Today, COGECO Inc. (TSX:CGO) ("COGECO" or the "Corporation") announced its
financial results for the fourth quarter and 2011 fiscal year ended August 31,
2011.
For the fourth quarter and fiscal 2011:
-- Fiscal 2011 fourth-quarter consolidated revenue increased by $41.7
million, or 12.5%, to reach $375.4 million, when compared to the
corresponding period of the prior year. Revenue in the cable subsidiary,
Cogeco Cable Inc. ("Cogeco Cable") went up by $25.8 million, or 8%.
Revenue from the radio activities increased by $15.9 million. For the
2011 fiscal year, consolidated revenue grew by 9.2% to reach $1,443.8
million;
-- Fiscal 2011 fourth-quarter operating income before amortization(1)
increased by $21 million, or 15.3%, to reach $158.8 million. The cable
sector contributed to the increase by $19.9 million as a result of the
revenue increase described above. For fiscal 2011, consolidated
operating income before amortization grew by 11.6% to reach $579.6
million;
-- Operating margin(1)increased to 42.3% for the fourth quarter compared to
41.3% in the corresponding period of the prior year, and to 40.1% during
fiscal 2011 from 39.3% the year before;
-- Fourth quarter of 2011 consolidated net income amounted to $21.1
million, or $1.26 per share compared to $12.3 million, or $0.73 per
share for the corresponding period of the prior year;
-- Fiscal 2011 net loss amounted to $9 million, or $0.54 per share. Fiscal
2011 net loss includes an impairment loss of $225.9 million recorded on
Cogeco Cable's investment in its subsidiary Cabovisao-Televisao por
Cabo, S.A. ("Cabovisao"). Net of non-controlling interest, the
impairment loss reduced net income by $72.7 million in fiscal 2011.
Fiscal 2010 net income of $56.3 million, or $3.36 per share, included a
favourable income tax adjustment of $29.8 million related to the
reduction of Ontario provincial corporate income tax rates for the
Canadian operations of the cable sector. This adjustment, net of non-
controlling interest, amounts to $9.6 million. Excluding the effect of
these items for both fiscal years, adjusted net income for fiscal 2011
would have amounted to $63.7 million, or $3.81 per share compared to
$46.6 million, or $2.79 per share for the previous year, representing
increases of 36.6% respectively;
-- Free cash flow(1)reached $23 million for the fourth quarter,
representing an increase of 22.8% over the prior year. The increase in
free cash flow is the result of an increase in cash flow from
operations(1)outpacing the increase in capital expenditures. Free cash
flow stands at $110.5 million for fiscal 2011 or 39.1% lower than free
cash flow of $181.3 million in fiscal 2010. The decline in free cash
flow when compared to fiscal 2010 is due to an increase of $105.5
million in current income tax expense stemming primarily from the fiscal
2010 modifications to Cogeco Cable's corporate structure, the increase
in financial expense and the increase in capital expenditures, which
offset the increase in operating income before amortization in the
current fiscal year;
-- On April 30, 2010, COGECO concluded, via its radio subsidiary, Cogeco
Diffusion Inc ("CDI"), an agreement with Corus Entertainment Inc
("Corus") to acquire its Quebec radio stations ("Quebec Radio Stations
Acquisition") for $80 million, subject to customary closing adjustments
and conditions, including approval by the Canadian Radio-television
Telecommunications Commission ("CRTC"). On June 30, 2010, the
Corporation submitted its application for approval of the Quebec Radio
Stations Acquisition to the CRTC. On December 17, 2010, the CRTC
approved the transaction essentially as proposed. On January 11, 2011,
the Corporation was served with an application by Astral to the Court
for leave to appeal the CRTC decision approving the transaction, and a
related application by Astral for a stay of execution of that decision
until final judgement of the Court. On February 21, 2011 the Court has
rejected applications filed by Astral in the matter of the Quebec Radio
Stations Acquisition. The transaction with Corus was concluded on
February 1, 2011;
-- On June 27, 2011, Cogeco Cable concluded an agreement to acquire all of
the shares of Quiettouch Inc. ("Quiettouch"), a leading independent
provider of outsourced managed information technology and infrastructure
services to mid-market and larger enterprises in Canada. Quiettouch
offers a full suite of differentiated services that allow customers to
outsource their mission-critical information technology infrastructure
and application requirements, including managed infrastructure and
hosting, virtualization, firewall services, data backup with end-to-end
monitoring and reporting, and enhanced and traditional co-location
services. Quiettouch operates three data centres in Toronto and
Vancouver, as well as a fibre network within key business areas of
downtown Toronto. The transaction was completed on August 2, 2011;
-- On August 31, 2011, Cogeco Cable concluded and completed an agreement to
acquire all the shares of MTO Telecom Inc. ("MTO"). With over 1,500
kilometres of network, MTO, the largest private telecommunications
provider in the Greater Montreal Area and the Province of Quebec, offers
high-performance Ethernet broadband connectivity services to carrier,
enterprise and public sector customers;
-- In the cable sector, Revenue-Generating Units ("RGU")((1)) grew by
38,344 and 228,111 net additions in the quarter and fiscal year,
respectively, for a total of 3,407,460 RGU at August 31, 2011.
"COGECO posted strong results for fiscal 2011, a year marked by both organic and
external growth. In 2011, we welcomed Corus' Quebec radio stations, Quiettouch
and MTO into the COGECO family. Canada's cable sector, to keep pace with
customer needs, continued to enhance its product offering by further
implementing DOCSIS 3.0 technology to utilize bandwidth more efficiently and
starting to migrate analogue packages to digital. In Portugal, the economic
crisis facing the country and the government's economic reforms resulted in net
customer losses for Cabovisao, leading Cogeco Cable to write off its net
investment in the subsidiary during the fiscal year. Cabovisao is working to
hold its own until conditions return to normal. Cogeco Diffusion Inc, our radio
subsidiary, was very successful in consolidating its strong position as a radio
industry leader while carefully integrating its new radio stations.
For fiscal 2012, we expect growth in most of our performance indicators. Our
primary focus will be to integrate our new acquisitions, strengthen our
competitive positioning and continuously improve our processes and practices to
create more value for our customers, announcers, listeners, shareholders and
employees," declared Louis Audet, President and CEO of COGECO.
Fiscal 2012 Financial Guidelines
The preliminary financial guidelines for COGECO, as issued on July 6, 2011, have
been updated to reflect the fiscal 2011 business acquisitions in the cable
sector. The Corporation now expects revenue of approximately $1,567 million and
operating income before amortization of approximately $615 million. Free cash
flow should generate approximately $110 million and net income of approximately
$80 million should be earned as a result of growth in operating income before
amortization outpacing fixed charges. Please consult the "Fiscal 2012 financial
guidelines" section of the Corporation's 2011 Annual Report for further details.
(1)Represents the sum of Basic Cable, High Speed Internet ("HSI"), Digital
Television and Telephony service customers.
FINANCIAL HIGHLIGHTS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended August 31, Years ended August 31,
2011 2010 Change 2011 2010 Change
($000, except
percentages,
RGU growth and
per share
data) $ $ % $ $ %
----------------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited)
Operations
Revenue 375,402 333,671 12.5 1,443,769 1,321,694 9.2
Operating
income before
amortization
(1) 158,800 137,785 15.3 579,590 519,339 11.6
Operating
margin
(1) 42.3% 41.3% - 40.1% 39.3% -
Operating
income 104,626 73,942 41.5 330,578 259,882 27.2
Impairment of
goodwill and
fixed assets - - - 225,873 - -
Net income
(loss) 21,073 12,265 71.8 (8,979) 56,264 -
Adjusted net
income
(1) 21,073 12,265 71.8 63,700 46,644 36.6
----------------------------------------------------------------------------
Cash Flow
Cash flow from
operating
activities 225,647 198,492 13.7 527,127 425,336 23.9
Cash flow from
operations(1) 153,681 127,230 20.8 452,016 502,219 (10.0)
Capital
expenditures
and increase
in deferred
charges 130,693 108,515 20.4 341,541 320,962 6.4
Free cash
flow(1) 22,988 18,715 22.8 110,475 181,257 (39.1)
----------------------------------------------------------------------------
Financial
Condition
Total assets - - - 2,897,254 2,744,656 5.6
Indebtedness(2) - - - 1,056,214 961,354 9.9
Shareholders'
equity - - - 365,401 381,635 (4.3)
----------------------------------------------------------------------------
RGU growth 38,344 64,303 (40.4) 228,111 287,111 (20.5)
----------------------------------------------------------------------------
Per Share
Data(3)
Earnings (loss)
per share
Basic 1.26 0.73 72.6 (0.54) 3.36 -
Diluted 1.26 0.73 72.6 (0.54) 3.35 -
Adjusted
earnings per
share(1)
Basic 1.26 0.73 72.6 3.81 2.79 36.6
Diluted 1.25 0.73 71.2 3.78 2.78 36.0
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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 of the Results overview.
(2) Indebtedness is defined as the total of bank indebtedness, principal on
long-term debt, promissory note payable, balance due on a business
acquisition and obligations under derivative financial instruments.
(3) Per multiple and subordinate voting shares.
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 Corporation's future operating results and economic performance
and its objectives and strategies are forward-looking statements. These
statements are based on certain factors and assumptions including expected
growth, results of operations, performance and business prospects and
opportunities, which COGECO believes are reasonable as of the current date.
While management considers these assumptions to be reasonable based on
information currently available to the Corporation, they may prove to be
incorrect. The Corporation cautions the reader that the current economic
uncertainties 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 Corporation's expectations. It
is impossible for COGECO to predict with certainty the impact that this economic
environment may have on future results. Forward-looking information is also
subject to certain factors, including risks and uncertainties (described in the
"Uncertainties and main risk factors" section of the Corporation's 2011 annual
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 Corporation's control. Therefore, future events and
results may vary significantly from what management currently foresees. The
reader should not place undue importance on forward-looking information and
should not rely upon this information as of any other date. While management may
elect to, the Corporation is under no obligation (and expressly disclaims any
such obligation), and does not undertake to update or alter this information
before the next quarter, except as required by Law.
This press release should be read in conjunction with the Corporation's
consolidated financial statements, and the notes thereto, prepared in accordance
with Canadian GAAP and the MD&A included in the Corporation's 2011 Annual
Report. Throughout this discussion, all amounts are in Canadian dollars unless
otherwise indicated.
RESULTS OVERVIEW
This analysis should be read in conjunction with the Corporation's 2011 Annual
Report available on SEDAR at www.sedar.com. Please refer to the Corporation's
2011 Annual Report for more details on annual results.
CABLE SECTOR CUSTOMER STATISTICS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net additions (losses)
August 31, 2011 Quarters ended August 31, 2011
Canada Europe Consolidated Canada Europe Consolidated
----------------------------------------------------------------------------
RGU 2,575,795 831,665 3,407,460 49,204 (10,860) 38,344
Basic Cable
service
customers 877,985 255,777 1,133,762 (1,369) (2,350) (3,719)
HSI service
customers 601,214 162,436 763,650 7,746 (2,556) 5,190
Digital
television
service
customers 678,326 164,580 842,906 29,464 (5,182) 24,282
Telephony
service
customers 418,270 248,872 667,142 13,363 (772) 12,591
----------------------------------------------------------------------------
Net additions
August 31, 2010 Quarters ended August 31, 2010
Canada Europe Consolidated Canada Europe Consolidated
----------------------------------------------------------------------------
RGU 2,350,577 828,772 3,179,349 43,707 20,596 64,303
Basic Cable
service
customers 874,505 260,267 1,134,772 433 1,591 2,024
HSI service
customers 559,057 163,187 722,244 8,904 2,778 11,682
Digital
television
service
customers 559,418 159,852 719,270 17,472 12,017 29,489
Telephony
service
customers 357,597 245,466 603,063 16,898 4,210 21,108
----------------------------------------------------------------------------
----------------------------------------------------------------------------
In Canada, fiscal 2011 fourth-quarter RGU net additions were higher than in the
comparable periods of the prior year, and the Canadian operations continue to
generate RGU growth despite higher penetration rates, category maturity and
aggressive competition. Basic Cable service customer net losses stood at 1,369
for the quarter, compared to net additions of 433 in the fourth quarter of the
prior year. Fourth quarter Basic Cable service customer losses are usual and due
to the end of the school year for college and university students. In the
quarter, Telephony service customers grew by 13,363 compared to 16,898 for the
same period last year, and the number of net additions to the HSI service stood
at 7,746 customers compared to 8,904 customers in the fourth quarter of the
prior year. HSI and Telephony net additions continue to stem from the
enhancement of the product offering, the impact of the bundled offer (Cogeco
Complete Connection) of Television, HSI and Telephony services, and promotional
activities. For the three-month period ended August 31, 2011, additions to the
Digital Television service stood at 29,464 customers, compared to 17,472 for the
comparable period of the prior year. Digital Television service net additions
are due to targeted marketing initiatives to improve penetration, the launch of
new HD channels, the continuing interest for HD television service and the
deployment of the Digital Terminal Adapter ("DTA") technology in most of Cogeco
Cable's markets.
Economic conditions in Portugal continued to be difficult. During the second
half of fiscal 2011, and as part of the negotiated financial assistance package,
the Portuguese government has committed to financial reforms which include
increases in sales and income taxes combined with reductions in government
spending on social programs. Please consult the "Impairment of goodwill and
fixed assets" section for further details. These measures are expected to put
further downwards pressure on consumer spending. The rate of growth for our
services has diminished in this environment, with net customer losses across all
of the Corporation's services in the European operations in the fourth quarter
of fiscal 2011. The number of Basic Cable service customers decreased by 2,350
in the fourth quarter, compared to an increase of 1,591 customers in the
comparable period of the prior year. HSI service customers decreased by 2,556
for the quarter compared to an increase of 2,778 in the fourth quarter of the
prior year. The number of Digital Television service customers decreased by
5,182 customers in the fourth quarter of fiscal 2011, compared to a growth of
12,017 customers in the same quarter of fiscal 2010. The number of Telephony
service customers fell by 772 in the three months ended August 31, 2011,
compared to a growth of 4,210 customers in the same period of the prior year.
OPERATING RESULTS - CONSOLIDATED OVERVIEW
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended August 31, Years ended August 31,
2011 2010 Change 2011 2010 Change
($000, except
percentages) $ $ % $ $ %
----------------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited)
Revenue 375,402 333,671 12.5 1,443,769 1,321,694 9.2
Operating costs 216,602 195,886 10.6 864,179 802,355 7.7
----------------------------------------- ----------------------
Operating
income before
amortization
(1) 158,800 137,785 15.3 579,590 519,339 11.6
----------------------------------------- ----------------------
Operating
margin(1) 42.3% 41.3% 40.1% 39.3%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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.
Consolidated revenue for the fourth quarter rose by $41.7 million, or 12.5%
compared to the corresponding period last year. Cable revenue, driven by RGU
growth combined with an increase in rentals of home terminal devices stemming
from the strong growth in Digital Television services and rate increases in the
Canadian operations, increased by $25.8 million, or 8%. Revenue from the radio
activities increased by $15.9 million in the fourth quarter of 2011 due to the
Quebec Radio Stations Acquisition.
For fiscal 2011, the Corporation's revenue totalled $1,443.8 million, an
increase of $122.1 million, or 9.2% compared to the prior year. Cable sector
revenue increased by $79.8 million, or 6.2%, for fiscal 2011, primarily due to
strong RGU growth in the Canadian operations which offset the decline in Basic
Cable service customers in the European operations and the depreciation of the
Euro in relation to the Canadian dollar. Revenue from the radio activities
increased by $42.3 million, mainly due to the Quebec Radio Stations Acquisition.
Operating costs increased by $20.7 million, or 10.6%, at $216.6 million compared
to the fourth quarter of fiscal 2010 mainly due to the Quebec Radio Stations
Acquisition. The operating cost increase in the cable sector, resulting from
servicing additional RGU, the launch of new HD channels, additional marketing
initiatives in the Canadian operations and the higher value of the Euro in
relation to the Canadian dollar also contributed to the consolidated increase.
Fiscal 2011 operating costs amounted to $864.2 million compared to $802.4
million in fiscal 2010, an increase of $61.8 million, or 7.7%. The increase in
operating costs was mainly due to servicing additional RGU, the launch of new HD
channels and additional marketing initiatives in the Canadian operations of the
cable sector, and by the Quebec Radio Stations Acquisition. The increase in
operating costs was partly offset by the lower value of the Euro in relation to
the Canadian dollar combined with the lower cost of servicing fewer Basic Cable
service customers in the European operations.
Operating income before amortization increased by $21 million, or 15.3%, at
$158.8 million in the fourth quarter of fiscal 2011, compared to $137.8 million
for the corresponding period last year. As a result, the Corporation's
fourth-quarter operating margin increased to 42.3% from 41.3% for the
corresponding period of the prior year. The operating margin increased year over
year as a result of rate increases and RGU growth in the Canadian operations of
the cable sector which offset the decline in the operating margin of the
European operations.
As a result of the increase in revenue which surpassed the increase in operating
costs, operating income before amortization increased to $579.6 million in
fiscal 2011 from $519.3 million in 2010, an increase of $60.3 million, or 11.6%.
The cable sector contributed $55.9 million to the consolidated increase.
IMPAIRMENT OF GOODWILL AND FIXED ASSETS
During the third quarter of fiscal 2011, the economic environment in Portugal
continued to deteriorate, with the Country ultimately requiring financial
assistance from the International Monetary Fund and the European Central Bank.
As part of the negotiated financial assistance package, the Portuguese
government has committed to financial reforms which include increases in sales
and income taxes combined with reductions in government spending on social
programs. These measures are expected to put further downwards pressure on
consumer spending capacity. The rate of growth for Cogeco Cable's services has
diminished in this environment, with net customer losses and service downgrades
by customers in the European operations in the third quarter of fiscal 2011. In
accordance with current accounting standards, Cogeco Cable's management
considered that this situation combined with net customer losses in the third
quarter, which were significantly more important and persistent than expected,
will continue to negatively impact the financial results of the European
operations and indicate a decrease in the value of Cogeco Cable's investment in
its Portuguese subsidiary. As a result, Cogeco Cable tested goodwill and all
long-lived assets for impairment at May 31, 2011.
Goodwill is tested for impairment using a two step approach. The first step
consists of determining whether the fair value of the reporting unit to which
goodwill is assigned 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 impairment loss is measured as the amount by which the
carrying amount of the reporting unit's goodwill exceeds its fair value. Cogeco
Cable completed its impairment test on goodwill and concluded that goodwill was
impaired at May 31, 2011. As a result, a non-cash impairment loss of $29.3
million was recorded in the third quarter of the 2011 fiscal year. Fair value of
the reporting unit was determined using the discounted cash flow method. Future
cash flows were based on internal forecasts and consequently, considerable
management judgement was necessary to estimate future cash flows.
Long-lived assets with finite useful lives, such as fixed assets, are tested for
impairment by comparing the carrying amount of the asset or group of assets to
the expected future undiscounted cash flows to be generated by the asset or
group of assets. The impairment loss is measured as the amount by which the
asset's carrying amount exceeds its fair value. Accordingly, Cogeco Cable
completed its impairment test on the fixed assets of the Portuguese subsidiary
at May 31, 2011, and determined that the carrying value of these assets exceeded
the expected future undiscounted cash flows to be generated by these assets. As
a result, a non-cash impairment loss of $196.5 million was recognized in the
third quarter of the 2011 fiscal year.
The impairment of goodwill and fixed assets (the "impairment loss"), of Cogeco
Cable's net investment in Cabovisao affected the Corporation's financial results
as follows for the third quarter and 2011 fiscal year:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
($000)
---------------------------------------------------------------------------
Impairment of goodwill 29,344
Impairment of fixed assets 196,529
---------------------------------------------------------------------------
Impairment loss 225,873
Income taxes -
Non-controlling interest (153,194)
---------------------------------------------------------------------------
Impairment loss net of income taxes and non-controlling
interest 72,679
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CASH FLOW ANALYSIS
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended August Years ended August
31, 31,
2011 2010 2011 2010
($000) $ $ $ $
----------------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited)
Operating activities
Cash flow from operations(1) 153,681 127,230 452,016 502,219
Changes in non-cash operating
items 71,966 71,262 75,111 (76,883)
----------------------------------------------------------------------------
225,647 198,492 527,127 425,336
-
Investing activities(2) (263,029) (108,492) (549,544) (320,653)
-
Financing activities(2) 1,714 (75,671) 41,203 (106,955)
-
Effect of exchange rate
changes on cash and cash
equivalents denominated in a
foreign currency 150 402 588 (1,344)
----------------------------------------------------------------------------
Net change in cash and cash
equivalents (35,518) 14,731 19,374 (3,616)
Cash and cash equivalents,
beginning of period 90,734 21,111 35,842 39,458
----------------------------------------------------------------------------
Cash and cash equivalents, end
of period 55,216 35,842 55,216 35,842
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(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.
(2) Excludes assets acquired under capital leases.
During the fourth quarter of 2011, cash flow from operations reached $153.7
million, 20.8% higher than the comparable period last year, primarily due to the
growth in operating income before amortization and the increase in current
income tax recovery stemming from the fiscal 2010 modifications to Cogeco
Cable's corporate structure which reduced the future income tax expense
accordingly. Changes in non-cash operating items generated cash inflows of $72
million, mainly as a result of increases in accounts payable and accrued
liabilities, partly offset by a decrease in income tax liabilities. In the
fourth quarter of the prior year, cash inflows of $71.3 million mainly stemmed
from an increase in accounts payable and accrued liabilities.
For the fiscal 2011, cash flow from operations amounted to $452 million, $50.2
million, or 10%, lower than the comparable period last year. This reduction is
primarily due to the recognition of current income tax expense relating to the
modifications of Cogeco Cable's corporate structure which reduced the future
income tax expense accordingly and to the payment of a make-whole premium
amounting to $8.8 million on the early repayment of the Senior Secured Notes
Series B, partly offset by the increase in operating income before amortization.
Changes in non-cash operating items generated cash inflows of $75.1 million,
mainly as a result of increases in income tax liabilities and accounts payable
and accrued liabilities and a decrease in income taxes receivable, partly offset
by an increase in accounts receivable. The cash outflows of $76.9 million in the
prior year were mainly due to a decrease in income tax liabilities combined with
increases in income taxes receivable and accounts receivable, partly offset by
an increase in deferred and prepaid revenue and other liabilities.
Investing activities in the fourth quarter of 2011 amounted to $263 million
compared to $108.5 million for the same period the year before. For fiscal 2011,
investing activities amounted to $549.5 million compared to $320.7 million the
year before. Fourth-quarter fiscal 2011 investing activities include the
acquisitions, by Cogeco Cable, of Quiettouch and MTO for a total amount of
$132.3 million. Fiscal 2011 investing activities also include the Quebec Radio
Stations Acquisition for an amount of $75.9 million described below.
On April 30, 2010, COGECO concluded an agreement with Corus to acquire its
Quebec radio stations for $80 million, subject to customary closing adjustments
and conditions, including approval by the CRTC. On June 30, 2010, the
Corporation submitted its application for approval of the Quebec Radio Stations
Acquisition to the CRTC. On December 17, 2010, the CRTC approved the transaction
essentially as proposed. On January 11, 2011, the Corporation was served with an
application by Astral to the Court for leave to appeal the CRTC decision
approving the transaction, and a related application by Astral for a stay of
execution of that decision until final judgement of the Court. On February 21,
2011 the Court has rejected applications filed by Astral in the matter of the
Quebec Radio Stations Acquisition. The transaction with Corus was concluded on
February 1, 2011.
Pursuant to this acquisition, and as part of the CRTC's decision on the
Corporation's transfer application, the Corporation has put up for sale two
radio stations acquired in the transaction, CFEL-FM in the Quebec City market
and CJTS-FM in the Sherbrooke market. Accordingly, the assets and liabilities of
the two acquired radio stations put up for sale have been classified as held for
sale in the preliminary purchase price allocation presented below. In addition
to the two acquired radio stations above, and also as part of the CRTC's
decision, the Corporation has put up for sale radio station CJEC-FM, which it
owned prior to the Quebec Radio Stations Acquisition, in the Quebec City market.
Radio stations for which divestiture has been required by the CRTC, and the sale
process, are managed by a trustee approved by the CRTC pursuant to a voting
trust agreement.
On June 27, 2011, Cogeco Cable concluded an agreement to acquire all of the
shares of Quiettouch, a leading independent provider of outsourced managed
information technology and infrastructure services to mid-market and larger
enterprises in Canada. Quiettouch offers a full suite of differentiated services
that allow customers to outsource their mission-critical information technology
infrastructure and application requirements, including managed infrastructure
and hosting, virtualization, firewall services, data backup with end-to-end
monitoring and reporting, and enhanced and traditional co-location services.
Quiettouch operates three data centres in Toronto and Vancouver, as well as a
fibre network within key business areas of downtown Toronto. The transaction was
completed on August 2, 2011.
On August 31, 2011, Cogeco Cable concluded and completed an agreement to acquire
all the shares of MTO. With over 1,500 kilometres of network, MTO, the largest
private telecommunications provider in the Greater Montreal Area and the
Province of Quebec, offers high-performance Ethernet broadband connectivity
services to carrier, enterprise and public sector customers.
These acquisitions were accounted for using the purchase method. The results
have been consolidated as of the acquisition dates. The preliminary allocation
of the purchase price of these acquisitions, pending the completion of the
valuation of the net assets acquired, is as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(In thousands of dollars) $ $ $
----------------------------------------------------------------------------
Quebec radio
stations Other Total
Consideration
Paid
Purchase of shares 75,000 133,600 208,600
Preliminary working capital adjustment - (1,034) (1,034)
Acquisition costs 1,723 1,111 2,834
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76,723 133,677 210,400
Promissory note payable(1) 5,000 - 5,000
Balance due on a business acquisition( 2) - 11,400 11,400
Investment previously accounted for 200 - 200
Working capital adjustment payable 4,000 - 4,000
Preliminary working capital adjustment
payable - 1,429 1,429
Acquisition costs payable - 713 713
Acquisition costs previously recorded as
deferred charges 436 - 436
----------------------------------------------------------------------------
86,359 147,219 233,578
----------------------------------------------------------------------------
Net assets acquired
Cash and cash equivalents 647 1,409 2,056
Accounts receivable 14,103 4,619 18,722
Income taxes receivable 189 - 189
Prepaid expenses and other 760 1,036 1,796
Current future income tax assets 1,303 - 1,303
Fixed assets 11,497 27,195 38,692
Deferred charges and other 13 615 628
Customer relationships - 34,305 34,305
Broadcasting licenses 48,893 - 48,893
Goodwill 28,678 94,743 123,421
Future income tax assets 678 - 678
Long-term assets held for sale 5,506 - 5,506
Accounts payable and accrued liabilities
assumed (9,942) (3,626) (13,568)
Current deferred and prepaid revenue (379) - (379)
Current liabilities related to assets
held for sale (498) - (498)
Long-term deferred and prepaid revenue
and other liabilities (4,467) (1,538) (6,005)
Long-term future income tax liabilities (10,132) (11,539) (21,671)
Long-term liabilities related to assets
held for sale (490) - (490)
----------------------------------------------------------------------------
86,359 147,219 233,578
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Non-interest bearing and due on February 1, 2012.
(2) Bearing interest at bank prime rate plus 1% and payable in February
2013.
Other investing activities, including mainly capital expenditures, increased by
$22.1 million in the fourth quarter and by $20.5 million in fiscal 2011, mainly
due to the following factors:
-- An increase in support capital spending stemming from the construction
of new facilities and the acquisition of new service vehicles in the
Canadian operations;
-- An increase in customer premise equipment spending mainly due to the
timing of equipment purchases to support RGU growth in the Canadian
operations. This increase was partly offset by the decrease in customer
premise equipment spending reflecting lower RGU growth in the European
operations.
In the fourth quarter of 2011, the Corporation generated free cash flows of $23
million compared to $18.7 million in the prior year. The increase in free cash
flow is the result of an increase in cash flow from operations outpacing the
increase in capital expenditures. For fiscal 2011, free cash flow of $110.5
million was generated, $70.8 million, or 39.1%, lower than in fiscal 2010. The
decline in free cash flow when compared to fiscal 2010 is due to an increase of
$105.5 million in current income tax expense stemming primarily from the fiscal
2010 modifications to Cogeco Cable's corporate structure, the increase in
financial expense, and the increase in capital expenditures, which offset the
increase in operating income before amortization in the current fiscal year.
In the fourth quarter of 2011, Indebtedness affecting cash increased by $11.2
million, mainly due to the business acquisitions by Cogeco Cable for a total
amount of $132.3 million and the total dividend payment of $8.9 million
described below, partly offset by the cash inflows of $72 million from the
changes in non-cash operating items, the decrease in cash and cash equivalents
of $35.5 million and the free cash flow of $23 million. Indebtedness was reduced
mainly through net repayments on Cogeco Cable's Term Revolving Facility of $11.2
million. In the fourth quarter of 2010, Indebtedness affecting cash decreased by
$63.8 million mainly due to the inflows generated by changes in non-cash
operating items of $71.3 million and the free cash flow of $18.7 million, partly
offset by the increase in cash and cash equivalents of $14.7 million and the
payment of dividends totalling $6.3 million described below and an increase in
deferred transaction costs of $5.8 million. Indebtedness mainly reduced through
a decrease of $52.2 million in bank indebtedness and net repayments on Cogeco
Cable's term and revolving loans of $7.6 million.
During fiscal 2011, the level of Indebtedness affecting cash increased by $71.7
million, mainly due to the business acquisitions for a total of $208.3 million,
the dividend payments of $31.7 million described below and the increase in cash
and cash equivalents of $19.4 million, offset by the free cash flow of $110.5
million and the cash inflows of $75.1 million from the changes in non-cash
operating items. Indebtedness mainly increased through the issuance on November
16, 2010, in the cable sector, of Senior Secured Debentures Series 2 ("Fiscal
2011 debentures") for net proceeds of $198.3 million, combined with a net
increase of $53.5 million on the Corporation's Term Revolving Facilities. The
proceeds of issuance from the Fiscal 2011 debentures were used to repay on
December 22, 2010, the $175 million Senior Secured Notes Series B due on October
31, 2011 and the related make-whole premium on early repayment. In fiscal 2010,
Indebtedness affecting cash decreased by $73.8 million, mainly due to the free
cash flow of $181.3 million, partly offset by the outflows related to non-cash
operating items of $76.9 million, the payment of dividends totalling $25.1
million described below and an increase in deferred transaction costs of $5.8
million. Indebtedness mainly decreased through net repayments on the cable
subsidiary's term and revolving loans of $62.4 million and the Corporation's
revolving loans of $9.5 million.
During the fourth quarter of fiscal 2011, the Corporation paid a dividend of
$0.14 per share to the holders of subordinate and multiple voting shares
totalling $2.3 million, compared to a quarterly dividend of $0.10 per share
totalling $1.7 million in fiscal 2010. Dividends paid by a subsidiary to
non-controlling interests amounted to $6.6 million during the fourth quarter of
fiscal 2011 compared to $4.6 million in the fourth quarter of fiscal 2010,
bringing the consolidated dividend payments to $8.9 million in the current year
compared to $6.3 million in the prior year.
Total dividends of $0.50 per share, comprised of quarterly dividends of $0.12
per share in the first three quarters of the year and a dividend of $0.14 per
share in the last quarter, were paid during fiscal 2011, for a total of $8.4
million. In fiscal 2010, quarterly dividends of $0.10 per share, totalling $0.40
per share were paid, for an amount of $6.7 million. Dividends paid by a
subsidiary to non-controlling interests were $23.4 million during fiscal 2011
compared to $18.4 million in fiscal 2010, bringing the consolidated dividend
payments to $31.7 million for the current year compared to $25.1 million in the
prior year.
NON-GAAP FINANCIAL MEASURES
This section describes non-GAAP financial measures used by COGECO throughout
this Press release. 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
therefore, may not be comparable to similar measures presented by other
companies. These measures include "cash flow from operations", "free cash flow",
"operating income before amortization", "operating margin", "adjusted net
income", and "adjusted earnings per share".
CASH FLOW FROM OPERATIONS AND FREE CASH FLOW
Cash flow from 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 Corporation to isolate the
cash flow from operating activities from the impact of cash management
decisions. Cash flow from 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. Cash flow from operations is calculated as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended August 31, Years ended August 31,
2011 2010 2011 2010
($000) $ $ $ $
----------------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited)
Cash flow from operating
activities 225,647 198,492 527,127 425,336
Changes in non-cash
operating items (71,966) (71,262) (75,111) 76,883
----------------------------------------------------------------------------
Cash flow from operations 153,681 127,230 452,016 502,219
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Free cash flow is calculated as follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended August 31, Years ended August 31,
2011 2010 2011 2010
($000) $ $ $ $
----------------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited)
Cash flow from operations 153,681 127,230 452,016 502,219
Acquisition of fixed assets (128,356) (105,513) (330,669) (309,752)
Increase in deferred
charges (2,337) (3,002) (10,872) (11,069)
Assets acquired under
capital leases - - - (141)
----------------------------------------------------------------------------
Free cash flow 22,988 18,715 110,475 181,257
----------------------------------------------------------------------------
----------------------------------------------------------------------------
OPERATING INCOME BEFORE AMORTIZATION AND OPERATING MARGIN
Operating income before amortization is used by COGECO's management and
investors to assess the Corporation's ability to seize growth opportunities in a
cost effective manner, to finance its ongoing operations and to service its
debt. Operating income before amortization is a proxy for cash flows from
operations excluding the impact of the capital structure chosen, and is one of
the key metrics used by the financial community to value the business and its
financial strength. Operating margin is a measure of the proportion of the
Corporation's revenue which is left over, before income taxes, to pay for its
fixed costs, such as interest on Indebtedness. Operating margin is calculated by
dividing operating income before amortization by revenue.
The most comparable Canadian GAAP financial measure is operating income.
Operating income before amortization and operating margin are calculated as
follows:
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Quarters ended August 31, Years ended August 31,
2011 2010 2011 2010
($000, except percentages) $ $ $ $
----------------------------------------------------------------------------
(unaudited) (unaudited) (audited) (audited)
Operating income 104,626 73,942 330,578 259,882
Amortization 54,174 63,843 249,012 259,457
----------------------------------------------------------------------------
Operating income before
amortization 158,800 137,785 579,590 519,339
----------------------------------------------------------------------------
Revenue 375,402 333,671 1,443,769 1,321,694
----------------------------------------------------------------------------
Operating margin 42.3% 41.3% 40.1% 39.3%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
ADJUSTED NET INCOME AND ADJUSTED EARNINGS PER SHARE
Adjusted net income and adjusted earnings per share are used by COGECO's
management and investors to evaluate what would have been the net income and
earnings per share from ongoing operations without the impact of certain
adjustments, net of income taxes and non-controlling interest, which could
affect the comparability of the Corporation's financial results. The exclusion
of these adjustments does not indicate that they are non-recurring.
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 Years ended
August 31, August 31,
2011 2010 2011 2010
(in thousands of dollars,
except the number of shares
and per share data) $ $ $ $
----------------------------------------------------------------------------
Net income (loss) 21,073 12,265 (8,979) 56,264
Adjustments:
Impairment of goodwill and
fixed assets net of non-
controlling interest - - 72,679 -
Reduction of the Ontario
provincial income tax
rates, net of non-
controlling interest - - - (9,620)
----------------------------------------------------------------------------
Adjusted net income 21,073 12,265 63,700 46,644
----------------------------------------------------------------------------
Weighted average number of
multiple voting and
subordinate voting shares
outstanding 16,736,465 16,730,336 16,728,863 16,726,135
Effect of dilutive stock
options - 9,299 5,966 10,681
Effect of dilutive subordinate
voting shares held in trust
under the Incentive Share
Unit Plan 121,077 71,862 123,199 67,837
----------------------------------------------------------------------------
Weighted average number of
diluted multiple voting and
subordinate voting shares
outstanding 16,857,542 16,811,497 16,858,028 16,804,653
----------------------------------------------------------------------------
Adjusted earnings per share
Basic 1.26 0.73 3.81 2.79
Diluted 1.25 0.73 3.78 2.78
----------------------------------------------------------------------------
----------------------------------------------------------------------------
SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Fiscal 2011
Quarters ended(1) Nov. 30 Feb. 28 May 31 Aug. 31
($000, except percentages
and per share data) $ $ $ $
---------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue 342,766 350,644 374,957 375,402
Operating income before
amortization(2) 137,031 135,952 147,807 158,800
Operating margin(2) 40.0% 38.8% 39.4% 42.3%
Operating income 73,892 70,525 81,535 104,626
Impairment of goodwill and
fixed assets - - 225,873 -
Net income (loss) 15,975 10,645 (56,672) 21,073
Adjusted net income(2) 15,975 10,645 16,007 21,073
Cash flow from operating
activities 57,572 96,664 147,244 225,647
Cash flow from operations
(2) 42,499 120,675 135,161 153,681
Capital expenditures and
increase in deferred
charges 66,799 72,462 71,587 130,693
Free cash flow(2) (24,300) 48,213 63,574 22,988
Earnings (loss) per
share(3)
Basic 0.95 0.64 (3.39) 1.26
Diluted 0.95 0.63 (3.39) 1.26
Adjusted earnings per
share(2) (3)
Basic 0.95 0.64 0.96 1.26
Diluted 0.95 0.63 0.95 1.26
---------------------------------------------------------------------------
---------------------------------------------------------------------------
SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Fiscal 2010
Quarters ended(1) Nov. 30 Feb. 28 May 31 Aug. 31
($000, except percentages
and per share data) $ $ $ $
---------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue 328,003 329,087 330,933 333,671
Operating income before
amortization(2) 129,263 124,363 127,928 137,785
Operating margin(2) 39.4% 37.8% 38.7% 41.3%
Operating income 63,562 58,370 64,008 73,942
Impairment of goodwill and
fixed assets - - - -
Net income (loss) 22,748 10,511 10,740 12,265
Adjusted net income(2) 13,128 10,511 10,740 12,265
Cash flow from operating
activities (1,410) 117,498 110,756 198,492
Cash flow from operations
(2) 135,518 120,331 119,140 127,230
Capital expenditures and
increase in deferred
charges 68,387 74,549 69,511 108,515
Free cash flow(2) 67,131 45,782 49,629 18,715
Earnings (loss) per
share(3)
Basic 1.36 0.63 0.64 0.73
Diluted 1.35 0.63 0.64 0.73
Adjusted earnings per
share(2) (3)
Basic 0.79 0.63 0.64 0.73
Diluted 0.78 0.63 0.64 0.73
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(1) The addition of quarterly information may not correspond to the annual
total due to rounding.
(2) 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 of the Results overview.
(3) Per multiple and subordinate voting share.
SEASONAL VARIATIONS
Cogeco Cable's operating results are not generally subject to material seasonal
fluctuations. However, the customer growth in the Basic Cable and HSI service
are generally lower in the second half of the fiscal year as a result of a
decrease in economic activity due to the beginning of the vacation period, the
end of the television seasons, and students leaving their campuses at the end of
the school year. Cogeco Cable offers its services in several university and
college towns such as Kingston, Windsor, St. Catharines, Hamilton, Peterborough,
Trois-Rivieres and Rimouski in Canada, and Aveiro, Covilha, Evora, Guarda and
Coimbra in Portugal.
Furthermore, the third and fourth quarter operating margins of the cable
subsidiary are usually higher as no management fees are paid to COGECO Inc.
Under the management Agreement, Cogeco Cable pays a fee equal to 2% of its total
revenue subject to a maximum amount. As the maximum amount has been reached in
the second quarters of fiscal 2011 and fiscal 2010, Cogeco Cable did not pay
management fees in the second halves of either year.
ADDITIONAL INFORMATION
Additional information relating to the Corporation, including its 2011 Annual
Report and Annual Information Form, is available on the SEDAR website at
www.sedar.com.
ABOUT COGECO
COGECO (www.cogeco.ca) is a diversified communications corporation. 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, through its subsidiary Cogeco Data Services, data networking,
e-business applications, video conferencing, hosting services, Ethernet, private
line, VoIP, HSI access, data storage, data security, co-location services,
managed IT services, cloud services and other advanced communication solutions.
Through its Cogeco Diffusion Inc. subsidiary ("CDI"), COGECO wholly-owns and
operates 13 radio stations across most of Quebec with complementary radio
formats serving a wide range of audiences, as well as Cogeco News, its news
agency broadcast in close to 30 independent and community radio stations across
Quebec. 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, October 27, 2011 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 dialling five
minutes before the start of the conference:
Canada and US access number: 1 866-322-8032
International access number: + 1 416-640-3406
Confirmation code: 6470562
A rebroadcast of the conference call will be
available until November 3, by dialing:
Canada and US access number: 1 888-203-1112
International access number: + 1 647-436-0148
Confirmation code: 6470562
CABLE SECTOR CUSTOMER STATISTICS
(unaudited)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2011 2010
----------------------------------------------------------------------------
Homes passed
Canada 1,622,420 1,593,743
Portugal(1) 905,742 905,359
Total 2,528,162 2,499,102
----------------------------------------------------------------------------
Homes connected(2)
Canada 992,990 979,590
Portugal 264,223 269,194
Total 1,257,213 1,248,784
----------------------------------------------------------------------------
Revenue-generating units
Canada 2,575,795 2,350,577
Portugal 831,665 828,772
Total 3,407,460 3,179,349
----------------------------------------------------------------------------
Basic Cable service customers
Canada 877,985 874,505
Penetration as a percentage of homes passed 54.1% 54.9%
Portugal 255,777 260,267
Penetration as a percentage of homes passed 28.2% 28.7%
Total 1,133,762 1,134,772
----------------------------------------------------------------------------
HSI service customers
Canada 601,214 559,057
Penetration as a percentage of Basic Cable(3) 70.6% 66.2%
Portugal 162,436 163,187
Penetration as a percentage of Basic Cable(3) 63.5% 62.7%
Total 763,650 722,244
----------------------------------------------------------------------------
Digital Television service customers
Canada 678,326 559,418
Penetration as a percentage of Basic Cable(3) 78.2% 64.8%
Portugal 164,580 159,852
Penetration as a percentage of Basic Cable(3) 64.3% 61.4%
Total 842,906 719,270
----------------------------------------------------------------------------
Telephony service customers
Canada 418,270 357,597
Penetration as percentage of Basic Cable(3) 51.3% 44.4%
Portugal 248,872 245,466
Penetration as percentage of Basic Cable(3) 97.3% 94.3%
Total 667,142 603,063
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The Corporation is currently assessing the number of homes passed.
(2) Represents the sum of Basic Cable service customers and HSI and
Telephony service customers who do not subscribe to the Basic Cable
service.
(3) Calculated on the basis of the systems where the service is offered.
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