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 January 2009
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-______.
On
January 13, 2009, EXFO Electro-Optical Engineering Inc., a Canadian corporation,
reported its results of operations for the first fiscal quarter ended
November 30, 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 first fiscal
quarter of the 2009 fiscal year. This press release and information
relating to EXFO’s financial condition and results of operations for the first
fiscal quarter of the 2009 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:
January 14, 2009
EXFO Reports Strong Financial Results for First Quarter of
2009
|
§
|
Record-high
bookings of US$52.3 million, up 19.7%
year-over-year
|
|
§
|
Sales
increase 13.1% year-over-year to US$46.4
million
|
|
§
|
Gross
margin reaches 62.3%, highest level since second quarter of
2001
|
|
§
|
GAAP
net earnings amount to US$0.08 per diluted
share
|
QUEBEC
CITY, CANADA, January 13, 2009 – EXFO Electro-Optical Engineering Inc. (NASDAQ:
EXFO; TSX: EXF) reported today strong financial results for the first quarter
ended November 30, 2008.
Sales
increased 13.1% to US$46.4 million in the first quarter of fiscal 2009 from
US$41.0 million in the first quarter of 2008, but decreased 9.0% from US$50.9
million in the fourth quarter of 2008. Net bookings improved 19.7%
year-over-year to a record-high of US$52.3 million for a book-to-bill ratio of
1.13 in the first quarter of fiscal 2009 from US$43.7 million in the same
period last year and 14.5% from US$45.7 million in the fourth quarter of
2008.
Gross
margin reached 62.3% of sales in the first quarter of fiscal 2009, its highest
level since the second quarter of 2001, compared to 55.7% in the first quarter
of 2008 and 59.9% in the fourth quarter of 2008.
GAAP net
earnings in the first quarter of fiscal 2009 increased to US$5.3 million, or
US$0.08 per diluted share, from a GAAP net loss of US$0.1 million, or US$ 0.00
per diluted share, in the same period last year and GAAP net earnings of US$3.3
million, or US$0.05 per diluted share in the fourth quarter of fiscal 2008. GAAP
net earnings in the first quarter of 2009 included US$1.1 million in after-tax
amortization of intangible assets and US$0.3 million in stock-based compensation
costs. It should be noted that EXFO recorded a pre-tax, foreign exchange gain of
US$4.6 million in the first quarter of fiscal 2009.
“I am
quite pleased with our record-high bookings of US$52.3 million and best gross
margin in almost eight years in the last quarter, led by very strong growth from
our next-generation, IP test equipment and recent service assurance acquisition
that we’re starting to leverage,” said Germain Lamonde, EXFO’s Chairman,
President and CEO. “On the strength of a multi-million dollar service assurance
contract with a Tier-1 wireless operator, our Protocol business collectively
accounted for more than 30% of total bookings in the quarter to
significantly contribute to our book-to-bill ratio of 1.13. We also benefited
from a weaker Canadian/US exchange rate which positively affected our operating
expenses and our earnings.”
“A number
of wireline and wireless network operators will likely reduce their capital
expenditures in 2009, given the challenging macro-economic conditions,” Mr.
Lamonde added. “But we expect many will continue to strategically invest in
next-generation IP convergence and broadband deployments in order to add
higher-margin revenues, differentiated services and to reduce their operating
expenses. EXFO is well positioned to take advantage of these growth segments.
We’re also counting on important new products and increased focus to attain our
long-term performance metrics. To remain prudent, however, we have implemented a
series of measures to control expenses, deferred or cancelled hirings, and
fine-tuned our strategies. Finally, our balance sheet remains strong, even after
our successful C$30 million share buyback, as we navigate through this
tumultuous period.”
Unaudited
Selected Financial Information
(In
thousands of US dollars)
|
Segmented
results:
|
Q1 2009 | Q1 2008 | Q4 2008 | |||||||||
|
Sales:
|
||||||||||||
|
Telecom
Division
|
$ | 41,159 | $ | 35,365 | $ | 45,338 | ||||||
|
Life
Sciences and Industrial Division
|
5,204 | 5,620 | 5,605 | |||||||||
|
Total
|
$ | 46,363 | $ | 40,985 | $ | 50,943 | ||||||
|
Earnings
from operations:
|
||||||||||||
|
Telecom
Division
|
$ | 1,355 | $ | 21 | $ | 2,867 | ||||||
|
Life
Sciences and Industrial Division
|
738 | 281 | 721 | |||||||||
|
Total
|
$ | 2,093 | $ | 302 | $ | 3,588 | ||||||
|
Other
selected information:
|
||||||||||||
|
GAAP
net earnings (loss)
|
$ | 5,287 | $ | (93 | ) | $ | 3,314 | |||||
|
After-tax
amortization of intangible assets
|
$ | 1,098 | $ | 499 | $ | 1,177 | ||||||
|
Stock-based
compensation costs
|
$ | 322 | $ | 301 | $ | 368 |
Operating
Expenses
Selling
and administrative expenses amounted to US$17.1 million, or 36.9% of sales, in
the first quarter of fiscal 2009 compared to US$14.8 million, or 36.2% of
sales, in the same period last year and US$17.0 million, or 33.4% of sales, in
the fourth quarter of 2008.
Gross
research and development expenses totaled US$8.6 million, or 18.6% of sales, in
the first quarter of fiscal 2009 compared to US$7.5 million, or 18.3% of
sales, in the first quarter of 2008 and US$8.6 million, or 16.8% of sales, in
the fourth quarter of 2008.
Net
R&D expenses totaled US$7.2 million, or 15.6% of sales, in the first quarter
of fiscal 2009 compared to US$6.0 million, or 14.7% of sales, in the same
period last year and US$7.3 million, or 14.3% of sales, in the fourth quarter of
2008.
First-Quarter
Business Highlights
Market expansion — EXFO
delivered sales growth of 13.1% year-over-year, including a combined US$4.5
million revenue contribution from recently acquired Brix Networks and Navtel
Communications. Its Protocol business generated record quarterly revenues,
accounting for more than 30% of Telecom Division sales for the first time. The
company’s bookings made significant progress in the wireless market in the first
quarter of 2009, while Telecom Division sales increased 16.4% year-over-year and
the Life Sciences and Industrial Division experienced a 7.4% drop due to
deteriorating end-consumer markets. EXFO’s top customer accounted for 3.8% of
total sales, while its top three accounts represented 10.4% of sales,
demonstrating the company’s successful diversification efforts.
Profitability and Gross Margin
— EXFO reported GAAP net earnings of US$5.3 million, or US$0.08 per
diluted share. An improved gross margin at 62.3%, on account of a weaker
Canadian dollar, increased sales of higher-margin Protocol test solutions and
the ramp-up of low-cost manufacturing plant in China, also contributed to the
company’s profitability in the first quarter.
EXFO
launched five new products in the first quarter including amongst others a new
software release for the Transport Blazer product line that delivers
unprecedented insight into 40 Gbit/s network behavior; new software releases for
the IMS InterWatch platform and Packet Blazer product line to support the
migration of voice and video applications to the IPv6 (Internet Protocol,
version 6) addressing scheme; and expanded Ethernet test capabilities on the
Power Blazer product line through multi-stream, quality of service (QoS)
support. Products on the market two years or less generated 33.1% of total
sales.
Business
Outlook
EXFO
forecasted sales between US$45 million and US$50 million and GAAP net earnings
between US$0.01 per diluted share and US$0.05 per diluted share for the second
quarter of 2009. GAAP net earnings include US$0.02 per share in after-tax
amortization of intangible assets and stock-based compensation
costs.
This
guidance was established by management based on existing backlog as of the date
of this press release, seasonality, expected bookings for the remaining of the
quarter, as well as stability in exchange rates compared to the previous
quarter.
Conference
Call and Webcast
EXFO will
host a conference call today at 5 p.m. (Eastern time) to review its financial
results for the first quarter of fiscal 2009. To listen to the conference call
and participate in the question period via telephone, dial 1-416-620-2416. 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 7 p.m. on
January 20, 2009. The replay number is 1-402-977-9141 and the reservation number
is 21405504. 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
press 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, financial 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 service assurance 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 thousands of
US dollars)
|
As
at
November 30,
2008
|
As
at
August
31,
2008
|
|||||||
|
(unaudited)
|
||||||||
|
Assets
|
||||||||
|
Current
assets
|
||||||||
|
Cash
|
$ | 5,441 | $ | 5,914 | ||||
|
Short-term
investments
|
65,915 | 81,626 | ||||||
|
Accounts
receivable
|
||||||||
|
Trade
(note 4)
|
33,018 | 31,473 | ||||||
|
Other
|
4,859 | 4,753 | ||||||
|
Income
taxes and tax credits recoverable
|
3,541 | 4,836 | ||||||
|
Inventories
(note 5)
|
30,125 | 34,880 | ||||||
|
Prepaid
expenses
|
1,993 | 1,774 | ||||||
|
Future
income taxes
|
8,895 | 9,140 | ||||||
| 153,787 | 174,396 | |||||||
|
Tax
credits recoverable
|
19,264 | 20,657 | ||||||
|
Property,
plant and equipment
|
17,475 | 19,875 | ||||||
|
Intangible
assets
|
16,121 | 19,945 | ||||||
|
Goodwill
|
36,634 | 42,653 | ||||||
|
Future
income taxes
|
14,297 | 15,540 | ||||||
| $ | 257,578 | $ | 293,066 | |||||
|
Liabilities
|
||||||||
|
Current
liabilities
|
||||||||
|
Accounts
payable and accrued liabilities (note 6)
|
$ | 24,440 | $ | 24,713 | ||||
|
Deferred
revenue
|
4,560 | 5,079 | ||||||
| 29,000 | 29,792 | |||||||
|
Deferred
revenue
|
3,388 | 3,759 | ||||||
|
Forward exchange contracts
(note 4)
|
2,275 | – | ||||||
| 34,663 | 33,551 | |||||||
|
Contingency (note
7)
|
||||||||
|
Shareholders’
equity
|
||||||||
|
Share
capital (note 8)
|
141,991 | 142,786 | ||||||
|
Contributed
surplus
|
5,921 | 5,226 | ||||||
|
Retained
earnings
|
65,781 | 60,494 | ||||||
|
Accumulated
other comprehensive income
|
9,222 | 51,009 | ||||||
| 222,915 | 259,515 | |||||||
| $ | 257,578 | $ | 293,066 | |||||
The
accompanying notes are an integral part of these consolidated financial
statements.
EXFO Electro-Optical Engineering Inc.
Interim
Unaudited Consolidated Statements of Earnings
(in
thousands of US dollars, except share and per share data)
|
Three
months ended
November
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Sales
|
$ | 46,363 | $ | 40,985 | ||||
|
Cost of sales (note 5)
(1,
2)
|
17,480 | 18,144 | ||||||
|
Gross
margin
|
28,883 | 22,841 | ||||||
|
Operating
expenses
|
||||||||
|
Selling
and administrative(1)
|
17,091 | 14,817 | ||||||
|
Net
research and development(1)
(note 9)
|
7,221 | 6,012 | ||||||
|
Amortization
of property, plant and equipment
|
1,159 | 976 | ||||||
|
Amortization
of intangible assets
|
1,319 | 734 | ||||||
|
Total
operating expenses
|
26,790 | 22,539 | ||||||
|
Earnings
from operations
|
2,093 | 302 | ||||||
|
Interest
income
|
466 | 1,483 | ||||||
|
Foreign
exchange gain (loss)
|
4,568 | (616 | ) | |||||
|
Earnings
before income taxes
|
7,127 | 1,169 | ||||||
|
Income taxes (note
10)
|
||||||||
|
Current
|
(61 | ) | 1,181 | |||||
|
Future
|
1,901 | 81 | ||||||
| 1,840 | 1,262 | |||||||
|
Net
earnings (loss) for the period
|
$ | 5,287 | $ | (93 | ) | |||
|
Basic
and diluted net earnings (loss) per share
|
$ | 0.08 | $ | (0.00 | ) | |||
|
Basic
weighted average number of shares outstanding (000’s)
|
67,340 | 69,000 | ||||||
|
Diluted weighted average number
of shares outstanding (000’s) (note 11)
|
67,717 | 69,672 | ||||||
|
(1) Stock-based compensation costs
included in:
|
||||||||
|
Cost of sales
|
$ | 29 | $ | 37 | ||||
|
Selling and
administrative
|
201 | 197 | ||||||
|
Net research and
development
|
92 | 67 | ||||||
| $ | 322 | $ | 301 | |||||
|
(2)
|
The
cost of sales is exclusive of amortization, shown
separately.
|
The
accompanying notes are an integral part of these consolidated financial
statements.
EXFO Electro-Optical Engineering Inc.
Interim
Unaudited Consolidated Statements of Comprehensive Income (Loss)
and Accumulated Other
Comprehensive Income
(in
thousands of US dollars)
|
Comprehensive
income (loss)
|
||||||||
|
Three
months ended
November
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Net
earnings (loss) for the period
|
$ | 5,287 | $ | (93 | ) | |||
|
Foreign
currency translation adjustment
|
(36,933 | ) | 13,906 | |||||
|
Changes
in unrealized losses on short-term investments
|
22 | 39 | ||||||
|
Unrealized
gains (losses) on forward exchange contracts
|
(6,929 | ) | 1,948 | |||||
|
Reclassification
of realized gains on forward exchange contracts in net earnings
(loss)
|
(137 | ) | (759 | ) | ||||
|
Future
income tax effect of the above items
|
2,190 | (380 | ) | |||||
|
Comprehensive
income (loss)
|
$ | (36,500 | ) | $ | 14,661 | |||
|
Accumulated
other comprehensive income
|
||||||||
|
Three
months ended
November
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Foreign
currency translation adjustment
|
||||||||
|
Cumulative
effect of prior periods
|
$ | 51,129 | $ | 53,418 | ||||
|
Current
period
|
(36,933 | ) | 13,906 | |||||
| 14,196 | 67,324 | |||||||
|
Unrealized
gains (losses) on forward exchange contracts
|
||||||||
|
Cumulative
effect of prior periods
|
(96 | ) | 1,948 | |||||
|
Current
period, net of realized gains and future income taxes
|
(4,876 | ) | 809 | |||||
| (4,972 | ) | 2,757 | ||||||
|
Unrealized
losses on short-term investments
|
||||||||
|
Cumulative
effect of prior periods
|
(24 | ) | (55 | ) | ||||
|
Current
period, net of future income taxes
|
22 | 39 | ||||||
| (2 | ) | (16 | ) | |||||
|
Accumulated
other comprehensive income
|
$ | 9,222 | $ | 70,065 | ||||
Total
retained earnings and accumulated other comprehensive income amounted to
$112,263 and $75,003 as at November 30, 2007 and 2008,
respectively.
The
accompanying notes are an integral part of these consolidated financial
statements.
Interim
Unaudited Consolidated Statements of Retained Earnings and Contributed
Surplus
(in
thousands of US
dollars)
|
Retained
earnings
|
||||||||
|
Three
months ended
November
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Balance
– Beginning of the period
|
$ | 60,494 | $ | 42,330 | ||||
|
Add
(deduct)
|
||||||||
|
Net
earnings (loss) for the period
|
5,287 | (93 | ) | |||||
|
Premium
on redemption of share capital (note 8)
|
– | (39 | ) | |||||
|
Balance
– End of the period
|
$ | 65,781 | $ | 42,198 | ||||
|
Contributed
surplus
|
||||||||
|
Three
months ended
November
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Balance
– Beginning of the period
|
$ | 5,226 | $ | 4,453 | ||||
|
Add
(deduct)
|
||||||||
|
Stock-based
compensation costs
|
321 | 316 | ||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards
|
– | (2 | ) | |||||
|
Discount
on redemption of share capital (note 8)
|
374 | – | ||||||
|
Balance
– End of the period
|
$ | 5,921 | $ | 4,767 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
Interim
Unaudited Consolidated Statements of Cash Flows
(in thousands
of US dollars)
|
Three
months ended
November
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Cash
flows from operating activities
|
||||||||
|
Net
earnings (loss) for the period
|
$ | 5,287 | $ | (93 | ) | |||
|
Add
items not affecting cash
|
||||||||
|
Change
in discount on short-term investments
|
456 | 902 | ||||||
|
Stock-based
compensation costs
|
322 | 301 | ||||||
|
Amortization
|
2,478 | 1,710 | ||||||
|
Deferred
revenue
|
353 | 351 | ||||||
|
Future
income taxes
|
1,901 | 81 | ||||||
|
Change
in unrealized foreign exchange gain
|
(3,456 | ) | – | |||||
| 7,341 | 3,252 | |||||||
|
Change
in non-cash operating items
|
||||||||
|
Accounts
receivable
|
(7,325 | ) | 1,166 | |||||
|
Income
taxes and tax credits
|
(696 | ) | (458 | ) | ||||
|
Inventories
|
(367 | ) | (87 | ) | ||||
|
Prepaid
expenses
|
(542 | ) | (612 | ) | ||||
|
Accounts
payable and accrued liabilities
|
(1,087 | ) | (5,694 | ) | ||||
| (2,676 | ) | (2,433 | ) | |||||
|
Cash
flows from investing activities
|
||||||||
|
Additions
to short-term investments
|
(122,100 | ) | (211,453 | ) | ||||
|
Proceeds
from disposal and maturity of short-term investments
|
126,605 | 214,571 | ||||||
|
Additions
to capital assets (1)
|
(1,514 | ) | (1,573 | ) | ||||
| 2,991 | 1,545 | |||||||
|
Cash
flows from financing activities
|
||||||||
|
Change
in bank loan
|
– | 699 | ||||||
|
Exercise
of stock options
|
26 | – | ||||||
|
Redemption
of share capital (note 8)
|
(447 | ) | (174 | ) | ||||
| (421 | ) | 525 | ||||||
|
Effect
of foreign exchange rate changes on cash
|
(367 | ) | 343 | |||||
|
Change
in cash
|
(473 | ) | (20 | ) | ||||
|
Cash
– Beginning of the period
|
5,914 | 5,541 | ||||||
|
Cash
– End of the period
|
$ | 5,441 | $ | 5,521 | ||||
(1) As
at November 30, 2007 and 2008, unpaid purchases of capital assets amounted to
$852 and $312, respectively.
The
accompanying notes are an integral part of these consolidated financial
statements.
EXFO Electro-Optical Engineering Inc.
Notes
to 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 November 30, 2008, and for the three-month periods
ended November 30, 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 2009
In
December 2006, the Canadian Institute of Chartered Accountants (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 previously 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 or 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.
The
company adopted these new standards on September 1, 2008 (notes 3 and
4).
In June
2007, the CICA issued Section 3031, “Inventories”. 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 adopted this new standard on
September 1, 2008, and its adoption had no effect on its consolidated
financial statements.
In June
2007, the CICA amended Section 1400, “General Standards of Financial Statement
Presentation” to include new requirements regarding an entity’s ability to
continue as a going concern. These amendments apply to fiscal years beginning on
or after January 1, 2008. The company adopted these amendments on
September 1, 2008, and their adoption had no effect on its
consolidated financial statements.
EXFO
Electro-Optical Engineering Inc.
Notes
to 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 2009
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 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 has not yet determined the effects
its adoption will have on its consolidated financial statements.
3 Capital
Disclosures
The
company is not subject to any external restrictions on its capital.
The
company’s objectives when managing capital are:
|
·
|
To
maintain a flexible capital structure, which optimizes the cost of capital
at acceptable risk;
|
|
·
|
To
sustain future development of the company, including research and
development activities and potential acquisitions of complementary
businesses or products; and
|
|
·
|
To
provide the company’s shareholders with an appropriate return on their
investment.
|
The
company defines its capital as shareholders’ equity, excluding accumulated other
comprehensive income. Accumulated other comprehensive income’s main component is
the cumulative foreign currency translation adjustment, which is solely the
result of the translation of the company’s consolidated financial statements
into US dollars (the reporting currency).
The
capital of the company amounted to $208,506,000 and $213,693,000 as at August
31, 2008 and November 2008, respectively.
Of this
capital, as at November 30, 2008, an amount of $71,356,000 represented cash and
short-term investments ($87,540,000 as at August 31, 2008), a portion
of which can be considered in excess of the company’s current and expected
needs. The company has consequently been actively repurchasing shares from
the open market via a normal course issuer bid through the facilities of the
Toronto Stock Exchange and the NASDAQ. Furthermore, as at November 30, 2008, the
company had an outstanding substantial issuer bid to purchase for
cancellation up to 8,823,529 subordinate voting shares for an aggregate purchase
price not to exceed CA$30,000,000 (note 14).
4 Financial
Instruments
Market
risk
Currency
risk
The
principal measurement currency of the company is the Canadian dollar. The
company is exposed to currency risks as a result of its export sales
of products manufactured in Canada and China, the majority of which are
denominated in US dollars and euros. These risks are partially hedged
by forward exchange contracts (US dollars) and certain operating expenses
(US dollars and euros).
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
As at
November 30, 2008, the company held contracts to sell US dollars for Canadian
dollars at various forward rates, which are summarized as follows:
|
Expiry
dates
|
Contractual
amounts
|
Weighted
average contractual
forward
rates
|
||
|
(unaudited)
|
||||
|
December
2008 to August 2009
|
$
28,300
|
1.0616
|
||
|
September
2009 to August 2010
|
24,200
|
1.0760
|
||
|
September
2010 to August 2011
|
14,600
|
1.1221
|
||
|
September
2011
|
1,000
|
1.1278
|
||
|
Total
|
$
68,100
|
1.0807
|
||
These
contracts are designated and accounted for as cash flow hedges.
The fair
value of forward exchange contracts, which represents the amount that the
company would receive or pay to settle the contracts based on the forward
exchange rate at period end, amounted to net gains of $62,000 as at August 31,
2008 and net losses of $7,973,000 as at November 30, 2008, following
the significant decrease in the value of the Canadian dollar compared to the
US dollar during the quarter. As at November 30, 2008, forward exchange
contracts, in the amount of $4,877,000, are presented in the accounts
payable and accrued liabilities (note 6) in the balance sheet, and forward
exchange contracts, in the amount of $2,275,000, are presented in forward
exchange contracts in the balance sheet.
The
following table summarizes significant financial assets and liabilities that are
subject to currency risk as at November 30, 2008:
|
Carrying amount
(in thousands of
US dollars)
|
Carrying amount
(in thousands
of euros)
|
|||||||
|
(unaudited)
|
||||||||
|
Financial
Assets
|
||||||||
|
Cash
|
$ | 2,773 | € | 505 | ||||
|
Accounts
receivable
|
26,742 | 2,225 | ||||||
| 29,515 | 2,730 | |||||||
|
Financial
Liabilities
|
||||||||
|
Accounts
payable and accrued liabilities
|
5,982 | 356 | ||||||
|
Forward
exchange contracts
|
68,100 | − | ||||||
| 74,082 | 356 | |||||||
|
Net
exposure
|
$ | (44,567 | ) | € | 2,374 | |||
The
period-end value of the Canadian dollar compared to the US dollar was CA$1.2372
= US$1.00 as at November 30, 2008.
The
period-end value of the Canadian dollar compared to the euro was CA$1.5706 =
€1.00 as at November 30, 2008.
The
following sensitivity analyse summarizes the effect that a change in the value
of the Canadian dollar (compared to US dollar and euro) would have on
financial assets and liabilities denominated in US dollars and euros, as well as
on net earnings, net earnings per diluted share and comprehensive income, based
on the foreign exchange rates as at November 30, 2008:
|
·
|
An
increase (decrease) of 10% in the period-end value of the Canadian dollar
compared to the US dollar would decrease (increase) net earnings by
$1,832,000, or $0.03 per diluted
share.
|
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
|
·
|
An
increase (decrease) of 10% in the period-end value of the Canadian dollar
compared to the euro would decrease (increase) net earnings by $333,000,
or $0.00 per diluted share.
|
|
·
|
An
increase (decrease) of 10% in the period-end value of the Canadian dollar
compared to the US dollar would increase (decrease) comprehensive income
by $4,500,000.
|
The
impact of the change in the value of the Canadian dollar compared to the US
dollar and the euro on these financial assets and liabilities is recorded in the
foreign exchange gain or loss line item in the consolidated statements of
earnings, except for outstanding forward contracts, which impact is recorded in
comprehensive income. The change in the value of the Canadian dollar compared to
the US dollar and the euro also impacts the company’s balances of income tax and
tax credits recoverable or payable and future income tax assets and
liabilities related to integrated foreign subsidiaries; this may result in
additional and significant foreign exchange gain or loss. However, these assets
and liabilities are not considered financial instruments, and are excluded from
the sensitivity analysis above. The foreign exchange rate fluctuations also flow
through the statements of earnings line items, as a significant portion of the
company’s operating expenses are denominated in Canadian dollars, and the
company reports its results in US dollars; that effect is not reflected in the
sensitivity analysis above.
Interest
rate risk
The
company is exposed to interest rate risks through its short-term investments. As
at November 30, 2008, the company’s short-term investments, in the amount of
$65,915,000, bear interest at rates ranging between 2.36% to 3.16% and mature
between December 2008 and April 2009.
|
·
|
An
increase (decrease) of 0.5% in the interest rate of the company’s
short-term investments would increase (decrease) net earnings by $57,000,
or $0.00 per diluted share on a quarterly
basis.
|
Due to
their short-term maturity of usually three months or less, the company’s
short-term investments are not subject to significant fair value interest
rate risk. Accordingly, change in fair value has been nominal to the degree that
amortized cost has historically approximated the fair value. Any change in fair
value of the company’s short-term investments, all of which are classified
as available for sale, is recorded in comprehensive income.
Cash,
accounts receivable and accounts payable and accrued liabilities are
non-interest-bearing financial assets and liabilities.
Credit
risk
Financial
instruments that potentially subject the company to credit risk consist
primarily of cash, short-term investments, accounts receivable and forward
exchange contracts (with a positive fair value). As at November 30, 2008, the
company’s short-term investments consist of debt instruments issued by 13 (10 as
at August 31, 2008) high-credit quality corporations and trusts. None of these
debt instruments are expected to be affected by a liquidity risk, and
none of them represent asset-backed commercial paper. The company’s cash and
forward exchange contracts are held with or issued by high-credit quality
financial institutions; therefore, the company considers the risk of
non-performance on these instruments to be limited.
Generally,
the company does not require collateral or other security from customers for
trade accounts receivable; however, credit is extended to customers following an
evaluation of creditworthiness. In addition, the company performs ongoing credit
reviews of all its customers and establishes an allowance for doubtful accounts
receivable when accounts are determined to be uncollectible. Allowance for
doubtful accounts amounted to $305,000 and $331,000 as at August
31, 2008 and November 30, 2008, respectively and bad debt expense
amounted to $39,000 and $40,000 for the three months ended
November 30, 2007 and 2008, respectively.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
For the
three months ended November 30, 2008, no customer represented more than 10% of
global sales.
The
following table summarizes the age of trade accounts receivable as at November
30, 2008:
|
(unaudited)
|
||||
|
Current
|
$ | 23,855 | ||
|
Past
due since less than 30 days
|
6,720 | |||
|
Past
due, 31 to 60 days
|
1,969 | |||
|
Past
due, more than 61 days
|
805 | |||
|
Total
accounts receivable
|
33,349 | |||
|
Allowance
for doubtful accounts
|
(331 | ) | ||
| $ | 33,018 | |||
Liquidity
risk
Liquidity
risk is defined as the potential that the company cannot meet its obligations as
they become due.
The
following table summarizes the contractual maturity of the company’s financial
liabilities as at November 30, 2008:
|
0-12
months
|
13-24
months
|
25-36
months
|
||||||||||
|
(unaudited)
|
||||||||||||
|
Accounts
payable and accrued liabilities
|
$ | 19,563 | $ | – | $ | – | ||||||
|
Forward
exchange contracts
|
||||||||||||
|
Outflow
|
36,400 | 19,500 | 12,200 | |||||||||
|
Inflow
|
(31,277 | ) | (17,144 | ) | (11,062 | ) | ||||||
|
Total
|
$ | 24,686 | $ | 2,356 | $ | 1,138 | ||||||
In
addition to these contractual liabilities, the company has a cash contingent
consideration payable for the acquisition of Brix Networks, up to a maximum
of $7,537,000, and any amount payable will be paid during fiscal 2009. Also, the
company has share repurchase programs that may require additional cash outflows
during fiscal 2009 and 2010 (notes 8 and 14).
As at
November 30, 2008, the company had $71,356,000 in cash and short-term
investments. In addition to these financial assets, the company has unused
available lines of credit totalling $9,509,000 for working capital and other
general corporate purposes, including potential acquisitions and share
repurchase programs as well as unused lines of credit of $10,227,000 for
foreign currency exposure related to its forward exchange
contracts.
5 Inventories
|
As
at
November 30,
2008
|
As
at
August
31,
2008
|
|||||||
|
(unaudited)
|
||||||||
|
Raw
materials
|
$ | 14,355 | $ | 17,651 | ||||
|
Work
in progress
|
1,601 | 1,961 | ||||||
|
Finished
goods
|
14,169 | 15,268 | ||||||
| $ | 30,125 | $ | 34,880 | |||||
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
The cost
of sales comprised almost exclusively the amount of inventory recognized as an
expense during the reporting periods, except for the related amortization, that
is shown separately in operating expenses.
Inventory
write-down amounted to $351,000 and $794,000 for the three months ended November
30, 2007 and 2008, respectively.
6 Accounts
Payable and Accrued Liabilities
|
As
at
November
30,
2008
|
As
at
August
31,
2008
|
|||||||
|
(unaudited)
|
||||||||
|
Trade
|
$ | 8,273 | $ | 10,303 | ||||
|
Salaries
and social benefits
|
7,027 | 8,888 | ||||||
|
Warranty
|
696 | 974 | ||||||
|
Commissions
|
782 | 761 | ||||||
|
Tax
on capital
|
849 | 923 | ||||||
|
Restructuring
charges
|
195 | 292 | ||||||
|
Forward
exchange contracts (note 4)
|
4,877 | 714 | ||||||
|
Other
|
1,741 | 1,858 | ||||||
| $ | 24,440 | $ | 24,713 | |||||
Changes
in the warranty provision are as follows:
|
Three
months ended
November
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
(unaudited)
|
||||||||
|
Balance
– Beginning of period
|
$ | 974 | $ | 800 | ||||
|
Provision
|
142 | 159 | ||||||
|
Settlements
|
(420 | ) | (109 | ) | ||||
|
Balance
– End of period
|
$ | 696 | $ | 850 | ||||
7 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 predetermined
prices.
EXFO
Electro-Optical Engineering Inc.
Notes
to 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 defendants 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’s 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. That
motion was withdrawn without prejudice on October 10, 2008.
Due to
the inherent uncertainties of litigation, the final outcome of the case is
uncertain and it is not possible 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 November 30, 2008.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
8 Share
Capital
On
November 6, 2008, the company announced that its Board of Directors had
authorized a renewal of its share repurchase program, by way of a normal course
issuer bid on the open market, of up to 10% of its public float (as defined by
the Toronto Stock Exchange), or 2,738,518 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 period of the normal course issuer bid commenced on November 10,
2008, and will end on November 9, 2009, 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 under the bid will be
cancelled.
On
November 10, 2008, the company announced that its Board of Directors had
authorized a substantial issuer bid (the “Offer”) to purchase for cancellation
up to 8,823,529 subordinate voting shares for an aggregate purchase price not
to exceed CA$30,000,000. The Offer is being made by way of a “modified
Dutch Auction” pursuant to which shareholders might tender all or a portion of
their shares (i) at a price not less than CA$3.40 per share and not more than
CA$3.90 per share, in increments of CA$0.05 per share, or (ii) without
specifying a purchase price, in which case their shares would be purchased
at the purchase price determined in accordance with the Offer. The Offer expired
on December 16, 2008 (note 14).
Upon the
announcement of the Offer, the company suspended the normal course issuer bid
referred to above, until 20 business days following the expiration of the
Offer.
The
following tables summarize changes in share capital for the three months ended
November 30, 2007 and 2008.
|
Three
months ended November 30, 2007
|
||||||||||||||||||||
|
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 | ||||||||||||
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
|
Three
months ended November 30, 2008
|
||||||||||||||||||||
|
Multiple
voting shares
|
Subordinate
voting shares
|
|||||||||||||||||||
|
Number
|
Amount
|
Number
|
Amount
|
Total
amount
|
||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||
|
Balance
as at August 31, 2008
|
36,643,000 | $ | 1 | 30,783,705 | $ | 142,785 | $ | 142,786 | ||||||||||||
|
Exercise
of stock options
|
– | – | 12,500 | 26 | 26 | |||||||||||||||
|
Redemption
of share capital
|
– | – | (176,914 | ) | (821 | ) | (821 | ) | ||||||||||||
|
Balance
as at November 30, 2008
|
36,643,000 | $ | 1 | 30,619,291 | $ | 141,990 | $ | 141,991 | ||||||||||||
9 Net
Research and Development Expenses
Net
research and development expenses comprise the following:
|
Three
months ended
November
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
(unaudited)
|
||||||||
|
Gross
research and development expenses
|
$ | 8,612 | $ | 7,486 | ||||
|
Research
and development tax credits
|
(1,391 | ) | (1,474 | ) | ||||
| $ | 7,221 | $ | 6,012 | |||||
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
|
10
|
Income
Taxes
|
For the
three months ended November 30, 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
November
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
(unaudited)
|
||||||||
|
Income
tax provision at combined Canadian federal and provincial statutory tax
rate (31% in 2008 and 32% in 2007)
|
$ | 2,203 | $ | 374 | ||||
|
Increase
(decrease) due to:
|
||||||||
|
Foreign
income taxed at different rates
|
(19 | ) | 88 | |||||
|
Non-taxable
income
|
(48 | ) | (81 | ) | ||||
|
Non-deductible
expenses
|
172 | 222 | ||||||
|
Foreign
exchange effect of translation of foreign integrated
subsidiaries
|
(836 | ) | 127 | |||||
|
Other
|
177 | 157 | ||||||
|
Unrecognized
future income tax assets on temporary deductible differences and unused
tax losses and deductions
|
191 | 375 | ||||||
| $ | 1,840 | $ | 1,262 | |||||
The
income tax provision consists of the following:
|
Current
|
$ | (61 | ) | $ | 1,181 | |||
|
Future
|
1,710 | (294 | ) | |||||
|
Valuation
allowance
|
191 | 375 | ||||||
| 1,901 | 81 | |||||||
| $ | 1,840 | $ | 1,262 |
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
|
11
|
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
November
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
(unaudited)
|
||||||||
|
Basic
weighted average number of shares outstanding (000’s)
|
67,340 | 69,000 | ||||||
|
Plus
dilutive effect of:
|
||||||||
|
Stock
options (000’s)
|
125 | 401 | ||||||
|
Restricted
share units (000’s)
|
173 | 201 | ||||||
|
Deferred
share units (000’s)
|
79 | 70 | ||||||
|
Diluted
weighted average number of shares outstanding (000’s)
|
67,717 | 69,672 | ||||||
|
Stock
awards excluded from the calculation of the diluted weighted average
number of shares because their exercise price was greater than the average
market price of the common shares (000’s)
|
2,045 | 1,118 | ||||||
|
12
|
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
offers solutions in medical-device and opto-electronics assembly, fluorescence
microscopy and other life sciences sectors.
The
following tables present information by segment:
|
Three
months ended November 30, 2008
|
||||||||||||
|
Telecom
Division
|
Life
Sciences and Industrial Division
|
Total
|
||||||||||
|
(unaudited)
|
||||||||||||
|
Sales
|
$ | 41,159 | $ | 5,204 | $ | 46,363 | ||||||
|
Earnings
from operations
|
$ | 1,355 | $ | 738 | $ | 2,093 | ||||||
|
Unallocated
items
|
||||||||||||
|
Interest
income
|
466 | |||||||||||
|
Foreign
exchange gain
|
4,568 | |||||||||||
|
Earnings
before income taxes
|
7,127 | |||||||||||
|
Income
taxes
|
1,840 | |||||||||||
|
Net
earnings for the period
|
$ | 5,287 | ||||||||||
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
|
Three
months ended November 30, 2007
|
||||||||||||
|
Telecom
Division
|
Life
Sciences and Industrial Division
|
Total
|
||||||||||
|
(unaudited)
|
||||||||||||
|
Sales
|
$ | 35,365 | $ | 5,620 | $ | 40,985 | ||||||
|
Earnings
from operations
|
$ | 21 | $ | 281 | $ | 302 | ||||||
|
Unallocated
items
|
||||||||||||
|
Interest
income
|
1,483 | |||||||||||
|
Foreign
exchange loss
|
(616 | ) | ||||||||||
|
Earnings
before income taxes
|
1,169 | |||||||||||
|
Income
taxes
|
1,262 | |||||||||||
|
Net
loss for the period
|
$ | (93 | ) | |||||||||
Total
assets by reportable segment are detailed as follows:
|
As
at
November
30,
2008
|
As
at
August
31,
2008
|
|||||||
|
(unaudited)
|
||||||||
|
Total
assets
|
||||||||
|
Telecom
Division
|
$ | 132,021 | $ | 145,168 | ||||
|
Life
Sciences and Industrial Division
|
8,204 | 9,571 | ||||||
|
Unallocated
assets
|
117,353 | 138,327 | ||||||
| $ | 257,578 | $ | 293,066 | |||||
Unallocated
assets are comprised of cash, short-term investments, other receivables on
forward exchange contracts, income taxes and tax credits recoverable and future
income tax assets.
|
13
|
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 19 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 in the United States have not been
provided in these interim consolidated financial statements.
Statements
of earnings
For the
three months ended November 30, 2007 and 2008, there were no significant
differences between the net earnings (loss) under Canadian GAAP as compared
to U.S. GAAP.
EXFO
Electro-Optical Engineering Inc.
Notes
to 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
November 30,
2008
|
As
at
August
31,
2008
|
|||||||
|
(unaudited)
|
||||||||
|
Shareholders’
equity in accordance with Canadian GAAP
|
$ | 222,915 | $ | 295,515 | ||||
|
Goodwill
|
(10,856 | ) | (12,640 | ) | ||||
|
Stock
appreciation rights
|
(73 | ) | (73 | ) | ||||
|
Shareholders’
equity in accordance with U.S. GAAP
|
$ | 211,986 | $ | 246,802 | ||||
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 $980,000 and $896,000 for the three
months ended November 30, 2007 and 2008, respectively. This difference has
no impact on the net earnings (loss) and the net earnings (loss) per share for
the reporting periods.
Statements
of cash flows
For the
three months ended November 30, 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 2009
In
September 2006, the Financial Accounting Standard Board (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 adopted this statement
on September 1, 2008, and its adoption had no effect 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 adopted this statement on
September 1, 2008, and it did not elect to use the fair value
option as of the date of adoption.
EXFO
Electro-Optical Engineering Inc.
Notes
to 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 2009
In
December 2007, the FASB issued SFAS 141(R), “Business Combinations”,
and SFAS 160, “Noncontrolling 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 noncontrolling (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
will adopt this statement on September 1, 2009, and 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
will adopt this statement on September 1, 2009, and is currently evaluating the
impact its adoption 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 Lives 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
141 (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
will adopt this FSP on September 1, 2009, and is currently evaluating
the impact its adoption will have on its consolidated financial statements.
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’s 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.
|
14
|
Subsequent
Event
|
On
December 18, 2008, pursuant to its substantial issuer bid (note 8), the company
purchased for cancellation 7,692,307 subordinated voting shares for an aggregate
purchase price of CA$30,000,000, excluding related fees. The company used cash
and short-term investments to fund the repurchase of shares.
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, financial 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 January 8, 2009.
All
dollar amounts are expressed in US dollars, except as otherwise
noted.
INDUSTRY
OVERVIEW
The
fundamental drivers for increased bandwidth and convergence towards IP-based
networks in the global telecommunications industry remain solid for the moment.
However, it is still unknown what impact the current recession will have on
global telecom investment levels, particularly in the United States and Western
Europe. The growth in bandwidth demand, the intense competition between
telecom operators (telcos) and cable companies (cablecos), as well as the
various benefits of new converged IP networks (attracting new applications and
revenues while reducing cost of operation) are reasons several operators may
continue investing in broadband deployments and IP convergence.
Global
Internet bandwidth demand is fuelled by a wide range of applications like video
streaming, Web gaming, etc. TeleGeography Research estimated that global
Internet bandwidth increased at a compound annual growth rate (CAGR) of 54% from
2004 to 2008. This trend will likely remain strong in the years to come with
upcoming deployments of Internet protocol television (IPTV), high-definition
Internet protocol television (HD-IPTV) and increased online video streaming,
since these applications, among others, will consume a colossal amount
of additional bandwidth. As a result, telcos and cablecos will
likely maintain significant investments 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.
As the
volume of IP traffic, number of applications and quantity of consumers are
increasing, so is the need for a 24/7, real-time service assurance solution
that monitors IP traffic at the application level, from the access to the core
network, as this is the best method for wireline and wireless operators to
minimize the cost to operate their networks and provide a superior customer
experience.
As well,
it is now clear from a telco perspective, that fiber-to-the-home (FTTH) is
becoming the access network architecture of choice for network operators. It
allows 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. Some projects, however, might be
delayed based on the ability to fund such projects. 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 noteworthy to mention that
the cost of deploying FTTH has largely fallen over the last four years as volume
increased and deployment tools, like those we offer, are making the task
increasingly simple and efficient. 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 and even China have become
increasingly 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; for example, 43 Gbit/s (gigabits per
second) SONET/SDH
is now seeing early deployments and becoming mainstream, while the upcoming 100
Gbit/s Ethernet is in the early stage of field trials by a selected few
operators. The deployment of these solutions is 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 standards, which were first
established in the mid-1980s and implemented until 2005, do not have the payload
flexibility to seamlessly and efficiently mix and transport video with voice and
data. These networks will not be capable to efficiently carry these emerging
IP-based services as they are designed for public switched telephone network
(PSTN), point-to-point voice transmission only. As a result, with new SONET/SDH
standards, which are part of what the industry is calling next-gen networks, telco
operators 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 monitoring suppliers in the
first quarter of fiscal 2009. However, deteriorating macro-economic conditions
in the United States and Western Europe could instigate a slowdown in
capital spending among customers that would necessarily reduce demand for our
test and monitoring solutions.
COMPANY
OVERVIEW
We
reported sales of $46.4 million in the first quarter of fiscal 2009, which
represented an increase of 13.1% year-over-year. We also reported
record-high net accepted orders of $52.3 million in the first quarter of fiscal
2009 for a book-to-bill ratio of 1.13. Total sales for the first quarter of
fiscal 2009 included $4.5 million from newly acquired Brix Networks Inc. and
Navtel Communications Inc. Excluding the impact of theses two acquisitions, we
would have posted year-over-year organic sales growth of 2.1% in the first
quarter of fiscal 2009.
Looking
at the bottom line, we generated GAAP net earnings of $5.3 million, or $0.08 per
diluted share, in the first quarter of fiscal 2009, compared to a net loss
of $93,000, or $0.00 per share, for the same period last year. Net earnings
for the first quarter of fiscal 2009 were positively and significantly affected
by the weaker value of the Canadian dollar compared to the US dollar. During the
first quarter of fiscal 2009, we reported a foreign exchange gain of $4.6
million, compared to a foreign exchange loss of $616,000 for the same period
last year. Net earnings per diluted share in the first quarter of 2009 included
charges of $0.02 for stock-based compensation costs and the after-tax
amortization expense for intangible assets. EBITDA (earnings before interest,
income taxes, depreciation and amortization) reached $9.1 million, or 19.7% of
sales in the first quarter of fiscal 2009, compared
to $1.4 million, or 3.4% of sales for the same period last year (see
further in this document for a complete reconciliation of EBITDA to GAAP net
earnings/loss).
During
the first quarter of fiscal 2009, we faced a substantial and sudden decrease in
the value of the Canadian dollar versus the US dollar, which had a two-fold
positive impact on our financial results. Firstly, the average value of the
Canadian dollar decreased 13.9% in the first quarter of fiscal 2009, 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 resulted were positively affected as these expenses
(denominated in Canadian dollars) were reduced when translated in US
dollars for reporting purposes. Secondly, we recorded an exchange gain of
$4.6 million, which represents the effect of the 14.1% decrease (compared to
August 31, 2008) in the value of the Canadian dollar versus the US dollar on our
balance sheet items denominated in foreign currencies. In comparison, for the
same period last year, we reported a foreign exchange loss of $616,000. During
that period, the average value of the Canadian dollar increased 13.8% compared
to the US dollar year-over-year and the period-end value of the Canadian dollar
increased 5.6% compared to August 31, 2007.
On
November 6, 2008, we announced that our Board of Directors had authorized a
renewal of our share repurchase program, by way of a normal course
issuer bid on the open market, of up to 10% of our public float (as defined
by the Toronto Stock Exchange), or 2.7 million subordinate voting
shares, at the prevailing market price. We expect to use cash, short-term
investments or future cash flows from operations to fund the repurchase of
shares. The period of the normal course issuer bid started on November 10, 2008,
and will end on November 9, 2009, or on 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 and without
prior notice. All shares repurchased under the bid will be
cancelled.
On
November 10, 2008, we announced that our Board of Directors had authorized a
substantial issuer bid (the “Offer”) to purchase for cancellation up to 8.8
million subordinate voting shares for an aggregate purchase price not to exceed
CA$30 million. The Offer is being made by way of a “modified Dutch Auction”
pursuant to which shareholders may tender all or a portion of their
shares (i) at a price not less than CA$3.40 per share and not more than CA$3.90
per share, in increments of CA$0.05 per share, or (ii) without specifying a
purchase price, in which case their shares will be purchased at the
purchase price determined in accordance with the Offer. The Offer expired
on December 16, 2008, and, on December 18, 2008, we purchased for
cancellation 7.7 million subordinated voting shares for an aggregate purchase
price of CA$30 million, excluding related fees. We used cash and short-term
investments to fund the repurchase of shares.
Upon the
approval of the Offer, we suspended the normal course issuer bid referred to
above, until 20 business days following the expiration of the
Offer.
During
the first quarter of fiscal 2009, we launched five new products, including a new
software release for the Transport Blazer product line that delivers
unprecedented insight into 40 Gbit/s network behavior; new software
releases for the InterWatch platform and Packet Blazer product line to support
the migration of voice and video applications to the IPv6 (Internet Protocol,
version 6) addressing scheme; and expanded Ethernet test capabilities
on the Power Blazer product line through multistream, quality of service
(QoS) support. Sales from products that have been on the market two years or
less represented 33.1% of total sales in the first quarter of fiscal
2009.
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 2009, 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 2009 and those to be adopted
after 2009.
Adopted
in fiscal 2009
In
December 2006, the Canadian Institute of Chartered Accountants (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 previously 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.
We
adopted these new standards on September 1, 2008 and provided the required
disclosure in our interim consolidated financial statements.
In June
2007, the CICA issued Section 3031, “Inventories”. 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 adopted this new standard
on September 1, 2008, and its adoption had no effect on our
consolidated financial statements.
In June
2007, the CICA amended Section 1400, “General Standards of Financial Statement
Presentation” to include new requirements regarding an entity’s ability to
continue as a going concern. These amendments apply to fiscal years beginning on
or after January 1, 2008. We adopted these amendments on September 1,
2008, and their adoption had no effect on our consolidated financial
statements.
To
be adopted after fiscal 2009
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 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 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 three months ended November 30, 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) and significant differences in measurement
and disclosure from United States generally accepted accounting principles
(U.S. GAAP) are set out in note 13 to our interim consolidated financial
statements. Our measurement currency is the Canadian dollar, although we report
our financial statements in US dollars. The following table sets 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
November
30,
|
Three
months ended
November
30,
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
Consolidated
statements of earnings data:
|
||||||||||||||||
|
Sales
|
$ | 46,363 | $ | 40,985 | 100.0 | % | 100.0 | % | ||||||||
|
Cost
of sales (1)
|
17,480 | 18,144 | 37.7 | 44.3 | ||||||||||||
|
Gross
margin
|
28,883 | 22,841 | 62.3 | 55.7 | ||||||||||||
|
Operating
expenses
|
||||||||||||||||
|
Selling
and administrative
|
17,091 | 14,817 | 36.9 | 36.2 | ||||||||||||
|
Net
research and development
|
7,221 | 6,012 | 15.6 | 14.7 | ||||||||||||
|
Amortization
of property, plant and equipment
|
1,159 | 976 | 2.5 | 2.3 | ||||||||||||
|
Amortization
of intangible assets
|
1,319 | 734 | 2.8 | 1.8 | ||||||||||||
|
Total
operating expenses
|
26,790 | 22,539 | 57.8 | 55.0 | ||||||||||||
|
Earnings
from operations
|
2,093 | 302 | 4.5 | 0.7 | ||||||||||||
|
Interest
income
|
466 | 1,483 | 1.0 | 3.7 | ||||||||||||
|
Foreign
exchange gain (loss)
|
4,568 | (616 | ) | 9.9 | (1.5 | ) | ||||||||||
|
Earnings
before income taxes
|
7,127 | 1,169 | 15.4 | 2.9 | ||||||||||||
|
Income
taxes
|
||||||||||||||||
|
Current
|
(61 | ) | 1,181 | (0.1 | ) | 2.9 | ||||||||||
|
Future
|
1,901 | 81 | 4.1 | 0.2 | ||||||||||||
| 1,840 | 1,262 | 4.0 | 3.1 | |||||||||||||
|
Net
earnings (loss) for the period
|
$ | 5,287 | $ | (93 | ) | 11.4 | % | (0.2 | )% | |||||||
|
Basic
and diluted net earnings (loss) per share
|
$ | 0.08 | $ | (0.00 | ) | |||||||||||
|
Segment
information:
|
||||||||||||||||
|
Sales:
|
||||||||||||||||
|
Telecom
Division
|
$ | 41,159 | $ | 35,365 | 88.8 | % | 86.3 | % | ||||||||
|
Life
Sciences and Industrial Division
|
5,204 | 5,620 | 11.2 | 13.7 | ||||||||||||
| $ | 46,363 | $ | 40,985 | 100.0 | % | 100.0 | % | |||||||||
|
Earnings
from operations:
|
||||||||||||||||
|
Telecom
Division
|
$ | 1,355 | $ | 21 | 2.9 | % | 0.1 | % | ||||||||
|
Life
Sciences and Industrial Division
|
738 | 281 | 1.6 | 0.6 | ||||||||||||
| $ | 2,093 | $ | 302 | 4.5 | % | 0.7 | % | |||||||||
|
Research
and development data:
|
||||||||||||||||
|
Gross
research and development
|
$ | 8,612 | $ | 7,486 | 18.6 | % | 18.3 | % | ||||||||
|
Net
research and development
|
$ | 7,221 | $ | 6,012 | 15.6 | % | 14.7 | % | ||||||||
|
(1)
|
The
cost of sales is exclusive of amortization, shown
separately.
|
SALES
For the
three months ended November 30, 2008, our global sales increased 13.1% to
$46.4 million from $41.0 million for the same period last year, with
an 89%-11% split in favor of our Telecom Division (86%-14% for the same period
last year).
Telecom
Division
For the
three months ended November 30, 2008, our Telecom Division sales increased 16.4%
to $41.2 million from $35.4 million for the same period last
year.
In the
first quarter of fiscal 2009, we posted year-over-year sales growth mainly due
to the market acceptance as well as market share gain of our
next-generation IP test solutions, and due to the inclusion of the sales of
newly acquired Brix Networks and Navtel Communications’ products. In fact, sales
of Brix Network and Navtel Communications amounted to $4.5 million together for
the quarter. Excluding these sales, our telecom sales would have increased 3.6%
organically year-over-year. During the first quarter of fiscal 2009, we posted
record-high sales and bookings of protocol test solutions and, unsurprisingly,
our protocol test solutions represented our fastest-growing product line. Also,
they represented more than 30% of our telecom sales in the first quarter of
fiscal 2009, compared to more than 10% for the same period last
year.
On the
other hand, sales of optical test solutions slightly decreased during the first
quarter of fiscal 2009, compared to the same period last year. This mainly
results from lower sales in the Americas including Verizon’s Fiber Optic Service
(FIOS). Global sales to this top
customer represented 4.0% ($1.6 million) of our telecom sales in the first
quarter of fiscal 2009, compared to 13.1% ($4.6 million) for the same
period last year. Excluding sales to this customer, our telecom sales would have
increased 28.6% in the first quarter of fiscal 2009, compared
to the same period last year. This shows that we have successfully
diversified our customer base year-over-year. It should be noted that this
customer was not our top customer during the first quarter of fiscal 2009
(second largest).
Finally,
in the first quarter of fiscal 2009, foreign exchange losses on our forward
exchange contracts, which are included in our telecom sales, amounted to
$211,000 compared to foreign exchange gains of $1.3 million for the same period
last year. In the first quarter of fiscal 2009, the average value of the
Canadian dollar versus the US dollar decreased 13.9% compared to the same
period last year.
Sales of
our copper-access test solutions were slightly up in the first quarter of fiscal
2009, compared to the same period last year. During fiscal 2008,
we launched the AXS-200 SharpTESTER, a new added-value product that
integrates Consultronics (copper-access) core knowledge and intellectual
property; the AXS-200 SharpTESTER platform also houses a new test module, the
AXS-200/630 Triple-Play Test Set, which differentiates our access network
offering from that of other vendors. These new, innovative products have yet to
contribute to our sales for this market segment.
Life
Sciences and Industrial Division
For the
three months ended November 30, 2008, our Life Sciences and Industrial Division
sales decreased 7.4% to $5.2 million from $5.6 million for the
same period last year.
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. Moreover, a significant
part of our product offering is related to manufacturing applications of
consumer goods, which have been more susceptible to the state of the global
economy.
Net
bookings
Overall,
for the two divisions, net accepted orders increased 19.7% year-over-year to a
record-high $52.3 million in the first quarter of fiscal 2009 from
$43.7 million for the same period last year, for a book-to-bill ratio of
1.13.
This
increase of bookings year-over-year is due to significant order acceleration in
our Protocol test segment, lead by a major order amounting up to $4 million that
was announced in the first quarter of fiscal 2009 when a Tier-1 wireless
operator in North America has selected our converged service assurance solution
to provide real-time monitoring of the quality of voice-over-IP (VoIP) and IP
multimedia subsystem (IMS) services over its converged network.
Geographic
distribution
In the
first quarter of fiscal 2009, sales to the Americas, Europe, Middle-East and
Africa (EMEA) and Asia-Pacific (APAC) accounted for 56%, 27% and 17% of global
sales, respectively, compared to 58%, 24% and 18%, respectively for the same
period last year.
In the
first quarter of fiscal 2009, we reported year-over-year sales increases (in
dollars) in every geographic area. In fact, sales to the Americas, EMEA and
APAC increased (in dollars) 11.1%, 24.9% and 3.6%, respectively, which resulted
in a slightly larger percentage of sales coming from international
markets.
In the
Americas, the increase in sales in the first quarter of fiscal 2009, compared
to the same period last year, comes from every region; we posted a sales
growth of 43.3%, 6.3% and 8.9% in Canada, United States and Latin America,
respectively. In the United States, despite the decrease in sales to our
top customer year-over-year, we were able to increase our sales in
this region partially thanks to the contribution of Brix Networks and Navtel
Communications whose sales were traditionally in that region. As mentioned
above, during the first quarter of fiscal 2008, we benefited from
aggressive FTTH rollouts from our top customer, and sales to this customer
represented 11.3% ($4.6 million) of our global sales in the first quarter
of fiscal 2008, compared to 3.5% ($1.6 million) for the same period this year.
We believe that we did not lose market share with this particular customer
in the first quarter of fiscal 2009. We believe we have expanded
market share as we successfully got additional product-line approvals to
partially offset the decline in optical business and came out to a significant
growth in booking at that account during the last quarter. Excluding sales to
this customer, sales to the United States would have increased 31.3%
in dollars year-over-year; this shows that, overall, we have diversified
our customer base and product mix year-over-year in this region. Finally,
sales to Latin America fluctuate depending on the timing and scope of our
customers’ projects.
The
increase in sales in the EMEA market, in dollars, in the first quarter of fiscal
2009, compared to the same period last year, is a result of our continued
strategy from the last few years to aggressively develop this market in the
past several years, to consistently invest in sales resources, and
to develop 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 as well as our
DWDM, ROADM 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 continued return on investment of some specific
optical, protocol as well as life sciences and industrial products
developed and targeted for this important market. This increasingly competitive
range, coupled with our steadily expanding market presence, is responsible for
the higher sales in this region in the first quarter of fiscal 2009,
compared to the same period last year.
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. In the first
quarter of fiscal 2009, no customer accounted for more than 10% of our
global sales, and our top three customers accounted for 10.4% of our global
sales. In the corresponding period last year our top customer accounted for
11.3% ($4.6 million) of our global sales, and our top three customers
accounted for 16.5% of our global sales.
GROSS
MARGIN
Gross
margin reached 62.3% of sales for the three months ended
November 30, 2008, compared to 55.7% for the same period last
year.
In the
first quarter of fiscal 2009, gross margin reached its highest level since the
second quarter of fiscal 2001. The increase in our gross margin in the
first quarter of fiscal 2009, compared to the same period last year, can
be explained by the following factors.
First,
the impact of the fluctuations in the value of the Canadian dollar compared to
the US dollar was twofold in the first quarter of fiscal 2009. Indeed, over the
last several quarters, our procurement costs decreased as the Canadian dollar
strengthen compared to the US dollar and as a significant portion of our
raw material purchases is denominated in US dollars. This allowed us to
improve our gross margin continually over the last quarters, as our raw material
costs of parts purchased in US dollar are measured in Canadian dollar in our
financial statements. In addition, the sudden decrease in the value of the
Canadian dollar versus the US dollar resulted in a lower cost of goods sold
expressed in US dollars in the statements of earnings. However, the increase of
our procurement cost of raw materials purchased in US dollars, as a result of
the sudden and recent decrease in the value of the Canadian dollar compared to
the US dollar, will be seen in the next quarters, as these raw materials will be
included in the cost of goods sold of products manufactured with these
parts.
Secondly,
in the first quarter of fiscal 2009, our gross margin was positively affected by
the significant increase in 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. Sales
of protocol test solutions reached their highest level in the first quarter of
fiscal 2009.
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.
Finally,
the operation of our manufacturing facility in China resulted in a larger
portion of our sales coming from products manufactured in China; those products
have a lower cost of goods than those manufactured in our facilities in Canada,
thus resulting in an improvement in gross margin year-over-year.
Considering
the expected sales growth in fiscal 2009, the expected increase in sales of
protocol products and the full 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 and 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
operation of our manufacturing facility in China and increases in product
offerings by other suppliers in our industry. Finally, any increase in the
strength of the Canadian dollar, compared to the US dollar, would have a
negative impact on our gross margin in fiscal 2009 and beyond.
SELLING
AND ADMINISTRATIVE
For the
three months ended November 30, 2008, selling and administrative expenses were
$17.1 million, or 36.9% of sales, compared to $14.8 million, or 36.2% of
sales for the same period last year.
Brix
Networks and Navtel Communications, which were acquired in the third quarter of
fiscal 2008, contributed for the whole period to our selling and administrative
expenses in the first quarter of fiscal 2009, which caused these expenses to
increase compared to the same period last year. In addition, selling expenses
for Brix Networks and Navtel Communications tend to be higher in percentage of
sales than the rest of the business, as their sales cycle is much longer
and complex than our other product lines.
In
addition, during the first quarter of fiscal 2009, 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 additional employees and expenses to
support the launch of several new products and to increase brand name
recognition), compared to the corresponding period last year.
However,
during the first quarter of fiscal 2009, the substantial and sudden decrease in
the average value of the Canadian dollar compared to the US dollar had a
significant positive impact on our selling and administrative expenses, since a
significant portion of these expenses are denominated in Canadian dollars and
since these expenses increased year-over-year as our sales
grew.
Also,
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 that period.
For
fiscal 2009, considering the expected increase in sales and the significant
impact of the acquisitions of Brix Networks and Navtel Communications on our
selling and administrative expenses—whose selling expenses tend to be
higher, as their products deliver better margins compared to the rest
of our product lines—we expect our selling and administrative expenses to
increase in dollars and range between 32% and 34%. In particular, in fiscal
2009, 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 increase in the strength of the
Canadian dollar would also cause our selling and administrative expenses to
increase, as a significant portion of these expenses are incurred
in Canadian dollars.
RESEARCH
AND DEVELOPMENT
Gross
research and development expenses
For the
three months ended November 30, 2008, gross research and development expenses
totalled $8.6 million, or 18.6% of sales, compared to $7.5 million, or
18.3% of sales for the same period last year.
Brix
Networks and Navtel Communications, which were acquired in the third quarter of
fiscal 2008, contributed for the whole period to our gross research and
development expenses in the first quarter of fiscal 2009, which caused these
expenses to increase compared to the same period last year. In addition, 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, although they
deliver higher margins than most of our other product
lines.
In
addition, we intensified our research and development activities, namely in our
software development center in Pune, India, which resulted in increased
gross research and development expenses in the first quarter
of fiscal 2009, compared to the same period last year.
However,
during the first quarter of fiscal 2009, the significant and rapid decrease in
the average value of the Canadian dollar compared to the US dollar also had a
substantial positive effect on our gross research and development expenses as an
important portion of these expenses are denominated in Canadian dollars and also
because these expenses increased year-over-year.
Also, in
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.
|
Tax
credits
|
For the
three months ended November 30, 2008, tax credits from the Canadian federal and
provincial governments for research and development activities were $1.4
million, or 16.2% of gross research and development expenses, compared to $1.5
million, or 19.7% of gross research and development expenses for the same period
last year.
All our
research and development tax credits are denominated in Canadian dollars. The
significant and sudden decrease in the value of the Canadian dollar compared to
the US dollar during the first quarter of fiscal 2009 had a negative impact
on these tax credits expressed in US dollars.
However,
that decrease in tax credits was offset in part by increased research and
development activities in Canada where we are eligible to tax
credits.
The
decrease in research and development tax credits as a percentage of gross
research and development expenses is mainly due to the fact that the
portion of gross research and development incurred in Canada, where we are
entitled to tax credits, was lower than 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 conducted outside Canada do not entitle us to tax
credits.
For
fiscal 2009, we expect that our net research and development expenses will
increase in dollars, and range between 14% and 16% of sales, given our focus on
innovation, the addition of Brix Networks and Navtel Communications, whose
products are software-intensive, the addition of software features in our
products, our desire to gain market share and our goal to exceed customer
expectations. Also, we are increasingly taking advantage of talent pools around
the world with the establishment of a research and development center focused
on software development in Pune, India. Finally, any increase in the
strength of the Canadian dollar in the upcoming quarters would cause our
net research and development expenses to increase, as a significant portion of
these are incurred in Canadian dollars.
AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
For the
three months ended November 30, 2008, amortization of property, plant and
equipment was $1.2 million, compared to $976,000 for the same period last
year.
The
recent startup of our own manufacturing and research and development
facilities in China and India, the upgrade of our IT systems, and the impact of
the acquisition of Brix Networks and Navtel Communications in the third quarter
of fiscal 2008 resulted in an increase in our amortization expenses in
the first quarter of fiscal 2009, compared to the same period last year.
However, the significant decrease in the average value of the Canadian dollar
versus the US dollar in the first quarter of fiscal 2009, compared to the same
period last year, limited the increase in our amortization expenses
year-over-year as a significant portion of these expenses are denominated
in Canadian dollars.
AMORTIZATION
OF INTANGIBLE ASSETS
In
conjunction with the business combinations we completed over the past several
years, we recorded intangible assets, primarily consisting of core technology.
These intangible assets resulted in amortization expense
of $1.3 million during the first quarter of fiscal 2009, compared to
$734,000 for the same period last year.
The
increase in amortization expenses in the first quarter of fiscal 2009, compared
to the same period last year, is mainly due to the acquisition of Brix
Networks core technology in the third quarter of 2008.
INTEREST
INCOME
Our
interest income mainly resulted from our short-term investments, less interests
and bank charges. For the three months ended November 30, 2008, interest income
amounted to $466,000, compared to $1.5 million for the same period last
year.
The
decrease in interest income in the first quarter of fiscal 2009, 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 $41.0 million for the acquisitions of
Brix Networks and Navtel Communications in the third quarter of fiscal 2008, the
redemption of share capital for $8.5 million over the last 12 months, in
accordance with our share buy-back program as well as the general reduction
in interest rates year-over-year. In addition, the significant decrease in the
average value of the Canadian dollar, compared to the US dollar
year-over-year, contributed to the decrease in our interest income in the first
quarter of fiscal 2009, compared to the same period last year, as it is
denominated in Canadian dollars.
FOREIGN
EXCHANGE GAIN (LOSS)
Foreign
exchange gains and losses are mainly the result of the translation of operating
activities denominated in currencies other than the Canadian
dollar.
For the
three months ended November 30, 2008, the foreign exchange gain amounted to $4.6
million compared to a foreign exchange loss of $616,000 for the same
period last year.
During
the first quarter of fiscal 2009, the value of the Canadian dollar significantly
and rapidly decreased versus the US dollar compared to the previous
quarter, which resulted in a foreign exchange gain in the first quarter
of fiscal 2009. In fact, the period-end value of the Canadian dollar
decreased 14.1% to CA$1.2372 = US$1.00 in the first quarter of fiscal 2009,
compared to CA$1.0626 = US$1.00 at the end of the previous quarter. This
represents the largest quarterly change in the value of the Canadian dollar
compared to the US dollar in the history of the company. We also have to
consider that the volume of operations denominated in foreign currency increased
year-over-year, further increasing the exchange gain compared to the same period
last year.
On the
other hand, during the first quarter of fiscal 2008, the value of the Canadian
dollar significantly and rapidly increased versus the US dollar compared to
the previous quarter, which resulted in a significant foreign exchange loss in
the first quarter of fiscal 2008. In fact, the period-end value of the Canadian
dollar increased 5.6% to CA$1.0008 = US$1.00 in the first quarter
of fiscal 2008, compared to CA$1.0564 = US$1.00 at the end of the previous
quarter.
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 significant decrease in the average
value of the Canadian dollar in the first quarter of fiscal 2009, compared to
the same period last year, resulted in a significant and positive 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 in the first quarter of fiscal 2009 was CA$1.1501 =
US$1.00 versus CA$0.9901 = US$1.00 for the same period last year, representing
a decrease of 13.9% in the average value of the Canadian 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
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 November 30, 2008, our income tax expense totaled $1.8
million compared to $1.3 million for the same period last
year.
For the
three months ended November 30, 2008, we reported income tax expenses of $1.8
million on earnings
before income taxes of $7.1 million, for an effective income tax rate of
25.8%. Our combined Canadian and provincial statutory tax rate is 31%. This
situation mainly results from the fact that a significant portion of our foreign
exchange gain is created by the translation of financial statements of our
foreign integrated subsidiaries, and is therefore non-taxable. On the other
hand, we continue to maintain a valuation allowance for some of our
subsidiaries at loss and we have some non-deductible expenses, such as
stock-based compensation costs. Otherwise, the actual tax rate would have been
closer to the statutory tax rate.
For the
three months ended November 30, 2007, we reported income tax expenses of $1.3
million on earnings
before income taxes of $1.2 million, for an effective income tax rate of
108%. This unusual situation mainly resulted from the fact that 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 the fact that we continue to
maintain a valuation allowance for some of our subsidiaries at loss. In
addition, we recorded income tax expenses for minimum taxes payable in
certain tax jurisdictions, which taxes are not related to pre-tax earnings.
Otherwise, the actual tax rate would have been closer to the statutory tax
rate.
Please
refer to note 10 to our interim consolidated financial statements for details on
income taxes and a full reconciliation of the income tax
provision.
LIQUIDITY
AND CAPITAL RESOURCES
Cash requirements
and capital resources
As at
November 30, 2008, cash and short-term investments totalled $71.4 million, while
our working capital was at $124.8 million. Our cash and short-term
investments decreased $16.2 million in the first quarter of fiscal 2009,
compared to the previous quarter, mainly due to the significant decrease in the
value of the Canadian dollar compared to the US dollar. Indeed, we recorded
an unrealized foreign exchange loss on our cash and short-term investments
of $11.6 million. This unrealized foreign exchange loss resulted from the
translation, in US dollars, of our Canadian-dollar-denominated cash
and short-term investments and was included in the accumulated other
comprehensive income in the balance sheet. In addition, we paid $1.5 million and
$447,000 for the purchases of capital assets and the redemption of share
capital, respectively. Finally, operating activities used cash flows
of $2.7 million.
Our
short-term investments consist of commercial paper issued by 13 (ten as at
August 31, 2008) high-credit quality corporations and trusts; therefore, we
consider the risk of non-performance of these financial instruments
to be limited. None of these debt instruments are expected to be
affected by a liquidity risk, and none of them represent 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 and our share
repurchase programs.
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, the cash payment of CA$30 million (US$25.1 million)
required in December 2008 under our substantial issuer bid, and the effect of
our normal course issuer bid. In addition to these assets, we have unused
available lines of credit totaling $9.5 million for working capital and other
general corporate purposes and unused lines of credit of $10.2 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.
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 used by operating activities were $2.7 million for the three months ended
November 30, 2008, compared to $2.4 million for the same period last
year.
Cash
flows used by operating activities in the first quarter of fiscal 2009 were
mainly attributable to the net earnings after items not affecting cash of $7.3
million, offset by the negative net change in non-cash operating items
of $10.0 million mainly due to the negative effect on cash of the
increase of $7.3 million in our accounts receivable (due to timing of sales, as
sales mainly occurred at the end of the quarter), the increase of
$696,000 in our income taxes and tax credits recoverable (mainly tax credits
earned during the quarter and not yet recovered), the increase of $542,000
in our prepaid expenses (fees paid for the substantial issuer bid), and the
decrease of $1.1 million in our accounts payable and accrued liabilities,
mainly due to timing of purchases and payments.
Cash
flows used by operating activities in the first quarter of fiscal 2008 were
mainly attributable to the net earnings after items not affecting cash of $3.3
million, offset by the negative net change in non-cash operating items
of $5.7 million mainly due to the negative effect on cash of the
increase of $458,000 in our income taxes and tax credits recoverable (mainly tax
credits earned during the quarter and not yet recovered), the increase of
$612,000 in our prepaid expenses, and the decrease of $5.7 million in our
accounts payable and accrued liabilities, mainly due to timing of purchases and
payments. The decrease of $1.2 million in our accounts receivable (timing and
sequential decrease of sales) offset in part these negative effects on
cash.
Investing
activities
Cash
flows provided by investing activities were $3.0 million for the three months
ended November 30, 2008, compared to $1.5 million for the same period
last year. In the first quarter of fiscal 2009, we disposed
(net of acquisitions) of $4.5 million worth of short-term investments
but paid $1.5 million for the purchase of capital assets. For the
corresponding period last year, we disposed (net of acquisitions) $3.1 million
worth of short-term investments and paid $1.6 million for the purchase of
capital assets.
Financing
activities
Cash
flows used by financing activities were $421,000 for the three months ended
November 30, 2008, compared to cash flows provided by financing
activities of $525,000 for the same period last year. During the first quarter
of fiscal 2009, we paid $447,000 for the redemption of share capital
under our normal course issuer bid program and received $26,000 from the
exercise of stock options. For the corresponding period last year, cash flows
provided by financing activities were due to changes in bank loan of
$699,000, offset by the cash payment of $174,000 for the redemption of share
capital under our normal course issuer bid program.
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
November 30, 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
|
||||||
|
December
2008 to August 2009
|
$ | 28,300,000 | 1.0616 | |||||
|
September
2009 to August 2010
|
24,200,000 | 1.0760 | ||||||
|
September
2010 to August 2011
|
14,600,000 | 1.1221 | ||||||
|
September
2011
|
1,000,000 | 1.1278 | ||||||
|
Total
|
$ | 68,100,000 | 1.0807 | |||||
The fair
value of forward exchange contracts, which represents the amount that the
company would receive or pay to settle the contracts based on the forward
exchange rate at period end, amounted to net gains of $62,000
as at August 31, 2008 and net losses of $8.0 million
as at November 30, 2008, following the significant decrease
in the value of the Canadian dollar compared to the US dollar during the
quarter.
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 predetermined prices.
On April
19, 2002, the plaintiffs filed an amended complaint containing master
allegations against all of the defendants 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 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’s opinion, liaison counsel for all issuer defendants,
including EXFO, informed the court that this settlement could not be approved,
because the defined settlement class, like the litigation class, could not 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. That motion was withdrawn
without prejudice on October 10, 2008.
Due to
the inherent uncertainties of litigation, the final outcome of the case is
uncertain and it is not possible 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 November 30, 2008.
SHARE
CAPITAL AND STOCK-BASED COMPENSATION PLANS
Share
capital
As at
January 8, 2009, EXFO had 36,643,000 multiple voting shares outstanding,
entitling to ten votes each and 22,930,178 subordinate voting shares
outstanding. The multiple voting shares and the subordinate voting shares are
unlimited as to number and without par value. On December 18, 2008, we redeemed
7.7 million subordinated voting shares for a total consideration of CA$30
million, plus related fees, based on our substantial issuer bid
program.
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 3,112,200 as at
November 30, 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 November 30, 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 (four individuals)
|
148,807
|
8%
|
$6.19
|
|||
|
Management
and Corporate Officers (eight individuals)
|
212,139
|
12%
|
$14.49
|
|||
|
540,588
|
30%
|
$10.40
|
||||
|
Restricted Share Units
(RSUs)
|
Number
|
%
of issued
and
outstanding
|
||||
|
Chairman
of the Board, President and CEO (one individual)
|
150,714
|
12%
|
||||
|
Management
and Corporate Officers (eleven individuals)
|
525,084
|
43%
|
||||
|
675,798
|
56%
|
|||||
|
Deferred Share Units
(DSUs)
|
Number
|
%
of issued
and
outstanding
|
||||
|
Board
of Directors (five individuals)
|
90,517
|
100%
|
OFF-BALANCE
SHEET ARRANGEMENTS
As at
November 30, 2008, our off-balance sheet arrangements consisted of letters of
guarantee. As at November 30, 2008, our letters of guarantee
amounted to $5.4 million; these letters of guarantee expire at various
dates through fiscal 2011. From this amount, we had $1.1 million worth of
letters of guarantee for our own selling and purchase requirements, which were
reserved from one of our lines of credit. The remainder in the amount of $4.3
million was used to secure our line of credit in Chinese currency. This line of
credit was unused as at November 30, 2008. This $4.3 million letter of
guarantee is secured by short-term investments.
VARIABLE
INTEREST ENTITY
As of
November 30, 2008, we did not have interests in any variable interest
entities.
RISKS
AND UNCERTAINTIES
Over the
past several 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,
has 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, including
our manufacturing facilities in China and our 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, cultural differences and the management
of operations in China and India.
Also,
while strategic acquisitions, like those we have made in the past, those closed
in 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.
With 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 limited.
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.
Non-GAAP
financial measure
We
provide a non-GAAP financial measure (EBITDA*) as supplemental information
regarding our operational performance. We use EBITDA for the purposes of
evaluating our historical and prospective financial performance, as well as our
performance relative to our competitors. This measure also helps us to plan and
forecast future periods as well as to make operational and strategic decisions.
We believe that providing this information to our investors, in addition to
the GAAP measures, allows them to see the company’s results through the eyes of
management, and to better understand our historical and future financial
performance.
The
presentation of this additional information is not prepared in accordance with
GAAP. Therefore, the information may not necessarily be comparable to that of
other companies and should be considered as a supplement to,
not a substitute for, the corresponding measures calculated in
accordance with GAAP.
The
following table summarizes the reconciliation of EBITDA to GAAP net earnings
(loss):
|
Three months ended November 30,
|
||||||||
|
2008
|
2007
|
|||||||
|
GAAP
net earnings (loss) for the period
|
$ | 5,287 | $ | (93 | ) | |||
|
Add
(deduct):
|
||||||||
|
Amortization
of property, plant and equipment
|
1,159 | 976 | ||||||
|
Amortization
of intangible assets
|
1,319 | 734 | ||||||
|
Interest
income
|
(466 | ) | (1,483 | ) | ||||
|
Income
taxes
|
1,840 | 1,262 | ||||||
|
EBITDA
for the period
|
$ | 9,139 | $ | 1,396 | ||||
|
EDITDA
in percentage of sales
|
19.7 | % | 3.4 | % | ||||
|
*
|
EBITDA
is defined as net earnings (loss) before interest, income taxes,
amortization of property, plant and equipment and amortization of
intangible assets.
|
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