Today, COGECO Inc. (TSX:CGO) ("COGECO" or the "Company") announced its financial
results for the first quarter 2010, ended November 30, 2009.
For the first quarter of fiscal 2010:
- Revenue increased by 6.4% to reach $328 million;
- Operating income before amortization(1) grew by 7.1% to reach $129.3 million;
- Net income amounted to $22.7 million. Excluding a favourable income tax
adjustment of $29.8 million related to the reduction of Ontario provincial
corporate income tax rates for the cable subsidiary, adjusted net income(1)
would have amounted to $13.1 million, an increase of $2.3 million, or 20.9%
compared to $10.9 million for the same quarter of fiscal 2009;
- Free cash flow(1) reached $67.1 million for the quarter, representing an
increase of $45.4 million when compared to the first quarter of fiscal 2009;
- Operating margin(1) for the quarter remained the same as the in the prior year
at 39.4% compared to 39.1% for the same quarter of fiscal 2009;
- In the cable sector, revenue-generating units ("RGU")(2) grew by 89,785 net
additions in the quarter, for a total of 2,982,023 RGU at November 30, 2009.
"COGECO shows signs of good vitality as the economy begins to recover from the
recent turmoil. Cogeco Cable's financial results for the first quarter of fiscal
2010 exhibit continued RGU, revenue and operating income before amortization
progression. Our Canadian operations have grown at a steady pace, as
demonstrated by net additions of 63,172 RGU. In our European operations, the
first quarter results evidence that our customer base has begun to stabilize as
a result of the customer retention and acquisition plans implemented in response
to the difficult competitive environment experienced in the prior year, with a
growth of 26,613 RGU. As for the radio activities, Rythme FM is still the first
choice in Montreal. Announcers and listeners continue to choose our radio
stations. In light of these positive results, management has revised most of its
guidelines for the 2010 fiscal year. Projected RGU growth, revenue, operating
income before amortization, net income and free cash flow have been increased to
reflect the favourable financial results generated in the first quarter of the
year", declared Louis Audet, President and CEO of COGECO.
(1) The indicated terms do not have standard definitions prescribed by
Canadian Generally Accepted Accounting Principles ("GAAP") and
therefore, may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-GAAP financial
measures" section of the Management's discussion and analysis.
(2) Represents the sum of Basic Cable, High Speed Internet ("HSI"), Digital
Television and Telephony service customers.
FINANCIAL HIGHLIGHTS
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Quarters ended November 30,
($000, except percentages 2009 2008(1) Change
and per share data) $ $ %
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(unaudited) (unaudited)
Operations
Revenue 328,003 308,375 6.4
Operating income before amortization(2) 129,263 120,711 7.1
Operating margin(2) 39.4% 39.1% -
Operating income 63,562 59,829 6.2
Net income 22,748 10,861 -
Adjusted net income(2) 13,128 10,861 20.9
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Cash Flow
Cash flow from operating activities (1,410) 26,477 -
Cash flow from operations(2) 135,518 91,633 47.9
Free cash flow(2) 67,131 21,771 -
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Financial condition(3)
Total assets 2,673,573 2,670,128 0.1
Indebtedness(4) 1,123,375 1,064,542 5.5
Shareholders' Equity 353,483 332,122 6.4
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Per Share Data(5)
Earnings per share
Basic 1.36 0.65 -
Diluted 1.35 0.65 -
Adjusted earnings per share(2)
Basic 0.79 0.65 21.5
Diluted 0.78 0.65 20.0
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(1) Certain comparative figures have been restated to reflect the
application of the Canadian Institute of Chartered Accountants ("CICA")
Handbook Section 3064. Please refer to the "Accounting policies and
estimates" section of the Management's discussion and analysis for more
details.
(2) The indicated terms do not have standardized definitions prescribed by
Canadian Generally Accepted Accounting Principles ("GAAP") and
therefore, may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-GAAP financial
measures" section of the Management's discussion and analysis.
(3) At November 30, 2009 and August 31, 2009.
(4) Indebtedness is defined as the total of bank indebtedness, principal on
long-term debt and obligations under derivative financial instruments.
(5) Per multiple and subordinate voting share.
FORWARD-LOOKING STATEMENTS
Certain statements in this press release may constitute forward-looking
information within the meaning of securities laws. Forward-looking information
may relate to COGECO's future outlook and anticipated events, business,
operations, financial performance, financial condition or results and, in
some cases, can be identified by terminology such as "may"; "will"; "should";
"expect"; "plan"; "anticipate"; "believe"; "intend"; "estimate"; "predict";
"potential"; "continue"; "foresee", "ensure" or other similar expressions
concerning matters that are not historical facts. In particular, statements
regarding the Company's future operating results and economic performance and
its objectives and strategies are forward-looking statements. These statements
are based on certain factors and assumptions including expected growth, results
of operations, performance and business prospects and opportunities, which
COGECO believes are reasonable as of the current date. While management
considers these assumptions to be reasonable based on information currently
available to the Company, they may prove to be incorrect. The Company cautions
the reader that the current adverse economic conditions make 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 Company's expectations. It is impossible for COGECO to predict
with certainty the impact that the current economic downtown may have on future
results. Forward-looking information is also subject to certain factors,
including risks and uncertainties (described in the "Uncertainties and main risk
factors" section of the Company's 2009 annual Management's Discussion and
Analysis (MD&A)) that could cause actual results to differ materially from what
COGECO currently expects. These factors include technological changes, changes
in market and competition, governmental or regulatory developments, general
economic conditions, the development of new products and services, the
enhancement of existing products and services, and the introduction of competing
products having technological or other advantages, many of which are beyond the
Company'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 Company is
under no obligation (and expressly disclaims any such obligation), and does not
undertake to update or alter this information before the next quarter.
This analysis should be read in conjunction with the Company's consolidated
financial statements, and the notes thereto, prepared in accordance with
Canadian GAAP and the MD&A included in the Company's 2009 Annual Report.
Throughout this discussion, all amounts are in Canadian dollars unless otherwise
indicated.
MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)
CORPORATE STRATEGIES AND OBJECTIVES
COGECO Inc.'s ("COGECO" or the "Company") objectives are to maximize shareholder
value by increasing profitability and ensuring continued growth. The strategies
employed to reach these objectives, supported by tight controls over costs and
business processes, are specific to each sector. For the cable sector, sustained
corporate growth and the continuous improvement of networks and equipment are
the main strategies used. The radio activities focus on continuous improvement
of programming in order to increase market share, and, thereby, profitability.
COGECO uses growth of revenue and operating income before amortization(1), free
cash flow(1) and revenue-generating units ("RGU")(2) growth in order to measure
its performance against these objectives for the cable sector. Below are the
Company's recent achievements in furthering the corporate objectives.
Cable sector
During the first quarter of fiscal 2010, Cogeco Cable invested approximately
$28.7 million in its network infrastructure and equipment to upgrade its
capacity, improve its robustness and extend its territories in order to better
serve and increase its service offerings for new and existing clientele.
Furthermore, Cogeco Cable has maintained its vigilance over operating costs,
which increased at the same pace as the growth in revenue despite the increase
in operating costs in the European operations related to customer retention
strategies put in place in the second half of fiscal 2009.
Other
Fall's BBM Canada survey conducted with the Portable People Meter ("PPM") shows
that Rythme FM has maintained its leadership position with audiences in the
adult and female categories in the Montreal and Trois-Rivieres markets. The
other Rythme FM stations continue to gain market share. Furthermore, the FM 93
station in Quebec City has preserved its position as the preferred station in
this very competitive market.
RGU growth and service offerings in the cable sector
During the first three months ended November 30, 2009, the number of RGU
increased by 89,785, or 3.1%, to reach 2,982,023 RGU, in line to surpass Cogeco
Cable's RGU growth projections of 125,000 net additions issued on October 29,
2009. In light of this performance, management has revised its guidelines and
RGU growth is now expected to reach 150,000 net additions for the fiscal year
ended August 31, 2010, representing an increase of 5% when compared to the prior
year. Please consult the revised projections in the "Fiscal 2010 financial
guidelines" section for further details.
Revenue, operating income before amortization
For the first quarter of fiscal 2010, revenue increased by $19.6 million, or
6.4%, to reach $328 million while operating income before amortization grew by
$8.6 million, or 7.1%, to reach $129.3 million. Given the improved performance,
management expects to attain $1,325 million for the 2010 fiscal year, which
represents an increase of $40 million when compared to the projections of $1,285
million issued on October 29, 2009. Management expects to achieve an operating
income before amortization of $512 million for the fiscal year, $26 million
higher than the amount of $486 million projected on October 29, 2009. Please
consult the revised projections in the "Fiscal 2010 financial guidelines"
section for further details.
(1) The indicated terms do not have standardized definitions prescribed by
Canadian GAAP and therefore, may not be comparable to similar measures
presented by other companies. For more details, please consult the
"Non-GAAP financial measures" section.
(2) Represent the sum of Basic Cable, High Speed Internet (HSI), Digital
Television and Telephony service customers.
Free cash flow
In the first three months of fiscal 2010, COGECO generated free cash flow of
$67.1 million compared to $21.8 million for the same period last year. Free cash
flow growth results mainly from the cable sector and is due to an increase in
cash flow from operations(1), including the reduction in current income taxes
stemming from modifications made to the corporate structure and by the decrease
in capital expenditures. Management has revised its free cash flow guidelines to
$140 million for the 2010 fiscal year, an increase of $10 million, or 7.7%, when
compared to the guideline of $130 million issued on October 29, 2009. Please
consult the revised projections in the "Fiscal 2010 financial guidelines"
section for further details.
OPERATING RESULTS - CONSOLIDATED OVERVIEW
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Quarters ended November 30,
2009 2008(1) Change
($000, except percentages) $ $ %
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(unaudited) (unaudited)
Revenue 328,003 308,375 6.4
Operating costs 198,740 187,664 5.9
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Operating income before amortization 129,263 120,711 7.1
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Operating margin(2) 39.4% 39.1%
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(1) Certain comparative figures have been restated to reflect the
application of the Canadian Institute of Chartered Accountants ("CICA")
Handbook Section 3064. Please refer to the "Accounting policies and
estimates" section for more details.
(2) The indicated terms do not have standardized definitions prescribed by
Canadian GAAP and therefore, may not be comparable to similar measures
presented by other companies. For more details, please consult the
"Non-GAAP financial measures" section.
Revenue
Fiscal 2010 first-quarter revenue improved, mainly in its cable sector, by $19.6
million, or 6.4%, to reach $328 million. Cable revenue, driven by increased RGU,
the introduction of HSI usage billing and rate increases implemented at the end
of fiscal 2009 in its Canadian operations, went up by $17.9 million, or 6% over
the comparable period of the prior year. Canadian cable operations revenue
increased by $27 million, or 11.4%, compared to the same period of last year.
The increase in revenue for the cable sector has however been limited by its
European operations whose revenue decreased by $9.1 million, or 14.6%, compared
to the same period of the prior year, mainly due to a lower number of Basic
Cable service customers compared to the same period of last year and to the
impact of retention strategies implemented in the second half of fiscal 2009 in
order to reduce customer attrition, partly offset by the strength of the Euro
compared to the Canadian dollar. First-quarter revenue from the European
operations in the local currency amounted to _33.7 million, a decrease of E6.5
million, or 16.1% compared to the same period of the prior year.
Operating costs
For the first three months of fiscal 2010, operating costs increased by $11.1
million to reach $198.7 million, an increase of 5.9% compared to the prior year,
mainly due to the cable sector. Operating costs in the Canadian operations
increased due to the servicing of additional RGU and the additional levy
amounting to 1.5% of gross Cable Television service revenue imposed by the
Canadian Radio-television and Telecommunications Commission ("CRTC") in order to
finance a new Local Programming Improvement Fund ("LPIF") for the benefit of
conventional television broadcasters operating local stations. In Europe,
operating costs increased due to marketing initiatives, including the launch of
new channels, and the appreciation of the Euro over the Canadian dollar, partly
offset by cost reduction initiatives, such as a headcount reduction plan.
Operating income before amortization and operating margin
Operating income before amortization grew, essentially in its cable segment, by
$8.6 million, or 7.1%, to reach $129.3 million in the first quarter of fiscal
2010 compared to the corresponding period of the prior year. The cable sector
contributed to the growth by $6.9 million during the first quarter of the fiscal
year. COGECO's first quarter operating margin increased to 39.4%, from 39.1% for
the same period of the prior year.
(1) The indicated terms do not have standardized definitions prescribed by
Canadian GAAP and therefore, may not be comparable to similar measures
presented by other companies. For more details, please consult the
"Non-GAAP financial measures" section.
FIXED CHARGES
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Quarters ended November 30,
2009 2008(1) Change
($000, except percentages) $ $ %
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(unaudited) (unaudited)
Amortization 65,701 60,882 7.9
Financial expense 16,277 23,778 (31.5)
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(1) Certain comparative figures have been restated to reflect the
application of the CICA Handbook Section 3064. Please refer to the
"Accounting policies and estimates" section for more details.
First-quarter 2010 amortization amounted to $65.7 million, compared to $60.9
million for the same period of the prior year. The increase is mainly due to the
cable sector and attributable to additional capital expenditures arising from
customer premise equipment acquisitions to sustain RGU and to the appreciation
of the Euro currency over the Canadian dollar.
First-quarter financial expense amounted to $16.3 million compared to $23.8
million in the first quarter of the prior year. The financial expense of the
current quarter includes a foreign exchange gain of $0.5 million, compared to a
foreign exchange loss of $3.8 million in the prior year. The loss in the prior
year was essentially due to the unusually high US dollar volatility, as the
majority of customer premise equipment is purchased and subsequently paid in US
dollars. The remaining decrease of $3.2 million is mainly attributable to the
cable sector and is due to interest rate reductions and a decrease in
Indebtedness (defined as the total of bank indebtedness, principal on long-term
debt and obligations under derivative financial instruments) when compared with
the comparable quarter of the previous fiscal year.
INCOME TAXES
Fiscal 2010 first-quarter income tax recovery amounted to $13.8 million which
includes, in the cable sector, the impact of the reduction in corporate income
tax rates announced on March 26, 2009 by the Ontario provincial government and
considered substantively enacted on November 16, 2009 (the "reduction of Ontario
provincial corporate income tax rates"). These lower corporate income tax rates
reduced future income tax expense by $29.8 million in the first three months of
fiscal 2010. Excluding the effect of this reduction, income tax expense would
have amounted to $16 million for the first three months of fiscal 2010, compared
to $9.6 million for the same period of last year. The increase in income tax
expense in fiscal 2010 is mainly due to the improvement in operating income
before amortization surpassing that of the fixed charges in the Canadian
operations of the cable sector.
NON-CONTROLLING INTEREST
The non-controlling interest represents a participation of approximately 67.7%
in Cogeco Cable's results. During the first quarter of fiscal 2010, the income
attributable to non-controlling interest amounted to $38.4 million due to the
strong cable sector's results. The non-controlling interest for the comparable
period of last year amounted to $15.5 million.
NET INCOME
Fiscal 2010 first quarter net income amounted to $22.7 million, or $1.36 per
share. Net income for the first quarter of fiscal 2010 includes the favourable
impact in the cable sector of $29.8 million from the reduction of Ontario
provincial corporate income tax rates described above. Excluding the impact of
the income tax adjustments, adjusted net income(1) would have amounted to $13.1
million, or $0.79 per share(1), compared to $10.9 million, or $0.65 per share in
the prior year, representing increases of 20.9% and 21.5%, respectively. Please
consult the "Non-GAAP financial measures" section for further details. Net
income progression for the quarter has resulted from the growth of the financial
results in the Canadian operations of the cable sector, partly offset by the
decline in the financial results of the European operations of the cable sector
as previously discussed.
(1) The indicated terms do not have standardized definitions prescribed by
Canadian GAAP and therefore, may not be comparable to similar measures
presented by other companies. For more details, please consult the
"Non-GAAP financial measures" section.
CASH FLOW AND LIQUIDITY
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Quarters ended November 30,
2009 2008(1)
($000) $ $
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(unaudited) (unaudited)
Operating activities
Cash flow from operations(2) 135,518 91,633
Changes in non-cash operating items (136,928) (65,156)
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(1,410) 26,477
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Investing activities(3) (68,226) (68,907)
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Financing activities(3) 47,453 38,776
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Effect of exchange rate changes on cash
and cash equivalents denominated in
foreign currencies 202 687
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Net change in cash and cash equivalents (21,981) (2,967)
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Cash and cash equivalents, beginning of period 39,458 37,472
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Cash and cash equivalents, end of period 17,477 34,505
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(1) Certain comparative figures have been restated to reflect the
application of the CICA Handbook Section 3064. Please refer to the
"Accounting policies and estimates" section for more details.
(2) Cash flow from operations does not have a standardized definition
prescribed by Canadian GAAP and therefore, may not be comparable to
similar measures presented by other companies. For more details,
please consult the "Non-GAAP financial measures" section.
(3) Excludes assets acquired under capital leases.
Fiscal 2010 first quarter cash flow from operations reached $135.5 million,
47.9% higher than the comparable period last year, primarily due to the cable
sector and attributable to the reduction in current income taxes stemming from
modifications made to the corporate structure, the increase in operating income
before amortization and the reduction in financial expense. Changes in non-cash
operating items required cash outflows of $136.9 million, mainly as a result of
decreases in accounts payable and accrued liabilities and income tax liabilities
and an increase in income taxes receivable. In the prior year, the cash outflows
of $65.2 million were mainly the result of a decrease in accounts payable and
accrued liabilities and in income tax liabilities. The significant decreases in
income tax liabilities in both fiscal years are due to payments made during the
first quarter of the current year related to the prior fiscal year.
In the first quarter of fiscal 2010, total capital expenditures amounted to
$65.2 million, essentially the same when compared to $65.7 million for the
corresponding period of last year. The most significant variations are due to
the following factors:
- A decrease in support capital spending as the prior year included the
acquisition of a power generator for the Canadian data communications
subsidiary;
- An increase in customer premise equipment spending which reflects higher RGU
growth and the appreciation of the Euro over the Canadian dollar.
Deferred charges and others are mainly attributable to reconnect costs. For the
first quarter, the increase in deferred charges and others amounted to $3
million, essentially the same when compared to $3.2 million for the same period
of the prior year.
In the first quarter, COGECO generated free cash flows of $67.1 million compared
to $21.8 million in the prior year, representing an increase of $45.4 million.
The growth in free cash flow for the quarter is mainly due to an increase in
cash flow from operations, including the reduction in current income taxes
stemming from modifications made to the corporate structure and the decrease in
capital expenditures in the cable sector. The aggregate amount of total capital
expenditures and deferred charges and others decreased by $1.5 million for the
quarter ended November 30, 2009 compared to the corresponding period of the
prior year due to the factors explained above.
In the first quarter of 2010, Indebtedness affecting cash increased by $56.5
million mainly due to the decrease in non-cash operating items of $136.9 million
and the aggregate dividend payments of $6.3 million described below, partly
offset by the free cash flow of $67.1 million and the decrease in cash and cash
equivalents of $22 million. Indebtedness mainly increased through an increase of
$46.3 million in bank indebtedness and a net amount of $14.9 million drawn on
the Cogeco Cable's revolving loans. In the first quarter of 2009, Indebtedness
affecting cash increased by $43.8 million due to the reduction of non-cash
operating items of $65.2 million, partly offset by the free cash flow of $21.8
million. Indebtedness was increased through the issuance by Cogeco Cable of
Senior Secured Notes, Series A and Series B, for net proceeds of approximately
$255 million, net of the repayment of US$150 million Senior Secured Notes Series
A and the related derivative financial instrument for a total of $238.7 million,
and by an increase of $23.5 million in bank indebtedness.
During the first quarter of fiscal 2010, a dividend of $0.10 per share was paid
by the Company to the holders of subordinate and multiple voting shares,
totalling $1.7 million, compared to a dividend of $0.08 per share, or $1.3
million the year before. In addition, dividends paid by a subsidiary to
non-controlling interests in the first quarter of fiscal 2010 amounted to $4.6
million, for consolidated dividend payments of $6.3 million.
As at November 30, 2009, the Company had a working capital deficiency of $197.2
million compared to $245.8 million as at August 31, 2009. The decrease in the
deficiency is mainly attributable to the cable sector and due to the reduction
in accounts payable and accrued liabilities stemming from the timing of payments
made to suppliers and in income tax liabilities stemming from income tax
payments relating to the 2009 fiscal year, and to an increase in income taxes
receivable as a result of modifications made to the corporate structure. These
decreases have been partially offset by the increase in bank indebtedness and
the decreases in cash and cash equivalents resulting from the above mentioned
payments, and by the increase in the current portion of future income tax
liabilities also stemming from the modifications made to the corporate
structure. As part of the usual conduct of its business, COGECO maintains a
working capital deficiency due to a low level of accounts receivable as a large
portion of the cable subsidiary's customers pay before their services are
rendered, unlike accounts payable and accrued liabilities, which are paid after
products are delivered or services are rendered, thus enabling Cogeco Cable to
use cash and cash equivalents to reduce Indebtedness.
At November 30, 2009, Cogeco Cable had used $268.6 million of its $862.5 million
Term Facility for a remaining availability of $593.9 million and the Company had
drawn $7.7 million of its $50 million Term Facility, for a remaining
availability of $42.3 million.
On October 1, 2008, the Cogeco Cable completed, pursuant to a private placement,
the issuance of US$190 million Senior Secured Notes Series A maturing October 1,
2015, and $55 million Senior Secured Notes Series B maturing October 1, 2018.
The Senior Secured Notes Series B bear interest at the coupon rate of 7.60% per
annum, payable semi-annually. The Cogeco Cable has entered into cross-currency
swap agreements to fix the liability for interest and principal payments on the
Senior Secured Notes Series A in the amount of US$190 million, which bear
interest at the coupon rate of 7.00% per annum, payable semi-annually. Taking
into account these agreements, the effective interest rate on the Senior Secured
Notes Series A is 7.24% and the exchange rate applicable to the principal
portion of the US dollar-denominated debt has been fixed at $1.0625 per US
dollar.
Transfers of funds from non-wholly owned subsidiaries to COGECO are subject to
approval by the subsidiaries' Board of Directors and may also be restricted
under the terms and conditions of certain debt instruments. In accordance with
applicable corporate and securities laws, significant transfers of funds from
COGECO may be subject to approval by minority shareholders.
FINANCIAL POSITION
Since August 31, 2009, there have been significant changes to the balances of
"accounts payable and accrued liabilities", "income taxes receivable", "income
tax liabilities", "future income tax liabilities", "fixed assets", "bank
indebtedness", "long-term debt", "derivative financial instruments" and "cash
and cash equivalents".
The $72.1 million decrease in accounts payable and accrued liabilities is
related to the timing of payments made to suppliers mostly in the cable sector.
The increases of $20.5 million in income taxes receivable and $20.2 million in
the current portion of future income tax liabilities are mainly due to
modifications made to the corporate structure in the cable sector. The $39.2
million decrease in income tax liabilities is due to income tax payments made in
the first quarter of the 2010 fiscal year relating to the 2009 fiscal year in
the cable sector. The $17.8 million decrease in long-term future income tax
liabilities is mainly due to reduction, in the cable sector, of Ontario
provincial corporate income tax rates. The $6.3 million increase in fixed assets
is mainly related to capital expenditures to sustain RGU growth in the cable
sector. The increases of $46.3 million in bank indebtedness, $5.3 million in
long-term debt and $5.9 million in net derivative financial instrument
liabilities and the decrease of $22 million in cash and cash equivalents are due
to the factors previously discussed in the "Cash Flow and Liquidity" section and
the fluctuations in foreign exchange and interest rates.
A description of COGECO's share data as at December 31, 2009 is presented in the
table below:
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Number of shares/options Amount
($000)
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Common shares 1,842,860 12
Multiple voting shares 14,942,470 120,994
Subordinate voting shares
Options to purchase subordinate voting shares
Outstanding options 79,650
Exercisable options 79,650
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In the normal course of business, COGECO has incurred financial obligations,
primarily in the form of long-term debt, operating and capital leases and
guarantees. COGECO's obligations, discussed in the 2009 Annual Report, have not
materially changed since August 31, 2009.
DIVIDEND DECLARATION
At its January 12, 2010 meeting, the Board of Directors of COGECO declared a
quarterly eligible dividend of $0.10 per share for subordinate and multiple
voting shares, payable on February 9, 2010, to shareholders of record on January
26, 2010. The declaration, amount and date of any future dividend will continue
to be considered and approved by the Board of Directors of the Company based
upon the Company'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, their amount and frequency may vary.
FINANCIAL MANAGEMENT
During fiscal 2009, the Company's cable subsidiary, Cogeco Cable, entered into a
swap agreement with a financial institution to fix the floating benchmark
interest rate with respect to the Euro-denominated Term Loan facilities for a
notional amount of EURO111.5 million. The interest rate swap to hedge the Term
Loans has been fixed at 2.08% until their maturity at July 28, 2011. The
notional value of the swap will decrease in line with the amortization schedule
of the Term Loans and stood at EURO95.8 million at November 30, 2009. In
addition to the interest rate swap of 2.08%, Cogeco Cable will continue to pay
the applicable margin on these Term Loans in accordance with its Term Facility.
In the first three months of the fiscal year, the fair value of interest rate
swap decreased by $0.1 million, which is recorded as a decrease of other
comprehensive income net of income taxes.
In the previous fiscal year, Cogeco Cable 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 in 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 ?xed at
$1.0625 per US dollar. In the first quarter of the 2010 fiscal year, amounts due
under the US$190 million Senior Secured Notes Series A decreased by $7.5 million
due to the US dollar's depreciation compared to the Canadian dollar. The fair
value of cross-currency swaps decreased by a net amount of $5.8 million, of
which $7.5 million offsets the foreign exchange gain on the debt denominated in
US dollars. The difference of $1.7 million was recorded as an increase of other
comprehensive income, net of income taxes of $1.1 million.
Cogeco Cable's net investment in the self-sustaining foreign subsidiary,
Cabovisao - Televisao por Cabo, S.A. ("Cabovisao"), is exposed to market risk
attributable to fluctuations in foreign currency exchange rates, primarily
changes in the values of the Canadian dollar versus the Euro. This risk is
mitigated since the major part of the purchase price for Cabovisao was borrowed
directly in Euros. This debt is designated as a hedge of the net investment in
self-sustaining foreign subsidiaries and accordingly, Cogeco Cable realized a
foreign exchange gain of $0.6 million in the first three months of fiscal 2010,
which is presented in other comprehensive income. The exchange rate used to
convert the Euro into Canadian dollars for the balance sheet accounts at
November 30, 2009 was $1.5852 per Euro compared to $1.5698 per Euro at August
31, 2009. The average exchange rate prevailing during the first quarter used to
convert the operating results of the European operations was $1.5732 per Euro,
compared to $1.5462 per Euro for the same period of the prior year.
The following table shows the Canadian dollar impact of a 10% change in the
average exchange rate of the Euro currency into Canadian dollars on European
operating results in the cable sector for the first nine months ended November
30, 2009:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Quarter ended November 30, 2009 Exchange rate
As reported impact
($000) $ $
--------------------------------------------------------------------------
(unaudited) (unaudited)
Revenue 53,005 5,301
Operating income before amortization 10,176 1,018
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The Company 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 equipment, as the majority of customer premise equipment
in the cable sector is purchased and subsequently paid in US dollars. Please
consult the "Fixed charges" section of this MD&A and the Foreign Exchange Risk
section in note 13 of the consolidated financial statements for further details.
CABLE SECTOR
CUSTOMER STATISTICS
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net additions % of
Quarters ended Penetration(1)
November 30, November 30, November 30,
2009 2009 2008 2009 2008
--------------------------------------------------------------------------
RGU 2,982,023 89,785 52,714 - -
Basic Cable service
customers 1,132,642 8,357 798 - -
HSI service customers 681,381 22,715 14,300 62.8 58.1
Digital Television service
customers 633,371 32,220 23,617 56.6 43.0
Telephony service customers 534,629 26,493 13,999 50.8 45.9
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) As a percentage of Basic Cable service customers in areas served.
In the cable sector, first quarter RGU net additions were higher than for the
same period of last year with a growth of 89,785 compared to 52,714.
The Canadian operations' net additions to RGU of 63,172 were essentially the
same as compared to 65,463 for the same period of the prior year, and continue
to generate RGU growth despite early signs of maturation of some of its
services. The number of net additions for Basic Cable service customers stood at
8,919 compared to 8,833 for the same period of the prior year, mainly due to the
beginning of the school year for college and university students and from
expansions in the network. Telephony service customers grew by 20,641 compared
to 18,901 for the same period last year, and the number of net additions to HSI
service stood at 17,506 customers for the quarter, compared to 19,509 customers
for the same period last year. HSI and Telephony net additions continue to stem
from the enhancement of the product offering, the impact of the bundled offer
(Cogeco Complete Connection) of Television, HSI and Telephony services, and
promotional activities. Telephony service coverage, as a percentage of homes
passed, is now above 90% compared to 87% at November 30, 2008. The Digital
Television service net additions stood at 16,106 customers compared to 18,220
customers for the first quarter, and are due to targeted marketing initiatives
to improve penetration and to the continuing strong interest for HD television
service.
The European operations net additions have begun to stabilize and reflect the
benefits of the Portuguese subsidiary's customer retention and acquisition
strategies launched at the end of the 2009 fiscal year in order to reduce the
customer attrition brought on by the difficult competitive landscape in Portugal
and economic environment in the Iberian Peninsula throughout the previous fiscal
year. The RGU net additions for the first three months of fiscal 2010 amounted
to 26,613 compared to net losses of 12,749 for the same period of the previous
year. Basic Cable service customers decreased by 562 customers compared to a
decrease of 8,035 customers in the comparable period of the prior year. HSI
service customers increased by 5,209 customers compared to a decrease of 5,209
customers in the first three months of fiscal 2009. The number of Digital
Television service customers grew by 16,114 customers in the first quarter of
the current fiscal year compared to 5,397 customers in the first quarter of the
prior year. Telephony service customers increased by 5,852 customers compared to
a loss of 4,902 customers for the same period of the preceding year.
OPERATING RESULTS
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Quarters ended November 30,
2009 2008(1) Change
($000, except percentages) $ $ %
--------------------------------------------------------------------------
(unaudited) (unaudited)
Revenue 317,365 299,438 6.0
Operating costs 188,418 177,727 6.0
Management fees - COGECO Inc. 6,341 5,981 6.0
--------------------------------------------------------------------------
Operating income from before amortization 122,606 115,730 5.9
--------------------------------------------------------------------------
Operating margin 38.6% 38.6%
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) Certain comparative figures have been restated to reflect the
application of the CICA Handbook Section 3064. Please refer to the
"Accounting policies and estimates" section for more details.
Revenue
Fiscal 2010 first-quarter revenue improved by $17.9 million, or 6%, to reach
$317.4 million when compared to the prior year. Driven by the introduction of
HSI usage billing, RGU growth and the impact of rate increases implemented in
the second half of fiscal 2009 in Ontario, first quarter Canadian operations
revenue went up by $27 million, or 11.4% over the comparable period of the prior
year.
Fiscal 2010 first-quarter European operations revenue decreased by $9.1 million,
or 14.6%, at $53 million, compared to the same period of the prior year, mainly
due to lower Basic Cable service customers compared to the same period of last
year and to the impact of retention strategies implemented in the second half of
fiscal 2009 in order to reduce customer attrition, partly offset by the strength
of the Euro compared to the Canadian dollar. Revenue from the European
operations in the local currency for the first quarter amounted to EURO33.7
million, a decrease of EURO6.5 million, or 16.1%.
Operating costs
For the first three months of fiscal 2010, operating costs, excluding management
fees payable to COGECO Inc., increased by $10.7 million to reach $188.4 million,
an increase of 6% compared to the prior year. Operating costs increased due to
the servicing of additional RGU and the additional levy amounting to 1.5% of
gross Cable Television service revenue imposed by the CRTC in order to finance a
new LPIF for the benefit of conventional television broadcasters operating local
stations in Canada, and in Europe, due to marketing initiatives, including the
launch of new channels, and the appreciation of the Euro over the Canadian
dollar, partly offset by cost reduction initiatives, such as a headcount
reduction plan.
Operating income before amortization and operating margin
Fiscal 2010 first quarter operating income before amortization increased by $6.9
million, or 5.9%, to reach $122.6 million, as a result of RGU growth and rate
adjustments generating additional revenues which outpaced operating cost
increases in the first three months of the year. Cogeco Cable's first quarter
operating margin remained the same when compared to the prior year, amounting to
38.6%. The operating margin in Canada improved to 42.5% from 40% which offset
the decrease in the European operating margin to 19.2% from 33.5%.
FISCAL 2010 FINANCIAL GUIDELINES
Given the improved performance of the Company during the first quarter, the
expected trend for fiscal 2010 and the Ontario provincial corporate income tax
rate reductions announced on March 26, 2009 and considered substantively enacted
on November 16, 2009, management has revised most of its guidelines for the 2010
fiscal year. The Company now expects revenue to attain $1,325 million and
operating income before amortization should reach $512 million. Free cash flow
should generate approximately $140 million and net income of approximately $45
million should be achieved.
Consolidated
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Revised
Projections Projections
January 12, October 29,
2010 2009
Fiscal 2010 Fiscal 2010
(in millions of dollars) $ $
--------------------------------------------------------------------------
Financial guidelines
Revenue 1,325 1,285
Operating income before amortization 512 486
Financial expense 69 70
Current income taxes (40) (55)
Net income 45 30
Capital expenditures and increase in deferred
charges 341 341
Free cash flow 140 130
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Cable sector
Cogeco Cable has revised upwards its guidelines to reflect the HSI usage billing
and to charge back the LPIF costs to its Canadian Cable Television service
customers. RGU growth should also increase due to the continued demand for cable
telecommunications services. In addition, the projected foreign currency
exchange rate from the Euro to the Canadian dollar is revised upwards. During
the last segment of fiscal 2009, Cabovisao launched new channels and implemented
retention strategies, which combined with new marketing and other operating
initiatives, have helped reduce customer attrition since their implementation.
However, Cabovisao is still facing fierce competition in the Portuguese market.
Subsequent to these adjustments, projected revenue and operating income before
amortization were revised upwards. The increase in projected revenue from $1,250
million to $1,290 million should come from both the Canadian and European
operations. The operating income before amortization should increase to $505
million from $481 million and, as a result, operating margin should increase to
39.1% from 38.5%.
As a result of the revised projections, free cash flow is now expected to reach
$135 million from the $125 million initially projected.
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Revised
Projections Projections
January 12, October 29,
(in millions of dollars, except RGU growth 2010 2009
and operating margin) Fiscal 2010 Fiscal 2010
--------------------------------------------------------------------------
Financial guidelines
Revenue 1,290 1,250
Operating income before amortization 505 481
Operating margin 39.1% 38.5%
Amortization 273 273
Financial expense 69 70
Current income taxes (40) (55)
Capital expenditures and increase in
deferred charges 341 341
Free cash flow 135 125
RGU growth 150,000 125,000
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The exchange rate used for the fiscal 2010 revised projections is $1.55 per Euro
compared to $1.50 per Euro for the October 29, 2009 projections.
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 NI 52-109. COGECO'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 Canadian GAAP.
The CEO and CFO, supported by management, evaluated the design of the Company's
disclosure controls and procedures and internal controls over financial
reporting as of November 30, 2009, and have concluded that they were adequate.
UNCERTAINTIES AND MAIN RISK FACTORS
There has been no significant change in the uncertainties and main risk factors
faced by the Company since August 31, 2009. A detailed description of the
uncertainties and main risk factors faced by COGECO can be found in the 2009
Annual Report.
ACCOUNTING POLICIES AND ESTIMATES
There has been no significant change in COGECO's accounting policies, estimates
and future accounting pronouncements since August 31, 2009, except as described
below. A description of the Company's policies and estimates can be found in the
2009 Annual Report.
Goodwill and intangible assets
In February 2008, the CICA issued Section 3064, Goodwill and intangible assets,
replacing Section 3062, Goodwill and other intangible assets and Section 3450,
Research and development costs. The new Section established standards for the
recognition, measurement, presentation and disclosure of goodwill subsequent to
its initial recognition and of intangible assets by profit-oriented enterprises.
Standards concerning goodwill remained unchanged from the standards included in
the previous Section 3062. The new Section was applicable to interim and annual
financial statements relating to fiscal years beginning on or after October 1,
2008, with retroactive application. The adoption of Section 3064 eliminated the
deferral of new service launch costs which are now recognized as an expense when
they are incurred. Reconnect and additional services activation costs are
capitalized up to an amount not exceeding the revenue generated by the reconnect
activity. Consequently, the Company adjusted opening retained earnings on a
retroactive basis and the prior period comparative figures have been restated.
The adoption of this new section had the following impact on the Company's
consolidated financial statements:
Consolidated statement of income
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Increase (decrease) Quarter ended November 30, 2008
($000) $
--------------------------------------------------------------------------
(unaudited)
Operating costs 3,993
Amortization of deferred charges (3,181)
Future income tax expense (209)
Non-controlling interest (411)
Net income (192)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Consolidated balance sheets
--------------------------------------------------------------------------
--------------------------------------------------------------------------
August 31, September 1,
Increase (decrease) 2009 2008
($000) $ $
--------------------------------------------------------------------------
(unaudited) (unaudited)
Deferred charges (34,551) (32,405)
Future income tax liabilities (10,229) (9,624)
Non-controlling interest (16,428) (15,376)
Retained earnings (7,894) (7,405)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
FUTURE ACCOUNTING PRONOUNCEMENTS
Harmonization of Canadian and International accounting standards
Throughout the quarter, the Company has continued its project for the transition
from Canadian GAAP to International Financial Reporting Standards ("IFRS"). The
conversion project is progressing according to the established plan and the
Company expects to meet its target date for migration. Please refer to the 2009
Annual Report for more details.
NON-GAAP FINANCIAL MEASURES
This section describes non-GAAP financial measures used by COGECO throughout
this MD&A. It also provides reconciliations between these non-GAAP measures and
the most comparable GAAP financial measures. These financial measures do not
have standard definitions prescribed by Canadian GAAP and may not be comparable
with similar measures presented by other companies. These measures include "cash
flow from operations", "free cash flow", "operating income before amortization",
"operating margin", "adjusted net income", and "adjusted earnings per share".
Cash flow from operations and free cash flow
Cash flow from operations is used by COGECO's management and investors to
evaluate cash flows generated by operating activities excluding the impact of
changes in non-cash operating items. This allows the Company 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-GAAP
measure "free cash flow". Free cash flow is used by COGECO's management and
investors to measure COGECO's ability to repay debt, distribute capital to its
shareholders and finance its growth.
The most comparable Canadian GAAP financial measure is cash flow from operating
activities. Cash flow from operations is calculated as follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Quarters ended November 30,
2009 2008(1)
($000) $ $
--------------------------------------------------------------------------
(unaudited) (unaudited)
Cash flow from operating activities (1,410) 26,477
Changes in non-cash operating items 136,928 65,156
--------------------------------------------------------------------------
Cash flow from operations 135,518 91,633
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Free cash flow is calculated as follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Quarters ended November 30,
2009 2008(1)
($000) $ $
--------------------------------------------------------------------------
(unaudited) (unaudited)
Cash flow from operations 135,518 91,633
Acquisition of fixed assets (65,182) (65,709)
Increase in deferred charges (3,064) (3,214)
Assets acquired under capital leases -
as per note 11 c) (141) (939)
--------------------------------------------------------------------------
Free cash flow 67,131 21,771
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) Certain comparative figures have been restated to reflect the
application of the CICA Handbook Section 3064. Please refer to the
"Accounting policies and estimates" section for more details.
Operating income before amortization and operating margin
Operating income before amortization is used by COGECO's management and
investors to assess the Company's ability to seize growth opportunities in a
cost effective manner, to finance its ongoing operations and to service its
debt. Operating income before 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
Company's revenue which is left over, before taxes, to pay for its fixed costs,
such as interest on Indebtedness. Operating margin is calculated by dividing
operating income before amortization by revenue.
The most comparable Canadian GAAP financial measure is operating income.
Operating income before amortization and operating margin are calculated as
follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Quarters ended November 30,
2009 2008(1)
($000, except percentages) $ $
--------------------------------------------------------------------------
(unaudited) (unaudited)
Operating income 63,562 59,829
Amortization 65,701 60,882
--------------------------------------------------------------------------
Operating income before amortization 129,263 120,711
--------------------------------------------------------------------------
Revenue 328,003 308,375
--------------------------------------------------------------------------
Operating margin 39.4% 39.1%
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) Certain comparative figures have been restated to reflect the
application of the CICA Handbook Section 3064. Please refer to the
"Accounting policies and estimates" section for more details.
Adjusted net income and adjusted earnings per share
Adjusted net income and adjusted earnings per share are used by COGECO's
management and investors to evaluate what would have been the net income and
earnings per share excluding unusual adjustments. This allows the Company to
isolate the unusual adjustments in order to evaluate the net income and earnings
per share from ongoing activities.
The most comparable Canadian GAAP financial measures are net income and earnings
per share. These above-mentioned non-GAAP financial measures are calculated as
follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Quarters ended November 30,
2009 2008(1)
($000) $ $
--------------------------------------------------------------------------
(unaudited) (unaudited)
Net income 22,748 10,861
Adjustment for the reduction of Ontario
provincial corporate income tax rates (9,620) -
--------------------------------------------------------------------------
Adjusted net income 13,128 10,861
--------------------------------------------------------------------------
Weighted average number of multiple voting
and subordinate voting shares outstanding 16,721,277 16,701,699
Effect of dilutive stock options 6,594 20,386
Effect of dilutive incentive share units 64,053 38,747
--------------------------------------------------------------------------
Weighted average number of diluted multiple
voting and subordinate voting
shares outstanding 16,791,924 16,760,832
--------------------------------------------------------------------------
Adjusted earnings per share
Basic 0.79 0.65
Diluted 0.78 0.65
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) Certain comparative figures have been restated to reflect the
application of the CICA Handbook Section 3064. Please refer to the
"Accounting policies and estimates" section for more details.
ADDITIONAL INFORMATION
This MD&A was prepared on January 12, 2010. Additional information relating to
the Company, including its Annual Information Form, is available on the SEDAR
website at www.sedar.com.
ABOUT COGECO
COGECO is a diversified communications company. Through its Cogeco Cable
subsidiary, COGECO provides its residential customers with Audio, Analogue and
Digital Television, as well as HSI and Telephony services using its two-way
broadband cable networks. Cogeco Cable also provides, to its commercial
customers, data networking, e-business applications, video conferencing, hosting
services, Ethernet, private line, VoIP, HSI access, dark fibre, data storage,
data security and co-location services and other advanced communication
solutions. Through its subsidiary, Cogeco Diffusion Inc., COGECO owns and
operates the Rythme FM radio stations in Montreal, Quebec City, Trois-Rivieres
and Sherbrooke, as well as the FM 93 radio station in Quebec City. COGECO's
subordinate voting shares are listed on the Toronto Stock Exchange (TSX: CGO).
The subordinate voting shares of Cogeco Cable are also listed on the Toronto
Stock Exchange (TSX: CCA).
Analyst Conference Call: Wednesday, January 13, 2010 at 11:00 A.M. (EST)
Media representatives may attend as listeners
only.
Please use the following dial-in number to have
access to the conference call by dialling five
minutes before the start of the conference:
Canada/USA Access Number: 1 888 300-0053
International Access Number: + 1 647 427-3420
Confirmation Code: 5342110
By Internet at www.cogeco.ca/investors
A rebroadcast of the conference call will be
available until January 20, by dialling:
Canada and USA access number: 1 800 642-1687
International access number: + 1 706 645-9291
Confirmation code: 5342110
Supplementary Quarterly Financial Information
(unaudited)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Quarters ended November 30, August 31,
($000, except percentages
and per share data) 2009 2008(1) 2009(1) 2008(1)(2)
--------------------------------------------------------------------------
Revenue 328,003 308,375 316,284 292,873
Operating income
from continuing
operations before
amortization(2) 129,263 120,711 144,654 117,557
Operating margin(2) 39.4% 39.1% 45.7% 40.1%
Operating income
from continuing
operations 63,562 59,829 76,244 58,664
Impairment of goodwill
and intangible assets - - - -
Net income (loss)
from continuing
operations 22,748 10,861 14,631 9,332
Net loss from
discontinued
operations - - - -
Net income (loss) 22,748 10,861 14,631 9,332
Adjusted net income
(2)(3) 13,128 10,861 7,647 9,332
Cash flow from
operating activities
from continuing
operations (1,410) 26,477 177,032 141,590
Cash flow from
operations from
continuing
operations(2) 135,518 91,633 108,744 95,507
Free cash flow(2) 67,131 21,771 14,742 20,981
Earnings (loss)
per share(4)
Basic
Income (loss)
from continuing
operations 1.36 0.65 0.87 0.56
Loss from
discontinued
operations - - - -
Net income (loss) 1.36 0.65 0.87 0.56
Adjusted net
income(2)(3) 0.79 0.65 0.46 0.56
Diluted
Income (loss)
from continuing
operations 1.35 0.65 0.87 0.56
Loss from
discontinued
operations - - - -
Net income (loss) 1.35 0.65 0.87 0.56
Adjusted net income
(2)(3) 0.78 0.65 0.46 0.56
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Quarters ended May 31, February 28/29
($000, except
percentages
and per share data) 2009(1) 2008(1)(2) 2009(1) 2008(1)(2)
--------------------------------------------------------------------------
Revenue 316,310 283,878 311,825 271,894
Operating income
from continuing
operations before
amortization(2) 126,624 112,639 123,505 105,893
Operating margin(2) 40.0% 39.7% 39.6% 38.9%
Operating income
from continuing
operations 62,623 57,114 60,171 52,769
Impairment of
goodwill and
intangible assets - - 399,648 -
Net income (loss)
from continuing
operations 10,704 9,221 (115,210) 16,296
Net loss from
discontinued
operations - - - (425)
Net income (loss) 10,704 9,221 (115,210) 15,871
Adjusted net
income(2)(3) 9,157 9,221 8,741 8,387
Cash flow from
operating
activities from
continuing
operations 99,873 108,326 117,322 89,312
Cash flow from
operations from
continuing
operations(2) 92,718 91,501 97,193 81,744
Free cash flow(2) 32,416 37,107 32,089 19,374
Earnings (loss)
per share(4)
Basic
Income (loss)
from continuing
operations 0.64 0.55 (6.88) 0.98
Loss from
discontinued
operations - - - (0.03)
Net income (loss) 0.64 0.55 (6.88) 0.95
Adjusted net income
(2)(3) 0.55 0.55 0.52 0.50
Diluted
Income (loss) from
continuing
operations 0.64 0.55 (6.88) 0.97
Loss from
discontinued
operations - - - (0.03)
Net income (loss) 0.64 0.55 (6.88) 0.95
Adjusted net income
(2)(3) 0.55 0.55 0.52 0.50
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) Certain comparative figures have been restated to reflect the
application of the Canadian Institute of Chartered Accountants ("CICA")
Handbook Section 3064. Please refer to the "Accounting policies and
estimates" section of the Management's discussion and analysis for more
details.
(2) Certain comparative figures have been reclassified to reflect the
reclassification of foreign exchange gains or losses from operating
costs to financial expense.
(3) The indicated terms do not have standardized definitions prescribed by
Canadian Generally Accepted Accounting Principles ("GAAP") and
therefore, may not be comparable to similar measures presented by
other companies. For more details, please consult the "Non-GAAP
financial measures" section of the Management's discussion and
analysis.
(4) Per multiple and subordinate voting share.
SEASONAL VARIATIONS
Cogeco Cable's operating results are not generally subject to material seasonal
fluctuations. However, the loss in Basic Cable service customers is usually
greater, and the addition of HSI service customers is 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 seasons,
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 Aveiro, Covilha, Evora, Guarda and Coimbra in Portugal. Furthermore,
the operating margin in the third and fourth quarters is generally higher as the
maximum amount payable to COGECO under the management agreement is usually
reached in the second quarter of the year. As part of the management agreement
between Cogeco Cable and COGECO, Cogeco Cable pays management fees to COGECO
equivalent to 2% of its revenue subject to an annual maximum amount, which is
adjusted annually to reflect the increase in the Canadian Consumer Price index.
For fiscal 2009, the maximum amount of $9 million was attained in the second
quarter and therefore, no management fees were paid in the third or fourth
quarters of the 2009 fiscal year. For the current fiscal year, the maximum
amount has been set at $9 million.
Cable Sector Customer Statistics
(unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
November 30, August 31,
2009 2009
Homes passed
Ontario 1,052,470 1,049,818
Quebec 518,163 515,327
-------------------------------------------------------------------------
Canada 1,570,633 1,565,145
Portugal(1) 905,197 905,129
-------------------------------------------------------------------------
Total 2,475,830 2,470,274
-------------------------------------------------------------------------
Homes connected(2)
Ontario 667,017 658,690
Quebec 288,535 285,944
-------------------------------------------------------------------------
Canada 955,552 944,634
Portugal 268,202 269,022
-------------------------------------------------------------------------
Total 1,223,754 1,213,656
-------------------------------------------------------------------------
Revenue-generating units
Ontario 1,526,556 1,483,324
Quebec 696,479 676,539
-------------------------------------------------------------------------
Canada 2,223,035 2,159,863
Portugal 758,988 732,375
-------------------------------------------------------------------------
Total 2,982,023 2,892,238
-------------------------------------------------------------------------
Basic Cable service customers
Ontario 604,028 597,651
Quebec 269,696 267,154
-------------------------------------------------------------------------
Canada 873,724 864,805
Portugal 258,918 259,480
-------------------------------------------------------------------------
Total 1,132,642 1,124,285
-------------------------------------------------------------------------
High Speed Internet service customers
Ontario 387,497 374,906
Quebec 145,061 140,146
-------------------------------------------------------------------------
Canada 532,558 515,052
Portugal 148,823 143,614
-------------------------------------------------------------------------
Total 681,381 658,666
-------------------------------------------------------------------------
Digital Television service customers
Ontario 336,270 326,227
Quebec 178,234 172,171
-------------------------------------------------------------------------
Canada 514,504 498,398
Portugal 118,867 102,753
-------------------------------------------------------------------------
Total 633,371 601,151
-------------------------------------------------------------------------
Telephony service customers
Ontario 198,761 184,540
Quebec 103,488 97,068
-------------------------------------------------------------------------
Canada 302,249 281,608
Portugal 232,380 226,528
-------------------------------------------------------------------------
Total 534,629 508,136
-------------------------------------------------------------------------
(1) Cogeco Cable is currently assessing the number of homes passed.
(2) Includes Basic Cable service customers and HSI and Telephony service
customers who do not subscribe to other cable services.
COGECO INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended
November 30,
(In thousands of dollars, 2009 2008
except per share data) $ $
--------------------------------------------------------------------------
(restated,
see note 1)
Revenue 328,003 308,375
Operating costs 198,740 187,664
--------------------------------------------------------------------------
Operating income before amortization 129,263 120,711
Amortization (note 3) 65,701 60,882
--------------------------------------------------------------------------
Operating income 63,562 59,829
Financial expense (note 4) 16,277 23,778
--------------------------------------------------------------------------
Income before income taxes and the following items 47,285 36,051
Income taxes (note 5) (13,818) 9,639
Loss on dilution resulting from the
issuance of shares by a subsidiary - 26
Non-controlling interest 38,355 15,525
--------------------------------------------------------------------------
Net income 22,748 10,861
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Earnings per share (note 6)
Basic 1.36 0.65
Diluted 1.35 0.65
--------------------------------------------------------------------------
--------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended
November 30,
(In thousands of dollars) 2009 2008
$ $
--------------------------------------------------------------------------
(restated,
see note 1)
Net income 22,748 10,861
--------------------------------------------------------------------------
Other comprehensive income
Unrealized gains (losses) on derivative financial
instruments designated as cash flow hedges,
net of income taxes recovery of $2,141,000 and
non-controlling interest of $2,551,000
(income taxes expense of $3,387,000 and
non-controlling interest of $17,451,000 in 2008) (1,218) 8,338
Reclassification to net income of realized losses
(gains) on derivative financial instruments
designated as cash flow hedges, net of income
taxes recovery of $1,007,000 and non-controlling
interest of $4,386,000 (income taxes expense of
$4,323,000 and non-controlling interest of
$19,211,000 in 2008) 2,093 (9,180)
Unrealized gains on translation of a net investment
in self-sustaining foreign subsidiaries, net of
non controlling interest of $1,844,000
($4,114,000 in 2008) 882 1,966
Unrealized losses on translation of long-term debts
designated as hedges of a net investment in self
sustaining foreign subsidiaries, net of
non-controlling interest of $1,415,000
($2,273,000 in 2008) (676) (1,086)
--------------------------------------------------------------------------
1,081 38
--------------------------------------------------------------------------
Comprehensive income 23,829 10,899
--------------------------------------------------------------------------
--------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(unaudited)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended
November 30,
(In thousands of dollars) 2009 2008
$ $
--------------------------------------------------------------------------
(restated,
see note 1)
Balance at beginning, as reported 211,922 295,808
Changes in accounting policies (note 1) (7,894) (7,405)
--------------------------------------------------------------------------
Balance at beginning, as restated 204,028 288,403
Net income 22,748 10,861
Dividends on multiple voting shares (184) (147)
Dividends on subordinate voting shares (1,494) (1,192)
--------------------------------------------------------------------------
Balance at end 225,098 297,925
--------------------------------------------------------------------------
--------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(In thousands of dollars) November 30, August 31,
2009 2009
$ $
--------------------------------------------------------------------------
(restated,
see note 1)
Assets
Current
Cash and cash equivalents (note 11 b)) 17,477 39,458
Accounts receivable 71,659 66,076
Income taxes receivable 25,766 5,228
Prepaid expenses 15,941 14,805
Future income tax assets 4,934 4,275
--------------------------------------------------------------------------
135,777 129,842
--------------------------------------------------------------------------
Investments 739 739
Fixed assets 1,312,049 1,305,769
Deferred charges 23,912 24,062
Intangible assets (note 7) 1,046,581 1,047,774
Goodwill (note 7) 149,615 153,695
Derivative financial instruments - 4,236
Future income tax assets 4,900 4,011
--------------------------------------------------------------------------
2,673,573 2,670,128
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Liabilities and Shareholders' equity
Liabilities
Current
Bank indebtedness 46,740 416
Accounts payable and accrued liabilities 183,171 255,281
Income tax liabilities 2,154 41,358
Deferred and prepaid revenue 36,059 33,877
Current portion of long-term debt (note 8) 44,693 44,706
Future income tax liabilities 20,209 -
--------------------------------------------------------------------------
333,026 375,638
--------------------------------------------------------------------------
Long-term debt (note 8) 1,024,573 1,019,258
Derivative financial instruments 3,842 2,168
Deferred and prepaid revenue and
other liabilities 12,918 12,900
Pension plan liabilities and
accrued employees benefits 11,379 10,453
Future income tax liabilities 216,934 234,710
--------------------------------------------------------------------------
1,602,672 1,655,127
--------------------------------------------------------------------------
Non-controlling interest 717,418 682,879
--------------------------------------------------------------------------
Shareholders' equity
Capital stock (note 9) 121,006 121,006
Treasury shares (note 9) (2,896) (1,847)
Contributed surplus 2,866 2,607
Retained earnings 225,098 204,028
Accumulated other comprehensive income (note 10) 7,409 6,328
--------------------------------------------------------------------------
353,483 332,122
--------------------------------------------------------------------------
2,673,573 2,670,128
--------------------------------------------------------------------------
--------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended
November 30,
(In thousands of dollars) 2009 2008
$ $
--------------------------------------------------------------------------
(restated,
see note 1)
Cash flow from operating activities
Net income 22,748 10,861
Adjustments for:
Amortization (note 3) 65,701 60,882
Amortization of deferred transaction
costs and discounts on long-term debt 762 717
Future income taxes (note 5) 6,404 2,615
Non-controlling interest 38,355 15,525
Loss on dilution resulting from the
issuance of shares by a subsidiary - 26
Stock-based compensation 708 89
Loss on disposal of fixed assets 98 223
Other 742 695
--------------------------------------------------------------------------
135,518 91,633
Changes in non-cash operating items (note 11 a)) (136,928) (65,156)
--------------------------------------------------------------------------
(1,410) 26,477
--------------------------------------------------------------------------
Cash flow from investing activities
Acquisition of fixed assets (note 11 c)) (65,182) (65,709)
Increase in deferred charges (3,064) (3,214)
Other 20 16
--------------------------------------------------------------------------
(68,226) (68,907)
--------------------------------------------------------------------------
Cash flow from financing activities
Increase in bank indebtedness 46,324 23,459
Net increase under the term facilities 11,425 5,294
Issuance of long-term debt,
net of discounts and transaction costs - 254,771
Repayment of long-term debt and settlement
of derivative financial instrument (1,224) (239,747)
Acquisition of treasury shares (note 9) (1,049) -
Dividends on multiple voting shares (184) (147)
Dividends on subordinate voting shares (1,494) (1,192)
Issuance of shares by a subsidiary
non-controlling interest - 278
Acquisition of treasury shares by a subsidiary
from non-controlling interest (note 9) (1,744) -
Dividends paid by a subsidiary to
non-controlling interest (4,601) (3,940)
--------------------------------------------------------------------------
47,453 38,776
--------------------------------------------------------------------------
Effect of exchange rate changes on cash and
cash equivalents denominated
in foreign currencies 202 687
--------------------------------------------------------------------------
Net change in cash and cash equivalents (21,981) (2,967)
--------------------------------------------------------------------------
Cash and cash equivalents at beginning 39,458 37,472
--------------------------------------------------------------------------
Cash and cash equivalents at end 17,477 34,505
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See supplemental cash flow information in note 11.
COGECO INC.
Notes to Consolidated Financial Statements
November 30, 2009
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and per
share data)
1. Basis of Presentation
In the opinion of management, the accompanying unaudited interim consolidated
financial statements, prepared in accordance with Canadian generally accepted
accounting principles, present fairly the financial position of COGECO Inc.
("the Company") as at November 30, 2009 and August 31, 2009 as well as its
results of operations and its cash flows for the three month periods ended
November 30, 2009 and 2008.
While management believes that the disclosures presented are adequate, these
unaudited interim consolidated financial statements and notes should be read in
conjunction with COGECO Inc.'s annual consolidated financial statements for the
year ended August 31, 2009. These unaudited interim consolidated financial
statements follow the same accounting policies as the most recent annual
consolidated financial statements, except for the adoption of the new accounting
policies described below.
Goodwill and intangible assets
In February 2008, the CICA issued Section 3064, Goodwill and intangible assets,
replacing Section 3062, Goodwill and other intangible assets and Section 3450,
Research and development costs. The new Section establishes standards for the
recognition, measurement, presentation and disclosure of goodwill subsequent to
its initial recognition and of intangible assets by profit-oriented enterprises.
Standards concerning goodwill remained unchanged from the standards included in
the previous Section 3062. The new Section was applicable to interim and annual
financial statements relating to fiscal years beginning on or after October 1,
2008, with retroactive application. The adoption of Section 3064 eliminated the
deferral of new service launch costs which are now recognized as an expense when
they are incurred. Reconnect and additional services activation costs are
capitalized up to an amount not exceeding the revenue generated by the reconnect
activity. Consequently, the Company adjusted opening retained earnings on a
retroactive basis and the prior period comparative figures have been restated.
The adoption of this new section had the following impacts on the Company's
consolidated financial statements.
Consolidated statement of income
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended
November 30, 2008
Increase (decrease) $
--------------------------------------------------------------------------
Operating costs 3,993
Amortization of deferred charges (3,181)
Future income tax expense (209)
Non-controlling interest (411)
Net income (192)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Consolidated balance sheets
--------------------------------------------------------------------------
--------------------------------------------------------------------------
August 31, September 1,
2009 2008
Increase (decrease) $ $
--------------------------------------------------------------------------
Deferred charges (34,551) (32,405)
Future income tax liabilities (10,229) (9,624)
Non-controlling interest (16,428) (15,376)
Retained earnings (7,894) (7,405)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
2. Segmented Information
The Company's activities are divided into two business segments: Cable and
other. The Cable segment is comprised of Cable Television, High Speed Internet,
Telephony and other telecommunications services, and the other segment is
comprised of radio and head office activities, as well as eliminations. The
Cable segment's activities are carried out in Canada and in Europe.
The principal financial information per business segment is presented in the
tables below:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Other and
Cable eliminations Consolidated
--------------------------------------------------------------------------
Three months ended
November 30, 2009 2008 2009 2008 2009 2008
$ $ $ $ $ $
--------------------------------------------------------------------------
(restated) (restated) (restated)
Revenue 317,365 299,438 10,638 8,937 328,003 308,375
Operating costs 194,759 183,708 3,981 3,956 198,740 187,664
Operating income
before
amortization 122,606 115,730 6,657 4,981 129,263 120,711
Amortization 65,565 60,746 136 136 65,701 60,882
Operating income 57,041 54,984 6,521 4,845 63,562 59,829
Financial expense 16,141 23,394 136 384 16,277 23,778
Income taxes (15,766) 8,645 1,948 994 (13,818) 9,639
Loss on dilution
resulting from
the issuance of
shares by a
subsidiary - 26 - - - 26
Non-controlling
interest 38,355 15,525 - - 38,355 15,525
Net income 18,311 7,394 4,437 3,467 22,748 10,861
--------------------------------------------------------------------------
Total assets (1) 2,632,154 2,630,912 41,419 39,216 2,673,573 2,670,128
Fixed assets (1) 1,308,488 1,302,238 3,561 3,531 1,312,049 1,305,769
Intangible
assets (1) 1,021,241 1,022,434 25,340 25,340 1,046,581 1,047,774
Goodwill (1) 149,615 153,695 - - 149,615 153,695
Acquisition
of fixed
assets (2) 65,157 66,606 166 42 65,323 66,648
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) At November 30, 2009 and August 31, 2009.
(2) Includes capital leases that are excluded from the consolidated
statements of cash flows.
The following tables set out certain geographic market information based on
client location:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended
November 30,
2009 2008
$ $
--------------------------------------------------------------------------
Revenue
Canada 274,998 246,311
Europe 53,005 62,064
--------------------------------------------------------------------------
328,003 308,375
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
November 30, August 31,
2009 2009
$ $
--------------------------------------------------------------------------
Fixed assets
Canada 1,025,914 1,015,298
Europe 286,135 290,471
--------------------------------------------------------------------------
1,312,049 1,305,769
--------------------------------------------------------------------------
Intangible assets
Canada 1,046,581 1,047,774
Europe - -
--------------------------------------------------------------------------
1,046,581 1,047,774
--------------------------------------------------------------------------
Goodwill
Canada 116,243 116,243
Europe 33,372 37,452
--------------------------------------------------------------------------
149,615 153,695
--------------------------------------------------------------------------
3. Amortization
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended
November 30,
2009 2008
$ $
--------------------------------------------------------------------------
(restated)
Fixed assets 61,701 54,406
Deferred charges 2,807 2,607
Intangible assets 1,193 3,869
--------------------------------------------------------------------------
65,701 60,882
--------------------------------------------------------------------------
--------------------------------------------------------------------------
4. Financial expense
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended
November 30,
2009 2008
$ $
--------------------------------------------------------------------------
Interest on long-term debt 15,901 20,270
Foreign exchange losses (gains) (488) 3,784
Amortization of deferred transaction costs 407 407
Other 457 (683)
--------------------------------------------------------------------------
16,277 23,778
--------------------------------------------------------------------------
--------------------------------------------------------------------------
5. Income Taxes
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended
November 30,
2009 2008
$ $
--------------------------------------------------------------------------
(restated)
Current (20,222) 7,024
Future 6,404 2,615
--------------------------------------------------------------------------
(13,818) 9,639
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The following table provides the reconciliation between Canadian statutory
federal and provincial income taxes and the consolidated income tax
expense:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended
November 30,
2009 2008
$ $
--------------------------------------------------------------------------
(restated)
Income before income taxes 47,285 36,051
Combined income tax rate 31.43% 32.46%
Income taxes at combined income tax rate 14,862 11,702
Adjustments for losses or income subject
to lower or higher tax rates (2,422) (194)
Decrease in future income taxes as a result of
decrease in substantively enacted tax rates (29,782) -
Utilization of pre-acquisition tax losses 4,432 -
Income taxes arising from non-deductible expenses 209 117
Effect of foreign income tax rate differences 247 (1,604)
Other (1,364) (382)
--------------------------------------------------------------------------
Income taxes at effective income tax rate (13,818) 9,639
--------------------------------------------------------------------------
--------------------------------------------------------------------------
6. Earnings per Share
The following table provides the reconciliation between basic and diluted
earnings (loss) per share:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended
November 30,
2009 2008
$ $
--------------------------------------------------------------------------
(restated)
Net income 22,748 10,861
--------------------------------------------------------------------------
Weighted average number of multiple voting
and subordinate voting shares outstanding 16,721,277 16,701,699
Effect of dilutive stock options (1) 6,594 20,386
Effect of dilutive incentive share units 64,053 38,747
--------------------------------------------------------------------------
Weighted average number of diluted multiple
voting and subordinate voting
shares outstanding 16,791,924 16,760,832
--------------------------------------------------------------------------
Earnings per share
Basic 1.36 0.65
Diluted 1.35 0.65
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) For the three month period ended November 30, 2009, 32,782 stock
options (32,782 in 2008) were excluded from the calculation of diluted
earnings per share as the exercise price of the options was greater
than the average share price of the subordinate voting shares.
7. Goodwill and Other Intangible Assets
--------------------------------------------------------------------------
--------------------------------------------------------------------------
November 30, August 31,
2009 2009
$ $
--------------------------------------------------------------------------
Customer relationships 31,689 32,882
Broadcasting licenses 25,120 25,120
Customer base 989,772 989,772
--------------------------------------------------------------------------
1,046,581 1,047,774
Goodwill 149,615 153,695
--------------------------------------------------------------------------
1,196,196 1,201,469
--------------------------------------------------------------------------
--------------------------------------------------------------------------
a) Intangible assets
During the first three months, intangible assets variations were as
follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Customer Broadcasting Customer
relationships licenses Base Total
$ $ $ $
--------------------------------------------------------------------------
Balance as at
August 31, 2009 32,882 25,120 989,772 1,047,774
Amortization (1,193) - - (1,193)
--------------------------------------------------------------------------
Balance as at
November 30, 2009 31,689 25,120 989,772 1,046,581
--------------------------------------------------------------------------
--------------------------------------------------------------------------
b) Goodwill
During the first three months, goodwill variation was as follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
$
--------------------------------------------------------------------------
Balance as at August 31, 2009 153,695
Recognition of pre-acquisition tax losses (4,432)
Foreign currency translation adjustment 352
--------------------------------------------------------------------------
Balance as at November 30, 2009 149,615
--------------------------------------------------------------------------
--------------------------------------------------------------------------
On November 25, 2009, Cogeco Cable Inc.'s subsidiary, Cabovisao-Televisao por
Cabo, S.A., received approval to its request for preservation of tax losses for
the years preceeding the 2006 taxation year. Accordingly, the recognition of
these pre-acquisition tax losses in the three month period ended November 30,
2009, has reduced goodwill by approximately $4.4 million.
8. Long-Term Debt
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Maturity Interest November 30, August 31,
rate 2009 2009
% $ $
--------------------------------------------------------------------------
Parent company
Term Facility 2011 3.02 (1) 5,905 9,382
Obligations under
capital leases 2013 6.61 - 9.29 86 91
Subsidiaries
Term Facility
Term loan
- 78,413,625 Euros 2011 1.19 (1)(2) 123,949 122,674
Term loan
- 17,358,700 Euros 2011 1.19 (1)(2) 27,423 27,142
Revolving loan
- 40,000,000 Euros 2011 1.19 (1) 63,408 62,792
Revolving loan 2011 2.25 15,000 -
Senior Secured Notes
Series B 2011 7.73 174,582 174,530
Senior Secured Notes
Series A - US$190 million 2015 7.00 199,169 206,606
Series B 2018 7.60 54,584 54,576
Senior Secured
Debentures Series 1 2014 5.95 296,922 296,860
Senior Unsecured Debenture 2018 5.94 99,791 99,786
Obligations under
capital leases 2013 6.73 - 9.93 8,422 9,496
Other - - 25 29
--------------------------------------------------------------------------
1,069,266 1,063,964
Less current portion 44,693 44,706
--------------------------------------------------------------------------
1,024,573 1,019,258
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) Interest rate on debt as at November 30, 2009, including stamping fees.
(2) On January 21, 2009, the Company's subsidiary, Cogeco Cable Inc.,
entered into a swap agreement with a financial institution to fix the
floating benchmark interest rate with respect to the Euro-denominated
Term Loan facilities for a notional amount of Euros111.5 million. The
interest swap rate to hedge the Term Loans has been fixed at 2.08%
until their maturity on July 28, 2011. The notional value of the swap
will decrease in line with the amortization schedule of the Term Loans.
In addition to the interest swap rate of 2.08%, the Company's
subsidiary will continue to pay the applicable margin on these Term
Loans in accordance with the Term Facility.
9. Capital Stock
Authorized, an unlimited number
Preferred shares of first and second rank, could be issued in series and
non-voting, except when specified in the Articles of Incorporation of the
Company or in the Law.
Multiple voting shares, 20 votes per share.
Subordinate voting share, 1 vote per share.
Issued
--------------------------------------------------------------------------
--------------------------------------------------------------------------
November 30, August 31,
2009 2009
$ $
--------------------------------------------------------------------------
1,842,860 multiple voting shares 12 12
14,942,470 subordinate voting shares 120,994 120,994
--------------------------------------------------------------------------
121,006 121,006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Stock-based plans
The Company offers, for the benefit of its employees and those of its
subsidiaries, an Employee Stock Purchase Plan and a Stock Option Plan for
certain executives, which are described in the Company's annual consolidated
financial statements. During the first three months of 2010 and 2009, no stock
options were granted to employees by COGECO Inc. However, the Company's
subsidiary, Cogeco Cable Inc., granted 63,695 stock options (133,381 in 2008)
with an exercise price of $31.82 ($34.46 in 2008), of which 33,266 stock options
(29,711 in 2008) were granted to COGECO Inc.'s employees. As a result, a
compensation expense of $337,000 ($101,000 in 2008) was recorded for the three
month period ended November 30, 2009.
The weighted average fair value of stock options granted by the Company's
subsidiary, Cogeco Cable Inc., for the three month period ended November 30,
2009 was $8.11 ($8.96 in 2008) per option. The weighted average fair value was
estimated at the grant date for purposes of determining stock-based compensation
expense using the binomial option pricing model based on the following
assumptions:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
2009 2008
% %
--------------------------------------------------------------------------
Expected dividend yield 1.49 1.40
Expected volatility 29 29
Risk-free interest rate 2.67 4.22
Expected life in years 4.8 4.0
--------------------------------------------------------------------------
--------------------------------------------------------------------------
At November 30, 2009, the Company had outstanding stock options providing for
the subscription of 79,650 subordinate voting shares. These stock options can be
exercised at various prices ranging from $20.95 to $37.50 and at various dates
up to October 19, 2011.
The Company also offers a senior executive and designated employee incentive
share unit plan (the "Incentive Share Unit Plan") which is described in the
Company's annual consolidated financial statements. Effective October 29, 2009,
the Company's subsidiary, Cogeco Cable Inc., established a similar plan for
senior executives and designated employees. During the first three months of
2010, the Company granted 41,571 (17,702 in 2008) and Cogeco Cable Inc. granted
55,094 Incentive Share Units. The Company and its subsidiary instructed the
trustee to purchase 41,571 and 55,094 subordinate voting shares on the stock
market. These shares were purchased in November 2009 for cash considerations
aggregating $1,049,000 ($326,000 in 2008) and $1,744,000, respectively, and are
held in trust for participants until they are completely vested. The Trusts,
considered as variable interest entities, are consolidated in the Company's
financial statements with the value of the acquired shares presented as treasury
shares in reduction of capital stock or non-controlling interest. A compensation
expense of $187,000 ($108,000 in 2008) was recorded for the three month period
ended November 30, 2009 related to these plans.
The Company and its subsidiary, Cogeco Cable Inc., offer deferred share unit
plans ("DSU Plans") which are described in the Company's annual consolidated
financial statements. During the first quarter of 2010, the Company and its
subsidiary did not award any deferred share unit to the participants in
connection with the DSU Plans. A compensation expense of $184,000 (reduction of
expense of $120,000 in 2008) was recorded for the three month period ended
November 30, 2009 for the liabilities related to these plans.
10. Accumulated Other Comprehensive Income
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Translation of a net
investment in self-
sustaining foreign Cash flow
subsidiaries hedges Total
$ $ $
--------------------------------------------------------------------------
Balance as at August 31, 2009 7,634 (1,306) 6,328
Other comprehensive income 206 875 1,081
--------------------------------------------------------------------------
Balance as at November 2009 7,840 (431) 7,409
--------------------------------------------------------------------------
--------------------------------------------------------------------------
11. Statements of Cash Flows
a) Changes in non-cash operating items
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended
November 30,
2009 2008
$ $
--------------------------------------------------------------------------
Accounts receivable (5,494) (3,189)
Income taxes receivable (20,514) (2,885)
Prepaid expenses (1,105) 1,337
Accounts payable and accrued liabilities (72,789) (44,644)
Income tax liabilities (39,224) (17,001)
Deferred and prepaid revenue and
other liabilities 2,198 1,226
--------------------------------------------------------------------------
(136,928) (65,156)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
b) Cash and cash equivalents
--------------------------------------------------------------------------
--------------------------------------------------------------------------
November 30, August 31,
2009 2009
$ $
--------------------------------------------------------------------------
Cash 7,173 23,760
Cash equivalents (1) 10,304 15,698
--------------------------------------------------------------------------
17,477 39,458
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) Term deposit of Euros 6,500,000, 0.30%, maturing on December 4, 2009
(Euros 10,000,000, 0.67%, maturing on September 14, 2009 at August 31,
2009).
c) Other information
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended
November 30,
2009 2008
$ $
--------------------------------------------------------------------------
Fixed asset acquisitions through capital leases 141 939
Financial expense paid 21,047 21,751
Income taxes paid 39,517 26,916
--------------------------------------------------------------------------
--------------------------------------------------------------------------
12. Employees Future Benefits
The Company and its Canadian subsidiaries offer their employees contributory
defined benefit pension plans, a defined contribution pension plan or collective
registered retirement savings plans, which are described in the Company's annual
consolidated financial statements. The total expenses related to these plans are
as follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended
November 30,
2009 2008
$ $
--------------------------------------------------------------------------
Contributory defined benefit pension plans 870 747
Defined contribution pension plan and
collective registered retirement savings plans 1,126 923
--------------------------------------------------------------------------
1,996 1,670
--------------------------------------------------------------------------
--------------------------------------------------------------------------
13. Financial and Capital Management
a) Financial management
Management's objectives are to protect COGECO Inc. and its subsidiaries against
material economic exposures and variability of results and against certain
financial risks including credit risk, liquidity risk, interest rate risk and
foreign exchange risk.
Credit risk
Credit risk represents the risk of financial loss for the Company if a customer
or counterparty to a financial asset fails to meet its contractual obligations.
The Company is exposed to credit risk arising from the derivative financial
instruments, cash and cash equivalents and trade accounts receivable, the
maximum exposure of which is represented by the carrying amounts reported on the
balance sheet.
Credit risk from the derivative financial instruments arises from the
possibility that counterparties to the cross-currency swap and interest rate
swap agreements may default on their obligations in instances where these
agreements have positive fair values for the Company. The Company reduces this
risk by completing transactions with financial institutions that carry a credit
rating equal to or superior to its own credit rating. The Company assesses the
creditworthiness of the counterparties in order to minimize the risk of
counterparties default under the agreements. At November 30, 2009, management
believes that the credit risk relating to its swaps is minimal, since the lowest
credit rating of the counterparties to the agreements is "A".
Cash and cash equivalents consist mainly of highly liquid investments, such as
money market deposits. The Company has deposited the cash and cash equivalents
with reputable financial institutions, from which management believes the risk
of loss to be remote.
The Company is also exposed to credit risk in relation to its trade accounts
receivable. In the current global economic environment, the Company's credit
exposure is higher but it is difficult to predict the impact this could have on
the Company's accounts receivable balances. To mitigate such risk, the Company
continuously monitors the financial condition of its customers and reviews the
credit history or worthiness of each new major customer. At November 30, 2009,
no customer balance represents a significant portion of the Company's
consolidated trade receivables. The Company establishes an allowance for
doubtful accounts based on specific credit risk of its customers by examining
such factors as the number of overdue days of the customer's balance outstanding
as well as the customer's collection history. The Company believes that its
allowance for doubtful accounts is sufficient to cover the related credit risk.
The Company has credit policies in place and has established various credit
controls, including credit checks, deposits on accounts and advance billing, and
has also established procedures to suspend the availability of services when
customers have fully utilized approved credit limits or have violated existing
payment terms. Since the Company has a large and diversified clientele dispersed
throughout its market area in Canada and Portugal, there is no significant
concentration of credit risk. The following table provides further details on
the Company's accounts receivable balances:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
November 30, August 31,
2009 2009
$ $
--------------------------------------------------------------------------
Trade accounts receivable 81,815 75,044
Allowance for doubtful accounts (16,779) (17,261)
--------------------------------------------------------------------------
65,036 57,783
Other accounts receivable 6,623 8,293
--------------------------------------------------------------------------
71,659 66,076
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The following table provides further details on trade accounts receivable, net
of allowance for doubtful accounts. Trade accounts receivable past due is
defined as amount outstanding beyond normal credit terms and conditions for the
respective customers. A large portion of Cogeco Cable Inc.'s customers are
billed in advance and are required to pay before their services are rendered.
The Company considers amount outstanding at the due date as trade accounts
receivable past due.
--------------------------------------------------------------------------
--------------------------------------------------------------------------
November 30, August 31,
2009 2009
$ $
--------------------------------------------------------------------------
Net trade accounts receivable not past due 46,434 43,136
Net trade accounts receivable past due 18,602 14,647
--------------------------------------------------------------------------
65,036 57,783
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its
financial obligations as they become due. The Company manages liquidity risk
through the management of its capital structure and access to different capital
markets. It also manages liquidity risk by continuously monitoring actual and
projected cash flows to ensure sufficient liquidity to meet its obligations when
due. At November 30, 2009, the available amount of the Company's Term Facilities
was $636.2 million. Management believes that the committed Term Facilities will,
until their maturities in July 2011 and December 2011, provide sufficient
liquidity to manage its long-term debt maturities and support working capital
requirements.
The following table summarizes the contractual maturities of the financial
liabilities and related capital amounts:
--------------------------------------------------------------------------
2010 2011 2012 2013
$ $ $ $
--------------------------------------------------------------------------
Bank indebtedness 46,740 - - -
Accounts payable and accrued liabilities 183,171 - - -
Long-term debt (1) 56,443 173,809 181,000 -
Derivative financial instruments
Cash outflows (Canadian dollar) - - - -
Cash inflows
(Canadian dollar equivalent of US dollar) - - - -
Obligations under capital leases (2) 2,892 3,339 2,324 915
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289,246 177,148 183,324 915
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2014 Thereafter Total
$ $ $
--------------------------------------------------------------------------
Bank indebtedness - - 46,740
Accounts payable and accrued liabilities - - 183,171
Long-term debt (1) 300,000 355,564 1,066,816
Derivative financial instruments
Cash outflows (Canadian dollar) - 201,875 201,875
Cash inflows
(Canadian dollar equivalent of US dollar) - (200,564) (200,564)
Obligations under capital leases (2) 41 - 9,511
--------------------------------------------------------------------------
300,041 356,875 1,307,549
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) Principal excluding obligations under capital leases.
(2) Including interest.
The following table is a summary of interest payable on long-term debt
(excluding interest on capital leases) that are due for each of the next five
years and thereafter, based on the principal amount and interest rate prevailing
on the current debt at November 30, 2009 and their respective maturities:
--------------------------------------------------------------------------
2010 2011 2012 2013
$ $ $ $
--------------------------------------------------------------------------
Interest payments on long-term debt 43,690 57,606 44,313 42,005
Interest payments on derivative
financial instruments 14,081 17,473 14,614 14,614
Interest receipts on derivative
financial instruments (11,841)(15,241)(14,039)(14,039)
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45,930 59,838 44,888 42,580
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--------------------------------------------------------------------------
--------------------------------------------------------------------------
2014 Thereafter Total
$ $ $
--------------------------------------------------------------------------
Interest payments on long-term debt 37,543 53,054 278,211
Interest payments on derivative
financial instruments 14,614 15,831 91,227
Interest receipts on derivative
financial instruments (14,039) (15,209) (84,408)
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38,118 53,676 285,030
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Interest rate risk
The Company is exposed to interest rate risks for both fixed interest rate and
floating interest rate instruments. Fluctuations in interest rates will have an
effect on the valuation and collection or repayment of these instruments. At
November 30, 2009, all of the Company's long-term debt was at fixed rate, except
for the Company's Term Facilities. However, on January 21, 2009, the Company's
subsidiary, Cogeco Cable Inc., entered into a swap agreement with a financial
institution to fix the floating benchmark interest rate with respect to the
Euro-denominated Term Loan facilities for a notional amount of Euros 111.5
million. The interest swap rate to hedge the Term Loans has been fixed at 2.08%
until their maturity on July 28, 2011. The notional value of the swap will
decrease in line with the amortization schedule of the Term Loans. In addition
to the interest swap rate of 2.08%, the Company's subsidiary will continue to
pay the applicable margin on these Term Loans in accordance with the Term
Facility. The Company's subsidiary elected to apply cash flow hedge accounting
on this derivative financial instrument. The sensitivity of the Company's annual
financial expense to a variation of 1% in the interest rate applicable to the
Term Facilities is approximately $0.8 million based on the current debt at
November 30, 2009 and taking into consideration the effect of the interest rate
swap agreement.
Foreign exchange risk
The Company is exposed to foreign exchange risk related to its long-term debt
denominated in US dollars. In order to mitigate this risk, the Company has
established guidelines whereby currency swap agreements can be used to fix the
exchange rates applicable to its US dollar denominated long-term debt. All such
agreements are exclusively used for hedging purposes. Accordingly, on October 2,
2008, the Company's subsidiary, Cogeco Cable Inc., 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 issued on October 1, 2008. These
agreements have the effect of converting the US 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. The Company's subsidiary elected to apply cash flow hedge accounting on
these derivative financial instruments.
The Company is also exposed to foreign exchange risk on cash and cash
equivalents, bank indebtedness and accounts payable denominated in US dollars or
Euros. At November 30, 2009, cash and cash equivalents denominated in US dollars
amounted to US$2,309,000 (US$5,555,000 at August 31, 2009) while accounts
payable denominated in US dollars amounted to US$4,014,000 (US$14,997,000 at
August 31, 2009). At November 30, 2009, Euro-denominated cash and cash
equivalents amounted to 607,000 Euros (bank indebtedness of 299,000 Euros at
August 31, 2009) while accounts payable denominated in Euros amounted to 146,000
Euros (26,000 Euros at August 31, 2009). Due to their short-term nature, the
risk arising from fluctuations in foreign exchange rates is usually not
significant. The impact of a 10% change in the foreign exchange rates (US dollar
and Euros) would change financial expense by approximately $0.1 million.
Furthermore, Cogeco Cable Inc.'s net investment in self-sustaining 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 Euro. This risk is mitigated since the major part of the purchase
price for Cabovisao-Televisao por Cabo, S. A. was borrowed directly in Euros. At
November 30, 2009, the net investment amounted to 175,302,000 Euros (183,220,000
Euros at August 31, 2009) while long-term debt denominated in Euros amounted to
135,772,000 Euros (135,772,000 Euros at August 31, 2009). The exchange rate used
to convert the Euro currency into Canadian dollars for the balance sheet
accounts at November 30, 2009 was $1.5852 per Euro compared to $1.5698 per Euro
at August 31, 2009. The impact of a 10% change in the exchange rate of the Euro
into Canadian dollars would change financial expense by approximately $0.5
million and other comprehensive income by approximately $2 million.
Fair value
Fair value is the amount at which willing parties would accept to exchange a
financial instrument based on the current market for instruments with the same
risk, principal and remaining maturity. Fair values are estimated at a specific
point in time, by discounting expected cash flows at rates for debts of the same
remaining maturities and conditions. These estimates are subjective in nature
and involve uncertainties and matters of significant judgement, and therefore,
cannot be determined with precision. In addition, income taxes and other
expenses that would be incurred on disposition of these financial instruments
are not reflected in the fair values. As a result, the fair values are not
necessarily the net amounts that would be realized if these instruments were
settled.
The carrying values of obligations under capital leases approximate the fair
value of these financial instruments due to their terms.
--------------------------------------------------------------------------
--------------------------------------------------------------------------
November 30, 2009 August 31, 2009
Carrying Fair Carrying Fair
value value value value
$ $ $ $
--------------------------------------------------------------------------
Long-term debt 1,069,266 1,160,418 1,063,964 1,126,449
--------------------------------------------------------------------------
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b) Capital management
The Company's objectives in managing capital are to ensure sufficient liquidity
to support the capital requirements of its various businesses, including growth
opportunities. The Company manages its capital structure and makes adjustments
in light of general economic conditions, the risk characteristics of the
underlying assets and the Company's working capital requirements. Management of
the capital structure involves the issuance of new debt, the repayment of
existing debts using cash generated by operations and the level of distribution
to shareholders.
The capital structure of the Company is composed of shareholders' equity, bank
indebtedness, long-term debt and assets or liabilities related to derivative
financial instruments.
The provisions under the Term Facilities provide for restrictions on the
operations and activities of the Company. 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 the operating income before amortization,
financial expense and total indebtedness. At November 30, 2009, and August 31,
2009, the Company was in compliance with all debt covenants and was not subject
to any other externally imposed capital requirements.
The following table summarizes certain of the key ratios used to monitor and
manage the Company's capital structure:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
November 30, August 31,
2009 2009
--------------------------------------------------------------------------
(restated)
Net indebtedness (1) /
Shareholders' equity 3.1 3.1
Net indebtedness (1) /
Operating income before amortization (2) 2.1 2.0
Operating income before amortization (2) /
Financial expense (2) 8.3 7.3
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(1) Net indebtedness is defined as the total of bank indebtedness,
principal on long-term debt and obligations under derivative financial
instruments, less cash and cash equivalents.
(2) Calculation based on operating income before amortization for the last
twelve month period ended November 30, 2009, and August 31, 2009.
14. Comparative Figures
Certain comparative figures have been reclassified to conform to the current
year's presentation.
Pacific Imperial Mines (TSXV:PPM)
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