COGECO reports strong third-quarter 2008 financial results
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MONTREAL, QUEBEC--(Marketwire - July 9, 2008) - Today, COGECO Inc. (TSX: CGO) announced its financial results for the third quarter and first nine months of fiscal 2008, ended May 31, 2008.
Third-quarter 2008 and first nine months consolidated results show continuous growth:
- Revenue increased by 13.8% to $283.9 million in the third quarter and by 13.6% to $816 million for the first nine months;
- Operating income from continuing operations before amortization grew by 22.4% to $117.2 million in the third quarter and by 21.1% to $327.8 million for the first nine months;
- Free cash flow(1) reached $37.1 million in the third quarter and $79.5 million for the first nine months.
Cable sector
- Revenue-generating units ("RGUs")(2) grew by 50,889 and 190,109 net additions, respectively, for a total of 2,675,774 RGUs at May 31, 2008.
External growth
- In order to further develop Cogeco Cable's business telecommunications activities, the Company pursued its external growth strategy and concluded the acquisition of all assets of MaXess Networx(R), ENWIN Energy Ltd.'s telecommunications division (City of Windsor's energy company). In addition, the Company announced the acquisition of all the assets of FibreWired Burlington Hydro Communications (Burlington Hydro Electric's telecommunications division). On June 13, Cogeco Cable also announced its entry into the Greater Toronto Area market through the announcement of the acquisition of all the shares of Toronto Hydro Telecom Inc., the telecommunications subsidiary of Toronto Hydro Corporation, subject to certain conditions, including regulatory approval by the Commissioner of Competition.
Other
- Radio revenue has improved in the third quarter. RYTHME FM network and the 93.3 station in Quebec City continue to grow advertising revenues.
- On May 22, 2008, the plan of arrangement proposed by Remstar Corporation was approved by the creditors of TQS Inc., its subsidiaries and its parent, 3947424 Canada Inc., (the "TQS Group") and subsequently approved by the Superior Court of Quebec on June 4, 2008. Certain employees of TQS Inc. and their union filed a motion on June 19, 2008 for leave to appeal the order of the Superior Court of Quebec approving the plan. On June 26, 2008, the Canadian Radio-television and Telecommunications Commission ("CRTC") approved the proposed transfer of ownership and control of TQS Inc. to Remstar Corporation.
Fiscal 2009 Preliminary Financial Guidelines:
The Company announces its 2009 preliminary guidelines, setting revenue outlook at about $1,198 million, an increase of $108 million compared to the revised fiscal 2008 projections issued in April 2008. Operating income before amortization should increase to approximately $500 million, an improvement of $55 million compared to the revised fiscal 2008 projections, and free cash flow(1) should grow by approximately $35 million to reach $110 million.
"On a consolidated basis, COGECO's third-quarter 2008 financial results are positive. In the cable sector, Cogeco Cable's internal growth continued on a steady pace. The Company is also pursuing its external growth strategy, as shown by the acquisitions of MaXess Networx(R) and FibreWired Burlington Hydro Communications, which will enhance our Cogeco Business Solutions offering. As for the acquisition of Toronto Hydro Telecom, this is a great growth opportunity for Cogeco Cable as it provides us the capacity to serve the business telecommunication market through the addition of owned and operated points of presence throughout the Greater Toronto Area, linked to our other broadband facilities extending over the dense telecommunications corridor from Windsor to Cornwall in Ontario" declared Louis Audet, President and CEO of COGECO. "On the radio side, COGECO is experiencing an increase in revenue with programming that meets audience and advertiser expectations", added Mr. Audet.
(1) Free cash flow does not have a standardized definition 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.
FINANCIAL HIGHLIGHTS
---------------------------------------------------------------------------
---------------------------------------------------------------------------
($000, except
percentages
and per share Quarters ended Nine months ended
data) May 31, May 31,
2008 2007 Change 2008 2007 Change
$ $ % $ $ %
---------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenue 283,878 249,424 13.8 816,027 718,035 13.6
Operating
income from
continuing
operations
before
amortization 117,204 95,791 22.4 327,759 270,640 21.1
Income from
continuing
operations 9,538 5,025 89.8 33,509 48,526 (30.9)
Loss from
discontinued
operations - (1,966) - (18,057) (4,170) -
Net income 9,538 3,059 - 15,452 44,356 (65.2)
---------------------------------------------------------------------------
Cash flow from operations (1) 96,068 76,862 25.0 262,819 205,412 27.9 Less: Capital expenditures and increase in deferred charges 58,961 57,810 2.0 183,364 185,118 (0.9) Free cash flow (1) 37,107 19,052 94.8 79,455 20,294 -
----------------------------------------------------------------------------
Earnings (loss) per share Basic Income from continuing operations 0.57 0.30 90.0 2.01 2.93 (31.4) Loss from discontinued operations - (0.12) - (1.08) (0.25) - Net income 0.57 0.18 - 0.93 2.67 - Diluted Income from continuing operations 0.57 0.30 90.0 2.00 2.91 (31.3) Loss from discontinued operations - (0.12) - (1.08) (0.25) -
Net income 0.57 0.18 - 0.92 2.66 - --------------------------------------------------------------------------- ---------------------------------------------------------------------------
(1) Cash flow from operations and free cash flow 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.
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 our future outlook and anticipated events, our business, our operations, our financial performance, our financial condition or our 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 our future operating results and economic performance and our 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 we believe are reasonable as of the current date. While we consider these assumptions to be reasonable based on information currently available to us, they may prove to be incorrect. 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 2007 annual Management's Discussion and Analysis (MD&A) that could cause actual results to differ materially from what we currently expect. 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 our control. Therefore, future events and results may vary significantly from what we currently foresee. You should not place undue importance on forward-looking information and should not rely upon this information as of any other date. While we may elect to, we are under no obligation (and expressly disclaim any such obligation), and do not undertake, to update or alter this information before next quarter.
This analysis should be read in conjunction with the Company's financial statements, and the notes thereto, prepared in accordance with Canadian GAAP and the MD&A included in the Company's 2007 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's objectives are to maximize shareholder value by increasing profitability and ensuring continued growth. The strategies employed to reach these objectives, supported by tight cost control and business processes, are specific to each sector. For the cable sector, sustained 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 (the "Company") uses growth of operating income before amortization, free cash flow(1) and 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) Free cash flow does not have a standardized definition 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) See the "Customer statistics" section of the cable sector for detailed
explanations.
Tight control over costs and business processes
- For the third quarter of 2008, the Company's operating costs increased over last year by 8.5% compared to a revenue growth of 13.8%;
- The design of internal controls over financial reporting as per National Instrument 52-109 is still underway. As discussed in the 2007 annual MD&A, the Company identified certain material weaknesses in the design of internal controls over financial reporting and there has been improvement in the design of internal controls on some significant processes during the quarter. The documentation and remediation of internal controls weaknesses are progressing normally.
Cable sector
Continuous improvement of the service offering and expansion of the customer base
Canadian operations
- Acquisitions:
- June 30, conclusion of the acquisition of all assets of FibreWired
Burlington Hydro Communications, Burlington Hydro Electric's
telecommunications division (City of Burlington's energy company) to
expand Cogeco Business Solutions' commercial broadband service
offering in Burlington, Ontario;
- June 13, announcement of the acquisition of all the shares of Toronto
Hydro Telecom Inc., the telecommunications subsidiary of Toronto
Hydro Corporation (City of Toronto's energy company); subject to
certain conditions, including regulatory approval by the Commissioner
of Competition, in order to further develop Cogeco Cable's business
telecommunications activities by entering the Greater Toronto Area
market;
- March 31, conclusion of the acquisition of all the assets of MaXess
Networx(R), ENWIN Energy Ltd.'s telecommunications division (City of
Windsor's energy company) to strengthen Cogeco Business Solutions'
Data offering in Windsor, Ontario.
- High Speed Internet service:
- June 7, launch of Wi-Fi Internet access at LaSalle Park in
Burlington, Ontario;
- May 7, launch of Wi-Fi Internet access in Quebec with the deployment
of the first seven Quebec hotspots in Trois-Rivieres.
- Digital Television services:
- June 24, launch of Food Network On Demand, HGTV On Demand and
National Geographic On Demand in Ontario territories;
- May 6, launch of RDI HD and ARTV HD, two new High Definition (HD)
channels in Quebec;
- March 4, launch of Family On Demand in Ontario, a new On Demand
service.
- Telephony service:
- June 24, launch of Telephony in Maitland and Prescott, Ontario;
- June 17, launch of Telephony in Wickham, St-Cyrille-de-Wendover,
Morin-Heights, Shawbridge, St-Germain-de-Grantham and
St-Prosper-de-Dorchester, Quebec;
- June 4, launch of Telephony in Tillbury, Ontario;
- During the third quarter, the Telephony service was launched in
the following cities:
- St-Pie, St-Damase, Ste-Madeleine, Acton Vale, St-Thomas d'Aquin,
St-Dominique-de-Bagot, Val-David, St-Donat-de-Montcalm, St-Faustin,
St-Adolphe-d'Howard, Bic, Ste-Luce, Ste-Blandine, St-Fabien,
St-Gedeon and St-Martin-de-Beauce in Quebec;
- Kemptville, Acton, Winona, Smithville, Ridgeway, Huntsville,
Bracebridge and Gravenhurst, in Ontario.
- Customer service:
- Opening of a Cogeco Cable store located in Drummondville, Quebec.
European operations
- Digital Television services:
- Cabovisao - Televisao por Cabo, S.A. ("Cabovisao") continued its
Digital Television service deployment.
- Customer service:
- Opening of two (2) new Cabovisao stores located in Paivas (Seixal)
and Castelo Branco.
Continuous improvement of networks and equipment
- During the first nine months of fiscal 2008, Cogeco Cable has invested
approximately $71.8 million in its infrastructure including headends
and upgrade/rebuild.
Other
- RYTHME FM network and the 93.3 station in Quebec City continue to grow
advertising revenues. 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. TQS' position in the Quebec Francophone over-the-air television market deteriorated markedly in spite of the measures and investments initiated by the Company over the last several months. The gradual loss of advertising revenue to specialty TV networks and content accessible over the Internet, combined with increased production costs, the Canadian Radio-television and Telecommunications Commission's ("CRTC") refusal to grant general interest television networks the same ability to charge subscriber fees for signal distribution as the speciality television networks, the programming strategy of Societe Radio-Canada ("SRC"), which acts like a commercial player rather than a publicly-owned television broadcaster and SRC's notice of disaffiliation in Saguenay, Sherbrooke and Trois-Rivieres after a 50-year partnership all contributed to this decision. After considering CIBC World Markets' report, the Board of Directors of TQS concluded that it was in the best interest of TQS, its employees and creditors to request court protection. On December 18, 2007, the Quebec Superior Court issued an order under the Companies' Creditors Arrangement Act (Canada) protecting TQS Inc., its subsidiaries and its parent 3947424 Canada Inc. ("the TQS Group") from claims by their creditors for an initial suspension period ending on January 17, 2008, which period was afterwards renewed. Under the order, RSM Richter Inc. has been appointed as monitor, with a mandate to support the applicants, under Court supervision, in preparing a creditors arrangement plan. On March 10, 2008, the Quebec Superior Court agreed with TQS Inc.'s Board of Director decision to accept the offer made by Remstar Corporation Inc. to acquire all shares held by Cogeco Radio-Television Inc. and CTV Television Inc., the two shareholders of TQS. On May 22, 2008, the plan of arrangement proposed by Remstar Corporation Inc. was approved by the creditors of the TQS Group and subsequently approved by the Superior Court of Quebec on June 4, 2008. Certain employees of TQS Inc. and their union filed a motion on June 19, 2008 for leave to appeal the order of the Superior Court of Quebec approving the plan. On June 26, 2008, the CRTC approved the proposed transfer of ownership and control of TQS Inc. to Remstar Corporation Inc.
Effective December 18, 2007, the Company has ceased to consolidate the financial statements of the TQS Group. Accordingly, the investment in the TQS Group as at August 31, 2007, as well as its results of operations and its cash flow for the period of September 1, 2007 to December 18, 2007 and for the three and nine-month periods ended May 31, 2007, have been reclassified as a discontinued operation.
The assets and liabilities related to the discontinued operations as at August 31, 2007, were as follows:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
($000) $ ---------------------------------------------------------------------------
(unaudited) Accounts receivable 23,611 Prepaid expenses 442 Broadcasting rights 14,647
--------------------------------------------------------------------------- Current assets 38,700 --------------------------------------------------------------------------- Broadcasting rights 17,456 Fixed assets 21,653 Broadcasting licenses 3,000 --------------------------------------------------------------------------- Non-current assets 42,109 --------------------------------------------------------------------------- Bank indebtedness 8,173 Accounts payable and accrued liabilities 28,893 Broadcasting rights payable 8,531 Income tax liabilities 141 Deferred and prepaid income 42 Current portion of long-term debt 251 --------------------------------------------------------------------------- Current liabilities 46,031 --------------------------------------------------------------------------- Share in the partner's deficiency of a general partnership 518 Broadcasting rights payable 4,408 Pension plan liabilities 1,444 Non-controlling interest 11,219 --------------------------------------------------------------------------- Long-term liabilities 17,589
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The results of the discontinued operations were as follows:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months ended May 31, Nine months ended May
31,
($000) 2008 2007 2008 2007
$ $ $ $
---------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited) Revenue - 28,329 38,499 84,901 Operating costs - 28,625 35,822 88,010
---------------------------------------------------------------------------
Operating income (loss)
before amortization - (296) 2,677
(3,109)
Amortization - 1,110 1,364 3,288 --------------------------------------------------------------------------- Operating income (loss) - (1,406) 1,313
(6,397)
Financial expense - 248 291 659 Impairment of assets - - 30,298 -
---------------------------------------------------------------------------
Loss before income taxes and the following items - (1,654) (29,276) (7,056) Income taxes - 1,624 - (101) Non-controlling interest - (1,311) (11,219) (2,780) Shares in the earnings of a general partnership - (1) - (5)
---------------------------------------------------------------------------
Loss from
discontinued operations - (1,966) (18,057)
(4,170)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The cash flow of the discontinued operations was as follows:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months ended May 31, Nine months ended May
31,
($000) 2008 2007 2008 2007
$ $ $ $
---------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited) Cash flow from operating activities - (187) (3,973) (8,054) Cash flow from investing activities - (567) (133) (1,255) Cash flow from financing activities - 754 4,106 9,309
---------------------------------------------------------------------------
Cash flow from
discontinued operations - - - -
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Continuing Operations
RGU growth in the cable sector
During the first nine months ended May 31, 2008, the consolidated number of RGUs increased by 190,109, or 7.6% to reach 2,675,774 units, which is in line with Cogeco Cable's revised RGU growth projections of 225,000 units, representing growth of approximately 9%, for the fiscal year ended August 31, 2008. Please consult the fiscal 2008 revised projections in the "Fiscal 2009 preliminary financial guidelines" section for further details.
Revenue and operating income before amortization growth
For the third quarter of fiscal 2008, revenue increased by $34.5 million, or 13.8%, to reach $283.9 million while operating income before amortization grew by $21.4 million, or 22.4%, to reach $117.2 million. For the first nine months of 2008, revenue increased by $98 million, or 13.6%, to reach $816 million, while operating income before amortization grew by $57.1 million, or 21.1%, to reach $327.8 million. For fiscal 2008, the Company expects revenue to reach $1,090 million, while operating income is expected to reach $445 million. Please consult the fiscal 2008 revised projections in the "Fiscal 2009 preliminary financial guidelines" section for further details.
Free cash flow
In the third quarter of fiscal 2008, COGECO generated free cash flow of $37.1 million, compared to $19.1 million for the same period last year. For the nine-month period ended May 31, 2008, the Company generated free cash flow of $79.5 million compared to $20.3 million for the same period the year before. These increases result mainly from the cable sector and are attributable to an increase in operating income before amortization and a reduction in financial expense. Capital expenditures and deferred charges remained essentially the same compared to the corresponding periods last year. Due to the usual higher level of capital expenditures in the fourth quarter, the Company projects free cash flow of $75 million for the fiscal year ended August 31, 2008. Please consult the fiscal 2008 revised projections in the "Fiscal 2009 preliminary financial guidelines" section for further details.
OPERATING RESULTS - CONSOLIDATED OVERVIEW
---------------------------------------------------------------------------
---------------------------------------------------------------------------
($000, except Quarters ended May 31, Nine months ended May 31,
percentages) 2008 2007 Change 2008 2007 Change
$ $ % $ $ %
---------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited) Revenue 283,878 249,424 13.8 816,027 718,035 13.6 Operating
costs 166,674 153,633 8.5 488,268 447,395 9.1 --------------------------------- ---------------------- Operating
income
before
amortization 117,204 95,791 22.4 327,759 270,640 21.1 --------------------------------- ---------------------- Operating
margin 41.3% 38.4% 40.2% 37.7%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Revenue
Fiscal 2008 third-quarter revenue improved, mainly by its Cable segment, by $34.5 million, or 13.8%, to reach $283.9 million, and, for the first nine-month period, by $98 million, or 13.6%, to reach $816 million. Cable revenue, driven by an increased number of RGUs, combined with rate increases, went up by $34.3 million, or 14.3%, and by $97.3 million, or 14%, respectively, in the third quarter and first nine months of fiscal 2008.
Operating costs
For the third quarter and the first nine months of fiscal 2008, operating costs increased by $13 million, or 8.5% and $40.9 million, or 9.1%, compared to last year, to reach $166.7 million and $488.3 million, respectively. The increase in operating costs for the third quarter and first nine-month period of 2008 was mainly attributable to the cable sector and due to servicing additional RGUs in Canada and Portugal. In addition, for the first nine-month period, operating costs were impacted by the timing of certain marketing initiatives in Portugal, including a major campaign to increase brand awareness, and costs related to the design of internal controls and review of business processes to comply with National Instrument 52-109.
Operating income before amortization
Operating income before amortization grew, essentially by its Cable segment, by $21.4 million, or 22.4%, to reach $117.2 million in the third quarter of fiscal 2008 and by $57.1 million, or 21.1%, to reach $327.8 million in the first nine months of fiscal 2008 compared to the corresponding periods of the prior year. The cable sector contributed to the growth by $19.6 million and $56 million during the third quarter and first nine months of fiscal 2008, respectively.
FIXED CHARGES
---------------------------------------------------------------------------
---------------------------------------------------------------------------
($000, except Quarters ended May 31, Nine months ended May 31,
percentages) 2008 2007 Change 2008 2007 Change
$ $ % $ $ %
---------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Amortization 58,564 47,725 22.7 167,949 136,498 23.0 Financial
expense 17,746 21,603 (17.9) 52,487 67,132 (21.8) --------------------------------------------------------------------------- ---------------------------------------------------------------------------
Fiscal 2008 third-quarter and first nine-month period amortization amounted to $58.6 million and $167.9 million compared to $47.7 million and $136.5 million for the same periods the year before. Amortization expense increased for both periods mainly due to the following factors in the cable sector: the completion, in the fourth quarter of fiscal 2007, of the purchase price allocation of the Cabovisao acquisition, which includes the revaluation of tangible and intangible assets for an additional amortization expense of approximately $6.2 million and $16.4 million in the third quarter and first nine months, respectively, and additional capital expenditures arising from the required customer premise equipment to sustain RGU growth and to support the deployment of the Digital Television service in Portugal.
Fiscal 2008 third-quarter and first nine-month period financial expense decreased by $3.9 million and $14.6 million, respectively, compared to the same periods in fiscal 2007. During the first nine months of fiscal 2008, the Company's cable subsidiary reduced its level of Indebtedness (defined as bank indebtedness and long-term debt) from the net proceeds of subordinate voting shares issued during fiscal 2007. During the first nine-month period of fiscal 2007, Cogeco Cable also recorded a one-time charge of $2.6 million related to the early repayment of its Second Secured Debentures, Series A.
INCOME TAXES
Fiscal 2008 third-quarter income tax expense amounted to $10.3 million compared to $8.1 million in fiscal 2007. The effective tax rate for the three months ended May 31, 2008 was 25.2% compared to 30.4% for the same period of 2007, mainly due to the cable sector's lower corporate income tax rates in Canada and to income tax reductions in European operations resulting from the revaluation of tangible and intangible assets upon the completion of the Cabovisao purchase price allocation in the fourth quarter of fiscal 2007.
For the first nine months of fiscal 2008, income tax expense amounted to $5.1 million compared to $18.8 million in 2007. Included in first nine months of 2008 expense is a recovery of $24.1 million related to the reduction in corporate income tax rates announced on October 16, 2007 by the Canadian federal government in its Economic Statement. According to the new tax initiatives, corporate income tax rates have been further reduced from 20.5% to 19.5% effective January 1, 2008, from 20% to 19% effective January 1, 2009, from 19% to 18% effective January 1, 2010, from 18.5% to 16.5% effective January 1, 2011, and to 15% effective January 1, 2012. These corporate income tax rates were considered substantively enacted on December 14, 2007. The effective tax rates for the first nine months of 2008 and 2007 were 4.8% and 28.1%, respectively. Excluding the effect of the tax rate reductions, the effective tax rate for the first nine months of 2008 was 27.3%.
GAIN ON DILUTION RESULTING FROM SHARES ISSUED BY A SUBSIDIARY
During the first nine months of 2007, the Company's subsidiary, Cogeco Cable Inc., completed a public offering totalling 5,000,000 subordinate voting shares. The offering resulted in gross proceeds of $192.5 million and net proceeds of $184.2 million. The Company's subsidiary has also issued, during the first nine months of fiscal 2007, 7,344 subordinate voting shares pursuant to its Employee Stock Purchase Plan and 305,573 subordinate voting shares pursuant to its Employee Stock Option Plan for cash considerations of $0.2 million and $5.7 million, respectively. As a result, the Company's interest in Cogeco Cable Inc. decreased from 39.2% to 34.6% and a gain on dilution of $30.9 million was recorded for the nine-month period ended May 31, 2007.
NON-CONTROLLING INTEREST
The non-controlling interest represents a participation of approximately 67.7% in Cogeco Cable's results. During the third quarter and first nine months of 2008, the non-controlling interest amounted to $21.1 million and $68.6 million, respectively, due to the cable sector's strong results. The non-controlling interest for the comparable periods of last year amounted to $13.3 million and $30.6 million, respectively.
NET INCOME
Fiscal 2008 third-quarter net income amounted to $9.5 million, or $0.57 per share, compared to $3.1 million, or $0.18 per share, for the same period last year. The net income increase in the third quarter of fiscal 2008 was mainly due to growth in operating income before amortization exceeding those of the fixed charges, net of non-controlling interest, from the cable sector, and to the loss from discontinued operations of $2 million in the third quarter of fiscal 2007.
Fiscal 2008 first nine-month period net income amounted to $15.5 million, or $0.93 per share, compared to $44.4 million, or $2.67 per share, for the same period in 2007. The net income decrease in the first nine months of fiscal 2008 was due to the following factors: a gain on dilution amounting to $30.9 million was recorded in the first nine months of fiscal 2007, a loss from discontinued operations of $18.1 million recorded in the first nine months of fiscal 2008, partially offset by the growth in operating income before amortization exceeding those of the fixed charges and the effect of income tax rate reductions of $24 million, net of non-controlling interest, from the cable sector.
Excluding the effect of the fiscal 2007 gain on dilution and the effect of the fiscal 2008 income tax rate reductions net of non-controlling interest and the loss from discontinued operations, net income for the third quarter of fiscal 2008 would have amounted to $9.5 million, or $0.57 per share, compared to $5.1 million, or $0.31 per share, for the same period in 2007, an improvement of 87.5% and 83.9%, respectively. For the 2008 nine-month period, net income, excluding the adjustments discussed above, would have amounted to $25.7 million, or $1.54 per share, compared to $17.6 million, or $1.06 per share, in 2007, an increase of 45.9% and 45.3%, respectively. Please consult the "Non-GAAP financial measures" section for further details.
CASH FLOW AND LIQUIDITY
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Quarters ended May 31, Nine months ended May
31,
($000) 2008 2007 2008 2007
$ $ $ $
---------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited) Operating activities Cash flow from operations 96,068 76,862 262,819 205,412 Changes in non-cash operating items 16,825 (25,193) (10,380) (102,005)
---------------------------------------------------------------------------
112,893 51,669 252,439 103,407
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Investing activities (1) (74,415) (53,541) (197,487) (179,875) --------------------------------------------------------------------------- --------------------------------------------------------------------------- Financing activities (1) 18,771 (15,255) (39,815) 26,143 --------------------------------------------------------------------------- --------------------------------------------------------------------------- Effect of exchange rate
changes on cash and cash equivalents denominated in foreign currencies 1,063 (1,774) 1,265 1,486
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Net change in cash and cash equivalents 58,312 (18,901) 16,402 (48,839) Cash and cash
equivalents at beginning 24,369 41,578 66,279 71,516 --------------------------------------------------------------------------- --------------------------------------------------------------------------- Cash and cash
equivalents at end 82,681 22,677 82,681 22,677 --------------------------------------------------------------------------- ---------------------------------------------------------------------------
(1) Excludes assets acquired under capital leases.
Fiscal 2008 third-quarter cash flow from operations reached $96.1 million, 25% higher than for the comparable period last year, primarily due to the increase in operating income before amortization and to a reduction in financial expense in the cable sector. Changes in non-cash operating items generated cash inflows compared to cash outflows for the same period last year, attributable to the cable sector and mainly as a result of an increase in accounts payable and accrued liabilities and in income tax liabilities.
Fiscal 2008 first nine-month period cash flow from operations reached $262.8 million, an increase of 27.9% compared to the same period the year before, primarily due to the growth in operating income before amortization and to a reduction in financial expense in the cable sector. Changes in non-cash operating items generated lower cash outflows than for the same period last year, attributable to the cable sector and mainly as a result of a smaller decrease in accounts payable and accrued liabilities, and an increase in income tax liabilities. The larger reduction in accounts payable and accrued liabilities in the first nine months of fiscal 2007 was due to non-recurring payments made by the Portuguese cable subsidiary in accordance with the terms of the acquisition.
In the third quarter of fiscal 2008, investing activities stood at $74.4 million mainly due to capital expenditures of $50.9 million, a business acquisition of $16.1 million and from an increase of $7.1 million in deferred charges in the cable sector. The capital expenditures from the cable sector increased compared to the same period last year due to the following factors:
- An increase in customer premise equipment capital spending resulted from higher RGU growth fuelled in part by increased interest for High Definition technology for the Canadian operations combined with the deployment of Digital Television in Portugal, partly offset by lower RGU growth in Portugal.
- A decrease in scalable infrastructure capital spending mainly due to the timing of the expansion and the headend improvements, system powering and equipment reliability to sustain increased customer demand for HSI and Telephony services.
- An increase in capital expenditures associated with the network upgrade and rebuild due to the construction costs incurred to increase the number of homes passed in Portugal.
In the first nine months of fiscal 2008, investing activities stood at $197.5 million mainly due to capital expenditures of $160.3 million, an increase of $20.6 million in deferred charges in the cable sector and a business acquisition of $16.1 million. The capital expenditures from the cable sector decreased compared to the same period last year due to the following factors:
- A reduction in customer premise equipment resulted from the timing to acquire such equipment in fiscal 2007, in the Canadian operations, to ensure the availability of equipment required to sustain expected RGU growth, partly offset by the deployment of Digital Television service in Portugal.
- An increase in support capital due to the improvement in information systems to sustain the business operations and to the acquisition of vehicles.
Deferred Charges are mainly attributable to reconnect costs. Fiscal 2008 third-quarter and first nine-month period capital spending amounted to $7.1 million and $20.6 million compared to $6 million and $19.3 million for the same periods the year before. The higher reconnect costs associated with RGUs in Canada combined with the deployment of the Digital television service in Portugal explained the increases recorded so far in 2008.
In the third quarter and first nine months of fiscal 2008, the Company generated free cash flow in the amount of $37.1 million and $79.5 million, respectively, compared to $19.1 million and $20.3 million for the same periods of the preceding year. The free cash flow increases over last year's same periods are attributable to the cable sector and are mainly due to an increase in operating income before amortization and to a reduction in financial expense. The aggregate of the capital expenditures and deferred charges remained essentially the same compared to the same periods in the prior year.
Indebtedness increased by $22.9 million in the third quarter of fiscal 2008. This increase is primarily due to the issuance by Cogeco Cable on March 5, 2008 of a $100 million senior unsecured debenture by way of a private placement, the proceeds of which were used in part by the cable subsidiary to reimburse its bank indebtedness of $17.7 million and to finance the acquisition of MaXess Networx(R) for $16.1 million. The debenture bears interest at a fixed rate of 5.936%, is redeemable at Cogeco Cable's option at any time, in whole or in part, prior to maturity, at 100% of the principal amount plus a make-whole premium and will mature on March 5, 2018. The increase in Indebtedness was partly offset by repayments on the revolving credit facility of $58.6 million in the cable sector and a reduction of the Company's Term Facility for an amount of $2 million from the free cash flow of $37.1 million and the increase in non-cash operating items of $16.8 million. For the same period last year, Indebtedness decreased by $13.6 million. The decrease in the level of Indebtedness is mainly due to the free cash flow generated of $19.1 million and to the decrease of $18.9 million in cash and cash equivalents, partly offset by a decline of $25.2 million in non-cash operating items. In addition, dividends of $0.07 per share for subordinate and multiple voting shares, totalling $1.2 million, were paid by the Company during the third quarters of fiscal 2008 and fiscal 2007. Dividends paid by a subsidiary to non-controlling interests were $3.3 million during the third quarter, for consolidated dividend payments of $4.4 million.
During the first nine months of fiscal 2008, the level of Indebtedness decreased by $29.7 million mainly due to a net reduction of the amount outstanding on the revolving credit facility of $123.1 million in the cable sector and a reduction of the Company's Term Facility of $6.5 million. This decrease was partly offset by the issuance of a senior unsecured debenture, as discussed above. For the same period last year, Indebtedness decreased by $156.7 million mainly due to the completion of a public offering of 5,000,000 subordinate shares for a net proceeds of $184.2 million, the generated free cash flow of $20.3 million and the decrease of $48.8 million in cash and cash equivalents, partly offset by a decline of $102 million in non-cash operating items. In addition, quarterly dividends of $0.07 per share for subordinate and multiple voting shares, totalling $3.5 million, were paid by the Company during the first nine months of fiscal 2008 compared to quarterly dividends of $0.0625 per share for the first quarter and $0.07 per share for the second and third quarters, totalling $3.4 million, were paid during the first nine months of fiscal 2007. Dividends paid by a subsidiary to non-controlling interests were $9.8 million during the first nine months of fiscal 2008, bringing the consolidated dividend payments to $13.3 million.
As at May 31, 2008, the Company had a working capital deficiency of $350.4 million compared to $127.3 million as at August 31, 2007. The greater deficiency is mainly attributable to Cogeco Cable's US$150 million Senior Secured Notes, Series A and its related derivative financial instruments of $91.3 million for an aggregate amount of $240.1 million due on October 31, 2008. Due to the nature of its business, COGECO maintains a working capital deficiency due to a low level of accounts receivable since the majority of the cable subsidiary's customers pay before their services are rendered, contrary to accounts payable and accrued liabilities, which are paid after products or services are rendered, thus enabling the cable subsidiary to use cash and cash equivalents to reduce Indebtedness.
As at May 31, 2008, the cable subsidiary had used $366.8 million of its $900 million Term Facility and the Company had drawn $19 million of its $50 million Term Facility.
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, 2007, except for the changes in the presentation of assets and liabilities related to discontinued operations, there have been major changes to the balance of Fixed assets, Cash and cash equivalents, Accounts payable and accrued liabilities, Income tax liabilities, Accounts receivable, Future income tax assets, Future income tax liabilities, Goodwill, Accumulated other comprehensive income (loss), Non-controlling interest, Derivative financial instruments, and Indebtedness.
The $55.2 million increase in fixed assets is mainly due to increased capital expenditures to sustain RGU growth and by the appreciation of the Euro over the Canadian dollar in the cable sector. The $16.4 million increase in cash and cash equivalents is mainly related to the net proceeds of issuance of senior unsecured debentures, as discussed in the "Cash Flow and Liquidity" section, as well as the free cash flow generated of $79.5 million, partly offset by the net reductions of the cable subsidiary's revolving credit facility of $123.1 million and the Company's Term Facility of $6.5 million, the acquisition of MaXess Networx(R) for $16.1 million and dividends paid totalling $13.3 million, $9.8 million of which were paid by the cable sector. The $13.9 million reduction in accounts payable and accrued liabilities is primarily related to the timing of payments made to suppliers in the cable sector. The $14 million increase in income tax liabilities and the $9.8 million reduction in future income tax assets are due to the utilization of Cogeco Cable's tax loss carry forwards before fiscal 2008. The $7.6 million accounts receivable increase is essentially due to revenue growth and its related level of receivables in the cable sector. The $21 million future income tax liabilities reduction, also attributable to the cable sector, is mainly due to the corporate income tax rate reductions announced by the Canadian federal government and considered substantively enacted on December 14, 2007. The $25.2 million goodwill increase is due to the appreciation of the Euro over the Canadian dollar in the cable sector. The $4.9 million increase in accumulated other comprehensive income (loss) is mainly the result of the appreciation of the Euro over the Canadian dollar, partly offset by the changes in accounting policies related to financial instruments in the cable sector. The $74.1 million increase in non-controlling interest is mainly due to the improved results in the cable sector. Finally, the derivative financial instruments have increased by $91.3 million and Indebtedness has decreased by $88.2 million as a result of accounting changes and factors previously discussed in the "Cash Flow and Liquidity" section, net of the unfavourable impact of the appreciation of the Euro over the Canadian dollar. Please consult the "Accounting policies and estimates" section for further details.
A description of COGECO's share data as at June 30, 2008 is presented in the table below:
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Number of Amount
shares/options
($000)
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Common shares Multiple voting shares 1,842,860 12 Subordinate voting shares 14,851,586 119,393 Options to purchase subordinate voting shares Outstanding options 169,758 Exercisable options 169,758
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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 2007 annual MD&A, have not materially changed since August 31, 2007, except that on December 14, 2007, the Company concluded an amended and restated credit agreement with a group of four Canadian banks led by the Canadian Imperial Bank of Commerce ("CIBC"), which will now act as agent for the banking syndicate. The annually renewable three-year amended credit agreement establishes a revolving credit of $50 million to which may be added a further credit of $25 million under certain conditions. The amended credit agreement maintains certain financial commitments with the same security by the Company, its subsidiary Cogeco Radio-Television Inc., and indirect subsidiary, Cogeco Diffusion Inc.
In November 2007, the Company posted a guarantee for a maximum amount of $12 million in favour of CIBC, the bank of the TQS Group. On March 18, 2008, the Company was unconditionally relieved from all of its obligations under the guarantee, as CIBC was fully repaid by Remstar Corporation for all indebtedness of the TQS Group under the TQS credit agreement.
Furthermore, on March 5, 2008, Cogeco Cable issued a $100 million senior unsecured debenture by way of a private placement. The debenture bears interest at a fixed rate of 5.936%, is redeemable at the Cogeco Cable's option at any time, in whole or in part, prior to maturity, at 100% of the principal amount plus a make-whole premium and will mature on March 5, 2018.
On June 30, 2008, Cogeco Cable completed the acquisition of all the assets of FibreWired Burlington Hydro Communications, Burlington Hydro Electric's telecommunications division (City of Burlington's energy company) for a total consideration of $12.5 million. FibreWired Burlington Hydro Communications operates a broadband network equipped with next generation Ethernet technology, provides Burlington organizations with the broadband capacity they need for data networking, high-speed Internet access, hosting services, e-business applications, video conferencing and other advanced communications. Cogeco Cable will use this network to expand its commercial broadband service offering in the area, which is in Cogeco Cable's footprint.
On June 13, 2008, Cogeco Cable announced the acquisition of all of the shares of Toronto Hydro Telecom Inc., the telecommunications subsidiary of Toronto Hydro Corporation (City of Toronto's energy company) for a total purchase price of $200 million, subject to certain conditions, including regulatory approval by the Commissioner of Competition. In addition, the Company will assume a working capital deficiency and liabilities of approximately $4 million. Toronto Hydro Telecom Inc. offers data communications and other telecommunications services such as Ethernet, private line, Voice-over-Internet protocol ("VoIP"), high-speed Internet access, dark fibre, data storage, data security and co-location to a wide range of business customers and organizations throughout the Greater Toronto Area ("GTA"). This agreement will allow Cogeco Cable to further the development of its business telecommunications activities.
On March 31, 2008, Cogeco Cable completed the acquisition of all the assets of MaXess Networx(R), ENWIN Energy Ltd.'s telecommunications division (City of Windsor's energy company), for a total cost of $16.1 million, including transaction costs. MaXess Networx(R) operates a broadband network equipped with next generation ATM and Ethernet technology and provides organizations in south-western Ontario with the broadband capacity required for data networking, high-speed Internet access, e-business applications, video conferencing and other advanced communications.
DIVIDEND DECLARATION
At its July 9, 2008 meeting, the Board of Directors of COGECO declared a quarterly eligible dividend of $0.07 per share for subordinate and multiple voting shares, payable on August 6, 2008, to shareholders of record on July 23, 2008.
FOREIGN EXCHANGE MANAGEMENT
The Company's subsidiary, Cogeco Cable, has entered into cross-currency swap agreements to set the liability for interest and principal payments on its US$150 million Senior Secured Notes. These agreements have the effect of converting the U.S. interest coupon rate of 6.83% per annum to an average Canadian dollar fixed interest rate of 7.254% per annum. The exchange rate applicable to the principal portion of the debt has been fixed at CAN$1.5910. Amounts due under the US$150 million Senior Secured Notes, Series A decreased by CAN$9.5 million at the end of the third quarter compared to August 31, 2007 due to the Canadian dollar's appreciation. The fair value of cross-currency swaps increased by a net amount of $7.8 million, of which $9.5 million offset the foreign exchange gain on the US$ debt. The difference of $1.7 million was recorded as an increase of other comprehensive income.
As noted in the MD&A of the 2007 Annual Report, Cogeco Cable's investment in the Portuguese 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 CAN$16.2 million in the first nine months of 2008, which is presented net of non-controlling interest of $11 million in other comprehensive income. The exchange rate used to convert the Euro into Canadian dollars for the balance sheet accounts as at May 31, 2008 was $1.5448 per Euro compared to $1.4390 per Euro as at August 31, 2007. The average exchange rates prevailing during the third quarter and first nine months of 2008 used to convert the operating results of the European operations were $1.5694 and $1.4851 per Euro, respectively, compared to $1.5202 and $1.4946 per Euro, respectively, for the same periods last year.
CABLE SECTOR CUSTOMER STATISTICS
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Net additions (losses)
Quarters ended Nine months ended
May 31, May 31,
2008 2008 2007 2008 2007
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RGUs(2) 2,675,774 50,889 52,434 190,109 251,112 Basic Cable service customers 1,159,161 (1,589) 2,784 16,001 38,160 HSI service customers 628,978 6,865 16,454 53,119 81,202 Digital Television service customers 440,066 26,055 8,583 60,187 43,768 Telephony service customers 447,569 19,558 24,613 60,802 87,982
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% of
Penetration(1)
2008 2007
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RGUs(2)
Basic Cable service customers HSI service customers 56.7 51.7 Digital Television service customers 38.5 44.5 Telephony service customers 44.2 38.2
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(1) As a percentage of Basic Cable service customers in areas served.
(2) Represents the sum of Basic Cable, HSI, Digital Television and
Telephony service customers.
In Canada, third-quarter 2008 RGU net additions were higher than for the same period last year but reflect an early sign of maturation in some services. In Portugal, fiscal 2008 third-quarter and first nine-month periods were marked by an unfavourable economic environment, aggressive marketing campaigns from competitors, including periodic intense price competition, and the arrival of multiple triple-play providers in the Portuguese market. Cabovisao did not match the competition's highly discounted offering at all times. These factors were the main contributors to net customer losses in the Basic Cable and lower customer growth in HSI and in Telephony services compared to the same period last year. The net RGU growth in the European operations is attributable to the launch of the Digital Television service in the third quarter of 2008. Management considers the current competitive dynamic is Portugal to be transitory. Cabovisao's performance since its acquisition by Cogeco Cable has exceeded management's original business plan, and long-term growth prospects remain excellent in management's view.
The net loss of customers for Basic Cable in the Canadian market stood at 520 customers compared to 2,910 customers for the same period last year. Third-quarter Basic Cable service customer losses are due to the end of the school year for college and university students. In addition, 2007 third-quarter net losses were unusually high due to the end of an aggressive promotional offer which resulted in a significant number of customer disconnections. In Portugal, Basic Cable service decreased by 1,069 customers compared to an increase of 5,694 customers in the same period of the prior year.
In Canada, the number of net additions to HSI service stood at 8,480 customers compared to 11,030 customers for the same period last year. During the third quarter of 2008, 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. HSI service customers in Portugal decreased by 1,615 customers compared to an increase of 5,424 customers in 2007.
Canadian net additions of Digital Television service stood at 11,585 customers compared to 8,583 customers for the same period last year due to targeted marketing initiatives in 2008 to improve the penetration rate. It also reflects the continuing strong interest for High Definition technology. The Digital Television service was launched in Portugal in the third quarter of 2008, with the addition of 14,470 customers in that period.
Telephony customers grew in both operating units. In Canada, net additions stood at 17,113 to reach 200,165 compared to a growth of 19,065 for the same period last 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. Telephony service coverage, as a percentage of homes passed, has now reached 83% compared to 77% last year. Telephony service in Portugal grew by 2,445 customers compared to 5,548 customers for th
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