Shaw Announces Fourth Quarter and Full Year Financial and Operating Results and Preliminary Fiscal 2013 Guidance
- Fourth quarter consolidated revenues improved 3% and operating income before amortization was up 4%. On a full year basis revenues improved 5% and operating income before amortization increased 4%. - Cable margin of 49% reflects revenue growth and cost management. While competition is intense the operational focus remains on profitable and sustainable growth initiatives. - Net income was $133 million for the quarter or $0.28 per share. On an annual basis net income was up 36% over last year to $761 million, or $1.62 per share.
(firmenpresse) - CALGARY, ALBERTA -- (Marketwire) -- 10/25/12 -- Shaw Communications Inc. (TSX: SJR.B) (NYSE: SJR) announced consolidated financial and operating results for the fourth quarter and year ended August 31, 2012 and 2011. Consolidated revenue for the three month period of $1.21 billion was up 3% compared to the same period last year while the annual amount of $5.0 billion improved 5%. Total operating income before amortization(1)for the quarter and annual period of $501 million and $2.13 billion, respectively, each improved 4% over the comparable periods.
Free cash flow(1) for the three and twelve month periods were $103 million and $482 million, respectively, compared to $49 million and $617 million for the same periods last year. Increased operating income before amortization and reduced capital investment were the main drivers of the quarterly improvement. On an annual basis improved operating income before amortization was more than offset by increased capital investment, CRTC benefit funding, and cash taxes.
Chief Executive Officer Brad Shaw said, "Our financial performance in the quarter was solid as we balanced subscriber growth and profitability. The competitive environment continues to be intense and we remain focused on strengthening our core business through technology, customer service and value leadership."
"We continue to leverage our advanced network rolling out a number of new products and services this year bringing innovation, choice and value to our customers. Our investments in technology include the ongoing expansion of the WiFi network footprint, our Digital Network Upgrade ("DNU"), broader offers of leading internet speeds, and the first phase of our TV Everywhere service, with the launches of Movie Central Go and NFL Sunday Ticket Go. A significant focus was also improved customer service with investment in our Canadian call centres, additional staffing, and customer care tool enhancements to ensure an exceptional customer experience."
Net income from continuing operations of $133 million or $0.28 per share for the quarter ended August 31, 2012 compared to $167 million or $0.37 per share for the same period last year. Net income from continuing operations for the annual period was $761 million or $1.62 per share compared to $559 million or $1.23 per share in the prior year. All periods included non-operating items which are more fully detailed in Management's Discussions and Analysis ("MD&A").(2) The prior annual 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 $91 million. Excluding the non-operating items, net income from continuing operations for the three and twelve month periods ended August 31, 2012 would have been $153 million and $760 million, respectively, compared to $153 million and $717 million in the same periods last year.
Revenue in the Cable division of $803 million and $3.19 billion for the current three and twelve month periods increased 2% and 3%, respectively, over the comparable periods. Operating income before amortization for the quarter of $396 million was comparable to last year. The annual operating income before amortization of $1.50 billion was down marginally from $1.51 billion in the prior year. Quarterly financial results improved compared to the second and third quarters with margins increasing from 44% to 47% to 49%, respectively, mainly due to improved revenues combined with operational cost controls and disciplined promotional activity.
Satellite revenue of $213 million and $844 million for the three and twelve month periods, respectively, was up 3% and 2%, respectively, compared to the same periods last year. Operating income before amortization for the current quarter and annual period of $77 million and $293 million improved 5% and 1%, respectively.
Revenue in the Media division was up 3% for the quarter to $217 million and operating income before amortization was $28 million compared to $12 million last year. For informational purposes, on a comparative basis to the prior year, Media revenues for the full twelve month period were down 2% and operating income before amortization was up 2%. The revenue decline was due to lower conventional advertising revenues while the improvement in operating income before amortization was due to lower programming costs year-over-year.
Brad Shaw continued, "As we enter the new fiscal year we expect growth in consolidated revenue and operating income before amortization. Capital investment is expected to marginally decline from 2012 spend levels as we continue to enhance our network, provide innovative product offerings, and launch the new Anik G1 satellite. Combined with higher cash taxes, we expect free cash flow to be comparable to fiscal 2012."
Mr. Shaw concluded, "The business is dynamic and continually evolving. Our growth oriented asset mix, solid investment grade balance sheet and committed employee base position us well to meet the challenges and leverage the opportunities in the year ahead delivering value to all of our stakeholders."
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 19 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 from continuing operations in Consolidated Overview in MD&A.
MANAGEMENT'S DISCUSSION AND ANALYSIS
AUGUST 31, 2012
October 25, 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 August 31, 2011 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 15 of the August 31, 2012 interim financial statements for a summary of the differences between the financial statements previously prepared under Canadian GAAP and to those under IFRS.
CONSOLIDATED RESULTS OF OPERATIONS
FOURTH QUARTER ENDING AUGUST 31, 2012
Selected Financial Highlights
(1) See definitions and discussion under Key Performance Drivers in MD&A.
(2) Funds flow from continuing operations is before changes in non-cash working capital balances related to continuing operations as presented in the unaudited interim Consolidated Statements of Cash Flows.
Subscriber Highlights
Consolidated Overview
Consolidated revenue of $1.21 billion for the current quarter compares to $1.18 billion for the same period last year. Revenue for the twelve month period of $5.0 billion improved 5.4% over last year. Both current periods benefitted from rate increases in the Cable and Satellite divisions while the annual period also included a full twelve months of revenue from Shaw Media.
Consolidated operating income before amortization for the three month period of $501 million improved 4.2% compared to the same period last year. The revenue related growth in the Cable and Satellite divisions was partially reduced by higher programming and employee related amounts. Both divisions also benefitted from lower sales and marketing related costs in the current quarter. Media was up due to higher revenues and lower programming costs. On an annual basis operating income before amortization improved 3.7% to $2.13 billion primarily due to the current period including a full twelve months of the Media division.
Net income from continuing operations was $133 million and $761 million for the three and twelve months ended August 31, 2012, respectively, compared to $167 million and $559 million for the same periods last year. Non-operating items affected net income in all periods. The prior quarterly period included a gain on the redemption of US$ senior notes while the prior annual period also included a charge of $139 million for the discounted value of the CRTC benefit obligation related to the Media acquisition, as well as business acquisition, integration and restructuring expenses of $91 million. Outlined below are further details on these and other operating and non-operating components of net income from continuing operations for each period.
The changes in net income from continuing operations are outlined in the table below.
(1) Net other costs and revenue includes gain on redemption of debt, CRTC benefit obligations, business acquisition, integration and restructuring expenses, gain on remeasurement of interests in equity investments, gain (loss) on derivative instruments, accretion of long-term liabilities and provisions, foreign exchange gain (loss) on unhedged long-term debt, equity income (loss) from associates and other gains as detailed in the unaudited interim Consolidated Statements of Income.
Basic earnings per share were $0.28 and $1.62 for the three and twelve months, respectively, compared to $0.37 and $1.23 in the same periods last year. In the current quarter, improved operating income before amortization of $20 million was offset by increases in amortization, net other costs and revenue, and income taxes, of $25 million, $22 million, and $12 million, respectively. The change in net other costs and revenue related to a gain realized in the prior year on the redemption of certain US$ senior notes and the higher taxes included an amount related to the indefinite postponement of previously enacted tax rate reductions in Ontario. The annual increase was primarily due to the favourable change in net other costs and revenue of $183 million along with improved operating income before amortization of $76 million and lower income taxes of $15 million. 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 due to the inclusion of Shaw Media for the full twelve months and the lower taxes included a tax recovery related to the resolution of certain tax matters with CRA. These improvements were partially reduced by increased amortization of $74 million.
Net income in the current quarter declined $115 million compared to the third quarter of fiscal 2012 driven by lower operating income before amortization of $66 million primarily due to seasonality in the Media business, and increased income taxes of $31 million. The higher taxes included an amount related to the indefinite postponement of previously enacted tax rate reductions in Ontario.
Free cash flow for the quarter and annual periods of $103 million and $482 million, respectively, compared to $49 million and $617 million in the same periods last year. The improvement in the current quarter was primarily due to reduced capital investment of $61 million as well as improved operating income before amortization. The lower annual amount was mainly due to higher capital investment of $92 million related to the strategic initiatives and customer equipment subsidies, as well as increased cash taxes of $42 million. Annual improved operating income before amortization of $76 million in the current period was offset by various items including higher CRTC benefit funding, interest, preferred share dividends, and non-controlling interest entitlements.
On July 11, 2012 an electrical fire occurred at Shaw Court in Calgary causing significant water damage to the building. No injuries resulted and full operations were resumed within a very short period of time. Also, within days, all 900 displaced employees were relocated to seven Shaw buildings across Calgary, mainly at the Shaw Campus. Due to the extent of the damage, the building is going through an extensive renovation, a portion of which will be funded through insurance recoveries. In the current quarter a loss of $26 million was reflected in Other gains and includes $6 million of costs in respect of restoration and recovery activities, including amounts incurred in the relocation of employees, and an asset write-down of $20 million related to the damages sustained to the building and its contents. Insurance recoveries will be included in Other gains as claims are approved. No insurance recoveries were recorded in the fourth quarter.
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 measure 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 measure to assess 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 share-based compensation expense, less cash amounts associated with funding the new and assumed CRTC benefit obligations 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. Free cash flow also includes changes in receivable related balances with respect to customer equipment financing transactions as a cash item, and is adjusted for cash funding of pension amounts net of pension expense. Dividends paid on the Company's Cumulative Redeemable Rate Reset Preferred Shares are also deducted.
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.
Free cash flow is calculated as follows:
(1) See definitions and discussion under Key Performance Drivers in MD&A.
(2) Restated to reflect changes in the calculation related to the pension adjustment and customer equipment financing.
CABLE
FINANCIAL HIGHLIGHTS
(1) See definitions and discussion under Key Performance Drivers in MD&A.
Operating Highlights
Cable revenue for the three and twelve months of $803 million and $3.19 billion improved 2.4% and 3.1%, respectively, over the comparable periods. Rate increases and customer growth in Internet and Digital Phone, including Business growth, partially offset by lower Basic cable subscribers, accounted for the improvement.
Operating income before amortization of $396 million for the quarter was consistent with the same period last year. Revenue related improvements and lower marketing and sales expenses were offset by higher programming amounts, related to new services and increased rates as contracts were renewed, and higher employee related amounts, mainly related to annual merit increases and employee growth to enhance customer service initiatives.
Operating income before amortization for the annual period declined modestly over the prior year. The revenue related improvement was offset by higher employee related amounts, programming costs, and various other expenses.
Revenue was up 1.1% compared to the third quarter of fiscal 2012 primarily due to rate increases, lower promotional activity and Digital Phone growth, the total of which was partially offset by lower Basic cable subscribers. Operating income before amortization improved $19 million over this same period due to the revenue related growth and certain lower expenses. Margin improved from 47.5% in the third quarter to 49.3%.
Total capital investment of $184 million in the current quarter decreased $39 million over the same period last year. Annual spend increased $101 million over the comparable period.
Success-based capital declined $16 million compared to the prior year quarter. The decrease was primarily due to lower video equipment rentals partially offset by higher subsidies on video equipment sales. For the annual period, success-based capital was up $43 million over last year. The increase was primarily due to higher subsidies on sales of HDPVRs resulting from increased volumes and lower customer pricing, and investment in DOCSIS 3.0 WiFi internet modems, partially offset by lower HDPVR rentals and phone modem purchases.
Investment in Upgrades and enhancement and Replacement categories combined decreased $18 million compared to the same quarter last year. The decline was due to lower spend on residential telephony infrastructure and licensing, reduced activity on core network capacity upgrades and lower vehicle purchases. Expenditures for the current annual period increased $38 million and included higher spending on hub upgrades, network electronics related to the DNU, Digital Phone infrastructure to support Business growth, as well as investment related to the strategic WiFi build.
Investment in Buildings and other declined $7 million over the comparable three month period while annual spend increased $8 million. The current quarter decrease was primarily due to lower spend on back office infrastructure replacement projects while the annual increase was mainly due to facility investment related to the Calgary data centre, customer service centres and new retail locations. The prior year also benefitted from proceeds from the sale of redundant real estate assets.
Spending in New housing development increased $2 million and $12 million, respectively, over the comparable three and twelve month periods mainly due to higher activity.
Shaw recently introduced content offerings for its TV Everywhere application with the introduction of Shaw Go. The Movie Central Go app for Apple devices provides access to current and library content for Shaw customers who subscribe to Movie Central programming, including HBO Canada titles. The app provides several features that enhance the user experience, including intelligent streaming, which provides the most optimal video quality based on Internet connection speed, and video bookmarking, which allows customers to stop and resume video playback at their convenience. The NFL Sunday Ticket Go app provides Shaw NFL Sunday Ticket subscribers with live broadcasts of up to 14 NFL regular season games along with interactive features, such as instant replay and play-by-play summaries. Shaw customers have the added benefit of being able to access content on Shaw's WiFi network.
Subscriber Statistics
(1) Represents primary and secondary lines on billing plus pending installs.
SATELLITE (DTH and Satellite Services)
FINANCIAL HIGHLIGHTS
(1) See definitions and discussion under Key Performance Drivers in MD&A.
(2) Net of the profit on the sale of satellite equipment as it is viewed as a recovery of expenditures on customer premise equipment.
Operating Highlights
Revenue of $213 million and $844 million for the three and twelve month periods, respectively, was up 2.9% and 2.1% over the comparable periods last year. The improvement was primarily due to rate increases. Operating income before amortization of $77 million and $293 million for the quarter and annual period improved 5.5% and 1.4%, respectively, over the same periods last year.
Operating income before amortization improved $1 million over the third quarter of fiscal 2012 primarily due to rate increases partially offset by increased sales and marketing expenses.
Total capital investment of $27 million and $94 million for the three and twelve month periods, respectively, decreased over the same periods last year. The decline was primarily due to a deposit for the Anik G1 satellite included in the prior year periods partially offset by higher investment in the current periods on satellite related ground equipment. The launch of the satellite, originally expected to occur this fall, has been delayed as a result of issues experienced on an unrelated satellite launch, and Anik G1 is now expected to launch early in calendar 2013.
In June, Shaw Direct started offering a video on demand service using adaptive streaming technology through the satellite receiver. This new internet based service currently has over 3,000 movie and TV titles available. In addition, with their television subscription package, Shaw Direct customers now have access to the Shaw Go Apps, including the recently launched Movie Central Go and NFL Sunday Ticket Go.
Subscriber Statistics
(1) Including seasonal customers who temporarily suspend their service.
MEDIA
FINANCIAL HIGHLIGHTS
(1) See definitions and discussion under Key Performance Drivers in MD&A.
Operating Highlights
Revenue and operating income before amortization for the quarter were $217 million and $28 million, respectively, compared to $210 million and $12 million last year. Revenue for the quarter was up 3.3% due to higher specialty advertising and subscriber revenues. Operating income improved due to the revenue growth combined with lower programming and other expenses.
For informational purposes, on a comparative basis to the full twelve months ended August 31, 2011, Media revenues were down 2% reflecting softness in the advertising market as a result of continued economic uncertainty. Operating income before amortization increased 2%, as lower programming costs in 2012 more than offset the reduced advertising revenues.
Compared to the third quarter of fiscal 2012, revenue and operating income before amortization decreased $78 million and $86 million, respectively. The decreases were primarily due to the cyclical nature of the Media business, with higher advertising revenues in the first and third quarters driven by the launch of season premieres in the first quarter and season finales and mid season launches in the third quarter. The fourth quarter is typically the lowest quarter of the fiscal year as it spans the summer months when viewership is generally lower.
During the quarter, Global delivered solid programming results led by the strength of Big Brother, Hotel Hell and Rookie Blue. The Media specialty portfolio also led in the channel rankings in the adult 25-54 category, with 4 of the Top 10 analog services, including History as the top entertainment network in Canada, and 5 of the Top 10 digital services, with National Geographic as the leading digital channel. In the quarter Shaw Media launched Lifetime and H2. National Geographic Wild delivered strong audience ratings in the first full quarter of operation.
In News, Global is in the number one position in all three major western markets with ratings up for the majority of all news programs. Global Toronto News Hour moved into the number two position and the station also delivered solid audience growth in the News Hour Final. The West Block with Tom Clark continued to perform well, beginning its second season as Canada's most watched political talk show.
The conventional fall programming premiered throughout the month of September with a solid returning line-up and new drama programming including Vegas, Chicago Fire, Last Resort and Elementary. Shaw Media also added several new comedies to the Fall schedule including Go On and Guys With Kids.
Capital investment continued on various projects and included upgrading production equipment, infrastructure and facility investments.
OTHER INCOME AND EXPENSE ITEMS
Amortization
Amortization of deferred equipment revenue and deferred equipment costs increased over the comparative periods due to the sales mix of equipment and changes in customer pricing on certain equipment.
Amortization of property, plant and equipment, intangibles and other increased over the comparable periods as the amortization of new expenditures and inclusion of the Media division for the full twelve months in the current year exceeded the impact of assets that became fully depreciated.
Amortization of financing costs and Interest expense
Interest expense decreased over the comparative quarter primarily due to a lower average debt level. As part of the Media acquisition in October 2010, the Company assumed US $338 million senior unsecured notes of which US $56 million were repurchased in December 2010 and the remaining US $282 million were redeemed in the fourth quarter of 2011.
Gain on redemption of debt
During the prior year, the Company repurchased and cancelled US $56 million of the Media unsecured notes in the second quarter and redeemed the remaining US $282 million in the fourth quarter. As a result, the Company recorded gains of $10 million and $23 million in the second and fourth quarters, respectively. The $33 million gain resulted from recognizing the remaining unamortized acquisition date fair value adjustment of $57 million, partially reduced by repurchase and redemption premiums totaling $19 million and the write-off of the embedded derivative instrument associated with the early prepayment option of $5 million.
CRTC benefit obligations
As part of the CRTC decisions approving the acquisition of Mystery and The Cave, during the third quarter of 2012, and the Media acquisition during the first quarter of 2011, the Company is required to contribute approximately $2 million and $180 million, respectively, in new benefits to the Canadian broadcasting system over seven years. The fair value of the obligations of $2 million and $139 million have been recorded in the income statement.
Business acquisition, integration and restructuring expenses
During the three and twelve months ended August 31, 2011, the Company recorded $1 million and $91 million, respectively, related to the Media acquisition 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 business and increasing organizational effectiveness for future growth as well as package costs for the former CEO.
Gain on remeasurement of interests in equity investments
The Company recorded a $6 million gain in respect of a remeasurement to fair value of the Company's 50% interest in Mystery and 49% interest in The Cave which were held prior to the acquisition on May 31, 2012. The fair value of the Company's equity interest in these specialty channels held prior to the acquisition was $19 million compared to a carrying value of $13 million.
Gain (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. In addition, the Media senior unsecured notes had a variable prepayment option which represented an embedded derivative that was accounted for separately at fair value until the Company gave notice of redemption in the fourth quarter of 2011. The fluctuation in amounts recorded in 2012 compared to 2011 is due to a reduction in the number of outstanding contracts as well as the amounts recorded in respect of the embedded derivative in the prior year.
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.
Foreign exchange gain (loss) on unhedged long-term debt
In conjunction with the Media 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. A portion of the senior unsecured notes were repurchased during the second quarter of 2011 and the Company redeemed the remaining notes in the fourth quarter of 2011. As a result of fluctuations of the Canadian dollar relative to the US dollar, a foreign exchange gain of $17 million was recorded for the twelve months ended August 31, 2011.
Equity income (loss) from associates
During the first quarter of the prior year, 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. The Company also records equity income (loss) in respect of interests in several specialty channels.
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 minor investments, and the Company's share of the operations of Burrard Landing Lot 2 Holdings Partnership. In the fourth quarter of the current year, the category also includes a loss of $26 million related to the electrical fire and resulting water damage to Shaw Court as well as a pension curtailment gain of $25 million. The loss of $26 million includes $6 million of costs in respect of restoration and recovery activities, including amounts incurred in the relocation of employees, and an asset write-down of $20 million related to the damages sustained to the building and its contents. Insurance recoveries are expected and amounts will be included in Other gains as claims are approved. No insurance recoveries were recorded in the fourth quarter. The pension curtailment gain arose due to a plan amendment to freeze base salary levels.
Income taxes
Income taxes were higher in the current quarter and included an amount related to the indefinite postponement of previously enacted tax rate reductions. Taxes declined on a year-over-year basis due to tax recoveries in the current year related to resolution with CRA on certain tax matters.
Loss from discontinued operations
During the fourth quarter of 2011, the Company discontinued further construction of its traditional wireless network and accordingly, all traditional wireless activities in the comparative year have been classified as discontinued operations.
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 August 31, 2012 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 declined $31 million primarily due to decreases in cash of $16 million, assets held for sale of $15 million, and accounts receivable of $10 million, the total of which was partially offset by increased inventories of $5 million and other current assets of $7 million. 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 and accounts receivable declined due to timing of collection of miscellaneous receivables. Inventories were higher due to timing of equipment purchases while other current assets were up primarily as a result of increases in program rights.
Property, plant and equipment increased $42 million as current year capital investment exceeded amortization and the asset write-down related to the electrical fire and resulting water damage at Shaw Court.
Other long-term assets were up $73 million primarily due to an increase in deferred equipment costs and related customer equipment financing receivables.
Intangibles increased $63 million due to higher program rights and advances and the broadcast licenses recorded on the acquisition of Mystery and The Cave. Program rights and advances (current and noncurrent) increased as advances and additional investment in acquired rights exceeded the amortization for the current year. The increase in goodwill of $3 million is due to the aforementioned acquisition of Mystery and The Cave.
Current liabilities were up $250 million due to increases in income taxes payable of $32 million and current portion of long-term debt of $450 million partially offset by decreases in accounts payable and accrued liabilities of $67 million, other current liability of $161 million and derivative instruments of $7 million. Income taxes payable increased due to the current year 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. Accounts payable and accrued liabilities decreased due to lower trade and other payables primarily in respect of timing of payment of capital expenditures and inventory and a reduction in the current portion of the CRTC benefit obligations. The other liability decreased due to settlement of previously amended cross-currency interest rate agreements and derivative instruments decreased due to settlement of contracts.
Other long-term liabilities were up $45 million due to an increase in employee benefit plans of $71 million, primarily as a result of actuarial losses recorded in the current year, partially reduced by a decrease in CRTC benefit obligations of $22 million.
Deferred credits were up $5 million due to an increase in deferred equipment revenue partially offset by amortization of deferred IRU revenue.
Deferred income tax liabilities, net of deferred income tax assets, decreased $63 million due to the current year recovery.
Shareholders' equity increased $357 million primarily due to increases in share capital of $117 million, retained earnings of $291 million and non-controlling interests of $9 million partially offset by an increase in accumulated other comprehensive loss of $64 million. Share capital increased due to the issuance of 5,972,349 Class B Non-Voting Shares under the Company's option plan and Dividend Reinvestment Plan ("DRIP"). As of October 15, 2012, share capital is as reported at August 31, 2012 with the exception of the issuance of a total of 550,999 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 year earnings of $728 million partially offset by dividends of $437 million while non-controlling interests increased as their share of earnings exceeded the distributions declared during the year. Accumulated other comprehensive loss increased due to the actuarial losses recorded on employee benefit plans.
LIQUIDITY AND CAPITAL RESOURCES
In the current year, the Company generated $482 million of free cash flow. Shaw used its free cash flow along with cash of $16 million, proceeds on issuance of Class B Non-Voting Shares of $17 million and other net items of $25 million to pay common share dividends of $318 million, fund the $162 million on settlement of amended cross-currency interest rate agreements, invest an additional net $42 million in program rights and purchase the remaining interests in two specialty channels for $18 million.
During the second quarter, the Company entered into a five-year $1 billion bank credit facility which includes a revolving term facility to a maximum of $50 million and matures in January 2017. The credit facility has a feature whereby the Company may request an additional $500 million of borrowing capacity so long as no default or event of default has occurred and is continuing or would occur as a result of the increased borrowings. No lender has any obligation to participate in the requested increase unless it agrees to do so at its sole discretion.This facility replaced the prior credit and operating loan facilities which were scheduled to mature in May 2012. The new facility will be used for general corporate purposes.
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. No shares have been repurchased during the current year.
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 $98 million during the twelve months ending August 31, 2012.
Based on available credit facilities and forecasted free cash flow, the Company expects to have sufficient liquidity to fund operations and obligations including maturing debt during the upcoming 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 decreased over the comparative twelve month period as higher operating income before amortization adjusted for non-cash program rights expenses in the current year and charges in the prior year for termination of swap contracts and business acquisition, integration and restructuring expenses were more than offset by the combined impact of the settlement of the amended cross-currency interest rate agreements as well as increased current income taxes, program rights purchases and CRTC benefit obligation funding in the current year. The net change in non-cash working capital balances related to continuing operations fluctuated over the comparative periods due to fluctuations in accounts receivable and the timing of payment of current income taxes payable and accounts payable and accrued liabilities.
Investing Activities
The cash used in investing activities decreased over the comparable quarter due to lower cash outlays for capital expenditures and fluctuations in inventory levels. Cash requirements for investing activities decreased over the comparable twelve month period due to amounts paid to complete the Media business acquisition in the first quarter of 2011 and fluctuations in inventory levels partially offset by the higher capital expenditures in the current year.
Financing Activities
The changes in financing activities during the comparative periods were as follows:
SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION
(1) See definition and discussion under Key Performance Drivers in MD&A.
(2) Net income attributable to both common shareholders and non-controlling interests.
Generally, revenue and operating income before amortization have grown quarter-over-quarter mainly due to customer growth and rate increases with the exception of the fourth quarters of 2012 and 2011 and second quarter of 2012. In the second quarter of 2012, revenue and operating income before amortization decreased by $48 million and $73 million, respectively due to the seasonality of the Media business with higher revenues in the first quarter driven by the fall launch of season premieres and high demand as well as lower operating income before amortization in the Cable division. Operating expenses increased in the second quarter which included employee related costs, mainly related to bringing the new customer service centres on line, as well as higher marketing, sales and programming costs. The fourth quarters of 2011 and 2012 were both impacted by the cyclical nature of the Media business with lower advertising revenues in the summer months. Accordingly, in the fourth quarter of 2011, revenue and operating income before amortization declined $104 million and $105 million, respectively, while in the fourth quarter of 2012, revenue and operating income before amortization declined $68 million and $66 million, respectively. The impact of the Media business in the fourth quarter of 2012 was partially offset by improved operating income before amortization in the Cable division.
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. In the fourth quarter of 2012, net income decreased by $115 million, primarily due to lower operating income before amortization of $66 million and increased income tax expense of $31 million. The fourth quarter also included a loss of $26 million in respect of the electrical fire at the Company's head office offset by a pension curtailment gain of $25 million. In the third quarter of 2012, net income increased by $70 million due to higher operating income before amortization of $74 million and lower amortization of $9 million partially offset by increased income tax expense of $17 million. In the second quarter of 2012, net income decreased by $24 million due to a decline in operating income before amortization of $73 million partially offset by lower income tax expense of $53 million. 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 first 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 increased $153 million in the second quarter of 2011 due to the impact of the CRTC benefit obligation of $139 million and acquisition, integration and restructuring costs of $58 million recorded in the first quarter and higher operating income before amortization and foreign exchange gain on unhedged long-term debt in the second quarter, 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 $83 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. 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 unaudited 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 confirmed that Canadian publicly accountable enterprises would be required to adopt IFRS, as issued by the International Accounting Standards Board, for fiscal periods beginning on or after January 1, 2011. These standards required the Company to begin reporting under IFRS in the first quarter of fiscal 2012 with comparative data for the prior year. Refer to note 15 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 and as at and for the three and twelve months 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.
2013 GUIDANCE
With respect to 2013 guidance, the Company anticipates modest growth in consolidated revenue and operating income before amortization. During fiscal 2013 the Company plans to continue to enhance its network, provide innovative product offerings, and launch the Anik G1 satellite and expects consolidated capital investment to decline marginally from 2012 levels. Combined with increased cash tax amounts, the Company expects to deliver consolidated free cash flow comparable to 2012.
Certain important assumptions for 2013 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; 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 conditions, interest and exchange rates, technology deployment, content and equipment costs, industry structure, conditions 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 and business conditions; changes in the competitive environment in the markets in which Shaw operates and from the development of new markets for emerging technologies; industry trends and other changing conditions in the entertainment, information and communications industries; Shaw's ability to execute its strategic plans; opportunities that may be presented to and pursued by Shaw; changes in laws, regulations and decisions by regulators that affect Shaw or the markets in which it operates; Shaw's status as a holding company with separate operating subsidiaries; and other factors referenced in this report under the heading "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 Company provides certain financial guidance for future performance as the Company 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.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(unaudited)
See accompanying notes
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
See accompanying notes
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
See accompanying notes
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
See accompanying notes
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
See accompanying notes
Shaw Communications Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
August 31, 2012 and 2011
(all amounts in millions of Canadian dollars, except share and 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 15.
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 16 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 15.
The condensed interim consolidated financial statements of the Company for the three and twelve months ended August 31, 2012, were authorized for issue in accordance with a resolution of the Board of Directors on October 25, 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 including Mystery Partnership which became a wholly-owned subsidiary on May 31, 2012 (see note 4).
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 revolving term 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 stat
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