3. Liquidity and capital resources /
This section examines the Company’s capital structure, sources of liquidity and various financial instruments including its debt instruments.
|As at December 31, 2014||As at December 31, 2013|
|Cash and cash equivalents||$102,776||$202,287|
|Senior Secured Notes||$507,014||$646,577|
|Obligations under finance leases||897||891|
|Net debt, net of cash and cash equivalents 1||$494,094||$533,115|
|Equity attributable to shareholders||684,180||544,495|
|Net debt to total capitalization||41.9%||49.5%|
As at December 31, 2014, Yellow Pages had $494.1 million of net debt, compared to $533.1 million as at December 31, 2013.
The net debt to Latest Twelve Month EBITDA1,2 ratio as at December 31, 2014 was 1.6 times compared to 1.3 times as at December 31, 2013. The increase is due to lower EBITDA.
In August 2013, the Company, through its subsidiary Yellow Pages Digital & Media Solutions Limited, entered into a five-year $50 million asset-based loan (ABL) expiring in August 2018. The ABL is used for general corporate purposes. Through the ABL, the Company has access to the funds in the form of prime rate loans, Banker’s acceptance (BA) equivalent loans or letters of credit. The ABL is secured by a first priority lien over the receivables of the Company. The ABL is subject to an availability reserve of $5 million if the Company’s trailing twelve-month fixed charge coverage ratio is below 1.1 times. As at December 31, 2014, the fixed charge coverage ratio was below 1.1 times and the Company had $4.2 million of letters of credit issued and outstanding. As such, $40.8 million of the ABL was available as at December 31, 2014. Interest is calculated based either on the BA Rate or the Canadian Prime Rate plus an applicable margin.
As at December 31, 2014, the Company was in compliance with all covenants under the loan agreement governing the ABL.
Senior Secured Notes
On December 20, 2012, the Company, through its subsidiary Yellow Pages Digital & Media Solutions Limited, issued $800 million of 9.25% senior secured notes (the Senior Secured Notes) maturing November 30, 2018. Interest on the Senior Secured Notes is payable in cash, quarterly in arrears, in equal instalments on the last day of February, May, August and November of each year.
To date, the Company repaid $293 million of its Senior Secured Notes, of which $153.4 million was repaid in 2013 and $139.6 million in 2014.
As at December 31, 2014, the Company was in compliance with all covenants under the indenture governing the Senior Secured Notes.
Pursuant to the indenture governing the Senior Secured Notes, the Company is required to use an amount equal to 75% of its consolidated Excess Cash Flow for the immediately preceding six-month period ending March 31 or September 30, as applicable, to redeem on a semi-annual basis on the last day of May and November of each year, commencing on May 31, 2013, the Senior Secured Notes at a redemption price equal to 100% of the principal amount thereof from holders on a pro rata basis, subject to the Company maintaining a minimum cash balance of $75 million immediately following the mandatory redemption payment. The $75 million minimum cash balance condition is subject to a reduction in certain cases provided in the indenture governing the Senior Secured Notes. Excess Cash Flow, as defined in the indenture governing the Senior Secured Notes, means the aggregate cash flow from operating activities adjusted for, among other things, payments relating to interest, taxes, long-term employee compensation plans, certain pension plan contribution payments and the acquisition of property, plant and equipment and intangible assets. For purposes of determining the consolidated Excess Cash Flow, deductions for capital expenditures and information systems/ information technology expenses are each subject to an annual deduction limit of $50 million. Under other circumstances, the Company may also have to make additional repayments on the Senior Secured Notes (refer to the indenture governing the Senior Secured Notes).
The Company was required to make minimum annual aggregate mandatory redemption payments of $75 million in 2014. In 2015, the minimum annual aggregate mandatory redemption payments was set at $50 million, or if the redemption payments made in 2014 exceeded $75 million, $50 million less such excess redemption payments. The Company made mandatory redemption payments of $139.6 million in 2014 (2013 - $118.4 million), thereby exceeding the $75 million minimum aggregate mandatory redemption payment for 2014 by $64.6 million. As such, the Company completed its minimum aggregate mandatory redemption payments for 2014 and 2015 combined. The Company is also required to use an amount equal to 75% of its consolidated Excess Cash Flow to redeem on a semi-annual basis the Senior Secured Notes.
The Company may redeem all or part of the Senior Secured Notes at its option, upon not less than 30 nor more than 60 days prior notice, at a redemption price equal to:
- In the case of a redemption occurring prior to May 31, 2017, 105% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date; or
- In the case of a redemption occurring on or after May 31, 2017, 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date.
During the year ended December 31, 2013, the Company purchased on the open market $8 million of Senior Secured Notes for a total cash consideration of $8.3 million and exercised its option to redeem $27 million of Senior Secured Notes for a total cash consideration of $28.4 million. A loss of $1.7 million was recorded in net earnings in financial charges.
On December 20, 2012, the Company, through its subsidiary Yellow Pages Digital & Media Solutions Limited, issued $107.5 million of senior subordinated exchangeable debentures (Exchangeable Debentures) due November 30, 2022.
Interest on the Exchangeable Debentures accrues at a rate of 8% per annum if, for the applicable interest period, it is paid in cash or 12% per annum, for the applicable interest period, if the Company makes a Payment in Kind (PIK) election to pay interest in respect of all or any part of the then outstanding Exchangeable Debentures in additional Exchangeable Debentures. Interest on the Exchangeable Debentures is payable semi-annually in arrears in equal instalments on the last day of May and November of each year.
As at December 31, 2014, the Company was in compliance with all covenants under the indenture governing the Exchangeable Debentures.
The Exchangeable Debentures are exchangeable at the holder’s option into common shares at any time at an exchange price per common share equal to $19.04, subject to adjustment for specified transactions.
During the year ended December 31, 2014, $0.4 million of Exchangeable Debentures at face value were exchanged for 21,584 common shares of Yellow Pages Limited with a fair value of $0.5 million (2013 –nil).
The Company may, at any time on or after the date on which all of the Senior Secured Notes have been repaid in full, redeem all or part of the Exchangeable Debentures at its option, upon not less than 30 nor more than 60 days’ prior notice, at a redemption price equal to:
- In the case of a redemption occurring prior to May 31, 2021, 110% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date; or
- In the case of a redemption occurring on or after May 31, 2021, 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date.
|DBRS Limited||Standard and Poor's Rating Services|
|B (low)/Issuer rating – positive trend||B/Corporate credit rating – stable outlook|
|B (low)/Credit rating for Senior Secured Notes||BB-/Credit rating for Senior Secured Notes|
|CCC/Credit rating for Exchangeable Debentures||CCC+/Credit rating for Exchangeable Debentures|
On November 21, 2014, Standard & Poor’s Rating Services raised the rating on our Senior Secured Notes from B+ to BB-. On August 29, 2014, DBRS Limited raised the rating on our Senior Secured Notes from CCC (high) to B (low). All other ratings remained unchanged.
The Company’s principal source of liquidity is cash generated from operations and cash on hand. The Company expects to generate sufficient liquidity to fund capital expenditures, working capital requirements and current obligations, including the mandatory repayments on the Senior Secured Notes. As at February 11, 2015, the Company had approximately $114.6 million of cash and cash equivalents and $40.8 million available under the ABL.
As at February 12, 2015, outstanding share data was as follows:
Outstanding Share Data
|1As at February 12, 2015, Yellow Pages had $107.1 million principal amount of Exchangeable Debentures outstanding, which amount is exchangeable into 5,624,422 common shares of Yellow Pages Limited at an exchange price of $19.04, subject to adjustment for specified transactions pursuant to the indenture governing the Exchangeable Debentures.|
|As at February 13, 2015||As at December 31, 2014||As at December 31, 2013|
|Exchangeable Debentures outstanding1||27,976,661||27,976,661||27,955,077|
|Common shares outstanding||5,624,422||5,624,422||5,646,008|
On December 20, 2012, as part of the implementation of Yellow Pages’ recapitalization transaction, a new stock option plan (the Stock Option Plan) was adopted. The Stock Option Plan is intended to attract and retain the services of selected employees (the Participants) of Yellow Pages who are in a position to make a material contribution to the successful operation of the business, provide meaningful incentive to management to lead Yellow Pages through the transition and transformation of its business and to more closely align the interests of management with those of the shareholders of Yellow Pages Limited. A maximum of 1,290,612 options may be granted under the Stock Option Plan.
On May 6, 2013, 376,000 options were granted to the Participants. The options have an exercise price of $10.12 and vest 50% in February 2015, 25% in February 2016 and 25% in February 2017.
On February 25, 2014, 183,200 options were granted to the Participants. The options have an exercise price of $24.65 and vest 50% in February 2016, 25% in February 2017 and 25% in February 2018.
During the second quarter of 2014, a total of 12,600 options was granted to certain Participants. The options have a weighted average exercise price of $19.89 and vest 50% in February 2016, 25% in February 2017 and 25% in February 2018. During the year ended December 31, 2014, 91,600 options were forfeited with a weighted average exercise price per option of $14.42. These options were expected to vest between February 2015 and February 2018.
The options expire seven years after the grant date and Participants are required to hold 25% of the common shares received pursuant to the exercise of the options until the Participants meet the ownership guidelines which apply to their respective levels.
Contractual Obligations and Other Commitments
|22 The repayment of the Senior Secured Notes may vary subject to the Excess Cash Flow under the indenture governing the Senior Secured Notes.|
|Payments due for the years following December 31, 2014|
|Total||1 year||2 – 3 years||4 – 5 years||After 5 years|
|Obligations under finance leases1||$897||$357||$342||$198||$–|
|Total contractual obligations||$858,491||$173,346||$59,392||$422,680||$203,073|
Obligations under finance leases
We enter into finance lease agreements for office equipment and software. As at December 31, 2014, minimum payments under these finance leases up to 2019 totalled $0.9 million.
We rent our premises and office equipment under various operating leases. As at December 31, 2014, minimum payments under these operating leases up to 2034 totalled $166.4 million.
We use the services of outside suppliers to distribute and print our directories and have entered into long-term agreements with a number of these suppliers. These agreements expire between 2015 and 2038. We also have purchase obligations under service contracts for both operating and capital expenditures. As at December 31, 2014, we have an obligation to purchase services for $76.8 million over the next five years and thereafter. Cash from operations will be used to fund these purchase obligations.
YP sponsors a pension plan registered with the Canada Revenue Agency and the Financial Services Commission of Ontario with defined benefit (DB) for employees hired prior to January 1, 2006, and defined contribution (DC) components for the non-Québec based employees hired on or after January 1, 2006 (the YP Pension Plan) as well as a DC plan registered with the Régie des Rentes du Québec (the YP Québec Plan), for the Québec based employees hired on or after January 1, 2006. Both plans together cover substantially all employees of the Company.
As at December 31, 2014, the DB component of the YP Pension Plan’s assets totalled $473.6 million and were invested in a diversified portfolio of Canadian fixed income securities and Canadian and international equity securities. Its rate of return on assets was 12.4% for 2014, 0.1% below our benchmark portfolio.
The most recent actuarial valuation of the defined benefit component of the YP Pension Plan for funding purposes was performed as at May 31, 2014. The May 2014 valuation resulted in a solvency deficit of $144.6 million to be funded over a five-year period. The next actuarial valuation will be due no later than May 31, 2015.
In 2014, the Company made annual contributions equivalent to the current service cost (the Annual Employer Cost) of $35.6 million, including $21.3 million to fund the deficit. Total cash payments are expected to amount to $47.4 million for 2015, of which $32 million will be to fund the deficit.
Sources and Uses of Cash
Sources and Uses of Cash
|Years ended December 31,|
|Cash flows from operating activities|
|Cash flows from operations||$151,302||$302,218|
|Change in operating assets and liabilities||$5,205||$38,462|
|Cash flows used in investing activities|
|Acquisition of intangible assets and internally-generated software||(69,179)||(54,584)|
|Acquisition of property, plant and equipment||(14,771)||(11,743)|
|Business acquisition, net of cash acquired||(33,504)||3,581|
|Proceeds from the settlement of a note receivable||14,100||–|
|Cash flows used in financing activities|
|Repayment and settlement of long-term debt||$(140,098)||$(11,984)|
|Purchase of restricted shares||(12,450)||6,630|
|Optional redemption of long-term debt||–||(36,670)|
Cash flows from operating activities
Cash flows from operations
Cash flows from operations decreased by $150.9 million from $302.2 million for the year ended December 31, 2013 to $151.3 million for the same period in 2014, mainly due to lower cash EBITDA of $102.8 million, higher income taxes paid of $35.3 million as Yellow Pages was not required to pay income tax installments in 2013 and higher restructuring and special charges payments of $10.7 million primarily related to the November 2013 workforce realignment.
Change in operating assets and liabilities
The change in operating assets and liabilities for the year ended December 31, 2014 generated an inflow of $5.2 million compared with $38.5 million for the same period last year. During the year ended December 31, 2013, an improved collection experience of our trade receivables contributed mainly to the inflow. During the year ended December 31, 2014, operating assets and liabilities remained relatively stable.
Cash flows used in investing activities
Cash used in investing activities amounted to $103.5 million for the year ended December 31, 2014 compared with $69.5 million for the same period last year. During the year ended December 31, 2014, we invested in software development and ISIT equipment in the amount of $69.2 million and $14.8 million, respectively, as compared to $54.6 million and $11.7 million, respectively, spent during the same period last year. The increase year-over-year is due to the increased level of transformation expenses associated to the Return to Growth Plan. During 2014, we acquired the remaining interest in 411 for a net consideration of $22.7 million, as well as the shares of Bookenda Inc. and the assets of dine.TO for a total cash consideration of $10.8 million. These investing activities were partly offset by cash proceeds of $14.1 million received resulting from the settlement of a note receivable which had a carrying value of $15.3 million. During 2013, we acquired the remaining 40% of Mediative G.P. Inc. and Mediative Performance L.P. in exchange for cash consideration of $3.6 million.
Acquisition of property, plant, equipment and intangible assets, net of lease inducements
|Years ended December 31,|
|Adjustment to reflect expenditures on a cash basis||(1,623)||4,907|
|Acquisition of property, plant, equipment and intangible assets, net of lease inducements||$83,950||$65,442|
Sustaining capital expenditures are related to the ongoing operations required to maintain the integrity of the infrastructure. It also includes investments in leasehold improvements during 2013 as we reconfigured certain premises to accommodate our growing digital fulfillment teams. Sustaining capital expenditures amounted to $17.1 million for the year ended December 31, 2014, compared to $16 million for the same period last year.
Growth capital expenditures relate to the development and implementation of new technology and software aimed at new initiatives as we continue our transformation to become a leading local digital company in Canada. During the year ended December 31, 2014, these amounted to $68.5 million compared to $44.6 million for the same period last year. In 2014, our capital expenditures were mainly composed of investments in our sales and media platforms, in the consolidation of our legacy print publishing platforms, in key infrastructure projects, such as our new datacentres, as well as in the automation and streamlining of our digital fulfillment operations.
The total capital expenditures for 2014 amounted to $85.6 million. Total capital expenditures for 2015 are expected to range between $70 and $75 million.
Cash flows used in financing activities
Cash used in financing activities amounted to $152.5 million during the year ended December 31, 2014 compared to $175.7 million for the same period last year. During the year, we repaid $139.6 million of the Senior Secured Notes compared to a repayment of $119 million and a repurchase of $35 million during the same period last year. During the year ended December 31, 2014, we purchased common shares of Yellow Pages Limited on the open market to fund the Restricted Share Unit and Performance Share Unit Plan at a cost of $12.5 million compared to $6.6 million during the same period last year. During the year ended December 31, 2013, we paid $6.6 million of costs associated with our 2012 recapitalization and $5.6 million relative to earn-outs to former owners of acquired businesses.
Financial and Other Instruments
(See Note 22 of the Consolidated Financial Statements of the Company for the year ended December 31, 2014).
The Company’s financial instruments consist of cash and cash equivalents, trade and other receivables, trade and other payables, long-term debt and Exchangeable Debentures.
There is no carrying value of embedded derivatives as at December 31, 2014. The carrying value is calculated, as is customary in the industry, using discounted cash flows based on quarter-end market rates.include 'mdaMenuList.tpl' ?>