Today, Cogeco Cable Inc. (TSX:CCA) ("Cogeco Cable" or the "Corporation")
announced its financial results for the second quarter of fiscal 2013, ended
February 28, 2013, in accordance with International Financial Reporting
Standards ("IFRS").
For the second quarter and first six months of fiscal 2013, which include three
months operating results of Atlantic Broadband ("ABB") and one month for Peer 1
Network Enterprises, Inc. ("PEER 1"):
-- Revenue increased by 35.2% to reach $429.7 million, and by 19.7% to
reach $757.6 million ;
-- Operating income before depreciation and amortization increased by 36.2%
to $195.8 million when compared to the second quarter of fiscal 2012,
and by 24.4% to $342.9 million when compared to the first half of the
prior year;
-- Operating margin(1)increased to 45.6% from 45.2% in the quarter and
increased to 45.3% from 43.5% in the first six months when compared to
the same periods of the prior year;
-- Profit for the period from continuing operations amounted to $58.5
million in the second quarter when compared to $31.1 million for the
same period of the previous fiscal year. Profit progression for the
quarter is mostly attributable to the operating income before
depreciation and amortization increase coming primarily from the
acquisitions of ABB and PEER 1, partly offset by the acquisition costs
and the financial expense increases both related to ABB and PEER 1. For
the first half of fiscal 2013, profit for the period from continuing
operations amounted to $100.6 million when compared to $70.7 million for
the first half of fiscal 2012. The increase for the six-month period
ended February 28, 2013 is mostly attributable to the increase in
operating income before depreciation and amortization coming primarily
from the acquisition of ABB, partly offset by the acquisition costs and
the financial expense increases both related to ABB and PEER 1 and the
income tax expense increase;
-- Profit for the period amounted to $58.5 million in the second quarter
when compared to $83.1 million for the same period of the previous
fiscal year. For the first half of fiscal 2013, profit for the period
amounted to $100.6 million when compared to $126.1 million for the
comparable period of prior year. The decline for both periods is mostly
attributable to the last year's profit from the Portuguese subsidiary,
Cabovisao - Televisao por Cabo, S.A. ("Cabovisao"), reported as
discontinued operations and disposed of on February 29, 2012, partly
offset by the increases in operating income before depreciation and
amortization, financial expense and acquisition costs all related to ABB
and PEER 1 and the income tax expense increase;
-- Free cash flow(1)reached $36.1 million for the second quarter compared
to $18.4 million in the comparable quarter of the prior year. For the
first six months, free cash flow amounted to $53.1 million, compared to
$38.1 million in the first half of fiscal 2012. The increases in free
cash flow over the prior year are due to the improvement of operating
income before depreciation and amortization, partly offset by the
increase in financial expense, the acquisition costs related to ABB and
PEER 1 acquisitions as well as the increase in acquisition of property,
plant and equipment;
(1) The indicated terms do not have standard definitions prescribed by
IFRS and therefore, may not be comparable to similar measures
presented by other companies. For more details, please consult the
"Non-IFRS financial measures" section of the Management's discussion
and analysis.
-- A quarterly dividend of $0.26 per share was paid to the holders of
subordinate and multiple voting shares, an increase of $0.01 per share,
or 4%, when compared to a dividend of $0.25 per share paid in the second
quarter of fiscal 2012. Dividend payments in the first six months
totaled $0.52 per share in fiscal 2013, compared to $0.50 per share in
fiscal 2012;
-- Fiscal 2013 second-quarter primary service units ("PSU")(1)grew by 7,463
and by 22,543 in the first six months of fiscal 2013. At February 28,
2013, consolidated PSU amounted to 2,486,350 of which 1,984,555 comes
from the Canadian cable services segment and 501,795 from the American
cable services segment;
-- On January 31, 2013, Cogeco Cable completed the acquisition of 96.57% of
the issued and outstanding shares of PEER 1 by way of takeover bid (the
"offer") valued at approximately $649 million. On April 3, 2013, Cogeco
Cable completed the acquisition of the remaining 3.43% of the issued and
outstanding shares of PEER 1 for a cash consideration of $17 million
pursuant to the compulsory acquisition provisions in Section 300 of the
Business Corporations Act ("British Columbia"). In connection with the
completion of the offer, Cogeco Cable has entered into secured credit
facilities in the amount of approximately $650 million and maturing in
2017, with a syndicate of lenders. PEER 1 is one of the world's leading
internet infrastructure providers, specializing in managed hosting,
dedicated servers, cloud services and co-location. This acquisition
enhances Cogeco Cable's footprint and builds on its strategic
initiatives by increasing scale in an attractive industry segment with
significant growth prospects in the state of the art data center
platforms. The Corporation will also serve additional businesses
worldwide, in addition to approximately 11,000 customers currently
served, through 23 data centres and 21 points-of-presence across North
America and Europe. PEER 1's primary network centre and head office
remain located in Vancouver.
"Cogeco Cable delivered great overall results for the second quarter of fiscal
2013," declared Louis Audet, President and Chief Executive Officer of Cogeco
Cable. "During this first fiscal quarter with ABB on board, we made progress as
we had forecasted, and believe the market opportunities of our combined
capabilities to be positive going forward," Louis Audet added.
"The integration of our more recent acquisition of PEER 1 is running smoothly
and we are in line with meeting the objectives we had communicated last
December," Louis Audet continued. "With increased operating margin, moderate yet
steady organic revenue increase and encouraging growth prospects for the
Enterprise services segment, I am confident that we will deliver on our updated
projections for 2013, which were modified to include PEER 1 operating results.
Looking forward to the third quarter, we are focused on continuing our efforts
to fully capitalize on our acquisitions and maintaining efficiencies across all
of our operations," concluded Louis Audet.
(1) Represents the sum of Television, High Speed Internet ("HSI") and
Telephony service customers.
SHAREHOLDERS' REPORT
Three and six-month periods ended February 28, 2013
FINANCIAL HIGHLIGHTS
Quarters ended Six months ended
(in thousands of
dollars, except
PSU growth,
percentages and February February February February
per share data) 28, 29, 28, 29,
2013 2012 Change 2013 2012 Change
$ $ % $ $ %
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Operations
Revenue 429,672 317,735 35.2 757,583 633,159 19.7
Operating income
before
depreciation and
amortization(1) 195,776 143,743 36.2 342,902 275,566 24.4
Operating
margin(1) 45.6% 45.2% - 45.3% 43.5% -
Operating income 103,721 59,491 74.3 178,881 126,490 41.4
Profit for the
period from
continuing
operations 58,458 31,086 88.1 100,618 70,653 42.4
Profit for the
period from
discontinued
operations - 52,047 - - 55,446 -
Profit for the
period 58,458 83,133 (29.7) 100,618 126,099 (20.2)
Profit for the
period
attributable to
owners of the
Corporation 58,660 83,133 (29.4) 100,820 126,099 (20.0)
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Cash Flow
Cash flow from
operating
activities 150,084 120,961 24.1 149,804 134,768 11.2
Cash flow from
operations(1) 140,515 104,622 34.3 240,360 201,665 19.2
Acquisitions of
property, plant
and equipment,
intangible and
other assets 104,433 86,234 21.1 187,266 163,517 14.5
Free cash flow(1) 36,082 18,388 96.2 53,094 38,148 39.2
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Financial
Condition(2)
Property, plant
and equipment - - - 1,730,766 1,322,093 30.9
Total assets - - - 5,207,588 2,908,079 79.1
Indebtedness(3) - - - 3,019,682 1,069,112 -
Equity
attributable to
owners of the
Corporation - - - 1,271,591 1,188,431 7.0
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Primary service
units ("PSU")
growth(4) 7,463 12,280 (39.2) 22,543 58,459 (61.4)
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Per Share Data(5)
Earnings per share
attributable to
owners of the
Corporation
From continuing
and
discontinued
operations
Basic 1.20 1.71 (29.8) 2.07 2.59 (20.1)
Diluted 1.19 1.70 (30.0) 2.06 2.57 (19.8)
From continuing
operations
Basic 1.20 0.64 87.5 2.07 1.45 42.8
Diluted 1.19 0.63 88.9 2.06 1.44 43.1
From
discontinued
operations
Basic - 1.07 - - 1.14 -
Diluted - 1.06 - - 1.13 -
(1) The indicated terms do not have standardized definitions prescribed by
International Financial Reporting Standards ("IFRS") and therefore,
may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-IFRS financial
measures" section of the Management's discussion and analysis
("MD&A").
(2) At February 28, 2013 and August 31, 2012.
(3) Indebtedness is defined as the total of bank indebtedness, principal
on long-term debt, balance due on a business combination and
obligations under derivative financial instruments.
(4) Represents the sum of Television, High Speed Internet ("HSI") and
Telephony service customers.
(5) Per multiple and subordinate voting share.
MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)
Three and six-month periods ended February 28, 2013
FORWARD-LOOKING STATEMENTS
Certain statements in this Management's Discussion and Analysis ("MD&A") may
constitute forward-looking information within the meaning of securities laws.
Forward-looking information may relate to Cogeco Cable's future outlook and
anticipated events, business, operations, financial performance, financial
condition or results and, in some cases, can be identified by terminology such
as "may"; "will"; "should"; "expect"; "plan"; "anticipate"; "believe"; "intend";
"estimate"; "predict"; "potential"; "continue"; "foresee", "ensure" or other
similar expressions concerning matters that are not historical facts. In
particular, statements regarding the Corporation's future operating results and
economic performance and its objectives and strategies are forward-looking
statements. These statements are based on certain factors and assumptions
including expected growth, results of operations, performance and business
prospects and opportunities, which Cogeco Cable believes are reasonable as of
the current date. While management considers these assumptions to be reasonable
based on information currently available to the Corporation, they may prove to
be incorrect. The Corporation cautions the reader that the economic downturn
experienced over the past few years makes forward- looking information and the
underlying assumptions subject to greater uncertainty and that, consequently,
they may not materialize, or the results may significantly differ from the
Corporation's expectations. It is impossible for Cogeco Cable to predict with
certainty the impact that the current economic uncertainties may have on future
results. Forward-looking information is also subject to certain factors,
including risks and uncertainties (described in the "Uncertainties and main risk
factors" section of the Corporation's 2012 annual MD&A as well as in the present
MD&A) that could cause actual results to differ materially from what Cogeco
Cable currently expects. These factors include risks pertaining to markets and
competition, technology, regulatory developments, operating costs, information
systems, disasters or other contingencies, financial risks related to capital
requirements, human resources, controlling shareholder and holding structure,
many of which are beyond the Corporation's control. Therefore, future events and
results may vary significantly from what management currently foresees. The
reader should not place undue importance on forward-looking information and
should not rely upon this information as of any other date. While management may
elect to, the Corporation is under no obligation and does not undertake to
update or alter this information at any particular time, except as may required
by law.
All amounts are stated in Canadian dollars unless otherwise indicated. This
report should be read in conjunction with the Corporation's condensed interim
consolidated financial statements and the notes thereto, prepared in accordance
with the International Financial Reporting Standards ("IFRS") and the MD&A
included in the Corporation's 2012 Annual Report.
CORPORATE OBJECTIVES AND STRATEGIES
Cogeco Cable Inc.'s ("Cogeco Cable" or the "Corporation") objectives are to
provide outstanding service to its customers, improve profitability and create
shareholder value. To achieve these objectives, the Corporation has developed
strategies that focus on expanding its service offering, enhancing its existing
services and bundles, The Corporation measures its performance, with regard to
these objectives by monitoring operating income before depreciation and
amortization(1), operating margin(1), PSU(2) growth and free cash flow(1).
KEY PERFORMANCE INDICATORS
OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION AND OPERATING MARGIN
For the six-month period ended February 28, 2013, operating income before
depreciation and amortization increased by 24.4% when compared to the same
period of fiscal 2012 to reach $342.9 million and operating margin increased to
45.3% from 43.5%. As a result of the acquisition of Peer 1 Network Enterprises,
Inc. ("PEER 1"), management revised its January 14, 2013 projections for fiscal
2013. Operating income before depreciation and amortization is now expected to
reach $767 million from $735 million and operating margin should decrease to
45.2% from 46.2%. For further details, please consult the fiscal 2013 revised
projections in the "Fiscal 2013 financial guidelines" section.
FREE CASH FLOW
For the six-month period ended February 28, 2013, Cogeco Cable reports free cash
flow of $53.1 million, compared to $38.1 million for the same period of the
previous fiscal year, an increase of $14.9 million. This variance is mostly
attributable to the improvement of operating income before depreciation and
amortization, partly offset by the increase in financial expense, the
acquisition costs related to Atlantic Broadband ("ABB") and PEER 1 acquisitions
as well as the increase in acquisition of property, plant and equipment. Giving
effect to the acquisition of PEER 1, management also revised its free cash flow
projections from $170 million to $145 million as a result of acquisitions of
property, plant and equipment, intangible and other assets exceeding cash flow
generated by PEER 1, additional integration, restructuring and acquisition costs
of $9 million as well as additional financial expense of $17 million both
related to this acquisition. For further details, please consult the fiscal 2013
revised projections in the "Fiscal 2013 financial guidelines" section.
PSU GROWTH AND PENETRATION OF SERVICE OFFERINGS
During the six-month period ended February 28, 2013, PSU reach 2,486,350 of
which 1,984,555 comes from the Canadian cable services segment and 501,795 from
the American cable services segment. In the American cable services segment, PSU
increased by 7,121 in the quarter, stemming primarily from the Television and
HSI services. In the Canadian cable services segment, PSU increased at a lower
pace to 342 when compared to 12,280 PSU for the comparable period of the prior
year, mainly as a result of service category maturity and a more competitive
environment in the Television services. Cogeco Cable maintains targeted
marketing initiatives to increase the penetration level of its services.
BUSINESS DEVELOPMENTS
On January 31, 2013, Cogeco Cable completed the acquisition of 96.57% of the
issued and outstanding shares of PEER 1 by way of takeover bid (the "offer")
valued at approximately $649 million. On April 3, 2013, Cogeco Cable completed
the acquisition of the remaining 3.43% of the issued and outstanding shares of
PEER 1 for a cash consideration of $17 million pursuant to the compulsory
acquisition provisions in Section 300 of the Business Corporations Act ("British
Columbia"). In connection with the completion of the offer, Cogeco Cable has
entered into secured credit facilities in the amount of approximately $650
million and maturing in 2017, with a syndicate of lenders. PEER 1 is one of the
world's leading internet infrastructure providers, specializing in managed
hosting, dedicated servers, cloud services and co-location. This acquisition
enhances Cogeco Cable's footprint and builds on its strategic initiatives by
increasing scale in an attractive industry segment with significant growth
prospects in the state of the art data center platforms. The Corporation will
also serve additional businesses worldwide, in addition to approximately 11,000
customers currently served, through 23 data centres and 21 points-of-presence
across North America and Europe. PEER 1's primary network centre and head office
remain located in Vancouver. For the purpose of segmented operating results,
operating results from PEER 1 acquisition are incorporated in the Enterprise
services segment. For further details on PEER 1 operating results, please refer
to the "Enterprise services" section.
On November 30, 2012, the Corporation completed the acquisition of ABB, an
independent cable system operator formed in 2003, serving about 495,000 PSU's
and providing Analogue and Digital Television, as well as HSI and Telephony
services. The acquisition is an attractive entry point into the United States of
America ("US") market, providing a significant increase in PSU base with further
growth potential, a high quality network infrastructure and the ability for the
Corporation's management to leverage its core knowledge and operational
experience. The transaction, valued at US$1.36 billion, was financed through a
combination of cash on hand, a draw-down on the existing Term Revolving Facility
of approximately US$588 million and US$660 million of borrowings under a new
committed non-recourse debt financing at ABB. Ranked the 12th- largest cable
television system operator in the US, ABB operates cable systems in Western
Pennsylvania, Southern Florida, Maryland, Delaware and South Carolina. For the
purpose of segmented operating results, operating results from ABB acquisition
are presented in the American cable services operations. For further details on
ABB's operating results, please refer to the "American cables services" section.
(1) The indicated terms do not have standardized definitions prescribed by
IFRS and therefore, may not be comparable to similar measures
presented by other companies. For more details, please consult the
"Non-IFRS financial measures" section.
(2) Represents the sum of Television, High Speed Internet ("HSI") and
Telephony service customers.
OPERATING AND FINANCIAL RESULTS
OPERATING RESULTS
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Quarters ended Six months ended
February February February February
28, 29, 28, 29,
2013 2012 Change 2013 2012 Change
(in thousands of
dollars, except
percentages) $ $ % $ $ %
----------------------------------------------------------------------------
Revenue 429,672 317,735 35.2 757,583 633,159 19.7
Operating
expenses 230,908 171,649 34.5 405,112 348,108 16.4
Management fees
- COGECO Inc. 2,988 2,343 27.5 9,569 9,485 0.9
-------------------------------------- ----------------------
Operating income
before
depreciation
and
amortization 195,776 143,743 36.2 342,902 275,566 24.4
-------------------------------------- ----------------------
Operating margin 45.6% 45.2% 45.3% 43.5%
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REVENUE
Fiscal 2013 second-quarter revenue increased by $111.9 million, or 35.2%, to
reach $429.7 million, when compared to the same period last year. For the first
six months, revenue amounted to $757.6 million, an increase of $124.4 million,
or 19.7% when compared to the same period of fiscal 2012. Revenue increases for
both periods is mainly attributable to the operating results of the recent
acquisitions, ABB and PEER 1, ("recent acquisitions"). For further details on
the Corporation's revenue, please refer to the "Canadian cable services",
"American cable services" and "Enterprise services" sections.
OPERATING EXPENSES
For the second quarter of fiscal 2013, operating expenses increased by $59.3
million, to reach $230.9 million, an increase of 34.5% compared to the prior
year. For the first half of the fiscal year, operating expenses amounted to
$405.1 million, an increase of $57 million, or 16.4%, when compared to the same
period of fiscal 2012. Operating expenses increase is mostly attributable to the
recent acquisitions, partly offset by cost reduction initiatives and the
reduction in operating expenses in the Canadian cable services related to the
deployment and support costs incurred in fiscal 2012 for the migration of
Television service customers from analogue to digital. For further details on
the Corporation's operating expenses, please refer to the "Canadian cable
services", "American cable services" and "Enterprise services" sections.
OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION AND OPERATING MARGIN
Fiscal 2013 second-quarter operating income before depreciation and amortization
increased by $52.0 million, or 36.2%, to reach $195.8 million, and by $67.3
million, or 24.4%, to reach $342.9 million in the first six-month as a result of
the recent acquisitions and the improvement in the Canadian cable services
segment. Cogeco Cable's second-quarter operating margin increased to 45.6% from
45.2% and to 45.3% from 43.5% for the first six months of fiscal 2013 when
compared to the comparable periods of the prior year. For further details on the
Corporation's operating income before depreciation and amortization and
operating margin, please refer to the "Canadian cable services", "American cable
services" and "Enterprise services" sections.
CUSTOMER STATISTICS
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----------------------------------------------------------------------
Consolidated US CANADA
February 28, 2013
----------------------------------------------------------------------
PSU 2,486,350 501,795(1) 1,984,555
Television service
customers 1,100,547 247,840 852,707
HSI service customers 824,144 174,979 649,165
Telephony service
customers 561,659 78,976 482,683
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Consolidated
----------------------------
Net additions (losses) Net additions (losses)
Quarters ended Six months ended
February 28, February 29, February 28, February 29,
2013 2012 2013 2012
----------------------------------------------------------------------------
PSU 7,463 12,280 22,543 58,459
Television service
customers (4,896) (9,111) (6,972) (4,659)
HSI service customers 7,125 7,518 17,970 24,803
Telephony service
customers 5,234 13,873 11,545 38,315
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(1) Include 494,674 PSU (244,404 Television service, 171,640 HSI service
and 78,630 Telephony service customers) from the acquisition of ABB on
November 30, 2012.
Fiscal 2013 second-quarter and first six months, PSU net additions were lower
than in the comparable period of the prior year mainly as a result of service
category maturity, competitive offers and tightening of our customer credit
controls and processes. PSU progression comes mainly from the American cable
services. For the second quarter net customer losses for Television service
customers stood at 4,896 compared to 9,111 for fiscal 2012 second-quarter.
Television service customer net losses are mainly due to the promotional offers
of competitors for the video service combined with the tightening of our
customer credit controls. Fiscal 2013 second-quarter HSI service customers grew
by 7,125 compared to 7,518 in the second quarter of the prior year, and the
number of net additions to the Telephony service stood at 5,234 customers
compared to 13,873 customers for the same period of the prior year. For the
first six months of fiscal 2013, PSU net additions are the results of the recent
acquisition of ABB at the end of the first quarter of fiscal 2013. For further
details on the Corporation's customer statistics, please refer to the "Canadian
cable services" and "American cable services" sections.
RELATED PARTY TRANSACTIONS
Cogeco Cable Inc. is a subsidiary of COGECO Inc., which holds 32.1% of the
Corporation's equity shares, representing 82.6% of the Corporation's voting
shares. On September 1, 1992, Cogeco Cable Inc. executed a management agreement
with COGECO Inc. under which the parent company agreed to provide certain
executive, administrative, legal, regulatory, strategic and financial planning
services and additional services to the Corporation and its subsidiaries (the
"Management Agreement"). These services are provided by COGECO Inc.'s senior
executives, including the President and Chief Executive Officer, the Senior Vice
President and Chief Financial Officer, the Vice President Corporate Affairs, the
Vice President Chief Legal Officer and Secretary, the Vice President Corporate
Development, the Vice President and Treasurer, the Vice President Public Affairs
and Communications and the Vice President Internal Audit. No direct remuneration
is payable to such senior executives by the Corporation. However, the
Corporation granted 71,233 stock options (47,729 in 2012) to these senior
executives as executives of Cogeco Cable during the first six months of fiscal
year 2013. During the second quarter and first six months of fiscal 2013, the
Corporation charged COGECO Inc. an amount of $86,000 and $176,000 ($75,000 and
$149,000 in 2012) with regards to the Corporation's stock options to these
employees.
During the first six months of fiscal 2013, the Corporation also granted 12,280
(11,006 in 2012) Incentive Share Units ("ISUs") to these senior executives as
executives of Cogeco Cable. During the second quarter and first six months of
fiscal 2013, the Corporation charged COGECO Inc. an amount of $112,000 and
$219,000 ($104,000 and $180,000 in 2012) with regards to the Corporation's ISUs
granted to these employees.
Under the Management Agreement, the Corporation pays monthly fees equal to 2% of
its total revenue to COGECO Inc. for the above-mentioned services. In 1997, the
management fee was capped at $7 million per year, subject to annual upward
adjustment based on increases in the Consumer Price Index in Canada. This limit
can be increased under certain circumstances upon request to that effect by
COGECO Inc. For fiscal year 2013, management fees have been set at a maximum of
$9.6 million ($9.5 million in 2012), which was paid within the first six months
of the fiscal year. For fiscal year 2012, management fees were also fully paid
in the first half of the year. In addition, the Corporation reimburses COGECO
Inc.'s out-of-pocket expenses incurred with respect to services provided to the
Corporation under the Management Agreement.
Details regarding the Management Agreement and stock options and ISUs granted to
COGECO Inc.'s employees are provided in the Corporation's 2012 Annual Report.
There were no other material related party transactions during the periods covered.
FIXED CHARGES
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Quarters ended Six months ended
February February February February
28, 29, 28, 29,
2013 2012 Change 2013 2012 Change
(in thousands of
dollars, except
percentages) $ $ % $ $ %
----------------------------------------------------------------------------
Depreciation and
amortization 84,591 84,252 0.4 149,257 149,076 0.1
Financial
expense 29,094 14,788 96.7 44,694 31,617 41.4
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For the three and six-month periods ended February 28, 2013, depreciation and
amortization expense remained essentially the same at $85 million and $149.3
million, respectively compared to $84.3 million and $149.1 million for the same
periods of the prior year, respectively, resulting mainly from the recent
acquisitions and from additional acquisition of property, plant and equipment
offset by higher fiscal 2012 depreciation expense related to the reduction of
useful lives for certain home terminal devices.
Fiscal 2013 second-quarter financial expense increased by $14.3 million, or
96.7%, at $29.1 million when compared to $14.8 million in fiscal 2012
second-quarter. For the first six months of fiscal 2013, financial expense
increased by $13.1 million, or 41.4%, at $44.7 million, compared to $31.6
million in the prior year. Financial expense increased in both periods as a
result of the cost of financing related to the recent acquisitions.
INCOME TAXES
For the three and six-month periods ended February 28, 2013, income tax expense
amounted to $16.2 million and $33.6 million, respectively, compared to $13.6
million and $24.2 million, respectively, for the comparable periods in the prior
year. These increases are mostly attributable to the improvement in operating
income before depreciation and amortization and by income taxes reductions, in
fiscal 2012, from the implementation of certain tax measures of the 2011 federal
budget limiting the tax deferrals for corporations with a significant interest
in a partnership, partly offset by the increase in the financial expense and by
the efficient tax structure resulting from the recent acquisitions.
PROFIT FOR THE PERIOD FROM CONTINUING OPERATIONS
For the three-month period ended February 28, 2013, profit for the period from
continuing operations amounted to $58.5 million of which $58.7 million, or $1.20
per share is attributable to owners of the Corporation, compared to a profit for
the period from continuing operations of $31.1 million, or $0.64 per share, all
of which is attributable to owners of the Corporation for the comparable period.
For the six-month period ended February 28, 2013, profit for the period from
continuing operations amounted to $100.6 million of which $100.8 million, or
$2.07 per share is attributable to owners of the Corporation, compared to a
profit for the period from continuing operations of $70.7 million, or $1.45 per
share, all of which is attributable to owners of the Corporation for the
comparable period. Profit for the period from continuing operations progression
for the quarter and the first half of fiscal 2013 is mostly attributable to the
increase in operating income before depreciation and amortization, partly offset
by the acquisition costs related to the recent acquisitions and the financial
expense and income tax expenses increases explained above.
PROFIT FOR THE PERIOD
For the three and six-month periods ended February 28, 2013, profit for the
period amounted to $58.5 million and $100.6 million, respectively, compared to
$83.1 million and $126.1 million for the comparable periods. Fiscal 2013
second-quarter profit for the period attributable to owners of the Corporation
amounted to $58.7 million, or $1.20 per share, compared to $83.1 million, or
$1.71 per share, in the second quarter of fiscal 2012. For the six-month period
ended February 28, 2013, profit for the period attributable to owners of the
Corporation amounted to $100.8 million or $2.07 per share, compared to $126.1
million, or $2.59 per share for the comparable period of fiscal 2012. The
decline for both periods is mostly attributable to last year's profit from the
Portuguese subsidiary, Cabovisao - Televisao por Cabo, S.A. ("Cabovisao"),
reported as discontinued operations and disposed of on February 29, 2012, partly
offset by the increases of operating income before depreciation and
amortization, financial expense and acquisition costs all related to the recent
acquisitions.
The non-controlling interest resulting from the acquisition of PEER 1 represents
a participation of approximately 3.43% and amounted to a loss for the period of
$0.2 million in the second quarter and for the first six months of fiscal 2013.
CASH FLOW ANALYSIS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Six months ended
February 28, February 29, February 28, February 29,
2013 2012 2013 2012
(in thousands of
dollars) $ $ $ $
----------------------------------------------------------------------------
Operating activities
Cash flow from
operations 140,515 104,622 240,360 201,665
Changes in non-cash
operating activities 4,931 3,179 (76,182) (59,489)
Amortization of deferred
transaction costs and
discounts on long-term
debt (2,723) (682) (3,463) (1,357)
Income taxes paid (17,475) (17,635) (60,008) (53,817)
Current income tax
expense 23,027 26,206 48,118 45,696
Financial expense paid (27,285) (9,517) (43,715) (29,547)
Financial expense 29,094 14,788 44,694 31,617
----------------------------------------------------------------------------
150,084 120,961 149,804 134,768
Investing activities (733,414) (86,292) (2,170,308) (163,370)
Financing activities 610,025 34,111 1,841,086 59,510
----------------------------------------------------------------------------
Effect of exchange rate
changes on cash and
cash equivalents
denominated in foreign
currencies 705 - 705 -
----------------------------------------------------------------------------
Net change in cash and
cash equivalents from
continuing operations 27,400 68,780 (178,713) 30,908
Net change in cash and
cash equivalents from
discontinued operations
(1) - 47,237 - 49,597
Cash and cash
equivalents from
continuing and
discontinued
operations, beginning
of year 9,278 19,935 215,391 55,447
----------------------------------------------------------------------------
Cash and cash
equivalents from
continuing and
discontinued
operations, end of year 36,678 135,952 36,678 135,952
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) For further details on the Corporation's cash flows attributable to
discontinued operations, please refer to the "Disposal of subsidiary
and discontinued operations" in note 14 of the condensed interim
consolidated financial statements.
OPERATING ACTIVITIES
Fiscal 2013 second-quarter cash flow from operations reached $140.5 million
compared to $104.6 million, an increase of $35.9 million, or 34.3%, compared to
the same period of prior year. For the first six months, cash flow from
operations reached $240.4 million compared to $201.7 million for the same period
last year, an increase of $38.7 million, or 19.2%. Increases for both periods
are primarily due to the improvement of operating income before depreciation and
amortization, partly offset by financial expense increase and by the acquisition
costs related to ABB and PEER 1 acquisitions. For the second quarter, changes in
non-cash operating activities generated cash inflows of $4.9 million compared to
$3.2 million in the second quarter of fiscal 2012, mainly as a result of a
higher increase in trade and other payables, partly offset by a higher increase
in trade and other receivables. For the first six months, changes in non-cash
operating activities generated cash outflows of $76.2 million compared to $59.5
million for the same period in fiscal 2012, mainly as a result of a higher
decrease in trade and other payables and by a decrease in provisions compared to
an increase in the prior year, partly offset by an increase in deferred and
prepaid revenue and other liabilities compared to a decrease in the prior year.
INVESTING ACTIVITIES
BUSINESS COMBINATIONS IN FISCAL 2013
On January 31, 2013, the Corporation completed the acquisition of PEER 1 and on
November 30, 2012, the acquisition of ABB. These acquisitions were accounted for
using the purchase method. The preliminary purchase price allocation of these
acquisitions, pending the completion of the valuation of the net assets
acquired, is as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
PEER 1 ABB TOTAL
$ $ $
----------------------------------------------------------------------------
Consideration
Paid
Purchase of shares 477,834 337,779 815,613
Repayment of secured debts and
settlement of options outstanding 170,872 1,021,854 1,192,726
----------------------------------------------------------------------------
648,706 1,359,633 2,008,339
----------------------------------------------------------------------------
Net assets acquired
Cash and cash equivalents 10,840 5,480 16,320
Restricted cash 8,729 - 8,729
Trade and other receivables 12,772 9,569 22,341
Prepaid expenses and other 3,855 1,370 5,225
Income tax receivable 672 - 672
Other assets 3,328 - 3,328
Property, plant and equipment 150,206 205,353 355,559
Intangible assets 139,703 763,084 902,787
Goodwill 421,986 602,690 1,024,676
Deferred tax assets 8,355 33,835 42,190
Trade and other payables assumed (26,330) (27,620) (53,950)
Provisions - (721) (721)
Income tax liabilities assumed (4,716) - (4,716)
Deferred and prepaid revenue and
other liabilities assumed (3,315) (5,254) (8,569)
Long-term debt assumed (1,735) - (1,735)
Deferred tax liabilities (58,682) (228,153) (286,835)
Non-controlling interest (16,962) - (16,962)
----------------------------------------------------------------------------
648,706 1,359,633 2,008,339
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 Six months ended
February 28, February 29, February 28, February 29,
2013 2012 2013 2012
(in thousands of
dollars) $ $
----------------------------------------------------------------------------
Customer premise
equipment(1) 18,174 24,445 37,874 57,071
Scalable
infrastructure(2) 24,302 35,024 56,916 51,350
Line extensions 5,191 4,319 8,120 7,921
Upgrade / Rebuild 12,139 5,470 15,650 11,654
Support capital 4,771 6,534 10,383 11,803
----------------------------------------------------------------------------
Acquisition of
property, plant and
equipment - Canadian
and American cable
services 64,577 75,792 128,943 139,799
Acquisition of
property, plant and
equipment - Enterprise
services 35,363 7,796 49,189 17,128
----------------------------------------------------------------------------
Acquisitions of
property, plant and
equipment 99,940 83,588 178,132 156,927
----------------------------------------------------------------------------
Acquisition of
intangible and other
assets - Canadian and
American cable
services 4,214 2,957 8,115 6,253
Acquisition of
intangible and other
assets - Enterprise
services 279 (311) 1,019 337
----------------------------------------------------------------------------
Acquisitions of
intangible and other
assets 4,493 2,646 9,134 6,590
----------------------------------------------------------------------------
104,433 86,234 187,266 163,517
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes mainly home terminal devices as well as new and replacement
drops.
(2) Includes mainly head-end equipment, digital video and telephony
transport as well as HSI equipment.
For the three and six-month periods ended February 28, 2013, acquisition of
property, plant and equipment amounted to $99.9 million and $178.1 million,
respectively, compared to $83.6 million and $156.9 million for the comparable
periods of fiscal 2012. In the Canadian cable services, fiscal 2013
second-quarter acquisition of property, plant and equipment amounted to $51.4
million, a decrease of 32.2% when compared to $75.8 million in the second
quarter of the prior year. For the six-month period ended February 28, 2013,
acquisition of property, plant and equipment amounted to $115.7 million, a
decrease of 17.2% when compared to the prior year. For the three and six-month
periods ended February 28, 2013, acquisition of property, plant and equipment in
the American cable services segment amounted $13.2 million. The decreases in the
Canadian cable services segment are mainly attributable to the following
factors:
-- A decrease in the quarter and an increase for the six-month period ended
February 28, 2013 in scalable infrastructure and network upgrade and
rebuild to extend and improve network capacity and to deploy advanced
technologies such as DOCSIS 3.0 and Switched Digital Video in existing
areas served; and
-- A decrease in customer premise equipment, mainly due to the achievement
in fiscal 2012 of the first phase in the conversion of Television
service customers from analogue to digital and the lower PSU growth as a
result of service maturity.
Fiscal 2013 second-quarter and first six months acquisition of property, plant
and equipment in the Enterprise services segment, including the capital
expenditures of the recent acquisition of PEER 1, amounted to $35.4 million and
$49.2 million compared to $7.8 million and $17.1 million in the comparable
periods of fiscal 2012, respectively. The increases included capital
expenditures in data centre facilities in the Montreal and Toronto areas in
Canada and Portsmouth in England as well as expansion of the fibre in the
Toronto area in order to fulfill orders from new customers.
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 second quarter and the first six months of fiscal 2013, the
acquisition of intangible and other assets amounted to $4.5 million and $9.1
million, compared to $2.6 million and $6.6 million for the same periods last
year, respectively.
FREE CASH FLOW AND FINANCING ACTIVITIES
In the second quarter of fiscal 2013, free cash flow amounted to $36.1 million,
$17.7 million higher than in the comparable period of fiscal 2012. For the
six-month period, free cash flow amounted to $53.1 million, $14.9 million, or
39.2%, higher than the same period of last year. Free cash flow increase for
both periods over the prior year are due to the improvement of operating income
before depreciation and amortization, partly offset by the increase in financial
expense, the acquisition costs related to ABB and PEER 1 acquisitions as well as
the increase in acquisition of property, plant and equipment.
In the second quarter of fiscal 2013, higher Indebtedness level provided for a
cash increase of $636.4 million, mainly due to drawings of $640.3 million (net
of transaction costs of $2.8 million) under new credit facilities amounting
approximately to $650 million incurred to finance the acquisition of PEER 1. In
the second quarter of fiscal 2012, higher Indebtedness level provided a cash
increase of $46.5 million mainly due to the issuance, on February 14, 2012, of
$200 million Senior Secured Debentures Series 3 ("Fiscal 2012 debentures") for
net proceed of $198.1 million which was used to repay the $130 million Term
Revolving Facility and $21 million of bank indebtedness.
For the six-month period of fiscal 2013, higher Indebtedness level provided for
a cash increase of $1.9 billion, mainly due to the draw-down on the existing
Term Revolving Facility of $584.2 million (US$588 million) and the new Term Loan
Facilities of $637.4 million (US$660 million for a net proceed of US$641.5
million, net of transaction costs of US$18.5 million) to finance the acquisition
of ABB as well to drawings of $640.3 million (net of transaction costs of $2.8
million) under new credit facilities amounting approximately to $650 million
incurred to finance the acquisition of PEER 1. In the first six months of fiscal
2012, Indebtedness affecting cash increased by $86.9 million mainly due to the
issuance of Fiscal 2012 debentures previously described, which was used to repay
the $110 million Term Revolving Facility.
During the second quarter of fiscal 2013, a quarterly dividend of $0.26 per
share was paid to the holders of subordinate and multiple voting shares,
totaling $12.6 million, when compared to a dividend paid of $0.25 per share, or
$12.2 million in the second quarter of fiscal 2012. Dividend payments in the
first six months totaled $0.52 per share, or $25.3 million, compared to $0.50
per share, or $24.3 million the year before.
As at February 28, 2013, the Corporation had a working capital deficiency of
$152.8 million compared to $17.2 million at August 31, 2012. The increase of
$135.6 million in the deficiency is mainly due to the decrease of $178.7 million
in cash and cash equivalents, primarily used for the acquisition of ABB. The
deficiency was also impacted by an increase of $28.4 million in trade and other
receivables and by a decrease of $23.6 million in trade and other payables. As
part of the usual conduct of its business, Cogeco Cable maintains a working
capital deficiency due to a low level of accounts receivable as a large portion
of the Corporation's customers pay before their services are rendered, unlike
trade and other payables, which are paid after products are delivered or
services are rendered, thus enabling the Corporation to use cash and cash
equivalents to reduce Indebtedness.
At February 28, 2013, the Corporation had used $626.5 million of its $750
million Term Revolving Facility for a remaining availability of $123.5 million.
The Corporation's subsidiary, ABB, also benefits from a Revolving Credit
Facility of $51.6 million (US$50 million), of which $3.6 million (US$3.5
million) was used at February 28, 2013 for a remaining availability of $48
million. At February 28, 2013, the Corporation also benefits from additional
Revolving Credit Facilities of $250.9 million incurred as a result of the
acquisition of PEER 1, of which $243.6 million was used at February 28, 2013 for
a remaining availability of $7.3 million.
FINANCIAL POSITION
As a result of the acquisition of ABB and PEER 1, most financial position
balances have changed significantly since August 31, 2012. For further details
on the preliminary allocation of the purchase price of the acquisitions, please
refer to the investing activities under the "Cash flow analysis" section.
OUTSTANDING SHARE DATA
A description of Cogeco Cable's share data at March 31, 2013 is presented in the
table below. Additional details are provided in note 10 of the condensed interim
consolidated financial statements.
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Amount
Number of (in thousands
shares/options of dollars)
----------------------------------------------------------------------------
Common shares
Multiple voting shares 15,691,100 98,346
Subordinate voting shares 33,146,196 900,795
Options to purchase subordinate
voting shares
Outstanding options 782,440
Exercisable options 443,063
----------------------------------------------------------------------------
----------------------------------------------------------------------------
In the normal course of business, Cogeco Cable has incurred financial
obligations, primarily in the form of long-term debt, operating and finance
leases and guarantees. Cogeco Cable's obligations, as discussed in the 2012
Annual Report, have not materially changed since August 31, 2012, except as
mentioned below.
In connection with the acquisition of PEER 1 on January 31, 2013, the
Corporation concluded Secured Credit Facilities totaling approximately $650
million with a syndicate of lenders in four tranches for a net proceed of $640.3
million net of transaction costs of $2.8 million. The first tranche, a Canadian
Term Facility amounting to $175 million, the second tranche, a US Term Facility
amounting to US$225 million, the third tranche, a Revolving Facility of $240
million and the fourth tranche, a UK Revolving Facility of GBP 7 million. The
Canadian and US Term Facilities are available in Canadian and US dollars and
interest rates are based on Bankers' Acceptance, LIBOR Loans, Prime Rate Loans
or US Base Rate Loans, plus the applicable margin. The Revolving Facility is
available in Canadian dollars, US dollars, British Pounds and Euros and interest
rates are based on Bankers' Acceptance, LIBOR Loans in US dollars, British
Pounds or Euros, Prime Rate Loans or US and British Pounds Base Rate Loans, plus
the applicable margin. The UK Revolving Facility is available in British Pounds
and interest rates are based on British Pounds Base Rate Loans or British Pounds
LIBOR Loans. Starting on August 31, 2013, the Canadian and US Term Facilities
are subject to quarterly amortization of 1.25% in the first year, 1.875% in the
second year, 3.125% in the third year and 3.75% in the fourth year, payable on
the last business day of each fiscal quarter. The Secured Credit Facilities will
mature on January 31, 2017. The Secured Credit Facilities are indirectly secured
by a first priority fixed and floating charge on substantially all present and
future real and personal property and undertaking of every nature and kind of
the Corporation and most of its subsidiaries except for ABB and its
subsidiaries, and provides for certain permitted encumbrances, including
purchased money obligations, existing funded obligations and charges granted by
any subsidiary prior to the date when it becomes a subsidiary, subject to a
maximum amount. The provisions under this facility provides for restrictions on
the operations and activities of the Corporation but does not cover ABB.
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.
In connection with the acquisition of ABB on November 30, 2012, the Corporation
concluded, through two of its US subsidiaries, First Lien Credit Facilities
totaling US$710 million with a syndicate of banks and other institutional
lenders in three tranche and draw down by an amount of US$660 million of which
US$641.5 million was used to repay ABB's prior secured debt and US$18.5 million
to pay for some of the transaction costs. The first tranche, a Term Loan A
Facility amounting to US$240 million, which will mature on November 30, 2017,
the second tranche, a Term Loan B Facility amounting to US$420 million, which
will mature on November 30, 2019 and the third tranche, a Revolving Credit
Facility of US$50 million, including a swingline of US$15 million, which will
mature on November 30, 2017. Interest rates on the First Lien Credit Facilities
are based on LIBOR plus the applicable margin, with a LIBOR floor of 1.00% for
the Term Loan B Facility. Starting on December 31, 2013, the Term Loan A
Facility is subject to quarterly amortization of 1.25% in the first year, 2.5%
in the second year and 3.0% in the third and fourth years. Starting on December
31, 2012, the Term Loan B Facility is subject to quarterly amortization of 0.25%
until its maturity date. In addition to the fixed amortization schedule and
commencing in the first quarter of fiscal 2015, loans under the Term Loan
Facilities shall be prepaid according to a Prepayment Percentage of excess cash
flow generated during the prior fiscal year. The First Lien Credit Facilities
are non-recourse to the Corporation, its Canadian subsidiaries and PEER 1's
subsidiaries and are indirectly secured by a first priority fixed and floating
charge on substantially all present and future real and personal property and
undertaking of every nature and kind of ABB and its subsidiaries. The provisions
under these facilities provide for restrictions on the operations and activities
of ABB and its subsidiaries. Generally, the most significant restrictions relate
to permitted indebtedness and investments, distributions and maintenance of
certain financial ratios.
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 half of fiscal 2013, amounts
due under the US$190 million Senior Secured Notes Series A increased by $8.7
million due to the US dollar's appreciation relative to the Canadian dollar. The
fair value of cross-currency swaps liability decreased by a net amount of $7.9
million, of which a decrease of $8.7 million offsets the foreign exchange loss
on the debt denominated in US dollars. The difference of $0.7 million was
recorded as a decrease of other comprehensive income. During the first half of
fiscal 2012, amounts due under the US$190 million Senior Secured Notes Series A
increased by $1.9 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 $1.9 million, of which $1.9 million offsets the foreign exchange loss
on the debt denominated in US dollars.
Furthermore, the Corporation's net investment in foreign subsidiaries is exposed
to market risk attributable to fluctuations in foreign currency exchange rates,
primarily changes in the values of the Canadian dollar versus the US dollar and
British Pound. This risk was mitigated since the major part of the purchase
prices for ABB and PEER 1 were borrowed directly in US dollars and British
Pounds. These debts were designated as hedges of net investments in foreign
operations. At February 28, 2013, the net investment for ABB amounted to
US$472.6 million while long- term debt was of US$323 million. At February 28,
2013, the net investment for PEER 1 amounted to US$368 million and GBP 69.1
million while long-term debt was of US$245 million and GBP 69.1 million.The
exchange rate used to convert the US dollar currency and British Pound currency
into Canadian dollars for the statement of financial position accounts at
February 28, 2013 was $1.0314 per US dollar and $1.5645 per British Pound. The
impact of a 10% change in the exchange rate of the US dollar and British Pound
into Canadian dollars would change other comprehensive income by approximately
$28.1 million.
The Corporation is also impacted by foreign currency exchange rates, primarily
changes in the values of the US dollar relative to the Canadian dollar with
regards to purchases of certain equipment, as the majority of customer premise
equipment is purchased and subsequently paid in US dollars. Please consult the
"Foreign Exchange Risk" section in Note 13 of the condensed interim consolidated
financial statements for further details.
DIVIDEND DECLARATION
At its April 10, 2013 meeting, the Board of Directors of Cogeco Cable declared a
quarterly eligible dividend of $0.26 per share for multiple voting and
subordinate voting shares, payable on May 8, 2013, to shareholders of record on
April 24, 2013. The declaration, amount and date of any future dividend will
continue to be considered and approved by the Board of Directors of the
Corporation based upon the Corporation's financial condition, results of
operations, capital requirements and such other factors as the Board of
Directors, at its sole discretion, deems relevant. There is therefore no
assurance that dividends will be declared, and if declared, the amount and
frequency may vary.
SEGMENTED OPERATING RESULTS
The Corporation reports its operating results in three operating segments:
Canadian cable services, American cable services and Enterprise services. The
reporting structure reflects how the Corporation manages the business activities
to make decisions about resources to be allocated to the segment and to assess
its performance. For the purpose of segmented operating results, operating
results from the ABB acquisition are presented in the American cable services
and operating results from the PEER 1 acquisition are included in the Enterprise
services segment.
CANADIAN CABLE SERVICES
CUSTOMER STATISTICS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net additions (losses)
Quarters ended Six months ended
February February February February February
28, 28, 29, 28, 29,
2013 2013 2012 2013 2012
----------------------------------------------------------------------------
PSU 1,984,555 342 12,280 15,422 58,459
Television
service
customers 852,707 (8,332) (9,111) (10,408) (4,659)
HSI service
customers 649,165 3,786 7,518 14,631 24,803
Telephony service
customers 482,683 4,888 13,873 11,199 38,315
----------------------------------------------------------------------------
----------------------------------------------------------------------------
-------------------------------------------------------------
-------------------------------------------------------------
% of penetration(1)
February 28, February 29,
2013 2012
-------------------------------------------------------------
PSU
Television
service
customers 51.4 53.5
HSI service
customers 39.1 38.3
Telephony service
customers 29.1 27.9
-------------------------------------------------------------
-------------------------------------------------------------
(1) As a percentage of homes passed.
Fiscal 2013 second-quarter and first six months PSU net additions were lower
than in the comparable periods of the prior year mainly as a result of service
category maturity, competitive offers and tightening of our customer credit
controls and processes. For the second quarter and the first six months net
customer losses for Television service customers stood at 8,332 and 10,408,
respectively, compared to 9,111 and 4,659 for the same periods of the prior
year. Television service customer net losses are mainly due to the promotional
offers of competitors for the video service combined with the tightening of our
customer credit controls. Fiscal 2013 second-quarter HSI service customers grew
by 3,786 compared to 7,518 in the second quarter of the prior year, and the
number of net additions to the Telephony service stood at 4,888 customers
compared to 13,873 customers for the same period of the prior year. For the
first six months of fiscal 2013, net additions for HSI service customers stood
at 14,631 and Telephony net additions at 11,199 compared to 24,803 and 38,315,
respectively, for the comparable periods of the prior year. HSI and Telephony
net additions continue to stem from the enhancement of the product offering, the
impact of the bundled offer (Cogeco Complete Connection) of Television, HSI and
Telephony services, and promotional activities.
OPERATING RESULTS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Six months ended
February February February February
28, 29, 28, 29,
2013 2012 Change 2013 2012 Change
(in thousands of
dollars, except
percentages) $ $ % $ $ %
----------------------------------------------------------------------------
Revenue 306,173 295,451 3.6 610,988 589,130 3.7
Operating expenses 155,870 156,753 (0.6) 312,080 316,636 (1.4)
---------------------------------------- --------------------
Operating income
before depreciation
and amortization 150,303 138,698 8.4 298,908 272,494 9.7
---------------------------------------- --------------------
Operating margin 49.1% 46.9% 48.9% 46.3%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue
Fiscal 2013 second-quarter revenue increased by $10.7 million, or 3.6%, to reach
$306.2 million, when compared to the same period last year. For the first six
months, revenue amounted to $611.0 million, an increase of 3.7% when compared to
the first six months of fiscal 2012. The increases are primarily due to rate
increases implemented in June and July 2012 and PSU growth.
Operating expenses
For the period ended February 28, 2013, operating expenses decreased by $0.9
million at $155.9 million. For the first six months, operating expenses amounted
to $312.1 million, a decrease of 1.4% when compared to the same period of prior
year. These decreases are mainly attributable to the deployment and support
costs incurred in fiscal 2012 related to the migration of Television service
customers from analogue to digital, partly offset by PSU growth.
Operating income before depreciation and amortization and operating margin
As a result of revenue growth exceeding operating expenses, fiscal 2013
second-quarter operating income before depreciation and amortization amounted to
$150.3 million, or 8.4% higher than in the same period of the prior year. For
the first six months of fiscal 2013, operating income before depreciation and
amortization amounted to $298.9 million, or 9.7% higher than in the same period
of the prior year. Operating margin increased to 49.1% from 46.9% when compared
to fiscal 2012 second-quarter and from 46.3% to 48.9% for the first six months
of fiscal 2013 when compared to prior year.
AMERICAN CABLE SERVICES
On November 30, 2012, the Corporation completed the acquisition of ABB, an
independent cable system operator formed in 2003 and providing Analogue and
Digital Television, as well as HSI and Telephony services. ABB operates cable
systems in Western Pennsylvania, Southern Florida, Maryland, Delaware and South
Carolina. Fiscal 2013 second-quarter included three month of operations of ABB.
CUSTOMER STATISTICS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net additions
Quarters ended Six months ended
February February February February February
28, 28, 29, 28, 29,
2013 2013 2012 2013 2012
----------------------------------------------------------------------------
PSU 501,795 7,121 - 7,121 -
Television service
customers 247,840 3,436 - 3,436 -
HSI service customers 174,979 3,339 - 3,339 -
Telephony service
customers 78,976 346 - 346 -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
-------------------------------------------
-------------------------------------------
% of penetration(1)
February February
28, 29,
2013 2012
-------------------------------------------
PSU
Television service
customers 48.0 -
HSI service customers 33.9 -
Telephony service
customers 15.3 -
-------------------------------------------
-------------------------------------------
(1) As a percentage of homes passed
Fiscal 2013 second-quarter, PSU net additions stood at 7,121 of which 3,436
comes from the Television service and 3,339 from the HSI service customers. The
PSU progression is stemming primarily from increases in residential HSI
subscribers through additional marketing focus on bundle package offerings and
increased overall demand given the higher speed offerings with the rollout of
DOCIS 3.0 capabilities in 2012 to a majority of ABB's markets, as well as
increased commercial HSI and Telephony growth driven by improved sales focus and
resources.
OPERATING RESULTS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Six months ended
February February February February
28, 29, 28, 29,
2013 2012 Change 2013 2012 Change
(in thousands of
dollars, except
percentages) $ $ % $ $ %
----------------------------------------------------------------------------
Revenue 85,850 - - 85,850 - -
Operating expenses 46,629 - - 46,629 - -
---------------------------------------- --------------------
Operating income
before depreciation
and amortization 39,221 - - 39,221 - -
---------------------------------------- --------------------
Operating margin 45.7% -% 45.7% -%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Fiscal 2013 second-quarter revenue reached $85.9 million mainly as a result of
(i) an increase in high-speed data revenue from continued marketing focus for
this service offering driving HSI subscriber growth; (ii) an increase in
Telephony revenue generated by increases in subscriber levels and an increase in
commercial revenue as ABB continues to expand its non-residential customer base
through targeted marketing efforts. Fiscal 2013 second-quarter operating
expenses amounted to $46.6 million and operating income before depreciation and
amortization reached $39.2 million, and consequently, operating margin stood at
45.7%. ABB's operating results are in line with management's expectations.
ENTERPRISE SERVICES
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Six months ended
February February February February
28, 29, 28, 29,
2013 2012 Change 2013 2012 Change
(in thousands of
dollars, except
percentages) $ $ % $ $ %
----------------------------------------------------------------------------
Revenue 37,980 22,284 70.4 61,480 44,029 39.6
Operating expenses 23,671 13,345 77.4 37,353 26,525 40.8
---------------------------------------- --------------------
Operating income
before depreciation
and amortization 14,309 8,939 60.1 24,127 17,504 37.8
---------------------------------------- --------------------
Operating margin 37.7% 40.1% 39.2% 39.8%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
OPERATING RESULTS
Revenue
Fiscal 2013 second-quarter revenue increased by $15.7 million, or 70.4%, to
reach $38.0 million, when compared to the same period last year. For the first
six months, revenue amounted to $61.5 million, an increase of 39.6% when
compared to the first six months of fiscal 2012. The increases in revenue for
both periods are primarily due to the recent acquisition of PEER 1 for one month
and the organic growth of its original operations.
Operating expenses
For the second quarter of fiscal 2013, operating expenses increased by $10.3
million, or 77.4%, to $23.7 million. For the first six months, operating
expenses amounted to $37.4 million, an increase of 40.8% when compared to the
first six months of fiscal 2012. The increases in operating expenses for both
periods are primarily due to the recent acquisition of PEER 1 and the organic
growth of its original operations.
Operating income before depreciation and amortization and operating margin
As a result of revenue growth exceeding the increase in operating expenses,
fiscal 2013 second-quarter operating income before depreciation and amortization
increased by $5.4 million, or 60.1%, to reach $14.3 million and by $6.6 million,
or 37.8%, in the first six months to reach $24.1 million, when compared to the
same periods of the prior year. Operating margin decreased to 37.7% from 40.1%
in the second quarter and to 39.2% from 39.8% for first six months compared to
the comparable periods of fiscal 2012 as a result of lower margins business
activities from PEER 1.
FISCAL 2013 FINANCIAL GUIDELINES
Giving effect to the recent acquisition of PEER 1 on January 31, 2012, the
Corporation revised its financial guidelines for the 2013 fiscal year issued on
January 14, 2013 to include a seven-month period of PEER 1's financial
projections. Management expects revenue to reach $1.70 billion, representing a
growth of $105 million, or 6.6%, when compared to those issued on January 14,
2013. Operating income before depreciation and amortization should increase by
$32 million to reach $767 million reflecting the PEER 1 acquisition. However,
operating margin should decrease from 46.2% to 45.2% as a result of lower
margins business activities from PEER 1. Depreciation and amortization of
property, plant and equipment and intangible assets should increase from $330
million to $368 million and acquisition of property, plant and equipment,
intangible and other assets should increase by $31 million to take into
consideration the PEER 1 seven-month operations. Financial expense should amount
to $113 million, an increase of $17 million, as a result of the cost of
financing related to the PEER 1 acquisition. Fiscal 2013 free cash flow is
expected to amount to $145 million, a decrease of $25 million, or 14.7%, when
compared to the free cash flow projection issued on January 14, 2013 as a result
of acquisitions of property, plant and equipment, intangible and other assets
exceeding cash flow generated by PEER 1, additional integration, restructuring
and acquisition costs of $9 million as well as additional financial expense of
$17 million both related to PEER 1. Profit for the year is expected to amount to
$205 million, $20 million lower than the January 14, 2013 projections, mainly as
a result of the PEER 1's expected financial results for the seven-month
operations.
Fiscal 2013 revised financial guidelines are as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revised Revised
projections projections
(in millions of dollars, April 10, 2013 January 14, 2013
except net customer additions Fiscal 2013 Fiscal 2013
and operating margin) $ $
----------------------------------------------------------------------------
Financial guidelines
Revenue 1,695 1,590
Operating income before
depreciation and
amortization 767 735
Operating margin 45.2% 46.2%
Integration, restructuring
and acquisition costs 16 7
Depreciation and
amortization 368 330
Financial expense 113 96
Current income tax expense 92 92
Profit for the year 205 225
Acquisitions of property,
plant and equipment,
intangible and other assets 401 370
Free cash flow(1) 145 170
Net customer addition
guidelines
PSU growth 35,000 35,000
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Free cash flow is calculated as operating income before depreciation
and amortization less integration, restructuring and acquisition
costs, financial expense, current income tax expense and acquisitions
of property, plant and equipment, intangible and other assets.
CONTROLS AND PROCEDURES
The President and Chief Executive Officer ("CEO") and the Senior Vice President
and Chief Financial Officer ("CFO"), together with Management, are responsible
for establishing and maintaining adequate disclosure controls and procedures and
internal controls over financial reporting, as defined in National Instrument
52-109. Cogeco Cable's internal control framework is based on the criteria
published in the report Internal Control- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and is designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with IFRS.
The CEO and CFO, supported by Management, evaluated the design of the
Corporation's disclosure controls and procedures and internal controls over
financial reporting as of February 28, 2013, and have concluded that they are
adequate. Furthermore, no significant changes to the internal controls over
financial reporting occurred during the quarter ended February 28, 2013, except
as described below with respect to ABB and PEER 1.
On November 30, 2012, the Corporation completed the acquisition of ABB and,
subsequently on January 31, 2013 and on April 3, 2013, the Corporation acquired
100% of the issued and outstanding shares of PEER 1. Due to the short period of
time between those acquisition dates and the certification date on April 10,
2013, management was unable to complete its review of the design of Internal
Controls Over Financial Reporting ("ICFR") for the newly acquired corporations.
At February 28, 2013, risks were however mitigated as management was fully
apprised of any material events affecting these recent acquisitions. In
addition, all the assets and liabilities acquired were valued and recorded in
the condensed interim consolidated financial statements as part of the
preliminary purchase price allocation process and both ABB and PEER 1 results of
operations were also included in the Corporation's consolidated results. ABB
constitutes 11% of revenue, 7% of profit of the period, 33% of the total assets,
19% of the current assets, 33% of the non current assets, 12% of the current
liabilities and 25% of the non current liabilities of the consolidated condensed
interim financial statements for the six-month period ended February 28, 2013.
PEER 1 constitutes 2% of revenue, -6% of profit of the period, 15% of the total
assets, 20% of the current assets, 15% of the non current assets, 10% of the
current liabilities and 2% of the non current liabilities of the consolidated
condensed interim financial statements for the six-month period ended February
28, 2013. In the upcoming quarters, management will complete its review of the
design of ICFR for ABB and PEER 1 and assess its effectiveness. The business
combinations of fiscal 2013 under the "Cash flow analysis" section of this MD&A
presents summary financial information about the preliminary purchase price
allocation, assets acquired and liabilities assumed as well as other financial
information about ABB and PEER 1 business impact on the consolidated results of
the Corporation. Other financial information can be found in the Business
Acquisition Report filed by the Corporation on www.sedar.com, on February 13,
2013.
UNCERTAINTIES AND MAIN RISK FACTORS
The uncertainties and main risk factors faced by the Corporation have not
changed significantly for its Canadian cable services since August 31, 2012,
except for the proposed Astral/Bell amended Arrangement Agreement described
below. In addition, risks and uncertainties have been updated to reflect the
recent acquisitions of ABB and PEER 1. A detailed description of the
uncertainties and main risk factors faced by Cogeco Cable can be found in the
2012 Annual Report filed on SEDAR, available at www.sedar.com.
In Canada, following the denial by the CRTC on October 18, 2012 of an
application by BCE Inc. ("Bell") to acquire Astral Media Inc. ("Astral"), Astral
and Bell amended their Arrangement Agreement with a view to submitting a revised
proposal to the CRTC for approval of Bell's acquisition of Astral. The closing
date of the proposed transaction was extended to June 1, 2013, with Astral and
Bell having a further right to postpone the closing date to July 31, 2013. On
March 4, 2013, the Commissioner of Competition and Bell announced the signing of
a consent agreement and the filing thereof with the Competition Tribunal. The
consent agreement provides conditional clearance for the proposed transaction
under the Competition Act subject to, inter alia, the divestiture by Bell of
Astral's joint venture ownership interests in certain television services and
its ownership interest in certain additional French-language television
services. Also on March 4, 2013, Bell announced that it had concluded an
agreement to sell the Astral joint venture ownership interests as well as two
Ottawa FM radio stations to Corus Entertainment Inc. ("Corus"), and that it was
putting up for sale the remaining properties to be divested and 8 additional
English-language radio stations through an auction process. The sale of the
joint venture properties to Corus was approved by the Commissioner of
Competition on March 15, 2013. In Management's view, if it is ultimately
approved by the CRTC, the proposed transaction, as revised, would still
significantly increase the level of vertical integration in the Canadian
broadcasting and communications industries and leave the opportunity as well as
an incentive for Bell to abuse its dominant position in the supply of
programming for distribution in the downstream broadcasting distribution market
in Canada by non-vertically integrated distributors such as Cogeco Cable. Bell
would end up controlling over forty percent (40 %) of Cogeco Cable's programming
service affiliation payments at current wholesale rates. The Corporation's
businesses and results of operations could thus be adversely affected in the
future as affiliation agreements need to be renewed with Bell. In the event of
future disputes concerning the terms of affiliation between Cogeco Cable and
Bell for services controlled by Bell, the CRTC may however set such terms at
either party's request following a dispute resolution process, and the services
may not be interrupted by either party while such dispute resolution process is
pending.
Uncertainties and risks subsequent to the acquisitions of PEER 1 or ABB
The Corporation acquired PEER 1 and ABB with the expectation that the
combination of its businesses and each of PEER 1 and ABB would result in greater
long-term potential and value creation than the individual corporations could
achieve on their own. These anticipated benefits will depend in part on whether
the operations, systems, management and cultures of each of the Corporation's
other businesses and those of PEER 1 and ABB can be combined in an effective
manner and in part on whether the presumed bases for the combination produce the
benefits anticipated. Most operational and strategic decisions, and certain
staffing decisions, with respect to the combined entity have not yet been made
and may not have been fully identified at this time.
There can be no assurance that the integration of the Corporation's capital
investment optimization and equipment purchases with those of PEER 1 and ABB
will be timely or effectively accomplished, or ultimately will be successful in
achieving the anticipated benefits. The integration process may lead to greater
than expected operating costs, customer loss and business disruption for Cogeco
Cable's other businesses, PEER 1, ABB or the combined businesses. Similarly, the
integration process that may adversely affect the ability of the combined
businesses to realize the anticipated benefits of the combination or may
materially and adversely affect the Corporation's, PEER 1's, ABB's or the
combined entity's businesses, results of operations and/or financial condition.
There may be liabilities and contingencies that Cogeco Cable did not discover in
its due diligence review prior to consummation of the PEER 1 and ABB
acquisitions and the Corporation may not be indemnified for these liabilities
and contingencies. The discovery of any material liabilities or contingencies
relating to the business of PEER 1 or ABB following the acquisitions could have
a material adverse effect on the Corporation's businesses, financial condition
and results of operations.
The Corporation currently intends to retain key personnel of PEER 1 and ABB to
continue to manage and operate each of PEER 1 and ABB. Cogeco Cable will compete
with other potential employers for employees, and may not be successful in
keeping the services of executives and other employees that PEER 1 or ABB need.
The failure of key personnel to remain as part of the management team of PEER 1
and ABB in the period following the PEER 1 and ABB acquisitions could have a
material adverse effect on the Corporation's businesses, financial condition and
results of operations.
Risks pertaining to markets and competition
In the US, the competition is fragmented and varies by geographical area. ABB's
principal competitor for video services is Direct Broadcast Satellite ("DBS")
and its principal competitor for High Speed Data ("HSD") services is Direct
Subscriber Line ("DSL"). Intensive marketing efforts and aggressive pricing from
its competitors and an increase in the presence of local telephone companies and
electric utilities competing in its market may have an adverse impact on the
Corporation's ability to retain customers. Cogeco Cable's phone service faces
competition from the local incumbent local exchange carriers ("ILEC"), as well
as other providers such as cellular and Voice over Internet Protocol ("VoIP")
providers such as Vonage.
In the US, ABB also currently faces competition from over-the-top services such
as Netflix, Google TV, and Apple TV, Hulu and Samsung, which are gaining
increased interest by consumers. The availability of these services could cause
customers to view television content through their broadband connection rather
than through their traditional cable television subscription services, and view
less on-demand television content on the video-on-demand ("VOD") or
subscription-video-on-demand ("SVOD") platforms of cable television service
providers. We may not be able to make up for the loss of revenue associated with
this migration.
PEER 1's risks pertaining to markets and competition are similar to Cogeco Data
Services risks which can be found in the 2012 Annual Report.
Risk pertaining to Third-Party Service Suppliers
In the US, ABB also depends on third-party suppliers and providers, such as
Motorola and Cisco for certain specialized services, hardware and equipment that
are critical to their operations. These materials and services include set-top
boxes, telephony, cable and telephony modems, servers and routers, fiber-optic
cable, telephony switches, inter-city links, support structures, software, the
"backbone" telecommunications network for the Internet access and telephony
services, and construction services for expansion and upgrades of the cable and
telephony networks. These services and equipment are available from a limited
number of suppliers.
In addition, ABB depends on third-party plant construction contractors in areas
of new homes growth. If no supplier can provide ABB with the equipment or
services that it require or that comply with evolving internet and
telecommunications standards or that are compatible with ABB's other equipment
and software, ABB's cable services businesses, financial condition and results
of operations could be materially adversely affected. In addition, if ABB is
unable to obtain critical equipment, software, services or other items on a
timely basis and at an acceptable cost, its ability to offer its products and
services and roll out its advanced services may be delayed, and ABB's
businesses, financial condition and results of operations could be materially
adversely affected.
In recent years, the US cable industry has experienced a rapid escalation in the
cost of programming, particularly sports programming and retransmission of
broadcast programming. This escalation may continue, and ABB may not be able to
pass programming cost increases on to its customers. The inability to pass these
programming cost increases on to its customers would have an adverse impact on
ABB's cash flow and operating margins. As ABB upgrades the channel capacity of
its systems and adds programming to its basic, expanded basic and digital
service offerings, ABB may face additional market constraints on its ability to
pass programming costs on to its customers. The inability to pass these costs
increases on to its customers could materially adversely affect ABB's
profitability. ABB is also subject to increasing financial and other demands by
broadcasters to obtain the required consent for the transmission of broadcast
programming to its subscribers.
Financial risks - currency
Most of the Corporation's financial results are reported in Canadian dollars and
a significant portion of its sales and operating costs are realized in
currencies other than Canadian dollars, most often US dollars, Euros and pounds
sterling. For the purposes of financial reporting, any change in the value of
the Canadian dollar against the US dollar or pounds sterling during a given
financial reporting period would result in a foreign exchange gain or loss on
the translation of any unhedged foreign currency denominated debt into Canadian
dollars. Consequently, Cogeco Cable reported earnings and indebtedness could
fluctuate materially as a result of foreign-exchange gains or losses.
Significant fluctuations in relative currency values against the Canadian dollar
could therefore have a significant impact on the Corporation's future
profitability.
Risk pertaining to leased facilities
Most of PEER 1's data centers are located in leased premises, and there can be
no assurance that PEER 1 will remain in compliance with its leases and that they
will not be terminated or can be renewed at commercially reasonable terms.
Termination of a lease could have a material impact on its businesses, results
of operations and financial condition.
Regulatory risks - US
US federal, state and local governments extensively regulate the video services
industry and may increase the regulation of the Internet services and VoIP phone
industries. Current regulation of the cable industry imposes administrative and
operational expenses and may limit the revenues of cable systems. Cable
operators are subject to, among other things:
-- subscriber privacy regulations;
-- limited rate regulation;
-- requirements that, under specified circumstances, a cable system carry a
local broadcast station or obtain consent to carry a local or distant
broadcast station;
-- rules for franchise renewals and transfers;
-- regulations concerning the content of programming offered to
subscribers;
-- the manner in which program packages are marketed to subscribers;
-- the use of cable system facilities by local franchising authorities, the
public and unrelated entities;
-- cable system ownership limitations and program access requirements;
-- payment of franchise fees to local franchising authorities;
-- payment of federal universal service assessments for any end user
revenues from interstate and international telecommunications services
and telecommunications provided to a third party for a fee, and other
state and federal telecommunications fees; and
-- regulations governing other requirements covering a variety of
operational areas such as equal employment opportunity, technical
standards and customer service requirements.
Further US regulation could give rise to increases in cable rates. The Federal
Communications Commission ("FCC") and the US Congress continue to be concerned
that cable rate increases are exceeding inflation and as a result it is possible
that either the FCC or the US Congress will restrict the ability of cable system
operators to implement rate increases. If ABB is unable to raise its rates in
response to increasing costs, its financial condition and results of operations
could be materially adversely affected.
In addition, ABB could be materially disadvantaged if it remains subject to
legal and regulatory constraints that do not apply equally to its competitors.
The FCC recently adopted rules to ensure that the local franchising process does
not unreasonably interfere with competitive entry, and several states have
enacted legislation to ease the franchising obligations of new entrants. These
changes in regulation by the FCC and several states will benefit ABB's
competitors. In addition, both the Congress and the FCC are considering various
forms of "network neutrality" regulation which may have the impact of
restricting ABB's ability to manage its network efficiently.
Human Resources
As of February 28, 2013, approximately 26.8% of ABB's employees are represented
by several unions under collective bargaining agreements. ABB can neither
predict the outcome of current or future negotiations relating to labor
disputes, union representation or renewal of collective bargaining agreements,
nor be able to avoid future work stoppages, strikes or other forms of labor
protests pending the outcome of any current or future negotiations. A prolonged
work stoppage, strike or other form of labor protest could have a material
adverse effect on its businesses, operations and reputation. Even if ABB does
not experience strikes or other forms of labor protests, the outcome of labor
negotiations could adversely affect its businesses and results of operations. In
addition, its ability to make short-term adjustments to control compensation and
benefits costs is limited by the terms of its collective bargaining agreements.
ABB's and PEER 1's success are substantially dependent upon the retention and
the continued performance of their executive officers. Many of these executive
officers are uniquely qualified in their areas of expertise, making it difficult
to replace their services. The loss of the services of any of these officers
could adversely affect Cogeco Cable's growth, financial condition and results of
operations. In addition, to implement and manage its businesses and operating
strategies effectively, ABB and PEER 1 must maintain a high level of efficiency,
performance and content quality, continue to enhance its operational and
management systems, and continue to effectively attract, train, motivate and
manage its employees. If ABB and PEER 1 are not successful in their efforts, it
may have a material adverse effect on the Corporation's businesses, prospects,
results of operations and financial condition.
FUTURE ACCOUNTING DEVELOPMENTS IN CANADA
A number of new standards, interpretations and amendments to existing standards
were issued by the International Accounting Standard Board ("IASB") that are
mandatory but not yet effective for the period ended February 28, 2013 and have
not been applied in preparing the condensed interim consolidated financial
statements. These standards are described under "Future accounting developments
in Canada" in the Corporation's 2012 annual MD&A, available at www.sedar.com and
www.cogeco.ca.
CHANGES IN CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There has been no significant change in Cogeco Cable's accounting policies,
estimates and future accounting pronouncements since August 31, 2012. A
description of the Corporation's policies and estimates can be found in the 2012
Annual Report, available at www.sedar.com and www.cogeco.ca.
NON-IFRS FINANCIAL MEASURES
This section describes non-IFRS financial measures used by Cogeco Cable
throughout this MD&A. It also provides reconciliations between these non-IFRS
measures and the most comparable IFRS financial measures. These financial
measures do not have standard definitions prescribed by IFRS and therefore, may
not be comparable to similar measures presented by other companies. These
measures include "cash flow from operations", "free cash flow", "operating
income before depreciation and amortization" and "operating margin".
CASH FLOW FROM OPERATIONS AND FREE CASH FLOW
Cash flow from operations is used by Cogeco Cable's management and investors to
evaluate cash flows generated by operating activities, excluding the impact of
changes in non-cash operating activities, amortization of deferred transaction
costs and discounts on long-term debt, income taxes paid, current income tax
expense, financial expense paid and financial expense. This allows the
Corporation to isolate the cash flows from operating activities from the impact
of cash management decisions. Cash flow from operations is subsequently used in
calculating the non-IFRS measure, "free cash flow". Free cash flow is used, by
Cogeco Cable's management and investors, to measure its ability to repay debt,
distribute capital to its shareholders and finance its growth.
The most comparable IFRS measure is cash flow from operating activities. Cash
flow from operations is calculated as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Six months ended
February 28, February 29, February 28, February 29,
2013 2012 2013 2012
(in thousands of
dollars) $ $ $ $
----------------------------------------------------------------------------
Cash flow from operating
activities 150,084 120,961 149,804 134,768
Changes in non-cash
operating activities (4,931) (3,179) 76,182 59,489
Amortization of deferred
transaction costs and
discounts on long-term
debt 2,723 682 3,463 1,357
Income taxes paid 17,475 17,635 60,008 53,817
Current income tax
expense (23,027) (26,206) (48,118) (45,696)
Financial expense paid 27,285 9,517 43,715 29,547
Financial expense (29,094) (14,788) (44,694) (31,617)
----------------------------------------------------------------------------
Cash flow from
operations 140,515 104,622 240,360 201,665
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Free cash flow is calculated as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Six months ended
February 28, February 29, February 28, February 29,
2013 2012 2013 2012
(in thousands of
dollars) $ $ $ $
----------------------------------------------------------------------------
Cash flow from
operations 140,515 104,622 240,360 201,665
Acquisition of property,
plant and equipment (99,940) (83,588) (178,132) (156,927)
Acquisition of
intangible and other
assets (4,493) (2,646) (9,134) (6,590)
----------------------------------------------------------------------------
Free cash flow 36,082 18,388 53,094 38,148
----------------------------------------------------------------------------
----------------------------------------------------------------------------
OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION AND OPERATING MARGIN
Operating income before depreciation and amortization is used by Cogeco Cable's
management and investors to assess the Corporation's ability to seize growth
opportunities in a cost effective manner, to finance its ongoing operations and
to service its debt. Operating income before depreciation and amortization is a
proxy for cash flows from operations excluding the impact of the capital
structure chosen, and is one of the key metrics used by the financial community
to value the business and its financial strength. Operating margin is a measure
of the proportion of the Corporation's revenue which is available, before income
taxes, to pay for its fixed costs, such as interest on Indebtedness. Operating
margin is calculated by dividing operating income before depreciation and
amortization by revenue.
The most comparable IFRS financial measure is operating income. Operating income
before depreciation and amortization and operating margin are calculated as
follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Six months ended
February 28, February 29, February 28, February 29,
2013 2012 2013 2012
(in thousands of
dollars, except
percentages) $ $ $ $
----------------------------------------------------------------------------
Operating income 103,721 59,491 178,881 126,490
Depreciation and
amortization 84,591 84,252 149,257 149,076
Integration,
restructuring and
acquisitions costs 7,464 - 14,764 -
----------------------------------------------------------------------------
Operating income before
depreciation and
amortization 195,776 143,743 342,902 275,566
----------------------------------------------------------------------------
Revenue 429,672 317,735 757,583 633,159
----------------------------------------------------------------------------
Operating margin 45.6% 45.2% 45.3% 43.5%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended February 28, February 29, November 30,
(in thousands of dollars,
except percentages and per
share data) 2013 2012 2012 2011
$ $ $ $
----------------------------------------------------------------------------
Revenue 429,672 317,735 327,911 315,424
Operating income before
depreciation and
amortization 195,776 143,743 147,126 131,823
Operating margin 45.6% 45.2% 44.9% 41.8%
Operating income 103,721 59,491 75,160 66,999
Income taxes 16,169 13,617 17,400 10,603
Profit for the period from
continuing operations 58,458 31,086 42,160 39,567
Profit (loss) for the
period from discontinued
operations - 52,047 - 3,399
Profit (loss) for the
period 58,458 83,133 42,160 42,966
Profit (loss) for the
period attributable to
owners of the Corporation 58,660 83,133 42,160 42,966
Cash flow from operating
activities 150,084 120,961 (280) 13,807
Cash flow from operations 140,515 104,622 99,845 97,043
Acquisitions of property,
plant and equipment,
intangible and other
assets 104,433 86,234 82,833 77,283
Free cash flow 36,082 18,388 17,012 19,760
Earnings (loss) per
share(1)
From continuing and
discontinued operations
Basic 1.20 1.71 0.87 0.88
Diluted 1.19 1.70 0.86 0.88
From continuing
operations
Basic 1.20 0.64 0.87 0.81
Diluted 1.19 0.63 0.86 0.81
From discontinued
operations
Basic - 1.07 - 0.07
Diluted - 1.06 - 0.07
----------------------------------------------------------------------------
----------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
Quarters ended August 31, May 31,
(in thousands of dollars,
except percentages and per
share data) 2012 2011 2012 2011
$ $ $ $
------------------------------------------------------------------------
Revenue 324,768 305,811 319,771 298,211
Operating income before
depreciation and
amortization 160,825 151,579 152,661 138,147
Operating margin 49.5% 49.6% 47.7% 46.3%
Operating income 94,709 97,941 90,981 86,995
Income taxes 32,987 20,713 21,449 18,747
Profit for the period from
continuing operations 45,705 62,745 53,159 52,352
Profit (loss) for the
period from discontinued
operations - 6,219 - (233,573)
Profit (loss) for the
period 45,705 68,964 53,159 (181,221)
Profit (loss) for the
period attributable to
owners of the Corporation 45,705 68,964 53,159 (181,221)
Cash flow from operating
activities 203,343 211,847 112,275 142,009
Cash flow from operations 126,946 144,699 113,075 125,923
Acquisitions of property,
plant and equipment,
intangible and other
assets 124,392 120,663 87,459 62,782
Free cash flow 2,554 24,036 25,616 63,141
Earnings (loss) per
share(1)
From continuing and
discontinued operations
Basic 0.94 1.42 1.09 (3.73)
Diluted 0.93 1.42 1.09 (3.73)
From continuing
operations
Basic 0.94 1.29 1.09 1.08
Diluted 0.93 1.29 1.09 1.08
From discontinued
operations
Basic - 0.13 - (4.80)
Diluted - 0.13 - (4.80)
------------------------------------------------------------------------
------------------------------------------------------------------------
(1) Per multiple and subordinate voting share.
SEASONAL VARIATIONS
Cogeco Cable's operating results are not generally subject to material seasonal
fluctuations except as follows. The customer growth in the Television service
customers and HSI service are generally lower in the second half of the fiscal
year as a result of a decrease in economic activity due to the beginning of the
vacation period, the end of the television season, and students leaving their
campuses at the end of the school year. Cogeco Cable offers its services in
several university and college towns such as Kingston, Windsor, St.Catharines,
Hamilton, Peterborough, Trois-Rivieres and Rimouski in Canada. Furthermore, the
third and fourth quarter's operating margin is usually higher as no management
fees are paid to COGECO Inc. Under the Management Agreement, Cogeco Cable pays a
fee equal to 2% of its total revenue subject to a maximum amount. As the maximum
amount has been reached in the second quarter of fiscal 2013, Cogeco Cable will
not pay management fees in the second half of fiscal 2013. Similarly, as the
maximum amount was paid in the first six months of fiscal 2012, Cogeco Cable
paid no management fees in the second half of the previous fiscal year.
ADDITIONAL INFORMATION
This MD&A was prepared on April 10, 2013. Additional information relating to the
Corporation, including its Annual Information Form, is available on the SEDAR
website at www.sedar.com.
/s/ Jan Peeters /s/ Louis Audet
------------------------------ --------------------------------------------
Jan Peeters Louis Audet
Chairman of the Board President and Chief Executive Officer
Cogeco Cable Inc.
Montreal, Quebec
April 10, 2013
CUSTOMER STATISTICS
----------------------------------------------------------------------------
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February November February
28, 30, August 31, May 31, 29,
2013 2012 2012 2012 2012
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Primary service
units(1) 2,486,350 2,478,887 1,969,133 1,962,174 1,955,928
CANADA 1,984,555 1,984,213 1,969,133 1,962,174 1,955,928
US 501,795 494,674 - - -
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Television service
customers 1,100,547 1,105,443 863,115 868,873 873,326
CANADA 852,707 861,039 863,115 868,873 873,326
Penetration as a
percentage of homes
passed 51.4% 52.1% 52.4% 52.9% 53.5%
US 247,840 244,404 - - -
Penetration as a
percentage of homes
passed 48.0% 47.4% - - -
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Digital Television
service customers 922,703 922,623 771,503 765,585 752,642
CANADA 778,728 780,724 771,503 765,585 752,642
Penetration as a
percentage of homes
passed 46.9% 47.2% 46.8% 46.6% 46.1%
US 143,975 141,899 - - -
Penetration as a
percentage of homes
passed 27.9% 27.5% - - -
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Analogue Television
service customers 177,844 182,820 91,612 103,288 120,684
CANADA 73,979 80,315 91,612 103,288 120,684
Penetration as a
percentage of homes
passed 4.5% 4.9% 5.6% 6.3% 7.4%
US 103,865 102,505 - - -
Penetration as a
percentage of homes
passed 20.1% 19.9% - - -
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High Speed Internet
service customers 824,144 817,019 634,534 628,852 626,017
CANADA 649,165 645,379 634,534 628,852 626,017
Penetration as a
percentage of homes
passed 39.1% 39.0% 38.5% 38.3% 38.3%
US 174,979 171,640 - - -
Penetration as a
percentage of homes
passed 33.9% 33.3% - - -
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Telephony service
customers 561,659 556,425 471,484 464,449 456,585
CANADA 482,683 477,795 471,484 464,449 456,585
Penetration as a
percentage of homes
passed 29.1% 28.9% 28.6% 28.3% 27.9%
US 78,976 78,630 - - -
Penetration as a
percentage of homes
passed 15.3% 15.2% - - -
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(1) Represents the sum of Television, High Speed Internet ("HSI") and
Telephony service customer.
ABOUT COGECO CABLE
Cogeco Cable (www.cogeco.ca) is a telecommunications corporation and is the11th
largest hybrid fibre coaxial cable operator in North America operating in Canada
under the Cogeco Cable brand name in Quebec and Ontario, and in the United
States through its subsidiary Atlantic Broadband in Western Pennsylvania, South
Florida, Maryland, Delaware and South Carolina. Its two-way broadband cable
networks provide to its residential and small business customers Analogue and
Digital Television, High Speed Internet ("HSI") and Telephony services. Through
its subsidiaries Cogeco Data Services and PEER 1 Hosting, Cogeco Cable provides
its commercial customers a suite of IT hosting, information and communications
technology services (Data Centre, Co-location, Managed Hosting, Cloud
Infrastructure and Connectivity), with 23 data centres, extensive fibre networks
in Montreal and Toronto as well as points-of-presence in North America and
Europe. Cogeco Cable's subordinate voting shares are listed on the Toronto Stock
Exchange (TSX:CCA). For more information about Cogeco Cable and its subsidiaries
visit www.cogeco.ca, cogecodata.com, peer1.com and peer1hosting.co.uk.
Analyst Conference Call: Thursday, April 11, 2013 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/USA Access Number: 1 866-322-8032
International Access Number: + 1 416-640-3406
Confirmation Code: 4371097
By Internet at www.cogeco.ca/investors
A rebroadcast of the conference call will be
available until July 11, 2013, by dialing:
Canada and US access number: 1 888-203-1112
International access number: + 1 647-436-0148
Confirmation code: 4371097
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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