 30, 2010     December 31, 2009  
     Canada     United States     Canada     United States  

Current assets

   $ 1,067.9      $ 1,067.9      $ 1,110.8      $ 1,111.1   

Property, plant and equipment

     2,553.1        2,546.8        2,439.8        2,438.0   

Other assets

     137.0        80.6        122.1        59.2   

Long-term future income tax assets

     14.1        17.5        12.5        15.2   

Current liabilities

     (1,026.2     (1,029.2     (1,112.0     (1,124.8

Long-term debt

     (3,701.1     (3,716.0     (3,693.4     (3,714.8

Other liabilities

     (118.1     (148.4     (104.8     (131.1

Long-term future income tax liabilities

     (449.8     (413.4     (413.4     (364.1

Contributed surplus (vi), (vii)

     (3,223.1     (3,423.6     (3,223.1     (3,423.6

Deficit

     2,327.9        2,556.3        2,524.6        2,759.0   

Accumulated other comprehensive (income) loss

     (68.5     (30.1     20.1        53.6   

Non-controlling interest

     (121.2     (116.4     (116.2     (110.7

The accumulated other comprehensive income (loss) as of June 30, 2010 and December 31, 2009 is as follows:

 

     June 30,
2010
    December 31,
2009
 

Accumulated other comprehensive income (loss) as per Canadian GAAP

   $ 68.5      $ (20.1

Adjustments:

    

Pension and postretirement benefits (i)

     (76.7     (78.2

Derivative financial instruments (ii)

     4.0        9.2   

Income taxes (v)

     23.2        24.1   

Non-controlling interest

     11.1        11.4   
                
     (38.4     (33.5
                

Accumulated other comprehensive income (loss) as per U.S. GAAP

   $ 30.1      $ (53.6
                

 

46


QUEBECOR MEDIA INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three-month and six-month periods ended June 30, 2010

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

(unaudited)

 

9. SIGNIFICANT DIFFERENCES BETWEEN GAAP IN CANADA AND IN THE UNITED STATES—(Continued)

 

  (i) Under U.S. GAAP, Codification Topic 715, Compensation – Retirement Benefits, requires the recognition of over- or under-funded positions of defined benefit pension and other postretirement plans on the balance sheet, along with a corresponding non-cash adjustment to be recorded in accumulated other comprehensive income (loss).

Under Canadian GAAP, a company is not required to recognize over- or under-funded positions. However, when a defined benefit plan gives rise to an accrued benefit asset, a company must recognize a valuation allowance for the excess of the adjusted benefit asset over the expected future benefit to be realized from plan assets. U.S. GAAP does not provide for a valuation allowance against pension assets.

 

  (ii) Since January 1, 2007, standards for hedge accounting under Canadian GAAP are similar to those under U.S. GAAP, as established by Codification Topic 815, Derivatives and Hedging.

However, under Canadian GAAP, certain embedded derivatives, such as the early settlement options included in some of the Company’s borrowing agreements, do not meet the criteria to be considered closely related to their host contracts and therefore must be recorded at their fair value with changes in income. Under U.S. GAAP, those embedded derivatives are considered closely related to their host contract and do not have to be recorded separately at their fair values. Accordingly, the measurement of ineffective hedging relationships recorded in income under U.S. GAAP differs from the measurement under Canadian GAAP.

 

  (iii) Under U.S. GAAP, in accordance with Codification Topic 718, Compensation – Stock Compensation, the liability related to stock-based awards that call for settlement in cash or other assets must be measured at its fair value based on the fair value of stock option awards and is to be re-measured at the end of each reporting period. Under Canadian GAAP, the liability is measured and re-measured based on the intrinsic values of the stock option awards instead of at their fair values.

 

  (iv) Under U.S. GAAP, Codification Topic 840, Leases, requires that rental costs relating to an operating lease be expensed as incurred during the construction period of an asset. Under Canadian GAAP, such rent expenses can be capitalized to the cost of an item of property, plant and equipment being constructed until this items is substantially complete and ready for productive use.

 

  (v) Under Canadian GAAP, income taxes are measured using substantively enacted tax rates, while under U.S. GAAP, measurement is based on enacted tax rates.

Furthermore, under U.S. GAAP, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), an interpretation of Codification Topic 740, Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Codification Topic 740 and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance as to derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Under Canadian GAAP, there is no such interpretation and therefore the reserve related to income tax contingencies is not based on the same level of likelihood as that prescribed by FIN 48.

Other adjustments represent the tax impact of U.S. GAAP adjustments.

 

  (vi) Under Canadian GAAP, a gain on repurchase of redeemable preferred shares of a subsidiary was included in income in 2003. Under U.S. GAAP, any such gain is included in contributed surplus.

 

47


QUEBECOR MEDIA INC. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the three-month and six-month periods ended June 30, 2010

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

(unaudited)

 

9. SIGNIFICANT DIFFERENCES BETWEEN GAAP IN CANADA AND IN THE UNITED STATES—(Continued)

 

  (vii) The Company or its subsidiaries have entered into tax consolidation transactions with the Company’s parent company, through which tax losses were transferred between the parties. Under Canadian GAAP, this resulted in the recognition of deferred credits. Under U.S. GAAP, since these transactions relate to asset transfers between related parties, the difference between the carrying value of the tax benefits transferred and the cash consideration received or paid is recognized in contributed surplus.

 

  (viii) The new provisions of Codification Topic 805, Business Combinations, adopted in 2009, apply prospectively to business combinations for which the acquisition date is on or after December 31, 2008. Codification Topic 805 establishes guidance on the recognition and measurement of all assets and all liabilities of the acquired business at fair value. Non-controlling interests are measured at either their fair value or at their proportionate share of the fair value of identifiable assets and liabilities. The measurement of consideration given now includes the fair value of any contingent consideration as of the acquisition date, and subsequent changes in fair value of the contingent consideration classified as a liability are recognized in earnings. Acquisition-related costs are excluded from the purchase price and are expensed as incurred. In addition, restructuring costs related to a business combination are no longer part of the purchase price equation and are expensed as incurred. The adoption of these provisions has not yet created a material difference between Canadian and U.S. GAAP.

The rules under Codification Topic 810, Consolidation, also adopted in 2009, establish guidance on accounting for non-controlling interests and for transactions with non-controlling interest. Codification Topic 810 requires that non-controlling interest be presented as a separate component of shareholders’ equity. In the statement of income, net income is calculated before non-controlling interest and is then attributed to shareholders and non-controlling interest. In addition, changes in the Company’s ownership interest in a subsidiary that do not result in a loss of control are now accounted for as equity transactions.

 

48


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.

 

QUEBECOR MEDIA INC.
By:   /S/    JEAN-FRANÇOIS PRUNEAU         
 

Jean-François Pruneau

Vice President, Finance

Date: August 12, 2010