Today, COGECO Inc. (TSX:CGO) ("COGECO" or the "Company") announced its financial
results for the third quarter and first nine months of fiscal 2011, ended May
31, 2011.
For the third quarter and first nine months of fiscal 2011:
-- Revenue increased by 13.3% to reach $375 million in the quarter, and by
8.1% to reach $1,068.4 million in the first nine months;
-- Operating income before amortization(1) grew by 15.5% to reach $147.8
million in the quarter and by 10.3% to reach $420.8 million in the first
nine months when compared to the same periods of fiscal 2010;
-- Operating margin(1) increased to 39.4% in the third quarter and first
nine months, compared to 38.7% and 38.6%, respectively, in the third
quarter and first nine months of fiscal 2010;
-- In the third quarter of fiscal 2011, a write-off of Cogeco Cable Inc.'s
net investment in Cabovisao was recorded through a non-cash impairment
loss in the amount of $225.9 million as a result of the severe decline
in the economic environment in Portugal, with the Country ultimately
requiring financial assistance from the International Monetary Fund and
the European Central Bank, combined with subscriber losses in the third
quarter despite additional marketing initiatives designed to generate
RGU growth in the near term. Net of non-controlling interest, the
impairment loss reduced the Company's net income by an amount of $72.7
million in the third quarter and first nine months of fiscal 2011;
-- In the first nine months, Cogeco Cable Inc. redeemed its $175 million
Senior Secured Notes Series B, bearing interest at 7.73%, from the net
proceeds of the issuance, in the first quarter of fiscal 2011, of the
$200 million Senior Secured Debentures Series 2, bearing interest at
5.15%. A one-time make-whole premium of $8.8 million was paid on the
redemption, which increased financial expense;
-- Net loss amounted to $56.7 million in the third quarter, compared to net
income of $10.7 million for the same period of the previous fiscal year.
The net loss in the third quarter of fiscal 2011 was due to the write-
off of Cogeco Cable's net investment in Cabovisao described above.
Excluding this amount, adjusted net income(1) would have amounted to $16
million, an increase of $5.3 million, or 49% when compared to the third
quarter of the prior year;
-- For the first nine months of fiscal 2011, net loss amounted to $30.1
million, also as a result of the write-off of Cogeco Cable Inc.'s net
investment in Cabovisao described above. In the first nine months of
fiscal 2010, net income amounted to $44 million, which included 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 Company's Canadian operations. Excluding these
adjustments, adjusted net income(1) of $42.6 million in the first nine
months of fiscal 2011 represents a progression of $8.2 million, or 24%
when compared to $34.4 million in the first nine months of fiscal 2010;
-- Free cash flow(1) of $63.6 million was posted in the third quarter,
$13.9 million, or 28.1% higher than $49.6 million in the comparable
period of the prior year. In the first nine months, free cash flow
amounted to $87.5 million, compared to $162.5 million in the first nine
months of fiscal 2010. This reduction is primarily due to the
recognition of current income tax expense relating to the modifications
to the cable subsidiary's corporate structure which reduced the future
income tax expense accordingly and to the increase in financial expense;
-- Quarterly dividends of $0.12 per share were paid to the holders of
subordinate and multiple voting shares, a quarterly increase of $0.02
per share, or 20%, when compared to quarterly dividends of $0.10 per
share in the first nine months of fiscal 2010. Dividend payments in the
first nine months totalled $0.36 per share in fiscal 2011, compared to
$0.30 per share in fiscal 2010. In addition, the Board of Directors
declared a dividend of $0.14 per share payable in the fourth quarter of
fiscal 2011, an increase of 40% when compared to the prior year,
reflecting the continued strong financial performance;
-- On February 1, 2011, the Company concluded its acquisition of Corus
Entertainment Inc.'s Quebec radio stations (the "Quebec Radio Stations
Acquisition") for $80 million, subject to customary closing adjustments
and conditions;
-- In the cable sector, revenue-generating units ("RGU")(2) grew by 41,819
net additions in the quarter and 189,767 net additions in the first nine
months, for a total of 3,369,116 RGU at May 31, 2011.
(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's solid results in the third quarter of fiscal 2011 are mainly
attributable to the performance of Cogeco Cable's Canadian operations, which
generated continued RGU and revenue growth," declared Louis Audet, President and
CEO of COGECO. "However, in the European operations, customer losses and service
reductions have become more significant and persistent than Cogeco Cable's
management expected. This situation is due to economic measures taken by the
Portuguese government to reform the economy and reduce the deficit, which led to
a decrease in customer spending capacity. Under these prevailing circumstances
Cogeco Cable wrote-off its investment in its Portuguese subsidiary, Cabovisao."
"As for our Canadian business activities, Cogeco Cable has concluded in the past
weeks an agreement to acquire all of the shares of Quiettouch Inc., a leading
independent provider of outsourced managed information technology and
infrastructure services to mid-market and larger enterprises in Canada. We
expect the transaction, which will boost our business offering, to close during
the last quarter of fiscal 2011," continued Mr. Audet.
"On the radio front, Cogeco Diffusion completed its first full quarter since the
acquisition Corus Entertainment Inc.'s Quebec radio stations was completed on
February 1st, 2011. The integration of the newly acquired radio stations, which
contributed positively to our quarterly results, continues to go according to
plan. COGECO now has a stronger position in the Quebec radio market, with 13
stations in five regions. Cogeco Diffusion has also submitted to the CRTC a
licence request to operate two AM stations in the Montreal market, which would
be entirely dedicated to weather and traffic. A decision is expected in the
coming months," added Mr. Audet.
"Despite the Cabovisao situation, we expect to meet most of fiscal 2011
financial targets. Our results and future outlook remain positive, which is why
the quarterly dividend has been increased from $0.12 to $0.14 per share. As for
our fiscal 2012 preliminary guidelines, we expect to continue to generate growth
for most of our key performance indicators, with operating income before
amortization growing by 6.3% and free cash flow, by 31.3%", said Mr. Audet.
ABOUT COGECO
COGECO (www.cogeco.ca) 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, through its subsidiary Cogeco Data Services, data networking,
e-business applications, video conferencing, hosting services, Ethernet, private
line, VoIP, HSI access, data storage, data security and co-location services and
other advanced communication solutions. Through its Cogeco Diffusion subsidiary,
COGECO owns and operates 13 radio stations across most of Quebec with
complementary radio formats serving a wide range of audiences. 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 Thursday, July 7, 2011 at 11:00 a.m. (EDT)
Call: Media representatives may attend as listeners only.
Please use the following dial-in number to have access to the
conference call by dialing five minutes before the start of the
conference:
Canada/USA Access Number: 1 866 321-8231
International Access Number: + 1 416 642-5213
Confirmation Code: 3298006
By Internet at www.cogeco.ca/investors
A rebroadcast of the conference call will be available until
July 14, 2011, by dialing:
Canada and USA access number: 1 888 203-1112
International access number: + 1 647 436-0148
Confirmation code: 3298006
SHAREHOLDERS' REPORT
Third quarter ended May 31, 2011
FINANCIAL HIGHLIGHTS
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Quarters ended May 31,
2011 2010 Change
($000, except percentages and per
share data) $ $ %
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Operations (unaudited) (unaudited)
Revenue 374,957 330,933 13.3
Operating income before
amortization(1) 147,807 127,928 15.5
Operating margin(1) 39.4% 38.7% -
Operating income 81,535 64,008 27.4
Impairment of goodwill and fixed
assets 225,873 - -
Net income (loss) (56,672) 10,740 -
Adjusted net income(1) 16,007 10,740 49.0
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Cash Flow
Cash flow from operating activities 147,244 110,756 32.9
Cash flow from operations(1) 135,161 119,140 13.4
Capital expenditures and increase in
deferred charges 71,587 69,511 3.0
Free cash flow(1) 63,574 49,629 28.1
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Financial Condition(2)
Fixed assets - - -
Total assets - - -
Indebtedness(3) - - -
Shareholders' equity - - -
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RGU growth 41,819 64,241 (34.9)
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Per Share Data(4)
Earnings (loss) per share
Basic (3.39) 0.64 -
Diluted (3.39) 0.64 -
Adjusted earnings per share(1)
Basic 0.96 0.64 50.0
Diluted 0.95 0.64 48.4
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Nine months ended May 31,
2011 2010 Change
($000, except percentages and per
share data) $ $ %
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Operations (unaudited) (unaudited)
Revenue 1,068,367 988,023 8.1
Operating income before
amortization(1) 420,790 381,554 10.3
Operating margin(1) 39.4% 38.6% -
Operating income 225,952 185,940 21.5
Impairment of goodwill and fixed
assets 225,873 - -
Net income (loss) (30,052) 43,999 -
Adjusted net income(1) 42,627 34,379 24.0
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Cash Flow
Cash flow from operating activities 301,480 226,844 32.9
Cash flow from operations(1) 298,335 374,989 (20.4)
Capital expenditures and increase in
deferred charges 210,848 212,447 (0.8)
Free cash flow(1) 87,487 162,542 (46.2)
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Financial Condition(2)
Fixed assets 1,168,001 1,328,866 (12.1)
Total assets 2,707,787 2,744,656 (1.3)
Indebtedness(3) 1,033,075 961,354 7.5
Shareholders' equity 346,745 381,635 (9.1)
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RGU growth 189,767 222,808 (14.8)
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Per Share Data(4)
Earnings (loss) per share
Basic (1.80) 2.63 -
Diluted (1.80) 2.62 -
Adjusted earnings per share(1)
Basic 2.55 2.06 23.8
Diluted 2.53 2.05 23.4
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(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 of the Management's Discussion and Analysis.
(2) At May 31, 2011 and August 31, 2010.
(3) Indebtedness is defined as the total of bank indebtedness, promissory
note payable, principal on long-term debt and obligations under
derivative financial instruments.
(4) Per multiple and subordinate voting share.
MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)
Third quarter ended May 31, 2011
FORWARD-LOOKING STATEMENTS
Certain statements in this report 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 economic
downturn experienced over the past two years makes forward-looking information
and the underlying assumptions subject to greater uncertainty and that,
consequently, they may not materialize, or the results may significantly differ
from the 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 2010 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 report 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 2010 Annual Report.
Throughout this discussion, all amounts are in Canadian dollars unless otherwise
indicated.
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.
(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 2011, the Company's subsidiary, Cogeco
Cable Inc. ("Cogeco Cable" or the "Cable subsidiary"), invested approximately
$100 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, 2011, the number of RGU in the Cable
subsidiary increased by 189,767, or 6%, to reach 3,369,116 RGU, mainly as a
result of targeted marketing initiatives in the Canadian operations and to the
continuing interest for high definition ("HD") television service, which offset
the lower customer growth in the European operations resulting primarily from
the impact of further austerity measures announced by the Portuguese government
in recent months which adversely impact consumer spending. In light of the lower
RGU growth in the European operations during the first nine months of fiscal
2011, Cogeco Cable has revised its guidelines from 275,000 as issued on January
12, 2011 to 250,000 net additions, or approximately 7.9% when compared to August
31, 2010. RGU growth is expected to stem primarily from the Canadian operations
of the cable subsidiary and reflect the continued strong interest in Digital
Television services, enhanced service offerings and promotional activities.
Please consult the "Fiscal 2011 financial guidelines" section for further
details.
Operating income before amortization and operating margin
For the first nine months of fiscal 2011, operating income before amortization
grew by $39.2 million, or 10.3%, to reach $420.8 million, in line to achieve
management's revised projection of $560 million in operating income before
amortization for fiscal 2011. Operating margin increased to 39.4%, from 38.6% in
the first nine months of the year.
Free cash flow
For the nine-month period ended May 31, 2011, COGECO achieved free cash flow of
$87.5 million, compared to $162.5 million for the comparable period of the
previous fiscal year, a decrease of $75.1 million. The decrease in free cash
flow in the first nine months of fiscal 2011 reflects the timing of the
recognition of income tax liabilities as a result of modifications made to
Cogeco Cable's corporate structure in fiscal 2009. As a result of an increase in
capital expenditures expected in the last quarter of fiscal 2011, management
maintains its revised free cash flow guideline of $80 million for the 2011
fiscal year.
Other
BBM Canada's spring 2011 survey and radio broadcast week measures from February
28, 2011 to May 29, 2011, conducted with the Portable People Meter ("PPM"), show
that Rythme FM has maintained its leadership position in the competitive
Montreal region market.
On June 27, 2011, Cogeco Cable concluded an agreement to acquire all of the
shares of Quiettouch Inc. (the "Quiettouch acquisition"), a leading independent
provider of outsourced managed information technology and infrastructure
services to mid-market and larger enterprises in Canada. Quiettouch offers a
full suite of differentiated services that allow customers to outsource their
mission-critical information technology infrastructure and application
requirements, including managed infrastructure and hosting, virtualization,
firewall services, data backup with end-to-end monitoring and reporting, and
enhanced and traditional colocation services. Quiettouch operates three data
centres in Toronto and Vancouver, as well as a fibre network within key business
areas of downtown Toronto. The transaction is subject to certain arrangements
and commercial approvals, and is expected to close during the last quarter of
fiscal 2011.
On April 30, 2010, the Company concluded an agreement with Corus Entertainment
Inc. ("Corus") to acquire its Quebec radio stations ("Quebec Radio Stations
Acquisition") for $80 million, subject to customary closing adjustments and
conditions, which was concluded on February 1, 2011.
OPERATING RESULTS - CONSOLIDATED OVERVIEW
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Quarters ended May 31,
2011 2010 Change
($000, except percentages) $ $ %
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(unaudited) (unaudited)
Revenue 374,957 330,933 13.3
Operating costs 227,150 203,005 11.9
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Operating income before amortization 147,807 127,928 15.5
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Operating margin 39.4% 38.7%
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Nine months ended May 31,
2011 2010 Change
($000, except percentages) $ $ %
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(unaudited) (unaudited)
Revenue 1,068,367 988,023 8.1
Operating costs 647,577 606,469 6.8
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Operating income before amortization 420,790 381,554 10.3
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Operating margin 39.4% 38.6%
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Revenue
Fiscal 2011 third-quarter revenue improved by $44 million, or 13.3%, to reach
$375 million primarily due to the cable sector and the results of the Quebec
Radio Stations Acquisition. Revenue amounted to $1,068.4 million in the first
nine months of fiscal 2011, $80.3 million, or 8.1%, higher than in the same
period of fiscal 2010.
Cable revenue increased by $23.6 million, or 7.4%, for the third quarter and by
$53.9 million, or 5.6%, in the first nine months when compared to the same
periods of the prior year. For further details on Cogeco Cable's operating
results, please refer to the "Cable sector" section.
Revenue from the radio activities improved by $20.4 million in the third quarter
and by $26.4 million in the first nine months, mainly as a result of the Quebec
Radio Stations Acquisition.
Operating costs
For the third quarter and first nine months of fiscal 2011, operating costs
amounted to $227.2 million and $647.6 million, increases of $24.1 million, or
11.9%, and of $41.1 million, or 6.8%, when compared to the prior year, mainly
from the Quebec Radio Stations Acquisition combined with increases in the cable
sector.
Operating costs in the Cable sector increased by $6.2 million, or 3.2%, for the
third quarter and by $17.8 million, or 3.1%, in the first nine months when
compared to the same periods of the prior year. For further details on Cogeco
Cable's operating results, please refer to the "Cable sector" section.
Operating costs from the other activities, including radio activities, grew by
$17.9 million in the third quarter and $23.1 million in the first nine months,
mainly from the Quebec Radio Stations Acquisition.
Operating income before amortization and operating margin
Mainly as a result of the Quebec Radio Stations Acquisition and growth in the
cable sector, operating income before amortization grew by $19.9 million, or
15.5%, in the third quarter to reach $147.8 million, and by $39.2 million, or
10.3%, at $420.8 million for the first nine months of fiscal 2011, when compared
to the same periods the previous year. COGECO's operating margin increased to
39.4% in the three and nine-month periods ended May 31, 2011, from 38.7% in the
third quarter and 38.6% 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,
2011 2010 Change
($000, except percentages) $ $ %
----------------------------------------------------------------------------
(unaudited) (unaudited)
Amortization 66,272 63,920 3.7
Financial expense 16,766 16,824 (0.3)
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Nine months ended May 31,
2011 2010 Change
($000, except percentages) $ $ %
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(unaudited) (unaudited)
Amortization 194,838 195,614 (0.4)
Financial expense 58,172 48,288 20.5
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Third-quarter 2011 amortization amounted to $66.3 million, compared to $63.9
million for the same period of the prior year. The increase is mainly due to
additional capital expenditures in Cogeco Cable's Canadian operations arising
from customer premise equipment acquisitions to support RGU growth, partly
offset by a reduction in amortization in the European operations stemming from
certain acquired assets that are now fully amortized. For the first nine months,
amortization was essentially the same at $194.8 million when compared to $195.6
million in the first nine months of the prior year.
Financial expense amounted to $16.8 million in the third quarter essentially the
same when compared to the prior year. In the first nine months of fiscal 2011,
financial expense amounted to $58.2 million, compared to $48.3 million in the
first nine months of the prior year. Financial expense in the first nine months
includes the payment, in the Cable sector, of a make-whole premium amounting to
$8.8 million on the early repayment, on December 22, 2010, of the $175 million
Senior Secured Notes Series B due on October 31, 2011. The remaining variance is
mainly attributable to the financial expense impact of fluctuations in the level
of bank indebtedness, combined with the impact of the lower interest rate on the
$200 million Senior Secured Debentures Series 2 issued by Cogeco Cable on
November 16, 2010.
IMPAIRMENT OF GOODWILL AND FIXED ASSETS
During the third quarter of fiscal 2011, the economic environment in Portugal
continued to deteriorate, with the Country ultimately requiring financial
assistance from the International Monetary Fund and the European Central Bank.
As part of the negotiated financial assistance package, the Portuguese
government has committed to financial reforms which include increases in sales
and income taxes combined with reductions in government spending on social
programs. These measures are expected to put further downwards pressure on
consumer spending capacity. The rate of growth for Cogeco Cable's services has
diminished in this environment, with net customer losses and service downgrades
by customers in the European operations in the third quarter of fiscal 2011.
Please refer to the "Cable sector" section for further details. In accordance
with current accounting standards, Cogeco Cable's management considered that
this situation combined with net customer losses in the third quarter, which
were significantly more important and persistent than expected, will continue to
negatively impact the financial results of the European operations and indicate
a decrease in the value of Cogeco Cable's investment in its Portuguese
subsidiary. As a result, Cogeco Cable tested goodwill and all long-lived assets
for impairment at May 31, 2011.
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 test on goodwill and concluded that goodwill was
impaired at May 31, 2011. As a result, a non-cash impairment loss of $29.3
million was recorded in the third quarter of the 2011 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.
Long-lived assets with finite useful lives, such as fixed assets, are tested for
impairment by comparing the carrying amount of the asset or group of assets to
the expected future undiscounted cash flows 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 the fixed assets of the Portuguese subsidiary
at May 31, 2011, and determined that the carrying value of these assets exceeded
the expected future undiscounted cash flows to be generated by these assets. As
a result, a non-cash impairment loss of $196.5 million was recognized in the
third quarter of the 2011 fiscal year.
The impairment of goodwill and fixed assets (the "impairment loss"), which
effectively wrote-off Cogeco Cable's net investment in Cabovisao affected the
Company's financial results as follows for the third quarter and first nine
months of fiscal 2011:
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($000)
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Impairment of goodwill 29,344
Impairment of fixed assets 196,529
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Impairment loss 225,873
Income taxes -
Non-controlling interest (153,194)
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Impairment loss net of income taxes and non-controlling interest 72,679
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INCOME TAXES
Fiscal 2011 third-quarter income tax expense amounted to $19 million, compared
to $15.3 million in the prior year. The increase of $3.7 million, or 24%, is
mainly due to operating income before amortization growth, partly offset by the
previously announced declines in the enacted Canadian federal and provincial
income tax rates.
For the first nine months, income tax expense amounted to $51.5 million,
compared to $14 million in the prior year. The income tax expense in the first
nine months of the prior year included 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"),
which reduced future income tax expense by $29.8 million. Excluding this prior
year impact, income tax expense would have amounted to $43.8 million for the
first nine months of fiscal 2010. Fiscal 2011 income tax expense increase is
mainly due to operating income before amortization growth, partly offset by the
increase in financial expense and the previously announced declines in the
enacted Canadian federal and provincial income tax rates.
NON-CONTROLLING INTEREST
The non-controlling interest represents a participation of approximately 67.8%
in Cogeco Cable's results. During the third quarter of fiscal 2011 the loss
attributable to non-controlling interest amounted to $123.4 million, and $79.5
million for the nine months ended May 31, 2011, due to the impairment loss
recorded in the cable sector. The income attributable to non-controlling
interest for the comparable periods of the prior year amounted to $21.1 million
and $79.6 million, respectively.
NET INCOME (LOSS)
For the three and nine-month periods ended May 31, 2011, net losses amounted to
$56.7 million, or $3.39 per share, and $30.1 million, or $1.80 per share,
respectively, as a result of the previously described impairment loss of $72.7
million, net of income tax and non-controlling interest. For the comparable
periods of fiscal 2010, net income amounted to $10.7 million, or $0.64 per share
in the quarter, and $44 million, or $2.63 per share in the first nine months.
Fiscal 2010 first nine months net income included the reduction of Ontario
provincial corporate income tax rates described in the "Income Taxes" section,
which increased net income by an amount of $9.6 million net of non-controlling
interest.
Excluding the impairment loss in the current year and the reduction of income
tax rates in the prior year, fiscal 2011 adjusted net income(1) amounted to $16
million, or $0.96 per share(1) in the third quarter, representing growth of $5.3
million, or 49%, and of $0.32 per share, or 50%, when compared to $10.7 million,
or $0.64 per share in the prior year. Adjusted net income in the first nine
months of fiscal 2011 grew by $8.2 million, or 24%, and $0.49 per share, or
23.8%, to reach $42.6 million or $2.55 per share when compared to $34.4 million
or $2.06 per share in the comparable period of the prior year. Net income
progression for both periods has resulted mainly from the growth in operating
income before amortization, partly offset in the first nine months by the
make-whole premium on early repayment of debt of $2 million, net of income taxes
and non-controlling interest.
(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
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended May 31, Nine months ended May 31,
2011 2010 2011 2010
($000) $ $ $ $
----------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Operating activities
Cash flow from
operations 135,161 119,140 298,335 374,989
Changes in non-cash
operating items 12,083 (8,384) 3,145 (148,145)
----------------------------------------------------------------------------
147,244 110,756 301,480 226,844
----------------------------------------------------------------------------
Investing activities(1) (71,371) (69,488) (286,515) (212,161)
----------------------------------------------------------------------------
Financing activities(1) (12,147) (36,043) 39,489 (31,284)
----------------------------------------------------------------------------
Effect of exchange rate
changes on cash and
cash equivalents
denominated in a
foreign currency 573 (846) 438 (1,746)
----------------------------------------------------------------------------
Net change in cash and
cash equivalents 64,299 4,379 54,892 (18,347)
Cash and cash
equivalents, beginning
of period 26,435 16,732 35,842 39,458
----------------------------------------------------------------------------
Cash and cash
equivalents, end of
period 90,734 21,111 90,734 21,111
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Excludes assets acquired under capital leases.
Fiscal 2011 third quarter cash flow from operations reached $135.2 million,
compared to $119.1 million in the third quarter of the prior year. The increase
of $16 million, or 13.4%, is mainly attributable to the increase in operating
income before amortization, partly offset by the decrease in current income tax
recovery. Changes in non-cash operating items generated cash inflows of $12.1
million, mainly as a result of an increase in accounts payable and accrued
liabilities and a decrease in income taxes receivable, partly offset by a
decrease in income tax liabilities. In the prior year, 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 first nine months of fiscal 2011, cash flow from operations reached
$298.3 million, $76.7 million, or 20.4%, lower than the comparable period last
year. This reduction is primarily due to the recognition of current income tax
expense relating to the modifications to Cogeco Cable's corporate structure
which reduced the future income tax expense accordingly and to the payment of a
make-whole premium amounting to $8.8 million on the early repayment of the
Senior Secured Notes Series B, also in the cable sector, partly offset by the
increase in operating income before amortization. Changes in non-cash operating
items generated cash inflows of $3.1 million, mainly as a result of an increase
in income tax liabilities and a decrease in income taxes receivable, partly
offset by a decrease in accounts payable and accrued liabilities and an increase
in accounts receivable. In the prior year, 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 third quarter of fiscal 2011, investing activities, including mainly
capital expenditures and the increase in deferred charges, amounted to $71.4
million, an increase of $1.9 million, or 2.7% when compared to $69.5 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 customer premise equipment spending mainly due to the
timing of equipment purchases to support RGU growth in the Canadian
operations. This increase was partly offset by the decrease in customer
premise equipment spending reflecting lower RGU growth in the European
operations, net of the impact of the higher value of the Euro relative
to the Canadian dollar when compared to the third quarter of the prior
year;
-- A decrease in support capital spending since there were prior year
acquisitions of new facilities in the Canadian operations.
In the first nine months of fiscal 2011, investing activities amounted to $286.5
million as a result of the net outflows related to the Quebec Radio Stations
Acquisition for an amount of $75.9 million described below, capital expenditures
and the increase in deferred charges. This represents an increase of $74.4
million, or 35% when compared to $212.2 million for the corresponding period of
last year.
On April 30, 2010, the Company concluded an agreement with Corus to acquire its
Quebec radio stations for $80 million, subject to customary closing adjustments
and conditions, including approval by the Canadian Radio-television and
Telecommunications Commission ("CRTC"). On June 30, 2010, the Company submitted
its application for approval of the Quebec Radio Stations Acquisition to the
CRTC. On December 17, 2010, the CRTC approved the transaction essentially as
proposed. On January 11, 2011, the Company was served with an application by
Astral to the Court for leave to appeal the CRTC decision approving the
transaction, and a related application by Astral for a stay of execution of that
decision until final judgement of the Court. On February 21, 2011 the Court has
rejected applications filed by Astral in the matter of the Quebec Radio Stations
Acquisition. The transaction with Corus was concluded on February 1, 2011.
Pursuant to this acquisition, and as part of the CRTC's decision on the
Company's transfer application, the Company has put up for sale two radio
stations acquired in the transaction, CFEL-FM in the Quebec City market and
CJTS-FM in the Sherbrooke market. Accordingly, the assets and liabilities of the
two acquired radio stations put up for sale have been classified as held for
sale in the preliminary purchase price allocation presented below. In addition
to the two acquired radio stations above, and also as part of the CRTC's
decision, the Company has put up for sale radio station CJEC-FM, which it owned
prior to the Quebec Radio Stations Acquisition, in the Quebec City market. Radio
stations for which divestiture has been required by the CRTC, and the sale
process, are managed by a trustee approved by the CRTC pursuant to a voting
trust agreement.
This acquisition was accounted for using the purchase method. The results have
been consolidated as of the acquisition date. The preliminary allocation of the
purchase price of the acquisition, pending the completion of the valuation of
the net assets acquired, is as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
$
----------------------------------------------------------------------------
(unaudited)
Consideration
Paid
Purchase of shares 75,000
Acquisition costs 1,530
----------------------------------------------------------------------------
76,530
Promissory note payable, non-interest bearing and due on
February 1, 2012 5,000
Investment previously accounted for 200
Acquisition costs previously recorded as deferred charges 435
Preliminary working capital adjustment payable 4,000
----------------------------------------------------------------------------
86,165
----------------------------------------------------------------------------
Net assets acquired
Cash and cash equivalents 647
Accounts receivable 14,132
Income tax receivable 92
Prepaid expenses and other 527
Current future income tax assets 1,018
Fixed assets 11,497
Deferred charges and other 99
Broadcasting licenses 48,193
Goodwill 27,227
Non-current future income tax assets 2,272
Non-current assets held for sale 9,531
Accounts payable and accrued liabilities assumed (9,058)
Income tax liabilities assumed (194)
Current liabilities related to assets held for sale (797)
Deferred and prepaid revenue and other liabilities (7,390)
Non-current future income tax liabilities (10,656)
Non-current liabilities related to assets held for sale (975)
----------------------------------------------------------------------------
86,165
----------------------------------------------------------------------------
----------------------------------------------------------------------------
In the first nine months of fiscal 2011, capital expenditures amounted to $202.3
million, a decrease of $1.9 million, or 0.9%, when compared to $204.2 million in
the first nine months of the prior fiscal year. The most significant variations
are in the cable sector and are due to the following factors:
-- An increase in customer premise equipment spending mainly due to the
timing of equipment purchases to support RGU growth in the Canadian
operations. This increase was partly offset by the decrease in customer
premise equipment spending reflecting lower RGU growth in the European
operations combined with the impact of the lower value of the Euro
relative to the Canadian dollar when compared to the same period of the
prior year;
-- An increase in scalable infrastructure in the Canadian operations to
improve network capacity in existing areas served;
-- Decreases in upgrades and rebuilds and in line extensions stemming from
the timing of the various initiatives undertaken by Cogeco Cable in
order to expand its network and improve its capacity;
-- A decrease in support capital spending since there were prior year
acquisitions of new facilities in the Canadian operations.
In the third quarter, free cash flow amounted to $63.6 million, compared to
$49.6 million in the comparable period of fiscal 2010, representing an increase
of $13.9 million, or 28.1%. The growth in free cash flow over the prior year is
due to the increase in operating income before amortization, partly offset by
the decrease in current income tax recovery.
In the first nine months, free cash flow amounted to $87.5 million, a decrease
of $75.1 million, or 46.2%, when compared to $162.5 million in the first nine
months of fiscal 2010. The decline in free cash flow over the prior year is due
to an increase of $109.3 million in current income tax expense in the cable
sector stemming primarily from modifications to Cogeco Cable's corporate
structure and the increase in financial expense, which offset the increase in
operating income before amortization and the decrease in capital expenditures in
the first nine months of fiscal 2011.
In the third quarter of fiscal 2011, Indebtedness affecting cash decreased by
$5.1 million mainly due to the free cash flow of $63.6 million and the cash
inflows of $12.1 million from the changes in non-cash operating items, offset by
the increase in cash and cash equivalents of $64.3 million and the dividend
payment of $7.6 million described below. Indebtedness mainly decreased through a
net repayment of $4.4 million on the Company's Term Revolving Facilities. In the
third quarter of the prior year, 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 Term Facility.
During the third quarter of fiscal 2011, a dividend of $0.12 per share was paid
by the Company to the holders of subordinate and multiple voting shares,
totalling $2 million, compared to a dividend of $0.10 per share, or $1.7 million
the year before. In addition, dividends paid by a subsidiary to non-controlling
interests in the third quarter of fiscal 2011 amounted to $5.6 million, for
consolidated dividend payments of $7.6 million, compared to $4.6 million, for
consolidated dividend payments of $6.3 million in the third quarter of the prior
year.
In the first nine months of fiscal 2011, Indebtedness affecting cash increased
by $60.5 million mainly due to the Quebec Radio Stations Acquisition for a net
amount of $75.9 million, the increase in cash and cash equivalents of $54.9
million and the dividend payments totalling $22.8 million described below. The
increase was partly offset by the free cash flow of $87.5 million generated in
the first nine months of the fiscal year and the cash inflows of $3.1 million
from the changes in non cash operating items. Indebtedness mainly increased
through the issuance, on November 16, 2010, of Senior Secured Debentures Series
2 ("Fiscal 2011 debentures") for net proceeds of $198.3 million and a net
increase of $41.7 million on the Company's Term Revolving Facilities. The
increase was partly offset by the repayment, on December 22, 2010, of Cogeco
Cable's $175 million Senior Secured Notes Series B due on October 31, 2011 and
the related make-whole premium on early repayment. For the comparable period 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 2011, quarterly dividends of $0.12 per
share, for a total of $0.36 per share, were paid to the holders of subordinate
and multiple voting shares, totalling $6 million, compared to quarterly
dividends of $0.10 per share, for a total of $0.30 per share, or $5 million the
year before. In addition, dividends paid by a subsidiary to non-controlling
interests in the first nine months of fiscal 2011 amounted to $16.8 million, for
consolidated dividend payments of $22.8 million, compared to $13.8 million for
consolidated dividend payments of $18.8 million in the first nine months of the
prior year.
As at May 31, 2011, the Company had a working capital deficiency of $135.3
million compared to $202.9 million as at August 31, 2010. The decrease in the
deficiency is mainly attributable to the cable sector and caused by increases in
cash and cash equivalents and accounts receivable and decreases in accounts
payable and accrued liabilities and future income tax liabilities. The decrease
was partly offset by an increase in income tax liabilities and a decrease in
income taxes receivable. 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 Cogeco Cable'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 cable
subsidiary to use cash and cash equivalents to reduce Indebtedness.
At May 31, 2011, the Company had used $72.9 million of its $100 million Term
Revolving Facility for a remaining availability of $27.1 million. Cogeco Cable
had used $112.5 million of its $750 million Term Revolving Facility for a
remaining availability of $637.5 million.
Transfers of funds from non-wholly owned subsidiaries to COGECO are subject to
approval by the subsidiaries' Boards 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, 2010, there have been significant changes to the balances of
"fixed assets", "income tax liabilities", "future income tax liabilities",
"income taxes receivable", "cash and cash equivalents", "long-term debt",
"intangible assets", "assets held for sale", "accounts payable and accrued
liabilities", "accounts receivable", "derivative financial instruments",
"deferred and prepaid revenue and other liabilities", "promissory note payable",
"goodwill" and "non-controlling interest".
The $160.9 million decrease in fixed assets reflects the impairment loss
recorded in the third quarter of the fiscal year, partly offset by the assets
acquired in the Quebec Radio Stations Acquisition and the capital expenditures
discussed in the "Cash Flow and Liquidity" section which surpassed the
amortization expense and the impact of the depreciation of the Euro in relation
to the Canadian dollar. The increase of $68.2 million in income tax liabilities
and the decreases of $18.7 million in future income tax liabilities, $6.6
million in income taxes receivable primarily reflect the timing of the
recognition of income tax liabilities as a result of modifications made to
Cogeco Cable's corporate structure, combined with the impact of the Quebec Radio
Stations Acquisition and the increase in operating income before amortization.
The increases of $54.9 million in cash and cash equivalents and $49.7 million in
long-term debt are due to the factors previously discussed in the "Cash Flow and
Liquidity" section combined with the fluctuations in foreign exchange rates. The
increases of $44.6 million in intangible assets and $11.6 million in assets held
for sale mainly stem from the Quebec Radio Stations Acquisition. The $44 million
decrease in accounts payable and accrued liabilities is related to the timing of
supplier payments, partly offset by the Quebec Radio Stations Acquisition. The
$28.5 million increase in accounts receivable is due to the Quebec Radio
Stations acquisition combined with the increase in revenue and the timing of
payments received from customers. The $19.4 million decrease in derivative
financial instruments is due to the factors discussed in the "Financial
management" section. The increases of $10 million in deferred and prepaid
revenue and other liabilities and $5 million in promissory note payable are
mainly due to the Quebec Radio Stations acquisition. The decrease of $1.2
million in goodwill also reflects the Quebec Radio Stations Acquisition,
entirely offset by the impairment loss recorded in the cable sector. The $89.6
million decrease in non-controlling interest is due to the impairment loss
recorded in the European operations of the cable sector, partly offset by
improvements in the operating results of the cable subsidiary's Canadian
operations in the current fiscal year.
A description of COGECO's share data as at June 30, 2011 is presented in the
table below:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Number of Amount
shares/options ($000)
----------------------------------------------------------------------------
Common shares
Multiple voting shares 1,842,860 12
Subordinate voting shares 14,989,338 121,976
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 2010 Annual Report, have not
materially changed since August 31, 2010, except as mentioned below.
On November 16, 2010, Cogeco Cable completed, pursuant to a public debt
offering, the issue of $200 million Senior Secured Debentures Series 2 for net
proceeds of $198.3 million, net of discounts and transaction costs. These
debentures mature on November 16, 2020 and bear interest at 5.15% per annum,
payable semi-annually. These debentures are indirectly secured by a first
priority fixed and floating charge and a security interest 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. The net proceeds of
sale of the debentures were used to redeem in full, on December 22, 2010, Cogeco
Cable's Senior Secured Notes Series B due October 31, 2011 for an amount of $175
million plus accrued interest and make-whole premium, and the remainder for
working capital and general corporate purposes.
The Company benefits from Term Revolving Facility of up to $100 million with a
group of financial institutions led by a large Canadian bank, which acts as
agent for the banking syndicate. 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 is composed of two tranches of $50
million each, one of which was subject to the completion of the Quebec Radio
Stations Acquisition and which became available on February 1, 2011 with the
conclusion of the transaction. The Term Revolving Facility was extended at that
same date and currently matures on February 1, 2014. The Term Revolving Facility
can be repaid at any time without penalty. The Term Revolving Facility is
indirectly secured by a first priority fixed and floating charge and a security
interest on substantially all present and future real and personal property and
undertaking of every nature and kind of the Company and certain of its
subsidiaries, excluding the capital stock and assets of the Company's
subsidiary, Cogeco Cable, and guaranteed by its subsidiaries excluding Cogeco
Cable. Under the terms and conditions of the credit agreement, the Company must
comply with certain restrictive covenants. Generally, the most significant
restrictions are related to permitted investments, dividends on multiple and
subordinate voting shares and reimbursement of long-term debt as well as
incurrence and maintenance of certain financial ratios primarily linked to the
operating income before amortization, financial expense and total indebtedness.
The Term Revolving Facility bears interest, at the Company's option, on bankers'
acceptance, LIBOR in Euros or in US dollars, bank prime rate or US base rate
plus the applicable margin, and commitment fees are payable on the unused
portion.
DIVIDEND DECLARATION
At its July 6, 2011 meeting, the Board of Directors of COGECO declared a
quarterly eligible dividend of $0.14 per share for subordinate and multiple
voting shares, payable on August 3, 2011, to shareholders of record on July 20,
2011, an increase of 40% compared to the dividend of $0.10 per share declared
last year. The increased dividend mainly reflects the strong financial
performance of Cogeco Cable's Canadian operations. 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, the amount and
frequency may vary.
FINANCIAL MANAGEMENT
Cogeco Cable has entered into a swap agreement with a financial institution to
fix the floating benchmark interest rate with respect to a portion of the
Euro-denominated loans outstanding under the Term Revolving Facility, and
previously the Term Facility, for a notional amount of EUR111.5 million, which
has been reduced to EUR95.8 million on July 28, 2009, and to EUR69.6 million on
July 28, 2010. The interest rate swap to hedge these loans has been fixed at
2.08% until the settlement of the swap agreement on June 28, 2011. In addition
to the interest rate swap of 2.08%, Cogeco Cable continued to pay the applicable
margin on these loans in accordance with its Term Revolving Facility. In the
first nine months of fiscal 2011, the fair value of the interest rate swap
increased by $1.1 million, which is recorded as an increase of other
comprehensive income (loss), net of income taxes and non-controlling interest,
compared to an increase of $0.6 million in the prior year.
Cogeco Cable has also entered into cross-currency swap agreements to set the
liability for interest and principal payments on its US$190 million Senior
Secured Notes Series A maturing on October 1, 2015. These agreements have the
effect of converting the U.S. interest coupon rate of 7.00% per annum to an
average Canadian dollar interest rate of 7.24% per annum. The exchange rate
applicable to the principal portion of the debt has been fixed at $1.0625 per US
dollar. In the first nine months of fiscal 2011, amounts due under the US$190
million Senior Secured Notes Series A decreased by $18.6 million due to the US
dollar's depreciation relative to the Canadian dollar. The fair value of
cross-currency swaps decreased by a net amount of $20.4 million, of which a
decrease of $18.6 million offsets the foreign exchange gain on the debt
denominated in US dollars. The difference of $1.8 million was recorded as a
decrease of other comprehensive income (loss), net of income taxes and
non-controlling interest. In the first nine months of the prior 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 over the Canadian dollar. The fair
value of cross-currency swaps decreased by a net amount of $3.2 million, of
which $9.8 million offsets the foreign exchange gain on the debt denominated in
US dollars. The difference of $6.5 million was recorded as an increase of other
comprehensive income (loss), net of income taxes and non-controlling interest.
Furthermore, Cogeco Cable's net investment in self-sustaining foreign
subsidiaries was 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 was mitigated since the major part of the purchase
price for Cabovisao was borrowed directly in Euros. This debt was designated as
a hedge of a net investment in self-sustaining foreign subsidiaries and,
accordingly, Cogeco Cable recorded a foreign exchange gain of $3.9 million in
the first nine months of fiscal 2011, compared to a foreign exchange loss of
$13.4 million in the comparable period of the prior year, which was deferred and
recorded in the consolidated statement of comprehensive income (loss), net of
income taxes and non-controlling interest. The exchange rate used to convert the
Euro currency into Canadian dollars for the balance sheet accounts as at May 31,
2011 was $1.3939 per Euro compared to $1.3515 per Euro as at August 31, 2010.
The average exchange rates prevailing during the third quarter and first nine
months of fiscal 2011 used to convert the operating results of the European
operations were $1.3809 per Euro and $1.3670 per Euro, respectively, compared to
$1.3472 per Euro and $1.4703 per Euro in the comparable periods of fiscal 2010.
Since Cogeco Cable's consolidated financial statements are expressed in Canadian
dollars but a portion of its business is conducted in the Euro currency,
exchange rate fluctuations can increase or decrease revenue, operating income
before amortization, net income and the carrying value of assets and
liabilities.
The following table shows the Canadian dollar impact of a 10% fluctuation in the
average exchange rate of the Euro currency into Canadian dollars on European
operating results for the nine month period ended May 31, 2011:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Exchange rate
Nine months ended May 31, 2011 As reported impact
($000) $ $
----------------------------------------------------------------------------
(unaudited) (unaudited)
Revenue 128,971 12,897
Operating income before amortization 14,427 1,443
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net additions (losses)
Quarters ended Nine months ended
May 31, May 31,
May 31, 2011 2011 2010 2011 2010
----------------------------------------------------------------------------
RGU 3,369,116 41,819 64,241 189,767 222,808
Basic Cable service
customers 1,137,481 (3,374) 900 2,709 8,463
HSI service customers 758,460 4,760 12,320 36,216 51,896
Digital Television service
customers 818,624 28,039 30,167 99,354 88,630
Telephony service customers 654,551 12,394 20,854 51,488 73,819
----------------------------------------------------------------------------
----------------------------------------------------------------------------
---------------------------------------------
---------------------------------------------
% of
Penetration(1)
May 31,
2011 2010
---------------------------------------------
RGU - -
Basic Cable service
customers - -
HSI service customers 68.2 64.6
Digital Television service
customers 72.6 61.6
Telephony service customers 60.9 55.1
---------------------------------------------
---------------------------------------------
(1) As a percentage of Basic Cable service customers in areas served.
In the cable sector, third quarter and first nine-month RGU net additions
amounted to 41,819 and 189,767 RGU, respectively, compared to 64,241 and 222,808
RGU in the comparable periods of the previous fiscal year.
Fiscal 2011 third-quarter and first nine month RGU net additions were lower than
in the comparable periods of the prior year, as the strong RGU growth generated
by the Canadian operations, despite higher penetration rates, category maturity
and aggressive competition, was offset by RGU losses in the European operations
reflecting the continuing difficult economic conditions in Portugal. During the
third quarter of fiscal 2011, and as part of the negotiated financial assistance
package, the Portuguese government has committed to financial reforms which
include increases in sales and income taxes combined with reductions in
government spending on social programs. Please consult the "Impairment of
goodwill and fixed assets" section for further details. These measures are
expected to put further downwards pressure on consumer spending. The rate of
growth for our services has diminished in this environment, with net customer
losses across all of Cogeco Cable's services in the European operations in the
third quarter of fiscal 2011.
Basic Cable service customers net losses stood at 3,374 for the quarter,
compared to growth of 900 in the third quarter of the prior year. For the first
nine months, Basic Cable service customers increased by 2,709, compared to 8,463
in the prior year. In the quarter, Telephony service customers grew by 12,394
compared to 20,854 for the same period last year, and the number of net
additions to the HSI service stood at 4,760 customers compared to 12,320
customers in the third quarter of the prior year. For the first nine months, net
additions of Telephony service customers amounted to 51,488 compared to 73,819
for the same period last year, and the number HSI service customers grew by
36,216 compared to 51,896 in the first nine months of the prior 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 in the
Canadian operations. For the three and nine month periods ended May 31, 2011,
additions to the Digital Television service stood at 28,039 and 99,354
customers, compared to 30,167 and 88,630 for the comparable periods of the prior
year. Digital Television service net additions are due to targeted marketing
initiatives to improve penetration, the launch of new HD channels and the
continuing interest for HD television service.
OPERATING RESULTS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended May 31,
2011 2010 Change
($000, except percentages) $ $ %
----------------------------------------------------------------------------
(unaudited) (unaudited)
Revenue 342,910 319,291 7.4
Operating costs 198,825 192,591 3.2
Management fees - COGECO Inc. - - -
--------------------------------------------------------------------
Operating income before amortization 144,085 126,700 13.7
--------------------------------------------------------------------
Operating margin 42.0% 39.7%
----------------------------------------------------------------------------
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Nine months ended May 31,
2011 2010 Change
($000, except percentages) $ $ %
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(unaudited) (unaudited)
Revenue 1,010,998 957,053 5.6
Operating costs 593,941 576,115 3.1
Management fees - COGECO Inc. 9,172 9,019 1.7
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Operating income before amortization 407,885 371,919 9.7
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Operating margin 40.3% 38.9%
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Revenue
Fiscal 2011 third-quarter revenue improved by $23.6 million, or 7.4%, to reach
$342.9 million, when compared to the prior year. For the first nine months of
fiscal 2011, revenue amounted to $1,011 million, $53.9 million, or 5.6%, higher
when compared to $957.1 million in the comparable period of fiscal 2010.
Driven by RGU growth combined with an increase in rentals of home terminal
devices stemming from the strong growth in Digital Television services and rate
increases implemented in April 2011 and in the second half of fiscal 2010, the
Canadian operations' third-quarter revenue rose by $23.6 million, or 8.6%, to
reach $299.3 million, and first nine-month revenue increased by $70.6 million,
or 8.7%, at $882 million.
In the third quarter of fiscal 2011 revenue from the European operations
remained essentially the same at $43.6 million when compared to the same period
of the prior year as a result of the higher value of the Euro in relation to the
Canadian dollar in the third quarter of the year when compared to the prior
year, partly offset by lower revenue in local currency as a result of a
decreased demand for services. First nine-month European operations revenue
amounted to $129 million, $16.6 million, or 11.4%, less than in the prior year.
The decline in revenue in the first nine months was mainly due to RGU losses
combined with the lower value of the Euro in relation to the Canadian dollar.
Revenue from the European operations in the local currency for the three and
nine-month periods ended May 31, 2011 amounted to EUR31.6 million and EUR94.3
million, decreases of EUR0.8 million, or 2.3%, and EUR4.6 million, or 4.6%,
respectively, when compared to the same periods of the prior year.
Operating costs
For the third quarter of fiscal 2011, operating costs increased by $6.2 million,
to reach $198.8 million, an increase of 3.2% compared to the prior year. For the
first nine months, operating costs amounted to $593.9 million, $17.8 million, or
3.1% higher than in the same period of fiscal 2010.
In the Canadian operations, for the three and nine month periods ended May 31,
2011, operating costs increased by $5.9 million, or 3.8%, at $161.2 million, and
by $24.4 million, or 5.4%, to reach $479.4 million, respectively. The increases
in operating costs are mainly attributable to servicing additional RGU, the
launch of new HD channels and additional marketing initiatives.
As for the European operations, fiscal 2011 third-quarter operating costs
remained essentially the same at $37.6 million when compared to $37.3 million in
the third quarter of the prior year, primarily due to the higher value of the
Euro in relation to the Canadian dollar in the third quarter of the 2011 fiscal
year. 2011 first nine-months operating costs decreased by $6.5 million, or 5.4%,
at $114.5 million, mainly reflecting RGU losses combined with the lower value of
the Euro in relation to the Canadian dollar. These decreases in operating costs
offset increases related to additional marketing initiatives and the launch of
new HD channels by Cabovisao. Operating costs of the European operations for the
third quarter and first nine months in the local currency amounted to EUR27.3
million, essentially the same when compared to EUR27.7 million, and EUR83.8
million, an increase of EUR1.4 million, or 1.7%, respectively, when compared to
the corresponding periods of the prior year.
Operating income before amortization and operating margin
Fiscal 2011 third-quarter operating income before amortization increased by
$17.4 million, or 13.7%, to reach $144.1 million. Cogeco Cable's third-quarter
operating margin increased to 42% from 39.7% in the comparable period of the
prior year. For the first nine months of fiscal 2011, operating income before
amortization amounted to $407.9 million, an increase of $36 million, or 9.7%,
when compared to the first nine months of fiscal 2010. The operating margin
increased to 40.3% in the first nine months of fiscal 2011 from 38.9% in the
same period of the prior year.
Operating income before amortization in the Canadian operations rose by $17.7
million, or 14.7%, to reach $138.1 million in the third quarter, mainly due to
revenue growth exceeding the increase in operating costs. Cogeco Cable's
Canadian operations' operating margin increased to 46.1% in the third quarter
compared to 43.7% for the same period of the prior year. In the first nine
months of fiscal 2011, operating income before amortization amounted to $393.5
million, $46.1 million, or 13.3%, higher than in the same period of the prior
year. The operating margin increased to 44.6% from 42.8% when compared to the
first nine months of fiscal 2010. The growth in the operating margin stems from
rate increases and RGU growth.
For the European operations, operating income before amortization amounted to $6
million in the third quarter, compared to $6.3 million for the same period of
the prior year. In the first nine months, operating income before amortization
decreased by $10.1 million, or 41.1%, at $14.4 million. The reductions are
mainly due to decreases in revenue which outpaced the decreases in operating
costs. European operations' operating margin decreased to 13.8% in the third
quarter and 11.2% in the first nine months of fiscal 2011 from 14.5% and 16.8%,
respectively, in the third quarter and first nine months of fiscal 2010.
Operating income before amortization in the local currency amounted to EUR4.4
million compared to EUR4.7 million in the third quarter of the prior year,
representing a decrease of 7.1%, and EUR10.5 million compared to EUR16.5 million
in the first nine months, representing a decrease of 36.2%.
FISCAL 2011 FINANCIAL GUIDELINES
In the third quarter of fiscal 2011, a non-cash impairment loss of Cogeco
Cable's investment in Cabovisao was recorded in the amount of $225.9 million as
a result of the severe decline in the economic environment in Portugal, with the
Country ultimately requiring financial assistance from the International
Monetary Fund and the European Central Bank. As part of the negotiated financial
assistance package, the Portuguese government has committed to financial reforms
which are expected to put further downwards pressure on consumer spending due to
increases in taxes. The rate of growth for Cogeco Cable's services has
diminished, with net customer losses and service downgrades by customers in the
European operations in the third quarter of fiscal 2011. In order to reflect the
impact of this unfavourable economic environment and the impairment loss
recorded by Cogeco Cable, the cable subsidiary has revised its net income
guideline for the 2011 fiscal year to a net loss of approximately $85 million,
from net income of $140 million as issued on January 12, 2011. As a result of
this revision in Cogeco Cable, COGECO now expects a net loss of approximately
$20 million for fiscal 2011.
Additionally, net customer additions in the cable sector are now expected to
amount to approximately 250,000 RGU, or 7.9% when compared to August 31, 2010,
from 275,000 RGU as issued by Cogeco Cable on January 12, 2011. RGU growth in
the fourth quarter of fiscal 2011 will stem primarily from the growth in Digital
Television service customers and promotional activities in the Canadian
operations. The decrease in revenue stemming from the revision of the RGU growth
guideline is expected to be offset by strong continuing interest for HD
television services in the Canadian operations, and an increase in operating
costs attributable to the launch of new HD channels and increased marketing
initiatives. Accordingly, management has not revised its other financial
projections for the 2011 fiscal year.
FISCAL 2012 PRELIMINARY FINANCIAL GUIDELINES
Consolidated
For fiscal 2012, COGECO expects revenue of approximately $1,530 million and
operating income before amortization should amount to approximately $595
million, as a result of Cogeco Cable's 2012 preliminary guidelines and the full
year impact of the Quebec Radio Stations Acquisition.
Free cash flow should generate approximately $105 million and net income of $80
million should be earned. The fiscal 2012 financial guidelines exclude the
Quiettouch acquisition by Cogeco Cable, which is subject to customary closing
adjustments and conditions.
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Revised
Preliminary projections
projections January 12,
Fiscal 2012 2011
(in millions of dollars, except operating
margin) $ $
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Financial guidelines
Revenue 1,530 1,442
Operating income before amortization 595 560
Financial expense 63 75
Current income taxes 76 64
Net income (loss)(1) 80 (20)
Capital expenditures and increase in deferred
charges 351 341
Free Cash Flow 105 80
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(1) The net loss guideline for fiscal 2011 was revised on July 6, 2011.
Cable sector
For fiscal 2012, Cogeco Cable expects to achieve revenue of $1,420 million,
representing growth of $60 million, or 4.4% when compared to the revised fiscal
2011 guidelines issued on January 12, 2011. The preliminary guidelines take into
consideration the current uncertain global economic environment. In Canada,
while the recovery phase seems sustainable, recent reforms to the mortgage
market and further tightening from the Bank of Canada will nonetheless constrain
housing market activity and should coincide with a contraction in consumer
spending. 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 prolonged difficult economic
environment. In Portugal, during the third quarter of fiscal 2011, the
unfavourable economic environment continued to deteriorate, with the Country
ultimately requiring financial assistance from the International Monetary Fund
and the European Central Bank. As part of the negotiated financial assistance
package, the Portuguese government has committed to financial reforms which
include increases in sales and income taxes combined with reductions in
government spending on social programs. These measures are expected to put
further downwards pressure on consumer spending and the rate of growth for our
services has diminished and is expected to continue to slowdown in this
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 customers' ongoing strong
interest in Cogeco Cable's growing HD service offerings. Canadian operations
revenue will also benefit from the impact of rate increases implemented in April
2011 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.
Cogeco Cable anticipates that the decline in the customer base of the European
operations, which began during the second half of fiscal 2011, is likely to
continue in the next year. Net losses are expected in Basic Cable and Digital
Television service customers partly offset by net additions coming from HSI and
Telephony service customers. Management is expected to maintain its retention
strategies and marketing initiatives implemented over the last few years, but
the economic difficulties being experienced by the European market at large and
the competitive environment which has plagued the Portuguese telecommunications
industry for the past years are continuing to negatively impact the financial
results of the European operations. As a result of the economic environment in
Portugal, revenue in local currency is expected to decrease in fiscal 2012. For
fiscal 2012, it is anticipated that the Euro should be converted at a rate of
approximately $1.35 per Euro, essentially the same when compared to the revised
fiscal 2011 guidelines issued on January 12, 2011.
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 past few years, consolidated
operating costs are expected to expand by approximately $25 million, or 3.1% in
the 2012 fiscal year when compared to the revised projections for fiscal 2011.
For fiscal 2012, Cogeco Cable expects operating income before amortization of
$580 million, an increase of $35 million, or 6.4% when compared to the revised
fiscal 2011 projections issued on January 12, 2011. The operating margin is
expected to reach approximately 40.8% in fiscal 2012, compared to revised
projections of 40.1% for the 2011 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
decrease by $45 million for fiscal 2012, mainly from the impairment loss in the
third quarter of fiscal 2011 in the European operations, partly offset by
capital expenditures and deferred charges related to RGU growth and other
initiatives of fiscal 2012 in the Canadian operations and by the full year
impact of those of fiscal 2011. Cash flows from operations should finance
capital expenditures and the increase in deferred charges amounting to $350
million, an increase of $10 million when compared to the revised fiscal 2011
projections. Capital expenditures projected for the 2012 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 support capital to improve
business information systems and support facility requirements.
Fiscal 2012 free cash flow is expected to amount to $95 million, an increase of
$25 million, or 35.7% when compared to the projected free cash flow of $70
million for fiscal 2011, resulting from the growth in operating income before
amortization. Generated free cash flow should be used primarily to reduce
Indebtedness, thus improving Cogeco Cable's leverage ratios. Financial expense
will be reduced to $60 million from the projected $72 million in fiscal 2011
revised projections, as a result of an anticipated decrease in Indebtedness and
the one-time make-whole premium on the early repayment, in fiscal 2011, of the
Senior Secured Notes Series B, partly offset by a slight increase in Cogeco
Cable's cost of debt reflecting current market conditions. As a result, net
income of approximately $225 million should be achieved compared to a net loss
of $85 million for the revised fiscal 2011 projections. Fiscal 2012 projected
net income represents an increase of $85 million when compared to the revised
fiscal 2011 projection when the impact of the non-cash impairment loss of $225.9
million in the European operations is excluded.
The fiscal 2012 financial guidelines exclude the Quiettouch acquisition, which
is subject to customary closing adjustments and conditions.
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Revised
Preliminary projections
projections January 12,
Fiscal 2012 2011
(in millions of dollars, except net customer
additions and operating margin) $ $
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Financial guidelines
Revenue 1,420 1,360
Operating income before amortization 580 545
Operating margin 40.8% 40.1%
Amortization 220 265
Financial expense 60 72
Current income taxes 75 63
Net income (loss)(1) 225 (85)
Capital expenditures and increase in deferred
charges 350 340
Free Cash Flow 95 70
Net customer addition guidelines
RGU(1) 225,000 250,000
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(1) Net loss and net customer addition guidelines for fiscal 2011 were
revised on July 6, 2011.
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, 2011, 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, 2011.
However, in the first quarter of fiscal 2011, the Company introduced a new
financial suite under an integrated Oracle platform. This project was required
in order to adequately support the implementation of the International Financial
Reporting Standards ("IFRS") and to remain current with the operational platform
used by the Company. Following the introduction of this new financial suite,
internal controls over financial reporting have been updated in order to support
adequate disclosure controls and procedures.
UNCERTAINTIES AND MAIN RISK FACTORS
There has been no significant change in the uncertainties and main risk factors
faced by the Company since August 31, 2010. A detailed description of the
uncertainties and main risk factors faced by COGECO can be found in the 2010
Annual Report.
ACCOUNTING POLICIES AND ESTIMATES
There has been no significant change in COGECO's accounting policies, estimates
and future accounting pronouncements since August 31, 2010, except as described
below. A description of the Company's policies and estimates can be found in the
2010 Annual Report.
Future accounting pronouncements
Adoption of International accounting standards
In March 2006, the Canadian Accounting Standards Board ("AcSB") of the Canadian
Institute of Chartered Accountants ("CICA") released its new strategic plan,
which proposed to abandon Canadian GAAP and effect a complete convergence to the
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's first interim consolidated financial
statements presented in accordance with IFRS will be for the quarter 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:
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Phase Area of impact Key activities Status
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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.
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Impact For each area Identify the specific Completed
analysis, identified in changes required to
evaluation and the scoping and existing accounting
design 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 Completed
information systems and
business processes.
Prepare draft IFRS
consolidated financial
statement template.
Identify impacts on
internal controls over
financial reporting and
other business processes.
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Implementation For each area Test and execute changes Completed
and review identified in to information systems
the scoping and and business processes.
diagnostic
phase
------------------------------------------
Obtain formal approval of In progress -
required accounting to be completed
policy changes and in fiscal 2011
selected accounting
policy choices.
------------------------------------------
Communicate impact on To be completed
accounting policies and during fiscal
business processes to 2011
external stakeholders.
-----------------------------------------------------------
Pervasive Gather financial In progress -
information necessary for to be completed
opening balance sheet and in fiscal 2011
comparative IFRS
financial statements.
Update and test internal
control processes over
financial reporting and
other business processes.
------------------------------------------
Collect financial In progress -
information necessary to to be completed
compile IFRS-compliant during fiscal
financial statements. 2012
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
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The Company has completed all activities included in the scoping and diagnostic
and impact analysis, evaluation and design phases. The Company has also
completed its implementation of a new financial suite under an integrated Oracle
platform in order to adequately support the implementation of IFRS. This
financial suite will facilitate the completion of the Company's transition
project and the conversion of the results of operations for fiscal 2011 to be
presented as comparative figures to the fiscal 2012 IFRS financial statements.
The effects on other information technology, data systems, and internal controls
have also been assessed, no significant modifications are necessary on
conversion.
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.
Upon conversion to IFRS, an entity is required to apply the guidance contained
in these standards retrospectively without limitation unless there is a specific
exemption which modifies this requirement. IFRS 1 - First-time adoption of
international financial reporting standards applies only for first-time adopters
of IFRS and contains several mandatory exceptions and optional exemptions to be
applied to these entities' first IFRS financial statements. Management has
completed its analysis of the impact of most of the significant transitional
optional exemptions, and Cogeco Cable's elections to be applied at the date of
transition to IFRS for these exemptions are as follows:
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International Summary of the optional IFRS 1 Application and impact for the
standard exemption Company
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IFRS 3 - A first-time adopter may elect The Company has elected not to
Business not to apply IFRS 3 restate business combinations
combinations retrospectively to past completed prior to September
business combinations. 1, 2010.
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IFRS 2 - A first-time adopter may elect The Company has elected to
Share-based to apply IFRS 2 only to equity apply the requirements of IFRS
payments instruments that were granted 2 only to equity instruments
after November 7 2002 and granted after November 7, 2002
which vested after the date of and which vested after the
transition to IFRS. date of transition to IFRS.
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IAS 16 - A first-time adopter may elect The Company has elected not to
Property, to measure an item of use the fair value of any of
plant and property, plant and equipment its property, plant and
equipment at its fair value at the date equipment as their deemed cost
of transition to IFRS and use at the date of transition to
that fair value as its deemed IFRS.
cost at that date.
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IAS 19 - A first-time adopter may elect The Company has elected to
Employee to recognise all cumulative recognise all actuarial gains
benefits actuarial gains and losses at and losses at the date of
the date of transition to transition to IFRS.
IFRS.
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IAS 23 - A first-time adopter may elect The Company has elected to
Borrowing to apply IAS 23 only to apply the requirements of IAS
costs borrowing costs relating to 23 only to borrowing costs
qualifying assets for which relating to assets for which
the commencement date for the commencement date for
capitalisation is on or after capitalisation is on or after
the date of transition to the date of transition to
IFRS. IFRS.
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The Company is currently completing the evaluation of the differences between
IFRS and Canadian GAAP. The most significant differences in accounting policies
adopted on and after transition to IFRS with respect to the recognition,
measurement, presentation and disclosure of financial information, along with
the related expected financial statement impacts, are expected to be in the
following key accounting areas:
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International Summary of the difference Application and impact for the
standard between IFRS and Canadian GAAP Company
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IAS 16 - IFRS requires that each The Company will apply IAS 16
Property, significant component of an retroactively to all items of
plant and asset be depreciated property, plant and equipment.
equipment separately. The impact of the retroactive
application on the Company's
opening IFRS balance sheet at
the date of transition will
reduce property, plant and
equipment and retained
earnings by an amount of
approximately $6 million
before the impact of related
income taxes and non-
controlling interest.
Depreciation expense is also
expected to be different under
IFRS.
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IAS 19 - IAS 19 requires an entity to The Company has elected to
Employee recognize the expense related recognize actuarial gains and
benefits to past service cost on an losses immediately as a
accelerated basis compared to component of other
Canadian GAAP. Furthermore, comprehensive income. The
IAS 19 allows an entity a impact of this policy choice
policy choice for the will depend on the future
recognition of actuarial gains fluctuations in market
and losses on defined benefit interest rates and actual
pension plans. One of these returns on plan assets.
choices permits the immediate
recognition of actuarial gains In addition, at the date of
and losses as a component of transition, the IFRS 1
other comprehensive income, optional election described
which was not permitted under above will result in a
Canadian GAAP. decrease in opening retained
earnings and an increase in
pension plan liabilities and
accrued employee benefits of
approximately $14 million
before the impact of related
income taxes and non-
controlling interest.
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IFRS 2 - IFRS 2 requires the graded- The requirement to use the
Share-based vesting method for the graded-vesting method for the
payment recognition of stock-based recognition of stock-based
compensation awards, while compensation awards will
Canadian GAAP permitted the result in an accelerated
straight-line method. IFRS 2 recognition of the expense for
also requires that an entity the Company. At the date of
measure cash-settled stock- transition to IFRS, and
based payments at their fair reflecting the IFRS 1
value based on an option exemption described above,
pricing model. this difference in accounting
policies will result in a
decrease in opening retained
earnings and an increase in
contributed surplus (equity
settled employee compensation
reserve in the Company's IFRS
financial statements) by an
amount of approximately $1
million before the impact of
non-controlling interest. As a
result of this adjustment,
operating expense related to
employee benefits are expected
to be slightly lower in the
Company's first IFRS financial
statements.
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International Summary of the difference Application and impact for the
standard between IFRS and Canadian GAAP Company
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IAS 36 - For the purposes of impairment The Company has identified and
Impairment testing, IFRS requires that tested its CGUs for impairment
of assets assets be grouped into cash at the date of the opening
generating units ("CGU"s). IFRS balance sheet and no
IFRS then requires a one-step impairment was identified.
approach whereby the carrying
value of the CGU is compared
to the higher of fair value
less costs to sell and the
value in use. Canadian GAAP
required grouping at the
lowest level of independent
cash flows and used a two-step
approach for impairment
testing whereby the carrying
values were first compared to
the undiscounted future cash
flows in order to determine
the existence of an
impairment, and subsequently
compared to the fair value to
determine the amount of the
impairment.
IFRS also requires the
reversal of a previous
impairment loss on assets
other than goodwill in the
event a change in
circumstances indicates that
the impairment no longer
exists or has decreased. The
reversal of prior impairment
losses is not permitted under
Canadian GAAP.
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IAS 38 - Intangible assets with On transition to IFRS, the
Intangible indefinite lives are not Company will reverse all
assets amortized under IFRS or amortization recorded on
Canadian GAAP. However, IFRS intangible assets with
requires full retrospective indefinite lives. The impact
application, including the will increase opening retained
reversal of amortization which earnings and increase
was not reversed under the intangible assets by an amount
transitional provisions of of approximately $58 million,
Canadian GAAP. before the impact of related
income taxes and non-
controlling interest, on the
opening IFRS balance sheet.
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IFRS 3 - Acquisition-related costs, In accordance with the IFRS 1
Business which the Company capitalized election described above, the
combinations under Canadian GAAP, are Company will apply the
expensed under IFRS. requirements of IFRS 3
prospectively from the date of
transition. As part of the
application of IFRS 3, the
Company will be required to
expense acquisition-related
costs capitalized on
acquisitions completed since
the date of transition to
IFRS.
Also as a result of the IFRS 1
election described above, the
Company will be required to
reverse the retroactive
adjustment to intangible
assets acquired in prior
business acquisition stemming
from the recognition of
deferred income taxes upon
application of CICA Handbook
section 3465, Income taxes.
The impact will decrease
intangible assets by an amount
of approximately $73 million,
deferred income tax
liabilities by an amount of
approximately $62 million and
retained earnings by an amount
of approximately $11 million,
before the impact of related
income taxes and non-
controlling interest, at the
transition date.
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IAS 39 - The criteria and method used Upon transition to IFRS, the
Financial for assessing hedge Company will continue to apply
instruments: effectiveness may be different hedge accounting under IFRS to
recognition under IFRS than Canadian GAAP. all hedging arrangements which
and the Company recorded under
measurement Canadian GAAP. The hedging
documentation and hedge
effectiveness tests have been
updated to conform to the
requirements of IAS 39.
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IAS 23 - IFRS requires that borrowing In light of the Company's
Borrowing costs be capitalized on election under IFRS 1, this
costs qualifying assets purchased or difference will have no impact
constructed by the entity. on the Company's opening IFRS
Canadian GAAP permitted a balance sheet. Borrowing costs
policy choice to capitalize or will be capitalized on any
expense these costs, which the qualifying assets purchased or
Company elected to expense. constructed after the date of
transition to IFRS.
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IAS 12 - Recognition and measurement The differences related to the
Income taxes criteria for deferred tax recognition and measurement of
assets and liabilities may income taxes are expected to
differ. IFRS also requires have a material impact on the
that temporary differences Company's opening IFRS balance
relating to current assets and sheet. The Company is
current liabilities be currently assessing the impact
presented as non-current of these differences. The
liabilities and non-current impact on income taxes of
assets, whereas these were other IFRS differences are
classified as current under also being assessed.
Canadian GAAP.
----------------------------------------------------------------------------
IAS 37 - The threshold for the The Company is currently
Provisions, recognition of a provision is assessing the impact of these
contingent different under IFRS than differences.
liabilities Canadian GAAP. Presentation
and differences also exist between
contingent the two sets of accounting
assets standards.
----------------------------------------------------------------------------
IAS 1 - Additional disclosures are The Company has elected to
Presentation required under IFRS. present items of revenue and
of financial Presentation differences also expense on its Consolidated
statements exist between IFRS and statement of income according
Canadian GAAP, the most to the nature of the item. The
notable of which are Consolidated statement of
presentation choices for the comprehensive income will be
Statement of income and the presented separately from the
Statement of comprehensive Consolidated statement of
income and Statement of cash income.
flows.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Multiple deliverable revenue arrangements
In December 2009, the Emerging Issues Committee ("EIC") of the Canadian AcSB
issued a new abstract concerning multiple deliverable revenue arrangements,
EIC-175, Multiple deliverable revenue arrangements, which amended EIC-142,
Revenue arrangements with multiple deliverables. EIC-175 requires a vendor to
allocate arrangement consideration at the inception of the arrangement to all
deliverables using the relative selling price method, thereby eliminating the
use of the residual value method. The amendment also changes the level of
evidence of the standalone selling price required to separate deliverables when
more objective evidence of the selling price is not available. EIC-175 should be
adopted prospectively to revenue arrangements entered into or materially
modified in the first annual fiscal period beginning on or after January 1,
2011, with early adoption permitted. The Company has elected not to early-adopt
this EIC, and in light of the adoption of International accounting standards
taking effect at that same date, this EIC will not be applicable to the Company.
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 ended
May 31, May 31,
2011 2010 2011 2010
($000) $ $ $ $
----------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Cash flow from operating
activities 147,244 110,756 301,480 226,844
Changes in non-cash
operating items (12,083) 8,384 (3,145) 148,145
----------------------------------------------------------------------------
Cash flow from operations 135,161 119,140 298,335 374,989
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Free cash flow is calculated as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Nine months ended
May 31, May 31,
2011 2010 2011 2010
($000) $ $ $ $
----------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Cash flow from operations 135,161 119,140 298,335 374,989
Acquisition of fixed
assets (68,806) (66,963) (202,313) (204,239)
Increase in deferred
charges (2,781) (2,548) (8,535) (8,067)
Assets acquired under
capital leases - as per
note 13 c) - - - (141)
----------------------------------------------------------------------------
Free cash flow 63,574 49,629 87,487 162,542
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Nine months ended May
Quarters ended May 31, 31,
2011 2010 2011 2010
($000, except percentages) $ $ $ $
----------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Operating income 81,535 64,008 225,952 185,940
Amortization 66,272 63,920 194,838 195,614
----------------------------------------------------------------------------
Operating income before
amortization 147,807 127,928 420,790 381,554
----------------------------------------------------------------------------
Revenue 374,957 330,933 1,068,367 988,023
----------------------------------------------------------------------------
Operating margin 39.4% 38.7% 39.4% 38.6%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 from ongoing operations without the impact of certain
adjustments, net of income taxes and non-controlling interest, which could
affect the comparability of the Company's financial results. The exclusion of
these adjustments does not indicate that they are non-recurring.
The most comparable Canadian GAAP financial measures are net income and earnings
per share. These above-mentioned non-GAAP financial measures are calculated as
follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended May 31, Nine months ended May 31,
2011 2010 2011 2010
($000, except numbers of
shares and per share
data) $ $ $ $
----------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net income (loss) (56,672) 10,740 (30,052) 43,999
Adjustments:
Impairment of goodwill
and fixed assets, net
of non-controlling
interest 72,679 - 72,679 -
Reduction of Ontario
provincial corporate
income tax rates, net
of non-controlling
interest - - - (9,620)
----------------------------------------------------------------------------
Adjusted net income 16,007 10,740 42,627 34,379
----------------------------------------------------------------------------
Weighted average number
of multiple voting and
subordinate voting
shares outstanding 16,736,587 16,730,336 16,726,302 16,724,720
Effect of dilutive stock
options - 9,300 7,835 10,969
Effect of dilutive
subordinate voting
shares held in trust
under the Incentive
Share Unit Plan 95,611 71,862 88,329 66,480
----------------------------------------------------------------------------
Weighted average number
of diluted multiple
voting and subordinate
voting shares
outstanding 16,832,198 16,811,498 16,822,466 16,802,169
----------------------------------------------------------------------------
Adjusted earnings per
share
Basic 0.96 0.64 2.55 2.06
Diluted 0.95 0.64 2.53 2.05
----------------------------------------------------------------------------
----------------------------------------------------------------------------
SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended(1) May 31, February 28,
($000, except percentages and
per share data) 2011 2010 2011 2010
$ $ $ $
----------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue 374,957 330,933 350,644 329,087
Operating income before
amortization 147,807 127,928 135,952 124,363
Operating margin 39.4% 38.7% 38.8% 37.8%
Operating income 81,535 64,008 70,525 58,370
Impairment of goodwill and
fixed assets 225,873 - - -
Income taxes 19,007 15,334 14,277 12,525
Net income (loss) (56,672) 10,740 10,645 10,511
Adjusted net income 16,007 10,740 10,645 10,511
Cash flow from operating
activities 147,244 110,756 96,664 117,498
Cash flow from operations 135,161 119,140 120,675 120,331
Capital expenditures and
increase in deferred charges 71,587 69,511 72,462 74,549
Free cash flow 63,574 49,629 48,213 45,782
Earnings (loss) per share(2)
Basic (3.39) 0.64 0.64 0.63
Diluted (3.39) 0.64 0.63 0.63
Adjusted earnings per
share(2)
Basic 0.96 0.64 0.64 0.63
Diluted 0.95 0.64 0.63 0.63
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended(1) November 30, August 31,
($000, except percentages and
per share data) 2010 2009 2010 2009
$ $ $ $
----------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue 342,766 328,003 333,671 316,284
Operating income before
amortization 137,031 129,263 137,785 144,654
Operating margin 40.0% 39.4% 41.3% 45.7%
Operating income 73,892 63,562 73,942 76,244
Impairment of goodwill and
fixed assets - - - -
Income taxes 18,244 (13,818) 17,623 22,306
Net income (loss) 15,975 22,748 12,265 14,631
Adjusted net income 15,975 13,128 12,265 7,647
Cash flow from operating
activities 57,572 (1,410) 198,492 177,032
Cash flow from operations 42,499 135,518 127,230 108,744
Capital expenditures and
increase in deferred charges 66,799 68,387 108,515 94,002
Free cash flow (24,300) 67,131 18,715 14,742
Earnings (loss) per share(2)
Basic 0.95 1.36 0.73 0.87
Diluted 0.95 1.35 0.73 0.87
Adjusted earnings per
share(2)
Basic 0.95 0.79 0.73 0.46
Diluted 0.95 0.78 0.73 0.46
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The addition of quarterly information may not correspond to the annual
total due to rounding.
(2) Per multiple and subordinate voting share.
ADDITIONAL INFORMATION
This MD&A was prepared on July 6, 2011. Additional information relating to the
Company, including its Annual Report and Annual Information Form, is available
on the SEDAR website at www.sedar.com.
SEASONAL VARIATIONS
Cogeco Cable's operating results are not generally subject to material seasonal
fluctuations. However, the customer growth in the Basic Cable and HSI service
are generally lower in the second half of the fiscal year as a result of a
decrease in economic activity due to the beginning of the vacation period, the
end of the television 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 third and fourth quarter operating margins
are usually higher as no management fees are paid to COGECO Inc. Under the
management Agreement, Cogeco Cable pays a fee equal to 2% of its total revenue
subject to a maximum amount. As the maximum amount has been reached in the
second quarter of fiscal 2011, Cogeco Cable will not pay management fees in the
second half of fiscal 2011. Similarly, as the maximum amount was paid in the
first six months of fiscal 2010, Cogeco Cable paid no management fees in the
second half of the previous fiscal year.
/s/ Jan Peeters /s/ Louis Audet
------------------------------------ -------------------------------------
Jan Peeters Louis Audet
Chairman of the Board President and Chief Executive Officer
COGECO Inc.
Montreal, Quebec
July 7, 2011
INTERIM FINANCIAL STATEMENTS
Third quarter ended May 31, 2011
COGECO INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Nine months ended
May 31, May 31,
2011 2010 2011 2010
(In thousands of dollars,
except per share data) $ $ $ $
----------------------------------------------------------------------------
Revenue 374,957 330,933 1,068,367 988,023
Operating costs 227,150 203,005 647,577 606,469
----------------------------------------------------------------------------
Operating income before
amortization 147,807 127,928 420,790 381,554
Amortization (note 4) 66,272 63,920 194,838 195,614
----------------------------------------------------------------------------
Operating income 81,535 64,008 225,952 185,940
Financial expense (note 5) 16,766 16,824 58,172 48,288
Impairment of goodwill and
fixed assets (note 6) 225,873 - 225,873 -
----------------------------------------------------------------------------
Income (loss) before income
taxes and the following
items (161,104) 47,184 (58,093) 137,652
Income taxes (note 7) 19,007 15,334 51,528 14,041
Loss (gain) on dilution
resulting from the issuance
of shares by a subsidiary 1 - (60) (18)
Non-controlling interest (123,440) 21,110 (79,509) 79,630
----------------------------------------------------------------------------
Net income (loss) (56,672) 10,740 (30,052) 43,999
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Earnings (loss) per share
(note 8)
Basic (3.39) 0.64 (1.80) 2.63
Diluted (3.39) 0.64 (1.80) 2.62
----------------------------------------------------------------------------
----------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months
ended Nine months ended
May 31, May 31,
2011 2010 2011 2010
(In thousands of dollars) $ $ $ $
----------------------------------------------------------------------------
Net income (loss) (56,672) 10,740 (30,052) 43,999
----------------------------------------------------------------------------
Other comprehensive income (loss)
Unrealized gains (losses) on derivative
financial instruments designated as
cash flow hedges, net of income tax
expense of $183,000 and income tax
recovery of $3,117,000 (income tax
expense of $622,000 and income tax
recovery of $1,852,000 in 2010) and
non-controlling interest of $328,000
and $11,018,000 ($2,802,000 and
$531,000 in 2010) 155 1,338 (5,232) (253)
Reclassification to financial expense of
unrealized losses on derivative
financial instruments designated as
cash flow hedges, net of income tax
recovery of $72,000 and $2,400,000
($230,000 and $1,316,000 in 2010) and
non-controlling interest of $312,000
and $10,979,000 ($1,002,000 and
$5,733,000 in 2010) 148 478 5,222 2,736
Unrealized gains (losses) on translation
of a net investment in self-sustaining
foreign subsidiaries, net of non-
controlling interest of $6,070,000 and
$4,885,000 ($17,159,000 and $33,128,000
in 2010) 2,882 (8,190) 2,314 (15,811)
Unrealized gains (losses) on translation
of long-term debt designated as hedges
of a net investment in self-sustaining
foreign subsidiaries, net of non-
controlling interest of $2,530,000 and
$2,259,000 ($11,479,000 and $24,052,000
in 2010) (1,201) 5,479 (1,071) 11,479
----------------------------------------------------------------------------
1,984 (895) 1,233 (1,849)
----------------------------------------------------------------------------
Comprehensive income (loss) (54,688) 9,845 (28,819) 42,150
----------------------------------------------------------------------------
----------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Nine months ended
May 31,
2011 2010
(In thousands of dollars) $ $
----------------------------------------------------------------------------
Balance at beginning, as previously reported 253,169 211,922
Changes in accounting policies - (7,894)
----------------------------------------------------------------------------
Balance at beginning, as restated 253,169 204,028
Net income (loss) (30,052) 43,999
Excess of the value attributed to the incentive share
units at issuance (price paid for the acquisition of
the subordinate voting shares) over the price paid
for the acquisition of the subordinate voting shares
(value attributed to the incentive share units at
issuance) 56 (430)
Dividends on multiple voting shares (663) (553)
Dividends on subordinate voting shares (5,360) (4,467)
----------------------------------------------------------------------------
Balance at end 217,150 242,577
----------------------------------------------------------------------------
----------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
May 31, August 31,
2011 2010
(In thousands of dollars) $ $
----------------------------------------------------------------------------
Assets
Current
Cash and cash equivalents (note 13 b)) 90,734 35,842
Accounts receivable (note 15) 103,011 74,560
Income taxes receivable 38,805 45,400
Prepaid expenses and other 16,106 14,189
Future income tax assets 5,541 6,133
Assets held for sale (note 16) 1,639 -
----------------------------------------------------------------------------
255,836 176,124
Investments 539 739
Fixed assets 1,168,001 1,328,866
Deferred charges 27,051 27,960
Intangible assets (note 9) 1,087,610 1,042,998
Goodwill (note 9) 143,470 144,695
Derivative financial instruments - 5,085
Future income tax assets 15,369 18,189
Assets held for sale (note 16) 9,911 -
----------------------------------------------------------------------------
2,707,787 2,744,656
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities and Shareholders' equity
Liabilities
Current
Bank indebtedness - 2,328
Accounts payable and accrued liabilities 204,805 248,775
Income tax liabilities 68,776 558
Deferred and prepaid revenue 47,577 45,602
Derivative financial instrument 132 1,189
Promissory note payable, non-interest bearing and
due on February 1, 2012 (note 2) 5,000 -
Current portion of long-term debt (note 10) 2,349 2,329
Future income tax liabilities 60,356 78,267
Liabilities related to assets held for sale (note
16) 2,153 -
----------------------------------------------------------------------------
391,148 379,048
Long-term debt (note 10) 1,002,462 952,741
Derivative financial instruments 15,339 -
Deferred and prepaid revenue and other liabilities 20,242 12,234
Pension plan liabilities and accrued employees
benefits 12,866 10,568
Future income tax liabilities 237,882 238,699
Liabilities related to assets held for sale (note
16) 971 -
----------------------------------------------------------------------------
1,680,910 1,593,290
----------------------------------------------------------------------------
Non-controlling interest 680,132 769,731
----------------------------------------------------------------------------
Shareholders' equity
Capital stock (note 11) 119,318 119,527
Contributed surplus 3,110 3,005
Retained earnings 217,150 253,169
Accumulated other comprehensive income (note 12) 7,167 5,934
----------------------------------------------------------------------------
346,745 381,635
----------------------------------------------------------------------------
2,707,787 2,744,656
----------------------------------------------------------------------------
----------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Nine months ended
May 31, May 31,
2011 2010 2011 2010
(In thousands of dollars) $ $ $ $
----------------------------------------------------------------------------
Cash flow from operating
activities
Net income (loss) (56,672) 10,740 (30,052) 43,999
Adjustments for:
Amortization (note 4) 66,272 63,920 194,838 195,614
Amortization of deferred
transaction costs and
discounts on long-term debt 1,141 772 2,902 2,314
Impairment of goodwill and
fixed assets (note 6) 225,873 - 225,873 -
Future income taxes 20,507 21,264 (21,961) 49,900
Non-controlling interest (123,440) 21,110 (79,509) 79,630
Loss (gain) on dilution
resulting from the issuance
of shares by a subsidiary 1 - (60) (18)
Stock-based compensation (note
11) 994 450 2,987 2,014
Loss on disposals and write-
offs of fixed assets 231 2,443 1,635 2,505
Other 254 (1,559) 1,682 (969)
----------------------------------------------------------------------------
135,161 119,140 298,335 374,989
Changes in non-cash operating
items (note 13 a)) 12,083 (8,384) 3,145 (148,145)
----------------------------------------------------------------------------
147,244 110,756 301,480 226,844
----------------------------------------------------------------------------
Cash flow from investing
activities
Acquisition of fixed assets
(note 13 c)) (68,806) (66,963) (202,313) (204,239)
Increase in deferred charges (2,781) (2,548) (8,535) (8,067)
Business acquisition, net of
cash and cash equivalents
acquired (note 2) - - (75,883) -
Other 216 23 216 145
----------------------------------------------------------------------------
(71,371) (69,488) (286,515) (212,161)
----------------------------------------------------------------------------
Cash flow from financing
activities
Increase (decrease) in bank
indebtedness - 4,444 (2,328) 54,073
Net repayments under the Term
Facilities and Term Revolving
Facilities (4,424) (33,150) 41,679 (61,220)
Issuance of long-term debt, net
of discounts and transaction
costs - - 198,295 -
Repayments of long-term debt (660) (821) (177,189) (2,907)
Issuance of subordinate voting
shares (note 11) - - 629 353
Acquisition of subordinate
voting shares held in trust
under the Incentive Share Unit
Plan (note 11) (14) - (1,296) (1,049)
Dividends on multiple voting
shares (221) (187) (663) (553)
Dividends on subordinate voting
shares (1,788) (1,479) (5,360) (4,467)
Issuance of shares by a
subsidiary to non-controlling
interest 561 - 4,740 283
Acquisition by a subsidiary from
non-controlling interest of
subordinate voting shares held
in trust under the Incentive
Share Unit Plan (note 11) - (264) (2,258) (2,008)
Dividends paid by a subsidiary
to non-controlling interest (5,601) (4,586) (16,760) (13,789)
----------------------------------------------------------------------------
(12,147) (36,043) 39,489 (31,284)
----------------------------------------------------------------------------
Effect of exchange rate changes
on cash and cash equivalents
denominated in a foreign
currency 573 (846) 438 (1,746)
----------------------------------------------------------------------------
Net change in cash and cash
equivalents 64,299 4,379 54,892 (18,347)
Cash and cash equivalents at
beginning 26,435 16,732 35,842 39,458
----------------------------------------------------------------------------
Cash and cash equivalents at end 90,734 21,111 90,734 21,111
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See supplemental cash flow information in note 13.
COGECO INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2011
(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, 2011 and August 31, 2010 as well as its results of
operations and its cash flows for the three and nine-month periods ended May 31,
2011 and 2010.
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, 2010. These unaudited interim consolidated financial
statements have been prepared using the same accounting policies and methods as
the most recent annual consolidated financial statements.
Future accounting pronouncements
Multiple deliverable revenue arrangements
In December 2009, the Emerging Issues Committee ("EIC") of the Canadian
Accounting Standards Board issued a new abstract concerning multiple deliverable
revenue arrangements, EIC-175, Multiple deliverable revenue arrangements, which
amended EIC-142, Revenue arrangements with multiple deliverables. EIC-175
requires a vendor to allocate arrangement consideration at the inception of the
arrangement to all deliverables using the relative selling price method, thereby
eliminating the use of the residual value method. The amendment also changes the
level of evidence of the standalone selling price required to separate
deliverables when more objective evidence of the selling price is not available.
EIC-175 should be adopted prospectively to revenue arrangements entered into or
materially modified in the first annual fiscal period beginning on or after
January 1, 2011, with early adoption permitted. The Company has elected not to
early-adopt this EIC, and in light of the adoption of International accounting
standards taking effect at that same date, this EIC will not be applicable to
the Company.
2. Business acquisition
On April 30, 2010, the Company concluded an agreement with Corus Entertainment
Inc. ("Corus") to acquire its Quebec radio stations for $80 million, subject to
customary closing adjustments and conditions, including approval by the Canadian
Radio-television and Telecommunications Commission ("CRTC"). On June 30, 2010,
the Company submitted its application for approval of the acquisition to the
CRTC. On December 17, 2010, the CRTC approved the transaction essentially as
proposed. On January 11, 2011, the Company was served with an application by
Astral Media Radio Inc. ("Astral") to the Federal Court of Appeal ("Court") for
leave to appeal the CRTC decision approving the transaction, and a related
application by Astral for a stay of execution of that decision until final
judgement of the Court. On February 21, 2011 the Court rejected applications
filed by Astral in the matter of COGECO's acquisition of the Corus radio
stations in Quebec. The transaction with Corus was concluded on February 1,
2011.
Pursuant to this acquisition, and as part of CRTC's decision on the Company's
transfer application, the Company has put up for sale two radio stations
acquired, CFEL-FM in the Quebec City market and CJTS-FM in the Sherbrooke
market. Accordingly, the assets and liabilities of the two acquired radio
stations put up for sale have been classified as held for sale in the
preliminary purchase price allocation presented below. In addition to the two
acquired radio stations above, and also as part of the CRTC's decision, the
Company has put up for sale radio station CJEC-FM, which it owned prior to the
acquisition, in the Quebec City market. Radio stations for which divestiture has
been required by the CRTC, and the sale process, are managed by a trustee
approved by the CRTC pursuant to a voting trust agreement.
This acquisition was accounted for using the purchase method. The results have
been consolidated as of the acquisition date. The preliminary allocation of the
purchase price of the acquisition, pending the completion of the valuation of
the net assets acquired, is as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
$
----------------------------------------------------------------------------
Consideration
Paid
Purchase of shares 75,000
Acquisition costs 1,530
----------------------------------------------------------------------------
76,530
----------------------------------------------------------------------------
Promissory note payable, non-interest bearing and due on February
1, 2012 5,000
Investment previously accounted for 200
Acquisition costs previously recorded as deferred charges 435
Preliminary working capital adjustment payable 4,000
----------------------------------------------------------------------------
86,165
----------------------------------------------------------------------------
Net assets acquired
Cash and cash equivalents 647
Accounts receivable 14,132
Income taxes receivable 92
Prepaid expenses and other 527
Current future income tax assets 1,018
Fixed assets 11,497
Deferred charges and other 99
Broadcasting licenses 48,193
Goodwill 27,227
Non-current future income tax assets 2,272
Non-current assets held for sale 9,531
Accounts payable and accrued liabilities assumed (9,058)
Income tax liabilities assumed (194)
Current liabilities related to assets held for sale (797)
Deferred and prepaid revenue and other liabilities (7,390)
Non-current future income tax liabilities (10,656)
Non-current liabilities related to assets held for sale (975)
----------------------------------------------------------------------------
86,165
----------------------------------------------------------------------------
----------------------------------------------------------------------------
3. 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:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cable Other and eliminations
----------------------------------------------------------------------------
2011 2010 2011 2010
Three months ended May 31, $ $ $ $
----------------------------------------------------------------------------
Revenue 342,910 319,291 32,047 11,642
Operating costs 198,825 192,591 28,325 10,414
Operating income before
amortization 144,085 126,700 3,722 1,228
Amortization 65,641 63,771 631 149
Operating income 78,444 62,929 3,091 1,079
Financial expense 16,043 16,684 723 140
Impairment of goodwill and
fixed assets 225,873 - - -
Income taxes 18,547 15,060 460 274
Loss on dilution resulting
from the issuance of
shares by a subsidiary 1 - - -
Non-controlling interest (123,440) 21,110 - -
Net income (loss) (58,580) 10,075 1,908 665
----------------------------------------------------------------------------
Total assets(1) 2,543,743 2,702,819 164,044 41,837
Fixed assets(1) 1,151,049 1,325,077 16,952 3,789
Intangible assets(1) 1,014,077 1,017,658 73,533 25,340
Goodwill(1) 116,243 144,695 27,227 -
Acquisition of fixed assets 67,781 66,749 1,025 214
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------
----------------------------------------------------
Consolidated
----------------------------------------------------
2011 2010
Three months ended May 31, $ $
----------------------------------------------------
Revenue 374,957 330,933
Operating costs 227,150 203,005
Operating income before
amortization 147,807 127,928
Amortization 66,272 63,920
Operating income 81,535 64,008
Financial expense 16,766 16,824
Impairment of goodwill and
fixed assets 225,873 -
Income taxes 19,007 15,334
Loss on dilution resulting
from the issuance of
shares by a subsidiary 1 -
Non-controlling interest (123,440) 21,110
Net income (loss) (56,672) 10,740
----------------------------------------------------
Total assets(1) 2,707,787 2,744,656
Fixed assets(1) 1,168,001 1,328,866
Intangible assets(1) 1,087,610 1,042,998
Goodwill(1) 143,470 144,695
Acquisition of fixed assets 68,806 66,963
----------------------------------------------------
----------------------------------------------------
(1) At
May 31,
2011 and
August
31, 2010.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cable Other and eliminations
----------------------------------------------------------------------------
2011 2010 2011 2010
Nine months ended May 31, $ $ $ $
----------------------------------------------------------------------------
Revenue 1,010,998 957,053 57,369 30,970
Operating costs 603,113 585,134 44,464 21,335
Operating income before
amortization 407,885 371,919 12,905 9,635
Amortization 193,710 195,175 1,128 439
Operating income 214,175 176,744 11,777 9,196
Financial expense 56,868 47,858 1,304 430
Impairment of goodwill and
fixed assets 225,873 - - -
Income taxes 48,665 11,246 2,863 2,795
Gain on dilution resulting
from the issuance of
shares by a subsidiary (60) (18) - -
Non-controlling interest (79,509) 79,630 - -
Net income (loss) (37,662) 38,028 7,610 5,971
----------------------------------------------------------------------------
Total assets(1) 2,543,743 2,702,819 164,044 41,837
Fixed assets(1) 1,151,049 1,325,077 16,952 3,789
Intangible assets(1) 1,014,077 1,017,658 73,533 25,340
Goodwill(1) 116,243 144,695 27,227 -
Acquisition of fixed
assets(2) 199,142 203,830 3,171 550
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------
----------------------------------------------------
Consolidated
----------------------------------------------------
2011 2010
Nine months ended May 31, $ $
----------------------------------------------------
Revenue 1,068,367 988,023
Operating costs 647,577 606,469
Operating income before
amortization 420,790 381,554
Amortization 194,838 195,614
Operating income 225,952 185,940
Financial expense 58,172 48,288
Impairment of goodwill and
fixed assets 225,873 -
Income taxes 51,528 14,041
Gain on dilution resulting
from the issuance of
shares by a subsidiary (60) (18)
Non-controlling interest (79,509) 79,630
Net income (loss) (30,052) 43,999
----------------------------------------------------
Total assets(1) 2,707,787 2,744,656
Fixed assets(1) 1,168,001 1,328,866
Intangible assets(1) 1,087,610 1,042,998
Goodwill(1) 143,470 144,695
Acquisition of fixed
assets(2) 202,313 204,380
----------------------------------------------------
----------------------------------------------------
(1) At May 31, 2011 and August 31, 2010.
(2) Includes fixed assets acquired through 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 Nine months ended
May 31, May 31,
2011 2010 2011 2010
$ $ $ $
----------------------------------------------------------------------------
Revenue
Canada 331,310 287,317 939,396 842,435
Europe 43,647 43,616 128,971 145,588
----------------------------------------------------------------------------
374,957 330,933 1,068,367 988,023
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
May 31, August 31,
2011 2010
$ $
----------------------------------------------------------------------------
Fixed assets
Canada 1,141,831 1,098,760
Europe 26,170 230,106
----------------------------------------------------------------------------
1,168,001 1,328,866
----------------------------------------------------------------------------
Intangible assets
Canada 1,087,610 1,042,998
Europe - -
----------------------------------------------------------------------------
1,087,610 1,042,998
----------------------------------------------------------------------------
Goodwill
Canada 143,470 116,243
Europe - 28,452
----------------------------------------------------------------------------
143,470 144,695
----------------------------------------------------------------------------
----------------------------------------------------------------------------
4. Amortization
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Nine months ended
May 31, May 31,
2011 2010 2011 2010
$ $ $ $
----------------------------------------------------------------------------
Fixed assets 62,430 60,027 183,215 183,845
Deferred charges 2,648 2,699 8,042 8,187
Intangible assets 1,194 1,194 3,581 3,582
----------------------------------------------------------------------------
66,272 63,920 194,838 195,614
----------------------------------------------------------------------------
----------------------------------------------------------------------------
5. Financial expense
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Nine months ended
May 31, May 31,
2011 2010 2011 2010
$ $ $ $
----------------------------------------------------------------------------
Interest on long-term debt 15,234 15,588 55,689 47,277
Foreign exchange losses (gains) (113) 409 (1,578) (470)
Amortization of deferred
transaction costs 474 408 1,419 1,222
Other 1,171 419 2,642 259
----------------------------------------------------------------------------
16,766 16,824 58,172 48,288
----------------------------------------------------------------------------
----------------------------------------------------------------------------
6. Impairment of goodwill and fixed assets
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Nine months ended
May 31, May 31,
2011 2010 2011 2010
$ $ $ $
----------------------------------------------------------------------------
Impairment of goodwill 29,344 - 29,344 -
Impairment of fixed assets 196,529 - 196,529 -
----------------------------------------------------------------------------
225,873 - 225,873 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
During the third quarter of fiscal 2011, the economic environment in Portugal
continued to deteriorate, with the Country ultimately requiring financial
assistance from the International Monetary Fund and the European Central Bank.
As part of the negotiated financial assistance package, the Portuguese
government has committed to financial reforms which include increases in sales
and income taxes combined with reductions in government spending on social
programs. These measures are expected to put further downwards pressure on
consumer spending capacity. The rate of growth for our services has diminished
in this environment, with net customer losses and service downgrades by
customers in the European operations in the third quarter of fiscal 2011. In
accordance with current accounting standards, management considered that this
situation combined with net customer losses in the third quarter, which were
significantly more important and persistent than expected, will continue to
negatively impact the financial results of the European operations and indicate
a decrease in the value of Cogeco Cable Inc.'s investment in its Portuguese
subsidiary. As a result, the Company's subsidiary tested goodwill and all
long-lived assets for impairment at May 31, 2011.
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 test on goodwill and concluded
that goodwill was impaired at May 31, 2011. As a result, a non-cash impairment
loss of $29.3 million was recorded in the third quarter of the 2011 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.
Long-lived assets with finite useful lives, such as fixed assets, are tested for
impairment by comparing the carrying amount of the asset or group of assets to
the expected future undiscounted cash flows 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 the fixed assets of the Portuguese
subsidiary at May 31, 2011, and determined that the carrying value of these
assets exceeded the expected future undiscounted cash flows to be generated by
these assets. As a result, a non-cash impairment loss of $196.5 million was
recognized in the third quarter of the 2011 fiscal year.
7. Income taxes
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Nine months ended
May 31, May 31,
2011 2010 2011 2010
$ $ $ $
----------------------------------------------------------------------------
Current (1,500) (5,930) 73,489 (35,859)
Future 20,507 21,264 (21,961) 49,900
----------------------------------------------------------------------------
19,007 15,334 51,528 14,041
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table provides the reconciliation between income tax expense
(recovery) at the Canadian statutory federal and provincial income tax rates and
the consolidated income tax expense:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months
ended Nine months ended
May 31, May 31,
2011 2010 2011 2010
$ $ $ $
----------------------------------------------------------------------------
Income (loss) before income taxes (161,104) 47,184 (58,093) 137,652
Combined income tax rate 28.91% 31.47% 28.91% 31.45%
Income tax expense (recovery) at
combined income tax rate (46,576) 14,848 (16,795) 43,295
Adjustment for losses or income subject
to lower or higher tax rates (1,697) (1,894) (4,139) (7,563)
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 and fixed assets 59,856 - 59,856 -
Utilization of pre-acquisition tax
losses - - - 4,432
Income taxes arising from non-deductible
expenses 128 289 458 595
Effect of foreign income tax rate
differences 7,725 2,177 12,358 4,301
Other (429) (86) (210) (1,237)
----------------------------------------------------------------------------
Income tax expense at effective income
tax rate 19,007 15,334 51,528 14,041
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 31, May 31,
2011 2010 2011 2010
$ $ $ $
----------------------------------------------------------------------------
Net income (loss) (56,672) 10,740 (30,052) 43,999
----------------------------------------------------------------------------
Weighted average number of
multiple voting and
subordinate voting shares
outstanding 16,736,587 16,730,336 16,726,302 16,724,720
Effect of dilutive stock
options(1)(2) - 9,300 - 10,969
Effect of dilutive
subordinate voting shares
held in trust under the
Incentive Share Unit
Plan(1) - 71,862 - 66,480
----------------------------------------------------------------------------
Weighted average number of
diluted multiple voting
and subordinate voting
shares outstanding 16,736,587 16,811,498 16,726,302 16,802,169
----------------------------------------------------------------------------
Earnings (loss) per share
Basic (3.39) 0.64 (1.80) 2.63
Diluted (3.39) 0.64 (1.80) 2.62
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The weighted average dilutive potential number of subordinate voting
shares which were anti-dilutive for the three and nine-month periods
ended May 31, 2011 amounted to 95,611 and 96,164.
(2) For the three and nine-month periods ended May 31, 2011, no stock
options (32,782 in 2010) were excluded from the calculation of diluted
earnings per share because the exercise price of the options was greater
than the average share price of the subordinate voting shares.
9. Goodwill and other intangible assets
----------------------------------------------------------------------------
----------------------------------------------------------------------------
May 31, August 31,
2011 2010
$ $
----------------------------------------------------------------------------
Customer relationships 24,525 28,106
Broadcasting licenses 73,313 25,120
Customer base 989,772 989,772
----------------------------------------------------------------------------
1,087,610 1,042,998
Goodwill 143,470 144,695
----------------------------------------------------------------------------
1,231,080 1,187,693
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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, 2010 28,106 25,120 989,772 1,042,998
Business acquisition (note
2) - 48,193 - 48,193
Amortization (note 4) (3,581) - - (3,581)
----------------------------------------------------------------------------
Balance at May 31, 2011 24,525 73,313 989,772 1,087,610
----------------------------------------------------------------------------
----------------------------------------------------------------------------
b. Goodwill
During the first nine months, goodwill variation was as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
$
----------------------------------------------------------------------------
Balance at August 31, 2010 144,695
Business acquisition (note 2) 27,227
Impairment (note 6) (29,344)
Foreign currency translation adjustment 892
----------------------------------------------------------------------------
Balance at May 31, 2011 143,470
----------------------------------------------------------------------------
----------------------------------------------------------------------------
10. Long-term debt
----------------------------------------------------------------------------
----------------------------------------------------------------------------
May 31, August 31,
Maturity Interest rate 2011 2010
% $ $
----------------------------------------------------------------------------
Parent company
Term Revolving Facility 2014(1) 3.39(2) 69,984 -
Obligations under capital
leases 2013 9.29 57 72
Subsidiaries
Term Revolving Facility
Revolving loan -
EUR70,000,000
(EUR90,000,000 at
August 31, 2010) 2014 3.25(2)(3) 97,573 121,635
Senior Secured Notes
Series A -
US$190,000,000 2015 7.00(4) 182,944 201,387
Series B 2018 7.60 54,637 54,609
Senior Secured Debentures
Series 1 2014 5.95 297,857 297,379
Senior Secured Debentures
Series 2(5) 2020 5.15 198,367 -
Senior Secured Notes
Series B 2011(6) 7.73 - 174,738
Senior Unsecured Debenture 2018 5.94 99,822 99,806
Obligations under capital
leases 2013 6.71 - 9.93 3,564 5,429
Other 2011 - 6 15
----------------------------------------------------------------------------
1,004,811 955,070
Less current portion 2,349 2,329
----------------------------------------------------------------------------
1,002,462 952,741
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The Company benefits from a Term Revolving Facility of up to $100
million with a group of financial institutions led by a large Canadian
bank, which acts as agent for the banking syndicate. 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 is composed of two tranches of $50 million each,
one of which was subject to the completion of the acquisition of Corus
Quebec radios stations and which became available on February 1, 2011
with the conclusion of the transaction. The Term Revolving Facility was
extended at that same date and currently matures on February 1, 2014.
The Term Revolving Facility can be repaid at any time without penalty.
The Term Revolving Facility is indirectly secured by a first priority
fixed and floating charge and a security interest on substantially all
present and future real and personal property and undertaking of every
nature and kind of the Company and certain of its subsidiaries,
excluding the capital stock and assets of the Company's subsidiary,
Cogeco Cable Inc., and guaranteed by its subsidiaries excluding Cogeco
Cable Inc. Under the terms and conditions of the credit agreement, the
Company must comply with certain restrictive covenants. Generally, the
most significant restrictions are related to permitted investments,
dividends on multiple and subordinate voting shares and reimbursement of
long-term debt as well as incurrence and maintenance of certain
financial ratios primarily linked to the operating income before
amortization, financial expense and total indebtedness. The Term
Revolving Facility bears interest, at the Company's option, on bankers'
acceptance, LIBOR in Euros or in US dollars, bank prime rate or US base
rate plus the applicable margin, and commitment fees are payable on the
unused portion.
(2) Interest rate on debt as at May 31, 2011, including applicable margin.
(3) 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 a portion of Euro-
denominated loans outstanding under the Term Revolving Facility, and
previously the Term Facility for a notional amount of EUR111.5 million
which have been reduced to EUR95.8 million on July 28, 2009 and to
EUR69.6 million on July 28, 2010. The interest swap rate to hedge the
Euro-denominated loans has been fixed at 2.08% until the settlement of
the swap agreement maturity on June 28, 2011. In addition to the
interest swap rate of 2.08%, the Company's subsidiary will continue to
pay the applicable margin on these Euro-denominated loans in accordance
with the Term Revolving Facility.
(4) 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.
(5) On November 16, 2010 the Company's subsidiary, Cogeco Cable Inc.,
completed pursuant to a public debt offering, the issue of $200 million
Senior Secured Debentures Series 2 (the "Debentures") for net proceeds
of $198.3 million net of discounts and transaction costs. These
Debentures mature on November 16, 2020 and bear interest at 5.15% per
annum payable semi-annually. These debentures are indirectly secured by
a first priority fixed and floating charge and a security interest on
substantially all present and future real and personal property and
undertaking of every nature and kind of the Company's subsidiary and
certain of its subsidiaries.
(6) On December 22, 2010, the Company's subsidiary, Cogeco Cable Inc.,
redeemed the 7.73% Senior Secured Notes Series B in the aggregate
principal amount of $175 million. As a result, the aggregate redemption
cash consideration that the Company's subsidiary paid totalled $183.8
million excluding accrued interest. The excess of the redemption price
over the aggregate principal amount was recorded as financial expense
during the second quarter of fiscal 2011.
11. Capital stock
Authorized
Unlimited number of:
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 shares, 1 vote per share.
Issued
----------------------------------------------------------------------------
----------------------------------------------------------------------------
May 31, August 31,
2011 2010
$ $
----------------------------------------------------------------------------
1,842,860 multiple voting shares 12 12
14,989,338 subordinate voting shares (14,959,338 at
August 31, 2010) 121,976 121,347
----------------------------------------------------------------------------
121,988 121,359
95,733 subordinate voting shares held in trust under
the Incentive Share Unit Plan (71,862 at August 31,
2010) (2,670) (1,832)
----------------------------------------------------------------------------
119,318 119,527
----------------------------------------------------------------------------
----------------------------------------------------------------------------
During the first nine months, subordinate voting share transactions were as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Number of
shares Amount
$
----------------------------------------------------------------------------
Balance at August 31, 2010 14,959,338 121,347
Shares issued for cash under the Employee Stock
Option Plan 30,000 629
----------------------------------------------------------------------------
Balance at May 31, 2011 14,989,338 121,976
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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, 2010 71,862 1,832
Subordinate voting shares acquired 36,460 1,296
Subordinate voting shares distributed to employees (12,589) (458)
----------------------------------------------------------------------------
Balance at May 31, 2011 95,733 2,670
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Stock-based plans
The Company and its subsidiary, Cogeco Cable Inc., offer, for certain executives
Stock Option Plans, which are described in the Company's annual consolidated
financial statements. During the first nine months of 2011 and 2010, no stock
options were granted to employees by COGECO Inc. However, the Company's
subsidiary, Cogeco Cable Inc., granted 69,500 stock options (66,174 in 2010)
with an exercise price of $39.00 to $44.00 ($31.82 to $38.86 in 2010), of which
35,800 stock options (33,266 in 2010) 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 $139,000 and $446,000 ($218,000 and $774,000 in 2010)
was recorded for the three and nine-month periods ended May 31, 2011.
The fair value of stock options granted by the Company's subsidiary, Cogeco
Cable Inc., for the nine-month period ended May 31, 2011 was $9.55 ($8.11 in
2010) 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:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2011 2010
% %
----------------------------------------------------------------------------
Expected dividend yield 1.44 1.49
Expected volatility 29 29
Risk-free interest rate 2.05 2.67
Expected life in years 4.9 4.8
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Under the Company's Stock Option Plan, the following options were granted and
are outstanding at May 31, 2011:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Outstanding at August 31, 2010 62,382
Exercised (30,000)
Expired (32,382)
----------------------------------------------------------------------------
Outstanding at May 31, 2011 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Under Cogeco Cable Inc.'s Stock Option Plan, the following options were granted
and are outstanding at May 31, 2011:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Outstanding at August 31, 2010 716,760
Granted 69,500
Exercised (188,319)
Forfeited (34,706)
Expired (448)
----------------------------------------------------------------------------
Outstanding at May 31, 2011 562,787
----------------------------------------------------------------------------
Exercisable at May 31, 2011 391,802
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The Company and its subsidiary, Cogeco Cable Inc., also offers senior executive
and designated employee Incentive Share Unit Plans ("ISU Plans") which are
described in the Company's annual consolidated financial statements. During the
first nine months of 2011, the Company granted 36,460 (41,571 in 2010) Incentive
Share Units ("ISUs") and Cogeco Cable Inc. granted 60,388 ISUs (63,666 in 2010)
of which, 10,000 ISUs (9,981 in 2010) were granted to COGECO Inc.'s employees.
The Company and its subsidiary established the value of the compensation related
to the ISUs granted based on the fair value of the subordinate voting shares at
the date of grant and a compensation expense is recognized over the vesting
period, which is three years less one day. Two trusts were created for the
purpose of purchasing these shares on the stock market in order to protect
against stock price fluctuations. The Company and its subsidiary instructed the
trustees to purchase 36,460 and 57,203 subordinate voting shares (41,571 and
62,436 in 2010) on the stock market. These shares were purchased for cash
consideration of $1,296,000 ($1,049,000 in 2010) and $2,258,000 ($2,008,000 in
2010), respectively, and are held in trust for participants until they are
completely vested. These 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 trusts under the
ISU Plans in reduction of capital stock or non-controlling interest. A
compensation expense of $648,000 and $1,834,000 ($338,000 and $840,000 in 2010)
was recorded for the three and nine-month periods ended May 31, 2011 related to
these plans.
Under the Company's ISU Plan, the following ISUs were granted and are
outstanding at May 31, 2011:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Outstanding at August 31, 2010 71,862
Granted 36,460
Distributed (12,589)
----------------------------------------------------------------------------
Outstanding at May 31, 2011 95,733
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Under Cogeco Cable Inc.'s ISU Plan, the following ISUs were granted and are
outstanding at May 31, 2011:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Outstanding at August 31, 2010 57,409
Granted 60,388
Distributed (13,184)
Forfeited (885)
----------------------------------------------------------------------------
Outstanding at May 31, 2011 103,728
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 2011, the Company and its
subsidiary issued respectively 6,302 and 4,521 (6,987 and 4,422 in 2010)
Deferred Share Units ("DSUs") to the participants in connection with the DSU
Plans. A compensation expense of $207,000 and $707,000 (reduction of
compensation expense of $106,000 and compensation expense of $400,000 in 2010)
was recorded for the three and nine-month periods ended May 31, 2011 for the
liabilities related to these plans.
Under the Company's DSU Plan, the following DSUs were issued and are outstanding
at May 31, 2011:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Outstanding at August 31, 2010 21,630
Issued 6,302
Dividend equivalents 240
----------------------------------------------------------------------------
Outstanding at May 31, 2011 28,172
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Under Cogeco Cable Inc.'s DSU Plan, the following DSUs were issued and are
outstanding at May 31, 2011:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Outstanding at August 31, 2010 10,855
Issued 4,521
Dividend equivalents 166
----------------------------------------------------------------------------
Outstanding at May 31, 2011 15,542
----------------------------------------------------------------------------
----------------------------------------------------------------------------
12. Accumulated other comprehensive income
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Translation of a net
investment in self-
sustaining foreign Cash flow
subsidiaries hedges Total
$ $ $
----------------------------------------------------------------------------
Balance at August 31, 2010 4,993 941 5,934
Other comprehensive income (loss) 1,243 (10) 1,233
----------------------------------------------------------------------------
Balance at May 31, 2011 6,236 931 7,167
----------------------------------------------------------------------------
----------------------------------------------------------------------------
13. Statements of cash flows
a. Changes in non-cash operating items
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Nine months ended
May 31, May 31,
2011 2010 2011 2010
$ $ $ $
----------------------------------------------------------------------------
Accounts receivable 1,498 1,793 (15,660) (9,887)
Income taxes receivable 5,212 (5,671) 6,752 (36,670)
Prepaid expenses and other (741) (437) (1,285) (1,732)
Accounts payable and accrued
liabilities 10,606 (3,780) (57,457) (67,700)
Income tax liabilities (6,526) (914) 68,195 (40,189)
Deferred and prepaid revenue and
other liabilities 2,034 625 2,600 8,033
----------------------------------------------------------------------------
12,083 (8,384) 3,145 (148,145)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
b. Cash and cash equivalents
----------------------------------------------------------------------------
----------------------------------------------------------------------------
May 31, August 31,
2011 2010
$ $
----------------------------------------------------------------------------
Cash 83,764 35,842
Cash equivalents(1) 6,970 -
----------------------------------------------------------------------------
90,734 35,842
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) At May 31, 2011, term deposit of EUR5,000,000, bearing interest at
0.65%, maturing on June 20, 2011.
c. Other information
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Three months ended Nine months ended
May 31, May 31,
2011 2010 2011 2010
$ $ $ $
----------------------------------------------------------------------------
Fixed asset acquisitions through
capital leases - - - 141
Financial expense paid 19,751 20,702 62,376 52,541
Income taxes paid (received) (22) (196) (1,271) 41,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
14. Employee future benefits
The Company and its Canadian subsidiaries offer to their employees contributory
defined benefit pension plans, defined contribution pension plans 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 Nine months ended
May 31, May 31,
2011 2010 2011 2010
$ $ $ $
----------------------------------------------------------------------------
Contributory defined benefit pension
plans 1,009 874 2,931 2,614
Defined contribution pension plans
and collective registered
retirement savings plans 1,363 1,200 3,984 3,438
----------------------------------------------------------------------------
2,372 2,074 6,915 6,052
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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, 2011, 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
term 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, particularly in
Portugal, 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, 2011, 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, August 31,
2011 2010
$ $
----------------------------------------------------------------------------
Trade accounts receivable 101,293 76,243
Allowance for doubtful accounts (8,709) (8,531)
----------------------------------------------------------------------------
92,584 67,712
Other accounts receivable 10,427 6,848
----------------------------------------------------------------------------
103,011 74,560
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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, August 31,
2011 2010
$ $
----------------------------------------------------------------------------
Net trade accounts receivable not past due 61,894 46,291
Net trade accounts receivable past due 30,690 21,421
----------------------------------------------------------------------------
92,584 67,712
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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, 2011, the available amount of the Company's Term Revolving
Facilities was $664.6 million. Management believes that the committed Term
Revolving Facilities will, until their maturities in February 2014 and July
2014, provide sufficient liquidity to manage its long-term debt maturities and
support working capital requirements.
The following table summarizes the contractual maturities of the financial
liabilities and related capital amounts:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2011 2012 2013 2014 2015
$ $ $ $ $
----------------------------------------------------------------------------
Accounts payable and accrued
liabilities(1) 191,347 - - - -
Promissory note payable - 5,000 - - -
Long-term debt(2) 6 - - 467,573 -
Other liabilities - 1,253 1,231 1,183 1,145
Derivative financial
instruments
Cash outflows (Canadian
dollar) - - - - -
Cash inflows (Canadian dollar
equivalent of US dollar) - - - - -
Obligations under capital
leases(3) 669 2,322 915 13 -
----------------------------------------------------------------------------
192,022 8,575 2,146 468,769 1,145
----------------------------------------------------------------------------
----------------------------------------------------------------------------
-------------------------------------------------------------
-------------------------------------------------------------
Thereafter Total
$ $
-------------------------------------------------------------
Accounts payable and accrued
liabilities(1) - 191,347
Promissory note payable - 5,000
Long-term debt(2) 539,034 1,006,613
Other liabilities 2,180 6,992
Derivative financial
instruments
Cash outflows (Canadian
dollar) 201,875 201,875
Cash inflows (Canadian dollar
equivalent of US dollar) (184,034) (184,034)
Obligations under capital
leases(3) - 3,919
-------------------------------------------------------------
559,055 1,231,712
-------------------------------------------------------------
-------------------------------------------------------------
(1) Excluding accrued interest.
(2) Principal excluding obligations under capital leases.
(3) 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 outstanding debt at May 31, 2011 and their respective maturities:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2011 2012 2013 2014 2015
$ $ $ $ $
----------------------------------------------------------------------------
Interest payments on long-term
debt 10,311 56,692 56,692 54,912 33,298
Interest payments on derivative
financial instruments 659 14,614 14,614 14,614 14,614
Interest receipts on derivative
financial instruments (526) (12,882) (12,882) (12,882) (12,882)
----------------------------------------------------------------------------
10,444 58,424 58,424 56,644 35,030
----------------------------------------------------------------------------
----------------------------------------------------------------------------
---------------------------------------------------------------
---------------------------------------------------------------
Thereafter Total
$ $
---------------------------------------------------------------
Interest payments on long-term
debt 95,529 307,434
Interest payments on derivative
financial instruments 7,306 66,421
Interest receipts on derivative
financial instruments (6,442) (58,496)
---------------------------------------------------------------
96,393 315,359
---------------------------------------------------------------
---------------------------------------------------------------
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, 2011, all of the Company's long-term debt was at fixed rate, except for the
Company's Term Revolving 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 a
portion of the Euro-denominated loans outstanding under the Term Revolving
Facility and previously the Term Facility, for a notional amount of EUR111.5
million which have been reduced to EUR95.8 million on July 28, 2009 and to
EUR69.6 million on July 28, 2010. The interest swap rate to hedge the
Euro-denominated loans has been fixed at 2.08% until the settlement of the swap
agreement on July 28, 2011. In addition to the interest swap rate of 2.08%, the
Company's subsidiary will continue to pay the applicable margin on these in
accordance with the Term Revolving 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 Revolving Facilities is approximately
$0.7 million based on the outstanding debt at May 31, 2011 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, 2011, cash and cash equivalents denominated in US dollars
amounted to US$18,842,000 (US$13,613,000 at August 31, 2010) while accounts
payable denominated in US dollars amounted to US$8,901,000 (US$15,850,000 at
August 31, 2010). At May 31, 2011, Euro-denominated cash and cash equivalents
amounted to EUR171,000 (EUR187,000 at August 31, 2010) while there were no
accounts payable denominated in Euros at May 31, 2011 and August 31, 2010. 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 $1 million.
Furthermore, Cogeco Cable Inc.'s net investment in self-sustaining foreign
subsidiaries is exposed to market risk attributable to fluctuations in foreign
currency exchange rates, primarily changes in the value 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, 2011, the net
investment amounted to EUR1,692,000 (EUR182,104,000 at August 31, 2010) while
long-term debt denominated in Euros amounted to EUR70,000,000 (EUR90,000,000 at
August 31, 2010). The exchange rate used to convert the Euro currency into
Canadian dollars for the balance sheet accounts at May 31, 2011 was $1.3939 per
Euro compared to $1.3515 per Euro at August 31, 2010. The impact of a 10% change
in the exchange rate of the Euro into Canadian dollars would change financial
expense by approximately $0.4 million and other comprehensive income (loss) by
approximately $3.1 million net of non-controlling interest of $6.5 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 Company has determined the fair value of its financial instruments
as follows:
a. The carrying amount of cash and cash equivalents, accounts receivable,
bank indebtedness and accounts payable and accrued liabilities
approximates fair value because of the short-term nature of these
instruments.
b. Interest rates under the terms of the Company's Term Revolving
Facilities are based on bankers' acceptance, LIBOR, EURIBOR, bank prime
rate loan or US base rate loan plus applicable margin. Therefore, the
carrying value approximates fair value for the Term Revolving Facilities
since the Term Revolving Facilities have financing conditions similar to
those currently available to the Company.
c. The fair value of the Senior Secured Debentures Series 1 and 2, Senior
Secured Notes Series A and B and Senior Unsecured Debenture are based
upon current trading values for similar financial instruments.
d. The fair values of obligations under capital leases are not
significantly different from their carrying amounts.
The carrying value of all the Company's financial instruments approximates fair
value, except as otherwise noted in the following table:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
May 31, 2011 August 31, 2010
Carrying Carrying
value Fair value value Fair value
$ $ $ $
----------------------------------------------------------------------------
Long-term debt 1,004,811 1,079,666 955,070 1,050,783
----------------------------------------------------------------------------
----------------------------------------------------------------------------
In accordance with CICA Handbook Section 3862, Financial instruments -
disclosures, all financial instruments recognized at fair value on the
consolidated balance sheet must be classified based on the three fair value
hierarchy levels, which are as follows:
-- Level 1: quoted prices (unadjusted) in active markets for identical
assets or liabilities;
-- Level 2: inputs other than quoted prices included in Level 1 that are
observable for the asset or liability, either directly (i.e., as prices)
or indirectly (i.e., derived from prices); and
-- Level 3: inputs for the asset or liability that are not based on
observable market data (unobservable inputs).
The Company considers that its derivative financial instruments are classified
as Level 2 under the fair value hierarchy. The fair value of derivative
financial instruments are estimated using valuation models that reflect
projected future cash flows over contractual terms of the derivative financial
instruments and observable market data, such as interest and currency exchange
rate curves.
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 Revolving 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, 2011, and August 31, 2010,
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, August 31,
2011 2010
----------------------------------------------------------------------------
Net indebtedness(1) / shareholders' equity 2.7 2.4
Net indebtedness(1) / operating income before
amortization(2) 1.7 1.8
Operating income before amortization(2) / financial
expense(2) 7.4 7.9
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Net indebtedness is defined as the total of bank indebtedness, principal
on long-term debt, promissory note payable and obligations under
derivative financial instruments, less cash and cash equivalents.
(2) Calculation based on operating income before amortization and financial
expense for the twelve-month periods ended May 31, 2011 and August 31,
2010.
16. Assets held for sale
Pursuant to the acquisition of Corus Quebec radio stations (see note 2), and as
part of the CRTC's decision on the Company's transfer application, the Company
has put up for sale two radio stations acquired in the transaction, CFEL-FM in
the Quebec City market and CJTS-FM in the Sherbrooke market. In addition to the
two acquired radio stations above, and also as part of the CRTC's decision, the
Company has put up for sale radio station CJEC-FM, which it owned prior to the
acquisition, in the Quebec City market. Radio stations for which divestiture has
been required by the CRTC, and the sale process, is being managed by a trustee
approved by the CRTC pursuant to a voting trust agreement. Accordingly, the
assets and liabilities of the three radio stations put up for sale have been
classified as held for sale as of February 1, 2011 in the Company's consolidated
balance sheet.
The assets and liabilities related to the three radio stations held for sale as
at May 31, 2011, were as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
$
----------------------------------------------------------------------------
Accounts receivable 1,619
Prepaid expenses 20
----------------------------------------------------------------------------
Current assets held for sale 1,639
----------------------------------------------------------------------------
Fixed assets 2,171
Goodwill and other intangible assets 7,740
----------------------------------------------------------------------------
Non-current assets held for sale 9,911
----------------------------------------------------------------------------
Accounts payable and accrued liabilities 1,922
Income tax liabilities 184
Deferred and prepaid revenue 47
----------------------------------------------------------------------------
Current liabilities related to assets held for sale 2,153
----------------------------------------------------------------------------
Other liabilities 38
Future income tax liabilities 933
----------------------------------------------------------------------------
Non-current liabilities related to assets held for sale 971
----------------------------------------------------------------------------
----------------------------------------------------------------------------
17. Subsequent event
On June 27, 2011, the Company's subsidiary, Cogeco Cable Inc., concluded an
agreement to acquire all of the shares of Quiettouch Inc. ("Quiettouch"), a
leading independent provider of outsourced managed information technology and
infrastructure services to mid-market and larger enterprises in Canada.
Quiettouch offers a full suite of differentiated services that allow customers
to outsource their mission-critical information technology infrastructure and
application requirements, including managed infrastructure and hosting,
virtualization, firewall services, data backup with end-to-end monitoring and
reporting, and enhanced and traditional colocation services. Quiettouch operates
three data centres in Toronto and Vancouver, as well as a fibre network within
key business areas of downtown Toronto. The transaction is subject to certain
arrangements and commercial approvals, and is expected to close during the last
quarter of fiscal 2011.
CABLE SECTOR CUSTOMER STATISTICS
(unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
May 31, August 31,
2011 2010
----------------------------------------------------------------------------
Homes passed
Canada 1,614,210 1,593,743
Portugal(1) 905,692 905,359
Total 2,519,902 2,499,102
----------------------------------------------------------------------------
Homes connected(2)
Canada 992,332 979,590
Portugal 266,680 269,194
Total 1,259,012 1,248,784
----------------------------------------------------------------------------
Revenue-generating units(3)
Canada 2,526,591 2,350,577
Portugal 842,525 828,772
Total 3,369,116 3,179,349
----------------------------------------------------------------------------
Basic Cable service customers
Canada 879,354 874,505
Portugal 258,127 260,267
Total 1,137,481 1,134,772
----------------------------------------------------------------------------
High Speed Internet service customers
Canada 593,468 559,057
Portugal 164,992 163,187
Total 758,460 722,244
----------------------------------------------------------------------------
Digital Television service customers
Canada 648,862 559,418
Portugal 169,762 159,852
Total 818,624 719,270
----------------------------------------------------------------------------
Telephony service customers
Canada 404,907 357,597
Portugal 249,644 245,466
Total 654,551 603,063
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Cogeco Cable is currently assessing the number of homes passed.
(2) Represents the sum of Basic Cable service customers and High Speed
Internet ("HSI") and Telephony service customers who do not subscribe to
the Basic Cable service.
(3) Represents the sum of Basic Cable, HSI, Digital Television and Telephony
service customers.
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