Shaw Announces Third Quarter Financial and Operating Results
(firmenpresse) - CALGARY, ALBERTA -- (Marketwire) -- 06/28/12 -- Shaw Communications Inc. (TSX: SJR.B) (NYSE: SJR) announced consolidated financial and operating results for the three and nine months ended May 31, 2012 and 2011. Consolidated revenue for the three month period of $1.28 billion was comparable to the same period last year. Revenue for the nine month period of $3.79 billion was up 6% over last year. Total operating income before amortization(1) of $567 million declined 3% over the comparable quarterly period while the year-to-date amount of $1.63 billion improved almost 4%.
Free cash flow(1) for the three and nine month periods was $203 million and $379 million, respectively, compared to $240 million and $568 million for the same periods last year. Lower operating income before amortization in the current quarter, along with higher capital investment in both the current three and nine month periods were the main drivers of the decrease.
Chief Executive Officer Brad Shaw said, "During the quarter we focused on sustainable growth initiatives, while maintaining our commitment to technology, customer service and value leadership. We continued to drive innovation with our Wi-Fi build, now offering EXO Wi-Fi at over 1,500 sites in Calgary, Edmonton, Vancouver, Victoria and Winnipeg, and our DNU project, allowing us to provide leading internet speeds, more HD channels and an exceptional variety of VOD movies and TV shows. Our EXO product offerings are popular with customers and we are continuing to add staff to our customer service centres to support an exceptional customer experience. We also saw solid performance across our leading portfolio of Specialty services."
Net income from continuing operations of $248 million or $0.53 per share for the quarter ended May 31, 2012 compared to $203 million or $0.45 per share for the same period last year. Net income from continuing operations for the first nine months of the year was $628 million or $1.34 per share compared to $392 million or $0.86 per share last year. All periods included non-operating items which are more fully detailed in Management's Discussions and Analysis (MD&A).(2) The prior year-to-date period included a charge of $139 million for the discounted value of the CRTC benefit obligation related to the acquisition of Shaw Media, as well as business acquisition, integration and restructuring expenses of $90 million. Excluding the non-operating items, net income from continuing operations for the three and nine month periods ended May 31, 2012 would have been $219 million and $607 million, respectively, compared to $229 million and $564 million in the same periods last year.
Revenue in the Cable division of $794 million and $2.39 billion for the current three and nine month periods increased 1% and 3%, respectively, over the comparable periods. Operating income before amortization for the quarter and year-to-date periods of $377 million and $1.11 billion, was down 4% and 1%, respectively, compared to the same periods last year. Financial results improved compared to the second quarter with margins increasing from 43.8% to 47.5%; however, subscriber growth slowed reflecting the commitment to maintain and increase the base in a disciplined and prudent manner.
Satellite revenue of $211 million and $631 million for the three and nine month periods, respectively, was up from $210 million and $620 million for the same periods last year. Operating income before amortization for the current quarter and year-to-date period of $76 million and $216 million were comparable to the same periods last year.
Revenue in the Media division for the three and nine month periods was $295 million and $836 million, respectively, and operating income before amortization was $114 million and $304 million. The quarterly amounts were down 5% and 3%, respectively, compared to the same period last year. For informational purposes, on a comparative basis to the prior year, Media revenues and operating income before amortization for the full nine month period were each down approximately 3%.
Brad Shaw concluded, "As we enter the final quarter of fiscal 2012 we are on track to achieve our free cash flow guidance of approximately $450 million. We remain focused on the long term profitability of our assets and will continue to implement cost savings, execute on operational efficiencies, and prudently manage our capital investments building value for all of our stakeholders."
Shaw Communications Inc. is a diversified communications and media company, providing consumers with broadband cable television, High-Speed Internet, Home Phone, telecommunications services (through Shaw Business), satellite direct-to-home services (through Shaw Direct) and engaging programming content (through Shaw Media). Shaw serves 3.4 million customers, through a reliable and extensive fibre network. Shaw Media operates one of the largest conventional television networks in Canada, Global Television, and 19 specialty networks including HGTV Canada, Food Network Canada, History Television and Showcase. Shaw is traded on the Toronto and New York stock exchanges and is included in the S&P/TSX 60 Index (TSX: SJR.B) (NYSE: SJR).
The accompanying Management's Discussion and Analysis forms part of this news release and the "Caution Concerning Forward Looking Statements" applies to all forward-looking statements made in this news release.
(1) See definitions and discussion under Key Performance Drivers in MD&A.
(2) See reconciliation of Net income from continuing operations in Consolidated Overview in MD&A.
MANAGEMENT'S DISCUSSION AND ANALYSIS
MAY 31, 2012
June 28, 2012
Certain statements in this report may constitute forward-looking statements. Included herein is a "Caution Concerning Forward-Looking Statements" section which should be read in conjunction with this report.
The following Management's Discussion and Analysis ("MD&A") should also be read in conjunction with the unaudited interim consolidated Financial Statements and Notes thereto of the current quarter, the 2011 Annual MD&A included in the Company's August 31, 2011 Annual Report including the Consolidated Financial Statements and the Notes thereto.
The financial information presented herein has been prepared on the basis of International Financial Reporting Standards ("IFRS") for interim financial statements and is expressed in Canadian dollars unless otherwise stated. The amounts in this MD&A and the Company's interim financial statements for the period ended May 31, 2011 have been restated to reflect the adoption of IFRS, with effect from September 1, 2010. Periods prior to September 1, 2010 have not been restated and are prepared in accordance with Canadian GAAP. Refer to note 14 of the May 31, 2012 interim financial statements for a summary of the differences between the financial statements previously prepared under Canadian GAAP and to those under IFRS.
The unaudited IFRS related disclosures and values in this MD&A have been prepared using the standards and interpretations currently issued and expected to be effective at the end of the Company's first annual IFRS reporting period, August 31, 2012. Certain accounting policies expected to be adopted under IFRS may not be adopted and the application of policies to certain transactions or circumstances may be modified and as a result, the May 31, 2012 and August 31, 2011 underlying values prepared on a basis consistent with IFRS are subject to change.
CONSOLIDATED RESULTS OF OPERATIONS
THIRD QUARTER ENDING MAY 31, 2012
Selected Financial Highlights
Subscriber Highlights
Additional Highlights
Consolidated Overview
Consolidated revenue of $1.28 billion for the current quarter compares to $1.29 billion for the same period last year. Revenue for the nine month period of $3.79 billion improved 6.4% over last year. Both the current periods benefitted from rate increases in the Cable and Satellite divisions while the year-to-date period also included a full nine months of revenue from Shaw Media.
Consolidated operating income before amortization for the three month period of $567 million declined 3.2% compared to the same period last year. The revenue related growth in the Cable and Satellite divisions was offset by higher programming and employee related costs while Media declined modestly primarily due to lower conventional advertising revenues. On a year-to-date basis operating income before amortization was up 3.6% to $1.63 billion. The current year-to-date period included three full quarters of Shaw Media and revenue related growth in the Cable and Satellite divisions, partially offset by higher programming, employee related costs, and sales and marketing expenses.
Net income from continuing operations was $248 million and $628 million for the three and nine months ended May 31, 2012, respectively, compared to $203 million and $392 million for the same periods last year. Non-operating items affected net income in both periods. The prior year-to-date period included a charge of $139 million for the discounted value of the CRTC benefit obligation, net of incremental revenues, related to the Media acquisition, as well as business acquisition, integration and restructuring expenses of $90 million. Outlined below are further details on these and other operating and non-operating components of net income from continuing operations for each period.
(1) See definitions and discussion under Key Performance Drivers in MD&A.
The changes in net income from continuing operations are outlined in the table below.
(1) Net other costs and revenue includes gain on repurchase of debt, CRTC benefit obligations, business acquisition, integration and restructuring expenses, gain on remeasurement of interests in equity investments, gain (loss) on derivative instruments, accretion of long-term liabilities and provisions, foreign exchange gain on unhedged long-term debt, other gains (losses) and equity income from associates as detailed in the unaudited interim Consolidated Statements of Income.
Basic earnings per share were $0.53 and $1.34 for the quarter and year-to-date, respectively, compared to $0.45 and $0.86 in the same periods last year. In the current quarter, reduced operating income before amortization of $19 million and increased amortization of $20 million were offset by lower net other costs and revenue and income taxes of $40 million and $36 million, respectively. The reduced net other costs and revenue related to various acquisition, integration and restructuring expenses incurred in the prior year while the lower taxes included a tax recovery related to the resolution of certain tax matters with Canada Revenue Agency ("CRA"). The year-to-date increase was primarily due to the favourable change in net other costs and revenue of $205 million along with improved operating income before amortization of $56 million and lower income taxes of $27 million. The change in net other costs and revenue was primarily due to amounts included in the prior year related to the CRTC benefit obligation and various acquisition, integration and restructuring costs. Operating income before amortization was up in the current period due to the inclusion of Shaw Media for the full nine months and the lower taxes included a tax recovery related to the resolution of certain tax matters with CRA. These improvements were partially reduced by increased amortization of $49 million.
Net income in the current quarter increased $70 million compared to the second quarter of fiscal 2012 driven by improved operating income before amortization of $74 million primarily due to seasonality in the Media business as well as improved operating income in the Cable and Satellite divisions.
Free cash flow for the quarter and year-to-date periods of $203 million and $379 million, respectively, compared to $240 million and $568 million in the same periods last year. The decrease in the current quarter was mainly due to higher capital investment of $16 million and lower operating income before amortization. The lower year-to-date amount was mainly due to higher capital investment of $153 million related to the strategic initiatives and customer equipment subsidies, as well as increased interest, cash taxes, and CRTC benefit funding of $18 million, $24 million, and $16 million, respectively, partially offset by improved operating income before amortization of $56 million. Operating income before amortization was up due to the full nine month inclusion of Media.
During the quarter the Company announced the opening of its first store in Calgary offering a new retail experience as part of its continued investment in defining the customer experience. The new store showcases all of Shaw's products and services through a unique technology experience of interactive displays along with hands on training and technical support.
Shaw continues to make a positive contribution in the communities across Canada. During the quarter Shaw concluded its Fill the Food Banks Campaign, a national initiative to raise awareness and donations for food banks across the country. Shaw partnered with Campbell Canada, Food Banks Canada and Purolator and, together with Shaw employees, customers and members of the community donated 1.2 million pounds of food and over $0.6 million. During the quarter Shaw also hosted the A World of Smiles telethon raising almost $0.4 million for BC Children's Hospital.
Key Performance Drivers
The Company's continuous disclosure documents may provide discussion and analysis of non-IFRS financial measures. These financial measures do not have standard definitions prescribed by IFRS and therefore may not be comparable to similar measures disclosed by other companies. The Company's continuous disclosure documents may also provide discussion and analysis of additional GAAP measures. Additional GAAP measures include line items, headings, and sub-totals included in the financial statements. The Company utilizes these measures in making operating decisions and assessing its performance. Certain investors, analysts and others, utilize these measures in assessing the Company's operational and financial performance and as an indicator of its ability to service debt and return cash to shareholders. The non-IFRS financial measures and additional GAAP measures have not been presented as an alternative to net income or any other measure of performance required by IFRS.
The following contains a listing of non-IFRS financial measures and additional GAAP measures used by the Company and provides a reconciliation to the nearest IFRS measure or provides a reference to such reconciliation.
Operating income before amortization and operating margin
Operating income before amortization is calculated as revenue less operating, general and administrative expenses and is presented as a sub-total line item in the Company's unaudited interim Consolidated Statements of Income. It is intended to indicate the Company's ability to service and/or incur debt, and therefore it is calculated before amortization (a non-cash expense) and interest. Operating income before amortization is also one of the measures used by the investing community to value the business. Operating margin is calculated by dividing operating income before amortization by revenue.
Free cash flow
The Company utilizes this measure to assess the Company's ability to repay debt and return cash to shareholders.
Free cash flow is calculated as operating income before amortization, less interest, cash taxes paid or payable, capital expenditures (on an accrual basis and net of proceeds on capital dispositions) and equipment costs (net), adjusted to exclude share-based compensation expense, less cash amounts associated with funding the new and assumed CRTC benefit obligations related to the acquisition of Shaw Media as well as excluding non-controlling interest amounts that are consolidated in the operating income before amortization, capital expenditure and cash tax amounts. Free cash flow also includes changes in receivable related balances with respect to customer equipment financing transactions as a cash item, and is adjusted for cash funding of pension amounts net of pension expense. Dividends paid on the Company's Cumulative Redeemable Rate Reset Preferred Shares are also deducted.
Commencing in 2012 free cash flow has not been reported on a segmented basis. Certain components of free cash flow including operating income before amortization, capital expenditures (on an accrual basis) net of proceeds on capital dispositions and equipment costs (net), CRTC benefit obligation funding, and non-controlling interest amounts continue to be reported on a segmented basis. Other items, including interest and cash taxes, are not generally directly attributable to a segment, and are reported on a consolidated basis.
Free cash flow is calculated as follows:
CABLE
FINANCIAL HIGHLIGHTS
Operating Highlights
Cable revenue for the three and nine month periods of $794 million and $2.39 billion improved 1.1% and 3.4%, respectively, over the comparable periods last year. Rate increases and customer growth in Internet and Digital Phone partially offset by lower Basic subscribers accounted for the improvement.
Operating income before amortization of $377 million for the quarter decreased 3.8% compared to the same period last year. Revenue growth and lower marketing and sales related expenses were more than offset by higher employee related amounts, mainly related to annual merit increases and employee growth to bring new customer service centres on line, and also higher programming amounts related to new services and increased rates as contracts renewed.
Operating income before amortization for the year-to-date period declined modestly over last year. The revenue improvement was offset by increased employee related expenses, programming costs, and marketing and sales related spend.
Revenue decreased 1.2% compared to the second quarter of fiscal 2012 primarily due to declines in On Demand and lower Cable subscribers, partially offset by reduced promotional discounts and growth in Digital Phone. Operating income before amortization improved $25 million over this same period primarily due to lower sales, marketing and various other expenses. As a result margins increased from 43.8% in the second quarter to 47.5%. Capital expenditures declined $65 million compared to the prior quarter. The decrease was due to lower success based spend arising from higher pricing on digital boxes, lower Digital Network Upgrade ("DNU") related activations and reduced modem purchases; along with lower upgrades and enhancements due to prior quarter bulk purchasing of network electronics and plant gear in support of the DNU.
Total capital investment of $169 million and $626 million for the current quarter and nine month periods increased $17 million and $140 million, respectively, over the same periods last year.
Success-based capital was in line with the prior year quarter and up $59 million over the comparable nine month period. The increase was primarily due to higher subsidies on sales of HDPVRs resulting from lower customer pricing and increased volumes, deployment of digital boxes related to the DNU, and investment in wireless internet modems. These increases were partially offset by lower HDPVR rentals and phone modem purchases.
Investment in Upgrades and enhancement and Replacement categories combined increased $4 million and $56 million for the quarter and year-to-date periods, respectively, compared to the same periods last year. The year-to-date investment included higher spending on hub upgrades and network electronics related to the DNU, Digital Phone infrastructure to support business growth and soft-switch upgrades, and investment related to the Wi-Fi build.
Investment in Buildings and other was up $6 million and $15 million, respectively, over the comparable three and nine month periods. The increase was mainly due to higher spend related to back office infrastructure replacement projects, as well as facility investment related to the Calgary data centre, customer service centres and new retail location.
Spending in New housing development increased $7 million and $10 million, respectively, over the comparable three and nine month periods mainly due to higher activity.
During the quarter Shaw Business announced multi-year agreements with the City of Winnipeg and BC Biomedical Laboratories. Telecommunication services provided by Shaw Business deliver standard and customized offerings on a competitive basis.
Subscriber Statistics
SATELLITE (DTH and Satellite Services)
FINANCIAL HIGHLIGHTS
Operating Highlights
Revenue of $211 million and $631 million for the three and nine month periods, respectively, was up 0.5% and 1.8% over the same periods last year. The improvement was primarily due to rate increases. Operating income before amortization of $76 million and $216 million for the three and nine month periods, respectively, were comparable to the same periods last year.
Operating income before amortization improved $5 million over the second quarter of fiscal 2012 primarily due to the full quarter impact of the February 2012 rate increases and lower sales and marketing expenditures.
Total capital investment of $17 million and $67 million for the three and nine month periods, respectively, compared to $16 million and $58 million in the same periods last year. The year-to-date increase was mainly due to new customer activations, customer equipment upgrades to new receivers, outfitting outdoor equipment to access triple satellites, and purchases of uplink ground equipment for the new Anik G1 satellite. Construction of Anik G1, which will provide capacity to add over 100 HD channels, continues to progress and is on track for a fall launch.
During the quarter, Shaw Direct launched National Geographic Wild HD, the 11th HD channel launched this year. Shaw Direct now has over 565,000 HD customers representing an HD penetration of over 60%.
Also in the quarter Shaw Direct completed and implemented a marketing and sales agreement with Xplornet to offer a DTH and satellite high speed internet service. More recently, Shaw Direct became the first Canadian DTH service to offer a video-on-demand service using adaptive streaming technology directly to satellite set-top receivers. This internet based service was launched with over 1,500 movie and TV titles. Additional titles will be added over the next few months.
Subscriber Statistics
MEDIA
FINANCIAL HIGHLIGHTS
Operating Highlights
Revenue and operating income before amortization for the quarter of $295 million and $114 million, respectively, compared to $312 million and $118 million last year. Revenue for the quarter was down 5.4% mainly due to lower conventional advertising revenues. Operating income decreased 3.4% due to the revenue decline partially offset by lower programming costs and various other expenses.
For informational purposes, on a comparative basis to the full nine months ended May 31, 2011, Media revenues and operating income before amortization were each down approximately 3%, reflecting the softness in the advertising market as a result of continuing economic uncertainty. Advertising revenue in the nine month period was driven by spend in the automotive, household supplies, service and direct marketing categories.
Compared to the second quarter of fiscal 2012, revenue and operating income before amortization increased $53 million and $44 million, respectively. The increases were primarily due to the cyclical nature of the Media business, with higher advertising revenues in the first and third quarters driven by the launches of season premieres in the first quarter and season finales and mid season launches in the third quarter.
During the quarter, Global delivered solid programming results, increasing the number of Top 20 positions nationally with Glee, House and Survivor leading as top performing shows. The quarter also saw high audience delivery on the season finales of Hawaii 5-0, Survivor, Bones, Glee and the series finale of House.
The Media specialty portfolio continues to lead the channel rankings in the adult 25-54 category, with 4 of the Top 10 Analog services, including History as the top entertainment network in Canada, and 7 of the Top 10 Digital services, with National Geographic as the leading Digital channel. National Geographic and Action's strong audience results rank the channels within the Top 20 Analog services. In the quarter Shaw Media launched National Geographic Wild and announced the launches of Lifetime and H2 in late August.
The on-line business continued to move forward in the quarter by signing an exclusive sales representation agreement with CBS Interactive which includes their full suite of on-line properties, such as CBS, CBS News, CBS Sports and CNET.
Capital investment continued on various projects and included upgrading production equipment, infrastructure and facility investments.
OTHER INCOME AND EXPENSE ITEMS
Amortization
Amortization of deferred equipment revenue and deferred equipment costs increased over the comparative periods due to the sales mix of equipment and changes in customer pricing on certain equipment.
Amortization of property, plant and equipment, intangibles and other increased over the comparable periods as the amortization of new expenditures and inclusion of the Media division for the full nine months in the current year exceeded the impact of assets that became fully depreciated.
Amortization of financing costs and Interest expense
Interest expense fluctuated over the comparative periods primarily due to changes in debt levels. Approximately $1 billion was required to complete the Media acquisition in October 2010 including repayment of a term loan and breakage of related currency swaps. The transaction was initially funded by the Company's credit facility which was subsequently repaid during the second quarter of 2011 with the net proceeds from the three senior notes offerings totaling $1.3 billion. In addition, the Company assumed US $338 million senior unsecured notes as part of the Media transaction of which US $56 million were repurchased in December 2010 and remaining US $282 million redeemed in the fourth quarter of 2011.
Gain on repurchase of debt
During the second quarter of the prior year, the Company repurchased and cancelled US $56 million of the Media unsecured notes and recorded a gain of $10 million as result of recognizing the related remaining unamortized acquisition date fair value adjustment.
CRTC benefit obligations
As part of the CRTC decisions approving the acquisition of Mystery and The Cave during the current quarter and the Media acquisition during the first quarter of 2011, the Company is required to contribute approximately $2 million and $180 million, respectively in new benefits to the Canadian broadcasting system over the following seven years. The fair value of the obligations of $2 million and $139 million have been recorded in the income statement.
Business acquisition, integration and restructuring expenses
During the three and nine months ended May 31, 2011, the Company recorded $29 million and $90 million, respectively related to the acquisition of the broadcasting business of Canwest and organizational restructuring. Amounts included acquisition related costs to effect the acquisition, such as professional fees paid to lawyers and consultants. The integration and restructuring costs related to integrating the new business and increasing organizational effectiveness for future growth as well as package costs for the former CEO.
Gain on remeasurement of interests in equity investments
The Company recorded a $6 million gain in respect of remeasurement to fair value of the Company's 50% interest in Mystery and 49% interest in The Cave which were held prior to the acquisition on May 31, 2012. The fair value of the Company's equity interest in these specialty channels held prior to the acquisition was $19 million compared to a carrying value of $13 million.
Gain (loss) on derivative instruments
For derivative instruments where hedge accounting is not permissible or derivatives are not designated in a hedging relationship, the Company records changes in the fair value of derivative instruments in the income statement. In addition, the Media senior unsecured notes had a variable prepayment option which represented an embedded derivative that was accounted for separately at fair value until the Company gave notice of redemption in the fourth quarter of 2011. The fluctuation in amounts recorded in 2012 compared to 2011 is due to a reduction in the number of outstanding contracts as well as the amounts recorded in respect of the embedded derivative in the prior year.
Accretion of long-term liabilities and provisions
The Company records accretion expense in respect of the discounting of certain long-term liabilities and provisions which are accreted to their estimated value over their respective terms. The expense is primarily in respect of CRTC benefit obligations as well as the liability which arose in 2010 when the Company entered into amended agreements with the counterparties to certain cross-currency agreements to fix the settlement of the principal portion of the swaps in December 2011.
Foreign exchange gain on unhedged long-term debt
In conjunction with the Media business acquisition in October 2010, the Company assumed a US $390 million term loan and US $338 million senior unsecured notes. Shortly after closing the acquisition, the Company repaid the term loan including breakage of the related cross currency interest rate swaps. A portion of the senior unsecured notes were repurchased during the second quarter of 2011 and the Company elected to redeem the remaining notes in the fourth quarter. As a result of fluctuations of the Canadian dollar relative to the US dollar, a foreign exchange gain of $23 million was recorded for the nine months ended May 31, 2011.
Other gains (losses)
This category generally includes realized and unrealized foreign exchange gains and losses on US dollar denominated current assets and liabilities, gains and losses on disposal of property, plant and equipment and minor investments, and the Company's share of the operations of Burrard Landing Lot 2 Holdings Partnership.
Income taxes
Income taxes fluctuated over the comparative periods due to a tax recovery included in the current year related to resolution with CRA on certain tax matters.
Equity income from associates
During the first quarter of the prior year, the Company recorded income of $14 million primarily in respect of its 49.9% equity interest in CW Media Investments Co. ("CW Media") for the period September 1 to October 26, 2010. On October 27, 2010, the Company acquired the remaining equity interest in CW Media as part of its purchase of all the broadcasting assets of Canwest. Results of operations are consolidated effective October 27, 2010. The remaining equity income is in respect of interests in several specialty channels.
Loss from discontinued operations
During the fourth quarter of 2011, the Company discontinued further construction of its traditional wireless network and accordingly, all traditional wireless activities in the comparative year have been classified as discontinued operations.
RISKS AND UNCERTAINTIES
The significant risks and uncertainties affecting the Company and its business are discussed in the Company's August 31, 2011 Annual Report under the Introduction to the Business - Known Events, Trends, Risks and Uncertainties in Management's Discussion and Analysis.
FINANCIAL POSITION
Total assets at May 31, 2012 were $12.7 billion compared to $12.6 billion at August 31, 2011. Following is a discussion of significant changes in the consolidated statement of financial position since August 31, 2011.
Current assets decreased $110 million primarily due to decreases in cash of $191 million and assets held for sale of $15 million partially offset by increases in accounts receivable of $61 million, inventories of $24 million and other current assets of $11 million. Cash decreased as the cash outlay for investing and financing activities exceeded the funds provided by operations. Assets held for sale decreased as the sale of the wireless assets was completed during the first quarter. Accounts receivable were up primarily due to higher advertising revenue during the third quarter of the current year in comparison to the fourth quarter of the prior year. Inventories were higher due to timing of equipment purchases while other current assets were up primarily as a result of increases in program rights and prepaid maintenance and support contracts.
Property, plant and equipment increased $60 million as current year capital investment exceeded amortization.
Other long-term assets were up $72 million primarily due to an increase in deferred equipment costs and related customer equipment financing receivables.
Intangibles increased $72 million due to higher program rights and advances and the broadcast licenses recorded on the acquisition of Mystery and The Cave in the current quarter. Program rights and advances (current and noncurrent) increased as advances and additional investment in acquired rights exceeded the amortization for the current year. The increase in goodwill of $2 million is due to the aforementioned acquisition of Mystery and The Cave.
Current liabilities were up $213 million due to increases in income taxes payable of $21 million and current portion of long-term debt of $449 million partially offset by decreases in accounts payable and accrued liabilities of $90 million, other current liability of $161 million and derivative instruments of $8 million. Income taxes payable increased due to the current year provision partially offset by tax installment payments. The current portion of long-term debt increased and long-term debt decreased due to the reclassification of the 6.1% $450 million senior notes which are due in November 2012. Accounts payable and accrued liabilities decreased due to lower trade and other payables primarily in respect of timing of payment of capital expenditures and interest payments partially offset by the amount owing in respect of the acquisition of Mystery and The Cave. The other liability decreased due to settlement of previously amended cross-currency interest rate agreements and derivative instruments decreased due to settlement of contracts.
Other long-term liabilities increased $73 million due to the actuarial losses recorded on employee benefit plans.
Deferred credits were up $10 million due to an increase in deferred equipment revenue partially offset by amortization of deferred IRU revenue.
Deferred income tax liabilities, net of deferred income tax assets, decreased $73 million due to the current year recovery.
Shareholders' equity increased $318 million primarily due to increases in share capital of $86 million, retained earnings of $273 million and non-controlling interests of $12 million partially offset by an increase in accumulated other comprehensive loss of $57 million. Share capital increased due to the issuance of 4,367,298 Class B Non-Voting Shares under the Company's option plan and Dividend Reinvestment Plan ("DRIP"). As of June 15, 2012, share capital is as reported at May 31, 2012 with the exception of the issuance of a total of 24,000 Class B Non-Voting Shares upon exercise of options under the Company's option plan subsequent to the quarter end. Retained earnings increased due to current year earnings of $599 million partially offset by dividends of $326 million while non-controlling interests increased as their share of earnings exceeded the distributions declared during the year. Accumulated other comprehensive loss increased due to the actuarial loss recorded on employee benefit plans.
LIQUIDITY AND CAPITAL RESOURCES
In the current year, the Company generated $379 million of free cash flow. Shaw used its free cash flow along with cash of $191 million, proceeds on issuance of Class B Non-Voting Shares of $13 million and other net items of $23 million to fund the $162 million on settlement of amended cross-currency interest rate agreements, pay common share dividends of $238 million, fund the net change in working capital requirements and inventory of $151 million and invest an additional net $55 million in program rights.
During the second quarter, the Company entered into a five-year $1 billion bank credit facility which includes a revolving term facility to a maximum of $50 million and matures in January 2017. This facility replaces the prior credit and operating loan facilities which were scheduled to mature in May 2012. The new facility will be used for general corporate purposes.
On November 29, 2011 Shaw received the approval of the TSX to renew its normal course issuer bid to purchase its Class B Non-Voting Shares for a further one year period. The Company is authorized to acquire up to 20,000,000 Class B Non-Voting Shares during the period December 1, 2011 to November 30, 2012. No shares have been repurchased during the current year.
The Company issues Class B Non-Voting Shares from treasury under its DRIP which resulted in cash savings and incremental Class B Non-Voting Shares of $71 million during the nine months ending May 31, 2012.
Based on available credit facilities and forecasted free cash flow, the Company expects to have sufficient liquidity to fund operations and obligations during the current fiscal year. On a longer-term basis, Shaw expects to generate free cash flow and have borrowing capacity sufficient to finance foreseeable future business plans and refinance maturing debt.
CASH FLOW
Operating Activities
Funds flow from continuing operations decreased over the comparative nine month period as the higher operating income before amortization adjusted for non-cash program rights expenses in the current year and charges in the prior year for termination of swap contracts and business acquisition, integration and restructuring expenses were more than offset by the combined impact of the settlement of the amended cross-currency interest rate agreements as well as higher current income taxes, program rights purchases and CRTC benefit obligation funding in the current year. The net change in non-cash working capital balances related to continuing operations fluctuated over the comparative periods due to fluctuations in accounts receivable and the timing of payment of current income taxes payable and accounts payable and accrued liabilities.
Investing Activities
The cash used in investing activities decreased over the comparable nine month period due to amounts paid to complete the Media business acquisition in the first quarter of 2011 partially offset by the higher capital expenditures in the current year.
Financing Activities
The changes in financing activities during the comparative periods were as follows:
SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION
Generally, revenue and operating income before amortization have grown quarter-over-quarter mainly due to customer growth and rate increases with the exception of the fourth quarter of 2011 and second quarter of 2012. In the second quarter of 2012, revenue and operating income before amortization decreased by $48 million and $73 million, respectively due to the seasonality of the Media business with higher revenues in the first quarter driven by the fall launch of season premieres and high demand as well as lower operating income before amortization in the Cable division. Operating expenses increased in the second quarter which included employee related costs, mainly related to bringing the new customer service centres on line, as well as higher marketing, sales and programming costs. In the fourth quarter of 2011, revenue and operating income before amortization declined $104 million and $105 million, respectively, due to the cyclical nature of the Media business with lower advertising revenues in the summer months.
Net income has fluctuated quarter-over-quarter primarily as a result of the growth in operating income before amortization described above and the impact of the net change in non-operating items. In the third quarter of 2012, net income increased by $70 million due to higher operating income before amortization of $74 million and lower amortization of $9 million partially offset by increased income tax expense of $17 million. In the second quarter of 2012, net income decreased by $24 million due to a decline in operating income before amortization of $73 million partially offset by lower income tax expense of $53 million. Net income increased by $118 million in the first quarter of 2012 due to the combined impact of higher operating income before amortization of $85 million and income tax expense of $18 million in the first quarter and the loss from discontinued operations of $84 million and gain on redemption of debt of $23 million recorded in the preceding quarter. The first and second quarters of 2011 were impacted by the Media acquisition. As a result, net income declined by $106 million in the first quarter of 2011 as the higher operating income before amortization of $55 million due to the contribution from the new Media division and lower income taxes of $22 million were offset by the CRTC benefit obligation of $139 million and acquisition, integration and restructuring costs of $58 million. Net income increased $153 million in the second quarter of 2011 due to the impact of the broadcasting business acquisition in the immediately preceding quarter and higher operating income before amortization and foreign exchange gain on unhedged long-term debt, the total of which was partially offset by increases in interest expense, loss on derivative instruments and income tax expense. During the third quarter of 2011 net income increased by $32 million due to higher operating income before amortization and a lower loss on derivative instruments partially offset by increased income taxes, a lower foreign exchange gain on unhedged long-term debt and the impact of the restructuring activities undertaken by the Company. In the fourth quarter of 2011 net income declined $117 million due to lower operating income before amortization of $105 million and the loss of $83 million in respect of the wireless discontinued operations partially offset by the gain on redemption of debt and the aforementioned restructuring activities in the previous quarter. As a result of the aforementioned changes in net income, basic and diluted earnings per share have trended accordingly.
ACCOUNTING STANDARDS
Update to critical accounting policies and estimates
The MD&A included in the Company's August 31, 2011 Annual Report outlined critical accounting policies including key estimates and assumptions that management has made under these policies and how they affect the amounts reported in the Consolidated Financial Statements. The MD&A also describes significant accounting policies where alternatives exist.
On September 1, 2011 with the adoption of IFRS the critical accounting policies have been updated to conform with this adoption. Refer to Note 2 of the Company's unaudited interim consolidated financial statements for a detailed discussion regarding the Company's significant accounting policies, application of critical accounting estimates and recent accounting pronouncements.
Adoption of recent accounting pronouncements
In February 2008, the CICA Accounting Standards Board confirmed that Canadian publicly accountable enterprises would be required to adopt IFRS, as issued by the International Accounting Standards Board, for fiscal periods beginning on or after January 1, 2011. These standards required the Company to begin reporting under IFRS in the first quarter of fiscal 2012 with comparative data for the prior year. Refer to note 14 to the unaudited interim consolidated financial statements for a summary of the differences between financial statements previously prepared under Canadian GAAP and those prepared under IFRS as at September 1, 2010, for the three and nine months ended May 31, 2011 and as at and for the year ended August 31, 2011.
Recent accounting pronouncements:
The Company has not yet adopted certain standards, interpretations and amendments that have been issued but are not yet effective. Unless otherwise indicated, the following standards are required to be applied for periods beginning on or after September 1, 2013. The following pronouncements are being assessed to determine their impact on the Company's results and financial position.
2012 GUIDANCE
The Company expects to deliver consolidated free cash flow of approximately $450 million and anticipates a marginal decline in Cable operating income before amortization year-over-year, modest growth in Satellite, and consistent operating income before amortization on a full year-over-year comparative basis in Media. The Company expects moderate revenue growth in Cable and Satellite and consistent revenue on a full year-over-year comparative basis in Media. For the remainder of this year the Company plans to continue to execute on and invest in the various strategic initiatives including the DNU and Wi-Fi build with capital investment expected to exceed 2011 spend levels (excluding wireless).
Certain important assumptions for 2012 guidance purposes include: continued overall customer growth; stable pricing environment for Shaw's products relative to current rates; no significant market disruption or other significant changes in economic conditions, competition or regulation that would have a material impact; stable advertising demand and rates; cash income taxes to be paid or payable in 2012; and a stable regulatory environment.
See the following section entitled "Caution Concerning Forward-Looking Statements".
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
Statements included in this MD&A that are not historic constitute "forward-looking statements" within the meaning of applicable securities laws. Such statements include, but are not limited to, statements about future capital expenditures, financial guidance for future performance, business strategies and measures to implement strategies, competitive strengths, expansion and growth of Shaw's business and operations and other goals and plans. They can generally be identified by words such as "anticipate", "believe", "expect", "plan", "intend", "target", "goal" and similar expressions (although not all forward-looking statements contain such words). All of the forward-looking statements made in this report are qualified by these cautionary statements.
Forward-looking statements are based on assumptions and analyses made by Shaw in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances as of the current date. These assumptions include, but are not limited to, general economic and industry growth rates, currency exchange rates, technology deployment, content and equipment costs, industry structure and stability, government regulation and the integration of recent acquisitions. Many of these assumptions are confidential.
You should not place undue reliance on any forward-looking statements. Many factors, including those not within Shaw's control, may cause Shaw's actual results to be materially different from the views expressed or implied by such forward-looking statements, including, but not limited to, general economic, market or business conditions; opportunities that may be presented to and pursued by Shaw; Shaw's ability to execute its strategic plans; changing conditions in the entertainment, information and communications industries; industry trends; changes in the competitive environment in the markets in which Shaw operates and from the development of new markets for emerging technologies; changes in laws, regulations and decisions by regulators that affect Shaw or the markets in which it operates in both Canada and the United States; Shaw's status as a holding company with separate operating subsidiaries; and other factors referenced in this report under the heading "Risks and uncertainties". The foregoing is not an exhaustive list of all possible factors. Should one or more of these risks materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results may vary materially from those described herein.
The Company provides certain financial guidance for future performance as the Company believes that certain investors, analysts and others utilize this and other forward-looking information in order to assess the Company's expected operational and financial performance and as an indicator of its ability to service debt and return cash to shareholders. The Company's financial guidance may not be appropriate for this or other purposes.
Any forward-looking statement speaks only as of the date on which it was originally made and, except as required by law, Shaw expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement to reflect any change in related assumptions, events, conditions or circumstances.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(unaudited)
See accompanying notes
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
See accompanying notes
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
See accompanying notes
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
See accompanying notes
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
See accompanying notes
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
May 31, 2012 and 2011
(all amounts in millions of Canadian dollars, except share and per share amounts)
1. CORPORATE INFORMATION
Shaw Communications Inc. (the "Company") is a diversified Canadian communications company whose core operating business is providing broadband cable television services, Internet, Digital Phone, and telecommunications services ("Cable"); Direct-to-home ("DTH") satellite services (Shaw Direct); satellite distribution services ("Satellite Services"); and programming content (through Shaw Media).
The Company was incorporated under the laws of the Province of Alberta on December 9, 1966 under the name Capital Cable Television Co. Ltd. and was subsequently continued under the Business Corporations Act (Alberta) on March 1, 1984 under the name Shaw Cablesystems Ltd. Its name was changed to Shaw Communications Inc. on May 12, 1993. The Company's shares are listed on the Toronto and New York Stock Exchanges. The registered office of the Company is located at Suite 900, 630 - 3rd Avenue S.W., Calgary, Alberta, Canada T2P 4L4.
2. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Statement of compliance
These condensed interim consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards ("IFRS") and in compliance with International Accounting Standard ("IAS") 34 Interim Financial Reporting and IFRS 1 First-time Adoption of International Financial Reporting Standards ("IFRS 1") as issued by the International Accounting Standards Board ("IASB") and using the accounting policies the Company expects to adopt in its consolidated financial statements as at and for the year ended August 31, 2012. An explanation of how the transition to IFRS has affected the Company's consolidated financial statements is provided in note 14.
The accounting policies are based on standards currently issued and effective for the Company's first annual IFRS reporting period. Accounting policies currently adopted under IFRS are subject to potential change as a result of either a new accounting standard being issued with an effective date of August 31, 2012 or prior, or as a result of a voluntary change in accounting policy made by the Company during fiscal 2012.
The notes presented in these condensed interim consolidated financial statements include only significant events and transactions occurring since the Company's last fiscal year end and are not fully inclusive of all matters required to be disclosed in the Company's annual consolidated financial statements. Annual required disclosures that have been significantly impacted by the transition to IFRS are included in note 15 for the year ended August 31, 2011. As a result, these condensed interim consolidated financial statements should also be read in conjunction with the Company's consolidated financial statements prepared under Canadian GAAP for the year ended August 31, 2011 and the IFRS transition disclosures included in note 14.
The condensed interim consolidated financial statements of the Company for the three and nine months ended May 31, 2012, were authorized for issue in accordance with a resolution of the Audit Committee on June 27, 2012.
Basis of presentation
These condensed interim consolidated financial statements have been prepared primarily under the historical cost convention and are expressed in millions of Canadian dollars unless otherwise indicated. Other measurement bases used are outlined in the applicable notes below. The condensed interim consolidated statements of income are presented using the nature classification for expenses.
Basis of consolidation
The condensed interim consolidated financial statements include the accounts of the Company and those of its subsidiaries. Intercompany transactions and balances are eliminated on consolidation. The results of operations of subsidiaries acquired during the period are included from their respective dates of acquisition.
The accounts also include the Company's proportionate share of the assets, liabilities, revenues, and expenses of its interests in joint ventures which includes a 33.33% interest in the Burrard Landing Lot 2 Holdings Partnership and 50% interest in three specialty television channels including Mystery Partnership which became a wholly-owned subsidiary on May 31, 2012 (see note 4).
Non-controlling interests arise from business combinations in which the Company acquires less than 100% interest. At the time of acquisition, non-controlling interests are measured at either fair value or their proportionate share of the fair value of acquiree's identifiable assets. The Company determines the measurement basis on a transaction by transaction basis. Subsequent to acquisition, the carrying amount of non-controlling interests is increased or decreased for their share of changes in equity.
Investments and other assets
Investments in associates are accounted for using the equity method based on the Company's ability to exercise significant influence over the operating and financial policies of the investee. Investments of this nature are recorded at original cost and adjusted periodically to recognize the Company's proportionate share of the associate's net income or losses after the date of investment, additional contributions made and dividends received. Investments are written down when there has been a significant or prolonged decline in fair value.
Revenue and expenses
The Company has multiple deliverable arrangements comprised of upfront fees (subscriber connection and installation fee revenue and/or customer premise equipment revenue) and related subscription revenue. Upfront fees charged to customers do not constitute separate units of accounting, therefore these revenue streams are assessed as an integrated package.
(i) Revenue
Revenue from cable, Internet, Digital Phone and DTH customers includes subscriber revenue earned as services are provided. Satellite distribution services and telecommunications service revenue is recognized in the period in which the services are rendered to customers. Affiliate subscriber revenue is recognized monthly based on subscriber levels. Advertising revenues are recognized in the period in which the advertisements are broadcast and recorded net of agency commissions as these amounts are paid directly to the agency or advertiser. When a sales arrangement includes multiple advertising spots, the proceeds are allocated to individual advertising spots under the arrangement based on relative fair values.
Subscriber connection fees received from customers are deferred and recognized as revenue on a straight-line basis over two years. Direct and incremental initial selling, administrative and connection costs related to subscriber acquisitions are recognized as an operating expense as incurred. The costs of physically connecting a new home are capitalized as part of the distribution system and costs of disconnections are expensed as incurred.
Installation revenue received on contracts with commercial business customers is deferred and recognized as revenue on a straight-line basis over the related service contract, which generally span two to ten years. Direct and incremental costs associated with the service contract, in an amount not exceeding the upfront installation revenue, are deferred and recognized as an operating expense on a straight-line basis over the same period.
(ii) Deferred equipment revenue and deferred equipment costs
Revenue from sales of DTH equipment and digital cable terminals ("DCTs") is deferred and recognized on a straight-line basis over two years commencing when subscriber service is activated. The total cost of the equipment, including installation, represents an inventoriable cost which is deferred and recognized on a straight-line basis over the same period. The DCT and DTH equipment is generally sold to customers at cost or a subsidized price in order to expand the Company's customer base.
Revenue from sales of satellite tracking hardware and costs of goods sold are deferred and recognized on a straight-line basis over the related service contract for monthly service charges for air time, which is generally five years. The amortization of the revenue and cost of sale of satellite service equipment commences when goods are shipped.
Recognition of deferred equipment revenue and deferred equipment costs is recorded as deferred equipment revenue amortization and deferred equipment costs amortization, respectively.
(iii) Deferred IRU revenue
Prepayments received under indefeasible right to use ("IRU") agreements are amortized on a straight-line basis into income over the term of the agreement and included in amortization of property, plant and equipment, intangibles and other in the consolidated statements of income.
Cash
Cash is presented net of outstanding cheques. When the amount of outstanding cheques and the amount drawn under the Company's revolving term facility are greater than the amount of cash, the net amount is presented as bank indebtedness.
Allowance for doubtful accounts
The Company maintains an allowance for doubtful accounts for the estimated losses resulting from the inability of its customers to make required payments. In determining the allowance, the Company considers factors such as the number of days the account is past due, whether or not the customer continues to receive service, the Company's past collection history and changes in business circumstances.
Inventories
Inventories include subscriber equipment such as DCTs and DTH receivers, which are held pending rental or sale at cost or at a subsidized price. When subscriber equipment is sold, the equipment revenue and equipment costs are deferred and amortized over two years. When the subscriber equipment is rented, it is transferred to property, plant and equipment and amortized over its useful life. Inventories are determined on a first-in, first-out basis, and are stated at cost due to the eventual capital nature as either an addition to property, plant and equipment or deferred equipment costs.
Property, plant and equipment
Property, plant and equipment are recorded at purchase cost. Direct labour and other directly attributable costs incurred to construct new assets, upgrade existing assets and connect new subscribers are capitalized and borrowing costs on qualifying assets for which the commencement date is on or after September 1, 2010 are also capitalized. As well, any asset removal and site restoration costs in connection with the retirement of assets are capitalized. Repairs and maintenance expenditures are charged to operating expense as incurred. Amortization is recorded on a straight-line basis over the estimated useful lives of assets as follows:
The Company reviews the estimates of lives and useful lives on a regular basis.
Assets held for sale and discontinued operations
Assets are classified as held for sale when specific criteria are met and are measured at the lower of carrying amount and estimated fair value less costs to sell. Assets held for sale are not amortized and are reported separately on the statement of financial position. The operating results of a component that has been disposed of or is classified as held for sale are reported as discontinued operations if the operations and cash flows of the component have been, or will be, eliminated from the company's ongoing operations and if the company does not have significant continuing involvement in the operations of the component after the disposal transaction. A component of a company includes operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of a company's operations and cash flows. The Company does not allocate interest to discontinued operations.
Other long-term assets
Other long-term assets primarily include (i) equipment costs, as described in the revenue and expenses accounting policy, deferred and amortized on a straight-line basis over two to five years; (ii) credit facility arrangement fees amortized on a straight-line basis over the term of the facility; (iii) long-term receivables; and (iv) the non-current portion of prepaid maintenance and support contracts.
Intangibles
The excess of the cost of acquiring cable, satellite and media businesses over the fair value of related net identifiable tangible and intangible assets acquired is allocated to goodwill. Net identifiable intangible assets acquired consist of amounts allocated to broadcast rights, trademarks, brands, program rights, material agreements and software assets. Broadcast rights, trademarks and brands represent identifiable assets with indefinite useful lives. Spectrum licenses were acquired in Industry Canada's auction of licenses for advanced wireless services and have an indefinite life.
Program rights represent licensed rights acquired to broadcast television programs on the Company's conventional and specialty television channels and program advances are in respect of payments for programming prior to the window license start date. For li
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Datum: 28.06.2012 - 06:30 Uhr
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