Strong Canadian Results for COGECO Despite a Non-Cash Impairment in its European Cable Operations Intangible Assets
MONTREAL, QUEBEC, Apr 9, 2009 (Marketwire via COMTEX) --
Company: Cogeco Inc. (CGO)
Today, COGECO Inc. (TSX:CGO) ("COGECO" or the "Company") announced its financial results for the second quarter and first six months of fiscal 2009, ended February 28, 2009.
For the second quarter and first six months of fiscal 2009:
- Consolidated revenue increased by 14.7% to $311.8 million, and by 16.5% to $620.2 million, respectively;
- Consolidated operating income from continuing operations before amortization(1) grew by 15.6% to reach $126.7 million, and by 19.9% to reach $251.4 million;
- In the second quarter of fiscal 2009, the cable subsidiary recorded a non-cash impairment loss of its investment in Cabovisao in the amount of $399.6 million as a result of recurring competitive pressure resulting in subscriber losses that are significantly more important than originally anticipated. Net of related income taxes and non- controlling interest, the impairment loss amounted to $124 million;
- Consolidated net loss amounted to $115.3 million in the second quarter, compared to net income of $15.9 million for the same period of the prior year. Excluding the impairment loss described above, and the $7.9 million income tax adjustment related to the reduction of federal enacted income tax rates, net of non- controlling interest, and a loss from discontinued operations of $0.4 million in the second quarter of the prior year(1) , consolidated net income would have amounted to $8.7 million for the second quarter of 2009, compared to $8.4 million in the prior year, an increase of $0.3 million, or 3%;
- Consolidated net loss amounted to $104.2 million for the first six months, compared to net income of $5.9 million in the prior year. Excluding the impairment loss described above, the $7.9 million income tax adjustment related to the reduction of federal enacted income tax rates, net of non-controlling interest, and a loss from discontinued operations of $18.1 million in the first six months of the prior year, consolidated net income would have amounted to $19.7 million for the first half of fiscal 2009, compared to $16.1 million in the prior year, an increase of $3.7 million, or 22.7%;
- Free cash flow(1) reached $32.1 million for the quarter and $53.9 million for the first six months, increases of 65.6% and 27.2% over the same periods of the prior year;
- In the cable sector, revenue-generating units ("RGU")(2) grew by 25,626 and 78,340 net additions in the quarter and first six months, for a total of 2,795,214 RGU at February 28, 2009.
"Our results in the second quarter rest on the solid performance of our Canadian operations both in radio and cable. We are very pleased with the performance of the radio activities of COGECO. RYTHME FM continues to lead in the Montreal market in the winter BBM survey and to grow in its other markets. In the Canadian cable operations, we have maintained our focus and increased the number of RGU by 47,577 units in the quarter, for total net additions of 113,040 RGU so far this year. Our commercial activities, the results of which are in line with our expectations, continue to constitute a wonderful growth opportunity for Cogeco Cable as shown by the 10-year, $39 million deal with the Toronto District School Board announced in December by Cogeco Data Services. However, in our European cable operations, Cabovisao's competitive position continued to deteriorate in the second quarter due to the unfavourable economic climate and recurring intense customer promotions and advertising initiatives from competitors in the Portuguese market during the latter part of the second quarter. In accordance with current accounting standards, management considers that this situation, as evidenced by the RGU and revenue decline, is more significant and persistent than expected, resulting in a decrease in the value of Cogeco Cable's investment in the Portuguese subsidiary. Consequently, Cogeco Cable recorded a non-cash impairment loss of $399.6 million on the net value of the assets acquired. Cogeco Cable is in the process of implementing new marketing and other operating initiatives to improve the results of the European operations", declared Louis Audet, President and CEO of COGECO.
(1) The indicated terms do not have standard definitions prescribed by
Canadian Generally Accepted Accounting Principles ("GAAP") and
therefore, may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-GAAP financial
measures" section of the Management's discussion and analysis.
(2) Represents the sum of Basic Cable, High Speed Internet (HSI), Digital
Television and Telephony service customers.
FINANCIAL HIGHLIGHTS
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Quarters ended Six months ended
($000, except February February February February
percentages 28, 29, 28, 29,
and per 2009 2008(1) Change 2009 2008(1) Change
share data) $ $ % $ $ %
--------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue 311,825 271,894 14.7 620,200 532,149 16.5
Operating
income from
continuing
operations
before
amorti-
zation(2) 126,663 109,523 15.6 251,367 209,697 19.9
Operating
income from
continuing
operations 59,878 53,177 12.6 120,519 100,312 20.1
Impairment of
goodwill and
intangible
assets 399,648 - - 399,648 - -
Income (loss)
from
continuing
operations (115,291) 16,315 - (104,238) 23,971 -
Loss from
discontinued
operations - (425) - - (18,057) -
Net income
(loss) (115,291) 15,890 - (104,238) 5,914 -
Net income
excluding the
impairment
loss, the
income tax
adjustment
and the
loss from
discontinued
operations(2) 8,660 8,406 3.0 19,713 16,0622 22.7
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Cash flow from
operating
activities
from
continuing
operations 120,480 92,942 29.6 150,950 139,546 8.2
Cash flow from
operations
from
continuing
operations(2) 100,351 85,374 17.5 195,977 166,751 17.5
Capital
expenditures
and increase
in deferred
charges 68,262 66,000 3.4 142,117 124,403 14.2
Free cash
flow(2) 32,089 19,374 65.6 53,860 42,348 27.2
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Earnings (loss)
per share
Basic
Income
(loss)
from
continuing
operations (6.89) 0.98 - (6.23) 1.44 -
Loss from
discontinued
operations - (0.03) - - (1.08) -
Net income
(loss) (6.89) 0.95 - (6.23) 0.35 -
Net income
excluding
the
impairment
loss, the
income tax
adjustment
and the
loss from
discontinued
operations(2) 0.52 0.50 4.0 1.18 0.96 22.9
Diluted
Income (loss)
from
continuing
operations (6.89) 0.97 - (6.23) 1.43 -
Loss from
discontinued
operations - (0.03) - - (1.08) -
Net income
(loss) (6.89) 0.95 - (6.23) 0.35 -
Net income
excluding the
impairment
loss, the
income tax
adjustment
and the loss
from
discontinued
operations(2) 0.52 0.50 4.0 1.18 0.96 22.9
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(1) Certain comparative figures have been reclassified to conform to the
current year's presentation. Financial information for the previous
year has been restated to reflect the presentation of foreign exchange
gains or losses as financial expense instead of operating costs.
(2) The indicated terms do not have standardized definitions prescribed by
Canadian Generally Accepted Accounting Principles ("GAAP") and
therefore, may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-GAAP financial
measures" section of the Management's discussion and analysis.
FORWARD-LOOKING STATEMENTS
Certain statements in this press release may constitute forward-looking information within the meaning of securities laws. Forward-looking information may relate to COGECO'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 Company'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 believes are reasonable as of the current date. While management considers these assumptions to be reasonable based on information currently available to the Company, they may prove to be incorrect. The Company cautions the reader that the current adverse economic conditions make 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 Company's expectations. It is impossible for COGECO to predict with certainty the impact that the current economic downtown 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 Company's 2008 annual Management's Discussion and Analysis (MD&A) that could cause actual results to differ materially from what COGECO 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 Company's control. Therefore, future events and results may vary significantly from what management currently foresees. The reader should not place undue importance on forward-looking information and should not rely upon this information as of any other date. While management may elect to, the Company is under no obligation (and expressly disclaims any such obligation), and does not undertake to update or alter this information before the next quarter.
This analysis should be read in conjunction with the Company's consolidated financial statements, and the notes thereto, prepared in accordance with Canadian GAAP and the MD&A included in the Company's 2008 Annual Report. Throughout this discussion, all amounts are in Canadian dollars unless otherwise indicated.
MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)
CORPORATE STRATEGIES AND OBJECTIVES
COGECO Inc.'s ("COGECO" or the "Company") objectives are to maximize shareholder value by increasing profitability and ensuring continued growth. The strategies employed to reach these objectives, supported by tight controls over costs and business processes, are specific to each sector. For the cable sector, sustained corporate growth and the continuous improvement of networks and equipment are the main strategies used. The radio activities focus on continuous improvement of programming in order to increase market share, and, thereby, profitability. COGECO uses growth of revenue and operating income before amortization(1), free cash flow(1) and revenue-generating units ("RGU")(2) growth in order to measure its performance against these objectives for the cable sector. Below are the Company's recent achievements in furthering the corporate objectives.
(1) The indicated terms do not have standardized definitions prescribed by
Canadian Generally Accepted Accounting Principles ("GAAP") and
therefore, may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-GAAP financial
measures" section
(2) Represents the sum of Basic Cable, High Speed Internet (HSI), Digital
Television and Telephony service customers.
Tight control over costs and business processes
- For the first six months of fiscal 2009, the Company's operating costs increased over last year by 14.4% compared to a revenue growth of 16.5%;
- The Company's Portuguese subsidiary, Cabovisao, continued to improve its business processes, and at the end of the second quarter, reinforced controls over its doubtful accounts;
- The design of internal controls over financial reporting as per National Instrument 52-109 is still ongoing. As discussed in the 2008 annual MD&A, the Company had identified certain material weaknesses in the design of internal controls over financial reporting and has been working to improve the design and efficiency of internal controls on some significant processes during the quarter. The documentation and remediation of key internal controls are progressing normally.
Cable sector
Sustained corporate growth
Canadian operations
- Digital Television service:
- During the second quarter, the following Digital and High Definition
("HD") Television services were launched:
- TSN2 HD,Teletoon Retro and Sportsnet East HD in Quebec.
- Telephony service:
- During the second quarter, the Telephony service was launched in the
following cities:
- Callander, Ingleside, Long Sault and Lancaster, Ontario;
- Daveluyville, Chambord, Desbiens, Lac Bouchette, Metabetchouan,
Normandin, St-Ferdinand- d'Halifax, St-Gedeon, Tring Jonction, Amqui,
Batiscan, Causapscal, Lac-au-Saumon, St-Stanislas, St-Ulric, Ste-
Anne-de-la-Perade, Sayabec et Val-Brillant, Quebec.
- High Speed Internet service:
- Launch of a new High Speed Internet ("HSI") package, HSI Lite Plus, in
Ontario and in Quebec with download speeds of up to 3 Mbps and a
monthly load bit capacity of 20 GB.
- Cogeco Data Services:
- During the second quarter, announcement of a 10-year, $39 million
contract with the Toronto District School Board.
European operations
- Bundled offers:
- Cabovisao - Televisao por Cabo, S.A. ("Cabovisao") realigned some of
its bundle offers for certain customers and is currently assessing
improvements to its retention strategies;
- Digital Television service:
- Continued deployment of Cabovisao's Digital Television service;
- Launch of SET channel, Sony Entertainment, Animax, Benfica TV, Disney
Channel and Disney Cinemagic;
- Launch of a new HD Set Top Box with Digital Video recording
capabilities (HD + DVR).
- High Speed Internet service:
- During the second quarter, Cabovisao ceased charging for excess
consumption for HSI customers.
Continuous improvement of networks and equipment
- During the first six months of fiscal 2009, the Company invested
approximately $48.3 million in its cable infrastructure including head-
ends and upgrades and rebuilds.
Other
- Winter's BBM Canada survey conducted with the Portable People Meter
("PPM") shows that RYTHME FM has maintained its leadership position with
audiences in the adult and female categories in the Montreal market. The
other RYTHME FM stations and the 93.3 station in the Quebec City continue
to expand their audiences.
Discontinued Operations
In October 2007, the Board of Directors of TQS, an indirect subsidiary of the Company, engaged CIBC World Markets to advise on and assess strategic options for the TQS network in the face of financial difficulties. On December 18, 2007, the Quebec Superior Court issued an order under the Companies' Creditors Arrangement Act (Canada) protecting TQS, its subsidiaries and its parent 3947424 Canada Inc. ("TQS Group") from claims by their creditors. On June 26, 2008, the Canadian Radio-television and Telecommunications Commission ("CRTC") approved the proposed transfer of ownership and control of TQS to Remstar Corporation Inc. ("Remstar") and on August 29, 2008, the transfer of ownership and control of TQS to Remstar was completed, which allowed the new ownership group to pursue the broadcasting activities of TQS.
Effective December 18, 2007, the Company has ceased to consolidate the financial statements of the TQS Group. Accordingly, the results of operations and cash flows for the three and six month periods ended February 29, 2008, have been reclassified as discontinued operations.
The results of the discontinued operations were as follows:
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Quarters ended Six months ended
February February February February
28, 29, 28, 29,
2009 2008 2009 2008
($000) $ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue - 5,741 - 38,499
Operating costs - 5,865 - 35,822
--------------------------------------------------------------------------
Operating income (loss)
before amortization - (124) - 2,677
Amortization - 248 - 1,364
--------------------------------------------------------------------------
Operating income (loss) - (372) - 1,313
Financial expense - 53 - 291
Impairment of assets - - - 30,298
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Loss before income taxes
and the following items - (425) - (29,276)
Income taxes - - - -
Non-controlling interest - - - (11,219)
--------------------------------------------------------------------------
Loss from discontinued operations - (425) - (18,057)
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The cash flows of the discontinued operations were as follows:
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Quarters ended Six months ended
February February February February
28, 29, 28, 29,
2009 2008 2009 2008
($000) $ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Cash flow from
operating activities - 1,770 - (3,973)
Cash flow from
investing activities - (48) - (133)
Cash flow from
financing activities - (1,722) - 4,106
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Cash flow from
discontinued operations - - - -
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Continuing Operations
RGU growth in the cable sector
During the first six months ended February 28, 2009, the consolidated number of RGU increased by 78,340, or 2.9%, to reach 2,795,214 RGU, on target to attain the Company's RGU growth projections of 100,000 net additions issued on October 29, 2008 and revised on April 8, 2009, which represents approximately 3.7%, for the fiscal year ending August 31, 2009. Please consult the "Fiscal 2009 financial guidelines" section for further details.
Revenue and operating income from continuing operations before amortization growth
For the second quarter of fiscal 2009, revenue increased by $39.9 million, or 14.7%, to reach $311.8 million while operating income before amortization from continuing operations grew by $17.1 million, or 15.6%, to reach $126.7 million. For the first six months of the year, revenue increased by $88.1 million, or 16.5%, to reach $620.2 million while operating income before amortization from continuing operations grew by $41.7 million, or 19.9%, to reach $251.4 million. Due to the difficult environment in the Portuguese cable market, management has revised its guidelines for fiscal 2009 and now expects that revenue should reach $1,238 million, a decrease of $5 million compared to its original guidelines and operating income before amortization should decrease by $8 million to reach $505 million. Please consult the "Fiscal 2009 financial guidelines" section for further details.
Free cash flow
In the second quarter of fiscal 2009, COGECO generated free cash flow of $32.1 million compared to $19.4 million for the same period last year. For the six month period ended February 28, 2009, COGECO generated free cash flow of $53.9 million compared to $42.3 million in the prior year. These free cash flow increases resulted mainly from the cable sector and are attributable to an increase in cash flow from operations, resulting primarily from the improvement of the Company's operating income before amortization, partly offset by an increase in capital expenditures and by the impact of the rapid appreciation of the US dollar over the Canadian dollar in the first six months of the year. Due to the difficult environment in the Portuguese market of the cable segment partly offset by the appreciation of the Euro currency over the Canadian dollar, management has revised downwards its guidelines for fiscal 2009, and now expects free cash flow to reach $85 million for fiscal 2009, a decrease of $10 million compared to the original guidelines issued. Please consult the "Fiscal 2009 financial guidelines" section for further details.
IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS
In the second quarter of fiscal 2009, the competitive position of Cogeco Cable's subsidiary Cabovisao in the Iberian Peninsula further deteriorated due to the continuing unfavourable economic climate and recurring intense customer promotions and advertising initiatives from competitors in the Portuguese market at the end of the second quarter. Please refer to the "Cable sector" section for further details. In accordance with current accounting standards, management considers that the continued RGU and local currency revenue decline are more significant and persistent than expected, resulting in a decrease in the value of Cogeco Cable's investment in the Portuguese subsidiary. As a result, Cogeco Cable tested goodwill and all long-lived assets for impairment at February 28, 2009.
Goodwill has to be tested for impairment using a two step approach. The first step consists of determining whether the fair value of the reporting unit exceeds the net carrying amount of that reporting unit, including goodwill. In the event that the net carrying amount exceeds the fair value, a second step is performed in order to determine the amount of the impairment loss. Cogeco Cable has completed its impairment tests on goodwill and has concluded that goodwill was impaired at February 28, 2009. As a result, a non-cash impairment loss of $339.2 million was recorded in the second quarter. Fair value of the reporting unit was determined using the discounted cash flow method. Future cash flows are based on internal forecasts and consequently, considerable management judgement is necessary to estimate future cash flows. Significant changes in assumptions could result in further impairments of goodwill.
Intangible assets with definite lives, such as customer relationships, must be tested for impairment by comparing the carrying amount of the asset or group of assets to the expected future undiscounted cash flow to be generated by the asset or group of assets. Accordingly, Cogeco Cable has completed its impairment test on customer relationships at February 28, 2009, and has determined that the carrying value of customer relationships exceeds its fair value. As a result, a non-cash impairment loss of $60.4 million was recorded in the second quarter.
The impairment loss affected the Company's goodwill and customer relationship assets balances as follows at February 28, 2009:
-------------------------------------------------
-------------------------------------------------
($000) $
-------------------------------------------------
(unaudited)
Goodwill 339,206
Customer relationships 60,442
Future income taxes (16,018)
-------------------------------------------------
Impairment loss net of
related income taxes 383,630
Non-controlling interest (259,679)
-------------------------------------------------
Impairment loss net of related income
taxes and non-controlling interest 123,951
-------------------------------------------------
-------------------------------------------------
OPERATING RESULTS - CONSOLIDATED OVERVIEW
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Quarters ended Six months ended
February February February February
28, 29, 28, 29,
($000, except 2009 2008(1) Change 2009 2008(1) Change
percentages) $ $ % $ $ %
--------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue 311,825 271,894 14.7 620,200 532,149 16.5
Operating
costs 185,162 162,371 14.0 368,833 322,452 14.4
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Operating
income from
continuing
operations
before
amortization 126,663 109,523 15.6 251,367 209,697 19.9
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Operating
margin(2) 40.6% 40.3% 40.5% 39.4%
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(1) Certain comparative figures have been reclassified to conform to the
current year's presentation. Financial information for the previous
year has been restated to reflect the presentation of foreign exchange
gains or losses as financial expense instead of operating costs.
(2) Operating margin does not have a standardized definition prescribed by
Canadian GAAP and therefore, may not be comparable to similar measures
presented by other companies. For more details, please consult the
"Non-GAAP financial measures" section.
Revenue
Fiscal 2009 second-quarter revenue improved, mainly in its cable sector, by $39.9 million, or 14.7%, to reach $311.8 million, and for the six month period, by $88.1 million, or 16.5%, to reach $620.2 million. Cable revenue, driven by an increased number of RGU combined with rate increases and the acquisition of MaXess Networx(R), FibreWired Burlington Hydro Communications and Cogeco Data Services (the "recent acquisitions") in the second half of fiscal 2008 in Canadian operations, and by the appreciation of the Euro over the Canadian dollar in European operations, went up by $39.8 million, or 15%, and by $87.4 million, or 16.9%, respectively, in the second quarter and first six months of fiscal 2009.
Operating costs
Operating costs increased by $22.8 million, or 14%, to reach $185.2 million in the second quarter and by $46.4 million, or 14.4%, to reach $368.8 million in the first half of fiscal 2009 compared to the prior year. The increase in operating costs was mainly attributable to the cable sector, due to the servicing of additional RGU and the impact of the recent acquisitions in Canada, and in Europe due to the appreciation of the Euro over the Canadian dollar and an increase in the level of uncollectible customer accounts.
Operating income from continuing operations before amortization
Operating income from continuing operations before amortization grew, essentially by its cable segment, by $17.1 million, or 15.6%, to reach $126.7 million in the second quarter of fiscal 2009 compared to the corresponding period of the prior year, and for the six month period ended February 28, 2009, by $41.7 million, or 19.9%, to reach $251.4 million. The cable sector contributed to the growth by $16.8 million during the second quarter, and $39.2 million during the first half of the fiscal year.
FIXED CHARGES
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Quarters ended Six months ended
February February February February
28, 29, 28, 29,
($000, except 2009 2008(1) Change 2009 2008(1) Change
percentages) $ $ % $ $ %
--------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Amortization 66,785 56,346 18.5 130,848 109,385 19.6
Financial
expense 18,028 17,550 2.7 41,806 33,883 23.4
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(1) Certain comparative figures have been reclassified to conform to the
current year's presentation. Financial information for the previous
year has been restated to reflect the presentation of foreign exchange
gains or losses as financial expense instead of operating costs.
Fiscal 2009 second quarter and first six-month period, amortization amounted to $66.8 million and $130.8 million, respectively, compared to $56.3 million and $109.4 million for the corresponding period the year before. The increase in amortization expense was mainly due the cable sector and attributable to additional capital expenditures arising from customer premise equipment acquisitions to sustain RGU growth, to the recent acquisitions in the Canadian operations and to the appreciation of the Euro currency over the Canadian dollar.
Second-quarter and first six-month period financial expense increased by $0.5 million and $7.9 million compared to the same periods in fiscal 2008 due to the rapid appreciation of the US dollar and the Euro over the Canadian dollar and the increase in the level of Indebtedness (defined as bank indebtedness, derivative financial instruments and long-term debt). More specifically, financial expense in the cable sector was adversely impacted by foreign exchange losses amounting to $0.6 million in the second quarter and $4.4 million in the first six months of fiscal 2009 as the majority of customer premise equipment is purchased and subsequently paid in US dollars. These losses were essentially due to the unusually high US dollar volatility, with the Bank of Canada closing rate fluctuating from CA$1.0620 per US dollar at August 31, 2008 to CA$1.2723 per US dollar at February 27, 2009, reaching a high of CA$1.2935 per US dollar on November 20, 2008. For the corresponding periods of the prior year, the cable subsidiary recorded a foreign exchange loss of $0.2 million and a foreign exchange gain of $0.9 million, respectively.
INCOME TAXES
Fiscal 2009 second-quarter income tax expense amounted to $0.2 million compared to a recovery of $14.4 million in fiscal 2008. For the first half of the year, income tax expense amounted to $10 million compared to a recovery of $5.1 million in the prior year. The income tax expenses for the current year include a future income tax recovery of $16 million related to the impairment loss recorded in the second quarter in the cable sector. Prior year income tax amounts include the impact of the reduction in corporate income tax rates announced on October 16, 2007 by the Canadian federal government in its Economic Statement and considered substantively enacted on December 14, 2007 (the "income tax adjustment"). The reduction of these corporate income tax rates reduced future income tax expense by $24.1 million in the second quarter and first six months of fiscal 2008. Excluding the effects of the impairment loss in the current year and the tax rate reductions in the prior year, income tax expense would have amounted to $16.2 million for the second quarter and $26 million for the first six months of fiscal 2009, compared to $9.7 million for the second quarter and $19 million for the first half of fiscal 2008. The increases in income tax expense for fiscal 2009 are mainly due to the increase in operating income before amortization surpassing that of the fixed charges.
NON-CONTROLLING INTEREST
The non-controlling interest represents a participation of approximately 67.7% in Cogeco Cable's results. During the second quarter of fiscal 2009 the loss attributable to non-controlling interest amounted to $242.7 million, and $226.8 million for the six months ended February 28, 2009, due to the impairment loss recorded in the cable sector. The income attributable to non-controlling interest for the comparable periods of the prior year amounted to $33.8 million and $47.5 million, respectively.
NET INCOME (LOSS)
Fiscal 2009 second-quarter net loss amounted to $115.3 million, or $6.89 per share, compared to net income of $15.9 million, or $0.95 per share, for the same period last year. Net loss in the first six month period of fiscal 2009 amounted to $104.2 million, or $6.23 per share, compared to net income of $5.9 million, or $0.35 per share, for the same period last year. Fiscal 2009 net losses in the second quarter and first six months are due to the impairment loss of $399.6 million recorded in the second quarter of the year, as described in the "Impairment of goodwill and intangible assets" section. Net of related income taxes and non-controlling interest, the impairment loss reduced net income for the quarter and first six months by $124 million. The net income amounts of the 2008 fiscal year included an income tax recovery of $24.1 million resulting from the reduction of corporate income tax rates in the second quarter of fiscal 2008 as described in the "Income taxes" section, net of non-controlling interest of $16.2 million, for a net impact on income of $7.9 million, and losses from discontinued operations of $0.4 million and $18.1 million for the quarter and first six months of fiscal 2008 respectively. Excluding the effect of the above items(1), net income would have amounted to $8.7 million, or $0.52 per share(1), and $19.7 million, or $1.18 per share, for the quarter and first six months ended February 28, 2009, respectively, compared to $8.4 million, or $0.50 per share, representing increases of 3% and 4%, and $16.1 million, or $0.96 per share, representing increases of 22.7% and 22.9%, respectively, for the second quarter and first six months of the 2008 fiscal year. Net income progression has resulted mainly from the growth in the cable sector of operating income before amortization exceeding that of fixed charges from the Canadian operations, partly offset by the reduction in operating income before amortization, the increase in fixed charges and the unfavourable impact of the Euro currency over the Canadian dollar for the European operations in the cable sector.
(1) The indicated terms do not have standardized definitions prescribed by
Canadian GAAP and therefore, may not be comparable to similar measures
presented by other companies. For more details, please consult the
"Non-GAAP financial measures" section.
CASH FLOW AND LIQUIDITY
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Quarters ended Six months ended
February February February February
28, 29, 28, 29,
2009 2008 2009 2008
($000) $ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Operating activities
from continuing operations
Cash flow from operations(1) 100,351 85,374 195,977 166,751
Changes in non-cash
operating items 20,129 7,568 (45,027) (27,205)
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120,480 92,942 150,950 139,546
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Investing activities from
continuing operations(2)
(67,895) (64,743) (140,795) (123,072)
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Financing activities from
continuing operations(2) (36,365) (22,329) 2,411 (58,586)
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Effect of exchange rate
changes on cash and cash
equivalents denominated
in foreign currencies 641 355 1,328 202
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Net change in cash and
cash equivalents from
continuing operations 16,861 6,225 13,984 (41,910)
Net change in cash and
cash equivalents from
discontinued operations - - - -
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Cash and cash equivalents,
beginning of period 34,505 18,144 37,472 66,279
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Cash and cash equivalents,
end of period 51,366 24,369 51,366 24,369
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(1) Cash flow from operations does not have a standardized definition
prescribed by Canadian GAAP and therefore, may not be comparable to
similar measures presented by other companies. For more details,
please consult the "Non-GAAP financial measures" section.
(2) Excludes assets acquired under capital leases.
Fiscal 2009 second quarter cash flow from operations reached $100.4 million, 17.5% higher than the comparable period last year, primarily due to the increase in operating income before amortization. Changes in non-cash operating items generated greater cash inflows compared to the same period last year, mainly as a result of increases in accounts payable and accrued liabilities, and a slight decrease in accounts receivable in the second quarter of fiscal 2009 compared to an increase in accounts receivable in the second quarter of the prior year, partly offset by an increase in income taxes receivable.
In the first six months of fiscal 2009, cash flow from operations reached $196 million, 17.5% higher than the comparable period last year, primarily due to the increase in operating income before amortization, partly offset by the increase in financial expense and current income taxes. Changes in non-cash operating items generated greater cash outflows compared to the same period last year, mainly as a result of a decrease in income tax liabilities in the current year compared to an increase in the prior year and a higher increase in income taxes receivable in the first half of the year compared to the prior year, partly offset by a lower decrease in accounts payable and accrued liabilities and an increase in accounts receivable in the prior year.
In the second quarter of fiscal 2009, investing activities from continuing operations including assets acquired under capital leases stood at $67.9 million due to capital expenditures of $62.5 million and from an increase of $5.7 million in deferred charges and others in the cable sector. The capital expenditures, stemming essentially from the cable sector, increased compared to the same period last year due to the following factors:
- An increase in support capital spending due to improvements in the information systems to sustain the business activities and the acquisition of a new facility in the Canadian operations;
- An increase in scalable infrastructure capital spending mainly due to the timing of the expansion and head-end improvements, system powering and equipment reliability to sustain increased customer demand for HSI and Telephony services in Canada;
- An increase in line extensions due to the expansion of the networks in Canada;
- An increase from the appreciation of the US dollar and the Euro over the Canadian dollar;
- These increases were partly offset by a decrease in customer premise equipment spending which reflect lower RGU growth in Canadian operations and net RGU losses in European operations;
- A decrease in capital expenditures associated with network upgrades and rebuilds due to the timing of these initiatives.
In the first six months of fiscal 2009, investing activities from continuing operations including assets acquired under capital leases stood at $140.8 million due to capital expenditures of $129.1 million and from an increase of $12.9 million in deferred charges and others in the cable sector. The capital expenditures, stemming essentially from the cable sector, increased compared to the same period last year due to the following factors:
- An increase in support capital spending due to improvements in the information systems to sustain the business activities and the acquisition of a new facility in the Canadian operations, and to the acquisition of a power generator for Cogeco Data Services in the first quarter of the year;
- An increase in customer premise equipment capital spending resulting from RGU growth in Canadian operations fuelled in part by continued interest for the HD Television service, combined with the deployment of Digital Television in Portugal, net of RGU losses in the other services in European operations;
- An increase in scalable infrastructure capital spending mainly due to the timing of the expansion and head-end improvements, system powering and equipment reliability to sustain increased customer demand for HSI and Telephony services in Canada;
- An increase in line extensions due to the expansion of the networks in Canada;
- An increase from the appreciation of the US dollar and the Euro over the Canadian dollar;
- Partly offsetting these increases, capital expenditures associated with network upgrades and rebuilds decreased due to the timing of these initiatives.
Deferred charges and others are mainly attributable to reconnect costs in the cable sector. The increase in deferred charges and others for the second quarter amounted to $5.7 million compared to $6.2 million for the same period the year before, and to $12.9 million compared to $13.7 million for the first six months of the year. Slower RGU growth explained the lower increases recorded in fiscal 2009.
In the second quarter and first six months, the Company generated free cash flows amounting to $32.1 million and $53.9 million, respectively, compared to $19.4 million and $42.3 million for the same periods of the preceding year. These free cash flow increases over the comparable periods of the prior year are mainly due to the cable sector and attributable to an increase in cash flow from operations, resulting primarily from the improvement of the cable sudsidiary's operating income before amortization, partly offset by an increase in capital expenditures. The aggregate amount of total capital expenditures and deferred charges increased by $2.3 million for the quarter ended February 28, 2009, and by $17.7 million for the first half of fiscal 2009 compared to the corresponding periods of the prior year due to the factors explained above.
In the second quarter of 2009, Indebtedness affecting cash decreased by $31.5 million due to the free cash flow of $32.1 million and the increase of non-cash operating items of $20.1 million, net of the increase in cash and cash equivalents of $16.9 million and the dividend payment of $1.3 million described below. For the same period of the prior year, Indebtedness affecting cash decreased by $18.2 million due to the free cash flow of $19.4 million, partly offset by a $1.2 million dividend payment described below.
During the second quarter of fiscal 2009, dividends of $0.08 per share for subordinate and multiple voting shares, totalling $1.3 million, were paid by the Company, compared to $0.07 per share, totalling $1.2 million in the second quarter of fiscal 2008. Dividends paid by a subsidiary to non-controlling interests amounted to $3.9 million during the second quarter of fiscal 2009, for consolidated dividend payments of $5.3 million.
In the first half of fiscal 2009, Indebtedness affecting cash increased by $12.3 million due to the reduction of non-cash operating items of $45 million, the increase in cash and cash equivalents of $13.9 million and the payment of dividends totalling $2.7 million, partly offset by the free cash flow of $53.9 million. Indebtedness was increased through the issuance on October 1, 2008, in the cable sector, of Senior Secured Notes, Series A and B and by an increase of $28.1 million in bank indebtedness, net of the repayment of US$150 million Senior Secured Notes Series A and the related derivative financial instrument of $56.2 million, both maturing on October 31, 2008, for a total of $238.7 million, and of net repayments on the cable subsidiary's revolving loans of $23 million. For the same period of the prior year, Indebtedness affecting cash decreased by $52.6 million mainly due to the free cash flow of $42.3 million, the reduction of $41.9 million in cash and cash equivalents partly used to offset the $27.2 million reduction in non-cash operating items, partly offset by the dividend payment of $2.3 million described below.
During the first six months of fiscal 2009, quarterly dividends of $0.08 per share for subordinate and multiple voting shares, totalling $2.7 million, were paid by the Company, compared to quarterly dividends of $0.07 per share, totalling $2.3 million in the first half of the prior year. Dividends paid by a subsidiary to non-controlling interests amounted to $7.9 million, for consolidated dividend payments of $10.6 million in the six month period ended February 28, 2009.
At February 28, 2009, the Company had a working capital deficiency of $348.8 million compared to $611.8 million as at August 31, 2008. The decrease in the deficiency is mainly attributable to the cable sector and is due to the repayment of the US$150 million Senior Secured Notes, Series A and the related derivative financial instrument for a total of $238.7 million on October 31, 2008 using the proceeds of issuance of the Senior Secured Notes, Series A and B. As part of the usual conduct of its cable business, COGECO maintains a working capital deficiency due to a low level of accounts receivable as a large portion of the cable subsidiary's customers pay before their services are rendered, unlike accounts payable and accrued liabilities, which are paid after products are delivered or services are rendered, thus enabling Cogeco Cable to use cash and cash equivalents to reduce Indebtedness.
At February 28, 2009, Cogeco Cable had used $476.8 million of its $885 million Term Facility for a remaining availability of $408.2 million and the Company had drawn $12.3 million of its $50 million Term Facility, for a remaining availability of $37.7 million.
The assumptions used in the actuarial valuations performed for the year ended August 31, 2008 were adjusted to reflect the current rates of return and market conditions, and accordingly, the Company expects the payments required to fund the actuarial deficit of its defined benefit pension plans to be higher in fiscal 2009 than in fiscal 2008. Based on the August 31, 2008 actuarial valuation, the Company expects these payments to be approximately $1 million for the 2009 fiscal year.
Transfers of funds from non-wholly owned subsidiaries to COGECO are subject to approval by the subsidiaries' Board of Directors and may also be restricted under the terms and conditions of certain debt instruments. In accordance with applicable corporate and securities laws, significant transfers of funds from COGECO may be subject to approval by minority shareholders.
FINANCIAL POSITION
Since August 31, 2008, there have been major changes to the balances of "fixed assets", "intangible assets", "goodwill", "accounts payable and accrued liabilities", "future income tax assets" "income taxes receivable", "income tax liabilities", "future income tax liabilities", "cash and cash equivalents", "Indebtedness" and "non-controlling interest".
The $28.1 million increase in fixed assets is mainly related to increases in capital expenditures to sustain RGU growth, to the recent acquisitions in Canada and to the appreciation of the Euro and the US dollar over the Canadian dollar in the cable sector. The $66.2 million and $326.1 million reductions in intangible assets and goodwill and the $14.2 million decrease in future income tax liabilities are due to the impairment loss recorded on the cable subsidiary's investment in Cabovisao in the second quarter of the year as described in the "Impairment of goodwill and intangible assets" section, net of the appreciation of the Euro over the Canadian dollar. The $25.9 million decrease in accounts payable and accrued liabilities and the $13.9 million increase in cash and cash equivalents are related to the timing of payments made to suppliers and to the fluctuations of the Euro over the Canadian dollar in the cable sector. The $5.7 million reduction in future income tax assets is due to the utilization of Ontario minimum tax credits and tax loss carry forwards to reduce current income taxes in the cable sector. The $6.6 million increase in income taxes receivable and the $9.6 million decrease in income tax liabilities are due to income tax payments relating to fiscal 2008 that were made by the cable subsidiary in the first quarter of fiscal 2009. Indebtedness has increased by $32.1 million as a result of the factors previously discussed in the "Cash Flow and Liquidity" section and the unfavourable impact of the appreciation of the US dollar and the Euro over the Canadian dollar, partly offset by the increase of $34.3 million in the fair value of the cross-currency swaps related to the Senior Secured Notes Series A issued on October 1, 2008. The $228.2 million decrease in non-controlling interest is due to the impairment loss recorded on the cable subsidiary's investment in Cabovisao in the second quarter of the year as described in the "Impairment of goodwill and intangible assets" section, net of improvements in the cable subsidiary's operating results excluding the impairment loss.
A description of COGECO's share data as at March 31, 2009 is presented in the table below:
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Number of shares/options Amount
($000)
--------------------------------------------------------------------------
Common shares
Multiple voting shares 1,842,860 12
Subordinate voting shares 14,898,762 120,058
Options to purchase subordinate
voting shares
Outstanding options 123,358
Exercisable options 123,358
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In the normal course of business, COGECO has incurred financial obligations, primarily in the form of long-term debt, operating and capital leases and guarantees. COGECO's obligations, discussed in the 2008 annual MD&A, have not materially changed since August 31, 2008, except for the new financing in the cable sector discussed in the "Cash Flow and Liquidity" section.
DIVIDEND DECLARATION
At its April 8, 2009 meeting, the Board of Directors of COGECO declared a quarterly eligible dividend of $0.08 per share for subordinate and multiple voting shares, payable on May 6, 2009, to shareholders of record on April 22, 2009. The declaration, amount and date of any future dividend will continue to be considered and approved by the Board of Directors of the Company based upon the Company'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, their amount and periodicity may vary.
FINANCIAL MANAGEMENT
On January 22, 2009, the Company's cable subsidiary, Cogeco Cable, entered into a swap agreement with a financial institution to fix the floating benchmark interest rate with respect to the Euro-denominated Term Loan facilities for a notional amount of EUR 111.5 million. The interest rate swap to hedge the Term Loans has been fixed at 2.08% until their maturity at July 28, 2011. The notional value of the swap will decrease in line with the amortization schedule of the Term Loans. In addition to the interest rate swap of 2.08%, Cogeco Cable will continue to pay the applicable margin on these Term Loans in accordance with its Term Facility. Since the issuance on January 22, 2009, the fair value of interest rate swap liability increased by $1.3 million, which is recorded as a decrease of other comprehensive income net of income taxes of $0.4 million and non-controlling interest of $0.6 million.
On October 1, 2008, Cogeco Cable 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 in 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 CA$1.0625 per US dollar. Since the issuance on October 1, 2008, amounts due under the US$190 million Senior Secured Notes Series A increased by $39.9 million due to the US dollar's appreciation over the Canadian dollar. The fair value of cross-currency swaps increased by a net amount of $35.5 million, of which $39.9 million offsets the foreign exchange loss on the debt denominated in US dollars. The difference of $4.3 million was recorded as a decrease of other comprehensive income, net of income taxes of $1.2 million and non-controlling interest of $2.1 million.
Cogeco Cable's net investment in the self-sustaining foreign subsidiary, Cabovisao, is exposed to market risk attributable to fluctuations in foreign currency exchange rates, primarily changes in the value of the Canadian dollar versus the Euro. This risk is mitigated since the major part of the purchase price for Cabovisao was borrowed directly in Euros. This debt is designated as a hedge of net investments in self-sustaining foreign subsidiaries and, accordingly, Cogeco Cable realized a foreign exchange gain of $11.4 million in the first six months of fiscal 2009, which is presented net of non-controlling interest of $7.7 million in other comprehensive income. The exchange rate used to convert the Euro into Canadian dollars for the balance sheet accounts as at February 28, 2009 was $1.6129 per Euro compared to $1.5580 per Euro as at August 31, 2008. The average exchange rates prevailing during the second quarter and first six months used to convert the operating results of the European operations were $1.6265 and $1.5864 per Euro, respectively, compared to $1.4741 and $1.4430 per Euro for the same periods of the 2008 fiscal year.
The following table shows the Canadian dollar impact of a 10% change in the average exchange rate of the Euro currency into Canadian dollars on European operating results in the cable sector for the first six months ended February 28, 2009:
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Exchange rate
Six months ended February 28, 2009 As reported impact
($000) $ $
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(unaudited) (unaudited)
Revenue 123,304 12,330
Operating income before amortization 38,678 3,868
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The Company 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 equipment, as the majority of customer premise equipment in the cable sector is purchased and subsequently paid in US dollars. Please consult the "Fixed charges" section of this MD&A and the Foreign Exchange Risk section in note 14 of the consolidated financial statements for further details.
CABLE SECTOR
CUSTOMER STATISTICS
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Net additions (losses) % of
Penetration(1)
Quarters ended Years ended
February February February February February February February
28, 28, 29, 28, 29, 28, 29,
2009 2009 2008 2009 2008 2009 2008
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RGU 2,795,214 25,626 56,196 78,340 139,220 - -
Basic
Cable
service
custom-
mers 1,144,074 (9,953) 4,593 (9,155) 17,590 - -
HIS
service
custom-
mers(2) 650,098 3,030 17,154 17,330 46,254 58.8 56.1
Digital
Tele-
vision
service
custom-
mers 514,917 25,102 17,879 48,719 34,132 45.5 49.1
Telephony
service
custom-
mers(3) 486,125 7,447 16,570 21,446 41,244 46.5 43.1
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(1) As a percentage of Basic Cable service customers in areas served.
(2) Customers subscribing to the HSI service without the Basic Cable
service totalled 85,487 as at February 28, 2009 compared to 81,745 at
February 29, 2008.
(3) Customers subscribing to the Telephony service without the Basic Cable
service totalled 31,109 as at February 28, 2009 compared to 22,054 at
February 29, 2008.
In the cable sector, second-quarter and first six months RGU net additions were lower than for the same periods last year and reflect an early sign of maturation in some services for the Canadian operations and the difficult economic environment in Portugal. The number of net losses for Basic Cable stood at 9,953 customers for the quarter and 9,155 customers for the first six months, compared to net additions of 4,593 and 17,590 customers, respectively, for the same periods of the prior year. This decrease is due to net customer losses in the European operations reflecting a continuing unfavourable economic environment in the Iberian Peninsula, recurring intense customer promotions and advertising initiatives from competitors for their new respective third leg of the triple-play service during the latter part of the second quarter in the Portuguese market, net of increases in Canadian operations stemming from continuous improvements to the service offering, targeted marketing activities and an upswing in subscription activity in border markets due to the impending over-the-air digital conversion in the United States. The number of net additions to HSI service stood at 3,030 customers for the quarter and 17,330 customers for the first six months, compared to 17,154 and 46,254 customers, respectively, for the same periods last year. The growth in HSI customer net additions continues 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 in Canadian operations offset by net customer losses in European operations due to the factors mentioned above. The Digital Television service net additions stood at 25,102 and 48,719 customers, for the quarter and first six months ended February 28, 2009, respectively, compared to 17,879 and 34,132 customers for the same periods in the prior year due to targeted marketing initiatives in the second half of fiscal 2008 and in 2009 to improve market penetration and to the continuing strong interest for the HD Television service in Canadian operations, as well as the launch of the Digital Television service in Portugal in the third quarter of fiscal 2008. In the quarter and first six months, Telephony customers grew by 7,447 and 21,446 customers to reach 486,125 at February 28, 2009, compared to a growth of 16,570 and 41,244 customers for the same periods of the prior year. The lower growth is mostly attributable to the increased penetration in areas where the service is already offered and to fewer new areas where the service was launched in Canadian operations offset by net customer losses in European operations due to the unfavourable economic environment. Telephony service coverage in Canada, as a percentage of homes passed, has now reached 89% compared to 80% at February 29, 2008. The service is offered in all of the Company's territories in Portugal.
In addition to the launch of new channels and retention strategies during the quarter in the European operations, new marketing and other operating initiatives are in the process of being implemented, the result of which should help in reducing customer attrition in the upcoming quarters.
OPERATING RESULTS
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Quarters ended Six months ended
February February February February
28, 29, 28, 29,
($000, except 2009 2008(1) Change 2009 2008(1) Change
percentages) $ $ % $ $ %
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(unaudited) (unaudited) (unaudited) (unaudited)
Revenue 304,920 265,102 15.0 604,358 516,935 16.9
Operating
costs 176,421 152,765 15.5 350,155 302,261 15.8
Management
fees -
COGECO Inc. 3,038 3,679 (17.4) 9,019 8,714 3.5
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Operating
income from
continuing
operations
before
amortization 125,461 108,658 15.5 245,184 205,960 19.0
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Operating
margin 41.1% 41.0% 40.6% 39.8%
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(1) Certain comparative figures have been reclassified to conform to the
current year's presentation. Financial information for the previous
year has been restated to reflect the presentation of foreign exchange
gains or losses as financial expense instead of operating costs.
Revenue
Fiscal 2009 second-quarter consolidated revenue improved by $39.8 million, or 15%, to reach $304.9 million, and first six month consolidated revenue by $87.4 million, or 16.9%, to reach $604.4 million, when compared to the prior year. Driven by an increased number of RGU combined with rate increases and the acquisition of MaXess Networx(R), FibreWired Burlington Hydro Communications and Cogeco Data Services (the "recent acquisitions") in the second half of fiscal 2008, second-quarter Canadian operations revenue went up by $38.5 million, or 18.8%, and for the first six months by $79.6 million, or 19.8% .
Fiscal 2009 second-quarter European operations revenue increased by $1.3 million, or 2.2%, to reach $61.2 million, and first six month revenue by $7.8 million, or 6.7%, to reach $123.3 million, compared to the same period last year. The increase is due to the strength of the Euro against the Canadian dollar, despite a RGU loss in the first six months of the year. Revenue from the European operations in the local currency for the second quarter amounted to EUR 37.6 million, a decrease of EUR 3 million, or 7.4%, and to EUR 77.8 million, a decrease of EUR 2.3 million, or 2.8% for the first six months.
Operating costs
For the second quarter and first six months of fiscal 2009, operating costs, excluding management fees payable to COGECO Inc., increased by $23.7 million and $47.9 million to reach $176.4 million and $350.2 million, respectively, increases of 15.5% and 15.8% compared to the prior year. Operating costs increased due to the servicing of additional RGU and the impact of the recent acquisitions in Canada, and in Europe due to the appreciation of the Euro over the Canadian dollar and an increase in the level of uncollectible customer accounts. Operating costs of the European operations in local current amounted to EUR 26.7 million for the second quarter and EUR 53.3 million for the first six months, increases of EUR 0.9 million, or 3.5%, and EUR 0.5 million, or 0.9% over the comparable periods of the prior year.
Operating income before amortization
Fiscal 2009 second quarter and first six-month operating income before amortization increased by $16.8 million, or 15.5%, to reach $125.5 million, and by $39.2 million, or 19%, to reach $245.2 million, respectively, mainly as a result of various rate increases, recent acquisitions, and RGU growth generating additional revenues in the Canadian operations which outpaced operating cost increases. Operating income before amortization for the Canadian operations rose by $20.9 million, or 24.1%, to reach $107.6 million in the second quarter, and by $39.9 million, or 23.9%, to reach $206.5 million in the first six months of fiscal 2009. Operating income before amortization for the European operations decreased to $17.8 million from $21.9 million, and to $38.7 million from $39.3 million in the first six months of fiscal 2009, representing decreases of 18.7% and 1.6%, respectively, and in the local currency, amounted to EUR 10.9 million for the second quarter, a decrease of EUR 3.9 million or 26.4%, and to EUR 24.4 million, a decrease of EUR 2.7 million, or 10.1% for the first half of the year.
Cogeco Cable's second quarter operating margin remained essentially the same at 41.1% compared to 41% for the same period of the prior year. The operating margin in Canada improved to 44.2% from 42.3% which offset the decrease in the European operating margin to 29.1% from 36.6%. For the first six months of fiscal 2009, the consolidated operating margin improved to 40.6% from 39.8% with the Canadian operating margin improving to 42.9% from 41.5% and the European operating margin decreasing to 31.4% from 34% the year before.
FISCAL 2009 FINANCIAL GUIDELINES
As a result of the continuing unfavourable economic climate and the renewal of marketing initiatives from competitors in the Portuguese market of the cable sector, the Company's subsidiary, Cogeco Cable, recorded a non-cash impairment loss amounting to $399.6 million on its net investment in its Portuguese subsidiary, Cabovisao, in the second quarter of fiscal 2009. Net of related income taxes and non-controlling interest, the impairment loss had an unfavourable impact of $124 million on net income in the second quarter of 2009. For further details, please see the "Impairment of goodwill and intangible assets" section. Furthermore, the European operations financial results in the cable sector have been revised downwards to take into consideration the current situation in the Portuguese market described above and the exchange rate used for the fiscal 2009 revised projections for the European operations has been increased to $1.60 per Euro compared to $1.50 per Euro for the original guidelines.
Finally, the Canadian operations of the cable sector and the radio activities continue to show solid results and management expects to meet their initial projections for the 2009 fiscal year.
Consolidated
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Revised projections
April 8, 2009 Projections
Fiscal 2009 Fiscal 2009
(in millions of dollars) $ $
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Financial guidelines
Revenue 1,238 1,243
Operating income before amortization 505 513
Net income (loss) (87) 35
Free cash flow 85 95
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Cable sector
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Revised projections
April 8, 2009 Projections
Fiscal 2009 Fiscal 2009
(in millions of dollars, except net
customer additions and operating margin) $ $
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Financial guidelines
Revenue 1,205 1,210
Operating income before amortization 500 508
Operating margin 42% 42%
Financial expense 70 70
Amortization 270 275
Current income taxes 50 50
Capital expenditures and deferred charges 300 300
Free cash flow 80 90
Net customer additions guidelines
RGU 100,000 100,000
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Other sector
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Revised projections
April 8, 2009 Projections
Fiscal 2009 Fiscal 2009
(in millions of dollars) $ $
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Financial guidelines
Revenue 33 33
Operating income before amortization 5 5
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UNCERTAINTIES AND MAIN RISK FACTORS
There has been no significant change in the uncertainties and main risk factors faced by the Company since August 31, 2008, except as described below. A detailed description of the uncertainties and main risk factors faced by COGECO can be found in the 2008 annual MD&A.
Cogeco Cable's footprint includes certain regions in Ontario (Burlington and Windsor) and in Portugal (Palmela) where the automobile industry is a significant driver of economic activity. The sharp downturn experienced by the automobile industry in recent months may have an adverse impact on the level of economic activity and consumer expenditures on goods and services within those communities. In previous recessionary periods, demand for cable telecommunications services has generally proved to be resilient. However, there is no assurance that demand will remain resilient in a prolonged global recession.
Despite Cogeco Cable's strong balance sheet and the proactive management of debt maturities, the present situation in financial markets and the credit crisis may result in reduced availability of capital in both the debt and equity markets in the coming years. As Cogeco Cable's current credit facilities and other sources of financing reach their respective maturities, the terms of bank and other debt facilities may be less favourable upon renewal.
Market conditions may also have an impact on the Company's defined benefit pension plans as there is no assurance that the actual rate of return on plan assets will approximate the assumed rate of return used in the most recent actuarial valuation. Market driven changes may impact the assumptions used in future actuarial valuations and could result in the Company being required to make contributions in the future that differ significantly from the current contributions to the Company's defined benefit pension plans.
The Company is exposed to interest rate risks for both fixed interest rate and floating interest rate instruments. Fluctuations in interest rates will have an effect on the valuation and the collection or repayment of these instruments which could result in a significant impact on the Company's financial expense. At February 28, 2009, 76% of Cogeco Cable's debt is at fixed interest rates.
The current volatility of currency exchange and interest rate in the financial markets is unusually high and could lead to an increase in the level of risk on hedging instruments to which Cogeco Cable is a party should one or more of the counterparts to these instruments become financially distressed and unable to meet their obligations.
It is anticipated that digital terrestrial television services will be launched in Portugal in the second half of the current year. This development may result in some attrition of Basic Cable television service customers, and consequently have an adverse impact on RGU in the cable sector.
ACCOUNTING POLICIES AND ESTIMATES
There has been no significant change in COGECO's accounting policies, estimates and future accounting pronouncements since August 31, 2008, except as described below. A description of the Company's policies and estimates can be found in the 2008 annual MD&A.
Capital disclosures and financial instruments
Effective September 1, 2008, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1535, Capital Disclosures, Section 3862, Financial Instruments - Disclosures and Section 3863, Financial Instruments - Presentation.
Capital disclosures
Section 1535 of the CICA Handbook requires that an entity disclose information that enables users of its financial statements to evaluate the entity's objectives, policies and processes for managing capital, including disclosures of any externally imposed capital requirements and the consequences for non-compliance. These new disclosures are included in note 14 of the Company's interim consolidated financial statements.
Financial instruments
Section 3862 on financial instrument disclosures requires the disclosure of information about the significance of financial instruments for the entity's financial position and performance and the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the balance sheet date, and how the entity manages those risks.
Section 3863 establishes standards for presentation of financial instruments and non-financial derivatives. It deals with the classification of financial instruments, from the perspective of the issuer, between liabilities and equities, the classification of related interest, dividends, gains and losses, and circumstances in which financial assets and financial liabilities are offset.
The adoption of these standards did not have any impact on the classification and measurements of the Company's financial instruments. The new disclosures pursuant to these new Sections are included in note 14 of the Company's interim consolidated financial statements.
Credit risk and fair value of financial assets and financial liabilities
On January 20, 2009, the Emerging Issues Committee ("EIC") of the Canadian Accounting Standards Board issued EIC Abstract 173, Credit Risk and Fair Value of Financial Assets and Financial Liabilities, which establishes guidance requiring an entity to consider its own credit risk as well as the credit risk of the counterparty in determining the fair value of financial assets and financial liabilities, including derivative instruments. EIC 173 is applicable to all financial assets and liabilities measured at fair value in interim and annual financial statements for periods ending on or after January 20, 2009 and is applicable to the Company for its second quarter of fiscal 2009 with retrospective application, without restatement of prior periods, to the beginning of its current fiscal year. The adoption of this new abstract during the second quarter decreased derivative financial instruments assets by $3.5 million, decreased future income tax liabilities by $1 million, decreased non-controlling interest by $1.8 million and decreased accumulated other comprehensive income by $0.8 million at December 1, 2008 and had no significant impact on the consolidated balance sheet at September 1, 2008.
General standards of financial statement presentation
The CICA amended Section 1400 of the CICA Handbook, General Standards of Financial Statement Presentation, to include a requirement for management to make an assessment of the entity's ability to continue as a going concern when preparing financial statements. These changes, including the related disclosure requirements, were adopted by the Company on September 1, 2008 and had no impact on the interim consolidated financial statements.
FUTURE ACCOUNTING PRONOUNCEMENTS
Business combinations, consolidated financial statements and non-controlling interests
During January 2009, the CICA issued Handbook Section 1582, Business Combinations, which replaces Section 1581 of the same name, and Sections 1601, Consolidated Financial Statements and 1602, Non-Controlling Interests, which together replace Section 1600, Consolidated Financial Statements. These new Sections harmonize significant aspects of Canadian accounting standards with the International Financial Reporting Standards ("IFRS") that will be mandated for entities with fiscal year beginning on or after January 1, 2011.
Section 1582 requires that all business acquisitions be measured at the fair value of the acquired entity at the acquisition date even if the business combination is achieved in stages, or if less than 100 percent of the equity interest in the acquiree is owned at the acquisition date, and expands the definition of a business subject to an acquisition. The Section also establishes new guidance on the measurement of consideration given and the recognition and measurement of assets acquired and liabilities assumed in a business combination. Furthermore, under this new guidance, acquisition costs, which were previously included as a component of the consideration given, and any negative goodwill resulting from the allocation of the purchase price, which was allocated as a reduction of non-current assets acquired under the previous standard, will be recorded in earnings in the current period. This new Section will be applied prospectively and will only impact the Company's consolidated financial statements for future acquisitions concluded in periods subsequent to the date of adoption.
Sections 1601 and 1602 dealing with consolidated financial statements require an entity to measure non-controlling interest upon acquisition either at fair value or at the non-controlling interest's proportionate share of the acquiree's identifiable net assets. The new Sections also require non-controlling interest to be presented as a separate component of shareholders' equity.
The new standards will apply as of the beginning of the first annual reporting period beginning on or after January 1, 2011, with simultaneous early adoption permitted. Early adoption may reduce the amount of restatement required upon conversion to IFRS. The Company is currently assessing the impact of these new Sections on its consolidated financial statements.
Harmonization of Canadian and International accounting standards
In March 2006, the Accounting Standards Board of the CICA released its new strategic plan, which proposed to abandon Canadian GAAP and effect a complete convergence to the International Financial Reporting Standards ("IFRS") for publicly accountable entities.
In April 2008, the CICA published an exposure draft as guidance which requires the transition to IFRS to replace Canadian GAAP as currently employed by Canadian publicly accountable enterprises. The changeover will occur no later than fiscal years beginning on or after January 1, 2011. Accordingly, the Company expects that its first interim consolidated financial statements presented in accordance with IFRS will be for the three-month period ending November 30, 2011, and its first annual consolidated financial statements presented in accordance with IFRS will be for the year ending August 31, 2012.
IFRS uses a conceptual framework similar to Canadian GAAP, but there are significant differences in recognition, measurement and disclosure requirements. The Company has established a project team including representatives from various areas of the organization to plan and complete the transition to IFRS. This team reports periodically to the Audit Committee, who oversees the IFRS implementation project on behalf of the Board of Directors. The Company will be assisted by external advisors as required.
The implementation project consists of three primary phases, which may occur concurrently as IFRS are applied to specific areas of operations:
- Scoping and diagnostic phase -This phase involves performing a high-level impact assessment to identify key areas that are expected to be impacted by the transition to IFRS. The result of these procedures is the ranking of IFRS impacts in order of priority in order to assess the timing and complexity of transition efforts that will be required in subsequent phases.
- Impact analysis, evaluation and design phase - In this phase, each area identified from the scoping and diagnostic phase will be addressed in order of descending priority, with project teams established as deemed necessary. This phase involves specification of changes required to existing accounting policies, information systems and business processes, together with an analysis of policy choices permitted under IFRS and the development of draft IFRS financial statement content.
- Implementation and review phase - This phase includes execution of changes to information systems and business processes, completing formal authorization processes to approve recommended accounting policy changes and training programs across the organization, as necessary. It will culminate in the collection of financial information necessary to compile IFRS-compliant financial statements, embedding IFRS in business processes, eliminating any unnecessary data collection processes and finally the approval by the Audit Committee of the IFRS financial statements. Implementation also involves delivery of further training to staff as revised systems begin to take effect.
The Company completed the scoping and diagnostic phase in February 2009, and is now conducting the impact analysis, evaluation and design phase. As implications of the conversion are identified, information technology and data system impacts as well as impacts on business activities will be assessed. The Company's analysis of IFRS and comparison with currently applied accounting principles has identified a number of differences that may require information system changes or which are likely to have a material impact on the financial statements of the Company.
Set out below are the main areas where changes in accounting policies are expected to have a significant impact on the Company's consolidated financial statements. The list below should not be regarded as a complete list of changes that will result from transition to IFRS. It is intended to highlight those areas that the Company believes to be the most significant; however, analysis of changes is still in process and the selection of accounting policies where choices are available under IFRS has not been completed. We note that the regulatory bodies that promulgate Canadian GAAP and IFRS have significant ongoing projects that could affect the ultimate differences between Canadian GAAP and IFRS and their impact on the Company's consolidated financial statements in future years. The future impacts of IFRS will also depend on the particular circumstances prevailing in those years. The standards listed below are those existing based on current Canadian GAAP and IFRS. At this stage, the Company is not able to reliably quantify the impacts expected on its consolidated financial statements for these differences. They are as follows:
- Presentation of Financial Statements (IAS 1)
- Income Taxes (IAS 12)
- Property, Plant and Equipment (IAS 16)
- Revenue (IAS 18)
- Impairment of Assets (IAS 36)
- Business Combinations (IFRS 3)
Furthermore, IFRS 1, First-Time Adoption of International Financial Reporting Standards, provides entities adopting IFRS for the first time with a number of optional exemptions and mandatory exceptions to the general requirement for full retrospective application of IFRS which may differ from the requirements of the sections listed above. The Company is analyzing the various accounting policy choices available and will implement those determined to be most appropriate in the Company's circumstances. The Company has not yet determined the aggregate financial impact of adopting IFRS 1 on its consolidated financial statements.
The conversion project is progressing according to the plan established by management.
NON-GAAP FINANCIAL MEASURES
This section describes non-GAAP financial measures used by COGECO throughout this MD&A. It also provides reconciliations between these non-GAAP measures and the most comparable GAAP financial measures. These financial measures do not have standard definitions prescribed by Canadian GAAP and may not be comparable with similar measures presented by other companies. These measures include "cash flow from operations from continuing operations", "free cash flow", "operating income from continuing operations before amortization", "operating margin", "net income excluding the impairment loss, the income tax adjustment and the loss from discontinued operations", and "earnings per share excluding the impairment loss, the income tax adjustment and the loss from discontinued operations".
Cash flow from operations from continuing operations and free cash flow
Cash flow from operations from continuing operations is used by COGECO's management and investors to evaluate cash flows generated by operating activities excluding the impact of changes in non-cash operating items. This allows the Company to isolate the cash flows from operating activities from the impact of cash management decisions. Cash flow from operations from continuing operations is subsequently used in calculating the non-GAAP measure "free cash flow". Free cash flow is used by COGECO's management and investors to measure COGECO's ability to repay debt, distribute capital to its shareholders and finance its growth.
The most comparable Canadian GAAP financial measure is cash flow from operating activities from continuing operations. Cash flow from operations from continuing operations is calculated as follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Quarters ended Six months ended
February February February February
28, 29, 28, 29,
2009 2008 2009 2008
($000) $ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Cash flow from operating
activities from
continuing operations 120,480 92,942 150,950 139,546
Changes in non-cash
operating items (20,129) (7,568) 45,027 27,205
--------------------------------------------------------------------------
Cash flow from operations
from continuing operations 100,351 85,374 195,977 166,751
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Free cash flow is calculated as follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Quarters ended Six months ended
February February February February
28, 29, 28, 29,
2009 2008 2009 2008
($000) $ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Cash flow from operations
from continuing operations 100,351 85,374 195,977 166,751
Acquisition of fixed assets (62,161) (58,533) (127,870) (109,346)
Increase in deferred charges (5,779) (6,094) (12,986) (13,611)
Assets acquired under capital
leases - as per note 12 b) (322) (1,373) (1,261) (1,446)
--------------------------------------------------------------------------
Free cash flow 32,089 19,374 53,860 42,348
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Operating income from continuing operations before amortization and operating margin
Operating income from continuing operations before amortization is used by COGECO's management and investors to assess the Company's ability to seize growth opportunities in a cost effective manner, to finance its ongoing operations and to service its debt. Operating income from continuing operations before 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 Company's revenue which is left over, before taxes, to pay for its fixed costs, such as interest on Indebtedness. Operating margin is calculated by dividing operating income from continuing operations before amortization by revenue.
The most comparable Canadian GAAP financial measure is operating income from continuing operations. Operating income from continuing operations before amortization and operating margin are calculated as follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Quarters ended Six months ended
February February February February
28, 29, 28, 29,
($000, except 2009 2008(1) 2009 2008(1)
Percentages) $ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Operating income from
continuing operations 59,878 53,177 120,519 100,312
Amortization 66,785 56,346 130,848 109,385
--------------------------------------------------------------------------
Operating income from
continuing operations
before amortization 126,663 109,523 251,367 209,697
--------------------------------------------------------------------------
Revenue 311,825 271,894 620,200 532,149
--------------------------------------------------------------------------
Operating margin 40.6% 40.3% 40.5% 39.4%
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) Certain comparative figures have been reclassified to conform to the
current year's presentation. Financial information for the previous
year has been restated to reflect the presentation of foreign exchange
gains or losses as financial expense instead of operating costs.
Net income excluding the impairment loss, the income tax adjustment and the loss from discontinued operations and earnings per share excluding the impairment loss, the income tax adjustment and the loss from discontinued operations
Net income excluding the impairment loss, the income tax adjustment and the loss from discontinued operations and earnings per share excluding the impairment loss, the income tax adjustment and the loss from discontinued operations are used by COGECO's management and investors to evaluate what would have been the net income and earnings per share excluding these adjustments. This allows the Company to isolate the unusual adjustments in order to evaluate the net income and earnings per share from ongoing activities.
The most comparable Canadian GAAP financial measures are net income and earnings per share. These above-mentioned non-GAAP financial measures are calculated as follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Quarters ended Six months ended
February February February February
28, 29, 28, 29,
2009 2008 2009 2008
($000) $ $ $ $
--------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net income (loss) (115,291) 15,890 (104,238) 5,914
Adjustments:
Impairment loss net of
related income taxes and
non-controlling interest 123,951 - 123,951 -
Income tax adjustment net
of non-controlling interest - (7,909) - (7,909)
Loss from discontinued
operations - 425 - 18,057
--------------------------------------------------------------------------
Net income excluding the
impairment loss, the income
tax adjustment and the loss
from discontinued operations 8,660 8,406 19,713 16,062
--------------------------------------------------------------------------
Weighted average number
of multiple voting and
subordinate voting
shares outstanding 16,741,230 16,673,921 16,740,692 16,673,286
Effect of dilutive
stock options 9,963 74,013 15,175 78,084
--------------------------------------------------------------------------
Weighted average number
of diluted multiple
voting and subordinate
voting shares outstanding 16,751,193 16,747,934 16,755,867 16,751,370
--------------------------------------------------------------------------
Earnings per share
excluding the impairment
loss, the income tax
adjustment and the loss
from discontinued
operations
Basic 0.52 0.50 1.18 0.96
Diluted 0.52 0.50 1.18 0.96
--------------------------------------------------------------------------
--------------------------------------------------------------------------
ADDITIONAL INFORMATION
This MD&A was prepared on April 8, 2009. Additional information relating to the Company, including its Annual Information Form, is available on the SEDAR website at www.sedar.com.
ABOUT COGECO
COGECO is a diversified communications company. Through its Cogeco Cable subsidiary, COGECO provides its residential customers with Audio, Analogue and Digital Television, as well as HSI and Telephony services using its two-way broadband cable networks. Cogeco Cable also provides, to its commercial customers, data networking, e-business applications, video conferencing, hosting services, Ethernet, private line, VoIP, HSI access, dark fibre, data storage, date security and co-location services and other advanced communication solutions. Through its Cogeco Diffusion subsidiary, COGECO owns and operates the RYTHME FM radio stations in Montreal, Quebec City, Trois-Rivieres and Sherbrooke, as well as the 93.3 station in Quebec City. COGECO's subordinate voting shares are listed on the Toronto Stock Exchange (TSX: CGO). The subordinate voting shares of Cogeco Cable are also listed on the Toronto Stock Exchange (TSX:CCA).
Analyst Conference Call: Thursday, April 9, 2009 at 11:00 A.M. (EDT)
Media representatives may attend as listeners
only.
Please use the following dial-in number to have
access to the conference call by dialing five
minutes before the start of the conference:
Canada/USA Access Number: 1 800 820-0231
International Access Number: +1 416-640-5926
Confirmation Code: 7471071
By Internet at www.cogeco.ca/investors
A rebroadcast of the conference call will be
available until April 17, by dialing:
Canada and USA access number: 1 888-203-1112
International access number: +1 647-436-0148
Confirmation code: 7471071
Supplementary Quarterly Financial Information
(unaudited)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Quarters ended February 28/29, November 30,
($000, except percentages 2009 2008(1) 2008 2007(1)
and per share data) $ $ $ $
--------------------------------------------------------------------------
Revenue 311,825 271,894 308,375 260,255
Operating income from
continuing operations
before amortization(2) 126,663 109,523 124,704 100,174
Operating margin(2) 40.6% 40.3% 40.4% 38.5%
Amortization 66,785 56,346 64,063 53,039
Operating income from
continuing operations 59,878 53,177 60,641 47,135
Financial expense 18,028 17,550 23,778 16,333
Impairment of goodwill
and intangible assets 399,648 - - -
Income taxes 175 (14,426) 9,848 9,277
Loss (gain) on dilution 22 (25) 26 107
Non-controlling interest (242,704) 33,763 15,936 13,762
Income from
continuing operations (115,291) 16,315 11,053 7,656
Loss from
discontinued operations - (425) - (17,632)
Net income (loss) (115,291) 15,890 11,053 (9,976)
Net income excluding
the impairment loss,
the income tax adjustment
and the loss from
discontinued operations(2)(3) 8,660 8,406 11,053 7,656
Cash flow from
operations from
continuing operations(2) 100,351 85,374 95,626 81,377
Cash flow from operating
activities from
continuing operations 120,480 92,942 30,470 46,604
Free cash flow(2) 32,089 19,374 21,771 22,974
Earnings (loss) per share
Basic
Income from
continuing operations (6.89) 0.98 0.66 0.46
Loss from
discontinued operations - (0.03) - (1.06)
Net income (loss) (6.89) 0.95 0.66 (0.60)
Net income excluding the
impairment loss, the income
tax adjustment and the loss
from discontinued
operations(2)(3) 0.52 0.50 0.66 0.46
Diluted
Income from
continuing operations (6.89) 0.97 0.66 0.46
Loss from
discontinued operations - (0.03) - (1.06)
Net income (loss) (6.89) 0.95 0.66 (0.60)
Net income excluding the
impairment loss, the income
tax adjustment and the loss
from discontinued
operations(2)(3) 0.52 0.50 0.66 0.46
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Quarters ended August 31, May 31,
($000, except percentages 2008(1) 2007(1) 2008(1) 2007(1)
and per share data) $ $ $ $
--------------------------------------------------------------------------
Revenue 292,873 251,300 283,878 249,424
Operating income from
continuing operations
before amortization(2) 122,019 100,755 117,206 94,533
Operating margin(2) 41.7% 40.1% 41.3% 37.9%
Amortization 61,775 54,723 58,564 47,725
Operating income from
continuing operations 60,244 46,032 58,642 46,808
Financial expense 19,066 19,084 17,748 20,345
Impairment of goodwill
and intangible assets - - - -
Income taxes 9,849 (7,480) 10,285 8,055
Loss (gain) on dilution 19 (27,011) 3 64
Non-controlling interest 21,559 24,240 21,068 13,318
Income from
continuing operations 9,656 37,097 9,538 5,025
Loss from
discontinued operations - (6,713) - (1,966)
Net income (loss) 9,656 30,384 9,538 3,059
Net income excluding the
impairment loss, the income
tax adjustment and the loss
from discontinued
operations(2)(3) 9,656 5,309 9,538 5,025
Cash flow from operations
from continuing operations(2) 99,969 78,153 96,068 76,862
Cash flow from operating
activities from
continuing operations 146,052 107,155 112,893 51,669
Free cash flow(2) 20,981 9,131 37,107 19,052
Earnings (loss) per share
Basic
Income from
continuing operations 0.58 2.23 0.57 0.30
Loss from
discontinued operations - (0.40) - (0.12)
Net income (loss) 0.58 1.83 0.57 0.18
Net income excluding the
impairment loss, the income
tax adjustment and the loss
from discontinued
operations(2)(3) 0.58 0.32 0.57 0.30
Diluted
Income from
continuing operations 0.58 2.21 0.57 0.30
Loss from
discontinued operations - (0.40) - (0.12)
Net income (loss) 0.58 1.81 0.57 0.18
Net income excluding the
impairment loss, the income
tax adjustment and the loss
from discontinued
operations(2)(3) 0.58 0.32 0.57 0.30
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) Certain comparative figures have been reclassified to conform to the
current year's presentation. Financial information for the four
quarters of fiscal 2008 and third and fourth quarters of fiscal 2007
reflects the presentation of foreign exchange gains or losses as
financial expense instead of operating costs.
(2) The indicated terms do not have standardized definitions prescribed by
Canadian Generally Accepted Accounting Principles ("GAAP") and
therefore, may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-GAAP financial
measures" section of the Management's discussion and analysis.
(3) Net income for the quarter ended August 31, 2007 has been adjusted to
remove a $27 million gain on dilution resulting from shares issued by a
subsidiary and income tax adjustments of $4.8 million, net of non-
controlling interest, related to the recognition of benefits stemming
from prior years' income tax losses and minimum income tax paid, and a
reduction of Canadian federal enacted income tax rates in addition to
the adjustments described in the "Non-GAAP financial measures" section
of the Management's discussion and analysis.
The cable sector's operating results are not generally subject to material seasonal fluctuations. However, the loss in Basic Cable service customers is usually greater, and the addition of HSI service customers is generally lower in the third quarter, mainly because students leave their campus 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.
COGECO INC.
Customer Statistics
February 28, August 31,
2009 2008
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Homes Passed
Ontario 1,039,955 1,029,121
Quebec 509,701 502,490
-----------------------------------------------------------------------
Canada 1,549,656 1,531,611
Portugal 902,570 895,923
-----------------------------------------------------------------------
Total 2,452,226 2,427,534
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Revenue Generating Units
Ontario 1,458,928 1,387,054
Quebec 646,020 604,854
Canada 2,104,948 1,991,908
Portugal 690,266 724,966
-----------------------------------------------------------------------
Total 2,795,214 2,716,874
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Basic Cable Service Customers
Ontario 602,552 596,229
Quebec 265,330 260,865
Canada 867,882 857,094
Portugal 276,192 296,135
-----------------------------------------------------------------------
Total 1,144,074 1,153,229
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Discretionnary Service Customers
Ontario 496,416 493,858
Quebec 223,190 215,820
-----------------------------------------------------------------------
Canada 719,606 709,678
Portugal - -
-----------------------------------------------------------------------
Total 719,606 709,678
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Pay TV Service Customers
Ontario 108,279 97,753
Quebec 51,639 47,075
Canada 159,918 144,828
Portugal 70,710 57,715
-----------------------------------------------------------------------
Total 230,628 202,543
-----------------------------------------------------------------------
-----------------------------------------------------------------------
High Speed Internet Service Customers
Ontario 371,572 352,553
Quebec 131,922 120,914
-----------------------------------------------------------------------
Canada 503,494 473,467
Portugal 146,604 159,301
-----------------------------------------------------------------------
Total 650,098 632,768
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Digital Television Service Customers
Ontario 313,886 288,345
Quebec 164,773 153,401
Canada 478,659 441,746
Portugal 36,258 24,452
-----------------------------------------------------------------------
Total 514,917 466,198
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Telephony Service Customers
Ontario 170,918 149,927
Quebec 83,995 69,674
-----------------------------------------------------------------------
Canada 254,913 219,601
Portugal 231,212 245,078
-----------------------------------------------------------------------
Total 486,125 464,679
-----------------------------------------------------------------------
-----------------------------------------------------------------------
COGECO INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(unaudited)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended Six months ended
(In thousands of February 28, February 29, February 28, February 29,
dollars, except per 2009 2008 2009 2008
share data) $ $ $ $
--------------------------------------------------------------------------
Revenue 311,825 271,894 620,200 532,149
Operating costs 185,162 162,371 368,833 322,452
--------------------------------------------------------------------------
Operating income from
continuing operations
before amortization 126,663 109,523 251,367 209,697
Amortization (note 3) 66,785 56,346 130,848 109,385
--------------------------------------------------------------------------
Operating income from
continuing operations 59,878 53,177 120,519 100,312
Financial expense
(note 4) 18,028 17,550 41,806 33,883
Impairment of goodwill
and intangible assets
(note 5) 399,648 - 399,648 -
--------------------------------------------------------------------------
Income (loss) from
continuing operations
before income taxes
and the following
items (357,798) 35,627 (320,935) 66,429
Income taxes (note 6) 175 (14,426) 10,023 (5,149)
Loss (gain) on dilution
resulting from shares
issued by a subsidiary 22 (25) 48 82
Non-controlling
interest (242,704) 33,763 (226,768) 47,525
--------------------------------------------------------------------------
Income (loss) from
continuing operations (115,291) 16,315 (104,238) 23,971
Loss from discontinued
operations (note 15) - (425) - (18,057)
--------------------------------------------------------------------------
Net income (loss) (115,291) 15,890 (104,238) 5,914
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Earnings (loss) per
share (note 7)
Basic
Income (loss) from
continuing
operations (6.89) 0.98 (6.23) 1.44
Loss from
discontinued
operations - (0.03) - (1.08)
Net income (loss) (6.89) 0.95 (6.23) 0.35
Diluted
Income (loss) from
continuing
operations (6.89) 0.97 (6.23) 1.43
Loss from
discontinued
operations - (0.03) - (1.08)
Net income (loss) (6.89) 0.95 (6.23) 0.35
--------------------------------------------------------------------------
--------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended Six months ended
(In thousands of February 28, February 29, February 28, February 29,
dollars) 2009 2008 2009 2008
$ $ $ $
--------------------------------------------------------------------------
Net income (loss) (115,291) 15,890 (104,238) 5,914
--------------------------------------------------------------------------
Other comprehensive
income
Unrealized gains
(losses) on derivative
financial instruments
designated as cash
flow hedges, net of
income tax expense
of $1,401,000 and
$3,836,000 and non-
controlling interest
of $4,907,000 and
$20,606,000 (income
tax recovery of
$44,000 and
$1,187,000 and non
-controlling interest
of $1,013,000 and
$5,513,000 in 2008) 2,342 (485) 9,842 (2,638)
Reclassification to
net income of realized
losses (gains) on
derivative financial
instruments designated
as cash flow hedges,
net of income tax
expenses of $902,000
and $5,225,000 and non
-controlling interest
of $3,929,000 and
$23,140,000 (income
tax recovery of
$319,000 and $1,664,000
and non-controlling
interest of $1,367,000
and $6,159,000 in
2008) (1,876) 654 (11,055) 2,947
Unrealized gain on
translation of a net
investment in self-
sustaining foreign
subsidiaries, net of
non-controlling
interest of
$12,339,000 and
$16,453,000
($9,505,000 and
$16,499,000 in 2008) 5,890 4,545 7,856 7,891
Unrealized losses on
translation of long-
term debts designated
as hedges of a net
investment in self-
sustaining foreign
subsidiaries, net of
non-controlling
interest of
$6,469,000 and
$8,742,000
($6,012,000 and
$10,325,000 in 2008) (3,088) (2,875) (4,174) (4,938)
--------------------------------------------------------------------------
3,268 1,839 2,469 3,262
--------------------------------------------------------------------------
Comprehensive income
(loss) (112,023) 17,729 (101,769) 9,176
--------------------------------------------------------------------------
--------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(unaudited)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Six months ended
(In thousands of dollars) February 28, February 29,
2009 2008
$ $
--------------------------------------------------------------------------
Balance at beginning, as previously reported 295,808 274,946
Changes in accounting policies - 424
--------------------------------------------------------------------------
Balance at beginning, as restated 295,808 275,370
Net income (loss) (104,238) 5,914
Dividends on multiple voting shares (295) (258)
Dividends on subordinate voting shares (2,384) (2,076)
--------------------------------------------------------------------------
Balance at end 188,891 278,950
--------------------------------------------------------------------------
--------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(In thousands of dollars) February 28, August 31,
2009 2008
$ $
--------------------------------------------------------------------------
Assets
Current
Cash and cash equivalents 51,366 37,472
Accounts receivable 65,944 64,910
Income taxes receivable 10,170 3,569
Prepaid expenses 13,115 13,271
Future income tax assets 4,254 8,661
--------------------------------------------------------------------------
144,849 127,883
--------------------------------------------------------------------------
Investments 739 739
Fixed assets 1,289,666 1,261,610
Deferred charges 58,200 57,841
Intangible assets (note 8) 1,050,162 1,116,382
Goodwill (note 8) 161,669 487,805
Derivative financial instruments 34,285 -
Future income tax assets 5,922 7,221
--------------------------------------------------------------------------
2,745,492 3,059,481
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Liabilities and Shareholders' equity
Liabilities
Current
Bank indebtedness 38,420 10,302
Accounts payable and accrued liabilities 233,094 259,038
Income tax liabilities 11,229 20,793
Deferred and prepaid income 32,496 32,859
Derivative financial instruments - 79,791
Current portion of long-term debt (note 9) 178,445 336,858
--------------------------------------------------------------------------
493,684 739,641
--------------------------------------------------------------------------
Long-term debt (note 9) 1,013,535 737,055
Deferred and prepaid income and other liabilities 12,636 11,859
Pension plan liabilities and accrued employees
benefits 11,278 9,645
Future income tax liabilities 242,086 256,307
Non-controlling interest 655,739 883,948
--------------------------------------------------------------------------
2,428,958 2,638,455
--------------------------------------------------------------------------
Shareholders' equity
Capital stock (note 10) 120,070 120,049
Treasury shares (note 10) (1,847) (1,522)
Contributed surplus 1,987 1,727
Retained earnings 188,891 295,808
Accumulated other comprehensive income (note 11) 7,433 4,964
--------------------------------------------------------------------------
316,534 421,026
--------------------------------------------------------------------------
2,745,492 3,059,481
--------------------------------------------------------------------------
--------------------------------------------------------------------------
COGECO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended Six months ended
(In thousands of February 28, February 29, February 28, February 29,
dollars) 2009 2008 2009 2008
$ $ $ $
--------------------------------------------------------------------------
Cash flow from
operating activities
Income (loss) from
continuing operations (115,291) 16,315 (104,238) 23,971
Adjustments for:
Amortization (note 3) 66,785 56,346 130,848 109,385
Amortization of
deferred transaction
costs 634 751 1,351 1,473
Impairment of goodwill
and intangible assets
(note 5) 399,648 - 399,648 -
Future income taxes
(note 6) (10,086) (22,918) (7,262) (17,740)
Non-controlling
interest (242,704) 33,763 (226,768) 47,525
Loss (gain) on dilution
resulting from shares
issued by a subsidiary 22 (25) 48 82
Stock-based compensation 775 682 864 1,070
Loss (gain) on disposal
of fixed assets (19) (105) 204 237
Other 587 565 1,282 748
--------------------------------------------------------------------------
100,351 85,374 195,977 166,751
Changes in non-cash
operating items
(note 12 a)) 20,129 7,568 (45,027) (27,205)
--------------------------------------------------------------------------
Cash flow from operating
activities from
continuing operations 120,480 92,942 150,950 139,546
Cash flow from operating
activities from
discontinued operations
(note 15) - 1,770 - (3,973)
--------------------------------------------------------------------------
120,480 94,712 150,950 135,573
--------------------------------------------------------------------------
Cash flow from investing
activities
Acquisition of fixed
assets (note 12 b)) (62,161) (58,533) (127,870) (109,346)
Increase in deferred
charges (5,779) (6,094) (12,986) (13,611)
Other 45 (116) 61 (115)
--------------------------------------------------------------------------
Cash flow from investing
activities from
continuing operations (67,895) (64,743) (140,795) (123,072)
Cash flow from investing
activities from
discontinued operations
(note 15) - (48) - (133)
--------------------------------------------------------------------------
(67,895) (64,791) (140,795) (123,205)
--------------------------------------------------------------------------
Cash flow from financing
activities
Increase in bank
indebtedness 4,659 17,570 28,118 17,776
Net repayments under the
term facilities (35,243) (35,104) (29,949) (69,135)
Issuance of long-term
debt, net of transaction
costs - - 254,771 51
Repayments of long-term
debt and settlement of
derivative financial
instruments (880) (644) (240,627) (1,276)
Issue of subordinate
voting shares 21 61 21 61
Acquisition of treasury
shares (325) - (325) (468)
Dividends on multiple
voting shares (148) (129) (295) (258)
Dividends on subordinate
voting shares (1,192) (1,038) (2,384) (2,076)
Issue of shares by a
subsidiary to
non-controlling interest 686 236 964 3,292
Dividends paid by a
subsidiary to
non-controlling interest (3,943) (3,281) (7,883) (6,553)
--------------------------------------------------------------------------
Cash flow from financing
activities from
continuing operations (36,365) (22,329) 2,411 (58,586)
Cash flow from financing
activities from
discontinued operations
(note 15) - (1,722) - 4,106
--------------------------------------------------------------------------
(36,365) (24,051) 2,411 (54,480)
--------------------------------------------------------------------------
Effect of exchange rate
changes on cash and
cash equivalents
denominated in foreign
currencies 641 355 1,328 202
--------------------------------------------------------------------------
Net change in cash and
cash equivalents 16,861 6,225 13,894 (41,910)
--------------------------------------------------------------------------
Cash and cash equivalents
at beginning 34,505 18,144 37,472 66,279
--------------------------------------------------------------------------
Cash and cash equivalents
at end 51,366 24,369 51,366 24,369
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See supplemental cash flow information in note 12.
COGECO INC.
Notes to Consolidated Financial Statements
February 28, 2009
(unaudited)
(amounts in tables are in thousands of dollars, except number of shares and
per share data)
1. Basis of Presentation
In the opinion of management, the accompanying unaudited interim consolidated financial statements, prepared in accordance with Canadian generally accepted accounting principles, present fairly the financial position of COGECO Inc. ("the Company") at February 28, 2009 and August 31, 2008 as well as its results of operations and its cash flows for the three and six month periods ended February 28, 2009 and February 29, 2008.
While management believes that the disclosures presented are adequate, these unaudited interim consolidated financial statements and notes should be read in conjunction with COGECO Inc.'s annual consolidated financial statements for the year ended August 31, 2008. These unaudited interim consolidated financial statements follow the same accounting policies as the most recent annual consolidated financial statements, except for the adoption of the new accounting policies described below.
Adoption of new accounting policies
Capital disclosures and financial instruments
Effective September 1, 2008, the Company adopted the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1535, Capital Disclosures, Section 3862, Financial Instruments - Disclosures and Section 3863, Financial Instruments - Presentation.
Capital disclosures
Section 1535 of the CICA Handbook requires that an entity disclose information that enables users of its financial statements to evaluate the entity's objectives, policies and processes for managing capital, including disclosures of any externally imposed capital requirements and the consequences for non-compliance. These new disclosures are included in note 14.
Financial instruments
Section 3862 on financial instrument disclosures requires the disclosure of information about the significance of financial instruments for the entity's financial position and performance and the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the balance sheet date, and how the entity manages those risks.
Section 3863 establishes standards for presentation of financial instruments and non-financial derivatives. It deals with the classification of financial instruments, from the perspective of the issuer, between liabilities and equities, the classification of related interest, dividends, gains and losses, and circumstances in which financial assets and financial liabilities are offset.
The adoption of these standards did not have any impact on the classification and measurements of the Company's financial instruments. The new disclosures pursuant to these new Sections are included in note 14.
General standards of financial statement presentation
The CICA amended Section 1400 of the CICA Handbook, General Standards of Financial Statement Presentation, to include a requirement for management to make an assessment of the entity's ability to continue as a going concern when preparing financial statements. These changes, including the related disclosure requirements, were adopted by the Company on September 1, 2008 and had no impact on the interim consolidated financial statements.
Credit risk and fair value of financial assets and financial liabilities On January 20, 2009, the Emerging Issues Committee ("EIC") of the Canadian Accounting Standards Board issued EIC Abstract 173, Credit Risk and Fair Value of Financial Assets and Financial Liabilities, which establishes guidance requiring an entity to consider its own credit risk as well as the credit risk of the counterparty in determining the fair value of financial assets and financial liabilities, including derivative instruments. EIC 173 is applicable to all financial assets and liabilities measured at fair value in interim and annual financial statements for periods ending on or after January 20, 2009 and is applicable to the Company for its second quarter of fiscal 2009 with retrospective application, without restatement of prior periods, to the beginning of its current fiscal year. The adoption of this new abstract during the second quarter decreased derivative financial instruments assets by $3.5 million, decreased future income tax liabilities by $1 million, decreased non-controlling interest by $1.8 million and decreased accumulated other comprehensive income by $0.8 million at December 1, 2008 and had no significant impact on the consolidated balance sheet at September 1, 2008.
Future accounting pronouncement
Business combinations, consolidated financial statements and non-controlling interests
During January 2009, the CICA issued Handbook Section 1582, Business Combinations, which replaces Section 1581 of the same name, and Sections 1601, Consolidated Financial Statements and 1602, Non-Controlling Interests, which together replace Section 1600, Consolidated Financial Statements. These new Sections harmonize significant aspects of Canadian accounting standards with the International Financial Reporting Standards ("IFRS") that will be mandated for entities for fiscal year beginning on or after January 1, 2011.
Section 1582,requires that all business acquisition be measured at the fair value of the acquired entity at the acquisition date even if the business combination is achieved in stages, or if less than 100 percent of the entity interest in the acquiree is owned at the acquisition date, and expands the definition of a business subject to an acquisition. The Section also establishes new guidance on the measurement of consideration given and the recognition and measurement of assets acquired and liabilities assumed in a business combination. Furthermore, under this new guidance, acquisition costs, which were previously included as a component of the consideration given, and any negative goodwill resulting from the allocation of the purchase price, which was allocated as a reduction of non-current assets acquired under the previous standard, will be recorded in earnings in the current period. This new Section will be applied prospectively and will only impact the Company's consolidated financial statements for future acquisitions concluded in periods subsequent to the date of adoption.
Sections 1601 and 1602 dealing with consolidated financial statements require an entity to measure non-controlling interest upon acquisition either at fair value or at the non-controlling interest's proportionate share of the acquiree's identifiable net assets. The new Sections also require non-controlling interest to be presented as a separate component of shareholders' equity.
The new standards will apply as of the beginning of the first annual reporting period beginning on or after January 1, 2011, with simultaneous early adoption permitted. Early adoption may reduce the amount of restatement required upon conversion to IFRS. The Company is currently assessing the impact of these new Sections on its consolidated financial statements.
Harmonization of Canadian and International accounting standards
In March 2006, the Accounting Standards Board of the CICA released its new strategic plan, which proposed to abandon Canadian GAAP and effect a complete convergence to the IFRS for publicly accountable entities.
In April 2008, the CICA published an exposure draft as guidance which requires the transition to IFRS to replace Canadian GAAP as currently employed by Canadian publicly accountable enterprises. The changeover will occur no later than fiscal years beginning on or after January 1, 2011. Accordingly, the Company expects that its first interim consolidated financial statements presented in accordance with IFRS will be for the three-month period ending November 30, 2011, and its first annual consolidated financial statements presented in accordance with IFRS will be for the year ending August 31, 2012.
IFRS uses a conceptual framework similar to Canadian GAAP, but there are significant differences in recognition, measurement and disclosure requirements. The Company has established a project team including representatives from various areas of the organization to plan and complete the transition to IFRS. This team reports periodically to the Audit Committee, who oversees the IFRS implementation project on behalf of the Board of Directors. The Company will be assisted by external advisors as required.
The implementation project consists of three primary phases, which may occur concurrently as IFRS are applied to specific areas of operations:
- Scoping and diagnostic phase - This phase involves performing a high-level impact assessment to identify key areas that are expected to be impacted by the transition to IFRS. The result of these procedures is the ranking of IFRS impacts in order of priority to assess the timing and complexity of transition efforts that will be required in subsequent phases.
- Impact analysis, evaluation and design phase - In this phase, each area identified from the scoping and diagnostic phase will be addressed in order of descending priority, with project teams established as deemed necessary. This phase involves specification of changes required to existing accounting policies, information systems and business processes, together with an analysis of policy choices permitted under IFRS and the development of draft IFRS financial statement content.
- Implementation and review phase - This phase includes execution of changes to information systems and business processes, completing formal authorization processes to approve recommended accounting policy changes and training programs across the organization, as necessary. It will culminate in the collection of financial information necessary to compile IFRS-compliant financial statements, embedding IFRS in business processes, eliminating any unnecessary data collection processes and finally the approval by the Audit Committee of the IFRS consolidated financial statements. Implementation also involves additional staff training with the deployment of revised systems.
The Company completed the scoping and diagnostic phase in February 2009, and is now conducting the impact analysis, evaluation and design phase. As implications of the conversion are identified, the impact on information technology, data system and business activities will be assessed. The Company's analysis of the IFRS and the comparison with currently applied accounting principles has identified a number of differences that may require information system changes or which are likely to have a material impact on the consolidated financial statements of the Company.
Set out below are the main areas where changes in accounting policies are expected to have a significant impact on the Company's consolidated financial statements. The list below should not be regarded as a complete list of changes that will result from transition to the IFRS. It is intended to highlight areas that the Company believes to be the most significant; however, analysis of changes is still in process and the selection of accounting policies where choices are available under IFRS has not been completed. We note that the regulatory bodies that promulgate the Canadian GAAP and the IFRS have significant ongoing projects that could affect the ultimate differences between Canadian GAAP and IFRS and their impact on the Company's consolidated financial statements in future years. The future impacts of the IFRS will also depend on the particular circumstances prevailing in those years. The standards listed below are those existing based on current Canadian GAAP and IFRS. At this stage, the Company is not able to reliably quantify the expected impacts of these differences on its consolidated financial statements. They are as follows:
- Presentation of Financial Statements (IAS 1)
- Income Taxes (IAS 12)
- Property, Plant and Equipment (IAS 16)
- Revenue (IAS 18)
- Impairment of Assets (IAS 36)
- Business Combinations (IFRS 3)
Furthermore, IFRS 1, First-Time Adoption of International Financial Reporting Standards, provides entities adopting IFRS for the first time with a number of optional exemptions and mandatory exceptions to the general requirement for full retrospective application of IFRS which may differ from the requirements of the sections listed above. The Company is analyzing the various accounting policy choices available and will implement those determined to be most appropriate in the Company's circumstances. The Company has not yet determined the aggregate financial impact of adopting IFRS 1 on its consolidated financial statements.
The conversion project is progressing according to the established plan.
2. Segmented Information
The principal financial information per business segment is presented in the tables below:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Cable Other and eliminations
--------------------------------------------------------------------------
Three months ended February 28, February 29, February 28, February 29,
2009 2008 2009 2008
$ $ $ $
--------------------------------------------------------------------------
Revenue 304,920 265,102 6,905 6,792
Operating costs 179,459 156,444 5,703 5,927
Operating income from
continuing operations
before amortization 125,461 108,658 1,202 865
Amortization 66,644 55,989 141 357
Operating income from
continuing operations 58,817 52,669 1,061 508
Financial expense 17,988 17,136 40 414
Impairment of goodwill
and intangible assets 399,648 - - -
Income taxes (250) (14,378) 425 (48)
Loss (gain) on dilution
resulting from shares
issued by a subsidiary 22 (25) - -
Non-controlling
interest (242,704) 33,763 - -
Income (loss) from
continuing operations (115,887) 16,173 596 142
Loss from discontinued
operations - - - (425)
--------------------------------------------------------------------------
Total assets (1) 2,703,164 3,019,155 42,328 40,326
Fixed assets (1) 1,286,150 1,257,965 3,516 3,645
Intangible assets (1) 1,024,822 1,091,042 25,340 25,340
Goodwill (1) 161,669 487,805 - -
Acquisition of
fixed assets (2) 62,342 59,874 141 32
--------------------------------------------------------------------------
--------------------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
Consolidated
------------------------------------------------------------
Three months ended February 28, February 29,
2009 2008
$ $
------------------------------------------------------------
Revenue 311,825 271,894
Operating costs 185,162 162,371
Operating income from continuing
operations before amortization 126,663 109,523
Amortization 66,785 56,346
Operating income from
continuing operations 59,878 53,177
Financial expense 18,028 17,550
Impairment of goodwill
and intangible assets 399,648 -
Income taxes 175 (14,426)
Loss (gain) on dilution resulting
from shares issued by a subsidiary 22 (25)
Non-controlling interest (242,704) 33,763
Income (loss) from
continuing operations (115,291) 16,315
Loss from discontinued operations - (425)
------------------------------------------------------------
Total assets (1) 2,745,492 3,059,481
Fixed assets (1) 1,289,666 1,261,610
Intangible assets (1) 1,050,162 1,116,382
Goodwill (1) 161,669 487,805
Acquisition of fixed assets (2) 62,483 59,906
------------------------------------------------------------
------------------------------------------------------------
(1) At February 28, 2009 and August 31, 2008.
(2) Includes capital leases that are excluded from the consolidated
statements of cash flows.
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Cable Other and eliminations
--------------------------------------------------------------------------
Six months ended February 28, February 29, February 28, February 29,
2009 2008 2009 2008
$ $ $ $
--------------------------------------------------------------------------
Revenue 604,358 516,935 15,842 15,214
Operating costs 359,174 310,975 9,659 11,477
Operating income from
continuing operations
before amortization 245,184 205,960 6,183 3,737
Amortization 130,566 108,676 282 709
Operating income from
continuing operations 114,618 97,284 5,901 3,028
Financial expense 41,382 33,013 424 870
Impairment of goodwill
and intangible assets 399,648 - - -
Income taxes 8,606 (6,003) 1,417 854
Loss on dilution
resulting from
shares issued
by a subsidiary 48 82 - -
Non-controlling
interest (226,768) 47,525 - -
Income (loss) from
continuing operations (108,298) 22,667 4,060 1,304
Loss from
discontinued operations - - - (18,057)
--------------------------------------------------------------------------
Total assets (1) 2,703,164 3,019,155 42,328 40,326
Fixed assets (1) 1,286,150 1,257,965 3,516 3,645
Intangible
assets (1) 1,024,822 1,091,042 25,340 25,340
Goodwill (1) 161,669 487,805 - -
Acquisition of
fixed assets (2) 128,948 110,601 183 191
--------------------------------------------------------------------------
--------------------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
Consolidated
------------------------------------------------------------
Six months ended February 28, February 29,
2009 2008
$ $
------------------------------------------------------------
Revenue 620,200 532,149
Operating costs 368,833 322,452
Operating income from continuing
operations before amortization 251,367 209,697
Amortization 130,848 109,385
Operating income from
continuing operations 120,519 100,312
Financial expense 41,806 33,883
Impairment of goodwill
and intangible assets 399,648 -
Income taxes 10,023 (5,149)
Loss on dilution resulting from
shares issued by a subsidiary 48 82
Non-controlling interest (226,768) 47,525
Income (loss) from
continuing operations (104,238) 23,971
Loss from discontinued operations - (18,057)
------------------------------------------------------------
Total assets (1) 2,745,492 3,059,481
Fixed assets (1) 1,289,666 1,261,610
Intangible assets (1) 1,050,162 1,116,382
Goodwill (1) 161,669 487,805
Acquisition of fixed assets (2) 129,131 110,792
------------------------------------------------------------
------------------------------------------------------------
(1) At February 28, 2009 and August 31, 2008.
(2) Includes capital leases that are excluded from the consolidated
statements of cash flows.
The following tables set out certain geographic market information based
on client location:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended Six months ended
February 28, February 29, February 28, February 29,
2009 2008 2009 2008
$ $ $ $
-------------------------------------------------------------------------
Revenue
Canada 250,585 211,960 496,896 416,623
Europe 61,240 59,934 123,304 115,526
-------------------------------------------------------------------------
311,825 271,894 620,200 532,149
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
February 28, August 31,
2009 2008
$ $
-------------------------------------------------------------------------
Fixed assets
Canada 979,510 944,328
Europe 310,156 317,282
-------------------------------------------------------------------------
1,289,666 1,261,610
-------------------------------------------------------------------------
Intangible assets
Canada 1,050,162 1,052,608
Europe - 63,774
-------------------------------------------------------------------------
1,050,162 1,116,382
-------------------------------------------------------------------------
Goodwill
Canada 116,890 116,890
Europe 44,779 370,915
-------------------------------------------------------------------------
161,669 487,805
-------------------------------------------------------------------------
-------------------------------------------------------------------------
3. Amortization
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended Six months ended
February 28, February 29, February 28, February 29,
2009 2008 2009 2008
$ $ $ $
-------------------------------------------------------------------------
Fixed assets 56,650 47,972 111,056 92,994
Deferred charges 6,071 5,826 11,859 11,400
Intangible assets 4,064 2,548 7,933 4,991
-------------------------------------------------------------------------
66,785 56,346 130,848 109,385
-------------------------------------------------------------------------
-------------------------------------------------------------------------
4. Financial expense
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended Six months ended
February 28, February 29, February 28, February 29,
2009 2008 2009 2008
$ $ $ $
-------------------------------------------------------------------------
Interest on long-
term debt 17,029 16,989 37,299 33,832
Foreign exchange
losses (gains) 619 177 4,403 (858)
Amortization of
deferred transaction
costs 407 407 814 814
Other (27) (23) (710) 95
-------------------------------------------------------------------------
18,028 17,550 41,806 33,883
-------------------------------------------------------------------------
-------------------------------------------------------------------------
5. Impairment of goodwill and intangible assets
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended Six months ended
February 28, February 29, February 28, February 29,
2009 2008 2009 2008
$ $ $ $
-------------------------------------------------------------------------
Impairment of
goodwill 339,206 - 339,206 -
Impairment of
intangible assets 60,442 - 60,442 -
-------------------------------------------------------------------------
399,648 - 399,648 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In the second quarter of fiscal 2009, the competitive position of Cabovisao in the Iberian Peninsula further deteriorated due to the continuing unfavourable economic climate and recurring intense customer promotions and advertising initiatives from competitors in the Portuguese market at the end of the second quarter. In accordance with current accounting standards, management considers that the continued RGU and local currency revenue decline, are more significant and persistent than expected, resulting in a decrease in the value of the Company's subsidiary's investment in the Portuguese subsidiary. As a result, the Company's subsidiary tested goodwill and all long-lived assets for impairment at February 28, 2009.
Goodwill has to be tested for impairment using a two step approach. The first step consists of determining whether the fair value of the reporting unit exceeds the net carrying amount of that reporting unit, including goodwill. In the event that the net carrying amount exceeds the fair value, a second step is performed in order to determine the amount of the impairment loss. The Company's subsidiary has completed its impairment tests on goodwill and has concluded that goodwill was impaired at February 28, 2009. As a result, an impairment loss of $339.2 million was recorded in the second quarter. Fair value of the reporting unit was determined using the discounted cash flow method. Future cash flows are based on internal forecasts and consequently, considerable management judgement is necessary to estimate future cash flows. Significant changes in assumptions could result in further impairments of goodwill.
Intangible assets with definite lives, such as customer relationships, must be tested for impairment by comparing the carrying amount of the asset or group of assets to the expected future undiscounted cash flow to be generated by the asset or group of assets. Accordingly, the Company's subsidiary has completed its impairment test on customer relationships at February 28, 2009, and has determined that the carrying value of customer relationships exceeds its fair value. As a result, an impairment loss of $60.4 million was recorded in the second quarter.
6. Income Taxes
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended Six months ended
February 28, February 29, February 28, February 29,
2009 2008 2009 2008
$ $ $ $
-------------------------------------------------------------------------
Current 10,261 8,492 17,285 12,591
Future (10,086) (22,918) (7,262) (17,740)
-------------------------------------------------------------------------
175 (14,426) 10,023 (5,149)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table provides a reconciliation between Canadian statutory
federal and provincial income taxes and the consolidated income tax
expense:
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three months ended Six months ended
February 28, February 29, February 28, February 29,
2009 2008 2009 2008
$ $ $ $
-------------------------------------------------------------------------
Income (loss) before
income taxes (357,798) 35,627 (320,935) 66,429
Combined income
tax rate 32.49% 32.82% 32.48% 33.38%
Income taxes at
combined income tax
rate (116,249) 11,694 (104,283) 22,175
Adjustments for loss
or income subject to
lower or higher tax
rates (686) 37 (880) (350)
Decrease in future
income taxes as a
result of decreases
in substantively
enacted tax rates - (24,146) - (24,146)
Decrease in income tax
recovery arising from
the non-deductible
impairment of goodwill 89,890 - 89,890 -
Decrease in income tax
recovery arising from
non-deductible expenses 157 180 274 304
Effect of foreign income
tax rate differences 25,632 (2,213) 24,028 (3,377)
Other 1,431 22 994 245
-------------------------------------------------------------------------
Income taxes at
effective income tax
rate 175 (14,426) 10,023 (5,149)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
7. Earnings (Loss) per Share
The following table provides a reconciliation between basic and diluted
earnings (loss) per share:
-------------------------------------------------------------------------
Three months ended Six months ended
February 28, February 29, February 28, February 29,
2009 2008 2009 2008
$ $ $ $
-------------------------------------------------------------------------
Income (loss) from
continuing
operations (115,291) 16,315 (104,238) 23,971
Loss from
discontinued
operations - (425) - (18,057)
-------------------------------------------------------------------------
Net income (loss) (115,291) 15,890 (104,238) 5,914
-------------------------------------------------------------------------
Weighted average
number of multiple
voting and
subordinate voting
shares outstanding 16,741,230 16,673,921 16,740,836 16,673,286
Effect of dilutive
stock options (1) - 74,013 - 78,084
-------------------------------------------------------------------------
Weighted average
number of diluted
multiple voting and
subordinate voting
shares outstanding 16,741,230 16,747,934 16,740,836 16,751,370
-------------------------------------------------------------------------
Earnings (loss) per
share
Basic
Income (loss) from
continuing
operations (6.89) 0.98 (6.23) 1.44
Loss from
discontinued
operations - (0.03) - (1.08)
Net income (loss) (6.89) 0.95 (6.23) 0.35
Diluted
Income (loss) from
continuing operations (6.89) 0.97 (6.23) 1.43
Loss from discontinued
operations - (0.03) - (1.08)
Net income (loss) (6.89) 0.95 (6.23) 0.35
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The weighted average dilutive number of subordinate voting shares,
which were anti-dilutive for the three and six month periods ended
February 28, 2009, amounted to 9,963 and 15,175. For the three and six
month periods ended February 28, 2009, 32,782 stock options (33,182
and 16,591 in 2008) were excluded from the calculation of diluted
earnings per share as the exercise price of the options was greater
than the average share price of the subordinate voting shares.
8. Goodwill and Intangible Assets
--------------------------------------------------------------------------
--------------------------------------------------------------------------
February 28, August 31,
2009 2008
$ $
--------------------------------------------------------------------------
Customer relationships 35,270 101,490
Broadcasting licenses 25,120 25,120
Customer base 989,772 989,772
--------------------------------------------------------------------------
1,050,162 1,116,382
Goodwill 161,669 487,805
--------------------------------------------------------------------------
1,211,831 1,604,187
--------------------------------------------------------------------------
--------------------------------------------------------------------------
a) Intangible assets
During the first six months, intangible assets variations were as follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Customer Broadcasting Customer Total
Relationships licenses Base
$ $ $ $
--------------------------------------------------------------------------
Balance at August 31,
2008 101,490 25,120 989,772 1,116,382
Amortization (7,933) - - (7,933)
Foreign currency
translation adjustment 2,155 - - 2,155
Impairment (note 5) (60,442) - - (60,442)
--------------------------------------------------------------------------
Balance at February
28, 2009 35,270 25,120 989,772 1,050,162
--------------------------------------------------------------------------
--------------------------------------------------------------------------
b) Goodwill
During the first six months, goodwill variation was as follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
$
--------------------------------------------------------------------------
Balance at August 31, 2008 487,805
Foreign currency translation adjustment 13,070
Impairment (note 5) (339,206)
--------------------------------------------------------------------------
Balance at February 28, 2009 161,669
--------------------------------------------------------------------------
--------------------------------------------------------------------------
9. Long-Term Debt
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Maturity Interest rate February 28, August 31,
2009 2008
% $ $
--------------------------------------------------------------------------
Parent company Term
Facility 2011 (1) 3.85 (2) 11,808 18,748
Obligations under
capital leases 2013 6.61 - 9.29 108 77
Subsidiaries
Term Facility
Term loan -
EUR94,096,350 2011 2.31 (2)(5) 151,173 145,832
Term loan -
EUR17,358,700 2011 2.31 (2)(5) 27,862 26,881
Revolving loan -
EUR117,500,000
(EUR126,000,000 at
August 31, 2008) 2011 2.44 (2) 189,516 196,308
Revolving loan 2011 1.86 (2) 84,839 94,375
Senior Secured Debentures
Series 1 2009 6.75 149,931 149,814
Senior Secured Notes
Series A - US$150
million 2008 6.83 (3) - 159,233
Series B 2011 7.73 174,434 174,338
Senior Secured Notes (4)
Series A - US$190
million 2015 7.00 240,180 -
Series B 2018 7.60 54,560 -
Senior Unsecured Debenture 2018 5.94 99,777 99,768
Obligations under capital
leases 2013 6.47 - 9.93 7,754 8,492
Other - - 38 47
--------------------------------------------------------------------------
1,191,980 1,073,913
Less current portion 178,445 336,858
--------------------------------------------------------------------------
1,013,535 737,055
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) In December 2008, the Term Facility has been extended for an additional
year.
(2) Average interest rate on debt at February 28, 2009, including stamping
fees.
(3) Cross-currency swap agreements have resulted in an effective interest
rate of 7.254% on the Canadian dollar equivalent of the US denominated
debt of the Company's subsidiary, Cogeco Cable Inc.
(4) On October 1, 2008, the Company's subsidiary, Cogeco Cable Inc., issued
US$190 million Senior Secured Notes Series A maturing October 1, 2015,
and $55 million Senior Secured Notes Series B maturing October 1, 2018,
net of transaction costs of $2.1 million. The Senior Secured Notes
Series B bear interest at the coupon rate of 7.60% per annum, payable
semi-annually. The Company's subsidiary has entered into cross-currency
swap agreements to fix the liability for interest and principal
payments on the Senior Secured Notes Series A in the amount of US$190
million, which bear interest at the coupon rate of 7.00% per annum,
payable semi-annually. Taking into account these agreements, the
effective interest rate on the Senior Secured Notes Series A is 7.24%
and the exchange rate applicable to the principal portion of the US
dollar-denominated debt has been fixed at $1.0625.
(5) On January 22, 2009, the Company's subsidiary, Cogeco Cable Inc.,
entered into a swap agreement with a financial institution to fix the
floating benchmark interest rate with respect to the Euro-denominated
Term Loan facilities for a notional amount of Euro 111.5 million. The
interest swap rate to hedge the Term Loans has been fixed at 2.08%
until their maturity of July 28, 2011. The notional value of the swap
will decrease in line with the amortization schedule of the Term Loans.
In addition to the interest swap rate of 2.08%, the Company's
subsidiary will continue to pay the applicable margin on these Term
Loans in accordance with the Term Facility.
10. Capital Stock
Authorized, an unlimited number
Preferred shares of first and second rank, issuable in series and non-voting, except when specified in the Articles of Incorporation of the Company or in the Law.
Multiple voting shares, 20 votes per share.
Subordinate voting share, 1 vote per share.
--------------------------------------------------------------------------
--------------------------------------------------------------------------
February 28, 2009 August 31, 2008
$ $
--------------------------------------------------------------------------
Issued
1,842,860 multiple voting shares 12 12
14,898,762 subordinate voting shares
(14,897,586 at August 31, 2008) 120,058 120,037
--------------------------------------------------------------------------
120,070 120,049
--------------------------------------------------------------------------
--------------------------------------------------------------------------
During the first six months, subordinate voting share transactions were as
follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Number of shares Amount
$
--------------------------------------------------------------------------
Balance at August 31, 2008 14,897,586 120,037
Shares issued for cash under the
Employee Stock Purchase Plan 1,176 21
--------------------------------------------------------------------------
Balance at February 28, 2009 14,898,762 120,058
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Stock-based plans
The Company offers, for the benefit of its employees and those of its subsidiaries, an Employee Stock Purchase Plan and a Stock Option Plan for certain executives, which are described in the Company's annual consolidated financial statements. During the first six months of 2009 and 2008, no stock options were granted to employees by COGECO Inc. However, the Company's subsidiary, Cogeco Cable Inc., granted 133,381 stock options (99,084 in 2008) with an exercise price of $34.46 ($45.59 to $49.82 in 2008), of which 29,711 stock options (22,683 in 2008) were granted to COGECO Inc.'s employees. The Company records compensation expense for options granted on or after September 1, 2003. As a result, a compensation expense of $174,000 and $275,000 ($587,000 and $907,000 in 2008) was recorded for the three and six month periods ended February 28, 2009.
The fair value of stock options granted by the Company's subsidiary, Cogeco Cable Inc., for the six months period ended February 28, 2009 was $8.96 ($12.86 in 2008) per option. The fair value was estimated at the grant date for purposes of determining the stock-based compensation expense using the binomial option pricing model based on the following assumptions:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
2009 2008
% %
--------------------------------------------------------------------------
Expected dividend yield 1.40 0.90
Expected volatility 29 27
Risk-free interest rate 4.22 4.25
Expected life in years 4.0 4.0
--------------------------------------------------------------------------
--------------------------------------------------------------------------
At February 28, 2009, the Company had outstanding stock options providing for the subscription of 123,358 subordinate voting shares. These stock options can be exercised at various prices ranging from $20.95 to $37.50 and at various dates up to October 19, 2011.
The Company also offers a senior executives and designated employee incentive unit plan (the "Incentive Share Unit Plan") which is described in the Company's annual consolidated financial statements. During the first six months, the Company granted 17,702 Incentive Share Units (12,852 in 2008). These shares were purchased for a cash consideration of $325,000 ($468,000 in 2008) and are held in trust for participants until they are completely vested. The trust, considered as a variable interest entity, is consolidated in the Company's financial statements with the value of the acquired shares presented as treasury shares in reduction of capital stock. A compensation expense of $130,000 and $238,000 ($95,000 and $163,000 in 2008) was recorded for the three and six month periods ended February 28, 2009 related to this plan.
The Company and its subsidiary, Cogeco Cable Inc., offer deferred share unit plans ("DSU Plans") which are described in the Company's annual consolidated financial statements. During the first six months, 11,113 and 6,282 deferred share units were awarded to the participants in connection with the DSU Plans by the Company and its subsidiary, respectively. Expenses of $471,000 and $351,000 were recorded for the three and six month periods ended February 28, 2009 for the liabilities related to these plans.
11. Accumulated Other Comprehensive Income
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Translation of a
net investment
in self-sustaining Cash flow
foreign subsidiaries hedges Total
$ $ $
--------------------------------------------------------------------------
Balance at August 31, 2008 5,064 (100) 4,964
Other comprehensive income (loss) 3,682 (1,213) 2,469
--------------------------------------------------------------------------
Balance at February 28, 2009 8,746 (1,313) 7,433
--------------------------------------------------------------------------
--------------------------------------------------------------------------
12. Statements of Cash Flows
a) Changes in non-cash operating items
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended Six months ended
February 28, February 29, February 28, February 29,
2009 2008 2009 2008
$ $ $ $
--------------------------------------------------------------------------
Accounts receivable 2,695 (2,380) (494) (4,279)
Income taxes
receivable (3,637) 380 (6,522) 1,207
Prepaid expenses (1,163) (640) 174 1,196
Accounts payable
and accrued
liabilities 15,646 6,428 (28,998) (32,366)
Income tax liabilities 7,416 5,908 (9,585) 8,190
Deferred and prepaid
income and other
liabilities (828) (2,128) 398 (1,153)
--------------------------------------------------------------------------
20,129 7,568 (45,027) (27,205)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
b) Other information
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended Six months ended
February 28, February 29, February 28, February 29,
2009 2008 2009 2008
$ $ $ $
--------------------------------------------------------------------------
Fixed asset
acquisitions through
capital leases 322 1,373 1,261 1,446
Interest paid 12,219 11,550 33,970 32,744
Income taxes paid 6,479 2,662 33,395 3,140
--------------------------------------------------------------------------
--------------------------------------------------------------------------
13. Employees Future Benefits
The Company and its Canadian subsidiaries offer their employees contributory defined benefit pension plans, a defined contribution pension plan or collective registered retirement savings plans, which are described in the Company's annual consolidated financial statements. The total expenses related to these plans are as follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended Six months ended
February 28, February 29, February 28, February 29,
2009 2008 2009 2008
$ $ $ $
--------------------------------------------------------------------------
Contributory defined
benefit pension plans 747 658 1,494 1,316
Defined contribution
pension plan and
collective registered
retirement savings plans 903 714 1,826 1,422
--------------------------------------------------------------------------
1,650 1,372 3,320 2,738
--------------------------------------------------------------------------
--------------------------------------------------------------------------
14. Financial and Capital Management
a) Financial management
Management's objectives are to protect COGECO Inc. and its subsidiaries against material economic exposures and variability of results and against certain financial risks including credit risk, liquidity risk, interest rate risk and foreign exchange risk.
Credit risk
Credit risk represents the risk of financial loss for the Company if a customer or counterpart to a financial asset fails to meet its contractual obligations. The Company is exposed to credit risk arising from the derivative financial instruments, cash and cash equivalents and trade accounts receivable, the maximum exposure of which is represented by the carrying amounts reported on the balance sheet.
Credit risk from the derivative financial instruments arises from the possibility that counterparts to the cross-currency swap and interest rate swap agreements may default on their obligations in instances where these agreements have positive fair values for the Company. The Company reduces this risk by completing transactions with financial institutions that carry a credit rating equal to or superior to its own credit rating. The Company assesses the creditworthiness of the counterparts in order to minimize the risk of counterparts default under the agreements. At February 28, 2009, management believes that the credit risk relating to its swaps is minimal, since the lowest credit rating of the counterparts to the agreements is A-.
Cash and cash equivalents consist mainly of highly liquid investments, such as money market deposits. The Company has deposited the cash and cash equivalents with reputable financial institutions, from which management believes the risk of loss to be remote.
The Company is also exposed to credit risk in relation to its trade accounts receivable. In the current global economic environment, the Company's credit exposure is higher but it is difficult to predict the impact this could have on the Company's accounts receivable balances. To mitigate such risk, the Company continuously monitors the financial condition of its customers and reviews the credit history or worthiness of each new major customer. At February 28, 2009, no customer balance represents a significant portion of the Company's consolidated trade receivables. The Company establishes an allowance for doubtful accounts based on specific credit risk of its customers by examining such factors as the number of overdue days of the customer's balance outstanding as well as the customer's collection history. The Company believes that its allowance for doubtful accounts is sufficient to cover the related credit risk. The Company has credit policies in place and has established various credit controls, including credit checks, deposits on accounts and advance billing, and has also established procedures to suspend the availability of services when customers have fully utilized approved credit limits or have violated existing payment terms. Since the Company has a large and diversified clientele dispersed throughout in it's market area in Canada and Portugal, there is no significant concentration of credit risk. The following table provides further details on the Company's accounts receivable balances:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
February 28, 2009 August 31, 2008
$ $
--------------------------------------------------------------------------
Trade accounts receivable 78,181 73,160
Allowance for doubtful accounts (17,164) (13,181)
--------------------------------------------------------------------------
61,017 59,979
Other accounts receivable 4,927 4,931
--------------------------------------------------------------------------
65,944 64,910
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The following table provides further details on trade accounts receivable, net of allowance for doubtful accounts. Trade accounts receivable past due is defined as amount outstanding beyond normal credit terms and conditions for the respective customers. A large portion of Cogeco Cable Inc.'s customers are billed in advance and are required to pay before their services are rendered. The Company considers amount outstanding at the due date as trade accounts receivable past due.
--------------------------------------------------------------------------
--------------------------------------------------------------------------
February 28, 2009 August 31, 2008
$ $
--------------------------------------------------------------------------
Net trade accounts receivable not past due 43,302 43,659
Net trade accounts receivable past due 17,715 16,320
--------------------------------------------------------------------------
61,017 59,979
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company manages liquidity risk through the management of its capital structure and access to different capital markets. It also manages liquidity risk by continuously monitoring actual and projected cash flows to ensure sufficient liquidity to meet its obligations when due. At February 28, 2009, the available amount of the Company's Term Facilities was $445.9 million. Management believes that the committed Term Facilities will, until their maturities in July 2011 and December 2011, provide sufficient liquidity to manage its long-term debt maturities and support working capital requirements.
The following table summarizes the contractual maturities of the financial liabilities and related capital amounts:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
2009 2010 2011 2012
(six (twelve (twelve (twelve
months) months) months) months)
$ $ $ $
--------------------------------------------------------------------------
Bank indebtedness 38,420 - - -
Accounts payable and
accrued liabilities 233,094 - - -
Long-term debt (1) 175,311 42,180 386,829 187,000
Derivative financial
instruments
Cash outflows
(Canadian dollar) - - - -
Cash inflows (Canadian
dollar equivalent of
US dollar) - - - -
Obligations under
capital leases (2) 2,349 3,216 2,013 1,281
--------------------------------------------------------------------------
449,174 45,396 388,842 188,281
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
2013 Thereafter Total
(twelve months)
$ $ $
--------------------------------------------------------------------------
Bank indebtedness - - 38,420
Accounts payable and accrued liabilities - - 233,094
Long-term debt (1) - 396,737 1,188,057
Derivative financial instruments
Cash outflows (Canadian dollar) - 201,875 201,875
Cash inflows (Canadian dollar
equivalent of US dollar) - (241,737) (241,737)
Obligations under capital leases (2) 69 - 8,928
--------------------------------------------------------------------------
69 356,875 1,428,637
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) Principal excluding obligations under capital leases.
(2) Including interest.
The following table is a summary of interest payable on long-term debt (excluding interest on capital leases) that are due for each of the next five years and thereafter, based on the principal and interest rate prevailing on the current debt at February 28 and their respective maturities:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
2009 2010 2011 2012
(six (twelve (twelve (twelve
months) months) months) months)
$ $ $ $
--------------------------------------------------------------------------
Interest payments on
long-term debt 28,175 50,718 49,091 29,427
Interest payments on
derivative financial
instruments 9,787 18,880 17,523 14,614
Interest receipts on
derivative financial
instruments (10,490) (20,412) (19,302) (16,922)
--------------------------------------------------------------------------
27,472 49,186 47,312 27,119
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
--------------------------------------------------------------------------
2013 Thereafter Total
(twelve months)
$ $ $
--------------------------------------------------------------------------
Interest payments on long-term debt 27,038 83,214 267,663
Interest payments on derivative
financial instruments 14,614 30,445 105,863
Interest receipts on derivative
financial instruments (16,922) (35,253) (119,301)
--------------------------------------------------------------------------
24,730 78,406 254,225
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Interest rate risk
The Company is exposed to interest rate risks for both fixed interest rate and floating interest rate instruments. Fluctuations in interest rates will have an effect on the valuation and collection or repayment of these instruments. At February 28, 2009, all of the Company's long-term debt was at fixed rate, except for the Company's Term Facilities. On January 22, 2009, the Company's subsidiary, Cogeco Cable Inc., entered into a swap agreement with a financial institution to fix the floating benchmark interest rate with respect to the Euro-denominated Term Loan facilities for a notional amount of Euro 111.5 million. The interest swap rate to hedge the Term Loans has been fixed at 2.08% until their maturity of July 28, 2011. The notional value of the swap will decrease in line with the amortization schedule of the Term Loans. In addition to the interest swap rate of 2.08%, the Company subsidiary will continue to pay the applicable margin on these Term Loans in accordance with the Term Facility. The Company's subsidiary elected to apply cash flow hedge accounting on this derivative financial instrument. The sensitivity of the Company's annual financial expense to a variation of 1% in the interest rate applicable to the Term Facilities is approximately $2.9 million based on the current debt at February 28, 2009 and taking into consideration the effect of the interest rate swap agreement.
Foreign exchange risk
The Company is exposed to foreign exchange risk related to its long-term debt denominated in US dollars. In order to mitigate this risk, the Company has established guidelines whereby currency swap agreements can be used to fix the exchange rates applicable to its US dollar denominated long-term debt. All such agreements are exclusively used for hedging purposes. Accordingly, on October 2, 2008, the Company's subsidiary, Cogeco Cable Inc., 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 issued on October 1, 2008. These agreements have the effect of converting the US 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. The Company's subsidiary elected to apply cash flow hedge accounting on these derivative financial instruments.
The Company is also exposed to foreign exchange risk on cash and cash equivalents, bank indebtedness and accounts payable denominated in US dollars or Euros. At February 28, 2009, bank indebtedness denominated in US dollars amounted to US$1,451,000 (US$286,000 at August 31, 2008) while accounts payable denominated in US dollars amounted to US$7,580,000 (US$16,121,000 at August 31, 2008). At February 28, 2009, Euro-denominated cash and cash equivalents amounted to Euro 736,000 (Euro 219,000 at August 31, 2008) while accounts payable denominated in Euros amounted to Euro 134,000 (Euro 163,000 at August 31, 2008). Due to their short-term nature, the risk arising from fluctuations in foreign exchange rates is usually not significant, except for the unusual high volatility of the US dollar compared to the Canadian dollar during the first six months of fiscal 2009. During the six month period ended February 28, 2009, the exchange rate increased from $1.0620 at August 31, 2008, to $1.2723 at February 27, 2009, reaching a high of $1.2935 on November 20, 2008. The impact of a 10% change in the foreign exchange rates (US dollar and Euros) would change financial expense by approximately $1.1 million.
Furthermore, the Company'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. This risk is mitigated since the major part of the purchase price for Cabovisao-Televisao por Cabo, S.A. was borrowed directly in Euros. At February 28, 2009, the net investment amounted to Euro 196,758,000 (Euro 446,051,000 at August 31, 2008) while long-term debt denominated in Euros amounted to Euro 228,955,000 (Euro 237,455,000 at August 31, 2008). The exchange rate used to convert the Euro currency into Canadian dollars for the balance sheet accounts at February 28, 2009 was $1.6129 per Euro compared to $1.5580 per Euro at August 31, 2008. The impact of a 10% change in the exchange rate of the Euro into Canadian dollars would change financial expense by approximately $1 million and other comprehensive income by approximately $1.7 million.
Fair value
Fair value is the amount at which willing parties would accept to exchange a financial instrument based on the current market for instruments with the same risk, principal and remaining maturity. Fair values are estimated at a specific point in time, by discounting expected cash flows at rates for debts of the same remaining maturities and conditions. These estimates are subjective in nature and involve uncertainties and matters of significant judgement, and therefore, cannot be determined with precision. In addition, income taxes and other expenses that would be incurred on disposition of these financial instruments are not reflected in the fair values. As a result, the fair values are not necessarily the net amounts that would be realized if these instruments were settled. The carrying value of all of the Company's financial instruments approximates fair value, except as otherwise noted in the following table:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
February 28, 2009 August 31, 2008
Carrying value Fair value Carrying value Fair value
--------------------------------------------------------------------------
Long-term debt 1,191,980 1,161,464 1,073,913 1,068,469
--------------------------------------------------------------------------
--------------------------------------------------------------------------
b) Capital management
The Company's objectives in managing capital are to ensure sufficient liquidity to support the capital requirements of its various businesses, including growth opportunities. The Company manages its capital structure and makes adjustments in light of general economic conditions, the risk characteristics of the underlying assets and the Company's working capital requirements. Management of the capital structure involves the issuance of new debt, the repayment of existing debts using cash generated by operations and the level of distribution to shareholders.
The capital structure of the Company is composed of shareholders' equity, bank indebtedness, long-term debt and assets or liabilities related to derivative financial instruments.
The provisions under the Term Facilities provide for restrictions on the operations and activities of the Company. Generally, the most significant restrictions relate to permitted investments and dividends on multiple and subordinate voting shares, as well as incurrence and maintenance of certain financial ratios primarily linked to the operating income before amortization, financial expense and total Indebtedness. At February 28, 2009, the Company was in compliance with all debt covenants and was not subject to any other externally imposed capital requirements.
The following table summarizes certain of the key ratios used by management to monitor and manage the Company's capital structure:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
February 28, 2009 August 31, 2008
--------------------------------------------------------------------------
Net indebtedness (1) / Shareholders'
equity 3.6 2.7
Net indebtedness (1) / Operating income
before amortization (2) 2.3 2.5
Operating income before amortization /
Financial expense (3) 2.9 6.3
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(1) Net indebtedness is defined as the total of bank indebtedness, long-
term debt and derivative financial instrument liability, less cash and
cash equivalents and assets related to derivative financial
instruments.
(2) Calculation based on operating income before amortization for the last
twelve month period ended February 28, 2009.
(3) Calculation based on operating income before amortization for the six
month period ended February 28, 2009 and twelve month period ended
August 31, 2008.
15. Discontinued Operations
In October 2007, the Board of Directors of TQS, an indirect subsidiary of the Company, engaged CIBC World Markets to advise on and assess strategic options for the TQS network in the face of financial difficulties. On December 18, 2007, the Quebec Superior Court issued an order under the Companies' Creditors Arrangement Act (Canada) protecting TQS, its subsidiaries and its parent 3947424 Canada Inc. ("TQS Group") from claims by their creditors. On June 26, 2008, the Canadian Radio-television and Telecommunications Commission ("CRTC") approved the proposed transfer of ownership and control of TQS to Remstar Corporation Inc. ("Remstar") and on August 29, 2008, the transfer of ownership and control of TQS to Remstar was completed, which allowed the new ownership group to pursue the broadcasting activities of TQS.
Effective December 18, 2007, the Company has ceased to consolidate the financial statements of the TQS Group. Accordingly, the results of operations and cash flows for the three month period ended November 30, 2007, has been reclassified as discontinued operations. The results of the discontinued operations were as follows:
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Three months ended Six months ended
February 28, February 29, February 28, February 29,
2009 2008 2009 2008
$ $ $ $
--------------------------------------------------------------------------
Revenue - 5,741 - 38,499
Operating costs - 5,865 - 35,822
--------------------------------------------------------------------------
Operating income
(loss) before
amortization - (124) - 2,677
Amortization - 248 - 1,364
--------------------------------------------------------------------------
Operating income (loss) - (372) - 1,313
Financial expense - 53 - 291
Impairment of assets - - - 30,298
--------------------------------------------------------------------------
Loss before income
taxes and the following
items - (425) - (29,276)
Income taxes - - - -
Non-controlling interest - - - (11,219)
--------------------------------------------------------------------------
Loss from discontinued
operations - (425) - (18,057)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
16. Comparative figures
Certain comparative figures have been reclassified to conform to the current year's presentation to reflect the reclassification of foreign exchange gains or losses from operating costs to financial expense.
SOURCE: COGECO Inc.
Source: COGECO Inc. Pierre Gagne Vice President, Finance and Chief Financial Officer 514-764-4700 Information: Media Marie Carrier Director, Corporate Communications 514-764-4700
Copyright (C) 2009 Marketwire Canada. All rights reserved
News Provided by COMTEX
Company: Cogeco Inc. (CGO)
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