CGO Annual Report 2009
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2009 ANNUAL REPORT PROFILE COGECO INC. (“COGECO” OR “THE COMPANY”) IS A DIVERSIFIED HOLDING COMPANY WITH SUBORDINATE VOTING SHARES LISTED ON THE TORONTO STOCK EXCHANGE (“TSX”), UNDER THE SYMBOL CGO. THE COMPANY’S CURRENT HOLDINGS ARE CONCENTRATED IN VARIOUS SEGMENTS OF THE COMMUNICATIONS SECTOR. COGECO CABLE INC. (“COGECO CABLE” OR THE “CABLE SUBSIDIARY”) IS A MAJOR CABLE TELECOMMUNICATIONS COMPANY WITH SHARES LISTED ON THE TORONTO STOCK EXCHANGE (“TSX”) UNDER THE SYMBOL CCA. COGECO CABLE BUILDS ON ITS CABLE DISTRIBUTION BASE BY OFFERING ANALOGUE AND DIGITAL TELEVISION, HIGH SPEED INTERNET (“HSI”), TELEPHONY, DATA COMMUNICATIONS AND OTHER ADVANCED TELECOMMUNICATION SERVICES SUCH AS ETHERNET, PRIVATE LINE, VOICE-OVER-INTERNET PROTOCOL (“VOIP”), HSI ACCESS, DARK FIBRE, DATA STORAGE, DATA SECURITY AND CO-LOCATION SERVICES. COGECO CABLE SERVES 2,892,238 REVENUE-GENERATING UNITS TO THE 2,470,274 HOMES PASSED BY ITS CABLE NETWORK IN THE TERRITORIES IT SERVES. IT IS THE SECOND LARGEST CABLE SYSTEM OPERATOR IN ONTARIO, QUÉBEC AND PORTUGAL IN TERMS OF BASIC CABLE SERVICE CUSTOMERS SERVED. COGECO CABLE FOCUSES ITS ATTENTION ON THE SATISFACTION OF RESIDENTIAL AND BUSINESS CUSTOMERS’ VARIED ELECTRONIC COMMUNICATION NEEDS BY INVESTING IN STATE-OF-THE-ART BROADBAND NETWORK FACILITIES, DELIVERING A WIDE RANGE OF SERVICES OVER THESE FACILITIES WITH GREAT SPEED AND RELIABILITY AT ATTRACTIVE PRICES, AND STRIVING TO PROVIDE SUPERIOR CUSTOMER SERVICE AND GROWING PROFITABILITY. THROUGH ITS COGECO DIFFUSION INC. SUBSIDIARY (“CDI”), COGECO OPERATES AND WHOLLY-OWNS THE RYTHME FM NETWORK WHICH HAS FOUR RADIO STATIONS THROUGHOUT THE PROVINCE OF QUÉBEC, IN MONTRÉAL, QUÉBEC CITY, AND IN THE MAURICIE AND EASTERN TOWNSHIPS REGIONS, AS WELL AS THE FM 93 RADIO STATION IN QUÉBEC CITY. COGECO INC. 2009 1 ANNUAL REPORT FINANCIAL HIGHLIGHTS 4 INVESTOR INFORMATION 87 MESSAGE TO SHAREHOLDERS 5 CABLE SECTOR CUSTOMER STATISTICS 89 MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A) 7 BOARD OF DIRECTORS AND CORPORATE MANAGEMENT 91 CONSOLIDATED FINANCIAL STATEMENTS 46 CORPORATE INFORMATION 93 FIVE-YEAR FINANCIAL HIGHLIGHTS 86 SUBSIDIARIES AND OPERATING UNITS 95 2 COGECO INC. 2009 FORWARD-LOOKING STATEMENTS Certain statements in this annual report may constitute forward-looking information within the meaning of securities laws. Forward- looking information may relate to COGECO’s future outlook and anticipated events, business, operations, financial performance, financial condition or results and, in some cases, can be identified by terminology such as "may"; "will"; "should"; "expect"; "plan"; "anticipate"; "believe"; "intend"; "estimate"; "predict"; "potential"; "continue"; "foresee", "ensure" or other similar expressions concerning matters that are not historical facts. In particular, statements regarding the Company’s future operating results and economic performance and its objectives and strategies are forward-looking statements. These statements are based on certain factors and assumptions including expected growth, results of operations, performance and business prospects and opportunities, which COGECO believes are reasonable as of the current date. While management considers these assumptions to be reasonable based on information currently available to the Company, they may prove to be incorrect. The Company cautions the reader that the current adverse economic conditions make forward-looking information and the underlying assumptions subject to greater uncertainty and that, consequently, they may not materialize, or the results may significantly differ from the Company’s expectations. It is impossible for COGECO to predict with certainty the impact that the current economic downturn may have on future results. Forward-looking information is also subject to certain factors, including those described in the “Uncertainties and Main Risk Factors” section starting on page 17 of the management’s discussion and analysis (“MD&A”) that could cause actual results to differ materially from what COGECO currently expects. These factors include technological changes, changes in market and competition, governmental or regulatory developments, general economic conditions, the development of new products and services, the enhancement of existing products and services, and the introduction of competing products having technological or other advantages, many of which are beyond the Company’s control. Therefore, future events and results may vary significantly from what management currently foresees. The reader should not place undue importance on forward-looking information and should not rely upon this information as of any other date. While management may elect to do so, the Company is under no obligation (and expressly disclaims any such obligation), and does not undertake to update or alter this information before the next quarter, except as required by law. This analysis should be read in conjunction with the Company’s management’s discussion and analysis, consolidated financial statements and the notes thereto, prepared in accordance with Canadian generally accepted accounting principles (“GAAP”). Throughout this discussion, all amounts are in Canadian dollars unless otherwise indicated. Acronyms ATM ASYNCHRONOUS TRANSFER MODE DOCSIS DATA OVER CABLE SERVICE INTERFACE SPECIFICATIONS DVR DIGITAL VIDEO RECORDER (SAME AS PERSONAL VIDEO RECORDER OR PVR) € EURO CURRENCY HD HIGH DEFINITION HSI HIGH SPEED INTERNET IP INTERNET PROTOCOL Kbps KILOBITS PER SECOND Mbps MEGABITS PER SECOND MHz MEGAHERTZ NTSC NATIONAL TELEVISION SYSTEM COMMITTEE PAL PHASE ALTERNATING LINE RGU REVENUE GENERATING UNITS INCLUDE BASIC CABLE, HSI, DIGITAL TELEVISION AND TELEPHONY SERVICE CUSTOMERS SVOD SUBSCRIPTION VIDEO ON DEMAND SERVICES VOD VIDEO ON DEMAND SERVICES VoIP VOICE-OVER-INTERNET PROTOCOL Wi-Fi WIRELESS FIDELITY COGECO INC. 2009 3 FINANCIAL HIGHLIGHTS 2009 2008 (1)(2) CHANGE (in thousands of dollars, except percentages, per share data and RGU growth) $ $ % OPERATIONS REVENUE 1,252,794 1,108,900 13.0 OPERATING INCOME FROM CONTINUING OPERATIONS BEFORE AMORTIZATION (3) 532,013 448,922 18.5 OPERATING MARGIN (3) 42.5% 40.5% – OPERATING INCOME FROM CONTINUING OPERATIONS 261,013 219,198 19.1 IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS 399,648 – – INCOME (LOSS) FROM CONTINUING OPERATIONS (78,525) 43,165 – LOSS FROM DISCONTINUED OPERATIONS – (18,057) – NET INCOME (LOSS) (78,525) 25,108 – ADJUSTED NET INCOME (3) 36,895 35,256 4.6 CASH FLOW CASH FLOW FROM OPERATING ACTIVITIES FROM CONTINUING OPERATIONS 437,223 398,491 9.7 CASH FLOW FROM OPERATIONS FROM CONTINUING OPERATIONS (3) 406,807 362,788 12.1 FREE CASH FLOW (3) 101,018 100,436 0.6 FINANCIAL CONDITION TOTAL ASSETS 2,704,679 3,059,481 (11.6) INDEBTEDNESS (4) 1,064,542 1,166,523 (8.7) SHAREHOLDERS’ EQUITY 340,016 421,026 (19.2) RGU GROWTH 175,364 231,209 (24.2) PER SHARE DATA (5) INCOME (LOSS) FROM CONTINUING OPERATIONS (4.69) 2.59 – LOSS FROM DISCONTINUED OPERATIONS – (1.08) – NET INCOME (LOSS) (4.69) 1.50 – ADJUSTED NET INCOME (3) 2.20 2.11 4.3 WEIGHTED AVERAGE NUMBER OF OUTSTANDING SHARES 16,756,610 16,684,809 0.4 (1) INCLUDES THE RESULTS OF COGECO DATA SERVICES INC. SINCE THE DATE OF ACQUISITION OF CONTROL ON JULY 31, 2008. (2) CERTAIN COMPARATIVE FIGURES HAVE BEEN RECLASSIFIED TO CONFORM TO THE CURRENT YEAR’S PRESENTATION. FINANCIAL INFORMATION FOR THE PREVIOUS YEAR HAS BEEN RESTATED TO REFLECT THE PRESENTATION OF FOREIGN EXCHANGE GAINS OR LOSSES AS FINANCIAL EXPENSE INSTEAD OF OPERATING COSTS. (3) THE INDICATED TERMS DO NOT HAVE STANDARDIZED DEFINITIONS PRESCRIBED BY CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (“GAAP”) AND THEREFORE, MAY NOT BE COMPARABLE TO SIMILAR MEASURES PRESENTED BY OTHER COMPANIES. FOR FURTHER DETAILS, PLEASE CONSULT THE “NON-GAAP FINANCIAL MEASURES” SECTION ON PAGE 37 OF THE MANAGEMENT’S DISCUSSION AND ANALYSIS. (4) INDEBTEDNESS IS DEFINED AS THE TOTAL OF BANK INDEBTEDNESS, PRINCIPAL ON LONG-TERM DEBT AND OBLIGATIONS UNDER DERIVATIVE FINANCIAL INSTRUMENTS. (5) PER MULTIPLE AND SUBORDINATE VOTING SHARE. ORIGINAL REVISED ACHIEVEMENT PROJECTIONS PROJECTIONS OF THE REVISED NOVEMBER 5, 2008 APRIL 8, 2009 ACTUALS PROJECTIONS FISCAL 2009 FISCAL 2009 FISCAL 2009 FISCAL 2009 (in millions of dollars, except RGU growth) $ $ $ FINANCIAL GUIDELINES REVENUE 1,243 1,238 1,253 Surpassed OPERATING INCOME BEFORE AMORTIZATION 513 505 532 Surpassed OPERATING MARGIN 41% 41% 42.5% Surpassed NET INCOME (LOSS) 35 (87) (79) Surpassed CAPITAL EXPENDITURES AND INCREASE IN DEFERRED CHARGES 300 300 306 Under-achieved FREE CASH FLOW 95 85 101 Surpassed RGU GROWTH 100,000 100,000 175,364 Surpassed 4 COGECO INC. 2009 Financial highlights MESSAGE TO SHAREHOLDERS Dear friends, Fiscal 2009 will remain etched in our memories as a year of economic upheavals. That said, the cable distribution and Québec radio broadcasting industries showed resiliency amid these difficult circumstances. On a consolidated basis, operating income before amortization (1) grew by 18.5% and the operating margin (1) increased to 42.5% from 40.5%. Free cash flow (1) increased by 0.6% despite a significant increase in capital expenditures in order to support RGU growth in the cable sector. The dividend payout for the fiscal year rose 14.3% to $0.32 per share from $0.28 per share in 2008. In Canada and in Portugal, the economic crisis was particularly hard on the automobile industry, which is a player in several markets served by our cable distribution subsidiary, Cogeco Cable Inc. Many other industries were also affected, leading to job losses, a decline in confidence and a heightened