Shaw Announces Third Quarter and Year-to-Date Results
/EINPresswire.com/ -- CALGARY, ALBERTA -- (Marketwired) -- 07/15/16 -- Shaw Communications Inc. (TSX: SJR.B)(NYSE: SJR) announces consolidated financial and operating results for the quarter ended May 31, 2016. Revenue from continuing operations for the quarter and year-to-date of $1.28 billion and $3.58 billion increased 13.0% and 6.7% over the comparable periods, respectively. Operating income before restructuring costs and amortization(1) for the quarter and year-to-date of $555 million and $1.56 billion improved 5.3% and 3.5% over the comparable periods, respectively. Excluding the results of wireless and the former media division, revenue and operating income before restructuring costs and amortization for the quarter from the combined Consumer, Business Network Services and Business Infrastructure Services divisions were up 1.2% and down 0.2% in the quarter over the comparable period, respectively.
Chief Executive Officer, Brad Shaw said, "We continue to make significant progress in our journey to becoming an enhanced connectivity provider. Our third quarter financial and operating results include a full quarter contribution from WIND Mobile ("WIND"), our new wireless division, and we are pleased to confirm that during the quarter we surpassed over 1 million wireless subscribers. We also completed the first critical step in our wireless network upgrade. All 3G equipment in western Canada has now been replaced with Nokia equipment which enables us to increase speeds and throughput as well as put to use an additional 10MHz of AWS-1 spectrum to significantly enhance performance. Our path towards an LTE network is currently underway and we expect to have this completed by the end of fiscal 2017."
"In addition to enhancing our wireless network, the continuous investments we have made to our wireline infrastructure have positioned us to go-to-market with a premium Internet product that is immediately available throughout our entire footprint. Today we launched WideOpen Internet 150, an affordable and unrivalled product that showcases the strength and reach of our hybrid fibre coax network. The new product is available to all customers that are connected to our fibre coax cable system. We are making great strides towards delivering a seamless customer network experience and believe that more and more customers will choose Shaw to connect to the world," said Mr. Shaw.
Selected Financial Highlights
Three months Nine months ended
ended May 31, May 31
------------------ ------------------
(millions of
Canadian dollars
except per share Change Change
amounts) 2016 2015 % 2016 2015 %
----------------------------------------------------------------------------
Revenue 1,283 1,135 13.0 3,578 3,354 6.7
Operating income
before
restructuring costs
and amortization 555 527 5.3 1,565 1,512 3.5
Operating margin (1) 43.3% 46.4% (3.1)pts 43.7% 45.1% (1.4)pts
Free cash flow (1) 182 256 (28.9) 473 618 (23.5)
Net income 704 209 236.8 1,086 604 79.8
Earnings per share
Basic 1.44 0.42 2.21 1.23
Diluted 1.44 0.42 2.20 1.22
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Shaw continues to focus on identifying and driving efficiencies throughout the business. As part of our strategic direction and transformation to an enhanced connectivity company, the Company initiated an efficiency program that will deliver fiscal 2017 operating cost and capital efficiencies, in aggregate of approximately $75 million. The actions that took place during the current quarter resulted in a non-recurring restructuring charge of $24 million.
Net income for the quarter was $704 million or $1.44 per share relative to $209 million or $0.42 per share for the comparable period. Net income for the nine month period was $1.09 billion or $2.21 per share compared to $604 million or $1.23 per share for the comparable period. The increase to net income in the period reflects higher operating income before restructuring costs and amortization with the addition of our Wireless results, our gain on the sale of the Media division which were offset in part by an equity loss from our investment in Corus Entertainment Inc. and the following non-recurring items: i) transaction costs associated with the WIND acquisition; ii) restructuring costs related to the aforementioned efficiency program, iii) impairment losses related to investments; and v) an impairment to goodwill associated with our Tracking business.
Consolidated free cash flow(1) for the three and nine month periods of $182 million and $473 million, respectively, compares to $256 million and $618 million for the comparable periods. The reduction for the quarter and year-to-date was largely due to lower free cash flow from Media as a discontinued operation for only one month prior to its disposition and higher planned capital expenditures from continuing operations, all of which were partially offset by higher operating income before restructuring costs and amortization and lower cash taxes.
Revenue generating units ("RGU"s) continue to be affected by a number of external factors including the economy, competition, seasonality and the wildfires that significantly affected the Fort McMurray area. The fires in the Fort McMurray area caused a 5,400 RGU reduction in the quarter; however, many of those customers have reconnected following the lift of the mandatory evacuation order. Shaw's network did not incur any significant damage or service interruptions due to these fires.
"The generosity and true spirit of the residents in Alberta was evident following the fires in Fort McMurray. Many of our friends, families, customers and our own employees lost their homes in this tragic event. I am so proud to be part of a community that pulls together to support their own and want to thank everyone for their continued dedication and support," said Mr. Shaw.
"We have an exceptional management team in place and as we look ahead over the next 18 months, we are confident in the execution of our strategic plan. This is a period of investment for our future and we continue to implement the building blocks required to complete a number of these strategic initiatives by the end of fiscal 2017."
Shaw is expecting that its fiscal 2016 operating income before restructuring and amortization for its consolidated results (including Wireless) and for Consumer, Business Network Services and Business Infrastructure Services on a combined basis to range between flat to low single digit growth as compared to fiscal 2015.
In regards to consolidated capital, investment in fiscal 2016 is expected to be $1.2 billion, including WIND. In addition, Shaw is introducing preliminary fiscal 2017 consolidated capital to be approximately $1.3 billion and will provide additional details regarding fiscal 2017 guidance in conjunction with the release of its fourth quarter results.
Brad Shaw concluded, "By the end of fiscal 2017 we will have the X1 set-top box available to all customers, completion of the wireless LTE upgrade in our existing markets and DOCSIS 3.1 implemented throughout the wireline network, enabling Internet speeds of 1GB and more. As we enter the next fiscal year, our entire employee base is behind this strategy and has never been more motivated to execute on our future with operational efficiency top of mind."
Shaw is an enhanced connectivity provider. Shaw serves consumers with broadband Internet, WiFi, video, digital phone and, through WIND Mobile, wireless services. Shaw Business Network Services provides business customers with Internet, data, WiFi, telephony, video and fleet tracking services. Shaw Business Infrastructure Services provides enterprises colocation, cloud and managed services through ViaWest. 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). For more information, please visit www.shaw.ca
The accompanying Management's Discussion and Analysis ("MD&A") 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 "Non-IFRS and additional GAAP measures" in the accompanying MD&A.
MANAGEMENT'S DISCUSSION AND ANALYSIS
For the three and nine months ended May 31, 2016
July 15, 2016
Contents
Introduction 6 Selected financial and operational highlights 6 Overview 9 Outlook 11 Non-IFRS and additional GAAP measures 11 Discussion of operations 15 Supplementary quarterly financial information 21 Other income and expense items 22 Financial position 23 Liquidity and capital resources 25 Accounting standards 27 Risk and uncertainties 29
Advisories
The following Management's Discussion and Analysis ("MD&A"), dated July 15, 2016, should be read in conjunction with the unaudited interim Consolidated Financial Statements and Notes thereto for the quarter ended May 31, 2016 and the 2015 Annual Consolidated Financial Statements, the Notes thereto and related MD&A included in the Company's 2015 Annual Report. 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 indicated. References to "Shaw", the "Company", "we", "us" or "our" mean Shaw Communications Inc. and its subsidiaries and consolidated entities, unless the context otherwise requires.
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, asset acquisitions and dispositions, cost efficiencies, 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 conditions, interest, income tax and exchange rates, technology deployment, content and equipment costs, industry structure, conditions and stability, government regulation and the integration of 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 and business conditions; changes in the competitive environment in the markets in which Shaw currently operates and will operate and from the development of new markets for emerging technologies; industry trends and other changing conditions in the entertainment, information and communications industries; Shaw's ability to execute its strategic plans and achieve cost efficiencies; opportunities that may be presented to and pursued by Shaw; changes in laws, regulations and decisions by regulators that affect Shaw or the markets in which it now operates and will operate; 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
Non-IFRS and additional GAAP measures
Certain measures in this MD&A do not have standard meanings prescribed by IFRS and are therefore considered non-IFRS measures. These measures are provided to enhance the reader's overall understanding of our financial performance or current financial condition. They are included to provide investors and management with an alternative method for assessing our operating results in a manner that is focused on the performance of our ongoing operations and to provide a more consistent basis for comparison between periods. These measures are not in accordance with, or an alternative to, IFRS and do not have standardized meanings. Therefore, they are unlikely to be comparable to similar measures presented by other entities.
Please refer to "Non-IFRS and additional GAAP measures" in this MD&A for a discussion and reconciliation of non-IFRS measures, including operating income before restructuring costs and amortization, free cash flow and accelerated capital fund.
Introduction
The Company's third quarter financial and operating results include contribution for the full period from our new Wireless division following the closing of the acquisition of WIND Mobile ("WIND"). We surpassed one million wireless subscribers in the quarter and continue to grow the subscriber base. We completed the first critical step in the wireless network upgrade with all 3G equipment in western Canada now replaced with Nokia equipment which enables us to increase speeds and throughput and put to use an additional 10MHz of AWS-1 spectrum to significantly enhance performance.
In addition, the continuous investments we have made to our wireline infrastructure positions us to go-to-market with a premium Internet product that is immediately available throughout our entire footprint. WideOpen Internet 150 is an affordable and unrivalled product that officially launched today and will showcase the strength and reach of our hybrid fibre coax network. The new product is immediately available to all customers that are connected to our fibre coax cable system. We are making great strides towards delivering a seamless customer network experience and believe that more and more customers will choose Shaw to connect to the world. As we continue to expand our product and service offering through next generation video and network connectivity deployment of DOCSIS 3.1, we will continue to offer our customers a leading experience.
By the end of fiscal 2017 we will have the X1 set-top box available to all customers, completion of the wireless LTE upgrade in our existing markets and DOCSIS 3.1 implemented throughout the network, enabling Internet speeds of 1GB and more.
Shaw continues to be focused on identifying and driving efficiencies throughout the business. During the quarter the Company initiated a program to improve its overall efficiency as the Company set out to create the optimal structure to lead the organization through its strategic asset realignment and manage costs effectively in the challenging economic and competitive environment. Disciplined cost management and operational efficiency remain key focuses for the Company. The program initiatives that began in the quarter and that will continue into the next year will deliver fiscal 2017 operating cost and capital efficiencies, in aggregate, of approximately $75 million. The initiatives that occurred in the third quarter resulted in a non-recurring restructuring charge of $24 million.
Selected financial and operational highlights
Basis of presentation
On April 1, 2016, Shaw sold 100% of its wholly owned subsidiary Shaw Media Inc. ("Shaw Media") to Corus Entertainment Inc. ("Corus"), a related party subject to common voting control for $2.65 billion, comprised of $1.85 billion in cash and 71,364,853 Corus Class B non-voting participating shares.
Accordingly, the operating results and operating cash flows for the previously reported Media division are presented as discontinued operations separate from the Company's continuing operations. Prior period financial information has been reclassified to present the Media division as a discontinued operation, and has therefore been excluded from both continuing operations and segmented results for all periods presented in this MD&A and the accompanying interim financial statements. This MD&A reflects the results of continuing operations, unless otherwise noted.
Financial Highlights
Three months ended May 31, Nine months ended May 31,
--------------------------------------------------------
(millions of
Canadian dollars
except per share Change Change
amounts) 2016 2015 % 2016 2015 %
----------------------------------------------------------------------------
Operations:
Revenue 1,283 1,135 13.0 3,578 3,354 6.7
Operating income
before
restructuring
costs and
amortization (1) 555 527 5.3 1,565 1,512 3.5
Operating margin
(1) 43.3% 46.4% (3.1pts) 43.7% 45.1% (1.4pts)
Net income from
continuing
operations 58 136 (57.3) 312 419 (25.5)
Income from
discontinued
operations, net
of tax(3) 646 73 784.9 774 185 318.4
Net income 704 209 236.8 1,086 604 79.8
Per share data:
Basic earnings per
share
Continuing
operations 0.11 0.28 0.63 0.88
Discontinued
operations 1.33 0.14 1.58 0.35
----------------------------------------------------------------------------
1.44 0.42 2.21 1.23
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Diluted earnings per
share
Continuing
operations 0.11 0.28 0.63 0.87
Discontinued
operations 1.33 0.14 1.57 0.35
----------------------------------------------------------------------------
1.44 0.42 2.20 1.22
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average
participating
shares
outstanding
during period
(millions) 482 471 478 466
Funds flow from
continuing
operations (2) 403 416 (3.1) 1,113 1,072 3.8
Free cash flow(1) 182 256 (28.9) 473 618 (23.5)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1)See definitions and discussion under "Non-IFRS and additional GAAP
measures".
(2)Funds flow from operations is before changes in non-cash balances related
to operations as presented in the unaudited interim Consolidated
Statements of Cash Flows.
(3)As of the date the Media division met the criteria to be classified as
held for sale and for the period in the quarter up to the transaction
closing date, April 1, 2016, the Company ceased amortization of non-
current assets of the division, including program rights, property, plant
and equipment, intangibles and other. Amortization that would otherwise
have been taken in the three and nine month periods, before tax, amounted
to $15 and $35 for program rights and $2 and $6 for property, plant and
equipment, intangibles and other, respectively.
Subscriber highlights
Change Change
Three months ended Nine months ended
May 31, May 31,
-----------------------------------------
May 31, August 31,
2016 2015 2016 2015 2016 2015
----------------------------------------------------------------------------
Consumer (1)
Video -
Cable 1,693,230 1,764,523 (27,482) (23,576) (71,293) (68,949)
Video -
Satellite 796,906 811,988 3,847 (1,111) (15,082) (30,191)
Internet (2) 1,777,301 1,772,293 (8,760) 5,292 5,008 12,228
Phone 975,705 1,027,266 (14,861) (26,628) (51,561) (48,927)
----------------------------------------------------------------------------
5,243,142 5,376,070 (47,256) (46,023) (132,928) (135,839)
----------------------------------------------------------------------------
Business
Network
Services
Video -
Cable 62,755 77,709 1,489 (948) (14,954) (7,133)
Video -
Satellite 31,442 31,435 (2,734) (1,709) 7 1,137
Internet (2) 178,144 180,248 458 1,920 (2,104) 7,213
Phone 295,480 284,785 5,094 5,654 10,695 15,327
----------------------------------------------------------------------------
567,821 574,177 4,307 4,917 (6,356) 16,544
----------------------------------------------------------------------------
Wireless (3)
Postpaid 639,997 - 639,997 - 639,997 -
Prepaid 363,472 - 363,472 - 363,472 -
----------------------------------------------------------------------------
1,003,469 - 1,003,469 - 1,003,469 -
----------------------------------------------------------------------------
6,814,432 5,950,247 960,520 (41,106) 864,185 (119,295)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1)Consumer cable, internet and phone RGU declines included the loss of an
estimated 5,400 RGU's as a result of the Fort McMurray evacuation. The
Company expects to recover the majority of these RGU's in the fourth
quarter
(2)Internet subscribers at August 31, 2015 have been restated to reclass
2,081 customers from Consumer to Business Network Services.
(3)Wireless subscribers (or Revenue Generating Units ("RGUs") - Recurring
revenue-generating units (e.g. cellular phone, smartphone, tablet or
mobile Internet device) that has access to the wireless network for voice
and/or data communications, whether Prepaid or Postpaid. Prepaid
subscribers include revenue-generating unit where the account is within
90 days of the prepaid credits expiring.
Shaw's current method of counting Business Network Services subscriber measures is at the individual unit level. These measures are suited for traditional offerings such as analog video, and phone, including SmartVoice and non-cloud based traditional internet products, because larger installations result in subscriber additions that correlated relatively with the increase in business.
With the introduction of SmartVoice, SmartWiFi and SmartSecurity cloud based solutions, subscriber additions are generally recorded at the customer level so that one customer is recorded when an installation may involve several units. The result is that when new customers subscribe for our market leading services, the subscriber impact is minimal. The effects are greater when existing customers upgrade from traditional business internet with additional subscriptions to our cloud based solutions because the customer that was formerly counted for each unit is now counted as a single subscriber. This means that, as the Company succeeds by attracting new and existing customers to its new offerings, the number of Business Network Services subscribers for internet fall even as revenue increases.
Overview
Our fiscal 2016 third quarter financial results, including a full period of operations from the new Wireless division, represent improvements in operating income before restructuring costs and amortization over the third quarter of fiscal 2015. Highlights of the quarter are as follows:
-- Revenue for the quarter of $1.28 billion, an increase of 13.0% from
$1.14 billion for the third quarter of 2015
-- Third quarter operating income before restructuring costs and
amortization of $555 million, an increase of 5.3% from $527 million for
the third quarter of 2015
-- Operating margin for the third quarter of 43.3%, down from 46.4% for the
third quarter of 2015
-- Net income for the third quarter of $704 million, an increase of 236.8%
from $209 million for the third quarter of 2015
-- Free cash flow for the third quarter of $182 million, a $74 million
decrease from $256 million for the third quarter of 2015
-- The period ended with 6,814,432 revenue generating unit ("RGU"),
inclusive of the acquired 1,003,469 Wireless subscribers. Consumer and
Business Network Services had a combined 42,949 RGU decline in the third
quarter compared to declines of 41,106 for the third quarter of 2015
Revenue increased 13.0% and 6.7% for the three and nine month periods, respectively, primarily with the contribution of $132 million of revenue from the Wireless division formed by the March 1, 2016 acquisition of WIND. Business Network Services and Business Infrastructure Services divisions also contributed to revenue increases, the result of customer growth and the mid-December 2015 acquisition of INetU by the Business Infrastructure Services division.
Operating income before restructuring costs and amortization of $555 million and $1.56 billion for the three and nine month periods improved 5.3% and 3.4% compared to $527 million and $1.51 billion for the comparable periods. The improvement in the quarter reflects the addition of the Wireless division and growth in the Business Infrastructure Services and Business Network Services divisions reflecting higher revenues, the acquisition of INetU and the effect of favorable year-over-year foreign exchange. This improvement was partially offset by lower operating income before restructuring costs and amortization in the Consumer division related to lower revenues and higher costs associated with the deployment of FreeRange TV and programming.
Revenue and operating income before restructuring costs and amortization increased $133 million and $53 million, respectively, over the second quarter 2016. The increase in revenue was primarily due to $132 million of revenue for Wireless. The increase in operating income before restructuring costs and amortization was primarily due to the addition of $29 million for Wireless and lower promotional and employee related costs in the Consumer division.
Consumer and Business Network Services, excluding named and wholesale customers, had a combined 5.8 million RGUs as at May 31, 2016. During the quarter, Consumer RGUs declined by 47,256 compared to declines of 41,922 RGUs in the second quarter of 2016 and 46,023 RGUs in the third quarter of 2015. RGU decline in the current quarter is comprised of 14,861 phone, 8,760 Internet and 27,482 cable video, partially offset by satellite video gains of 3,847. WIND acquired its one millionth RGU in May 2016, finishing the quarter with 1,003,469 RGUs, a significant milestone in the execution of the Company's wireless strategy.
Net income was $704 million and $1,086 million for the three and nine months ended May 31, 2016, respectively, compared to $209 million and $604 million for the same periods last year. The changes in net income are outlined in the following table.
May 31, 2016 net income compared to:
------------------------------------------
Three Months Three Months Nine Months
ended ended ended
------------------------------------------
February 28,
(millions of Canadian dollars) 2016 May 31, 2015 May 31, 2015
----------------------------------------------------------------------------
Increased operating income before
restructuring costs and
amortization (1) 53 28 53
Decreased (Increased)
restructuring costs (22) (21) 15
Increased amortization (19) (36) (59)
Increased interest expense (2) (8) (18)
Change in net other costs and
revenue (2) (95) (56) (100)
Decreased (increased) income taxes 27 15 2
Increased (decreased) income from
discontinued operations, net of
tax 598 573 589
----------------------------------------------------------------------------
540 495 482
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1)See definitions and discussion under "Non-IFRS and additional GAAP
measures".
(2)Net other costs and revenue includes business acquisition costs,
accretion of long-term liabilities and provisions, debt retirement costs,
equity loss of an associate or joint venture, equity income of
investments in associates and other losses as detailed in the unaudited
Consolidated Statements of Income and in the prior period distributions
from a venture capital fund investment.
Net income third quarter increased $540 million compared to the second quarter of fiscal 2016 mainly due to higher income from discontinued operations million relating primarily to the gain on the divestiture of Shaw Media as a discontinued operation, increased operating income before restructuring costs and amortization and lower income taxes. Partly offsetting the net income improvement in the quarter were increases in other costs net of revenues, restructuring charges and amortization. Net other costs increased primarily due to a $17 million impairment of goodwill relating to the Tracking business, a $51 million impairment of the Company's joint venture in shomi, a $20 million write-down of a private portfolio investment, $12 million acquisition related costs and a $10 loss from an equity accounted associate. See "Other income and Expense" for further detail on non-operating items.
Shaw continues to focus on identifying and driving efficiencies throughout the business. During the quarter the Company initiated an efficiency program that will deliver fiscal 2017 operating cost and capital efficiencies, in aggregate, of approximately $75 million. The program actions that took place in the third quarter resulted in a non-recurring restructuring charge of $24 million.
Net income for the current quarter and the nine months ended increased $495 million and $482 million, respectively, relative to the comparable period mainly due to higher income from discontinued operations relating primarily to the gain on the divestiture of Shaw Media as a discontinued operation and higher operating income before restructuring costs and amortization. Partly offsetting the improvement in the quarter were increases in other costs net of revenues, the aforementioned restructuring charges and amortization. Net other costs increased primarily due to costs recorded in the quarter related to the acquisition of WIND and INetU, the impairment of goodwill relating to the Tracking business, the impairment of the Company's joint venture in shomi, the write-down of private portfolio investment and a $10 loss from an equity accounted associate.
Free cash flow of $182 million and $473 million for the three and nine months ended May 31, 2016, respectively, compared to $256 million and $618 million for the comparable periods. The decreases are primarily the result of receiving one month of free cash flow from discontinued operations prior to the divestiture and higher planned capital expenditures, including the incremental Wireless division spend. The decrease was offset partially by an increase in operating income before restructuring costs and amortization, including an incremental $29 million from the Wireless segment, and the added dividend from investments in associates.
Outlook
Shaw is expecting that its fiscal 2016 operating income before restructuring and amortization for its consolidated results (including Wireless) and for Consumer, Business Network Services and Business Infrastructure Services on a combined basis to range between flat to low single digit growth as compared to fiscal 2015.
In regards to consolidated capital, investment in fiscal 2016 is expected to be $1.2 billion, including WIND. In addition, Shaw is introducing preliminary fiscal 2017 consolidated capital to be approximately $1.3 billion and will provide additional details regarding fiscal 2017 guidance in conjunction with the release of its fourth quarter results.
See "Caution concerning forward-looking statements".
Non-IFRS and additional GAAP measures
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.
Below is a discussion of the 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 restructuring costs and amortization
Operating income before restructuring costs and amortization is calculated as revenue less operating, general and administrative expenses. It is intended to indicate the Company's ongoing ability to service and/or incur debt, and is therefore calculated before one-time items such as restructuring costs, amortization (a non-cash expense) and interest. Operating income before restructuring costs and amortization is also one of the measures used by the investing community to value the business.
Three months ended Nine months ended
May 31, May 31,
----------------------------------------
(millions of Canadian dollars) 2016 2015 2016 2015
----------------------------------------------------------------------------
Operating income from continuing
operations 283 312 839 830
Add back (deduct):
Restructuring costs 22 1 22 37
Amortization:
Deferred equipment revenue (16) (19) (52) (58)
Deferred equipment costs 37 41 116 123
Property, plant and equipment,
intangibles and other 229 192 640 580
----------------------------------------------------------------------------
Operating income before
restructuring costs and
amortization 555 527 1,565 1,512
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating margin
Operating margin is calculated by dividing operating income before restructuring costs and amortization by revenue.
Three months ended May 31, Nine months ended May 31,
--------------------------------------------------------
2016 2015 Change 2016 2015 Change
----------------------------------------------------------------------------
Consumer 45.7% 46.1% (0.5pts) 44.4% 44.5% (0.1pts)
Business Network
Services 48.5% 48.1% 0.4pts 47.9% 48.8% (0.9pts)
Business
Infrastructure
Services 38.4% 39.7% (1.4pts) 36.7% 39.9% (3.2pts)
Wireless 22.0% - 22.0% -
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Income from discontinued operations before restructuring costs, amortization, taxes and other non-operating items
Income from discontinued operations before restructuring costs, amortization, taxes and other non-operating items is calculated as revenue less operating, general and administrative expenses from discontinued operations. This measure is used in the determination of free cash flow.
Three months ended Nine months ended
May 31, May 31,
----------------------------------------
(millions of Canadian dollars) 2016 2015 2016 2015
----------------------------------------------------------------------------
Income from discontinued operations,
net of tax 646 73 774 185
Add back (deduct):
Gain on divestiture, net of tax (615) - (615) -
Income taxes 10 25 57 66
Restructuring costs - 11 - 13
Amortization:
Property, plant and equipment,
intangibles and other - 7 11 23
Other non-operating items (1) - 2 6
----------------------------------------------------------------------------
Income from discontinued operations
before restructuring costs,
amortization, taxes and other non-
operating items 40 116 229 293
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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 free cash flow from continuing operations and free cash flow from discontinued operations.
Free cash flow from continuing operations is comprised of operating income before restructuring costs and amortization and includes changes in receivable related balances with respect to customer equipment financing transactions as a cash item and dividends paid on the Company's Cumulative Redeemable Rate Reset Preferred Shares.
Free cash flow from discontinued operations is comprised of income from discontinued operations before restructuring costs, amortization, taxes and other non-operating items after deducting program rights amortization on assets held for sale, cash amounts associated with funding CRTC benefit obligations related to media acquisitions and excludes non-controlling interest amounts that are included in the income from discontinued operations before restructuring costs, amortization, taxes and other non-operating items.
Free cash flow from continuing operations and free cash flow from discontinued operations are each calculated by adding dividends from equity accounted associates and deducting interest, cash taxes paid or payable, capital expenditures (on an accrual basis and net of proceeds on capital dispositions and adjusted to exclude amounts funded through the accelerated capital fund) and equipment costs (net) and adjusted to exclude share-based compensation expense and recurring cash funding of pension amounts net of pension expense.
Free cash flow from continuing operations has not been reported on a segmented basis. Certain components of free cash flow from continuing operations, including operating income before restructuring costs and amortization continue to be reported on a segmented basis. Capital expenditures and equipment costs (net) are reported on a combined basis for Consumer and Business Network Services due to the common infrastructure and for Business Infrastructure Services is separately reported. 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:
Three months ended May 31, Nine months ended May 31,
------------------------------------------------------
(millions of Canadian Change Change
dollars) 2016 2015 % 2016 2015 %
----------------------------------------------------------------------------
Revenue
Consumer 935 949 (1.5) 2,813 2,813 0.0
Business Network
Services 136 131 3.8 409 387 5.7
Business
Infrastructure
Services 86 63 36.5 248 178 39.3
Wireless 132 - n/a 132 - n/a
----------------------------------------------------------------------------
1,289 1,143 12.8 3,602 3,378 6.6
Intersegment
eliminations (6) (8) 25.0 (24) (24) -
----------------------------------------------------------------------------
1,283 1,135 13.0 3,578 3,354 6.7
----------------------------------------------------------------------------
Operating income
before restructuring
costs and
amortization (1)
Consumer 427 439 (2.7) 1,249 1,252 (0.2)
Business Network
Services 66 63 4.8 196 189 3.7
Business
Infrastructure
Services 33 25 32.0 91 71 28.2
Wireless 29 - n/a 29 - n/a
----------------------------------------------------------------------------
555 527 5.3 1,565 1,512 3.5
----------------------------------------------------------------------------
Capital expenditures
and equipment costs
(net):(2)
Consumer and
Business Network
Services 200 200 - 649 654 (0.8)
Business
Infrastructure
Services 35 43 (18.6) 105 82 28.1
Wireless 51 - n/a 51 - n/a
----------------------------------------------------------------------------
286 243 17.7 805 736 9.4
Accelerated capital
fund investment (1) - (32) n/a - (91) n/a
----------------------------------------------------------------------------
286 211 35.5 805 645 24.8
----------------------------------------------------------------------------
Free cash flow before
the following 269 316 (14.6) 760 867 (12.3)
Less:
Interest (79) (70) 12.9 (227) (210) 8.1
Cash taxes (56) (62) (9.7) (188) (207) (9.2)
Other adjustments:
Dividends from
equity accounted
associates 14 - n/a 14 - n/a
Non-cash share-based
compensation 1 1 - 2 3 (33.3)
Pension adjustment 3 2 50.0 (17) (18) (5.6)
Customer equipment
financing 3 2 50.0 7 10 (30.0)
Preferred share
dividends (3) (3) - (10) (10) -
----------------------------------------------------------------------------
Free cash flow from
continuing operations 152 186 (17.8) 341 435 (21.6)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Income from
discontinued
operations before
restructuring costs,
amortization, taxes
and other non-
operating items 40 116 (65.5) 229 293 (21.8)
Less:
Capital expenditures (2) (3) (33.3) (5) (8) (37.5)
Cash taxes 13 (27) (148.1) (26) (63) (58.7)
Program rights (14) - n/a (33) - n/a
CRTC benefit
obligation funding (3) (8) (62.5) (11) (19) (42.1)
Non-controlling
interests (4) (8) (50.0) (20) (20) -
Pension adjustment - - - (2) - n/a
----------------------------------------------------------------------------
Free cash flow from
discontinued
operations 30 70 (57.1) 132 183 (27.9)
----------------------------------------------------------------------------
Free cash flow 182 256 (28.9) 473 618 (23.5)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1)See definitions and discussion under "Non-IFRS and additional GAAP
measures".
(2)Per Note 4 to the unaudited interim Consolidated Financial Statements.
Accelerated capital fund
In fiscal 2013, the Company established a notional fund, the accelerated capital fund, of $500 million with proceeds received, from several strategic transactions. The accelerated capital initiatives were funded through this fund and not cash generated from operations. Key investments included the Calgary data centres, further digitization of the network and additional bandwidth upgrades, expansion of Shaw Go WiFi, and additional innovative product offerings related to Shaw Go WiFi and other applications to provide an enhanced customer experience. Approximately $110 million was invested in fiscal 2013, $240 million in fiscal 2014 and $150 million in fiscal 2015. The accelerated capital fund closed in fiscal 2015.
Statistical and financial measures
The following measures are industry metrics that are useful in assessing the operating performance of a wireless entity, but do not have a standardized meaning under IFRS.
Wireless ARPU - Average revenue per subscriber unit per month (ARPU) is calculated as service revenue divided by the average number of subscribers on the network during the period and is expressed as a rate per month.
Wireless subscribers (or Revenue Generating Units ("RGUs") - Recurring revenue-generating units (e.g. cellular phone, smartphone, tablet or mobile Internet device) that has access to the wireless network for voice and/or data communications, whether Prepaid or Postpaid. Prepaid subscribers include revenue-generating unit where the account is within 90 days of the prepaid credits expiring.
Discussion of operations
Consumer Three months ended May 31, Nine months ended May 31,
----------------------------------------------------------
(millions of Change Change
Canadian dollars) 2016 2015 % 2016 2015 %
----------------------------------------------------------------------------
Revenue 935 949 (1.5)% 2,813 2,813 0.0%
Operating income
before
restructuring
costs and
amortization (1) 427 439 (2.7)% 1,249 1,252 (0.2)%
----------------------------------------------------------------------------
Operating margin
(1) 45.7% 46.2% (0.5)pts 44.4% 44.5% (0.1)pts
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1)See definitions and discussion under "Non-IFRS and additional GAAP
measures".
Consumer revenue for the current quarter of $935 million was down 1.5% relative to the comparable period. This decrease in revenue was driven by: i) lower video, phone and internet RGUs; ii) fewer On Demand buys as a result of the very successful boxing event in the prior year; and iii) a one month credit given to all of our customers in Fort McMurray and surrounding areas. Partly offsetting the decrease was the impact of rate increases in the fourth quarter of 2015. For the nine month period, revenue of $2.81 billion was in line with the comparable period. Revenue improvements driven by the combined offset of the January 2015 and August 2015 rate adjustments and year-to-date internet RGU gains were fully offset by lower video and phone RGU's.
During the quarter, Consumer RGUs declined by 47,256 with cable video, phone lines and internet decreased 27,482, 14,861, and 8,760 respectively. The cable, internet and phone RGU declines included the loss of an estimated 5,400 RGU's as a result of the Fort McMurray evacuation. The Company expects to recover many of these RGU's in the fourth quarter. The economic slowdown in parts of western Canada and competitive pressures continue to weigh on Consumer RGUs; however, for the first time since February 2013 Satellite video RGUs increased with a 3,847 RGU gain as compared losses in the prior year of 1,111.
Operating income before restructuring costs and amortization for the quarter of $427 million was lower by 2.7% relative to the comparable quarter. The quarter results reflect a decrease in revenue and higher expenses, including implementation and recurring costs attributable to the launch of FreeRange TV and higher programming costs. Operating income before restructuring costs and amortization for the nine-month period was lower by 0.2% than in the comparable period. The aforementioned rate increases and lower employee related costs were fully offset by RGU losses, fewer On Demand buys, and higher costs related to the launch of FreeRange TV and programming.
Current quarter revenue was in line with that of the second quarter of fiscal 2016 and operating income before restructuring costs and amortization increased 6.0% or $24 million reflecting lower promotional costs, lower employee related costs in part due to the corporate restructuring in the quarter and delayed timing of marketing spend.
During the current quarter the residents of Fort McMurray and surrounding areas in northern Alberta were affected by the devastating wildfires. Shaw and its employees are dedicated to help support those affected as they begin to rebuild their communities. Our customers were offered a one-month credit for all of their services. The application of this credit, retroactive to May 3, 2016, ensured that all affected customers continued to have access to Shaw Go WiFi, FreeRange TV and their @shaw.ca email account while they are out of their homes. The revenue effect associated with the service credit in the period is approximately $2 million.
In addition, all residents and visitors whether Shaw customers or not, in Northern Alberta and Edmonton were provided open access to the Shaw Go WiFi network where available. This connection allowed residents to have access to timely news and information, and help them stay in touch with friends and loved ones. The company also announced the launch of a new Shaw TV channel to help Fort McMurray residents stay connected to the latest community news and developments as they returned home.
Business Network Services
Three months ended May 31, Nine months ended May 31,
------------------------------------------------------
(millions of Canadian Change Change
dollars) 2016 2015 % 2016 2015 %
----------------------------------------------------------------------------
Revenue 136 131 3.8 409 387 5.7
Operating income
before restructuring
costs and
amortization (1) 66 63 4.8 196 189 3.7
----------------------------------------------------------------------------
Operating margin (1) 48.5% 48.1% 0.4pts 47.9% 48.8% (0.9)pts
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1)See definitions and discussion under "Non-IFRS and additional GAAP
measures".
Revenue of $136 million and $409 million for the quarter and year-to-date were up 3.8% and 5.7%, respectively, over the comparable periods primarily due to customer growth in both the small to medium business and large enterprise markets. The core business, excluding satellite services, increased 5.1% in the current quarter and 7.1% on a year-to-date basis, reflecting customers converting to or adding Shaw's services. The Company also provided a one-month credit to its business customers impacted by the Fort McMurray fires and also provided free access in work camp facilities to Shaw services for use by evacuees to stay connected. The revenue effect associated with the service credit in the period is approximately $1 million.
Operating income before restructuring costs and amortization of $66 million and $196 million for the quarter and year-to-date improved 4.8% and 3.7%, respectively, over the comparable periods. Consistent with the growth trend throughout the fiscal year, improvements were due mainly to higher revenue from customer growth which was partially offset by annual salary rate increases and the incremental costs associated with pursuing new customer opportunities, including additional employees and marketing costs associated with the launch of Smart suite of products.
In the third quarter, revenue declined modestly by $1 million over the second quarter of fiscal 2016, primarily due to service credits provided to business customers affected by the Fort McMurray wildfires. Operating income before restructuring and amortization was comparable to the second quarter results as service credits were offset fully by various cost reductions.
Further complementing its Smart suite of products that includes SmartVoice and SmartWiFi, the Company introduced SmartSecurity in July, building on its portfolio of managed service offerings. This new product is a hassle-free cloud based enterprise-grade network security solution tailored for small businesses. The service provides advanced threat protection with automatic updates, content filtering, traffic shaping and easy site-to-site VPN capabilities.
Business Infrastructure Services
Three months ended May 31, Nine months ended May 31,
------------------------------------------------------
(millions of Canadian Change Change
dollars) 2016 2015 % 2016 2015 %
----------------------------------------------------------------------------
Revenue 86 63 36.5 248 178 39.3
Operating income
before restructuring
costs and
amortization (1) 33 25 32.0 91 71 28.2
----------------------------------------------------------------------------
Operating margin (1) 38.4% 39.7% (1.3)pts 36.7% 39.9% (3.2)pts
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1)See definitions and discussion under "Non-IFRS and additional GAAP
measures".
Revenue of $86 million for the three-month period was up 36.5% over the comparable period primarily due to the added revenues from INetU acquired in the second quarter of 2016, customer growth, and favourable foreign exchange. For the nine-month period, revenue of $248 million increased 39.3% over the comparable period. Excluding the effect of foreign exchange, revenue for the U.S. based operations increased by 29.2% to US$66 million for the three-month period and by 23.8% to US$185 million for the nine-month period. Excluding the effect of INetU, revenue for the U.S. based operations increased by 12.1% to US$57 million for the three-month period and by 13.1% to US$169 million for the nine-month period.
Operating income before restructuring costs and amortization improved over the comparable period by 32.0% for the current quarter and by 28.2% for the nine-month period. Improvements were attributable to customer growth, the acquisition of INetU and favourable year-over-year foreign exchange. Partly offsetting the improvements were costs associated with the new data centre operations in Calgary, Alberta and Portland, Oregon and the re-measurements of share appreciation rights.
Compared to the second quarter of 2016, revenue decreased 3.4% primarily the result of fluctuation in foreign exchange in the period. Operating income before restructuring costs and amortization was consistent with the prior quarter. Excluding the impact of foreign exchange, revenue and operating income before restructuring costs and amortization for U.S. based operations increased 3.0% and 6.9% compared to the second quarter of 2016.
The Company's newest data centre in Plano, Texas is currently under construction and on schedule to open in October 2016. In addition, the recently launched data centre in Calgary has established the Company as a Canadian leader in infrastructure services including private cloud, public cloud, colocation and related data centre services.
Wireless
(millions of Canadian dollars) Three months ended May 31, ---------------------------------------------------------------------------- Revenue 132 Operating income before restructuring costs and amortization (1) 29 ---------------------------------------------------------------------------- Operating margin (1) 22.0% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (1)See definitions and discussion under "Non-IFRS and additional GAAP measures".
On March 1, 2016, the Company successfully closed the acquisition of WIND to form its Wireless division. The division is comprised solely of WIND operations. Revenue and operating income before amortization for the current quarter were $132 million and $29 million, respectively. For information purposes, revenue was up 24% relative to the prior year comparable period. The increase was driven primarily by a year-over-year 136,000 increase in subscribers.
As at May 31, 2016, WIND reached a milestone in acquiring its one-millionth combined postpaid and prepaid subscriber. The growth in subscribers has driven both higher handset sales volume and accompanying service revenues. Blended ARPU, inclusive of postpaid and prepaid subscribers, for the quarter ended May 31, 2016 was $36.30.
Capital expenditures and equipment costs
Three months ended May 31, Nine months ended May 31,
------------------------------------------------------
(millions of Canadian Change Change
dollars) 2016 2015 % 2016 2015 %
----------------------------------------------------------------------------
Consumer and Business
Network Services
New housing
development 29 25 16.0 79 78 1.3
Success based 60 60 - 201 204 (1.5)
Upgrades and
enhancements 80 77 3.9 277 218 27.1
Replacement 12 7 71.4 30 21 42.9
Building and other 19 31 (38.7) 62 133 (53.4)
----------------------------------------------------------------------------
Total as per Note 4 to
the unaudited interim
consolidated
financial statements 200 200 - 649 654 (0.8)
----------------------------------------------------------------------------
Business
Infrastructure
Services
Total as per Note 4 to
the unaudited interim
consolidated
financial statements 35 43 (18.6) 105 82 28.1
----------------------------------------------------------------------------
Wireless
Total as per Note 4 to
the unaudited interim
consolidated
financial statements 51 - n/a 51 - n/a
----------------------------------------------------------------------------
Consolidated total as
per Note 4 to the
unaudited interim
consolidated
financial
statements(1) 286 243 17.7 805 736 9.4
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1)The three and nine months ended May 31, 2015 included $32 million and $91
million, respectively, related to certain capital investments that were
funded from the accelerated capital fund as defined under "Non-IFRS and
additional GAAP measures".
Capital investment was $286 million and $805 million in the current three and nine month periods. Capital investment for the comparable periods was $243 million and $736 million and included $32 million and $91 million, respectively, of investment funded through the accelerated capital fund. The accelerated capital fund initiatives, which were completed in the fourth quarter of 2015, included investment on new internal and external Calgary data centres, increasing network capacity, next generation video delivery systems, back office infrastructure upgrades, and expediting the WiFi infrastructure build.
Consumer and Business Network Services
Success based capital for the three and nine month periods of $60 million and $201 million were in line with the comparable periods last year. The current quarter spend reflected installation activity, and equipment costs that were in line with the prior year quarter across all product lines. On a year-to-date basis lower phone activity along with decreased spend driven by the timing of delivery of advanced Internet WiFi modem purchases, was partially offset by higher Satellite success based spend as a result of improved customer activations and increased equipment discounts, together with lower rental returns, due mainly to the termination of the Satellite rental program. Cable video success base spend was generally in line with last year reflecting higher activations of whole home installations offset by lower cost deployments resulting from the use of refurbished units.
For the three and nine month periods, investment in the combined upgrades and enhancement and replacement categories was $92 million and $307 million, an increase of $8 million and $68 million over the comparable periods. The year-to-date increase was primarily due to: i) investment in the core network including significant bandwidth and upgrade programs; ii) next generation video delivery platforms necessary to support the rollout of Comcast's X1 and TVE experiences; iii) timing of bulk material and vehicle purchases: iv) investment in Business Network Services managed WiFi and SmartVoice products; and v) mainline Upgrade activities. Partly offset by lower spend on Shaw Go WiFi access points.
Investment in buildings and other of $19 million and $62 million for the three and nine month periods was down $12 million and $71 million, respectively, over the comparable periods. The decrease relates to lower spend on the internal data centre, Shaw Court refurbishment expenditures and lower capitalized interest.
New housing development capital investment for the three and nine month periods was $29 million and $79 million, respectively. The current quarter was up $4 million compared to the same period a year ago due to higher new customer drop activity in both the Consumer and Business Network Services divisions. The year-to-date results were comparable to the prior year period.
Business Infrastructure Services
Capital investment of $35 million and $105 million for the three and nine month periods, respectively, was primarily growth related capital investment in core infrastructure and equipment to expand existing facilities in Denver, Colorado and Portland, Oregon along with development of the newest data center in Plano, Texas. Also included in the nine month period is $9 million related to investment in the Calgary, Alberta facility.
Wireless
Capital investment for the quarter was $51 million reflecting the continued improvement of network infrastructure through capital projects including the continued upgrade of the western Canada network to the latest generation of LTE-ready High Speed Packet Access+ (HSPA+) equipment, a mobile telephony technology that allows for data transmission speeds up to 42 Mbps, and LTE core and radio network rollout readiness across the network.
Discontinued operations - Shaw Media
Three months ended Nine months ended May
May 31, 31,
--------------------------------------------
2016 2015 2016 2015
----------------------------------------------------------------------------
Revenue 88 303 610 848
Eliminations(1) (7) (19) (46) (58)
----------------------------------------------------------------------------
81 284 564 790
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating, general and
administrative expenses
Employee salaries and benefits 16 44 109 137
Purchases of goods and
services(2) 32 143 272 418
----------------------------------------------------------------------------
48 187 381 555
Eliminations(1) (7) (19) (46) (58)
----------------------------------------------------------------------------
41 168 335 497
Restructuring costs - 11 - 13
Amortization(2) - 7 11 23
Accretion of long-term
liabilities and provisions - 1 2 3
Other losses (1) (1) - 3
----------------------------------------------------------------------------
Income from discontinued
operations before tax and gain
on divestiture 41 98 216 251
Income taxes 10 25 57 66
----------------------------------------------------------------------------
Income from discontinued
operations before gain on
divestiture 31 73 159 185
Gain on divestiture 662 - 662 -
Income taxes on gain 47 - 47 -
----------------------------------------------------------------------------
Income (loss) from discontinued
operations, net of tax 646 73 774 185
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1)Eliminations relate to intercompany transactions between continuing and
discontinued operations. The costs are included in continuing operations
as they are expected to continue to be incurred subsequent to the
disposition.
(2)As of the date the Media division met the criteria to be classified as
held for sale, the Company ceased amortization of non-current assets of
the division, including program rights, property, plant and equipment,
intangibles and other. Amortization that would otherwise have been taken
in the three and nine month periods amounted to $15 and $35 for program
rights and $2 and $6 for property, plant and equipment, intangibles and
other.
Revenue and income from discontinued operations net of tax for the quarter was $81 million and $646 million, respectively, compared to $284 million and $73 million in the prior year. The revenue decrease was the result of one month of current quarter results prior to the divestiture of Shaw Media which closed on April 1, 2016 as compared to three months of cumulative results in the prior period. The increase in income from discontinued operations, net of tax, was primarily due to the gain on the divesture of $662 million offset by: i) the impact of lower income from discontinued operations before gain on divestiture, the result of only one month of results in the quarter; and ii) income taxes on the gain.
For the nine month period, revenue of $564 million and income from discontinued operations net of tax of $774 million compared to $790 million and $185 million last year, respectively. The revenue decrease was the result of one month of current quarter results prior to the divestiture of Shaw Media which closed on April 1, 2016. The increase in income from discontinued operations, net of tax, was primarily due to the gain on the divesture of $662 million offset by: i) the impact of lower income from discontinued operations before gain on divestiture, the result of only one month of results in the quarter; and ii) income taxes on the gain.
Capital investment continued on various projects in the quarter and included upgrading production equipment and infrastructure. Capital investment for the quarter was $2 million.
Supplementary quarterly financial information
Net income from
Operating income continuing
before operations Net income
restructuring attributable to attributable to
costs and equity equity
Quarter Revenue amortization (1) shareholders shareholders
----------------------------------------------------------------------------
(millions of Canadian dollars except per share amounts)
2016
Third 1,283 555 58 700
Second 1,151 502 116 156
First 1,144 508 138 209
2015
Fourth 1,131 525 247 272
Third 1,135 527 136 202
Second 1,118 498 135 163
First 1,100 487 148 219
2014
Fourth 1,052 484 170 187
----------------------------------------------------------------------------
Basic and
Diluted earnings
per share from Basic and
continuing Diluted earnings
Quarter Net income (2) operations per share
------------------------------------------------------------
(millions of Canadian dollars except per share amounts)
2016
Third 704 0.11 1.44
Second 164 0.24 0.32
First 218 0.28 0.43
2015
Fourth 276 0.51 0.57
Third 209 0.28 0.42
Second 168 0.28 0.34
First 227 0.31 0.46
2014
Fourth 192 0.36 0.40
------------------------------------------------------------
(1)See definition and discussion under "Non-IFRS and additional GAAP
measures".
(2)Net income attributable to both equity shareholders and non-controlling
interests
Net income for the third quarter increased $540 million compared to the second quarter of fiscal 2016 mainly due to higher income from discontinued operations relating primarily to the gain on the divestiture of the discontinued operation, increased operating income before restructuring costs and amortization and lower income taxes. Partly offsetting the net income improvement in the quarter were : i) decreased net other costs and revenue; ii) increased restructuring charges; and iii) increased amortization. Net other costs and revenue decreased primarily due to $17 million impairment of goodwill relating to the Tracking business, a $51 million impairment of the Company's shomi joint venture, a $20 million write-down of a private portfolio investment and a $10 loss from an equity accounted associate.
In the second quarter of 2016, net income decreased $54 million compared to the first quarter of fiscal 2016 mainly due to decreased income from discontinued operations of $32 million, primarily due to the seasonality of the Media business reflected in income from discontinued operations and net other costs and revenues of $13 million. Net other costs and revenues decreased primarily due to $8 million of costs recorded in the quarter related to the acquisition of WIND and INetU.
In the first quarter of 2016, net income decreased $58 million compared to the fourth quarter of 2015 mainly due to a change in net other costs and revenues of $140 million and decrease in operating income before restructuring costs and amortization of $17 million offset by an increase in income from discontinued operations, net of tax, of $51 million and a decrease in income taxes of $50 million. Net other costs and revenues decreased primarily due to a fourth quarter 2015 gain on the sale of wireless spectrum of $158 million less the impact of a $27 million write-down of a private portfolio investment in the same period offset by an increase in the equity loss of a joint venture of $5 million in the first quarter of 2016.
In the fourth quarter of 2015, net income increased $67 million primarily due to improved net other revenue items of $191 million partially offset by lower income from discontinued operations, net of tax, of $44 million and higher income tax expense of $70 million. The improvement in net other revenue items was due to the combined effects of the aforementioned sale of spectrum licenses and write-down of a private portfolio investment during the fourth quarter and the $59 million net charge arising in the third quarter related to an impairment of goodwill, write-down of IPTV assets and proceeds received on the Shaw Court insurance claim.
In the third quarter of 2015, net income increased $41 million due to higher operating income before restructuring costs and amortization of $29 million, an increase in income from discontinued operations, net of tax, of $40 million, lower restructuring costs of $35 million and $11 million of proceeds related to the Shaw Court insurance claim, partially offset by a charge for impairment of goodwill of $15 million and write-down of IPTV assets of $55 million as well as the distributions received from a venture capital fund in the second quarter. The impairment of goodwill was in respect of the Tracking operations in the Business Network Services division and was a result of the Company's annual impairment test of goodwill and indefinite-life intangibles in the third quarter. The write-down of IPTV assets was a result of the Company's decision to work with Comcast to begin technical trials of their cloud-based X1 platform.
In the second quarter of 2015, net income decreased $59 million due to lower income from discontinued operations, net of tax, of $46 million and restructuring expenses of $36 million partially offset by higher operating income before restructuring costs and amortization of $10 million, net other revenue items of $24 million due to the aforementioned venture capital fund distributions.
In the first quarter of 2015, net income increased $35 million due to income from discontinued operations, net of tax, of $56 million and a decrease in income taxes of $26 million, partially offset by increases in amortization of $33 million and net other costs of $17 million. The increase in net other costs was primarily due to an equity loss of $13 million in respect of the Company's 50% interest in shomi, a new subscription video-on-demand service launched in the first quarter.
Other income and expense items
Amortization Three months ended May 31, Nine months ended May 31,
------------------------------------------------------
(millions of Canadian Change Change
dollars) 2016 2015 % 2016 2015 %
----------------------------------------------------------------------------
Amortization revenue
(expense)
Deferred equipment
revenue 16 19 (15.8) 52 58 (10.3)
Deferred equipment
costs (37) (41) (9.8) (116) (123) (5.7)
Property, plant and
equipment,
intangibles and
other (229) (192) 19.3 (640) (580) 10.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Amortization of property, plant and equipment, intangibles and other increased over the comparable periods due to amortization related to the new Wireless division as well as the effect of higher foreign exchange rates on the translation of ViaWest and the amortization of new expenditures exceeding the amortization of assets that became fully amortized during the periods.
Amortization of financing costs and Interest expense
Three months ended May 31, Nine months ended May 31,
------------------------------------------------------
(millions of Canadian Change Change
dollars) 2016 2015 % 2016 2015 %
----------------------------------------------------------------------------
Amortization of
financing costs -
long-term debt 1 1 - 4 2 100.0
Interest expense 79 71 11.3 229 211 8.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest expense for the three and nine month periods ended May 31, 2016 increased over the comparable periods primarily due to increased debt related to the INetU and WIND acquisitions, foreign exchange on U.S. dollar denominated debt and a decrease in capitalized interest.
Business acquisition costs
During the current quarter and year to date, the Company incurred $12 million and $20 million, respectively, of acquisition related costs for professional fees paid to lawyers, consultants, advisors and other related costs in respect of the acquisition of WIND which closed on March 1, 2016. Also included in the previous quarter was $1 million related to the acquisition of INetU. During the first quarter of the prior year, $6 million of costs were incurred in respect of the acquisition of ViaWest.
Equity loss of an associate or joint venture
For the three and nine month periods ended May 31, 2016, the Company recorded equity losses of $15 million and $51 million, respectively, compared to $14 million and $43 million for in the comparable periods related to its interest in shomi, the subscription video-on-demand service launched in early November 2014. For the three and nine month periods ended May 31, 2016, the Company recorded equity losses of $10 million related to its investment in Corus.
Other losses
This category generally includes realized and unrealized foreign exchange gains and losses on U.S. 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. In the current year to date, the category also includes a write-down of $51 in respect of the Company's investment in shomi, a write-down of $20 in respect of a private portfolio investment and asset write-downs of $6. In the comparable year, the category included distributions of $27 from a venture capital fund investment, additional proceeds of $11 related to the fiscal 2012 Shaw Court insurance claim and asset write-downs of $55.
Income taxes
Income taxes are lower in the current year mainly due to a reduction in net income offset by an increase in the provincial tax rate and the impact of adjustments in the first quarter of fiscal 2015.
Financial position
Total assets were $15.1 billion at May 31, 2016 compared to $14.6 billion at August 31, 2015. Following is a discussion of significant changes in the consolidated statement of financial position since August 31, 2015.
Current assets decreased $210 million due to decreases in cash of $74 million and accounts receivable of $209 million, partially offset by increases in other current assets of $59 million and inventories of $19 million. Cash decreased as the cash outlay for investing and financing activities exceeded the funds provided by operations. Accounts receivable decreased primarily due to the sale of Shaw Media, partly offset by accounts receivable of WIND acquired during the quarter. Inventories and other current assets increased with the acquisition of WIND.
Investments and other assets increased $763 million primarily due to the Corus Class B shares received as proceeds on the sale of Shaw Media, partially offset by equity losses of associates and joint ventures and write-downs of an investment in shomi and an investment in a privately held entity.
Property, plant and equipment increased $266 million due to the WIND and INetU business acquisitions and capital investment in excess of amortization, partly offset by property, plant and equipment of Shaw Media, which was sold during the quarter. Other long-term assets increased $14 million mainly due to the acquisition of WIND. Intangibles and goodwill decreased $318 million due to goodwill and intangibles related to Shaw Media which was disposed of during the quarter, partly offset by $1.6 billion of intangibles and $254 million goodwill recorded on the acquisitions of INetU and WIND, net software intangible additions and the ongoing effect of foreign exchange arising on translation of ViaWest.
Current liabilities decreased $281 million during the quarter due to decreases in the current portion of long-term debt of $201 million, accounts payable and accruals of $60 million and income taxes payable of $35 million, partially offset by a $16 million increase in unearned revenue. The decrease in current portion of long term debt is due to the repayment of the $300 million variable senior rate notes on February 1, 2016 and the $300 million 6.15% senior notes on May 9, 2016, partly offset by inclusion of the $400 million 5.70% senior notes due March 2, 2017. Income taxes payable decreased as a result of installments made in the period partially offset by the current period provision. Accounts payable and accruals decreased due accounts payable related to Shaw Media which was sold during the quarter and the timing of payment and fluctuations in various payables including capital expenditures and interest, partly offset by accounts payable related to the WIND acquisition.
Long-term debt increased $132 million due to the issuance of $300 million in fixed rate senior notes at a rate of 3.15% due February 19, 2021, the debt incurred related to the acquisition of INetU under ViaWest's and the Company's credit facility totaling US $170 million and the effect of foreign exchanges rates on ViaWest's debt and the Company's US dollar borrowings under its credit facility, partially offset by the reclassification of the 6.75% senior notes to current liabilities.
Other long-term liabilities decreased $53 million mainly due to amounts related to Shaw Media which was sold and contributions to employee benefit plans partially offset by actuarial losses recorded on those plans in the current quarter. Provisions increased due to the addition of WIND asset retirement obligations.
Deferred credits decreased $19 million due to a decline in deferred equipment revenue.
Deferred income tax liabilities increased $85 million primarily due to the amounts recorded on the acquisition of WIND and INetU, partly offset by amounts related to Shaw Media which was sold during the quarter and current year income tax recovery.
Shareholders' equity increased $605 million primarily due to increases in share capital of $233 million and retained earnings of $624 million and a decrease in accumulated other comprehensive loss of $14 million and equity attributable to non-controlling interests of $236 million. Share capital increased due to the issuance of 6,789,953 Class B non-voting participating shares ("Class B Non-Voting Shares") under the Company's option plan and Dividend Reinvestment Plan ("DRIP") and the issuance of 2,866,384 Class B Non-Voting Shares in connection with the acquisition of WIND. As at June 15, 2016, share capital is as reported at May 31, 2016 with the exception of the issuance of a total of 332,675 Class B Non-Voting Shares upon exercise of options under the Company's option plan. Retained earnings increased due to current year earnings of $1,066 million, partially offset by dividends of $438 million while equity attributable to non-controlling interests decreased due to their share of current year earnings and derecognition in connection to the sale of Shaw Media. Accumulated other comprehensive loss decreased due to the net effect of exchange differences arising on the translation of ViaWest and U.S. dollar denominated debt designated as a hedge of the Company's net investment in those foreign operations as well as re-measurements recorded on employee benefit plans.
Liquidity and capital resources
In the current year, the Company generated $473 million of free cash flow, including $132 million of free cash flow from discontinued operations. Shaw used its free cash flow along with cash of $74 million, $1.8 billion net proceeds on the sale of Shaw Media, $300 million proceeds from a 3.15% senior note issuance, borrowings of $1.4 billion under its credit facilities, borrowings of $178 million under ViaWest's credit facility and proceeds on issuance of Class B Non-Voting Shares of $22 million to repay at maturity $300 million of variable rate senior notes, repay at maturity $300 million 6.75% senior notes, finance the $223 million acquisition of INetU, finance the $1.6 billion acquisition of WIND, pay common share dividends of $286 million, fund the net working capital change of $41 million, make $69 million in financial investments, repay $1.4 billion borrowings under its credit facilities, invest an additional net $74 million in program rights, pay $27 million in restructuring costs and pay $20 million in other net items.
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 $139 million during the nine months ending May 31, 2016.
On December 15, 2015, ViaWest closed the acquisition of 100% of the shares of INetU for approximately US$162 million which was funded through a combination of borrowings under ViaWest's and the Company's revolving credit facilities and an incremental term loan proceeds under ViaWest's credit facility. In addition, ViaWest's revolving credit facility was increased from US$85 million to US$120 million.
On February 11, 2016 the Company amended the terms of its bank credit facility to increase the maximum borrowings from $1.0 billion to $1.5 billion under the bank credit facility.
The Company entered into an agreement with a syndicate of lenders to provide a $1.0 billion non-revolving term loan facility to partially fund the acquisition of WIND. The Company used the proceeds of the term loan along with cash on hand, $300 million borrowings under its existing bank credit facility and proceeds from the issuance of 2,866,384 Class B Non-Voting Shares to finance the acquisition of WIND on March 1, 2016. The $1.0 billion non-revolving term loan facility and $300 million borrowings under the Company's bank credit facility were repaid on April 1, 2016 with the proceeds from the sale of Shaw Media to Corus.
Shaw's and ViaWest's credit facilities are subject to customary covenants which include maintaining minimum or maximum financial ratios. At May 31, 2016 Shaw is in compliance with these covenants and based on current business plans, the Company is not aware of any condition or event that would give rise to non-compliance with the covenants over the life of the borrowings.
Covenant Limit
----------------------------------------------------------------------------
Shaw Credit Facilities
Total Debt to Operating Cash Flow(1) Ratio less than 5.00:1
Operating Cash Flow(1) to Fixed Charges(2) Ratio greater than 2.00:1
ViaWest Credit Facilities
less than or equal to
Total Net Leverage Ratio(3) 6.50:1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1)Operating Cash Flow, for the purposes of the covenants, is calculated as
net earnings before interest expense, depreciation, amortization and
current and deferred income taxes, excluding profit or loss from
investments accounted for on an equity basis, for the most recently
completed fiscal quarter multiplied by four, plus cash dividends and
other cash distributions received in the most recently completed four
fiscal quarters from investments accounted for on an equity basis.
(2)Fixed Charges are defined as the aggregate of interest expense for the
most recently completed fiscal quarter multiplied by four and dividends
paid or accrued on shares (other than participating shares) during the
most recently completed four fiscal quarters.
(3)Total Net Leverage Ratio is calculated as the ratio of consolidated total
debt under the facility as of the last day of the most recent completed
four fiscal quarters to Consolidated Adjusted EBITDA of ViaWest for the
same period. Consolidated Adjusted EBITDA, for the purposes of the
covenants, is calculated similar to Operating income before restructuring
and amortization with adjustments for certain items such as one-time
expenses and extraordinary items.
On June 30, 2016, 1,987,607 of the Company's Cumulative Redeemable Rate Reset Class 2 Preferred Shares, Series A ("Series A Shares") were converted into an equal number of Cumulative Redeemable Floating Rate Class 2 Preferred Shares, Series B ("Series B Shares") in accordance with the notice of conversion right issued on May 31, 2016. As a result of the conversion, the Company has 10,012,393 Series A Shares and 1,987,607 Series B Shares issued and outstanding. The Series A Shares will continue to be listed on the TSX under the symbol SJR.PR.A. The Series B Shares began trading on the TSX on June 30, 2016 under the symbol SJR.PR.B. The annual fixed dividend rate for the Series A Shares, payable quarterly, was reset to 2.791% for the five year period from and including June 30, 2016 to but excluding June 30, 2021. The floating quarterly dividend rate for the Series B Shares was set at an annual dividend rate of 2.539% for the period from and including June 30, 2016 to but excluding September 30, 2016. The floating quarterly dividend rate will be reset quarterly.
Based on the aforementioned financing activities, available credit facilities and forecasted free cash flow, the Company expects to have sufficient liquidity to fund operations and obligations, including maturing debt, during the upcoming 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 from Operations
Operating Activities
Three months ended May 31, Nine months ended May 31,
------------------------------------------------------
(millions of Canadian Change Change
dollars) 2016 2015 % 2016 2015 %
----------------------------------------------------------------------------
Funds flow from
operations 403 416 (3.1) 1,113 1,072 3.8
Net change in non-cash
balances related to
operations 22 (16) 237.5 (27) (114) 76.3
Operating activities
of discontinued
operations 2 40 (95.0) 108 141 (23.4)
----------------------------------------------------------------------------
427 440 (2.95) 1,194 1,099 8.6
----------------------------------------------------------------------------
----------------------------------------------------------------------------
For the three month period ended May 31, 2016, funds flow from operations decreased over the comparable period primarily due to higher restructuring costs, business acquisition costs and interest expense, partially offset by higher operating income before restructuring costs and amortization and lower income tax expense. On a year to date basis, funds flow from operations increased over the comparable period primarily due to higher operating income before restructuring costs and amortization restructuring costs, lower restructuring costs and lower income tax expense, partially offset by higher business acquisition costs and interest expense. The net change in non-cash working capital balances related to 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
Three months ended May 31, Nine months ended May 31,
------------------------------------------------------
(millions of Canadian
dollars) 2016 2015 Decrease 2016 2015 Decrease
----------------------------------------------------------------------------
Cash flow used in
investing activities (65) (263) 198 (910) (1,679) 769
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The cash used in investing activities decreased over the comparable quarter due primarily to the proceeds on sale of Shaw Media exceeding the acquisition of WIND in the current quarter and reduced additions to investments and other assets, partly offset by higher cash outlay for capital expenditures in the current quarter. For the nine month period ended May 31, 2016, cash used in investing activities decreased over the comparable period primarily due to proceeds on sale of Shaw Media and lower additions to investments in the current year, partially offset by higher acquisitions and higher cash outlays for capital expenditures and inventory in the current year.
Financing Activities
The changes in financing activities during the comparative periods were as follows:
Three months ended Nine months ended May
May 31, 31,
--------------------------------------------
(millions of Canadian dollars) 2016 2015 2016 2015
----------------------------------------------------------------------------
Bank loans - net borrowings (25) - 69 361
ViaWest's credit facility and
finance lease obligations (3) 56 172 54
Repay Cdn variable rate senior
notes - - (300) -
Issuance of 3.15% senior
unsecured notes - - 300 -
Senior notes issuance cost - - (2) -
Repay 6.15% senior unsecured
notes (300) - (300) -
Bank facility arrangement costs (5) (12) (11) (14)
Dividends (100) (98) (296) (282)
Issuance of Class B Non-Voting
Shares 10 29 22 124
Financing activities of
discontinued operations (12) (5) (12) (18)
----------------------------------------------------------------------------
(435) (30) (358) 225
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accounting standards
The MD&A included in the Company's August 31, 2015 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. The condensed interim consolidated financial statements follow the same accounting policies and methods of application as the most recent annual consolidated financial statements except as described below.
Accounting policies for WIND Mobile Corp. ("WIND")
The Company has adopted the following accounting policies in respect of WIND.
Revenue
WIND earns its revenue from providing access to, and usage of, its wireless telecommunications infrastructure. The Company's principal sources of revenue and the methods of recognition of this revenue are as follows:
-- Monthly subscription fees for wireless voice, text and data services are
recorded as revenue in the period the service is provided. Payments
related to unearned prepaid services are recorded as deferred revenue at
the reporting date.
-- Fees for wireless voice, text and data services on a pay-per-use basis
are recognized in the period that the service is provided.
-- Revenue from the direct sale of equipment to subscribers or dealers is
recognized when the equipment is delivered and accepted by the
subscribers or dealers.
The Company offers a discretionary handset discount program, whereby the subscriber earns the applicable discount by maintaining services with the Company, such that the receivable relating to the discount at inception of the transaction is reduced over a period of time. A portion of future revenue earned in connection with the services is applied against the up-front discount provided on the handset. WIND also offers a plan allowing customers to receive larger up-front handset discounts than they would otherwise qualify for, if they pay a predetermined incremental charge to their existing service plan on a monthly basis. The charge is billed on a monthly basis and is recognized as revenue at that time.
The Company recognizes the handset discount as a receivable and revenue upon the sale of the equipment on the basis that the receivable is recoverable. The receivable is realized on a straight-line basis over the period which the discount is forgiven to a maximum of two years with an offsetting reduction to revenue. The amount receivable is classified as part of other current or non-current receivables, as applicable, in the consolidated statement of financial position.
Inventories
Inventories of wireless handsets, accessories and SIM cards are carried at the lower of cost and net realizable value. Cost is determined using the weighted average method and includes expenditures incurred in acquiring the inventories and bringing them to their existing condition and location. Net realizable value is the estimated selling price in the ordinary course of business, less selling expenses.
Recent accounting pronouncements
During the quarter, the Company adopted amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures outlined in Sale or Contribution of Assets between and Investor and its Associates or Joint Venture as issued by the IASB in September 2014. These amendments were to be applied prospectively to transactions occurring for annual periods commencing after a date to be determined by the IASB, however earlier application is permitted.
The Company has not yet adopted certain standards and amendments that have been issued but are not yet effective. The following pronouncements are being assessed to determine their impact on the Company's results and financial position.
-- IFRS 16, Leases, requires entities to recognize lease assets and lease
obligations on the balance sheet. It may be applied retroactively or
using a modified retrospective approach for annual periods commencing
January 1, 2019, with early adoption permitted if IFRS 15, Revenue from
Contracts with Customers has been adopted.
-- IAS 12, Income Taxes was amended in 2016 to clarify how to account for
deferred tax assets related to debt instruments measured at fair value.
It is required to be applied for annual periods commencing January 1,
2017.
-- IAS 7, Statement of Cash Flows was amended in 2016 to improve
disclosures regarding changes in financing liabilities. It is required
to be applied for annual period beginning on or after January 1, 2017.
Risks and uncertainties
The significant risks and uncertainties affecting the Company and its business are discussed in the Company's August 31, 2015 Annual Report under "Known events, trends, risks and uncertainties" in Management's Discussion and Analysis.
The sale of Shaw Media and retention of a smaller equity interest in Corus has reduced the Company's exposure to risks relating to Media as described in the August 31, 2015 Annual Report.
The acquisition of WIND exposes Shaw to new risks relating to wireless operations. The descriptions of many of the risks discussed in the Company's August 31, 2015 Annual Report are relevant to the Company's expansion into the wireless communications business, including, risks described under "Competition and technological change", "Impact of regulation", "Economic conditions", "Interest rates, foreign exchange rates, and capital markets", "Litigation", "Network failure", "Information systems and internal business processes" and "Reliance on suppliers". The following is an overview of the regulatory environment relating to wireless operations and certain risks that are particular to WIND.
Overview of Regulatory Environment for Wireless Operations
WIND currently owns and operates a 3G mobile wireless network in Ontario, Alberta and British Columbia, and offers services to customers over this network as a Wireless Service Provider ("WSP") and a Wireless CLEC.
The issuance of licenses for the use of radiofrequency spectrum in Canada is administered by Innovation, Science and Economic Development Canada (formerly, Industry Canada, and referred to as the "Department") under the Radiocommunication Act. The use of spectrum is governed by conditions of license, including license term, transferability/divisibility, technical compliance requirements, lawful interception, research and development, and mandated antenna site sharing and domestic roaming services.
WIND's AWS-1 licenses were issued in March 2008 for a term of ten years. Prior to expiration, WIND may apply for license renewal for an additional license term of up to ten years. WIND's AWS-3 licenses were issued in April 2015 and have a term of 20 years. WIND has a high expectation that new licenses will be issued for a subsequent term through a renewal process unless a breach of license condition has occurred or some unforeseen issue occurs. The process for issuing licenses after the initial term, and applicable terms and conditions of such renewals, will be determined by the Department.
In June 2013, the Department set out a framework governing transfers, divisions and subordination of spectrum licenses for commercial mobile spectrum. The framework sets out considerations and criteria for reviewing and approving license transfers, prospective transfers, and deemed license transfers, which include the consideration of the quantum and concentration of license holdings of the applicants in the licensed area, availability of alternative spectrum, and the degree of deployment of spectrum by the applicants. The framework articulates review procedures and timelines.
The CRTC regulates mobile wireless services under the Telecommunications Act. In August 1994, the CRTC decided to forbear from regulating most areas pertaining to mobile wireless service (while deciding to maintain active oversight of customer confidential information and other general conditions for mobile wireless service, including mandating wireless number portability and issues pertaining mobile 911). Further, the CRTC published the current Wireless Code in June 2013 (which came into effect in December 2013), which imposes inter alia limitations on early cancellation fees to ensure customers are not liable to contract terms longer than two years, the unlocking of wireless devices, mandating trial periods for wireless contracts and setting default caps on overage roaming charges. In May 2015, the CRTC issued a comprehensive policy framework for wholesale wireless services, including roaming, tower sharing and mobile virtual network operators ("MVNOs"). The CRTC required the three national wireless incumbent carriers to provide wholesale roaming services to other wireless carriers, including WIND, at cost-based rates. A proceeding is underway to set these cost-based rates, which should be completed by late 2016 or early 2017. The CRTC did not mandate MVNO access services. The cost-based wholesale roaming tariff proceeding may have an impact on WIND's roaming costs, and on the rates and services that WIND can offer customers.
In December 2014, the Government of Canada's Bill C-43 received Royal Assent, providing that under the Telecommunications Act and the Radiocommunication Act, the CRTC and the Department can impose monetary penalties on companies that contravene associated laws, regulations and rules.
WIND's wireless operations are dependent on being able to locate and construct wireless antenna sites, which in some cases require certain authorizations or approvals from municipalities. In February 2013, a protocol related to the siting of wireless antenna systems was established to provide for a more comprehensive consultation process related to local land use priorities and new antenna site design parameters. The protocol contemplates notification of municipalities and the undertaking of public consultations in certain circumstances.
Risks for Wireless Operations
Changes to, or the introduction of new, laws, regulations, policies and conditions of license related to WIND's wireless operations, as well as the failure to issue new spectrum licenses, the failure to renew existing licenses, the failure to approve the transfer of licenses (if such were to be requested), and the issuance of additional spectrum licenses to WIND's competitors, could have a material adverse effect on WIND's business, including how WIND provides products and services, and WIND's financial condition, prospects and the results of operations. In addition, WIND could experience higher costs due to amended or newly-adopted laws and regulations, or decisions of the Department or the CRTC.
The Department may not renew WIND's mobile spectrum licenses on acceptable terms, or at all. The process for issuing or renewing licenses, including the terms and conditions of any renewed or new licenses, and whether license fees should apply for future license terms, is expected to be determined by the Department.
Competition for Wireless Operations
WIND operates in the highly competitive Canadian wireless market which is characterized by several large and established national and regional participants in Canada, and may face increased competition in the future from existing or new entrants or from alternate technologies, such as the use of Wi-Fi networks to deliver data services to customers beyond their home. Competition for new subscribers and retention of existing subscribers may require substantial promotional activity and increase our cost of customer acquisition, decrease our average revenue per user for wireless subscribers, or both, and may have other adverse effects on Shaw's operations and/or its financial results. Significant capital investments will be required to upgrade and maintain the WIND wireless network, and these investments may be need to be made before related revenues, if any, are realized.
Other Potential Risks for Wireless Operations
Concerns about alleged health risks relating to radiofrequency emissions may adversely affect WIND's business. Some studies have alleged links between radiofrequency emissions from certain wireless devices and cell sites and various health problems or possible interference with electronic medical devices, including hearing aids and pacemakers. All of WIND's cell sites comply with all applicable laws and regulations. Further, WIND relies on suppliers of network equipment and customer equipment to meet or exceed all applicable regulatory and safety requirements. No definitive evidence exists of harmful effects from exposure to radiofrequency emissions when legal limits are complied with. Additional studies of radiofrequency emissions are ongoing and WIND cannot be certain of results, which could result in additional or more restrictive regulation or exposure to potential litigation.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(unaudited)
August 31,
(millions of Canadian dollars) May 31, 2016 2015
----------------------------------------------------------------------------
ASSETS
Current
Cash 324 398
Accounts receivable 259 468
Inventories 79 60
Other current assets 137 78
Assets held for sale (note 12) - 5
----------------------------------------------------------------------------
799 1,009
Investments and other assets (notes 12 and 13) 860 97
Property, plant and equipment 4,486 4,220
Other long-term assets 274 259
Deferred income tax assets 8 14
Intangibles 7,452 7,459
Goodwill 1,195 1,506
----------------------------------------------------------------------------
15,074 14,564
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 827 887
Provisions 51 52
Income taxes payable 160 195
Unearned revenue 212 196
Current portion of long-term debt (notes 7 and
12) 407 608
----------------------------------------------------------------------------
1,657 1,938
Long-term debt (notes 7 and 12) 5,193 5,061
Other long-term liabilities 133 186
Provisions 51 10
Deferred credits 569 588
Deferred income tax liabilities 1,220 1,135
----------------------------------------------------------------------------
8,823 8,918
Shareholders' equity (notes 8 and 10)
Common and preferred shareholders 6,250 5,409
Non-controlling interests in subsidiaries 1 237
----------------------------------------------------------------------------
6,251 5,646
----------------------------------------------------------------------------
15,074 14,564
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three months ended Nine months ended May
May 31, 31,
--------------------------------------------
(millions of Canadian dollars) 2016 2015 2016 2015
----------------------------------------------------------------------------
Revenue (note 4) 1,283 1,135 3,578 3,354
Operating, general and
administrative expenses (note
6) (728) (608) (2,013) (1,842)
Restructuring costs (notes 6 and
14) (22) (1) (22) (37)
Amortization:
Deferred equipment revenue 16 19 52 58
Deferred equipment costs (37) (41) (116) (123)
Property, plant and equipment,
intangibles and other (229) (192) (640) (580)
----------------------------------------------------------------------------
Operating income from continuing
operations 283 312 839 830
Amortization of financing
costs - long-term debt (1) (1) (4) (2)
Interest expense (79) (71) (229) (211)
Business acquisition costs (12) - (21) (6)
Equity income (loss) of an
associate or joint venture (25) (14) (61) (43)
Impairment of goodwill (note
15) (17) (15) (17) (15)
Other losses (note 16) (74) (43) (82) (19)
----------------------------------------------------------------------------
Income from continuing
operations before income taxes 75 168 425 534
Current income tax expense
(note 4) 44 50 165 185
Deferred income tax recovery (27) (18) (52) (70)
----------------------------------------------------------------------------
Net income from continuing
operations 58 136 312 419
Income from discontinued
operations, net of tax (note 3) 646 73 774 185
----------------------------------------------------------------------------
Net income 704 209 1,086 604
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income from continuing
operations attributable to:
Equity shareholders 58 136 312 419
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Income (loss) from discontinued
operations attributable to:
Equity shareholders 642 65 754 165
Non-controlling interests in
subsidiaries held for sale 4 8 20 20
----------------------------------------------------------------------------
646 73 774 185
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic earnings per share (note
9)
Continuing operations 0.11 0.28 0.63 0.88
Discontinued operations 1.33 0.14 1.58 0.35
----------------------------------------------------------------------------
1.44 0.42 2.21 1.23
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Diluted earnings per share (note
9)
Continuing operations 0.11 0.28 0.63 0.87
Discontinued operations 1.33 0.14 1.57 0.35
----------------------------------------------------------------------------
1.44 0.42 2.20 1.22
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
Three months ended Nine months ended May
May 31, 31,
--------------------------------------------
(millions of Canadian dollars) 2016 2015 2016 2015
----------------------------------------------------------------------------
Net income 704 209 1,086 604
Other comprehensive income
(loss) (note 10)
Items that may subsequently be
reclassified to income:
Change in unrealized fair
value of derivatives
designated as cash flow
hedges 1 - 1 6
Adjustment for hedged items
recognized in the period - (2) - (4)
Unrealized loss on available-
for-sale investment - - - (2)
Share of other comprehensive
income of associates (1) - (1) -
Exchange differences on
translation of a foreign
operation (36) (6) (8) 125
Exchange differences on US
denominated debt hedging a
foreign operation 16 2 5 (50)
----------------------------------------------------------------------------
(20) (6) (3) 75
Items that will not subsequently
be reclassified to income:
Remeasurements on employee
benefit plans:
Continuing operations (11) 18 (17) (6)
Discontinued operations 3 7 2 (4)
----------------------------------------------------------------------------
(28) 19 (18) 65
----------------------------------------------------------------------------
Comprehensive income 676 228 1,068 669
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Comprehensive income
attributable to:
Equity shareholders 672 220 1,048 649
Non-controlling interests in
subsidiaries 4 8 20 20
----------------------------------------------------------------------------
676 228 1,068 669
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See accompanying notes.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
Nine months ended May 31, 2016
Attributable to equity shareholders
Accumulated
other
(millions of Canadian Share Contributed Retained comprehensive
dollars) capital surplus earnings loss
----------------------------------------------------------------------------
Balance as at September 1,
2015 3,500 45 1,883 (19)
Net income - - 1,066 -
Other comprehensive income - - - (18)
----------------------------------------------------------------------------
Comprehensive income - - 1,066 (18)
Dividends - - (299) -
Dividend reinvestment plan 139 - (139) -
Shares issued under stock
option plan 26 (4) - -
Share-based compensation - 2 - -
Business acquisition 68 - - -
Distributions declared by
subsidiaries to non-
controlling interests - - - -
Derecognition/transfer on
sale of discontinued
operation (note 3) - - (4) 4
----------------------------------------------------------------------------
Balance as at May 31, 2016 3,733 43 2,507 (33)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Nine months ended May 31, 2016
Equity
attributable to
(millions of Canadian non-controlling
dollars) Total interests Total equity
----------------------------------------------------------------------------
Balance as at September 1,
2015 5,409 237 5,646
Net income 1,066 20 1,086
Other comprehensive income (18) - (18)
----------------------------------------------------------------------------
Comprehensive income 1,048 20 1,068
Dividends (299) - (299)
Dividend reinvestment plan - - -
Shares issued under stock
option plan 22 - 22
Share-based compensation 2 - 2
Business acquisition 68 - 68
Distributions declared by
subsidiaries to non-
controlling interests - (12) (12)
Derecognition/transfer on
sale of discontinued
operation (note 3) - (244) (244)
----------------------------------------------------------------------------
Balance as at May 31, 2016 6,250 1 6,251
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Nine months ended May 31, 2015
Attributable to equity shareholders
Accumulated
other
(millions of Canadian Share Contributed Retained comprehensive
dollars) capital surplus earnings loss
----------------------------------------------------------------------------
Balance as at September 1,
2014 3,182 64 1,589 (133)
Net income - - 584 -
Other comprehensive income - - - 65
----------------------------------------------------------------------------
Comprehensive income - - 584 65
Dividends - - (296) -
Dividend reinvestment plan 123 - (123) -
Shares issued under stock
option plan 147 (22) - -
Share-based compensation - 3 - -
Distributions declared by
subsidiaries to non-
controlling interests - - - -
----------------------------------------------------------------------------
Balance as at May 31, 2015 3,452 45 1,754 (68)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Nine months ended May 31, 2015
Equity
attributable to
(millions of Canadian non-controlling
dollars) Total interests Total equity
----------------------------------------------------------------------------
Balance as at September 1,
2014 4,702 235 4,937
Net income 584 20 604
Other comprehensive income 65 - 65
----------------------------------------------------------------------------
Comprehensive income 649 20 669
Dividends (296) - (296)
Dividend reinvestment plan - - -
Shares issued under stock
option plan 125 - 125
Share-based compensation 3 - 3
Distributions declared by
subsidiaries to non-
controlling interests - (18) (18)
----------------------------------------------------------------------------
Balance as at May 31, 2015 5,183 237 5,420
----------------------------------------------------------------------------
----------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended Nine months ended May
May 31, 31,
--------------------------------------------
(millions of Canadian dollars) 2016 2015 2016 2015
----------------------------------------------------------------------------
OPERATING ACTIVITIES
Funds flow from continuing
operations (note 11) 403 416 1,113 1,072
Net change in non-cash balances
related to continuing
operations 22 (16) (27) (114)
Operating activities of
discontinued operations 2 40 108 141
----------------------------------------------------------------------------
427 440 1,194 1,099
----------------------------------------------------------------------------
INVESTING ACTIVITIES
Additions to property, plant and
equipment (note 4) (257) (203) (740) (634)
Additions to equipment costs
(net) (note 4) (20) (17) (62) (53)
Additions to other intangibles
(note 4) (24) (20) (77) (54)
Net reduction to inventories 4 4 5 43
Business acquisitions, net of
cash acquired (note 5) (1,552) - (1,778) (893)
Proceeds on sale of discontinued
operations, net of costs and
cash sold 1,798 - 1,798 -
Additions to investments and
other assets (12) (29) (55) (110)
Distributions received and
proceeds from sale of
investments - - 2 29
Proceeds on disposal of
property, plant and equipment - 5 6 5
Investing activities of
discontinued operations (2) (3) (9) (12)
----------------------------------------------------------------------------
(65) (263) (910) (1,679)
----------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in long-term debt 1,300 510 1,897 921
Debt repayments (1,628) (452) (1,958) (506)
Bank facility arrangement costs (5) (12) (11) (14)
Issue of Class B Non-Voting
Shares (note 8) 10 29 22 124
Dividends paid on Class A Shares
and Class B Non-Voting Shares (96) (96) (286) (272)
Dividends paid on Preferred
Shares (4) (4) (10) (10)
Financing activities of
discontinued operations (12) (5) (12) (18)
----------------------------------------------------------------------------
(435) (30) (358) 225
----------------------------------------------------------------------------
Effect of currency translation
on cash balances (1) (1) - -
----------------------------------------------------------------------------
Increase (Decrease) in cash (74) 146 (74) (355)
Cash, beginning of the period 357 136 398 637
Cash, classified as held for
sale at beginning of period 41 - - -
----------------------------------------------------------------------------
Cash of continuing operations,
end of the period 324 282 324 282
----------------------------------------------------------------------------
----------------------------------------------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
May 31, 2016 and 2015
(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: Cable telecommunications and Satellite video services to residential customers ("Consumer"); data networking, Cable telecommunications, Satellite video and fleet tracking services to businesses and public sector entities ("Business Network Services"); data centre colocation, cloud technology and managed IT solutions to businesses ("Business Infrastructure Services"); and wireless services for voice and data communications ("Wireless"). The Company's shares are listed on the Toronto Stock Exchange ("TSX"), TSX Venture Exchange and New York Stock Exchange.
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 as issued by the International Accounting Standards Board ("IASB").
The condensed interim consolidated financial statements of the Company for the three and nine months ended May 31, 2016 were authorized for issue by the Audit Committee on July 14, 2016.
Basis of presentation
These condensed interim consolidated financial statements have been prepared primarily under the historical cost convention except as detailed in the significant accounting policies disclosed in the Company's consolidated financial statements for the year ended August 31, 2015 and are expressed in millions of Canadian dollars unless otherwise indicated. The condensed interim consolidated statements of income are presented using the nature classification for expenses.
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 by IFRS in the Company's annual consolidated financial statements. As a result, these condensed interim consolidated financial statements should be read in conjunction with the Company's consolidated financial statements for the year ended August 31, 2015.
The condensed interim consolidated financial statements follow the same accounting policies and methods of application as the most recent annual consolidated financial statements except as noted below.
Adoption of accounting policies for WIND Mobile Corp. ("WIND")
The Company has adopted the following accounting policies in respect of WIND.
Revenue
WIND earns its revenue from providing access to, and usage of, its wireless telecommunications infrastructure. The Company's principal sources of revenue and the methods of recognition of this revenue are as follows:
-- Monthly subscription fees for wireless voice, text and data services are
recorded as revenue in the period the service is provided. Payments
related to unearned prepaid services are recorded as deferred revenue at
the reporting date.
-- Fees for wireless voice, text and data services on a pay-per-use basis
are recognized in the period that the service is provided.
-- Revenue from the direct sale of equipment to subscribers or dealers is
recognized when the equipment is delivered and accepted by the
subscribers or dealers.
The Company offers a discretionary handset discount program, whereby the subscriber earns the applicable discount by maintaining services with the Company, such that the receivable relating to the discount at inception of the transaction is reduced over a period of time. A portion of future revenues earned in connection with the services is applied against the up-front discount provided on the handset. WIND also offers a plan allowing customers to receive larger up-front handset discounts than they would otherwise qualify for, if they pay a predetermined incremental charge to their existing service plan on a monthly basis. The charge is billed on a monthly basis and is recognized as revenue at that time.
The Company recognizes the handset discount as a receivable and revenue upon the sale of the equipment on the basis that the receivable is recoverable. The receivable is realized on a straight-line basis over the period which the discount is forgiven to a maximum of two years with an offsetting reduction to revenue. The amount receivable is classified as part of other current or non-current receivables, as applicable, in the consolidated statement of financial position.
Inventories
Inventories of wireless handsets, accessories and SIM cards are carried at the lower of cost and net realizable value. Cost is determined using the weighted average method and includes expenditures incurred in acquiring the inventories and bringing them to their existing condition and location. Net realizable value is the estimated selling price in the ordinary course of business, less selling expenses.
Standards and amendments to standards issued but not yet effective
During the quarter, the Company adopted amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures outlined in Sale or Contribution of Assets between and Investor and its Associates or Joint Venture as issued by the IASB in September 2014. These amendments were to be applied prospectively to transactions occurring for annual periods commencing after a date to be determined by the IASB, however earlier application is permitted.
The Company has not yet adopted certain standards and amendments that have been issued but are not yet effective. The following pronouncements are being assessed to determine their impact on the Company's results and financial position.
-- IFRS 16, Leases, requires entities to recognize lease assets and lease
obligations on the balance sheet. For lessees, IFRS 16 removes the
classification of leases as either operating leases or finance leases,
effectively treating all leases as finance leases. Certain short-term
leases (less than 12 months) and leases of low-value are exempt from the
requirements and may continue to be treated as operating leases. Lessors
will continue with a dual lease classification model. Classification
will determine how and when a lessor will recognize lease revenue, and
what assets would be recorded. It may be applied retroactively or using
a modified retrospective approach for annual periods commencing January
1, 2019, with early adoption permitted if IFRS 15, Revenue from
Contracts with Customers has been adopted.
-- IAS 12, Income Taxes was amended in 2016 to clarify how to account for
deferred tax assets related to debt instruments measured at fair value.
It is required to be applied for annual periods commencing January 1,
2017.
-- IAS 7, Statement of Cash Flows was amended in 2016 to improve
disclosures regarding changes in financing liabilities. It is required
to be applied for annual period beginning on or after January 1, 2017.
Discontinued operations
The Company reports financial results for discontinued operations separately from continuing operations to distinguish the financial impact of disposal transactions from ongoing operations. Discontinued operations reporting occurs when the disposal of a component or a group of components of the Company represents a strategic shift that will have a major impact on the Company's operations and financial results, and where the operations and cash flows can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the Company.
The results of discontinued operations are excluded from both continuing operations and business segment information in the interim consolidated financial statements and the notes to the interim consolidated financial statements, unless otherwise noted, and are presented net of tax in the statement of income for the current and comparative periods. Refer to Note 3 Discontinued Operations for further information regarding the Company's discontinued operations.
3. DISCONTINUED OPERATIONS
In the second quarter of fiscal 2016, the Company announced it entered into an agreement with Corus Entertainment Inc. ("Corus"), a related party subject to common voting control, to sell 100% of its wholly owned subsidiary Shaw Media Inc. ("Shaw Media") for a purchase price of approximately $2.65 billion comprised of $1.85 billion of cash and 71,364,853 Corus Class B non-voting participating shares.
Although, through holding of the shares in Corus, the Company will effectively retain an indirect, non-controlling interest in the Media division subsequent to the sale, the Company will no longer have control over the division. Accordingly, the assets and liabilities, operating results and operating cash flows for the previously reported Media segment are presented as discontinued operations separate from the Company's continuing operations. Prior period financial information has been reclassified to present the Media division as a discontinued operation.
The transaction closed on April 1, 2016, but remains subject to customary closing adjustments. The Company recognized a gain on the divestiture within income from discontinued operations as follows:
May 31, 2016
----------------------------------------------------------------------------
Proceeds on disposal, net of transaction costs of $22 2,645
Non-controlling interest in disposed net assets 244
Net assets disposed (2,227)
----------------------------------------------------------------------------
662
Income taxes 47
----------------------------------------------------------------------------
Gain on divestiture, net of tax 615
----------------------------------------------------------------------------
----------------------------------------------------------------------------
In connection with the disposal, remeasurements of employee benefit plans related to discontinued operations of $4 were transferred within equity from accumulated other comprehensive income to retained earnings.
A reconciliation of the major classes of line items constituting income from discontinued operations, net of tax, as presented in the consolidated statements of income is as follows:
Three months ended Nine months ended May
May 31, 31,
--------------------------------------------
2016 2015 2016 2015
----------------------------------------------------------------------------
Revenue 88 303 610 848
Eliminations(1) (7) (19) (46) (58)
----------------------------------------------------------------------------
81 284 564 790
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating, general and
administrative expenses
Employee salaries and benefits 16 44 109 137
Purchases of goods and
services(2) 32 143 272 418
----------------------------------------------------------------------------
48 187 381 555
Eliminations(1) (7) (19) (46) (58)
----------------------------------------------------------------------------
41 168 335 497
Restructuring costs - 11 - 13
Amortization(2) - 7 11 23
Accretion of long-term
liabilities and provisions - 1 2 3
Other losses (gains) (1) (1) - 3
----------------------------------------------------------------------------
Income from discontinued
operations before tax and gain
on divestiture 41 98 216 251
Income taxes 10 25 57 66
----------------------------------------------------------------------------
Income from discontinued
operations before gain on
divestiture 31 73 159 185
Gain on divestiture, net of tax 615 - 615 -
----------------------------------------------------------------------------
Income from discontinued
operations, net of tax 646 73 774 185
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1)Eliminations relate to intercompany transactions between continuing and
discontinued operations. The costs are included in continuing operations
as they are expected to continue to be incurred subsequent to the
disposition.
(2)As of the date the Media division met the criteria to be classified as
held for sale, the Company ceased amortization of non-current assets of
the division, including program rights, property, plant and equipment,
intangibles and other. Amortization that would otherwise have been taken
in the three and nine month periods amounted to $15 and $35 for program
rights and $2 and $6 for property, plant and equipment, intangibles and
other.
4. BUSINESS SEGMENT INFORMATION
The Company's chief operating decision makers are the CEO, President and CFO and they review the operating performance of the Company by segments which comprise Consumer, Business Network Services, Business Infrastructure Services and Wireless. The chief operating decision makers utilize operating income before restructuring costs and amortization for each segment as a key measure in making operating decisions and assessing performance. The Consumer segment provides Cable telecommunications services including Video, Internet, WiFi and Phone, and Satellite Video, to Canadian consumers. The Business Network Services segment provides data networking, video, voice and Internet services through a national fibre-optic backbone network and also provides satellite Video services, and fleet tracking services to North American businesses and public sector entities. The Business Infrastructure Services segment provides data centre colocation, cloud and managed services to North American and European businesses. The Wireless segment, formed by the acquisition of WIND on March 1, 2016, provides wireless services for voice and data communications serving customers in Ontario, British Columbia and Alberta with 50MHz of spectrum covering these regions. All of the Company's reportable segments are substantially located in Canada with the exception of Business Infrastructure Services, consisting primarily of ViaWest which has operations located in the United States and Europe. Information on operations by segment is as follows:
Operating information
Three months ended Nine months ended May
May 31, 31,
--------------------------------------------
2016 2015 2016 2015
----------------------------------------------------------------------------
Revenue
Consumer 935 949 2,813 2,813
Business Network Services 136 131 409 387
Business Infrastructure
Services 86 63 248 178
Wireless 132 - 132 -
----------------------------------------------------------------------------
1,289 1,143 3,602 3,378
Intersegment eliminations (6) (8) (24) (24)
----------------------------------------------------------------------------
1,283 1,135 3,578 3,354
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Operating income before
restructuring costs and
amortization
Consumer 427 439 1,249 1,252
Business Network Services 66 63 196 189
Business Infrastructure
Services 33 25 91 71
Wireless 29 - 29 -
----------------------------------------------------------------------------
555 527 1,565 1,512
Restructuring costs (22) (1) (22) (37)
Amortization (250) (214) (704) (645)
----------------------------------------------------------------------------
Operating income 283 312 839 830
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Current taxes
Operating 56 62 188 207
Other/non-operating (12) (12) (23) (22)
----------------------------------------------------------------------------
44 50 165 185
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Capital expenditures
Three months ended Nine months ended May
May 31, 31,
--------------------------------------------
2016 2015 2016 2015
----------------------------------------------------------------------------
Capital expenditures accrual
basis (1)
Consumer and Business Network
Services (2) 179 180 581 592
Business Infrastructure
Services 35 43 105 82
Wireless 51 - 51 -
----------------------------------------------------------------------------
265 223 737 674
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Equipment costs (net of revenue)
Consumer and Business Network
Services 21 20 68 62
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Capital expenditures and
equipment costs (net)
Consumer and Business Network
Services 200 200 649 654
Business Infrastructure
Services 35 43 105 82
Wireless 51 - 51 -
----------------------------------------------------------------------------
286 243 805 736
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Reconciliation to Consolidated
Statements of Cash Flows
Additions to property, plant
and equipment 257 203 740 634
Additions to equipment costs
(net) 20 17 62 53
Additions to other intangibles 24 20 77 54
----------------------------------------------------------------------------
Total of capital expenditures
and equipment costs (net) per
Consolidated Statements of
Cash Flows 301 240 879 741
Increase/decrease in working
capital and other liabilities
related to capital
expenditures (15) 7 (71) (7)
Decrease in customer equipment
financing receivables 1 2 5 9
Less: Proceeds on disposal of
property, plant and equipment - (5) (6) (5)
Less: Satellite equipment
profit (2) (1) (1) (2) (2)
----------------------------------------------------------------------------
Total capital expenditures and
equipment costs (net)
reported by segments 286 243 805 736
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1)The three and nine months ended May 31, 2015 include $32 and $91,
respectively, related to certain capital investments that were funded
from the accelerated capital fund.
(2)The profit from the sale of satellite equipment is subtracted from the
calculation of segmented capital expenditures and equipment costs (net)
as the Company views the profit on sale as a recovery of expenditures on
customer premise equipment.
5. BUSINESS ACQUISITIONS
Mid-Bowline Group Corp. (and its wholly owned subsidiary, WIND Mobile Corp.)
On March 1, 2016, the Company completed the acquisition of 100% of the shares of Mid-Bowline Group Corp. and its wholly owned subsidiary WIND Mobile Corp. (collectively, "WIND") for enterprise value of $1.6 billion which was funded through a combination of cash on hand, a drawdown of $1.3 billion on the Company's credit facilities and the issuance of 2,866,384 Class B Non-Voting Participating Shares. The acquisition of WIND is a significant step in the Company's drive for growth and positions the Company to be a leading pure-play provider of connectivity that is focused on delivering consumer and business communications supported by best-in-class wireline, WiFi, wireless and data infrastructure.
The operating results of WIND are included in the Company's consolidated financial statements from the date of acquisition. WIND contributed $132 revenue and $2 net income for the period from March 1, 2016 to May 31, 2016. If the acquisition had closed on September 1, 2015, WIND revenue and net income would have approximated $393 and $6, respectively. In connection with the transaction, the Company incurred $20 of acquisition related costs for professional fees paid to lawyers, consultants and advisors.
The fair value of purchase consideration consisted of $1,588 in cash and $68 in shares issued in connection with the acquisition. The purchase price equation is preliminary pending finalization of valuation of net assets acquired. A summary of net assets and preliminary allocation of consideration is as follows:
$
----------------------------------------------------------------------------
Net assets acquired at assigned fair values
Cash 35
Accounts receivable(1) 12
Inventories 24
Other current assets 58
Property, plant and equipment 277
Other long term assets 19
Intangibles (2) 1,560
Goodwill, not deductible for tax (3) 88
----------------------------------------------------------------------------
2,073
Accounts payable and accrued liabilities 110
Unearned revenue 9
Current debt (4) 3
Long-term debt (4) 2
Provisions 43
Deferred income taxes 250
----------------------------------------------------------------------------
1,656
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1)Accounts receivable consist of $23 gross contractual amounts receivable
from customers less $11 not expected to be collected.
(2)Intangibles include wireless spectrum licenses, subscriber relationships
and software assets.
(3)Goodwill comprises the value of growth opportunities created through the
combination of businesses and networks, a strong management team and an
assembled workforce.
(4)Current and long-term debt is comprised of finance lease obligations in
respect of certain equipment.
INetU, Inc.
On December 15, 2015, ViaWest closed the acquisition of 100% of the shares of INetU, Inc. ("INetU") for US$162 which was funded through a combination of borrowings under ViaWest's and the Company's revolving credit facilities as well as incremental term loan proceeds under ViaWest's credit facility. INetU is a solutions provider of public, private and hybrid cloud environments in addition to offering managed security and compliance services. The acquisition of INetU allows ViaWest to add new services to its cloud and managed offerings, and to expand its geographical footprint with eastern U.S. and European cloud locations.
INetU contributed $21 revenue and $7 net income for the period from December 15, 2015 to May 31, 2016. If the acquisition had closed on September 1, 2015, revenue and net income would have been approximately $35 and $11, respectively.
In connection with the transaction, the Company incurred $1 of acquisition related costs for professional fees paid to lawyers, consultants and advisors.
The purchase consideration consisted of $223 in cash. The purchase price equation is preliminary pending finalization of valuation of net assets acquired. A summary of net assets and preliminary allocation of consideration is as follows:
$
----------------------------------------------------------------------------
Net assets acquired at assigned fair values
Cash and cash equivalents -
Receivables 4
Other current assets 1
Property and equipment 25
Intangibles (1) 68
Goodwill, not deductible for tax (2) 166
----------------------------------------------------------------------------
264
Current liabilities 7
Deferred income taxes 34
----------------------------------------------------------------------------
223
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1)Intangibles include customer relationships and software assets.
(2)Goodwill comprises the value of growth opportunities created through the
combination of businesses, a strong management team and an assembled
workforce. Goodwill decreased $8 at May 31, 2016 due to translation using
the period end foreign exchange rate.
Other
Effective October 31, 2015, the Company acquired the assets of a small cable system serving approximately 1,300 video subscribers in British Columbia. The cash consideration of $2 has been allocated to property, plant and equipment and broadcast rights.
6. OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES AND RESTRUCTURING COSTS
Three months ended May Nine months ended May
31, 31,
--------------------------------------------
2016 2015 2016 2015
----------------------------------------------------------------------------
Employee salaries and benefits 236 187 644 602
Purchase of goods and services 514 422 1,391 1,277
----------------------------------------------------------------------------
750 609 2,035 1,879
----------------------------------------------------------------------------
----------------------------------------------------------------------------
7. LONG-TERM DEBT
May 31, 2016
---------------------------------------------
Long-term debt Adjustment Long-term debt
at amortized for finance repayable at
cost costs maturity
$ $ $
----------------------------------------------------------------------------
Corporate
Bank loans (1) 498 - 498
Cdn fixed rate senior notes-
6.15% due May 9, 2016 - - -
5.70% due March 2, 2017 399 1 400
5.65% due October 1, 2019 1,246 4 1,250
5.50% due December 7, 2020 498 2 500
3.15% due February 19, 2021 298 2 300
4.35% due January 31, 2024 497 3 500
6.75% due November 9, 2039 1,418 32 1,450
----------------------------------------------------------------------------
4,854 44 4,898
Cdn variable rate senior notes-
Due February 1, 2016 - - -
----------------------------------------------------------------------------
4,854 44 4,898
Other
ViaWest - credit facility(2) 670 13 683
ViaWest - other 31 - 31
WIND - other 5 - 5
Burrard Landing Lot 2 Holdings
Partnership 40 - 40
----------------------------------------------------------------------------
Total consolidated debt 5,600 57 5,657
Less current portion (3) 407 - 407
----------------------------------------------------------------------------
5,193 57 5,250
----------------------------------------------------------------------------
----------------------------------------------------------------------------
August 31, 2015
---------------------------------------------
Long-term debt Long-term debt
at amortized Adjustment for repayable at
cost finance costs maturity
$ $ $
----------------------------------------------------------------------------
Corporate
Bank loans (1) 434 - 434
Cdn fixed rate senior notes-
6.15% due May 9, 2016 299 1 300
5.70% due March 2, 2017 399 1 400
5.65% due October 1, 2019 1,245 5 1,250
5.50% due December 7, 2020 497 3 500
3.15% due February 19, 2021 - - -
4.35% due January 31, 2024 497 3 500
6.75% due November 9, 2039 1,418 32 1,450
----------------------------------------------------------------------------
4,789 45 4,834
Cdn variable rate senior notes-
Due February 1, 2016 300 - 300
----------------------------------------------------------------------------
5,089 45 5,134
Other
ViaWest - credit facility(2) 506 12 518
ViaWest - other 34 - 34
WIND - other - - -
Burrard Landing Lot 2 Holdings
Partnership 40 - 40
----------------------------------------------------------------------------
Total consolidated debt 5,669 57 5,726
Less current portion (3) 608 1 609
----------------------------------------------------------------------------
5,061 56 5,117
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1)Bank loans include borrowings of USD $380 at May 31, 2016 (August 31,
2015 - USD $330). During the previous quarter, the Company amended the
terms of its bank credit facility to increase the maximum borrowings from
$1 billion to $1.5 billion.
(2)In connection with the INetU acquisition completed during the previous
quarter, ViaWest increased its term loan by USD $80 and increased its
revolving credit facility by USD $35.
(3)Current portion of long-term debt includes the 5.70% senior notes due
March 2017 and the amounts due within one year in respect of ViaWest's
term loan, and ViaWest's and WIND's finance lease obligations and
landlord debt.
On February 19, 2016, the Company issued $300 senior notes at a rate of 3.15% due February 19, 2021.
During the third quarter, related to the acquisition of WIND, the Company entered into $1.0 billion non-revolving credit facility with a syndicate of lenders (the "WIND Facility"). The full amount of the WIND Facility was drawn to fund the acquisition of WIND, along with $300 million drawn on the Company's existing credit facility. These amounts were repaid using the cash proceeds received from the Shaw Media disposition.
8. SHARE CAPITAL
Changes in share capital during the nine months ended May 31, 2016 are as follows:
Class B Non-Voting
Class A Shares Shares Preferred Shares
------------------------------------------------------------
Number $ Number $ Number $
----------------------------------------------------------------------------
August 31, 2015 22,420,064 2 451,471,562 3,205 12,000,000 293
Issued upon
stock option
plan exercises - - 1,079,248 26 - -
Issued pursuant
to dividend
reinvestment
plan - - 5,710,705 139 - -
Issued in
connection with
acquisition of
WIND - - 2,866,384 68 - -
----------------------------------------------------------------------------
May 31, 2016 22,420,064 2 461,127,899 3,438 12,000,000 293
----------------------------------------------------------------------------
----------------------------------------------------------------------------
9. EARNINGS PER SHARE
Earnings per share calculations are as follows:
Three months ended Nine months ended May
May 31, 31,
--------------------------------------------
2016 2015 2016 2015
----------------------------------------------------------------------------
Numerator for basic and diluted
earnings per share ($)
Net income from continuing
operations 58 136 312 419
Deduct: dividends on Preferred
Shares (3) (3) (11) (11)
----------------------------------------------------------------------------
Net income attributable to
common shareholders from
continuing operations 55 133 301 408
Net income (loss) from
discontinued operations 646 73 774 185
Deduct: net income from
discontinued operations
attributable to non-controlling
interests (4) (8) (20) (20)
----------------------------------------------------------------------------
Net income from discontinued
operations attributable to
common shareholders 642 65 754 165
----------------------------------------------------------------------------
Net income attributable to
common shareholders 697 198 1,055 573
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Denominator (millions of shares)
Weighted average number of Class
A Shares and Class B Non-Voting
Shares for basic earnings per
share 482 471 478 466
Effect of dilutive securities
(1) 1 2 1 3
----------------------------------------------------------------------------
Weighted average number of Class
A Shares and Class B Non-Voting
Shares for diluted earnings per
share 483 473 479 469
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Basic earnings per share ($)
Continuing operations 0.11 0.28 0.63 0.88
Discontinued operations 1.33 0.14 1.58 0.35
----------------------------------------------------------------------------
Attributable to common
shareholders 1.44 0.42 2.21 1.23
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Diluted earnings per share ($)
Continuing operations 0.11 0.28 0.63 0.87
Discontinued operations 1.33 0.14 1.57 0.35
----------------------------------------------------------------------------
Attributable to common
shareholders 1.44 0.42 2.20 1.22
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1)The earnings per share calculation does not take into consideration the
potential dilutive effect of certain stock options since their impact is
anti-dilutive. For the three and nine months ended May 31, 2016,
2,116,921 (2015 - 2,836,837) and 1,426,173 (2015 - 1,891,410) options
were excluded from the diluted earnings per share calculation.
10. OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Components of other comprehensive income and the related income tax effects for the nine months ended May 31, 2016 are as follows:
Amount Income taxes Net
$ $ $
----------------------------------------------------------------------------
Items that may subsequently be
reclassified to income
Change in unrealized fair value of
derivatives designated as cash flow
hedges 1 - 1
Share of other comprehensive income of
associates (1) - (1)
Exchange differences on translation of
a foreign operation (8) - (8)
Exchange differences on translation of
US denominated debt hedging a foreign
operation 5 - 5
----------------------------------------------------------------------------
(3) - (3)
Items that will not be subsequently be
reclassified to income
Remeasurements on employee benefit
plans:
Continuing operations (23) 6 (17)
Discontinued operations 2 - 2
----------------------------------------------------------------------------
(24) 6 (18)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Components of other comprehensive income and the related income tax effects for the three months ended May 31, 2016 are as follows:
Income
Amount taxes Net
$ $ $
----------------------------------------------------------------------------
Items that may subsequently be
reclassified to income
Change in unrealized fair value of
derivatives designated as cash flow
hedges 1 - 1
Share of other comprehensive income of
associates (1) - (1)
Exchange differences on translation of
a foreign operation (36) - (36)
Exchange differences on translation of
US denominated debt hedging a foreign
operation 16 - 16
----------------------------------------------------------------------------
(20) - (20)
Items that will not be subsequently be
reclassified to income
Remeasurements on employee benefit
plans:
Continuing operations (15) 4 (11)
Discontinued operations 4 (1) 3
----------------------------------------------------------------------------
(31) 3 (28)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Components of other comprehensive income and the related income tax effects for the nine months ended May 31, 2015 are as follows:
Income
Amount taxes Net
$ $ $
----------------------------------------------------------------------------
Items that may subsequently be
reclassified to income
Change in unrealized fair value of
derivatives designated as cash flow
hedges 8 (2) 6
Adjustment for hedged items recognized
in the period (5) 1 (4)
Unrealized loss on available-for-sale
investment (2) - (2)
Exchange differences on translation of
a foreign operation 125 - 125
Exchange differences on translation of
US denominated debt hedging a foreign
operation (50) - (50)
----------------------------------------------------------------------------
76 (1) 75
Items that will not be subsequently be
reclassified to income
Remeasurements on employee benefit
plans:
Continuing operations (8) 2 (6)
Discontinued operations (6) 2 (4)
----------------------------------------------------------------------------
62 3 65
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Components of other comprehensive income and the related income tax effects for the three months ended May 31, 2015 are as follows:
Income
Amount taxes Net
$ $ $
----------------------------------------------------------------------------
Items that may subsequently be
reclassified to income
Change in unrealized fair value of
derivatives designated as cash flow
hedges - - -
Adjustment for hedged items recognized
in the period (3) 1 (2)
Unrealized loss on available-for-sale
investment - -
Exchange differences on translation of
a foreign operation (6) (6)
Exchange differences on translation of
US denominated debt hedging a foreign
operation 2 2
----------------------------------------------------------------------------
(7) 1 (6)
Items that will not be subsequently be
reclassified to income
Remeasurements on employee benefit
plans:
Continuing operations 24 (6) 18
Discontinued operations 10 (3) 7
----------------------------------------------------------------------------
27 (8) 19
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Accumulated other comprehensive loss is comprised of the following:
August 31,
May 31, 2016 2015
$ $
----------------------------------------------------------------------------
Items that may subsequently be reclassified to
income
Change in unrealized fair value of derivatives
designated as cash flow hedges 1 -
Share of other comprehensive income of
associates (1) -
Unrealized loss on available-for-sale
investment (5) (5)
Foreign currency translation adjustments 107 110
Items that will not be subsequently reclassified
to income
Remeasurements on employee benefit plans:
Continuing operations (135) (119)
Discontinued operations - (5)
----------------------------------------------------------------------------
(33) (19)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
11. STATEMENTS OF CASH FLOWS
Disclosures with respect to the Consolidated Statements of Cash Flows are as follows:
(i) Funds flow from continuing operations
Three months ended Nine months ended May
May 31, 31,
--------------------------------------------
2016 2015 2016 2015
----------------------------------------------------------------------------
Net income from continuing
operations 58 136 312 419
Adjustments to reconcile net
income to funds flow from
operations:
Amortization 252 215 708 648
Deferred income tax recovery (27) (18) (52) (69)
Share-based compensation 1 1 2 3
Defined benefit pension plans 3 4 (17) (16)
Accretion of long-term
liabilities and provisions - - (1) (1)
Equity loss of an associate or
joint venture 25 14 61 43
Impairment of goodwill 17 15 17 15
Loss on write-down of assets 1 55 8 58
Loss on write-down of
investments 70 - 70 -
Distributions from a venture
capital investment - - - (27)
Other 3 (6) 5 (1)
----------------------------------------------------------------------------
Funds flow from continuing
operations 403 416 1,113 1,072
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(ii) Interest and income taxes paid and interest received and classified as operating activities are as follows:
Three months ended May Nine months ended May
31, 31,
--------------------------------------------
2016 2015 2016 2015
----------------------------------------------------------------------------
Interest paid 131 109 280 247
Income taxes paid (net of
refunds) 15 62 227 333
Interest received - 1 - 1
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(iii) Non-cash transactions:
The Consolidated Statements of Cash Flows exclude the following non-cash transactions:
Three months ended May Nine months ended May
31, 31,
--------------------------------------------
2016 2015 2016 2015
----------------------------------------------------------------------------
Issuance of Class B Non-Voting
Shares:
Dividend reinvestment plan 46 44 139 123
----------------------------------------------------------------------------
----------------------------------------------------------------------------
12. FAIR VALUE
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Financial instruments
The fair value of financial instruments has been determined as follows:
(i) Current assets and current liabilities
The fair value of financial instruments included in current assets and current liabilities approximates their carrying value due to their short-term nature.
(ii) Investments and other assets and other long-term assets
The fair value of publicly traded investments is determined by quoted market prices. Investments in private entities which do not have quoted market prices in an active market and whose fair value cannot be readily measured are carried at cost. No published market exists for such investments. Theses equity investments have been made as they are considered to have the potential to provide future benefit to the Company and accordingly, the Company has no current intention to dispose of these investments in the near term. The fair value of long-term receivables approximates their carrying value as they are recorded at the net present values of their future cash flows, using an appropriate discount rate.
(iii) Long-term debt
The carrying value of long-term debt is at amortized cost based on the initial fair value as determined at the time of issuance or at the time of a business acquisition. The fair value of publicly traded notes is based upon current trading values. The fair value of finance lease obligations is determined by discounting future cash flows using a rate for loans with similar terms, conditions and maturity dates. The carrying value of bank credit facilities approximates fair value as the debt bears interest at rates that fluctuate with market values. Other notes and debentures are valued based upon current trading values for similar instruments.
(iv) Other long-term liabilities
The fair value of program rights payable, estimated by discounting future cash flows, approximates their carrying value. The fair value of contingent consideration arising from a business acquisition is determined by calculating the present value of the probability weighted assessment of the likelihood that revenue targets will be met and the estimated timing of such payments.
(v) Derivative financial instruments
The fair value of US currency forward purchase contracts is determined by an estimated credit-adjusted mark-to-market valuation using observable forward exchange rates at the end of reporting periods and contract forward rates.
The carrying values and estimated fair values of an investment in a publicly traded company, long-term debt and a contingent liability are as follows:
May 31, 2016 August 31, 2015
--------------------------------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
$ $ $ $
----------------------------------------------------------------------------
Assets
Investment in publicly traded
company (1) 4 4 4 4
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Liabilities
Long-term debt (including
current portion) (2) 5,600 6,232 5,669 6,307
Contingent liability(3) 2 2 2 2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1)Level 1 fair value - determined by quoted market prices. (2)Level 2 fair value - determined by valuation techniques using inputs based on observable market data, either directly or indirectly, other than quoted prices. (3)Level 3 fair value - determined by valuation techniques using inputs that are not based on observable market data.
Real estate property
A real estate property was classified as held for sale in the statement of financial position at August 31, 2015. At August 31, 2015, the property's fair value of $5 was based on the sale which closed during the first quarter.
13. INVESTMENTS AND OTHER ASSETS
Corus Entertainment Inc.
In connection with the sale of the Media division to Corus, the Company received 71,364,853 Corus Class B non-voting participating shares representing approximately 37% of Corus' total issued equity of Class A and Class B shares. Although the Class B Corus shares do not have voting rights, the Company is considered to have significant influence due to Board representation.
Corus is a leading media and content company that creates and delivers high quality brands and content across platforms for audiences around the world. The company's portfolio of multimedia offerings encompasses 45 specialty television services, 39 radio stations, 15 conventional television stations, a global content business, digital assets, live events, children's book publishing, animation software, technology and media services. Corus is headquartered in Canada, and its stock is listed on the TSX under the symbol CJR.B.
The Company participates in Corus' dividend reinvestment program for its initial investment in Corus Class B Shares. For the three and nine month periods ended May 31, 2016, the Company received dividends of $14 from Corus that were reinvested in additional Corus Class B shares. At May 31, 2016, the Company owned 72,499,684 Corus Class B shares having a fair value of $911 and representing 37% of the total issued equity of Corus. The Company's weighted average ownership of Corus for the period from April 1 to May 31, 2016 was 37%.
Summary financial information for Corus at May 31, 2016 and for the three and nine months then ended is as follows:
$ $
----------------------------------------------------------------------------
Current assets 538
Non-current assets 5,657
Current liabilities (599)
Non-current liabilities (3,081)
----------------------------------------------------------------------------
Net assets 2,515
Less: non-controlling interests (159)
----------------------------------------------------------------------------
2,356
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Carrying amount of the investment 822
----------------------------------------------------------------------------
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Revenue 361 787
Net income (loss) attributable to:
Shareholders (16) 128
Non-controlling interest 5 7
----------------------------------------------------------------------------
(11) 135
Other comprehensive income, attributable to
shareholders (4) (3)
----------------------------------------------------------------------------
Comprehensive income (15) 132
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Equity income from associates(1) (10) (10)
Other comprehensive income from equity accounted
associates(1) (1) (1)
----------------------------------------------------------------------------
(11) (11)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1)The Company's share of income and other comprehensive income reflect the
weighted average proportion of Corus net income and other comprehensive
income attributable to shareholders from April 1, 2016.
14. RESTRUCTURING COSTS
During 2014 and 2015, the Company undertook organizational changes and restructured its operations across its Consumer and Business Network Services operating segments. The remaining costs in respect of the restructuring activities were paid in fiscal 2016.
During the third quarter of the current year, the Company underwent a restructuring following a set of significant asset realignment initiatives, including the acquisition of WIND and the divestiture of Shaw Media. In connection with the restructuring, the Company recorded $24 primarily related to severance and employee related costs in respect of the approximate 200 affected employees. The continuity of the restructuring provisions follows and the majority of remaining costs are expected to be paid within the next seven months.
$
----------------------------------------------------------------------------
Balance as at September 1, 2015 17
Additions 24
Unused amounts related to prior restructuring
provisions (2)
Payments (27)
----------------------------------------------------------------------------
Balance as at May 31, 2016 12
----------------------------------------------------------------------------
----------------------------------------------------------------------------
15. IMPAIRMENT OF GOODWILL
As a result of the Company's annual impairment test of goodwill and indefinite-life intangibles, an impairment charge of $17 was recorded in the current quarter with respect to goodwill associated with the Tracking operations in the Business Network Services division. The Company estimated the recoverable amount using a discounted cash flow analysis based on the most recent estimates of future operating results which are reflective of long-term pressures as customers migrate from satellite based tracking to wireless tracking, and technology changes in the industry.
16. OTHER LOSSES
Other gains/losses 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. In the current year, the category also includes a write-down of $51 in respect of the Company's investment in shomi, a write-down of $20 in respect of a private portfolio investment and asset write-downs of $6. In the comparable year, the category included distributions of $27 from a venture capital fund investment, additional proceeds of $11 related to the fiscal 2012 Shaw Court insurance claim and asset write-downs of $55.
17. SUBSEQUENT EVENTS
On June 30, 2016, 1,987,607 of the Company's Cumulative Redeemable Rate Reset Class 2 Preferred Shares, Series A ("Series A Shares") were converted into an equal number of Cumulative Redeemable Floating Rate Class 2 Preferred Shares, Series B ("Series B Shares") in accordance with the notice of conversion right issued on May 31, 2016. As a result of the conversion, the Company has 10,012,393 Series A Shares and 1,987,607 Series B Shares issued and outstanding. The Series A Shares will continue to be listed on the TSX under the symbol SJR.PR.A. The Series B Shares began trading on the TSX on June 30, 2016 under the symbol SJR.PR.B. The annual fixed dividend rate for the Series A Shares, payable quarterly, was reset to 2.791% for the five year period from and including June 30, 2016 to but excluding June 30, 2021. The floating quarterly dividend rate for the Series B Shares was set at an annual dividend rate of 2.539% for the period from and including June 30, 2016 to but excluding September 30, 2016. The floating quarterly dividend rate will be reset quarterly.
Contacts:
Shaw Communications Inc.
Investor Relations
investor.relations@sjrb.ca
www.shaw.ca
Legal Disclaimer:
EIN Presswire provides this news content "as is" without warranty of any kind. We do not accept any responsibility or liability for the accuracy, content, images, videos, licenses, completeness, legality, or reliability of the information contained in this article. If you have any complaints or copyright issues related to this article, kindly contact the author above.
