Today, COGECO Inc. (TSX:CGO) ("COGECO" or the "Company") announced its financial
results for the third quarter and first nine months of fiscal 2010, ended May
31, 2010.
For the third quarter and first nine months of fiscal 2010:
-- Revenue increased by 4.6% to reach $330.9 million, and by 5.5% to $988
million, respectively;
-- Operating income before amortization(1) grew slightly by 1% to reach
$127.9 million for the third quarter, and by 2.9% to reach $381.6
million for the first nine months;
-- Operating margin(1) for the quarter decreased to 38.7% from 40% and to
38.6% from 39.6% in the first nine months when compared to fiscal 2009.
The reduced margins reflect the retention strategies and additional
marketing activities in the European operations of the cable subsidiary;
-- For the third quarter, net income amounted to $10.7 million, virtually
identical to the comparable period of the previous fiscal year. However,
net income in the third quarter of the prior year included an
unfavourable income tax adjustment of $2 million related to the
utilization of pre-acquisition tax losses in the indirect cable
subsidiary, Cabovisao - Televisao por Cabo, S.A. ("Cabovisao"), and a
$3.5 million favourable reduction of withholding and stamp tax
contingent liabilities, also in Cabovisao, both net of non-controlling
interest. Excluding the two preceding adjustments, third quarter net
income progressed by $1.6 million, or 17.3% when compared to the
adjusted net income(1) of $9.2 million in the third quarter of fiscal
2009. For the first nine months of the fiscal year, net income amounted
to $44 million, compared to a net loss of $93.6 million for the
comparable period of the prior year. Net income in the first nine months
of the current year includes a favourable income tax adjustment, net of
non-controlling interest, of $9.6 million related to the reduction of
Ontario provincial corporate income tax rates for the cable subsidiary.
In addition to the adjustments affecting the third quarter of the prior
year described above, the net loss in the first nine months of fiscal
2009 included a non-cash impairment loss on the net value of the
acquired assets of the indirect Portuguese subsidiary, net of related
income taxes and non-controlling interest, of $124 million. Excluding
these amounts, adjusted net income would have amounted to $34.4 million
for the first nine months of fiscal 2010, a growth of $5.6 million, or
19.5%, when compared to adjusted net income of $28.8 million in fiscal
2009;
-- Free cash flow(1) reached $49.6 million for the quarter and $162.5
million for the first nine months, representing increases of $17.2
million, or 53.1%, and $76.3 million, or 88.4% when compared to the
equivalent periods of fiscal 2009;
-- In the cable sector, revenue-generating units ("RGU")(2) grew by 64,241
and 222,808 net additions in the quarter and first nine months,
respectively, for a total of 3,115,046 RGU at May 31, 2010.
(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.
"COGECO continues to grow its cable customer base both in Canada and in Portugal
with net additions in all services. In Portugal, growth this quarter generated
27,680 RGU. While Europe's economic difficulties persist, the competitive
situation in Portugal appears to be settling down. In part, we ascribe this to
the retention strategy adopted by Cogeco Cable in fiscal 2009. Our Canadian
operations grew as well, adding 36,561 RGU in the third quarter.", declared
Louis Audet, President and CEO of COGECO.
"On the radio side, Rythme FM has maintained its leadership position in the
competitive Montreal region according to the 2010 winter BBM Canada survey,
conducted with the Portable People Meter ("PPM"). On April 30, 2010, we have
concluded an agreement with Corus Entertainment Inc. to acquire its Quebec radio
stations, which represents a great opportunity to accentuate our local presence
in the Quebec radio industry. Our vision is to focus on the local content the
listeners crave while facilitating synergies on the information front. We
submitted our plan to the CRTC on June 30 and it should be made public in the
coming weeks", added Mr. Audet.
"As for our fiscal 2011 preliminary financial guidelines, which exclude the
financial projections of the Corus radio stations until the transaction is
completed, we anticipate an upward progression with revenue at approximately
$1,380 million and operating income before amortization at approximately $538
million. We expect to generate free cash flow of approximately $60 million as a
result of projected income tax payments of approximately $65 million compared to
a refund of $40 million in 2010", concluded Mr. Audet.
FINANCIAL HIGHLIGHTS
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Quarters ended May 31, Nine months ended May 31,
2010 2009(1) Change 2010 2009(1) Change
($000, except
percentages
andper share
data) $ $ % $ $ %
---------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Operations
Revenue 330,933 316,310 4.6 988,023 936,510 5.5
Operating
income
before
amortization
(2) 127,928 126,624 1.0 381,554 370,840 2.9
Operating
margin(2) 38.7% 40.0% - 38.6% 39.6% -
Operating
income 64,008 62,623 2.2 185,940 182,623 1.8
Impairment of
goodwill and
intangible
assets - - - - 399,648 -
Net income
(loss) 10,740 10,704 0.3 43,999 (93,645) -
Adjusted net
income(2) 10,740 9,157 17.3 34,379 28,759 19.5
---------------------------------------------------------------------------
Cash Flow
Cash flow
from
operating
activities 110,756 99,873 10.9 226,844 243,672 (6.9)
Cash flow
from
operations
(2) 119,140 92,718 28.5 374,989 281,544 33.2
Free cash
flow(2) 49,629 32,416 53.1 162,542 86,276 88.4
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Financial
condition(3)
Total assets - - - 2,660,500 2,670,128 (0.4)
Indebtedness(
4) - - - 1,019,167 1,064,542 (4.3)
Shareholders'
Equity - - - 369,365 332,122 11.2
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RGU growth 64,241 14,070 - 222,808 127,194 75.2
---------------------------------------------------------------------------
Per Share
Data(5)
Earnings
(loss) per
share
Basic 0.64 0.64 - 2.63 (5.61) -
Diluted 0.64 0.64 - 2.62 (5.59) -
Adjusted
earnings per
share(2)
Basic 0.64 0.55 16.4 2.06 1.72 19.8
Diluted 0.64 0.55 16.4 2.05 1.72 19.2
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(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 May 31, 2010 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 downturn 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 operating income before amortization(1), operating margin(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.
(1) 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.
(2) Represents the sum of Basic Cable, High Speed Internet ("HSI"), Digital
Television and Telephony service customers.
Cable sector
During the first nine months of fiscal 2010, the Company's subsidiary, Cogeco
Cable Inc. ("Cogeco Cable" or the "Cable subsidiary"), invested approximately
$103.6 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.
RGU growth and service offerings in the cable sector
During the first nine months ended May 31, 2010, the number of RGU increased by
222,808, or 7.7%, to reach 3,115,046 RGU. Reflecting the usual seasonal slowdown
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 expects a lower increase in RGU in the last quarter of the
fiscal year. As a result of the RGU growth in the first nine months of the year
combined with lower increase expected in the coming quarter, Cogeco Cable
expects to surpass its revised fiscal 2010 guidelines of 200,000 net additions,
a growth of approximately 6.9% when compared to August 31, 2009, as issued on
April 7, 2010. RGU growth stems primarily from the Digital Television services
and through promotional activities. While the increase in RGU will generate
additional revenue, operating and capital expenses, the anticipated decrease in
the value of the Euro over the Canadian dollar is expected to offset these
increases. As a result, management has not revised the financial projections for
the 2010 fiscal year.
For the 2011 fiscal year, Cogeco Cable expects to achieve RGU growth of
approximately 250,000 customers. Please consult the fiscal 2011 preliminary
projections in the "Fiscal 2011 preliminary financial guidelines" section for
further details.
Operating income before amortization and operating margin
For the third quarter of fiscal 2010, operating income before amortization grew
slightly by $1.3 million, or 1%, to reach $127.9 million, however operating
margin decreased to 38.7%, from 40%. For the first nine months of fiscal 2010,
operating income before amortization increased by $10.7 million, or 2.9%, to
reach $381.6 million, while operating margin decreased to 38.6% from 39.6%.
Management maintains its revised projection of $512 million in operating income
before amortization for the 2010 fiscal year as issued on January 12, 2010. For
fiscal 2011, the Company expects operating income before amortization to amount
to $538 million. Please consult the fiscal 2011 preliminary projections in the
"Fiscal 2011 preliminary financial guidelines" section for further details.
Free cash flow
In the three-month period ended May 31, 2010, COGECO generated free cash flow of
$49.6 million, compared to $32.4 million in the third quarter of the prior
fiscal year. In the first nine months of fiscal 2010, free cash flow amounted to
$162.5 million, compared to $86.3 million in the first nine months of fiscal
2009. Free cash flow growth resulted mainly from the cable sector and is due to
an increase in cash flow from operations(1), including the reduction in income
tax payments stemming from modifications to the corporate structure, partly
offset by the increase in capital expenditures. As a result of an increase in
capital expenditures expected in the cable sector in the last quarter of fiscal
2010, Management maintains its revised free cash flow guidelines of $140 million
for the 2010 fiscal year. In the 2011 fiscal year, COGECO expects to generate
free cash flow of $60 million. Please consult the fiscal 2011 preliminary
projections in the "Fiscal 2011 preliminary 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.
Other
BBM Canada's winter survey in the Montreal region, conducted with the Portable
People Meter ("PPM"), shows that Rythme FM has maintained its leadership
position in this competitive market. On April 30, 2010, COGECO has concluded an
agreement with Corus Entertainment Inc. to acquire its Quebec radio stations for
$80 million in cash, subject to customary closing adjustments and conditions,
including approval by the Canadian Radio-television and Telecommunications
Commission (the "CRTC"). On June 30 2010, COGECO submitted its transfer
application for approval to the CRTC.The transaction is expected to close during
the first half of fiscal 2011.
IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS
During the second quarter of fiscal 2009, the competitive position of Cogeco
Cable's subsidiary, Cabovisao - Televisao por Cabo, S.A. ("Cabovisao"), in the
Iberian Peninsula further deteriorated due to the continuing difficult
competitive environment and recurring intense promotions and advertising
initiatives from competitors in the Portuguese market. Please refer to the
"Cable sector" section for further details. In accordance with current
accounting standards, management considered that the continued customer, local
currency revenue and operating income before amortization decline were more
severe and persistent than expected, resulting in a decrease in the value of
Cogeco Cable's investment in the Portuguese subsidiary. As a result, Cogeco
Cable tested goodwill and all long-lived assets for impairment at February 28,
2009.
Goodwill is tested for impairment using a two step approach. The first step
consists of determining whether the fair value of the reporting unit to which
goodwill is assigned exceeds the net carrying amount of that reporting unit,
including goodwill. In the event that the net carrying amount exceeds the fair
value, a second step is performed in order to determine the amount of the
impairment loss. The impairment loss is measured as the amount by which the
carrying amount of the reporting unit's goodwill exceeds its fair value. Cogeco
Cable completed its impairment tests on goodwill and concluded that goodwill was
impaired at February 28, 2009. As a result, a non-cash impairment loss of $339.2
million was recorded in the second quarter of the 2009 fiscal year. Fair value
of the reporting unit was determined using the discounted cash flow method.
Future cash flows were based on internal forecasts and consequently,
considerable management judgement was necessary to estimate future cash flows.
Significant future changes in circumstances could result in further impairments
of goodwill.
Intangible assets with finite useful lives, such as customer relationships, must
be tested for impairment by comparing the carrying amount of the asset or group
of assets to the expected future undiscounted cash flow to be generated by the
asset or group of assets. The impairment loss is measured as the amount by which
the asset's carrying amount exceeds its fair value. Accordingly, Cogeco Cable
completed its impairment test on customer relationships at February 28, 2009,
and determined that the carrying value of customer relationships exceeded its
fair value. As a result, a non-cash impairment loss of $60.4 million was
recorded in the second quarter of the 2009 fiscal year.
The impairment loss affected the Company's financial results as follows during
the second quarter of fiscal 2009:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
($000) $
--------------------------------------------------------------------------
Impairment of goodwill 339,206
Impairment of customer relationships 60,442
Future income taxes (16,018)
--------------------------------------------------------------------------
Impairment loss net of related income taxes 383,630
Non-controlling interest (259,679)
--------------------------------------------------------------------------
Impairment loss net of related income taxes and non-
controlling interest 123,951
--------------------------------------------------------------------------
--------------------------------------------------------------------------
OPERATING RESULTS - CONSOLIDATED OVERVIEW
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Quarters ended May 31, Nine months ended May 31,
2010 2009(1)Change 2010 2009(1)Change
($000, except
percentages) $ $ % $ $ %
---------------------------------------------------------------------------
(unaudited)(unaudited) (unaudited)(unaudited)
Revenue 330,933 316,310 4.6 988,023 936,510 5.5
Operating costs 203,005 189,686 7.0 606,469 565,670 7.2
----------------------------------------- ----------------------
Operating income
before
amortization 127,928 126,624 1.0 381,554 370,840 2.9
----------------------------------------- ----------------------
Operating margin 38.7% 40.0% 38.6% 39.6
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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.
Revenue
Fiscal 2010 third-quarter and first nine-month revenue improved, mainly from the
cable sector, by $14.6 million, or 4.6%, and by $51.5 million, or 5.5%, to reach
$330.9 million and $988 million, respectively. Cable revenue increased by $13.6
million, or 4.5%, for the third quarter and by $47 million, or 5.2%, for the
first nine months when compared to the prior year. For further details on the
Company's operating results, please refer to the "Cable sector" section.
Operating costs
For the third quarter and first nine months of fiscal 2010, operating costs
amounted to $203 million and $606.5 million, respectively, increases of $13.3
million, or 7%, and of $40.8 million, or 7.2%, when compared to the prior year,
mainly in the cable sector. For further details on the Company's operating
results, please refer to the "Cable sector" section.
Operating income before amortization and operating margin
Operating income before amortization grew slightly by $1.3 million, or 1%, to
reach $127.9 million in the third quarter of fiscal 2010 when compared to the
same period the previous year. In the first nine months of the current fiscal
year, operating income before amortization increased by $10.7 million, or 2.9%,
when compared to the corresponding period of the prior year. The cable sector
contributed to the growth by $0.7 million during the quarter, and by $7.9
million in the first nine months of fiscal 2010. COGECO's third-quarter
operating margin decreased to 38.7%, from 40%, and in the first nine months
decreased to 38.6% from 39.6% in the first nine months of the previous year. For
further details on the Company's operating results, please refer to the "Cable
sector" section.
FIXED CHARGES
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--------------------------------------------------------------------------
Quarters ended May 31, Nine months ended May 31,
2010 2009(1)Change 2010 2009(1)Change
($000, except
percentages) $ $ % $ $ %
--------------------------------------------------------------------------
(unaudited)(unaudited) (unaudited)(unaudited)
Amortization 63,920 64,001 (0.1) 195,614 188,217 3.9
Financial expense 16,824 14,362 17.1 48,288 56,168 (14.0)
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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.
Third-quarter 2010 amortization amounted to $63.9 million, compared to $64
million for the same period of the prior year. For the first nine months,
amortization amounted to $195.6 million, compared to $188.2 million in fiscal
2009. The increase in the nine month period is mainly due to additional capital
expenditures in the cable sector arising from customer premise equipment
acquisitions to support RGU growth.
Third-quarter and first nine-month financial expense amounted to $16.8 million
and $48.3 million, compared to $14.4 million and $56.2 million for the prior
year, respectively. The financial expense for the third quarter of the current
year includes a foreign exchange loss of $0.4 million in the cable sector,
compared to a foreign exchange gain of $1.7 million in the third quarter of the
prior year. For the first nine months, fiscal 2010 financial expense in the
cable sector includes a foreign exchange gain of $0.5 million, compared to a
foreign exchange loss of $2.7 million in the comparable period of the prior
year. Foreign exchange gains and losses are essentially due to the volatility in
the relative values of the Euro and US dollar to the Canadian dollar, with the
Euro affecting the financial results of the European operations, and the US
dollar affecting mainly the Canadian operations as the majority of customer
premise equipment is purchased and subsequently paid in US dollars. The
remaining increase of $0.4 million in the third quarter is due to the timing of
fluctuations in bank indebtedness, and the remaining decrease of $4.7 million in
the first nine months of the fiscal year 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 same periods of the previous fiscal year.
REDUCTION OF WITHHOLDING AND STAMP TAX CONTINGENT LIABILITIES
COGECO's indirect Portuguese subsidiary, Cabovisao, had recorded contingent
liabilities for withholding and stamp taxes relating to fiscal years prior to
its acquisition by Cogeco Cable. At the date of acquisition, the amount accrued
represented management's best estimate based on the available information.
Management reviews its estimate periodically to take into consideration payments
made relating to these contingencies as well as newly available information
which would allow the cable subsidiary to improve its previous estimate. During
the third quarter of fiscal 2009, Cabovisao received a preliminary report from
the Portuguese tax authorities with respect to some of the items included in the
contingent liabilities. Accordingly, management reviewed its estimate of the
contingent liabilities to reflect the new information available in this
preliminary report, and determined that a reduction of EUR7 million, equivalent
to $10.9 million, of the amount previously accrued was required at May 31, 2009,
in order to reflect management's best estimate.
INCOME TAXES
Fiscal 2010 third-quarter income tax expense amounted to $15.3 million, compared
to $26.5 million in the prior year, and for the first nine months, income tax
expense amounted to $14 million compared to $36.4 million in the prior year. The
income tax expense in the first nine months of fiscal 2010 includes the impact,
in the cable sector, 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 nine months of fiscal 2010. The income
tax expense for the quarter and first nine months of fiscal 2009 was
unfavourably impacted by a non-cash income tax expense of $6.1 million resulting
from the utilization of Cabovisao's pre-acquisition income tax losses following
the receipt of preliminary tax audit reports for those fiscal years. The income
tax amount for the first nine months of the prior year was further impacted by a
future income tax recovery of $16 million related to the impairment loss
recorded in the second quarter of fiscal 2009. Excluding the impact of the
reduction of Ontario provincial corporate income tax rates in the current year
and of the utilization of Cabovisao's pre-acquisition income tax losses and the
income tax recovery related to the impairment loss in the prior year, income tax
expense would have amounted to $15.3 million and $43.8 million for the third
quarter and first nine months of fiscal 2010, respectively, compared to $20.4
million for the third quarter and $46.3 million for the first nine months of
fiscal 2009. The decreases in income tax expense for the third quarter and first
nine months of fiscal 2010 are mainly due to the previously announced annual
declines in the enacted Canadian federal and provincial income tax rates, partly
offset by the improvement in operating income before amortization.
NON-CONTROLLING INTEREST
The non-controlling interest represents a participation of approximately 67.7%
in Cogeco Cable's results. During the third quarter and first nine months of
fiscal 2010, the income attributable to non-controlling interest amounted to
$21.1 million and $79.6 million due to the cable sector's positive results. The
income attributable to non-controlling interest for the third quarter of fiscal
2009 amounted to $22 million, and the loss attributable to non-controlling
interest in the first nine months of the previous fiscal year amounted to $205
million due to the impairment loss recorded in the cable sector.
NET INCOME
Fiscal 2010 third quarter net income amounted to $10.7 million, or $0.64 per
share, virtually equivalent to the same period in 2009. For the first nine
months of fiscal 2010, net income amounted to $44 million, or $2.63 per share,
compared to a net loss of $93.6 million, or $5.61 per share. Net income for the
first nine months of fiscal 2010 includes the reduction of Ontario provincial
corporate income tax rates described above. Net income in the cable sector for
the third quarter and first nine months of the previous fiscal year were
favourably impacted by a $3.5 million reduction of withholding and stamp tax
contingent liabilities, and unfavourably affected by a non-cash income tax
expense of $2 million, both net of non-controlling interest, resulting from the
utilization of Cabovisao's pre-acquisition income tax losses following the
receipt of preliminary tax audit reports for those fiscal years, both previously
described. The net loss in the first nine months of fiscal 2009 was due to the
impairment loss, net of related income taxes and non-controlling interest, of
$124 million recorded in the second quarter, as described in the "Impairment of
goodwill and intangible assets" section. Excluding the effect of the preceding
adjustments, adjusted net income(1) would have amounted to $10.7 million, or
$0.64 per share(1), and $34.4 million, or $2.06 per share, for the quarter and
first nine months ended May 31, 2010, respectively. These amounts represent
increases of 17.3% and 16.4%, respectively, over adjusted net income of $9.2
million, or $0.55 per share for the quarter, and of 19.5% and 19.8% over
adjusted net income of $28.8 million, or $1.72 per share for the first nine
months of fiscal 2009. Net income progression has resulted mainly from the
decrease in the Canadian federal and provincial corporate income tax rates,
coupled with the cable sector's operating income before amortization growth in
the first nine months of the fiscal 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.
CASH FLOW AND LIQUIDITY
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Nine months ended May
Quarters ended May 31, 31,
2010 2009(1) 2010 2009(1)
($000) $ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Operating activities
Cash flow from operations 119,140 92,718 374,989 281,544
Changes in non-cash
operating items (8,384) 7,155 (148,145) (37,872)
--------------------------------------------------------------------------
110,756 99,873 226,844 243,672
--------------------------------------------------------------------------
Investing activities(2) (69,488) (58,939) (212,161) (192,583)
--------------------------------------------------------------------------
Financing activities(2) (36,043) (44,677) (31,284) (42,266)
--------------------------------------------------------------------------
Effect of exchange rate
changes on cash and cash
equivalents denominated in
foreign currencies (846) (1,866) (1,746) (538)
--------------------------------------------------------------------------
Net change in cash and cash
equivalents 4,379 (5,609) (18,347) 8,285
--------------------------------------------------------------------------
Cash and cash equivalents,
beginning of period 16,732 51,366 39,458 37,472
--------------------------------------------------------------------------
Cash and cash equivalents,
end of period 21,111 45,757 21,111 45,757
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(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)Excludes assets acquired under capital leases.
Fiscal 2010 third quarter cash flow from operations reached $119.1 million,
28.5% higher than the comparable period last year, primarily attributable to the
cable sector and due to the reduction in income tax payments stemming from
modifications to the corporate structure. Changes in non-cash operating items
required cash outflows of $8.4 million, mainly as a result of an increase in
income taxes receivable and a decrease in accounts payable and accrued
liabilities. In the prior year, the cash inflows of $7.2 million were mainly the
result of an increase in income tax liabilities, partly offset by a decrease in
accounts payable and accrued liabilities.
For the first nine months of fiscal 2010, cash flow from operations reached $375
million, 33.2% higher than the comparable period last year, primarily due to the
reduction in income tax payments stemming from modifications to the corporate
structure, and the reduction in financial expense, both in the cable sector.
Changes in non-cash operating items required cash outflows of $148.1 million,
mainly as a result of decreases in accounts payable and accrued liabilities and
in income tax liabilities, combined with increases in income taxes receivable
and accounts receivable, partly offset by an increase in deferred and prepaid
revenue and other liabilities. In the prior year, the cash outflows of $37.9
million were mainly the result of a decrease in accounts payable and accrued
liabilities and an increase in income taxes receivable, partly offset by an
increase in income tax liabilities.
In the third quarter of fiscal 2010, investing activities, including mainly
capital expenditures and the increase in deferred charges, amounted to $69.5
million, an increase of $10.5 million, or 17.9% when compared to $58.9 million
for the corresponding period of last year. The most significant variations are
in the cable sector and are due to the following factors:
-- An increase in upgrade and rebuild and in line extensions in the
Canadian operations to improve network capacity in existing areas served
and to extend territories in new areas;
-- An increase in support capital spending due to the acquisition of new
facilities in the Canadian operations;
-- Decreases in customer premise equipment spending in the Canadian
operations due to the timing of equipment purchases, and in the European
operations due to the depreciation of the value of the Euro relative to
the Canadian dollar, which offset an increase in customer premise
equipment spending in the European operations in order to support the
continued growth of Digital Television service customers.
For the first nine months of the current year, investing activities, including
mainly capital expenditures and the increase in deferred charges, amounted to
$212.2 million for the first nine months of the current year, an increase of
$19.6 million, or 10.2% when compared to $192.6 million for the same period of
the previous year. The increase was primarily due to the following factors in
the cable sector:
-- An increase in scalable infrastructure spending in the Canadian
operations to increase DOCSIS network bandwidth capacity in order to
support the internet traffic growth;
-- An increase in upgrade and rebuild and in line extensions in the
Canadian operations to improve network capacity in existing areas served
and to extend territories in new areas;
-- An increase in support capital spending due to the acquisition of new
facilities in the Canadian operations.
In the third quarter and nine-month periods ended May 31, 2010, free cash flows
reached $49.6 million and $162.5 million, compared to $32.4 million and $86.3
million in the prior year, representing increases of $17.2 million, or 53.1%,
and of $76.3 million, or 88.4%, respectively. Free cash flow growth over the
prior year is mainly generated by the cable sector from an increase in cash
flows from operations including the reduction in income tax payments stemming
from modifications to Cogeco Cable's corporate structure, partly offset by the
increase in capital expenditures.
In the third quarter of fiscal 2010, indebtedness affecting cash decreased by
$29.5 million mainly due to the free cash flow of $49.6 million, partly offset
by the cash outflows of $8.4 million from the changes in non-cash operating
items, the dividend payment of $6.3 million described below and the increase in
cash and cash equivalents of $4.4 million. Indebtedness mainly decreased through
a net repayment of $33.2 million on Cogeco Cable's revolving loans. In the third
quarter of fiscal 2009, indebtedness affecting cash decreased by $40.3 million
mainly due to the free cash flow of $32.4 million, cash inflows of $7.2 million
from the changes in non-cash operating items, and the decrease in cash and cash
equivalents of $5.6 million, net of the dividend payment of $5.3 million
described below. Indebtedness mainly decreased through the net repayments on
Cogeco Cable's revolving loans of $56.5 million, net of an increase of $17
million in bank indebtedness.
During the third 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 third quarter of fiscal 2010 amounted to $4.6
million, for consolidated dividend payments of $6.3 million, compared to $3.9
million for consolidated dividend payments of $5.3 million in the third quarter
of the prior year.
For the first nine months of fiscal 2010, indebtedness affecting cash decreased
by $10.1 million mainly due to the free cash flow of $162.5 million and the
decrease in cash and cash equivalents of $18.3 million, partly offset by the
cash outflows of $148.1 million from the changes in non-cash operating items and
the dividend payment of $18.8 million described below. Indebtedness mainly
decreased through net repayments totalling $61.2 million on the Company's Term
Facilities, including net repayments of $54.7 million by the cable subsidiary,
partly offset by an increase of $54.1 million in bank indebtedness. During the
first nine months of fiscal 2009, indebtedness affecting cash decreased by $28
million due to the free cash flow of $86.3 million, partly offset by the cash
outflows of $37.9 million from the changes in non-cash operating items, the
payment of dividends totalling $15.8 million described below and the increase in
cash and cash equivalents of $8.3 million. Indebtedness decreased through the
repayment, in the cable sector, of Senior Secured Notes Series A and the related
derivative financial instrument for a total of $238.7 million, and of net
repayments on Cogeco Cable's revolving loans of $79.5 million, net of the
issuance of Senior Secured Notes, Series A and Series B for net proceeds of
approximately $255 million, and by an increase of $45.1 million in bank
indebtedness.
During the first nine months of fiscal 2010, quarterly dividends of $0.10 per
share were paid by the Company to the holders of subordinate and multiple voting
shares, totalling $5 million, compared to quarterly dividends of $0.08 per
share, or $4 million the year before. In addition, dividends paid by a
subsidiary to non-controlling interests in the first nine months of fiscal 2010
amounted to $13.8 million, for consolidated dividend payments of $18.8 million,
compared to $11.8 million for consolidated dividend payments of $15.8 million in
the first nine months of fiscal 2009.
As at May 31, 2010, the Company had a working capital deficiency of $176.6
million compared to $245.8 million as at August 31, 2009. The decrease in the
deficiency is mainly attributable to the cable sector and caused by reductions
in accounts payable and accrued liabilities and in income tax liabilities,
combined with a decrease in the current portion of long-term debt as a result of
the new Term Revolving Facilities described in the "Financial position" section.
The working capital deficiency was further reduced by an increase in income
taxes receivable. These improvements have been partially offset by increases in
the current portion of future income tax liabilities and bank indebtedness, and
by the decrease in cash and cash equivalents. 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 the Company to use cash and cash equivalents to reduce
Indebtedness.
At May 31, 2010, Cogeco Cable had used $161.7 million of its $862.5 million Term
Facility for a remaining availability of $700.8 million and the Company had
drawn $4.9 million of its $50 million Term Facility, for a remaining
availability of $45.1 million.
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
"fixed assets", "goodwill", "accounts receivable", "accounts payable and accrued
liabilities", "deferred and prepaid revenue", "income taxes receivable", "income
tax liabilities", "future income tax assets", "future income tax liabilities",
"bank indebtedness", "long-term debt", "cash and cash equivalents" and
"non-controlling interest".
The $33.2 million decrease in fixed assets is attributable to the cable sector
and is primarily due to the decline in the relative value of the Euro over the
Canadian dollar, partly offset by the increase in capital expenditures
previously discussed net of the amortization expense for the first nine months
of the fiscal year. The $10.4 million dollar decrease in goodwill is due to the
decline in the value of the Euro relative to the Canadian dollar in the cable
sector. The $7.9 million increase in accounts receivable is due to the increase
in revenue and the timing of payments received from customers. The $80.3 million
decrease in accounts payable and accrued liabilities is related to the timing of
payments made to suppliers in the cable sector. The increase of $8.5 million in
the current portion of deferred and prepaid revenue is mainly due to advance
billing in Cogeco Cable's data telecommunications subsidiary for services to be
provided in the coming months. The increases of $36.2 million in income taxes
receivable, $15.7 million in future income tax assets and $58 million in the
current portion of future income tax liabilities are mainly due to modifications
to Cogeco Cable's corporate structure. The $40.3 million decrease in income tax
liabilities is due to income tax payments made in the first half of fiscal 2010
relating to the 2009 fiscal year. The increases of $54.1 million in bank
indebtedness and the decreases of $108.2 million in long-term debt and $18.3
million in cash and cash equivalents are due to the factors previously discussed
in the "Cash Flow and Liquidity" section combined with the fluctuations in
foreign exchange rates. The $61 million increase in non-controlling interest is
due to improvements in the cable subsidiary's operating results in the current
fiscal year.
A description of COGECO's share data as at June 30, 2010 is presented in the
table below:
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Number of Amount
shares/options ($000)
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Common shares
Multiple voting shares 1,842,860 12
Subordinate voting shares 14,959,338 121,347
Options to purchase subordinate voting shares
Outstanding options 62,782
Exercisable options 62,782
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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, except as mentioned below.
On March 4, 2010, the Company's subsidiary, Cogeco Cable Inc., issued a letter
of credit amounting to EUR2.2 million to guarantee the payment by Cabovisao of
withholding taxes for the 2005 year assessed by the Portuguese tax authorities,
which are currently being challenged by Cabovisao. Although the principal amount
in dispute is fully recorded in the books of its subsidiary Cabovisao, the
Company's subsidiary, Cogeco Cable Inc., may be required to pay the amount
following final judgement, up to a maximum aggregate amount of EUR2.2 million
($2.8 million), should Cabovisao fail to pay such required amount.
In July 2010, the Company entered into a new Term Revolving Facility of up to
$100 million with a group of financial institutions led by a large Canadian
bank, which will now act as agent for the banking syndicate. This new Term
Revolving Facility will replace the Company's $50 million Term Facility coming
to maturity on December 14, 2011. The Term Revolving Facility of up to $100
million includes a swingline limit of $7.5 million, is extendable by additional
one-year periods on an annual basis, subject to lenders' approval, and if not
extended, matures three years after its issuance or the last extension, as the
case may be. The Term Revolving Facility can be repaid at any time without
penalty. The Term Revolving Facility is secured by all assets of COGECO Inc. and
its subsidiaries, excluding the capital stock of Cogeco Cable Inc. and
guaranteed by its subsidiaries. Under the terms and conditions of the credit
agreement, the Company must comply with certain restrictive covenants, including
the requirement to maintain certain financial ratios. The Term Revolving
Facility bears interest rates based, at the Company's option, on bankers'
acceptance, LIBOR in Euros or in US dollars, bank prime rate or US base rate
plus fees, and commitment fees are payable on the unused portion.
In July 2010, the Company's subsidiary, Cogeco Cable, entered into a new $750
million Term Revolving Facility with a group of financial institutions led by
two large Canadian banks, which will be effective on July 12, 2010, subject to
usual conditions, and replace Cogeco Cable's $862.5 million Term Facility coming
to maturity on July 28, 2011. This new Term Revolving Facility has an option to
be increased up to $1 billion subject to lenders' participation. The Term
Revolving Facility is available in Canadian, US or Euro currencies and includes
a swingline of $25 million available in Canadian or US currencies. The Term
Revolving Facility may be extended by additional one-year periods on an annual
basis, subject to lenders' approval, and, if not extended, matures four years
after its issuance or the last extension, as the case may be. The Term Revolving
Facility can be repaid at any time without penalty. The Term Revolving Facility
requires commitment fees, and interest rates are based on bankers' acceptance,
LIBOR in Euros or in US dollars, bank prime rate loan or US base rate loan plus
stamping fees. The Term Revolving Facility is indirectly secured by a first
priority fixed and floating charge on substantially all present and future real
and personal property and undertaking of every nature and kind of Cogeco Cable
and certain of its subsidiaries, and provides for certain permitted
encumbrances, including purchased money obligations, existing funded obligations
and charges granted by any subsidiary prior to the date when it becomes a
subsidiary, subject to a maximum amount. The provisions under this facility
provides for restrictions on the operations and activities of Cogeco Cable.
Generally, the most significant restrictions relate to permitted investments and
dividends on multiple and subordinate voting shares, as well as incurrence and
maintenance of certain financial ratios primarily linked to operating income
before amortization, financial expense and total indebtedness.
DIVIDEND DECLARATION
At its July 7, 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 August 4, 2010, to shareholders of record on July 21,
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 EUR111.5 million. The interest rate swap to hedge the Term
Loans has been fixed at 2.08% until its 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 EUR95.8 million at May 31, 2010. 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
nine months of the fiscal year, the fair value of interest rate swap increased
by $0.6 million, which is recorded as an increase of other comprehensive income
net of income taxes and non-controlling interest.
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 fixed at
$1.0625 per US dollar. In the first nine months of the 2010 fiscal year, amounts
due under the US$190 million Senior Secured Notes Series A decreased by $9.8
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 $3.2 million,
resulting in an increase, net of income taxes and non-controlling interest, of
$2.3 million recorded in other comprehensive income.
Cogeco Cable's net investment in the self-sustaining foreign subsidiary,
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 loss of $13.4 million in
the first nine months of fiscal 2010, which is presented in other comprehensive
income net of non-controlling interest of $9.1 million. The exchange rate used
to convert the Euro into Canadian dollars for the balance sheet accounts at May
31, 2010 was $1.2838 per Euro compared to $1.5698 per Euro at August 31, 2009.
The average exchange rate prevailing during the third quarter and first nine
months used to convert the operating results of the European operations were
$1.3472 per Euro and $1.4703 per Euro, respectively, compared to $1.6126 per
Euro and $1.5951 per Euro for the same periods 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 May 31,
2010:
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Nine months ended May 31, 2010 As reported Exchange rate impact
($000) $ $
---------------------------------------------------------------------------
(unaudited) (unaudited)
Revenue 145,588 14,559
Operating income before amortization 24,511 2,451
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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 15 of the consolidated financial statements for further details.
CABLE SECTOR
CUSTOMER STATISTICS
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% of
Net additions (losses) Penetration(1)
Quarters ended Nine months ended
May 31, May 31, May 31, May 31,
2010 2010 2009 2010 2009 2010 2009
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RGU(2) 3,115,046 64,241 14,070 222,808 127,194 - -
Basic Cable
service
customers 1,132,748 900 (13,547) 8,463 (22,702) - -
HSI service
customers 710,562 12,320 1,519 51,896 18,849 64.6 59.7
Digital
Television
service
customers(2) 689,781 30,167 18,320 88,630 101,823 61.6 50.8
Telephony
service
customers 581,955 20,854 7,778 73,819 29,224 55.1 47.2
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(1)As a percentage of Basic Cable service customers in areas served.
(2)The number of Digital Television service customers in the European
operations of the cable sector for the third quarter and first nine
months of fiscal 2009 have been restated in order to conform to the
presentation adopted in the Canadian operations. This restatement
increased the number of net additions to the Digital Television service
customers and RGU by 33,869 customers in the first nine months of the
2009 fiscal year.
In the cable sector, third quarter and first nine months RGU net additions
amounted to 64,241 and 222,808 RGU, respectively, compared to 14,070 and 127,194
RGU in the comparable periods of the previous fiscal year.
The Canadian operations' net additions of 36,561 RGU in the quarter and 147,007
RGU in the first nine months were higher as compared to 27,175 RGU and 140,215
RGU for the same periods of the prior year, and continue to generate RGU growth
despite early signs of maturation of some of its services. The net customer
additions for Basic Cable service customers stood at 402 for the quarter,
compared to net customer losses of 2,153 in the third quarter of the prior year.
For the first nine months, Basic Cable service customers grew by 9,267, compared
to 8,635 in the prior year. Basic Cable service net additions in the first nine
months of the fiscal year were mainly due to expansions in the network. In the
quarter, Telephony service customers grew by 16,244 compared to 13,324 for the
same period last year, and the number of net additions to HSI service stood at
6,527 customers for the quarter, compared to 5,939 customers for the same
periods last year. For the first nine months of the fiscal year, Telephony
service customers grew by 59,091 and HSI service customer net additions amounted
to 35,101, compared to 48,636 and 35,966 net additions, respectively, 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. The Digital Television service net additions stood at 13,388
customers for the quarter and 43,548 customers for the first nine months of the
year, compared to 10,065 and 46,978 customers for the three and nine month
periods of the prior year. Digital Television service net additions are due to
targeted marketing initiatives to improve penetration and to the continuing
interest for high definition ("HD") television service.
Third-quarter fiscal 2010 net additions show a return to customer growth for the
cable subsidiary's European operations, and the Basic Cable service customer
base has begun to stabilize and reflect the benefits of Cogeco Cable'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 the economic environment in Europe
throughout the previous fiscal year. In the third quarter of fiscal 2010, the
number of Basic Cable service customers grew by 498 customers compared to a loss
of 11,394 customers in the comparable period of the prior year. In the first
nine months of the fiscal year, Basic Cable customer losses amounted to 804
compared to 31,337 in the 2009 fiscal year. HSI service customers increased by
5,793 and 16,795 customers for the quarter and first nine months, respectively,
compared to decreases of 4,420 and 17,117 customers in the third quarter and
first nine months of fiscal 2009. The number of Digital Television service
customers grew by 16,779 customers in the third quarter and by 45,082 customers
in the nine months ended May 31, 2010, compared to 8,255 and 54,845 customers in
the three and nine month periods ended May 31 of the previous fiscal year.
Telephony service customers increased by 4,610 customers in the quarter and
14,728 in the first nine months of fiscal 2010, compared to losses of 5,546 and
19,412 customers for the comparable periods of the preceding year.
OPERATING RESULTS
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Quarters ended May 31, Nine months ended May 31,
2010 2009(1) Change 2010 2009(1) Change
($000, except
percentages) $ $ % $ $ %
---------------------------------------------------------------------------
(unaudited)(unaudited) (unaudited)(unaudited)
Revenue 319,291 305,672 4.5 957,053 910,030 5.2
Operating costs 192,591 179,721 7.2 576,115 537,027 7.3
Management fees
- COGECO Inc. - - - 9,019 9,019 -
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Operating
income from
before
amortization 126,700 125,951 0.6 371,919 363,984 2.2
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Operating
margin 39.7% 41.2% 38.9% 40.0%
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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.
Revenue
Fiscal 2010 third-quarter revenue improved by $13.6 million, or 4.5%, to reach
$319.3 million, and first nine-month revenue amounted to $957.1 million, an
increase of $47 million, or 5.2%, when compared to the prior year.
Driven by increased RGU, the introduction of HSI usage billing, rate increases
implemented at the end of fiscal 2009 and the revenue related to the new levy
amounting to 1.5% of gross Cable Television service revenue imposed by the CRTC
in order to finance the new Local Programming Improvement Fund ("LPIF"), the
Canadian operations' third-quarter revenue rose by $27.6 million, or 11.1%, to
reach $275.7 million, and first nine-month revenue amounted to $811.5 million,
$82.3 million, or 11.3%, higher than in the first nine months of the previous
fiscal year.
In the third quarter and first nine months of fiscal 2010, revenue from the
European operations decreased by $14 million, or 24.2%, and by $35.3 million, or
19.5%, respectively, at $43.6 million for the quarter and $145.6 million for the
nine months, due to fewer Basic Cable service customers compared to the same
period of last year, the impact of retention strategies implemented in the
second half of fiscal 2009 in order to curtail customer attrition, and the
decline of the Euro in relation to the Canadian dollar. Revenue from the
European operations in the local currency for the third quarter amounted to
EUR32.4 million, a decrease of EUR3.3 million, or 9.3%, when compared to the
same period of the prior year. For the first nine months, revenue amounted to
EUR98.9 million, representing a decrease of EUR14.6 million, or 12.8%, when
compared to the first nine months of fiscal 2009.
Operating costs
For the third quarter and first nine months of fiscal 2010, operating costs,
excluding management fees payable to COGECO Inc., increased by $12.9 million and
$39.1 million, respectively, to reach $192.6 million and $576.1 million,
increases of 7.2% and 7.3% compared to the prior year.
In the Canadian operations, for the three months ended May 31, 2010, operating
costs excluding management fees payable to COGECO Inc. increased by $18.2
million, or 13.3%, to reach $155.3 million. In the first nine months of the
fiscal year, operating costs excluding management fees payable to COGECO Inc.
amounted to $455 million in the first nine months of the fiscal year, an
increase of $45.3 million, or 11.1% over the first nine months of the prior
year. The increase in operating costs is mainly attributable to servicing
additional RGU, the launch of new HD channels, additional marketing initiatives
and the new levy amounting to 1.5% of gross Cable Television service revenue
imposed by the CRTC in order to finance the LPIF.
As for the European operations, fiscal 2010 third-quarter and first nine-months
operating costs decreased by $5.3 million, or 12.5%, at $37.3 million, and by
$6.2 million, or 4.9%, at $121.1 million when compared to the prior year.
Operating costs decreased due to the decline of the value of the Euro over the
Canadian dollar which surpassed increases in operating costs related to
additional marketing initiatives and the launch of new channels, net of the
impact of implemented cost reduction initiatives. Operating costs from the
European operations for the third quarter in the local currency amounted to
EUR27.7 million, an increase of EUR1.3 million, or 4.7% when compared to the
prior year. For the first nine months of fiscal 2010 operating costs amounted to
EUR82.4 million, representing an increase of EUR2.6 million, or 3.3% when
compared to the same period of the previous fiscal year.
Operating income before amortization and operating margin
Fiscal 2010 third-quarter operating income before amortization slightly
increased by 0.6% to reach $126.7 million, and increased by $7.9 million, or
2.2%, to $371.9 million for the first nine months of fiscal 2010. Cogeco Cable's
third-quarter operating margin decreased to 39.7% from 41.2% in the comparable
period of the prior year. For the first nine months, Cogeco Cable's operating
margin decreased to 38.9% from 40%.
Operating income before amortization from the Canadian operations rose by $9.4
million, or 8.4%, to reach $120.4 million in the third quarter, and by $37
million, or 11.9% to reach $347.4 million for the first nine months ended May
31, 2010. The operating income before amortization has risen due to the increase
in revenue exceeding the growth in operating costs. Cogeco Cable's Canadian
operations' operating margin decreased to 43.7% in the third quarter compared to
44.7% for the same period of the prior year, and stood at 42.8% in the first
nine months of fiscal 2010 compared to 42.6% in the first nine months of fiscal
2009. The reduction in the operating margin in the third quarter stems from the
launch of new services which generate lower margins, the migration of customers
from Analogue to Digital Television services, and the revenue from the new LPIF
which does not generate operating income before amortization.
For the European operations, operating income before amortization decreased to
$6.3 million in the third quarter from $14.9 million for the same period of the
prior year, representing a decrease of $8.6 million, or 57.7%, mainly due to
decreases in revenue which outpaced the decreases in operating costs. For the
first nine months, operating income before amortization decreased by $29.1
million, or 54.2%, at $24.5 million. European operations' operating margin
decreased for the third quarter to 14.5% from 25.9% in the prior year, and for
the first nine months to 16.8% from 29.6% in fiscal 2009. Operating income
before amortization in the local currency amounted to EUR4.7 million for the
third quarter compared to EUR9.3 million in the same period of the prior year,
and EUR16.5 million in the first nine months, compared to EUR33.7 million in the
first nine months of fiscal 2009, representing decreases of 49.4% and 51%,
respectively.
FISCAL 2011 PRELIMINARY FINANCIAL GUIDELINES
Consolidated
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Revised
projections
Preliminary January 12,
Projections 2010(1)
Fiscal 2011 Fiscal 2010
(in millions of dollars, except net customer
additions and operating margin) $ $
--------------------------------------------------------------------------
Financial guidelines
Revenue 1,380 1,325
Operating income before amortization 538 512
Financial expense 70 69
Current income taxes 65 (40)
Net income 45 45
Capital expenditures and increase in deferred
charges 341 341
Free cash flow 60 140
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Cable sector
For fiscal 2011, Cogeco Cable expects to achieve revenue of $1,340 million,
representing growth of $50 million, or 3.9% when compared to the revised fiscal
2010 guidelines issued on January 12, 2010. The preliminary guidelines take into
consideration the current global economic environment. In Canada, Cogeco Cable's
footprint includes certain regions in Ontario (Burlington and Windsor) where the
automobile industry is a significant driver of economic activity. The sharp
downturn experienced by the automobile industry in the past years is expected to
continue to have an adverse impact on the level of economic activity including
consumer expenditures on goods and services within those communities. In
previous recessionary periods, demand for cable telecommunications services has
generally proven to be resilient. However, there is no assurance that demand
would remain resilient in a difficult economic environment. These preliminary
guidelines also take into consideration the competitive environment that
prevails in Portugal and, in Canada, the deployment of new technologies such as
Fibre to the Home ("FTTH"), Fibre to the Node ("FTTN") and Internet Protocol
Television ("IPTV") by the incumbent telecommunications providers.
Revenue from the Canadian operations should increase as a result of RGU growth
stemming from targeted marketing initiatives to improve penetration rates of the
Digital Television, HSI and Telephony services. Furthermore, the Digital
Television service should continue to benefit from the continuing strong
interest in the Cogeco Cable's growing HD service offerings. Canadian operations
revenue will also benefit from the impact of rate increases implemented in June
2010 in Ontario and Quebec, averaging $2 per Basic Cable service customer.
Cogeco Cable's strategies include consistently effective marketing, competitive
product offerings and superior customer service, which combined, lead to the
expansion and loyalty of the Canadian operations' Basic Cable Service clientele.
As the penetration of HSI, Telephony and Digital Television services increase,
the new demand for these products should slow, reflecting early signs of
maturity.
European operations is expected to continue to grow their customer base with
projected net additions across all services that should result from the
acquisition and retention strategies implemented in the second half of fiscal
2009. The economic difficulties being experienced by the European market at
large and the transitory competitive environment which has plagued the
Portuguese telecommunications industry for the past two years are beginning to
assuage, which should lead to an increase in revenue in local currency for the
2011 fiscal year, however the economic climate is expected to remain difficult
in the short-term, and the expected volatility of the Euro compared to the
Canadian dollar in the upcoming fiscal year is expected to offset the favourable
impact on Euro-denominated revenue. For fiscal 2010, the expected foreign
exchange rate was approximately $1.55 per Euro while for fiscal 2011, it is
anticipated that the Euro should be converted at a rate of approximately $1.35
per Euro.
As a result of increased costs to service additional RGU, inflation and manpower
increases, as well as the continuation of the marketing initiatives and
retention strategies launched in Portugal in the second half of fiscal 2009,
consolidated operating costs are expected to expand by approximately $25
million, or 3.2% in the 2011 fiscal year when compared to the revised
projections for fiscal 2010.
For fiscal 2011, Cogeco Cable expects operating income before amortization of
$530 million, an increase of $25 million, or 5% when compared to the revised
fiscal 2010 projections issued on January 12, 2010. The operating margin is
expected to reach approximately 39.6% in fiscal 2011, compared to revised
projections of 39.1% for the 2010 fiscal year, reflecting revenue growth which
is expected to exceed the increase in operating costs.
Cogeco Cable expects the amortization of capital assets and deferred charges to
increase slightly by $2 million for fiscal 2011, mainly from capital
expenditures and deferred charges related to RGU growth and other initiatives of
fiscal 2011 and the full year impact of those of fiscal 2010. Cash flows from
operations should finance capital expenditures the increase in and deferred
charges amounting to $340 million, essentially the same as the revised fiscal
2010 projections. Capital expenditures projected for the 2011 fiscal year are
mainly due to customer premise equipment required to support RGU growth,
scalable infrastructure for product enhancements and the deployment of new
technologies, line extensions to expand existing territories, and to support
capital to improve business information systems and facility requirements.
Fiscal 2011 free cash flow is expected to decline to $55 million. The decrease
of approximately $80 million when compared to the $135 million revised
projections for the 2010 fiscal year is primarily due to the projected fiscal
2011 income tax payments of approximately $65 million compared to the expected
fiscal 2010 income tax recoveries of approximately $40 million as a result of
modifications to the corporate structure. The $105 million variation in cash
income taxes year over year will be partly offset by the growth in operating
income before amortization. Generated free cash flow should be used primarily to
reduce Indebtedness, thus improving the Cogeco Cable's leverage ratios.
Financial expense will remain essentially the same at $70 million as the
anticipated decrease in Indebtedness will be offset by a slight increase in
Cogeco Cable's cost of debt reflecting current market conditions and additional
costs related to the new Term Revolving Facility previously described in the
"Financial position" section. As a result, net income of approximately $120
million should be achieved compared to $125 million for the revised fiscal 2010
projections. Fiscal 2010 projected net income includes a favourable income tax
adjustment of $29.8 million related to the reduction of Ontario provincial
corporate income tax rates for the Canadian operations. Excluding this amount,
fiscal 2011 projected net income of $120 million represents an increase of $25
million over adjusted projected net income of $95 million for fiscal 2010.
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revised
projections
Preliminary January 12,
Projections 2010(1)
Fiscal 2011 Fiscal 2010
(in millions of dollars, except net customer $ $
additions and operating margin)
-------------------------------------------------------------------------
Financial guidelines
Revenue 1,340 1,290
Operating income before amortization 530 505
Operating margin 39.6% 39.1%
Amortization 275 273
Financial expense 70 69
Current income taxes 65 (40)
Net income 120 125
Capital expenditures and increase in deferred 340 341
charges
Free cash flow 55 135
Net customer additions guidelines
RGU(1) 250,000 200,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1)Net customer addition guidelines for Fiscal 2010 were revised on April
7, 2010.
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 at May 31, 2010, and have concluded that they were adequate.
Furthermore, no significant changes to the internal controls over financial
reporting occurred during the quarter ended May 31, 2010.
UNCERTAINTIES AND MAIN RISK FACTORS
Except as mentioned below, 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.
The CRTC recently published its broadcasting regulatory policy on a group-based
approach to the licensing of private television services. This policy
contemplates the establishment of a new right for private local television
stations to negotiate with cable and satellite broadcasting distribution
undertakings ("BDU"s) a value for carriage of their signal ("VFS"). The VFS
regime would also establish a new right for private local television stations
that elect to negotiate VFS to withhold carriage of their signal and require
deletion on other signals distributed by BDUs of the programs for which they own
exclusive broadcasting rights. The VFS regime, which may lead to various forms
of compensation, including monetary compensation, is however predicated on the
Federal Court of Appeal issuing a favourable legal ruling. The CRTC is also
considering the offering of discrete small basic packages comprising only local
and regional television signals at no charge in order to facilitate the
transition to digital terrestrial television broadcasting scheduled to take
place on August 31, 2011. Because the final outcome of these proceedings is
uncertain, the Company is unable to estimate the potential impact of VFS at this
time.
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 resulted in the
elimination of 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 (loss)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months Nine months
ended May 31, ended May 31,
Increase (decrease) 2009 2009
($000) $ $
-------------------------------------------------------------------------
(unaudited) (unaudited)
Operating costs 2,780 9,931
Amortization of deferred charges (3,653) (10,285)
Future income tax expense 187 23
Non-controlling interest 462 218
Net income 224 113
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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
In March 2006, the Accounting Standards Board of the CICA released its new
strategic plan, which proposed to abandon Canadian GAAP and effect a complete
convergence to the International Financial Reporting Standards ("IFRS") for
Canadian publicly accountable entities. This plan was confirmed in subsequent
exposure drafts issued in April 2008, March 2009 and October 2009. The
changeover will occur no later than fiscal years beginning on or after January
1, 2011. Accordingly, the Company expects that its first interim consolidated
financial statements presented in accordance with IFRS will be for the
three-month period ending November 30, 2011, and its first annual consolidated
financial statements presented in accordance with IFRS will be for the year
ending August 31, 2012.
IFRS uses a conceptual framework similar to Canadian GAAP, but there are
significant differences in recognition, measurement and disclosure requirements.
The Company has established a project team including representatives from
various areas of the organization to plan and complete the transition to IFRS.
This team reports periodically to the Audit Committee, which oversees the IFRS
implementation project on behalf of the Board of Directors. The Company is
assisted by external advisors as required.
The implementation project consists of three primary phases, which may occur
concurrently as IFRS are applied to specific areas of operations:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Phase Area of impact Key activities Status
---------------------------------------------------------------------------
Scoping and Pervasive Perform a high-level Completed
diagnostic impact assessment to
identify key areas that
are expected to be
impacted by the transition
to IFRS.
Rank IFRS impacts in order
of priority to assess the
timing and complexity of
transition efforts that
will be required in
subsequent phases.
---------------------------------------------------------------------------
Impact For each area Identify the specific Completed
analysis, identified in changes required to
evaluation and the scoping existing accounting
design and diagnostic policies.
phase
Analyse policy choices
permitted under IFRS.
Present analysis and
recommendations on
accounting policy choices
to the audit committee.
-----------------------------------------------------------
Pervasive Identify impacts on In progress -
reporting systems and to be completed
business processes. in fiscal 2010
Prepare draft IFRS
consolidated financial
statement content.
-------------------------------------------
Identify impacts on To be completed
internal controls over in fiscal 2010
financial reporting and
other business processes.
---------------------------------------------------------------------------
Implementation For each area Test and execute changes In progress -
and review identified in to information systems and to be completed
the scoping business processes. by fiscal 2010
and diagnostic
phase
-------------------------------------------
Obtain formal approval of To be completed
required accounting policy in fiscal 2010
changes and selected
accounting policy choices.
-------------------------------------------
Communicate impact on To be completed
accounting policies and by fiscal 2011
business processes to
external stakeholders.
-----------------------------------------------------------
Pervasive Gather financial To be completed
information necessary for in fiscal 2011
opening balance sheet and
comparative IFRS financial
statements.
Update and test internal
control processes over
financial reporting and
other business processes.
-------------------------------------------
-------------------------------------------
Collect financial To be completed
information necessary to by fiscal 2012
compile IFRS-compliant
financial statements.
Provide training to
employees and end-users
across the organization.
Prepare IFRS compliant
financial statements.
Obtain the approval from
the Audit Committee of the
IFRS consolidated
financial statements.
-------------------------------------------
-------------------------------------------
Continually review IFRS To be completed
and implement changes to throughout
the standards as they transition and
apply to the Company. post-conversion
periods
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The Company's project for the transition from Canadian GAAP to IFRS 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 Nine months
May 31, ended May 31,
2010 2009(1) 2010 2009(1)
($000) $ $ $ $
---------------------------------------------------------------------------
(unaudited)(unaudited) (unaudited)(unaudited)
Cash flow from operating
activities 110,756 99,873 226,844 243,672
Changes in non-cash operating
items 8,384 (7,155) 148,145 37,872
---------------------------------------------------------------------------
Cash flow from operations 119,140 92,718 374,989 281,544
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Free cash flow is calculated as follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Quarters ended Nine months
May 31, ended May 31,
2010 2009(1) 2010 2009(1)
($000) $ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Cash flow from operations 119,140 92,718 374,989 281,544
Acquisition of fixed assets (66,963) (56,664) (204,239) (184,534)
Increase in deferred
charges (2,548) (2,476) (8,067) (8,311)
Assets acquired under
capital leases - as per
note 13 c) - (1,162) (141) (2,423)
--------------------------------------------------------------------------
Free cash flow 49,629 32,416 162,542 86,276
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(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 available, 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 Nine months
May 31, ended May 31,
2010 2009(1) 2010 2009(1)
($000, except percentages) $ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Operating income 64,008 62,623 185,940 182,623
Amortization 63,920 64,001 195,614 188,217
--------------------------------------------------------------------------
Operating income before
amortization 127,928 126,624 381,554 370,840
--------------------------------------------------------------------------
Revenue 330,933 316,310 988,023 936,510
--------------------------------------------------------------------------
Operating margin 38.7% 40.0% 38.6% 39.6%
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(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.
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:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Nine months ended May
Quarters ended May 31, 31,
2010 2009(1) 2010 2009(1)
($000, except number of
shares and per share
data) $ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net income (loss) 10,740 10,704 43,999 (93,645)
Adjustments:
Impairment loss net of
related taxes and non-
controlling interest - - - 123,951
Tax adjustments net of
non-controlling
interest:
Reduction of Ontario
provincial corporate
income tax rates - - (9,620) -
Reduction of
withholding and stamp
tax contingent
liabilities - (3,531) - (3,531)
Utilization of pre-
acquisition tax
losses - 1,984 - 1,984
--------------------------------------------------------------------------
Adjusted net income 10,740 9,157 34,379 28,759
--------------------------------------------------------------------------
Weighted average number of
multiple voting and
subordinate voting shares
outstanding 16,730,336 16,702,474 16,724,720 16,696,901
Effect of dilutive stock
options 9,300 3,947 10,969 11,432
Effect of dilutive
incentive share units 71,862 56,449 66,480 50,030
--------------------------------------------------------------------------
Weighted average number of
diluted multiple voting
and subordinate voting
shares outstanding 16,811,498 16,762,870 16,802,169 16,758,363
--------------------------------------------------------------------------
Adjusted earnings per
share
Basic 0.64 0.55 2.06 1.72
Diluted 0.64 0.55 2.05 1.72
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(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 July 7, 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:
Thursday, July 8, 2010 at 11:00 a.m. (EDT)
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: 76235441
By Internet at www.cogeco.ca/investors
A rebroadcast of the conference call will be available until
July 15, 2010, by dialling:
Canada and USA access number: 1 800 839-9868
International access number: + 1 402 220-4283
Confirmation code: 76235441
Supplementary Quarterly Financial Information
(unaudited)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Quarters ended May 31, February 28,
($000, except percentages and per
share data) 2010 2009(1) 2010 2009(1)
---------------------------------------------------------------------------
Revenue 330,933 316,310 329,087 311,825
Operating income before
amortization(3) 127,928 126,624 124,363 123,505
Operating margin(3) 38.7% 40.0 % 37.8% 39.6%
Operating income 64,008 62,623 58,370 60,171
Impairment of goodwill and
intangible assets - - - (399,648)
Net income (loss) 10,740 10,704 10,511 (115,210)
Adjusted net income(3) 10,740 9,157 10,511 8,741
Cash flow from operating activities 110,756 99,873 117,498 117,322
Cash flow from operations(3) 119,140 92,718 120,331 97,193
Free cash flow(3) 49,629 32,416 45,782 32,089
Earnings (loss) per share(4)
Basic 0.64 0.64 0.63 (6.90)
Diluted 0.64 0.64 0.63 (6.88)
Adjusted earnings per share(3)(4)
Basic 0.64 0.55 0.63 0.52
Diluted 0.64 0.55 0.63 0.52
---------------------------------------------------------------------------
---------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Quarters ended November 30, August 31,
($000, except percentages and per 2008(1)(2
share data) 2009 2008(1) 2009(1) )
--------------------------------------------------------------------------
Revenue 328,003 308,375 316,284 292,873
Operating income before
amortization(3) 129,263 120,711 144,654 117,557
Operating margin(3) 39.4% 39.1% 45.7% 40.1%
Operating income 63,562 59,829 76,244 58,664
Impairment of goodwill and
intangible assets - - - -
Net income (loss) 22,748 10,861 14,631 9,332
Adjusted net income(3) 13,128 10,861 7,647 9,332
Cash flow from operating activities (1,410) 26,477 177,032 141,590
Cash flow from operations(3) 135,518 91,633 108,744 95,507
Free cash flow(3) 67,131 21,771 14,742 20,981
Earnings (loss) per share(4)
Basic 1.36 0.65 0.87 0.56
Diluted 1.35 0.65 0.87 0.56
Adjusted earnings per share(3)(4)
Basic 0.79 0.65 0.46 0.56
Diluted 0.78 0.65 0.46 0.56
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(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 the current fiscal year, the maximum amount has been set at $9 million,
which has been paid in the first half of the fiscal year. 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.
Cable Sector Customer Statistics
(unaudited)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
May 31, 2010 August 31, 2009
---------------------------------------------------------------------------
Homes passed
Ontario 1,063,542 1,049,818
Quebec 524,023 515,327
---------------------------------------------------------------------------
Canada 1,587,565 1,565,145
Portugal(1) 905,307 905,129
---------------------------------------------------------------------------
Total 2,492,872 2,470,274
---------------------------------------------------------------------------
Homes connected(2)
Ontario 679,849 658,690
Quebec 297,015 285,944
---------------------------------------------------------------------------
Canada 976,864 944,634
Portugal 267,851 269,022
---------------------------------------------------------------------------
Total 1,244,715 1,213,656
---------------------------------------------------------------------------
Revenue-generating units
Ontario 1,576,838 1,483,324
Quebec 730,032 676,539
---------------------------------------------------------------------------
Canada 2,306,870 2,159,863
Portugal 808,176 732,375
---------------------------------------------------------------------------
Total 3,115,046 2,892,238
---------------------------------------------------------------------------
Basic Cable service customers
Ontario 601,746 597,651
Quebec 272,326 267,154
---------------------------------------------------------------------------
Canada 874,072 864,805
Portugal 258,676 259,480
---------------------------------------------------------------------------
Total 1,132,748 1,124,285
---------------------------------------------------------------------------
High Speed Internet service customers
Ontario 397,238 374,906
Quebec 152,915 140,146
---------------------------------------------------------------------------
Canada 550,153 515,052
Portugal 160,409 143,614
---------------------------------------------------------------------------
Total 710,562 658,666
---------------------------------------------------------------------------
Digital Television service customers
Ontario 355,955 326,227
Quebec 185,991 172,171
---------------------------------------------------------------------------
Canada 541,946 498,398
Portugal 147,835 102,753
---------------------------------------------------------------------------
Total 689,781 601,151
---------------------------------------------------------------------------
Telephony service customers
Ontario 221,899 184,540
Quebec 118,800 97,068
---------------------------------------------------------------------------
Canada 340,699 281,608
Portugal 241,256 226,528
---------------------------------------------------------------------------
Total 581,955 508,136
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(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 (LOSS)
(unaudited)
--------------------------------------------------------------------------
Three months ended May 31, Nine months ended May 31,
(In thousands of
dollars, except per
share data) 2010 2009 2010 2009
$ $ $ $
--------------------------------------------------------------------------
(restated, see (restated, see
note 1) note 1)
Revenue 330,933 316,310 988,023 936,510
Operating costs 203,005 189,686 606,469 565,670
--------------------------------------------------------------------------
Operating income
before amortization 127,928 126,624 381,554 370,840
Amortization (note
3) 63,920 64,001 195,614 188,217
--------------------------------------------------------------------------
Operating income 64,008 62,623 185,940 182,623
Financial expense
(note 4) 16,824 14,362 48,288 56,168
Reduction of
withholding stand
stamp tax
contingent
liabilities (note
5) - (10,930) - (10,930)
Impairment of
goodwill and
intangible assets
(note 6) - - - 399,648
--------------------------------------------------------------------------
Income (loss) before
income taxes and
the following items 47,184 59,191 137,652 (262,263)
Income taxes (note
7) 15,334 26,521 14,041 36,380
Loss (gain) on
dilution resulting
from the issuance
of shares by a
subsidiary - - (18) 48
Non-controlling
interest 21,110 21,966 79,630 (205,046)
--------------------------------------------------------------------------
Net income (loss) 10,740 10,704 43,999 (93,645)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Earnings (loss) per
share (note 8)
Basic 0.64 0.64 2.63 (5.61)
Diluted 0.64 0.64 2.62 (5.59)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED
STATEMENTS OF
COMPREHENSIVE INCOME
(LOSS)
(unaudited)
---------------------------------------------------------------------------
Three months ended May 31, Nine months ended May 31,
(In thousands of
dollars) 2010 2009 2010 2009
$ $ $ $
---------------------------------------------------------------------------
(restated, (restated,
see note 1) see note 1)
Net income (loss) 10,740 10,704 43,999 (93,645)
---------------------------------------------------------------------------
Other comprehensive
income (loss)
Unrealized gains
(losses) on
derivative
financial
instruments
designated as cash
flow hedges, net
of income tax
expense of
$622,000 and
income tax
recovery
$1,852,000 and
non-controlling
interest of
$2,802,000 and
$531,000 (income
tax recovery of
$3,847,000 and
$11,000 and non-
controlling
interest of
$22,173,000 and
$1,566,000 in
2009) 1,338 (10,584) (253) (742)
Reclassification to
net income of
realized losses
(gains) on
derivative
financial
instruments
designated as cash
flow hedges, net
of income tax
recovery of
$230,000 and
$1,316,000 and
non-controlling
interest of
$1,002,000 and
$5,733,000 (income
tax recovery of
$4,615,000 and
income tax expense
of $746,000 and
non-controlling
interest of
$20,104,000 and
$3,037,000 in
2009) 478 9,595 2,736 (1,460)
Unrealized gains
(losses) on
translation of a
net investment in
self-sustaining
foreign
subsidiaries, net
of non-controlling
interest of
$17,159,000 and
$33,128,000
($8,925,000 and
$7,528,000 in
2009) (8,190) (4,260) (15,811) 3,596
Unrealized gains
(losses) on
translation of
long-term debt
designated as
hedge of a net
investment in
self-sustaining
foreign
subsidiaries, net
of non-controlling
interest of
$11,479,000 and
$24,052,000
($7,709,000 and
$1,033,000 in
2009) 5,479 3,680 11,479 (494)
---------------------------------------------------------------------------
(895) (1,569) (1,849) 900
---------------------------------------------------------------------------
Comprehensive income
(loss) 9,845 9,135 42,150 (92,745)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(unaudited)
--------------------------------------------------------------------------
Nine months ended May 31,
(In thousands of dollars) 2010 2009
$ $
--------------------------------------------------------------------------
(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 (loss) 43,999 (93,645)
Excess of price paid for the acquisition of
subordinate voting shares over the value
attributed to the incentive share units at
issuance (430) -
Dividends on multiple voting shares (553) (442)
Dividends on subordinate voting shares (4,467) (3,576)
--------------------------------------------------------------------------
Balance at end 242,577 190,740
--------------------------------------------------------------------------
--------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
--------------------------------------------------------------------------
(In thousands of dollars) May 31, 2010 August 31, 2009
$ $
--------------------------------------------------------------------------
(restated, see
note 1)
Assets
Current
Cash and cash equivalents (note 13 b)) 21,111 39,458
Accounts receivable 73,947 66,076
Income taxes receivable 41,458 5,228
Prepaid expenses 15,512 14,805
Future income tax assets 5,148 4,275
--------------------------------------------------------------------------
157,176 129,842
--------------------------------------------------------------------------
Investments 739 739
Fixed assets 1,272,561 1,305,769
Deferred charges 22,720 24,062
Intangible assets (note 9) 1,044,192 1,047,774
Goodwill (note 9) 143,270 153,695
Derivative financial instruments 992 4,236
Future income tax assets 18,850 4,011
--------------------------------------------------------------------------
2,660,500 2,670,128
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Liabilities and Shareholders' equity
Liabilities
Current
Bank indebtedness 54,489 416
Accounts payable and accrued liabilities 174,993 255,281
Income tax liabilities 1,032 41,358
Deferred and prepaid revenue 42,332 33,877
Current portion of long-term debt (note
10) 2,904 44,706
Future income tax liabilities 58,012 -
--------------------------------------------------------------------------
333,762 375,638
--------------------------------------------------------------------------
Long-term debt (note 10) 952,849 1,019,258
Derivative financial instrument 1,560 2,168
Deferred and prepaid revenue and other
liabilities 12,450 12,900
Pension plan liabilities and accrued
employees benefits 9,884 10,453
Future income tax liabilities 236,722 234,710
--------------------------------------------------------------------------
1,547,227 1,655,127
--------------------------------------------------------------------------
Non-controlling interest 743,908 682,879
--------------------------------------------------------------------------
Shareholders' equity
Capital stock (note 11) 119,527 119,159
Contributed surplus 2,782 2,607
Retained earnings 242,577 204,028
Accumulated other comprehensive income
(note 12) 4,479 6,328
--------------------------------------------------------------------------
369,365 332,122
--------------------------------------------------------------------------
2,660,500 2,670,128
--------------------------------------------------------------------------
--------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED
STATEMENTS OF CASH
FLOWS
(unaudited)
--------------------------------------------------------------------
Three months ended May Nine months ended May
31, 31,
(In thousands of
dollars) 2010 2009 2010 2009
$ $ $ $
--------------------------------------------------------------------
(restated, (restated,
see note 1) see note 1)
Cash flow from
operating
activities
Net income (loss) 10,740 10,704 43,999 (93,645)
Adjustments for:
Amortization (note
3) 63,920 64,001 195,614 188,217
Amortization of
deferred
transaction costs
and discounts on
long-term debt 772 634 2,314 1,985
Reduction of
withholding and
stamp tax
contingent
liabilities (note
5) - (10,930) - (10,930)
Impairment of
goodwill and
intangible assets
(note 6) - - - 399,648
Future income taxes 21,264 8,015 49,900 589
Non-controlling
interest 21,110 21,966 79,630 (205,046)
Loss (gain) on
dilution resulting
from the issuance
of shares by a
subsidiary - - (18) 48
Foreign exchange
gain on unhedged
long-term debt - (2,376) - (2,376)
Stock-based
compensation 450 396 2,014 1,260
Loss on disposal
and write-offs of
fixed assets 2,443 29 2,505 233
Other (1,559) 279 (969) 1,561
--------------------------------------------------------------------
119,140 92,718 374,989 281,544
Changes in non-cash
operating items
(note 13 a)) (8,384) 7,155 (148,145) (37,872)
--------------------------------------------------------------------
110,756 99,873 226,844 243,672
--------------------------------------------------------------------
Cash flow from
investing
activities
Acquisition of fixed
assets (note 13 c)) (66,963) (56,664) (204,239) (184,534)
Increase in deferred
charges (2,548) (2,476) (8,067) (8,311)
Other 23 201 145 262
--------------------------------------------------------------------
(69,488) (58,939) (212,161) (192,583)
--------------------------------------------------------------------
Cash flow from
financing
activities
Increase in bank
indebtedness 4,444 16,986 54,073 45,104
Net decrease under
the term facilities (33,150) (56,515) (61,220) (86,464)
Issuance of long-
term debt, net of
discounts and
transaction costs - - - 254,771
Repayment of long-
term debt and
settlement of
derivative
financial
instruments (821) (801) (2,907) (241,428)
Issuance of
subordinate voting
shares - 936 353 957
Acquisition of
subordinate voting
shares held in
trust under the
Incentive Share
Unit Plan (note 11) - - (1,049) (325)
Dividends on
multiple voting
shares (187) (147) (553) (442)
Dividends on
subordinate voting
shares (1,479) (1,192) (4,467) (3,576)
Issuance of shares
by a subsidiary to
non-controlling
interest - - 283 964
Acquisition by a
subsidiary from
non-controlling
interest of
subordinate voting
shares held in
trust under the
Incentive Share
Unit Plan (note 11) (264) - (2,008) -
Dividends paid by a
subsidiary to non-
controlling
interest (4,586) (3,944) (13,789) (11,827)
--------------------------------------------------------------------
(36,043) (44,677) (31,284) (42,266)
--------------------------------------------------------------------
Effect of exchange
rate changes on
cash and cash
equivalents
denominated in
foreign currencies (846) (1,866) (1,746) (538)
--------------------------------------------------------------------
Net change in cash
and cash
equivalents 4,379 (5,609) (18,347) 8,285
--------------------------------------------------------------------
Cash and cash
equivalents at
beginning 16,732 51,366 39,458 37,472
--------------------------------------------------------------------
Cash and cash
equivalents at end 21,111 45,757 21,111 45,757
--------------------------------------------------------------------
--------------------------------------------------------------------
See supplemental cash flow information in note 13.
COGECO INC.
Notes to Consolidated Financial Statements
May 31, 2010
(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 May 31, 2010 and August 31, 2009 as well as its results of
operations and its cash flows for the three and nine month periods ended May 31,
2010 and 2009.
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 Canadian Institute of Chartered Accountants ("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 resulted in the elimination of 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 (loss)
--------------------------------------------------------------------------
Three months ended Nine months ended
May 31, 2009 May 31, 2009
Increase (decrease) $ $
--------------------------------------------------------------------------
Operating costs 2,780 9,931
Amortization of deferred charges (3,653) (10,285)
Future income tax expense 187 23
Non-controlling interest 462 218
Net income 224 113
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Consolidated balance sheets
--------------------------------------------------------------------------
August 31, 2009 September 1, 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 May 31, 2010 2009 2010 2009 2010 2009
$ $ $ $ $ $
--------------------------------------------------------------------------
(restated) (restated) (restated)
Revenue 319,291 305,672 11,642 10,638 330,933 316,310
Operating
costs 192,591 179,721 10,414 9,965 203,005 189,686
Operating
income before
amortization 126,700 125,951 1,228 673 127,928 126,624
Amortization 63,771 63,865 149 136 63,920 64,001
Operating
income 62,929 62,086 1,079 537 64,008 62,623
Financial
expense 16,684 14,206 140 156 16,824 14,362
Reduction of
withholding
and stamp tax
contingent
liabilities - (10,930) - - - (10,930)
Income taxes 15,060 26,357 274 164 15,334 26,521
Non-
controlling
interest 21,110 21,966 - - 21,110 21,966
Net income 10,075 10,487 665 217 10,740 10,704
--------------------------------------------------------------------------
Total assets
(1) 2,611,111 2,630,912 49,389 39,216 2,660,500 2,670,128
Fixed assets
(1) 1,268,919 1,302,238 3,642 3,531 1,272,561 1,305,769
Intangible
assets (1) 1,018,852 1,022,434 25,340 25,340 1,044,192 1,047,774
Goodwill (1) 143,270 153,695 - - 143,270 153,695
Acquisition of
fixed assets
(2) 66,749 57,663 214 163 66,963 57,826
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) At May 31, 2010 and August 31, 2009.
(2) Includes capital leases that are excluded from the consolidated
statements of cash flows.
--------------------------------------------------------------------------
Other and
Cable eliminations Consolidated
--------------------------------------------------------------------------
Nine months
ended May 31, 2010 2009 2010 2009 2010 2009
$ $ $ $ $ $
--------------------------------------------------------------------------
(restated) (restated) (restated)
Revenue 957,053 910,030 30,970 26,480 988,023 936,510
Operating
costs 585,134 546,046 21,335 19,624 606,469 565,670
Operating
income before
amortization 371,919 363,984 9,635 6,856 381,554 370,840
Amortization 195,175 187,809 439 408 195,614 188,217
Operating
income 176,744 176,175 9,196 6,448 185,940 182,623
Financial
expense 47,858 55,588 430 580 48,288 56,168
Reduction of
withholding
and stamp
taxcontingent
liabilities - (10,930) - - - (10,930)
Impairment of
goodwill and
intangible
assets - 399,648 - - - 399,648
Income taxes 11,246 34,795 2,795 1,585 14,041 36,380
Loss (gain) on
dilution
resulting
from the
issuance of
shares by a
subsidiary (18) 48 - - (18) 48
Non-
controlling
interest 79,630 (205,046) - - 79,630 (205,046)
Net income
(loss) 38,028 (97,928) 5,971 4,283 43,999 (93,645)
--------------------------------------------------------------------------
Total assets
(1) 2,611,111 2,630,912 49,389 39,216 2,660,500 2,670,128
Fixed assets
(1) 1,268,919 1,302,238 3,642 3,531 1,272,561 1,305,769
Intangible
assets (1) 1,018,852 1,022,434 25,340 25,340 1,044,192 1,047,774
Goodwill (1) 143,270 153,695 - - 143,270 153,695
Acquisition of
fixed assets
(2) 203,830 186,611 550 346 204,380 186,957
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) At May 31, 2010 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 May 31, Nine months ended May 31,
2010 2009 2010 2009
$ $ $ $
--------------------------------------------------------------------------
Revenue
Canada 287,317 258,739 842,435 755,635
Europe 43,616 57,571 145,588 180,875
--------------------------------------------------------------------------
330,933 316,310 988,023 936,510
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
May 31, 2010 August 31, 2009
$ $
--------------------------------------------------------------------------
Fixed
assets
Canada 1,048,232 1,015,298
Europe 224,329 290,471
--------------------------------------------------------------------------
1,272,561 1,305,769
--------------------------------------------------------------------------
Intangible
assets
Canada 1,044,192 1,047,774
Europe - -
--------------------------------------------------------------------------
1,044,192 1,047,774
--------------------------------------------------------------------------
Goodwill
Canada 116,243 116,243
Europe 27,027 37,452
--------------------------------------------------------------------------
143,270 153,695
--------------------------------------------------------------------------
--------------------------------------------------------------------------
3. Amortization
--------------------------------------------------------------------------
Three months ended May 31, Nine months ended May 31,
2010 2009 2010 2009
$ $ $ $
--------------------------------------------------------------------------
(restated) (restated)
Fixed
assets 60,027 60,163 183,845 171,219
Deferred
charges 2,699 2,645 8,187 7,872
Intangible
assets 1,194 1,193 3,582 9,126
--------------------------------------------------------------------------
63,920 64,001 195,614 188,217
--------------------------------------------------------------------------
--------------------------------------------------------------------------
4. Financial expense
--------------------------------------------------------------------------
Three months ended May 31, Nine months ended May 31,
2010 2009 2010 2009
$ $ $ $
--------------------------------------------------------------------------
Interest
on long-
term debt 15,588 15,300 47,277 52,599
Foreign
exchange
losses
(gains) 409 (1,687) (470) 2,716
Amortizati
on of
deferred
transacti
on costs 408 408 1,222 1,222
Other 419 341 259 (369)
--------------------------------------------------------------------------
16,824 14,362 48,288 56,168
--------------------------------------------------------------------------
--------------------------------------------------------------------------
5. Reduction of withholding and stamp tax contingent liabilities
The Company's Portuguese subsidiary, Cabovisao-Televisao por Cabo, S.A.
("Cabovisao"), had recorded contingent liabilities for withholding and stamp
taxes relating to fiscal years prior to its acquisition. At the date of
acquisition, the amount accrued represented management's best estimate based on
the available information. Management reviews its estimates periodically to take
into consideration payments made relating to these contingencies as well as
newly available information which would allow the Company's subsidiary to
improve its previous estimate. During the third quarter of fiscal 2009,
Cabovisao received a preliminary report from the Portuguese tax authorities with
respect to some of the items included in the contingent liabilities.
Accordingly, management has reviewed its estimate of the contingent liabilities
to reflect the new information available in this preliminary report, and has
determined that a reduction of EUR7 million, equivalent to $10.9 million, of the
amount previously accrued was required at May 31, 2009, in order to reflect
management's best estimate.
6. Impairment of goodwill and intangible assets
--------------------------------------------------------------------------
Three months ended May 31, Nine months ended May 31,
2010 2009 2010 2009
$ $ $ $
--------------------------------------------------------------------------
Impairment of
goodwill - - - 339,206
Impairment of
intangible assets - - - 60,442
--------------------------------------------------------------------------
- - - 399,648
--------------------------------------------------------------------------
--------------------------------------------------------------------------
During the second quarter of fiscal 2009, the competitive position of Cabovisao
in the Iberian Peninsula further deteriorated due to the continuing difficult
competitive environment and recurring intense promotions and advertising
initiatives from competitors in the Portuguese market. In accordance with
current accounting standards, management considered that the continued customer,
local currency revenue and operating income before amortization decline, were
more severe and persistent than expected, resulting in a decrease in the value
of the Company's subsidiary's investment in the Portuguese subsidiary. As a
result, the Company's subsidiary tested goodwill and all long-lived assets for
impairment at February 28, 2009.
Goodwill is tested for impairment using a two step approach. The first step
consists of determining whether the fair value of the reporting unit to which
goodwill is assigned exceeds the net carrying amount of that reporting unit,
including goodwill. In the event that the net carrying amount exceeds the fair
value, a second step is performed in order to determine the amount of the
impairment loss. The impairment loss is measured as the amount by which the
carrying amount of the reporting unit's goodwill exceeds its fair value. The
Company's subsidiary completed its impairment tests on goodwill and concluded
that goodwill was impaired at February 28, 2009. As a result, an impairment loss
of $339.2 million was recorded in the second quarter of fiscal 2009. Fair value
of the reporting unit was determined using the discounted cash flow method.
Future cash flows were based on internal forecasts and consequently,
considerable management judgement was necessary to estimate future cash flows.
Significant future changes in circumstances could result in further impairments
of goodwill.
Intangible assets with finite useful lives, such as customer relationships, must
be tested for impairment by comparing the carrying amount of the asset or group
of assets to the expected future undiscounted cash flow to be generated by the
asset or group of assets. The impairment loss is measured as the amount by which
the asset's carrying amount exceeds its fair value. Accordingly, the Company's
subsidiary completed its impairment test on customer relationships at May 31,
2009, and determined that the carrying value of customer relationships exceeds
its fair value. As a result, an impairment loss of $60.4 million was recorded in
the second quarter of fiscal 2009.
At August 31, 2009, the Company's subsidiary tested the value of goodwill for
impairment and concluded that no further impairment existed.
7. Income Taxes
--------------------------------------------------------------------------
Three months ended May 31, Nine months ended May 31,
2010 2009 2010 2009
$ $ $ $
--------------------------------------------------------------------------
(restated) (restated)
Current (5,930) 18,506 (35,859) 35,791
Future 21,264 8,015 49,900 589
--------------------------------------------------------------------------
15,334 26,521 14,041 36,380
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The following table provides the reconciliation between Canadian statutory
federal and provincial income taxes and the consolidated income tax expense:
--------------------------------------------------------------------------
Three months ended Nine months ended
May 31, May 31,
2010 2009 2010 2009
$ $ $ $
--------------------------------------------------------------------------
(restated) (restated)
Income (loss) before income
taxes 47,184 59,191 137,652 (262,263)
Combined income tax rate 31.47% 32.49% 31.45% 32.49%
Income taxes at combined income
tax rate 14,848 19,231 43,295 (85,220)
Adjustments for losses or income
subject to lower or higher tax
rates (1,894) (38) (7,563) (918)
Decrease in future income taxes
as a result of decrease in
substantively enacted tax rates - - (29,782) -
Decrease in income tax recovery
arising from the non-deductible
impairment of goodwill - - - 89,890
Utilization of pre-acquisition
tax losses - 6,142 4,432 6,142
Income taxes arising from non-
deductible expenses 289 238 595 512
Effect of foreign income tax
rate differences 2,177 1,127 4,301 25,155
Other (86) (179) (1,237) 819
--------------------------------------------------------------------------
Income taxes at effective income
tax rate 15,334 26,521 14,041 36,380
--------------------------------------------------------------------------
--------------------------------------------------------------------------
8. Earnings (loss) per Share
The following table provides the reconciliation between basic and diluted
earnings (loss) per share:
--------------------------------------------------------------------------
Three months ended Nine months ended May
May 31, 31,
2010 2009 2010 2009
$ $ $ $
--------------------------------------------------------------------------
(restated) (restated)
Net income (loss) 10,740 10,704 43,999 (93,645)
--------------------------------------------------------------------------
Weighted average number of
multiple voting and
subordinate voting shares
outstanding 16,730,336 16,702,474 16,724,720 16,696,901
Effect of dilutive stock
options (1) 9,300 - 10,969 -
Effect of dilutive incentive
share units 71,862 56,449 66,480 50,030
--------------------------------------------------------------------------
Weighted average number of
diluted multiple voting and
subordinate voting shares
outstanding 16,811,498 16,758,923 16,802,169 16,746,931
--------------------------------------------------------------------------
Earnings (loss) per share
Basic 0.64 0.64 2.63 (5.61)
Diluted 0.64 0.64 2.62 (5.59)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) For the three and nine month periods ended May 31, 2010 and 2009, 32,782
stock options were excluded from the calculation of diluted earnings (loss)
per share as the exercise price of the options was greater than the average
share price of the subordinate voting shares. Furthermore, the weighted
average dilutive potential number of subordinate voting shares, which were
anti-dilutive for the three and nine month periods ended May 31, 2009
amounted to 3,947 and 11,432.
9. Goodwill and Other Intangible Assets
--------------------------------------------------------------------------
May 31, 2010 August 31, 2009
$ $
--------------------------------------------------------------------------
Customer relationships 29,300 32,882
Broadcasting licenses 25,120 25,120
Customer base 989,772 989,772
--------------------------------------------------------------------------
1,044,192 1,047,774
Goodwill 143,270 153,695
--------------------------------------------------------------------------
1,187,462 1,201,469
--------------------------------------------------------------------------
--------------------------------------------------------------------------
a) Intangible assets
During the first nine months, intangible assets variations were as follows:
-------------------------------------------------- -----------------------
Customer Broadcasting Customer
relationships licenses Base Total
$ $ $ $
------------------------------------ ------------- ----------------------
Balance at August 31,
2009 32,882 25,120 989,772 1,047,774
Amortization (3,582) - - (3,582)
------------------------------------ ------------- ----------------------
Balance at May 31, 2010 29,300 25,120 989,772 1,044,192
-------------------------------------------------- -----------------------
-------------------------------------------------- -----------------------
b) Goodwill
During the first nine months, intangible assets variations were as follows:
-------------------------------------------------------------------------
$
-------------------------------------------------------------------------
Balance at August 31, 2009 153,695)
Recognition of pre-acquisition tax losses (4,432)
Foreign currency translation adjustment (5,993
-------------------------------------------------------------------------
Balance at May 31, 2010 143,270
-------------------------------------------------------------------------
-------------------------------------------------------------------------
On November 25, 2009, Cogeco Cable Inc.'s subsidiary, Cabovisao, received
approval to its request for preservation of tax losses for the years preceding
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.
10. Long-Term Debt
-------------------------------- ------------------------------------------
Interest May 31, August 31,
Maturity rate 2010 2009
% $ $
-------------------------------- ------------------------------------------
Parent company
Term Facility 2011 2.68(1) 2,952 9,382
Obligations under
capital lease 2013 9.29 76 91
Subsidiaries
Term Facility
Term loan -
EUR78,413,625 2011 1.19 (1)(2) 100,447 122,674
Term loan -
EUR17,358,700 2011 1.19 (1)(2) 22,220 27,142
Revolving loan -
EURnil (EUR40,000,000
at August 31, 2009) 2011 - - 62,792
Senior Secured Notes
Series B 2011 7.73 174,685 174,530
Senior Secured Notes
Series A -
US$190,000,000 2015 7.00(3) 196,968 206,606
Series B 2018 7.60 54,601 54,576
Senior Secured
Debentures Series 1 2014 5.95 297,229 296,860
Senior Unsecured
Debenture 2018 5.94 99,801 99,786
Obligations under
capital leases 2013 6.61 - 9.93 6,755 9,496
Other - - 19 29
-------------------------------- ------------------------------------------
955,753 1,063,964
Less current portion 2,904 44,706
-------------------------------- ------------------------------------------
952,849 1,019,258
-------------------------------- ------------------------------------------
-------------------------------- ------------------------------------------
1. Interest rate on debt as at May 31, 2010, 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 EUR111.5 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.
3. Cross-currency swap agreements have resulted in an effective interest
rate of 7.24% on the Canadian dollar equivalent of the US denominated
debt of the Company's subsidiary, Cogeco Cable Inc.
11. 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
--------------------------------------------------------------------------
May 31, 2010 August 31, 2009
$ $
--------------------------------------------------------------------------
1,842,860 multiple voting shares 12 12
14,959,338 subordinate voting shares
(14,942,470 at August 31, 2009) 121,347 120,994
--------------------------------------------------------------------------
121,359 121,006
71,862 subordinate voting shares held in
trust under the Incentive Share Unit Plan
(56,449 at August 31, 2009) (1,832) (1,847)
--------------------------------------------------------------------------
119,527 119,159
--------------------------------------------------------------------------
--------------------------------------------------------------------------
During the first nine months, subordinate voting share transactions were as follows:
--------------------------------------------------------------------------
Number of shares Amount
$
--------------------------------------------------------------------------
Balance at August 31, 2009 14,942,470 120,994
Shares issued for cash under the Employee
Stock Option Plan 16,868 353
--------------------------------------------------------------------------
Balance at May 31, 2010 14,959,338 121,347
--------------------------------------------------------------------------
--------------------------------------------------------------------------
During the first nine months, subordinate voting shares held in trust under the
Incentive Share Unit Plan transactions were as follows:
--------------------------------------------------------------------------
Number of
shares Amount
$
--------------------------------------------------------------------------
Balance at August 31, 2009 56,449 1,847
Subordinate voting shares acquired 41,571 1,049
Subordinate voting shares distributed to
employees (26,158) (1,064)
--------------------------------------------------------------------------
Balance at May 31, 2010 71,862 1,832
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Stock-based plans
The Company offers, for the benefit of its employees, an Employee Stock Purchase
Plan, which has been modified effective January 1st, 2010. The new plan is
accessible to all employees up to a maximum of 7% of their base salary and the
Company contributes 25% of the employee contributions. The subscriptions are
made monthly and employee shares are purchased on the stock market. The
Company's subsidiary, Cogeco Cable Inc., offers a similar plan to its employees
and those of its subsidiaries.
The Company and its subsidiary, Cogeco Cable Inc., also offer, for certain
executives a Stock Option Plan, which is described in the Company's annual
consolidated financial statements. During the first nine months of 2010 and
2009, no stock options were granted to employees by COGECO Inc. However, the
Company's subsidiary, Cogeco Cable Inc., granted 66,174 stock options (138,381
in 2009) with an exercise price ranging from $31.82 to $38.86 ($31.90 to $34.46
in 2009), of which 33,266 stock options (29,711 in 2009) were granted to COGECO
Inc.'s employees. These options vest over a period of five years beginning one
year after the day such options are granted and are exercisable over ten years.
As a result, a compensation expense of $218,000 and $774,000 ($310,000 and
$585,000 in 2009) was recorded for the three and nine month periods ended May
31, 2010.
The fair value of stock options granted by the Company's subsidiary, Cogeco
Cable Inc., for the nine months period ended May 31, 2010 was $8.11 ($7.70 in
2009) 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:
--------------------------------------------------------------------------
2010 2009
% %
--------------------------------------------------------------------------
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 May 31, 2010, the Company had outstanding stock options providing for the
subscription of 62,782 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.
Under the Company's Stock Option Plan, the following options were granted and
are outstanding as at May 31, 2010:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Outstanding at August 31, 2009 79,650
Exercised (16,868)
--------------------------------------------------------------------------
Outstanding at May 31, 2010 62,782
--------------------------------------------------------------------------
Exercisable at May 31, 2010 62,782
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Under Cogeco Cable Inc.'s Stock Option Plan, the following options were granted
and are outstanding as at May 31, 2010:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Outstanding at August 31, 2009 716,745
Granted 66,174
Exercised (10,364)
Forfeited / Cancelled (23,892)
--------------------------------------------------------------------------
Outstanding at May 31, 2010 748,663
--------------------------------------------------------------------------
Exercisable at May 31, 2010 520,083
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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 nine months of
2010, the Company granted 41,571 (17,702 in 2009) and Cogeco Cable Inc. granted
63,666 Incentive Share Units of which, 9,981 Incentive Share Units were granted
to Cogeco Inc.'s employees. The Company and its subsidiary instructed the
trustee to purchase 41,571 and 62,436 subordinate voting shares on the stock
market. These shares were purchased for cash consideration aggregating
$1,049,000 ($325,000 in 2009) and $2,008,000, 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 subordinate voting
shares held in trust under the Incentive Share Unit Plan in reduction of capital
stock or non-controlling interest. A compensation expense of $338,000 and
$840,000 ($133,000 and $371,000 in 2009) was recorded for the three and nine
month periods ended May 31, 2010 related to these plans.
Under the Company's Incentive Share Unit Plan, the following Incentive Share
Units were granted and are outstanding as at
May 31, 2010:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Outstanding at August 31, 2009 56,449
Granted 41,571
Distributed (26,158)
--------------------------------------------------------------------------
Outstanding at May 31, 2010 71,862
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Under Cogeco Cable Inc.'s Incentive Share Unit Plan, the following Incentive
Share Units were granted and are outstanding as at May 31, 2010:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Outstanding at August 31, 2009 -
Granted 63,666
Forfeited / Cancelled (1,230)
--------------------------------------------------------------------------
Outstanding at May 31, 2010 62,436
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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 nine months of 2010, 6,987 and 4,422
(11,113 and 6,282 in 2009) deferred share units ("DSUs") were awarded to the
participants in connection with the DSU Plans. Reduction of compensation expense
of $106,000 and compensation expense of $400,000 (reduction of compensation
expense of $47,000 and compensation expense of $304,000 in 2009) was recorded
for the three and nine month periods ended May 31, 2010 for the liabilities
related to these plans.
Under the Company's DSU Plan, the following DSUs were awarded and are
outstanding as at May 31, 2010:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Outstanding at August 31, 2009 17,244
Awarded 6,987
Dividend equivalents 224
--------------------------------------------------------------------------
Outstanding at May 31, 2010 24,455
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Under Cogeco Cable Inc.'s DSU Plan, the following DSUs were awarded and are
outstanding as at May 31, 2010:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Outstanding at August 31, 2009 10,000
Awarded 4,422
Distributed (2,181)
Dividend equivalents 132
--------------------------------------------------------------------------
Outstanding at May 31, 2010 12,373
--------------------------------------------------------------------------
--------------------------------------------------------------------------
12. 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 (loss) (4,332) 2,483 (1,849)
----------------------------------------------------------------------------
Balance as at May 31,
2010 3,302 1,177 4,479
----------------------------------------------------------------------------
----------------------------------------------------------------------------
13. Statements of Cash Flows
a) Changes in non-cash operating items
--------------------------------------------------------------------------
Three months ended May 31, Nine months ended May 31,
2010 2009 2010 2009
$ $ $ $
--------------------------------------------------------------------------
Accounts
receivable 1,793 475 (9,887) (19)
Income taxes
receivable (5,671) (1,468) (36,670) (7,990)
Prepaid expenses (437) (2,200) (1,732) (2,026)
Accounts payable
and accrued
liabilities (3,780) (5,732) (67,700) (34,730)
Income tax
liabilities (914) 16,437 (40,189) 6,852
Deferred and
prepaid revenue
and other
liabilities 625 (357) 8,033 41
--------------------------------------------------------------------------
(8,384) 7,155 (148,145) (37,872)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
b) Cash and cash equivalents
--------------------------------------------------------------------------
May 31, 2010 August 31, 2009
$ $
--------------------------------------------------------------------------
Cash 21,111 23,760
Cash equivalents (1) - 15,698
--------------------------------------------------------------------------
21,111 39,458
--------------------------------------------------------------------------
--------------------------------------------------------------------------
c) Other information
--------------------------------------------------------------------------
Three months ended May 31, Nine months ended May 31,
2010 2009 2010 2009
$ $ $ $
--------------------------------------------------------------------------
Fixed asset
acquisitions
through capital
leases - 1,162 141 2,423
Financial expense
paid 20,702 22,518 52,541 56,488
Income taxes paid
(received) (196) 3,168 41,000 36,563
--------------------------------------------------------------------------
--------------------------------------------------------------------------
14. Employee Future Benefits
The Company and its Canadian subsidiaries offer to 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 expense related to these plans is
as follows:
--------------------------------------------------------------------------
Three months ended May 31, Nine months ended May 31,
2010 2009 2010 2009
$ $ $ $
--------------------------------------------------------------------------
Contributory
defined benefit
pension plans 874 767 2,614 2,261
Defined
contribution
pension plan and
collective
registered
retirement
savings plans 1,200 1,093 3,438 2,919
--------------------------------------------------------------------------
2,074 1,860 6,052 5,180
--------------------------------------------------------------------------
--------------------------------------------------------------------------
15. 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 May 31, 2010, management
believes that the credit risk relating to its derivative financial instruments
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 than usual 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 large customer. At May 31,
2010, no customer balance represents a significant portion of the Company's
consolidated trade accounts receivable. 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 areas in Canada and Europe, there is no significant
concentration of credit risk. The following table provides further details on
the Company's accounts receivable balances:
--------------------------------------------------------------------------
May 31, 2010 August 31, 2009
$ $
--------------------------------------------------------------------------
Trade accounts receivable 78,902 75,044
Allowance for doubtful accounts (12,088) (17,261)
--------------------------------------------------------------------------
66,814 57,783
Other accounts receivable 7,133 8,293
--------------------------------------------------------------------------
73,947 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.
--------------------------------------------------------------------------
May 31, 2010 August 31, 2009
$ $
--------------------------------------------------------------------------
Net trade accounts receivable not past due 47,220 43,136
Net trade accounts receivable past due 19,594 14,647
--------------------------------------------------------------------------
66,814 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 May 31, 2010, the available amount of the Company's Term Facilities was
$745.8 million.
The following table summarizes the contractual maturities of the financial
liabilities and related capital amounts:
--------------------------------------------------------------------------
2010 2011 2012 2013
$ $ $ $
--------------------------------------------------------------------------
Bank indebtedness 54,489 - - -
Accounts payable and accrued
liabilities 174,993 - - -
Long-term debt (1) 33,559 89,413 178,000 -
Derivative financial instruments
Cash outflows (Canadian dollar) - - - -
Cash inflows (Canadian dollar
equivalent of US dollar) - - - -
Obligations under capital leases
(2) 1,361 3,339 2,324 915
--------------------------------------------------------------------------
264,402 92,752 180,324 915
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
2014 Thereafter Total
$ $ $
--------------------------------------------------------------------------
Bank indebtedness - - 54,489
Accounts payable and accrued
liabilities - - 174,993
Long-term debt (1) 300,000 353,265 954,237
Derivative financial instruments
Cash outflows (Canadian dollar) - 201,875 201,875
Cash inflows (Canadian dollar
equivalent of US dollar) - (198,265) (198,265)
Obligations under capital leases
(2) 41 - 7,980
--------------------------------------------------------------------------
300,041 356,875 1,195,309
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(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 is due for each of the next five
years and thereafter, based on the principal amount and interest rate prevailing
on the current debt at May 31, 2010 and their respective maturities:
--------------------------------------------------------------------------
2010 2011 2012 2013
$ $ $ $
--------------------------------------------------------------------------
Interest payments on long-term
debt 14,195 56,425 44,123 41,845
Interest payments on derivative
financial instruments 4,443 16,930 14,614 14,614
Interest receipts on derivative
financial instruments (3,801) (14,852) (13,879) (13,879)
--------------------------------------------------------------------------
14,837 58,503 44,858 42,580
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
2014 Thereafter Total
$ $ $
--------------------------------------------------------------------------
Interest payments on long-term
debt 37,382 52,879 246,849
Interest payments on derivative
financial instruments 14,614 15,832 81,047
Interest receipts on derivative
financial instruments (13,879) (15,035) (75,325)
--------------------------------------------------------------------------
38,117 53,676 252,571
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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 May
31, 2010, 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 EUR111.5 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 nil based on the current debt at May 31, 2010
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 May 31, 2010, cash and cash equivalents denominated in US dollars
amounted to US$4,321,000 (US$5,555,000 at August 31, 2009) while accounts
payable denominated in US dollars amounted to US$3,169,000 (US$14,997,000 at
August 31, 2009). At May 31, 2010, Euro-denominated cash and cash equivalents
amounted to EUR783,000 (bank indebtedness of EUR299,000 at August 31, 2009)
while accounts payable denominated in Euros amounted to EUR9,000 (EUR26,000 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 Euro) would change
financial expense by approximately $0.2 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 was borrowed directly in Euros. At May 31, 2010, the net
investment amounted to EUR172,798,000 (EUR183,220,000 at August 31, 2009) while
long-term debt denominated in Euros amounted to EUR95,772,000 (EUR135,772,000 at
August 31, 2009). The exchange rate used to convert the Euro currency into
Canadian dollars for the balance sheet accounts at May 31, 2010 was $1.2838 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 $0.3 million and other comprehensive income by
approximately $3.2 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 all the Company's financial instruments approximates fair
value, excepts as otherwise noted in the following table:
--------------------------------------------------------------------------
May 31, 2010 August 31, 2009
Carrying value Fair value Carrying value Fair value
$ $ $ $
--------------------------------------------------------------------------
Long-term
debt 955,753 1,030,337 1,063,964 1,126,449
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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 May 31, 2010, 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:
--------------------------------------------------------------------------
May 31, 2010 August 31, 2009
--------------------------------------------------------------------------
(restated)
Net indebtedness (1) / Shareholders'
equity 2.7 3.1
Net indebtedness (1) / Operating income
before amortization (2) 1.9 2.0
Operating income before amortization (2) /
Financial expense (2) 8.4 7.3
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(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 and
financial expense for the last twelve month period ended May 31,
2010, and August 31, 2009.
16. Guarantees
On March 4, 2010, the Company's subsidiary, Cogeco Cable Inc., issued a letter
of credit amounting to EUR2.2 million to guarantee the payment by Cabovisao of
withholding taxes for the 2005 year assessed by the Portuguese tax authorities,
which are currently being challenged by Cabovisao. Even though the principal
amount in dispute is fully recorded in the books of its subsidiary Cabovisao,
the Company's subsidiary, Cogeco Cable Inc., may be required to pay the amount
following final judgement, up to a maximum aggregate amount of EUR2.2 million
($2.8 million), should Cabovisao fail to pay such required amount.
17. Subsequent events
a) Business acquisition
On April 30, 2010, The Company has concluded an agreement with Corus
Entertainment Inc. to acquire its Quebec radio stations for $80 million in cash,
subject to customary closing adjustments and conditions, including approval by
the Canadian Radio-television and Telecommunications Commission (the "CRTC"). On
June 30, 2010, the Company submitted its transfer application for approval to
the CRTC. The transaction is expected to close during the first half of fiscal
2011.
b) New credit facilities
On July 7, 2010, the Company entered into a new Term Revolving Facility of up to
$100 million with a group of financial institutions led by a large Canadian
bank, which will now act as agent for the banking syndicate. This new Term
Revolving Facility will replace the Company's $50 million Term Facility coming
to maturity on December 14, 2011. The Term Revolving Facility of up to $100
million includes a swingline limit of $7.5 million, is extendable by additional
one-year periods on an annual basis, subject to lenders' approval, and if not
extended, matures three years after its issuance or the last extension, as the
case may be. The Term Revolving Facility can be repaid at any time without
penalty. The Term Revolving Facility is secured by all assets of the Company and
its subsidiaries, excluding the capital stock of the Company's subsidiary,
Cogeco Cable Inc., and guaranteed by its subsidiaries. Under the terms and
conditions of the credit agreement, the Company must comply with certain
restrictive covenants, including the requirement to maintain certain financial
ratios. The Term Revolving Facility bears interest rates based, at the Company's
option, on bankers' acceptance, LIBOR in Euros or in US dollars , bank prime
rate or US base rate plus fees, and commitment fees are payable on the unused
portion.
On July 7, 2010, the Company's subsidiary, Cogeco Cable Inc., entered into a new
$750 million Term Revolving Facility with a group of financial institutions led
by two large Canadian banks, which will be effective on July 12, 2010, subject
to usual conditions, and replace Cogeco Cable Inc.'s $862.5 million Term
Facility coming to maturity on July 28, 2011. This new Term Revolving Facility
has an option to be increased up to $1 billion subject to lenders'
participation. The Term Revolving Facility is available in Canadian, US or Euro
currencies and includes a swingline of $25 million available in Canadian or US
currencies. The Term Revolving Facility may be extended by additional one-year
periods on an annual basis, subject to lenders' approval, and, if not extended,
matures four years after its issuance or the last extension, as the case may be.
The Term Revolving Facility can be repaid at any time without penalty. The Term
Revolving Facility requires commitment fees, and interest rates are based on
bankers' acceptance, LIBOR in Euros or in US dollars, bank prime rate loan or US
base rate loan plus stamping fees. The Term Revolving Facility is indirectly
secured by a first priority fixed and floating charge on substantially all
present and future real and personal property and undertaking of every nature
and kind of Cogeco Cable Inc. and certain of its subsidiaries, and provides for
certain permitted encumbrances, including purchased money obligations, existing
funded obligations and charges granted by any subsidiary prior to the date when
it becomes a subsidiary, subject to a maximum amount. The provisions under this
facility provides for restrictions on the operations and activities of Cogeco
Cable Inc. Generally, the most significant restrictions relate to permitted
investments and dividends on multiple and subordinate voting shares, as well as
incurrence and maintenance of certain financial ratios primarily linked to
operating income before amortization, financial expense and total indebtedness.
18. Comparative Figures
Certain comparative figures have been reclassified to conform to the current
year's presentation.
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