UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
6-K
Report
of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16
Under
the Securities Exchange Act of 1934
For the
month of July 2008
EXFO
Electro-Optical Engineering Inc.
(Translation
of registrant’s name into English)
400
Godin Avenue, Quebec, Quebec, Canada G1M 2K2
(Address
of principal executive offices)
Indicate
by check mark whether the registrant files or will file annual reports under
cover of Form 20-F or Form 40-F.
|
Form
20-F þ
|
Form
40-F o
|
Indicate
by check mark whether the registrant by furnishing the information contained in
this Form is also thereby furnishing the information to the Commission pursuant
to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
|
Yes
o
|
No
þ
|
If “Yes”
is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-______.
Page 1 de
55
On June
26, 2008, EXFO Electro-Optical Engineering Inc., a Canadian corporation,
reported its results of operations for the third fiscal quarter ended May 31,
2008. This report on Form 6-K sets forth the news release relating to
EXFO’s announcement and certain information relating to EXFO’s financial
condition and results of operations for the third fiscal quarter of the 2008
fiscal year. This press release and information relating to EXFO’s
financial condition and results of operations for the third fiscal quarter of
the 2008 fiscal year are hereby incorporated as a document by reference to Form
F-3 (Registration Statement under the Securities Act of 1933) declared effective
as of July 30, 2001 and to Form F-3 (Registration Statement under the Securities
Act of 1933) declared effective as of March 11, 2002 and to amend
certain material information as set forth in these two Form F-3
documents.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
EXFO
ELECTRO-OPTICAL ENGINEERING INC.
|
|
|
By:
/s/ Germain
Lamonde
Name:
Germain Lamonde
Title:
President and Chief Executive Officer
|
|
Date:
July 8, 2008
EXFO Reports Record Sales and Bookings for Third Quarter of Fiscal
2008
|
§
|
Sales
increase 23.9% year-over-year to US$48.6 million with bookings at US$50.7
million
|
|
§
|
Gross
margin reaches 60.9%, highest level in seven
years
|
|
§
|
Navtel
Communications and Brix Networks acquisitions announced and
completed
|
QUEBEC
CITY, CANADA, June 26, 2008 – EXFO Electro-Optical Engineering Inc. (NASDAQ:
EXFO; TSX: EXF) reported today record sales and bookings as well as its highest
gross margin in seven years for its third quarter ended May 31,
2008.
Sales
increased 23.9% to a record-high of US$48.6 million in the third quarter of
fiscal 2008 from US$39.2 million in the third quarter of 2007 and 12.2% from
US$43.3 million in the second quarter of 2008. EXFO’s year-over-year revenue
growth was more than 75% organic, since the acquisitions of Navtel
Communications and Brix Networks, which closed approximately one month and two
months respectively into the third quarter of 2008, contributed US$2.2 million
in total revenue.
Net
bookings improved 16.0% year-over-year to a record-high of US$50.7 million in
the third quarter of fiscal 2008 for a book-to-bill ratio of 1.04, excluding the
backlogs of Brix Networks and Navtel Communications at their acquisition dates.
In comparison, net bookings in the third quarter of fiscal 2007 amounted to
US$43.7 million and US$44.5 million in the second quarter of 2008.
Gross
margin reached 60.9% of sales in the third quarter of fiscal 2008. In
comparison, gross margin attained 57.1% in the third quarter of 2007 and 58.3%
in the second quarter of 2008.
GAAP net
earnings in the third quarter of fiscal 2008 totaled US$11.2 million, or US$0.16
per diluted share, compared to GAAP net earnings of US$2.6 million, or
US$0.04 per diluted share, in the same period last year and US$4.0 million, or
US$0.06 per diluted share, in the second quarter of 2008. GAAP net earnings in
the third quarter of fiscal 2008 included US$5.3million for the recognition of
previously unrecognized future income tax assets in the United States, an
extraordinary gain of US$3.0 million related to the recognition of Navtel
Communications’ future income tax assets in excess of the acquisition price, as
well as US$0.8 million in after-tax amortization of intangible assets and
US$0.3 million in stock-based compensation costs.
“Our
strategic acquisitions of Navtel Communications and Brix Networks are
accelerating the transformation of EXFO into the leading supplier of
next-generation, IP-based test and monitoring solutions,” said Germain Lamonde,
EXFO’s Chairman, President and CEO. “They allow us to cover the full technology
lifecycle, extending from advanced test equipment for network equipment
manufacturers (NEMs) and carrier labs onto portable field-test gear and service
assurance solutions for network service providers (NSPs). These acquisitions
also enable us to support the higher-margin application and service layers on a
network infrastructure to enable triple-play services and next-generation,
converged IP networking. I’d like to take this opportunity to welcome staff
members of Navtel Communications and Brix Networks to the EXFO
family.”
“Looking
at our financial results, I’m really pleased with our strong performance in the
third quarter with record sales and bookings allowing us to grow substantially
faster than our industry based again on market-share gains, while our gross
margin reached its highest level in seven years,” Mr. Lamonde added. “We
also barely started to reap the benefits from investments in our new R&D
software center in India and manufacturing facility in China. These investments,
combined with our excellent competitive position and superior quality of
execution, should help accelerate our revenue growth, increase gross margin and,
ultimately, drive up earnings.”
Selected
Financial Information
(In
thousands of US dollars)
|
Segmented
results:
|
Q3 2008 | Q2 2008 | Q3 2007 | |||||||||
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
||||||||||
|
Sales:
|
||||||||||||
|
Telecom
Division
|
$ | 42,843 | $ | 37,435 | $ | 33,821 | ||||||
|
Life
Sciences and Industrial Division
|
5,738 | 5,846 | 5,384 | |||||||||
|
Total
|
$ | 48,581 | $ | 43,281 | $ | 39,205 | ||||||
|
Earnings
from operations:
|
||||||||||||
|
Telecom
Division
|
$ | 3,819 | $ | 2,817 | $ | 2,143 | ||||||
|
Life
Sciences and Industrial Division
|
639 | 818 | 697 | |||||||||
|
Total
|
$ | 4,458 | $ | 3,635 | $ | 2,840 | ||||||
|
Other
selected information:
|
||||||||||||
|
GAAP
net earnings
|
$ | 11,179 | $ | 4,024 | $ | 2,574 | ||||||
|
After-tax
amortization of intangible assets
|
$ | 791 | $ | 490 | $ | 653 | ||||||
|
Stock-based
compensation costs
|
$ | 334 | $ | 269 | $ | 178 | ||||||
|
Recognition
of previously unrecognized future income tax assets
|
$ | (5,324 | ) | $ | – | $ | – | |||||
|
Extraordinary
gain
|
$ | (3,036 | ) | $ | – | $ | – | |||||
|
Future
income tax recovery
|
$ | – | $ | (2,715 | ) | $ | – | |||||
|
Reduced
rate on future income tax assets
|
$ | – | $ | 1,524 | $ | – | ||||||
Operating
Expenses
Selling
and administrative expenses amounted to US$15.7 million, or 32.2% of sales, in
the third quarter of fiscal 2008 compared to US$12.8 million, or 32.7% of sales,
in the same period last year and US$13.7 million, or 31.6% of sales, in the
second quarter of 2008.
Gross
research and development expenses totaled US$8.8 million, or 18.2% of sales, in
the third quarter of fiscal 2008 compared to US$6.6 million, or 16.9% of sales,
in the third quarter of 2007 and US$7.6 million, or 17.5% of sales, in the
second quarter of 2008.
Net
R&D expenses totaled US$7.4 million, or 15.2% of sales, in the third quarter
of fiscal 2008 compared to US$5.3 million, or 13.6% of sales, in the same
period last year and US$6.2 million, or 14.3% of sales, in the second quarter of
2008.
Third-Quarter
Business Highlights
Market expansion – EXFO
delivered year-over-year sales growth of 23.9% in the third quarter of fiscal
2008 and 20.8% year-to-date mostly due to market-share gains in optical and
protocol testing as well as revenue contribution from Brix Networks and Navtel
Communications. EXFO’s protocol test business, which now includes Navtel
Communications and Brix Networks, accounted for more than 20% of Telecom
Division revenues for a second consecutive quarter. Telecom Division sales
increased 26.7% year-over-year to US$42.8 million in the third quarter of 2008.
The corporate performance metric for sales growth in fiscal 2008 has been
established at 20% year-over-year.
Profitability – EXFO reported
GAAP net earnings of US$11.2 million, or US$0.16 per diluted share, in the third
quarter of fiscal 2008, including US$5.3 million for the recognition of
previously unrecognized future income tax assets in the United States and US$3.0
million related to the recognition of Navtel Communications’ future income tax
assets in excess of the acquisition price.
Increased
sales of higher-margin protocol test solutions (including Brix and Navtel
products) and ramping sales volume were largely responsible for the significant
increase of the gross margin to 60.9% in the third quarter of 2008. GAAP
earnings from operations reached 9.2% in the third quarter of 2008 and 6.3%
after nine months versus the company’s stated goal of 8% for the fiscal
year.
Innovation – EXFO launched
five new products in the third quarter and 20 after nine months into the fiscal
year. Key product launches in the third quarter included an IP test module for
the installation and troubleshooting of Ethernet-based triple-play services in
access networks; 1X/2X/4X/10X Fibre Channel test functionalities on the
FTB-8130NGE and IQS-8130NGE Packet Blazer multi-service test modules for
field-test and manufacturing applications; and Fiber Guardian, a remotely
controllable test head and related software to allow real-time monitoring of
optical networks. Following the quarter-end, EXFO introduced two new test
solutions, including an optional Internet Protocol/Multi-Protocol Label
Switching (IP/MPLS) software functionality for its established base of IQS and
FTB-8510B/8510G 1GbE and 10GbE Packet Blazer test modules. Sales from products
that have been on the market two years or less accounted for 32.2 % of total
sales in the third quarter of fiscal 2008 and 36.7% after nine months, while the
company’s published goal is 30% for the fiscal year.
Business
Outlook
The
company forecasted sales between US$49.0 million and US$53.0 million and GAAP
net earnings between US$0.00 and US$0.04 per diluted share for the fourth
quarter of fiscal 2008. This outlook includes a full contribution from Brix
Networks and Navtel Communications in the fourth quarter. GAAP net earnings
include US$0.02 per diluted share in stock-based compensation costs and
after-tax amortization of intangible assets.
Conference
Call and Webcast
EXFO will
host a conference call today at 5 p.m. (Eastern time) to review its financial
results for the third quarter of fiscal 2008. To listen to the conference call
and participate in the question period via telephone, dial 1-416-641-6652. Germain Lamonde,
Chairman, President and CEO, and Pierre Plamondon, CA, Vice-President of Finance
and Chief Financial Officer, will participate in the call. An audio replay of
the conference call will be available one hour after the event until midnight on
July 3, 2008. The replay number is 1-402-977-9141 and the reservation number is
21383027. The audio Webcast and replay of the conference call will also be
available on EXFO’s Website at www.EXFO.com,
under the Investors section.
Forward-Looking
Statements
This news
release contains forward-looking statements within the meaning of the U.S.
Private Securities Litigation Reform Act of 1995, and we intend that such
forward-looking statements be subject to the safe harbors created thereby.
Forward-looking statements are statements other than historical information or
statements of current condition. Words such as may, will, expect, believe,
anticipate, intend, could, estimate, continue, or the negative or comparable
terminology are intended to identify forward-looking statements. In addition,
any statements that refer to expectations, projections or other
characterizations of future events and circumstances are considered
forward-looking statements. They are not guarantees of future performance and
involve risks and uncertainties. Actual results may differ materially from those
in forward-looking statements due to various factors including consolidation in
the global telecommunications test, measurement and monitoring industry; capital
spending levels in the telecommunications, life sciences and high-precision
assembly sectors; concentration of sales; fluctuating exchange rates and our
ability to execute in these uncertain conditions; the effects of the additional
actions we have taken in response to such economic uncertainty (including our
ability to quickly adapt cost structures with anticipated levels of business,
ability to manage inventory levels with market demand); market acceptance of our
new products and other upcoming products; limited visibility with regards to
customer orders and the timing of such orders; our ability to successfully
integrate our acquired and to-be-acquired businesses; our ability to
successfully expand international operations; the retention of key technical and
management personnel; and future economic, competitive and market conditions,
including any slowdown or recession in the global economy. Assumptions relating
to the foregoing involve judgments and risks, all of which are difficult or
impossible to predict and many of which are beyond our control. Other risk
factors that may affect our future performance and operations are detailed in
our Annual Report, on Form 20-F, and our other filings with the U.S. Securities
and Exchange Commission and the Canadian securities commissions. We believe that
the expectations reflected in the forward-looking statements are reasonable
based on information currently available to us, but we cannot assure you that
the expectations will prove to have been correct. Accordingly, you should not
place undue reliance on these forward-looking statements. These statements speak
only as of the date of this document. Unless required by law or applicable
regulations, we undertake no obligation to revise or update any of them to
reflect events or circumstances that occur after the date of this
document.
About
EXFO
EXFO is a
leading provider of test and monitoring solutions for network service providers
and equipment manufacturers in the global telecommunications industry. The
Telecom Division offers a wide range of innovative solutions extending across
the full technology lifecycle – from design to technology deployment and onto
service assurance – and covering all layers on a network infrastructure to
enable triple-play services and next-generation, converged IP networking. The
Life Sciences and Industrial Division offers solutions in medical device and
opto-electronics assembly, fluorescence microscopy and other life science
sectors. For more information, visit www.EXFO.com.
For
more information
Vance
Oliver
Manager,
Investor Relations
(418)
683-0913, Ext. 3733
vance.oliver@exfo.com
EXFO Electro-Optical Engineering Inc.
Interim
Consolidated Balance Sheet
(in
thousand of US dollars)
|
As
at
May
31,
2008
|
As
at
August
31,
2007
|
|||||||
|
(unaudited)
|
||||||||
|
Assets
|
||||||||
|
Current
assets
|
||||||||
|
Cash
|
$ | 8,582 | $ | 5,541 | ||||
|
Short-term
investments (note 2)
|
87,913 | 124,217 | ||||||
|
Accounts
receivable
|
||||||||
|
Trade,
less allowance for doubtful accounts of $241
($206
as at August 31, 2007)
|
30,100 | 26,699 | ||||||
|
Other
(note 2)
|
5,454 | 2,479 | ||||||
|
Income
taxes and tax credits recoverable (notes 3 and 9)
|
4,698 | 6,310 | ||||||
|
Inventories
(note 4)
|
38,098 | 31,513 | ||||||
|
Prepaid
expenses
|
2,282 | 1,391 | ||||||
|
Future
income taxes
|
9,882 | 7,609 | ||||||
| 187,009 | 205,759 | |||||||
|
Forward
exchange contracts (note 2)
|
628 | − | ||||||
|
Tax
credits recoverable (notes 3 and 9)
|
21,464 | − | ||||||
|
Property,
plant and equipment
|
21,118 | 18,117 | ||||||
|
Intangible
assets
|
22,264 | 9,628 | ||||||
|
Goodwill
|
47,285 | 28,437 | ||||||
|
Future
income taxes
|
16,795 | 17,197 | ||||||
| $ | 316,563 | $ | 279,138 | |||||
|
Liabilities
|
||||||||
|
Current
liabilities
|
||||||||
|
Bank
loan
|
$ | 1,470 | $ | − | ||||
|
Accounts
payable and accrued liabilities (note 5)
|
23,589 | 22,721 | ||||||
|
Deferred
revenue
|
6,831 | 2,598 | ||||||
| 31,890 | 25,319 | |||||||
|
Deferred
revenue
|
3,815 | 3,414 | ||||||
|
Future
income taxes
|
− | 240 | ||||||
| 35,705 | 28,973 | |||||||
|
Contingency (note
6)
|
||||||||
|
Shareholders’
Equity
|
||||||||
|
Share
capital (note 7)
|
147,732 | 150,019 | ||||||
|
Contributed
surplus
|
4,985 | 4,453 | ||||||
|
Retained
earnings
|
56,782 | 42,275 | ||||||
|
Accumulated
other comprehensive income (note 2)
|
71,359 | 53,418 | ||||||
| 280,858 | 250,165 | |||||||
| $ | 316,563 | $ | 279,138 | |||||
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO
Electro-Optical Engineering Inc.
Interim
Unaudited Consolidated Statements of Earnings
(in
thousand of US dollars, except share and per share data)
|
Three months
ended
May
31, 2008
|
Nine
months ended
May
31, 2008
|
Three
months ended
May
31, 2007
|
Nine
months ended
May
31, 2007
|
|||||||||||||
|
Sales
|
$ | 48,581 | $ | 132,847 | $ | 39,205 | $ | 109,959 | ||||||||
|
Cost of sales (1,2)
|
19,004 | 55,208 | 16,828 | 47,027 | ||||||||||||
|
Gross
margin
|
29,577 | 77,639 | 22,377 | 62,932 | ||||||||||||
|
Operating
expenses
|
||||||||||||||||
|
Selling
and administrative (1)
|
15,660 | 44,160 | 12,819 | 36,545 | ||||||||||||
|
Net
research and development (1)
(note 8)
|
7,373 | 19,570 | 5,328 | 14,360 | ||||||||||||
|
Amortization
of property, plant and equipment
|
1,071 | 3,045 | 737 | 2,182 | ||||||||||||
|
Amortization
of intangible assets
|
1,015 | 2,469 | 653 | 2,165 | ||||||||||||
|
Total
operating expenses
|
25,119 | 69,244 | 19,537 | 55,252 | ||||||||||||
|
Earnings
from operations
|
4,458 | 8,395 | 2,840 | 7,680 | ||||||||||||
|
Interest
income
|
964 | 4,063 | 1,236 | 3,513 | ||||||||||||
|
Foreign
exchange gain (loss)
|
(59 | ) | (907 | ) | (628 | ) | 107 | |||||||||
|
Earnings
before income taxes and extraordinary gain
|
5,363 | 11,551 | 3,448 | 11,300 | ||||||||||||
|
Income taxes (note
9)
|
||||||||||||||||
|
Current
|
112 | (7,080 | ) | 874 | 2,509 | |||||||||||
|
Future
|
2,432 | 11,881 | – | – | ||||||||||||
|
Recognition
of previously unrecognized future income tax assets
|
(5,324 | ) | (5,324 | ) | – | – | ||||||||||
| (2,780 | ) | (523 | ) | 874 | 2,509 | |||||||||||
|
Earnings
before extraordinary gain
|
8,143 | 12,074 | 2,574 | 8,791 | ||||||||||||
|
Extraordinary gain (note
3)
|
3,036 | 3,036 | – | – | ||||||||||||
|
Net
earnings for the period
|
$ | 11,179 | $ | 15,110 | $ | 2,574 | $ | 8,791 | ||||||||
|
Basic
earnings before extraordinary gain per share
|
$ | 0.12 | $ | 0.18 | $ | 0.04 | $ | 0.13 | ||||||||
|
Diluted
earnings before extraordinary gain per share
|
$ | 0.12 | $ | 0.17 | $ | 0.04 | $ | 0.13 | ||||||||
|
Basic
and diluted net earnings per share
|
$ | 0.16 | $ | 0.22 | $ | 0.04 | $ | 0.13 | ||||||||
|
Basic
weighted average number of shares outstanding (000’s)
|
68,907 | 68,964 | 68,917 | 68,844 | ||||||||||||
|
Diluted weighted average number
of shares outstanding (000’s) (note 10)
|
69,467 | 69,543 | 69,590 | 69,507 | ||||||||||||
|
(1)
Stock-based compensation
costs included in:
|
||||||||||||||||
|
Cost
of sales
|
$ | 37 | $ | 112 | $ | 32 | $ | 93 | ||||||||
|
Selling
and administrative
|
218 | 598 | 86 | 442 | ||||||||||||
|
Net
research and development
|
79 | 194 | 60 | 169 | ||||||||||||
| $ | 334 | $ | 904 | $ | 178 | $ | 704 | |||||||||
(2)
The cost of sales is exclusive of amortization, shown separately.
The accompanying notes are an integral part of
these consolidated financial statements.
Page 10
de 55
EXFO
Electro-Optical Engineering Inc.
Interim
Unaudited Statements of Comprehensive Income
and
Accumulated Other Comprehensive Income
(in
thousand of US dollars)
|
Comprehensive
income
|
||||||||||||||||
|
Three months
ended
May
31, 2008
|
Nine
months
ended
May
31, 2008
|
Three
months
ended
May
31, 2007
|
Nine
months
ended
May
31, 2007
|
|||||||||||||
|
Net
earnings for the period
|
$ | 11,179 | $ | 15,110 | $ | 2,574 | $ | 8,791 | ||||||||
|
Foreign
currency translation adjustment
|
(3,511 | ) | 16,222 | 18,067 | 7,307 | |||||||||||
|
Changes
in unrealized gains (losses) on short-term investments
|
(50 | ) | 40 | – | – | |||||||||||
|
Unrealized
gains on forward exchange contracts
|
295 | 2,844 | – | – | ||||||||||||
|
Reclassification
of realized gains on forward exchange contracts in net
earnings
|
(1,218 | ) | (3,145 | ) | – | – | ||||||||||
|
Future
income taxes effect of the above items
|
286 | 87 | – | – | ||||||||||||
|
Comprehensive
income
|
$ | 6,981 | $ | 31,158 | $ | 20,641 | $ | 16,098 | ||||||||
|
Accumulated
other comprehensive income
|
||||||||
|
Nine
months
ended
May
31, 2008
|
Nine
months
ended
May
31, 2007
|
|||||||
|
Foreign
currency translation adjustment
|
||||||||
|
Cumulative
effect of prior periods
|
$ | 53,418 | $ | 43,537 | ||||
|
Current
period
|
16,222 | 7,307 | ||||||
| 69,640 | 50,844 | |||||||
|
Unrealized
gains on forward exchange contracts
|
||||||||
|
Adjustment
related to the implementation of new accounting standards (note
2)
|
1,948 | – | ||||||
|
Current
period, net of realized gains and future income taxes
|
(214 | ) | – | |||||
| 1,734 | – | |||||||
|
Unrealized
gains (losses) on short-term investments
|
||||||||
|
Adjustment
related to the implementation of new accounting standards (note
2)
|
(55 | ) | – | |||||
|
Current
period, net of future income taxes
|
40 | – | ||||||
| (15 | ) | – | ||||||
|
Accumulated
other comprehensive income
|
$ | 71,359 | $ | 50,844 | ||||
Total
retained earnings and accumulated other comprehensive income amounted to $59,635
and $128,141 as of May 31, 2007, and May 31, 2008,
respectively.
The accompanying notes are an integral part of
these consolidated financial statements.
Page 11
de 55
EXFO
Electro-Optical Engineering Inc.
Interim
Unaudited Consolidated Statements of Retained Earnings
and
Contributed Surplus
(in
thousand of US dollars)
|
Retained
earnings
|
||||||||
|
Nine
months
ended
May
31, 2008
|
Nine
months
ended
May
31, 2007
|
|||||||
|
Balance
– Beginning of the period
|
$ | 42,275 | $ | − | ||||
|
Add
(deduct)
|
||||||||
|
Adjustment
related to the implementation of new accounting standards (note
2)
|
55 | − | ||||||
|
Net
earnings for the period
|
15,110 | 8,791 | ||||||
|
Premium
on redemption of share capital (note 7)
|
(658 | ) | − | |||||
|
Balance
– End of the period
|
$ | 56,782 | $ | 8,791 | ||||
|
Contributed
surplus
|
||||||||
|
Nine
months
ended
May
31, 2008
|
Nine
months
ended
May
31, 2007
|
|||||||
|
Balance
– Beginning of the period
|
$ | 4,453 | $ | 3,776 | ||||
|
Add
(deduct)
|
||||||||
|
Stock-based
compensation costs
|
919 | 687 | ||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards
|
(387 | ) | (221 | ) | ||||
|
Balance
– End of the period
|
$ | 4,985 | $ | 4,242 | ||||
The accompanying notes are an integral part of
these consolidated financial statements.
Page 12
de 55
EXFO
Electro-Optical Engineering Inc.
Interim
Unaudited Consolidated Statements of Cash Flows
(in
thousand of US dollars)
|
Three
months ended
May
31, 2008
|
Nine
months ended
May
31, 2008
|
Three
months ended
May
31, 2007
|
Nine
months ended
May
31, 2007
|
|||||||||||||
|
Cash
flows from operating activities
|
||||||||||||||||
|
Net
earnings for the period
|
$ | 11,179 | $ | 15,110 | $ | 2,574 | $ | 8,791 | ||||||||
|
Add
(deduct) items not affecting cash
|
||||||||||||||||
|
Discount
on short-term investments
|
533 | 1,521 | (190 | ) | 588 | |||||||||||
|
Stock-based
compensation costs
|
334 | 904 | 178 | 704 | ||||||||||||
|
Amortization
|
2,086 | 5,514 | 1,390 | 4,347 | ||||||||||||
|
Unrealized
losses on short-term investments
|
– | – | 70 | 70 | ||||||||||||
|
Gain
on disposal of capital assets
|
– | – | (100 | ) | (100 | ) | ||||||||||
|
Deferred
revenue
|
(937 | ) | (435 | ) | (75 | ) | 1,164 | |||||||||
|
Government
grants
|
– | – | − | (22 | ) | |||||||||||
|
Future
income taxes
|
(2,892 | ) | 6,557 | − | − | |||||||||||
|
Extraordinary
gain
|
(3,036 | ) | (3,036 | ) | − | − | ||||||||||
| 7,267 | 26,135 | 3,847 | 15,542 | |||||||||||||
|
Change
in non-cash operating items
|
||||||||||||||||
|
Accounts
receivable
|
(326 | ) | (145 | ) | (3,015 | ) | (6,260 | ) | ||||||||
|
Income
taxes and tax credits
|
(1,789 | ) | (11,437 | ) | (466 | ) | (1,397 | ) | ||||||||
|
Inventories
|
(3,585 | ) | (2,878 | ) | (2,503 | ) | (2,632 | ) | ||||||||
|
Prepaid
expenses
|
(110 | ) | (506 | ) | (224 | ) | (89 | ) | ||||||||
|
Accounts
payable and accrued liabilities
|
(116 | ) | (3,075 | ) | (231 | ) | 2,541 | |||||||||
| 1,341 | 8,094 | (2,592 | ) | 7,705 | ||||||||||||
|
Cash
flows from investing activities
|
||||||||||||||||
|
Additions
to short-term investments
|
(235,160 | ) | (644,220 | ) | (236,286 | ) | (726,789 | ) | ||||||||
|
Proceeds
from disposal and maturity of short-term investments
|
277,791 | 686,371 | 235,446 | 718,362 | ||||||||||||
|
Additions
to capital assets (1)
|
(1,370 | ) | (5,056 | ) | (1,890 | ) | (3,536 | ) | ||||||||
|
Net
proceeds from disposal of capital assets
|
– | – | 1,563 | 2,791 | ||||||||||||
|
Business
combinations, net of cash acquired (note 3)
|
(40,938 | ) | (40,938 | ) | − | − | ||||||||||
| 323 | (3,843 | ) | (1,167 | ) | (9,172 | ) | ||||||||||
|
Cash
flows from financing activities
|
||||||||||||||||
|
Change
in bank loan
|
786 | 1,485 | − | − | ||||||||||||
|
Repayment
of long-term debt
|
– | – | (27 | ) | (78 | ) | ||||||||||
|
Redemption
of share capital (note 7)
|
(3,219 | ) | (3,393 | ) | − | − | ||||||||||
|
Exercise
of stock options
|
51 | 61 | 90 | 573 | ||||||||||||
| (2,382 | ) | (1,847 | ) | 63 | 495 | |||||||||||
|
Effect
of foreign exchange rate changes on cash
|
89 | 637 | 596 | 127 | ||||||||||||
|
Change
in cash
|
(629 | ) | 3,041 | (3,100 | ) | (845 | ) | |||||||||
|
Cash
– Beginning of period
|
9,211 | 5,541 | 9,108 | 6,853 | ||||||||||||
|
Cash
– End of period
|
$ | 8,582 | $ | 8,582 | $ | 6,008 | $ | 6,008 | ||||||||
(1) As
at May 31, 2007 and 2008, unpaid purchases of capital assets amounted to
$360,000 and $35,000, respectively.
The accompanying notes are an integral part of
these consolidated financial statements.
Page 13
de 55
EXFO
Electro-Optical Engineering Inc.
Note to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
|
1.
|
Interim
financial information
|
The
financial information as at May 31, 2008, and for the three- and nine-month
periods ended May 31, 2007 and 2008, is unaudited. In the opinion of
management, all adjustments necessary to present fairly the results
of these periods in accordance with generally accepted accounting
principles (GAAP) in Canada have been included. The adjustments made were
of a normal and recurring nature. Interim results may not necessarily be
indicative of results anticipated for the entire year.
These
interim consolidated financial statements are prepared in accordance with
generally accepted accounting principles in Canada and use the same
accounting policies and methods used in the preparation of the company’s most
recent annual consolidated financial statements, except for changes as described
in note 2. However, all disclosures required for annual financial statements
have not been included in these financial statements. Consequently, these
interim consolidated financial statements should be read in conjunction with the
company’s most recent annual consolidated financial statements.
|
2.
|
New
accounting standards and
pronouncements
|
Adopted
in fiscal 2008
On
September 1, 2007, the company adopted the Canadian Institute of Chartered
Accountants (CICA) Handbook Section 1530, “Comprehensive Income”, Section 3251,
“Equity”, Section 3855, “Financial Instruments – Recognition and Measurement”,
and Section 3865, “Hedges”. Sections 3251 and 3865 have been adopted
prospectively while Section 3855 has been applied retroactively, without
restatement of prior years’ financial statements, and Section 1530 has been
applied retroactively with restatement of prior years’ financial
statements.
Following
the adoption of Section 3855, the company classified its financial instruments
as follows:
Cash
Cash is
classified as financial asset held for trading and is carried at fair value in
the balance sheet and any changes in its fair value are reflected in the
statements of earnings.
Short-term
investments
The
company has elected to classify its short-term investments as available-for-sale
securities, and therefore they are carried at fair value in the balance sheet
and any changes in their fair value are reflected in other comprehensive income.
Upon the disposal or maturity of these assets, accumulated changes in their fair
value are reclassified in the statements of earnings. Also, upon the adoption of
this new standard, unrealized losses on short-term investments as of August 31,
2007, in the amount of $55,000 (previously recorded in the statements of
earnings), have been reclassified from the opening balance of retained earnings
to the opening balance of accumulated other comprehensive income for the nine
months ended May 31, 2008.
Interest
income on short-term investments is recorded in interest income in the
statements of earnings and in cash flows from operating activities in the
statements of cash flows.
The fair
value of these assets as of May 31, 2008, amounted to $87,913,000.
Accounts
receivable
Accounts
receivable are classified as loans and receivable. After their initial
measurement at fair value, they are carried at amortized cost, which
generally corresponds to cost due to their short-term
maturity.
Page 14
de 55
EXFO Electro-Optical
Engineering Inc.
Note to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
Bank
loan and accounts payable and accrued liabilities
Bank loan
and accounts payable and accrued liabilities are classified as other financial
liabilities. They are initially measured at their fair value. Subsequent
measurements are at cost, net of amortization, using the effective interest rate
method. For the company, that value corresponds to cost either as a result of
their short-term maturity or the floating-rate nature of some
liabilities.
Forward
exchange contracts
Forward
exchange contracts, which qualify for hedge accounting, are entered into by the
company to hedge anticipated US-dollar-denominated sales and the related
accounts receivable. They are recorded at fair value in the balance sheet, and
changes in their fair value are reported in other comprehensive income. Upon the
recognition of related hedged sales, accumulated changes in fair value are
reclassified in the statements of earnings. Unrecognized gains on forward
exchange contracts as of August 31, 2007, in the amount of $1,948,000,
net of future income taxes of $916,000, have been reflected as an adjustment to
the opening balance of accumulated other comprehensive income for the nine
months ended May 31, 2008. The short-term portion of the forward
exchange contracts in the amount of $2,098,000 is presented in other receivables
in the balance sheet.
Based on
the portfolio of forward exchange contracts as of May 31, 2008, the company
estimates that the portion of the unrecognized gains on these contracts as of
that date, which will be realized and reclassified from accumulated other
comprehensive income to net earnings over the next 12 months amounts to
$2,098,000.
Cumulative
foreign currency translation adjustment
The
cumulative foreign currency translation adjustment, which is solely the result
of the translation of the company’s consolidated financial statements in US
dollars (the reporting currency), represents a component of accumulated other
comprehensive income for all periods presented.
Transition
The
company has elected to use September 1, 2002, as the transition date for
embedded derivatives.
Other
than the adjustments described above for the short-term investments and the
forward exchange contracts, the recognition, derecognition and measurement
methods used to prepare the consolidated financial statements have not changed
from the methods of periods prior to the effective date of the new standards.
Consequently, there were no further adjustments to record on
transition.
Section
1506, “Accounting Changes”
On
September 1, 2007, the company adopted Section 1506, “Accounting Changes”. This
section establishes criteria for changes in accounting policies, accounting
treatment and disclosures regarding changes in accounting policies, estimates
and corrections of errors. In particular, this section allows for voluntary
changes in accounting policy only when they result in the financial statements
providing reliable and more relevant information. Furthermore, this section
requires disclosure when an entity has not applied a new source of GAAP that has
been issued but is not yet effective. Such disclosure is provided below.
The adoption of this section had no effects on the company’s consolidated
financial statements for the three and the nine months ended May 31,
2008.
To
be adopted after fiscal 2008
In
December 2006, the CICA issued three new sections, which provide a complete set
of disclosure and presentation requirements for financial instruments: Section
3862, “Financial Instruments − Disclosures”; Section 3863, “Financial
Instruments − Presentation”; and Section 1535, “Capital
Disclosures”.
Page 15
de 55
EXFO Electro-Optical
Engineering Inc.
Note to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
Section
3862 replaces the disclosure portion of Section 3861, “Financial
Instruments − Disclosure and Presentation”. The new standard
places increased emphasis on disclosures regarding risks associated with both
recognized and unrecognized financial instruments and how these risks are
managed. It is also intended to remove any duplicate disclosures and simplify
the disclosures about concentrations of risk, credit risk, liquidity risk and
price risk currently found in Section 3861.
Section
3863 carries forward the presentation requirements from Section 3861,
unchanged.
Section
1535 applies to all entities, regardless of whether they have financial
instruments and are subject to external capital requirements. The new section
requires disclosure of information about an entity’s objectives, policies and
processes for managing capital, as well as quantitative data about capital and
whether the entity has complied with any capital requirements.
Sections
1535, 3862 and 3863 apply to fiscal years beginning on or after October 1, 2007.
The company will adopt these new standards on September 1, 2008, and is
currently assessing the effects these new standards will have on its
consolidated financial statements.
In June
2007, the CICA issued Section 3031, “Inventories”, to harmonize accounting for
inventories under Canadian GAAP with IFRS. This standard requires the
measurement of inventories at the lower of cost and net realizable value and
includes guidance on the determination of cost, including allocation of
overheads and other costs to inventory. The standard also requires the
consistent use of either first-in, first-out (FIFO) or weighted average cost
formula to measure the cost of inventories and requires the reversal of previous
write-downs to net realizable value when there is a subsequent increase in the
value of inventories. The new standard applies to fiscal years beginning on or
after January 1, 2008. The company will adopt this new standard on September 1,
2008, and is currently assessing the effects this new standard will have on its
consolidated financial statements.
In
February 2008, the CICA issued Section 3064, “Goodwill and intangible assets”,
which supersedes Section 3062, “Goodwill and other intangible assets” and
Section 3450, “Research and development costs”. Various changes have been made
to other sections of the CICA Handbook for consistency purposes. Section 3064
establishes standards for the recognition, measurement, presentation and
disclosure of goodwill subsequent to its initial recognition and of intangible
assets by profit-oriented enterprises. Standards concerning goodwill remain
unchanged from the standards included in the previous Section 3062. This new
section applies to fiscal years beginning on or after October 1, 2008. The
company will adopt this new standard on September 1, 2009, and it has not yet
determined the effects its adoption will have on its consolidated financial
statements.
|
3.
|
Business
combinations
|
Navtel
Communications Inc.
On March
26, 2008, the company acquired all issued and outstanding shares of Navtel
Communications Inc. Based in Toronto, Canada, Navtel was a privately held
company specializing in tests for next-generation Internet Protocol networks. On
March 26, 2008, Navtel Communications Inc. was liquidated into the parent
company.
This
acquisition was settled for a total cash consideration valued at $11,477,000, or
$11,332,000 net of $145,000 of cash acquired. The total consideration included
acquisition related costs of $172,000. As at May, 31, 2008, a portion of the
total consideration, in the amount of $11,000 was not yet paid and has been
recorded as an account payable related to business combination (note
5).
This
acquisition was accounted for using the purchase method and, consequently, the
results of operations of the acquired business have been included in the
consolidated financial statements of the company since March 26, 2008, being the
date of acquisition.
EXFO Electro-Optical
Engineering Inc.
Note to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
The
purchase price, including acquisition related costs, was allocated based on
preliminary estimated fair value of acquired net assets at the date of
acquisition as follows:
|
(unaudited)
|
||||
|
Assets
acquired, net of cash acquired
|
||||
|
Accounts
receivable
|
$ | 776 | ||
|
Inventories
|
447 | |||
|
Other
current assets
|
320 | |||
|
Tax
credits
|
7,397 | |||
|
Core
technology
|
2,919 | |||
|
Future
income tax assets
|
8,351 | |||
|
Current
liabilities assumed
|
||||
|
Accounts
payable and accrued liabilities
|
(431 | ) | ||
|
Deferred
revenue
|
(523 | ) | ||
|
Future
income tax liabilities
|
(2,825 | ) | ||
|
Net
identifiable assets acquired
|
16,431 | |||
|
Purchase
price, net of cash acquired
|
11,332 | |||
|
Excess
of the fair value of net identifiable assets acquired over the
purchase price
|
$ | (5,099 | ) | |
The
excess of the fair value of the net identifiable assets acquired over the
purchase price of $5,099,000 has been eliminated in part by fully reducing the
amount assigned to acquired core technology and related future income tax
liabilities. The remaining excess in the amount of $3,036,000 has been presented
as an extraordinary gain in the statements of earnings for the three- and
nine-month period ended May 31, 2008. The basic and diluted extraordinary gain
per share amounted to $0.04 for the three months and the nine months ended May
31, 2008.
The
allocation of the purchase price is preliminary because the acquisition was
closed during the quarter and because critical information was still missing to
complete the final allocation. The company expects to complete the final
allocation for this acquisition in the fourth quarter of fiscal 2008. Assets and
liabilities susceptible to change upon the finalization of the purchase
price allocation mainly consist of intangible assets and future income
taxes.
Brix
Networks Inc. (renamed EXFO Service Assurance Inc.)
On April
22, 2008, the company acquired all issued and outstanding shares of Brix
Networks Inc. (renamed EXFO Service Assurance Inc.). Based in the Boston area
(MA), Brix Networks Inc. was a privately held company offering VoIP and IPTV
service testing across the three areas that most affect the success of a
real-time service: signaling quality (signaling path performance), delivery
quality (media transport performance) and content quality (overall quality of
experience).
This
acquisition was settled for a cash consideration valued at $29,696,000, or
$29,684,000 net of $12,000 of cash acquired, plus a contingent cash
consideration of up to a maximum of $7,537,000, based upon the achievement of
bookings volume exceeding $16,000,000 up to $40,000,000 in the 12 months
following the acquisition. The purchase price allocation took into account
severance expenses of $497,000 for the termination of employees of the acquired
business as well as other acquisition-related costs of $1,021,000. As at
May 31, 2008, a portion of the cash consideration in the amount
of $564,000 was not yet paid. From this amount, $497,000 is related to
severance expenses and has been recorded in restructuring charges payable
(note 5), while the remainder of $67,000, relating to acquisition-related costs,
has been recorded as an account payable related to a business
combination (note 5). Any amount payable for the contingent cash
consideration will increase goodwill.
This
acquisition was accounted for using the purchase method and, consequently, the
results of operations of the acquired business have been included in the
consolidated financial statements of the company since April 22, 2008, being the
date of acquisition.
EXFO Electro-Optical
Engineering Inc.
Note to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
The
purchase price, including acquisition related costs, was allocated based on
preliminary estimated fair value of acquired net assets at the date of
acquisition as follows:
|
(unaudited)
|
||||
|
Assets
acquired, net of cash acquired
|
||||
|
Accounts
receivable
|
$ | 1,106 | ||
|
Inventories
|
1,229 | |||
|
Other
current assets
|
488 | |||
|
Property,
plant and equipment
|
1,097 | |||
|
Core
technology
|
13,765 | |||
|
Future
income tax assets
|
1,641 | |||
|
Current
liabilities assumed
|
||||
|
Accounts
payable and accrued liabilities
|
(2,565 | ) | ||
|
Deferred
revenue
|
(4,120 | ) | ||
|
Net
identifiable assets acquired
|
12,641 | |||
|
Goodwill
|
17,043 | |||
|
Purchase
price, net of cash acquired
|
$ | 29,684 | ||
Intangible
assets are amortized on a straight-line basis over their estimated useful life
of five years.
The
allocation of the purchase price is preliminary because the acquisition was
closed during the quarter and because critical information was still missing to
complete the final allocation. The company expects to complete the final
allocation for this acquisition in the fourth quarter of fiscal 2008. Assets and
liabilities susceptible to change upon the finalization of the purchase
price allocation mainly consist of intangible assets, future income taxes and
deferred revenue.
Future
income tax assets at the acquisition date amounted to approximately $17,000,000
and were mainly comprised of net operating losses and research and development
expenses carried forward. A valuation allowance of approximately $12,000,000 was
recorded against these assets. In the event the company would reverse a portion
of or all the valuation allowance, the amount of such reversal would reduce the
goodwill recognized at the date of acquisition.
These two
businesses, including acquired goodwill, report to the Telecom Division.
Acquired goodwill is not deductible for tax purposes.
|
4.
|
Inventories
|
|
As
at
May
31,
2008
|
As
at
August
31,
2007
|
|||||||
|
(unaudited)
|
||||||||
|
Raw
materials
|
$ | 18,079 | $ | 16,898 | ||||
|
Work
in progress
|
2,208 | 1,387 | ||||||
|
Finished
goods
|
17,811 | 13,228 | ||||||
| $ | 38,098 | $ | 31,513 | |||||
EXFO Electro-Optical
Engineering Inc.
Note to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
|
5.
|
Accounts
payable and accrued liabilities
|
|
As
at
May 31, 2008
|
As
at
August 31, 2007
|
|||||||
|
(unaudited)
|
||||||||
|
Trade
|
$ | 9,573 | $ | 11,749 | ||||
|
Salaries
and social benefits
|
8,670 | 7,929 | ||||||
|
Warranty
|
965 | 800 | ||||||
|
Commissions
|
782 | 824 | ||||||
|
Tax
on capital
|
903 | 524 | ||||||
|
Restructuring
charges payable
|
620 | – | ||||||
|
Business
combinations (note 3)
|
78 | – | ||||||
|
Other
|
1,998 | 895 | ||||||
| $ | 23,589 | $ | 22,721 | |||||
Changes
in the warranty provision are as follows:
|
Nine
months
ended
May
31, 2008
|
Nine
months
ended
May
31, 2007
|
|||||||
|
(unaudited)
|
||||||||
|
Balance – Beginning of the
period
|
$ | 800 | $ | 1,006 | ||||
|
Provision
|
470 | 597 | ||||||
|
Addition from business combinations
|
175 | – | ||||||
|
Settlements
|
(480 | ) | (748 | ) | ||||
|
Balance – End of the
period
|
$ | 965 | $ | 855 | ||||
|
6.
|
Contingency
|
On
November 27, 2001, a class action suit was filed in the United States District
Court for the Southern District of New York against the company, four of
the underwriters of its Initial Public Offering and some of its executive
officers pursuant to the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder and Sections 11, 12 and 16 of the Securities Act of
1933. This class action alleges that the company’s registration
statement and prospectus filed with the Securities and Exchange Commission on
June 29, 2000, contained material misrepresentations and/or omissions resulting
from (i) the underwriters allegedly soliciting and receiving additional,
excessive and undisclosed commissions from certain investors in exchange for
which they allocated material portions of the shares issued in connection with
the company’s Initial Public Offering; and (ii) the underwriters allegedly
entering into agreements with customers whereby shares issued in connection with
the company’s Initial Public Offering would be allocated to those customers in
exchange for which customers agreed to purchase additional amounts of shares in
the after-market at pre-determined prices.
EXFO Electro-Optical
Engineering Inc.
Note to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
On April
19, 2002, the plaintiffs filed an amended complaint containing master
allegations against all of the underwriters in all of the 310 cases included in
this class action and also filed an amended complaint containing allegations
specific to four of the company’s underwriters, the company and two of its
executive officers. In addition to the allegations mentioned above, the amended
complaint alleges that the underwriters (i) used their analysts to manipulate
the stock market; and (ii) implemented schemes that allowed issuer insiders
to sell their shares rapidly after an initial public offering and benefit from
high market prices. As concerns the company and its two executive officers in
particular, the amended complaint alleges that (i) the company’s registration
statement was materially false and misleading because it failed to disclose the
additional commissions and compensation to be received by underwriters; (ii) the
two named executive officers learned of or recklessly disregarded the alleged
misconduct of the underwriters; (iii) the two named executive officers had
motive and opportunity to engage in alleged wrongful conduct due to personal
holdings of the company’s stock and the fact that an alleged artificially
inflated stock price could be used as currency for acquisitions; and (iv) the
two named executive officers, by virtue of their positions with the company,
controlled the company and the contents of the registration statement and had
the ability to prevent its issuance or cause it to be corrected. The plaintiffs
in this suit seek an unspecified amount for damages suffered.
In July
2002, the issuers filed a motion to dismiss the plaintiffs’ amended complaint
and a decision was rendered on February 19, 2003. Only one of the claims
against the company was dismissed. On October 8, 2002, the claims against
its officers were dismissed pursuant to the terms of Reservation of Rights and
Tolling Agreements entered into with the plaintiffs.
In June
2004, an agreement of partial settlement was submitted to the court for
preliminary approval. The proposed partial settlement was between the
plaintiffs, the issuer defendants in the consolidated actions, the issuer
officers and directors named as defendants, and the issuers’ insurance
companies. The court granted the preliminary approval motion on
February 15, 2005, subject to certain modifications. On August 31,
2005, the court issued a preliminary order further approving the modifications
to the settlement and certifying the settlement classes. The court also
appointed the notice administrator for the settlement and ordered that notice of
the settlement be distributed to all settlement class members by
January 15, 2006. The settlement fairness hearing occurred on
April 24, 2006, and the court reserved decision at that time.
While the
partial settlement was pending approval, the plaintiffs continued to litigate
against the underwriter defendants. The district court directed that the
litigation proceed within a number of “focus cases” rather than in all of the
310 cases that have been consolidated. The company's case is not one
of these focus cases. On October 13, 2004, the district court
certified the focus cases as class actions. The underwriter
defendants appealed that ruling, and on December 5, 2006, the Court of Appeals
for the Second Circuit reversed the district court’s class certification
decision.
On April
6, 2007, the Second Circuit denied the plaintiffs’ petition for rehearing of
that decision and, on May 18, 2007, the Second Circuit denied the plaintiffs’
petition for rehearing en banc. In light of the Second Circuit
opinion, liaison counsel for all issuer defendants, including the company,
informed the court that this settlement cannot be approved, because the defined
settlement class, like the litigation class, cannot be certified. On
June 25, 2007, the district court entered an order terminating the settlement
agreement. On August 14, 2007, the plaintiffs filed their second
consolidated amended class action complaints against the focus cases and, on
September 27, 2007, again moved for class certification.
On November 12, 2007, certain of the defendants in the focus
cases moved to dismiss the second consolidated amended class action complaints.
On March 26, 2008, the district court denied the motions to dismiss except as to
Section 11 claims raised by those plaintiffs who sold their securities for a
price in excess of the initial offering price and those who purchased outside of
the previously certified class period. Briefing on the class
certification motion was completed in May 2008.
Due to
the inherent uncertainties of litigation, it is not possible to predict the
final outcome of the case, nor to determine the amount of any possible losses.
The company will continue to defend its position in this litigation that the
claims against it, and its officers, are without merit. Accordingly, no
provision for this case has been made in the interim consolidated financial
statements as at May 31, 2008.
EXFO Electro-Optical
Engineering Inc.
Note to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
|
7.
|
Share
capital
|
On
November 5, 2007, the Board of Directors of the company approved a share
repurchase program, by way of a normal course issuer bid on the open market, of
up to 9.9% of the company’s public float (as defined by the Toronto Stock
Exchange), or 2,869,585 subordinate voting shares, at the prevailing market
price. The company expects to use cash, short-term investments or future cash
flows from operations to fund the repurchase of shares. The normal course issuer
bid started on November 8, 2007, and will end on November 7, 2008, or
on an earlier date if the company repurchases the maximum number of shares
permitted under the bid. The program does not require the company to repurchase
any specific number of shares, and it may be modified, suspended or terminated
at any time and without prior notice. All shares repurchased by the company
under the bid are canceled.
|
|
The
following tables summarize changes in share capital for the nine months
ended May 31, 2007 and 2008:
|
|
Nine
months ended May 31, 2007
|
||||||||||||||||||||
|
Multiple
voting shares
|
Subordinate
voting shares
|
|||||||||||||||||||
|
Number
|
Amount
|
Number
|
Amount
|
Total
amount
|
||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||
|
Balance
as at August 31, 2006
|
37,143,000 | $ | 1 | 31,609,969 | $ | 148,920 | $ | 148,921 | ||||||||||||
|
Exercise
of stock options
|
– | – | 41,550 | 121 | 121 | |||||||||||||||
|
Redemption
of restricted share units
|
– | – | 88 | – | – | |||||||||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards
|
– | – | – | 47 | 47 | |||||||||||||||
|
Balance
as at November 30, 2006
|
37,143,000 | 1 | 31,651,607 | 149,088 | 149,089 | |||||||||||||||
|
Exercise
of stock options
|
– | – | 109,723 | 362 | 362 | |||||||||||||||
|
Redemption
of restricted share units
|
– | – | 976 | – | – | |||||||||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards
|
– | – | – | 127 | 127 | |||||||||||||||
|
Balance
as at February 28, 2007
|
37,143,000 | 1 | 31,762,306 | 149,577 | 149,578 | |||||||||||||||
|
Exercise
of stock options
|
– | – | 26,825 | 90 | 90 | |||||||||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards
|
– | – | – | 47 | 47 | |||||||||||||||
|
Balance
as at May 31, 2007
|
37,143,000 | $ | 1 | 31,789,131 | $ | 149,714 | $ | 149,715 | ||||||||||||
EXFO Electro-Optical
Engineering Inc.
Note to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
|
Nine
months ended May 31, 2008
|
||||||||||||||||||||
|
Multiple
voting shares
|
Subordinate
voting shares
|
|||||||||||||||||||
|
Number
|
Amount
|
Number
|
Amount
|
Total
amount
|
||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||
|
Balance
as at August 31, 2007
|
36,643,000 | $ | 1 | 32,361,561 | $ | 150,018 | $ | 150,019 | ||||||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards
|
– | – | – | 2 | 2 | |||||||||||||||
|
Redemption
of share capital
|
– | – | (29,200 | ) | (135 | ) | (135 | ) | ||||||||||||
|
Balance
as at November 30, 2007
|
36,643,000 | 1 | 32,332,361 | 149,885 | 149,886 | |||||||||||||||
|
Exercise
of stock options
|
– | – | 4,000 | 10 | 10 | |||||||||||||||
|
Redemption
of restricted share units
|
– | – | 38,031 | – | – | |||||||||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards
|
– | – | – | 209 | 209 | |||||||||||||||
|
Balance
as at February 29, 2008
|
36,643,000 | 1 | 32,374,392 | 150,104 | 150,105 | |||||||||||||||
|
Exercise
of stock options
|
– | – | 14,500 | 51 | 51 | |||||||||||||||
|
Redemption
of restricted share units
|
– | – | 27,839 | – | – | |||||||||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards
|
– | – | – | 176 | 176 | |||||||||||||||
|
Redemption
of share capital
|
– | – | (560,407 | ) | (2,600 | ) | (2,600 | ) | ||||||||||||
|
Balance
as at May 31, 2008
|
36,643,000 | $ | 1 | 31,856,324 | $ | 147,731 | $ | 147,732 | ||||||||||||
|
8.
|
Net
research and development expenses
|
|
Three months
ended
May
31, 2008
|
Nine
months
ended
May
31, 2008
|
Three
months
ended
May
31, 2007
|
Nine
months
ended
May
31, 2007
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
Gross
research and development expenses
|
$ | 8,843 | $ | 23,904 | $ | 6,637 | $ | 18,085 | ||||||||
|
Research
and development tax credits and grants
|
(1,470 | ) | (4,334 | ) | (1,309 | ) | (3,725 | ) | ||||||||
| $ | 7,373 | $ | 19,570 | $ | 5,328 | $ | 14,360 | |||||||||
EXFO Electro-Optical
Engineering Inc.
Note to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
|
9.
|
Income
taxes
|
For the
three and nine-month periods ended May 31, 2007 and 2008, the reconciliation of
the income tax provision calculated using the combined Canadian federal and
provincial statutory income tax rate with the income tax provision in the
financial statements is as follows:
|
Three
months
ended
May
31, 2008
|
Nine
months
ended
May
31, 2008
|
Three
months
ended
May
31, 2007
|
Nine
months
ended
May
31, 2007
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
Income
tax provision at combined Canadian federal and provincial statutory tax
rate
|
$ | 1,638 | $ | 3,618 | $ | 1,104 | $ | 3,616 | ||||||||
|
Increase
(decrease) due to:
|
||||||||||||||||
|
Income
taxed at different rates
|
97 | 174 | (13 | ) | 20 | |||||||||||
|
Non-taxable
income
|
(30 | ) | (401 | ) | (48 | ) | (143 | ) | ||||||||
|
Non-deductible
expenses
|
233 | 823 | 142 | 588 | ||||||||||||
|
Change
in tax rates (1)
|
– | 1,522 | – | 290 | ||||||||||||
|
Change
in tax strategy (2)
|
– | (2,715 | ) | – | – | |||||||||||
|
Foreign
exchange effect of translation of foreign integrated
subsidiaries
|
33 | 227 | (13 | ) | 73 | |||||||||||
|
Other
|
(113 | ) | 278 | (167 | ) | (127 | ) | |||||||||
|
Recognition
of previously unrecognized future income tax assets
(3)
|
(5,324 | ) | (5,324 | ) | – | – | ||||||||||
|
Utilization
of previously unrecognized future income tax assets
|
– | (1,881 | ) | (511 | ) | (2,510 | ) | |||||||||
|
Unrecognized
future income tax assets on temporary deductible differences and unused
tax losses and deductions
|
686 | 3,156 | 379 | 702 | ||||||||||||
| $ | (2,780 | ) | $ | (523 | ) | $ | 874 | $ | 2,509 | |||||||
The
income tax provision consists of the following:
|
Current
|
$ | 112 | $ | (7,080 | ) | $ | 874 | $ | 2,509 | |||||||
|
Future
|
1,746 | 10,606 | 132 | 1,808 | ||||||||||||
|
Valuation
allowance
|
(4,638 | ) | (4,049 | ) | (132 | ) | (1,808 | ) | ||||||||
| (2,892 | ) | 6,557 | – | – | ||||||||||||
| $ | (2,780 | ) | $ | (523 | ) | $ | 874 | $ | 2,509 |
|
(1)
|
During
the second quarter of fiscal 2008, reductions to the Canadian federal
statutory tax rate, previously announced by the Canadian federal
Government, were enacted. Therefore, Canadian federal future income tax
assets decreased by $1,524,000, and generated a future income tax
expense for the same amount during the nine-month period ended
May 31, 2008.
|
|
(2)
|
During
the second quarter of fiscal 2008, based on new Canadian federal enacted
tax rates, the company reviewed its tax strategy for the future use of its
Canadian federal operating losses, research and development expenses,
certain timing differences and research and development tax credits to
minimize income taxes payable on future years’ taxable income,
by amending its prior year’s income tax returns to generate a net
operating loss to be carried back to prior years, which will release
previously used research and development tax credits. This resulted in an
increase of its tax-related assets of $2,715,000 and in an income tax
recovery for the same amount in the statements of earnings for the
nine-month period ended May
31, 2008.
|
EXFO Electro-Optical
Engineering Inc.
Note to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
|
(3)
|
During
the third quarter of fiscal 2008, considering the expected positive
impacts the acquisitions of Navtel Communications Inc. and Brix Networks
Inc. will have on future years’ taxable income at the United States
(federal level) and because actual taxable income in the United States is
greater than expected, management concluded that is was more likely than
not that all future income tax assets of its consolidated US group would
be recovered. Consequently, it reversed its valuation allowance against
future income tax assets in the amount of $7,617,000. The portions of the
valuation allowance that was reversed, and that was attributable to the
impacts of the acquisitions of Navtel Communications Inc. and Brix
Networks Inc., in the amount of $652,000 and $1,641,000, respectively,
were included in the purchase price allocation of the related acquired
businesses. The remaining of the reversal, in the amount of $5,324,000,
has been recorded in the income taxes in the statements of earnings for
the three and nine months ended
May 31, 2008.
|
For the
three and nine months ended May 31, 2007, the company recorded a full valuation
allowance against its future income tax assets. During these periods, the
company recorded an income tax expense of $874,000 and $2,509,000, respectively. Most of
this expense represents income taxes payable at the Canadian federal level,
which are reduced by research and development tax credits that are recorded
against gross research and development expenses in the statements of
earnings.
|
10.
|
Earnings
per share
|
The
following table summarizes the reconciliation of the basic weighted average
number of shares outstanding and the diluted weighted average number of shares
outstanding:
|
Three months
ended
May
31, 2008
|
Nine
months
ended
May
31, 2008
|
Three
months
ended
May
31, 2007
|
Nine
months
ended
May
31, 2007
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
Basic
weighted average number of shares outstanding (000’s)
|
68,907 | 68,964 | 68,917 | 68,844 | ||||||||||||
|
Plus
dilutive effect of:
|
||||||||||||||||
|
Stock
options (000’s)
|
299 | 313 | 435 | 446 | ||||||||||||
|
Restricted
share units (000’s)
|
175 | 188 | 184 | 168 | ||||||||||||
|
Deferred
share units (000’s)
|
86 | 78 | 54 | 49 | ||||||||||||
|
Diluted
weighted average number of shares outstanding (000’s)
|
69,467 | 69,543 | 69,590 | 69,507 | ||||||||||||
|
Stock
awards excluded from the calculation of diluted weighted average number of
shares because their exercise price was greater than the average market
price of the common shares (000’s)
|
1,168 | 1,332 | 1,132 | 1,255 | ||||||||||||
|
11.
|
Segment
information
|
The
company is organized under two reportable segments: the Telecom Division and the
Life Sciences and Industrial Division. The Telecom Division offers integrated
test solutions and network monitoring systems to network service providers,
cable TV operators, system vendors and component manufacturers throughout the
global telecommunications industry. The Life Sciences and Industrial Division
mainly leverages developed and acquired core telecom technologies for
high-precision assembly and research sectors.
EXFO Electro-Optical
Engineering Inc.
Note to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
The
following tables set out information by segment:
|
Three
months ended May 31, 2008
|
Nine
months ended May 31, 2008
|
|||||||||||||||||||||||
|
Telecom
Division
|
Life
Sciences and Industrial Division
|
Total
|
Telecom
Division
|
Life
Sciences and Industrial Division
|
Total
|
|||||||||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||||||||||
|
Sales
|
$ | 42,843 | $ | 5,738 | $ | 48,581 | $ | 115,643 | $ | 17,204 | $ | 132,847 | ||||||||||||
|
Earnings
from operations
|
$ | 3,819 | $ | 639 | $ | 4,458 | $ | 6,657 | $ | 1,738 | $ | 8,395 | ||||||||||||
|
Unallocated
items:
|
||||||||||||||||||||||||
|
Interest
income
|
964 | 4,063 | ||||||||||||||||||||||
|
Foreign
exchange loss
|
(59 | ) | (907 | ) | ||||||||||||||||||||
|
Earnings
before income taxes and extraordinary gain
|
5,363 | 11,551 | ||||||||||||||||||||||
|
Income
taxes recovery
|
(2,780 | ) | (523 | ) | ||||||||||||||||||||
|
Earnings
before extraordinary gain
|
8,143 | 12,074 | ||||||||||||||||||||||
|
Extraordinary
gain
|
3,036 | 3,036 | ||||||||||||||||||||||
|
Net
earnings for the period
|
$ | 11,179 | $ | 15,110 | ||||||||||||||||||||
|
Three
months ended May 31, 2007
|
Nine
months ended May 31, 2007
|
|||||||||||||||||||||||
|
Telecom
Division
|
Life
Sciences and Industrial Division
|
Total
|
Telecom
Division
|
Life
Sciences and Industrial Division
|
Total
|
|||||||||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||||||||||
|
Sales
|
$ | 33,821 | $ | 5,384 | $ | 39,205 | $ | 92,640 | $ | 17,319 | $ | 109,959 | ||||||||||||
|
Earnings
from operations
|
$ | 2,143 | $ | 697 | $ | 2,840 | $ | 5,024 | $ | 2,656 | $ | 7,680 | ||||||||||||
|
Unallocated
items:
|
||||||||||||||||||||||||
|
Interest
income
|
1,236 | 3,513 | ||||||||||||||||||||||
|
Foreign
exchange gain (loss)
|
(628 | ) | 107 | |||||||||||||||||||||
|
Earnings
before income taxes
|
3,448 | 11,300 | ||||||||||||||||||||||
|
Income
taxes
|
874 | 2,509 | ||||||||||||||||||||||
|
Net
earnings for the period
|
$ | 2,574 | $ | 8,791 | ||||||||||||||||||||
EXFO Electro-Optical
Engineering Inc.
Note to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
Total
assets by reportable segment are detailed as follows:
|
As
at
May
31,
2008
|
As
at
August
31,
2007
|
|||||||
|
(unaudited)
|
||||||||
|
Total
assets
|
||||||||
|
Telecom
Division
|
$ | 155,462 | $ | 109,065 | ||||
|
Life
Sciences and Industrial Division
|
9,040 | 9,199 | ||||||
|
Unallocated
assets
|
152,061 | 160,874 | ||||||
| $ | 316,563 | $ | 279,138 | |||||
Unallocated
assets are comprised of cash, short-term investments, other receivables on
forward exchange contracts, income taxes and tax credits recoverable as well as
future income tax assets.
|
12.
|
Differences
between Canadian and U.S. GAAP
|
These
interim consolidated financial statements are prepared in accordance with
Canadian GAAP and significant differences in measurement and disclosure from
U.S. GAAP are set out in note 20 to the company’s most recent annual
consolidated financial statements. This note describes significant changes
occurring since the most recent annual consolidated financial statements and
provides a quantitative analysis of all significant differences. All disclosures
required in annual financial statements under U.S. GAAP and Regulation S-X of
the Securities and Exchange Commission (SEC) in the United States have not
been provided in these interim consolidated financial statements.
EXFO Electro-Optical
Engineering Inc.
Note to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
Reconciliation
of net earnings and comprehensive income to conform to U.S. GAAP
|
Three
months
ended
May
31, 2008
|
Nine
months
ended
May
31, 2008
|
Three
months
ended
May
31, 2007
|
Nine
months
ended
May
31, 2007
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
Net
earnings for the period in accordance with Canadian GAAP
|
$ | 11,179 | $ | 15,110 | $ | 2,574 | $ | 8,791 | ||||||||
|
Unrealized
losses on available-for-sale securities
|
– | – | 70 | 70 | ||||||||||||
|
Net
earnings for the period in accordance with U.S. GAAP
|
$ | 11,179 | $ | 15,110 | $ | 2,644 | $ | 8,861 | ||||||||
|
Out
of which:
|
||||||||||||||||
|
Earnings
before extraordinary gain
|
$ | 8,143 | $ | 12,074 | $ | 2,644 | $ | 8,861 | ||||||||
|
Extraordinary
gain
|
$ | 3,036 | $ | 3,036 | $ | – | $ | – | ||||||||
|
Net
earnings for the period in accordance with U.S. GAAP
|
$ | 11,179 | $ | 15,110 | $ | 2,644 | $ | 8,861 | ||||||||
|
Foreign
currency translation adjustment
|
(3,313 | ) | 15,409 | 16,942 | 6,638 | |||||||||||
|
Changes
in unrealized gains (losses) on available-for-sale
securities
|
(50 | ) | 40 | (70 | ) | (70 | ) | |||||||||
|
Unrealized
gains (losses) on forward exchange contracts
|
295 | 2,844 | 4,262 | (1,531 | ) | |||||||||||
|
Reclassification
of realized gains on forward exchange contracts in net
earnings
|
(1,218 | ) | (3,145 | ) | 40 | (804 | ) | |||||||||
|
Future
income taxes effect of the above items
|
286 | 87 | – | – | ||||||||||||
|
Comprehensive
income under U.S. GAAP
|
$ | 7,719 | $ | 30,345 | $ | 23,818 | $ | 13,094 | ||||||||
|
Basic
earnings before extraordinary gain per share in accordance with U.S.
GAAP
|
$ | 0.12 | $ | 0.18 | $ | 0.04 | $ | 0.13 | ||||||||
|
Diluted
earnings before extraordinary gain per share in accordance with U.S.
GAAP
|
$ | 0.12 | $ | 0.17 | $ | 0.04 | $ | 0.13 | ||||||||
|
Basic
and diluted net earnings per share in accordance with U.S.
GAAP
|
$ | 0.16 | $ | 0.22 | $ | 0.04 | $ | 0.13 | ||||||||
|
Basic
weighted average number of shares outstanding (000’s)
|
68,907 | 68,964 | 68,917 | 68,844 | ||||||||||||
|
Diluted
weighted average number of shares outstanding (000’s)
|
69,467 | 69,543 | 69,590 | 69,507 | ||||||||||||
EXFO Electro-Optical
Engineering Inc.
Note to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
Reconciliation
of shareholders’ equity to conform to U.S. GAAP
The
following summary sets out the significant differences between the company’s
reported shareholders’ equity under Canadian GAAP as compared to U.S.
GAAP:
|
As
at
May
31,
2008
|
As
at
August
31,
2007
|
|||||||
|
(unaudited)
|
||||||||
|
Shareholders’
equity in accordance with Canadian GAAP
|
$ | 280,858 | $ | 250,165 | ||||
|
Forward
exchange contracts (note 2)
|
– | 2,864 | ||||||
|
Goodwill
|
(13,510 | ) | (12,697 | ) | ||||
|
Future
income tax assets (note 2)
|
– | (916 | ) | |||||
|
Stock
appreciation rights
|
(73 | ) | (73 | ) | ||||
|
Shareholders’
equity in accordance with U.S. GAAP
|
$ | 267,275 | $ | 239,343 | ||||
EXFO Electro-Optical
Engineering Inc.
Note to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
The
following table summarizes the shareholders’ equity activity under U.S. GAAP
since August 31, 2007:
|
Share
capital
|
Contributed
surplus
|
Deficit
|
Other
capital
|
Accumulated
other comprehensive income
|
Shareholders’
equity
|
|||||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||||||
|
Balance
as at August 31, 2007
|
$ | 599,519 | $ | 1,537 | $ | (416,687 | ) | $ | 4,684 | $ | 50,290 | $ | 239,343 | |||||||||||
|
Net
loss for the period
|
– | – | (93 | ) | – | – | (93 | ) | ||||||||||||||||
|
Stock-based
compensation costs
|
– | – | – | 316 | – | 316 | ||||||||||||||||||
|
Foreign
currency translation adjustment
|
– | – | – | – | 13,182 | 13,182 | ||||||||||||||||||
|
Unrealized
losses on available-for-sale securities
|
– | – | – | – | 39 | 39 | ||||||||||||||||||
|
Unrealized
gains on forward exchange contracts, net of realized gains and future
income taxes
|
– | – | – | – | 809 | 809 | ||||||||||||||||||
|
Reclassification
of stock-based compensation costs upon exercise of stock
awards
|
2 | – | – | (2 | ) | – | – | |||||||||||||||||
|
Redemption
of share capital
|
(135 | ) | – | (39 | ) | – | – | (174 | ) | |||||||||||||||
|
Balance
as at November 30, 2007
|
599,386 | 1,537 | (416,819 | ) | 4,998 | 64,320 | 253,422 | |||||||||||||||||
|
Net
earnings for the period
|
– | – | 4,024 | – | – | 4,024 | ||||||||||||||||||
|
Stock-based
compensation costs
|
– | – | – | 269 | – | 269 | ||||||||||||||||||
|
Foreign
currency translation adjustment
|
– | – | – | – | 5,540 | 5,540 | ||||||||||||||||||
|
Unrealized
losses on available-for-sale securities
|
– | – | – | – | 51 | 51 | ||||||||||||||||||
|
Unrealized
gains on forward exchange contracts, net of realized gains and future
income taxes
|
– | – | – | – | (386 | ) | (386 | ) | ||||||||||||||||
|
Exercise
of stock options
|
10 | – | – | – | – | 10 | ||||||||||||||||||
|
Reclassification
of stock-based compensation costs upon exercise of stock
awards
|
209 | – | – | (209 | ) | – | – | |||||||||||||||||
|
Balance
as at February 29, 2008
|
599,605 | 1,537 | (412,795 | ) | 5,058 | 69,525 | 262,930 | |||||||||||||||||
|
Net
earnings for the period
|
– | – | 11,179 | – | – | 11,179 | ||||||||||||||||||
|
Stock-based
compensation costs
|
– | – | – | 334 | – | 334 | ||||||||||||||||||
|
Foreign
currency translation adjustment
|
– | – | – | – | (3,313 | ) | (3,313 | ) | ||||||||||||||||
|
Unrealized
losses on available-for-sale securities
|
– | – | – | – | (50 | ) | (50 | ) | ||||||||||||||||
|
Unrealized
gains on forward exchange contracts, net of realized gains and future
income taxes
|
– | – | – | – | (637 | ) | (637 | ) | ||||||||||||||||
|
Exercise
of stock options
|
51 | – | – | – | – | 51 | ||||||||||||||||||
|
Reclassification
of stock-based compensation costs upon exercise of stock
awards
|
176 | – | – | (176 | ) | – | – | |||||||||||||||||
|
Redemption
of share capital
|
(10,788 | ) | 7,530 | 39 | – | – | (3,219 | ) | ||||||||||||||||
|
Balance
as at May 31, 2008
|
$ | 589,044 | $ | 9,067 | $ | (401,577 | ) | $ | 5,216 | $ | 65,525 | $ | 267,275 | |||||||||||
EXFO Electro-Optical
Engineering Inc.
Note to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
Accumulated
other comprehensive income under U.S. GAAP is comprised of the
following:
|
Nine
months
ended
May 31, 2008
|
Nine
months
ended
May
31, 2007
|
|||||||
|
(unaudited)
|
(unaudited)
|
|||||||
|
Foreign
currency translation adjustment
|
||||||||
|
Current
period
|
$ | 15,409 | $ | 6,638 | ||||
|
Cumulative
effect of prior periods
|
48,397 | 39,179 | ||||||
| 63,806 | 45,817 | |||||||
|
Unrealized
gains (losses) on forward exchange contracts
|
||||||||
|
Current
period, net of realized gains (losses) and future income
taxes
|
(214 | ) | (2,335 | ) | ||||
|
Cumulative
effect of prior periods, net of future income taxes
|
1,948 | 5,451 | ||||||
| 1,734 | 3,116 | |||||||
|
Unrealized
gains (losses) on available-for-sale securities
|
||||||||
|
Current
period, net of future incomes taxes
|
40 | − | ||||||
|
Cumulative
effect of prior periods, net of future income taxes
|
(55 | ) | (70 | ) | ||||
| (15 | ) | (70 | ) | |||||
| $ | 65,525 | $ | 48,863 | |||||
Research
and development tax credits
Under
Canadian GAAP, all research and development tax credits are recorded as a
reduction of gross research and development expenses. Under U.S. GAAP, tax
credits that are utilizable against income taxes payable are recorded in the
income taxes. These tax credits amounted to $849,000, $2,396,000, $985,000 and
$2,773,000 for the three- and nine-month periods ended May 31, 2007, and 2008,
respectively. This difference has no impact on the net earnings and the net
earnings per share for the reporting periods.
Statements
of cash flows
For the
three- and nine-month periods ended May 31, 2007, and 2008, there were no
significant differences between the statements of cash flows under Canadian
GAAP as compared to U.S. GAAP, except for the subtotal before change in non-cash
operating items, whose presentation is not permitted under U.S.
GAAP.
New
accounting standards and pronouncements
Adopted
in fiscal 2008
In June
2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for
Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109”,
which clarifies the accounting for uncertainties in income taxes recognized in
accordance with SFAS 109, “Accounting for Income Taxes”. The interpretation is
effective for fiscal years beginning after December 15, 2006. The company
adopted this interpretation on September 1, 2007, and its adoption had no impact
on the company’s consolidated financial statements. Upon the adoption of FIN 48,
the company elected to classify interest and penalties in interest
expense.
EXFO Electro-Optical
Engineering Inc.
Note to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
To
be adopted after fiscal 2008
In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements”, which
establishes a framework for measuring fair value in GAAP and is applicable to
other accounting pronouncements, in which fair value is considered to be the
relevant measurement attribute. SFAS 157 also expands disclosures about fair
value measurement. In February 2008, the FASB amended SFAS 157 to exclude
leasing transactions and to delay the effective date by one year for
non-financial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a non-recurring basis. This statement is
effective for fiscal years beginning after November 15, 2007. The company will
adopt this statement on September 1, 2008, and is currently
evaluating the impact its adoption will have on its consolidated financial
statements.
In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115”, which permits entities to choose to measure many financial instruments and
certain other items at fair value. Most of the provisions of this statement
apply only to entities that elect the fair value option. However, the amendment
to SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities”,
applies to all entities with available-for-sale and trading securities. This
statement is effective for fiscal years beginning after November 15, 2007. The
company will adopt this statement on September 1, 2008, and has not
yet determined if it will elect to use the fair value option.
In
December 2007, the FASB issued SFAS 141(R), “Business Combinations”,
and SFAS 160, “Non-controlling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51”. These new standards will
significantly change the accounting and reporting for business combination
transactions and non-controlling (minority) interests in consolidated financial
statements. SFAS 141(R) and SFAS160 are required to be adopted
simultaneously and are effective for the first annual reporting period beginning
on or after December 15, 2008. Earlier adoption is prohibited. The company
is currently evaluating the impact the adoption of SFAS 141(R) and SFAS 160
will have on its consolidated financial statements.
In March
2008, the FASB issued SFAS 161, “Disclosure about Derivative Instruments and
Hedging Activities – an Amendment of FASB Statement no. 133”, which will
require entities to provide enhanced disclosures about (a) how and why an entity
uses derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under SFAS 133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect an entity’s financial
position, financial performance and cash flow. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. The company is currently
evaluating the impact the adoption of SFAS 161 will have on its note disclosures
related to derivative instruments and hedging activities.
In April
2008, the FASB issued the FASB staff position (FSP) FAS 142-3, “Determination of
the Useful Live of Intangible Assets”. This
FSP amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS
142, “Goodwill and Other
Intangible Assets”. The intent of
this FSP is to improve
the consistency between the useful life of a recognized intangible asset under
SFAS 142 and
the period of expected cash flows used to measure the fair value of the asset
under SFAS 41
(revised 2007), “Business
Combinations”, and other U.S.
generally accepted accounting
principles (GAAP). This
FSP shall be effective for financial statements issued for fiscal years
beginning after December 15,
2008, and interim periods within those fiscal years. Early adoption is
prohibited. The guidance for
determining the useful life of a recognized intangible asset in paragraphs 7–11
of this FSP shall be
applied prospectively to intangible assets acquired after the effective date.
The disclosure requirements
in paragraphs 13–15 shall be applied prospectively to all intangible assets
recognized as of, and subsequent to, the effective date. The company is currently
evaluating the impact of adoption SFAS 162 will have on its consolidated
financial statements.
EXFO Electro-Optical
Engineering Inc.
Note to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
In May
2008, the FASB issued SFAS 162, “The Hierarchy of
Generally Accepted Accounting Principles”. The new standard is intended to improve
financial reporting by identifying a consistent framework, or hierarchy,
for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. GAAP
for non-governmental entities. For
non-governmental entities, the guidance in SFAS 162 replaces that prescribed
in Statement on
Auditing Standards (SAS) No. 69, “The Meaning of Present Fairly in Conformity
with Generally
Accepted Accounting Principles” and will become effective 60 days following the
SEC's approval of the
Public Company Accounting Oversight Board Auditing amendments to AU Section 411, “The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting
Principles”. The
company is currently evaluating the impact the adoption of SFAS 162 will have on
its consolidated financial statements.
Management’s Discussion and Analysis of Financial
Condition
and
Results of Operations
This
discussion and analysis contains forward-looking statements within the meaning
of the U.S. Private Securities Litigation Reform Act of 1995, and we intend that
such forward-looking statements be subject to the safe harbors created thereby.
Forward-looking statements are statements other than historical information or
statements of current condition. Words such as may, will, expect, believe,
anticipate, intend, could, estimate, continue, or the negative or comparable
terminology are intended to identify forward-looking statements. In addition,
any statements that refer to expectations, projections or other
characterizations of future events and circumstances are considered
forward-looking statements. They are not guarantees of future performance and
involve risks and uncertainties. Actual results may differ materially from those
in forward-looking statements due to various factors including consolidation in
the global telecommunications test, measurement and monitoring industry; capital
spending levels in the telecommunications, life sciences and high-precision
assembly sectors; concentration of sales; fluctuating exchange rates and our
ability to execute in these uncertain conditions; the effects of the additional
actions we have taken in response to such economic uncertainty (including our
ability to quickly adapt cost structures with anticipated levels of business,
ability to manage inventory levels with market demand); market acceptance of our
new products and other upcoming products; limited visibility with regards to
customer orders and the timing of such orders; our ability to successfully
integrate our acquired and to-be-acquired businesses; our ability to
successfully expand international operations; the retention of key technical and
management personnel; and future economic, competitive and market conditions,
including any slow-down or recession in the global economy. Assumptions relating
to the foregoing involve judgments and risks, all of which are difficult or
impossible to predict and many of which are beyond our control. Other risk
factors that may affect our future performance and operations are detailed in
our Annual Report, on Form 20-F, and our other filings with the U.S. Securities
and Exchange Commission and the Canadian securities commissions. We believe that
the expectations reflected in the forward-looking statements are reasonable
based on information currently available to us, but we cannot assure you that
the expectations will prove to have been correct. Accordingly, you should not
place undue reliance on these forward-looking statements. These statements speak
only as of the date of this document. Unless required by law or applicable
regulations, we undertake no obligation to revise or update any of them to
reflect events or circumstances that occur after the date of this
document.
The
following discussion and analysis of financial condition and results of
operations is dated June 26, 2008.
All
dollar amounts are expressed in US dollars, except as otherwise
noted.
INDUSTRY
OVERVIEW
The
fundamentals of the wireline telecom industry are fairly robust in most regions
of the world, except in the United States where an economic slowdown could
potentially reduce investments and affect other parts of the world. These
fundamentals are based upon exponential growth in bandwidth demand, intense
competition between telecom operators (telcos) and cable companies (cablecos)
pushing massive network investments to capitalize on significant operational
efficiencies and service revenues generated by fully converged IP (Internet
protocol) networks.
Global
Internet bandwidth grew at a compound annual growth rate (CAGR) of 45% from 2003
to 2006, according to TeleGeography Research. This trend is likely to
remain steady, if not accelerate, with the upcoming deployments of IPTV
(Internet protocol television), HD-IPTV (high-definition Internet protocol
television) and increased online video streaming, since these applications,
amongst others, will consume a colossal amount of additional bandwidth. As a
result, telcos and cablecos are investing substantially in their access networks
in order to provide differentiated, revenue-generating services to attract
and retain consumers, who are increasingly relying on broadband network services
for their work, entertainment and everyday activities. From a telco perspective,
it is now clear that fiber-to-the-home (FTTH) will become the access
network architecture of choice, which will allow them to meet heightened
bandwidth requirements and future-proof their access networks as residential
bandwidth requirements are growing from the 1 to 5 Mbit/s (megabits per second)
of the past to the 30 to 100 Mbit/s required in the long-term to assure multiple
HD-IPTV channels, online gaming, high-speed content-rich Internet, VoIP
(voice-over-Internet-protocol) telephony, and a myriad of other IP-based
applications. Hybrid architectures, combining copper and fiber
(fiber-to-the-curb, or FTTC, and fiber-to-the-node, or FTTN), will also
keep expanding in the short term, since they are less expensive methods to
increase bandwidth and can be mass-deployed faster.
These
investment decisions are applicable not only to green-field deployments and
high-rise buildings, but also to larger-scale rollouts as long-term operating
costs are less than FTTC and FTTN. It is important to mention that the cost of
deploying FTTH has been falling considerably over the last three years as volume
increased and deployment tools, like those we offer, are making the task
increasingly easy. We are only at the early stages of fiber deployments in
access networks both in the Americas and around the world. It is also worth
noting that Western Europe has become very committed to deploying FTTH networks,
given their high population density.
As
bandwidth growth in access networks continues to increase, it has begun placing
a strain on metro rings and core networks. It is also driving the need for
higher-speed technologies, such as 43 Gbit/s (gigabits per
second) SONET/SDH
that are now in their early deployments and the upcoming 100 Gbit/s Ethernet,
because these solutions are expected to be significantly more economical,
especially if trenches need to be dug in order to deploy new fiber in metro or
long-distance routes.
As
telecommunication networks are being transformed to provide IP-based voice,
video and data capabilities, legacy SONET/SDH networks, which were designed in
the 1980s and 1990s and implemented until 2005, will not be capable of
efficiently carrying these emerging IP-based services as they are based on
design standards aimed at public switched telephone network (PSTN), for
point-to-point voice transmission only. As a result, telcos are
increasingly turning to next-generation IP-based networks to allow for more
flexible and efficient transport of applications and services, and to offer
customers higher-margin triple-play services and even quadruple-play services as
wireline and wireless technologies become increasingly interconnected. Finally,
as subscribers of these new services reach a critical mass, telcos are
relying on service-assurance solutions to ensure that the quality of service
(QoS) and quality of experience (QoE) demanded by users are optimal
in the post-deployment phase.
These
market dynamics positively affected telecom test and measurement suppliers
in the third quarter of fiscal 2008; however, deteriorating macro-economic
conditions in the United States could instigate a slowdown in capital
spending among customers, which would necessarily reduce demand for our test
solutions.
COMPANY
OVERVIEW
We
reported sales of $48.6 million in the third quarter of fiscal 2008, which
represented an increase of 23.9% over the third quarter of 2007.
Year-over-year sales growth was largely organic since the acquisitions of Navtel
Communications Inc. and Brix Networks Inc., renamed EXFO Service Assurance Inc.,
which closed approximately one month and two months into the quarter,
respectively, contributed $2.2 million in sales. Net accepted orders amounted to
$50.7 million in the third quarter of fiscal 2008 for a book-to-bill ratio of
1.04, excluding the backlogs of Navtel Communications and Brix Networks at their
acquisition dates. Nine months into fiscal 2008, sales increased 20.8%
year-over-year to $132.8 million, while our corporate performance metric for
sales growth is 20% for fiscal 2008.
Looking
at our bottom line, we generated GAAP net earnings of $11.2 million, or $0.16
per diluted share, in the third quarter of fiscal 2008, compared to net
earnings of $2.6 million, or $0.04 per diluted share, in the same period last
year. GAAP net earnings in the third quarter of fiscal 2008 included $5.3
million for the recognition of previously unrecognized future income tax assets
in the United States, an extraordinary gain of $3.0 million related to the
negative goodwill on the Navtel acquisition, as well as $0.8 million in
after-tax amortization of intangible assets and $0.3 million in stock-based
compensation costs. In terms of earnings from operations, it reached 9.2%
of sales in the third quarter and 6.3% year-to-date in fiscal 2008, while
our stated goal is 8% for the whole fiscal year.
We
launched five new products in the third quarter of fiscal 2008, for a total of
20 so far for the fiscal year. Key product launches in the third quarter
included an IP test module for the installation and troubleshooting of
Ethernet-based triple-play services in access networks; 1X/2X/4X/10X Fibre
Channel test functionalities on the IQS-8130-NGE and IQS-8130-NGE Packet Blazer
multiservice test modules for field-test and manufacturing applications; and
Fiber Guardian, a remotely controllable test head and related software to allow
real-time monitoring of optical networks. Following the quarter-end, we
introduced a triple-play test set for the deployment and troubleshooting of
ADSL2+/VDSL2 networks and a new software release that enables the field-test and
manufacturing Packet Blazer test modules to support Provider Backbone
Bridge-Traffic Engineering (PBB-TE) and Internet Protocol/Multiprotocol Label
Switching (IP/MPLS) functionalities. Sales from products that have been on the
market two years or less accounted for 32.2 % of total sales in the third
quarter and 36.7% so far for fiscal 2008, while our published goal is 30% for
the fiscal year.
On March
26, 2008, we acquired all the shares issued and outstanding of Navtel
Communications Inc., for a cash consideration of $11.3 million including
acquisition-related costs, net of $145,000 of cash acquired. Navtel
Communications Inc., a privately held company in Toronto, Canada, is a
leading provider of Internet Protocol Multimedia Subsystem (IMS) and
Voice-over-Internet Protocol (VoIP) test solutions for network equipment
manufacturers (NEMs) and network service provider (NSP) labs. Navtel specializes
in testing next-generation Internet Protocol networks that are increasingly
combining wireline and wireless technologies. This acquisition was accounted for
using the purchase method and, consequently, the results of operations of the
acquired business have been included in our consolidated financial statements
since March 26, 2008, being the date of acquisition. Upon the
preliminary purchase price allocation, we recognized $12.9 million of tax
credits and future income tax assets, which lead to the recognition of an
extraordinary gain of $3.0 million in the statement of earnings for the third
quarter of fiscal 2008. The purchase price allocation, which takes into account
acquisition-related costs of $172,000, is preliminary because the acquisition
was closed during the quarter and we are still waiting for critical information
to complete the final allocation. Assets and liabilities susceptible to change
upon the finalization of the purchase price allocation mainly consist of
intangible assets and future income taxes. We expect to complete the final
allocation in the fourth quarter of fiscal 2008.
On April
2, 2008, we announced that we had reached an agreement to acquire all issued and
outstanding shares of Brix Networks Inc. (renamed EXFO Service Assurance Inc.).
We closed this acquisition on April 22, 2008. Based in the Boston area
(MA), Brix Network Inc. was a privately held company offering VoIP and IPTV
service testing across the three areas that most affect the success of a
real-time service: signaling quality (signaling path performance), delivery
quality (media transport performance) and content quality (overall quality of
experience). This acquisition was settled for a cash consideration of $29.7
million including acquisition related costs, net of $12,000 of cash acquired,
plus a contingent cash consideration of up to a maximum of $7.5 million, based
upon the achievement of bookings volume exceeding $16 million up to $40 million
in the 12 months following the acquisition. The preliminary estimated fair
value of acquired intangible assets amounts to $13.8 million. These
intangible assets, namely core technology, are amortized on a straight-line
basis over their estimated useful life of five years. This acquisition was
accounted for using the purchase method and, consequently, the results of
operations of the acquired business have been included in our consolidated
financial statements since April 22, 2008, being the closing date of the deal
and date of acquisition. The purchase price allocation, which takes into account
severance expenses of $497,000 as well as acquisition-related costs of $1.0
million, is preliminary because the acquisition was closed during the quarter
and we are still waiting for critical information to complete the final
allocation. Assets and liabilities susceptible to change upon the finalization
of the purchase price allocation mainly consist of intangible assets, deferred
revenue and future income taxes. We expect to complete the final allocation in
the fourth quarter of fiscal 2008.
These two
acquisitions report to the Telecom Division.
During
the first nine months of fiscal 2008, we faced a substantial and sudden increase
in the value of the Canadian dollar versus the US dollar, which had a two-fold
impact on our financial results. Firstly, the average value of the Canadian
dollar increased 14.2% in the first nine months of fiscal 2008, compared to the
same period last year. Given that most of our sales are denominated in US
dollars but a significant portion of our expenses are denominated in Canadian
dollars, our financial results were negatively affected. Secondly, we incurred
an exchange loss of $907,000 in the first nine months of fiscal 2008, which
represents the effect of the increase in the value of the Canadian dollar versus
the US dollar on our balance sheet items denominated in foreign currencies. In
comparison, we reported a foreign exchange gain of $107,000 for the same period
of fiscal 2007. However, over the last few months, we witnessed some stability
in the value of the Canadian dollar compared to the US dollar (close to par). We
incurred an exchange loss of $59,000 in the third quarter of fiscal
2008.
On
November 5, 2007, the Board of Directors approved a share repurchase program, by
way of normal course issuer bid on the open market, up to 9.9% of our public
float (as defined by the Toronto Stock Exchange), or 2.9 million
of subordinate voting shares, at the prevailing market price. We expect to
use cash, short-term investments, or future cash flows from operating activities
to fund the repurchase of shares. The normal course issuer bid started
on November 8, 2007, and will end on November 7, 2008, or an
earlier date if we repurchase the maximum number of shares permitted under
the bid. The program does not require that we repurchase any specific number of
shares, and it may be modified, suspended or terminated at any time, without
prior notice. All shares repurchased under the bid will be canceled. So far in
fiscal 2008, we redeemed 589,607 subordinated voting shares for a total
consideration of $3.4 million.
Finally,
during the third quarter of fiscal 2008, we performed our annual impairment test
for goodwill and reviewed the carrying value of certain acquired intangible
assets for impairment. Based on our impairment tests, we concluded that
goodwill and these intangible assets were not impaired.
OUR
STRATEGY, KEY PERFORMANCE INDICATORS AND CAPABILITY TO DELIVER
RESULTS
For a
complete description of our strategy and the related key performance indicators,
as well as our capability to deliver results in fiscal 2008, please refer to the
corresponding sections in our most recent Annual Report, filed with the
securities commissions.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
For a
complete description of our critical accounting policies and estimates, please
refer to the corresponding section in our most recent Annual Report, filed with
the securities commissions. The following details the changes in critical
accounting policies that were adopted in fiscal 2008 and those to be adopted
after 2008.
Adopted
in fiscal 2008
On
September 1, 2007, we adopted the Canadian Institute of Chartered Accountants
(CICA) Handbook Section 1530, “Comprehensive Income’’, Section 3251, “Equity’’,
Section 3855, “Financial Instruments – Recognition and Measurement’’, and
Section 3865, “Hedges’’. Sections 3251 and 3865 have been adopted prospectively
while Section 3855 has been applied retroactively, without restatement of prior
years’ financial statements and Section 1530 has been applied retroactively with
restatement of prior years’ financial statements.
Following
the adoption of Section 3855, the company classified its financial instruments
as follows:
Cash
Cash is
classified as a financial asset held for trading and is carried at fair value in
the balance sheet and any changes in its fair value are reflected in the
statements of earnings.
Short-term
investments
We
elected to classify our short-term investments as available-for-sale securities,
and therefore they are carried at fair value in the balance sheet with any
changes in their fair value being reflected in other comprehensive income. Upon
the disposal or maturity of these assets, accumulated changes in their fair
value are reclassified in the statements of earnings. Also, upon the adoption of
this new standard, unrealized losses on short-term investments as of
August 31, 2007, in the amount of $55,000 (previously recorded in the
statements of earnings), have been reclassified from the opening balance of
retained earnings to the opening balance of accumulated other comprehensive
income for the nine months ended May 31, 2008.
Interest
income on short-term investments is recorded in interest income in the
statements of earnings and in cash flows from operating activities in the
statements of cash flows.
Accounts
receivable
Accounts
receivable are classified as loans and receivable. After their initial
measurement at fair value, they are carried at amortized cost, which generally
corresponds to cost due to their short-term maturity.
Bank
loan and accounts payable and accrued liabilities
Bank loan
and accounts payable and accrued liabilities are classified as other financial
liabilities. They are initially measured at their fair value. Subsequent
measurements are at cost, net of amortization, using the effective interest rate
method. For us, that value corresponds to cost either as a result of their
short-term maturity or the floating-rate nature of some
liabilities.
Forward
exchange contracts
Our
forward exchange contracts, which qualify for hedge accounting, are used to
hedge anticipated US-dollar-denominated sales and the related accounts
receivable. They are recorded at fair value in the balance sheet with changes in
their fair value being reported in other comprehensive income. Upon the
recognition of related hedged sales, accumulated changes in fair value are
reclassified in the statements of earnings. Unrecognized gains on forward
exchange contracts as of August 31, 2007, in the amount of $1.9
million, net of future income taxes of $916,000, have been reflected as an
adjustment to the opening balance of accumulated other comprehensive income for
the nine months ended May 31, 2008. The short-term portion of the forward
exchange contracts is presented in other receivables in the balance
sheet.
Cumulative
foreign currency translation adjustment
The
cumulative foreign currency translation adjustment, which is solely the result
of the translation of our consolidated financial statements in US dollars (our
reporting currency), represents a component of accumulated other comprehensive
income for all periods presented.
Transition
We
elected to use September 1, 2002, as the transition date for embedded
derivatives.
Other
than the adjustments described above for the short-term investments and the
forward exchange contracts, the recognition, derecognition and measurement
methods used to prepare the consolidated financial statements have not changed
from the methods of periods prior to the effective date of the new standards.
Consequently, there were no further adjustments to record on
transition.
Section
1506, “Accounting Changes”
On
September 1, 2007, we adopted Section 1506, “Accounting Changes”. This section
establishes criteria for changes in accounting policies, accounting treatment
and disclosures regarding changes in accounting policies, estimates and
corrections of errors. In particular, this section allows for voluntary changes
in accounting policy only when they result in the financial statements providing
reliable and more relevant information. Furthermore, this section requires
disclosure of when an entity has not applied a new source of GAAP that has been
issued but is not yet effective. The adoption of this section had no further
effects on our consolidated financial statements for the three and the nine
months ended May 31, 2008.
To
be adopted after fiscal 2008
In
December 2006, the CICA issued three new sections, which provide a complete set
of disclosure and presentation requirements for financial instruments: Section
3862, “Financial Instruments − Disclosures”; Section 3863, “Financial
Instruments − Presentation”; and Section 1535, “Capital
Disclosures”.
Section
3862 replaces the disclosure portion of Section 3861, “Financial
Instruments − Disclosure and Presentation”. The new standard places
increased emphasis on disclosures regarding risks associated with both
recognized and unrecognized financial instruments and how these risks are
managed. It is also intended to remove any duplicate disclosures and simplify
the disclosures about concentrations of risk, credit risk, liquidity risk and
price risk currently found in Section 3861.
Section
3863 carries forward the presentation requirements from Section 3861,
unchanged.
Section
1535 applies to all entities, regardless of whether they have financial
instruments and are subject to external capital requirements. The new section
requires disclosure of information about an entity’s objectives, policies and
processes for managing capital, as well as quantitative data about capital and
whether the entity has complied with any capital requirements.
Sections
1535, 3862 and 3863 apply to fiscal years beginning on or after October 1, 2007.
We will adopt these new standards on September 1, 2008, and are
currently assessing the effects these new standards will have on our
consolidated financial statements.
In June
2007, the CICA issued Section 3031, “Inventories”, to harmonize accounting for
inventories under Canadian GAAP with IFRS. This standard requires the
measurement of inventories at the lower of cost and net realizable value and
includes guidance on the determination of cost, including allocation of
overheads and other costs to inventory. The standard also requires the
consistent use of either first-in, first-out (FIFO) or weighted average cost
formula to measure the cost of inventories and requires the reversal of previous
write-downs to net realizable value when there is a subsequent increase in the
value of inventories. The new standard applies to fiscal years beginning on or
after January 1, 2008. We will adopt this new standard on September 1, 2008, and
are currently assessing the effects this new standard will have on our
consolidated financial statements.
In
February 2008, the CICA issued Section 3064, “Goodwill and intangible assets’’,
which supersedes Section 3062, “Goodwill and other intangible assets’’ and
Section 3450, “Research and development costs’’. Various changes have been made
to other sections of the CICA Handbook for consistency purposes. Section 3064
establishes standards for the recognition, measurement, presentation and
disclosure of goodwill subsequent to its initial recognition and of intangible
assets by profit-oriented enterprises. Standards concerning goodwill remain
unchanged from the standards included in the previous Section 3062. This new
section applies to fiscal years beginning on or after October 1, 2008. We will
adopt this new standard on September 1, 2009, and we have not yet determined the
effects its adoption will have on our consolidated financial
statements.
RESULTS
OF OPERATIONS
The
following discussion and analysis of our consolidated financial condition and
results of operations for the periods ended May 31, 2007 and 2008, should be
read in conjunction with our interim consolidated financial statements and the
related notes thereto. Our interim consolidated financial statements have been
prepared in accordance with Canadian generally accepted accounting principles
(Canadian GAAP); significant differences in measurement and disclosure from the
United States generally accepted accounting principles (U.S. GAAP) are set
out in note 12 to our interim consolidated financial statements. Our measurement
currency is the Canadian dollar although we report our financial statements in
US dollars. The following tables set forth interim consolidated statements
of earnings data in thousands of US dollars, except per share data, and as
a percentage of sales for the periods indicated:
|
Three
months
ended
May
31, 2008
|
Three
months
ended
May
31, 2007
|
Nine
months
ended
May
31, 2008
|
Nine
months
ended
May
31, 2007
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
Sales
|
$ | 48,581 | $ | 39,205 | $ | 132,847 | $ | 109,959 | ||||||||
|
Cost
of sales (1)
|
19,004 | 16,828 | 55,208 | 47,027 | ||||||||||||
|
Gross
margin
|
29,577 | 22,377 | 77,639 | 62,932 | ||||||||||||
|
Operating
expenses
|
||||||||||||||||
|
Selling
and administrative
|
15,660 | 12,819 | 44,160 | 36,545 | ||||||||||||
|
Net
research and development
|
7,373 | 5,328 | 19,570 | 14,360 | ||||||||||||
|
Amortization
of property, plant and equipment
|
1,071 | 737 | 3,045 | 2,182 | ||||||||||||
|
Amortization
of intangible assets
|
1,015 | 653 | 2,469 | 2,165 | ||||||||||||
|
Total
operating expenses
|
25,119 | 19,537 | 69,244 | 55,252 | ||||||||||||
|
Earnings
from operations
|
4,458 | 2,840 | 8,395 | 7,680 | ||||||||||||
|
Interest
income
|
964 | 1,236 | 4,063 | 3,513 | ||||||||||||
|
Foreign
exchange gain (loss)
|
(59 | ) | (628 | ) | (907 | ) | 107 | |||||||||
|
Earnings
before income taxes and extraordinary gain
|
5,363 | 3,448 | 11,551 | 11,300 | ||||||||||||
|
Income
taxes
|
||||||||||||||||
|
Current
|
112 | 874 | (7,080 | ) | 2,509 | |||||||||||
|
Future
|
2,432 | – | 11,881 | – | ||||||||||||
|
Recognition
of previously unrecognized future income tax assets
|
(5,324 | ) | – | (5,324 | ) | – | ||||||||||
| (2,780 | ) | 874 | (523 | ) | 2,509 | |||||||||||
|
Earnings
before extraordinary gain
|
8,143 | 2,574 | 12,074 | 8,791 | ||||||||||||
|
Extraordinary
gain
|
3,036 | – | 3,036 | – | ||||||||||||
|
Net
earnings for the period
|
$ | 11,179 | $ | 2,574 | $ | 15,110 | $ | 8,791 | ||||||||
|
Basic
earnings before extraordinary gain
|
$ | 0.12 | $ | 0.04 | $ | 0.18 | $ | 0.13 | ||||||||
|
Diluted
earnings before extraordinary gain
|
$ | 0.12 | $ | 0.04 | $ | 0.17 | $ | 0.13 | ||||||||
|
Basic
and diluted net earnings per share
|
$ | 0.16 | $ | 0.04 | $ | 0.22 | $ | 0.13 | ||||||||
|
Segmented
information:
|
||||||||||||||||
|
Sales:
|
||||||||||||||||
|
Telecom
Division
|
$ | 42,843 | $ | 33,821 | $ | 115,643 | $ | 92,640 | ||||||||
|
Life
Sciences and Industrial Division
|
5,738 | 5,384 | 17,204 | 17,319 | ||||||||||||
| $ | 48,581 | $ | 39,205 | $ | 132,847 | $ | 109,959 | |||||||||
|
Earnings
from operations:
|
||||||||||||||||
|
Telecom
Division
|
$ | 3,819 | $ | 2,143 | $ | 6,657 | $ | 5,024 | ||||||||
|
Life
Sciences and Industrial Division
|
639 | 697 | 1,738 | 2,656 | ||||||||||||
| $ | 4,458 | $ | 2,840 | $ | 8,395 | $ | 7,680 | |||||||||
|
Research
and development data:
|
||||||||||||||||
|
Gross
research and development
|
$ | 8,843 | $ | 6,637 | $ | 23,904 | $ | 18,085 | ||||||||
|
Net
research and development
|
$ | 7,373 | $ | 5,328 | $ | 19,570 | $ | 14,360 | ||||||||
|
(1)
|
The
cost of sales is exclusive of amortization, shown
separately.
|
|
Three
months
ended
May
31, 2008
|
Three
months
ended
May
31, 2007
|
Nine
months
ended
May
31, 2008
|
Nine
months
ended
May
31, 2007
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
Sales
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
|
Cost
of sales (1)
|
39.1 | 42.9 | 41.6 | 42.8 | ||||||||||||
|
Gross
margin
|
60.9 | 57.1 | 58.4 | 57.2 | ||||||||||||
|
Operating
expenses
|
||||||||||||||||
|
Selling
and administrative
|
32.2 | 32.7 | 33.2 | 33.2 | ||||||||||||
|
Net
research and development
|
15.2 | 13.6 | 14.7 | 13.0 | ||||||||||||
|
Amortization
of property, plant and equipment
|
2.2 | 1.9 | 2.3 | 2.0 | ||||||||||||
|
Amortization
of intangible assets
|
2.1 | 1.7 | 1.9 | 2.0 | ||||||||||||
|
Total
operating expenses
|
51.7 | 49.9 | 52.1 | 50.2 | ||||||||||||
|
Earnings
from operations
|
9.2 | 7.2 | 6.3 | 7.0 | ||||||||||||
|
Interest
income
|
1.9 | 3.2 | 3.1 | 3.2 | ||||||||||||
|
Foreign
exchange gain (loss)
|
(0.1 | ) | (1.6 | ) | (0.7 | ) | 0.1 | |||||||||
|
Earnings
before income taxes and extraordinary gain
|
11.0 | 8.8 | 8.7 | 10.3 | ||||||||||||
|
Income
taxes
|
||||||||||||||||
|
Current
|
0.2 | 2.2 | (5.3 | ) | 2.3 | |||||||||||
|
Future
|
5.0 | – | 8.9 | – | ||||||||||||
|
Recognition
of previously unrecognized future income tax assets
|
(11.0 | ) | – | (4.0 | ) | – | ||||||||||
| (5.8 | ) | 2.2 | (0.4 | ) | 2.3 | |||||||||||
|
Earnings
before extraordinary gain
|
16.8 | 6.6 | 9.1 | 8.0 | ||||||||||||
|
Extraordinary
gain
|
6.2 | – | 2.3 | – | ||||||||||||
|
Net
earnings for the period
|
23.0 | % | 6.6 | % | 11.4 | % | 8.0 | % | ||||||||
|
Segmented
information:
|
||||||||||||||||
|
Sales:
|
||||||||||||||||
|
Telecom
Division
|
88.2 | % | 86.3 | % | 87.0 | % | 84.2 | % | ||||||||
|
Life
Sciences and Industrial Division
|
11.8 | 13.7 | 13.0 | 15.8 | ||||||||||||
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||
|
Earnings
from operations:
|
||||||||||||||||
|
Telecom
Division
|
7.9 | % | 5.5 | % | 5.0 | % | 4.6 | % | ||||||||
|
Life
Sciences and Industrial Division
|
1.3 | 1.7 | 1.3 | 2.4 | ||||||||||||
| 9.2 | % | 7.2 | % | 6.3 | % | 7.0 | % | |||||||||
|
Research
and development data:
|
||||||||||||||||
|
Gross
research and development
|
18.2 | % | 16.9 | % | 18.0 | % | 16.5 | % | ||||||||
|
Net
research and development
|
15.2 | % | 13.6 | % | 14.7 | % | 13.0 | % | ||||||||
|
(1)
|
The
cost of sales is exclusive of amortization, shown
separately.
|
SALES
For the
three months ended May 31, 2008, our global sales increased 23.9% to $48.6
million from $39.2 million for the same period last year, with an 88%-12%
split in favor of our Telecom Division.
For the
nine months ended May 31, 2008, our global sales increased 20.8% to
$132.8 million from $110.0 million for the same period last year, with
an 87%-13% split in favor of our Telecom Division. Our corporate
performance metric for sales growth is 20% for fiscal 2008.
Telecom
Division
For the
three months ended May 31, 2008, sales of our Telecom Division increased 26.7%
to $42.8 million from $33.8 million for the same period last
year.
For the
nine months ended May 31, 2008, sales of our Telecom Division increased 24.8% to
$115.6 million from $92.6 million for the same period last
year.
During
the third quarter and the first nine months of fiscal 2008, we posted sales
growth due to the market acceptance of our next-generation IP test solutions and
continued market-share gains in optical test solutions as well as due to
continued spending in access networks fueled by the competitive dynamic between
telephone and cable companies. In addition, newly acquired Brix Networks and
Navtel Communications contributed for $2.2 million to our sales since their
acquisition in the third quarter, which had a positive impact on our telecom
sales during the third quarter and the first nine months of fiscal 2008. In
fact, during the third quarter and the first nine months of fiscal 2008, we
posted record-high sales and bookings of protocol test solutions, including
next-generation IP test solutions and product lines of our newly acquired
businesses. So far in fiscal 2008, and with the contribution of Brix Networks
and Navtel Communications, these test solutions represented our fastest-growing
product line with year-over-year sales increase of 137% and 46% for the third
quarter and the first nine months of fiscal 2008, respectively, and they
represented more than 20% and more than 15% of our telecom sales for these two
periods, respectively. With these two acquisitions as well as the recent
launches of significant strategic protocol test solutions; namely, the compact
multiservice transport test set that combines next-generation SONET/SDH and
Ethernet testing inside a single module (FTB-8120NGE/FTB-8130NGE Power
Blazer), the 40/43 Gbit/s SONET/SDH field-test solution for high-speed optical
networks (FTB-8140 Transport Blazer) as well as the advanced IQS-600 Integrated
Qualification System, a highly scalable modular test platform for R&D and
manufacturing applications, we have a much more comprehensive offering in
this market segment, which provides us with a significant competitive advantage;
this should help us further increase our market share and sales in the upcoming
quarters.
However,
during the third quarter and the nine months of fiscal 2008, we posted a slight
year-over-year sales decrease for our copper-access test solutions as
large-scale IPTV deployments have been delayed until calendar 2008, which
affected our sales in the first three quarters of fiscal 2008 to some extent.
During fiscal 2008, we launched new added-value products that integrate
Consultronics (copper-access) core knowledge and intellectual property; namely,
the new AXS-200 SharpTESTER. These new, innovative products have yet to
contribute to our sales for this market segment. Following the quarter-end,
however, we launched a new test module housed inside the AXS-200 SharpTESTER
platform, which differentiates our access network offering from those of other
vendors. The AXS-200/630 Triple-Play Test Set, which leverages the benefits of
Broadcom’s customer premises equipment (CPE) multimode VDSL2 chipset, enables
the installation and troubleshooting of ADSL2+ and VDSL2 access networks with
the highest level of interoperability.
It should
be noted however that during the third quarter of fiscal 2007, we benefited from
aggressive FTTH roll-outs from our top customer and sales to this customer
represented 19.1% ($6.5 million) of our telecom sales in the third quarter of
fiscal 2007, compared to 10.2% (4.4 millions $) during the same period this
year. Excluding sales to this customer, our telecom sales would have increased
40.6% in the third quarter of fiscal 2008, compared to the same period last
year; this shows that we have diversified our customer base
year-over-year.
Life
Sciences and Industrial Division
For the
three months ended May 31, 2008, sales of our Life Sciences and Industrial
Division increased 6.6% year-over-year at $5.7 million, compared to $5.4 million
for the same period last year.
For the
nine months ended May 31, 2008, sales of our Life Sciences and Industrial
Division were flat year-over-year to $17.2 million compared to $17.3 million for
the same period last year.
The
increase in sales during the third quarter of fiscal 2008 compared to the same
period last year is due to increased sales activities from both curing and
fluorescence illumination market. A significant portion of sales of that
Division are conducted through original equipment manufacturer (OEM) agreements.
Consequently, we are dependent, to some extent, on the buying pattern of our
customers and our sales may fluctuate quarter-over-quarter.
Net
Bookings
Overall,
for the two divisions, net accepted orders increased 16.0% year-over-year to a
record-high $50.7 million in the third quarter of fiscal 2008 from $43.7
million for the same period last year. Our book-to-bill ratio reached 1.04
(excluding the backlog of Brix Networks and Navtel Communications) in the third
quarter of fiscal 2008, compared to 1.12 for the same period last year. In
the previous quarter, the net book-to-bill ratio was 1.03. Our 16.0% increase in
net accepted orders in the third quarter of fiscal 2008, compared to the same
period last year, is mainly due to the increased demand for our next-generation
IP and optical test solutions.
Geographic
distribution
For the
three months ended May 31, 2008, sales to the Americas, Europe-Middle
East-Africa (EMEA) and Asia-Pacific (APAC) accounted for 60%, 28% and 12% of
global sales, respectively. For the corresponding period last year, sales to the
Americas, EMEA and APAC accounted for 60%, 26% and 14% of global sales,
respectively. For the nine months ended May 31, 2008, sales to the Americas,
EMEA and APAC accounted for 56%, 29% and 15% of global sales, respectively. For
the corresponding period last year, sales to the Americas, EMEA and APAC
accounted for 58%, 29% and 13% of global sales, respectively.
During
the third quarter of fiscal 2008, we reported that sales increased (in dollars)
in every geographic area, compared to the same period last year with increases
of 23.7% in the Americas, 30.4% in EMEA and 12.4% in APAC. During the first nine
months of fiscal 2008, we reported that sales increased (in dollars) in every
geographic area compared to the same period last year with increases of 15.9% in
the Americas, 21.0% in EMEA and 34.5% in APAC.
In the
Americas, the increase in sales in dollars during the three months ended May 31,
2008, compared to the same period last year comes from Canada and United
States where we posted year-over-year growth in sales of 66.6% and 21.4%,
respectively. However, in Latin America sales decreased 16.4% in dollars
year-over-year. In the United States, despite the decrease in sales to our
top customer (who is located in the US) year-over-year, we were able to
significantly increase our sales in this region. Brix Networks and Navtel
Communications contributed to some extent to the increase in sales in the United
States and in Canada year-over-year as a significant portion of their sales is
made in these two countries. As mentioned above, during fiscal 2007, we
benefited from aggressive FTTH roll-outs from our top customer, and sales to
this customer represented 16.5% ($6.5 million) of our global sales in the third
quarter of fiscal 2007, compared to 9.0% ($4.4 million) during the same
period this year. We do not believe that we have lost market share with
this particular customer in fiscal 2008 as the sales level with this customer
may fluctuate quarter-over-quarter, based on amount of budget available,
allocation of such budget and timing and scope of projects. Excluding sales to
this customer, sales to United States would have increased 48.4% in dollars
year-over-year; this shows that, overall, we have diversified our customer base
year-over-year in this region. Finally, sales to Latin America fluctuate
depending on the timing and scope of projects of our customers. During the first
nine months of fiscal 2008, sales to the Americas increased in every region.
During that period, our top customer, who is located in the United States,
accounted for 8.6% ($11.4 million) of our global sales while during the same
period last year, our top customer, who is also located in the United States,
represented 17.2% ($18.9 million) of our
global sales.
The
increase in sales in the EMEA market, in dollars, in the third quarter and the
first nine months of fiscal 2008, compared to the same periods last year, is a
direct result of our continued efforts to aggressively develop this market
in the last several years and investments to increase our sales presence as well
as the development of stronger support and service operations in this region. In
addition, many Tier-1 carriers in EMEA are migrating their traditional
circuit-switched core networks to higher-speed, dense wavelength-division
multiplexing (DWDM) and next-generation packet-based architectures, which is
creating a market demand for our protocol test solutions and fiber
characterization test kits. Furthermore, we are leveraging our FTTx leadership
gained in the United States to provide consultancy with many of the early
adopters in this field in EMEA.
In the
APAC market, we are seeing the return on investment of some specific optical,
protocol as well as life science and industrial products developed and
targeted for this important market. This increasingly competitive range, coupled
with our steadily increasing market presence, are responsible for the increase
in sales in this growth region in the third quarter and the first nine
months of fiscal 2008, compared to the corresponding periods last year. However,
the recent natural disaster in China delayed a few important tenders and also
resulted in an order volume slowdown, which had an impact on the last few
weeks of the third quarter of fiscal 2008.
Through
our two divisions, we sell our products to a broad range of customers, including
network service providers, network equipment manufacturers, wireless operators,
cable TV operators, optical system and component manufacturers, as well as
customers in the life sciences and high-precision assembly sectors. During the
three months ended May 31, 2008, no customer accounted for more than 10% of our
global sales, and our top three customers accounted for 14.9% of our global
sales. For the corresponding period last year, our top customer accounted for
16.5% ($6.5 million) of our global sales, and our top three customers accounted
for 23.0% of our global sales. For the nine months ended May 31, 2008,
no customer accounted for more than 10% of our global sales, and our top three
customers accounted for 14.5% of our global sales. For the corresponding period
last year, our top customer accounted for 17.2% ($18.9 million) of our
global sales, and our top three customers accounted for 22.3% of our global
sales.
GROSS
MARGIN
Gross
margin increased to 60.9% of sales for the three months ended May 31, 2008,
from 57.1% for the same period last year.
Gross
margin amounted to 58.4% of sales for the nine months ended May 31, 2008,
compared to 57.2% for the same period last year.
Gross
margin reached the 60% mark for the first time since the third quarter of 2001.
The increase in our gross margin in the third quarter of fiscal 2008, compared
to the corresponding period last year, can be explained by the following
factors. First, during the third quarter of fiscal 2008, our gross margin was
positively affected by the increased sales of our protocol test solutions
year-over-year, including those of Brix Networks and Navtel Communications, as
these products have better margins than our other test solutions. In addition,
the significant increase in global sales, year-over-year resulted in an increase
in manufacturing activities, allowing us to better absorb our fixed
manufacturing costs. Furthermore, we were able to reduce our cost of goods sold
by better leveraging our supplier base and by developing innovative new products
with cost-effective design. Also, ramping sales volume at our manufacturing
facility in China resulted in margin improvements. Also, our cost of goods was
positively affected by lower costs for raw material due to the significant
increase in the value of the Canadian dollar compared to the US dollar in the
last quarters, as most of these costs are incurred in US dollars. Furthermore,
the shift in sales between the APAC in favor of EMEA had a positive impact on
our gross margin year-over-year as gross margin tends to be higher in EMEA
than in APAC. However, we are facing continued aggressive pricing pressure
worldwide. In addition, during the third quarter of fiscal 2008, a stronger
Canadian dollar, compared to the US dollar year-over-year, prevented us
from further improving our gross margin as most of our overhead costs and
a portion of our raw material purchases are denominated in Canadian
dollars.
The
increase in our gross margin in the first nine months of fiscal 2008, compared
to the corresponding period last year, can be explained by the following
factors. First, during the first nine months of fiscal 2008, our gross margin
was also positively affected by the increased sales of our protocol test
solutions year-over-year, including those of Brix Networks and Navtel
Communications, as these products have better margins than our other test
solutions. In addition, the significant increase in global sales, year-over-year
resulted in an increase in manufacturing activities, allowing us to better
absorb our fixed manufacturing costs. Furthermore, we were able to reduce our
cost of goods sold by better leveraging our supplier base and by developing
innovative new products with cost-effective design. Also, our cost of goods was
positively affected by lower costs for raw material due to the significant
increase in the value of the Canadian dollar compared to the US dollar in the
last quarters, as most of these costs are incurred in US dollars. However, the
shift in the geographic distribution of sales in favor of APAC versus the
Americas had a negative impact on our gross margin in the first nine months of
fiscal 2008 compared to the same period last year. In fact, sales to APAC tend
to have lower margins than sales to the Americas since we are facing higher
pricing pressure in the APAC region. Furthermore, a stronger Canadian dollar,
compared to the US dollar year-over-year, had a negative impact on our
gross margin as most of our overhead costs and a portion of our raw material
purchases are denominated in Canadian dollars. Finally, the start-up of our own
manufacturing activities in China, over the last few months, resulted in
additional expenses, which reduced our gross margin in fiscal 2008,
compared to the same period last year.
Considering
the expected sales growth in the fourth quarter of fiscal 2008, compared to the
same period last year, the expected increase in sales of protocol products and
the contribution of Brix Networks and Navtel Communications (which tend to
generate higher margins), the cost-effective design of our products, our
manufacturing activities in China, our tight control on operating costs, we
expect our gross margin to improve in the future. However, our gross margin may
fluctuate quarter-over-quarter as our sales may fluctuate. Furthermore, our
gross margin can be negatively affected by increased competitive pricing
pressure, customer concentration and/or consolidation, increased obsolescence
costs, shifts in customer and product mix, under-absorption of fixed
manufacturing costs, challenges encountered in the ramp-up of our manufacturing
facilities in China, and increases in product offerings by other suppliers in
our industry. Finally, any further increase in the strength of the Canadian
dollar would have a negative impact on our gross margin in fiscal 2008 and
beyond.
SELLING
AND ADMINISTRATIVE
For the
three months ended May 31, 2008, selling and administrative expenses were $15.7
million, or 32.2% of sales, compared to $12.8 million, or 32.7% of
sales for the same period last year.
For the
nine months ended May 31, 2008, selling and administrative expenses were $44.2
million, or 33.2% of sales, compared to $36.5 million, or 33.2% of
sales for the same period last year.
During the third quarter and
the first nine months of fiscal 2008, the substantial increase in the average
value of the Canadian dollar compared to the US dollar, had a significant
negative impact
on our selling and administrative expenses as more than half of these expenses
are denominated in Canadian dollars and also because these expenses increased
year-over-year with our increased sales level. In addition, during the third
quarter and the first nine months of fiscal 2008, we continued
intensifying our sales and marketing activities to develop our markets and
leverage our significant research and development investments; this resulted in
higher sales and marketing expenditures (including number of employees and
expenses to support the launch of several new products and to increase
brand-name recognition), compared to the corresponding periods last year. Furthermore, our overall
commission expenses increased in the third quarter and the first nine months of
fiscal 2008, compared to the same periods last year, due to the increase in
sales year-over-year. Also, Brix Networks and Navtel Communications
contributed about one month and two months, respectively, in the third quarter
and the first nine months of fiscal 2008, which caused our selling and
administrative expenses to increase compared to the same periods last year.
Finally, during the first quarter of fiscal 2008, we discontinued
certain product lines, which led to the lay-off of some of our sales
and marketing personnel, resulting in severance expenses during the first nine
months of fiscal 2008.
For
fiscal 2008, considering the actual value of the Canadian dollar compared to the
US dollar and the significant impacts of the acquisitions of Brix Networks and
Navtel Communications on our selling and administrative expenses, we expect our
selling and administrative expenses to increase in dollars and slightly exceed
the top of our expected range of 30% and 32% of sales expected before the
completion of our latest acquisitions. In particular, in fiscal 2008, we
expect our commission expenses to increase as sales volume increases.
Furthermore, considering our goal of becoming the leading player in the telecom
test, measurement and monitoring space, we plan to continue intensifying our
sales and marketing efforts, both domestic and international, which will also
cause our expenses to rise. Finally, any further increase in the strength of the
Canadian dollar would also cause our selling and administrative expenses to
increase, as more than half of these expenses are incurred
in Canadian dollars.
RESEARCH
AND DEVELOPMENT
For the
three months ended May 31, 2008, gross research and development expenses totaled
$8.8 million, or 18.2% of sales, compared to $6.6 million, or 16.9% of
sales for the same period last year.
For the
nine months ended May 31, 2008, gross research and development expenses totaled
$23.9 million, or 18.0% of sales, compared to $18.1 million, or 16.5% of
sales for the same period last year.
During the third quarter and
the first nine months of fiscal 2008, the significant increase in the average
value of the Canadian dollar compared to the US dollar year-over-year had also a
significant and negative effect on our gross research and development expenses
as most of these expenses are denominated in Canadian dollars and also because
these expenses increased year-over-year. In
addition, we intensified our research and development activities, including
additional employees, which resulted in more gross research and development
expenses in both divisions during the third quarter and the first nine months of
fiscal 2008, compared to the same periods last year. Furthermore, Brix Networks and Navtel Communications
contributed about one month and two months, respectively, in the third quarter
and the first nine months of fiscal 2008, which caused our gross research and development
expenses to increase compared to the same periods last year. It should be noted
that Brix
Networks and
Navtel Communications tend to incur a higher percentage of sales
for research and
development expenses compared to our other product lines as their products are more
software-intensive but they deliver
higher margins than most of our other product lines. Also, we
established a research and development center focused on software
development in Pune, India, which resulted in increased expenses
year-over-year. Finally, during the first quarter of fiscal 2008, we
closed down our R&D operations in Budapest, Hungary, and certain R&D
projects, which resulted in severance expenses during that period, causing our
expenses of the first nine months of fiscal 2008 to increase
year-over-year.
The
increase in our gross research and development expenses as a percentage of sales
year-over-year is mainly due to the negative effect of the increased value
of the Canadian dollar versus the US dollar year-over-year, the impacts of the
acquisition of Brix Networks and Navtel Communications as well as the severance
expenses incurred during the first quarter of fiscal 2008.
For the
three months ended May 31, 2008, tax credits and grants from the Canadian
federal and provincial governments for research and development activities were
$1.5 million, or 16.6% of gross research and development expenses, compared
to $1.3 million, or 19.7% of gross research and development expenses for the
same period last year. For the nine months ended May 31, 2008, these tax credits
and grants were $4.3 million, or 18.1% of gross research and development
expenses, compared to $3.7 million, or 20.6% of gross research and development
expenses for the same period last year.
The
increase in the dollar amount of our tax credits and grants in the third quarter
and the first nine months of fiscal 2008, compared to the same periods last year
is directly related to the increase in our gross research and development
expenses as we were entitled to the same tax credits and grants programs.
However, the decrease of research and development tax credits as a
percentage of gross research and development expenses is mainly due to the fact
that since the beginning of fiscal 2008, the portion of gross research and
development incurred in Canada, where we are entitled to tax credits was lower
than the same periods last year following the establishment of our new software
development center in India as well as the acquisition of Brix Networks, which
is located in the United States. Our research and development activities carried
outside Canada are not entitled to tax credits.
For the
first nine months of fiscal 2008, 36.7% of our sales originated from products
that have been on the market for two years or less, which is above our stated
goal of 30% for fiscal 2008.
For
fiscal 2008, we expect that our research and development expenses will increase
at a higher rate than the growth in our sales given our focus on innovation,
with the addition of Brix Networks and Navtel Communications, considering the
high software content of their products, the addition of software features in
our products, our desire to gain market share and our goal to exceed customer
needs and expectations. Also, we are increasingly taking advantage of talent
pools around the world with the recent establishment of a research and
development center focused on software development in Pune, India. Finally,
any further increase in the strength of the Canadian dollar in the upcoming
quarters would cause our net research and development expenses to increase, as
most of these are incurred in Canadian dollars.
AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
For the
three months ended May 31, 2008, amortization of property, plant and equipment
was $1.1 million, compared to $737,000 for the same period last year. For the
nine months ended May 31, 2008, amortization expenses amounted to $3.0 million,
compared to $2.2 million for the same period last year. The recent start-up
of our own
manufacturing and research and development facilities in China and India, the
upgrade of our IT system, and the impacts of the acquisition of Brix Networks
and Navtel Communications, which contributed about one month and two months in
the third quarter, respectively, and the first nine months of fiscal 2008,
resulted in an increase in our amortization expenses during the third
quarter and the first nine months of fiscal 2008 compared to the same periods
last year. In addition, the increase in the average
value of the Canadian dollar versus to the US dollar in the third quarter and
the first nine months of fiscal 2008, compared to the same periods last year
contributed to
the increase in our
amortization expenses year-over-year as most of these expenses are denominated
in Canadian dollars.
AMORTIZATION
OF INTANGIBLE ASSETS
For the
three months ended May 31, 2008, amortization of intangible assets was $1.0
million, compared to $653,000 for the same period last year. For the nine
months ended May 31, 2008, amortization of intangible assets was $2.5 million,
compared to $2.2 million for the same period last year. The increase in the average
value of the Canadian dollar versus to
the US dollar in the third quarter and the first nine months of fiscal 2008,
compared to the same periods last year, contributed to
the increase in our amortization expenses year-over-year as most
of these expenses are
denominated in Canadian dollars. In addition, upon the acquisition of
Brix
Networks,
we recorded intangible assets,
which were amortized about a month in the third quarter and the first nine
months of fiscal 2008, which
contributed to further increase our amortization
expenses year-over-year.
INTEREST
INCOME
For the
three months ended May 31, 2008, interest income amounted to $964,000, compared
to $1.2 million for the same period last year. The decrease in
interest income in the third quarter of fiscal 2008 compared to the same period
last year is mainly due to the decrease of our cash and short-term investments
following the cash payment of $40.9 million made during the quarter for the
acquisitions of Brix Networks and Navtel Communications, the
redemption of share capital for $3.2 million in accordance with our share
buy-back program as well as the general reduction in interest rates
year-over-year. For the nine months ended May 31, 2008, interest income amounted
to $4.1 million, compared to $3.5 million for the same period last year. The
increase in our interest income in the first nine months of fiscal 2008,
compared to the same periods last year, and despite the decrease, in the third
quarter, of our cash position following the cash payment for the two business
combinations completed in the third quarter and the redemption of share capital,
is due in part to the increase in interest rates year-over-year and cash flows
provided by operating activities during the period. Furthermore, the increase in
the average value of the Canadian dollar, compared to the US dollar
year-over-year contributed to the increase in our interest income during the
first nine months of fiscal 2008, compared to the same period last year, as it
is denominated in Canadian dollars. Finally, during the first nine months of
fiscal 2008, we received interest of $241,000 by the Canadian tax authorities
following the recovery during that period of prior years’ income tax
receivable.
FOREIGN
EXCHANGE GAIN (LOSS)
For the
three months ended May 31, 2008, the foreign exchange loss amounted to $59,000,
compared to $628,000 for the same period last year.
For the
nine months ended May 31, 2008, the foreign exchange loss amounted to $907,000
compared to a foreign exchange gain of $107,000 for the same period
last year.
During
the third quarter of fiscal 2008, the value of the Canadian dollar was
relatively stable (close to par) compared to the US dollar. This resulted in a
limited foreign exchange loss of $59,000 during that period. In fact the
period-end value of the Canadian dollar slightly increased 1.4% in the third
quarter of fiscal 2008, compared to the previous quarter.
During
the third quarter of fiscal 2007, the value of the Canadian dollar increased
9.4% quarter-over-quarter, compared to the US dollar, which resulted in a
significant foreign exchange loss of $628,000 during that period.
During
the first nine months of fiscal 2008, the value of the Canadian dollar
significantly increased compared to the US dollar, which resulted in a
significant foreign exchange loss of $907,000 during that period. In fact, the period-end value of
the Canadian dollar for the first nine months of fiscal 2008 increased
6.3%, compared to August 31, 2007.
During
the first nine months of fiscal 2007, the Canadian dollar fluctuated up and down
compared to the US dollar, and overall, this resulted in a limited exchange gain
of $107,000.
It should be noted that
foreign exchange rate fluctuations also flow through the P&L line items
as a significant portion of our operating items are denominated in
Canadian dollars and we report our results in US dollars.
Consequently, the increase in the average value of the Canadian dollar in the
third quarter and the first nine months of fiscal 2008, compared to the same
periods last year, resulted in a negative impact on our financial results. This
was amplified by the fact that our operating activities incurred in Canadian dollars increased
year-over-year. In fact, the average value of the Canadian dollar
compared to the US dollar in the third quarter of fiscal 2008 was CA$1.0047 =
US$1.00 versus CA$1.1348 = US$1.00 during the same period last year,
representing an increase of 12.9% in the average value of the Canadian
dollar compared to the US dollar year-over-year. During the first
nine months of fiscal 2008, the average value of the Canadian dollar compared to
the US dollar was CA$1.0005 = US$1.00 versus CA$1.1425 = US$1.00 during the same
period last year, representing an increase of 14.2% in the average value of
the Canadian dollar compared to the US dollar
year-over-year.
We manage
our exposure to currency risks with forward exchange contracts. In addition,
some of our Canadian entities’ operating activities are denominated in US
dollars or other currencies, which further hedges these risks. However, any
further increase in the value of the Canadian dollar, compared to the US dollar,
would have a negative impact on our operating results.
INCOME
TAXES
For the
three months ended May 31, 2008, we reported an income tax recovery of $2.8
million compared to an income tax expense of $874,000 for the same
period last year.
For the
nine months ended May 31, 2008, we reported an income tax recovery of $523,000
compared to an income tax expense of $2.5 million for the same period
last year.
We
recorded a full valuation allowance against our future income tax assets until
August 31, 2007, and most of our income tax expenses of prior periods
represented income taxes payable at the Canadian federal level, which were
reduced by research and development tax credits that were recorded against gross
research and development expenses in the statements of earnings. However, on
August 31, 2007, we recorded a future income tax recovery of $24.6 million for
the reversal of a portion of our valuation allowance at the Canadian federal and
provincial levels and at the US federal level. Consequently, in the third
quarter and the first nine months of fiscal 2008, our income tax recovery was
affected by the recognition of future income taxes in some tax jurisdictions,
compared to the same periods last year.
As
mentioned above, for the three months ended May 31, 2008, we reported an income
tax recovery of $2.8 million on earnings before income taxes and
extraordinary gain of $5.4 million. During the third quarter of fiscal 2008,
considering the expected positive impacts of the acquisitions of Brix Networks
and Navtel Communications will have on future years’ taxable income of our US
subsidiaries (federal level) and because actual taxable income of these
subsidiaries is higher than expected, we concluded that is was more likely than
not that all future income taxes of our consolidated US group would be
recovered. Consequently, we reversed the valuation allowance previously recorded
against future income tax assets in the amount of $7.6 million. The portions of
the valuation allowance that was reversed during the quarter, and that was
attributable to the impacts of the acquisitions of Brix Networks and Navtel
Communications, in the amount of $1.6 million and $652,000, respectively, were
included in the purchase price allocation of the related acquired businesses.
The remaining of the reversal, in the amount of $5.3 million, has been recorded
in the income taxes in the statements of earnings for the three and the nine
months ended May 31, 2008. Excluding this unusual tax recovery, we would have
reported an income tax expense of $2.5 million on earnings before income taxes
and extraordinary gain of $5.4 million, for an effective income tax rate of
47.4%. In fact, during the third quarter of fiscal 2008, some expenses were
non-deductible for tax purposes (mainly stock-based compensation expenses and
foreign exchange losses created by the translation of financial statements
of our foreign integrated subsidiaries) and some revenues were non-taxable
(namely certain R&D tax credits). In addition, we continued to maintain
a valuation allowance for some of our subsidiaries at loss and we utilized
previously unrecognized future income tax assets, mainly in the United States.
Finally, we recorded income tax expenses for minimum taxes payable in certain
tax jurisdictions, whose taxes are not related to pre-tax earnings. Otherwise,
actual tax rate would have been closer to the statutory
tax rate.
For the
nine months ended May 31, 2008, we reported an income tax recovery of $523,000
on earnings before income taxes and extraordinary gain of $11.6 million. The
distortion between income taxes and earnings before income taxes and
extraordinary gain for that period can be explained by the following factors.
First and as previously mentioned, during the third quarter of fiscal 2008,
we reversed the valuation allowance previously recorded in our US subsidiaries
(US federal Level), which resulted in an unusual income tax recovery
of $5.3 million during the first nine months of fiscal 2008. In
addition, on December 14, 2007, reductions to the Canadian federal statutory tax
rate, previously announced by the Canadian federal Government were enacted.
Therefore, our Canadian federal future income tax assets decreased by
$1.5 million and generate a one-time future income tax expense for the same
amount during the first nine months of fiscal 2008. However, during the second
quarter of fiscal 2008, based on these new enacted tax rates, we reviewed our
tax strategy for the future use of our Canadian federal operating losses, tax
deductions, timing differences and R&D tax credits to minimize income taxes
payable on future years’ taxable income, by amending our prior year’s income tax
returns to create a net operating loss to be carried back to prior years, which
will release previously used research and development tax credits. This resulted
in an increase of our tax-related assets of $2.7 million and a one-time
income tax recovery for the same amount during the first nine months of fiscal
2008. Excluding these three unusual tax items, we would have reported an income
tax expense of $6.0 million on earnings before income taxes and extraordinary
gain of $11.6 million, for an effective income tax rate of 51.9%. In fact,
during the first nine months of fiscal 2008, some expenses were non-deductible
for tax purposes (mainly stock-based compensation expenses and foreign exchange
losses created by the translation of financial statements of our foreign
integrated subsidiaries) and some revenues were non-taxable (namely certain
R&D tax credits). In addition, we continued to maintain a valuation
allowance for some of our subsidiaries at loss, and we utilize previously
unrecognized future income tax assets. Finally, we recorded income tax expenses
for minimum taxes payable in certain tax jurisdictions, whose taxes are not
related to pre-tax earnings. Otherwise, actual tax rate would have been closer
to the statutory tax rate.
For the
three and the nine months ended May 31, 2007 and 2008, the reconciliation of the
income tax provision calculated using the combined Canadian federal and
provincial statutory income tax rate with the income tax provision in the
financial statements is as follows:
|
Three months
ended
May
31, 2008
|
Three months
ended
May
31, 2007
|
Nine months
ended
May
31, 2008
|
Nine months
ended
May
31, 2007
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
Income
tax provision at combined Canadian federal and provincial statutory tax
rate
|
$ | 1,638,000 | $ | 1,104,000 | $ | 3,618,000 | $ | 3,616,000 | ||||||||
|
Increase
(decrease) due to:
|
||||||||||||||||
|
Income
taxed at different rates
|
97,000 | (13,000 | ) | 174,000 | 20,000 | |||||||||||
|
Non-taxable
income
|
(30,000 | ) | (48,000 | ) | (401,000 | ) | (143,000 | ) | ||||||||
|
Non-deductible
expenses
|
233,000 | 142,000 | 823,000 | 588,000 | ||||||||||||
|
Change
in tax rates
|
– | – | 1,522,000 | 290,000 | ||||||||||||
|
Change
in tax strategy
|
– | – | (2,715,000 | ) | – | |||||||||||
|
Foreign
exchange effect of translation of foreign integrated
subsidiaries
|
33,000 | (13,000 | ) | 227,000 | 73,000 | |||||||||||
|
Other
|
(113,000 | ) | (167,000 | ) | 278,000 | (127,000 | ) | |||||||||
|
Recognition
of previously unrecognized future income tax assets
|
(5,324,000 | ) | – | (5,324,000 | ) | – | ||||||||||
|
Utilization
of previously unrecognized future income tax assets
|
– | (511,000 | ) | (1,881,000 | ) | (2,510,000 | ) | |||||||||
|
Unrecognized
future income tax assets on temporary deductible differences and unused
tax losses and deductions
|
686,000 | 379,000 | 3,156,000 | 702,000 | ||||||||||||
|
Income
tax expense (recovery)
|
$ | (2,780,000 | ) | $ | 874,000 | $ | (523,000 | ) | $ | 2,509,000 | ||||||
LIQUIDITY
AND CAPITAL RESOURCES
Cash Requirements
and Capital Resources
As at May
31, 2008, cash and short-term investments totalled $96.5 million, while our
working capital was at $155.1 million. Our cash and short-term investments
decreased $46.3 million in the third quarter of fiscal 2008, compared to the
previous quarter, mainly due to the cash payments of $40.9 million, $1.4 million
and $3.2 million for the acquisitions of Brix Networks and Navtel
Communications, the purchases of capital assets and the redemption of share
capital, respectively. We also recorded an unrealized foreign exchange loss on
our cash and short-term investments of $2.0 million. On the other hand,
operating activities generated cash flows of $1.3 million. The $2.0 million
unrealized foreign exchange loss resulted from the translation, in
US dollars, of our Canadian-dollar-denominated cash and short-term
investments and was recorded in the accumulated other comprehensive income in
the balance sheet.
Our
short-term investments consist of commercial paper and bank acceptances issued
by eight (eight as of February 29, 2008) high-credit quality
corporations and trusts; therefore, we consider the risk of non-performance of
these financial instruments to be remote. None of these debt instruments
are expected to be affected by a liquidity risk; 37% of our short-term
investments represent bank acceptances and none of our commercial paper
represents asset-backed commercial paper. For the purposes of
managing our cash position, we have established a cash management policy,
which we follow and monitor on a regular basis. These short-term investments
will be used for working capital and other general corporate purposes,
including other potential acquisitions.
We
believe that our cash balances and short-term investments will be sufficient to
meet our liquidity and capital requirements for the foreseeable future,
including the cash contingent consideration payable for the acquisition of Brix
Networks. In addition to these assets, we have unused available lines of credit
of $6.1 million for working capital and other general corporate purposes and an
unused line of credit of $11.6 million for foreign currency exposure
related to forward exchange contracts. However, possible operating losses and/or
possible investments in or acquisitions of complementary businesses, products or
technologies may require additional financing. There can be no assurance that
additional debt or equity financing will be available when required or,
if available, that it can be secured on satisfactory terms. Our lines of
credit bear interest at prime rate.
Sources
and Uses of Cash
We
finance our operations and meet our capital expenditure requirements mainly
through cash flows from operating activities, the use of our cash and short-term
investments as well as the issuance of subordinate voting shares.
Operating
Activities
Cash
flows provided by operating activities were $1.3 million for the three months
ended May 31, 2008, compared to cash flows used of $2.6 million for
the same period last year. Cash flows provided by operating activities in the
third quarter of fiscal 2008 were mainly attributable to the net earnings after
items not affecting cash of $7.3 million offset in part by the negative net
change in non-cash operating items of $6.0 million. The negative net change
in non-cash operating items was mainly due to the negative effect on cash of the
increase of $1.8 million of our income tax and tax credits recoverable as
well as the increase of $3.6 million of our inventories. The increase in our
income taxes and tax credits is mainly due to the increase of our tax credits
recoverable that were earned during the quarter but not yet recovered. The
increase in our inventories resulted from expected increased sales activities
for the next quarter.
Cash
flows provided by operating activities were $8.1 million for the nine months
ended May 31, 2008, compared to $7.7 million for the same period last year. Cash
flows provided by operating activities in the first nine months of fiscal 2008
were mainly attributable to the net earnings after items not affecting cash of
$26.1 million, offset in part by the negative net change in non-cash operating
items of $18.0 million; this negative net change in non-cash operating
items was mainly due to the negative effect on cash of the $11.4 million
increase in our income taxes and tax credits recoverable, the $2.9 million
increase in our inventories as well as the $3.1 million decrease in our accounts
payable and accrued liabilities. The increase in our income taxes and tax
credits recoverable is mainly due to the increase of our tax credits recoverable
following the change in our tax strategy explained elsewhere in this document.
This increase was for the most part offset by the positive effect on cash of the
decrease of our future income tax assets, which also resulted from the change in
the tax strategy. The increase in our income taxes and tax credits recoverable
is also due to tax credits earned during the period but not yet recovered. The
increase in our inventories resulted from expected increased sales activities
for the next quarter. The decrease in our accounts payable and accrued
liabilities is due to the timing of certain purchases and payments.
Investing
Activities
Cash
flows provided by investing activities amounted to $323,000 for the three months
ended May 31, 2008, compared to cash flows used of $1.2 million during
the same period last year. In the third quarter of fiscal 2008, we disposed of
$42.6 million worth of short-term investments to pay for the cash
consideration of $40.9 million for the two business combinations closed
during the quarter. On the other hand, we paid $1.4 million for the purchase of
capital assets. During the corresponding period last year, we acquired $840,000
worth of short-term investments and paid $1.9 million for the purchase of
capital assets. However, we received $1.6 million following the sale of capital
assets.
Cash
flows used by investing activities were $3.8 million for the nine months ended
May 31, 2008, compared to $9.2 million for the same period last year. In the
first nine months of fiscal 2008, we disposed of $42.2 million worth
of short-term investments to pay for the cash consideration of $40.9 million for
the two business combinations closed during the period. On the other hand, we
paid $5.1 million for the purchase of capital assets. During the corresponding
period last year, we acquired $8.4 million worth of short-term investments and
paid $3.5 million for the purchase of capital assets. On the other hand,
during that same period, we received $2.8 million following the sale of capital
assets.
Financing
activities
Cash
flows used by financing activities amounted to $2.4 million for the third
quarter of fiscal 2008, compared to cash flows provided of $63,000 during the
same period last year. During the third quarter of fiscal 2008, we redeemed
share capital for a cash consideration of $3.2 million. However, our bank loan
increased $786,000 during that period. Cash flows used by financing activities
were $1.8 million for the first nine months of fiscal 2008, compared to
cash flows provided of $495,000 during the same period last year. During the
first nine months of fiscal 2008, we redeemed share capital for $3.4 million.
However, our bank loan increased $1.5 million. During the first nine months of
fiscal 2007, cash flows provided by financing activities were mainly due to
the exercise of stock options for $573,000.
FORWARD
EXCHANGE CONTRACTS
We
utilize forward exchange contracts to manage our foreign currency exposure. Our
policy is not to utilize those derivative financial instruments for trading or
speculative purposes.
Our
forward exchange contracts, which are used to hedge anticipated
US-dollar-denominated sales, qualify for hedge accounting; therefore, foreign
exchange translation gains and losses on these contracts are recognized
as an adjustment of the revenues when the corresponding sales are
recorded.
As at May
31, 2008, we held forward exchange contracts to sell US dollars at various
forward rates, which are summarized as follows:
|
Expiry
dates
|
Contractual
amounts
|
Weighted
average contractual forward rates
|
||
|
June
to August 2008
|
$8,800,000
|
1.1154
|
||
|
September
2008 to March 2010
|
$27,400,000
|
1.0832
|
As at May
31, 2008, the fair value of our forward exchange contracts, which represents the
amount we would receive to settle the contracts, amounted to unrealized
gains of $2.7 million
($3.7 million as at February 29, 2008). The short-term portion of
the unrealized gains was recorded in other receivable in the balance sheet as at
May 31, 2008.
CONTINGENCY
On
November 27, 2001, a class action suit was filed in the United States District
Court for the Southern District of New York against EXFO, four of the
underwriters of our Initial Public Offering and some of our executive officers
pursuant to the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder and Sections 11, 12 and 16 of the Securities Act of
1933. This class action alleges that EXFO’s registration statement
and prospectus filed with the Securities and Exchange Commission on June 29,
2000, contained material misrepresentations and/or omissions resulting from (i)
the underwriters allegedly soliciting and receiving additional, excessive and
undisclosed commissions from certain investors in exchange for which they
allocated material portions of the shares issued in connection with EXFO’s
Initial Public Offering; and (ii) the underwriters allegedly entering into
agreements with customers whereby shares issued in connection with EXFO’s
Initial Public Offering would be allocated to those customers in exchange for
which customers agreed to purchase additional amounts of shares in the
after-market at pre-determined prices.
On April
19, 2002, the plaintiffs filed an amended complaint containing master
allegations against all of the underwriters in all of the 310 cases included in
this class action and also filed an amended complaint containing allegations
specific to four of EXFO’s underwriters, EXFO and two of our executive officers.
In addition to the allegations mentioned above, the amended complaint alleges
that the underwriters (i) used their analysts to manipulate the stock market;
and (ii) implemented schemes that allowed issuer insiders to sell their
shares rapidly after an initial public offering and benefit from high market
prices. As concerns EXFO and our two executive officers in particular, the
amended complaint alleges that (i) EXFO’s registration statement was materially
false and misleading because it failed to disclose the additional commissions
and compensation to be received by underwriters; (ii) the two named executive
officers learned of or recklessly disregarded the alleged misconduct of the
underwriters; (iii) the two named executive officers had motive and opportunity
to engage in alleged wrongful conduct due to personal holdings of the EXFO’s
stock and the fact that an alleged artificially inflated stock price could be
used as currency for acquisitions; and (iv) the two named executive officers, by
virtue of their positions with EXFO, controlled it and the contents of the
registration statement and had the ability to prevent its issuance or cause it
to be corrected. The plaintiffs in this suit seek an unspecified amount for
damages suffered.
In July
2002, the issuers filed a motion to dismiss the plaintiffs’ amended complaint
and a decision was rendered on February 19, 2003. Only one of the
claims against EXFO was dismissed. On October 8, 2002, the claims against
its officers were dismissed pursuant to the terms of Reservation of Rights and
Tolling Agreements entered into with the plaintiffs.
In June
2004, an agreement of partial settlement was submitted to the court for
preliminary approval. The proposed partial settlement was between the
plaintiffs, the issuer defendants in the consolidated actions, the issuer
officers and directors named as defendants, and the issuers’ insurance
companies. The court granted the preliminary approval motion on
February 15, 2005, subject to certain modifications. On August 31,
2005, the court issued a preliminary order further approving the modifications
to the settlement and certifying the settlement classes. The court also
appointed the notice administrator for the settlement and ordered that notice of
the settlement be distributed to all settlement class members by
January 15, 2006. The settlement fairness hearing occurred on
April 24, 2006, and the court reserved decision at that time.
While the
partial settlement was pending approval, the plaintiffs continued to litigate
against the underwriter defendants. The district court directed that the
litigation proceed within a number of “focus cases” rather than in all of the
310 cases that have been consolidated. EXFO's case is not one of
these focus cases. On October 13, 2004, the district court certified
the focus cases as class actions. The underwriter defendants appealed
that ruling, and on December 5, 2006, the Court of Appeals for the Second
Circuit reversed the district court’s class certification
decision.
On April
6, 2007, the Second Circuit denied the plaintiffs’ petition for rehearing of
that decision and, on May 18, 2007, the Second Circuit denied the plaintiffs’
petition for rehearing en banc. In light of the Second Circuit
opinion, liaison counsel for all issuer defendants, including EXFO, informed the
court that this settlement cannot be approved, because the defined settlement
class, like the litigation class, cannot be certified. On June 25,
2007, the district court entered an order terminating the settlement
agreement. On August 14, 2007, the plaintiffs filed their second
consolidated amended class action complaints against the focus cases and, on
September 27, 2007, again moved for class certification.
On November 12, 2007, certain of the defendants in the focus
cases moved to dismiss the second consolidated amended class action complaints.
On March 26, 2008, the district court denied the motions to dismiss except as to
Section 11 claims raised by those plaintiffs who sold their securities for a
price in excess of the initial offering price and those who purchased outside of
the previously certified class period. Briefing on the class
certification motion was completed in May 2008.
Due to
the inherent uncertainties of litigation, it is not possible to predict the
final outcome of the case, nor to determine the amount of any possible losses.
We will continue to defend our position in this litigation that the claims
against EXFO, and our officers, are without merit. Accordingly, no provision for
this case has been made in the interim consolidated financial statements as at
May 31, 2008.
SHARE
CAPITAL AND STOCK-BASED COMPENSATION PLANS
Share
Capital
As at
June 26, 2008, EXFO had 36,643,000 multiple voting shares outstanding, entitling
to ten votes each and 31,856,324 subordinate voting shares outstanding. The
multiple voting shares and the subordinate voting shares are unlimited as to
number and without par value.
Long-Term
Incentive Plan and Deferred Share Unit Plan
The
aggregate number of subordinate voting shares covered by stock options,
restricted share units (RSUs) and deferred share units (DSUs) granted under the
Long-Term Incentive Plan and the Deferred Share Unit Plan was 2,726,625 as at
May 31, 2008. The maximum number of subordinate voting shares issuable under
these two plans cannot exceed 6,306,153 shares. The following tables summarize
information about stock options, RSUs and DSUs granted to the members of the
Board of Directors and to Management and Corporate Officers of the company and
its subsidiaries as at May 31, 2008:
|
Stock
Options
|
Number
|
%
of issued and outstanding
|
Weighted
average exercise price
|
|||
|
Chairman
of the Board, President and CEO
(one
individual)
|
179,642
|
10%
|
$9.05
|
|||
|
Board
of Directors (five individuals)
|
194,375
|
11%
|
$6.23
|
|||
|
Management
and Corporate Officers
(eight
individuals)
|
212,139
|
11%
|
$14.49
|
|||
|
586,156
|
32%
|
$10.08
|
|
Restricted
Share Units (RSUs)
|
Number
|
%
of issued and outstanding
|
||||
|
Chairman
of the Board, President and CEO
(one
individual)
|
85,460
|
11%
|
||||
|
Management
and Corporate Officers
(ten
individuals)
|
238,069
|
30%
|
||||
|
323,529
|
41%
|
|
Deferred
Share Units (DSUs)
|
Number
|
%
of issued and outstanding
|
||||
|
Board
of Directors (five individuals)
|
92,722
|
100%
|
OFF-BALANCE
SHEET ARRANGEMENTS
As at May
31, 2008, our off-balance sheet arrangements consisted of letters of guarantee
and forward exchange contracts. As at May 31, 2008, our letters of
guarantee amounted to $8.4 million; these letters of guarantee expire at various
dates through fiscal 2011 and the full amount was reserved from one of our lines
of credit. Our forward exchange contracts are described above.
VARIABLE
INTEREST ENTITY
As of May
31, 2008, we did not have interests in any variable interest
entities.
RISKS
AND UNCERTAINTIES
Over the
past few years, we have managed our business in a difficult environment; focused
on research and development programs for new and innovative products aimed at
expected growth pockets in our sector; continued the development of our domestic
and international markets; and made strategic acquisitions. However, we operate
in a highly competitive sector that is in constant evolution and, as a
result, we encounter various risks and uncertainties that must be given
appropriate consideration in our strategic management policies.
We are
exposed to currency risks due to the export of our Canadian-manufactured
products, the large majority of which are denominated in US dollars. These
risks are partially hedged by operating expenses denominated
in US dollars, and forward exchange contracts. The increased strength
of the Canadian dollar, compared to the US dollar, over the last few years,
caused our operating expenses to increase significantly. Any further
increase in the value of the Canadian dollar in the coming months would
negatively affect our results of operations.
In
addition, risks and uncertainties related to the telecommunications test,
measurement and monitoring industry involve the rapid development of new
products that may have short life cycles and require extensive research and
development; the difficulty of adequately predicting market size and trends; the
difficulty of retaining highly skilled employees; and the ability to quickly
adapt our cost structure to changing market conditions in order to achieve
profitability.
Furthermore,
given our strategic goals for growth and competitive positioning in our
industry, we are continuously expanding into international markets, namely the
setup of manufacturing facilities in China and a software development
center in India. This exposes us to certain risks and uncertainties, namely
changes in local laws and regulations, multiple technological standards,
protective legislation, pricing pressure, and the successful setup and
activation of new operations in China and India.
Also,
while strategic acquisitions, like those we have made in the past, those closed
during the third quarter of fiscal 2008 and possibly others in the future, are
essential to our long-term growth, they also expose us to certain risks and
uncertainties related to the rapid and effective integration of these businesses
as well as their products, technologies and personnel. Finally, integration
requires the dedication of management resources, which may detract their
attention from our day-to-day business and operations.
Our
business is subject to the effects of general economic conditions in North
America and throughout the world and, more particularly, market conditions in
the telecommunications industry. In the past, our operating results were
adversely affected by reduced telecom capital spending in North America, Europe
and Asia and by general unfavorable economic conditions. In particular, sales to
network service providers in North America were significantly and adversely
affected by a downturn in 2001 in the telecommunications industry. If there
is a recession or slowdown in key geographic regions or markets, we
may experience a material adverse impact on our business, operating results
and financial condition.
The
economic environment of our industry could also result in some of our customers
experiencing difficulties and, consequently, this could have a negative effect
on our results especially in terms of future sales and recoverability
of accounts receivable. However, the sectorial and geographic diversity of
our customer base provides us with a reasonable level of protection in this
area. Finally, other financial instruments, which potentially subject
us to credit risks, consist mainly of cash, short-term investments and
forward exchange contracts. Our short-term investments consist of debt
instruments issued by high-credit quality corporations and trusts. Our cash and
forward exchange contracts are held with or issued by high-credit quality
financial institutions; therefore, we consider the risk of non-performance
on these instruments to be remote.
For a
more complete understanding of risk factors that may affect us, please refer to
the risk factors set forth in our disclosure documents published with securities
commissions at www.exfo.com or www.sedar.com in Canada
or www.sec.gov/edgar.shtml in the U.S.
QUARTERLY
SUMMARY FINANCIAL INFORMATION (Unaudited)
(tabular
amounts in thousands of US dollars, except per share data)
|
Q3-FY08
|
Q2-FY08
|
Q1-FY08
|
Q4-FY07
|
|||||||||||||
|
Sales
|
$ | 48,581 | $ | 43,281 | $ | 40,985 | $ | 42,975 | ||||||||
|
Cost
of sales
|
$ | 19,004 | $ | 18,060 | $ | 18,144 | $ | 18,109 | ||||||||
|
Gross
margin
|
$ | 29,577 | $ | 25,221 | $ | 22,841 | $ | 24,866 | ||||||||
|
Earnings
from operations
|
$ | 4,458 | $ | 3,635 | $ | 302 | $ | 9,102 | ||||||||
|
Earnings
(loss) before extraordinary gain
|
$ | 8,143 | $ | 4,024 | $ | (93 | ) | $ | 33,484 | |||||||
|
Net
earnings (loss)
|
$ | 11,179 | $ | 4,024 | $ | (93 | ) | $ | 33,484 | |||||||
|
Basic
earnings (loss) before extraordinary gain
|
$ | 0.12 | $ | 0.06 | $ | (0.00 | ) | $ | 0.49 | |||||||
|
Diluted
earnings (loss) before extraordinary gain
|
$ | 0.12 | $ | 0.06 | $ | (0.00 | ) | $ | 0.48 | |||||||
|
Basic
net earnings (loss) per share
|
$ | 0.16 | $ | 0.06 | $ | (0.00 | ) | $ | 0.49 | |||||||
|
Diluted
net earnings (loss) per share
|
$ | 0.16 | $ | 0.06 | $ | (0.00 | ) | $ | 0.48 | |||||||
|
Q3-FY07
|
Q2-FY07
|
Q1-FY07
|
Q4-FY06
|
|||||||||||||
|
Sales
|
$ | 39,205 | $ | 35,207 | $ | 35,547 | $ | 35,733 | ||||||||
|
Cost
of sales
|
$ | 16,828 | $ | 14,970 | $ | 15,229 | $ | 16,318 | ||||||||
|
Gross
margin
|
$ | 22,377 | $ | 20,237 | $ | 20,318 | $ | 19,415 | ||||||||
|
Earnings
from operations
|
$ | 2,840 | $ | 2,081 | $ | 2,759 | $ | 2,363 | ||||||||
|
Net
earnings
|
$ | 2,574 | $ | 2,684 | $ | 3,533 | $ | 2,910 | ||||||||
|
Basic
and diluted net earnings per share
|
$ | 0.04 | $ | 0.04 | $ | 0.05 | $ | 0.04 | ||||||||
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