Today, Cogeco Cable Inc. (TSX:CCA) ("Cogeco Cable" or the "Corporation")
announced its financial results for the first quarter of fiscal 2014, ended
November 30, 2013, in accordance with International Financial Reporting
Standards ("IFRS").
For the first quarter of fiscal 2014:
-- Revenue increased by 44.9% to reach $475.0 million compared to the same
period of the prior year;
-- Operating income before depreciation and amortization(1)increased by
43.7% compared to the first quarter of fiscal 2013, reaching $211.5
million. The rapid progression for the period result from the
acquisitions of Atlantic Broadband and Peer 1 Network Enterprises, Inc.
("PEER 1") ("the recent acquisitions") which occurred at the end of the
first quarter and during the second quarter of fiscal 2013,
respectively, as well as the improvement of financial results from all
of our operating units;
-- Operating margin(1)slightly decreased to 44.5% from 44.9% in the quarter
when compared to the same period of the prior year essentially
attributable to lower margin business activities from the recent
acquisition of PEER 1;
-- In the first quarter, profit for the period amounted to $49.7 million,
or $1.02 per share compared to $42.1 million, or $0.87 per share in
fiscal 2013. Profit progression is mostly attributable to the
improvement in the operating income before depreciation and amortization
generated by the recent acquisitions and the Canadian cable services
segment, partly offset by additional depreciation and amortization and
financial expense related to these acquisitions;
-- Free cash flow(1)reached $68.2 million for the quarter compared to $16.9
million in the comparable quarter of the prior year. The increase for
the period is attributable to the improvement of operating income before
depreciation and amortization explained above as well as the decrease in
integration, restructuring and acquisition costs, partly offset by the
increase in financial expense as a result of higher indebtedness;
-- A quarterly dividend of $0.30 per share was paid to the holders of
subordinate and multiple voting shares, an increase of $0.04 per share,
or 15.4%, when compared to a dividend of $0.26 per share paid in the
first quarter of fiscal 2013; and
-- On November 22, 2013, the Corporation amended and restated its Term
Revolving Facility of $800 million with a syndicate of lenders. The
amended and restated Term Revolving Facility also replaced Cogeco
Cable's Secured Credit Facilities coming to maturity on January 27, 2017
which was fully repaid on November 22, 2013. The Term Revolving Facility
was extended and will mature on January 22, 2019 and the maturity can be
extended annually.
(1) The indicated terms do not have standard definitions prescribed by
IFRS and, therefore, may not be comparable to similar measures
presented by other companies. For more details, please consult the
"Non-IFRS financial measures" section of the Management's discussion
and analysis.
"We are very pleased to report strong financial results for the first quarter of
fiscal year 2014," declared Louis Audet, President and Chief Executive Officer
of Cogeco Cable.
"We have delivered a solid performance across all of our business segments, in
order to meet our fiscal year 2014 financial guidelines. Our improved
profitability is partly due to sound cost management. In addition, we have
achieved a free cash flow of $68 million, which puts us on path towards reducing
our leverage ratio to 3 times by August 31, 2015." continued Louis Audet.
"Cogeco Cable continues to grow. I am enthusiastic that we are able to deliver
solid results and to add further value to our shareholders," concluded Louis
Audet
ABOUT COGECO CABLE
Cogeco Cable is a telecommunications corporation and is the11th largest hybrid
fibre coaxial cable operator in North America operating in Canada through its
subsidiary Cogeco Cable Canada in Quebec and Ontario, and in the United States
of America through its subsidiary Atlantic Broadband in Western Pennsylvania,
South Florida, Maryland/Delaware and South Carolina. Its two-way broadband cable
networks provide to its residential and small business customers Analogue and
Digital Television, High Speed Internet and Telephony services. Through its
subsidiary Cogeco Enterprise Services, the holding company of Cogeco Data
Services and Peer 1 Network Enterprises, Cogeco Cable provides its commercial
customers a suite of IT hosting, information and communications technology
services (data centre, colocation, managed hosting, cloud infrastructure and
connectivity), with 20 data centres, extensive fibre networks in Montreal and
Toronto as well as points-of-presence in North America and Europe. Cogeco
Cable's subordinate voting shares are listed on the Toronto Stock Exchange
(TSX:CCA). For more information about Cogeco Cable and its subsidiaries visit
www.cogeco.ca, cogecodata.com, atlanticbb.com, peer1.com and peer1hosting.co.uk.
Analyst Conference Call: Tuesday, January 14, 2014 at 9:30 a.m. (Eastern
Standard Time)
Media representatives may attend as listeners
only.
Please use the following dial-in number to have
access to the conference call by dialing five
minutes before the start of the conference:
Canada/United States Access Number: 1 866-321-6651
International Access Number: + 1 416-642-5212
Confirmation Code: 8812199
By Internet at www.cogeco.ca/investors
A rebroadcast of the conference call will be
available until April 25, 2014, by dialing:
Canada and United States access number: 1 888-203-
1112 International access number: + 1 647-436-0148
Confirmation code: 8812199
FINANCIAL HIGHLIGHTS
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Quarters ended November 30,
(in thousands of dollars, except
percentages and per share data) 2013 2012 (2) Change
$ $ %
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Operations
Revenue 474,980 327,911 44.9
Operating income before
depreciation and amortization(1) 211,522 147,176 43.7
Operating margin(1) 44.5% 44.9% -
Operating income 95,520 75,210 27.0
Profit for the period 49,698 42,113 18.0
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Cash Flow
Cash flow from operating
activities 63,110 (280) -
Cash flow from operations(1) 153,264 99,731 53.7
Acquisitions of property, plant
and equipment, intangible and
other assets 85,089 82,833 2.7
Free cash flow(1) 68,175 16,898 -
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Capital intensity(1) 17.9% 25.3% -
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Financial Condition(3)
Property, plant and equipment 1,842,190 1,854,155 (0.6)
Total assets 5,249,288 5,253,097 (0.1)
Indebtedness(4) 2,991,147 2,944,182 1.6
Shareholders' equity 1,381,635 1,344,092 2.8
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Per Share Data(5)
Earnings per share
Basic 1.02 0.87 17.2
Diluted 1.01 0.86 17.4
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(1) The indicated terms do not have standardized definitions prescribed by
International Financial Reporting Standards ("IFRS") and therefore,
may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-IFRS financial
measures" section of the Management's discussion and analysis
("MD&A").
(2) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note
2 of the condensed interim consolidated financial statements.
(3) At November 30, 2013 and August 31, 2013.
(4) Indebtedness is defined as the aggregate of bank indebtedness,
principal on long-term debt, balance due on a business combination and
obligations under derivative financial instruments.
(5) Per multiple and subordinate voting share.
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MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A")
Three-month period ended November 30, 2013
FORWARD-LOOKING STATEMENTS
Certain statements in this Management's Discussion and Analysis ("MD&A") may
constitute forward-looking information within the meaning of securities laws.
Forward-looking information may relate to Cogeco Cable's future outlook and
anticipated events, business, operations, financial performance, financial
condition or results and, in some cases, can be identified by terminology such
as "may"; "will"; "should"; "expect"; "plan"; "anticipate"; "believe"; "intend";
"estimate"; "predict"; "potential"; "continue"; "foresee", "ensure" or other
similar expressions concerning matters that are not historical facts. In
particular, statements regarding the Corporation's future operating results and
economic performance and its objectives and strategies are forward-looking
statements. These statements are based on certain factors and assumptions
including expected growth, results of operations, performance and business
prospects and opportunities, which Cogeco Cable believes are reasonable as of
the current date. While management considers these assumptions to be reasonable
based on information currently available to the Corporation, they may prove to
be incorrect. The Corporation cautions the reader that the economic downturn
experienced over the past few years makes forward- looking information and the
underlying assumptions subject to greater uncertainty and that, consequently,
they may not materialize, or the results may significantly differ from the
Corporation's expectations. It is impossible for Cogeco Cable to predict with
certainty the impact that the current economic uncertainties may have on future
results. Forward-looking information is also subject to certain factors,
including risks and uncertainties (described in the "Uncertainties and main risk
factors" section of section of the Corporation's 2013 annual MD&A) that could
cause actual results to differ materially from what Cogeco Cable currently
expects. These factors include namely risks pertaining to markets and
competition, technology, regulatory developments, operating costs, information
systems, disasters or other contingencies, financial risks related to capital
requirements, human resources, controlling shareholder and holding structure,
many of which are beyond the Corporation's control. Therefore, future events and
results may vary significantly from what management currently foresees. The
reader should not place undue importance on forward-looking information and
should not rely upon this information as of any other date. While management may
elect to, the Corporation is under no obligation and does not undertake to
update or alter this information at any particular time, except as may be
required by law.
All amounts are stated in Canadian dollars unless otherwise indicated. This
report should be read in conjunction with the Corporation's condensed interim
consolidated financial statements and the notes thereto for the three-month
period ended November 30, 2013, prepared in accordance with the International
Financial Reporting Standards ("IFRS") and the MD&A included in the
Corporation's 2013 Annual Report.
CORPORATE OBJECTIVES AND STRATEGIES
Cogeco Cable Inc.'s ("Cogeco Cable" or the "Corporation") objectives are to
provide outstanding service to its customers, improve profitability and create
shareholder value. To achieve these objectives, the Corporation has developed
strategies that focus on expanding its service offering and enhancing its
existing services or bundles, improving the networks, improving customer
experience and business processes as well as keeping a sound capital management
and a strict control over spending. The Corporation measures its performance,
with regard to these objectives by monitoring operating income before
depreciation and amortization(1), operating margin(1), free cash flow(1) and
capital intensity(1).
(1) The indicated terms do not have standardized definitions prescribed by
IFRS and therefore, may not be comparable to similar measures
presented by other companies. For more details, please consult the
"Non-IFRS financial measures" section.
KEY PERFORMANCE INDICATORS
OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION AND OPERATING MARGIN
First-quarter operating income before depreciation and amortization increased by
43.7% compared to the same period of fiscal 2013 to reach $211.5 million and
operating margin decreased to 44.5% from 44.9%. The improvement in operating
income before depreciation and amortization is mainly attributable to the
acquisition of Atlantic Broadband and Peer 1 Network Enterprises, Inc. ("PEER
1") (the "recent acquisitions") which occurred at the end of the first quarter
and in the second quarter of fiscal 2013, respectively, as well as the
improvement in the financial results of the Canadian cable services segment.
FREE CASH FLOW
For the three-month period ended November 30, 2013, Cogeco Cable reports free
cash flow of $68.2 million, compared to $16.9 million for the first three months
of the previous fiscal year, representing an increase of $51.3 million. This
variance is mostly attributable to the improvement of operating income before
depreciation and amortization explained above as well as the decrease in
integration, restructuring and acquisition costs, partly offset by the increase
in financial expense as a result of higher indebtedness.
CAPITAL INTENSITY AND ACQUISITIONS OF PROPERTY, PLANT AND EQUIPMENT, INTANGIBLE
AND OTHER ASSETS
For the first quarter of fiscal 2014, the acquisitions of property, plant and
equipment, intangible and other assets amounted to $85.1 million over revenue of
$475.0 million for a capital intensity ratio of 17.9% compared to 25.3% in the
comparable period of prior year. The improvement of the capital intensity ratio
is mainly attributable to the achievement of a comprehensive upgrade of the
networks in the Canadian cable services segment which occurred in fiscal 2012 as
well as in early fiscal 2013, partly offset by the timing of certain
initiatives. For further details on the Corporation's capital expenditures
please refer to the "Cash flow analysis" section.
OPERATING AND FINANCIAL RESULTS
OPERATING RESULTS
----------------------------------------------------------------------
----------------------------------------------------------------------
Quarters ended November 30, 2013 2012 (1)(2) Change
(in thousands of dollars, except
percentages) $ $ %
----------------------------------------------------------------------
Revenue 474,980 327,911 44.9
Operating expenses 253,949 174,154 45.8
Management fees - COGECO Inc. 9,509 6,581 44.5
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Operating income before
depreciation and amortization 211,522 147,176 43.7
----------------------------------------------------------
Operating margin 44.5% 44.9%
----------------------------------------------------------------------
----------------------------------------------------------------------
(1) Operating results for the period ended November 30, 2012 exclude those
of the recent acquisitions.
(2) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note
2 of the condensed interim consolidated financial statements.
REVENUE
Fiscal 2014 first-quarter revenue increased by $147.1 million, or 44.9%, to
reach $475.0 million, compared to the same period last year. Revenue increase is
mainly attributable to the operating results of the recent acquisitions as well
as rate increases implemented in June 2013 in the Canadian cable services
segment as well as the organic growth from data centre, managed IT and
connectivity services in the Enterprise services segment. For further details on
the Corporation's revenue, please refer to the "Segmented operating results"
sections.
OPERATING EXPENSES AND MANAGEMENT FEES
For the first quarter of fiscal 2014, operating expenses increased by $79.8
million, to reach $253.9 million, an increase of 45.8% compared to the prior
year. These additional operating expenses are mostly attributable to the recent
acquisitions, partly offset by cost reduction initiatives and the restructuring
activities occurred in the fourth quarter of fiscal 2013 in the Canadian cable
services. For further details on the Corporation's operating expenses, please
refer to the "Segmented operating results" sections.
Management fees paid to COGECO Inc. amounted to $9.5 million, 44.5% higher when
compared to $6.6 million in fiscal 2013 as a result of higher revenues stemming
from the recent acquisitions. For fiscal year 2014, management fees have been
set at a maximum of $9.7 million ($9.6 million in 2013), which is expected to be
paid within the first half of the fiscal year. For further details on the
Corporation's management fees, please refer to the "Related party transactions"
section.
OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION AND OPERATING MARGIN
Fiscal 2014 first-quarter operating income before depreciation and amortization
increased by $64.3 million, or 43.7%, to reach $211.5 million as a result of the
recent acquisitions and the improvement of the financial results in all our
business units. Cogeco Cable's first-quarter operating margin decreased to 44.5%
from 44.9% in the comparable period of the prior year essentially attributable
to lower margin business activities from the recent acquisition of PEER 1. For
further details on the Corporation's operating income before depreciation and
amortization, please refer to the "Segmented operating results" sections.
FIXED CHARGES
------------------------------------------------------------------------
------------------------------------------------------------------------
Quarters ended November 30 2013 2012(1) Change
(in thousands of dollars, except
percentages) $ $ %
------------------------------------------------------------------------
Depreciation and amortization 115,754 64,666 79.0
Financial expense 32,549 15,714 -
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note
2 of the condensed interim consolidated financial statements.
For the first quarter of fiscal 2014, depreciation and amortization expense
reached $115.8 million compared to $64.7 million for the same period of the
prior year. The increase resulted mainly from the recent acquisitions, which
occurred at the end of the first quarter and in the second quarter of fiscal
2013 and consequently, no depreciation and amortization expense related to these
acquisitions were included in the fiscal 2013 first- quarter.
For fiscal 2014 first-quarter, financial expense increased by $16.8 million to
reach $32.5 million compared to $15.7 million in the prior year as a result of
the recent acquisitions financing costs.
INCOME TAXES
Fiscal 2014 first-quarter income tax expense amounted to $13.3 million, compared
to $17.4 million in the prior year. The decrease is mostly attributable to the
increase in fixed charges as well as the favorable impact of the tax structure
from the recent acquisitions, partly offset by the improvement in operating
income before depreciation and amortization.
PROFIT FOR THE PERIOD
For the period ended November 30, 2013, profit for the period amounted to $49.7
million, or $1.02 per share, compared to $42.1 million, or $0.87 per share, in
fiscal 2013. Profit progression is mostly attributable to the improvement in the
operating income before depreciation and amortization generated by the recent
acquisitions, partly offset by the fixed charges explained above.
CUSTOMER STATISTICS
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Consolidated UNITED STATES CANADA
November 30,
2013
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Primary service
units ("PSU")(4) 2,464,932 489,430 1,975,502
Television service
customers 1,057,859 230,210 827,649
HSI service
customers 848,897 180,640 668,257
Telephony service
customers 558,176 78,580 479,596
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Net additions (losses) % of penetration(1)
Quarters ended November
30, November 30,
2013 2012 (2) 2013 2012(2)
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Primary service
units ("PSU")(4) (2,725) 15,788 (3)
Television service
customers (9,093) (2,076) 48.2 52.1
HSI service
customers 10,452 11,553 (3) 38.7 39.4(3)
Telephony service
customers (4,084) 6,311 25.4 28.9
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(1) As a percentage of homes passed.
(2) Net additions (losses) and penetration rates for fiscal 2012 are only
for the Canadian cable services segment.
(3) In the fourth quarter of fiscal 2013, High Speed Internet ("HSI")
customers have been adjusted upwards retroactively to comply with the
industry practices and consequently, PSU and penetration rate have
been also adjusted.
(4) Represents the sum of Television, HSI and Telephony service customers
On November 30, 2013, PSU reached 2,464,932 of which 1,975,502 come from the
Canadian cable services segment and 489,430 from the American cable services
segment. In the Canadian cable services segment, PSU decreased by 4,620 in the
quarter compared to an increase of 15,788 PSU for the comparable period of the
prior year, mainly as a result of service category maturity and a much more
competitive environment in all services. In the American cable services segment,
PSU increased by 1,895 for the quarter stemming primarily from additional HSI
services, offset by small losses in Television services. At the consolidated
level, fiscal 2014 first-quarter PSU net losses amounted to 2,725 compared to
net additions of 15,788 in the comparable period of the prior year. Fiscal 2014
first-quarter net losses for Television service customers stood at 9,093
compared to 2,076, HSI service customers grew by 10,452 compared to 11,553 and
the Telephony service net losses stood at 4,084 customers compared to net
additions of 6,311 for the comparable period of fiscal 2013. HSI net additions
continue to stem from the enhancement of the product offering and the impact of
the bundled offer. For further details please consult the customer statistics on
the Canadian and American cable services sections under the "Segmented operating
results" section.
RELATED PARTY TRANSACTIONS
Cogeco Cable is a subsidiary of COGECO Inc., which holds 32.1% of the
Corporation's equity shares, representing 82.6% of the Corporation's voting
shares. On September 1, 1992, Cogeco Cable executed a management agreement with
COGECO Inc. under which the parent company agreed to provide certain executive,
administrative, legal, regulatory, strategic and financial planning services and
additional services to the Corporation and its subsidiaries (the "Management
Agreement"). These services are provided by COGECO Inc.'s senior executives,
including the President and Chief Executive Officer, the Senior Vice President
and Chief Financial Officer, the Vice President, Corporate Affairs Chief Legal
Officer and Secretary, the Vice President, Corporate Development, the Vice
President and Treasurer, the Vice President, Public Affairs and Communications
and the Vice President, Internal Audit. No direct remuneration is payable to
such senior executives by the Corporation. However, the Corporation granted
83,650 stock options (69,615 in 2013) to these senior executives as senior
executives of Cogeco Cable during the first three months of fiscal 2014. During
the first quarter of fiscal 2014, the Corporation charged COGECO Inc. an amount
of $94,000 ($90,000 in 2013) with regard to the Corporation's stock options
granted to these senior executives.
During the first three months of fiscal 2014, the Corporation also granted
12,450 (12,005 in 2013) Incentive Share Units ("ISUs") to these senior
executives as senior executives of Cogeco Cable. During the first quarter of
fiscal 2014, the Corporation charged COGECO Inc. an amount of $199,000 ($107,000
in 2013) with regard to the Corporation's ISUs granted to these senior
executives.
Under the Management Agreement, the Corporation pays monthly fees equal to 2% of
its total revenue to COGECO Inc. for the above-mentioned services. The
management fees are subject to annual upward adjustment based on increases in
the Consumer Price Index in Canada. This limit can be increased under certain
circumstances upon request to that effect by COGECO Inc. For fiscal year 2014,
management fees have been set at a maximum of $9.7 million ($9.6 million in
2013), which is expected to be paid within the first half of the fiscal year.
For fiscal year 2013, management fees were fully paid in the first half of the
year. In addition, the Corporation reimburses COGECO Inc.'s out-of-pocket
expenses incurred with respect to services provided to the Corporation under the
Management Agreement.
Details regarding the management agreement and stock options and incentive share
units granted to COGECO Inc.'s senior executives are provided in the
Corporation's 2013 Annual Report.
There were no other material related party transactions during the periods covered.
CASH FLOW ANALYSIS
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Quarters ended November 30, 2013 2012(1)
(in thousands of dollars) $ $
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Operating activities
Cash flow from operations 153,264 99,731
Changes in non-cash operating activities (86,704) (81,113)
Amortization of deferred transaction costs and
discounts on long-term debt (1,842) (740)
Income taxes paid (18,304) (42,533)
Current income tax expense 26,553 25,091
Financial expense paid (42,406) (16,430)
Financial expense 32,549 15,714
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63,110 (280)
Investing activities (84,660) (1,436,894)
Financing activities 8,307 1,231,061
Effect of exchange rate changes on cash and cash
equivalents denominated in foreign currencies 199 -
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Net change in cash and cash equivalents (13,044) (206,113)
Cash and cash equivalents, beginning of the period 39,575 215,391
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Cash and cash equivalents, end of the period 26,531 9,278
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(1) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note
2 of the condensed interim consolidated financial statements.
OPERATING ACTIVITIES
Fiscal 2014 first-quarter cash flow from operating activities reached $63.1
million compared to negative cash flow from operating activities of $0.3 million
for the same period last year. This increase resulted from the improvement in
operating income before depreciation and amortization as well as the decrease in
integration, restructuring and acquisition costs, partly offset by an increase
in financial expense as a result of higher indebtedness level from the recent
acquisitions.
INVESTING ACTIVITIES
BUSINESS COMBINATION IN FISCAL 2013
On November 30, 2012, the Corporation completed the acquisition of all the
outstanding shares of Atlantic Broadband, an independent cable system operator
formed in 2003, providing Analogue and Digital Television, as well as HSI and
Telephony services to residential and small and medium business customers.
During the first quarter of fiscal 2014, the Corporation finalized the purchase
price allocation of Atlantic Broadband which remains unchanged since the last
adjustments made in the fourth quarter of fiscal 2013. Therefore, the final
purchase price allocation is as follows:
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Final
(in thousands of dollars) $
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Consideration
Paid
Purchase of shares 337,779
Working capital adjustments 5,415
Repayment of secured debt 1,021,854
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1,365,048
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Net assets acquired
Cash and cash equivalents 5,480
Trade and other receivables 12,012
Prepaid expenses and other 1,370
Income tax receivable 3,907
Property, plant and equipment 302,211
Intangible assets 711,418
Goodwill 522,215
Deferred tax assets 98,592
Trade and other payables assumed (27,620)
Provisions (721)
Deferred and prepaid revenue and other liabilities
assumed (7,697)
Deferred tax liabilities (256,119)
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1,365,048
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ACQUISITIONS OF PROPERTY, PLANT AND EQUIPMENT, INTANGIBLE AND OTHER ASSETS
Investing activities, including acquisition of property, plant and equipment
segmented according to the National Cable Television Association ("NCTA")
standard reporting categories, are as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended November 30, 2013 2012
(in thousands of dollars) $ $
----------------------------------------------------------------------------
Customer premise equipment(1) 25,317 19,700
Scalable infrastructure(2) 19,800 32,614
Line extensions 5,297 2,929
Upgrade / Rebuild 5,306 3,511
Support capital 3,981 5,612
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Acquisition of property, plant and equipment -
Cable services(3) 59,701 64,366
Acquisition of property, plant and equipment -
Enterprise services(4) 21,272 13,826
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Acquisitions of property, plant and equipment 80,973 78,192
----------------------------------------------------------------------------
Acquisition of intangible and other assets -
Cable services(3) 3,678 3,901
Acquisition of intangible and other assets -
Enterprise services(4) 438 740
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Acquisitions of intangible and other assets 4,116 4,641
----------------------------------------------------------------------------
85,089 82,833
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(1) Includes mainly home terminal devices as well as new and replacement
drops.
(2) Includes mainly head-end equipment, digital video and telephony
transport as well as HSI equipment.
(3) Fiscal 2013 first-quarter acquisition of property, plant and
equipment, intangible and other assets are only for the Canadian cable
services segment.
(4) Fiscal 2013 first-quarter acquisition of property, plant and
equipment, intangible and other assets are only for Cogeco Data
Services and therefore, exclude those of PEER 1.
Fiscal 2014 first-quarter acquisition of property, plant and equipment in the
Cable services amounted to $59.7 million, a decrease of 7.2% compared to $64.4
million for the comparable period of fiscal 2013. In the Canadian cable services
segment, acquisition of property, plant and equipment amounted to $48.8 million,
a decrease of $15.6 million compared to $64.4 million in the same period of the
prior year. Fiscal 2014 first-quarter acquisition of property, plant and
equipment in the American cable services segment amounted to $10.9 million.
The decreases in the Cable services segment included mainly the following factors:
-- A decrease in scalable infrastructure due to the deployment in fiscal
2012 and early fiscal 2013 of advanced technologies such as DOCSIS 3.0
and Switched Digital Video in existing areas served;
-- Some capital expenditures decreases due to the timing of certain
initiatives; and
-- Partly offset by, an increase in customer premise equipment mainly due
to the continuing migration of analogue packages to digital technology
in the American cable services segment.
Fiscal 2014 first-quarter acquisition of property, plant and equipment in the
Enterprise services segment amounted to $21.3 million, an increase of 53.9%
compared to $13.8 million in fiscal 2013. The increase is mainly due to the
recent acquisition of PEER 1 and by the expansion of data centre facilities in
Toronto, Canada and in Portsmouth, England as well as the fiber expansion in the
Toronto area in order to fulfill orders from new customer demand.
Acquisition of intangible and other assets are mainly attributable to reconnect
and additional service activation costs as well as other customer acquisition
costs. For the period ended November 30, 2013, the acquisition of intangible and
other assets amounted to $4.1 million compared to $4.6 million for the same
period last year.
FREE CASH FLOW AND FINANCING ACTIVITIES
In the first quarter, free cash flow amounted to $68.2 million, $51.3 million
higher than in the comparable period of fiscal 2013. Free cash flow increase
over the prior year is due to the improvement of operating income before
depreciation and amortization in the Canadian cable services segment and the
recent acquisitions as well as the decrease in integration, restructuring and
acquisition costs, partly offset by the increase in financial expense as a
result of higher indebtedness level from the recent acquisitions.
In the first quarter of fiscal 2014, higher Indebtedness level provided for a
cash increase of $27.8 million, mainly due to the increase of the Term Revolving
Facility of $33.3 million and the decrease in bank indebtedness of $4.2 million.
In the first quarter of fiscal 2013, higher Indebtedness level provided for a
cash increase of $1.246 billion, mainly due to the draw-down on the Term
Revolving Facility of $584.2 million (US$588 million) and the new Term Loan
Facilities of $637.4 million (US$660 million for net proceeds of US$641.5
million, net of transaction costs of US$18.5 million) to finance the acquisition
of Atlantic Broadband.
During the first quarter of fiscal 2014, a quarterly dividend of $0.30 per share
was paid to the holders of subordinate and multiple voting shares, totaling
$14.6 million, compared to a quarterly dividend of $0.26 per share, or $12.7
million the year before.
As at November 30, 2013, the Corporation had a working capital deficiency of
$144.4 million compared to $224.2 million at August 31, 2013. The decrease of
$79.8 million in the deficiency is mainly due to the decrease of $96.9 million
in trade and other payables partly offset by an increase of $8.7 million in
income tax liabilities. As part of the usual conduct of its business, Cogeco
Cable maintains a working capital deficiency due to a low level of accounts
receivable as a large portion of the Corporation's customers pay before their
services are rendered, unlike trade and other payables, which are paid after
products are delivered or services are rendered, thus enabling the Corporation
to use cash and cash equivalents to reduce Indebtedness.
At November 30, 2013, the Corporation had used $608.6 million of its $800
million amended and restated Term Revolving Facility for a remaining
availability of $191.4 million. In addition, two subsidiaries of the Corporation
also benefit from a Revolving Facility of $106.2 million (US$100 million)
related to the acquisition of Atlantic Broadband, of which $21.8 million
(US$20.6 million) was used at November 30, 2013 for a remaining availability of
$84.4 million (US$79.4 million).
FINANCIAL POSITION
Since August 31, 2013, the following balances have changed significantly: "cash
and cash equivalents", "property, plant and equipment", "goodwill", "trade and
other payables", "income tax liabilities" and "long-term debt".
The decrease of $13.0 million in cash and cash equivalents and the increase of
$54.2 million in long-term debt are due to the factors previously discussed in
the "Cash flow analysis" section and to the appreciation of US dollar and
British Pound currency compared to Canadian dollar. The $12.0 million decrease
in property, plant and equipment is mainly related to the excess of depreciation
expense over acquisitions discussed in the "Cash flow analysis" section, partly
offset by the impact of the appreciation of the US dollar and British Pound
currency compared to Canadian dollar. Goodwill increased by $11.1 million due to
the appreciation of the US dollar and the British Pound against the Canadian
dollar in the first quarter of fiscal 2014. The $96.9 million decrease in trade
and other payables is related to the timing of payments made to suppliers and
the income tax liabilities increase of $8.7 million due to the excess of current
income tax expense over income tax paid.
OUTSTANDING SHARE DATA
A description of Cogeco Cable's share data at December 31, 2013 is presented in
the table below. Additional details are provided in note 11 of the condensed
interim consolidated financial statements.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Amount
Number of (in thousands
shares/options of dollars)
----------------------------------------------------------------------------
Common shares
Multiple voting shares 15,691,100 98,346
Subordinate voting shares 33,311,641 907,500
Options to purchase subordinate voting shares
Outstanding options 890,121
Exercisable options 338,767
----------------------------------------------------------------------------
----------------------------------------------------------------------------
FINANCING
In the normal course of business, Cogeco Cable has incurred financial
obligations, primarily in the form of long-term debt, operating and finance
leases and guarantees. Cogeco Cable's obligations, as discussed in the 2013
Annual Report, have not materially changed since August 31, 2013, except as
mentioned below.
On November 22, 2013, the Corporation amended and restated its Term Revolving
Facility of $800 million with a syndicate of lenders. The maturity was extended
and will mature on January 22, 2019 and the maturity can be extended annually.
The amendments reduced the margin for the calculation of the interest rate and
reduced restrictions on some covenants. The amended and restated Term Revolving
Facility also replaced Cogeco Cable's Secured Credit Facilities coming to
maturity on January 27, 2017 which was fully repaid on November 22, 2013. This
amended and restated Term Revolving Facility is comprised of two tranches: a
first tranche, a Canadian tranche, amounting to $788 million and the second
tranche, a UK tranche, amounting to $12 million. The Canadian tranche is
available in Canadian dollars, US dollars, Euros and British Pounds and interest
rates are based on banker's acceptance, US dollar base rate loans, LIBOR loans
in US dollars, Euros or British Pounds, plus the applicable margin. The UK
tranche is available in British Pounds and interest rates are based on British
Pounds base rate loans and British Pounds LIBOR loans. The Term Revolving
Facility is indirectly secured by first priority fixed and floating charges and
a security interest on substantially all present and future real and personal
properties and undertaking of every nature and kind of the Corporation and
certain of its subsidiaries, and provides for certain permitted encumbrances,
including purchased money obligations, existing funded obligations and charges
granted by any subsidiary prior to the date when it becomes a subsidiary,
subject to a maximum amount. The provisions under this facility provide for
restrictions on the operations and activities of the Corporation. Generally, the
most significant restrictions relate to permitted investments and dividends on
multiple and subordinate voting shares, as well as incurrence and maintenance of
certain financial ratios primarily linked to operating income before
amortization, financial expense and total indebtedness.
FINANCIAL MANAGEMENT
The Corporation had entered into cross-currency swap agreements to set the
liability for interest and principal payments on its US$190 million Senior
Secured Notes Series A maturing on October 1, 2015. These agreements have the
effect of converting the U.S. interest coupon rate of 7.00% per annum to an
average Canadian dollar interest rate of 7.24% per annum. The exchange rate
applicable to the principal portion of the debt has been fixed at $1.0625 per US
dollar. The Corporation elected to apply cash flow hedge accounting on these
derivative financial instruments. During the first quarter of fiscal 2014,
amounts due under the US$190 million Senior Secured Notes Series A increased by
$1.7 million due to the US dollar's appreciation relative to the Canadian
dollar. The fair value of cross-currency swaps asset increased by a net amount
of $2.0 million, of which an increase of $1.7 million offsets the foreign
exchange loss on the debt denominated in US dollars. The difference of $0.3
million was recorded as an increase of other comprehensive income. During the
first quarter of fiscal 2013, amounts due under the US$190 million Senior
Secured Notes Series A increased by $1.5 million due to the US dollar's
appreciation over the Canadian dollar. The fair value of cross- currency swaps
liability decreased by a net amount of $1.1 million, of which $1.5 million
offsets the foreign exchange loss on the debt denominated in US dollars.
In addition, on July 22, 2013, Cogeco Cable had entered into interest rate swap
agreements to fix the interest rate on US$200 million of its LIBOR based loans.
These agreements have the effect of converting the floating US LIBOR base rate
at an average fixed rate of 0.39625% under the Term Revolving Facility until
July 25, 2015. The Corporation elected to apply hedge accounting on these
derivative financial instruments. The fair value of interest rate swaps asset
decreased by a net amount of $0.9 million which was recorded as a decrease of
other comprehensive income at November 30, 2013.
Furthermore, the Corporation's net investment in foreign subsidiaries is exposed
to market risk attributable to fluctuations in foreign currency exchange rates,
primarily changes in the values of the Canadian dollar versus the US dollar and
British Pound. This risk was mitigated since the major part of the purchase
prices for Atlantic Broadband and PEER 1 were borrowed directly in US dollars
and British Pounds. These debts were designated as hedges of net investments in
foreign operations. At November 30, 2013, the net investment for Atlantic
Broadband and for PEER 1 amounted to US$1.1 billion and GBP 70.7 million while
long-term debt hedging these net investments amounted to US$853.0 million and
GBP $56.7 million, respectively. The exchange rate used to convert the US dollar
currency and British Pound currency into Canadian dollars for the statement of
financial position accounts at November 30, 2013 was $1.0620 per US dollar and
$1.7383 per British Pound. The impact of a 10% change in the exchange rate of
the US dollar and British Pound into Canadian dollars would change other
comprehensive income by approximately $27.3 million.
The average rates prevailing during the first quarter of fiscal 2014 used to
convert the operating results of the American cable services and a portion of
the Enterprise services were $1.0399 per US dollar and $1.6670 per British
Pound. Since the Corporation's condensed interim consolidated financial
statements are expressed in Canadian dollars but a portion of its business is
conducted in US dollar and British Pound currency, exchange rate fluctuations
can increase or decrease the Corporation's operating results.
The following table highlights in Canadian dollars the impact of a 10% increase
in the average exchange rate of the US dollar against the Canadian dollar on the
American cable services and US dollar and British Pound currency against the
Canadian dollar on the Enterprise services operating results for the three-month
period ended November 30, 2013:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
American cable services Enterprise services
Exchange rate Exchange rate
As reported impact As reported impact
(in thousands of dollars) $ $ $ $
----------------------------------------------------------------------------
Revenue 92,549 9,255 73,372 3,550
Operating expense 50,019 5,002 45,481 2,554
----------------------------------------------------------------------------
Operating income before
depreciation and
amortization 42,530 4,253 27,891 996
Integration, restructuring
and acquisition costs 58 6 190 -
Depreciation and
amortization 23,154 2,315 32,731 1,436
----------------------------------------------------------------------------
Operating income 19,318 1,932 (5,030) (440)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Corporation is also impacted by foreign currency exchange rates, primarily
changes in the values of the US dollar relative to the Canadian dollar with
regards to purchases of certain equipment, which are purchased and subsequently
paid in US dollars.
DIVIDEND DECLARATION
At its January 13, 2014 meeting, the Board of Directors of Cogeco Cable declared
a quarterly eligible dividend of $0.30 per share for multiple voting and
subordinate voting shares, payable on February 10, 2014, to shareholders of
record on January 27, 2014. The declaration, amount and date of any future
dividend will continue to be considered and approved by the Board of Directors
of the Corporation based upon the Corporation's financial condition, results of
operations, capital requirements and such other factors as the Board of
Directors, at its sole discretion, deems relevant. There is therefore no
assurance that dividends will be declared, and if declared, the amount and
frequency may vary.
SEGMENTED OPERATING RESULTS
The Corporation reports its operating results in three operating segments:
Canadian cable services, American cable services and Enterprise services. The
reporting structure reflects how the Corporation manages the business activities
to make decisions about resources to be allocated to the segment and to assess
its performance.
CANADIAN CABLE SERVICES
CUSTOMER STATISTICS
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net additions (losses) % of penetration(1)
Quarters ended November November
30, 30,
November
30, 2013 2013 2012(2) 2013 2012(2)
-------------------------------------------------------------------------
PSU 1,975,502 (4,620) 15,788
Television
service
customers 827,649 (7,122) (2,076) 49.3 52.1
HSI service
customers 668,257 6,920 11,553 39.8 39.4
Telephony
service
customers 479,596 (4,418) 6,311 28.6 28.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) As a percentage of homes passed.
(2) In the fourth quarter of fiscal 2013, HSI customers have been adjusted
upwards retroactively to comply with the industry practices and
consequently, PSU and penetration rate have been also adjusted.
Fiscal 2014 first-quarter, PSU net losses amounted to 4,620 compared to net
additions of 15,788 in the comparable period of the prior year mainly as a
result of service category maturity, competitive offers and tightening of our
customer qualifications. For the first quarter of fiscal 2014 net customer
losses for Television service stood at 7,122 compared to 2,076 for the prior
year. Television service customer net losses are mainly due to the promotional
offers of competitors for the video service combined with the tightening of our
customer credit controls. Fiscal 2014 first quarter net additions for HSI
service customers stood at 6,920 and Telephony net losses at 4,418 compared to
net additions of 11,553 and 6,311, respectively, for the comparable period of
prior year. HSI net additions continue to stem from the enhancement of the
product offering, the impact of the bundled offer of Television, HSI and
Telephony services, and promotional activities.
Furthermore, as at November 30, 2013, 68% (66% in 2012) of the Canadian cable
services customers subscribed to two or more services. The distribution of
customers by number of services for the Canadian cable services were: 32% who
subscribe to the single play (34% in 2012), 32% to the double play (30% in 2012)
and 36% to the triple play (36% in 2012).
OPERATING RESULTS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended November 30, 2013 2012(1) Change
(in thousands of dollars, except percentages) $ $ %
----------------------------------------------------------------------------
Revenue 309,519 304,815 1.5
Operating expenses 155,173 156,160 (0.6)
-------------------------------------------------------------------
Operating income before depreciation and
amortization 154,346 148,655 3.8
-------------------------------------------------------------------
Operating margin 49.9% 48.8%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note
2 of the condensed interim consolidated financial statements.
Revenue
Fiscal 2014 first-quarter revenue increased by $4.7 million, or 1.5%, to reach
$309.5 million, compared to the same period last year. Revenue increased is
mainly attributable to rate increases implemented in June 2013 in Quebec and
Ontario.
Operating expenses
For the first quarter of fiscal 2014, operating expenses decreased by $1.0
million compared to the prior year to reach $155.2 million as a result of cost
reduction initiatives and the restructuring of the Canadian cable services
business.
Operating income before depreciation and amortization and operating margin
Fiscal 2014 first-quarter operating income before depreciation and amortization
increased by $5.7 million, or 3.8%, to reach $154.3 million as a result of
revenue growth combined with operating expense reduction. First-quarter
operating margin increased to 49.9% from 48.8% in the comparable period of the
prior year.
AMERICAN CABLE SERVICES
On November 30, 2012, the Corporation completed the acquisition of Atlantic
Broadband, an independent cable system operator formed in 2003 and providing
Analogue and Digital Television, as well as HSI and Telephony services. Atlantic
Broadband operates cable systems in Western Pennsylvania, Southern Florida,
Maryland/Delaware and South Carolina.
CUSTOMER STATISTICS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net additions (losses) % of penetration(1)
Quarters ended November November
30, 30,
November
30, 2013 2013 2012 2013 2012
----------------------------------------------------------------------------
PSU 489,430 1,895 -
Television service
customers 230,210 (1,971) - 44.5 -
HSI service
customers 180,640 3,532 - 34.9 -
Telephony service
customers 78,580 334 - 15.2 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) As a percentage of homes passed.
Fiscal 2014 first-quarter PSU net additions stood at 1,895. Television service
customers net losses amounted to 1,971 as a result of competitive offers. HSI
service customers net additions stood at 3,532 mainly as a result of an increase
in residential HSI customers through additional marketing which focused on
bundle package offerings, thus increasing overall demand given the higher speed
offerings, as well as increased commercial HSI. The number of Telephony service
customers increased by 334, mainly from the bundled offers.
Furthermore, on November 30, 2013, 60% (59% in 2012) of the American cable
services customers subscribed to two or more services. The distribution of
customers by number of services at November 30, 2013 for the American cable
services were: 40% who subscribe to the single play (41% in 2012), 38% to the
double play (37% in 2012) and 22% to the triple play (22% in 2012).
OPERATING RESULTS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended November 30, 2013 2012 Change
(in thousands of dollars, except
percentages) $ $ %
----------------------------------------------------------------------------
Revenue 92,549 - -
Operating expenses 50,019 - -
----------------------------------------------------------------
Operating income before depreciation and
amortization 42,530 - -
----------------------------------------------------------------
Operating margin 46.0% -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Fiscal 2014 first-quarter revenue reached $92.5 million, in progression from the
fourth quarter of fiscal 2013, mainly as a result of an increase in HSI revenue
from continued marketing focus for this service offering driving HSI subscriber
growth and an increase in commercial revenue by expansion of non-residential
customer base through targeted marketing efforts. Fiscal 2014 first-quarter
operating expenses amounted to $50.0 million and operating income before
depreciation and amortization reached $42.5 million, and consequently, operating
margin stood at 46.0%.
ENTERPRISE SERVICES
OPERATING RESULTS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended November 30, 2013 2012 Change
(in thousands of dollars, except
percentages) $ $ %
----------------------------------------------------------------------------
Revenue 73,372 23,500 -
Operating expenses 45,481 13,682 -
----------------------------------------------------------------
Operating income before depreciation
and amortization 27,891 9,818 -
----------------------------------------------------------------
Operating margin 38.0% 41.8%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue
Fiscal 2014 first-quarter revenue reached $73.4 million compared to $23.5
million for the same period last year. The increase is primarily due to the
recent acquisition in the second quarter of fiscal 2013 of PEER 1 as well as the
organic growth from data centre, managed IT and connectivity services.
Operating expenses
For the first quarter of fiscal 2014, operating expenses reached $45.5 million
compared to $13.7 million for the same period last year. Operating expenses
increased mainly due to the PEER 1 acquisition as well as organic growth.
Operating income before depreciation and amortization and operating margin
Since revenue grew at a faster pace than operating expenses, fiscal 2014
first-quarter operating income before depreciation and amortization amounted to
$27.9 million compared to $9.8 million for the same period of the prior year.
Operating margin decreased to 38.0% from 41.8% for fiscal 2013 first-quarter as
a result of lower margins business activities from PEER 1.
CONTROLS AND PROCEDURES
The President and Chief Executive Officer ("CEO") and the Senior Vice President
and Chief Financial Officer ("CFO"), together with Management, are responsible
for establishing and maintaining adequate disclosure controls and procedures and
internal controls over financial reporting, as defined in National Instrument
52-109. Cogeco Cable's internal control framework is based on the criteria
published in the report Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and is designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with IFRS.
The CEO and CFO, supported by Management, evaluated the design of the
Corporation's disclosure controls and procedures and internal controls over
financial reporting as of November 30, 2013, and have concluded that they are
adequate. Furthermore, no significant changes to the internal controls over
financial reporting occurred during the quarter ended November 30, 2013, except
as described below with respect to PEER 1.
On January 31, 2013 and on April 3, 2013, the Corporation acquired 100% of the
issued and outstanding shares of PEER 1. Due to the short period of time between
those acquisition dates and the certification date on January 13, 2014,
management was unable to complete its review of the design of Internal Controls
Over Financial Reporting ("ICFR") for this recent acquisition. At November 30,
2013, risks were however mitigated as management was fully apprised of any
material events affecting the PEER 1 recent acquisition. In addition, all the
assets and liabilities acquired were valued and recorded in the condensed
interim consolidated financial statements as part of the preliminary purchase
price allocation process and PEER 1 results of operations were also included in
the Corporation's consolidated results. PEER 1 constitutes 10% of revenue, -15%
of profit of the period, 15% of the total assets, 20% of the current assets, 15%
of the non current assets, 8% of the current liabilities and 15% of the non
current liabilities of the consolidated condensed interim financial statements
for the three-month period ended November 30, 2013. In the upcoming quarters,
management will complete its review of the design of ICFR for PEER 1 and assess
its effectiveness. Financial information about the preliminary purchase price
allocation, assets acquired and liabilities assumed as well as other financial
information about PEER 1's business impact can be found in the 2013 Annual
Report of the Corporation.
UNCERTAINTIES AND MAIN RISK FACTORS
There has been no significant change in the uncertainties and main risk factors
faced by the Corporation since August 31, 2013, except as mentioned below. A
detailed description of the uncertainties and main risk factors faced by Cogeco
Cable can be found in the 2013 Annual Report, available at www.sedar.com and
www.cogeco.ca.
On October 24, 2013, the Canadian Radio-Television and Telecommunications
Commission ("CRTC") issued a broadcasting notice inviting Canadians to express
their views on the future of the television system in Canada. The first phase of
that public proceeding was completed in December 2013 and the second phase will
take place in the winter of 2014. This public consultation is likely to lead to
changes in regulatory policy respecting significant aspects of the production,
funding and distribution of television programming content in Canada. On the
heels of the CRTC's invitation for comments from the public, the Canadian
Government issued on November 14, 2013 a direction to the CRTC under the
authority of section 15 of the Broadcasting Act requesting that the CRTC report
on television channel choice by no later than April 30, 2014. The requested
report will focus specifically on the issue of unbundling of television
channels, including the steps the CRTC intends to take in that regard. At this
time, it is not known what steps or measures the CRTC will recommend in its
report, or how and when these steps or measures would be implemented. They could
have a major impact on wholesale and retail pricing of television services
distributed by Cogeco Cable and other Canadian terrestrial and satellite
broadcasting distributors as, if and when they are eventually implemented.
On November 26, 2013, Rogers Communications and the National Hockey League
("NHL") announced that they had concluded a twelve-year comprehensive broadcast
and multimedia licensing agreement respecting all national rights to NHL games
on all platforms in all languages in Canada, beginning with 2014-2015 season.
Rogers Communications also announced that it had selected CBC and TVA for
separate sublicensing deals for English-language broadcasts of "Hockey Night in
Canada" and all national French-language multimedia rights, respectively. At
this time, the impact of this long-term agreement on wholesale and retail rates
for linear subscription and on-demand television programming services involving
NHL hockey games distributed by Cogeco Cable and other terrestrial and satellite
broadcasting distributors cannot be assessed, nor the extent to which the
consumption of Canadian premium sports programming will change over the next
twelve years as a result of future distribution sublicensing terms for NHL
hockey games.
FUTURE ACCOUNTING DEVELOPMENTS IN CANADA
A number of new standards, interpretations and amendments to existing standards
issued by the International Accounting Standard Board ("IASB") are effective for
annual periods starting on or after January 1, 2013 and have been applied in
preparing the condensed interim consolidated financial statements for the three
months ended November 30, 2013.
NEW ACCOUNTING STANDARDS
The Corporation adopted the following new accounting standards on September 1,
2013. The impacts of the application of this standard are described in Note 2 of
the condensed interim consolidated financial statements.
-- Amendment to IAS 19, Employee Benefits : The principal difference in the
amended standard is that the expected long-term rate of return on plan
assets will no longer be used to calculate the defined benefit pension
costs. The defined benefit pension costs concepts of "interest cost" and
"expected return on plan assets" are replaced by the concept of "net
interest" calculated by applying the discount rate to the net liability
or asset. The net interest cost takes into account the change any
contributions and benefit payments have on the net defined benefit
liability or asset during the period.
The Corporation also adopted the following standards on September 1, 2013 which
had no impact on the condensed interim consolidated financial statements.
-- Amendments to IFRS 7 Financial Instruments: Disclosures
-- IFRS 10 Consolidated Financial Statements
-- IFRS 12 Disclosure of Interest in Other Entities
-- IFRS 13 Fair Value Measurement
CHANGES IN CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There has been no significant change in Cogeco Cable's accounting policies,
estimates and future accounting pronouncements since August 31, 2013. A
description of the Corporation's policies and estimates can be found in the 2013
Annual Report, available at www.sedar.com and www.cogeco.ca.
NON-IFRS FINANCIAL MEASURES
This section describes non-IFRS financial measures used by Cogeco Cable
throughout this MD&A. It also provides reconciliations between these non-IFRS
measures and the most comparable IFRS financial measures. These financial
measures do not have standard definitions prescribed by IFRS and, therefore, may
not be comparable to similar measures presented by other companies. These
measures include "cash flow from operations", "free cash flow", "operating
income before depreciation and amortization", "operating margin" and "capital
intensity".
CASH FLOW FROM OPERATIONS AND FREE CASH FLOW
Cash flow from operations is used by Cogeco Cable's management and investors to
evaluate cash flow generated by operating activities, excluding the impact of
changes in non-cash operating activities, amortization of deferred transaction
costs and discounts on long-term debt, income taxes paid, current income tax
expense, financial expense paid and financial expense. This allows the
Corporation to isolate the cash flows from operating activities from the impact
of cash management decisions. Cash flow from operations is subsequently used in
calculating the non-IFRS measure, "free cash flow". Free cash flow is used, by
Cogeco Cable's management and investors, to measure its ability to repay debt,
distribute capital to its shareholders and finance its growth.
The most comparable IFRS measure is cash flow from operating activities. Cash
flow from operations is calculated as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended November 30, 2013 2012(1)
(in thousands of dollars) $ $
----------------------------------------------------------------------------
Cash flow from operating activities 63,110 (280)
Changes in non-cash operating activities 86,704 81,113
Amortization of deferred transaction costs and
discounts on long-term debt 1,842 740
Income taxes paid 18,304 42,533
Current income tax expense (26,553) (25,091)
Financial expense paid 42,406 16,430
Financial expense (32,549) (15,714)
----------------------------------------------------------------------------
Cash flow from operations 153,264 99,731
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note
2 of the condensed interim consolidated financial statements.
Free cash flow is calculated as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended November 30, 2013 2012(1)
(in thousands of dollars) $ $
----------------------------------------------------------------------------
Cash flow from operations 153,264 99,731
Acquisition of property, plant and equipment (80,973) (78,192)
Acquisition of intangible and other assets (4,116) (4,641)
----------------------------------------------------------------------------
Free cash flow 68,175 16,898
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note
2 of the condensed interim consolidated financial statements.
OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION AND OPERATING MARGIN
Operating income before depreciation and amortization is used by Cogeco Cable's
management and investors to assess the Corporation's ability to seize growth
opportunities in a cost effective manner, to finance its ongoing operations and
to service its debt. Operating income before depreciation and amortization is a
proxy for cash flows from operations excluding the impact of the capital
structure chosen, and is one of the key metrics used by the financial community
to value the business and its financial strength. Operating margin is a measure
of the proportion of the Corporation's revenue which is available, before income
taxes, to pay for its fixed costs, such as interest on Indebtedness. Operating
margin is calculated by dividing operating income before depreciation and
amortization by revenue.
The most comparable IFRS financial measure is operating income. Operating income
before depreciation and amortization and operating margin are calculated as
follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended November 30, 2013 2012(1)
(in thousands of dollars, except percentages) $ $
----------------------------------------------------------------------------
Operating income 95,520 75,210
Depreciation and amortization 115,754 64,666
Integration, restructuring and acquisitions costs 248 7,300
----------------------------------------------------------------------------
Operating income before depreciation and
amortization 211,522 147,176
----------------------------------------------------------------------------
Revenue 474,980 327,911
----------------------------------------------------------------------------
Operating margin 44.5% 44.9%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note
2 of the condensed interim consolidated financial statements.
CAPITAL INTENSITY
Capital intensity is used by Cogeco Cable's management and investors to assess
the Corporation's investment in capital expenditures in order to support a
certain level of revenue. Capital intensity ratio is defined as amount spent for
acquisitions of property, plant and equipment, intangible and other assets
divided by revenue.
Capital intensity is calculated as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended November 30, 2013 2012
(in thousands of dollars, except percentages) $ $
----------------------------------------------------------------------------
Acquisition of property, plant and equipment 80,973 78,192
Acquisition of intangible and other assets 4,116 4,641
----------------------------------------------------------------------------
Total capital expenditures 85,089 82,833
Revenue 474,980 327,911
----------------------------------------------------------------------------
Capital intensity 17.9% 25.3%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended November 30, August 31,
(in thousands of dollars, except
percentagesand per share data) 2013 2012 2013(2) 2012(2)
$ $ $ $
----------------------------------------------------------------------------
Revenue 474,980 327,911 470,386 324,768
Operating income before depreciation
and amortization 211,522 147,176 222,539 160,825
Operating margin 44.5% 44.9% 47.3% 49.5%
Operating income 95,520 75,210 103,731 94,709
Income taxes 13,273 17,383 11,159 32,987
Profit for the period from
continuing operations 49,698 42,113 43,870 45,705
Profit for the period from
discontinued operations - - - -
Profit for the period 49,698 42,113 43,870 45,705
Profit for the period attributable
to owners of the Corporation 49,698 42,113 43,870 45,705
Cash flow from operating activities 63,110 (280) 228,230 203,343
Cash flow from operations 153,264 99,731 161,581 126,946
Acquisitions of property, plant and
equipment, intangible and other
assets 85,089 82,833 108,095 124,392
Free cash flow 68,175 16,898 53,486 2,554
Capital intensity 17.9% 25.3% 23.0% 38.3%
Earnings per share(1)
From continuing and discontinued
operations
Basic 1.02 0.87 0.90 0.94
Diluted 1.01 0.86 0.89 0.93
From continuing operations
Basic 1.02 0.87 0.90 0.94
Diluted 1.01 0.86 0.89 0.93
From discontinued operations
Basic - - - -
Diluted - - - -
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February, February,
Quarters ended May 31, 28 29
(in thousands of dollars, except
percentagesand per share data) 2013 2012(2) 2013 2012(2)
$ $ $ $
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Revenue 464,497 319,771 429,672 317,735
Operating income before depreciation
and amortization 215,182 152,661 195,826 143,743
Operating margin 46.3% 47.7% 45.6% 45.2%
Operating income 101,636 90,981 95,862 59,491
Income taxes 18,411 21,449 15,821 13,617
Profit for the period from
continuing operations 48,079 53,159 50,833 31,086
Profit for the period from
discontinued operations - - - 52,047
Profit for the period 48,079 53,159 50,833 83,133
Profit for the period attributable
to owners of the Corporation 47,877 53,159 51,035 83,133
Cash flow from operating activities 166,976 112,275 150,084 120,961
Cash flow from operations 155,868 113,075 140,401 104,622
Acquisitions of property, plant and
equipment, intangible and other
assets 112,841 87,459 104,433 86,234
Free cash flow 43,027 25,616 35,968 18,388
Capital intensity 24.3% 27.4% 24.3% 27.1%
Earnings per share(1)
From continuing and discontinued
operations
Basic 0.98 1.09 1.05 1.71
Diluted 0.98 1.09 1.04 1.70
From continuing operations
Basic 0.98 1.09 1.05 0.64
Diluted 0.98 1.09 1.04 0.63
From discontinued operations
Basic - - - 1.07
Diluted - - - 1.06
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(1) Per multiple and subordinate voting share.
(2) These figures have been adjusted to comply with the adoption of IAS 19
- Employee Benefits.
SEASONAL VARIATIONS
Cogeco Cable's operating results are not generally subject to material seasonal
fluctuations except as follows. In the Canadian and American cable services
segment the number of customers in the Television service and HSI service are
generally lower in the second half of the fiscal year as a result of a decrease
in economic activity due to the beginning of the vacation period, the end of the
television season, and students leaving their campuses at the end of the school
year. Cogeco Cable offers its services in several university and college towns
such as Kingston, Windsor, St.Catharines, Hamilton, Peterborough, Trois-Rivieres
and Rimouski in Canada and in the Pennsylvania region, and to a lesser extent in
South Carolina, Maryland/Delaware in the United States. In the American cable
services segment, the Miami region is also subject to seasonal fluctuations due
to the winter season residents returning home from late Spring through the Fall.
Furthermore, the second, third and fourth quarter's operating margin is usually
higher as very low or no management fees are paid to COGECO Inc. Under the
Management Agreement, Cogeco
Cable pays a fee equal to 2% of its total revenue subject to a maximum amount.
As the maximum amount is expected to be reached in the second quarter of fiscal
2014, Cogeco Cable does not expect to pay management fees in the second half of
the year. Similarly, as the maximum amount was paid in the first six months of
fiscal 2013, Cogeco Cable paid no management fees in the second half of the
previous fiscal year.
ADDITIONAL INFORMATION
This MD&A was prepared on January 13, 2014. Additional information relating to
the Corporation, including its Annual Information Form, is available on the
SEDAR website at www.sedar.com.
/s/ Jan Peeters /s/ Louis Audet
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Jan Peeters Louis Audet
Chairman of the Board President and Chief Executive Officer
Cogeco Cable Inc.
Montreal, Quebec
January 13, 2014
FOR FURTHER INFORMATION PLEASE CONTACT:
Source:
Cogeco Cable Inc.
Pierre Gagne
Senior Vice President and Chief Financial Officer
514-764-4700
Information:
Media
Rene Guimond
Vice-President, Public Affairs and Communications
514-764-4700
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