CORUS ENTERTAINMENT INC - 6-K - 20050114 - MANAGEMENTS_DISCUSSION
Significant Events Subsequent to the Quarter
•
On December 31, 2004 the Company paid a semi-annual dividend of
$0.02 and $0.025 to holders of its Class A and Class B shares
respectively.
•
BBM radio ratings for Fall 2004 were released on December 16th and
Corus Radio retained it’s #1 position with the largest audience
reach and hours tuned. Corus holds the top-rated stations in key
demographics in Vancouver, Calgary, Edmonton, Winnipeg, Toronto
and Montreal and has positive momentum on the developing stations.
•
Corus Entertainment received a record 47 nominations for the 2004
Gemini Awards. At the awards ceremonies, held December 11, 12 and
13, 2004, Corus was awarded 10 Geminis for television properties
produced in association with independent producers, including
three wins for the Movie Central original mini-series, Slings &
Arrows.
•
On December 16, 2004, the CRTC announced a new policy for the
introduction of foreign third-language television channels.
Generally, all applications for general interest third-language
services will be approved subject to certain packaging and
programming rights conditions.
Management’s Discussion and Analysis
The following should be read in conjunction with Management’s Discussion and Analysis, consolidated
financial statements and the notes thereto included in our August 31, 2004 Annual Report. All
amounts are stated in Canadian dollars unless specified otherwise.
Certain statements in this report may constitute forward-looking statements and are subject to
important risks and uncertainties. The results or events predicted in these statements may differ
materially from actual results or events. Factors which could cause results or events to differ
from current expectations include, among other things: our ability to attract and retain
advertising revenues; audience acceptance of our television programs and cable networks; our
ability to recoup production costs, the availability of tax credits and the existence of
co-production treaties; our ability to compete in any of the industries in which we do business;
the opportunities (or lack thereof) that may be presented to and pursued by us; conditions in the
entertainment, information and communications industries and technological developments therein;
changes in laws or regulations or the interpretation or application of those laws and regulations;
our ability to integrate and realize anticipated benefits from our acquisitions and to effectively
manage our growth; and changes in accounting standards. Consequently, all of the forward-looking
statements made in this report are qualified by these cautionary statements, and there can be no
assurance that the actual results or developments anticipated by us will be realized or, even if
substantially realized, that they will have the expected consequences to, or effects on, us. Unless
otherwise required by applicable securities laws, we disclaim any intention or obligation to
publicly update or revise any forward-looking statements whether as a result of new information,
events or circumstances that arise after the date thereof or otherwise.
Overview of Consolidated Results
The first quarter was highlighted by strong net income growth and excellent operating performance
from our Radio and Television segments. Net income for the quarter was $29.1 million on revenues
of $180.6 million, compared to net income of $5.7 million on revenues of $185.0 million in the
prior year. The Radio and Television segments delivered segment profit growth of 18% and 13%
respectively, as consolidated segment profit grew 9% over the prior year.
Corus
2
First Quarter Results
Revenues
Revenues for the first quarter were $180.6 million, down 2% from $185.0 million last year.
Radio and Television experienced increases of 8% and 5% respectively, while Content was down 38%
from the prior year primarily due to lower merchandising revenues.
Operating, general and administrative expenses
Operating, general and administrative expenses for the first quarter were $118.2 million, down
7% from $127.7 million in the prior year. The decrease is primarily due to lower operating
expenses in the Content division.
Depreciation
Depreciation expense for the first quarter was $5.4 million, a decrease of $0.7 million from
last year. This change reflects a lower capital cost base, as capital expenditures have been
significantly lower than depreciation for the past several quarters and assets become fully
depreciated.
Amortization
Amortization expense for the first quarter was $1.2 million, down from $2.2 million last year.
The decrease is a result of deferred start-up and reformatting costs becoming fully amortized.
Interest on long-term debt
Interest expense for the first quarter was $13.6 million, down from $13.8 million last year
primarily due to savings generated by a fixed-to-floating interest rate swap, offset somewhat by a
higher average bank loan balance. The effective interest rate for the first quarter was 8.6%
compared to 8.9% in the prior year.
Other income, net
Other income for the first quarter was $6.4 million, compared to $2.4 million in the prior
year. The current year’s quarter includes an unrealized derivative transaction gain of $2.1
million and foreign exchange gains of $3.9 million, while the prior year’s quarter includes foreign
exchange gains of $2.7 million. The foreign exchange gains in the current year arise from the
impact of the strengthening Canadian dollar on Corus’ U.S. dollar bank loan balance.
Income taxes
The effective tax rate for the first quarter was 38.6%, compared to the statutory rate of
36.3%. The effective tax rate for the first quarter of last year was 82.8%. The first quarter of
last year was impacted by the Ontario government’s decision to cancel previously announced
reductions to future tax rates and to increase current tax rates. The change in Ontario tax rates
caused an increase in the Company’s non-cash income tax expense and net future tax liability
position of $17.8 million, or $0.42 per share.
Net income
Net income for the first quarter was $29.1 million, up from income of $5.7 million last year.
Earnings per share for the first quarter were $0.68 basic and diluted, compared with earnings per
share of $0.13 basic and diluted last year.
Corus
3
Radio
The Radio division comprises 50 radio stations situated primarily in eight of the ten largest
Canadian markets by population and in the densely populated area of southern Ontario. Corus is
Canada’s leading radio operator in terms of revenues and audience reach.
Financial Highlights
(Unaudited)
Three months ended November 30,
(thousands of Canadian dollars)
2004
2003
Revenues
65,533
60,738
Operating, general and administrative expenses
44,509
42,937
Segment profit
21,024
17,801
Revenues for the first quarter were $65.6 million, up 8% from the corresponding period last
year. The Ontario and Quebec regions delivered strong performances for the quarter. According to
the Trans-Canada Radio Advertising by Market (“TRAM”) report for the three months ended November
30, 2004, advertising sales growth for Corus’ Ontario and Quebec regions exceeded overall market
growth for those regions. A competitive environment continues to challenge the western region, and
is reflected in the results for that region for the quarter. While the western region lagged
behind overall market growth for the region in the year, as indicated by the TRAM report, Corus’
strategy, which included reformatting several stations, has translated into improved Fall 2004
Bureau of Broadcast Measurement ratings. In particular, the Vancouver cluster has started to
recover from last year’s performance by posting year-over-year ad growth.
Operating, general and administrative expenses for the first quarter were $44.5 million, up 4% from
the corresponding period last year. Variable costs increased in proportion to the revenue
increases, while fixed costs remained stable, resulting in improved margins.
Segment profit for the first quarter was $21.0 million, up 18% from the corresponding period last
year.
Corus
4
Television
The Television division is composed of the following: specialty television networks YTV, Treehouse
TV, W Network, Corus’ 80% interest in CMT (Country Music Television), 50.5% interest in Telelatino,
50% interest in Locomotion, and 40% interest in Teletoon; Corus’ premium television services Movie
Central and Encore; interests in three digital television channels, Scream, Discovery Kids and The
Documentary Channel; Digital Adventure (now known as Corus Custom Networks), a cable advertising
service; three local television stations; and Max Trax, a residential digital audio service.
Financial Highlights
(Unaudited)
Three months ended November 30,
(thousands of Canadian dollars)
2004
2003
Revenues
98,520
94,203
Operating, general and administrative expenses
53,575
54,415
Segment profit
44,945
39,788
Revenues for the first quarter were $98.5 million, up 5% over the corresponding period last
year. Strong growth in advertising revenue was achieved, up 6% for the quarter, driven by CMT,W,
Teletoon and YTV. Continued subscriber revenue growth of 3% over the prior year was also
experienced, with Movie Central, Corus’ western-based pay television service, finishing the quarter
with 704,000 subscribers, down slightly from August 31, 2004 but up 25,000 subscribers from the
first quarter of last year.
Operating, general and administrative expenses were $53.6 million for the first quarter, down 2%
from the prior year, as the Television segment effectively controlled overall expenditures.
Segment profit for the quarter was $44.9 million, up 13% from the prior year.
Corus
5
Content
The Content division consists of the production and distribution of television programs and the
sale and licensing of related products.
Financial Highlights
(Unaudited)
Three months ended November 30,
(thousands of Canadian dollars)
2004
2003
Revenues
18,928
30,718
Operating, general and administrative expenses
18,806
28,113
Segment profit
122
2,605
Revenues for the first quarter were $18.9 million, a decrease of 38% from the prior year.
During the quarter Content delivered 52 episodes, primarily of
Delta State
,
Funpak, Miss Spider
,
Backyardigans
and
Jacob Two Two
, compared to 17 episodes delivered in the same period last year.
Revenues were down in the quarter due primarily to lower sales of
Beyblade
merchandise and the
weaker U.S. dollar.
Miss Spider
and
Backyardigans
are enjoying considerable ratings success, but
Corus will not begin to realize the benefit of significant merchandising revenue on these
properties until fiscal 2006.
Operating, general and administrative expenses for the first quarter were $18.8 million, down 33%
from the prior year. The reduction reflects lower revenues.
Segment profit for the first quarter was $0.1 million, compared to $2.6 million last year.
Corporate
The Corporate segment results represent the incremental cost of corporate overhead in excess of the
amount allocated to the other operating segments.
Financial Highlights
(Unaudited)
Three months ended November 30,
(thousands of Canadian dollars)
2004
2003
Stock-based compensation
1,275
735
Other general and administrative costs
2,348
1,996
General and administrative expenses
3,623
2,731
General and administrative expense increased to $3.6 million in the first quarter from $2.7
million in the same period last year. This increase is in line with the Company’s expectations.
Stock-based compensation includes the expenses related to the Company’s Performance Share Units and
the issuance of stock options.
Corus
6
Quarterly Consolidated Financial Information
The following table sets forth certain unaudited data from the consolidated statements of income
and retained earnings (deficit) for each of the eight most recent quarters ended November 30, 2004.
The information has been derived from the Company’s unaudited consolidated financial statements
that, in management’s opinion, have been prepared on a basis consistent with the audited
consolidated financial statements contained in the Company’s Annual Report for the year ended
August 31, 2004.
(thousands of
Revenues
Segment profit
Net income (loss)
Earnings (loss) per share
Canadian dollars)
Basic and diluted
2005
1
st
Qtr
180,600
62,365
29,077
$
0.68
2004
4
th
Qtr
162,959
42,837
14,018
$
0.33
3
rd
Qtr
163,864
(43,777
)
(51,160
)
(1.20
)
2
nd
Qtr
155,019
34,069
8,305
0.19
1
st
Qtr
184,962
57,269
5,700
0.13
2003
4
th
Qtr
175,138
41,737
12,432
$
0.29
3
rd
Qtr
155,296
44,186
12,265
0.29
2
nd
Qtr
147,542
31,431
7,028
0.16
Seasonal Fluctuations
As discussed in Management’s Discussion and Analysis for the year end August 31, 2004, the first
quarter results tend to be the strongest and second quarter results tend to be the weakest in a
fiscal year.
Significant items causing variations in quarterly results
•
The first quarter of fiscal 2004 was impacted by the Ontario
government’s decision to cancel previously announced reductions to
future tax rates and to increase current tax rates. This change
in Ontario tax rates caused an increase in the Company’s non-cash
income tax expense and net future tax liability position of $17.8
million ($0.42/share).
•
The third quarter of fiscal 2004 was impacted by a non-cash,
after-tax write-down in film investments of $60.3 million
($1.41/share) resulting from the Company’s decision to lower
estimates of future revenue as a result of a challenging library
market and lower U.S. dollar. The pre-tax write-down of $85.0
million was recorded in operating, general and administrative
expenses.
Risks and Uncertainties
There have been no material changes in any risks or uncertainties facing the Company since the
year ended August 31, 2004.
Financial Position
Total assets at November 30, 2004 were $1.89 billion compared to $1.90 billion at August 31,
2004. The following discussion describes the significant changes in the consolidated balance sheet
since August 31, 2004.
Current assets decreased by $17.3 million. Cash and cash equivalents decreased by $47.1 million.
Accounts receivable, prepaid expenses and program rights increased by $24.0 million, $4.0 million
and $5.2 million respectively. The increase in accounts receivable was due to higher Radio and
Television
Corus
7
revenues in the quarter compared to the fourth quarter of fiscal 2004. The increase in prepaid
expenses reflects the timing of certain expenditures such as insurance.
Non-current assets increased by $9.8 million. Tax credits receivable increased by $0.9 million due
to accruals made related to film production. Capital assets decreased by $3.0 million as capital
expenditures of $3.0 million were offset by depreciation of $5.4 million. Program and film rights
(current and non-current) increased by $18.2 million, as accruals for acquired rights of $46.5
million were offset by amortization of $28.1 million. Film investments decreased by $0.5 million,
as net film spending of $13.4 million was offset by film amortization and accruals for tax credits.
Deferred charges decreased by $1.2 million due to amortization.
Current liabilities increased by $3.4 million. Accounts payable and accrued liabilities increased
by $0.2 million and income taxes payable increased by $3.2 million. Accounts payable and accrued
liabilities related to working capital decreased by $14.5 million, due to the payment of interest
on long-term debt in the quarter, while non-working capital accruals for program rights and film
investments increased by $14.7 million.
Non-current liabilities decreased by $37.3 million. Long-term debt decreased by $84.4 million,
resulting from repayments of $34.0 million and foreign exchange translation adjustments. Deferred
credits increased by $46.4 million, as payments of $1.1 million for public benefits related to
acquisitions were offset by $47.6 million in deferred foreign exchange gains for the year and other
working capital adjustments. Net future tax liability (including current asset) increased by $3.2
million in the quarter primarily as a result of the utilization of tax loss carryforwards.
Share capital is unchanged from the end of the prior year. Contributed surplus increased by $0.7
million as a result of expensing stock-based compensation for the period. Cumulative translation
adjustment increased by $3.4 million due to the effect of exchange rate fluctuation on the
translation of the net assets of self-sustaining foreign operations.
Liquidity and Capital Resources
Cash flows
Overall, the Company’s cash and cash equivalents position decreased by $47.1 million in the
three months ended November 30, 2004. Free cash flow was negative in the first quarter, as it was
in the first quarter of last year.
Cash used in operating activities for the first quarter was $8.4 million, compared to $2.3 million
last year. This increase is due primarily to an increase of $6.1 million in expenditures for
program rights. An increase in net income adjusted for non-cash items of $3.7 million was offset
by an increased investment in non-cash working capital of $4.7 million. The first quarter
typically requires an investment in non-cash working capital as revenues are generally higher than
in the fourth quarter of the prior year, and interest on long term debt is paid in the quarter.
Cash used in investing activities was $4.5 million for the first quarter compared to $6.4 million
last year. The decrease in cash used reflects a decrease in capital expenditures and lower
payments for public benefits associated with acquisitions.
Cash used in financing activities in the first quarter was $34.2 million compared to cash provided
of $4.1 million last year. The Company paid down its U.S. dollar denominated bank loan of $34.0
million in the quarter. The prior year’s quarter included a drawdown of the bank loan and cash
provided from the exercise of stock options.
Corus
8
Net debt and adjusted net debt
At November 30, 2004, net debt was $396.6 million, down from $433.9 million at August 31,
2004. Adjusted net debt at November 30, 2004 was $555.9 million, up from $545.5 million at August
31, 2004. The first quarter generally results in an increase in adjusted net debt. Adjusted net
debt to adjusted segment profit at November 30, 2004 was 3.1, unchanged from August 31, 2004.
Key Performance Indicators
The Company measures the success of its strategies using a number of key performance indicators.
These have been outlined in the Management’s Discussion and Analysis contained in the Annual Report
for the year ended August 31, 2004, including a discussion as to their relevance, definitions,
calculation methods and underlying assumptions. Certain key performance indicators are not
measurements in accordance with Canadian or U.S. generally accepted accounting principles (“GAAP”)
and should not be considered as an alternative to net income or any other measure of performance
under Canadian or U.S. GAAP.
The following tables reconcile those key performance indicators that are not in accordance with
GAAP measures.
Free cash flow
Three months ended November 30,
(thousands of Canadian dollars)
2004
2003
Cash used in:
Operating activities
(8,370
)
(2,289
)
Investing activities
(4,519
)
(6,379
)
Free cash flow
(12,889
)
(8,668
)
Net debt and adjusted net debt
As at November 30,
As at August 31,
(thousands of Canadian dollars)
2004
2004
Long-term debt
444,750
529,139
Cash and cash equivalents
(48,127
)
(95,231
)
Net debt
396,623
433,908
Unrealized cumulative foreign exchange gains
159,250
111,625
Adjusted net debt
555,873
545,533
Adjusted net debt to adjusted segment profit
As at November 30,
As at August 31,
(thousands of Canadian dollars except ratios)
2004
2004
Adjusted net debt [numerator]
555,873
545,533
Adjusted segment profit
Segment profit
(2)
95,494
90,398
Write-down of investment in film
(2)
85,000
85,000
Adjusted segment profit [denominator]
180,494
175,398
Adjusted net debt to adjusted segment profit
3.1
3.1
(2) Reflects aggregate amounts for the most recent four quarters, as detailed in the
table in the “Quarterly Consolidated Financial Information” of Management’s Discussion and
Analysis.
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