COGECO announces strong financial results for the second quarter of fiscal 2013
PRESS RELEASE
For immediate release
Cogeco Cable second quarter results bode well for fiscal 2013 projections
• Operating margin
(1)
increased to 45.6% in second quarter of 2013 from 45.2% and, for the first six
months of fiscal 2013 to 45.3% from 43.5% in the corresponding period last year
• $36.1 million in free cash flow
(1)
, representing a 96.2% increase from the same period of last year
• Profit for the period from continuing operations increased by 88.1%
Montréal, April 10, 2013 – Today, Cogeco Cable Inc. (TSX: CCA) (“Cogeco Cable” or the “Corporation”) announced its financial
results for the second quarter of fiscal 2013, ended February 28, 2013, in accordance with International Financial Reporting
Standards (“IFRS”).
For the second quarter and first six months of fiscal 2013, which include three months operating results of Atlantic Broadband
("ABB") and one month for Peer 1 Network Enterprises, Inc. (“PEER 1”):
• Revenue increased by 35.2% to reach $429.7 million, and by 19.7% to reach $757.6 million ;
• Operating income before depreciation and amortization increased by 36.2% to $195.8 million when compared to the
second quarter of fiscal 2012, and by 24.4% to $342.9 million when compared to the first half of the prior year;
• Operating margin
(1)
increased to 45.6% from 45.2% in the quarter and increased to 45.3% from 43.5% in the first six
months when compared to the same periods of the prior year;
• Profit for the period from continuing operations amounted to $58.5 million in the second quarter when compared to
$31.1 million for the same period of the previous fiscal year. Profit progression for the quarter is mostly attributable
to the operating income before depreciation and amortization increase coming primarily from the acquisitions of ABB
and PEER 1, partly offset by the acquisition costs and the financial expense increases both related to ABB and PEER 1.
For the first half of fiscal 2013, profit for the period from continuing operations amounted to $100.6 million when
compared to $70.7 million for the first half of fiscal 2012. The increase for the six-month period ended February 28,
2013 is mostly attributable to the increase in operating income before depreciation and amortization coming primarily
from the acquisition of ABB, partly offset by the acquisition costs and the financial expense increases both related to
ABB and PEER 1 and the income tax expense increase;
• Profit for the period amounted to $58.5 million in the second quarter when compared to $83.1 million for the same
period of the previous fiscal year. For the first half of fiscal 2013, profit for the period amounted to $100.6 million when
compared to $126.1 million for the comparable period of prior year. The decline for both periods is mostly attributable
to the last year’s profit from the Portuguese subsidiary, Cabovisão – Televisão por Cabo, S.A. (“Cabovisão”), reported
as discontinued operations and disposed of on February 29, 2012, partly offset by the increases in operating income
before depreciation and amortization, financial expense and acquisition costs all related to ABB and PEER 1 and the
income tax expense increase;
• Free cash flow
(1)
reached $36.1 million for the second quarter compared to $18.4 million in the comparable quarter of
the prior year. For the first six months, free cash flow amounted to $53.1 million, compared to $38.1 million in the first
half of fiscal 2012. The increases in free cash flow over the prior year are due to the improvement of operating income
before depreciation and amortization, partly offset by the increase in financial expense, the acquisition costs related
to ABB and PEER 1 acquisitions as well as the increase in acquisition of property, plant and equipment;
(1) The indicated terms do not have standard definitions prescribed by IFRS and therefore, may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-IFRS financial measures" section of the Management's discussion and analysis.
• A quarterly dividend of $0.26 per share was paid to the holders of subordinate and multiple voting shares, an increase
of $0.01 per share, or 4%, when compared to a dividend of $0.25 per share paid in the second quarter of fiscal 2012.
Dividend payments in the first six months totaled $0.52 per share in fiscal 2013, compared to $0.50 per share in fiscal
2012;
• Fiscal 2013 second-quarter primary service units (“PSU”)
(1)
grew by 7,463 and by 22,543 in the first six months of
fiscal 2013. At February 28, 2013, consolidated PSU amounted to 2,486,350 of which 1,984,555 comes from the
Canadian cable services segment and 501,795 from the American cable services segment;
• On January 31, 2013, Cogeco Cable completed the acquisition of 96.57% of the issued and outstanding shares of
PEER 1 by way of takeover bid (the “offer”) valued at approximately $649 million. On April 3, 2013, Cogeco Cable
completed the acquisition of the remaining 3.43% of the issued and outstanding shares of PEER 1 for a cash
consideration of $17 million pursuant to the compulsory acquisition provisions in Section 300 of the Business
Corporations Act ("British Columbia"). In connection with the completion of the offer, Cogeco Cable has entered into
secured credit facilities in the amount of approximately $650 million and maturing in 2017, with a syndicate of lenders.
PEER 1 is one of the world’s leading internet infrastructure providers, specializing in managed hosting, dedicated
servers, cloud services and co-location. This acquisition enhances Cogeco Cable's footprint and builds on its strategic
initiatives by increasing scale in an attractive industry segment with significant growth prospects in the state of the art
data center platforms. The Corporation will also serve additional businesses worldwide, in addition to approximately
11,000 customers currently served, through 23 data centres and 21 points-of-presence across North America and
Europe. PEER 1's primary network centre and head office remain located in Vancouver.
“Cogeco Cable delivered great overall results for the second quarter of fiscal 2013,” declared Louis Audet, President and Chief
Executive Officer of Cogeco Cable. “During this first fiscal quarter with ABB on board, we made progress as we had forecasted,
and believe the market opportunities of our combined capabilities to be positive going forward,” Louis Audet added.
“The integration of our more recent acquisition of PEER 1 is running smoothly and we are in line with meeting the objectives we
had communicated last December,” Louis Audet continued. “With increased operating margin, moderate yet steady organic
revenue increase and encouraging growth prospects for the Enterprise services segment, I am confident that we will deliver on
our updated projections for 2013, which were modified to include PEER 1 operating results. Looking forward to the third quarter,
we are focused on continuing our efforts to fully capitalize on our acquisitions and maintaining efficiencies across all of our
operations,” concluded Louis Audet.
ABOUT COGECO CABLE
Cogeco Cable (www.cogeco.ca) is a telecommunications corporation and is the11th largest hybrid fibre coaxial cable operator in North America
operating in Canada under the Cogeco Cable brand name in Quebec and Ontario, and in the United States through its subsidiary Atlantic
Broadband in Western Pennsylvania, South Florida, Maryland, Delaware and South Carolina. Its two-way broadband cable networks provide to
its residential and small business customers Analogue and Digital Television, High Speed Internet («HSI») and Telephony services. Through its
subsidiaries Cogeco Data Services and PEER 1 Hosting, Cogeco Cable provides its commercial customers a suite of IT hosting, information and
communications technology services (Data Centre, Co-location, Managed Hosting, Cloud Infrastructure and Connectivity), with 23 data centres,
extensive fibre networks in Montreal and Toronto as well as points-of-presence in North America and Europe. Cogeco Cable's subordinate voting
shares are listed on the Toronto Stock Exchange (TSX: CCA). For more information about Cogeco Cable and its subsidiaries visit www.cogeco.ca,
cogecodata.com, peer1.com and peer1hosting.co.uk.
(1) Represents the sum of Television, High Speed Internet ("HSI") and Telephony service customers.
- 30 -
Source: Cogeco Cable Inc.
Pierre Gagné
Senior Vice President and Chief Financial Officer
Tel.: 514-764-4700
Information: Media
René Guimond
Vice-President, Public Affairs and Communications
Tel.: 514-764-4700
Analyst Conference Call: Thursday, April 11, 2013 at 11:00 a.m. (Eastern Daylight Time)
Media representatives may attend as listeners only.
Please use the following dial-in number to have access to the conference call by dialing five minutes
before the start of the conference:
Canada/USA Access Number: 1 866-322-8032
International Access Number: + 1 416-640-3406
Confirmation Code: 4371097
By Internet at www.cogeco.ca/investors
A rebroadcast of the conference call will be available until July 11, 2013, by dialing:
Canada and US access number: 1 888-203-1112
International access number: + 1 647-436-0148
Confirmation code: 4371097
SHAREHOLDERS’ REPORT
Three and six-month periods ended February 28, 2013
COGECO CABLE INC. Q2 2013 2
FINANCIAL HIGHLIGHTS
Quarters ended Six months ended
(in thousands of dollars, except PSU growth, percentages and
per share data)
February 28,
2013
February 29,
2012 Change
February 28,
2013
February 29,
2012 Change
$ $ % $ $ %
Operations
Revenue 429,672 317,735 35.2 757,583 633,159 19.7
Operating income before depreciation and amortization
(1)
195,776 143,743 36.2 342,902 275,566 24.4
Operating margin
(1)
45.6% 45.2% — 45.3% 43.5% –
Operating income 103,721 59,491 74.3 178,881 126,490 41.4
Profit for the period from continuing operations 58,458 31,086 88.1 100,618 70,653 42.4
Profit for the period from discontinued operations — 52,047 — — 55,446 –
Profit for the period 58,458 83,133 (29.7) 100,618 126,099 (20.2)
Profit for the period attributable to owners of the Corporation 58,660 83,133 (29.4) 100,820 126,099 (20.0)
Cash Flow
Cash flow from operating activities 150,084 120,961 24.1 149,804 134,768 11.2
Cash flow from operations
(1)
140,515 104,622 34.3 240,360 201,665 19.2
Acquisitions of property, plant and equipment, intangible and
other assets 104,433 86,234 21.1 187,266 163,517 14.5
Free cash flow
(1)
36,082 18,388 96.2 53,094 38,148 39.2
Financial Condition
(2)
Property, plant and equipment — — — 1,730,766 1,322,093 30.9
Total assets — — — 5,207,588 2,908,079 79.1
Indebtedness
(3)
— — — 3,019,682 1,069,112 –
Equity attributable to owners of the Corporation — — — 1,271,591 1,188,431 7.0
Primary service units (“PSU”) growth
(4)
7,463 12,280 (39.2) 22,543 58,459 (61.4)
Per Share Data
(5)
Earnings per share attributable to owners of the Corporation
From continuing and discontinued operations
Basic 1.20 1.71 (29.8) 2.07 2.59 (20.1)
Diluted 1.19 1.70 (30.0) 2.06 2.57 (19.8)
From continuing operations
Basic 1.20 0.64 87.5 2.07 1.45 42.8
Diluted 1.19 0.63 88.9 2.06 1.44 43.1
From discontinued operations
Basic — 1.07 — — 1.14 –
Diluted — 1.06 — — 1.13 –
(1) The indicated terms do not have standardized definitions prescribed by International Financial Reporting Standards (“IFRS”) and therefore, may not be
comparable to similar measures presented by other companies. For more details, please consult the “Non-IFRS financial measures” section of the
Management’s discussion and analysis (“MD&A”).
(2) At February 28, 2013 and August 31, 2012.
(3) Indebtedness is defined as the total of bank indebtedness, principal on long-term debt, balance due on a business combination and obligations under derivative
financial instruments.
(4) Represents the sum of Television, High Speed Internet (“HSI”) and Telephony service customers.
(5) Per multiple and subordinate voting share.
MANAGEMENT’S DISCUSSION AND ANALYSIS (MD&A)
Three and six-month periods ended February 28, 2013
Management discussion and analysis (“MD&A”) COGECO CABLE INC. Q2 2013 4
FORWARD-LOOKING STATEMENTS
Certain statements in this Management’s Discussion and Analysis (“MD&A”) may constitute forward-looking information within the meaning of
securities laws. Forward-looking information may relate to Cogeco Cable’s future outlook and anticipated events, business, operations, financial
performance, financial condition or results and, in some cases, can be identified by terminology such as "may"; "will"; "should"; "expect"; "plan";
"anticipate"; "believe"; "intend"; "estimate"; "predict"; "potential"; "continue"; "foresee", "ensure" or other similar expressions concerning matters
that are not historical facts. In particular, statements regarding the Corporation’s future operating results and economic performance and its
objectives and strategies are forward-looking statements. These statements are based on certain factors and assumptions including expected
growth, results of operations, performance and business prospects and opportunities, which Cogeco Cable believes are reasonable as of the
current date. While management considers these assumptions to be reasonable based on information currently available to the Corporation, they
may prove to be incorrect. The Corporation cautions the reader that the economic downturn experienced over the past few years makes forward-
looking information and the underlying assumptions subject to greater uncertainty and that, consequently, they may not materialize, or the results
may significantly differ from the Corporation’s expectations. It is impossible for Cogeco Cable to predict with certainty the impact that the current
economic uncertainties may have on future results. Forward-looking information is also subject to certain factors, including risks and uncertainties
(described in the “Uncertainties and main risk factors” section of the Corporation’s 2012 annual MD&A as well as in the present MD&A) that could
cause actual results to differ materially from what Cogeco Cable currently expects. These factors include risks pertaining to markets and competition,
technology, regulatory developments, operating costs, information systems, disasters or other contingencies, financial risks related to capital
requirements, human resources, controlling shareholder and holding structure, 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 does not undertake to update or alter this information at any particular time, except as may required by law.
All amounts are stated in Canadian dollars unless otherwise indicated. This report should be read in conjunction with the Corporation’s condensed
interim consolidated financial statements and the notes thereto, prepared in accordance with the International Financial Reporting Standards
(“IFRS”) and the MD&A included in the Corporation’s 2012 Annual Report.
Management discussion and analysis (“MD&A”) COGECO CABLE INC. Q2 2013 5
CORPORATE OBJECTIVES AND STRATEGIES
Cogeco Cable Inc.’s (“Cogeco Cable” or the “Corporation”) objectives are to provide outstanding service to its customers, improve profitability
and create shareholder value. To achieve these objectives, the Corporation has developed strategies that focus on expanding its service offering,
enhancing its existing services and bundles, The Corporation measures its performance, with regard to these objectives by monitoring operating
income before depreciation and amortization
(1)
, operating margin
(1)
, PSU
(2)
growth and free cash flow
(1)
.
KEY PERFORMANCE INDICATORS
OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION AND OPERATING
MARGIN
For the six-month period ended February 28, 2013, operating income before depreciation and amortization increased by 24.4% when compared
to the same period of fiscal 2012 to reach $342.9 million and operating margin increased to 45.3% from 43.5%. As a result of the acquisition of
Peer 1 Network Enterprises, Inc. (“PEER 1”), management revised its January 14, 2013 projections for fiscal 2013. Operating income before
depreciation and amortization is now expected to reach $767 million from $735 million and operating margin should decrease to 45.2% from
46.2%. For further details, please consult the fiscal 2013 revised projections in the “Fiscal 2013 financial guidelines” section.
FREE CASH FLOW
For the six-month period ended February 28, 2013, Cogeco Cable reports free cash flow of $53.1 million, compared to $38.1 million for the same
period of the previous fiscal year, an increase of $14.9 million. This variance is mostly attributable to the improvement of operating income before
depreciation and amortization, partly offset by the increase in financial expense, the acquisition costs related to Atlantic Broadband (“ABB”) and
PEER 1 acquisitions as well as the increase in acquisition of property, plant and equipment. Giving effect to the acquisition of PEER 1, management
also revised its free cash flow projections from $170 million to $145 million as a result of acquisitions of property, plant and equipment, intangible
and other assets exceeding cash flow generated by PEER 1, additional integration, restructuring and acquisition costs of $9 million as well as
additional financial expense of $17 million both related to this acquisition. For further details, please consult the fiscal 2013 revised projections
in the “Fiscal 2013 financial guidelines” section.
PSU GROWTH AND PENETRATION OF SERVICE OFFERINGS
During the six-month period ended February 28, 2013, PSU reach 2,486,350 of which 1,984,555 comes from the Canadian cable services segment
and 501,795 from the American cable services segment. In the American cable services segment, PSU increased by 7,121 in the quarter, stemming
primarily from the Television and HSI services. In the Canadian cable services segment, PSU increased at a lower pace to 342 when compared
to 12,280 PSU for the comparable period of the prior year, mainly as a result of service category maturity and a more competitive environment
in the Television services. Cogeco Cable maintains targeted marketing initiatives to increase the penetration level of its services.
BUSINESS DEVELOPMENTS
On January 31, 2013, Cogeco Cable completed the acquisition of 96.57% of the issued and outstanding shares of PEER 1 by way of takeover
bid (the “offer”) valued at approximately $649 million. On April 3, 2013, Cogeco Cable completed the acquisition of the remaining 3.43% of the
issued and outstanding shares of PEER 1 for a cash consideration of $17 million pursuant to the compulsory acquisition provisions in Section
300 of the Business Corporations Act ("British Columbia"). In connection with the completion of the offer, Cogeco Cable has entered into secured
credit facilities in the amount of approximately $650 million and maturing in 2017, with a syndicate of lenders. PEER 1 is one of the world’s leading
internet infrastructure providers, specializing in managed hosting, dedicated servers, cloud services and co-location. This acquisition enhances
Cogeco Cable's footprint and builds on its strategic initiatives by increasing scale in an attractive industry segment with significant growth prospects
in the state of the art data center platforms. The Corporation will also serve additional businesses worldwide, in addition to approximately 11,000
customers currently served, through 23 data centres and 21 points-of-presence across North America and Europe. PEER 1's primary network
centre and head office remain located in Vancouver. For the purpose of segmented operating results, operating results from PEER 1 acquisition
are incorporated in the Enterprise services segment. For further details on PEER 1 operating results, please refer to the "Enterprise services"
section.
On November 30, 2012, the Corporation completed the acquisition of ABB, an independent cable system operator formed in 2003, serving about
495,000 PSU’s and providing Analogue and Digital Television, as well as HSI and Telephony services. The acquisition is an attractive entry point
into the United States of America ("US") market, providing a significant increase in PSU base with further growth potential, a high quality network
infrastructure and the ability for the Corporation’s management to leverage its core knowledge and operational experience. The transaction,
valued at US$1.36 billion, was financed through a combination of cash on hand, a draw-down on the existing Term Revolving Facility of
approximately US$588 million and US$660 million of borrowings under a new committed non-recourse debt financing at ABB. Ranked the 12th-
largest cable television system operator in the US, ABB operates cable systems in Western Pennsylvania, Southern Florida, Maryland, Delaware
and South Carolina. For the purpose of segmented operating results, operating results from ABB acquisition are presented in the American cable
services operations. For further details on ABB's operating results, please refer to the "American cables services" section.
(1) The indicated terms do not have standardized definitions prescribed by IFRS and therefore, may not be comparable to similar measures presented by other
companies. For more details, please consult the "Non-IFRS financial measures" section.
(2) Represents the sum of Television, High Speed Internet ("HSI") and Telephony service customers.
Management discussion and analysis (“MD&A”) COGECO CABLE INC. Q2 2013 6
OPERATING AND FINANCIAL RESULTS
OPERATING RESULTS
Quarters ended Six months ended
February 28,
2013
February 29,
2012 Change
February 28,
2013
February 29,
2012 Change
(in thousands of dollars, except percentages) $ $ % $ $ %
Revenue 429,672 317,735 35.2 757,583 633,159 19.7
Operating expenses 230,908 171,649 34.5 405,112 348,108 16.4
Management fees – COGECO Inc. 2,988 2,343 27.5 9,569 9,485
0.9
Operating income before depreciation and amortization 195,776 143,743 36.2 342,902 275,566 24.4
Operating margin 45.6% 45.2% 45.3% 43.5%
REVENUE
Fiscal 2013 second-quarter revenue increased by $111.9 million, or 35.2%, to reach $429.7 million, when compared to the same period last year.
For the first six months, revenue amounted to $757.6 million, an increase of $124.4 million, or 19.7% when compared to the same period of fiscal
2012. Revenue increases for both periods is mainly attributable to the operating results of the recent acquisitions, ABB and PEER 1, ("recent
acquisitions"). For further details on the Corporation’s revenue, please refer to the “Canadian cable services”, "American cable services" and
“Enterprise services” sections.
OPERATING EXPENSES
For the second quarter of fiscal 2013, operating expenses increased by $59.3 million, to reach $230.9 million, an increase of 34.5% compared
to the prior year. For the first half of the fiscal year, operating expenses amounted to $405.1 million, an increase of $57 million, or 16.4%, when
compared to the same period of fiscal 2012. Operating expenses increase is mostly attributable to the recent acquisitions, partly offset by cost
reduction initiatives and the reduction in operating expenses in the Canadian cable services related to the deployment and support costs incurred
in fiscal 2012 for the migration of Television service customers from analogue to digital. For further details on the Corporation’s operating expenses,
please refer to the “Canadian cable services”, "American cable services" and “Enterprise services” sections.
OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION AND OPERATING
MARGIN
Fiscal 2013 second-quarter operating income before depreciation and amortization increased by $52.0 million, or 36.2%, to reach $195.8 million,
and by $67.3 million, or 24.4%, to reach $342.9 million in the first six-month as a result of the recent acquisitions and the improvement in the
Canadian cable services segment. Cogeco Cable’s second-quarter operating margin increased to 45.6% from 45.2% and to 45.3% from 43.5%
for the first six months of fiscal 2013 when compared to the comparable periods of the prior year. For further details on the Corporation’s operating
income before depreciation and amortization and operating margin, please refer to the “Canadian cable services”, "American cable services" and
“Enterprise services” sections.
CUSTOMER STATISTICS
Consolidated
Net additions (losses) Net additions (losses)
Consolidated US CANADA Quarters ended Six months ended
February 28, 2013
February 28,
2013
February 29,
2012
February 28,
2013
February 29,
2012
PSU 2,486,350 501,795
(1)
1,984,555 7,463 12,280 22,543 58,459
Television service customers 1,100,547 247,840
852,707
(4,896) (9,111)
(6,972
)
(4,659
)
HSI service customers 824,144 174,979
649,165
7,125 7,518 17,970 24,803
Telephony service customers 561,659 78,976
482,683
5,234 13,873 11,545 38,315
(1) Include 494,674 PSU (244,404 Television service, 171,640 HSI service and 78,630 Telephony service customers) from the acquisition of ABB on November 30, 2012.
Fiscal 2013 second-quarter and first six months, PSU net additions were lower than in the comparable period of the prior year mainly as a result
of service category maturity, competitive offers and tightening of our customer credit controls and processes. PSU progression comes mainly
from the American cable services. For the second quarter net customer losses for Television service customers stood at 4,896 compared to 9,111
for fiscal 2012 second-quarter. Television service customer net losses are mainly due to the promotional offers of competitors for the video service
combined with the tightening of our customer credit controls. Fiscal 2013 second-quarter HSI service customers grew by 7,125 compared to
7,518 in the second quarter of the prior year, and the number of net additions to the Telephony service stood at 5,234 customers compared to
13,873 customers for the same period of the prior year. For the first six months of fiscal 2013, PSU net additions are the results of the recent
acquisition of ABB at the end of the first quarter of fiscal 2013. For further details on the Corporation’s customer statistics, please refer to the
“Canadian cable services” and "American cable services" sections.
Management discussion and analysis (“MD&A”) COGECO CABLE INC. Q2 2013 7
RELATED PARTY TRANSACTIONS
Cogeco Cable Inc. is a subsidiary of COGECO Inc., which holds 32.1% of the Corporation’s equity shares, representing 82.6% of the Corporation’s
voting shares. On September 1, 1992, Cogeco Cable Inc. executed a management agreement with COGECO Inc. under which the parent company
agreed to provide certain executive, administrative, legal, regulatory, strategic and financial planning services and additional services to the
Corporation and its subsidiaries (the “Management Agreement”). These services are provided by COGECO Inc.’s senior executives, including
the President and Chief Executive Officer, the Senior Vice President and Chief Financial Officer, the Vice President Corporate Affairs, the Vice
President Chief Legal Officer and Secretary, the Vice President Corporate Development, the Vice President and Treasurer, the Vice President
Public Affairs and Communications and the Vice President Internal Audit. No direct remuneration is payable to such senior executives by the
Corporation. However, the Corporation granted 71,233 stock options (47,729 in 2012) to these senior executives as executives of Cogeco Cable
during the first six months of fiscal year 2013. During the second quarter and first six months of fiscal 2013, the Corporation charged COGECO
Inc. an amount of $86,000 and $176,000 ($75,000 and $149,000 in 2012) with regards to the Corporation’s stock options to these employees.
During the first six months of fiscal 2013, the Corporation also granted 12,280 (11,006 in 2012) Incentive Share Units (“ISUs”) to these senior
executives as executives of Cogeco Cable. During the second quarter and first six months of fiscal 2013, the Corporation charged COGECO Inc.
an amount of $112,000 and $219,000 ($104,000 and $180,000 in 2012) with regards to the Corporation’s ISUs granted to these employees.
Under the Management Agreement, the Corporation pays monthly fees equal to 2% of its total revenue to COGECO Inc. for the above-mentioned
services. In 1997, the management fee was capped at $7 million per year, subject to annual upward adjustment based on increases in the
Consumer Price Index in Canada. This limit can be increased under certain circumstances upon request to that effect by COGECO Inc. For fiscal
year 2013, management fees have been set at a maximum of $9.6 million ($9.5 million in 2012), which was paid within the first six months of the
fiscal year. For fiscal year 2012, management fees were also fully paid in the first half of the year. In addition, the Corporation reimburses
COGECO Inc.’s out-of-pocket expenses incurred with respect to services provided to the Corporation under the Management Agreement.
Details regarding the Management Agreement and stock options and ISUs granted to COGECO Inc.’s employees are provided in the Corporation’s
2012 Annual Report.
There were no other material related party transactions during the periods covered.
FIXED CHARGES
Quarters ended Six months ended
February 28,
2013
February 29,
2012 Change
February 28,
2013
February 29,
2012 Change
(in thousands of dollars, except percentages) $ $ % $ $ %
Depreciation and amortization 84,591 84,252 0.4 149,257 149,076 0.1
Financial expense 29,094 14,788 96.7 44,694 31,617 41.4
For the three and six-month periods ended February 28, 2013, depreciation and amortization expense remained essentially the same at
$85 million and $149.3 million, respectively compared to $84.3 million and $149.1 million for the same periods of the prior year, respectively,
resulting mainly from the recent acquisitions and from additional acquisition of property, plant and equipment offset by higher fiscal 2012 depreciation
expense related to the reduction of useful lives for certain home terminal devices.
Fiscal 2013 second-quarter financial expense increased by $14.3 million, or 96.7%, at $29.1 million when compared to $14.8 million in fiscal
2012 second-quarter. For the first six months of fiscal 2013, financial expense increased by $13.1 million, or 41.4%, at $44.7 million, compared
to $31.6 million in the prior year. Financial expense increased in both periods as a result of the cost of financing related to the recent acquisitions.
INCOME TAXES
For the three and six-month periods ended February 28, 2013, income tax expense amounted to $16.2 million and $33.6 million, respectively,
compared to $13.6 million and $24.2 million, respectively, for the comparable periods in the prior year. These increases are mostly attributable
to the improvement in operating income before depreciation and amortization and by income taxes reductions, in fiscal 2012, from the
implementation of certain tax measures of the 2011 federal budget limiting the tax deferrals for corporations with a significant interest in a
partnership, partly offset by the increase in the financial expense and by the efficient tax structure resulting from the recent acquisitions.
PROFIT FOR THE PERIOD FROM CONTINUING OPERATIONS
For the three-month period ended February 28, 2013, profit for the period from continuing operations amounted to $58.5 million of which $58.7
million, or $1.20 per share is attributable to owners of the Corporation, compared to a profit for the period from continuing operations of $31.1
million, or $0.64 per share, all of which is attributable to owners of the Corporation for the comparable period. For the six-month period ended
February 28, 2013, profit for the period from continuing operations amounted to $100.6 million of which $100.8 million, or $2.07 per share is
attributable to owners of the Corporation, compared to a profit for the period from continuing operations of $70.7 million, or $1.45 per share, all
of which is attributable to owners of the Corporation for the comparable period. Profit for the period from continuing operations progression for
the quarter and the first half of fiscal 2013 is mostly attributable to the increase in operating income before depreciation and amortization, partly
offset by the acquisition costs related to the recent acquisitions and the financial expense and income tax expenses increases explained above.
Management discussion and analysis (“MD&A”) COGECO CABLE INC. Q2 2013 8
PROFIT FOR THE PERIOD
For the three and six-month periods ended February 28, 2013, profit for the period amounted to $58.5 million and $100.6 million, respectively,
compared to $83.1 million and $126.1 million for the comparable periods. Fiscal 2013 second-quarter profit for the period attributable to owners
of the Corporation amounted to $58.7 million, or $1.20 per share, compared to $83.1 million, or $1.71 per share, in the second quarter of fiscal 2012.
For the six-month period ended February 28, 2013, profit for the period attributable to owners of the Corporation amounted to $100.8 million or
$2.07 per share, compared to $126.1 million, or $2.59 per share for the comparable period of fiscal 2012. The decline for both periods is mostly
attributable to last year's profit from the Portuguese subsidiary, Cabovisão - Televisão por Cabo, S.A. (“Cabovisão”), reported as discontinued
operations and disposed of on February 29, 2012, partly offset by the increases of operating income before depreciation and amortization,
financial expense and acquisition costs all related to the recent acquisitions.
The non-controlling interest resulting from the acquisition of PEER 1 represents a participation of approximately 3.43% and amounted to a loss
for the period of $0.2 million in the second quarter and for the first six months of fiscal 2013.
CASH FLOW ANALYSIS
Quarters ended Six months ended
February 28,
2013
February 29,
2012
February 28,
2013
February 29,
2012
(in thousands of dollars)
$ $ $ $
Operating activities
Cash flow from operations 140,515 104,622
240,360 201,665
Changes in non-cash operating activities 4,931 3,179 (76,182) (59,489)
Amortization of deferred transaction costs and discounts on long-term debt (2,723) (682)
(3,463
)
(1,357
)
Income taxes paid (17,475) (17,635) (60,008) (53,817)
Current income tax expense 23,027 26,206 48,118 45,696
Financial expense paid (27,285) (9,517) (43,715) (29,547)
Financial expense 29,094 14,788 44,694 31,617
150,084 120,961
149,804 134,768
Investing activities (733,414) (86,292) (2,170,308) (163,370)
Financing activities 610,025 34,111 1,841,086 59,510
Effect of exchange rate changes on cash and cash equivalents denominated in foreign
currencies
705 — 705 —
Net change in cash and cash equivalents from continuing operations 27,400 68,780 (178,713) 30,908
Net change in cash and cash equivalents from discontinued operations
(1)
— 47,237 — 49,597
Cash and cash equivalents from continuing and discontinued operations, beginning of
year 9,278 19,935
215,391
55,447
Cash and cash equivalents from continuing and discontinued operations, end of year 36,678 135,952 36,678
135,952
(1) For further details on the Corporation’s cash flows attributable to discontinued operations, please refer to the “Disposal of subsidiary and discontinued operations”
in note 14 of the condensed interim consolidated financial statements.
OPERATING ACTIVITIES
Fiscal 2013 second-quarter cash flow from operations reached $140.5 million compared to $104.6 million, an increase of $35.9 million, or 34.3%,
compared to the same period of prior year. For the first six months, cash flow from operations reached $240.4 million compared to $201.7 million
for the same period last year, an increase of $38.7 million, or 19.2%. Increases for both periods are primarily due to the improvement of operating
income before depreciation and amortization, partly offset by financial expense increase and by the acquisition costs related to ABB and PEER 1
acquisitions. For the second quarter, changes in non-cash operating activities generated cash inflows of $4.9 million compared to $3.2 million in
the second quarter of fiscal 2012, mainly as a result of a higher increase in trade and other payables, partly offset by a higher increase in trade
and other receivables. For the first six months, changes in non-cash operating activities generated cash outflows of $76.2 million compared to
$59.5 million for the same period in fiscal 2012, mainly as a result of a higher decrease in trade and other payables and by a decrease in provisions
compared to an increase in the prior year, partly offset by an increase in deferred and prepaid revenue and other liabilities compared to a decrease
in the prior year.
Management discussion and analysis (“MD&A”) COGECO CABLE INC. Q2 2013 9
INVESTING ACTIVITIES
BUSINESS COMBINATIONS IN FISCAL 2013
On January 31, 2013, the Corporation completed the acquisition of PEER 1 and on November 30, 2012, the acquisition of ABB. These acquisitions
were accounted for using the purchase method. The preliminary purchase price allocation of these acquisitions, pending the completion of the
valuation of the net assets acquired, is as follows:
PEER 1 ABB TOTAL
$ $ $
Consideration
Paid
Purchase of shares
477,834 337,779 815,613
Repayment of secured debts and settlement of options outstanding
170,872
1,021,854 1,192,726
648,706
1,359,633 2,008,339
Net assets acquired
Cash and cash equivalents 10,840
5,480 16,320
Restricted cash
8,729 — 8,729
Trade and other receivables 12,772
9,569 22,341
Prepaid expenses and other
3,855 1,370 5,225
Income tax receivable 672
— 672
Other assets
3,328 — 3,328
Property, plant and equipment
150,206 205,353 355,559
Intangible assets
139,703 763,084 902,787
Goodwill
421,986 602,690
1,024,676
Deferred tax assets
8,355 33,835 42,190
Trade and other payables assumed (26,330)
(27,620
)
(53,950
)
Provisions —
(721
)
(721
)
Income tax liabilities assumed
(4,716
)
— (4,716
)
Deferred and prepaid revenue and other liabilities assumed
(3,315
)
(5,254
)
(8,569
)
Long-term debt assumed
(1,735
)
— (1,735
)
Deferred tax liabilities (58,682) (228,153) (286,835)
Non-controlling interest (16,962)
— (16,962
)
648,706
1,359,633 2,008,339
ACQUISITIONS OF PROPERTY, PLANT AND EQUIPMENT, INTANGIBLE AND OTHER ASSETS
Investing activities, including acquisition of property, plant and equipment segmented according to the National Cable Television Association
(“NCTA”) standard reporting categories, are as follows:
Quarters ended Six months ended
February 28,
2013
February 29,
2012
February 28,
2013
February 29,
2012
(in thousands of dollars) $ $
Customer premise equipment
(1)
18,174 24,445 37,874 57,071
Scalable infrastructure
(2)
24,302 35,024 56,916 51,350
Line extensions 5,191 4,319
8,120 7,921
Upgrade / Rebuild 12,139 5,470 15,650 11,654
Support capital 4,771 6,534 10,383 11,803
Acquisition of property, plant and equipment - Canadian and American cable services 64,577 75,792
128,943 139,799
Acquisition of property, plant and equipment - Enterprise services 35,363 7,796 49,189 17,128
Acquisitions of property, plant and equipment 99,940 83,588
178,132 156,927
Acquisition of intangible and other assets - Canadian and American cable services 4,214 2,957
8,115 6,253
Acquisition of intangible and other assets - Enterprise services 279 (311)
1,019
337
Acquisitions of intangible and other assets 4,493 2,646
9,134 6,590
104,433 86,234
187,266 163,517
(1) Includes mainly home terminal devices as well as new and replacement drops.
(2) Includes mainly head-end equipment, digital video and telephony transport as well as HSI equipment.
Management discussion and analysis (“MD&A”) COGECO CABLE INC. Q2 2013 10
For the three and six-month periods ended February 28, 2013, acquisition of property, plant and equipment amounted to $99.9 million and $178.1
million, respectively, compared to $83.6 million and $156.9 million for the comparable periods of fiscal 2012. In the Canadian cable services,
fiscal 2013 second-quarter acquisition of property, plant and equipment amounted to $51.4 million, a decrease of 32.2% when compared to $75.8
million in the second quarter of the prior year. For the six-month period ended February 28, 2013, acquisition of property, plant and equipment
amounted to $115.7 million, a decrease of 17.2% when compared to the prior year. For the three and six-month periods ended February 28,
2013, acquisition of property, plant and equipment in the American cable services segment amounted $13.2 million. The decreases in the Canadian
cable services segment are mainly attributable to the following factors:
• A decrease in the quarter and an increase for the six-month period ended February 28, 2013 in scalable infrastructure and network
upgrade and rebuild to extend and improve network capacity and to deploy advanced technologies such as DOCSIS 3.0 and Switched
Digital Video in existing areas served; and
• A decrease in customer premise equipment, mainly due to the achievement in fiscal 2012 of the first phase in the conversion of Television
service customers from analogue to digital and the lower PSU growth as a result of service maturity.
Fiscal 2013 second-quarter and first six months acquisition of property, plant and equipment in the Enterprise services segment, including the
capital expenditures of the recent acquisition of PEER 1, amounted to $35.4 million and $49.2 million compared to $7.8 million and $17.1 million
in the comparable periods of fiscal 2012, respectively. The increases included capital expenditures in data centre facilities in the Montreal and
Toronto areas in Canada and Portsmouth in England as well as expansion of the fibre in the Toronto area in order to fulfill orders from new
customers.
Acquisition of intangible and other assets are mainly attributable to reconnect and additional service activation costs as well as other customer
acquisition costs. For the second quarter and the first six months of fiscal 2013, the acquisition of intangible and other assets amounted to $4.5
million and $9.1 million, compared to $2.6 million and $6.6 million for the same periods last year, respectively.
FREE CASH FLOW AND FINANCING ACTIVITIES
In the second quarter of fiscal 2013, free cash flow amounted to $36.1 million, $17.7 million higher than in the comparable period of fiscal 2012.
For the six-month period, free cash flow amounted to $53.1 million, $14.9 million, or 39.2%, higher than the same period of last year. Free cash
flow increase for both periods over the prior year are due to the improvement of operating income before depreciation and amortization, partly
offset by the increase in financial expense, the acquisition costs related to ABB and PEER 1 acquisitions as well as the increase in acquisition
of property, plant and equipment.
In the second quarter of fiscal 2013, higher Indebtedness level provided for a cash increase of $636.4 million, mainly due to drawings of
$640.3 million (net of transaction costs of $2.8 million) under new credit facilities amounting approximately to $650 million incurred to finance the
acquisition of PEER 1. In the second quarter of fiscal 2012, higher Indebtedness level provided a cash increase of $46.5 million mainly due to
the issuance, on February 14, 2012, of $200 million Senior Secured Debentures Series 3 (“Fiscal 2012 debentures”) for net proceed of $198.1
million which was used to repay the $130 million Term Revolving Facility and $21 million of bank indebtedness.
For the six-month period of fiscal 2013, higher Indebtedness level provided for a cash increase of $1.9 billion, mainly due to the draw-down on
the existing Term Revolving Facility of $584.2 million (US$588 million) and the new Term Loan Facilities of $637.4 million (US$660 million for a
net proceed of US$641.5 million, net of transaction costs of US$18.5 million) to finance the acquisition of ABB as well to drawings of $640.3 million
(net of transaction costs of $2.8 million) under new credit facilities amounting approximately to $650 million incurred to finance the acquisition of
PEER 1. In the first six months of fiscal 2012, Indebtedness affecting cash increased by $86.9 million mainly due to the issuance of Fiscal 2012
debentures previously described, which was used to repay the $110 million Term Revolving Facility.
During the second quarter of fiscal 2013, a quarterly dividend of $0.26 per share was paid to the holders of subordinate and multiple voting shares,
totaling $12.6 million, when compared to a dividend paid of $0.25 per share, or $12.2 million in the second quarter of fiscal 2012. Dividend
payments in the first six months totaled $0.52 per share, or $25.3 million, compared to $0.50 per share, or $24.3 million the year before.
As at February 28, 2013, the Corporation had a working capital deficiency of $152.8 million compared to $17.2 million at August 31, 2012. The
increase of $135.6 million in the deficiency is mainly due to the decrease of $178.7 million in cash and cash equivalents, primarily used for the
acquisition of ABB. The deficiency was also impacted by an increase of $28.4 million in trade and other receivables and by a decrease of $23.6
million in trade and other payables. As part of the usual conduct of its business, Cogeco Cable maintains a working capital deficiency due to a
low level of accounts receivable as a large portion of the Corporation’s customers pay before their services are rendered, unlike trade and other
payables, which are paid after products are delivered or services are rendered, thus enabling the Corporation to use cash and cash equivalents
to reduce Indebtedness.
At February 28, 2013, the Corporation had used $626.5 million of its $750 million Term Revolving Facility for a remaining availability of $123.5
million. The Corporation’s subsidiary, ABB, also benefits from a Revolving Credit Facility of $51.6 million (US$50 million), of which $3.6 million
(US$3.5 million) was used at February 28, 2013 for a remaining availability of $48 million. At February 28, 2013, the Corporation also benefits
from additional Revolving Credit Facilities of $250.9 million incurred as a result of the acquisition of PEER 1, of which $243.6 million was used
at February 28, 2013 for a remaining availability of $7.3 million.
Management discussion and analysis (“MD&A”) COGECO CABLE INC. Q2 2013 11
FINANCIAL POSITION
As a result of the acquisition of ABB and PEER 1, most financial position balances have changed significantly since August 31, 2012. For further
details on the preliminary allocation of the purchase price of the acquisitions, please refer to the investing activities under the “Cash flow analysis”
section.
OUTSTANDING SHARE DATA
A description of Cogeco Cable’s share data at March 31, 2013 is presented in the table below. Additional details are provided in note 10 of the
condensed interim consolidated financial statements.
Number of
shares/options
Amount
(in thousands
of dollars)
Common shares
Multiple voting shares 15,691,100 98,346
Subordinate voting shares 33,146,196
900,795
Options to purchase subordinate voting shares
Outstanding options 782,440
Exercisable options 443,063
In the normal course of business, Cogeco Cable has incurred financial obligations, primarily in the form of long-term debt, operating and finance
leases and guarantees. Cogeco Cable’s obligations, as discussed in the 2012 Annual Report, have not materially changed since August 31, 2012,
except as mentioned below.
In connection with the acquisition of PEER 1 on January 31, 2013, the Corporation concluded Secured Credit Facilities totaling approximately
$650 million with a syndicate of lenders in four tranches for a net proceed of $640.3 million net of transaction costs of $2.8 million. The first
tranche, a Canadian Term Facility amounting to $175 million, the second tranche, a US Term Facility amounting to US$225 million, the third
tranche, a Revolving Facility of $240 million and the fourth tranche, a UK Revolving Facility of £7 million. The Canadian and US Term Facilities
are available in Canadian and US dollars and interest rates are based on Bankers' Acceptance, LIBOR Loans, Prime Rate Loans or US Base
Rate Loans, plus the applicable margin. The Revolving Facility is available in Canadian dollars, US dollars, British Pounds and Euros and interest
rates are based on Bankers' Acceptance, LIBOR Loans in US dollars, British Pounds or Euros, Prime Rate Loans or US and British Pounds Base
Rate Loans, plus the applicable margin. The UK Revolving Facility is available in British Pounds and interest rates are based on British Pounds
Base Rate Loans or British Pounds LIBOR Loans. Starting on August 31, 2013, the Canadian and US Term Facilities are subject to quarterly
amortization of 1.25% in the first year, 1.875% in the second year, 3.125% in the third year and 3.75% in the fourth year, payable on the last
business day of each fiscal quarter. The Secured Credit Facilities will mature on January 31, 2017. The Secured Credit Facilities are indirectly
secured by a first priority fixed and floating charge on substantially all present and future real and personal property and undertaking of every
nature and kind of the Corporation and most of its subsidiaries except for ABB and its subsidiaries, and provides for certain permitted encumbrances,
including purchased money obligations, existing funded obligations and charges granted by any subsidiary prior to the date when it becomes a
subsidiary, subject to a maximum amount. The provisions under this facility provides for restrictions on the operations and activities of the
Corporation but does not cover ABB. Generally, the most significant restrictions relate to permitted investments and dividends on multiple and
subordinate voting shares, as well as incurrence and maintenance of certain financial ratios primarily linked to operating income before amortization,
financial expense and total indebtedness.
In connection with the acquisition of ABB on November 30, 2012, the Corporation concluded, through two of its US subsidiaries, First Lien Credit
Facilities totaling US$710 million with a syndicate of banks and other institutional lenders in three tranche and draw down by an amount of
US$660 million of which US$641.5 million was used to repay ABB’s prior secured debt and US$18.5 million to pay for some of the transaction
costs. The first tranche, a Term Loan A Facility amounting to US$240 million, which will mature on November 30, 2017, the second tranche, a
Term Loan B Facility amounting to US$420 million, which will mature on November 30, 2019 and the third tranche, a Revolving Credit Facility of
US$50 million, including a swingline of US$15 million, which will mature on November 30, 2017. Interest rates on the First Lien Credit Facilities
are based on LIBOR plus the applicable margin, with a LIBOR floor of 1.00% for the Term Loan B Facility. Starting on December 31, 2013, the
Term Loan A Facility is subject to quarterly amortization of 1.25% in the first year, 2.5% in the second year and 3.0% in the third and fourth years.
Starting on December 31, 2012, the Term Loan B Facility is subject to quarterly amortization of 0.25% until its maturity date. In addition to the
fixed amortization schedule and commencing in the first quarter of fiscal 2015, loans under the Term Loan Facilities shall be prepaid according
to a Prepayment Percentage of excess cash flow generated during the prior fiscal year. The First Lien Credit Facilities are non-recourse to the
Corporation, its Canadian subsidiaries and PEER 1's subsidiaries and are indirectly secured by a first priority fixed and floating charge on
substantially all present and future real and personal property and undertaking of every nature and kind of ABB and its subsidiaries. The provisions
under these facilities provide for restrictions on the operations and activities of ABB and its subsidiaries. Generally, the most significant restrictions
relate to permitted indebtedness and investments, distributions and maintenance of certain financial ratios.
FINANCIAL MANAGEMENT
The Corporation has entered into cross-currency swap agreements to set the liability for interest and principal payments on its US$190 million
Senior Secured Notes Series A maturing on October 1, 2015. These agreements have the effect of converting the U.S. interest coupon rate of
7.00% per annum to an average Canadian dollar interest rate of 7.24% per annum. The exchange rate applicable to the principal portion of the
debt has been fixed at $1.0625 per US dollar. The Corporation elected to apply cash flow hedge accounting on these derivative financial instruments.
During the first half of fiscal 2013, amounts due under the US$190 million Senior Secured Notes Series A increased by $8.7 million due to the
US dollar’s appreciation relative to the Canadian dollar. The fair value of cross-currency swaps liability decreased by a net amount of $7.9 million,
Management discussion and analysis (“MD&A”) COGECO CABLE INC. Q2 2013 12
of which a decrease of $8.7 million offsets the foreign exchange loss on the debt denominated in US dollars. The difference of $0.7 million was
recorded as a decrease of other comprehensive income. During the first half of fiscal 2012, amounts due under the US$190 million Senior Secured
Notes Series A increased by $1.9 million due to the US dollar’s appreciation over the Canadian dollar. The fair value of cross-currency swaps
liability decreased by a net amount of $1.9 million, of which $1.9 million offsets the foreign exchange loss on the debt denominated in US dollars.
Furthermore, the Corporation’s net investment in foreign subsidiaries is exposed to market risk attributable to fluctuations in foreign currency
exchange rates, primarily changes in the values of the Canadian dollar versus the US dollar and British Pound. This risk was mitigated since the
major part of the purchase prices for ABB and PEER 1 were borrowed directly in US dollars and British Pounds. These debts were designated
as hedges of net investments in foreign operations. At February 28, 2013, the net investment for ABB amounted to US$472.6 million while long-
term debt was of US$323 million. At February 28, 2013, the net investment for PEER 1 amounted to US$368 million and £69.1 million while
long-term debt was of US$245 million and £69.1 million.The exchange rate used to convert the US dollar currency and British Pound currency
into Canadian dollars for the statement of financial position accounts at February 28, 2013 was $1.0314 per US dollar and $1.5645 per British
Pound. The impact of a 10% change in the exchange rate of the US dollar and British Pound into Canadian dollars would change other
comprehensive income by approximately $28.1 million.
The Corporation is also impacted by foreign currency exchange rates, primarily changes in the values of the US dollar relative to the Canadian
dollar with regards to purchases of certain equipment, as the majority of customer premise equipment is purchased and subsequently paid in US
dollars. Please consult the “Foreign Exchange Risk” section in Note 13 of the condensed interim consolidated financial statements for further
details.
DIVIDEND DECLARATION
At its April 10, 2013 meeting, the Board of Directors of Cogeco Cable declared a quarterly eligible dividend of $0.26 per share for multiple voting
and subordinate voting shares, payable on May 8, 2013, to shareholders of record on April 24, 2013. The declaration, amount and date of any
future dividend will continue to be considered and approved by the Board of Directors of the Corporation based upon the Corporation’s financial
condition, results of operations, capital requirements and such other factors as the Board of Directors, at its sole discretion, deems relevant.
There is therefore no assurance that dividends will be declared, and if declared, the amount and frequency may vary.
SEGMENTED OPERATING RESULTS
The Corporation reports its operating results in three operating segments: Canadian cable services, American cable services and Enterprise
services. The reporting structure reflects how the Corporation manages the business activities to make decisions about resources to be allocated
to the segment and to assess its performance. For the purpose of segmented operating results, operating results from the ABB acquisition are
presented in the American cable services and operating results from the PEER 1 acquisition are included in the Enterprise services segment.
CANADIAN CABLE SERVICES
CUSTOMER STATISTICS
Net additions (losses) % of penetration
(1)
Quarters ended Six months ended
February 28,
2013
February 28,
2013
February 29,
2012
February 28,
2013
February 29,
2012
February 28,
2013
February 29,
2012
PSU 1,984,555 342 12,280 15,422 58,459
Television service customers 852,707 (8,332)
(9,111
) (10,408) (4,659) 51.4 53.5
HSI service customers 649,165 3,786
7,518
14,631 24,803 39.1 38.3
Telephony service customers 482,683 4,888 13,873 11,199 38,315 29.1 27.9
(1) As a percentage of homes passed.
Fiscal 2013 second-quarter and first six months PSU net additions were lower than in the comparable periods of the prior year mainly as a result
of service category maturity, competitive offers and tightening of our customer credit controls and processes. For the second quarter and the first
six months net customer losses for Television service customers stood at 8,332 and 10,408, respectively, compared to 9,111 and 4,659 for the
same periods of the prior year. Television service customer net losses are mainly due to the promotional offers of competitors for the video service
combined with the tightening of our customer credit controls. Fiscal 2013 second-quarter HSI service customers grew by 3,786 compared to
7,518 in the second quarter of the prior year, and the number of net additions to the Telephony service stood at 4,888 customers compared to
13,873 customers for the same period of the prior year. For the first six months of fiscal 2013, net additions for HSI service customers stood at
14,631 and Telephony net additions at 11,199 compared to 24,803 and 38,315, respectively, for the comparable periods 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.
Management discussion and analysis (“MD&A”) COGECO CABLE INC. Q2 2013 13
OPERATING RESULTS
Quarters ended Six months ended
February 28,
2013
February 29,
2012 Change
February 28,
2013
February 29,
2012 Change
(in thousands of dollars, except percentages) $ $ % $ $ %
Revenue 306,173 295,451 3.6 610,988 589,130 3.7
Operating expenses 155,870 156,753 (0.6) 312,080 316,636
(1.4
)
Operating income before depreciation and amortization 150,303 138,698 8.4 298,908 272,494 9.7
Operating margin 49.1% 46.9% 48.9% 46.3%
Revenue
Fiscal 2013 second-quarter revenue increased by $10.7 million, or 3.6%, to reach $306.2 million, when compared to the same period last year.
For the first six months, revenue amounted to $611.0 million, an increase of 3.7% when compared to the first six months of fiscal 2012. The
increases are primarily due to rate increases implemented in June and July 2012 and PSU growth.
Operating expenses
For the period ended February 28, 2013, operating expenses decreased by $0.9 million at $155.9 million. For the first six months, operating
expenses amounted to $312.1 million, a decrease of 1.4% when compared to the same period of prior year. These decreases are mainly attributable
to the deployment and support costs incurred in fiscal 2012 related to the migration of Television service customers from analogue to digital,
partly offset by PSU growth.
Operating income before depreciation and amortization and operating margin
As a result of revenue growth exceeding operating expenses, fiscal 2013 second-quarter operating income before depreciation and amortization
amounted to $150.3 million, or 8.4% higher than in the same period of the prior year. For the first six months of fiscal 2013, operating income
before depreciation and amortization amounted to $298.9 million, or 9.7% higher than in the same period of the prior year. Operating margin
increased to 49.1% from 46.9% when compared to fiscal 2012 second-quarter and from 46.3% to 48.9% for the first six months of fiscal 2013
when compared to prior year.
AMERICAN CABLE SERVICES
On November 30, 2012, the Corporation completed the acquisition of ABB, an independent cable system operator formed in 2003 and providing
Analogue and Digital Television, as well as HSI and Telephony services. ABB operates cable systems in Western Pennsylvania, Southern Florida,
Maryland, Delaware and South Carolina. Fiscal 2013 second-quarter included three month of operations of ABB.
CUSTOMER STATISTICS
Net additions % of penetration
(1)
Quarters ended Six months ended
February 28,
2013
February 28,
2013
February 29,
2012
February 28,
2013
February 29,
2012
February 28,
2013
February 29,
2012
PSU 501,795 7,121 — 7,121 —
Television service customers 247,840 3,436 — 3,436 — 48.0 —
HSI service customers 174,979 3,339 — 3,339 — 33.9 —
Telephony service customers 78,976 346 — 346 — 15.3 —
(1) As a percentage of homes passed
Fiscal 2013 second-quarter, PSU net additions stood at 7,121 of which 3,436 comes from the Television service and 3,339 from the HSI service
customers. The PSU progression is stemming primarily from increases in residential HSI subscribers through additional marketing focus on bundle
package offerings and increased overall demand given the higher speed offerings with the rollout of DOCIS 3.0 capabilities in 2012 to a majority
of ABB's markets, as well as increased commercial HSI and Telephony growth driven by improved sales focus and resources.
Management discussion and analysis (“MD&A”) COGECO CABLE INC. Q2 2013 14
OPERATING RESULTS
Quarters ended Six months ended
February 28,
2013
February 29,
2012 Change
February 28,
2013
February 29,
2012 Change
(in thousands of dollars, except percentages) $ $ % $ $ %
Revenue 85,850 — — 85,850 — —
Operating expenses 46,629 — — 46,629 — —
Operating income before depreciation and amortization 39,221 — — 39,221 — —
Operating margin 45.7% —% 45.7% —%
Fiscal 2013 second-quarter revenue reached $85.9 million mainly as a result of (i) an increase in high-speed data revenue from continued
marketing focus for this service offering driving HSI subscriber growth; (ii) an increase in Telephony revenue generated by increases in subscriber
levels and an increase in commercial revenue as ABB continues to expand its non-residential customer base through targeted marketing efforts.
Fiscal 2013 second-quarter operating expenses amounted to $46.6 million and operating income before depreciation and amortization reached
$39.2 million, and consequently, operating margin stood at 45.7%. ABB's operating results are in line with management's expectations.
ENTERPRISE SERVICES
Quarters ended Six months ended
February 28,
2013
February 29,
2012 Change
February 28,
2013
February 29,
2012 Change
(in thousands of dollars, except percentages) $ $ % $ $ %
Revenue 37,980 22,284 70.4 61,480 44,029 39.6
Operating expenses 23,671 13,345 77.4 37,353 26,525 40.8
Operating income before depreciation and amortization 14,309 8,939 60.1 24,127 17,504 37.8
Operating margin 37.7% 40.1% 39.2% 39.8%
OPERATING RESULTS
Revenue
Fiscal 2013 second-quarter revenue increased by $15.7 million, or 70.4%, to reach $38.0 million, when compared to the same period last year.
For the first six months, revenue amounted to $61.5 million, an increase of 39.6% when compared to the first six months of fiscal 2012. The
increases in revenue for both periods are primarily due to the recent acquisition of PEER 1 for one month and the organic growth of its original
operations.
Operating expenses
For the second quarter of fiscal 2013, operating expenses increased by $10.3 million, or 77.4%, to $23.7 million. For the first six months, operating
expenses amounted to $37.4 million, an increase of 40.8% when compared to the first six months of fiscal 2012. The increases in operating
expenses for both periods are primarily due to the recent acquisition of PEER 1 and the organic growth of its original operations.
Operating income before depreciation and amortization and operating margin
As a result of revenue growth exceeding the increase in operating expenses, fiscal 2013 second-quarter operating income before depreciation
and amortization increased by $5.4 million, or 60.1%, to reach $14.3 million and by $6.6 million, or 37.8%, in the first six months to reach $24.1
million, when compared to the same periods of the prior year. Operating margin decreased to 37.7% from 40.1% in the second quarter and to
39.2% from 39.8% for first six months compared to the comparable periods of fiscal 2012 as a result of lower margins business activities from
PEER 1.
Management discussion and analysis (“MD&A”) COGECO CABLE INC. Q2 2013 15
FISCAL 2013 FINANCIAL GUIDELINES
Giving effect to the recent acquisition of PEER 1 on January 31, 2012, the Corporation revised its financial guidelines for the 2013 fiscal year
issued on January 14, 2013 to include a seven-month period of PEER 1’s financial projections. Management expects revenue to reach
$1.70 billion, representing a growth of $105 million, or 6.6%, when compared to those issued on January 14, 2013. Operating income before
depreciation and amortization should increase by $32 million to reach $767 million reflecting the PEER 1 acquisition. However, operating margin
should decrease from 46.2% to 45.2% as a result of lower margins business activities from PEER 1. Depreciation and amortization of property,
plant and equipment and intangible assets should increase from $330 million to $368 million and acquisition of property, plant and equipment,
intangible and other assets should increase by $31 million to take into consideration the PEER 1 seven-month operations. Financial expense
should amount to $113 million, an increase of $17 million, as a result of the cost of financing related to the PEER 1 acquisition. Fiscal 2013 free
cash flow is expected to amount to $145 million, a decrease of $25 million, or 14.7%, when compared to the free cash flow projection issued on
January 14, 2013 as a result of acquisitions of property, plant and equipment, intangible and other assets exceeding cash flow generated by
PEER 1, additional integration, restructuring and acquisition costs of $9 million as well as additional financial expense of $17 million both related
to PEER 1. Profit for the year is expected to amount to $205 million, $20 million lower than the January 14, 2013 projections, mainly as a result
of the PEER 1's expected financial results for the seven-month operations.
Fiscal 2013 revised financial guidelines are as follows:
Revised
projections
April 10, 2013
Revised
projections
January 14, 2013
Fiscal 2013 Fiscal 2013
(in millions of dollars, except net customer additions and operating margin) $ $
Financial guidelines
Revenue 1,695 1,590
Operating income before depreciation and amortization 767 735
Operating margin 45.2% 46.2%
Integration, restructuring and acquisition costs 16 7
Depreciation and amortization 368 330
Financial expense 113 96
Current income tax expense 92 92
Profit for the year 205 225
Acquisitions of property, plant and equipment, intangible and other assets 401 370
Free cash flow
(1)
145 170
Net customer addition guidelines
PSU growth 35,000 35,000
(1) Free cash flow is calculated as operating income before depreciation and amortization less integration, restructuring and acquisition costs, financial expense,
current income tax expense and acquisitions of property, plant and equipment, intangible and other assets.
CONTROLS AND PROCEDURES
The President and Chief Executive Officer (“CEO”) and the Senior Vice President and Chief Financial Officer (“CFO”), together with Management,
are responsible for establishing and maintaining adequate disclosure controls and procedures and internal controls over financial reporting, as
defined in National Instrument 52-109. Cogeco Cable’s internal control framework is based on the criteria published in the report Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
IFRS.
The CEO and CFO, supported by Management, evaluated the design of the Corporation’s disclosure controls and procedures and internal controls
over financial reporting as of February 28, 2013, and have concluded that they are adequate. Furthermore, no significant changes to the internal
controls over financial reporting occurred during the quarter ended February 28, 2013, except as described below with respect to ABB and PEER 1.
On November 30, 2012, the Corporation completed the acquisition of ABB and, subsequently on January 31, 2013 and on April 3, 2013, the
Corporation acquired 100% of the issued and outstanding shares of PEER 1. Due to the short period of time between those acquisition dates
and the certification date on April 10, 2013, management was unable to complete its review of the design of Internal Controls Over Financial
Reporting ("ICFR") for the newly acquired corporations. At February 28, 2013, risks were however mitigated as management was fully apprised
of any material events affecting these recent acquisitions. In addition, all the assets and liabilities acquired were valued and recorded in the
condensed interim consolidated financial statements as part of the preliminary purchase price allocation process and both ABB and PEER 1
results of operations were also included in the Corporation's consolidated results. ABB constitutes 11% of revenue, 7% of profit of the period,
33% of the total assets, 19% of the current assets, 33% of the non current assets, 12% of the current liabilities and 25% of the non current liabilities
of the consolidated condensed interim financial statements for the six-month period ended February 28, 2013. PEER 1 constitutes 2% of revenue,
-6% of profit of the period, 15% of the total assets, 20% of the current assets, 15% of the non current assets, 10% of the current liabilities and
2% of the non current liabilities of the consolidated condensed interim financial statements for the six-month period ended February 28, 2013.
In the upcoming quarters, management will complete its review of the design of ICFR for ABB and PEER 1 and assess its effectiveness. The
business combinations of fiscal 2013 under the "Cash flow analysis" section of this MD&A presents summary financial information about the
preliminary purchase price allocation, assets acquired and liabilities assumed as well as other financial information about ABB and PEER 1
business impact on the consolidated results of the Corporation. Other financial information can be found in the Business Acquisition Report filed
by the Corporation on www.sedar.com, on February 13, 2013.
Management discussion and analysis (“MD&A”) COGECO CABLE INC. Q2 2013 16
UNCERTAINTIES AND MAIN RISK FACTORS
The uncertainties and main risk factors faced by the Corporation have not changed significantly for its Canadian cable services since August 31,
2012, except for the proposed Astral/Bell amended Arrangement Agreement described below. In addition, risks and uncertainties have been
updated to reflect the recent acquisitions of ABB and PEER 1. A detailed description of the uncertainties and main risk factors faced by Cogeco
Cable can be found in the 2012 Annual Report filed on SEDAR, available at www.sedar.com.
In Canada, following the denial by the CRTC on October 18, 2012 of an application by BCE Inc. (“Bell”) to acquire Astral Media Inc. (“Astral”),
Astral and Bell amended their Arrangement Agreement with a view to submitting a revised proposal to the CRTC for approval of Bell's acquisition
of Astral. The closing date of the proposed transaction was extended to June 1, 2013, with Astral and Bell having a further right to postpone the
closing date to July 31, 2013. On March 4, 2013, the Commissioner of Competition and Bell announced the signing of a consent agreement and
the filing thereof with the Competition Tribunal. The consent agreement provides conditional clearance for the proposed transaction under the
Competition Act subject to, inter alia, the divestiture by Bell of Astral's joint venture ownership interests in certain television services and its
ownership interest in certain additional French-language television services. Also on March 4, 2013, Bell announced that it had concluded an
agreement to sell the Astral joint venture ownership interests as well as two Ottawa FM radio stations to Corus Entertainment Inc. (“Corus”), and
that it was putting up for sale the remaining properties to be divested and 8 additional English-language radio stations through an auction process.
The sale of the joint venture properties to Corus was approved by the Commissioner of Competition on March 15, 2013. In Management's view,
if it is ultimately approved by the CRTC, the proposed transaction, as revised, would still significantly increase the level of vertical integration in
the Canadian broadcasting and communications industries and leave the opportunity as well as an incentive for Bell to abuse its dominant position
in the supply of programming for distribution in the downstream broadcasting distribution market in Canada by non-vertically integrated distributors
such as Cogeco Cable. Bell would end up controlling over forty percent (40 %) of Cogeco Cable's programming service affiliation payments at
current wholesale rates. The Corporation's businesses and results of operations could thus be adversely affected in the future as affiliation
agreements need to be renewed with Bell. In the event of future disputes concerning the terms of affiliation between Cogeco Cable and Bell for
services controlled by Bell, the CRTC may however set such terms at either party's request following a dispute resolution process, and the services
may not be interrupted by either party while such dispute resolution process is pending.
Uncertainties and risks subsequent to the acquisitions of PEER 1 or ABB
The Corporation acquired PEER 1 and ABB with the expectation that the combination of its businesses and each of PEER 1 and ABB would
result in greater long-term potential and value creation than the individual corporations could achieve on their own. These anticipated benefits
will depend in part on whether the operations, systems, management and cultures of each of the Corporation's other businesses and those of
PEER 1 and ABB can be combined in an effective manner and in part on whether the presumed bases for the combination produce the benefits
anticipated. Most operational and strategic decisions, and certain staffing decisions, with respect to the combined entity have not yet been made
and may not have been fully identified at this time.
There can be no assurance that the integration of the Corporation's capital investment optimization and equipment purchases with those of
PEER 1 and ABB will be timely or effectively accomplished, or ultimately will be successful in achieving the anticipated benefits. The integration
process may lead to greater than expected operating costs, customer loss and business disruption for Cogeco Cable's other businesses, PEER 1,
ABB or the combined businesses. Similarly, the integration process that may adversely affect the ability of the combined businesses to realize
the anticipated benefits of the combination or may materially and adversely affect the Corporation's, PEER 1's, ABB's or the combined entity's
businesses, results of operations and/or financial condition.
There may be liabilities and contingencies that Cogeco Cable did not discover in its due diligence review prior to consummation of the PEER 1
and ABB acquisitions and the Corporation may not be indemnified for these liabilities and contingencies. The discovery of any material liabilities
or contingencies relating to the business of PEER 1 or ABB following the acquisitions could have a material adverse effect on the Corporation's
businesses, financial condition and results of operations.
The Corporation currently intends to retain key personnel of PEER 1 and ABB to continue to manage and operate each of PEER 1 and ABB.
Cogeco Cable will compete with other potential employers for employees, and may not be successful in keeping the services of executives and
other employees that PEER 1 or ABB need. The failure of key personnel to remain as part of the management team of PEER 1 and ABB in the
period following the PEER 1 and ABB acquisitions could have a material adverse effect on the Corporation's businesses, financial condition and
results of operations.
Risks pertaining to markets and competition
In the US, the competition is fragmented and varies by geographical area. ABB's principal competitor for video services is Direct Broadcast
Satellite (“DBS”) and its principal competitor for High Speed Data (“HSD”) services is Direct Subscriber Line (“DSL”). Intensive marketing efforts
and aggressive pricing from its competitors and an increase in the presence of local telephone companies and electric utilities competing in its
market may have an adverse impact on the Corporation's ability to retain customers. Cogeco Cable's phone service faces competition from the
local incumbent local exchange carriers (“ILEC”), as well as other providers such as cellular and Voice over Internet Protocol (“VoIP”) providers
such as Vonage.
In the US, ABB also currently faces competition from over-the-top services such as Netflix, Google TV, and Apple TV, Hulu and Samsung, which
are gaining increased interest by consumers. The availability of these services could cause customers to view television content through their
broadband connection rather than through their traditional cable television subscription services, and view less on-demand television content on
the video-on-demand (“VOD”) or subscription-video-on-demand (“SVOD”) platforms of cable television service providers. We may not be able to
make up for the loss of revenue associated with this migration.
PEER 1's risks pertaining to markets and competition are similar to Cogeco Data Services risks which can be found in the 2012 Annual Report.
Management discussion and analysis (“MD&A”) COGECO CABLE INC. Q2 2013 17
Risk pertaining to Third-Party Service Suppliers
In the US, ABB also depends on third-party suppliers and providers, such as Motorola and Cisco for certain specialized services, hardware and
equipment that are critical to their operations. These materials and services include set-top boxes, telephony, cable and telephony modems,
servers and routers, fiber-optic cable, telephony switches, inter-city links, support structures, software, the “backbone” telecommunications network
for the Internet access and telephony services, and construction services for expansion and upgrades of the cable and telephony networks. These
services and equipment are available from a limited number of suppliers.
In addition, ABB depends on third-party plant construction contractors in areas of new homes growth. If no supplier can provide ABB with the
equipment or services that it require or that comply with evolving internet and telecommunications standards or that are compatible with ABB's
other equipment and software, ABB's cable services businesses, financial condition and results of operations could be materially adversely
affected. In addition, if ABB is unable to obtain critical equipment, software, services or other items on a timely basis and at an acceptable cost,
its ability to offer its products and services and roll out its advanced services may be delayed, and ABB's businesses, financial condition and
results of operations could be materially adversely affected.
In recent years, the US cable industry has experienced a rapid escalation in the cost of programming, particularly sports programming and
retransmission of broadcast programming. This escalation may continue, and ABB may not be able to pass programming cost increases on to
its customers. The inability to pass these programming cost increases on to its customers would have an adverse impact on ABB's cash flow and
operating margins. As ABB upgrades the channel capacity of its systems and adds programming to its basic, expanded basic and digital service
offerings, ABB may face additional market constraints on its ability to pass programming costs on to its customers. The inability to pass these
costs increases on to its customers could materially adversely affect ABB's profitability. ABB is also subject to increasing financial and other
demands by broadcasters to obtain the required consent for the transmission of broadcast programming to its subscribers.
Financial risks - currency
Most of the Corporation's financial results are reported in Canadian dollars and a significant portion of its sales and operating costs are realized
in currencies other than Canadian dollars, most often US dollars, Euros and pounds sterling. For the purposes of financial reporting, any change
in the value of the Canadian dollar against the US dollar or pounds sterling during a given financial reporting period would result in a foreign
exchange gain or loss on the translation of any unhedged foreign currency denominated debt into Canadian dollars. Consequently, Cogeco Cable
reported earnings and indebtedness could fluctuate materially as a result of foreign-exchange gains or losses. Significant fluctuations in relative
currency values against the Canadian dollar could therefore have a significant impact on the Corporation's future profitability.
Risk pertaining to leased facilities
Most of PEER 1's data centers are located in leased premises, and there can be no assurance that PEER 1 will remain in compliance with its
leases and that they will not be terminated or can be renewed at commercially reasonable terms. Termination of a lease could have a material
impact on its businesses, results of operations and financial condition.
Regulatory risks - US
US federal, state and local governments extensively regulate the video services industry and may increase the regulation of the Internet services
and VoIP phone industries. Current regulation of the cable industry imposes administrative and operational expenses and may limit the revenues
of cable systems. Cable operators are subject to, among other things:
• subscriber privacy regulations;
• limited rate regulation;
• requirements that, under specified circumstances, a cable system carry a local broadcast station or obtain consent to carry a local
or distant broadcast station;
• rules for franchise renewals and transfers;
• regulations concerning the content of programming offered to subscribers;
• the manner in which program packages are marketed to subscribers;
• the use of cable system facilities by local franchising authorities, the public and unrelated entities;
• cable system ownership limitations and program access requirements;
• payment of franchise fees to local franchising authorities;
• payment of federal universal service assessments for any end user revenues from interstate and international telecommunications
services and telecommunications provided to a third party for a fee, and other state and federal telecommunications fees; and
• regulations governing other requirements covering a variety of operational areas such as equal employment opportunity, technical
standards and customer service requirements.
Further US regulation could give rise to increases in cable rates. The Federal Communications Commission (“FCC”) and the US Congress
continue to be concerned that cable rate increases are exceeding inflation and as a result it is possible that either the FCC or the US Congress
will restrict the ability of cable system operators to implement rate increases. If ABB is unable to raise its rates in response to increasing costs,
its financial condition and results of operations could be materially adversely affected.
In addition, ABB could be materially disadvantaged if it remains subject to legal and regulatory constraints that do not apply equally to its competitors.
The FCC recently adopted rules to ensure that the local franchising process does not unreasonably interfere with competitive entry, and several
states have enacted legislation to ease the franchising obligations of new entrants. These changes in regulation by the FCC and several states
will benefit ABB's competitors. In addition, both the Congress and the FCC are considering various forms of “network neutrality” regulation which
may have the impact of restricting ABB's ability to manage its network efficiently.
Management discussion and analysis (“MD&A”) COGECO CABLE INC. Q2 2013 18
Human Resources
As of February 28, 2013, approximately 26.8% of ABB's employees are represented by several unions under collective bargaining agreements.
ABB can neither predict the outcome of current or future negotiations relating to labor disputes, union representation or renewal of collective
bargaining agreements, nor be able to avoid future work stoppages, strikes or other forms of labor protests pending the outcome of any current
or future negotiations. A prolonged work stoppage, strike or other form of labor protest could have a material adverse effect on its businesses,
operations and reputation. Even if ABB does not experience strikes or other forms of labor protests, the outcome of labor negotiations could
adversely affect its businesses and results of operations. In addition, its ability to make short-term adjustments to control compensation and
benefits costs is limited by the terms of its collective bargaining agreements.
ABB's and PEER 1's success are substantially dependent upon the retention and the continued performance of their executive officers. Many of
these executive officers are uniquely qualified in their areas of expertise, making it difficult to replace their services. The loss of the services of
any of these officers could adversely affect Cogeco Cable's growth, financial condition and results of operations. In addition, to implement and
manage its businesses and operating strategies effectively, ABB and PEER 1 must maintain a high level of efficiency, performance and content
quality, continue to enhance its operational and management systems, and continue to effectively attract, train, motivate and manage its employees.
If ABB and PEER 1 are not successful in their efforts, it may have a material adverse effect on the Corporation's businesses, prospects, results
of operations and financial condition.
FUTURE ACCOUNTING DEVELOPMENTS IN CANADA
A number of new standards, interpretations and amendments to existing standards were issued by the International Accounting Standard Board
(“IASB”) that are mandatory but not yet effective for the period ended February 28, 2013 and have not been applied in preparing the condensed
interim consolidated financial statements. These standards are described under “Future accounting developments in Canada” in the Corporation’s
2012 annual MD&A, available at www.sedar.com and www.cogeco.ca.
CHANGES IN CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There has been no significant change in Cogeco Cable’s accounting policies, estimates and future accounting pronouncements since August 31,
2012. A description of the Corporation’s policies and estimates can be found in the 2012 Annual Report, available at www.sedar.com and
www.cogeco.ca.
NON-IFRS FINANCIAL MEASURES
This section describes non-IFRS financial measures used by Cogeco Cable throughout this MD&A. It also provides reconciliations between these
non-IFRS measures and the most comparable IFRS financial measures. These financial measures do not have standard definitions prescribed
by IFRS and therefore, may not be comparable to similar measures presented by other companies. These measures include “cash flow from
operations”, “free cash flow”, “operating income before depreciation and amortization” and “operating margin”.
CASH FLOW FROM OPERATIONS AND FREE CASH FLOW
Cash flow from operations is used by Cogeco Cable’s management and investors to evaluate cash flows generated by operating activities,
excluding the impact of changes in non-cash operating activities, amortization of deferred transaction costs and discounts on long-term debt,
income taxes paid, current income tax expense, financial expense paid and financial expense. This allows the Corporation to isolate the cash
flows from operating activities from the impact of cash management decisions. Cash flow from operations is subsequently used in calculating
the non-IFRS measure, “free cash flow”. Free cash flow is used, by Cogeco Cable’s management and investors, to measure its ability to repay
debt, distribute capital to its shareholders and finance its growth.
The most comparable IFRS measure is cash flow from operating activities. Cash flow from operations is calculated as follows:
Quarters ended Six months ended
February 28,
2013
February 29,
2012
February 28,
2013
February 29,
2012
(in thousands of dollars) $ $ $ $
Cash flow from operating activities 150,084 120,961
149,804 134,768
Changes in non-cash operating activities (4,931) (3,179) 76,182 59,489
Amortization of deferred transaction costs and discounts on long-term debt 2,723 682
3,463 1,357
Income taxes paid 17,475 17,635 60,008 53,817
Current income tax expense (23,027) (26,206) (48,118) (45,696)
Financial expense paid 27,285 9,517 43,715 29,547
Financial expense (29,094) (14,788) (44,694) (31,617)
Cash flow from operations 140,515 104,622
240,360 201,665
Management discussion and analysis (“MD&A”) COGECO CABLE INC. Q2 2013 19
Free cash flow is calculated as follows:
Quarters ended Six months ended
February 28,
2013
February 29,
2012
February 28,
2013
February 29,
2012
(in thousands of dollars) $ $ $ $
Cash flow from operations 140,515 104,622
240,360 201,665
Acquisition of property, plant and equipment (99,940) (83,588) (178,132) (156,927)
Acquisition of intangible and other assets (4,493) (2,646)
(9,134
)
(6,590
)
Free cash flow 36,082 18,388 53,094 38,148
OPERATING INCOME BEFORE DEPRECIATION AND AMORTIZATION AND
OPERATING MARGIN
Operating income before depreciation and amortization is used by Cogeco Cable’s management and investors to assess the Corporation’s ability
to seize growth opportunities in a cost effective manner, to finance its ongoing operations and to service its debt. Operating income before
depreciation and amortization is a proxy for cash flows from operations excluding the impact of the capital structure chosen, and is one of the
key metrics used by the financial community to value the business and its financial strength. Operating margin is a measure of the proportion of
the Corporation's revenue which is available, before income taxes, to pay for its fixed costs, such as interest on Indebtedness. Operating margin
is calculated by dividing operating income before depreciation and amortization by revenue.
The most comparable IFRS financial measure is operating income. Operating income before depreciation and amortization and operating margin
are calculated as follows:
Quarters ended Six months ended
February 28,
2013
February 29,
2012
February 28,
2013
February 29,
2012
(in thousands of dollars, except percentages)
$ $ $ $
Operating income 103,721 59,491 178,881 126,490
Depreciation and amortization 84,591 84,252 149,257 149,076
Integration, restructuring and acquisitions costs 7,464 — 14,764 —
Operating income before depreciation and amortization 195,776 143,743 342,902 275,566
Revenue 429,672 317,735 757,583 633,159
Operating margin 45.6% 45.2% 45.3% 43.5%
Management discussion and analysis (“MD&A”) COGECO CABLE INC. Q2 2013 20
SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION
Quarters ended
February
28,
February
29,
November 30, August 31, May 31,
(in thousands of dollars, except percentages and per
share data)
2013 2012 2012 2011 2012 2011 2012 2011
$ $ $ $ $ $ $ $
Revenue 429,672 317,735 327,911 315,424 324,768 305,811 319,771 298,211
Operating income before depreciation and
amortization
195,776 143,743 147,126 131,823 160,825 151,579 152,661 138,147
Operating margin 45.6% 45.2% 44.9% 41.8% 49.5% 49.6% 47.7% 46.3%
Operating income 103,721 59,491 75,160 66,999 94,709 97,941 90,981 86,995
Income taxes 16,169 13,617 17,400 10,603 32,987 20,713 21,449 18,747
Profit for the period from continuing operations 58,458 31,086 42,160 39,567 45,705 62,745 53,159 52,352
Profit (loss) for the period from discontinued
operations — 52,047 — 3,399 — 6,219 — (233,573)
Profit (loss) for the period 58,458 83,133 42,160 42,966 45,705 68,964 53,159 (181,221)
Profit (loss) for the period attributable to owners of
the Corporation 58,660 83,133 42,160 42,966 45,705 68,964 53,159 (181,221)
Cash flow from operating activities 150,084 120,961 (280) 13,807 203,343 211,847 112,275 142,009
Cash flow from operations 140,515 104,622 99,845 97,043 126,946 144,699 113,075 125,923
Acquisitions of property, plant and equipment,
intangible and other assets
104,433 86,234 82,833 77,283 124,392 120,663 87,459 62,782
Free cash flow 36,082 18,388 17,012 19,760 2,554 24,036 25,616 63,141
Earnings (loss) per share
(1)
From continuing and discontinued operations
Basic 1.20 1.71 0.87 0.88 0.94 1.42 1.09 (3.73)
Diluted 1.19 1.70 0.86 0.88 0.93 1.42 1.09 (3.73)
From continuing operations
Basic 1.20 0.64 0.87 0.81 0.94 1.29 1.09 1.08
Diluted 1.19 0.63 0.86 0.81 0.93 1.29 1.09 1.08
From discontinued operations
Basic — 1.07 — 0.07 — 0.13 — (4.80)
Diluted — 1.06 — 0.07 — 0.13 — (4.80)
(1) Per multiple and subordinate voting share.
SEASONAL VARIATIONS
Cogeco Cable’s operating results are not generally subject to material seasonal fluctuations except as follows. The customer growth in the
Television service customers and HSI service are generally lower in the second half of the fiscal year as a result of a decrease in economic activity
due to the beginning of the vacation period, the end of the television season, 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-Rivières and Rimouski in Canada. Furthermore, the third and fourth quarter’s operating margin is usually higher as no management fees
are paid to COGECO Inc. Under the Management Agreement, Cogeco Cable pays a fee equal to 2% of its total revenue subject to a maximum
amount. As the maximum amount has been reached in the second quarter of fiscal 2013, Cogeco Cable will not pay management fees in the
second half of fiscal 2013. Similarly, as the maximum amount was paid in the first six months of fiscal 2012, Cogeco Cable paid no management
fees in the second half of the previous fiscal year.
ADDITIONAL INFORMATION
This MD&A was prepared on April 10, 2013. Additional information relating to the Corporation, including its Annual Information Form, is available
on the SEDAR website at www.sedar.com.
/s/ Jan Peeters /s/ Louis Audet
Jan Peeters Louis Audet
Chairman of the Board President and Chief Executive Officer
Cogeco Cable Inc.
Montréal, Québec
April 10, 2013
Customer Statistics COGECO CABLE INC. Q2 2013 21
CUSTOMER STATISTICS
February 28,
2013
November 30,
2012
August 31,
2012
May 31,
2012
February 29,
2012
Primary service units
(1)
2,486,350 2,478,887 1,969,133 1,962,174 1,955,928
CANADA
1,984,555 1,984,213 1,969,133 1,962,174 1,955,928
US
501,795 494,674 – – –
Television service customers
1,100,547 1,105,443 863,115 868,873 873,326
CANADA
852,707 861,039 863,115 868,873 873,326
Penetration as a percentage of homes passed 51.4% 52.1% 52.4% 52.9% 53.5%
US 247,840 244,404 – – –
Penetration as a percentage of homes passed 48.0% 47.4% – – –
Digital Television service customers
922,703 922,623 771,503 765,585 752,642
CANADA 778,728 780,724 771,503 765,585 752,642
Penetration as a percentage of homes passed
46.9% 47.2% 46.8% 46.6% 46.1%
US
143,975 141,899 – – –
Penetration as a percentage of homes passed
27.9% 27.5% – – –
Analogue Television service customers
177,844 182,820 91,612 103,288 120,684
CANADA
73,979 80,315 91,612 103,288 120,684
Penetration as a percentage of homes passed
4.5% 4.9% 5.6% 6.3% 7.4%
US
103,865 102,505 – – –
Penetration as a percentage of homes passed 20.1% 19.9% – – –
High Speed Internet service customers
824,144 817,019 634,534 628,852 626,017
CANADA
649,165 645,379 634,534 628,852 626,017
Penetration as a percentage of homes passed
39.1% 39.0% 38.5% 38.3% 38.3%
US
174,979 171,640 – – –
Penetration as a percentage of homes passed
33.9% 33.3% – – –
Telephony service customers
561,659 556,425 471,484 464,449 456,585
CANADA 482,683 477,795 471,484 464,449 456,585
Penetration as a percentage of homes passed
29.1% 28.9% 28.6% 28.3% 27.9%
US
78,976 78,630 – – –
Penetration as a percentage of homes passed
15.3% 15.2% – – –
(1) Represents the sum of Television, High Speed Internet (“HSI”) and Telephony service customer.