Shaw Announces First Quarter Financial and Operating Results
(firmenpresse) - CALGARY, ALBERTA -- (Marketwire) -- 01/12/12 -- Shaw Communications Inc. (TSX: SJR.B) (NYSE: SJR) announced consolidated financial and operating results for the three months ended November 30, 2011 and 2010 in accordance with the newly adopted International Financial Reporting Standards ("IFRS"). Consolidated revenue for the three month period of $1.28 billion was up 19% over the comparable period last year. Total operating income before amortization(1) of $566 million increased 18% over the same period last year.
Free cash flow(1)for the quarter was $119 million compared to $154 million for the same period last year. Improved operating income before amortization in the current period was reduced by higher capital investment related to strategic initiatives as well as increased interest and cash taxes.
Chief Executive Officer Brad Shaw said, "Our financial performance this quarter was solid. We continued to grow despite a volatile economic and competitive environment."
Mr. Shaw continued, "We have a number of strategic initiatives underway including our digital network upgrade and Wi-Fi build that support our leadership position in broadband and video, strengthening our core business. Our digital network upgrade is well underway and we recently started the trial of our Wi-Fi network at a variety of locations in Calgary, Edmonton and Vancouver. We also recently opened three new Customer Solutions Centres, all in Canada consistent with our existing centres, adding resources to handle both inbound and outbound customer service. Shaw has been built on a reputation of superior customer service and we are committed to retaining this advantage."
Net income from continuing operations of $202 million or $0.43 per share for the quarter ended November 30, 2011 compared to $17 million or $0.03 per share for the same period last year. All periods included non-operating items which are more fully detailed in Management's Discussions and Analysis (MD&A).(2) The prior period included a charge of $139 million for the discounted value of the CRTC benefit obligation related to the acquisition of Shaw Media, as well as business acquisition, integration and restructuring expenses of $58 million. Excluding the non-operating items, net income for the three month period ended November 30, 2011 would have been $210 million compared to $164 million in the same period last year.
Revenue in the Cable division was up 4% for the three month period to $792 million. The improvement was primarily driven by customer growth and price changes. Operating income before amortization of $377 million was up 7% for the quarter.
Revenue in the Satellite division was $209 million for the three month period, up from $206 million for the same period last year. Operating income before amortization for the quarter of $69 million was comparable to the same period last year.
Revenue in the Media division for the three month period was $299 million and operating income before amortization was $120 million. For informational purposes, on a full quarter comparative basis to Q1 last year, Media revenues and operating income before amortization for the quarter declined 3% and 8%, respectively, reflecting the softening in the advertising market as a result of economic uncertainty.
Mr. Shaw concluded "Our performance is on track. Our management team continues to execute on the necessary strategic initiatives in this highly competitive environment. Our commitment to customer service and the strength of our delivery system, including our network infrastructure and employee base, have us positioned to deliver another year of solid financial and operational performance."
Shaw Communications Inc. is a diversified communications and media company, providing consumers with broadband cable television, High-Speed Internet, Home Phone, telecommunications services (through Shaw Business), satellite direct-to-home services (through Shaw Direct) and engaging programming content (through Shaw Media). Shaw serves 3.4 million customers, through a reliable and extensive fibre network. Shaw Media operates one of the largest conventional television networks in Canada, Global Television, and 18 specialty networks including HGTV Canada, Food Network Canada, History Television and Showcase. Shaw is traded on the Toronto and New York stock exchanges and is included in the S&P/TSX 60 Index (TSX: SJR.B) (NYSE: SJR).
The accompanying Management's Discussion and Analysis forms part of this news release and the "Caution Concerning Forward Looking Statements" applies to all forward-looking statements made in this news release.
(1) See definitions and discussion under Key Performance Drivers in MD&A.
(2) See reconciliation of Net Income in Consolidated Overview in MD&A
MANAGEMENT'S DISCUSSION AND ANALYSIS
NOVEMBER 30, 2011
January 12, 2012
Certain statements in this report may constitute forward-looking statements. Included herein is a "Caution Concerning Forward-Looking Statements" section which should be read in conjunction with this report.
The following Management's Discussion and Analysis ("MD&A") should also be read in conjunction with the unaudited interim consolidated Financial Statements and Notes thereto of the current quarter, the 2011 Annual MD&A included in the Company's August 31, 2011 Annual Report including the Consolidated Financial Statements and the Notes thereto.
The financial information presented herein has been prepared on the basis of International Financial Reporting Standards ("IFRS") for interim financial statements and is expressed in Canadian dollars unless otherwise stated. The amounts in this MD&A and the Company's interim financial statements for the period ended November 30, 2010 have been restated to reflect the adoption of IFRS, with effect from September 1, 2010. Periods prior to September 1, 2010 have not been restated and are prepared in accordance with Canadian GAAP. Refer to note 13 of the November 30, 2011 interim financial statements for a summary of the differences between the financial statements previously prepared under Canadian GAAP and to those under IFRS.
The unaudited IFRS related disclosures and values in this MD&A have been prepared using the standards and interpretations currently issued and expected to be effective at the end of the Company's first annual IFRS reporting period, which will be August 31, 2012. Certain accounting policies expected to be adopted under IFRS may not be adopted and the application of policies to certain transactions or circumstances may be modified and as a result, the November 30, 2011 and August 31, 2011 underlying values prepared on a basis consistent with IFRS are subject to change.
CONSOLIDATED RESULTS OF OPERATIONS
FIRST QUARTER ENDING NOVEMBER 30, 2011
Selected Financial Highlights
(1) See definition under Key Performance Drivers in MD&A.
(2) Funds flow from continuing operations is before changes in non-cash working capital balances related to operations as presented in the unaudited interim Consolidated Statements of Cash Flows.
Subscriber Highlights
Additional Highlights
Consolidated Overview
Consolidated revenue of $1.28 billion for the quarter improved 19% over the same period last year. The improvement was primarily due to the inclusion of Shaw Media for the full quarter, as well as customer growth and price changes in the Cable and Satellite divisions. Consolidated operating income before amortization for the three month period of $566 million was up 18% over the same period last year. The current period included a full quarter of Shaw Media and improved revenue related growth in the Cable and Satellite divisions, partially offset by higher programming expenses and employee related costs.
Net income was $202 million for the three months ended November 30, 2011 compared to $16 million for the same period last year. Non-operating items affected net income in both periods. The prior period included a charge of $139 million for the discounted value of the CRTC benefit obligation, net of incremental revenues, related to the Media acquisition, as well as business acquisition, integration and restructuring expenses of $58 million. Outlined below are further details on these and other operating and non-operating components of net income for each period.
(1) See definitions and discussion under Key Performance Drivers in MD&A.
The changes in net income from continuing operations are outlined in the table below.
(1) Net other costs and revenue includes the CRTC benefit obligation, business acquisition, integration and restructuring expenses, gain on redemption of debt, loss on derivative instruments, accretion of long-term liabilities and provisions, foreign exchange gain on unhedged long-term debt, other gains (losses) and equity income from associates as detailed in the unaudited interim Consolidated Statements of Income.
Basic earnings per share were $0.43 for the quarter compared to $0.03 in the same period last year. The increase was primarily due to improved operating income before amortization of $87 million and lower net other costs and revenue of $171 million, the total of which were partially reduced by increased income taxes, amortization, and interest of $46 million, $14 million and $13 million, respectively. The change in net other costs and revenue was primarily due to amounts included in the prior year related to the CRTC benefit obligation and various acquisition, integration and restructuring costs. Operating income before amortization was up in the current period mainly due to the inclusion of Shaw Media for the full quarter as well as growth in the Cable division.
Net income in the current quarter was up $35 million compared to the fourth quarter of fiscal 2011 mainly due to higher operating income before amortization of $85 million partially reduced by increased net other costs and revenue of $30 million and increased income taxes of $18 million. The improved operating income before amortization was mainly due to higher amounts from Media due to seasonality of the business. The change in net other costs and revenue was primarily due to a gain realized in the prior quarter on the redemption of the US$ senior notes.
Free cash flow for the quarter of $119 million compared to $154 million in the same period last year. The decrease was mainly due to higher capital investment of $50 million in the current period related to strategic initiatives, as well as increased interest and cash taxes, partially offset by improved operating income before amortization. Operating income was up mainly due to the full quarter inclusion of Media as well as growth in the Cable division.
Key Performance Drivers
The Company's continuous disclosure documents may provide discussion and analysis of non-IFRS financial measures. These financial measures do not have standard definitions prescribed by IFRS and therefore may not be comparable to similar measures disclosed by other companies. The Company's continuous disclosure documents may also provide discussion and analysis of additional GAAP measures. Additional GAAP measures include line items, headings, and sub-totals included in the financial statements. The Company utilizes these measures in making operating decisions and assessing its performance. Certain investors, analysts and others, utilize these measures in assessing the Company's operational and financial performance and as an indicator of its ability to service debt and return cash to shareholders. The non-IFRS financial measures and additional GAAP measures have not been presented as an alternative to net income or any other measure of performance required by IFRS.
The following contains a listing of non-IFRS financial measures and additional GAAP measures used by the Company and provides a reconciliation to the nearest IFRS measurement or provides a reference to such reconciliation.
Operating income before amortization and operating margin
Operating income before amortization is calculated as revenue less operating, general and administrative expenses and is presented as a sub-total line item in the Company's unaudited interim Consolidated Statements of Income. It is intended to indicate the Company's ability to service and/or incur debt, and therefore it is calculated before amortization (a non-cash expense) and interest. Operating income before amortization is also one of the measures used by the investing community to value the business. Operating margin is calculated by dividing operating income before amortization by revenue.
Free cash flow
The Company utilizes this measurement as it measures the Company's ability to repay debt and return cash to shareholders.
Free cash flow is calculated as operating income before amortization, less interest, cash taxes paid or payable, capital expenditures (on an accrual basis and net of proceeds on capital dispositions) and equipment costs (net), adjusted to exclude stock-based compensation expense, less cash amounts associated with funding the new and assumed CRTC benefit obligation related to the acquisition of Shaw Media as well as excluding non-controlling interest amounts that are consolidated in the operating income before amortization, capital expenditure and cash tax amounts.
Commencing in 2012 free cash flow has not been reported on a segmented basis. Certain components of free cash flow including operating income before amortization, capital expenditures (on an accrual basis) net of proceeds on capital dispositions and equipment costs (net), CRTC benefit obligation funding, and non-controlling interest amounts continue to be reported on a segmented basis. Other items, including interest and cash taxes, are not generally directly attributable to a segment, and are reported on a consolidated basis. Also commencing in 2012, Shaw has reported the changes in receivable related balances with respect to customer equipment financing transactions as a cash item, and adjusted for cash funding of pension amounts net of pension expense. Free cash flow has also been reduced for dividends paid on the Company's Cumulative Redeemable Rate Reset Preferred Shares.
Free cash flow is calculated as follows:
CABLE
FINANCIAL HIGHLIGHTS
Operating Highlights
Cable revenue improved 4% over the comparable period last year to $792 million. Price changes, along with customer growth in Internet and Digital Phone and reduced promotional activity, the total of which was partially offset by lower Basic cable subscribers, accounted for the improvement. Operating income of $377 million increased 7% over the comparable quarter. The revenue related growth was partially reduced by increased programming costs and higher employee related amounts, mainly due to annual merit increases.
Revenue increased 1% over the fourth quarter of fiscal 2011 primarily due to price changes and customer growth in Internet and Digital Phone partially offset by lower Basic cable subscribers. Operating income before amortization declined $20 million over this same period primarily due to increased expenses including employee related costs, mainly due to annual merit increases, and employee growth related to strategic initiatives, as well as higher programming costs.
Total capital investment of $223 million for the quarter increased $45 million over the same period last year.
Success-based capital increased $27 million over the comparable three month period due to increased subsidies on sales of HDPVRs resulting from lower customer pricing and higher volumes, deployment of digital set-top boxes related to the digital network upgrade, partially offset by lower HDPVR rentals. The current period also included increased spend on internet modems in support of new broadband offerings.
Investment in Upgrades and enhancement and Replacement categories increased $24 million over the same period last year. The current quarter included higher spending on hub upgrades and network electronics related to the Digital Network Upgrade, and investment related to the Wi-Fi build.
Investment in Buildings and other was moderately lower than the comparable three month period last year. The decrease was mainly due to lower spend related to back office infrastructure upgrades partially offset by higher activity on various facilities projects including the new Calgary data centre.
Spending in new housing development decreased $4 million over the comparable quarter last year mainly due to lower activity.
As at November 30, 2011 Shaw had 1,256,010 Digital Phone lines which represents a 55.4% penetration of Basic. Shaw also continued to grow its Digital customer base and Digital penetration of Basic at November 30, 2011 was 82.9%, up from 79.5% at August 31, 2011. During the quarter Shaw became the first television provider in Canada to offer full seasons of Saturday Night Live commercial free to customers through Shaw VOD and also launched new family focused channels including Disney XD in SD and HD, Family Channel HD and Disney Junior. Most recently the Company launched five additional HD channels including SPACE, BNN, Bravo!, Discovery Channel and Animal Planet. Shaw now has approximately 965,000 HD capable customers.
During the quarter in pursuit of Shaw's continued improvement for its approximately 1.9 million Internet customers, the Company announced as part of its Wi-Fi strategy a technical trial of HotSpot 2.0 in conjunction with Cisco Systems ("Cisco"), Shaw's Wi-Fi technology partner. HotSpot 2.0 provides a significant improvement in Wi-Fi accessibility and security, and allows Shaw's broadband Wi-Fi enabled customers to automatically connect and authenticate to the Wi-Fi network. HotSpot 2.0 also enables encryption ensuring that Wi-Fi access is secure and customers' data is protected. On December 6, the Company launched the trial of its Wi-Fi network with a limited number of locations in Calgary, Edmonton and Vancouver. Hundreds of access points will be added in the coming months, with thousands of locations being activated across the Shaw footprint over the next three years.
Subscriber Statistics
SATELLITE (DTH and Satellite Services)
FINANCIAL HIGHLIGHTS
Operating Highlights
Revenue of $209 million for the three month period was up 1% over the same period last year. The improvement was primarily due to price changes. Operating income before amortization of $69 million in the current period was in line with the comparable quarter.
Operating income before amortization declined $3 million compared to the fourth quarter primarily due to higher programming costs and employee related costs, mainly due to annual merit increases.
Total capital investment of $25 million for the quarter compared to $24 million in the same period last year.
During the quarter Shaw Direct launched 8 new HD channels including TVA Sports, RDS 2, TSN JETS and new NHL Centre Ice and NFL Sunday Ticket channels and as at November 30, 2011 offered almost 90 HD channels to over 500,000 HD customers. Shaw Direct's core offer now includes receivers that are HD and MPEG 4 technology capable allowing for additional channels to be added with existing satellite capacity.
Subscriber Statistics
MEDIA
FINANCIAL HIGHLIGHTS
Operating Highlights
Revenue in the Media division was $299 million for the quarter and operating income before amortization was $120 million. Advertising revenue in the quarter was driven by strength in the government, media, and alcohol beverages categories. For informational purposes, on a comparative basis to a full quarter last year, Media revenues were down 3% and operating income before amortization decreased 8%, reflecting the softening of the advertising market as a result of the economic uncertainty.
Compared to the fourth quarter of fiscal 2011, revenue and operating income before amortization improved $90 million and $108 million, respectively. The increases were primarily due to the cyclical nature of the Media business, with higher advertising revenues in the first quarter driven by high demand and the fall launch of season premieres.
Global's returning line-up delivered solid results this fall with House, Hawaii 5-0, Glee, NCIS, NCIS LA, Survivor and Bones all coming back as top 20 performers. Upcoming mid-season premieres include new programs such as The Firm, The Finder, Bomb Girls, and Touch. Several news initiatives were launched this quarter including Sunday morning's "The West Block" program, with Prime Minister Harper as the first guest, and the launch of Global TV Morning News shows in Toronto, Regina and Saskatoon. In the upcoming quarter, the Media division will be launching Global National Mandarin, the first Mandarin language newscast produced by a national network in Canada.
Media's Specialty schedule continued to deliver strong results in the quarter with History, Food Network and Showcase delivering shows in the top 25 entertainment specialty programs.
Capital investment in the quarter continued on various projects and focused on upgrading production equipment and continued improvements to the network infrastructure.
OTHER INCOME AND EXPENSE ITEMS
Amortization
Amortization increased over the comparable period as the amortization of new expenditures for property, plant and equipment and other intangibles and inclusion of the Media division for the full quarter in the current year exceeded the impact of assets that became fully depreciated.
Amortization of financing costs and Interest expense
Interest expense increased over the comparative period due to a higher debt level mainly as a result of the Media acquisition in October 2010. Approximately $1 billion was required to complete the transaction including repayment of a term loan and breakage of related currency swaps.
CRTC benefit obligation
As part of the CRTC decision approving the Media acquisition during the first quarter of 2011, the Company is required to contribute approximately $180 million in new benefits to the Canadian broadcasting system over the following seven years. The fair value of the obligation of $139 million was recorded in the income statement.
Business acquisition, integration and restructuring expenses
During the first quarter of 2011, the Company recorded $58 million of costs in respect of the acquisition of the broadcasting business of Canwest and organizational restructuring. Amounts included acquisition related costs to effect the acquisition, such as professional fees paid to lawyers and consultants. The integration and restructuring costs related to integrating the new businesses and increasing organizational effectiveness for future growth as well as package costs for the former CEO of Shaw.
Loss on derivative instruments
For derivative instruments where hedge accounting is not permissible or derivatives are not designated in a hedging relationship, the Company records changes in the fair value of derivative instruments in the income statement. A loss of $1 million was recorded in the comparative quarter in respect of such derivative instruments.
Accretion of long-term liabilities and provisions
The Company records accretion expense in respect of the discounting of certain long-term liabilities and provisions which are accreted to their estimated value over their respective terms. The expense is primarily in respect of CRTC benefit obligations as well as the liability which arose in 2010 when the Company entered into amended agreements with the counterparties to certain cross-currency agreements to fix the settlement of the principal portion of the swaps in December 2011. Accretion expense has increased over the prior year as the comparative quarter only includes the CRTC obligations for approximately one month.
Foreign exchange gain on unhedged long-term debt
In conjunction with the Media business acquisition in October 2010, the Company assumed a US $390 million term loan and US $338 million senior unsecured notes. Shortly after closing the acquisition, the Company repaid the term loan including breakage of the related cross currency interest rate swaps. As a result of fluctuations of the Canadian dollar relative to the US dollar, a net foreign exchange gain of $3 million was recorded in the first quarter of the prior year.
Other gains
This category generally includes realized and unrealized foreign exchange gains and losses on US dollar denominated current assets and liabilities, gains and losses on disposal of property, plant and equipment and the Company's share of the operations of Burrard Landing Lot 2 Holdings Partnership.
Income taxes
Income taxes increased over the comparative period due to higher net income before income taxes.
Equity income from associates
During the prior quarter, the Company recorded income of $14 million primarily in respect of its 49.9% equity interest in CW Media Investments Co. ("CW Media") for the period September 1 to October 26, 2010. On October 27, 2010, the Company acquired the remaining equity interest in CW Media as part of its purchase of all the broadcasting assets of Canwest. Results of operations are consolidated effective October 27, 2010.
RISKS AND UNCERTAINTIES
The significant risks and uncertainties affecting the Company and its business are discussed in the Company's August 31, 2011 Annual Report under the Introduction to the Business - Known Events, Trends, Risks and Uncertainties in Management's Discussion and Analysis.
FINANCIAL POSITION
Total assets at November 30, 2011 were $12.7 billion compared to $12.6 billion at August 31, 2011. Following is a discussion of significant changes in the consolidated statement of financial position since August 31, 2011.
Current assets increased $66 million primarily due to increases in accounts receivable of $108 million, inventories of $23 million and other current assets of $30 million all of which were partially offset by decreases in cash of $80 million and assets held for sale of $15 million. Accounts receivable were up primarily due to an increase in advertising revenue during the first quarter and higher equipment shipments to retailers. Other current assets were up primarily as a result of increases in program rights and advances and prepaid maintenance and support contracts while inventories were higher due to timing of equipment purchases to ensure sufficient supply for the holiday season. Cash decreased as the cash outlay for investing and financing activities exceeded the funds provided by operations. Assets held for sale decreased as the sale of the wireless assets was completed during the first quarter.
Property, plant and equipment increased $30 million as current year capital investment exceeded amortization.
Other long-term assets were up $47 million due to an increase in deferred equipment costs.
Intangibles increased $19 million due to higher program rights. Program rights and advances (current and noncurrent) increased as advances and additional investment in acquired rights exceeded the amortization for the current quarter.
Current liabilities were up $481 million due to increases in income taxes payable of $26 million and current portion of long-term debt of $449 million. Income taxes payable increased due to the current quarter provision partially offset by tax installment payments. The current portion of long-term debt increased and long-term debt decreased due to the reclassification of the 6.1% $450 million senior notes which are due in November 2012.
Deferred credits were up $13 million due to an increase in deferred equipment revenue.
Deferred income tax liabilities, net of deferred income tax assets, decreased $7 million due to the current quarter recovery.
Shareholders' equity increased $124 million due to increases in share capital of $33 million and retained earnings of $87 million. Share capital increased due to the issuance of 1,622,472 Class B Non-Voting Shares under the Company's option plan and Dividend Reinvestment Plan ("DRIP"). As of December 31, 2011, share capital is as reported at November 30, 2011 with the exception of the issuance of a total of 442,887 Class B Non-Voting Shares under the DRIP and upon exercise of options under the Company's option plan subsequent to the quarter end. Retained earnings increased due to current quarter earnings of $192 million partially offset by dividends of $105 million.
LIQUIDITY AND CAPITAL RESOURCES
In the current quarter, the Company generated $119 million of free cash flow. Shaw used its free cash flow along with cash of $80 million and proceeds on issuance of Class B Non-Voting Shares of $7 million to fund the net change in working capital requirements and inventory of $91 million, pay common share dividends of $76 million, invest an additional net $37 million in program rights and fund other items totaling $2 million.
On November 29, 2011 Shaw received the approval of the TSX to renew its normal course issuer bid to purchase its Class B Non-Voting Shares for a further one year period. The Company is authorized to acquire up to 20,000,000 Class B Non-Voting Shares during the period December 1, 2011 to November 30, 2012.
The Company issues Class B Non-Voting Shares from treasury under its DRIP which resulted in cash savings and incremental Class B Non-Voting Shares of $25 million during the current quarter.
Based on available credit facilities and forecasted free cash flow, the Company expects to have sufficient liquidity to fund operations and obligations during the current fiscal year. On a longer-term basis, Shaw expects to generate free cash flow and have borrowing capacity sufficient to finance foreseeable future business plans and refinance maturing debt.
CASH FLOW
Operating Activities
Funds flow from continuing operations increased over the comparative quarter due to the combined impact of higher operating income before amortization adjusted for non-cash program rights expenses in the current quarter and charges in the prior year for termination of swap contracts and business acquisition, integration and restructuring expenses partially offset by higher interest, current income taxes and program rights purchases in the current year. The net change in non-cash working capital balances related to continuing operations fluctuated over the comparative period due to the seasonal advertising impact on accounts receivable and the timing of payment of income taxes payable.
Investing Activities
The cash used in investing activities decreased over the comparable quarter due to amounts paid to complete the Media business acquisition in the prior year partially offset by higher capital expenditures in the current period.
Financing Activities
The changes in financing activities during the comparative periods were as follows:
SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION
Generally, revenue and operating income before amortization have grown quarter-over-quarter mainly due to customer growth and price changes with the exception of the fourth quarters of 2010 and 2011. In the fourth quarter of 2011, revenue and operating income before amortization declined $104 million and $105 million, respectively, due to the cyclical nature of the Media business with lower advertising revenues in the summer months. In the fourth quarter of 2010, revenue and operating income before amortization declined by $5 million and $12 million, respectively, due to customer growth offset by timing of On-Demand events, increased promotional activity and timing of certain expenses including maintenance and costs related to customer growth.
Net income has fluctuated quarter-over-quarter primarily as a result of the growth in operating income before amortization described above and the impact of the net change in non-operating items. Net income increased by $118 million in the first quarter of 2012 due to the combined impact of higher operating income before amortization of $85 million and income tax expense of $18 million in the current quarter and the loss from discontinued operations of $84 million and gain on redemption of debt of $23 million recorded in the preceding quarter. The first and second quarters of 2011 were impacted by the Media acquisition. As a result, net income declined by $106 million in the first quarter of 2011 as the higher operating income before amortization of $55 million due to the contribution from the new Media division and lower income taxes of $22 million were offset by the CRTC benefit obligation of $139 million and acquisition, integration and restructuring costs of $58 million. Net income increased $153 million in the second quarter of 2011 due to the impact of the broadcasting business acquisition in the immediately preceding quarter and higher operating income before amortization and foreign exchange gain on unhedged long-term debt, the total of which was partially offset by increases in interest expense, loss on derivative instruments and income tax expense. During the third quarter of 2011 net income increased by $32 million due to higher operating income before amortization and a lower loss on derivative instruments partially offset by increased income taxes, a lower foreign exchange gain on unhedged long-term debt and the impact of the restructuring activities undertaken by the Company. In the fourth quarter of 2011 net income declined $117 million due to lower operating income before amortization of $105 million and the loss of $84 million in respect of the wireless discontinued operations partially offset by the gain on redemption of debt and the aforementioned restructuring activities in the previous quarter. During the third quarter of 2010 net income increased $19 million mainly due to higher operating income before amortization and lower amortization. Net income declined $36 million in the fourth quarter of 2010 due to lower operating income before amortization of $12 million and higher amortization expense of $15 million. As a result of the aforementioned changes in net income, basic and diluted earnings per share have trended accordingly.
ACCOUNTING STANDARDS
Update to critical accounting policies and estimates
The MD&A included in the Company's August 31, 2011 Annual Report outlined critical accounting policies including key estimates and assumptions that management has made under these policies and how they affect the amounts reported in the Consolidated Financial Statements. The MD&A also describes significant accounting policies where alternatives exist.
On September 1, 2011 with the adoption of IFRS the critical accounting policies have been updated to conform with this adoption. Refer to Note 2 of the Company's interim consolidated financial statements for a detailed discussion regarding the Company's significant accounting policies, application of critical accounting estimates and recent accounting pronouncements.
Adoption of recent accounting pronouncements
In February 2008, the CICA Accounting Standards Board ("AcSB") confirmed that Canadian publicly accountable enterprises would be required to adopt IFRS as issued by the International Accounting Standards Board ("IASB"), for fiscal periods beginning on or after January 1, 2011. These standards require the Company to begin reporting under IFRS in the first quarter of fiscal 2012 with comparative data for the prior year. Refer to note 13 to the unaudited interim consolidated financial statements for a summary of the differences between financial statements previously prepared under Canadian GAAP and those prepared under IFRS as at September 1, 2010, for the three months ended November 30, 2010 and as at and for the year ended August 31, 2011.
Recent accounting pronouncements:
The Company has not yet adopted certain standards, interpretations and amendments that have been issued but are not yet effective. Unless otherwise indicated, the following standards are required to be applied for periods beginning on or after September 1, 2013. The following pronouncements are being assessed to determine their impact on the Company's results and financial position.
2012 GUIDANCE
The Company's preliminary view with respect to 2012 guidance was provided coincident with the release of its fourth quarter results on October 20, 2011. It called for continued growth in revenue and operating income before amortization across all divisions and that investment in the various strategic initiatives is expected to increase capital over 2011 spend levels (excluding wireless). Combined with higher CRTC benefit obligation funding and cash taxes, including increased cash taxes related to the recent tax changes with respect to partnership deferrals, free cash flow is expected to decline moderately from 2011 and is estimated to approximate $550 million. There are no revisions to the guidance at this time.
Certain important assumptions for 2012 guidance purposes include: continued overall customer growth; stable pricing environment for Shaw's products relative to current rates; no significant market disruption or other significant changes in economic conditions, competition or regulation that would have a material impact; stable advertising demand and rates; cash income taxes to be paid or payable in 2012; and a stable regulatory environment.
See the following section entitled "Caution Concerning Forward-Looking Statements".
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
Statements included in this MD&A that are not historic constitute "forward-looking statements" within the meaning of applicable securities laws. Such statements include, but are not limited to, statements about future capital expenditures, financial guidance for future performance, business strategies and measures to implement strategies, competitive strengths, expansion and growth of Shaw's business and operations and other goals and plans. They can generally be identified by words such as "anticipate", "believe", "expect", "plan", "intend", "target", "goal" and similar expressions (although not all forward-looking statements contain such words). All of the forward-looking statements made in this report are qualified by these cautionary statements.
Forward-looking statements are based on assumptions and analyses made by Shaw in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances as of the current date. These assumptions include, but are not limited to, general economic and industry growth rates, currency exchange rates, technology deployment, content and equipment costs, industry structure and stability, government regulation and the integration of recent acquisitions. Many of these assumptions are confidential.
You should not place undue reliance on any forward-looking statements. Many factors, including those not within Shaw's control, may cause Shaw's actual results to be materially different from the views expressed or implied by such forward-looking statements, including, but not limited to, general economic, market or business conditions; opportunities that may be presented to and pursued by Shaw; Shaw's ability to execute its strategic plans; changing conditions in the entertainment, information and communications industries; industry trends; changes in the competitive environment in the markets in which Shaw operates and from the development of new markets for emerging technologies; changes in laws, regulations and decisions by regulators that affect Shaw or the markets in which it operates in both Canada and the United States; Shaw's status as a holding company with separate operating subsidiaries; and other factors described in this report under the heading "Known events, trends, risks and uncertainties". The foregoing is not an exhaustive list of all possible factors. Should one or more of these risks materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results may vary materially from those described herein.
The Corporation provides certain financial guidance for future performance as the Corporation believes that certain investors, analysts and others utilize this and other forward-looking information in order to assess the Company's expected operational and financial performance and as an indicator of its ability to service debt and return cash to shareholders. The Company's financial guidance may not be appropriate for this or other purposes.
Any forward-looking statement speaks only as of the date on which it was originally made and, except as required by law, Shaw expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement to reflect any change in related assumptions, events, conditions or circumstances.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
November 30, 2011 and 2010
(all amounts in millions of Canadian dollars, except per share amounts)
1. CORPORATE INFORMATION
Shaw Communications Inc. (the "Company") is a diversified Canadian communications company whose core operating business is providing broadband cable television services, Internet, Digital Phone, and telecommunications services ("Cable"); Direct-to-home ("DTH") satellite services (Shaw Direct); satellite distribution services ("Satellite Services"); and programming content (through Shaw Media).
The Company was incorporated under the laws of the Province of Alberta on December 9, 1966 under the name Capital Cable Television Co. Ltd. and was subsequently continued under the Business Corporations Act (Alberta) on March 1, 1984 under the name Shaw Cablesystems Ltd. Its name was changed to Shaw Communications Inc. on May 12, 1993. The Company's shares are listed on the Toronto and New York Stock Exchanges. The registered office of the Company is located at Suite 900, 630 - 3rd Avenue S.W., Calgary, Alberta, Canada T2P 4L4.
2. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Statement of compliance
These condensed interim consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards ("IFRS") and in compliance with International Accounting Standard ("IAS") 34 Interim Financial Reporting and IFRS 1 First-time Adoption of International Financial Reporting Standards ("IFRS 1") as issued by the International Accounting Standards Board ("IASB") and using the accounting policies the Company expects to adopt in its consolidated financial statements as at and for the year ended August 31, 2012. An explanation of how the transition to IFRS has affected the Company's consolidated financial statements is provided in note 13.
The accounting policies are based on standards currently issued and effective for the Company's first annual IFRS reporting period. Accounting policies currently adopted under IFRS are subject to potential change as a result of either a new accounting standard being issued with an effective date of August 31, 2012 or prior, or as a result of a voluntary change in accounting policy made by the Company during fiscal 2012.
The notes presented in these condensed interim consolidated financial statements include only significant events and transactions occurring since the Company's last fiscal year end and are not fully inclusive of all matters required to be disclosed in the Company's annual consolidated financial statements. Annual required disclosures that have been significantly impacted by the transition to IFRS are included in note 14 for the year ended August 31, 2011. As a result, these condensed interim consolidated financial statements should also be read in conjunction with the Company's consolidated financial statements prepared under Canadian GAAP for the year ended August 31, 2011 and the IFRS transition disclosures included in note 13.
The condensed interim consolidated financial statements of the Company for the three months ended November 30, 2011, were authorized for issue in accordance with a resolution of the Audit Committee on January 11, 2012.
Basis of presentation
These condensed interim consolidated financial statements have been prepared primarily under the historical cost convention and are expressed in millions of Canadian dollars unless otherwise indicated. Other measurement bases used are outlined in the applicable notes below. The condensed interim consolidated statements of income are presented using the nature classification for expenses.
Basis of consolidation
The condensed interim consolidated financial statements include the accounts of the Company and those of its subsidiaries. Intercompany transactions and balances are eliminated on consolidation. The results of operations of subsidiaries acquired during the period are included from their respective dates of acquisition.
The accounts also include the Company's proportionate share of the assets, liabilities, revenues, and expenses of its interests in joint ventures which includes a 33.33% interest in the Burrard Landing Lot 2 Holdings Partnership and 50% interest in three specialty television channels.
Non-controlling interests arise from business combinations in which the Company acquires less than 100% interest. At the time of acquisition, non-controlling interests are measured at either fair value or their proportionate share of the fair value of acquiree's identifiable assets. The Company determines the measurement basis on a transaction by transaction basis. Subsequent to acquisition, the carrying amount of non-controlling interests is increased or decreased for their share of changes in equity.
Investments and other assets
Investments in associates are accounted for using the equity method based on the Company's ability to exercise significant influence over the operating and financial policies of the investee. Investments of this nature are recorded at original cost and adjusted periodically to recognize the Company's proportionate share of the associate's net income or losses after the date of investment, additional contributions made and dividends received. Investments are written down when there has been a significant or prolonged decline in fair value.
Revenue and expenses
The Company has multiple deliverable arrangements comprised of upfront fees (subscriber connection and installation fee revenue and/or customer premise equipment revenue) and related subscription revenue. Upfront fees charged to customers do not constitute separate units of accounting, therefore these revenue streams are assessed as an integrated package.
(i) Revenue
Revenue from cable, Internet, Digital Phone and DTH customers includes subscriber revenue earned as services are provided. Satellite distribution services and telecommunications service revenue is recognized in the period in which the services are rendered to customers. Affiliate subscriber revenue is recognized monthly based on subscriber levels. Advertising revenues are recognized in the period in which the advertisements are broadcast and recorded net of agency commissions as these amounts are paid directly to the agency or advertiser. When a sales arrangement includes multiple advertising spots, the proceeds are allocated to individual advertising spots under the arrangement based on relative fair values.
Subscriber connection fees received from customers are deferred and recognized as revenue on a straight-line basis over two years. Direct and incremental initial selling, administrative and connection costs related to subscriber acquisitions are recognized as an operating expense as incurred. The costs of physically connecting a new home are capitalized as part of the distribution system and costs of disconnections are expensed as incurred.
Installation revenue received on contracts with commercial business customers is deferred and recognized as revenue on a straight-line basis over the related service contract, which generally span two to ten years. Direct and incremental costs associated with the service contract, in an amount not exceeding the upfront installation revenue, are deferred and recognized as an operating expense on a straight-line basis over the same period.
(ii) Deferred equipment revenue and deferred equipment costs
Revenue from sales of DTH equipment and digital cable terminals ("DCTs") is deferred and recognized on a straight-line basis over two years commencing when subscriber service is activated. The total cost of the equipment, including installation, represents an inventoriable cost which is deferred and recognized on a straight-line basis over the same period. The DCT and DTH equipment is generally sold to customers at cost or a subsidized price in order to expand the Company's customer base.
Revenue from sales of satellite tracking hardware and costs of goods sold are deferred and recognized on a straight-line basis over the related service contract for monthly service charges for air time, which is generally five years. The amortization of the revenue and cost of sale of satellite service equipment commences when goods are shipped.
Recognition of deferred equipment revenue and deferred equipment costs is recorded as deferred equipment revenue amortization and deferred equipment costs amortization, respectively.
(iii) Deferred IRU revenue
Prepayments received under indefeasible right to use ("IRU") agreements are amortized on a straight-line basis into income over the term of the agreement and included in amortization of property, plant and equipment, intangibles and other in the consolidated statements of income.
Cash
Cash is presented net of outstanding cheques. When the amount of outstanding cheques and the amount drawn under the Company's operating facility are greater than the amount of cash, the net amount is presented as bank indebtedness.
Allowance for doubtful accounts
The Company maintains an allowance for doubtful accounts for the estimated losses resulting from the inability of its customers to make required payments. In determining the allowance, the Company considers factors such as the number of days the account is past due, whether or not the customer continues to receive service, the Company's past collection history and changes in business circumstances.
Inventories
Inventories include subscriber equipment such as DCTs and DTH receivers, which are held pending rental or sale at cost or at a subsidized price. When subscriber equipment is sold, the equipment revenue and equipment costs are deferred and amortized over two years. When the subscriber equipment is rented, it is transferred to property, plant and equipment and amortized over its useful life. Inventories are determined on a first-in, first-out basis, and are stated at cost due to the eventual capital nature as either an addition to property, plant and equipment or deferred equipment costs.
Property, plant and equipment
Property, plant and equipment are recorded at purchase cost. Direct labour and other directly attributable costs incurred to construct new assets, upgrade existing assets and connect new subscribers are capitalized and borrowing costs on qualifying assets for which the commencement date is on or after September 1, 2010 are also capitalized. As well, any asset removal and site restoration costs in connection with the retirement of assets are capitalized. Repairs and maintenance expenditures are charged to operating expense as incurred. Amortization is recorded on a straight-line basis over the estimated useful lives of assets as follows:
The Company reviews the estimates of lives and useful lives on a regular basis.
Assets held for sale and discontinued operations
Assets are classified as held for sale when specific criteria are met and are measured at the lower of carrying amount and estimated fair value less costs to sell. Assets held for sale are not amortized and are reported separately on the statement of financial position. The operating results of a component that has been disposed of or is classified as held for sale are reported as discontinued operations if the operations and cash flows of the component have been, or will be, eliminated from the Company's ongoing operations and if the Company does not have significant continuing involvement in the operations of the component after the disposal transaction. A component of a company includes operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the Company's operations and cash flows. The Company does not allocate interest to discontinued operations.
Other long-term assets
Other long-term assets primarily include (i) equipment costs, as described in the revenue and expenses accounting policy, deferred and amortized on a straight-line basis over two to five years; (ii) credit facility arrangement fees amortized on a straight-line basis over the term of the facility; (iii) long-term receivables; and (iv) the non-current portion of prepaid maintenance and support contracts.
Intangibles
The excess of the cost of acquiring cable, satellite and media businesses over the fair value of related net identifiable tangible and intangible assets acquired is allocated to goodwill. Net identifiable intangible assets acquired consist of amounts allocated to broadcast rights, trademarks, brands, program rights, material agreements and software assets. Broadcast rights, trademarks and brands represent identifiable assets with indefinite useful lives. Spectrum licenses were acquired in Industry Canada's auction of licenses for advanced wireless services and have an indefinite life.
Program rights represent licensed rights acquired to broadcast television programs on the Company's conventional and specialty television channels and program advances are in respect of payments for programming prior to the window license start date. For licensed rights, the Company records a liability for program rights and corresponding asset when the license period has commenced and all of the following conditions have been met: (i) the cost of the program is known or reasonably determinable, (ii) the program material has been accepted by the Company in accordance with the license agreement and (iii) the material is available to the Company for telecast. Program rights are expensed on a systematic basis generally over the estimated exhibition period as the programs are aired and are included in operating, general and administrative expenses. Program rights are segregated on the Statement of Financial Position between current and noncurrent based on estimated time of usage.
Software that is not an integral part of the related hardware is classified as an intangible asset. Internally developed software assets are recorded at historical cost and include direct material and labour costs as well as borrowing costs on qualifying assets for which the commencement date is on or after September 1, 2010. Software assets are amortized on a straight-line basis over estimated useful lives ranging from four to ten years. The Company reviews the estimates of lives and useful lives on a regular basis.
Borrowing costs
The Company capitalizes borrowing costs on qualifying assets, for which the commencement date is on or after September 1, 2010, that take more than one year to construct or develop using the Company's weighted average cost of borrowing.
Impairment
(i) Goodwill and indefinite-life intangible assets
Goodwill and indefinite-life intangibles assets, such as broadcast rights, are tested annually (as at March 1) and assessed at each reporting period to determine whether there is an indication that the carrying value may be impaired. The recoverable amount of each cash-generating unit ("CGU") is determined based on the higher of the CGU's fair value less costs to sell and its value in use. A CGU is the smallest identifiable group of assets that generate cash flows that are independent of the cash inflows from other assets or groups of assets. Where the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods.
(ii) Non-financial assets with finite useful lives
For non-financial assets, such as property, plant and equipment and finite-lived intangible assets, an assessment is made at each reporting date as to whether there is an indication that an asset may be impaired. If any indication exists, the recoverable amount of the asset is determined based on the higher of the fair value less costs to sell and value in use. Where the carrying amount of the asset exceeds its recoverable amount, the asset is considered impaired and written down to its recoverable amount. Previously recognized impairment losses are reviewed for possible reversal at each reporting date and all or a portion of the impairment reversed if the asset's value has increased.
CRTC benefit obligations
The fair value of CRTC benefit obligations committed as part of business acquisitions are initially recorded, on a discounted basis, at the present value of amounts to be paid net of any expected incremental cash inflows. The obligation is subsequently adjusted for the incurrence of related expenditures, the passage of time and for revisions to the timing of the cash flows. Changes in the obligation due to the passage of time are recorded as accretion of long-term liabilities and provisions in the income statement.
Provisions
Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions are measured using the best estimate of the expenditure required to settle the present obligation at the end of the reporting period, taking into account risks and uncertainties associated with the obligation. Provisions are discounted where the time value of money is considered material.
(i) Asset retirement obligations
The Company recognizes the fair value of a liability for an asset retirement obligation in the period in which it is incurred, on a discounted basis, with a corresponding increase to the carrying amount of property and equipment, primarily in respect of transmitter sites. This cost is amortized on the same basis as the related asset. The liability is subsequently increased for the passage of time and the accretion is recorded in the income statement as accretion of long-term liabilities and provisions. Revisions due to the estimated timing of cash flows or the amount required to settle the obligation may result in an increase or decrease in the liability. Actual costs incurred upon settlement of the obligation are charged against the liability to the extent recorded.
(ii) Other provisions
Provisions for disputes, legal claims and contingencies are recognized when warranted. The Company establishes provisions after taking into consideration legal assessments (if applicable), expected availability of insurance or other recourse and other available information.
Deferred credits
Deferred credits primarily include: (i) prepayments received under IRU agreements amortized on a straight-line basis into income over the term of the agreement; (ii) equipment revenue, as described in the revenue and expenses accounting policy, deferred and amortized over two years to five years; (iii) connection fee revenue and upfront installation revenue, as described in the revenue and expenses accounting policy, deferred and amortized over two to ten years; and (iv) a deposit on a future fibre sale.
Income taxes
The Company accounts for income taxes using the liability method, whereby deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities measured using substantively enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset and they relate to income taxes levied by the same authority in the same taxable entity. Income tax expense for the period is the tax payable for the period using tax rates substantively enacted at the reporting date, any adjustments to taxes payable in respect of previous years and any change during the period in deferred income tax assets and liabilities, except to the extent that they relate to a business combination, items recognized directly in equity or in other comprehensive income.
Tax credits and government grants
The Company has access to a government program which supports local programming produced by conventional television stations. In addition, the Company receives tax credits primarily related to its research and development activities. Government financial assistance is recognized when management has reasonable assurance that the conditions of the government programs are met and accounted for as a reduction of related costs, whether capitalized and amortized or expensed in the period the costs are incurred.
Foreign currency translation
Transactions originating in foreign currencies are translated into Canadian dollars at the exchange rate at the date of the transaction. Monetary assets and liabilities are translated at the period-end rate of exchange and non-monetary items are translated at historic exchange rates.
Exchange gains and losses on translating hedged and unhedged long-term debt are included in the consolidated statements of income. Foreign exchange gains and losses on hedging derivatives are reclassified from other comprehensive income (loss) to income to offset the foreign exchange adjustments on hedged long-term debt.
Financial instruments other than derivatives
Financial instruments have been classified as loans and receivables, assets available-for-sale, assets held-for-trading or financial liabilities. Cash has been classified as held-for-trading and is recorded at fair value with any change in fair value immediately recognized in income (loss). Other financial assets are classified as available-for-sale or as loans and receivables. Available-for-sale assets are carried at fair value with changes in fair value recorded in other comprehensive income (loss) until realized. Loans and receivables and financial liabilities are carried at amortized cost. None of the Company's financial assets are classified as held-to-maturity and none of its financial liabilities are classified as held-for-trading. Certain private investments where market value is not readily determinable are carried at cost net of write-downs and are included in Investments and other assets in the Statement of Financial Position.
Finance costs, discounts and proceeds on bond forward contracts associated with the issuance of debt securities and fair value adjustments to debt assumed in business acquisitions are netted against the related debt instrument and amortized to income using the effective
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Datum: 12.01.2012 - 13:00 Uhr
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News-ID 103549
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