Today, Cogeco Cable Inc. (TSX:CCA) ("Cogeco Cable" or the "Corporation")
announced its financial results for the third quarter of fiscal 2013, ended May
31, 2013, in accordance with International Financial Reporting Standards
("IFRS").
For the third quarter and first nine months of fiscal 2013, which include six
months operating results of ABB and four months operating results for PEER 1:
-- Third quarter revenue increased by 45.3% to reach $464.5 million and by
28.2% for the first nine months to reach $1.2 billion when compared to
the same periods of the prior year;
-- Operating income before depreciation and amortization increased by 40.9%
to $215.1 million when compared to the third quarter of fiscal 2012, and
by 30.3% to $558.0 million when compared to the nine months of the prior
year. Operating income before depreciation and amortization increases
for both periods are mainly attributable to the acquisitions of ABB and
PEER 1 ("recent acquisitions") as well as the improvement in the
financial results of the Canadian cable services segment;
-- Operating margin(1) decreased to 46.3% from 47.7% in the quarter and
increased to 45.7% from 44.9% in the first nine months when compared to
the same periods of the prior year
(1) The indicated terms do not have standard definitions prescribed by
IFRS and therefore, may not be comparable to similar measures
presented by other companies. For more details, please consult the
"Non-IFRS financial measures" section of the Management's discussion
and analysis.
-- Profit for the period from continuing operations amounted to $53.3
million in the third quarter compared to $53.2 million for the same
period of the previous fiscal year. Profit for the period from
continuing operations increased slightly during the quarter mostly due
to the operating income before depreciation and amortization generated
by the Canadian cable services segment and by the recent acquisitions,
partly offset by the acquisition costs, additional depreciation and
amortization and financial expense, including costs of approximately
$3.5 million to refinance certain long-term debt with respect to the
recent acquisitions. For the first nine months of fiscal 2013, profit
for the period from continuing operations amounted to $153.9 million
compared to $123.8 million for the same period of fiscal 2012. Profit
progression for the nine-month period is mostly attributable to factors
described above and by additional income tax expense;
-- Profit for the period amounted to $53.3 million in the third quarter
when compared to $53.2 million for the same period of the previous
fiscal year due to the factors described in the paragraph above. For the
nine months period ended May 31, 2013, profit for the period amounted to
$153.9 million when compared to $179.3 million for the same period of
fiscal 2012 mostly attributable to the improvement of the Canadian cable
services segment and by the recent acquisitions' financial results,
offset by last year's profit from the Portuguese subsidiary, Cabovisao -
Televisao por Cabo, S.A. ("Cabovisao"), reported as discontinued
operations and disposed of on February 29, 2012;
-- Free cash flow(1) reached $43.1 million for the third quarter compared
to $25.6 million in the comparable quarter of the prior year. For the
first nine months, free cash flow amounted to $96.2 million, compared to
$63.8 million in the same period of fiscal 2012. The increase for both
periods is mostly attributable to the improvement of operating income
before depreciation and amortization, partly offset by the increase in
financial expense, the recent acquisition costs as well as the increase
in acquisition of property, plant and equipment;
(1) The indicated terms do not have standard definitions prescribed by
IFRS and therefore, may not be comparable to similar measures
presented by other companies. For more details, please consult the
"Non-IFRS financial measures" section of the Management's discussion
and analysis.
-- A quarterly dividend of $0.26 per share was paid to the holders of
subordinate and multiple voting shares, an increase of $0.01 per share,
or 4%, when compared to a dividend of $0.25 per share paid in the third
quarter of fiscal 2012. Dividend payments in the first nine months
totaled $0.78 per share in fiscal 2013, compared to $0.75 per share in
fiscal 2012;
-- Fiscal 2013 third-quarter primary service units ("PSU")(1) decreased by
3,331 and increased by 15,851 for the first nine months of fiscal 2013.
At May 31, 2013, consolidated PSU amounted to 2,470,164 of which
1,981,290 come from the Canadian cable services segment and 488,874 from
the American cable services segment;
(1)Represents the sum of Television, High Speed Internet ("HSI") and
Telephony service customers.
-- On May 28, 2013, the First Lien Credit Facilities were amended. Pursuant
to the amendment, US$50 million of the Term Loan A Facility was
converted into the Revolving Facility resulting in amounts borrowed
under these two tranches of US$190 million and of US$100 million,
respectively, while the Term Loan B Facility remained the same. Interest
rates on the First Lien Credit Facilities are based on LIBOR plus the
applicable margin, with a LIBOR floor for the Term Loan B Facility. The
applicable margin was reduced by 0.625% for the Revolving Facility and
for the Term Loan A Facility and by 1.00% for the Term Loan B Facility.
In addition, the LIBOR floor for the Term Loan B Facility was reduced
from 1.00% to 0.75%. All other terms and conditions remained the same.
In connection with the amendment, transaction costs of $US 6.2 million
were incurred;
-- On May 27, 2013, Cogeco Cable completed pursuant to a public debt
offering, the issue of $300 million Senior Secured Debentures Series "4"
(the "Debentures") for a net proceed of $297.1 million net of
transaction costs of $2.9 million. The net proceeds from this offering
were used to reduce indebtedness. These Debentures mature on May 26,
2023 and bear interest at 4.175% 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 Corporation and its subsidiaries except for ABB and certain
immaterial subsidiaries (the "unrestricted subsidiaries"). The
provisions under these Debentures provide for restrictions on the
operations and activities of Cogeco Cable and its subsidiaries except
for the unrestricted subsidiaries. Generally, the most significant
restrictions relate to permitted indebtedness, dispositions and
maintenance of certain financial ratios;
-- On April 23, 2013, Cogeco Cable completed a private placement of $410.4
million (US$400 million) aggregate principal amount of Senior Unsecured
Notes (the "2020 Notes") for a net proceed of $402.6 million (US$392.4
million), net of transaction costs of $7.8 million (US$7.6 million). The
net proceeds from this offering were used to reduce indebtedness. These
2020 Notes mature on May 1, 2020 and bear interest at 4.875% per annum
payable semi-annually. These 2020 Notes are guaranteed on a senior
unsecured basis, jointly and severally, by its subsidiaries except for
the unrestricted subsidiaries. The provisions under these 2020 Notes
provide for restrictions on the operations and activities of Cogeco
Cable and its subsidiaries except for the unrestricted subsidiaries.
Generally, the most significant restrictions relate to permitted
indebtedness, investments and distributions.
"We are pleased with our third quarter results. Our business should deliver
better projections as we remain focused on generating sustained profitability
while maintaining our rigor on cost controls thus generating free cash flow to
reduce indebtedness," declared Louis Audet, President and Chief Executive
Officer of Cogeco Cable. "The results generated from our subsidiaries ABB and
PEER1 are in line with what we had expected," Louis Audet added.
"In the last three months, we successfully refinanced over half of Cogeco
Cable's indebtedness in order to take advantage of historically low interest
rates. In the process, we extended average maturity from 4.6 years to 6.1 years
and increased its fixed rate debt from 35% to 66%. We are pleased with the
financial market's reception and furthermore confident that Cogeco Cable is well
positioned going forward," concluded Louis Audet.
ABOUT COGECO CABLE
Cogeco Cable (www.cogeco.ca) is a telecommunications corporation and is the11th
largest hybrid fiber coaxial cable operator in North America operating in Canada
under the Cogeco Cable brand name in Quebec and Ontario, and in the United
States through its subsidiary Atlantic Broadband in Western Pennsylvania, South
Florida, Maryland, Delaware and South Carolina. Its two-way broadband cable
networks provide to its residential and small business customers Analogue and
Digital Television, High Speed Internet ("HSI") and Telephony services. Through
its subsidiaries Cogeco Data Services and PEER 1 Hosting, Cogeco Cable provides
its commercial customers a suite of IT hosting, information and communications
technology services (Data Centre, Co-location, Managed Hosting, Cloud
Infrastructure and Connectivity), with 23 data centres, extensive fiber networks
in Montreal and Toronto as well as points-of-presence in North America and
Europe. Cogeco Cable's subordinate voting shares are listed on the Toronto Stock
Exchange (TSX:CCA). For more information about Cogeco Cable and its subsidiaries
visit www.cogeco.ca, cogecodata.com, peer1.com and peer1hosting.co.uk.
Analyst Conference Thursday, July 11, 2013 at 11:00 a.m. (Eastern Daylight
Call: Time)
Media representatives may attend as listeners only.
Please use the following dial-in number to have access
to the conference call by dialing five minutes before
the start of the conference:
Canada/USA Access Number: 1 866-321-6651
International Access Number: + 1 416-642-5212
Confirmation Code: 7336653
By Internet at www.cogeco.ca/investors
A rebroadcast of the conference call will be available
until October 11, 2013, by dialing:
Canada and US access number: 1 888-203-1112
International access number: + 1 647-436-0148
Confirmation code: 7336653
SHAREHOLDERS' REPORT
Three and nine-month periods ended May 31, 2013
FINANCIAL HIGHLIGHTS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Nine months ended
(in thousands of
dollars, except
PSU growth,
percentages and
per share data) May 31, May 31, May 31, May 31,
2013 2012 Change 2013 2012 Change
$ $ % $ $ %
----------------------------------------------------------------------------
Operations
Revenue 464,497 319,771 45.3 1,222,080 952,930 28.2
Operating income
before
depreciation
and
amortization(1) 215,132 152,661 40.9 558,034 428,227 30.3
Operating
margin(1) 46.3% 47.7% - 45.7% 44.9% -
Operating income 109,648 90,981 20.5 288,529 217,471 32.7
Profit for the
period from
continuing
operations 53,258 53,159 0.2 153,876 123,812 24.3
Profit for the
period from
discontinued
operations - - - - 55,446 -
Profit for the
period 53,258 53,159 0.2 153,876 179,258 (14.2)
Profit for the
period
attributable to
owners of the
Corporation 53,056 53,159 (0.2) 153,876 179,258 (14.2)
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Cash Flow
Cash flow from
operating
activities 166,976 112,275 48.7 316,780 247,043 28.2
Cash flow from
operations(1) 155,982 113,075 37.9 396,342 314,740 25.9
Acquisitions of
property, plant
and equipment,
intangible and
other assets 112,841 87,459 29.0 300,107 250,976 19.6
Free cash
flow(1) 43,141 25,616 68.4 96,235 63,764 50.9
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Financial
Condition(2)
Property, plant
and equipment - - - 1,751,785 1,322,093 32.5
Total assets - - - 5,233,590 2,908,079 80.0
Indebtedness(3) - - - 3,026,408 1,069,112 -
Equity
attributable to
owners of the
Corporation - - - 1,316,500 1,188,431 10.8
----------------------------------------------------------------------------
Primary service
units ("PSU")
growth(4) (3,331) 6,246 - 15,851 64,705 (75.5)
----------------------------------------------------------------------------
Per Share
Data(5)
Earnings per
share
attributable to
owners of the
Corporation
From
continuing
and
discontinued
operations
Basic 1.09 1.09 - 3.16 3.68 (14.1)
Diluted 1.08 1.09 (0.9) 3.14 3.66 (14.2)
From
continuing
operations
Basic 1.09 1.09 - 3.16 2.54 24.4
Diluted 1.08 1.09 (0.9) 3.14 2.53 24.1
From
discontinued
operations
Basic - - - - 1.14 -
Diluted - - - - 1.13 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The indicated terms do not have standardized definitions prescribed by
International Financial Reporting Standards ("IFRS") and therefore,
may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-IFRS financial
measures" section of the Management's discussion and analysis
("MD&A").
(2) At May 31, 2013 and August 31, 2012.
(3) Indebtedness is defined as the total of bank indebtedness, principal
on long-term debt, balance due on a business combination and
obligations under derivative financial instruments.
(4) Represents the sum of Television, High Speed Internet ("HSI") and
Telephony service customers.
(5) Per multiple and subordinate voting share.
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MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)
Three and nine-month periods ended May 31, 2013
FORWARD-LOOKING STATEMENTS
Certain statements in this Management's Discussion and Analysis ("MD&A") may
constitute forward-looking information within the meaning of securities laws.
Forward-looking information may relate to Cogeco Cable's future outlook and
anticipated events, business, operations, financial performance, financial
condition or results and, in some cases, can be identified by terminology such
as "may"; "will"; "should"; "expect"; "plan"; "anticipate"; "believe"; "intend";
"estimate"; "predict"; "potential"; "continue"; "foresee", "ensure" or other
similar expressions concerning matters that are not historical facts. In
particular, statements regarding the Corporation's future operating results and
economic performance and its objectives and strategies are forward-looking
statements. These statements are based on certain factors and assumptions
including expected growth, results of operations, performance and business
prospects and opportunities, which Cogeco Cable believes are reasonable as of
the current date. While management considers these assumptions to be reasonable
based on information currently available to the Corporation, they may prove to
be incorrect. The Corporation cautions the reader that the economic downturn
experienced over the past few years makes forward- looking information and the
underlying assumptions subject to greater uncertainty and that, consequently,
they may not materialize, or the results may significantly differ from the
Corporation's expectations. It is impossible for Cogeco Cable to predict with
certainty the impact that the current economic uncertainties may have on future
results. Forward-looking information is also subject to certain factors,
including risks and uncertainties (described in the "Uncertainties and main risk
factors" section of the Corporation's 2012 annual MD&A, the Corporation's MD&A
for the period ended February 28, 2013 as well as in the present MD&A) that
could cause actual results to differ materially from what Cogeco Cable currently
expects. These factors include risks pertaining to markets and competition,
technology, regulatory developments, operating costs, information systems,
disasters or other contingencies, financial risks related to capital
requirements, human resources, controlling shareholder and holding structure,
many of which are beyond the Corporation's control. Therefore, future events and
results may vary significantly from what management currently foresees. The
reader should not place undue importance on forward-looking information and
should not rely upon this information as of any other date. While management may
elect to, the Corporation is under no obligation and does not undertake to
update or alter this information at any particular time, except as may be
required by law.
All amounts are stated in Canadian dollars unless otherwise indicated. This
report should be read in conjunction with the Corporation's condensed interim
consolidated financial statements and the notes thereto, prepared in accordance
with the International Financial Reporting Standards ("IFRS") and the MD&A
included in the Corporation's 2012 Annual Report.
CORPORATE OBJECTIVES AND STRATEGIES
Cogeco Cable Inc.'s ("Cogeco Cable" or the "Corporation") objectives are to
provide outstanding service to its customers, improve profitability and create
shareholder value. To achieve these objectives, the Corporation has developed
strategies that focus on expanding its service offering, enhancing its existing
services and bundles, improving customer experience and business processes as
well as keeping a sound capital management and a strict control over
spending.The Corporation measures its performance, with regard to these
objectives by monitoring operating income before depreciation and
amortization(1), operating margin(1), PSU(2) growth and free cash flow(1).
(1) The indicated terms do not have standardized definitions prescribed by
IFRS and therefore, may not be comparable to similar measures
presented by other companies. For more details, please consult the
"Non-IFRS financial measures" section.
(2) Represents the sum of Television, High Speed Internet ("HSI") and
Telephony service customers.
KEY PERFORMANCE INDICATORS
OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION AND OPERATING MARGIN
For the nine-month period ended May 31, 2013, operating income before
depreciation and amortization increased by 30.3% when compared to the same
period of fiscal 2012 to reach $558.0 million and operating margin increased to
45.7% from 44.9%. As a result of the improvement of operating income before
depreciation and amortization in the Canadian Cable services segment resulting
essentially from cost reduction initiatives, management revised its April 10,
2013 projections for fiscal 2013. Operating income before depreciation and
amortization is now expected to reach $780 million from $767 million and
operating margin should increase to 46.0% from 45.2%. For further details,
please consult the fiscal 2013 revised projections in the "Fiscal 2013 financial
guidelines" section.
FREE CASH FLOW
For the nine-month period ended May 31, 2013, Cogeco Cable reports free cash
flow of $96.2 million, compared to $63.8 million for the same period of the
previous fiscal year, an increase of $32.5 million. This variance is mostly
attributable to the improvement of operating income before depreciation and
amortization from the Canadian cable services segment and Atlantic Broadband
("ABB") and Peer 1 Network Enterprises, Inc. ("PEER 1") acquisitions (the
"recent acquisitions"), partly offset by the increase in financial expense, the
recent acquisition costs as well as the increase in acquisition of property,
plant and equipment.
PSU GROWTH AND PENETRATION OF SERVICE OFFERINGS
During the nine-month period ended May 31, 2013, PSU reached 2,470,164 of which
1,981,290 come from the Canadian cable services segment and 488,874 from the
American cable services segment. PSU for the American cable services segment
increased by 3,694 stemming primarily from additional HSI services, partly
offset by losses in Television services. PSU for the Canadian cable services
segment increased by 12,157 when compared to an increase of 64,705 PSU for the
comparable period of the prior year, mainly as a result of service category
maturity and a more competitive environment in the Television services. Cogeco
Cable maintains targeted marketing initiatives to increase the penetration level
of its services.
BUSINESS DEVELOPMENTS AND OTHER
On July 5, 2013, Cogeco Cable reduced its Term Revolving Facility from $750
million to $600 million and its Revolving Facility of its Secured Credit
Facilities from $240 million to $190 million.
On June 27, 2013, Cogeco Cable completed, pursuant to a private placement, the
issuance of US$215 million Senior Secured Notes bearing interest at 4.30%
payable semi-annually and maturing on June 16, 2025. The net proceeds from this
offering along with drawings under the Corporation's credit facilities will be
used to repay, on July 29, 2013, all the outstanding amount of $300 million
Senior Secured Debentures Series 1, due on June 9, 2014.
On January 31, 2013, Cogeco Cable completed the acquisition of 96.57% of the
issued and outstanding shares of PEER 1 by way of takeover bid (the "offer")
valued at approximately $649 million. On April 3, 2013, Cogeco Cable completed
the acquisition of the remaining 3.43% of the issued and outstanding shares of
PEER 1 for a cash consideration of $17 million pursuant to the compulsory
acquisition provisions in Section 300 of the Business Corporations Act ("British
Columbia"). In connection with the completion of the offer, Cogeco Cable has
entered into secured credit facilities in the amount of approximately $650
million and maturing in 2017, with a syndicate of lenders. PEER 1 is one of the
world's leading internet infrastructure providers, specializing in managed
hosting, dedicated servers, cloud services and co-location. This acquisition
enhances Cogeco Cable's footprint and builds on its strategic initiatives by
increasing scale in an attractive industry segment with significant growth
prospects in the state of the art data center platforms. The Corporation will
also serve additional businesses worldwide, in addition to approximately 11,000
customers currently served, through 23 data centres and 21 points-of-presence
across North America and Europe. PEER 1's primary network centre and head office
remain located in Vancouver. For the purpose of segmented operating results,
operating results from PEER 1 acquisition are incorporated in the Enterprise
services segment. For further details on PEER 1 operating results, please refer
to the "Enterprise services" section.
On November 30, 2012, the Corporation completed the acquisition of ABB, an
independent cable system operator formed in 2003, serving about 485,000 PSU's
and providing Analogue and Digital Television, as well as HSI and Telephony
services. The acquisition is an attractive entry point into the United States of
America ("US") market, providing a significant increase in PSU base with further
growth potential, a high quality network infrastructure and the ability for the
Corporation's management to leverage its core knowledge and operational
experience. The transaction, valued at US$1.36 billion, was financed through a
combination of cash on hand, a draw-down on the existing Term Revolving Facility
of approximately US$588 million and US$660 million of borrowings under a new
committed non-recourse debt financing at ABB. Ranked the 12th- largest cable
television system operator in the US, ABB operates cable systems in Western
Pennsylvania, Southern Florida, Maryland, Delaware and South Carolina. For the
purpose of segmented operating results, operating results from ABB acquisition
are presented in the American cable services operations. For further details on
ABB's operating results, please refer to the "American cables services" section.
OPERATING AND FINANCIAL RESULTS
OPERATING RESULTS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Nine months ended
May 31, May 31, May 31, May 31,
2013 2012 Change 2013 2012 Change
(in thousands of
dollars, except
percentages) $ $ % $ $ %
----------------------------------------------------------------------------
Revenue 464,497 319,771 45.3 1,222,080 952,930 28.2
Operating expenses 249,365 167,110 49.2 654,477 515,218 27.0
Management fees -
COGECO Inc. - - - 9,569 9,485 0.9
--------------------------------------- ----------------------
Operating income
before
depreciation and
amortization 215,132 152,661 40.9 558,034 428,227 30.3
--------------------------------------- ----------------------
Operating margin 46.3% 47.7% 45.7% 44.9%
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----------------------------------------------------------------------------
REVENUE
Fiscal 2013 third-quarter revenue increased by $144.7 million, or 45.3%, to
reach $464.5 million, when compared to the same period last year. For the first
nine months, revenue amounted to $1.2 billion, an increase of $269.2 million, or
28.2% when compared to the same period of fiscal 2012. Revenue increases for
both periods are mainly attributable to the operating results of the recent
acquisitions as well as rate increases implemented in June and July 2012 in the
Canadian cable services segment. For further details on the Corporation's
revenue, please refer to the "Canadian cable services", "American cable
services" and "Enterprise services" sections.
OPERATING EXPENSES
For the third quarter of fiscal 2013, operating expenses increased by $82.3
million, or 49.2%, to reach $249.4 million. For the first nine months of the
fiscal year, operating expenses amounted to $654.5 million, an increase of
$139.3 million, or 27.0%, when compared to the same period of fiscal 2012. These
additional operating expenses are mostly attributable to the recent
acquisitions, partly offset by cost reduction initiatives and the reduction in
operating expenses in the Canadian cable services related to the deployment and
support costs incurred in fiscal 2012 for the migration of Television service
customers from analogue to digital. For further details on the Corporation's
operating expenses, please refer to the "Canadian cable services", "American
cable services" and "Enterprise services" sections.
OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION AND OPERATING MARGIN
Fiscal 2013 third-quarter operating income before depreciation and amortization
increased by $62.5 million, or 40.9%, to reach $215.1 million, and by $129.8
million, or 30.3%, to reach $558.0 million in the first nine months as a result
of the recent acquisitions and the improvement in the Canadian cable services
segment. Cogeco Cable's third-quarter operating margin decreased to 46.3% from
47.7% mainly due to lower margins generated by PEER 1 acquisition and increased
to 45.7% from 44.9% for the first nine months of fiscal 2013 when compared to
the comparable periods of the prior year. For further details on the
Corporation's operating income before depreciation and amortization and
operating margin, please refer to the "Canadian cable services", "American cable
services" and "Enterprise services" sections.
CUSTOMER STATISTICS
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-----------------------------------------------------------------
Consolidated US(1) CANADA
May 31,
2013
-----------------------------------------------------------------
PSU 2,470,164 488,874 1,981,290
Television service customers 1,079,285 233,941 845,344
HSI service customers 826,495 176,170 650,325
Telephony service customers 564,384 78,763 485,621
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Consolidated
Net additions (losses) Net additions (losses)
Quarters
ended Nine months ended
May 31, May 31, May 31, May 31,
2013 2012 2013 2012
----------------------------------------------------------------------------
PSU (3,331) 6,246 15,851 64,705
Television service customers (8,407) (4,453) (21,143) (9,112)
HSI service customers 2,351 2,835 22,408 27,638
Telephony service customers 2,725 7,864 14,586 46,179
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(1)Include 485,180 PSU (237,313 Television service, 169,553 HSI service
and 78,314 Telephony service customers) from the acquisition of ABB.
In the third quarter of fiscal 2013, PSU from ABB at November 30, 2012
and February 28, 2013 have been adjusted downwards to comply with
Cogeco Cable's and Canadian practices mostly related to reporting the
number of hotels and hotel units.
Fiscal 2013 third-quarter and first nine months, PSU net additions for the
Canadian cable services segment were lower than in the comparable period of the
prior year mainly as a result of service category maturity, competitive offers
and tightening of our customer credit controls and processes. PSU net additions
for the American cable services segment were also lower than the last quarter
resulting mainly from snowbirds returning home for the summer in its Miami
cluster. For the third quarter net customer losses for Television service
customers stood at 8,407 compared to 4,453 for fiscal 2012 third-quarter.
Television service customer net losses are mainly due to the promotional offers
of competitors for the video service combined with the tightening of our
customer credit controls in Canada. Fiscal 2013 third-quarter HSI service
customers grew by 2,351 compared to 2,835 in the third quarter of the prior
year, and the number of net additions to the Telephony service stood at 2,725
customers compared to 7,864 customers for the same period of the prior year. For
the nine-month periods, PSU net additions are stemming primarily from additional
HSI services, partly offset by losses in Television services for both Canadian
and American cable services segment. For further details on the Corporation's
customer statistics, please refer to the "Canadian cable services" and "American
cable services" sections.
RELATED PARTY TRANSACTIONS
Cogeco Cable Inc. is a subsidiary of COGECO Inc., which holds 32.1% of the
Corporation's equity shares, representing 82.6% of the Corporation's voting
shares. On September 1, 1992, Cogeco Cable Inc. executed a management agreement
with COGECO Inc. under which the parent company agreed to provide certain
executive, administrative, legal, regulatory, strategic and financial planning
services and additional services to the Corporation and its subsidiaries (the
"Management Agreement"). These services are provided by COGECO Inc.'s senior
executives, including the President and Chief Executive Officer, the Senior Vice
President and Chief Financial Officer, the Vice President Corporate Affairs, the
Vice President Chief Legal Officer and Secretary, the Vice President Corporate
Development, the Vice President and Treasurer, the Vice President Public Affairs
and Communications and the Vice President Internal Audit. No direct remuneration
is payable to such senior executives by the Corporation. However, the
Corporation granted 71,233 stock options (47,729 in 2012) to these senior
executives as executives of Cogeco Cable during the first nine months of fiscal
year 2013. During the third quarter and first nine months of fiscal 2013, the
Corporation charged COGECO Inc. an amount of $99,000 and $275,000 ($83,000 and
$232,000 in 2012) with regards to the Corporation's stock options to these
employees.
During the first nine months of fiscal 2013, the Corporation also granted 12,280
(11,006 in 2012) Incentive Share Units ("ISUs") to these senior executives as
executives of Cogeco Cable. During the third quarter and first nine months of
fiscal 2013, the Corporation charged COGECO Inc. an amount of $117,000 and
$336,000 ($105,000 and $285,000 in 2012) with regards to the Corporation's ISUs
granted to these employees.
Under the Management Agreement, the Corporation pays monthly fees equal to 2% of
its total revenue to COGECO Inc. for the above-mentioned services. In 1997, the
management fee was capped at $7 million per year, subject to annual upward
adjustment based on increases in the Consumer Price Index in Canada. This limit
can be increased under certain circumstances upon request to that effect by
COGECO Inc. For fiscal year 2013, management fees have been set at a maximum of
$9.6 million ($9.5 million in 2012), which was paid within the first six months
of the fiscal year. For fiscal year 2012, management fees were also fully paid
in the first half of the year. In addition, the Corporation reimburses COGECO
Inc.'s out-of-pocket expenses incurred with respect to services provided to the
Corporation under the Management Agreement.
Details regarding the Management Agreement and stock options and ISUs granted to
COGECO Inc.'s employees are provided in the Corporation's 2012 Annual Report.
There were no other material related party transactions during the periods covered.
FIXED CHARGES
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Nine months ended
May 31, May 31, May 31, May 31,
2013 2012 Change 2013 2012 Change
(in thousands of
dollars, except
percentages) $ $ % $ $ %
----------------------------------------------------------------------------
Depreciation and
amortization 103,383 61,680 67.6 252,640 210,756 19.9
Financial expense 35,032 16,373 - 79,726 47,990 66.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three and nine-month periods ended May 31, 2013, depreciation and
amortization expense reached $103.4 million and $252.6 million, respectively
compared to $61.7 million and $210.8 million for the same periods of the prior
year, respectively. The increases result mainly from the recent acquisitions and
from additional acquisition of property, plant and equipment in the Enterprise
services segment, offset by higher fiscal 2012 depreciation expense related to
the reduction of useful lives for certain home terminal devices for the Canadian
cable services segment.
Fiscal 2013 third-quarter financial expense increased by $18.7 million to reach
$35.0 million compared to $16.4 million in fiscal 2012 third-quarter. For the
first nine months of fiscal 2013, financial expense increased by $31.7 million,
or 66.1%, to reach $79.7 million, compared to $48.0 million in the prior year.
Financial expense increased in both periods as a result of the cost of financing
the recent acquisitions, including costs of approximately $3.5 million to
refinance certain long-term debt with respect to these recent acquisitions.
INCOME TAXES
For the three and nine-month periods ended May 31, 2013, income tax expense
amounted to $21.4 million and $54.9 million, respectively, compared to $21.4
million and $45.7 million, respectively, for the comparable periods in the prior
year. The increase in the first nine months is mostly attributable to the
improvement in operating income before depreciation and amortization, partly
offset by the increase in depreciation and amortization and the financial
expense.
PROFIT FOR THE PERIOD FROM CONTINUING OPERATIONS
For the three and nine-month periods ended May 31, 2013, profit for the period
from continuing operations amounted to $53.3 million and $153.9 million,
respectively, compared to a profit for the period from continuing operations of
$53.2 million and $123.8 million for the comparable periods in fiscal 2012.
Profit for the period attributable to owners of the Corporation for the
three-month period reached $53.1 million, or $1.09 per share compared to $53.2
million, or $1.09 per share in fiscal 2012 and $153.9 million, or $3.16 per
share compared to $123.8 million, or $2.54 per share for the nine-month period.
Profit for the period from continuing operations increased slightly during the
quarter mostly due to the operating income before depreciation and amortization
generated by the Canadian cable services segment and by the recent acquisitions,
partly offset by the acquisition costs, additional depreciation and amortization
and financial expense, including costs of approximately $3.5 million to
refinance certain long-term debt with respect to the recent acquisitions. Profit
progression for the period from continuing operations for the first nine months
of fiscal 2013 is mostly attributable to the increase in operating income before
depreciation and amortization generated by the Canadian cable services segment
and by the recent acquisitions, partly offset by the recent acquisitions costs
and by the depreciation and amortization, financial expense and income tax
increases explained above.
PROFIT FOR THE PERIOD
For the three and nine-month periods ended May 31, 2013, profit for the period
amounted to $53.3 million and $153.9 million, respectively, compared to $53.2
million and $179.3 million for the comparable periods. Fiscal 2013 third-quarter
profit for the period attributable to owners of the Corporation amounted to
$53.1 million, or $1.09 per share, compared to $53.2 million, or $1.09 per
share, in the third quarter of fiscal 2012. The increase in the quarter is
attributable to the factors described above. For the nine-month period ended May
31, 2013, profit for the period attributable to owners of the Corporation
amounted to $153.9 million or $3.16 per share, compared to $179.3 million, or
$3.68 per share for the comparable period of fiscal 2012. The decline for the
period is mostly attributable to last year's profit from the Portuguese
subsidiary, Cabovisao - Televisao por Cabo, S.A. ("Cabovisao"), reported as
discontinued operations and disposed of on February 29, 2012 and by the
increases in depreciation and amortization, financial expense and acquisition
costs all related to the recent acquisitions, partly offset by the operating
income before depreciation and amortization generated by the Canadian cable
services segment and by the recent acquisitions.
CASH FLOW ANALYSIS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Nine months ended
May 31, May 31, May 31, May 31,
2013 2012 2013 2012
(in thousands of dollars) $ $ $ $
----------------------------------------------------------------------------
Operating activities
Cash flow from operations 155,982 113,075 396,342 314,740
Changes in non-cash operating
activities (2,526) (12,083) (78,708) (71,572)
Amortization of deferred
transaction costs and discounts
on long-term debt (3,580) (713) (7,043) (2,070)
Income taxes paid (16,894) (10,821) (76,902) (64,638)
Current income tax expense 25,789 24,044 73,907 69,740
Financial expense paid (26,827) (17,600) (70,542) (47,147)
Financial expense 35,032 16,373 79,726 47,990
----------------------------------------------------------------------------
166,976 112,275 316,780 247,043
Investing activities (135,161) (86,861)(2,305,469) (250,231)
Financing activities (31,688) (12,035) 1,809,398 47,475
----------------------------------------------------------------------------
Effect of exchange rate changes
on cash and cash equivalents
denominated in foreign
currencies 1,089 - 1,794 -
----------------------------------------------------------------------------
Net change in cash and cash
equivalents from continuing
operations 1,216 13,379 (177,497) 44,287
Net change in cash and cash
equivalents from discontinued
operations (1) - - - 49,597
Cash and cash equivalents from
continuing and discontinued
operations, beginning of year 36,678 135,952 215,391 55,447
----------------------------------------------------------------------------
Cash and cash equivalents from
continuing and discontinued
operations, end of year 37,894 149,331 37,894 149,331
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1)For further details on the Corporation's cash flows attributable to
discontinued operations, please refer to the "Disposal of subsidiary
and discontinued operations" in note 14 of the condensed interim
consolidated financial statements.
OPERATING ACTIVITIES
Fiscal 2013 third-quarter cash flow from operations reached $156.0 million
compared to $113.1 million, an increase of $42.9 million, or 37.9%, compared to
the same period of prior year. For the first nine months, cash flow from
operations reached $396.3 million compared to $314.7 million for the same period
last year, an increase of $81.6 million, or 25.9%. Increases for both periods
are primarily due to the improvement of operating income before depreciation and
amortization, partly offset by financial expense increase and by the recent
acquisition costs. For the third quarter, changes in non-cash operating
activities generated cash outflows of $2.5 million compared to $12.1 million in
the third quarter of fiscal 2012, mainly as a result of a lower decrease in
trade and other payables, partly offset by a lower increase in provisions. For
the first nine months, changes in non-cash operating activities generated cash
outflows of $78.7 million compared to $71.6 million for the same period in
fiscal 2012, mainly as a result of a decrease in provisions compared to an
increase in prior year, partly offset by an increase in deferred and prepaid
revenue and other liabilities compared to a decrease in the prior year.
INVESTING ACTIVITIES
BUSINESS COMBINATIONS IN FISCAL 2013
On March 6, 2013, Cogeco Cable, completed the working capital adjustments in
relation to the ABB acquisition, which increased income tax receivable by $3.4
million and goodwill by $0.6 million, and decreased trade and other payables
assumed by $1.5 million and income tax liabilities assumed by $0.1 million. In
addition, on April 3, 2013, Cogeco Cable completed the acquisition of the
remaining 3.43% of the issued and outstanding shares of PEER 1 for a cash
consideration of $17 million. The acquisition of non-controlling interest
resulted has not changed the purchase price allocation. On January 31, 2013, the
Corporation completed the acquisition of PEER 1 and on November 30, 2012, the
acquisition of ABB. These acquisitions were accounted for using the purchase
method.
The preliminary purchase price allocation of these acquisitions, pending the
completion of the valuation of the net assets acquired, is as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
PEER 1 ABB TOTAL
$ $ $
----------------------------------------------------------------------------
Consideration
Paid
Purchase of shares 494,796 337,779 832,575
Working capital adjustments - 5,415 5,415
Repayment of secured debts and
settlement of options outstanding 170,872 1,021,854 1,192,726
----------------------------------------------------------------------------
665,668 1,365,048 2,030,716
----------------------------------------------------------------------------
Net assets acquired
Cash and cash equivalents 10,840 5,480 16,320
Restricted cash 8,729 - 8,729
Trade and other receivables 12,772 9,569 22,341
Prepaid expenses and other 3,855 1,370 5,225
Income tax receivable 672 3,418 4,090
Other assets 3,328 - 3,328
Property, plant and equipment 150,206 205,353 355,559
Intangible assets 139,703 763,084 902,787
Goodwill 421,986 603,254 1,025,240
Deferred tax assets 8,355 33,835 42,190
Trade and other payables assumed (26,330) (26,134) (52,464)
Provisions - (721) (721)
Income tax liabilities assumed (4,716) (53) (4,769)
Deferred and prepaid revenue and other
liabilities assumed (3,315) (5,254) (8,569)
Long-term debt assumed (1,735) - (1,735)
Deferred tax liabilities (58,682) (228,153) (286,835)
----------------------------------------------------------------------------
665,668 1,365,048 2,030,716
----------------------------------------------------------------------------
----------------------------------------------------------------------------
ACQUISITIONS OF PROPERTY, PLANT AND EQUIPMENT, INTANGIBLE AND OTHER ASSETS
Investing activities, including acquisition of property, plant and equipment
segmented according to the National Cable Television Association ("NCTA")
standard reporting categories, are as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Nine months ended
May 31, May 31, May 31, May 31,
2013 2012 2013 2012
(in thousands of dollars) $ $ $ $
----------------------------------------------------------------------------
Customer premise equipment(1) 18,000 18,552 55,874 75,623
Scalable infrastructure(2) 21,512 33,235 78,428 84,585
Line extensions 5,961 4,402 14,081 12,323
Upgrade / Rebuild 10,924 5,923 26,574 17,577
Support capital 4,552 6,997 14,935 18,800
----------------------------------------------------------------------------
Acquisition of property, plant and
equipment - Canadian and American
cable services 60,949 69,109 189,892 208,908
Acquisition of property, plant and
equipment - Enterprise services 47,376 14,370 96,565 31,498
----------------------------------------------------------------------------
Acquisitions of property, plant and
equipment 108,325 83,479 286,457 240,406
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Acquisition of intangible and other
assets - Canadian and American
cable services 3,933 2,660 12,048 8,913
Acquisition of intangible and other
assets - Enterprise services 583 1,320 1,602 1,657
----------------------------------------------------------------------------
Acquisitions of intangible and other
assets 4,516 3,980 13,650 10,570
----------------------------------------------------------------------------
----------------------------------------------------------------------------
112,841 87,459 300,107 250,976
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes mainly home terminal devices as well as new and replacement
drops.
(2) Includes mainly head-end equipment, digital video and telephony
transport as well as HSI equipment.
For the three and nine-month periods ended May 31, 2013, acquisition of
property, plant and equipment amounted to $108.3 million and $286.5 million,
respectively, compared to $83.5 million and $240.4 million for the comparable
periods of fiscal 2012. In the Canadian cable services, fiscal 2013
third-quarter acquisition of property, plant and equipment amounted to $47.6
million, a decrease of 31.1% when compared to $69.1 million in the third quarter
of the prior year. For the nine-month period ended May 31, 2013, acquisition of
property, plant and equipment amounted to $163.4 million, a decrease of 21.8%
when compared to the prior year. For the three and nine-month periods ended May
31, 2013, acquisition of property, plant and equipment in the American cable
services segment amounted $13.3 million and $26.5 million, respectively. The
decreases in the Canadian cable services segment are mainly attributable to the
following factors:
-- A decrease in scalable infrastructure due to the timing of initiatives
to improve network capacity in existing areas served;
-- A decrease in customer premise equipment, mainly due to the achievement
in fiscal 2012 of the first phase in the conversion of Television
service customers from analogue to digital and the lower PSU growth as a
result of service maturity; and
-- An increase in network upgrade and rebuild to deploy advanced
technologies such as DOCSIS 3.0 and Switched Digital Video in existing
areas served;
Fiscal 2013 third-quarter and first nine months acquisition of property, plant
and equipment in the Enterprise services segment, including the capital
expenditures of the recent acquisition of PEER 1, amounted to $47.4 million and
$96.6 million compared to $14.4 million and $31.5 million in the comparable
periods of fiscal 2012, respectively. The increases for both periods are mainly
due to the construction of a new data centre facility in Barrie, Ontario, opened
last June, and by the expansion of data centre facilities in Toronto, Canada and
in Portsmouth, England as well as the fiber expansion in the Toronto area in
order to fulfill orders from new customers demand.
Acquisition of intangible and other assets are mainly attributable to reconnect
and additional service activation costs as well as other customer acquisition
costs. For the third quarter and the first nine months of fiscal 2013, the
acquisition of intangible and other assets amounted to $4.5 million and $13.7
million, compared to $4.0 million and $10.6 million for the same periods last
year, respectively.
FREE CASH FLOW AND FINANCING ACTIVITIES
In the third quarter of fiscal 2013, free cash flow amounted to $43.1 million,
$17.5 million, or 68.4%, higher than in the comparable period of fiscal 2012.
For the nine-month period, free cash flow amounted to $96.2 million, $32.5
million, or 50.9%, higher than the same period of last year. Free cash flow
increase for both periods over the prior year are due to the improvement of
operating income before depreciation and amortization in the Canadian cable
services segment and the recent acquisitions, partly offset by the increase in
financial expense, the recent acquisition costs as well as the increase in
acquisition of property, plant and equipment.
In the third quarter of fiscal 2013, higher Indebtedness level provided for a
cash decrease of $17.2 million, mainly due to the issuance of $300 million
Senior Secured Debentures Series "4" (the "Debentures") for a net proceed of
$297.1 million, net of transaction costs of $2.9 million and the issuance of a
private placement of $410.4 million (US$400 million) Senior Unsecured Notes (the
"2020 Notes") for a net proceed of $402.6 million (US$392.4 million), net of
transaction costs of $7.8 million (US$7.6 million). In addition, Cogeco Cable
used the net proceeds under the Debentures and the 2020 Notes to repay the
Canadian Term Facility amounting to $175 million, the US Term Facility amounting
to $230.8 million (US$225 million), the $114.7 Revolving loan in connection with
the financing of the acquisition of PEER 1 and the $192.4 million Term Revolving
Facility. In the third quarter of fiscal 2012, Indebtedness remained essentially
the same.
For the nine-month period of fiscal 2013, higher Indebtedness level provided for
a cash increase of $1.9 billion, mainly due to the issuance of the 2020 Notes
and the Debentures, described above, as well as draw-down on the existing Term
Revolving Facility of $411.9 million (US$420 million) including the repayment
made during the quarter explained above and the new First Lien Credit Facilities
of $637.4 million (US$660 million for a net proceed of US$641.5 million, net of
transaction costs of US$18.5 million) to finance the acquisition of ABB as well
to drawings of $125.1 million, under Secured Credit Facilities to finance the
acquisition of PEER 1, net of the repayment made during the third quarter
explained above. In the first nine months of fiscal 2012, Indebtedness affecting
cash increased by $86.3 million mainly due to the issuance, on February 14,
2012, of $200 million Senior Secured Debentures Series 3 ("Fiscal 2012
debentures") for net proceeds of $198.1 million which was used to repay the $110
million Term Revolving Facility.
During the third quarter of fiscal 2013, a quarterly dividend of $0.26 per share
was paid to the holders of subordinate and multiple voting shares, totaling
$12.6 million, when compared to a dividend paid of $0.25 per share, or $12.2
million in the third quarter of fiscal 2012. Dividend payments in the first nine
months totaled $0.78 per share, or $37.9 million, compared to $0.75 per share,
or $36.5 million the year before.
As at May 31, 2013, the Corporation had a working capital deficiency of $149.7
million compared to $17.2 million at August 31, 2012. The increase of $132.5
million in the deficiency is mainly due to the decrease of $177.5 million in
cash and cash equivalents, primarily used for the acquisition of ABB. The
deficiency was also impacted by an increase of $22.0 million in trade and other
receivables, a decrease of $29.8 million in trade and other payables and by an
increase of $14.7 million in deferred and prepaid revenue. As part of the usual
conduct of its business, Cogeco Cable maintains a working capital deficiency due
to a low level of accounts receivable as a large portion of the Corporation's
customers pay before their services are rendered, unlike trade and other
payables, which are paid after products are delivered or services are rendered,
thus enabling the Corporation to use cash and cash equivalents to reduce
Indebtedness.
At May 31, 2013, the Corporation had used $439.9 million of its $750 million
Term Revolving Facility for a remaining availability of $310.1 million. In
addition, the Corporation also benefits from additional Revolving Facilities of
$251 million as a result of the acquisition of PEER 1, of which $131.7 million
was used at May 31, 2013 for a remaining availability of $119.3 million. Two
subsidiaries of the Corporation also benefits from a Revolving Facility of
$103.7 million (US$100 million) related to the acquisition of ABB, of which
$55.7 million (US$53.7 million) was used at May 31, 2013 for a remaining
availability of $48 million (US$46.3 million).
FINANCIAL POSITION
As a result of the acquisition of ABB and PEER 1, most financial position
balances have changed significantly since August 31, 2012. For further details
on the preliminary allocation of the purchase price of the acquisitions, please
refer to the investing activities under the "Cash flow analysis" section.
OUTSTANDING SHARE DATA
A description of Cogeco Cable's share data at June 30, 2013 is presented in the
table below. Additional details are provided in note 10 of the condensed interim
consolidated financial statements.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Amount
Number of (in thousands
shares/options of dollars)
----------------------------------------------------------------------------
Common shares
Multiple voting shares 15,691,100 98,346
Subordinate voting shares 33,149,955 900,965
Options to purchase subordinate voting shares
Outstanding options 763,961
Exercisable options 436,344
----------------------------------------------------------------------------
----------------------------------------------------------------------------
FINANCING
In the normal course of business, Cogeco Cable has incurred financial
obligations, primarily in the form of long-term debt, operating and finance
leases and guarantees. Cogeco Cable's obligations, as discussed in the 2012
Annual Report, have not materially changed since August 31, 2012, except as
mentioned below.
On May 28, 2013, the First Lien Credit Facilities were amended. Pursuant to the
amendment, US$50 million of the Term Loan A Facility was converted into the
Revolving Facility resulting in amounts borrowed under these two tranches of
US$190 million and of US$100 million, respectively, while the Term Loan B
Facility remained the same. Interest rates on the First Lien Credit Facilities
are based on LIBOR plus the applicable margin, with a LIBOR floor for the Term
Loan B Facility. The applicable margin was reduced by 0.625% for the Revolving
Facility and for the Term Loan A Facility and by 1.00% for the Term Loan B
Facility. In addition, the LIBOR floor for the Term Loan B Facility was reduced
from 1.00% to 0.75%. All other terms and conditions remained the same. In
connection with the amendment, transaction costs of US$6.2 million were
incurred. In connection with the acquisition of ABB on November 30, 2012, the
Corporation initially concluded, through two of its US subsidiaries, First Lien
Credit Facilities totaling US$710 in three tranches for a net proceed of
US$641.5 million net of transaction costs of US$18.5 million. The first tranche,
a Term Loan A Facility will mature on November 30, 2017, the second tranche, a
Term Loan B Facility will mature on November 30, 2019 and the third tranche, a
Revolving Credit Facility will mature on November 30, 2017. Effective on
December 31, 2013, the Term Loan A Facility is subject to quarterly amortization
of $3 million in the first year, $6 million in the second year and $7.2 million
in the third and fourth years. Effective on December 31, 2012, the Term Loan B
Facility is subject to quarterly amortization of 0.25% until its maturity date.
In addition to the fixed amortization schedule and commencing in the first
quarter of fiscal 2015, loans under the Term Loan Facilities shall be prepaid
according to a Prepayment Percentage of excess cash flow generated during the
prior fiscal year. The First Lien Credit Facilities are non-recourse to the
Corporation, its Canadian subsidiaries and PEER 1's subsidiaries and are
indirectly secured by a first priority fixed and floating charge on
substantially all present and future real and personal property and undertaking
of every nature and kind of ABB and its subsidiaries. The provisions under these
facilities provide for restrictions on the operations and activities of ABB and
its subsidiaries. Generally, the most significant restrictions relate to
permitted indebtedness and investments, distributions and maintenance of certain
financial ratios.
On May 27, 2013, Cogeco Cable completed pursuant to a public debt offering, the
issue of $300 million Senior Secured Debentures Series "4" (the "Debentures")
for a net proceed of $297.1 million, net of transaction costs of $2.9 million.
These Debentures mature on May 26, 2023 and bear interest at 4.175% 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 Corporation and its subsidiaries except for ABB and certain
immaterial subsidiaries (the "unrestricted subsidiaries"). The provisions under
these Debentures provide for restrictions on the operations and activities of
Cogeco Cable and its subsidiaries except for the unrestricted subsidiaries.
Generally, the most significant restrictions relate to permitted indebtedness,
dispositions and maintenance of certain financial ratios.
On April 23, 2013, Cogeco Cable completed a private placement of $410.4 million
(US$400 million) aggregate principal amount of Senior Unsecured Notes (the "2020
Notes") for a net proceed of $402.6 million (US$392.4 million) net of
transaction costs of $7.8 million (US$7.6 million). These 2020 Notes mature on
May 1, 2020 and bear interest at 4.875% per annum payable semi-annually. These
2020 Notes are guaranteed on a senior unsecured basis, jointly and severally, by
its subsidiaries except for the unrestricted subsidiaries. The provisions under
these 2020 Notes provide for restrictions on the operations and activities of
Cogeco Cable and its subsidiaries except for the unrestricted subsidiaries.
Generally, the most significant restrictions relate to permitted indebtedness,
investments and distributions.
On April 23, 2013, Cogeco Cable reimbursed the Canadian Term Facility of $175
million and the US Term Facility of US$225 million in connection with the
financing for the acquisition of PEER 1. As a result of the acquisition of PEER
1 on January 31, 2013, the Corporation concluded Secured Credit Facilities
totaling approximately $650 million with a syndicate of lenders in four tranches
for a net proceed of $640.3 million net of transaction costs of $2.8 million.
The first tranche, a Canadian Term Facility amounting to $175 million, the
second tranche, a US Term Facility amounting to US$225 million, the third
tranche, a Revolving Facility of $240 million and the fourth tranche, a UK
Revolving Facility of GBP 7 million. The Revolving Facility is available in
Canadian dollars, US dollars, British Pounds and Euros and interest rates are
based on Bankers' Acceptance, LIBOR Loans in US dollars, British Pounds or
Euros, Prime Rate Loans or US and British Pounds Base Rate Loans, plus the
applicable margin. The UK Revolving Facility is available in British Pounds and
interest rates are based on British Pounds Base Rate Loans or British Pounds
LIBOR Loans.
The Secured Credit Facilities will mature on January 31, 2017. The Secured
Credit Facilities are indirectly secured by a first priority fixed and floating
charge on substantially all present and future real and personal property and
undertaking of every nature and kind of the Corporation and most of its
subsidiaries except for the unrestricted subsidiaries, and provides for certain
permitted encumbrances, including purchased money obligations, existing funded
obligations and charges granted by any subsidiary prior to the date when it
becomes a subsidiary, subject to a maximum amount. The provisions under this
facility provide for restrictions on the operations and activities of the
Corporation but do not cover the unrestricted subsidiaries. Generally, the most
significant restrictions relate to permitted investments and dividends on
multiple and subordinate voting shares, as well as incurrence and maintenance of
certain financial ratios primarily linked to operating income before
amortization, financial expense and total indebtedness.
FINANCIAL MANAGEMENT
The Corporation has entered into cross-currency swap agreements to set the
liability for interest and principal payments on its US$190 million Senior
Secured Notes Series A maturing on October 1, 2015. These agreements have the
effect of converting the U.S. interest coupon rate of 7.00% per annum to an
average Canadian dollar interest rate of 7.24% per annum. The exchange rate
applicable to the principal portion of the debt has been fixed at $1.0625 per US
dollar. The Corporation elected to apply cash flow hedge accounting on these
derivative financial instruments. During the first nine months of fiscal 2013,
amounts due under the US$190 million Senior Secured Notes Series A increased by
$9.7 million due to the US dollar's appreciation relative to the Canadian
dollar. The fair value of cross-currency swaps liability decreased by a net
amount of $9.3 million, of which a decrease of $9.7 million offsets the foreign
exchange loss on the debt denominated in US dollars. The difference of $0.4
million was recorded as a decrease of other comprehensive income. During the
first nine months of fiscal 2012, amounts due under the US$190 million Senior
Secured Notes Series A increased by $10.2 million due to the US dollar's
appreciation over the Canadian dollar. The fair value of cross- currency swaps
liability decreased by a net amount of $11.4 million, of which $10.2 million
offsets the foreign exchange loss on the debt denominated in US dollars.
Furthermore, the Corporation's net investment in foreign subsidiaries is exposed
to market risk attributable to fluctuations in foreign currency exchange rates,
primarily changes in the values of the Canadian dollar versus the US dollar and
British Pound. This risk was mitigated since the major part of the purchase
prices for ABB and PEER 1 were borrowed directly in US dollars and British
Pounds. These debts were designated as hedges of net investments in foreign
operations. At May 31, 2013, the net investment for ABB and for PEER 1 amounted
to US$1.1 billion and GBP 66.6 million while long-term debt amounted to US$841.7
million. and GBP 69.1 million.The exchange rate used to convert the US dollar
currency and British Pound currency into Canadian dollars for the statement of
financial position accounts at May 31, 2013 was $1.0368 per US dollar and
$1.5752 per British Pound. The impact of a 10% change in the exchange rate of
the US dollar and British Pound into Canadian dollars would change other
comprehensive income by approximately $27.5 million.
The Corporation is also impacted by foreign currency exchange rates, primarily
changes in the values of the US dollar relative to the Canadian dollar with
regards to purchases of certain equipment, as the majority of customer premise
equipment is purchased and subsequently paid in US dollars. Please consult the
"Foreign Exchange Risk" section in Note 13 of the condensed interim consolidated
financial statements for further details.
DIVIDEND DECLARATION
At its July 10, 2013 meeting, the Board of Directors of Cogeco Cable declared a
quarterly eligible dividend of $0.26 per share for multiple voting and
subordinate voting shares, payable on August 7, 2013, to shareholders of record
on July 24, 2013. The declaration, amount and date of any future dividend will
continue to be considered and approved by the Board of Directors of the
Corporation based upon the Corporation's financial condition, results of
operations, capital requirements and such other factors as the Board of
Directors, at its sole discretion, deems relevant. There is therefore no
assurance that dividends will be declared, and if declared, the amount and
frequency may vary.
SEGMENTED OPERATING RESULTS
The Corporation reports its operating results in three operating segments:
Canadian cable services, American cable services and Enterprise services. The
reporting structure reflects how the Corporation manages the business activities
to make decisions about resources to be allocated to the segment and to assess
its performance. For the purpose of segmented operating results, operating
results from the ABB acquisition are presented in the American cable services
and operating results from the PEER 1 acquisition are included in the Enterprise
services segment.
CANADIAN CABLE SERVICES
CUSTOMER STATISTICS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
% of
Net additions (losses) penetration(1)
Quarters ended Nine months ended
May 31, May 31, May 31, May 31, May 31, May 31, May 31,
2013 2013 2012 2013 2012 2013 2012
----------------------------------------------------------------------------
PSU 1,981,290 (3,265) 6,246 12,157 64,705
Television
service
customers 845,344 (7,363) (4,453) (17,771) (9,112) 50.7 52.9
HSI service
customers 650,325 1,160 2,835 15,791 27,638 39.0 38.3
Telephony
service
customers 485,621 2,938 7,864 14,137 46,179 29.1 28.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) As a percentage of homes passed.
Fiscal 2013 third-quarter and first nine months PSU net additions were lower
than in the comparable periods of the prior year mainly as a result of service
category maturity, competitive offers and tightening of our customer
qualifications. For the third quarter and the first nine months net customer
losses for Television service customers stood at 7,363 and 17,771, respectively,
compared to 4,453 and 9,112 for the same periods of the prior year. Television
service customer net losses are mainly due to the promotional offers of
competitors for the video service combined with the tightening of our customer
credit controls. Fiscal 2013 third-quarter HSI service customers grew by 1,160
compared to 2,835 in the third quarter of the prior year, and the number of net
additions to the Telephony service stood at 2,938 customers compared to 7,864
customers for the same period of the prior year. For the first nine months of
fiscal 2013, net additions for HSI service customers stood at 15,791 and
Telephony net additions at 14,137 compared to 27,638 and 46,179, respectively,
for the comparable periods 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.
OPERATING RESULTS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Nine months ended
May 31, May 31, May 31, May 31,
2013 2012 Change 2013 2012 Change
(in thousands of
dollars, except
percentages) $ $ % $ $ %
----------------------------------------------------------------------------
Revenue 306,401 297,595 3.0 917,389 886,725 3.5
Operating expenses 153,288 149,283 2.7 465,368 465,919 (0.1)
--------------------------------------- ------------------
Operating income
before depreciation
and amortization 153,113 148,312 3.2 452,021 420,806 7.4
--------------------------------------- ------------------
Operating margin 50.0% 49.8% 49.3% 47.5%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue
Fiscal 2013 third-quarter revenue increased by $8.8 million, or 3.0%, to reach
$306.4 million, when compared to the same period last year. For the first nine
months, revenue amounted to $917.4 million, an increase of 3.5% when compared to
the first nine months of fiscal 2012. These increases are primarily due to rate
increases implemented in June and July 2012 in Quebec and Ontario.
Operating expenses
For the period ended May 31, 2013, operating expenses increased by $4.0 million,
or 2.7%, to $153.3 million. For the first nine months, operating expenses
amounted to $465.4 million, a decrease of $0.6 million when compared to the same
period of prior year. Operating expenses increased during the third quarter as a
result of additional personnel to manage the PSU base, programming costs
increases and incentives programs such as bonus, partly offset by cost reduction
initiatives.
Operating income before depreciation and amortization and operating margin
As a result of revenue growth exceeding operating expenses, fiscal 2013
third-quarter operating income before depreciation and amortization amounted to
$153.1 million, or 3.2% higher than in the same period of the prior year. For
the first nine months of fiscal 2013, operating income before depreciation and
amortization amounted to $452.0 million, or 7.4% higher than in the same period
of the prior year. Operating margin increased to 50.0% from 49.8% when compared
to fiscal 2012 third-quarter and from 47.5% to 49.3% for the first nine months
of fiscal 2013 when compared to prior year.
AMERICAN CABLE SERVICES
On November 30, 2012, the Corporation completed the acquisition of ABB, an
independent cable system operator formed in 2003 and providing Analogue and
Digital Television, as well as HSI and Telephony services. ABB operates cable
systems in Western Pennsylvania, Southern Florida, Maryland, Delaware and South
Carolina. Fiscal 2013 nine-month period included six months of operations of
ABB.
CUSTOMER STATISTICS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
% of
Net additions (losses) penetration(1)
Quarters ended Nine months ended
May 31, May 31, May 31, May 31, May 31, May 31, May 31,
2013(2) 2013 2012 2013 2012 2013 2012
----------------------------------------------------------------------------
PSU 488,874 (66) - 3,694 -
Television
service
customers 233,941 (1,044) - (3,372) - 45.3 -
HSI
service
customers 176,170 1,191 - 6,617 - 34.1 -
Telephony
service
customers 78,763 (213) - 449 - 15.2 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1)As a percentage of homes passed.
(2) Include 485,180 PSU (237,313 Television service, 169,553 HSI service
and 78,314 Telephony service customers) from the acquisition of ABB.
In the third quarter of fiscal 2013, PSU from ABB at November 30, 2012
and February 28, 2013 have been adjusted downwards to comply with
Cogeco Cable's and Canadian practices mostly related to reporting the
number of hotels and hotel units.
Fiscal 2013 third-quarter, PSU net losses stood at 66 compared to net additions
of 3,694 for the first nine months. The decrease in PSU for the quarter is
mainly attributable to seasonal variations in the Miami area due to snowbirds
leaving for the summer, partly offset by the increases in residential HSI
subscribers. PSU increases for the first nine months is mostly attributable to
the increase in residential HSI subscribers through additional marketing focus
on bundle package offerings and increased overall demand given the higher speed
offerings with the rollout of DOCSIS 3.0 capabilities in 2012 to a majority of
ABB's markets, as well as increased commercial HSI and Telephony growth driven
by improved sales focus and resources.
OPERATING RESULTS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Nine months ended
May 31, May 31, May 31, May 31,
2013 2012 Change 2013 2012 Change
(in thousands of
dollars, except
percentages) $ $ % $ $ %
----------------------------------------------------------------------------
Revenue 90,394 - - 176,244 - -
Operating
expenses 49,145 - - 95,774 - -
------------------------------------ --------------------
Operating income
before
depreciation
and
amortization 41,249 - - 80,470 - -
------------------------------------ --------------------
Operating margin 45.6% -% 45.7% -%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Fiscal 2013 third-quarter revenue reached $90.4 million mainly as a result of
(i) an increase in HSI revenue from continued marketing focus for this service
offering driving HSI subscriber growth; (ii) an increase in Telephony revenue
generated by increases in subscriber level and an increase in commercial revenue
as ABB continues to expand its non-residential customer base through targeted
marketing efforts. Fiscal 2013 third-quarter operating expenses amounted to
$49.1 million and operating income before depreciation and amortization reached
$41.2 million, and consequently, operating margin stood at 45.6%. ABB's
operating results are in line with management's expectations.
ENTERPRISE SERVICES
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Nine months ended
May 31, May 31, May 31, May 31,
2013 2012 Change 2013 2012 Change
(in thousands of
dollars, except
percentages) $ $ % $ $ %
----------------------------------------------------------------------------
Revenue 68,130 22,669 - 129,610 66,698 94.3
Operating
expenses 44,710 13,248 - 82,063 39,773 -
------------------------------------ --------------------
Operating income
before
depreciation
and
amortization 23,420 9,421 - 47,547 26,925 76.6
------------------------------------ --------------------
Operating margin 34.4% 41.6% 36.7% 40.4%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
OPERATING RESULTS
Revenue
Fiscal 2013 third-quarter revenue reached $68.1 million compared to $22.7
million for the same period last year. For the first nine months, revenue
amounted to $129.6 million, an increase of 94.3% when compared to the first nine
months of fiscal 2012. Revenue increased for both periods primarily due to the
four months results of PEER 1 recently acquired as well as the organic growth of
Cogeco Data Services ("CDS").
Operating expenses
For the third quarter of fiscal 2013, operating expenses increased by $31.5
million to $44.7 million. For the first nine months, operating expenses amounted
to $82.1 million, an increase of $42.3 million when compared to the first nine
months of fiscal 2012. Operating expenses increased for both periods primarily
due to PEER 1 recently acquired as well as CDS's organic growth.
Operating income before depreciation and amortization and operating margin
As a result of revenue growth exceeding the increase in operating expenses,
fiscal 2013 third-quarter operating income before depreciation and amortization
increased by $14.0 million to reach $23.4 million and by $20.6 million, or
76.6%, for the first nine months to reach $47.5 million, when compared to the
same periods of the prior year. Operating margin decreased to 34.4% from 41.6%
in the third quarter and to 36.7% from 40.4% for first nine months compared to
the comparable periods of fiscal 2012 as a result of lower margins business
activities from PEER 1.
FISCAL 2013 FINANCIAL GUIDELINES
Giving effect to the improvement of the Corporation's financial performance in
the Canadian Cable services segment with regards to the operating income before
depreciation and amortization mainly as a result of costs reduction initiatives,
management revised upwards its operating income before depreciation and
amortization projections issued on April 10, 2013 from $767 million to $780
million which should contribute to increase the operating margin from 45.2% to
46.0%. PSU growth should decline from 35,000 to 15,000 as a consequence of a
more competitive environment in the Canadian services segment combined with
service category maturity and tighter customer credit qualification. However,
revenue projections should remain the same as a result of the rate increases
implemented in June 2013 in Quebec and Ontario. Furthermore, the Corporation
will use the net proceeds of the issuance of US$215 million Senior Secured
Notes, under a private placement, on June 27, 2013, and borrow under its credit
facilities to repay, on July 29, 2013, all the outstanding amount of $300
million Senior Secured Debentures Series 1, due on June 9, 2014. Therefore,
financial expense should reach $125 million, an increase of $12 million, mainly
as a result of the estimated make-whole premium on the early repayment of the
Senior Secured Debentures Series 1.
Fiscal 2013 revised financial guidelines are as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revised Revised
projections projections
July 10, 2013 April 10, 2013
Fiscal 2013 Fiscal 2013
(in millions of dollars, except net customer
additions and operating margin) $ $
----------------------------------------------------------------------------
Financial guidelines
Revenue 1,695 1,695
Operating income before depreciation and
amortization 780 767
Operating margin 46.0% 45.2%
Integration, restructuring and acquisition
costs 17 16
Depreciation and amortization 368 368
Financial expense 125 113
Current income tax expense 92 92
Profit for the year 205 205
Acquisitions of property, plant and
equipment, intangible and other assets 401 401
Free cash flow(1) 145 145
Net customer addition guidelines
PSU growth 15,000 35,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Free cash flow is calculated as operating income before depreciation
and amortization less integration, restructuring and acquisition
costs, financial expense, current income tax expense and acquisitions
of property, plant and equipment, intangible and other assets.
FISCAL 2014 PRELIMINARY FINANCIAL GUIDELINES
The fiscal 2014 preliminary financial guidelines take into consideration the
current uncertain global economic environment. These preliminary guidelines also
take into consideration the competitive environment that prevails 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.
For fiscal 2014, Cogeco Cable expects to achieve revenue of $1.935 billion,
representing growth of $240 million, or 14.2% when compared to the revised
fiscal 2013 projections issued on July 10, 2013. Revenue should increase as a
result of the full year impact from the recent acquisitions. In the Cable
services segment, revenue should stem primarily 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 the Corporation's
growing HD service offerings. Revenue will also benefit, in the Canadian cable
services, from the impact of rate increases implemented in June 2013 in Quebec
and Ontario, ranging on average between $2 to $3 per HSI and Telephony service
customers. Cogeco Cable's strategies include consistently effective marketing to
residential and business customers, competitive product offerings and superior
customer service, which combined, lead to the expansion and loyalty of the
Television service clientele. As the penetration of residential HSI, Telephony
and Digital Television services increase, the new demand for these products
should slow in the Canadian cable services, reflecting service category
maturity. However, growth in the commercial and business sector is expected to
continue at a consistent pace in the Cable services segment. In the Enterprise
services segment, revenue growth should stem primarily from the hosting services
and the opening of the Barrie data centre facility.
As a result of the full year impact from the recent acquisitions, the increased
costs to service additional customers, inflation and manpower increases, as well
as the continuation of the marketing initiatives and retention strategies,
operating expenses are expected to expand by approximately $135 million, or
14.8% in the 2014 fiscal year when compared to the revised 2013 projections.
For fiscal 2014, the Corporation expects operating income before depreciation
and amortization of $885 million, an increase of $105 million, or 13.5% when
compared to the revised projections for 2013. The operating margin is expected
to reach approximately 45.7% in fiscal 2014, compared to the revised projections
for the 2013 fiscal year of 46.0%, reflecting operating expenses growth slightly
higher than the revenue growth as well as lower margins business activities from
the Enterprise services segment.
Cogeco Cable expects the depreciation and amortization of property, plant and
equipment and intangible assets to increase by $67 million for fiscal 2014,
mainly from the full year impact of recent acquisitions. Cash flows from
operations should finance capital expenditures and the increase in intangible
assets amounting to $425 million, an increase of $24 million when compared to
the revised 2013 projections. Capital expenditures projected for the 2014 fiscal
year are mainly due to scalable infrastructure for product enhancements and the
deployment of new technologies, line extensions to expand existing territories,
support capital to improve business information systems and support facility
requirements and expansion for the Enterprise services segment in order to
fulfill orders from new customers.
Fiscal 2014 free cash flow is expected to amount to $225 million, an increase of
$80 million, or 55.2% when compared to the projected free cash flow of $145
million for fiscal 2013, resulting from the growth in operating income before
depreciation and amortization, partly offset by additional capital expenditures
and financial expense from the full year impact of the recent acquisitions of
ABB and PEER 1 and by an increase in current income taxes. Generated free cash
flow will reduce Indebtedness net of cash and cash equivalent, thus improving
the Corporation's net leverage ratios. Financial expense should amount to $130
million an increase of $5 million related to ABB's and PEER 1's acquisition
financing. As a result, profit for the year of approximately $245 million should
be achieved compared to $205 million for the revised projections for fiscal
2013.
Fiscal 2014 preliminary financial guidelines are as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revised
Preliminary projections
projections July 10, 2013
Fiscal 2014 Fiscal 2013
(in millions of dollars, except operating
margin) $ $
----------------------------------------------------------------------------
Financial guidelines
Revenue 1,935 1,695
Operating income before depreciation and
amortization 885 780
Operating margin 45.7% 46.0%
Integration, restructuring and acquisition
costs - 17
Depreciation and amortization 435 368
Financial expense 130 125
Current income tax expense 105 92
Profit for the year 245 205
Acquisitions of property, plant and
equipment, intangible and other assets 425 401
Free cash flow(1) 225 145
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1)Free cash flow is calculated as operating income before depreciation
and amortization less integration, restructuring and acquisition
costs, financial expense, current income tax expense and acquisitions
of property, plant and equipment, intangible and other assets.
CONTROLS AND PROCEDURES
The President and Chief Executive Officer ("CEO") and the Senior Vice President
and Chief Financial Officer ("CFO"), together with Management, are responsible
for establishing and maintaining adequate disclosure controls and procedures and
internal controls over financial reporting, as defined in National Instrument
52-109. Cogeco Cable's internal control framework is based on the criteria
published in the report Internal Control- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and is designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with IFRS.
The CEO and CFO, supported by Management, evaluated the design of the
Corporation's disclosure controls and procedures and internal controls over
financial reporting as of May 31, 2013, and have concluded that they are
adequate. Furthermore, no significant changes to the internal controls over
financial reporting occurred during the quarter ended May 31, 2013, except as
described below with respect to ABB and PEER 1.
On November 30, 2012, the Corporation completed the acquisition of ABB and,
subsequently on January 31, 2013 and on April 3, 2013, the Corporation acquired
100% of the issued and outstanding shares of PEER 1. Due to the short period of
time between those acquisition dates and the certification date on July 10,
2013, management was unable to complete its review of the design of Internal
Controls Over Financial Reporting ("ICFR") for the recent acquisitions. At May
31, 2013, risks were however mitigated as management was fully apprised of any
material events affecting these recent acquisitions. In addition, all the assets
and liabilities acquired were valued and recorded in the condensed interim
consolidated financial statements as part of the preliminary purchase price
allocation process and both ABB and PEER 1 results of operations were also
included in the Corporation's consolidated results. ABB constitutes 14% of
revenue, 13% of profit of the period, 33% of the total assets, 23% of the
current assets, 33% of the non current assets, 14% of the current liabilities
and 25% of the non current liabilities of the consolidated condensed interim
financial statements for the nine-month period ended May 31, 2013. PEER 1
constitutes 5% of revenue, -8% of profit of the period, 15% of the total assets,
12% of the current assets, 15% of the non current assets, 10% of the current
liabilities and 10% of the non current liabilities of the consolidated condensed
interim financial statements for the nine-month period ended May 31, 2013. In
the upcoming quarters, management will complete its review of the design of ICFR
for ABB and PEER 1 and assess its effectiveness. The business combinations of
fiscal 2013 under the "Cash flow analysis" section of this MD&A presents summary
financial information about the preliminary purchase price allocation, assets
acquired and liabilities assumed as well as other financial information about
ABB and PEER 1 business impact on the consolidated results of the Corporation.
Other financial information about ABB can be found in the Business Acquisition
Report filed by the Corporation on www.sedar.com, on February 13, 2013.
UNCERTAINTIES AND MAIN RISK FACTORS
The uncertainties and main risk factors faced by the Corporation have not
changed significantly for its Canadian cable services since August 31, 2012,
except for the proposed Astral/Bell amended Arrangement Agreement described
below. A detailed description of the uncertainties and main risk factors faced
by Cogeco Cable can be found in the 2012 Annual Report and the Corporation's
MD&A for the period ended February 28, 2013 filed on SEDAR, available at
www.sedar.com.
On June 27, 2013, the CRTC approved the application by Astral Media Inc.
("Astral") to transfer the control of Astral to BCE Inc. ("Bell"). The CRTC
concluded that the transaction as modified is in the public interest and
advances the objectives set out for the Canadian broadcasting. Specific measures
have been imposed by the CRTC to ensure that the transaction benefits Canadians
and the Canadian broadcasting system. As a part of the conditions, BCE will have
to sell 10 of the radio stations it acquired in the deal as well as 11 specialty
TV channels and be subject to greater increase of regulatory oversight with
respect to affiliation agreements. Bell will control over forty percent (40 %)
of Cogeco Cable's programming service affiliation payments at current wholesale
rates. In the event of future disputes concerning the terms of affiliation
between Cogeco Cable and Bell for services controlled by Bell, the CRTC may set
such terms at either party's request following a dispute resolution process, and
the services may not be interrupted by either party while such dispute
resolution process is pending.
FUTURE ACCOUNTING DEVELOPMENTS IN CANADA
A number of new standards, interpretations and amendments to existing standards
were issued by the International Accounting Standard Board ("IASB") that are
mandatory but not yet effective for the period ended May 31, 2013 and have not
been applied in preparing the condensed interim consolidated financial
statements. These standards are described under "Future accounting developments
in Canada" in the Corporation's 2012 annual MD&A, available at www.sedar.com and
www.cogeco.ca.
CHANGES IN CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There has been no significant change in Cogeco Cable's accounting policies,
estimates and future accounting pronouncements since August 31, 2012. A
description of the Corporation's policies and estimates can be found in the 2012
Annual Report, available at www.sedar.com and www.cogeco.ca.
NON-IFRS FINANCIAL MEASURES
This section describes non-IFRS financial measures used by Cogeco Cable
throughout this MD&A. It also provides reconciliations between these non-IFRS
measures and the most comparable IFRS financial measures. These financial
measures do not have standard definitions prescribed by IFRS and therefore, may
not be comparable to similar measures presented by other companies. These
measures include "cash flow from operations", "free cash flow", "operating
income before depreciation and amortization" and "operating margin".
CASH FLOW FROM OPERATIONS AND FREE CASH FLOW
Cash flow from operations is used by Cogeco Cable's management and investors to
evaluate cash flows generated by operating activities, excluding the impact of
changes in non-cash operating activities, amortization of deferred transaction
costs and discounts on long-term debt, income taxes paid, current income tax
expense, financial expense paid and financial expense. This allows the
Corporation to isolate the cash flows from operating activities from the impact
of cash management decisions. Cash flow from operations is subsequently used in
calculating the non-IFRS measure, "free cash flow". Free cash flow is used, by
Cogeco Cable's management and investors, to measure its ability to repay debt,
distribute capital to its shareholders and finance its growth.
The most comparable IFRS measure is cash flow from operating activities. Cash
flow from operations is calculated as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Nine months ended
May 31, 2013 May 31, 2012 May 31, 2013 May 31, 2012
(in thousands of
dollars) $ $ $ $
----------------------------------------------------------------------------
Cash flow from operating
activities 166,976 112,275 316,780 247,043
Changes in non-cash
operating activities 2,526 12,083 78,708 71,572
Amortization of deferred
transaction costs and
discounts on long-term
debt 3,580 713 7,043 2,070
Income taxes paid 16,894 10,821 76,902 64,638
Current income tax
expense (25,789) (24,044) (73,907) (69,740)
Financial expense paid 26,827 17,600 70,542 47,147
Financial expense (35,032) (16,373) (79,726) (47,990)
----------------------------------------------------------------------------
Cash flow from
operations 155,982 113,075 396,342 314,740
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Free cash flow is calculated as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Nine months ended
May 31, 2013 May 31, 2012 May 31, 2013 May 31, 2012
(in thousands of
dollars) $ $ $ $
----------------------------------------------------------------------------
Cash flow from
operations 155,982 113,075 396,342 314,740
Acquisition of property,
plant and equipment (108,325) (83,479) (286,457) (240,406)
Acquisition of
intangible and other
assets (4,516) (3,980) (13,650) (10,570)
----------------------------------------------------------------------------
Free cash flow 43,141 25,616 96,235 63,764
----------------------------------------------------------------------------
----------------------------------------------------------------------------
OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION AND OPERATING MARGIN
Operating income before depreciation and amortization is used by Cogeco Cable's
management and investors to assess the Corporation's ability to seize growth
opportunities in a cost effective manner, to finance its ongoing operations and
to service its debt. Operating income before depreciation and amortization is a
proxy for cash flows from operations excluding the impact of the capital
structure chosen, and is one of the key metrics used by the financial community
to value the business and its financial strength. Operating margin is a measure
of the proportion of the Corporation's revenue which is available, before income
taxes, to pay for its fixed costs, such as interest on Indebtedness. Operating
margin is calculated by dividing operating income before depreciation and
amortization by revenue.
The most comparable IFRS financial measure is operating income. Operating income
before depreciation and amortization and operating margin are calculated as
follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Nine months ended
May 31, 2013 May 31, 2012 May 31, 2013 May 31, 2012
(in thousands of
dollars, except
percentages) $ $ $ $
----------------------------------------------------------------------------
Operating income 109,648 90,981 288,529 217,471
Depreciation and
amortization 103,383 61,680 252,640 210,756
Integration,
restructuring and
acquisitions costs 2,101 - 16,865 -
----------------------------------------------------------------------------
Operating income before
depreciation and
amortization 215,132 152,661 558,034 428,227
----------------------------------------------------------------------------
Revenue 464,497 319,771 1,222,080 952,930
----------------------------------------------------------------------------
Operating margin 46.3% 47.7% 45.7% 44.9%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Quarters ended February February
May 31, 28, 29,
(in thousands of dollars,
except percentages and
pershare data) 2013 2012 2013 2012
$ $ $ $
---------------------------------------------------------------------------
Revenue 464,497 319,771 429,672 317,735
Operating income before
depreciation and amortization 215,132 152,661 195,776 143,743
Operating margin 46.3% 47.7% 45.6% 45.2%
Operating income 109,648 90,981 103,721 59,491
Income taxes 21,358 21,449 16,169 13,617
Profit for the period from
continuing operations 53,258 53,159 58,458 31,086
Profit for the period from
discontinued operations - - - 52,047
Profit for the period 53,258 53,159 58,458 83,133
Profit for the period
attributable to owners of the
Corporation 53,056 53,159 58,660 83,133
Cash flow from operating
activities 166,976 112,275 150,084 120,961
Cash flow from operations 155,982 113,075 140,515 104,622
Acquisitions of property, plant
and equipment, intangible and
other assets 112,841 87,459 104,433 86,234
Free cash flow 43,141 25,616 36,082 18,388
Earnings per share(1)
From continuing and
discontinued operations
Basic 1.09 1.09 1.20 1.71
Diluted 1.08 1.09 1.19 1.70
From continuing operations
Basic 1.09 1.09 1.20 0.64
Diluted 1.08 1.09 1.19 0.63
From discontinued operations
Basic - - - 1.07
Diluted - - - 1.06
---------------------------------------------------------------------------
---------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended November 30, August 31,
(in thousands of dollars,
except percentages and
pershare data) 2012 2011 2012 2011
$ $ $ $
----------------------------------------------------------------------------
Revenue 327,911 315,424 324,768 305,811
Operating income before
depreciation and amortization 147,126 131,823 160,825 151,579
Operating margin 44.9% 41.8% 49.5% 49.6%
Operating income 75,160 66,999 94,709 97,941
Income taxes 17,400 10,603 32,987 20,713
Profit for the period from
continuing operations 42,160 39,567 45,705 62,745
Profit for the period from
discontinued operations - 3,399 - 6,219
Profit for the period 42,160 42,966 45,705 68,964
Profit for the period
attributable to owners of the
Corporation 42,160 42,966 45,705 68,964
Cash flow from operating
activities (280) 13,807 203,343 211,847
Cash flow from operations 99,845 97,043 126,946 144,699
Acquisitions of property, plant
and equipment, intangible and
other assets 82,833 77,283 124,392 120,663
Free cash flow 17,012 19,760 2,554 24,036
Earnings per share(1)
From continuing and
discontinued operations
Basic 0.87 0.88 0.94 1.42
Diluted 0.86 0.88 0.93 1.42
From continuing operations
Basic 0.87 0.81 0.94 1.29
Diluted 0.86 0.81 0.93 1.29
From discontinued operations
Basic - 0.07 - 0.13
Diluted - 0.07 - 0.13
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Per multiple and subordinate voting share.
SEASONAL VARIATIONS
Cogeco Cable's operating results are not generally subject to material seasonal
fluctuations except as follows. In the Canadian cable services segment, the
customer growth in the Television service customers and HSI service are
generally lower in the second half of the fiscal year as a result of a decrease
in economic activity due to the beginning of the vacation period, the end of the
television season, and students leaving their campuses at the end of the school
year. Cogeco Cable offers its services in several university and college towns
such as Kingston, Windsor, St.Catharines, Hamilton, Peterborough, Trois-Rivieres
and Rimouski in Canada. In the American cable services segment, the customer
growth in the Television service customers and HSI service are also generally
lower in the second half of the fiscal year as a result of a decrease in
economic activity due to the snowbirds leaving for the summer season essentially
in the Miami area. Furthermore, the third and fourth quarter's operating margin
is 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 2013, Cogeco Cable will not pay management fees in the
second half of fiscal 2013. Similarly, as the maximum amount was paid in the
first six months of fiscal 2012, Cogeco Cable paid no management fees in the
second half of the previous fiscal year.
ADDITIONAL INFORMATION
This MD&A was prepared on July 10, 2013. Additional information relating to the
Corporation, including its Annual Information Form, is available on the SEDAR
website at www.sedar.com.
/s/ Jan Peeters /s/ Louis Audet
--------------------------------- ---------------------------------
Jan Peeters Louis Audet
Chairman of the Board President and Chief Executive
Officer
Cogeco Cable Inc.
Montreal, Quebec
July 10, 2013
CUSTOMER STATISTICS
--------------------------------------------------------------------------
--------------------------------------------------------------------------
May 31, February 28, November 30, August 31, May 31,
2013 2013 2012 2012 2012
--------------------------------------------------------------------------
Primary
service
units(1) 2,470,164 2,473,495 2,469,393 1,969,133 1,962,174
CANADA 1,981,290 1,984,555 1,984,213 1,969,133 1,962,174
US 488,874 488,940 (2) 485,180 (2) - -
--------------------------------------------------------------------------
Television
service
customers 1,079,285 1,087,692 1,098,352 863,115 868,873
CANADA 845,344 852,707 861,039 863,115 868,873
Penetration
as a
percentage
of homes
passed 50.7% 51.4% 52.1% 52.4% 52.9%
US 233,941 234,985 237,313 - -
Penetration
as a
percentage
of homes
passed 45.3% 45.5% 46.0% - -
--------------------------------------------------------------------------
Digital
Television
service
customers 924,155 922,703 922,576 771,503 765,585
CANADA 779,950 778,728 780,724 771,503 765,585
Penetration
as a
percentage
of homes
passed 46.8% 46.9% 47.2% 46.8% 46.6%
US 144,205 143,975 141,852 - -
Penetration
as a
percentage
of homes
passed 27.9% 27.9% 27.5% - -
--------------------------------------------------------------------------
Analogue
Television
service
customers 155,130 164,989 175,776 91,612 103,288
CANADA 65,394 73,979 80,315 91,612 103,288
Penetration
as a
percentage
of homes
passed 3.9% 4.5% 4.9% 5.6% 6.3%
US 89,736 91,010 95,461 - -
Penetration
as a
percentage
of homes
passed 17.4% 17.6% 18.5% - -
--------------------------------------------------------------------------
High Speed
Internet
service
customers 826,495 824,144 814,932 634,534 628,852
CANADA 650,325 649,165 645,379 634,534 628,852
Penetration
as a
percentage
of homes
passed 39.0% 39.1% 39.0% 38.5% 38.3%
US 176,170 174,979 169,553 - -
Penetration
as a
percentage
of homes
passed 34.1% 33.9% 32.9% - -
--------------------------------------------------------------------------
Telephony
service
customers 564,384 561,659 556,109 471,484 464,449
CANADA 485,621 482,683 477,795 471,484 464,449
Penetration
as a
percentage
of homes
passed 29.1% 29.1% 28.9% 28.6% 28.3%
US 78,763 78,976 78,314 - -
Penetration
as a
percentage
of homes
passed 15.2% 15.3% 15.2% - -
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) Represents the sum of Television, High Speed Internet ("HSI") and
Telephony service customer.
(2)In the third quarter of fiscal 2013, PSU from ABB at November 30, 2012
and February 28, 2013 have been adjusted downwards to comply with
Cogeco Cable's and Canadian practices mostly related to reporting the
number of hotels and hotel units.
FOR FURTHER INFORMATION PLEASE CONTACT:
Source:
Cogeco Cable Inc.
Pierre Gagne
Senior Vice President and Chief Financial Officer
514-764-4700
Information:
Media
Rene Guimond
Vice-President, Public Affairs and Communications
514-764-4700
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