Cogeco 2008 Annual Report Download - page 19

18 COGECO CABLE INC. 2008 Management’s Discussion and Analysis
maintains appropriate relations with its key personnel. The Corporation’s success depends to a significant extent on its ability to
attract and retain its managers and skilled employees in an increasingly competitive market. The Corporation’s inability or failure to
recruit, retain or adequately train its human resources may have a materially adverse effect on the Corporation’s business and
future prospects.
CONTROLLING SHAREHOLDER AND HOLDING STRUCTURE
Cogeco Cable is controlled by COGECO through the holding of multiple voting shares of Cogeco Cable, and COGECO is in turn
controlled by Gestion Audem Inc., a company controlled by Mr. Henri Audet and members of his family (the Audet Family), through
the holding of multiple and subordinate voting shares of COGECO. Both Cogeco Cable and COGECO are reporting issuers with
subordinate voting shares listed on the Toronto Stock Exchange. Pursuant to the Conflicts Agreement in effect between Cogeco
Cable and COGECO, all cable properties must be owned or controlled by Cogeco Cable. COGECO is otherwise free to own and
operate any other business or invest as it deems appropriate. It is possible that situations could arise where the respective interests
of the controlling shareholder, COGECO, and other shareholders of Cogeco Cable, or the respective interests of the Audet Family
and other shareholders of COGECO could differ.
PERFORMANCE HIGHLIGHTS
FINANCIAL RESULTS AND CASH FLOWS
For the 2008 fiscal year, Cogeco Cable achieved consolidated revenue growth of 14.7%. The Canadian operations revenue rose by
16.7%, reaching $833.1 million, surpassing the initial 13.4% target. Revenue growth for the Canadian operations resulted primarily
from an increased number of RGU combined with rate increases and the impact of the acquisitions of MaXess Networx®,
FibreWired Burlington Hydro Communications, and CDS (the “recent acquisitions”). Revenue from the European operations
amounted to $243.7 million, representing a growth of 8.4% over the prior year, which is slightly above the 2008 original guidelines,
but lower than expected in local currency due to a lower growth in RGU. The average foreign exchange conversion rate prevailing
during fiscal 2008 was $1.5098 per Euro compared to a guideline of $1.4250 per Euro.
Consolidated operating income before amortization rose by $74.7 million, or 20.1% to reach $445.4 million. Operating income
before amortization from Canadian operations increased by $64 million, or 21.9%, reaching $356.9 million, thus exceeding the initial
objective of 15.4%. European operations’ operating income before amortization amounted to $88.5 million, and increase of
$10.6 million, or 13.7%, exceeding its initial objective of $87 million, but lower than expected in local currency. These results are
attributable to various rate increases and RGU growth generating additional revenues which outpaced operating cost increases in
both the Canadian and European operations. The impact of the recent acquisitions has also contributed to the increase in operating
income before amortization in Canadian operations.
Amortization increased by $39 million to reach $228.3 million, which is $13.3 million higher than expected, due to the completion of
the purchase price allocation of the Cabovisão acquisition which included the revaluation of the fair value of tangible assets and
intangible assets for an additional amortization expense of approximately $18.7 million in the fiscal year combined with the impact of
the recent acquisitions.
Financial expense decreased by $15.5 million at $69.1 million, slightly better than management’s guideline of $72 million, due to the
reduction of the level of Indebtedness from the net proceeds of subordinate voting shares issued during fiscal 2007. Also in 2007, a
one-time charge of $2.6 million related to the early repayment of the Second Secured Debentures Series A contributed to an
increase in financial expense for that year.
Cogeco Cable reports net income 40.3% higher than its initial forecasts, standing at $133.3 million, mainly due to income tax rate
reductions of $24 million during the year. Excluding the impact of these income tax rate reductions, net income surpassed the initial
forecast by 15% due to the growth in operating income before amortization exceeding that of fixed charges.
Capital expenditures, including assets acquired under capital leases, and the increase in deferred charges amounted to
$261.5 million, in line with the initial expectation of $260 million. Capital expenditures for the current year were primarily the result of
RGU growth driven by increased interest for HD technology and expansions and improvements to the network infrastructure during
the year. The increase in deferred charges was lower in the current year due to the reduction in reconnect costs caused by lower-
than-anticipated RGU growth. Free cash flow of $98.9 million was generated, higher than the $65 million target initially expected.
The variance in free cash flow is the result of an increase in operating income before amortization and a decrease in financial
expense, partly offset by increased capital expenditures to support RGU growth.