Cogeco Cable's First Quarter Results on the Rise
(firmenpresse) - MONTREAL, QUEBEC -- (Marketwire) -- 01/26/12 -- Today, Cogeco Cable Inc. (TSX: CCA) ("Cogeco Cable" or the "Corporation") announced its financial results for the first quarter of fiscal 2012, ended November 30, 2011, in accordance with the newly adopted International Financial Reporting Standards ("IFRS").
For the first quarter of fiscal 2012:
"Cogeco Cable's results for the first quarter of fiscal 2012 improved and most of our performance indicators were positive. Our sales and marketing strategies for attracting new customers were particularly successful. Despite fierce competition, we recorded an overall increase of 45,129 PSU for the first quarter. Although these results improved compared to last year, we must remain vigilant and disciplined with our operating metrics, given ongoing worldwide economic uncertainty. We continue to invest in preserving the long term superiority of our networks and the competitiveness of our offerings. More than ever, our growth will be driven by our ability to maintain focus on our clients' priorities and to efficiently meet their ever-increasing needs", declared Louis Audet, President and CEO of Cogeco Cable.
(1) The indicated terms do not have standardized definitions prescribed by IFRS and therefore, may not be comparable to similar measures presented by other companies. For more details, please consult the "Non-IFRS financial measures" section.
(2) Represents the sum of Television, High Speed Internet ("HSI") and Telephony service customers.
ABOUT COGECO CABLE
Cogeco Cable () is a telecommunications corporation and is the second largest hybrid fibre coaxial cable operator in Ontario, Quebec and Portugal. Through its two-way broadband cable networks, Cogeco Cable provides its residential customers with Audio, Analogue and Digital Television, as well as HSI and Telephony services. Cogeco Cable also provides to its commercial customers, through its subsidiary Cogeco Data Services, data networking, e-business applications, video conferencing, hosting services, Ethernet, private line, VoIP, HSI access, data storage, data security, co-location services, managed IT services, cloud services and other advanced communication solutions. Cogeco Cable's subordinate voting shares are listed on the Toronto Stock Exchange (TSX: CCA).
SHAREHOLDERS' REPORT
First quarter ended November 30, 2011
FINANCIAL HIGHLIGHTS
MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)
First quarter ended November 30, 2011
TRANSITION TO IFRS
On January 1, 2011, the Canadian generally accepted accounting principles ("GAAP"), as used by publicly accountable enterprises, were fully converged to International Financial Reporting Standards ("IFRS"). Accordingly, the Corporation has prepared its first condensed interim consolidated financial statements for the three-month period ended November 30, 2011 in accordance with IFRS. Prior to the adoption of IFRS, for all periods up to and including the year ended August 31, 2011, the Corporation's consolidated financial statements were prepared in accordance with Canadian GAAP. IFRS uses a conceptual framework similar to Canadian GAAP, but there are significant differences related to recognition, measurement and disclosures.
The date of the opening balance sheet under IFRS and the date of transition to IFRS are September 1, 2010. The financial data for fiscal 2011 have therefore been restated. The Corporation is also required to apply IFRS accounting policies retrospectively to determine its opening statement of financial position, subject to certain exemptions. However, the Corporation is not required to restate figures for periods prior to September 1, 2010 that were previously prepared in accordance with Canadian GAAP.
The new significant accounting policies under IFRS are disclosed in Note 2 to the condensed interim consolidated financial statements for the three-month period ended November 30, 2011, while Note 15 explains adjustments made by the Corporation in preparing its IFRS opening consolidated balance sheet as of September 1, 2010 and in restating its previously published Canadian GAAP condensed interim consolidated financial statements for the three-month period ended November 30, 2010 and the year ended August 31, 2011. Note 15 also provides details on exemption choices made by the Corporation with respect to the general principle of retrospective application of IFRS. The changes to critical accounting policies as a result of IFRS, and their impacts on accounting estimates, are described under "Changes in critical accounting policies and estimates" below.
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 2011 annual MD&A) that could cause actual results to differ materially from what Cogeco Cable currently expects. These factors include technological changes, changes in market and competition, governmental or regulatory developments, general economic conditions, the development of new products and services, the enhancement of existing products and services, and the introduction of competing products having technological or other advantages, many of which are beyond the Corporation's control. Therefore, future events and results may vary significantly from what management currently foresee. 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 expressly disclaims any such obligation), and does not undertake to update or alter this information before the next quarter.
All amounts are stated in Canadian dollars unless otherwise indicated. This report should be read in conjunction with the Corporation's consolidated financial statements and MD&A for the fiscal year ended August 31, 2011 included in the Corporation's 2011 Annual Report. It should also be read in conjunction with the information on the adjustments to the fiscal 2011 financial figures upon adoption of IFRS, explained in Note 15 of the condensed interim consolidated financial statements for the three-month period ended November 30, 2011.
Corporate strategies and objectives
Cogeco Cable Inc.'s ("Cogeco Cable" or the "Corporation") objectives are to improve profitability and create shareholder value. The strategies for reaching those objectives are sustained growth through the diversification and the improvement of products, services, clientele and territories, as well as the continuous improvement of networks and equipment and tight controls over costs and business processes. The Corporation measures its performance, with regard to these objectives by monitoring operating income before depreciation and amortization((1), operating margin(1), primary service units ("PSU")((2) growth and free cash flow(1).
During the first three months of fiscal 2012, the Corporation invested approximately $33 million in its network infrastructure and equipment to upgrade its capacity, improve its robustness and extend its territories in order to better serve and increase its service offerings for new and existing clientele.
PSU growth and penetration of service offerings
During the first quarter ended November 30, 2011, the number of PSU increased by 45,129, or 1.8%, to reach 2,609,683 PSU, mainly as a result of targeted marketing initiatives in the Canadian operations and of the continuing interest for high definition ("HD") television service which offset the loss in the European operations resulting primarily from a decreased demand for services. As of fiscal 2012, Cogeco Cable has modified its key performance indicator for growth to a PSUconcept instead of a revenue-generating units ("RGU") concept. Cogeco Cable expects a PSU growth of 90,000 net additions for the fiscal 2012 year which amounts in terms of RGU to 225,000 net additions for fiscal 2012 year as presented in the Fiscal 2012 financial guidelines of the 2011 Annual Report.
Operating income before depreciation and amortization and operating margin
First-quarter operating income before depreciation and amortization increased by 5.5% when compared to the first quarter of fiscal 2011 to reach $136.6 million and operating margin decreased to 38.3% from 39.2%.
Free cash flow
For the three-month period ended November 30, 2011, Cogeco Cable reports positive free cash flow of $21 million, compared to negative free cash flow of $30 million for the first quarter of the previous fiscal year, representing an increase of $51 million. This variance is mostly attributable to the difference in the recognition of current income tax expense for both periods combined with the improvement of operating income before depreciation and amortization, partly offset by the increase in acquisition of property, plant and equipment.
OPERATING RESULTS - CONSOLIDATED OVERVIEW
Revenue
Fiscal 2012 first-quarter revenue rose by $26.5 million, or 8%, to reach $356.9 million, when compared to the prior year. For further details on the Corporation's operating results, please refer to the "Canadian operations" and "European operations" sections.
Operating costs
For the first quarter of fiscal 2012, operating costs, excluding management fees payable to COGECO Inc., increased by $18.9 million, to reach $213.2 million, an increase of 9.7% compared to the first quarter of the prior year. For further details on the Corporation's operating results, please refer to the "Canadian operations" and "European operations" sections.
Operating income before depreciation and amortization and operating margin
Fiscal 2012 first-quarter operating income before depreciation and amortization increased by 5.5% to reach $136.6 million. Cogeco Cable's first-quarter operating margin decreased to 38.3% from 39.2% in the comparable period of the prior year. For further details on the Corporation's operating results, please refer to the "Canadian operations" and "European operations" sections.
(1) The indicated terms do not have standardized definitions prescribed by IFRS and therefore, may not be comparable to similar measures presented by other companies. For more details, please consult the "Non-IFRS financial measures" section.
(2) Represents the sum of Television, High Speed Internet ("HSI") and Telephony service customers.
RELATED PARTY TRANSACTIONS
Cogeco Cable is a subsidiary of COGECO Inc., which holds 32.1% of the Corporation's equity shares, representing 82.6% of the votes attached to the Corporation's voting shares. Under a management agreement, the Corporation pays COGECO Inc. monthly management fees equal to 2% of its total revenue, capped annually and subject to an adjustment based on the increase in the Consumer Price Index in Canada, for certain executive, administrative, legal, regulatory, strategic and financial planning and additional services to the Corporation and its subsidiaries. Accordingly, for fiscal 2012, management fees have been set at a maximum of $9.5 million, which is expected to be paid within the first six months of the fiscal year. For fiscal 2011, management fees were capped at $9.2 million, and were fully paid in the first half of the year.
Cogeco Cable granted 46,400 stock options to COGECO Inc.'s employees during the first three months of fiscal 2012, compared to 35,800 for the same period last year. During the first quarter, Cogeco Cable charged COGECO Inc. an amount of $74,000 with regards to Cogeco Cable's options granted to COGECO Inc.'s employees, compared to $49,000 in the first quarter of the prior year.
Cogeco Cable also granted 10,700 incentive share units to COGECO Inc.'s employees during the first three months of fiscal 2012, compared to 10,000 incentive share units in the first three months of fiscal 2011. During the first quarter, the Corporation charged COGECO Inc. an amount of $76,000 with respect to these incentive share units, compared to $39,000 in the comparable period of the previous fiscal year.
Details regarding the management agreement and stock options and incentive share units granted to COGECO Inc.'s employees are provided in the Corporation's 2011 Annual Report.
There were no other material related party transactions during the periods covered.
FIXED CHARGES
First-quarter 2012 depreciation and amortization amounted to $66.1 million, compared to $61.8 million for the same period of the prior year. The increase is mainly due to additional acquisitions of property, plant and equipment in the Canadian operations arising mainly from customer premise equipment acquisitions to support PSU growth as well as reduction of the depreciation period for some home terminal devices in Canada, partly offset by the write-down of property, plant and equipment in Portugal in the third quarter of 2011.
For the first quarter 2012, financial expense was essentially the same at $16.7 million when compared to the prior year.
INCOME TAXES
Fiscal 2012 first-quarter income tax expense amounted to $10.8 million, compared to $16.4 million in the prior year. Fiscal 2012 first quarter income tax expense decrease is mainly due to the implementation of certain tax measures of the 2011 federal budget limiting the tax deferrals for corporations with a significant interest in a partnership. Under the transitional relief measures, some income will be taxed over a period of five years rather than being taxed all in fiscal 2012 and, with the effect of the decrease in income tax rates over the next five years, resulted in a tax expense reduction of $3.5 million in the first quarter of fiscal 2012.
The changes limiting the tax deferrals described above will have an additional cash outflow impact of approximately $13 million for the Corporation during the fiscal 2012, none of which have been disgorged during the quarter.
PROFIT FOR THE PERIOD
Fiscal 2012 first quarter profit for the period amounted to $43 million, or $0.88 per share, compared to $34.6 million, or $0.71 per share, for the same period in fiscal 2011. Profit progression for the period has resulted mainly from the operating income before depreciation and amortization growth and the decrease in income tax expense in the first three months of the 2012 fiscal year.
CASH FLOW AND LIQUIDITY
Fiscal 2012 first-quarter cash flow from operations reached $101.7 million compared to $36.5 million for the same period last year. This increase of $65.2 million is primarily due to the reduction in current income tax recovery, partly offset by the increase in operating income before depreciation and amortization. Changes in non-cash operating activities generated cash outflows of $63.3 million compared to $57.7 million for the same period in fiscal 2011, mainly as a result of a decrease in trade and other payables for both periods.
Investing activities, including acquisitions of property, plant and equipment segmented according to the National Cable Television Association ("NCTA") standard reporting categories, are as follows:
Fiscal 2012 first quarter acquisition of property, plant and equipment amounted to $76.8 million, an increase of 21.4% when compared to $63.3 million in the first quarter of the prior year due to the following factors:
Acquisition of intangible assets and others are mainly attributable to reconnect and additional service activation costs as well as other customer acquisition costs. For the first quarter, the acquisition of intangible assets and others amounted to $3.7 million, slightly higher when compared to $3.2 million for the first quarter of the 2011 fiscal year.
In the first quarter, positive free cash flow amounted to $21 million, compared to negative free cash flow of $30 million in the comparable period of fiscal 2011, representing an increase of $51 million. The growth in free cash flow over the prior year is due to the increase in operating income before depreciation and amortization combined with the current income tax expense reduction, partly offset by the increase in property, plant and equipment acquisitions.
In the first three months of fiscal 2012, Indebtedness affecting cash increased by $40.4 million mainly due to the cash outflows of $63.3 million from the changes in non-cash operating activities, to $14.6 million and $3.2 million of income tax and financial expense payments made during the quarter but recorded in 2011 fiscal year and dividend payment of $12.2 million, partly offset by the positive free cash flow of $21 million and the decrease in cash and cash equivalents of $35.5 million. In the first three months of fiscal 2011, Indebtedness affecting cash increased by $183.7 million mainly due the cash outflows of $57.7 million from the changes in non-cash operating activities, the increase in cash and cash equivalents of $161.8 million, negative free cash flow of $30 million and the dividend payment of $8.2 million, partly offset by $78.1 million of income tax expense recorded in the first quarter of fiscal 2011 but not paid due to modifications made to the corporate structure. Indebtedness mainly increased in 2011 through the issuance of $200 million Senior Secured Debentures Series 2, partly offset by a net repayment of $13.8 million on the Corporation's Term Revolving Facility.
During the first quarter of fiscal 2012, a dividend of $0.25 per share was paid to the holders of subordinate and multiple voting shares, totalling $12.2 million, compared to a dividend of $0.17 per share, or $8.2 million the year before.
As at November 30, 2011, the Corporation had a working capital deficiency of $151.4 million compared to $ 178.2 million at August 31, 2011. The decrease in the deficiency is mainly attributable to a decrease in trade and other payables and income tax liabilities, partly offset by decreases in cash and cash equivalents and in income taxes receivable and by an increase in bank indebtedness. 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 November 30, 2011, the Corporation had used $151.2 million of its $750 million Term Revolving Facility for a remaining availability of $598.8 million.
FINANCIAL POSITION
Since August 31, 2011, there have been significant changes to the balances of, "trade and other payables", "property, plant and equipment", "income taxes receivable", "income tax liabilities", "future income tax liabilities", "long-term debt", "derivative financial instruments", "cash and cash equivalents" and "bank indebtedness".
The $68.3 million decrease in trade and other payables is related to the timing of payments made to suppliers. The $14.5 million increase in property, plant and equipment reflects the acquisitions discussed in the "Cash flow and Liquidity" section net from the depreciation expense. The decrease of $25.2 million in income taxes receivable, of $39.7 million in income tax liabilities and of $7.9 million in future income tax liabilities primarily reflect the timing of the recognition of income tax liabilities as a result of modifications made to the corporate structure combined with the increase in operating income before depreciation and amortization. The increase of $21 million in bank indebtedness, of $27.8 million in long-term debt and the decrease of $35.5 million in cash and cash equivalents are due to the factors previously discussed in the "Cash Flow and Liquidity" section. The $7 million decrease in derivative financial instruments is due to the factors discussed in the "Financial management" section.
A description of Cogeco Cable's share data as of December 31, 2011 is presented in the table below:
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 2011 Annual Report, have not materially changed since August 31, 2011, except as mentioned below.
On November 22, 2011, Cogeco Cable renewed its credit agreement for a $750 million credit facility, with an option to increase to a total amount of up to $1 billion, subject to lenders' participation, in the form of a five year Term Revolving Facility. The renewed Term Revolving Facility was arranged by a group of financial institutions led by Canadian Imperial Bank of Commerce and Bank of Montreal. The renewed Term Revolving Facility will mature on November 22, 2016, but may be extended by additional one-year periods on an annual basis, subject to lenders' approval. The Term Revolving Facility is indirectly secured by a first priority fixed and floating charge on substantially all present and future real and personal property and undertaking of every nature and kind of the Corporation and 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.
DIVIDEND DECLARATION
At its January 25, 2012 meeting, the Board of Directors of Cogeco Cable declared a quarterly eligible dividend of $0.25 per share for multiple voting and subordinate voting shares, payable on February 22, 2012, to shareholders of record on February 8, 2012. 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.
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. During the first three months of fiscal 2012, amounts due under the US$190 million Senior Secured Notes Series A increased by $7.8 million due to the US dollar's appreciation relative to the Canadian dollar. The fair value of cross-currency swaps increased by a net amount of $7 million, of which an increase of $7.8 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, net of income taxes. In the first quarter of fiscal 2011, amounts due under the US$190 million Senior Secured Notes Series A decreased by $7.6 million due to the US dollar's depreciation over the Canadian dollar. The fair value of cross-currency swaps decreased by a net amount of $6.3 million, of which $7.6 million offsets the foreign exchange gain on the debt denominated in US dollars. The difference of $1.2 million was recorded as an increase of other comprehensive income, net of income taxes.
Furthermore, the Corporation's net investment in self-sustaining foreign subsidiaries is exposed to market risk attributable to fluctuations in foreign currency exchange rates, primarily changes in the values of the Canadian dollar versus the Euro. The Corporation recorded a foreign exchange loss of $0.3 million in the first quarter, compared to a foreign exchange loss of $1.9 million in the comparable period of the prior year, which was deferred and recorded in the interim consolidated statement of comprehensive income, net of income taxes. The exchange rate used to convert the Euro currency into Canadian dollars for the balance sheet accounts as at November 30, 2011 was $1.3706 per Euro compared to $1.4071 per Euro as at August 31, 2011. The average exchange rate prevailing during the first quarter of fiscal 2012 used to convert the operating results of the European operations was $1.3891 per Euro compared to $1.3833 per Euro in the first quarter of fiscal 2011. Since the Corporation's condensed interim consolidated financial statements are expressed in Canadian dollars but a portion of its business is conducted in the Euro currency, exchange rate fluctuations can increase or decrease revenue, operating income before depreciation and amortization, profit for the period and the carrying value of assets and liabilities.
The following table shows the Canadian dollar impact of a 10% fluctuation in the average exchange rate of the Euro currency into Canadian dollars on European operating results for the three month period ended November 30, 2011:
The Corporation is also impacted by foreign currency exchange rates, primarily changes in the values of the US dollar relative to the Canadian dollar with regards to purchases of certain equipment, as the majority of customer premise equipment is purchased and subsequently paid in US dollars. Please consult the "Foreign Exchange Risk" section in Note 14 of the Condensed interim consolidated financial statements for further details.
CANADIAN OPERATIONS
CUSTOMER STATISTICS
Fiscal 2012 first-quarter PSU net additions were higher than in the comparable period of the prior year, and the Canadian operations continue to generate PSU growth despite higher penetration rates, category maturity and aggressive competition. The net customer additions for Television service customers stood at 4,452 for the first quarter, compared to 7,038 for the same period of the prior year. Television service customers net additions in fiscal 2012 is mainly due to the back to school period for college and university students, to network expansions and the bundling effect of continued growth in HSI and Telephony services. In the quarter, Telephony service customers grew by 24,442 compared to 17,866 for the same period last year, and the number of net additions to the HSI service stood at 17,285 customers compared to 16,872 customers in the first quarter of the prior year. HSI and Telephony net additions continue to stem from the enhancement of the product offering, the impact of the bundled offer (Cogeco Complete Connection) of Television, HSI and Telephony services, and promotional activities. For the three month period ended November 30, 2011, additions to the Digital Television service which are included in the Television service customers, stood at 48,893 compared to 28,914 for the comparable period of the prior year. Digital Television service net additions are due to targeted marketing initiatives to improve penetration, the launch of new HD channels, the continuing interest for HD television service and the deployment of Digital Terminal Adapters technology to migrate customer from analog to digital services.
OPERATING RESULTS
Revenue
Revenue for the first quarter of fiscal 2012 rose by $28.2 million, or 9.8%, to reach $315.4 million. The increase in revenue was driven by PSU growth, rate increases implemented in October 2011 and April 2011 combined with the acquisitions of MTO Telecom Inc. ("MTO") and Quiettouch Inc. ("QTI").
Operating costs
For the three months ended November 30, 2011, operating costs increased by $21.1 million, or 13.6%, at $176.5 million. The increase in operating costs is mainly attributable to servicing additional PSU, the launch of new HD channels, additional programming costs, deployment and support costs related to the migration of Television service customers from analog to digital and the acquisitions of MTO and QTI.
Operating income before depreciation and amortization
Operating income before depreciation and amortization rose by $6.6 million, or 5.3%, to reach $131.8 million in the first quarter, mainly due to the increased revenue exceeding the increase in operating costs. Cogeco Cable's Canadian operations' operating margin decreased to 41.8% in the first quarter compared to 43.6% for the same period of the prior year mainly due to the incremental deployment and support costs for the migration of Television service customers from analog to digital.
EUROPEAN OPERATIONS
CUSTOMER STATISTICS
The economic environment in Portugal continued to decline and the government has implemented financial reforms which include increases in sales and income taxes combined with reductions in government spending on social programs, thus reducing consumer disposable income. These measures have generated consumer spending constraints while the intensity of the competitive environment remained. The rate of growth for our services has diminished in this environment, with net customer losses in Television and HSI service customers. The number of Television service customers decreased by 995 during the first quarter of fiscal 2012, compared to a growth of 588 for the comparable period of the prior year. HSI service customers decreased by 212 during the quarter compared to an increase of 3,592 in the first quarter of fiscal 2011. The number of Telephony service customers increased by 157 in the first quarter of fiscal 2012, compared to 3,264 for the same period in 2011.
OPERATING RESULTS
Revenue
In the first quarter of fiscal 2012 revenue decreased by $1.7 million, or 4%, at $41.5 million as a result of a decreased demand for services, partly offset by a higher value of the Euro over the Canadian dollar when compared to prior year. Revenue from the European operations in the local currency for the 2012 first quarter amounted to EUR29.9 million, a decrease of EUR1.4 million, or 4.4%, when compared to the same period of the prior year.
Operating costs
Fiscal 2012 first-quarter operating costs decreased by $2.2 million, or 5.7%, at $36.8 million, mainly due to the PSU losses and timing of marketing initiatives partly offset by a higher value of the Euro over the Canadian dollar when compared to prior year. Operating costs of the European operations for the first quarter in the local currency amounted to EUR26.5 million, a decrease of EUR1.7 million, or 6.1% when compared to the corresponding period of the prior year.
Operating income before depreciation and amortization
Operating income before depreciation and amortization increased to $4.7 million in the first quarter from $4.3 million for the same period of the prior year, representing an increase of $0.5 million, or 11.2%, mainly due to decreases in operating costs which outpaced the decreases in revenue. European operations' operating margin increased to 11.4% from 9.9% in the first quarter of fiscal 2012. Operating income before depreciation and amortization in the local currency amounted to EUR3.4 million compared to EUR3.1 million in the first quarter of the prior year, representing an increase of 10.7%.
CONTROLS AND PROCEDURES
The President and Chief Executive Officer ("CEO") and the Senior Vice President and Chief Financial Officer ("CFO"), together with Management, are responsible for establishing and maintaining adequate disclosure controls and procedures and internal controls over financial reporting, as defined in NI 52-109. Cogeco Cable's internal control framework is based on the criteria published in the report "Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission and is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.
The CEO and CFO, supported by Management, evaluated the design of the Corporation's disclosure controls and procedures and internal controls over financial reporting as at November 30, 2011, and have concluded that they were adequate. Furthermore, no significant changes to the internal controls over financial reporting occurred during the quarter ended November 30, 2011.
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, 2011. A detailed description of the uncertainties and main risk factors faced by Cogeco Cable can be found in the 2011 Annual Report.
CHANGES IN CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Corporation adopted the IFRS conceptual framework for its accounting policies on September 1, 2011 (see "Transition to IFRS" above"). Accordingly, the following paragraphs provide an analysis of accounting policies considered to be critical for which changes required under the adoption of IFRS were determined to be material. This "Changes in critical accounting policies and estimates" section should be read in conjunction with the Corporation's annual MD&A for the 2011 year, which provides a description of other accounting policies considered to be critical but for which the adoption of IFRS did not have a significant impact.
A. IMPAIRMENT OF NON FINANCIAL ASSETS
At the end of each reporting period, the Corporation reviews the carrying value of its property, plant and equipment and intangible assets with finite useful lives to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any.
Goodwill and intangible assets with indefinite useful lives are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired.
The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
For the purpose of impairment testing, assets that cannot be tested on an individual basis are grouped together into the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets ("cash-generating unit" or "CGU"). Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual CGU, or otherwise they are allocated to the smallest group of CGU for which a reasonable and consistent allocation basis can be identified.
An impairment loss is recognized when the carrying amount of an asset or a CGU exceeds its recoverable amount for the amount of this excess. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis. The impairment loss is recognized immediately in profit or loss in the period in which the loss is incurred.
Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. A reversal of an impairment loss is recognized immediately in profit or loss.
For the purpose of impairment testing, goodwill is allocated to each of the Corporation's CGUs that are expected to benefit from the synergies of the related business combination. An impairment loss recognized for goodwill cannot be reversed.
B. PROVISIONS
Provisions represent liabilities of the Corporation for which the amount or timing is uncertain. A provision is recorded when the Corporation has a legal or constructive present obligation as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognized represents management's best estimate of the amount required to settle the obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When the effect of the time value of money is material, the amount of a provision is determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognized as financial expense.
When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognized as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably.
C. EMPLOYEE BENEFITS
DEFINED BENEFIT PENSION PLANS
Pension costs for defined benefit pension plans are determined using the projected unit credit method, (sometimes known as the accrued benefit method pro-rated on service) with actuarial valuations being carried out at the end of each reporting period and are funded through contributions determined in accordance with this method. The Corporation's net obligation in respect of defined benefit pension plans is calculated separately for each plan.
Pension expense is charged to salaries, employee benefits and outsourced services and includes:
The retirement benefit obligation recognized in the statement of financial position represents the present value of the defined benefit obligation as adjusted for unrecognized past service cost, and as reduced by the fair value of plan assets.
The Corporation recognizes actuarial gains or losses in other comprehensive income in the period in which they arise.
FUTURE ACCOUNTING DEVELOPMENTS IN CANADA
A number of new standards, interpretations and amendments to existing standards were issued by the International Accounting Standard Board ("IASB") that are mandatory but not yet effective for the period ended November 30, 2011 or year ended August 31,2012, and have not been applied in preparing these condensed interim consolidated financial statements. The following standards may have a material impact on the consolidated financial statements of the Corporation:
IFRS 9 replaces the guidance in IAS 39 Financial Instruments: Recognition and Measurement on the classification and measurement of financial assets and financial liabilities. The replacement of IAS 39 is a three-phase project with the objective of improving and simplifying the reporting for financial instruments. This is the first phase of that project.
IFRS 10 replaces the consolidation requirements in IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation - Special Purpose Entities. It provides a single model to be applied in the control analysis for all investees.
IFRS 12 establishes disclosure requirements for entities that have interests in subsidiaries, joint arrangements, associates and/or unconsolidated structures entities.
IFRS 13 replaces the fair value measurement guidance contained in individual IFRS with a single source of fair value measurement guidance. The standard clarifies the definition of fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements.
The amendments to IAS 1 require that an entity present separately the items of other comprehensive income ("OCI") that may be reclassified to profit or loss in the future from those that would never be reclassified to profit or loss.
The amendments to IAS 19 requires the recognition of actuarial gains and losses immediately in other comprehensive income, full recognition of past service costs immediately in profit or loss, recognition of expected return on plan assets in profit or loss to be calculated based on the rate used to discount the defined benefit obligation and additional disclosures explaining the characteristics of the Corporation's defined benefit pension plans.
The Corporation is in the process of determining the extent of the impact of these standards on its consolidated financial statements.
NON-IFRS FINANCIAL MEASURES
This section describes non-IFRS financial measures used by Cogeco Cable throughout this MD&A. It also provides reconciliations between these non-IFRS measures and the most comparable IFRS financial measures. These financial measures do not have standard definitions prescribed by IFRS and therefore, may not be comparable to similar measures presented by other companies. These measures include "cash flow from operations", "free cash flow", "operating income before depreciation and amortization" and "operating margin".
Cash flow from operations and free cash flow
Cash flow from operations is used by Cogeco Cable's management and investors to evaluate cash flows generated by operating activities, excluding the impact of changes in non-cash operating activities, amortization of deferred transaction costs and discounts on long-term debt, income taxes paid or received, 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:
Free cash flow is calculated as follows:
Operating income before depreciation and amortization and operating margin
Operating income before depreciation and amortization is used by Cogeco Cable's management and investors to assess the Corporation's ability to seize growth opportunities in a cost effective manner, to finance its ongoing operations and to service its debt. Operating income before depreciation and amortization is a proxy for cash flows from operations excluding the impact of the capital structure chosen, and is one of the key metrics used by the financial community to value the business and its financial strength. Operating margin is a measure of the proportion of the Corporation's revenue which is available, before income taxes, to pay for its fixed costs, such as interest on Indebtedness. Operating margin is calculated by dividing operating income before depreciation and amortization by revenue.
The most comparable IFRS financial measure is operating income. Operating income before depreciation and amortization and operating margin are calculated as follows:
SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION
SEASONAL VARIATIONS
Cogeco Cable's operating results are not generally subject to material seasonal fluctuations except as follows. The customer growth in the Television service customers and HSI service are generally lower in the second half of the fiscal year as a result of a decrease in economic activity due to the beginning of the vacation period, the end of the television seasons, 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 Aveiro, Covilha, Evora, Guarda and Coimbra in Portugal. Furthermore, the third and fourth quarter's operating margin is usually higher as no management fees are paid to COGECO Inc. Under the Management Agreement, Cogeco Cable pays a fee equal to 2% of its total revenue subject to a maximum amount. As the maximum amount is expected to be reached in the second quarter of fiscal 2012, Cogeco Cable does not expect to pay management fees in the second half of fiscal 2012. Similarly, as the maximum amount was paid in the first six months of fiscal 2011, Cogeco Cable paid no management fees in the second half of the previous fiscal year.
ADDITIONAL INFORMATION
This MD&A was prepared on January 25, 2012. Additional information relating to the Corporation, including its Annual Information Form, is available on the SEDAR website at .
COGECO CABLE INC.
CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
First quarter ended November 30, 2011
INTERIM CONSOLIDATED STATEMENTS OF PROFIT OR LOSS
(unaudited)
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(unaudited)
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
NATURE OF OPERATIONS
Cogeco Cable Inc. (the "Corporation" or the "Parent Corporation") is a Canadian public corporation whose shares are listed on the Toronto Stock Exchange ("TSX"). The Corporation's core business is providing Cable Television, High Speed Internet ("HSI"), Telephony, managed information technology and infrastructure, and other telecommunications services to its residential and commercial customers in Canada and in Portugal.
The Corporation is a subsidiary of COGECO Inc., which holds 32.1% of the Corporation's equity shares, representing 82.6% of the votes attached to the Corporation's voting shares.
The Corporation's registered office is located at 5 Place Ville Marie, Suite 1700, Montreal, Quebec, H3B 0B3.
These condensed interim consolidated financial statements have been prepared in accordance with International Accounting Standards ("IAS") 34 Interim Financial Reporting and do not include all of the information required for full annual financial statements. Certain information and footnote disclosure normally included in annual financial statements were omitted or condensed where such information is not considered material to the understanding of the Corporation's interim financial information. As such, these condensed interim consolidated financial statements should be read in conjunction with the Corporation's 2011 annual financial statements.
These are the Corporation's first condensed interim consolidated financial statements prepared in conformity with IAS 34 and International financial reporting standards ("IFRS") 1 First-time Adoption of International Financial Reporting Standards has been applied. An explanation of how the transition to IFRS has affected the reported financial position, financial performance and cash flows of the Corporation is provided in note 15.
The condensed interim consolidated financial statements have been prepared on a going concern basis using historical cost except for derivative financial instruments and cash-settled share-based payment arrangements, which are measured at fair value.
Financial information is presented in Canadian dollars, which is the functional currency of Cogeco Cable Inc.
The results of operations for the interim period are not necessarily indicative of the results of operations for the full year. The Corporation does not expect seasonality to be a material factor in quarterly results except that the customer growth in the Cable Television 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 seasons, and students leaving their campuses at the end of the school year. Furthermore, the third and fourth quarter's operating margin is usually higher as no management fees are paid to COGECO Inc. Under the Management Agreement, the Corporation pays a fee equal to 2% of its total revenue subject to a maximum amount. As the maximum amount is expected to be reached in the second quarter of fiscal 2012, the Corporation does not expect to pay management fees in the second half of fiscal 2012.
The condensed interim consolidated financial statements were approved by the Board of Directors of Cogeco Cable Inc. at its meeting held on January 25, 2012.
These condensed interim consolidated financial statements have been prepared with the accounting policies the Corporation expects to adopt in its annual August 31, 2012 consolidated financial statements.
The accounting policies set out below have been applied consistently to all periods presented in the condensed interim consolidated financial statements and in preparing the opening consolidated statement of financial position as at September 1, 2010 for the purposes of the transition to IFRS, unless otherwise indicated.
These condensed interim consolidated financial statements include the accounts of the Corporation and its subsidiaries.
Subsidiaries are entities controlled by the Corporation. Control is achieved where the Corporation has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Corporation.
The Corporation has established a special purpose entity ("SPE") for the purpose of mitigating the impact of stock price fluctuations in connection with its Incentive Share Unit Plan. A SPE is consolidated if, based on an evaluation of the substance of its relationship with the Corporation and the SPE's risks and rewards, the Corporation concludes that it controls the SPE. A SPE controlled by the Corporation was established under terms that impose strict limitations on the decision-making powers of the SPE's management, resulting in the Corporation receiving the majority of the benefits related to the SPE's operations and net assets, being exposed to the majority of risks incident to the SPE's activities, and retaining the majority of the residual or ownership risks related to the SPE or its assets.
All inter-company transactions and balances and any unrealized revenue and expenses are eliminated in preparing the interim condensed consolidated financial statements.
Acquisitions on or after September 1, 2010
Business acquisitions are accounted for using the acquisition method. Goodwill is measured as the excess of the fair value of the consideration transferred including the recognized amount of any non-controlling interest in the acquiree over the net recognized amount of the identifiable assets acquired and liabilities assumed, all measured at the acquisition date.
The consideration transferred is measured as the sum of the fair values of assets transferred, liabilities incurred, and equity instruments issued by the Corporation at the acquisition date, including any asset or liability resulting from a contingent consideration arrangement, in exchange for control of the acquiree.
An obligation to pay contingent consideration is classified as an asset or a liability or as equity. Contingent consideration classified as equity is not re-measured. Contingent consideration classified as an asset or a liability is measured either as a financial instrument or as a provision. Changes in fair values that qualify as measurement period adjustments for preliminary purchase price allocations are adjusted in the current period against the cost of acquisition and such changes are applied on a retroactive basis.
Transaction costs, other than those associated with the issue of debt or equity securities, and integration and restructuring costs that the Corporation incurs in connection with a business acquisition are recognized in profit or loss as incurred.
Acquisitions prior to September 1, 2010
As part of its transition to IFRS, the Corporation elected not to restate those business combinations that occurred prior to September 1, 2010. In respect of acquisitions prior to that date, assets and liabilities are included in the statement of financial position on the basis of their deemed cost at the date of acquisition, which represents the amounts recognized under previous Canadian Generally Accepted Accounting Principles ("GAAP") immediately after the date of acquisition.
Revenue is measured at the fair value of the consideration received or receivable, net of returns and discounts. The Corporation recognizes revenue from the sale of products or the rendering of services when the following conditions are met:
More specifically, the Corporation's principal sources of revenue are recognized as follows:
MULTIPLE-ELEMENT ARRANGEMENTS
The Corporation offers certain products and services as part of multiple deliverable arrangements. The Corporation evaluates each deliverable in an arrangement to determine whether such deliverable would represent a separate component. Components are accounted separately when:
Consideration is measured and allocated amongst the components based upon their relative fair values and the relevant revenue recognition policy is applied to them.
The Corporation considers that installation and activation fees are not separate components because they have no stand-alone value. Accordingly, they are deferred and amortized into revenue at the same pace as the related telecommunications services are earned, which is the average life of a customer's subscription for residential customers and the term of the agreement for commercial customers.
Unearned revenue, such as payments for goods and services received in advance of delivery, are recorded as deferred and prepaid revenue until the service is provided or the product is delivered to the customer.
Property, plant and equipment are carried at cost, less accumulated depreciation and accumulated impairment losses.
During construction of new assets, direct costs plus a portion of direct overhead costs directly attributable to the asset are capitalized. Borrowing costs directly attributable to the acquisition or construction of qualifying assets, which require a substantial amount of time to get ready for their intended use or sale, are capitalized until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are recorded as financial expense in the period in which they are incurred.
Depreciation is recognized from the date the asset is ready for its intended use so as to write off the cost of assets, other than freehold land and properties under construction, less their residual values over their useful lives, using the straight-line method. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease. The depreciation periods are as follows:
When significant parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment.
The estimated useful lives, residual values and depreciation method are reviewed at the end of each annual reporting period, with the effect of any changes in estimate accounted for on a prospective basis.
The gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sale proceeds and the carrying amount of the asset and is recognized in profit or loss.
The Corporation does not record decommissioning obligations in connection with its cable distribution network. The Corporation expects to renew all of its agreements with utility companies to access their support structures in the future, thus the resulting present value of the obligation is not significant.
Intangible assets acquired separately are measured on initial recognition at cost. Intangible assets acquired in a business combination and recognized separately from goodwill are initially recognized at their fair value at the acquisition date. Subsequent to initial recognition, intangible assets are carried at cost less accumulated amortization and accumulated impairment losses.
The useful lives of intangible assets are assessed as either finite or indefinite.
Intangible assets with finite useful lives are amortized over their useful life. The estimated useful lives are reviewed at the end of each annual reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. Intangible assets with finite useful lives are amortized as follows:
Intangible assets with indefinite useful lives are those for which there is no foreseeable limit to their useful economic life as they arise from contractual or other legal rights that can be renewed without significant cost. They comprised Cable Distribution Undertaking Broadcasting Licences ("Cable Distribution Licences"). Cable Distribution Licences are comprised of broadcast authorities licenses and exemptions from licensing that allow access to homes and subscribers in a specific area. The Corporation has concluded that the Cable Distribution Licences have indefinite useful lives since there are no legal, regulatory, contractual, economic or other factors that would prevent their renewals or limit the period over which they will contribute to the Corporation's cash flows. The Corporation reviews at the end of each reporting period whether event and circumstances continue to support indefinite useful life assessment for these licences. Intangible assets with indefinite useful lives are not amortized, but tested for impairment at least annually, or more frequently if there is any indication of impairment.
Goodwill represents the future economic benefits arising from a business combination that are not individually identified and separately recognized. It is not amortized but tested for impairment at least annually, or whenever there is an indication of possible impairment.
At the end of each reporting period, the Corporation reviews the carrying value of its property, plant and equipment and intangible assets with finite useful lives to determine whether there is any indication that those assets may be impaired. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any.
Goodwill and intangible assets with indefinite useful lives are tested for impairment at least annually, or whenever there is an indication that the asset may be impaired.
The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.
For the purpose of impairment testing, assets that cannot be tested on an individual basis are grouped together into the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets ("cash-generating unit" or "CGU"). When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual CGU, or otherwise they are allocated to the smallest group of CGU for which a reasonable and consistent allocation basis can be identified.
An impairment loss is recognized when the carrying amount of an asset or a CGU exceeds its recoverable amount for the amount of this excess. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amount of the other assets in the CGU on a pro rata basis. The impairment loss is recognized immediately in profit or loss in the period in which the loss is incurred.
Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. A reversal of an impairment loss is recognized immediately in profit or loss.
For the purpose of impairment testing, goodwill is allocated to each of the Corporation's CGUs that are expected to benefit from the synergies of the related business combination. An impairment loss recognized for goodwill cannot be reversed.
LESSEE
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards incidental to ownership of the asset to the lessee. All other leases are classified as operating leases.
Assets held under finance leases are recognized as assets of the Corporation at their fair value
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