Today, Cogeco Cable Inc. (TSX:CCA) ("Cogeco Cable" or the "Corporation")
announced its financial results for the third quarter of fiscal 2014, ended May
31, 2014, in accordance with International Financial Reporting Standards
("IFRS").
For the third quarter and first nine months of fiscal 2014:
- Third quarter revenue increased by $32.0 million, or 6.9%, to reach $496.4
million driven by growth of 3.5% in the Canadian cable services segment, of
12.2% in the American cable services segment and of 15.3% in the Enterprise
services segment. Revenue increased organically from all of our operating units
combined with favorable foreign exchange rates in our foreign operations. For
the nine-month period ended May 31, 2014, revenue reached close to $1.5 billion,
an increase of $235.4 million, or 19.3% driven by growth of 2.4% in the Canadian
cable services segment, of 65.7% in the American cable services segment and of
75.4% in the Enterprise services segment. Revenue increased mainly attributable
to the full year impact of the acquisitions of Atlantic Broadband and Peer 1
Hosting(2) ("the recent acquisitions") which both occurred during fiscal 2013
combined with the organic growth from all of our operating segments and
favorable foreign exchange rates in our foreign operations;
- Adjusted EBITDA(1) increased by 6.6% to $229.4 million compared to the third
quarter of fiscal 2013, and by 18.7% to $662.5 million for the first nine months
compared to the same period of the prior year. The rapid progression for both
periods resulted mainly from the recent acquisitions, the improvement in all of
our operating segments as well as the favorable foreign exchange rates for our
foreign operations compared to the same period of last year;
- Operating margin(1) slightly decreased to 46.2% in the quarter and to 45.5% in
the first nine months compared to 46.3% and 45.7% for the same periods of the
prior year as a result of lower margins from the business activities of the
American cable services and Enterprise services segments;
- During the third quarter of fiscal 2014, the Corporation's subsidiary, Cogeco
Cable Canada, recognized an impairment of $32.2 million of property, plant and
equipment, capitalized wages and borrowing costs related to an Internet Protocol
Television ("IPTV") solution project on which its Canadian cable services
segment had worked. As a result of the unexpected performance issues encountered
with the platform, it had to be abandoned by Cogeco Cable Canada.
Subsequently, in order to enhance its competitiveness, Cogeco Cable Canada has
concluded a partnership with TiVo Inc. ("TiVo"), a global leader in
next-generation television services that enable viewers to consume content
across all screens in and out-of-the home to be launched at Cogeco Cable Canada
by mid-fiscal 2015. The TiVo solution was successfully launched in the first
half of fiscal 2014 at the Corporation's Atlantic Broadband subsidiary with
great customer acceptance;
- Profit for the third quarter amounted to $35.5 million compared to $48.1
million in fiscal 2013. The decline for the quarter is attributable to the
impairment of property, plant and equipment explained above, partly offset by
the improvement of the adjusted EBITDA. For the first nine months of fiscal
2014, profit for the period amounted to $145.6 million compared to $141.0
million for the comparable period of the prior year. Profit progression for the
period is mostly attributable to the improvement of the adjusted EBITDA
explained above combined with the decrease in integration, restructuring and
acquisition costs, partly offset by the impairment of property, plant and
equipment also explained above as well as the increases in financial expense and
depreciation and amortization expense essentially related to the recent
acquisitions;
- Third quarter free cash flow(1) increased by $48.1 million to reach $91.1
million compared to $43.0 million in the third quarter of fiscal 2013. This
increase is mainly due to the improvement of adjusted EBITDA and the decrease in
acquisitions of property, plant and equipment due to the timing of certain
initiatives. For the first nine months, free cash flow increased by $156.6
million to reach $252.5 million compared to $95.9 million for the same period of
fiscal 2013. This variance is mostly attributable to the improvement of adjusted
EBITDA, the decrease in acquisitions of property, plant and equipment due to the
timing of certain initiatives as well as the decrease in integration,
restructuring and acquisition costs, partly offset by the increase in financial
expense due to higher indebtedness level from the recent acquisitions;
- Fiscal 2014 third-quarter cash flow from operating activities reached $184.4
million compared to $167.0 million, an increase of $17.5 million, or 10.5%,
compared to fiscal 2013 third-quarter. The increase is mainly attributable to
the improvement of the adjusted EBITDA and the increase in changes in non-cash
operating activities, partly offset by the increase in financial expense paid.
For the first nine months of fiscal 2014, cash flow from operating activities
reached $429.2 million compared to $316.8 million, an increase of $112.4
million, or 35.5%, compared to the same period in fiscal 2013. The increase is
mostly attributable to the improvement of the adjusted EBITDA as well as the
decreases in integration, restructuring and acquisitions costs and in income tax
paid, partly offset by the increase in financial expense paid; and
- A quarterly dividend of $0.30 per share was paid to the holders of subordinate
and multiple voting shares, an increase of $0.04 per share, or 15.4%, compared
to a dividend of $0.26 per share paid in the third quarter of fiscal 2013.
Dividend payments in the first nine months totaled $0.90 per share in fiscal
2014 compared to $0.78 per share in the comparable period of fiscal 2013.
(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.
(2) Peer 1 Hosting refers to Peer 1 Network (USA) Holdings Inc., Peer 1 (UK)
Ltd. and Peer 1 Network Enterprises, Inc.
"We continue to be pleased with our solid quarterly results. The improvement of
our adjusted EBITDA, in these highly competitive industries, stemmed from
generating more revenue from current and new customers while maintaining
appropriate cost controls. This enabled us to keep growing and achieving the
Corporation's financial objectives," declared Louis Audet, President and Chief
Executive Officer of Cogeco Cable Inc.
"Moreover, I am delighted that we were able to build on the success achieved by
the TiVo video platform at our Atlantic Broadband subsidiary by extending our
partnership to bring this world leading platform to our Canadian customers at
our Cogeco Cable Canada subsidiary. We expect to launch by mid-fiscal 2015.
Excluding the impact of the impairment related to the prior attempt at
developing an alternate IPTV video platform, we expect to meet our Fiscal 2014
guidance" concluded Louis Audet.
ABOUT COGECO CABLE
Cogeco Cable Inc. (www.cogeco.ca) is a telecommunications corporation. It is the
11th largest cable operator in North America operating in Canada under the
Cogeco Cable Canada name in Quebec and Ontario, and in the United States under
the Atlantic Broadband name in Western Pennsylvania, South Florida,
Maryland/Delaware and South Carolina. Its two-way broadband fibre networks
provide to its residential and business customers analogue and digital
television, high speed Internet and telephony services. Through its subsidiaries
Cogeco Data Services and Peer 1 Hosting, Cogeco Cable Inc. provides to its
commercial customers a suite of information technology services (colocation,
managed and dedicated hosting, managed IT, cloud and connectivity services),
with 20 data centres, extensive fibre networks in Montreal and Toronto as well
as points-of-presence in North America and Europe. Cogeco Cable Inc.'s
subordinate voting shares are listed on the Toronto Stock Exchange (TSX:CCA).
Analyst
Conference
Call: Thursday, July 10, 2014 at 11:00 a.m. (Eastern Daylight Time)
Media representatives may attend as listeners only.
Please use the following dial-in number to have access to the
conference call by dialing five minutes before the start of the
conference:
Canada/United States Access Number: 1 800-820-0231
International Access Number: + 1 416-640-5926
Confirmation Code: 2083261
By Internet at www.cogeco.ca/investors
A rebroadcast of the conference call will be available until
July 16, 2014, by dialing:
Canada and United States access number: 1 888-203-1112
International access number: + 1 647-436-0148
Confirmation code: 2083261
FINANCIAL HIGHLIGHTS
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Quarters ended Nine months ended
(in thousands of
dollars, except
percentages and per
share data) May 31, May 31, May 31, May 31,
2014 2013 (2) Change 2014 2013 (2) Change
$ $ % $ $ %
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Operations
Revenue 496,448 464,497 6.9 1,457,436 1,222,080 19.3
Adjusted EBITDA(1) 229,389 215,182 6.6 662,527 558,184 18.7
Operating margin(1) 46.2% 46.3% - 45.5% 45.7% -
Impairment of
property, plant and
equipment 32,197 - - 32,197 - -
Profit for the
period 35,514 48,079 (26.1) 145,593 141,025 3.2
Profit for the
period attributable
to owners of the
Corporation 35,514 47,877 (25.8) 145,593 141,025 3.2
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Cash Flow
Cash flow from
operating
activities 184,435 166,976 10.5 429,173 316,780 35.5
Cash flow from
operations(1) 175,595 155,868 12.7 502,872 396,000 27.0
Acquisitions of
property, plant and
equipment,
intangible and
other assets 84,452 112,841 (25.2) 250,347 300,107 (16.6)
Free cash flow(1) 91,143 43,027 - 252,525 95,893 -
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Financial
Condition(3)
Property, plant and
equipment - - - 1,773,325 1,854,155 (4.4)
Total assets - - - 5,206,189 5,254,419 (0.9)
Indebtedness(4) - - - 2,858,303 2,944,182 (2.9)
Shareholders' equity - - - 1,456,730 1,342,940 8.5
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Capital intensity(1) 17.0% 24.3% - 17.2% 24.6% -
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Per Share Data(5)
Earnings per share
Basic 0.73 0.98 (25.5) 2.99 2.90 3.1
Diluted 0.72 0.98 (26.5) 2.96 2.88 2.8
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(1) The indicated terms do not have standardized definitions prescribed by
International Financial Reporting Standards ("IFRS") and therefore, may
not be comparable to similar measures presented by other companies. For
more details, please consult the "Non-IFRS financial measures" section
of the Management's discussion and analysis ("MD&A").
(2) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note 2
of the condensed interim consolidated financial statements.
(3) At May 31, 2014 and August 31, 2013.
(4) Indebtedness is defined as the aggregate of bank indebtedness, principal
on long-term debt and obligations under derivative financial
instruments.
(5) Per multiple and subordinate voting share.
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MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)
Three and nine-month periods ended May 31, 2014
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 2013 annual MD&A 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 namely risks pertaining to
markets and competition, technology, regulatory developments, operating costs,
information systems, disasters or other contingencies, financial risks related
to capital requirements, human resources, controlling shareholder and holding
structure, many of which are beyond the Corporation's control. Therefore, future
events and results may vary significantly from what management currently
foresees. The reader should not place undue importance on forward-looking
information and should not rely upon this information as of any other date.
While management may elect to, the Corporation is under no obligation and does
not undertake to update or alter this information at any particular time, except
as may required by law.
All amounts are stated in Canadian dollars unless otherwise indicated. This
report should be read in conjunction with the Corporation's condensed interim
consolidated financial statements and the notes thereto for the three and
nine-month periods ended May 31, 2014, prepared in accordance with the
International Financial Reporting Standards ("IFRS") and the MD&A included in
the Corporation's 2013 Annual Report.
CORPORATE OBJECTIVES AND STRATEGIES
Cogeco Cable Inc.'s ("Cogeco Cable" or the "Corporation") objectives are to
provide outstanding service to its customers, improve profitability and create
shareholder value. To achieve these objectives, the Corporation has developed
strategies that focus on expanding its service offering and enhancing its
existing services or bundles, improving the networks, improving customer
experience and business processes as well as keeping a sound capital management
and a strict control over spending. The Corporation measures its performance,
with regard to these objectives by monitoring adjusted EBITDA(1), operating
margin(1), free cash flow(1) and capital intensity(1).
KEY PERFORMANCE INDICATORS
ADJUSTED EBITDA AND OPERATING MARGIN
For the nine-month period ended May 31, 2014, adjusted EBITDA increased by 18.7%
to reach $662.5 million compared to the same period of fiscal 2013 and operating
margin slightly decreased to 45.5% from 45.7%. Improvement in the adjusted
EBITDA is mainly attributable to the full impact of the acquisitions of Atlantic
Broadband and Peer 1 Hosting(2) (the "recent acquisitions") which occurred at
the end of the first quarter and in the second quarter of fiscal 2013,
respectively, combined with the favorable foreign exchange rates benefiting our
foreign operations as well as the organic growth in the Canadian cable services
segment.
FREE CASH FLOW
For the nine-month period ended May 31, 2014, Cogeco Cable reported free cash
flow of $252.5 million, an increase of $156.6 million compared to $95.9 million
for the same period of the previous fiscal year. This variance is mostly
attributable to the improvement of adjusted EBITDA explained above, the decrease
in acquisitions of property, plant and equipment due to the timing of certain
initiatives as well as the decrease in integration, restructuring and
acquisition costs, partly offset by the increase in financial expense due to
higher indebtedness level from the recent acquisitions.
CAPITAL INTENSITY AND ACQUISITIONS OF PROPERTY, PLANT AND EQUIPMENT, INTANGIBLE
AND OTHER ASSETS
During the nine-month period ended May 31, 2014, the acquisitions of property,
plant and equipment, intangible and other assets amounted to $250.3 million and
revenue close to $1.5 billion for a capital intensity ratio of 17.2% compared to
24.6% in the comparable period of the prior year. Capital intensity ratio has
declined mainly as result of higher revenue for the first nine months of fiscal
2014 as a result of the full impact of the recent acquisitions combined with
lower acquisitions of property, plant and equipment, intangible and other assets
due to the timing of certain initiatives compared to the same period of the
prior year. For further details on the Corporation's capital expenditures please
refer to the "Cash flow analysis" section.
BUSINESS DEVELOPMENTS AND OTHER
During the third quarter of fiscal 2014, the Corporation's subsidiary, Cogeco
Cable Canada, recognized an impairment of $32.2 million of property, plant and
equipment, capitalized wages and borrowing costs related to an Internet Protocol
Television ("IPTV") solution project on which its Canadian cable services
segment had worked. As a result of the unexpected performance issues encountered
with the platform, it had to be abandoned by Cogeco Cable Canada. Subsequently,
in order to enhance its competitiveness, Cogeco Cable Canada has concluded a
partnership with TiVo Inc. ("TiVo"), a global leader in next-generation
television services that enable viewers to consume content across all screens in
and out-of-the home to be launched at Cogeco Cable Canada by mid-fiscal 2015.
The TiVo solution was successfully launched in the first half of fiscal 2014 at
the Corporation's Atlantic Broadband subsidiary with great customer acceptance.
On June 30, 2014, Cogeco Cable's subsidiary, Atlantic Broadband, amended its
First Lien Credit Facilities. Pursuant to the amendment, US$15 million of the
Term Loan A Facility was converted into the Revolving Facility. In addition, the
Revolving Facility was increased by US$35 million of which the proceeds were
used to reimburse a portion of the Term Loan B. Giving effect to this amendment,
the combined amounts borrowed under the Term Loan A, Term Loan B and the
Revolving Facility have not changed. All other terms and conditions related to
covenants, interest rates and maturity remained the same. In connection with the
amendment, transaction costs of US$0.4 million were incurred which are expected
to be more than off-set by interest expense savings over the next year.
(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) Peer 1 Hosting refers to Peer 1 Network (USA) Holdings Inc., Peer 1 (UK)
Ltd. and Peer 1 Network Enterprises, Inc.
OPERATING AND FINANCIAL RESULTS
OPERATING RESULTS
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Quarters ended Nine months ended
May 31, May 31, May 31, May 31,
2014 2013 (1) Change 2014 2013 (1) Change
(in thousands of
dollars, except
percentages) $ $ % $ $ %
----------------------------------------------------------------------------
Revenue 496,448 464,497 6.9 1,457,436 1,222,080 19.3
Operating expenses 267,059 249,315 7.1 785,235 654,327 20.0
Management fees -
COGECO Inc. - - - 9,674 9,569 1.1
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Adjusted EBITDA 229,389 215,182 6.6 662,527 558,184 18.7
--------------------------------------- -----------------------
Operating margin 46.2% 46.3% 45.5% 45.7%
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(1) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note 2
of the condensed interim consolidated financial statements.
REVENUE
Fiscal 2014 third-quarter revenue increased by $32.0 million, or 6.9%, to reach
$496.4 million driven by growth of 3.5% in the Canadian cable services segment,
of 12.2% in the American cable services segment and of 15.3% in the Enterprise
services segment. Revenue increased organically from all of our operating units
combined with favorable foreign exchange rates for our foreign operations. For
the nine-month period ended May 31, 2014, revenue reached approximately $1.5
billion, an increase of $235.4 million, or 19.3% driven by growth of 2.4% in the
Canadian cable services segment, of 65.7% in the American cable services segment
and of 75.4% in the Enterprise services segment. Revenue increased mainly
attributable to the full year impact of the recent acquisitions which both
occurred during fiscal 2013 combined with the organic growth from all of our
operating segments and favorable foreign exchange rates in our foreign
operations. For further details on the Corporation's revenue, please refer to
the "Segmented operating results" section.
OPERATING EXPENSES AND MANAGEMENT FEES
For the third quarter of fiscal 2014, operating expenses increased by $17.7
million, to reach $267.1 million, an increase of 7.1% compared to the prior
year. For the first nine months of the fiscal year, operating expenses amounted
to $785.2 million, an increase of $130.9 million, or 20.0%, compared to the same
period of fiscal 2013. Operating expenses increased was due to the full year
impact of the recent acquisitions and the appreciation of the US dollar and
British Pound currency compared to the Canadian dollar. For further details on
the Corporation's operating expenses, please refer to the "Segmented operating
results" section.
For the third quarter of fiscal 2014 and 2013, there was no management fees paid
to COGECO Inc. For the first nine months of the fiscal year 2014, management
fees paid to COGECO Inc. amounted to $9.7 million, 1.1% higher compared to $9.6
million in the comparable period of fiscal 2013. For further details on the
Corporation's management fees, please refer to the "Related party transactions"
section.
ADJUSTED EBITDA AND OPERATING MARGIN
For the three and nine-month periods ended May 31, 2014, adjusted EBITDA
increased by $14.2 million, or 6.6%, to reach $229.4 million, and by $104.3
million, or 18.7%, to reach $662.5 million, respectively, compared to the
comparable periods of the prior year. The increase for the quarter is mainly
attributable to the improvement from all our operating segments as well as the
favorable foreign exchange rates for our foreign operations compared to the same
periods of last year while the increase for the first nine months is largely
attributable to the full year impact of the recent acquisitions. Cogeco Cable's
third-quarter operating margin slightly decreased to 46.2% from 46.3% and to
45.5% from 45.7% for the first nine months of fiscal 2014 compared to the
comparable periods of the prior year essentially due to lower margin business
activities from the American cable services and Enterprise services segments.
For further details on the Corporation's adjusted EBITDA and operating margin,
please refer to the "Segmented operating results" section.
FIXED CHARGES
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Quarters ended Nine months ended
May 31, May 31, May 31, May 31,
2014 2013 (1) Change 2014 2013 (1) Change
(in thousands of
dollars, except
percentages) $ $ % $ $ %
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Depreciation and
amortization 117,653 111,445 5.6 346,540 268,611 29.0
Financial expense 32,038 35,146 (8.8) 97,505 80,068 21.8
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(1) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note 2
of the condensed interim consolidated financial statements.
For the three and nine-month periods ended May 31, 2014, depreciation and
amortization expense amounted to $117.7 million and $346.5 million,
respectively, compared to $111.4 million and $268.6 million for the same periods
of the prior year. The increase for the quarter is mostly attributable to the
appreciation of the US dollar and the British Pound currency compared to the
Canadian dollar. The increase for the first nine months of fiscal 2014 results
mainly from the full year impact of the recent acquisitions, which occurred at
the end of the first quarter and in the second quarter of fiscal 2013 and by
currency appreciation of the US dollar and the British Pound compared to the
Canadian dollar.
Fiscal 2014 third-quarter financial expense decreased by 8.8% to $32.0 million
compared to $35.1 million in fiscal 2013 third-quarter as a result of a lower
indebtedness level. For the first nine months of fiscal 2014, financial expense
increased by $17.4 million, or 21.8%, at $97.5 million, compared to $80.1
million in the prior year as a result of the full year impact of financing costs
related to the recent acquisitions.
IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT
During the third quarter of fiscal 2014, the Corporation's subsidiary, Cogeco
Cable Canada, recognized an impairment of $32.2 million of property, plant and
equipment, capitalized wages and borrowing costs related to an IPTV solution
project on which its Canadian Cable services segment had worked. As a result of
the unexpected performance issues encountered with the platform, it had to be
abandoned by Cogeco Cable Canada.
INCOME TAXES
For the three and nine-month periods ended May 31, 2014, income tax expense
amounted to $8.8 million and $36.9 million, respectively, compared to $18.4
million and $51.6 million, respectively, for the comparable periods in the prior
year. The decrease is mostly attributable to the impairment of property, plant
and equipment, the increase in fixed charges as well as the favorable impact of
the tax structure following the recent acquisitions, partly offset by the
improvement in adjusted EBITDA.
PROFIT FOR THE PERIOD
For the third quarter of fiscal 2014, profit for the period amounted to $35.5
million, or $0.73 per share, compared to $48.1 million, or $0.98 per share last
year. The decline for the quarter is attributable to the impairment of property,
plant and equipment explained above, partly offset by the improvement of the
adjusted EBITDA. For the nine-month period ended May 31, 2014, profit for the
period amounted to $145.6 million, or $2.99 per share, compared to $141.0
million, or $2.90 for the comparable period. Profit progression for the period
is mostly attributable to the improvement of the adjusted EBITDA explained above
as well as the decrease in integration, restructuring and acquisition costs,
partly offset by the impairment of property, plant and equipment and the
increase in fixed charges explained above.
CUSTOMER STATISTICS
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Consolidated UNITED STATES CANADA
May 31,
2014
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PSU (1) 2,452,118 495,674 1,956,444
Television service customers 1,034,991 227,160 807,831
HSI service customers 865,597 188,795 676,802
Telephony service customers 551,530 79,719 471,811
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Consolidated
Net additions (losses) Net additions (losses)
Quarters ended Nine months ended
May 31, May 31, May 31, May 31,
2014 2013 2014 2013
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PSU (1) (2,509) (1,079) (15,539) 20,783
Television service customers (9,620) (8,407) (31,961) (21,143)
HSI service customers 7,811 4,603 27,152 27,340
Telephony service customers (700) 2,725 (10,730) 14,586
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(1) Represents the sum of Television, High Speed Internet ("HSI") and
Telephony service customers.
At May 31, 2014, PSU reached 2,452,118 of which 1,956,444 came from the Canadian
cable services segment and 495,674 came from the American cable services
segment. For the three and nine-month periods ended May 31, 2014, PSU net losses
stood at 2,509 and 15,539, respectively, compared to 1,079 and net additions of
20,783 for the comparable periods of fiscal 2013. Fiscal 2014 third-quarter and
first nine months net losses for Television service customers stood at 9,620 and
31,961 compared to 8,407 and 21,143, HSI service customers grew by 7,811 and
27,152 compared to 4,603 and 27,340 and the Telephony service customers net
losses stood at 700 and 10,730 compared to net additions of 2,725 and 14,586 for
the comparable periods of fiscal 2013. HSI net additions continued to stem from
the enhancement of the product offering and the positive impact of the bundle
offer.
In the Canadian cable services segment, PSU decreased by 5,633 for the
third-quarter of fiscal 2014, compared to a decrease of 1,013 for the comparable
period last year. For the first nine months of fiscal 2014, PSU decreased by
23,678, compared to an increase of 17,089 for the comparable period in 2013. The
decrease is explained by service category maturity and a much more competitive
environment for all services.
In the American cable services segment, PSU increased by 3,124 for the
third-quarter of fiscal 2014, compared to a decrease of 66 for the same period
of prior year. For the first nine months of fiscal 2014, PSU increased by 8,139,
compared to an increase of 3,694 for the comparable period in 2013. The increase
is explained by additional HSI and Telephony services, offset by losses in the
Television service.
RELATED PARTY TRANSACTIONS
Cogeco Cable Inc. is a subsidiary of COGECO Inc., which holds 32.0% of the
Corporation's equity shares, representing 82.5% 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,
Chief Legal Officer and Secretary, the Vice President, Regulatory Affairs and
Copyright, the Vice President, Corporate Development, the Vice President and
Treasurer, the Vice President, Public Affairs and Communications and the Vice
President, Internal Audit and Risk Management. No direct remuneration is payable
to such senior executives by the Corporation. However, the Corporation granted
84,250 stock options (71,233 in 2013) to these senior executives as senior
executives of Cogeco Cable during the first nine months of fiscal year 2014.
During the third quarter and first nine months of fiscal 2014, the Corporation
charged COGECO Inc. amounts of $124,000 and $286,000 ($99,000 and $275,000 in
2013) with regards to the Corporation's stock options granted to these senior
executives.
During the first nine months of fiscal 2014 the Corporation also granted 12,550
(12,280 in 2013) Incentive Share Units ("ISUs") to these senior executives as
senior executives of Cogeco Cable. During the third quarter and first nine
months of fiscal 2014, the Corporation charged COGECO Inc. amounts of $122,000
and $440,000 ($117,000 and $336,000 in 2013) with regards to the Corporation's
ISUs granted to these senior executives.
Under the Management Agreement, the Corporation pays monthly fees equal to 2% of
its total revenue to COGECO Inc. for the above-mentioned services. The
management fees are subject to annual upward adjustment based on increases in
the Consumer Price Index in Canada. This limit can be increased under certain
circumstances upon request to that effect by COGECO Inc. For fiscal year 2014,
management fees have been set at a maximum of $9.7 million ($9.6 million in
2013), which were paid within the first half of the fiscal year. For fiscal year
2013, 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 senior executives are provided in the Corporation's 2013 Annual
Report.
There were no other material related party transactions during the periods covered.
CASH FLOW ANALYSIS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Nine months ended
May 31, May 31, May 31, May 31,
2014 2013 (2) 2014 2013(2)
(in thousands of dollars) $ $ $ $
----------------------------------------------------------------------------
Cash flow from operations(1) 175,595 155,868 502,872 396,000
Changes in non-cash operating
activities 15,397 (2,526) (77,388) (78,708)
Amortization of deferred
transaction costs and discounts
on long-term debt (1,898) (3,580) (5,628) (7,043)
Income taxes paid (15,995) (16,894) (53,538) (76,902)
Current income tax expense 22,162 25,789 68,932 73,907
Financial expense paid (42,864) (26,827) (103,582) (70,542)
Financial expense 32,038 35,146 97,505 80,068
----------------------------------------------------------------------------
Cash flow from operating
activities 184,435 166,976 429,173 316,780
Cash flow from investing
activities (84,427) (135,161) (249,742)(2,305,469)
Cash flow from financing
activities (123,719) (31,688) (189,870) 1,809,398
Effect of exchange rate changes
on cash and cash equivalents
denominated inforeign
currencies (535) 1,089 1,390 1,794
----------------------------------------------------------------------------
Net change in cash and cash
equivalents (24,246) 1,216 (9,049) (177,497)
Cash and cash equivalents,
beginning of the period 54,772 36,678 39,575 215,391
----------------------------------------------------------------------------
Cash and cash equivalents, end
of the period 30,526 37,894 30,526 37,894
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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.
(2) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note 2
of the condensed interim consolidated financial statements.
OPERATING ACTIVITIES
Fiscal 2014 third-quarter cash flow from operating activities reached $184.4
million compared to $167.0 million, an increase of $17.5 million, or 10.5%,
compared to fiscal 2013 third-quarter. The increase is mainly explained by the
improvement of adjusted EBITDA of $14.2 million and by the increase of $17.9
million in non-cash operating activities as a result of an increase in trade and
other payables compared to a decrease in the comparable period, partly offset by
a lower decrease in trade and other receivables compared to the prior year and
an increase of financial expense paid of $16.0 million. For the first nine
months of fiscal 2014, cash flow from operating activities reached $429.2
million compared to $316.8 million, an increase of $112.4 million, or 35.5%,
compared to the same period in fiscal 2013. The increase is mainly explained by
the improvement of adjusted EBITDA of $104.3 million combined with a decrease of
$23.4 million in income taxes paid and a decrease of $13.1 million in
integration, restructuring and acquisition costs, partly offset by an increase
of financial expense paid of $33.0 million.
For the three and nine-month periods ended May 31, 2014, cash flow from
operations amounted to $175.6 million and $502.9 million, respectively, compared
to $155.9 million and $396.0 million for the comparable periods in fiscal 2013,
representing increases of $19.7 million, or 12.7%, and $106.9 million, or 27.0%,
respectively. For both periods, the increases are mainly explained by the
improvement of adjusted EBITDA of $14.2 million and $104.3 million,
respectively.
INVESTING ACTIVITIES
For the three and nine-month periods ended May 31, 2014, investing activities
amounted to $84.4 million and $249.7 million, respectively, mainly due to the
acquisitions of property, plant and equipment, intangible and other assets. For
the comparable periods of fiscal 2013, investing activities amounted to $135.2
million and $2.3 billion explained below.
BUSINESS COMBINATIONS IN FISCAL 2013
On January 31, 2013 and on April 3, 2013, the Corporation acquired 100% of the
issued and outstanding shares of Peer 1 Hosting one of the world's leading
internet infrastructure providers, specializing in managed hosting, dedicated
servers, cloud services and colocation. During the second quarter of fiscal
2014, the Corporation finalized the purchase price allocation of Peer 1 Hosting
which had no impact on the statement of profit or loss and comprehensive income
for the three and nine-month periods ended May 31, 2013. The impact of the
finalization on the statement of financial position at August 31, 2013,
increased income tax receivable by $0.7 million, increased deferred tax assets
by $4.4 million, decreased intangibles assets by $0.9 million, decreased
goodwill by $2.8 million, increased deferred tax liabilities by $2.5 million and
decreased accumulated other comprehensive income by $1.2 million.
On November 30, 2012, the Corporation completed the acquisition of all the
outstanding shares of Atlantic Broadband, an independent cable system operator
formed in 2003, providing Analogue and Digital Television, as well as HSI and
Telephony services to residential and small and medium business customers.
During the first quarter of fiscal 2014 the Corporation finalized the purchase
price allocation of Atlantic Broadband which remained unchanged since the last
adjustments made in the fourth quarter of fiscal 2013.
The final purchase price allocations of Atlantic Broadband and Peer 1 Hosting
are as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Peer 1 Atlantic
Hosting Broadband TOTAL
Final Final Final
$ $ $
----------------------------------------------------------------------------
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 12,012 24,784
Prepaid expenses and other 3,855 1,370 5,225
Income tax receivable 2,797 3,907 6,704
Other assets 2,462 - 2,462
Property, plant and equipment 150,013 302,211 452,224
Intangible assets 144,231 711,418 855,649
Goodwill 410,454 522,215 932,669
Deferred tax assets 8,872 98,592 107,464
Trade and other payables assumed (26,512) (27,620) (54,132)
Provisions - (721) (721)
Deferred and prepaid revenue and other
liabilities assumed (3,388) (7,697) (11,085)
Long-term debt assumed (1,735) - (1,735)
Deferred tax liabilities (57,722) (256,119) (313,841)
----------------------------------------------------------------------------
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,
2014 2013 2014 2013
(in thousands of dollars) $ $ $ $
----------------------------------------------------------------------------
Customer premise equipment(1) 25,327 18,000 68,872 55,874
Scalable infrastructure(2) 17,867 21,512 53,341 78,428
Line extensions 5,677 5,961 17,095 14,081
Upgrade / Rebuild 6,658 10,924 17,225 26,574
Support capital 6,979 4,552 15,711 14,935
----------------------------------------------------------------------------
Acquisition of property, plant
and equipment - Cable
services(3) 62,508 60,949 172,244 189,892
Acquisition of property, plant
and equipment - Enterprise
services(4) 17,001 47,376 64,431 96,565
----------------------------------------------------------------------------
Acquisitions of property, plant
and equipment 79,509 108,325 236,675 286,457
----------------------------------------------------------------------------
Acquisition of intangible and
other assets - Cable
services(3) 3,368 3,933 10,513 12,048
Acquisition of intangible and
other assets - Enterprise
services(4) 1,575 583 3,159 1,602
----------------------------------------------------------------------------
Acquisitions of intangible and
other assets 4,943 4,516 13,672 13,650
----------------------------------------------------------------------------
84,452 112,841 250,347 300,107
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes mainly home terminal devices as well as new and replacement
drops.
(2) Includes mainly head-end equipment, digital video and telephony
transport as well as HSI equipment.
(3) Fiscal 2013 nine-months period include only six months of operating
results of American cable services.
(4) Fiscal 2013 nine-month period includes only four month of operating
results of Peer 1 Hosting.
For the three and nine-month periods ended May 31, 2014, acquisition of
property, plant and equipment in the Cable services amounted to $62.5 million
and $172.2 million compared to $60.9 million and $189.9 million for the
comparable periods of fiscal 2013, respectively.
In the Canadian cable services, fiscal 2014 third-quarter acquisition of
property, plant and equipment amounted to $39.6 million, a decrease of 16.9%
when compared to $47.6 million in the third quarter of the prior year. For the
nine-month period ended May 31, 2014, acquisition of property, plant and
equipment amounted to $120.9 million, a decrease of 26.0% when compared to the
prior year.
For the third quarter of fiscal 2014, acquisition of property, plant and
equipment in the American cable services segment amounted to $22.9 million
compared to $13.3 million for the same period of fiscal 2013. For the nine-month
period ended May 31, 2014, acquisition of property, plant and equipment amounted
to $51.4 million compared to $26.5 million in the prior year as a result of nine
months of operating results compared to six months in fiscal 2013.
The decreases in the Canadian and American cable services segments are mainly
attributable to the following factors:
- A decrease in the quarter and for the nine-month period ended May 31, 2014 in
scalable infrastructure and network upgrades and rebuild due to the deployment
in fiscal 2012 and early fiscal 2013 of advanced technologies such as DOCSIS 3.0
and Switched Digital Video in existing areas served; and
- An increase in customer premise equipment for the three and nine-month periods
ended May 31, 2014 mainly due to the launch of TiVo's digital entertainment
services in the American cable services segment.
Fiscal 2014 third-quarter and first nine months acquisition of property, plant
and equipment in the Enterprise services segment amounted to $17.0 million and
$64.4 million compared to $47.4 million and $96.6 million for the same periods
of fiscal 2013, respectively. The decrease for both periods is mainly due to the
construction of a new data centre facility in Barrie (north of Toronto), Canada,
in fiscal 2013 and the timing of initiatives.
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 2014, the
acquisition of intangible and other assets amounted to $4.9 million and $13.7
million compared to $4.5 million and $13.7 million for the same periods last
year, respectively.
FREE CASH FLOW AND FINANCING ACTIVITIES
For the third quarter of fiscal 2014, free cash flow amounted to $91.1 million,
an increase of $48.1 million compared to fiscal 2013. This increase is mainly
due to the improvement of adjusted EBITDA and the decrease in acquisitions of
property, plant and equipment due to the timing of certain initiatives. For the
nine-month period, free cash flow amounted to $252.5 million, $156.6 million
higher than the same period of last year. This variance is mostly attributable
to the improvement of adjusted EBITDA, the decrease in acquisitions of property,
plant and equipment due to the timing of certain initiatives as well as the
decrease in integration, restructuring and acquisition costs, partly offset by
the increase in financial expense due to higher indebtedness level from the
recent acquisitions.
In the third quarter of fiscal 2014, a cash decrease of $109.6 million was
mainly due to a lower Indebtedness from the repayments under the revolving
facilities of $112.6 million. In the third quarter of fiscal 2013, a cash
decrease of $17.2 million was mainly due to a higher level of Indebtedness from
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 $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 million
Revolving loan in connection with the acquisition of Peer 1 Hosting and the
$192.4 million Term Revolving Facility.
For the nine-month period of fiscal 2014, a cash decrease of $142.8 million was
mainly due to a lower level of Indebtedness from the repayments under the
revolving facilities of $128.2 million and of long-term debt amounting to $10.9
million. For the nine-month period of fiscal 2013, a cash increase of $1.9
billion was mainly due to a higher level of Indebtedness provided from 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 repayments 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 Atlantic Broadband as well the draw-down of $125.1
million, under Secured Credit Facilities to finance the acquisition of Peer 1
Hosting, net of the repayments made during the third quarter explained above.
During the third quarter of fiscal 2014, a quarterly dividend of $0.30 per share
was paid to the holders of subordinate and multiple voting shares, totaling
$14.6 million, compared to a dividend paid of $0.26 per share, or $12.6 million
in the third quarter of fiscal 2013. Dividend payments in the first nine months
totaled $0.90 per share, or $43.9 million, compared to $0.78 per share, or $37.9
million the year before.
As at May 31, 2014, the Corporation had a working capital deficiency of $160.3
million compared to $223.5 million at August 31, 2013. The $63.2 million
deficiency reduction is mainly due to a decrease of $85.5 million in trade and
other payables, partly offset by an increase of income tax liabilities of $20.2
million as a result of generated free cash flow. As part of the usual conduct of
its business, Cogeco Cable maintains a working capital deficiency due to a low
level of accounts receivable since a large proportion of the Corporation's
customers pay before their services are rendered, unlike trade and other
payables, which are usually 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, 2014, the Corporation had used $476.2 million of its $800 million
amended and restated Term Revolving Facility for a remaining availability of
$323.8 million. In addition, two subsidiaries of the Corporation also benefit
from a Revolving Facility of $108.4 million (US$100 million) related to its
acquisition of Atlantic Broadband, of which $1.1 million (US$1.0 million) was
used at May 31, 2014 for a remaining availability of $107.3 million (US$99
million).
FINANCIAL POSITION
Since August 31, 2013, the following balances have changed significantly:
"property, plant and equipment", "goodwill", "trade and other payables", "income
tax liabilities", "long-term debt" and "deferred tax liabilities".
Property, plant and equipment decreased by $80.8 million due to the impairment
of property, plant and equipment of $32.2 million as well as depreciation
expense exceeding the acquisitions discussed in the "Cash flow analysis"
section, taking into account the impact of the US dollar and British Pound
currency appreciation against the Canadian dollar. Goodwill increased by $29.3
million as a result of the US dollar and the British Pound currency appreciation
against the Canadian dollar during the first nine months of fiscal 2014. The
decrease of $85.5 million in trade and other payables is related to the timing
of payments made to suppliers. The income tax liabilities increase of $20.2
million is due to the excess of current income tax expense over income tax paid.
The decrease of $28.3 million in deferred tax liabilities results from the
impairment of property, plant and equipment and the increase in current income
taxes. The decrease of $82.0 million in long-term debt is due to the factors
previously discussed in the "Cash flow analysis" section, partly offset by the
appreciation of the US dollar and British Pound currency compared to the
Canadian dollar.
OUTSTANDING SHARE DATA
A description of Cogeco Cable's share data at June 30, 2014 is presented in the
table below. Additional details are provided in note 12 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 33,367,186 909,678
Options to purchase subordinate voting shares
Outstanding options 797,356
Exercisable options 297,899
----------------------------------------------------------------------------
----------------------------------------------------------------------------
FINANCING
In the normal course of business, Cogeco Cable has incurred financial
obligations, primarily in the form of long-term debt, operating and finance
leases and guarantees. Cogeco Cable's obligations, as discussed in the 2013
Annual Report, have not materially changed since August 31, 2013, except as
mentioned below.
On November 22, 2013, the Corporation amended and restated its Term Revolving
Facility of $800 million with a syndicate of lenders. The maturity was extended
until January 22, 2019 and can be further extended annually. The amendments
reduced the margin for the calculation of the interest rate and reduced
restrictions on some covenants. The amended and restated Term Revolving Facility
also replaced Cogeco Cable's Secured Credit Facilities coming to maturity on
January 27, 2017 which was fully repaid on November 22, 2013. This amended and
restated Term Revolving Facility is comprised of two tranches: a first tranche,
a Canadian tranche, amounting to $788 million and the second tranche, a UK
tranche, amounting to $12 million. Both Cogeco Cable and Peer 1 (UK) Ltd. can
borrow under the UK tranche. The Canadian tranche is available in Canadian
dollars, US dollars, Euros and British Pounds and interest rates are based on
banker's acceptance, US dollar base rate loans, LIBOR loans in US dollars, Euros
or British Pounds, plus the applicable margin. The UK tranche is available in
British Pounds and interest rates are based on British Pounds base rate loans
and British Pounds LIBOR loans. The Term Revolving Facility is indirectly
secured by first priority fixed and floating charges and a security interest on
substantially all present and future real and personal properties and
undertaking of every nature and kind of the Corporation and certain of its
subsidiaries, and provides for certain permitted encumbrances, including
purchased money obligations, existing funded obligations and charges granted by
any subsidiary prior to the date when it becomes a subsidiary, subject to a
maximum amount. The provisions under this facility provide for restrictions on
the operations and activities of the Corporation. Generally, the most
significant restrictions relate to permitted investments and dividends on
multiple and subordinate voting shares, as well as incurrence and maintenance of
certain financial ratios primarily linked to operating income before
amortization, financial expense and total indebtedness.
FINANCIAL MANAGEMENT
The Corporation 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 2014,
amounts due under the US$190 million Senior Secured Notes Series A increased by
$5.9 million due to the US dollar's appreciation relative to the Canadian
dollar. The fair value of cross-currency swaps asset increased by a net amount
of $6.1 million, of which an increase of $5.9 million offsets the foreign
exchange loss on the debt denominated in US dollars. The difference of $0.2
million was recorded as an increase of other comprehensive income. 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 over 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.
In addition, on July 22, 2013, Cogeco Cable had entered into interest rate swap
agreements to fix the interest rate on US$200 million of its LIBOR based loans.
These agreements have the effect of converting the floating US LIBOR base rate
at an average fixed rate of 0.39625% under the Term Revolving Facility until
July 25, 2015. The Corporation elected to apply hedge accounting on these
derivative financial instruments. During the first nine months of fiscal 2014,
the fair value of interest rate swaps asset decreased by a net amount of $0.8
million which was recorded as a decrease of other comprehensive income.
The sensitivity of the Corporation's annual financial expense to a variation of
1% in the interest rate applicable to these facilities is approximately $6.4
million based on the current debt at May 31, 2014.
Furthermore, the Corporation's investment in foreign operations is exposed to
market risk attributable to fluctuations in foreign currency exchange rates,
primarily changes in the values of the Canadian dollar versus the US dollar and
British Pound. This risk was mitigated since the major part of the purchase
prices for Atlantic Broadband and Peer 1 Hosting were borrowed directly in US
dollars and British Pounds. At May 31, 2014, the investments for Atlantic
Broadband and Peer 1 Hosting amounted to US$1.1 billion and GBP 62.7 million
while long-term debt hedging these investments were US$859.5 million and GBP
56.0 million. The exchange rates used to convert the US dollar currency and
British Pound currency into Canadian dollars for the statement of financial
position accounts at May 31, 2014 were $1.0842 per US dollar and $1.8173 per
British Pound compared to $1.0530 per US dollar and $1.6318 per British Pound at
August 31, 2013. The impact of a 10% fluctuation in the exchange rates of the US
dollar and British Pound into Canadian dollars would change other comprehensive
income by approximately $26.9 million.
Since the Corporation's condensed interim consolidated financial statements are
expressed in Canadian dollars but a portion of its business is conducted in US
dollar and British Pound currency, exchange rate fluctuations can increase or
decrease the Corporation's operating results. For the three and nine-month
periods ended May 31, 2014, the average rates prevailing used to convert the
operating results of the American cable services and a portion of the Enterprise
services were as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Nine months ended
May 31, May 31, May 31, May 31,
2014 2013 Change 2014 2013 Change
$ $ % $ $ %
----------------------------------------------------------------------------
US dollar vs Canadian
dollar 1.0997 1.0211 7.7 1.0759 1.0091 6.6
British Pound vs Canadian
dollar 1.8405 1.5545 18.4 1.7664 1.5565 13.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following tables highlight in Canadian dollars, the impact of a 10% increase
in the US dollar or British Pound against the Canadian dollar as the case may
be, of Cogeco Cable's operating results for the three and nine-month periods
ended May 31, 2014:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Canadian cable American cable Enterprise
services services services
Exchange Exchange Exchange
As rate As rate As rate
Quarter ended May 31,
2014 reported impact reported impact reported impact
(in thousands of
dollars) $ $ $ $ $ $
----------------------------------------------------------------------------
Revenue 317,072 - 101,435 10,144 78,573 3,846
Operating expense 153,337 522 56,610 5,661 54,407 3,187
----------------------------------------------------------------------------
Adjusted EBITDA 163,735 (522) 44,825 4,483 24,166 659
----------------------------------------------------------------------------
Acquisitions of
property, plant and
equipment, intangible
and other assets 42,455 1,433 23,421 2,343 18,576 802
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Canadian cable American cable Enterprise
services services services
Exchange Exchange Exchange
As rate As rate As rate
Nine months ended May
31, 2014 reported impact reported impact reported impact
(in thousands of
dollars) $ $ $ $ $ $
----------------------------------------------------------------------------
Revenue 939,750 - 292,032 29,193 227,284 11,195
Operating expenses 463,882 1,704 162,396 16,226 150,062 8,567
----------------------------------------------------------------------------
Adjusted EBITDA 475,868 (1,704) 129,636 12,967 77,222 2,628
----------------------------------------------------------------------------
Acquisitions of
property, plant and
equipment, intangible
and other assets 130,046 4,954 52,711 5,238 67,590 2,918
----------------------------------------------------------------------------
----------------------------------------------------------------------------
DIVIDEND DECLARATION
At its July 9, 2014 meeting, the Board of Directors of Cogeco Cable declared a
quarterly eligible dividend of $0.30 per share for multiple voting and
subordinate voting shares, payable on August 6, 2014, to shareholders of record
on July 23, 2014. The declaration, amount and date of any future dividend will
continue to be considered and approved by the Board of Directors of the
Corporation based upon the Corporation's financial condition, results of
operations, capital requirements and such other factors as the Board of
Directors, at its sole discretion, deems relevant. There is therefore no
assurance that dividends will be declared, and if declared, the amount and
frequency may vary.
SEGMENTED OPERATING RESULTS
The Corporation reports its operating results in three operating segments:
Canadian cable services, American cable services and Enterprise services. The
reporting structure reflects how the Corporation manages the business activities
to make decisions about resources to be allocated to the segment and to assess
its performance.
CANADIAN CABLE SERVICES
CUSTOMER STATISTICS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
% 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,
2014 2014 2013 2014 2013 2014 2013
----------------------------------------------------------------------------
PSU(2) 1,956,444 (5,633) (1,013) (23,678) 17,089
Television
service
customers 807,831 (8,021) (7,363) (26,940) (17,771) 47.9 50.7
HSI service
customers 676,802 3,821 3,412 15,465 20,723 40.2 39.7
Telephony
service
customers 471,811 (1,433) 2,938 (12,203) 14,137 28.0 29.1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) As a percentage of homes passed.
(2) Represents the sum of Television, HSI and Telephony service customers.
Fiscal 2014 third-quarter and first nine months PSU net losses amounted to 5,633
and 23,678 compared to net losses of 1,013 and net additions of 17,089 for the
comparable periods of the prior year, mainly as a result of service category
maturity, competitive offers in the industry and tightening of our customer
qualifications. For the third quarter and first nine months of fiscal 2014, net
customer losses for Television service stood at 8,021 and 26,940 compared to
7,363 and 17,771 for the same periods last year. Television service customer net
losses are mainly due to the promotional offers of competitors for the video
service, service category maturity and the IPTV footprint growth from
competitors. For the third quarter and first nine months of fiscal 2014, net
additions for HSI service customers stood at 3,821 and 15,465, respectively,
compared to 3,412 and 20,723 for the comparable periods of fiscal 2013. HSI net
additions continue to stem from the enhancement of the product offering, the
impact of the bundled offer of Television, HSI and Telephony services, and
promotional activities. Net losses for the Telephony service amounted to 1,433
and 12,203, respectively, for the third quarter and first nine months of fiscal
2014, compared to net additions of 2,938 and 14,137 for the same periods of
prior year.
Furthermore, as at May 31, 2014, 69% (68% in 2013) of the Canadian cable
services customers subscribed to two or more services. The distribution of
customers by number of services for the Canadian cable services were: 31% who
subscribe to the single play (32% in 2013), 33% to the double play (31% in 2013)
and 36% to the triple play (37% in 2013).
OPERATING RESULTS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Nine months ended
May 31, May 31, May 31, May 31,
2014 2013 (1) Change 2014 2013 (1) Change
(in thousands of
dollars, except
percentages) $ $ % $ $ %
----------------------------------------------------------------------------
Revenue 317,072 306,401 3.5 939,750 917,389 2.4
Operating expenses 153,337 153,238 0.1 463,882 465,218 (0.3)
--------------------------------------- --------------------
Adjusted EBITDA 163,735 153,163 6.9 475,868 452,171 5.2
--------------------------------------- --------------------
Operating margin 51.6% 50.0% 50.6% 49.3%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note 2
of the condensed interim consolidated financial statements.
Revenue
Fiscal 2014 third-quarter revenue increased by $10.7 million, or 3.5%, to reach
$317.1 million, compared to the same period last year. For the first nine
months, revenue amounted to $939.8 million, an increase of 2.4% compared to the
first nine months of fiscal 2013. Revenue increase is mainly attributable to
rate increases implemented in June 2013 and April 2014 in Quebec and Ontario,
partly offset by PSU losses.
Operating expenses
For the third quarter ended May 31, 2014, operating expenses remained
essentially the same at $153.3 million compared to $153.2 million last year. For
the first nine months, operating expenses amounted to $463.9 million, a decrease
of $1.3 million compared to the same period of the prior year. The decrease is
mainly attributable to cost reduction initiatives and the restructuring
activities which occurred in the fourth quarter of fiscal 2013 and in the first
nine months of fiscal 2014.
Adjusted EBITDA and operating margin
Fiscal 2014 third-quarter adjusted EBITDA amounted to $163.7 million, or 6.9%
higher than in the same period of the prior year. For the first nine months of
fiscal 2014, adjusted EBITDA amounted to $475.9 million, or 5.2% higher than the
comparable period of the prior year. Both increases in adjusted EBITDA are
mainly attributable to revenue growth exceeding operating expenses.
Consequently, operating margin increased to 51.6% from 50.0% compared to fiscal
2013 third-quarter and to 50.6% from 49.3% for the first nine months of fiscal
2014 compared to the prior year.
AMERICAN CABLE SERVICES
On November 30, 2012, the Corporation completed the acquisition of Atlantic
Broadband, an independent cable system operator formed in 2003 and providing
Analogue and Digital Television, as well as HSI and Telephony services. Atlantic
Broadband operates cable systems in Western Pennsylvania, Southern Florida,
Maryland/Delaware and South Carolina.
CUSTOMER STATISTICS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
% 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,
2014 2014 2013 2014 2013 2014 2013
----------------------------------------------------------------------------
PSU(2) 495,674 3,124 (66) 8,139 3,694
Television
service
customers 227,160 (1,599) (1,044) (5,021) (3,372) 43.8 45.3
HSI service
customers 188,795 3,990 1,191 11,687 6,617 36.4 34.1
Telephony
service
customers 79,719 733 (213) 1,473 449 15.4 15.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) As a percentage of homes passed.
(2) Represents the sum of Television, HSI and Telephony service customers.
Fiscal 2014 third-quarter and first nine months PSU net additions amounted to
3,124 and 8,139, respectively, compared to net losses of 66 and net additions of
3,694 for the comparable periods of the prior year. The comparable figures for
the first nine months of the prior year include only six months of operating
results since the acquisition of Atlantic Broadband occurred at the end of first
quarter of fiscal 2013. Net customer losses for the Television service stood at
1,599 and 5,021, respectively, for the third quarter and first nine months of
fiscal 2014, compared to net losses of 1,044 and 3,372 for the comparable
periods of last year as a result of competitive offers in the industry. For the
third quarter and first nine months of fiscal 2014, net customer additions for
HSI service amounted to 3,990 and 11,687 compared to 1,191 and 6,617 for the
same periods of the prior year mainly due to additional marketing initiatives
which focused on bundle package offerings, thus increasing overall demand for
the HSI residential services as well as increased commercial HSI customers. The
net customer additions for Telephony service stood at 733 and 1,473 for the
three and nine-month periods ended May 31, 2014, compared to net losses of 213
and net additions of 449 for the same periods of fiscal 2013.
Furthermore, as at May 31, 2014, 59% (59% in 2013) of the American cable
services customers subscribed to two or more services. The distribution of
customers by number of services for the American cable services were: 41% who
subscribe to the single play (41% in 2013), 38% to the double play (37% in 2013)
and 21% to the triple play (22% in 2013).
OPERATING RESULTS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Nine months ended
May 31, May 31, May 31, May 31,
2014 2013 Change 2014 2013 Change
(in thousands of
dollars, except
percentages) $ $ % $ $ %
----------------------------------------------------------------------------
Revenue 101,435 90,394 12.2 292,032 176,244 65.7
Operating expenses 56,610 49,145 15.2 162,396 95,774 69.6
----------------------------------------- -------------------
Adjusted EBITDA 44,825 41,249 8.7 129,636 80,470 61.1
----------------------------------------- -------------------
Operating margin 44.2% 45.6% 44.4% 45.7%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue
Fiscal 2014 third-quarter revenue increased by $11.0 million, or 12.2%, to reach
$101.4 million compared to the same period last year. Revenue increased due to
the PSU growth, rate increases implemented in fiscal 2014 as well as favorable
foreign exchange rates compared to last year. For the first nine months, revenue
amounted to $292.0 million, an increase of $115.8 million compared to the first
nine months of fiscal 2013. This increase is mainly due to nine months of
operating results included in fiscal 2014 compared to six months for the
comparable period since Atlantic Broadband was acquired at the end of the first
quarter of fiscal 2013, on November 30, 2012.
For the third quarter and first nine months of fiscal 2014, revenue in local
currency amounted to US$92.2 million and US$271.4 million, compared to US$88.5
million and US$174.6 million for the same periods last year.
Operating expenses
Fiscal 2014 third-quarter operating expenses amounted to $56.6 million, an
increase of 15.2% compared to the same period last year. The increase is mainly
attributable to servicing additional PSU, additional programming costs, the
deployment of TiVo's digital entertainment services as well as marketing
initiatives to improve PSU growth and by the appreciation of the US dollar over
the Canadian dollar. For the first nine months, operating expenses amounted to
$162.4 million, an increase of $66.6 million compared to the first nine months
of fiscal 2013. This increase is mainly due to nine months of operating results
included in fiscal 2014 compared to six months for the comparable period since
Atlantic Broadband was acquired at the end of the first quarter of fiscal 2013,
on November 30, 2012.
Operating expenses in local currency for the for the third quarter and first
nine months of fiscal 2014 amounted to US$51.5 million and US$150.8 million,
compared to US$48.1 million and US$94.9 million for the comparable periods of
last year.
Adjusted EBITDA and operating margin
Fiscal 2014 third-quarter adjusted EBITDA increased by 8.7% to reach $44.8
million compared to last year as a result of the factors previously discussed.
For the first nine months of fiscal 2014, adjusted EBITDA amounted to $129.6
million compared to $80.5 million for the same period of fiscal 2013 as a result
of nine months of operating results compared to six months for the comparable
period and to the factors previously discussed. As a result of operating
expenses growth exceeding revenue growth, operating margin for the three and
nine-month periods ended May 31, 2014 decreased to 44.2% from 45.6% and to 44.4%
from 45.7% for the comparable periods of the prior year.
Fiscal 2014 third-quarter adjusted EBITDA in local currency amounted to US$40.8
million compared to US$40.4 million for the same period last year and US$120.5
million compared to US$79.7 million for the first nine months of fiscal 2013.
ENTERPRISE SERVICES
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Nine months ended
May 31, May 31, May 31, May 31,
2014 2013 Change 2014 2013 Change
(in thousands of
dollars, except
percentages) $ $ % $ $ %
----------------------------------------------------------------------------
Revenue 78,573 68,130 15.3 227,284 129,610 75.4
Operating expenses 54,407 44,710 21.7 150,062 82,063 82.9
----------------------------------------- -------------------
Adjusted EBITDA 24,166 23,420 3.2 77,222 47,547 62.4
----------------------------------------- -------------------
Operating margin 30.8% 34.4% 34.0% 36.7%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
OPERATING RESULTS
Revenue
Fiscal 2014 third-quarter revenue increased by $10.4 million, or 15.3%, to reach
$78.6 million, compared to the same period last year. Revenue increased due to
the organic growth from data centre, managed IT and connectivity services as
well as the appreciation of the US dollar and the British Pound against the
Canadian dollar for our foreign operations. For the first nine months of fiscal
2014, revenue amounted to $227.3 million, an increase of $97.7 million compared
to fiscal 2013. The increase is mainly due to the full year impact of the
acquisition of Peer 1 Hosting which occurred during the second quarter of fiscal
2013 combined with the organic growth from data centre, managed IT and
connectivity services and favorable foreign exchange rates for our foreign
operations compared to last year. Revenue for the quarter and the first nine
months of fiscal 2014 of Peer 1 Hosting have been negatively impacted by non
recurring billing adjustments and credit notes as a result of improved controls
and procedures related to the certification process that is still underway.
Operating expenses
For the third quarter of fiscal 2014 operating expenses increased by $9.7
million, to $54.4 million due to the organic growth combined with the
appreciation of the US dollar and the British Pound against the Canadian dollar.
For the first nine months of fiscal 2014, operating expenses amounted to $150.1
million, an increase of $68.0 million compared to last year due to the full year
impact of Peer 1 Hosting acquisition, the organic growth as well as the
appreciation of the US dollar and the British Pound against the Canadian dollar.
During the third quarter of fiscal 2014, Peer 1 Hosting reviewed and enhanced
its collection process resulting in an increase in the impairment of trade and
other receivables. Furthermore, Peer 1 Hosting incurred non recurring additional
costs with regards to certain initiatives.
Adjusted EBITDA and operating margin
As a result of revenue growth exceeding the increase in operating expenses,
fiscal 2014 third-quarter adjusted EBITDA increased by $0.7 million, or 3.2%, to
reach $24.2 million and by $29.7 million, or 62.4%, in the first nine months to
reach $77.2 million, compared to the same periods of the prior year. The above
non-recurring revenue and operating expenses items have negatively impacted the
adjusted EBITDA by approximately $3.0 million for the third quarter ended May
31, 2014. Operating margin decreased to 30.8% from 34.4% in the third quarter
and to 34.0% from 36.7% for the first nine months compared to fiscal 2013 as a
result of lower margins business activities from Peer 1 Hosting as well as non
recurring adjustments recorded in the third quarter.
FISCAL 2014 REVISED FINANCIAL GUIDELINES
Giving effect to the impairment of property, plant and equipment of $32.2
million which occurred during the third quarter of fiscal 2014 in the Canadian
cable services segment as well as additional integration, restructuring and
acquisitions costs related to restructuring activities, Cogeco Cable revised
downwards its fiscal 2014 projected profit for the year compared to the one
issued on April 9, 2014. Profit for the year is now expected to reach $210
million, a decrease of $25 million, or 10.6%, compared to the April 9, 2014
projections.
Fiscal 2014 revised financial guidelines are as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
July 9, 2014 April 9, 2014
Fiscal 2014 Fiscal 2014
(in millions of dollars, except operating
margin and capital intensity) $ $
----------------------------------------------------------------------------
Financial guidelines
Revenue 1,955 1,955
Adjusted EBITDA 895 895
Operating margin 45.8% 45.8%
Integration, restructuring and acquisition
costs 4 -
Depreciation and amortization 470 470
Financial expense 130 130
Current income tax expense 96 100
Profit for the year 210 235
Acquisitions of property, plant and
equipment, intangible and other assets 425 425
Free cash flow(1) 240 240
Capital intensity 21.7% 21.7%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Free cash flow is calculated as adjusted EBITDA less, integration,
restructuring and acquisition costs, financial expense, current income
tax expense and acquisitions of property, plant and equipment,
intangible and other assets.
FISCAL 2015 PRELIMINARY FINANCIAL GUIDELINES
Fiscal 2015 preliminary financial guidelines take into consideration the current
uncertain global economic and the intense competitive environment that prevails
in Canada, the United States and Europe by the incumbent telecommunications or
IT infrastructure providers, as the case may be. In addition, these preliminary
financial guidelines are supported by Cogeco Cable's objectives which are to
improve profitability to create shareholder value. Cogeco Cable focus on
customer's needs by offering services at attractive prices, expanding its
offering with respect to geography and by diversifying its product and services.
As the Corporation operates in an industry characterized by rapid technological
innovation which requires substantial capital, Cogeco Cable will continue the
expansion and upkeep maintenance of its networks and data centre facilities as
well as the launch and expansion of new or additional services. The Corporation
recognizes that customer service is a key brand attribute that has potential to
differentiate its services compared to its competitors and that superior
customer service earns their loyalty and retention. As the cost containment is a
core element of financial performance and remains a key factor to maintain
strong operating margins, Cogeco Cable intends to continue executing its
strategy of tight operating and capital cost controls and rigorous
customer-related processes.
For fiscal 2015, Cogeco Cable expects to achieve revenue of $2.03 billion,
representing a growth of $75 million or 3.8% compared to the revised fiscal 2014
projection issued on July 9, 2014. In the Cable services segment, revenue should
stem primarily from targeted marketing initiatives to improve penetration rates
of HSI and Telephony services in the commercial and business sector while the
penetration of residential Telephony and Television services should slow in the
Canadian cable services, reflecting service category maturity and intense
competition. Furthermore, Digital video and HSI services should continue to
benefit from customers' ongoing interest in TiVo's digital entertainment
services in the American cable services segment as well as the projected launch
of TiVo services in the Canadian cable services segment. Cable services segment
will also benefit from the impact of rate increases in most of its services. In
the Enterprise services segment, revenue growth should stem primarily from
managed hosting and colocation services due to the expansion of Barrie data
centre facility as well as from the migration of services in the portfolio that
generate revenue with higher margins. In addition, the construction of a new
data centre facility in Kirkland, Montreal, is expected to be completed in the
first half of fiscal 2015 and should begin generating revenue. The revenue
growth should also be driven by connectivity services as a result of network
expansions and new customer installations.
Fiscal 2015 operating expenses are expected to expand by approximately $45
million, or 4.2%, compared to the 2014 revised projections due to additional
expenditures to support the Enterprise services segment growth, salary increases
as well as the continuation of the marketing initiatives and retention
strategies. These increases should be partly offset by cost reduction
initiatives from improved systems and processes and by the restructuring
activities that were completed in fiscal 2014.
For fiscal 2015, the Corporation expects adjusted EBITDA of $925 million, an
increase of $30 million, or 3.4%, compared to the 2014 revised projections. The
operating margin is expected to reach approximately 45.6% in fiscal 2015,
compared to the revised projections for the 2014 fiscal year of 45.8%,
reflecting lower margins business activities from the Enterprise services
segment as well as operating expenses increasing slightly faster than the
revenue.
Cogeco Cable expects the depreciation and amortization of property, plant and
equipment and intangible assets to decrease by $5 million for fiscal 2015,
mainly from the increase in capital expenditures with longer useful lives
resulting in lower depreciation and amortization expense for fiscal 2015. Cash
flows from operations should finance capital expenditures which are expected to
reach $430 million compared to $425 million for the 2014 revised projections.
Fiscal 2015 capital expenditures should increase mainly due to the completion of
the expansion of the Barrie data centre facility and the construction of a new
data centre in Kirkland in the Enterprise services segment.
Fiscal 2015 free cash flow is expected to amount to $270 million, an increase of
$30 million, or 12.5% compared to the projected free cash flow of $240 million
due to the adjusted EBITDA growth, partly offset by additional capital
expenditures. As a result, 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 $125 million, a decrease of $5
million, or 3.8%, from lower Indebtedness level. Finally, profit for the year
should reach approximately $260 million compared to $210 million for the 2014
revised projections.
Fiscal 2015 preliminary financial guidelines are as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revised
Preliminary projections
projections July 9, 2014
Fiscal 2015 Fiscal 2014
(in millions of dollars, except operating
margin and capital intensity) $ $
----------------------------------------------------------------------------
Financial guidelines
Revenue 2,030 1,955
Adjusted EBITDA 925 895
Operating margin 45.6% 45.8%
Integration, restructuring and acquisition
costs - 4
Depreciation and amortization 465 470
Financial expense 125 130
Current income tax expense 100 96
Profit for the year 260 210
Acquisitions of property, plant and
equipment, intangible and other assets 430 425
Free cash flow(1) 270 240
Capital intensity 21.2% 21.7%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Free cash flow is calculated as adjusted EBITDA 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
Internal control over financial reporting ("ICFR") is a process designed to
provide reasonable, but not absolute, assurance regarding the reliability of
financial reporting and of the preparation of financial statements for external
purposes in accordance with IFRS. 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 ("DC&P") and ICFR, as defined in
National Instrument 52-109. Cogeco Cable's internal control framework is based
on the criteria published in the updated version released in May 2013 of the
report Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
The CEO and CFO, supported by Management, evaluated the design of the
Corporation's DC&P and ICFR as at May 31, 2014, and concluded that, as described
below, there exists a material weakness in ICFR at Peer 1 Hosting. A material
weakness in ICFR exists if there exists a deficiency or combination of
deficiencies in ICFR such that there is a reasonable possibility that a material
misstatement of the annual or interim consolidated financial statements will not
be prevented or detected on a timely basis.
Cogeco Cable acquired 96.57% of the issued and outstanding shares of Peer 1
Hosting on January 31, 2013 pursuant to the public offer made by Cogeco Cable,
through its indirectly wholly-owned subsidiary 0957926 B.C. LTD. The remaining
shares of Peer 1 Hosting were acquired on April 3, 2013. Management has been
working diligently since the acquisition to complete its review of the design of
ICFR at Peer 1 Hosting. Despite these efforts, Management has not to date
completed its review. During the course of the portion of the review that has
been completed, Management identified certain deficiencies in ICFR at Peer 1
Hosting principally relating to the financial statements close and inadequate
segregation of duties over certain information system access controls.
Management has committed additional resources in order to complete the review of
Peer 1 Hosting's ICFR and bring them in line with Cogeco Cable's design
standards by 2014 calendar year, and has progressed in terms of the
implementation of a number of measures to address the deficiencies described
above. More specifically, Management has implemented several detailed review
processes that provide for a more granular level of analysis. Moreover, access
rights are being adjusted to reflect proper segregation of duties, and a series
of corporate policies have been introduced to enhance Peer 1 Hosting's overall
control environment. The Corporation cannot currently assess the potential
impact of any further design deficiencies which may be identified during the
completion of its review of Peer 1 Hosting's ICFR.
Based on the review completed to date, the CEO and the CFO believe that (i) the
Corporation's interim filings for the three and nine-month periods ended May 31,
2014 do not contain any untrue statement of a material fact or omit to state a
material fact required to be stated or that is necessary to make a statement not
misleading in light of the circumstances under which it was made, and (ii) the
interim financial report together with the other financial information included
in the interim filings fairly present, in all material respects, the financial
condition, financial performance and cash flows of Cogeco Cable for the three
and nine-month periods ended May 31, 2014.
Peer 1 Hosting represents 10% of revenue, -16% of profit for the period, 15% of
total assets, 21% of current assets, 15% of non current assets, 7% of current
liabilities and 17% of non current liabilities of the condensed consolidated
interim financial statements for the nine-month period ended May 31, 2014.
UNCERTAINTIES AND MAIN RISK FACTORS
A detailed description of the uncertainties and main risk factors faced by
Cogeco Cable can be found in the 2013 Annual Report, available at www.sedar.com
and www.cogeco.ca. Except as described below, there has been no significant
change in the uncertainties and main risk factors faced by the Corporation since
August 31, 2013.
On October 24, 2013, the Canadian Radio-television and Telecommunications
Commission ("CRTC") issued Broadcasting Notice of Invitation inviting Canadians
to express their views on the future of the television system in Canada. The
initial phases of the "Let's Talk TV" public proceeding and the issuance by the
federal government on November 11, 2013 of Order in Council PC 2013-1167
directing the CRTC to report on the ability of Canadian consumers to subscribe
to pay and specialty television services on a service-by-service basis have led
to the issuance by the CRTC on April 24, 2014 of Notice of Public Hearing CRTC
2014-190 setting up a proposed new broadcasting regulatory approach. If adopted
at the conclusion of this proceeding, the new regulatory framework would
provide, among other things, that broadcasting distribution undertakings
("BDUs") offer to their customers: a) a small basic service comprised only of
local television stations, mandatory services under subsection 9(1) (h) of the
Broadcasting Act, as well as the relevant provincial educational services, the
community channel and the provincial legislature service in the area served by
the BDU; and b) all other licensed or exempted programming services and
non-Canadian services as discretionary services on a pick-and-pay and on a
build-your-own-package basis. BDUs would however be allowed to continue offering
discretionary programming services in pre-assembled packages to subscribers in
the same manner as they do now. This new regulatory framework would have a
significant impact on the broadcasting distribution business of Cogeco Cable and
other BDUs by forcing the removal of American conventional television networks
and of popular sports and other specialty services from the basic service tier
and requiring the handling of pick-and-pay and build-your- own-package options
for all discretionary programming services. On June 27, 2014, Cogeco Cable filed
a comprehensive intervention with the CRTC as part of this proceeding and has
requested to appear at a public hearing to be held by the CRTC starting on
September 8, 2014. At this time, it is not possible to determine the final
outcome of this important regulatory proceeding, the timetable for its
implementation or its impact on the broadcasting distribution activities and
future financial outlook of Cogeco Cable.
On November 26, 2013, Rogers Communications and the National Hockey League
("NHL") announced that they had concluded a twelve-year comprehensive broadcast
and multimedia licensing agreement respecting all national rights to NHL games
on all platforms in all languages in Canada, beginning with the 2014-2015
season. Rogers Communications also announced that it had selected CBC and TVA
for separate sublicensing deals for English-language broadcasts of "Hockey Night
in Canada" and all national French-language multimedia rights, respectively. The
Corporation has concluded multi-years agreements for the distribution of the
Sportsnet and TVA Sport specialty programming services which include NHL hockey
games in their respective programming. These agreements are factored into the
financial guidelines issued by Cogeco Cable.
FUTURE ACCOUNTING DEVELOPMENTS IN CANADA
A number of new standards, interpretations and amendments to existing standards
issued by the International Accounting Standard Board ("IASB") are effective for
annual periods starting on or after January 1, 2013 and have been applied in
preparing the condensed interim consolidated financial statements for the three
and nine-month periods ended May 31, 2014.
NEW ACCOUNTING STANDARDS
The Corporation adopted the following new accounting standards on September 1,
2013. The impacts of the application of this standard are described in Note 2 of
the condensed interim consolidated financial statements.
- Amendment to IAS 19, Employee Benefits : The principal difference in the
amended standard is that the expected long-term rate of return on plan assets
will no longer be used to calculate the defined benefit pension costs. The
defined benefit pension costs concepts of "interest cost" and "expected return
on plan assets" are replaced by the concept of "net interest" calculated by
applying the discount rate to the net liability or asset. The net interest cost
takes into account the change any contributions and benefit payments have on the
net defined benefit liability or asset during the period.
The Corporation also adopted the following standards on September 1, 2013 which
had no impact on the condensed interim consolidated financial statements.
- Amendments to IFRS 7 Financial Instruments: Disclosures
- IFRS 10 Consolidated Financial Statements
- IFRS 12 Disclosure of Interest in Other Entities
- IFRS 13 Fair Value Measurement
CHANGES IN CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There has been no significant change in Cogeco Cable's accounting policies,
estimates and future accounting pronouncements since August 31,
2013. A description of the Corporation's policies and estimates can be found in
the 2013 Annual Report, available at www.sedar.com and www.cogeco.ca.
NON-IFRS FINANCIAL MEASURES
This section describes non-IFRS financial measures used by Cogeco Cable
throughout this MD&A. It also provides reconciliations between these non-IFRS
measures and the most comparable IFRS financial measures. These financial
measures do not have standard definitions prescribed by IFRS and therefore, may
not be comparable to similar measures presented by other companies. These
measures include "cash flow from operations", "free cash flow", "adjusted
EBITDA" 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, May 31, May 31, May 31,
2014 2013 (1) 2014 2013 (1)
(in thousands of dollars) $ $ $ $
----------------------------------------------------------------------------
Cash flow from operating
activities 184,435 166,976 429,173 316,780
Changes in non-cash operating
activities (15,397) 2,526 77,388 78,708
Amortization of deferred
transaction costs and discounts
on long-term debt 1,898 3,580 5,628 7,043
Income taxes paid 15,995 16,894 53,538 76,902
Current income tax expense (22,162) (25,789) (68,932) (73,907)
Financial expense paid 42,864 26,827 103,582 70,542
Financial expense (32,038) (35,146) (97,505) (80,068)
----------------------------------------------------------------------------
Cash flow from operations 175,595 155,868 502,872 396,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note 2
of the condensed interim consolidated financial statements.
Free cash flow is calculated as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Nine months ended
May 31, May 31, May 31, May 31,
2014 2013 (1) 2014 2013 (1)
(in thousands of dollars) $ $ $ $
----------------------------------------------------------------------------
Cash flow from operations 175,595 155,868 502,872 396,000
Acquisition of property, plant
and equipment (79,509) (108,325) (236,675) (286,457)
Acquisition of intangible and
other assets (4,943) (4,516) (13,672) (13,650)
----------------------------------------------------------------------------
Free cash flow 91,143 43,027 252,525 95,893
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note 2
of the condensed interim consolidated financial statements.
ADJUSTED EBITDA AND OPERATING MARGIN
Adjusted EBITDA 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. Adjusted EBITDA 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 adjusted EBITDA by revenue.
The most comparable IFRS financial measure is profit for the period. Adjusted
EBITDA and operating margin are calculated as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Nine months ended
May 31, May 31, May 31, May 31,
2014 2013 (1) 2014 2013 (1)
(in thousands of dollars, except
percentages) $ $ $ $
----------------------------------------------------------------------------
Profit for the period 35,514 48,079 145,593 141,025
Income taxes 8,801 18,411 36,912 51,615
Financial expense 32,038 35,146 97,505 80,068
Impairment of property, plant
and equipment 32,197 - 32,197 -
Depreciation and amortization 117,653 111,445 346,540 268,611
Integration, restructuring and
acquisitions costs 3,186 2,101 3,780 16,865
----------------------------------------------------------------------------
Adjusted EBITDA 229,389 215,182 662,527 558,184
----------------------------------------------------------------------------
Revenue 496,448 464,497 1,457,436 1,222,080
----------------------------------------------------------------------------
Operating margin 46.2% 46.3% 45.5% 45.7%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note 2
of the condensed interim consolidated financial statements.
CAPITAL INTENSITY
Capital intensity is used by Cogeco Cable's management and investors to assess
the Corporation's investment in capital expenditures in order to support a
certain level of revenue. Capital intensity ratio is defined as amount spent for
acquisitions of property, plant and equipment, intangible and other assets
divided by revenue.
Capital intensity is calculated as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Nine months ended
May 31, May 31, May 31, May 31,
2014 2013 2014 2013
(in thousands of dollars, except
percentages) $ $ $ $
----------------------------------------------------------------------------
Acquisition of property, plant
and equipment 79,509 108,325 236,675 286,457
Acquisition of intangible and
other assets 4,943 4,516 13,672 13,650
----------------------------------------------------------------------------
Total capital expenditures 84,452 112,841 250,347 300,107
Revenue 496,448 464,497 1,457,436 1,222,080
----------------------------------------------------------------------------
Capital intensity 17.0% 24.3% 17.2% 24.6%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended May 31, February 28,
(in thousands of dollars, except (2) (2)
percentages and per share data) 2014 2013 2014 2013
$ $ $ $
----------------------------------------------------------------------------
Revenue 496,448 464,497 486,008 429,672
Adjusted EBITDA 229,389 215,182 221,616 195,826
Operating margin 46.2% 46.3% 45.6% 45.6%
Impairment of property, plant and
equipment 32,197 - - -
Income taxes 8,801 18,411 14,838 15,821
Profit for the period 35,514 48,079 60,381 50,833
Profit for the period attributable
to owners of the Corporation 35,514 47,877 60,381 51,035
Cash flow from operating activities 184,435 166,976 181,628 150,084
Cash flow from operations 175,595 155,868 174,013 140,401
Acquisitions of property, plant and
equipment, intangible and other
assets 84,452 112,841 80,806 104,433
Free cash flow 91,143 43,027 93,207 35,968
Capital intensity 17.0% 24.3% 16.6% 24.3%
Earnings per share(1)
Basic 0.73 0.98 1.24 1.05
Diluted 0.72 0.98 1.23 1.04
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended November 30, August 31,
(in thousands of dollars, except (2) (2)
percentages and per share data) 2013 2012 2013 2012
$ $ $ $
----------------------------------------------------------------------------
Revenue 474,980 327,911 470,386 324,768
Adjusted EBITDA 211,522 147,176 222,539 160,825
Operating margin 44.5% 44.9% 47.3% 49.5%
Impairment of property, plant and
equipment - - - -
Income taxes 13,273 17,383 11,159 32,987
Profit for the period 49,698 42,113 43,870 45,705
Profit for the period attributable
to owners of the Corporation 49,698 42,113 43,870 45,705
Cash flow from operating activities 63,110 (280) 228,230 203,343
Cash flow from operations 153,264 99,731 161,581 126,946
Acquisitions of property, plant and
equipment, intangible and other
assets 85,089 82,833 108,095 124,392
Free cash flow 68,175 16,898 53,486 2,554
Capital intensity 17.9% 25.3% 23.0% 38.3%
Earnings per share(1)
Basic 1.02 0.87 0.90 0.94
Diluted 1.01 0.86 0.89 0.93
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----------------------------------------------------------------------------
(1) Per multiple and subordinate voting share.
(2) These figures have been adjusted to comply with the adoption of IAS 19 -
Employee Benefits.
SEASONAL VARIATIONS
Cogeco Cable's operating results are not generally subject to material seasonal
fluctuations except as follows. In the Canadian and American cable services
segment the number of customers in the Television service and HSI service are
generally lower in the second half of the fiscal year as a result of a decrease
in economic activity due to the beginning of the vacation period, the end of the
television season, and students leaving their campuses at the end of the school
year. Cogeco Cable offers its services in several university and college towns
such as Kingston, Windsor, St.Catharines, Hamilton, Peterborough, Trois-Rivieres
and Rimouski in Canada and in the Pennsylvania region, and to a lesser extent in
South Carolina, Maryland/Delaware in the United States. In the American cable
services segment, the Miami region is also subject to seasonal fluctuations due
to the winter season residents returning home from late Spring through the Fall.
Furthermore, the second, third and fourth quarter's operating margin is usually
higher as very low or no management fees are paid to COGECO Inc. Under the
Management Agreement, Cogeco Cable pays a fee equal to 2% of its total revenue
subject to a maximum amount. As the maximum amount has been reached in the
second quarter of fiscal 2014, Cogeco Cable will not pay management fees in the
second half of fiscal 2014. Similarly, as the maximum amount was paid in the
first six months of fiscal 2013, Cogeco Cable paid no management fees in the
second half of the previous fiscal year.
ADDITIONAL INFORMATION
This MD&A was prepared on July 9, 2014. Additional information relating to the
Corporation, including its Annual Information Form, is available on the SEDAR
website at www.sedar.com.
Jan Peeters Louis Audet
Chairman of the Board President and Chief Executive Officer
Cogeco Cable Inc.
Montreal, Quebec
July 9, 2014
FOR FURTHER INFORMATION PLEASE CONTACT:
Source:
Cogeco Cable Inc.
Pierre Gagne
Senior Vice President and Chief Financial Officer
514-764-4700
Information:
Media
Rene Guimond
Vice-President, Public Affairs and Communications
514-764-4700
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