Today, Cogeco Cable Inc. (TSX:CCA) ("Cogeco Cable" or the "Corporation")
announced its financial results for the second quarter of fiscal 2014, ended
February 28, 2014, in accordance with International Financial Reporting
Standards ("IFRS").
For the second quarter and first six months of fiscal 2014:
-- Second quarter revenue increased by $56.3 million, or 13.1%, to reach
$486.0 million driven by growth of 2.3% in the
Canadian cable services segment, of 14.2% in the American cable services
segment and of 98.4% in the Enterprise services segment. Revenue growth
results mainly from the full quarter impact of the acquisition of Peer 1
Hosting(2)("PEER 1") which was acquired during the second quarter of
fiscal 2013, on January 31, 2013, combined with favorable foreign
exchange rates compared to last year and the organic growth from all of
our operating units. For the six-month period ended February 28, 2014,
revenue reached $961.0 million, an increase of $203.4 million, or 26.8%.
Revenue increased mainly attributable to the full impact of the
acquisitions of Atlantic Broadband and PEER 1 ("the recent
acquisitions") which both occurred in fiscal 2013 combined with the
favorable foreign exchange rates and the organic growth from all of our
operating units;
-- Adjusted EBITDA(1)increased by 13.2% to $221.6 million compared to the
second quarter of fiscal 2013, and by 26.3% to $433.1 million compared
to the first half of the prior year. The rapid progression for both
periods results mainly from the recent acquisitions, the favorable
foreign exchange rates compared to the same period of last year as well
as the improvement in the Canadian cable services segment;
-- Operating margin(1)remained the same at 45.6% in the quarter and
slightly decreased to 45.1% from 45.3% in the first six months compared
to the same period of the prior year as a result of lower margins from
the business activities of the Enterprise services segment;
-- Profit for the period amounted to $60.4 million in the second quarter
compared to $50.8 million in fiscal 2013. For the first half of fiscal
2014, profit for the period amounted to $110.1 million compared to $92.9
million for the comparable period of the prior year. Profit progression
for both periods is mostly attributable to the improvement of the
adjusted EBITDA explained above and the decrease in integration,
restructuring and acquisition costs, partly offset by the increases in
financial expense and depreciation and amortization expense all related
to the recent acquisitions;
-- Second quarter free cash flow(1)increased by $57.2 million to reach
$93.2 million compared to $36.0 million in the second quarter of fiscal
2013. For the first six months, free cash flow increased by $108.5
million to reach $161.4 million compared to $52.9 million in the first
half of fiscal 2013. The increase for both periods is attributable to
the improvement of adjusted EBITDA explained above, the decrease in
acquisitions of property, plant and equipment, intangible and other
assets due to the timing of certain initiatives as well as the decrease
in integration, restructuring and acquisition costs, partly offset by
the increase in financial expense as a result of higher indebtedness;
-- Fiscal 2014 second-quarter cash flow from operating activities reached
$181.6 million compared to $150.1 million, an increase of $31.5 million,
or 21.0%, compared to fiscal 2013 second-quarter. For the first six
months of fiscal 2014, cash flow from operating activities reached
$244.7 million compared to $149.8 million, an increase of $94.9 million,
or 63.4%, compared to the same period in fiscal 2013. The increase for
both periods is mainly explained by an increase in profit for the period
explained above and depreciation and amortization expense; and
-- A quarterly dividend of $0.30 per share was paid to the holders of
subordinate and multiple voting shares, an increase of $0.04 per share,
or 15.4%, compared to a dividend of $0.26 per share paid in the second
quarter of fiscal 2013. Dividend payments in the first six months
totaled $0.60 per share in fiscal 2014 compared to $0.52 per share in
the comparable period of fiscal 2013.
(1) The indicated terms do not have standard definitions prescribed by
IFRS and therefore, may not be comparable to similar measures
presented by other companies. For more details, please consult the
"Non-IFRS financial measures" section of the Management's discussion
and analysis.
(2) Peer 1 hosting refers to Peer 1 Network (USA) Holdings Inc., Peer (UK)
Ltd. and Peer 1 Network Enterprises, Inc.
"We are satisfied with our financial results for the second quarter of fiscal
year 2014 as well as with the growth opportunities ahead of us," declared Louis
Audet, President and Chief Executive Officer of Cogeco Cable.
"We've remained very diligent with our cost management, which has helped
contribute to the strong performance across all of our segments and helped
maintain the operating margin over the last quarter to a satisfying level,"
continued Louis Audet.
"Fluctuations in foreign exchange rates have furthermore positively impacted our
operating results, and we have revised our 2014 financial guidelines as a
result. Despite these fluctuations, we remain on a solid path towards reaching
our indebtedness leverage ratio objectives by August 2015," concluded Louis
Audet.
ABOUT COGECO CABLE
Cogeco Cable Inc. ("Cogeco Cable") is a telecommunications corporation and is
the 11th largest hybrid fibre coaxial cable operator in North America. Through
Cogeco Cable Canada GP Inc. ("Cogeco Cable Canada"), Cogeco Cable is the fourth
largest cable system operator in Canada and the second largest Canadian cable
operator in each of the provinces of Ontario and Quebec. Through its subsidiary
Atlantic Broadband, Cogeco Cable is the 13th largest cable provider in the
United States, operating in four geographic clusters in Western Pennsylvania,
South Florida, Maryland/Delaware and South Carolina. Cogeco Cable's two-way
broadband cable networks provide to its residential and small business customers
Analogue and Digital Television, High Speed Internet and Telephony services.
Through its subsidiaries Cogeco Data Services Inc. ("Cogeco Data Services"),
Peer 1 Network (USA) Holdings Inc., Peer (UK) Ltd. and Peer 1 Network
Enterprises, Inc. (all together as "PEER 1 Hosting" or "PEER 1"), Cogeco Cable
provides its commercial customers a suite of IT hosting, information and
communications technology services (data centre, colocation, managed hosting,
cloud infrastructure and connectivity) with 20 data centres, extensive fibre
networks in Montreal and Toronto, as well as 56 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, atlanticbb.com, peer1.com
and peer1hosting.co.uk.
Analyst Conference Thursday, April 10, 2014 at 11:00 a.m. (Eastern Daylight
Call: Time)
Media representatives may attend as listeners only.
Please use the following dial-in number to have access
to the conference call by dialing five minutes before
the start of the conference:
Canada/United States Access Number: 1 800-820-0231
International Access Number: + 1 416-640-5926
Confirmation Code: 8125587
By Internet at www.cogeco.ca/investors
A rebroadcast of the conference call will be available
until April 16, 2014, by dialing:
Canada and United States access number: 1 888-203-1112
International access number: + 1 647-436-0148
Confirmation code: 8125587
FINANCIAL HIGHLIGHTS
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Quarters ended
(in thousands of dollars, except February 28, February 28,
percentages and per share data) 2014 2013 Change
$ $ (2) %
--------------------------------------------------------------------------
Operations
Revenue 486,008 429,672 13.1
Adjusted EBITDA(1) 221,616 195,826 13.2
Operating margin(1) 45.6% 45.6% -
Profit for the period 60,381 50,833 18.8
Profit for the period attributable to
owners of the
Corporation 60,381 51,035 18.3
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Cash Flow
Cash flow from operating activities 181,628 150,084 21.0
Cash flow from operations(1) 174,013 140,401 23.9
Acquisitions of property, plant and
equipment, intangible and other assets 80,806 104,433 (22.6
Free cash flow(1) 93,207 35,968 -
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Financial Condition(3)
Property, plant and equipment - - -
Total assets - - -
Indebtedness(4) - - -
Shareholders' equity - - -
--------------------------------------------------------------------------
Capital intensity(1) 16.6% 24.3% -
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Per Share Data(5)
Earnings per share
Basic 1.24 1.05 18.1
Diluted 1.23 1.04 18.3
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Six months ended
(in thousands of dollars, except February 28, February 28,
percentages and per share data) 2014 2013 Change
$ $ (2) %
----------------------------------------------------------------------------
Operations
Revenue 960,988 757,583 26.8
Adjusted EBITDA(1) 433,138 343,002 26.3
Operating margin(1) 45.1% 45.3% -
Profit for the period 110,079 92,946 18.4
Profit for the period attributable to
owners of the
Corporation 110,079 93,148 18.2
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Cash Flow
Cash flow from operating activities 244,738 149,804 63.4
Cash flow from operations(1) 327,277 240,132 36.3
Acquisitions of property, plant and
equipment, intangible and other assets ) 165,895 187,266 (11.4)
Free cash flow(1) 161,382 52,866 -
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Financial Condition(3)
Property, plant and equipment 1,838,584 1,854,155 (0.8)
Total assets 5,354,942 5,254,419 1.9
Indebtedness(4) 3,004,191 2,944,182 2.0
Shareholders' equity 1,439,788 1,342,940 7.2
----------------------------------------------------------------------------
Capital intensity(1) 17.3% 24.7% -
----------------------------------------------------------------------------
Per Share Data(5)
Earnings per share
Basic 2.26 1.91 18.3
Diluted 2.24 1.90 17.9
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----------------------------------------------------------------------------
(1) The indicated terms do not have standardized definitions prescribed by
International Financial Reporting Standards ("IFRS") and therefore,
may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-IFRS financial
measures" section of the Management's discussion and analysis
("MD&A").
(2) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note
2 of the condensed interim consolidated financial statements.
(3) At February 28, 2014 and August 31, 2013.
(4) Indebtedness is defined as the aggregate of bank indebtedness,
principal on long-term debt and obligations under derivative financial
instruments.
(5) Per multiple and subordinate voting share.
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MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)
Three and six-month periods ended February 28, 2014
FORWARD-LOOKING STATEMENTS
Certain statements in this Management's Discussion and Analysis ("MD&A") may
constitute forward-looking information within the meaning of securities laws.
Forward-looking information may relate to Cogeco Cable's future outlook and
anticipated events, business, operations, financial performance, financial
condition or results and, in some cases, can be identified by terminology such
as "may"; "will"; "should"; "expect"; "plan"; "anticipate"; "believe"; "intend";
"estimate"; "predict"; "potential"; "continue"; "foresee", "ensure" or other
similar expressions concerning matters that are not historical facts. In
particular, statements regarding the Corporation's future operating results and
economic performance and its objectives and strategies are forward-looking
statements. These statements are based on certain factors and assumptions
including expected growth, results of operations, performance and business
prospects and opportunities, which Cogeco Cable believes are reasonable as of
the current date. While management considers these assumptions to be reasonable
based on information currently available to the Corporation, they may prove to
be incorrect. The Corporation cautions the reader that the economic downturn
experienced over the past few years makes forward- looking information and the
underlying assumptions subject to greater uncertainty and that, consequently,
they may not materialize, or the results may significantly differ from the
Corporation's expectations. It is impossible for Cogeco Cable to predict with
certainty the impact that the current economic uncertainties may have on future
results. Forward-looking information is also subject to certain factors,
including risks and uncertainties (described in the "Uncertainties and main risk
factors" section of the Corporation's 2013 annual MD&A as well as in the present
MD&A) that could cause actual results to differ materially from what Cogeco
Cable currently expects. These factors include namely risks pertaining to
markets and competition, technology, regulatory developments, operating costs,
information systems, disasters or other contingencies, financial risks related
to capital requirements, human resources, controlling shareholder and holding
structure, many of which are beyond the Corporation's control. Therefore, future
events and results may vary significantly from what management currently
foresees. The reader should not place undue importance on forward-looking
information and should not rely upon this information as of any other date.
While management may elect to, the Corporation is under no obligation and does
not undertake to update or alter this information at any particular time, except
as may required by law.
All amounts are stated in Canadian dollars unless otherwise indicated. This
report should be read in conjunction with the Corporation's condensed interim
consolidated financial statements and the notes thereto for the three and
six-month periods ended February 28, 2014, prepared in accordance with the
International Financial Reporting Standards ("IFRS") and the MD&A included in
the Corporation's 2013 Annual Report.
CORPORATE OBJECTIVES AND STRATEGIES
Cogeco Cable Inc.'s ("Cogeco Cable" or the "Corporation") objectives are to
provide outstanding service to its customers, improve profitability and create
shareholder value. To achieve these objectives, the Corporation has developed
strategies that focus on expanding its service offering and enhancing its
existing services or bundles, improving the networks, improving customer
experience and business processes as well as keeping a sound capital management
and a strict control over spending. The Corporation measures its performance,
with regard to these objectives by monitoring adjusted EBITDA(1), operating
margin(1), free cash flow(1) and capital intensity(1).
(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.
KEY PERFORMANCE INDICATORS
ADJUSTED EBITDA AND OPERATING MARGIN
For the six-month period ended February 28, 2014, adjusted EBITDA increased by
26.3% to reach $433.1 million compared to the same period of fiscal 2013 and
operating margin decreased to 45.1% from 45.3%. The improvement in adjusted
EBITDA is mainly attributable to the acquisitions of Atlantic Broadband and PEER
1(2) (the "recent acquisitions") which occurred at the end of the first quarter
and in the second quarter of fiscal 2013, respectively, combined with the
favorable foreign exchange rates compared to last year and the improvement of
the Canadian cable services segment. As a result of the overall performance of
all of our operating units as well as the appreciation of the US dollar and
British Pound currency compared to the Canadian dollar, the Corporation revised
its financial guidelines for the 2014 fiscal year issued on October 30, 2013.
Adjusted EBITDA is now expected to reach $895 million from $885 million and
operating margin should now increase from 45.7% to 45.8%. For further details,
please consult the fiscal 2014 revised projections in the "Fiscal 2014 financial
guidelines" section.
(2) PEER 1 refers to Peer 1 Network (USA) Holdings Inc., Peer (UK) Ltd.
and Peer 1 Network Enterprises, Inc.
FREE CASH FLOW
For the six-month period ended February 28, 2014, Cogeco Cable reports free cash
flow of $161.4 million, an increase of $108.5 million compared to $52.9 million
for the same period of the previous fiscal year. This variance is mostly
attributable to the improvement of adjusted EBITDA explained above, the decrease
in acquisitions of property, plant and equipment, intangible and other assets
due to the timing of certain initiatives as well as the decrease in integration,
restructuring and acquisition costs, partly offset by the increase in financial
expense due to higher level of indebtedness. As a result of the improvement in
adjusted EBITDA explained above, the Corporation also revised its free cash
projections from $230 million to $240 million. For further detail, please
consult the fiscal 2014 revised projections in the "Fiscal 2014 financial
guidelines" section.
CAPITAL INTENSITY AND ACQUISITIONS OF PROPERTY, PLANT AND EQUIPMENT, INTANGIBLE
AND OTHER ASSETS
During the six-month period ended February 28, 2014, the acquisitions of
property, plant and equipment, intangible and other assets amounted to $165.9
million and revenue of $961.0 million for a capital intensity ratio of 17.3%
compared to 24.7% in the comparable period of the prior year. The improvement of
the capital intensity ratio is mainly attributable to higher revenue for the
first half of fiscal 2014 as a result of the full impact of the recent
acquisitions combined with lower acquisitions of property, plant and equipment,
intangible and other assets due to the timing of certain initiatives compared to
the same period of the prior year. For further details on the Corporation's
capital expenditures please refer to the "Cash flow analysis" section.
OPERATING AND FINANCIAL RESULTS
OPERATING RESULTS
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Quarters ended Six months ended
(in thousands February February February February
of dollars, 28, 28, 28, 28,
except 2014 2013 Change 2014 2013 Change
percentages) $ $ (1) % $ $ (1) %
----------------------------------------------------------------------------
Revenue 486,008 429,672 13.1 960,988 757,583 26.8
Operating
expenses 264,227 230,858 14.5 518,176 405,012 27.9
Management
fees - COGECO
Inc. 165 2,988 (94.5) 9,674 9,569 1.1
-------------------------------------- ------------------------
Adjusted
EBITDA 221,616 195,826 13.2 433,138 343,002 26.3
-------------------------------------- ------------------------
Operating
margin 45.6% 45.6% 45.1% 45.3%
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(1) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note
2 of the condensed interim consolidated financial statements.
REVENUE
Fiscal 2014 second-quarter revenue increased by $56.3 million, or 13.1%, to
reach $486.0 million driven by growth of 2.3% in the Canadian cable services
segment, of 14.2% in the American cable services segment and of 98.4% in the
Enterprise services segment. Revenue increase results mainly from the full
quarter impact of the acquisition of PEER 1 compared to one month of operating
results for the same period of fiscal 2013. The favorable foreign exchange rates
compared to last year and the organic growth from all of our operating units
also contributed to the increase of the revenue in the quarter. For the first
six months of fiscal 2014, revenue amounted to $961.0 million, an increase of
$203.4 million, or 26.8% compared to the same period of fiscal 2013. The
increase is mainly attributable to full impact of the recent acquisitions
compared to fiscal 2013 combined with the favorable foreign exchange rates as
well as the organic growth from all of our operating units. For further details
on the Corporation's revenue, please refer to the "Segmented operating results"
section.
OPERATING EXPENSES AND MANAGEMENT FEES
For the second quarter of fiscal 2014, operating expenses increased by $33.4
million, to reach $264.2 million, an increase of 14.5% compared to the prior
year. For the first half of the fiscal year, operating expenses amounted to
$518.2 million, an increase of $113.2 million, or 27.9%, compared to the same
period of fiscal 2013. Operating expenses increase is mostly attributable to the
full impact of the recent acquisitions and the appreciation of the US dollar and
British Pound currency compared to the Canadian dollar, partly offset by cost
reduction initiatives and restructuring activities which occurred in the fourth
quarter of fiscal 2013 in the Canadian cable services. For further details on
the Corporation's operating expenses, please refer to the "Segmented operating
results" section.
For the second quarter of fiscal 2014, management fees paid to COGECO Inc.
amounted to $0.2 million, 94.5% lower compared to $3.0 million for the same
period in fiscal 2013. For the first half of the fiscal year 2014, management
fees paid to COGECO Inc. amounted to $9.7 million, 1.1% higher compared to $9.6
million in the comparable period of fiscal 2013. For further details on the
Corporation's management fees, please refer to the "Related party transactions"
section.
ADJUSTED EBITDA AND OPERATING MARGIN
For the three and six-month periods ended February 28, 2014, adjusted EBITDA
increased by $25.8 million, or 13.2%, to reach $221.6 million, and by $90.1
million, or 26.3%, to reach $433.1 million, respectively, compared to the
comparable periods of the prior year. The increases for both periods is mainly
attributable to the full impact of the recent acquisitions, the favorable
foreign exchange rates compared to the same periods of last year as well as the
improvement in the Canadian cable services segment. Cogeco Cable's
second-quarter operating margin remained the same at 45.6% and decreased to
45.1% from 45.3% for the first six months of fiscal 2014 compared to the
comparable periods of the prior year essentially due to lower margin business
activities from the Enterprise services segment. For further details on the
Corporation's adjusted EBITDA and operating margin, please refer to the
"Segmented operating results" section.
FIXED CHARGES
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Quarters ended Six months ended
February February February February
(in thousands of 28, 28, 28, 28,
dollars, except 2014 2013 Change 2014 2013 Change
percentages) $ $ (1) % $ $ (1) %
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Depreciation and
amortization 113,133 92,500 22.3 228,887 157,166 45.6
Financial expense 32,918 29,208 12.7 65,467 44,922 45.7
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(1) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note
2 of the condensed interim consolidated financial statements.
For the three and six-month periods ended February 28, 2014, depreciation and
amortization expense amounted to $113.1 million and $228.9 million,
respectively, compared to $92.5 million and $157.2 million for the same periods
of the prior year, as a result of the full impact of the recent acquisitions,
which occurred at the end of the first quarter and in the second quarter of
fiscal 2013 and by the appreciation of the US dollar and the British Pound
currency compared to the Canadian dollar.
Fiscal 2014 second-quarter financial expense increased by $3.7 million, or
12.7%, amounting to $32.9 million compared to $29.2 million in fiscal 2013
second-quarter. For the first six months of fiscal 2014, financial expense
increased by $20.5 million, or 45.7%, at $65.5 million, compared to $44.9
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, 2014, income tax expense
amounted to $14.8 million and $28.1 million, respectively, compared to $15.8
million and $33.2 million, respectively, for the comparable periods in the prior
year. The decrease is mostly attributable to the increase in fixed charges
explained above as well as the favorable impact of the tax structure from the
recent acquisitions, partly offset by the improvement in adjusted EBITDA.
PROFIT FOR THE PERIOD
For the second quarter of fiscal 2014, profit for the period amounted to $60.4
million, or $1.24 per share, compared to $50.8 million, or $1.05 per share last
year. For the six-month period ended February 28, 2014, profit for the period
amounted to $110.1 million, or $2.26 per share, compared to $92.9 million, or
$1.91 for the comparable period. Profit progression for both periods is mostly
attributable to the improvement of the adjusted EBITDA explained above and the
decrease in integration, restructuring and acquisition costs, partly offset by
the increase in the fixed charges.
CUSTOMER STATISTICS
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----------------------------------------------------------------------
Consolidated UNITED STATES CANADA
February 28, 2014
----------------------------------------------------------------------
PSU (1) 2,454,627 492,550 1,962,077
Television
service
customers 1,044,611 228,759 815,852
HSI service
customers 857,786 184,805 672,981
Telephony
service
customers 552,230 78,986 473,244
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----------------------------------------------------------------------
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Consolidated
---------------------------------------------
Net additions (losses) Net additions (losses)
Quarters ended Six months ended
February 28, February 28, February 28, February 28,
2014 2013 2014 2013
----------------------------------------------------------------------------
PSU (1) (10,305) 6,074 (13,030) 21,862
Television
service
customers (13,248) (10,660) (22,341) (12,736)
HSI service
customers 8,889 11,184 19,341 22,737
Telephony
service
customers (5,946) 5,550 (10,030) 11,861
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(1) Represents the sum of Television, High Speed Internet ("HSI") and
Telephony service customers.
At February 28, 2014, PSU reached 2,454,627 of which 1,962,077 come from the
Canadian cable services segment and 492,550 come from the American cable
services segment. For the three and six-month periods ended February 28, 2014,
PSU net losses stood at 10,305 and 13,030, respectively, compared to net
additions of 6,074 and 21,862 for the comparable periods of fiscal 2013. Fiscal
2014 second-quarter and first six months net losses for Television service
customers stood at 13,248 and 22,341 compared to 10,660 and 12,736, HSI service
customers grew by 8,889 and 19,341 compared to 11,184 and 22,737 and the
Telephony service customers net losses stood at 5,946 and 10,030 compared to net
additions of 5,550 and 11,861 for the comparable periods of fiscal 2013. HSI net
additions continue to stem from the enhancement of the product offering and the
impact of the bundle offer.
In the Canadian cable services segment, PSU decreased by 13,425 for the
second-quarter of fiscal 2014, compared to an increase of 2,314 for the
comparable period last year. For the first six months of fiscal 2014, PSU
decreased by 18,045, compared to an increase of 18,102 for the comparable period
in 2013. The decrease is explained by service category maturity and a much more
competitive environment in all services.
In the American cable services segment, PSU increased by 3,120 for the
second-quarter of fiscal 2014, compared to an increase of 3,760 for the same
period of prior year. For the first six months of fiscal 2014, PSU increased by
5,015, compared to an increase of 3,760 for the comparable period in 2013. The
increase is explained by additional HSI and Telephony services, offset by losses
in the Television service.
RELATED PARTY TRANSACTIONS
Cogeco Cable Inc. is a subsidiary of COGECO Inc., which holds 32.0% of the
Corporation's equity shares, representing 82.5% of the Corporation's voting
shares. On September 1, 1992, Cogeco Cable Inc. executed a management agreement
with COGECO Inc. under which the parent company agreed to provide certain
executive, administrative, legal, regulatory, strategic and financial planning
services and additional services to the Corporation and its subsidiaries (the
"Management Agreement"). These services are provided by COGECO Inc.'s senior
executives, including the President and Chief Executive Officer, the Senior Vice
President and Chief Financial Officer, the Vice President, Corporate Affairs,
Chief Legal Officer and Secretary, the Vice President, Regulatory Affairs and
Copyright, the Vice President, Corporate Development, the Vice President and
Treasurer, the Vice President, Public Affairs and Communications and the Vice
President, Internal Audit and Risk Management. No direct remuneration is payable
to such senior executives by the Corporation. However, the Corporation granted
83,650 stock options (71,233 in 2013) to these senior executives as senior
executives of Cogeco Cable during the first six months of fiscal year 2014.
During the second quarter and first six months of fiscal 2014, the Corporation
charged COGECO Inc. amounts of $68,000 and $162,000 ($86,000 and $176,000 in
2013) with regards to the Corporation's stock options granted to these senior
executives.
During the first six months of fiscal 2014 the Corporation also granted 12,450
(12,280 in 2013) Incentive Share Units ("ISUs") to these senior executives as
senior executives of Cogeco Cable. During the second quarter and first six
months of fiscal 2014, the Corporation charged COGECO Inc. amounts of $119,000
and $318,000 ($112,000 and $219,000 in 2013) with regards to the Corporation's
ISUs granted to these senior executives.
Under the Management Agreement, the Corporation pays monthly fees equal to 2% of
its total revenue to COGECO Inc. for the above-mentioned services. The
management fees are subject to annual upward adjustment based on increases in
the Consumer Price Index in Canada. This limit can be increased under certain
circumstances upon request to that effect by COGECO Inc. For fiscal year 2014,
management fees have been set at a maximum of $9.7 million ($9.6 million in
2013), which were paid within the first half of the fiscal year. For fiscal year
2013, management fees were also fully paid in the first half of the year. In
addition, the Corporation reimburses COGECO Inc.'s out-of-pocket expenses
incurred with respect to services provided to the Corporation under the
Management Agreement.
Details regarding the Management Agreement and stock options and ISUs granted to
COGECO Inc.'s senior executives are provided in the Corporation's 2013 Annual
Report.
There were no other material related party transactions during the periods covered.
CASH FLOW ANALYSIS
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Quarters ended Six months ended
February 28, February 28, February 28, February 28,
(in thousands of 2014 2013 2014 2013
dollars) $ $ (1) $ $ (1)
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Cash flow from
operations 174,013 140,401 327,277 240,132
Changes in non-cash
operating activities (6,081) 4,931 (92,785) (76,182)
Amortization of deferred
transaction costs and
discounts on long-term
debt (1,888) (2,723) (3,730) (3,463)
Income taxes paid (19,239) (17,475) (37,543) (60,008)
Current income tax
expense 20,217 23,027 46,770 48,118
Financial expense paid (18,312) (27,285) (60,718) (43,715)
Financial expense 32,918 29,208 65,467 44,922
----------------------------------------------------------------------------
Cash flow from operating
activities 181,628 150,084 244,738 149,804
Cash flow from investing
activities (80,655) (733,414) (165,315) (2,170,308)
Cash flow from financing
activities (74,458) 610,025 (66,151) 1,841,086
Effect of exchange rate
changes on cash and
cash equivalents
denominated in foreign
currencies 1,726 705 1,925 705
----------------------------------------------------------------------------
Net change in cash and
cash equivalents 28,241 27,400 15,197 (178,713)
Cash and cash
equivalents, beginning
of the period 26,531 9,278 39,575 215,391
----------------------------------------------------------------------------
Cash and cash
equivalents, end of the
period 54,772 36,678 54,772 36,678
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note
2 of the condensed interim consolidated financial statements.
OPERATING ACTIVITIES
Fiscal 2014 second-quarter cash flow from operating activities reached $181.6
million compared to $150.1 million, an increase of $31.5 million, or 21.0%,
compared to fiscal 2013 second-quarter. The increase is mainly explained by an
increase of $9.5 million in profit for the period and of $20.6 million in
depreciation and amortization expense, a decrease of $9.0 million in financial
expense paid and by a decrease of $11.0 million in changes in non-cash operating
activities mainly as a result of an higher increase in trade and other
receivables and a lower increase in trade and other payables compared to the
prior year. For the first six months of fiscal 2014, cash flow from operating
activities reached $244.7 million compared to $149.8 million, an increase of
$94.9 million, or 63.4%, compared to the same period in fiscal 2013. The
increase is mainly explained by the improvement of $17.1 million in profit for
the period, increases of $71.7 million in depreciation and amortization expense,
of $20.5 million in financial expense and by a decrease in income taxes paid of
$22.5 million, partly offset by an increase of $17.0 million in financial
expense paid and a decrease of $16.6 million in changes in non-cash operating
activities mainly as result of higher increase in trade and other receivables, a
higher decrease in trade and other payables and an increase in prepaid expenses
and other compared to a decrease in the prior year.
For the three and six-month periods ended February 28, 2014, cash flow from
operations amounted to $174.0 million and $327.3 million, respectively, compared
to $140.4 million and $240.1 million for the comparable periods in fiscal 2013.
Increases for both periods are primarily due to the improvement of adjusted
EBITDA as well as the decrease in integration, restructuring and acquisition
costs, partly offset by an increase in financial expense as a result of higher
indebtedness levels from the recent acquisitions.
INVESTING ACTIVITIES
For the three and six-month periods ended February 28, 2014, investing
activities amounted to $80.7 million and $165.3 million, respectively, mainly
due to the acquisitions of property, plant and equipment, intangible and other
assets. For the comparable periods of fiscal 2013, investing activities amounted
to $733.4 million and $2.2 billion explained below.
BUSINESS COMBINATIONS IN FISCAL 2013
On January 31, 2013 and on April 3, 2013, the Corporation acquired 100% of the
issued and outstanding shares of PEER 1 one of the world's leading internet
infrastructure providers, specializing in managed hosting, dedicated servers,
cloud services and colocation. During the second quarter of fiscal 2014, the
Corporation finalized the purchase price allocation of PEER 1 which had no
impact on the statement of profit or loss and comprehensive income for three and
six-month periods ended February 28, 2013. The impact of the finalization on the
statement of financial position at August 31, 2013, increased income tax
receivable by $0.7 million, increased deferred tax assets by $4.4 million,
decreased intangibles assets by $0.9 million, decreased goodwill by $2.8
million, increased deferred tax liabilities by $2.5 million and decreased
accumulated other comprehensive income by $1.2 million.
On November 30, 2012, the Corporation completed the acquisition of all the
outstanding shares of Atlantic Broadband, an independent cable system operator
formed in 2003, providing Analogue and Digital Television, as well as HSI and
Telephony services to residential and small and medium business customers.
During the first quarter of fiscal 2014 the Corporation finalized the purchase
price allocation of Atlantic Broadband which remained unchanged since the last
adjustments made in the fourth quarter of fiscal 2013.
The final purchase price allocations of Atlantic Broadband and PEER 1 are as
follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
As
previously
presented February 28, 2014
Atlantic
PEER 1 PEER 1 Broadband TOTAL
Preliminary Final Final
$ $ $ $
----------------------------------------------------------------------------
Consideration
Paid
Purchase of shares 494,796 494,796 337,779 832,575
Working capital
adjustments - - 5,415 5,415
Repayment of secured
debts and settlement
of options
outstanding 170,872 170,872 1,021,854 1,192,726
----------------------------------------------------------------------------
665,668 665,668 1,365,048 2,030,716
----------------------------------------------------------------------------
Net assets acquired
Cash and cash
equivalents 10,840 10,840 5,480 16,320
Restricted cash 8,729 8,729 - 8,729
Trade and other
receivables 12,772 12,772 12,012 24,784
Prepaid expenses and
other 3,855 3,855 1,370 5,225
Income tax receivable 2,160 2,797 3,907 6,704
Other assets 2,462 2,462 - 2,462
Property, plant and
equipment 150,013 150,013 302,211 452,224
Intangible assets 144,671 144,231 711,418 855,649
Goodwill 412,347 410,454 522,215 932,669
Deferred tax assets 4,727 8,872 98,592 107,464
Trade and other payables
assumed (26,512) (26,512) (27,620) (54,132)
Provisions - - (721) (721)
Deferred and prepaid
revenue and other
liabilities assumed (3,388) (3,388) (7,697) (11,085)
Long-term debt assumed (1,735) (1,735) - (1,735)
Deferred tax liabilities (55,273) (57,722) (256,119) (313,841)
----------------------------------------------------------------------------
665,668 665,668 1,365,048 2,030,716
----------------------------------------------------------------------------
----------------------------------------------------------------------------
ACQUISITIONS OF PROPERTY, PLANT AND EQUIPMENT, INTANGIBLE AND OTHER ASSETS
Investing activities, including acquisition of property, plant and equipment
segmented according to the National Cable Television Association ("NCTA")
standard reporting categories, are as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Six months ended
February 28, February 28, February 28, February 28,
(in thousands of 2014 2013 2014 2013
dollars) $ $ $ $
----------------------------------------------------------------------------
Customer premise
equipment(1) 18,228 18,174 43,545 37,874
Scalable
infrastructure(2) 15,675 24,302 35,475 56,916
Line extensions 6,121 5,191 11,418 8,120
Upgrade / Rebuild 5,261 12,139 10,567 15,650
Support capital 4,750 4,771 8,731 10,383
----------------------------------------------------------------------------
Acquisition of property,
plant and equipment -
Cable services(3) 50,035 64,577 109,736 128,943
Acquisition of property,
plant and equipment -
Enterprise services(4) 26,158 35,363 47,430 49,189
----------------------------------------------------------------------------
Acquisitions of
property, plant and
equipment 76,193 99,940 157,166 178,132
----------------------------------------------------------------------------
Acquisition of
intangible and other
assets - Cable
services(3) 3,467 4,214 7,145 8,115
Acquisition of
intangible and other
assets - Enterprise
services(4) 1,146 279 1,584 1,019
----------------------------------------------------------------------------
Acquisitions of
intangible and other
assets 4,613 4,493 8,729 9,134
----------------------------------------------------------------------------
80,806 104,433 165,895 187,266
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Includes mainly home terminal devices as well as new and replacement
drops.
(2) Includes mainly head-end equipment, digital video and telephony
transport as well as HSI equipment.
(3) Fiscal 2013 six-months period include only three months of operating
results of American cable services.
(4) Fiscal 2013 three and six-month periods include only one month of
operating results of PEER 1.
For the three and six-month periods ended February 28, 2014, acquisition of
property, plant and equipment in the Cable services amounted to $50.0 million
and $109.7 million, respectively, compared to $64.6 million and $128.9 million
for the comparable periods of fiscal 2013.
In the Canadian cable services, fiscal 2014 second-quarter acquisition of
property, plant and equipment amounted to $32.5 million, a decrease of 36.7%
when compared to $51.4 million in the second quarter of the prior year. For the
six-month period ended February 28, 2014, acquisition of property, plant and
equipment amounted to $81.3 million, a decrease of 29.8% when compared to the
prior year.
For the second quarter of fiscal 2014, acquisition of property, plant and
equipment in the American cable services segment amounted to $17.5 million
compared to $13.2 million for the comparable period of fiscal 2013. For the
six-month period ended February 28, 2014, acquisition of property, plant and
equipment amounted to $28.4 million compared to $13.2 million in the prior year
as a result of six months of operating results compared to three months in
fiscal 2013.
The decreases in the Canadian and American cable services segments are mainly
attributable to the following factors:
-- A decrease in the quarter and for the six-month period ended February
28, 2014 in scalable infrastructure and network upgrades and rebuild due
to the deployment in fiscal 2012 and early fiscal 2013 of advanced
technologies such as DOCSIS 3.0 and Switched Digital Video in existing
areas served; and
-- An increase in customer equipment for the three and six-month period
ended February 28, 2014 mainly due to the launch of TiVo's digital
entertainment services in the American cable services segment.
Fiscal 2014 second-quarter and first six months acquisition of property, plant
and equipment in the Enterprise services segment amounted to $26.2 million and
$47.4 million, respectively, compared to $35.4 million and $49.2 million in the
comparable periods of fiscal 2013. The decrease in the quarter is mainly
attributable to the timing of initiatives while the capital expenditures for the
first six months of fiscal 2014 slightly increase as a result of expansion of
data centre facilities in Toronto, Canada and in Portsmouth, England as well as
the fiber expansion in the Toronto area in order to fulfill orders from new
customer demand.
Acquisition of intangible and other assets are mainly attributable to reconnect
and additional service activation costs as well as other customer acquisition
costs. For the second quarter and the first six months of fiscal 2014, the
acquisition of intangible and other assets amounted to $4.6 million and $8.7
million, respectively, compared to $4.5 million and $9.1 million for the same
periods last year.
FREE CASH FLOW AND FINANCING ACTIVITIES
For the second quarter of fiscal 2014, free cash flow amounted to $93.2 million,
$57.2 million higher than in the comparable period of fiscal 2013. For the
six-month period, free cash flow amounted to $161.4 million, $108.5 million
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 adjusted EBITDA as
well as the decrease in acquisitions of property, plant and equipment,
intangible and other assets due to the timing of certain initiatives, and in
integration, restructuring and acquisition costs, partly offset by the increase
in financial expense as a result of higher indebtedness level from the recent
acquisitions.
In the second quarter of fiscal 2014, a lower Indebtedness level provided for a
cash decrease of $60.9 million, mainly due to the repayments under the revolving
facilities of $48.9 million and a decrease in bank indebtedness of $7.4 million.
In the second quarter of fiscal 2013, a higher Indebtedness level provided a
cash increase of $636.4 million mainly due to drawings of $640.3 million (net of
transaction costs of $2.8 million) under the former secured credit facilities
amounting to approximately to $650 million incurred to finance the acquisition
of PEER 1.
For the six-month period of fiscal 2014, a lower Indebtedness level provided for
a cash decrease of $33.2 million, mainly due to a decrease in bank indebtedness
of $11.5 million and repayments under the revolving facilities of $15.6 million.
For the six-month of fiscal 2013, a 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 Term Loan
Facilities of $637.4 million (US$641.5 million, net of transaction costs of
US$18.5 million) to finance the acquisition of Atlantic Broadband as well to
drawings of $640.3 million (net of transaction costs of $2.8 million) under
credit facilities amounting to approximately to $650 million incurred to finance
the acquisition of PEER 1.
During the second quarter of fiscal 2014, a quarterly dividend of $0.30 per
share was paid to the holders of subordinate and multiple voting shares,
totaling $14.6 million, compared to a dividend paid of $0.26 per share, or $12.6
million in the second quarter of fiscal 2013. Dividend payments in the first six
months totaled $0.60 per share, or $29.2 million, compared to $0.52 per share,
or $25.3 million the year before.
As at February 28, 2014, the Corporation had a working capital deficiency of
$119.3 million compared to $223.5 million at August 31, 2013. The reduction of
$104.3 million in the deficiency is mainly due to the decrease of $81.8 million
in trade and other payables and of $11.5 million in bank indebtedness as well as
an increase of $15.2 million in cash and cash equivalents as a result of
generated free cash flow of $161.4 million. 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, 2014, the Corporation had used $574.8 million of its $800
million amended and restated Term Revolving Facility for a remaining
availability of $225.2 million. In addition, two subsidiaries of the Corporation
also benefit from a Revolving Facility of $110.7 million (US$100 million)
related to its acquisition of Atlantic Broadband, of which $23.3 million
(US$21.1 million) was used at February 28, 2014 for a remaining availability of
$87.4 million (US$78.9 million).
FINANCIAL POSITION
Since August 31, 2013, the following balances have changed significantly: "cash
and cash equivalents", "property, plant and equipment", "intangible assets",
"goodwill", "bank indebtedness", "trade and other payables" and "long-term
debt".
The increase of $15.2 million in cash and cash equivalents, the decrease of
$11.5 million in bank indebtedness and the increase of $76.6 million in
long-term debt are due to the appreciation of the US dollar and British Pound
currency compared to the Canadian dollar, partly offset by the factors
previously discussed in the "Cash flow analysis" section. The $15.6 million
decrease in property, plant and equipment is mainly related to the excess of
depreciation expense over acquisitions discussed in the "Cash flow analysis"
section, partly offset by the impact of the appreciation of the US dollar and
British Pound currency compared to the Canadian dollar. Intangible assets and
goodwill increased by $20.9 million and $48.1 million, respectively, due to the
appreciation of the US dollar and the British Pound against the Canadian dollar
during the first six months of fiscal 2014. The decrease of $81.8 million in
trade and other payables is related to the timing of payments made to suppliers.
OUTSTANDING SHARE DATA
A description of Cogeco Cable's share data at March 31, 2014 is presented in the
table below. Additional details are provided in note 11 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 33,352,985 909,002
Options to purchase subordinate voting
shares
Outstanding options 846,377
Exercisable options 312,020
----------------------------------------------------------------------------
----------------------------------------------------------------------------
FINANCING
In the normal course of business, Cogeco Cable has incurred financial
obligations, primarily in the form of long-term debt, operating and finance
leases and guarantees. Cogeco Cable's obligations, as discussed in the 2013
Annual Report, have not materially changed since August 31, 2013, except as
mentioned below.
On November 22, 2013, the Corporation amended and restated its Term Revolving
Facility of $800 million with a syndicate of lenders. The maturity was extended
until January 22, 2019 and can be further extended annually. The amendments
reduced the margin for the calculation of the interest rate and reduced
restrictions on some covenants. The amended and restated Term Revolving Facility
also replaced Cogeco Cable's Secured Credit Facilities coming to maturity on
January 27, 2017 which was fully repaid on November 22, 2013. This amended and
restated Term Revolving Facility is comprised of two tranches: a first tranche,
a Canadian tranche, amounting to $788 million and the second tranche, a UK
tranche, amounting to $12 million. Both Cogeco Cable and Peer 1 (UK) Ltd. can
borrow under the UK tranche. The Canadian tranche is available in Canadian
dollars, US dollars, Euros and British Pounds and interest rates are based on
banker's acceptance, US dollar base rate loans, LIBOR loans in US dollars, Euros
or British Pounds, plus the applicable margin. The UK tranche is available in
British Pounds and interest rates are based on British Pounds base rate loans
and British Pounds LIBOR loans. The Term Revolving Facility is indirectly
secured by first priority fixed and floating charges and a security interest on
substantially all present and future real and personal properties and
undertaking of every nature and kind of the Corporation and certain of its
subsidiaries, and provides for certain permitted encumbrances, including
purchased money obligations, existing funded obligations and charges granted by
any subsidiary prior to the date when it becomes a subsidiary, subject to a
maximum amount. The provisions under this facility provide for restrictions on
the operations and activities of the Corporation. Generally, the most
significant restrictions relate to permitted investments and dividends on
multiple and subordinate voting shares, as well as incurrence and maintenance of
certain financial ratios primarily linked to operating income before
amortization, financial expense and total indebtedness.
FINANCIAL MANAGEMENT
The Corporation has entered into cross-currency swap agreements to set the
liability for interest and principal payments on its US$190 million Senior
Secured Notes Series A maturing on October 1, 2015. These agreements have the
effect of converting the U.S. interest coupon rate of 7.00% per annum to an
average Canadian dollar interest rate of 7.24% per annum. The exchange rate
applicable to the principal portion of the debt has been fixed at $1.0625 per US
dollar. The Corporation elected to apply cash flow hedge accounting on these
derivative financial instruments. During the first half of fiscal 2014, amounts
due under the US$190 million Senior Secured Notes Series A increased by $10.3
million due to the US dollar's appreciation relative to the Canadian dollar. The
fair value of cross-currency swaps asset increased by a net amount of $11.1
million, of which an increase of $10.3 million offsets the foreign exchange loss
on the debt denominated in US dollars. The difference of $0.8 million was
recorded as an increase of other comprehensive income. 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 over 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.
In addition, on July 22, 2013, Cogeco Cable had entered into interest rate swap
agreements to fix the interest rate on US$200 million of its LIBOR based loans.
These agreements have the effect of converting the floating US LIBOR base rate
at an average fixed rate of 0.39625% under the Term Revolving Facility until
July 25, 2015. The Corporation elected to apply hedge accounting on these
derivative financial instruments. During the first half of fiscal 2014, the fair
value of interest rate swaps asset decreased by a net amount of $0.9 million
which was recorded as a decrease of other comprehensive income.
The sensitivity of the Corporation's annual financial expense to a variation of
1% in the interest rate applicable to these facilities is approximately $7.7
million based on the current debt at February 28, 2014.
Furthermore, the Corporation's investment in foreign operations is exposed to
market risk attributable to fluctuations in foreign currency exchange rates,
primarily changes in the values of the Canadian dollar versus the US dollar and
British Pounds. This risk was mitigated since the major part of the purchase
prices for Atlantic Broadband and PEER 1 were borrowed directly in US dollars
and British Pounds. At February 28, 2014, the investments for Atlantic Broadband
and PEER 1 amounted to US$1.1 billion and GBP 65.5 million while long-term debt
hedging these investments were US$859.5 million and GBP 56.9 million. The
exchange rates used to convert the US dollar currency and British Pounds
currency into Canadian dollars for the statement of financial position accounts
at February 28, 2014 were $1.1074 per US dollar and $1.8543 per British Pound
compared to $1.0530 per US dollar and $1.6318 per British Pound at August 31,
2013. The impact of a 10% fluctuation in the exchange rates of the US dollar and
British Pound into Canadian dollars would change other comprehensive income by
approximately $28.0 million.
Since the Corporation's condensed interim consolidated financial statements are
expressed in Canadian dollars but a portion of its business is conducted in US
dollars and British Pound currency, exchange rate fluctuations can increase or
decrease the Corporation's operating results. For the three and six-month
periods ended February 28, 2014, the average rates prevailing used to convert
the operating results of the American cable services and a portion of the
Enterprise services were as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Six months ended
February February February February
28, 28, 28, 28,
2014 2013 Change 2014 2013 Change
$ $ % $ $ %
----------------------------------------------------------------------------
US dollar vs
Canadian dollar 1.0879 0.9971 9.1 1.0639 0.9924 7.2
British Pound vs
Canadian dollar 1.7917 1.5623 14.7 1.7294 1.5623 10.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The following table highlights in Canadian dollars, the impact of a 10% increase
in the US dollar or British Pound against the Canadian dollar as the case may
be, of Cogeco Cable's operating results for the three and six-month periods
ended February 28, 2014:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Canadian cable American cable
services services Enterprise services
Quarter ended
February 28, Exchange Exchange Exchange
2014 As rate As rate As rate
(in thousands of reported impact reported impact reported impact
dollars) $ $ $ $ $ $
----------------------------------------------------------------------------
Revenue 313,159 - 98,048 9,804 75,339 3,802
Operating
expense 155,372 440 55,767 5,575 50,174 2,841
----------------------------------------------------------------------------
Adjusted EBITDA 157,787 (440) 42,281 4,229 25,165 961
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Acquisitions of
property, plant
and equipment,
intangible and
other assets 35,580 969 17,922 1,792 27,304 1,008
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Canadian cable American cable
services services Enterprise services
Six months
ended February Exchange Exchange Exchange
28, 2014 As rate As rate As rate
(in thousands reported impact reported impact reported impact
of dollars) $ $ $ $ $ $
----------------------------------------------------------------------------
Revenue 622,678 - 190,597 19,060 148,711 7,476
Operating
expense 310,545 1,208 105,786 10,579 95,655 5,481
----------------------------------------------------------------------------
Adjusted EBITDA 312,133 (1,208) 84,811 8,481 53,056 1,995
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Acquisitions of
property,
plant and
equipment,
intangible and
other assets 87,591 3,592 29,290 2,929 49,014 2,164
----------------------------------------------------------------------------
----------------------------------------------------------------------------
DIVIDEND DECLARATION
At its April 9, 2014 meeting, the Board of Directors of Cogeco Cable declared a
quarterly eligible dividend of $0.30 per share for multiple voting and
subordinate voting shares, payable on May 7, 2014, to shareholders of record on
April 23, 2014. The declaration, amount and date of any future dividend will
continue to be considered and approved by the Board of Directors of the
Corporation based upon the Corporation's financial condition, results of
operations, capital requirements and such other factors as the Board of
Directors, at its sole discretion, deems relevant. There is therefore no
assurance that dividends will be declared, and if declared, the amount and
frequency may vary.
SEGMENTED OPERATING RESULTS
The Corporation reports its operating results in three operating segments:
Canadian cable services, American cable services and Enterprise services. The
reporting structure reflects how the Corporation manages the business activities
to make decisions about resources to be allocated to the segment and to assess
its performance.
CANADIAN CABLE SERVICES
CUSTOMER STATISTICS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net additions (losses)
Quarters ended Six months ended
February February February February February
28, 28, 28, 28, 28,
2014 2014 2013 2014 2013
----------------------------------------------------------------------------
PSU(2) 1,962,077 (13,425) 2,314 (18,045) 18,102
Television service
customers 815,852 (11,797) (8,332) (18,919) (10,408)
HSI service customers 672,981 4,724 5,758 11,644 17,311
Telephony service
customers 473,244 (6,352) 4,888 (10,770) 11,199
----------------------------------------------------------------------------
----------------------------------------------------------------------------
---------------------------------------------------
---------------------------------------------------
% of penetration(1)
February 28, February 28,
2014 2013
---------------------------------------------------
PSU(2)
Television service
customers 48.5 51.4
HSI service customers 40.0 39.6
Telephony service
customers 28.1 29.1
---------------------------------------------------
---------------------------------------------------
(1) As a percentage of homes passed.
(2) Represents the sum of Television, HSI and Telephony service customers.
Fiscal 2014 second-quarter and first six months PSU net losses amounted to
13,425 and 18,045 compared to net additions of 2,314 and 18,102 for the
comparable periods of the prior year, mainly as a result of service category
maturity, competitive offers in the industry and tightening of our customer
qualifications. For the second quarter and first six months of fiscal 2014, net
customer losses for Television service stood at 11,797 and 18,919 compared to
8,332 and 10,408 for the same periods last 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. For the
second quarter and first six months of fiscal 2014, net additions for HSI
service customers stood at 4,724 and 11,644, respectively, compared to net
additions of 5,758 and 17,311 for the comparable periods of fiscal 2013. HSI net
additions continue to stem from the enhancement of the product offering, the
impact of the bundled offer of Television, HSI and Telephony services, and
promotional activities. Net losses for the Telephony service amounted to 6,352
and 10,770, respectively, for the second quarter and first six months of fiscal
2014, compared to net additions of 4,888 and 11,199 for the same periods of
prior year.
Furthermore, as at February 28, 2014, 68% (67% in 2013) of the Canadian cable
services customers subscribed to two or more services. The distribution of
customers by number of services for the Canadian cable services were: 32% who
subscribe to the single play (33% in 2013), 32% to the double play (30% in 2013)
and 36% to the triple play (37% in 2013).
OPERATING RESULTS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Six months ended
February February February February
(in thousands of 28, 28, 28, 28,
dollars, except 2014 2013 Change 2014 2013 Change
percentages) $ $ (1) % $ $ (1) %
----------------------------------------------------------------------------
Revenue 313,159 306,173 2.3 622,678 610,988 1.9
Operating
expenses 155,372 155,820 (0.3) 310,545 311,980 (0.5)
-------------------------------------- ----------------------
Adjusted EBITDA 157,787 150,353 4.9 312,133 299,008 4.4
-------------------------------------- ----------------------
Operating margin 50.4% 49.1% 50.1% 48.9%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note
2 of the condensed interim consolidated financial statements.
Revenue
Fiscal 2014 second-quarter revenue increased by $7.0 million, or 2.3%, to reach
$313.2 million, compared to the same period last year. For the first six months,
revenue amounted to $622.7 million, an increase of 1.9% compared to the first
six months of fiscal 2013. Revenue increase is mainly attributable to rate
increases implemented in June 2013 in Quebec and Ontario, partly offset by PSU
losses.
Operating expenses
For the second quarter ended February 28, 2014, operating expenses decreased by
$0.4 million to $155.4 million. For the first six months, operating expenses
amounted to $310.5 million, a decrease of 0.5% compared to the same period of
prior year. These decreases are mainly attributable to cost reduction
initiatives and the restructuring activities which occurred in the fourth
quarter of fiscal 2013.
Adjusted EBITDA and operating margin
Fiscal 2014 second-quarter adjusted EBITDA amounted to $157.8 million, or 4.9%
higher than in the same period of the prior year. For the first six months of
fiscal 2014, adjusted EBITDA amounted to $312.1 million, or 4.4% higher than in
the same period of the prior year. Both increases in adjusted EBITDA are mainly
attributable to revenue growth combined with operating expense reduction.
Consequently, operating margin increased to 50.4% from 49.1% compared to fiscal
2013 second-quarter and from 48.9% to 50.1% for the first six months of fiscal
2014 compared to the prior year.
AMERICAN CABLE SERVICES
On November 30, 2012, the Corporation completed the acquisition of Atlantic
Broadband, an independent cable system operator formed in 2003 and providing
Analogue and Digital Television, as well as HSI and Telephony services. Atlantic
Broadband operates cable systems in Western Pennsylvania, Southern Florida,
Maryland/Delaware and South Carolina.
CUSTOMER STATISTICS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net additions (losses)
Quarters ended Six months ended
February February February February February
28, 28, 28, 28, 28,
2014 2014 2013 2014 2013
----------------------------------------------------------------------------
PSU(2) 492,550 3,120 3,760 5,015 3,760
Television
service
customers 228,759 (1,451) (2,328) (3,422) (2,328)
HSI service
customers 184,805 4,165 5,426 7,697 5,426
Telephony service
customers 78,986 406 662 740 662
----------------------------------------------------------------------------
----------------------------------------------------------------------------
-----------------------------------------------
-----------------------------------------------
% of penetration(1)
February 28, February 28,
2014 2013
-----------------------------------------------
PSU(2)
Television
service
customers 44.2 45.5
HSI service
customers 35.7 33.9
Telephony service
customers 15.3 15.3
-----------------------------------------------
-----------------------------------------------
(1) As a percentage of homes passed.
(2) Represents the sum of Television, HSI and Telephony service customers.
Fiscal 2014 second-quarter and first six months PSU net additions amounted to
3,120 and 5,015, respectively, compared to 3,760 for both periods in fiscal
2013. The comparable figures for fiscal 2013 include only three months of
operating results since the acquisition of Atlantic Broadband occurred at the
end of first quarter of fiscal 2013. Net customer losses for the Television
service stood at 1,451 and 3,422, respectively, for the second quarter and first
six months of fiscal 2014, compared to net losses of 2,328 for the comparable
periods of last year as a result of competitive offers in the industry. For the
second quarter and first six months of fiscal 2014, net customer additions for
HSI service amounted to 4,165 and 7,697 compared to 5,426 for the same periods
of prior year mainly due to additional marketing which focused on bundle package
offerings, thus increasing overall demand given the higher speed offerings, as
well as increased commercial HSI. The net customer additions for Telephony
service stood at 406 and 740 for the three and six-month periods ended February
28, 2014, compared to 662 for the same periods of fiscal 2013.
Furthermore, as at February 28, 2014, 59% (59% in 2013) of the American cable
services customers subscribed to two or more services. The distribution of
customers by number of services for the American cable services were: 41% who
subscribe to the single play (41% in 2013), 38% to the double play (38% in 2013)
and 21% to the triple play (21% in 2013).
OPERATING RESULTS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Six months ended
(in thousands February February February February
of dollars, 28, 28, 28, 28,
except 2014 2013 Change 2014 2013 Change
percentages) $ $ % $ $ %
----------------------------------------------------------------------------
Revenue 98,048 85,850 14.2 190,597 85,850 -
Operating
expenses 55,767 46,629 19.6 105,786 46,629 -
-------------------------------------- ------------------------
Adjusted
EBITDA 42,281 39,221 7.8 84,811 39,221 -
-------------------------------------- ------------------------
Operating
margin 43.1% 45.7% 44.5% 45.7%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue
Fiscal 2014 second-quarter revenue increased by $12.2 million, or 14.2%, to
reach $98.0 million compared to the same period last year. Revenue for the
quarter increase is mainly attributable to the PSU growth, rate increases
implemented in fiscal 2014 as well as favorable foreign exchange rates compared
to last year. For the first six months, revenue amounted to $190.6 million, an
increase of $104.7 million compared to the first six months of fiscal 2013 since
Atlantic Broadband was acquired at the end of the first quarter of fiscal 2013,
on November 30, 2012.
For the second quarter and first six months of fiscal 2014, revenue in local
currency amounted to US$90.1 million and US$179.1 million, compared to US$86.1
million for the same periods last year.
Operating expenses
Fiscal 2014 second-quarter operating expenses amounted to $55.8 million, an
increase of 19.6% compared to the same period last year. The increase is mainly
attributable to servicing additional PSU, additional programming costs, the
deployment of TiVo's digital entertainment services as well as marketing
initiatives to improve PSU growth and by the appreciation of the US dollar over
the Canadian dollar. For the first six months, operating expenses amounted to
$105.8 million, an increase of $59.2 million compared to the first six months of
fiscal 2013 since Atlantic Broadband was acquired at the end of the first
quarter of fiscal 2013, on November 30, 2012.
Operating expenses in local currency for the for the second quarter and first
six months of fiscal 2014 amounted to US$51.2 million and US$99.3 million,
compared to US$46.8 million for the same periods last year.
Adjusted EBITDA and operating margin
Fiscal 2014 second-quarter adjusted EBITDA increased by 7.8% to reach $42.3
million compared to last year as a result of the factors previously discussed.
For the first six months of fiscal 2014, adjusted EBITDA amounted to $84.8
million compared to $39.2 million for the same period of fiscal 2013 as a result
of six months of operating results compared to three months for the comparable
period and to the factors previously discussed. As a result of operating
expenses growth exceeding revenue growth, operating margin for the three and
six-month periods ended February 28, 2014 decreased to 43.1% from 45.7% and to
44.5% from 45.7% for the comparable periods of the prior year.
Fiscal 2014 second-quarter adjusted EBITDA in local currency amounted to US$38.9
million compared to US$39.3 million for the same period last year and US$79.8
million compared to US$39.3 million for the first six months of fiscal 2013. The
decrease is mainly attributable to additional programming costs as well as
marketing initiatives to improve PSU growth.
ENTERPRISE SERVICES
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Six months ended
(in thousands February February February February
of dollars, 28, 28, 28, 28,
except 2014 2013 Change 2014 2013 Change
percentages) $ $ % $ $ %
----------------------------------------------------------------------------
Revenue 75,339 37,980 98.4 148,711 61,480 -
Operating
expenses 50,174 23,671 - 95,655 37,353 -
-------------------------------------- ------------------------
Adjusted
EBITDA 25,165 14,309 75.9 53,056 24,127 -
-------------------------------------- ------------------------
Operating
margin 33.4% 37.7% 35.7% 39.2%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
OPERATING RESULTS
Revenue
Fiscal 2014 second-quarter revenue increased by $37.4 million, or 98.4%, to
reach $75.3 million, compared to the same period last year. For the first six
months of fiscal 2014, revenue amounted to $148.7 million, an increase of $87.2
million compared to the first six months of fiscal 2013. The increases in
revenue for both periods are primarily due to the acquisition of PEER 1 during
the second quarter of fiscal 2013 combined with favorable foreign exchange rates
as well as the organic growth from data centre, managed IT and connectivity
services.
Operating expenses
For the second quarter of fiscal 2014 operating expenses increased by $26.5
million, to $50.2 million. For the first six months of fiscal 2014, operating
expenses amounted to $95.7 million, an increase of $58.3 million compared to
last year. The increases in operating expenses for both periods are primarily
due to the PEER 1 acquisition, the appreciation of the US dollar and the British
Pound currency compared to the Canadian dollar as well as organic growth.
Adjusted EBITDA and operating margin
As a result of revenue growth exceeding the increase in operating expenses,
fiscal 2014 second-quarter adjusted EBITDA increased by $10.9 million, or 75.9%,
to reach $25.2 million and by $28.9 million in the first six months to reach
$53.1 million, compared to the same periods of the prior year. Operating margin
decreased to 33.4% from 37.7% in the second quarter and to 35.7% from 39.2% for
first six months compared to the comparable periods of fiscal 2013 as a result
of lower margins business activities from PEER 1.
FISCAL 2014 FINANCIAL GUIDELINES
Giving effect to the overall performance of all of our operating units as well
as the appreciation of the US dollar and British Pound currency compared to the
Canadian dollar, the Corporation revised its financial guidelines for the 2014
fiscal year issued on October 30, 2013. Management expects revenue to reach
$1,955 million, representing a growth of $20 million, or 1.0%, compared to those
issued on October 30, 2013. Adjusted EBITDA should increase by$10 million to
reach$895 million and consequently, operating margin should improve to
approximately45.8% compared to 45.7%. Acquisitions of property, plant and
equipment, intangible and other assets as well as the depreciation and
amortization expense should remain the same as a result of lower capital
expenditures which should be offset by the Canadian dollar depreciation. Free
cash flow is expected to increase by $10 million to reach $240 million and
profit for the year is expected to amount to $235 million, representing a growth
of $5 million or 2.2% compared to the October 30, 2013 projections.
Fiscal 2014 revised financial guidelines are as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revised Revised
projections projections
April 9, 2014 October 30, 2013
(in millions of dollars, except Fiscal 2014 Fiscal 2014
operating margin and capital intensity) $ $
----------------------------------------------------------------------------
Financial guidelines
Revenue 1,955 1,935
Adjusted EBITDA 895 885
Operating margin 45.8% 45.7%
Depreciation and amortization 470 470
Financial expense 130 130
Current income tax expense 100 100
Profit for the year 235 230
Acquisitions of property, plant and
equipment, intangible and other
assets 425 425
Free cash flow(1) 240 230
Capital intensity 21.7% 22.0%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Free cash flow is calculated as adjusted EBITDA less, financial
expense, current income tax expense and acquisitions of property,
plant and equipment, intangible and other assets.
CONTROLS AND PROCEDURES
Internal control over financial reporting ("ICFR") is a process designed to
provide reasonable, but not absolute, assurance regarding the reliability of
financial reporting and of the preparation of financial statements for external
purposes in accordance with IFRS. The President and Chief Executive Officer
("CEO") and the Senior Vice President and Chief Financial Officer ("CFO"),
together with Management, are responsible for establishing and maintaining
adequate disclosure controls and procedures ("DC&P") and ICFR, as defined in
National Instrument 52-109. Cogeco Cable's internal control framework is based
on the criteria published in the updated version released in May 2013 of the
report Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
The CEO and CFO, supported by Management, evaluated the design of the
Corporation's DC&P and ICFR as at February 28, 2014, and concluded that, as
described below, there exists a material weakness in ICFR at PEER 1. A material
weakness in ICFR exists if there exists a deficiency or combination of
deficiencies in ICFR such that there is a reasonable possibility that a material
misstatement of the annual or interim consolidated financial statements will not
be prevented or detected on a timely basis.
Cogeco Cable acquired 96.57% of the issued and outstanding shares of PEER 1 on
January 31, 2013 pursuant to the public offer made by Cogeco Cable, through its
indirectly wholly-owned subsidiary 0957926 B.C. LTD. The remaining shares of
PEER 1 were acquired on April 3, 2013. Management has been working diligently
since the acquisition to complete its review of the design of ICFR at PEER 1.
Despite these efforts, Management has not to date completed its review. During
the course of the portion of the review that has been completed, Management
identified certain deficiencies in ICFR at PEER 1 principally relating to the
financial statements close, procurement and sales processes.
Management has committed additional resources in order to complete the review of
PEER 1's ICFR and bring them in line with Cogeco Cable's design standards by
August 31, 2014, and has commenced the implementation of a number of measures to
address the deficiencies described above. More specifically, Management has
implemented a number of remediations related to the financial statements close
process, transitioned to a new procurement system with appropriate embedded
approval controls and introduced a series of corporate policies to enhance PEER
1's overall control environment. The Corporation cannot currently assess the
potential impact of any further design deficiencies which may be identified
during the completion of its review of PEER 1's ICFR.
Based on the review completed to date, the CEO and the CFO believe that (i) the
Corporation's interim filings for the three and six-month periods ended February
28, 2014 do not contain any untrue statement of a material fact or omit to state
a material fact required to be stated or that is necessary to make a statement
not misleading in light of the circumstances under which it was made, and (ii)
the interim financial report together with the other financial information
included in the interim filings fairly present, in all material respects, the
financial condition, financial performance and cash flows of Cogeco Cable for
the three and six-month periods ended February 28, 2014.
PEER 1 represents 10% of revenue, -14% of profit for the period, 15% of total
assets, 16% of current assets, 15% of non current assets, 6% of current
liabilities and 16% of non current liabilities of the condensed consolidated
interim financial statements for the six-month period ended February 28, 2014.
UNCERTAINTIES AND MAIN RISK FACTORS
There has been no significant change in the uncertainties and main risk factors
faced by the Corporation since August 31, 2013, except as mentioned below. A
detailed description of the uncertainties and main risk factors faced by Cogeco
Cable can be found in the 2013 Annual Report, available at www.sedar.com and
www.cogeco.ca.
On October 24, 2013, the Canadian Radio-Television and Telecommunications
Commission ("CRTC") issued a broadcasting notice inviting Canadians to express
their views on the future of the television system in Canada. The first phase of
that public proceeding was completed in December 2013 and the second phase will
take place in the winter of 2014. This public consultation is likely to lead to
changes in regulatory policy respecting significant aspects of the production,
funding and distribution of television programming content in Canada. On the
heels of the CRTC's invitation for comments from the public, the Canadian
Government issued on November 14, 2013 a direction to the CRTC under the
authority of section 15 of the Broadcasting Act requesting that the CRTC report
on television channel choice by no later than April 30, 2014. The requested
report will focus specifically on the issue of unbundling of television
channels, including the steps the CRTC intends to take in that regard. At this
time, it is not known what steps or measures the CRTC will recommend in its
report, or how and when these steps or measures would be implemented. They could
have a major impact on wholesale and retail pricing of television services
distributed by Cogeco Cable and other Canadian terrestrial and satellite
broadcasting distributors as, if and when they are eventually implemented.
On November 26, 2013, Rogers Communications and the National Hockey League
("NHL") announced that they had concluded a twelve-year comprehensive broadcast
and multimedia licensing agreement respecting all national rights to NHL games
on all platforms in all languages in Canada, beginning with 2014-2015 season.
Rogers Communications also announced that it had selected CBC and TVA for
separate sublicensing deals for English-language broadcasts of "Hockey Night in
Canada" and all national French-language multimedia rights, respectively. At
this time, the impact of this long-term agreement on wholesale and retail rates
for linear subscription and on-demand television programming services involving
NHL hockey games distributed by Cogeco Cable and other terrestrial and satellite
broadcasting distributors cannot be assessed, nor the extent to which the
consumption of Canadian premium sports programming will change over the next
twelve years as a result of future distribution sublicensing terms for NHL
hockey games.
FUTURE ACCOUNTING DEVELOPMENTS IN CANADA
A number of new standards, interpretations and amendments to existing standards
issued by the International Accounting Standard Board ("IASB") are effective for
annual periods starting on or after January 1, 2013 and have been applied in
preparing the condensed interim consolidated financial statements for the three
and six-month periods ended February 28, 2014.
NEW ACCOUNTING STANDARDS
The Corporation adopted the following new accounting standards on September 1,
2013. The impacts of the application of this standard are described in Note 2 of
the condensed interim consolidated financial statements.
-- Amendment to IAS 19, Employee Benefits : The principal difference in the
amended standard is that the expected long-term rate of return on plan
assets will no longer be used to calculate the defined benefit pension
costs. The defined benefit pension costs concepts of "interest cost" and
"expected return on plan assets" are replaced by the concept of "net
interest" calculated by applying the discount rate to the net liability
or asset. The net interest cost takes into account the change any
contributions and benefit payments have on the net defined benefit
liability or asset during the period.
The Corporation also adopted the following standards on September 1, 2013 which
had no impact on the condensed interim consolidated financial statements.
-- Amendments to IFRS 7 Financial Instruments: Disclosures
-- IFRS 10 Consolidated Financial Statements
-- IFRS 12 Disclosure of Interest in Other Entities
-- IFRS 13 Fair Value Measurement
CHANGES IN CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There has been no significant change in Cogeco Cable's accounting policies,
estimates and future accounting pronouncements since August 31, 2013. A
description of the Corporation's policies and estimates can be found in the 2013
Annual Report, available at www.sedar.com and www.cogeco.ca.
NON-IFRS FINANCIAL MEASURES
This section describes non-IFRS financial measures used by Cogeco Cable
throughout this MD&A. It also provides reconciliations between these non-IFRS
measures and the most comparable IFRS financial measures. These financial
measures do not have standard definitions prescribed by IFRS and therefore, may
not be comparable to similar measures presented by other companies. These
measures include "cash flow from operations", "free cash flow", "adjusted
EBITDA" and "operating margin".
CASH FLOW FROM OPERATIONS AND FREE CASH FLOW
Cash flow from operations is used by Cogeco Cable's management and investors to
evaluate cash flows generated by operating activities, excluding the impact of
changes in non-cash operating activities, amortization of deferred transaction
costs and discounts on long-term debt, income taxes paid, current income tax
expense, financial expense paid and financial expense. This allows the
Corporation to isolate the cash flows from operating activities from the impact
of cash management decisions. Cash flow from operations is subsequently used in
calculating the non-IFRS measure, "free cash flow". Free cash flow is used, by
Cogeco Cable's management and investors, to measure its ability to repay debt,
distribute capital to its shareholders and finance its growth.
The most comparable IFRS measure is cash flow from operating activities. Cash
flow from operations is calculated as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Six months ended
February 28, February 28, February 28, February 28,
(in thousands of 2014 2013 2014 2013
dollars) $ $ (1) $ $ (1)
----------------------------------------------------------------------------
Cash flow from operating
activities 181,628 150,084 244,738 149,804
Changes in non-cash
operating activities 6,081 (4,931) 92,785 76,182
Amortization of deferred
transaction costs and
discounts on long-term
debt 1,888 2,723 3,730 3,463
Income taxes paid 19,239 17,475 37,543 60,008
Current income tax
expense (20,217) (23,027) (46,770) (48,118)
Financial expense paid 18,312 27,285 60,718 43,715
Financial expense (32,918) (29,208) (65,467) (44,922)
----------------------------------------------------------------------------
Cash flow from
operations 174,013 140,401 327,277 240,132
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note
2 of the condensed interim consolidated financial statements.
Free cash flow is calculated as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Six months ended
February 28, February 28, February 28, February 28,
(in thousands of 2014 2013 2014 2013
dollars) $ $ (1) $ $ (1)
----------------------------------------------------------------------------
Cash flow from
operations 174,013 140,401 327,277 240,132
Acquisition of property,
plant and equipment (76,193) (99,940) (157,166) (178,132)
Acquisition of
intangible and other
assets (4,613) (4,493) (8,729) (9,134)
----------------------------------------------------------------------------
Free cash flow 93,207 35,968 161,382 52,866
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note
2 of the condensed interim consolidated financial statements.
ADJUSTED EBITDA AND OPERATING MARGIN
Adjusted EBITDA is used by Cogeco Cable's management and investors to assess the
Corporation's ability to seize growth opportunities in a cost effective manner,
to finance its ongoing operations and to service its debt. Adjusted EBITDA is a
proxy for cash flows from operations excluding the impact of the capital
structure chosen, and is one of the key metrics used by the financial community
to value the business and its financial strength. Operating margin is a measure
of the proportion of the Corporation's revenue which is available, before income
taxes, to pay for its fixed costs, such as interest on Indebtedness. Operating
margin is calculated by dividing adjusted EBITDA by revenue.
The most comparable IFRS financial measure is profit for the period. Adjusted
EBITDA and operating margin are calculated as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Six months ended
(in thousands of February 28, February 28, February 28, February 28,
dollars, except 2014 2013 2014 2013
percentages) $ $ (1) $ $ (1)
----------------------------------------------------------------------------
Profit for the
period 60,381 50,833 110,079 92,946
Income taxes 14,838 15,821 28,111 33,204
Financial expense 32,918 29,208 65,467 44,922
Depreciation and
amortization 113,133 92,500 228,887 157,166
Integration,
restructuring and
acquisitions costs 346 7,464 594 14,764
----------------------------------------------------------------------------
Adjusted EBITDA 221,616 195,826 433,138 343,002
----------------------------------------------------------------------------
Revenue 486,008 429,672 960,988 757,583
----------------------------------------------------------------------------
Operating margin 45.6% 45.6% 45.1% 45.3%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Comparative figures have been adjusted to comply with the adoption of
IAS 19 - Employee Benefits. For further details, please refer to Note
2 of the condensed interim consolidated financial statements.
CAPITAL INTENSITY
Capital intensity is used by Cogeco Cable's management and investors to assess
the Corporation's investment in capital expenditures in order to support a
certain level of revenue. Capital intensity ratio is defined as amount spent for
acquisitions of property, plant and equipment, intangible and other assets
divided by revenue.
Capital intensity is calculated as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended Six months ended
(in thousands of February 28, February 28, February 28, February 28,
dollars, except 2014 2013 2014 2013
percentages) $ $ $ $
----------------------------------------------------------------------------
Acquisition of property,
plant and equipment 76,193 99,940 157,166 178,132
Acquisition of
intangible and other
assets 4,613 4,493 8,729 9,134
----------------------------------------------------------------------------
Total capital
expenditures 80,806 104,433 165,895 187,266
Revenue 486,008 429,672 960,988 757,583
----------------------------------------------------------------------------
Capital intensity 16.6% 24.3% 17.3% 24.7%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended February 28, November 30,
(in thousands of dollars,
except percentages and per 2014 2013 (2) 2013 2012 (2)
share data)
$ $ $ $
----------------------------------------------------------------------------
Revenue 486,008 429,672 474,980 327,911
Adjusted EBITDA 221,616 195,826 211,522 147,176
Operating margin 45.6% 45.6% 44.5% 44.9%
Income taxes 14,838 15,821 13,273 17,383
Profit for the period 60,381 50,833 49,698 42,113
Profit for the period
attributable to owners
of the Corporation 60,381 51,035 49,698 42,113
Cash flow from operating
activities 181,628 150,084 63,110 (280)
Cash flow from operations 174,013 140,401 153,264 99,731
Acquisitions of property,
plant and
equipment, intangible and
other assets 80,806 104,433 85,089 82,833
Free cash flow 93,207 35,968 68,175 16,898
Capital intensity 16.6% 24.3% 17.9% 25.3%
Earnings per share(1)
Basic 1.24 1.05 1.02 0.87
Diluted 1.23 1.04 1.01 0.86
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended August 31, May 31,
(in thousands of dollars,
except percentages and per 2013 (2) 2012 2013 (2) 2012
share data)
$ $ $ $
----------------------------------------------------------------------------
Revenue 470,386 324,768 464,497 319,771
Adjusted EBITDA 222,539 160,825 215,182 152,661
Operating margin 47.3% 49.5% 46.3% 47.7%
Income taxes 11,159 32,987 18,411 21,449
Profit for the period 43,870 45,705 48,079 53,159
Profit for the period
attributable to owners
of the Corporation 43,870 45,705 47,877 53,159
Cash flow from operating
activities 228,230 203,343 166,976 112,275
Cash flow from operations 161,581 126,946 155,868 113,075
Acquisitions of property,
plant and
equipment, intangible and
other assets 108,095 124,392 112,841 87,459
Free cash flow 53,486 2,554 43,027 25,616
Capital intensity 23.0% 38.3% 24.3% 27.4%
Earnings per share(1)
Basic 0.90 0.94 0.98 1.09
Diluted 0.89 0.93 0.98 1.09
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Per multiple and subordinate voting share.
(2) These figures have been adjusted to comply with the adoption of IAS 19
- Employee Benefits.
SEASONAL VARIATIONS
Cogeco Cable's operating results are not generally subject to material seasonal
fluctuations except as follows. In the Canadian and American cable services
segment the number of customers in the Television service and HSI service are
generally lower in the second half of the fiscal year as a result of a decrease
in economic activity due to the beginning of the vacation period, the end of the
television season, and students leaving their campuses at the end of the school
year. Cogeco Cable offers its services in several university and college towns
such as Kingston,
Windsor, St.Catharines, Hamilton, Peterborough, Trois-Rivieres and Rimouski in
Canada and in the Pennsylvania region, and to a lesser extent in South Carolina,
Maryland/Delaware in the United States. In the American cable services segment,
the Miami region is also subject to seasonal fluctuations due to the winter
season residents returning home from late Spring through the Fall. Furthermore,
the second, third and fourth quarter's operating margin is usually higher as
very low or no management fees are paid to COGECO Inc. Under the Management
Agreement, Cogeco Cable pays a fee equal to 2% of its total revenue subject to a
maximum amount. As the maximum amount has been reached in the second quarter of
fiscal 2014, Cogeco Cable will not pay management fees in the second half of
fiscal 2014. Similarly, as the maximum amount was paid in the first six months
of fiscal 2013, Cogeco Cable paid no management fees in the second half of the
previous fiscal year.
ADDITIONAL INFORMATION
This MD&A was prepared on April 9, 2014. 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 9, 2014
FOR FURTHER INFORMATION PLEASE CONTACT:
Source:
Cogeco Cable Inc.
Pierre Gagne
Senior Vice President and Chief Financial Officer
Tel.: 514-764-4700
Information:
Media
Rene Guimond
Vice-President, Public Affairs and Communications
Tel.: 514-764-4700
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