Exhibit 99.2
Chapter B -
Board of Directors’ Report on the State of the Company’s Affairs for the Period Ended
September 30, 2019
Board of Directors’ Report on the State of the Company’s Affairs for the Period Ended September 30, 2019
We hereby present the Board of Directors’ report on the state of affairs of “Bezeq” - The Israel Telecommunication Corporation Ltd. (“the Company”) and the consolidated Group companies (the Company and the consolidated companies, jointly - “the Group”), for the nine months ended September 30, 2019 (“the Period”) and the three months then ended (“Quarter”).
The Board of Directors’ report includes a condensed review of its subject-matter, and was prepared assuming the Board of Directors’ report of December 31, 2018 is also available to the reader.
For information concerning the Israel Securities Authority and the Israel Police’s investigation, see Note 1.2 to the financial statements.
The auditors have drawn attention to the matter in their opinion of the financial statements.
In its financial statements, the Group reports on four main operating segments:
| | 1. | Domestic Fixed-Line Communications |
| | | |
| | 2. | Cellular Communications |
| | | |
| | 3. | International Communications, Internet and NEP Services |
| | | |
| | 4. | Multi-Channel Television |
It is noted that the Company’s financial statements also include an “Others” segment, which comprises mainly online content services (through “Walla”) and call center services (through “Bezeq Online”). The “Others” segment is immaterial at the Group level.
The Group’s results were as follows:
| | | 1-9.2019 | | | 1-9.2018 | | | Increase (decrease) | | | 7-9.2019 | | | 7-9.2018 | | | Increase (decrease) | |
| | | NIS millions | | | NIS millions | | | NIS millions | | | % | | | NIS millions | | | NIS millions | | | NIS millions | | | % | |
| Profit (loss) | | | (1,082 | ) | | | 689 | | | | (1,771 | ) | | | - | | | | 191 | | | | 234 | | | | (43 | ) | | | (18.4 | ) |
| EBITDA1 | | | 2,301 | | | | 2,871 | | | | (570 | ) | | | (19.9 | ) | | | 940 | | | | 976 | | | | (36 | ) | | | (3.7 | ) |
The decrease in the above results in the Period was attributable to lower operating profit, mainly due to losses of NIS 951 million in impairment of goodwill in the Cellular Communications segment, See Note 5.1 to the financial statements. This decrease was partially offset, mainly by NIS 403 million in capital gains on the sale of a land asset in the Sakia property. See Note 7 to the financial statements. Furthermore, the change in the Group’s profits was affected by the write-off of the tax asset for losses in DBS, to the amount of NIS 1,166 million, effected as a change of an accounting estimate. See Note 6 to the financial statements.
Results for the Quarter were affected by higher operating profits, wholly offset by increased finance expenses, as detailed below.
| | 1-9.2019 | | | 1-9.2018 | | | 7-9.2019 | | | 7-9.2018 | |
| EBITDA calculations | | NIS millions | | | NIS millions | | | NIS millions | | | NIS millions | |
| Operating profit | | | 876 | | | | 1,262 | | | | 459 | | | | 429 | |
| Depreciation, amortization and impairment | | | 1,425 | | | | 1,609 | | | | 481 | | | | 547 | |
| EBITDA | | | 2,301 | | | | 2,871 | | | | 940 | | | | 976 | |
| 1 | EBITDA - In light of the continued impairment of DBS’s and Walla’s property, plant and equipment and intangible assets, the definition for EBITDA was updated as from the first quarter of 2019, as follows: operating profit before depreciation and amortization and continued losses from impairment of property, plant and equipment and intangible assets (see Notes 3.1 and 5 to the financial statements). |
Board of Directors’ Report on the State of the Company’s Affairs for the Period Ended September 30, 2019
| 1. | The Board of Directors’ explanations on the state of the Company’s affairs, the results of its operations, equity, cash flows, and additional matters |
| | | September 30,
2019 | | | September 30,
2018 | | | Increase (decrease) | | | |
| | | NIS millions | | | NIS millions | | | NIS millions | | | % | | | Explanation |
| | | | | | | | | | | | | | | |
| Cash and current investments | | | 2,389 | | | | 2,925 | | | | (536 | ) | | | (18.3 | ) | | The decrease was mainly recorded in Domestic Fixed-Line Communications cash balances, including due to early repayment of loans and debentures in the third quarter of 2019. For more information, see Section 1.3 - Cash Flows, below. |
| Current and non-current trade and other receivables | | | 2,505 | | | | 2,527 | | | | (22 | ) | | | (0.9 | ) | | |
| Inventory | | | 94 | | | | 86 | | | | 8 | | | | 9.3 | | | |
| Broadcasting rights | | | 63 | | | | 470 | | | | (407 | ) | | | (86.6 | ) | | The decrease was due to the asset’s impairment in DBS. See Note 5.2 to the financial statements. |
| Usage right assets | | | 1,361 | | | | 1,434 | | | | (73 | ) | | | (5.1 | ) | | This decrease was mainly attributable to the Domestic Fixed-Line Communications segment. |
| Property, plant and equipment | | | 6,217 | | | | 6,789 | | | | (572 | ) | | | (8.4 | ) | | The decrease was mainly due to the asset’s impairment in DBS. See Note 5.2 to the financial statements. |
| Intangible assets | | | 968 | | | | 2,627 | | | | (1,659 | ) | | | (63.2 | ) | | The decrease was mainly due to a NIS 951 million impairment in goodwill attributed to the Cellular Communications segment in the Period, and impairment and amortization of excess acquisition costs attributed to DBS and impairment of other intangible assets in DBS. See Note 5 to the financial statements. |
| Deferred tax assets | | | 18 | | | | 1,041 | | | | (1,023 | ) | | | (98.3 | ) | | The decrease was due to a NIS 1,166 million write-off of the tax asset for DBS’s losses, effected as a change of an accounting estimate in the second quarter of 2019. See Note 6 to the financial statements. The decrease was partially offset by the reversal of a tax reserve for DBS’s impairment in 2018. |
| Deferred costs and non-current investments | | | 469 | | | | 519 | | | | (50 | ) | | | (9.6 | ) | | The decrease includes impairment of a subscriber acquisition asset in DBS at the end of 2018, and impairment of assets in the International Communications, Internet, and NEP Services segment. |
| Investment property | | | - | | | | 140 | | | | (140 | ) | | | (100 | ) | | The balance was reduced after completion of the Sakia land asset’s sale and recognition of capital gains (see Note 7 to the financial statements). |
| Total assets | | | 14,084 | | | | 18,558 | | | | (4,474 | ) | | | (24.1 | ) | | |
Board of Directors’ Report on the State of the Company’s Affairs for the Period Ended September 30, 2019
| 1.1. | Financial Position (Contd.) |
| | | September 30,
2019 | | | September 30,
2018 | | | Increase (decrease) | | | |
| | | NIS millions | | | NIS millions | | | NIS millions | | | % | | | Explanation |
| Debt to financial institutions and debenture holders | | | 10,519 | | | | 11,947 | | | | (1,428 | ) | | | (12.0 | ) | | This decrease in debt balances was due to loan and debenture repayments, including an early repayment carried out in the present Quarter (see Note 8.3 to the financial statements). These were offset by debenture issuances and new loans in the Domestic Fixed-Line Communications segment. |
| Liabilities for leases | | | 1,416 | | | | 1,467 | | | | (51 | ) | | | (3.5 | ) | | |
| Trade and other payables | | | 1,503 | | | | 1,602 | | | | (99 | ) | | | (6.2 | ) | | The decrease was due, among other things, to timing differences. |
| Employee benefits | | | 904 | | | | 596 | | | | 308 | | | | 51.7 | | | The increase was due to an increase in provisions for an early retirement plan in the Domestic Fixed-Line Communications segment in the fourth quarter of 2018, and provisions for early retirement arrangements and a streamlining agreement in the Multi-Channel Television segment and the International Communications, Internet, and NEP Services segment, respectively, in the Period (see Note 9 to the financial statements). |
| Tax liabilities | | | 65 | | | | 100 | | | | (35 | ) | | | (35.0 | ) | | |
| Dividend payable | | | - | | | | 318 | | | | (318 | ) | | | (100 | ) | | |
| Other liabilities | | | 360 | | | | 358 | | | | 2 | | | | 0.6 | | | |
| Total liabilities | | | 14,767 | | | | 16,388 | | | | (1,621 | ) | | | (9.9 | ) | | |
| Total equity (equity deficit) | | | (683 | ) | | | 2,170 | | | | (2,853 | ) | | | - | | | The equity deficit comprises 4.8% of the balance sheet total, as compared to equity comprising 11.7% of the balance sheet total on September 30, 2018. The transition to equity deficit was mainly due to losses recorded in the present Period, attributable mainly to losses from impairment of goodwill in the Cellular Communications segment and the write-off of the tax asset for DBS’s losses.
Equity was also down due to losses recorded in the fourth quarter of 2018. |
| | | | 14,084 | | | | 18,558 | | | | (4,474 | ) | | | (24.1 | ) | | |
Board of Directors’ Report on the State of the Company’s Affairs for the Period Ended September 30, 2019
| | | 1-9.2019 | | | 1-9.2018 | | | Increase (decrease) | | | 7-9.2019 | | | 7-9.2018 | | | Increase (decrease) | | | |
| | | NIS millions | | | NIS millions | | | NIS millions | | | % | | | NIS millions | | | NIS millions | | | NIS millions | | | % | | | Explanation |
| Revenues | | | 6,727 | | | | 6,995 | | | | (268 | ) | | | (3.8 | ) | | | 2,247 | | | | 2,301 | | | | (54 | ) | | | (2.3 | ) | | The decrease was due to lower revenues across all the Group’s core segments (excluding the Cellular Communications segment, where revenues increased in the Quarter). |
| General and operating expenses | | | 2,420 | | | | 2,494 | | | | (74 | ) | | | (3.0 | ) | | | 794 | | | | 815 | | | | (21 | ) | | | (2.6 | ) | | The decrease in the present Period was mainly attributable to the Cellular Communications and Multi-Channel Television segments. |
| Salaries | | | 1,455 | | | | 1,507 | | | | (52 | ) | | | (3.5 | ) | | | 474 | | | | 494 | | | | (20 | ) | | | (4.0 | ) | | The decrease was due to lower expenses across all the Group’s core segments, following downsizing efforts. |
| Depreciation, amortization and impairment | | | 1,425 | | | | 1,609 | | | | (184 | ) | | | (11.4 | ) | | | 481 | | | | 547 | | | | (66 | ) | | | (12.1 | ) | | The decrease in depreciation and amortization costs was mainly due to impairment of depreciable assets and excess acquisition costs in DBS in the fourth quarter of 2018. On the other hand, in the present Period and Quarter, the item included an ongoing impairment of DBS’s assets (property, plant and equipment and intangible assets). See Note 5.2 to the financial statements. |
| Other operating expenses (income), net | | | (400 | ) | | | 113 | | | | (513 | ) | | | - | | | | 39 | | | | 6 | | | | 33 | | | | - | | | The transition from net expenses to net income in the present Period was attributable to the Domestic Fixed-Line Communications segment, mainly following NIS 403 million in capital gains from the sale of a land asset in the Sakia property (see Note 7 to the financial statements). This change was partially offset by a streamlining arrangement in the Multi-Channel Television segment (in the Period) and a streamlining agreement in the International Communications, Internet, and NEP Services segment (in the Quarter), to the amount of NIS 45 million in each segment (see Note 9 to the financial statements). |
| Impairment loss | | | 951 | | | | 10 | | | | 941 | | | | - | | | | - | | | | 10 | | | | (10 | ) | | | (100 | ) | | Loss from impairment of goodwill in Cellular Communications operations. See Note 5.1 to the financial statements. |
| Operating profit (loss) | | | 876 | | | | 1,262 | | | | (386 | ) | | | (30.6 | ) | | | 459 | | | | 429 | | | | 30 | | | | 7.0 | | | |
| Finance expenses, net | | | 440 | | | | 327 | | | | 113 | | | | 34.6 | | | | 205 | | | | 109 | | | | 96 | | | | 88.1 | | | This increase in net finance expenses was mainly attributable to the Domestic Fixed-Line Communications segment, mostly due to finance costs from the early repayment of loans and debentures (see Notes 8.3 and 16 to the financial statements). |
| Share in losses of investees | | | 2 | | | | 3 | | | | (1 | ) | | | (33.3 | ) | | | 1 | | | | 1 | | | | - | | | | - | | | |
| Income tax | | | 1,516 | | | | 243 | | | | 1,273 | | | | - | | | | 62 | | | | 85 | | | | (23 | ) | | | (27.1 | ) | | Taxes were up in the present Period following reversal of the tax asset recognized on DBS’s losses, and recognition of NIS 1,166 million in tax expenses in the second quarter of 2019. See Note 6.1 to the financial statements. Taxable profits were also up, mainly due to capital gains recognized on the sale of a land asset in the Sakia property in the Period. |
| Profit (loss) for the period | | | (1,082 | ) | | | 689 | | | | (1,771 | ) | | | - | | | | 191 | | | | 234 | | | | (43 | ) | | | (18.4 | ) | | |
Board of Directors’ Report on the State of the Company’s Affairs for the Period Ended September 30, 2019
| A. | Revenue and operating profit data, presented by the Group’s operating segments: |
| | | 1-9.2019 | | | 1-9.2018 | | | 7-9.2019 | | | 7-9.2018 | |
| | | NIS millions | | | % of total revenues | | | NIS millions | | | % of total revenues | | | NIS millions | | | % of total revenues | | | NIS millions | | | % of total revenues | |
| Revenues by operating segment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Domestic Fixed-Line Communications | | | 3,088 | | | | 45.9 | | | | 3,170 | | | | 45.3 | | | | 1,025 | | | | 45.6 | | | | 1,043 | | | | 45.3 | |
| Cellular Communications | | | 1,760 | | | | 26.1 | | | | 1,825 | | | | 26.1 | | | | 612 | | | | 27.2 | | | | 604 | | | | 26.3 | |
| International Communications, Internet and NEP Services | | | 1,009 | | | | 15.0 | | | | 1,021 | | | | 14.6 | | | | 329 | | | | 14.6 | | | | 333 | | | | 14.5 | |
| Multi-Channel Television | | | 1,014 | | | | 15.1 | | | | 1,117 | | | | 16.0 | | | | 334 | | | | 14.9 | | | | 367 | | | | 15.9 | |
| Others and adjustments | | | (144 | ) | | | (2.1 | ) | | | (138 | ) | | | (2.0 | ) | | | (53 | ) | | | (2.3 | ) | | | (46 | ) | | | (2.0 | ) |
| Total | | | 6,727 | | | | 100 | | | | 6,995 | | | | 100 | | | | 2,247 | | | | 100 | | | | 2,301 | | | | 100 | |
| | | 1-9.2019 | | | 1-9.2018 | | | 7-9.2019 | | | 7-9.2018 | |
| | | NIS millions | | | % of segment revenues | | | NIS millions | | | % of segment revenues | | | NIS millions | | | % of segment revenues | | | NIS millions | | | % of segment revenues | |
| Operating profit by segment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Domestic Fixed-Line Communications | | | 1,846 | | | | 59.8 | | | | 1,311 | | | | 41.4 | | | | 440 | | | | 42.9 | | | | 451 | | | | 43.2 | |
| Cellular Communications* | | | (2 | ) | | | (0.1 | ) | | | 2 | | | | 0.1 | | | | 16 | | | | 2.6 | | | | (2 | ) | | | (0.3 | ) |
| International Communications, Internet and NEP Services | | | 32 | | | | 3.2 | | | | 95 | | | | 9.3 | | | | (20 | ) | | | (6.1 | ) | | | 31 | | | | 9.3 | |
| Multi-Channel Television | | | (96 | )** | | | (9.5 | ) | | | (17 | ) | | | (1.5 | ) | | | (29 | )** | | | (8.7 | ) | | | 1 | | | | 0.3 | |
| Others and adjustments | | | (904 | ) | | | - | | | | (129 | ) | | | - | | | | 52 | | | | - | | | | (52 | ) | | | - | |
| Consolidated operating profit (loss) % of Group revenues | | | 876 | | | | 13.0 | | | | 1,262 | | | | 18.0 | | | | 459 | | | | 20.4 | | | | 429 | | | | 18.6 | |
| * | Impairment loss from Cellular Communications segment, as detailed in Note 5.1 to the financial statements, is presented under the adjustments item. |
| ** | Results for the Multi-Channel Television segment are presented after adjustment for impairment losses, as detailed in Note 5.2 to the financial statements. These impairment losses are presented under the ‘Adjustments’ item. |
Board of Directors’ Report on the State of the Company’s Affairs for the Period Ended September 30, 2019
| 1.2.2 | Operating segments (contd.) |
| B. | Domestic Fixed-Line Communications Segment |
| | | 1-9.2019 | | | 1-9.2018 | | | Increase (decrease) | | | 7-9.2019 | | | 7-9.2018 | | | Increase (decrease) | | | |
| | | NIS millions | | | NIS millions | | | NIS millions | | | % | | | NIS millions | | | NIS millions | | | NIS millions | | | % | | | Explanation |
| Fixed-line telephony | | | 792 | | | | 875 | | | | (83 | ) | | | (9.5 | ) | | | 259 | | | | 282 | | | | (23 | ) | | | (8.2 | ) | | The decrease was due to a decrease in the subscriber base and lower ARPU on phone lines. |
| Internet - infrastructure | | | 1,186 | | | | 1,200 | | | | (14 | ) | | | (1.2 | ) | | | 393 | | | | 401 | | | | (8 | ) | | | (2.0 | ) | | This decrease in revenues was mainly due to a decrease in the number of retail internet subscriber lines, offset by higher average revenues per retail user. This was coupled with a downward trend in revenues from wholesale internet services. |
| Transmission, data communications and others | | | 902 | | | | 898 | | | | 4 | | | | 0.4 | | | | 304 | | | | 291 | | | | 13 | | | | 4.5 | | | The increase was mainly attributable to cellular handset sales. |
| Digital and cloud services | | | 208 | | | | 197 | | | | 11 | | | | 5.6 | | | | 69 | | | | 69 | | | | - | | | | - | | | The increase in the Period was mainly due to IP Centrex services. |
| Total revenues | | | 3,088 | | | | 3,170 | | | | (82 | ) | | | (2.6 | ) | | | 1,025 | | | | 1,043 | | | | (18 | ) | | | (1.7 | ) | | |
| General and operating expenses | | | 418 | | | | 428 | | | | (10 | ) | | | (2.3 | ) | | | 144 | | | | 143 | | | | 1 | | | | 0.7 | | | The change was mainly due to lower marketing and general and building maintenance expenses, offset by higher expenses on terminal equipment and materials. |
| Salaries | | | 688 | | | | 693 | | | | (5 | ) | | | (0.7 | ) | | | 224 | | | | 233 | | | | (9 | ) | | | (3.9 | ) | | |
| Depreciation and amortization | | | 636 | | | | 633 | | | | 3 | | | | 0.5 | | | | 225 | | | | 218 | | | | 7 | | | | 3.2 | | | |
| Other operating expenses (income), net | | | (500 | ) | | | 105 | | | | (605 | ) | | | - | | | | (8 | ) | | | (2 | ) | | | (6 | ) | | | - | | | The change was mainly due to capital gains on real estate sales, primarily NIS 403 million in capital gains on the sale of the land asset in the Sakia property in the Period (see Note 7 to the financial statements).
Furthermore, in the Period, the provision for termination of employment by way of early retirement was reduced, as compared to expenses from termination of employment by way of early retirement in the corresponding period of last year. |
| Operating profit | | | 1,846 | | | | 1,311 | | | | 535 | | | | 40.8 | | | | 440 | | | | 451 | | | | (11 | ) | | | (2.4 | ) | | |
| Finance expenses, net | | | 454 | | | | 353 | | | | 101 | | | | 28.6 | | | | 207 | | | | 113 | | | | 94 | | | | 83.2 | | | The increase in net finance expenses was mainly due to NIS 73 million in finance costs on the early repayment of loans and Debentures (Series 7) recorded in the present Quarter (see Note 8.3 to the financial statements). Net finance expenses were also up due to finance expenses on employee benefits. This increase was partially offset, mainly by finance expenses recognized in the same period and quarter last year, following impairment in the fair value of the amount expected to have been returned to the Company on DBS’s acquisition. |
| Income tax | | | 334 | | | | 236 | | | | 98 | | | | 41.5 | | | | 58 | | | | 81 | | | | (23 | ) | | | (28.4 | ) | | |
| Segment profit | | | 1,058 | | | | 722 | | | | 336 | | | | 46.5 | | | | 175 | | | | 257 | | | | (82 | ) | | | (31.9 | ) | | |
Board of Directors’ Report on the State of the Company’s Affairs for the Period Ended September 30, 2019
| 1.2.2 | Operating segments (contd.) |
| C. | Cellular Communications segment |
| | | 1-9.2019 | | | 1-9.2018 | | | Increase (decrease) | | | 7-9.2019 | | | 7-9.2018 | | | Increase (decrease) | | | |
| | | NIS millions | | | NIS millions | | | NIS millions | | | % | | | NIS millions | | | NIS millions | | | NIS millions | | | % | | | Explanation |
| Services | | | 1,292 | | | | 1,318 | | | | (26 | ) | | | (2.0 | ) | | | 446 | | | | 449 | | | | (3 | ) | | | (0.7 | ) | | The decrease was mainly due to lower prices and migration of existing customers to cheaper plans offering greater data volumes at current market prices. This decrease in prices was partially offset by growth in the post-paid customer base. |
| Equipment sales | | | 468 | | | | 507 | | | | (39 | ) | | | (7.7 | ) | | | 166 | | | | 155 | | | | 11 | | | | 7.1 | | | The decrease in the Period was mainly due to a decrease in the number of handsets sold, and lower income per unit due to changes in the handset sales mix. The increase seen in the Quarter was mainly attributable to growth in wholesale volumes. |
| Total revenues | | | 1,760 | | | | 1,825 | | | | (65 | ) | | | (3.6 | ) | | | 612 | | | | 604 | | | | 8 | | | | 1.3 | | | |
| General and operating expenses | | | 1,009 | | | | 1,048 | | | | (39 | ) | | | (3.7 | ) | | | 348 | | | | 344 | | | | 4 | | | | 1.2 | | | The decrease in the present Period was mainly due to a reduction in the cost of handset sales and continued downsizing and streamlining of operating expenses. In the Quarter, these expenses were up, mainly due to an increase in the cost of sales for handsets. |
| Salaries | | | 279 | | | | 289 | | | | (10 | ) | | | (3.5 | ) | | | 89 | | | | 94 | | | | (5 | ) | | | (5.3 | ) | | The decrease was mainly attributable to a reduction in the workforce. |
| Depreciation and amortization | | | 469 | | | | 478 | | | | (9 | ) | | | (1.9 | ) | | | 157 | | | | 161 | | | | (4 | ) | | | (2.5 | ) | | |
| Other operating expenses, net | | | 5 | | | | 8 | | | | (3 | ) | | | (37.5 | ) | | | 2 | | | | 7 | | | | (5 | ) | | | (71.4 | ) | | |
| Operating profit (loss) | | | (2 | ) | | | 2 | | | | (4 | ) | | | - | | | | 16 | | | | (2 | ) | | | 18 | | | | - | | | |
| Finance income, net | | | 31 | | | | 28 | | | | 3 | | | | 10.7 | | | | 8 | | | | 11 | | | | (3 | ) | | | (27.3 | ) | | |
| Income tax | | | 7 | | | | 8 | | | | (1 | ) | | | (12.5 | ) | | | 6 | | | | 3 | | | | 3 | | | | 100 | | | |
| Segment profit | | | 22 | | | | 22 | | | | - | | | | - | | | | 18 | | | | 6 | | | | 12 | | | | 200 | | | |
For information on impairment in the mobile communications sector, see Note 5.1 to the financial statements.
Board of Directors’ Report on the State of the Company’s Affairs for the Period Ended September 30, 2019
| 1.2.2 | Operating segments (contd.) |
| D. | International Communications, Internet and NEP Services |
| | | 1-9.2019 | | | 1-9.2018 | | | Increase (decrease) | | | 7-9.2019 | | | 7-9.2018 | | | Increase (decrease) | | | |
| | | NIS millions | | | NIS millions | | | NIS millions | | | % | | | NIS millions | | | NIS millions | | | NIS millions | | | % | | | Explanation |
| Revenues | | | 1,009 | | | | 1,021 | | | | (12 | ) | | | (1.2 | ) | | | 329 | | | | 333 | | | | (4 | ) | | | (1.2 | ) | | In the Period, the decrease was mainly due to lower revenues from international calls and internet operations and the sale of outsourcing operations in the second quarter of 2018. This decrease was offset by higher revenues from services and equipment to businesses. |
| General and operating expenses | | | 582 | | | | 561 | | | | 21 | | | | 3.7 | | | | 194 | | | | 184 | | | | 10 | | | | 5.4 | | | The increase was due to an increase in the cost of sales for equipment and business licenses, and an increase in domestic and international bandwidth expenses. The increase was partially offset by lower international call expenses. |
| Salaries | | | 196 | | | | 228 | | | | (32 | ) | | | (14.0 | ) | | | 63 | | | | 70 | | | | (7 | ) | | | (10.0 | ) | | The decrease was due to a reduction in the number of employee roster and, in the Period, was also due to the sale of outsourcing operations in the second quarter of 2018. |
| Depreciation and amortization | | | 139 | | | | 134 | | | | 5 | | | | 3.7 | | | | 47 | | | | 46 | | | | 1 | | | | 2.2 | | | The increase in the present Period was due to increased amortization of the subscriber acquisition asset and amortization of international bandwidth. |
| Other expenses | | | 60 | | | | 3 | | | | 57 | | | | - | | | | 45 | | | | 2 | | | | 43 | | | | - | | | The increase was due to NIS 45 million in expenses recognized in the Quarter pursuant to an agreement signed by the Company and Histadrut Clalit and the workers’ union in July 2019. The agreement includes streamlining and operational synergy initiatives (see Note 9.2 to the financial statements). Results were also affected by an increase in provisions for legal claims in the Period. |
| Operating profit (loss) | | | 32 | | | | 95 | | | | (63 | ) | | | (66.3 | ) | | | (20 | ) | | | 31 | | | | (51 | ) | | | - | | | |
| Finance expenses, net | | | 10 | | | | 11 | | | | (1 | ) | | | (9.1 | ) | | | 3 | | | | 4 | | | | (1 | ) | | | (25.0 | ) | | |
| Tax expenses | | | 5 | | | | 20 | | | | (15 | ) | | | (75.0 | ) | | | (5 | ) | | | 7 | | | | (12 | ) | | | - | | | |
| Segment profit (loss) | | | 17 | | | | 64 | | | | (47 | ) | | | (73.4 | ) | | | (18 | ) | | | 20 | | | | (38 | ) | | | - | | | |
Board of Directors’ Report on the State of the Company’s Affairs for the Period Ended September 30, 2019
| 1.2.2 | Operating segments (contd.) |
| E. | Multi-Channel Television |
| | | 1-9.2019* | | | 1-9.2018 | | | Increase (decrease) | | | 7-9.2019* | | | 7-9.2018 | | | Increase (decrease) | | | |
| | | NIS millions | | | NIS millions | | | NIS millions | | | % | | | NIS millions | | | NIS millions | | | NIS millions | | | % | | | Explanation |
| Revenues | | | 1,014 | | | | 1,117 | | | | (103 | ) | | | (9.2 | ) | | | 334 | | | | 367 | | | | (33 | ) | | | (8.9 | ) | | The decrease was mainly due to a decrease in the customer base and in ARPU. |
| General and operating expenses | | | 667 | | | | 712 | | | | (45 | ) | | | (6.3 | ) | | | 219 | | | | 229 | | | | (10 | ) | | | (4.4 | ) | | The decrease was mainly due to a decrease in expenses for advertising and marketing, contractors and professional consultants which was offset (mainly in the Quarter) by higher content expenses. |
| Salaries | | | 156 | | | | 174 | | | | (18 | ) | | | (10.3 | ) | | | 50 | | | | 56 | | | | (6 | ) | | | (10.7 | ) | | The decrease was mainly attributable to a reduction in the workforce. |
| Depreciation and amortization | | | 252 | | | | 239 | | | | 13 | | | | 5.4 | | | | 93 | | | | 81 | | | | 12 | | | | 14.8 | | | The increase was mainly due to the impairment of STB boxes. |
| Other operating expenses, net | | | 35 | | | | 9 | | | | 26 | | | | - | | | | 1 | | | | - | | | | 1 | | | | - | | | In the Period, the increase was mainly due to expenses recognized on an employee retirement arrangement (see Note 9.1 to the financial statements), offset by an update to the provision for legal claims. |
| Operating profit (loss) | | | (96 | ) | | | (17 | ) | | | (79 | ) | | | - | | | | (29 | ) | | | 1 | | | | (30 | ) | | | - | | | |
| Finance expenses (income), net | | | 11 | | | | (7 | ) | | | 18 | | | | - | | | | 4 | | | | 3 | | | | 1 | | | | 33.3 | | | The change in net finance expenses in the present Period was mainly due to a change in the fair value of financial assets. |
| Tax expenses | | | 2 | | | | 1 | | | | 1 | | | | 100 | | | | 1 | | | | - | | | | 1 | | | | - | | | |
| Segment loss | | | (109 | ) | | | (11 | ) | | | (98 | ) | | | - | | | | (34 | ) | | | (2 | ) | | | (32 | ) | | | - | | | |
| * | The Multi-Channel Television segment’s results for the Period and Quarter are presented net of impairment. See Notes 5.2 and 18 to the financial statements. |
This matches the way that the Group’s chief operating decision maker assesses the segment’s performance and decides on resource allocations for the segment.
Furthermore, see Note 19.3 for highlights from DBS’s financial statements.
Board of Directors’ Report on the State of the Company’s Affairs for the Period Ended September 30, 2019
| | | 1-9.2019 | | | 1-9.2018 | | | Change | | | 7-9.2019 | | | 7-9.2018 | | | Change | | | |
| | | NIS millions | | | NIS millions | | | NIS millions | | | % | | | NIS millions | | | NIS millions | | | NIS millions | | | % | | | Explanation |
| Net cash from operating activities | | | 2,176 | | | | 2,598 | | | | (422 | ) | | | (16.2 | ) | | | 787 | | | | 883 | | | | (96 | ) | | | (10.9 | ) | | The decrease in net cash from operating activities was due to lower profits and changes in working capital, including employee retirement payments. In the Period, these were partially offset by a decrease in income tax payments on final tax assessments in the corresponding period last year.
This decrease in cash flow in the present Period was reported across all of the Group’s core segments. The decrease in cash flow in the Quarter was mainly attributable to the Domestic Fixed-Line Communications segment. |
| Net cash used in investing activities | | | (1,172 | ) | | | (2,543 | ) | | | 1,371 | | | | (53.9 | ) | | | (123 | ) | | | (232 | ) | | | 109 | | | | (47 | ) | | The decrease in net cash used in investing activities was mainly due to lower net investments in bank and other deposits (in the Quarter - an increase in net proceeds) in the Domestic Fixed-Line Communications segment. Furthermore, the present Period included proceeds on the sale of the Sakia property, and a refund of betterment levy received in the present Quarter (see Note 7 to the financial statements), as compared to betterment tax payments on the said sale in the same period last year. |
| Net cash used in financing activities | | | (1,255 | ) | | | (828 | ) | | | (427 | ) | | | 51.6 | | | | (996 | ) | | | (166 | ) | | | (830 | ) | | | 500 | | | The increase in net cash used in financing activities was due to early repayment of loans and debentures in the present Quarter in the Domestic Fixed-Line Communications segment, which was partially offset by debenture issuances and new loans (see Note 8 to the financial statements). This increase was also partially offset by the lack of dividend payments in the present Period. |
| Net increase (decrease) in cash | | | (251 | ) | | | (773 | ) | | | 522 | | | | (67.5 | ) | | | (332 | ) | | | 485 | | | | (817 | ) | | | (168.5 | ) | | |
Average volume in the reporting Period:
Long-term liabilities (including current maturities) to financial institutions and debenture holders - NIS 11,113 million.
Supplier credit: NIS 847 million. Short-term credit to customers: NIS 1,755 million. Long-term credit to customers: NIS 324 million.
Working Capital
As of September 30, 2019, the Group had a working capital surplus of NIS 967 million, as compared to a working capital surplus of NIS 509 million on September 30, 2018.
According to its separate financial statements, the Company had a working capital surplus of NIS 656 million as of September 30, 2019, as compared to a working capital surplus of NIS 355 million on September 30, 2018.
This increase in the Group’s and the Company’s working capital was mainly due to a decrease in current maturities on debentures and loans following loan and debenture repayments in accordance with the Company’s amortization schedule and including an early repayment made in the present Quarter while concurrently raising longer-duration debt (see Note 8 to the financial statements). Furthermore as of the financial statements’ date, there are no dividends payable. This increase was partially offset by a decrease in cash balances.
Board of Directors’ Report on the State of the Company’s Affairs for the Period Ended September 30, 2019
| 1.4 | Disclosure on the Company’s projected cash flows |
According to Regulation 10(b)(14) to the Securities Regulations (Periodic and Immediate Reports), 1970, and given the relevant warning sign of a deficit in equity in the Company’s separate statements and in the consolidated statements, the Company hereby presents its projected cash flow statement, disclosing the sources and uses of cash for the period starting October 1, 2019 and ending December 31, 2021.
| Projected cash flows | | From Oct. 1, 2019 through December 31,
2019 | | | From Jan. 1, 2020 through December 31,
2020 | | | From Jan. 1, 2021 through December 31,
2021 | |
| Company - Separate | | NIS millions | | | NIS millions | | | NIS millions | |
| | | | | | | | | | |
| Cash and cash equivalents at the beginning of the period | | | 242 | * | | | 427 | | | | 1,435 | |
| | | | | | | | | | | | | |
Sources - Company | | | | | | | | | | | | |
| Net cash from operating activities | | | 483 | | | | 1,844 | | | | 1,948 | |
| | | | | | | | | | | | | |
| Proceeds from the sale of property, plant and equipment | | | 29 | | | | 240 | | | | 27 | |
| Proceeds from redemption of bank and other deposits | | | 781 | | | | 937 | | | | - | |
| Miscellaneous | | | 2 | | | | 2 | | | | 4 | |
| Cash flows from investing activities | | | 812 | | | | 1,179 | | | | 31 | |
| | | | | | | | | | | | | |
| Debenture issuance and new loans | | | 325 | | | | 900 | | | | 400 | |
| Cash flows from financing activities | | | 325 | | | | 900 | ** | | | 400 | |
| Total sources - Company | | | 1,620 | | | | 3,923 | | | | 2,379 | |
| Sources from investees | | | | | | | | | | | | |
| Loans from investees | | | 170 | | | | 50 | | | | 156 | |
| Repayment of loans to investees | | | 15 | | | | 90 | | | | - | |
| Miscellaneous | | | 1 | | | | 3 | | | | - | |
| Total cash from investees | | | 186 | | | | 143 | | | | 156 | |
| | | | | | | | | | | | | |
| Total sources | | | 1,806 | | | | 4,066 | | | | 2,535 | |
| | | | | | | | | | | | | |
Projected liabilities (expected uses) - Company | | | | | | | | | | | | |
| Acquisition of fixed assets and investment in intangible assets | | | (219 | ) | | | (862 | ) | | | (939 | ) |
| Cash used in investing activities | | | (219 | ) | | | (862 | ) | | | (939 | ) |
| | | | | | | | | | | | | |
| Repayment of bank loans | | | (118 | ) | | | (344 | ) | | | (222 | ) |
| Repayment of debentures (public) | | | (661 | ) | | | (589 | ) | | | (597 | ) |
| Repayment of private debentures and non-bank credit | | | (317 | ) | | | (562 | )** | | | (98 | ) |
| Principal and interest payments on leases | | | (29 | ) | | | (112 | ) | | | (110 | ) |
| Interest payments and other finance expenses | | | (197 | ) | | | (379 | ) | | | (312 | ) |
| Miscellaneous | | | (27 | ) | | | (14 | ) | | | (29 | ) |
| Cash used in financing activities | | | (1,349 | ) | | | (2,000 | ) | | | (1,368 | ) |
| Total uses - Company | | | (1,568 | ) | | | (2,862 | ) | | | (2,307 | ) |
| * | The Company has NIS 1,718 million invested in deposits and money market funds that are available for short-term use. |
| ** | In light of the Company’s current estimates, the projection for debenture issuances and new loans and the projection for (early) repayment of private debentures and non-bank credit facilities include an assumption concerning continuation of the plan for extending the debt’s duration in 2020. |
Board of Directors’ Report on the State of the Company’s Affairs for the Period Ended September 30, 2019
| 1.4 | Disclosure on the Company’s projected cash flows (Contd.) |
| Projected cash flows | | From October 1, 2019 through December 31,
2019 | | | From January 1, 2020 through December 31,
2020 | | | From January 1, 2021 through December 31,
2021 | |
| Company - Separate (contd.) | | NIS millions | | | NIS millions | | | NIS millions | |
| | | | | | | | | | |
| Uses for investees | | | | | | | | | | | | |
| Investment in a subsidiary | | | (25 | ) | | | (165 | ) | | | (150 | ) |
| Loans to subsidiaries | | | - | | | | - | | | | (8 | ) |
| Interest payment | | | (28 | ) | | | (31 | ) | | | (36 | ) |
| Total cash used in investees | | | (53 | ) | | | (196 | ) | | | (194 | ) |
| | | | | | | | | | | | | |
| Total uses | | | (1,621 | ) | | | (3,058 | ) | | | (2,501 | ) |
| | | | | | | | | | | | | |
| Cash and cash equivalents at the end of the period | | | 427 | | | | 1,435 | | | | 1,469 | |
Assumptions underlying the projected cash flows:
| 1. | Company projections concerning cash flows from operating activities and cash flows for investing activities: |
| A. | The Company’s and its investees’ projections for the period starting October 1, 2019 and ending December 31, 2019 are based on the Company’s and its investees’ budget, with such adjustments as dictated by actual performance and changing circumstances. |
| B. | The cash flow projections for the Company and its investees for 2020 and 2021 are based on current assessments for said years, prior to formulating the budget for the Company and its investees for 2020. The companies are currently working to formulate its budget and work plans for 2020, and any changes in the goals, targets, and focus of the Group’s companies may affect these assessments. |
| C. | The projected cash flows for the Company and its investees are based, among other things, on the performance of the Company and its investees in recent years and assessments concerning trends expected in the telecom market in the coming years. These include assessments concerning market competition, prices, consumer preferences, regulatory arrangements, technological developments, and the economy at large. Operating, sales and marketing expenses have been adjusted to match the projected scope of operations. As such, the projection includes assumptions concerning streamlining initiatives in the Company’s and its investees’ workforce and the associated retirement and salary costs. |
| D. | These projections do not include the effects of the removal of the Group’s structural separation and the merger with the subsidiaries, should these occur in the projected period. |
| 2. | Material liabilities due for maturity in the first six months of the projected cash flow period |
Principal repayments in the period between October 1, 2019 and December 31, 2020 according to the Company’s amortization schedules:
October 2019 - a NIS 56 million repayment of bank loans.
November 2019 - a NIS 62 million repayment of bank loans and a NIS 17 million repayment of private debentures and non-bank credit.
December 2019 - a NIS 661 million repayment of public debentures.
Early repayments in the period between October 1, 2019 and December 31, 2020:
In December 2019, the Company plans to effect the early repayment of private debentures and non-bank credit facilities to the total amount of NIS 300 million.
Sources for settling liabilities
The Company has sufficient sources to settle its liabilities, through cash generated from operating activities, cash balances and investments in deposits and money market funds which can be utilized in the short term, and by raising debt from bank and non-bank sources.
Board of Directors’ Report on the State of the Company’s Affairs for the Period Ended September 30, 2019
| 3. | The Board of Directors has reviewed and approved the sources included in the disclosure concerning projected cash flows, having found the scope of each source and its expected timing to be reasonable. The Board of Directors has also reviewed whether any restrictions applicable to the receipt of dividends, loans, and loan repayments from investees and is satisfied that they are expected to be received as planned. |
The aforesaid disclosure concerning projected cash flows constitutes forward-looking information.
The Company’s assumptions and estimates concerning the projected cash flows, the sources for repaying the Company’s existing and expected liabilities, and concerning the assumptions underlying the projected cash flows are based on data available to the Company as of the reporting date, and assuming it continues operating in the ordinary course of business. There is no guarantee that these assumptions and estimates will materialize, in part or in full, as they also depend on external factors outside the Company’s control or over which the Company has only limited control, and also in light of current uncertainty in the Israeli telecom market. Actual data may differ materially from these assessments if there is a change in any of the factors originally taken into account.
Board of Directors’ Report on the State of the Company’s Affairs for the Period Ended September 30, 2019
| 2. | Disclosure Concerning the Company’s Financial Reporting |
| 2.1 | Disclosure of valuations |
The following table discloses valuations pursuant to Regulation 8B to the Securities Regulations (Periodic and Immediate Reports), 1970.
Pelephone’s valuation is included in these financial statements by way of reference to the Company’s financial statements as of June 30, 2019, published on August 29, 2019.
| | | DBS -
Extremely Material Valuation (1) Attached to the financial statements as of September 30, 2019 | | Pelephone -
Extremely Material Valuation (2) Attached to the financial statements as of June 30, 2019 |
| Subject of valuation | | Net disposal value of DBS Satellite Services (1998) Ltd.’s assets, to test for impairment of intangible assets. | | Pelephone’s EV to test for impairment of goodwill attributed for its operations in the Company’s financial statements pursuant to IAS 36. |
| | | | | |
| Date of valuation | | September 30, 2019; the valuation was signed on November 10, 2019. | | June 30, 2019; valuation signed on August 25, 2019. |
| | | | | |
| Value prior to the valuation | | Negative amount of NIS (68) million. | | NIS 2,165 carrying amount of Pelephone’s net operating assets * (NIS 1,027 million - balance of goodwill). |
| | | | | |
| Value set in the valuation | | Negative amount of NIS (148) million. | | NIS 1,214 million. The Company concluded that there is impairment requiring a write-down of NIS 951 million in goodwill recognized in the Company’s books. |
| | | | | |
| Assessor’s identity and profile | | Prometheus Financial Advisory Ltd. The valuation was performed by a team headed by Mr. Gideon Peletz, CPA, who holds a BA in Accounting and Economics from the Tel Aviv University. Mr. Peletz has extensive experience performing valuations, financial statement analyses, preparing expert opinions, and providing various financial advisory services for companies and businesses. The assessor has no dependence on the Company. The Company has undertaken to indemnify the assessor for damages exceeding three times their fee, unless they acted maliciously. |
| | | |
| Valuation model | | NRV | | Discounted Cash Flow method (DCF) |
| | | | | |
| Assumptions used in the valuation | | Assumptions concerning the NRV of DBS’s assets | | Discount rate - 10.27% Permanent growth rate - 2.5% Scrap value from total appraised value - 96% |
| * | Pelephone’s net operating assets do not include trade receivable balances from installment-based handset sales, which are presented at present value. |
| (1) | Despite the negative value of DBS’s operations, the Company supports DBS by approving credit facilities or investing in DBS’s equity (see Note 4.3 to the financial statements). The Company’s support of DBS as aforesaid is due, among other things, to the Multi-Channel Television segment’s current and expected contribution to the Bezeq Group’s overall operations. |
| (2) | The period that elapsed between the effective date of Pelephone’s valuation and the approval date of this report exceeds 90 days. As of September 30, 2019, Pelephone tested for signs of impairment. As of the reporting date, no signs have been identified which may indicate possible additional impairment in the cash-generating unit referred to as the Cellular Communications segment. |
For more information, see Note 5 to the financial statements.
Board of Directors’ Report on the State of the Company’s Affairs for the Period Ended September 30, 2019
| 2.2 | Testing for impairment in the International Communications, Internet and NEP Services segment |
Following on Section 3.2 to the Company’s Board of Directors’ Report of December 31, 2018, concerning a material valuation of Bezeq International, the latter performed a formal review to test for signs of impairment as of September 30, 2019. This review was performed in accordance with IAS 36 and in view of the small difference measured as of December 31, 2018 between the value of Bezeq International’s operations (NIS 1,061), and the carrying amount of its net operating assets (NIS 828 million). As of the financial statements’ date, no signs were found for impairment. It is clarified that the value of these operations are affected by assessments and forecasts concerning a long list of factors with various levels of influence on the value of operations, and that cash flows in the representative year significantly affect EV and changes in assessments concerning these cash flows significantly affect the valuation.
It is further clarified that internet operations are a key source of profit for Bezeq International, and changes in market trends in this segment, with no corresponding offsetting effect in Bezeq International’s other operations, may materially affect the valuation.
| 2.3 | Due to claims filed against the Group, and for which exposure cannot yet be estimated or assessed at this time, the auditors have drawn attention to the matter in their opinion of the financial statements. |
| 2.4 | For information onmaterial events subsequent to the financial statements’ date, see Note 20 to the financial statements. |
| 3. | Details of debt certificate series |
On April 8, 2019, Midroog Ltd. (“Midroog”) maintained its Aa2.il rating for the Company’s Debentures (Series 6,7,9, and 10) and changed its outlook from stable to negative (see immediate report, ref. no. 2019-01-032406). Furthermore, on May 7, 2019, S&P Global Ratings Maalot Ltd. (“Maalot”) affirmed its ilAA/Negative rating for the Company (see immediate report, ref. no. 2019-01-039834).
On August 6, 2019, Midroog posted an issuer comment concerning the Company’s debentures, while maintaining its Aa2.il/Negative rating for the debentures (see immediate report, ref. no. 2019-01-067917).
On August 12, 2019, Maalot announced that it was downgrading the Company and its subsidiaries, and of the Company’s debentures, to ilAA-/Negative following continued erosion in its operating results (see immediate report, ref. no. 2019-01.068886). The rating reports are included in this Board of Directors’ Report by way of reference.
In September 2019, the Company settled NIS 444 million par value of the Company’s Debentures (Series 7) by way of early repayment pursuant to a purchase offer made according to a specification at a price of 101.50 agorot per NIS 1 par value of debentures (see Note 8.3 to the financial statements).
For information concerning the liabilities balances of the reporting corporation and those companies consolidated in its financial statements as of September 30, 2019, see the Company’s reporting form on the MAGNA system, dated November 18, 2019.
We thank the managers of the Group’s companies, its employees, and shareholders.
| | | |
| Shlomo Rodav | | Dudu Mizrahi |
| Chairman of the Board | | CEO |
Signed: November 17, 2019
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