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 April 2007
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-______.
TABLE
OF CONTENTS
On
April
3, 2007, EXFO Electro-Optical Engineering Inc., a Canadian corporation, reported
its results of operations for the second fiscal quarter ended February 28,
2007.
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 second fiscal quarter of the 2007 fiscal year.
This press release and information relating to EXFO’s financial condition and
results of operations for the second fiscal quarter of the 2007 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:
April 5, 2007
EXFO
Reports
Year-over-Year Increases in Sales and Net Earnings
| § |
Sales
increase 17.1% to US$35.2 million from US$30.1 M in Q2
2006
|
| § |
GAAP
net earnings improve 96.5% to US$2.7 million from US$1.4 million
in Q2
2006
|
| § |
Gross
margin reaches 57.5% compared to 55.3% in Q2
2006
|
| § |
Seven
new products launched, mostly for broadband access, IPTV and next-gen
networks
|
QUEBEC
CITY, CANADA, April 3, 2007—EXFO Electro-Optical Engineering Inc. (NASDAQ: EXFO;
TSX: EXF) reported today year-over-year increases in sales and net earnings
for
the second quarter ended February 28, 2007.
Sales
increased 17.1% to US$35.2 million in the second quarter of fiscal 2007 from
US$30.1 million in the second quarter of 2006 and decreased 1.0% from US$35.5
million in the first quarter of 2007. At the half-way mark of fiscal 2007,
sales
rose 23.9% year-over-year to US$70.8 million. Net bookings increased 28.8%
to
US$36.5 million for a book-to-bill ratio of 1.04 in the second quarter of
fiscal
2007 from US$28.3 million in the same period last year and decreased 1.4%
from
US$37.0 million in the first quarter of 2007.
Gross
margin improved to 57.5% of sales in the second quarter of fiscal 2007 from
55.3% in the second quarter of 2006 and 57.2% in the first quarter of 2007.
GAAP
net
earnings in the second quarter of fiscal 2007 increased 96.5% to US$2.7 million,
or US$0.04 per diluted share, from US$1.4 million, or US$ 0.02 per diluted
share, in the same period last year, but decreased 24.0% from US$3.5 million,
or
US$0.05 per diluted share, in the first quarter of 2007. GAAP net earnings
in
the second quarter of fiscal 2007 included US$0.6 million in amortization
of
intangible assets and US$0.2 million in stock-based compensation
costs.
“I
am
satisfied about our financial results with bookings improving almost 30%
year-over-year and GAAP net earnings nearly doubling during the same period,
despite a challenging second quarter due to seasonality,” said Germain Lamonde,
EXFO’s Chairman, President and CEO. “While net earnings are improving much
faster than sales and bookings, I am particularly pleased that we are building
a
strong presence in strategic market areas like next-generation networking,
broadband deployments for triple-play offerings, convergence to IP including
all-important IPTV services, as well as growing FTTx rollouts.”
“We
have
accelerated the development of our rich product families in key market segments
while expanding our global reach to continue growing faster than our end-markets
— like we have done in the past 21 years,” Mr. Lamonde added. “Our 12 product
launches at the half-way mark of the fiscal year, plus several others introduced
early in the third quarter, are strengthening our competitive position in
strategic market segments and should help us accelerate market-share gains.
As a
result, I expect that sales will increase significantly in the second half
of
fiscal 2007.”
Selected
Financial Information
(In
thousands of US dollars)
|
Segmented
results:
|
Q2
2007
|
Q2
2006
|
Q1
2007
|
|||||||
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
||||||||
|
Sales:
|
||||||||||
|
Telecom
Division
|
$
|
29,297
|
$
|
25,254
|
$
|
29,522
|
||||
|
Life
Sciences and Industrial Division
|
5,910
|
4,812
|
6,025
|
|||||||
|
Total
|
$
|
35,207
|
$
|
30,066
|
$
|
35,547
|
||||
|
Earnings
from operations:
|
||||||||||
|
Telecom
Division
|
$
|
1,078
|
$
|
1,220
|
$
|
1,803
|
||||
|
Life
Sciences and Industrial Division
|
1,003
|
188
|
956
|
|||||||
|
Total
|
$
|
2,081
|
$
|
1,408
|
$
|
2,759
|
||||
|
Other
selected information:
|
||||||||||
|
GAAP
net earnings
|
$
|
2,684
|
$
|
1,366
|
$
|
3,533
|
||||
|
Amortization
of intangible assets
|
$
|
630
|
$
|
1,136
|
$
|
882
|
||||
|
Stock-based
compensation costs
|
$
|
241
|
$
|
281
|
$
|
285
|
||||
Operating
Expenses
Selling
and administrative expenses amounted to US$12.2 million, or 34.6% of sales,
in
the second quarter of fiscal 2007 compared to US$9.3 million, or 30.9% of
sales,
in the same period last year and US$11.5 million, or 32.5% of sales, in the
first quarter of 2007.
Gross
research and development expenses totaled US$5.9 million, or 16.9% of sales,
in
the second quarter of fiscal 2007 compared to US$4.9 million, or 16.4% of
sales,
in the second quarter of 2006 and US$5.5 million, or 15.5% of sales, in the
first quarter of 2007.
Net
R&D expenses totaled US$4.7 million, or 13.3% of sales, in the second
quarter of fiscal 2007 compared to US$3.9 million, or 13.0% of sales, in
the
same period last year and US$4.4 million, or 12.2% of sales, in the first
quarter of 2007.
Second-Quarter
Business Highlights
Market
expansion —
EXFO
delivered year-over-year sales growth of 17.1% in the second quarter of fiscal
2007 due to market-share gains in optical testing, year-end revenue from
a
Tier-1 network service provider, a full three-month contribution from the
Consultronics acquisition, heightened penetration of protocol test solutions,
and increased acceptance of fluorescence microscopy and light-based curing
solutions in the Life Sciences and Industrial Division. At the halfway mark
of
fiscal 2007, EXFO had increased its sales 23.9% compared to the same period
in
2006, while the corporate objective for fiscal 2007 is 20% year-over-year
growth.
Profitability
—
EXFO
recorded earnings from operations of 5.9% in the second quarter of fiscal
2007
and 6.8% after six months into the fiscal year. This mid-year performance
can
largely be attributed to an increase in gross margin which, in turn, was
positively affected by a higher proportion of protocol sales. EXFO expects
its
gross margin will reach 60% on a mid-term basis. The company’s profitability
goal for fiscal 2007 is 7% in earnings from operations.
Innovation
— EXFO
launched seven new products in the second quarter and 12 at the half-way
mark of
fiscal 2007, including IPTV test capabilities for its Packet Blazer Gigabit
Ethernet product line; an enhanced Packet Blazer test module for advanced,
higher-layer Ethernet test applications; a standards-based VDSL2 test module
to
characterize IPTV and HDTV over copper access links; as well as a new variable
optical attenuator (VOA) for R&D and manufacturing applications. Subsequent
to the quarter-end, the company released a series of OTDR test modules for
its
popular FTB-200 and FTB-400 field-test platforms as well as a new remote
fiber
test system (RFTS). Sales
derived from products that have been on the market two years or less represented
28.2% of total sales in the second quarter of fiscal 2007 and 30.5% after
six
months, while the published goal for fiscal 2007 is 35%.
Business
Outlook
EXFO
forecasted sales between US$36.0 million and US$39.0 million and GAAP net
earnings between US$0.03 and US$0.06 per diluted share for the third quarter
ending May 31, 2007. GAAP net earnings include US$0.01 per diluted share
in
amortization of intangible assets and stock-based compensation costs.
Conference
Call and Webcast
EXFO
will
host a conference call today at 5 p.m. (EDT) to review its financial results
for
the second quarter of fiscal 2007. To
listen
to the conference call and participate in the question period via telephone,
dial 1-416-620-5690. 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 April 10, 2007. The replay number is 1-402-977-9141 and the reservation
number is 21331773.
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.
About
EXFO
EXFO
is a
recognized test and measurement expert in the global telecommunications
industry. The Telecom Division, which represents the majority of the company's
business, offers a full suite of test solutions and monitoring systems to
network service providers, cable TV operators, telecom system vendors and
component manufacturers in approximately 70 countries. EXFO is the global
market
leader for portable optical test solutions and a leading supplier of protocol
and access test solutions to enable triple-play deployments and converged
IP
networking. Its PC/Windows-based modular FTB-200, FTB-400 and IQS-500 test
platforms host a wide range of modular test solutions across optical, physical,
data and network layers, while maximizing technology reuse across several
market
segments. The Life Sciences and Industrial Division, which leverages several
core telecom technologies, offers value-added solutions in the life sciences
and
high-precision assembly sectors based on advanced spot-curing, fluorescence
microscopy and nanopositioning solutions. For more information about EXFO,
visit
www.EXFO.com.
Forward-Looking
Statements
This
news
release contains forward-looking statements within the meaning of the U.S.
Private Securities Litigation Reform Act of 1995, and we intend that such
forward-looking statements be subject to the safe harbors created thereby.
Forward-looking statements are statements other than historical information
or
statements of current condition. Words such as may,
will, expect, believe, anticipate, intend, could, estimate,
continue,
or the
negative or comparable terminology are intended to identify forward-looking
statements. In addition, any statements that refer to expectations, projections
or other characterizations of future events and circumstances are considered
forward-looking statements. They are not guarantees of future performance
and
involve risks and uncertainties. Actual results may differ materially from
those
in forward-looking statements due to various factors including consolidation
in
the global telecommunications test and measurement 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; the retention of key
technical and management personnel; and future economic, competitive and
market
conditions. 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. We undertake no obligation to revise or update any of them to reflect
events or circumstances that occur after the date of this document.
-30-
For
more information
Vance
Oliver
Manager,
Investor Relations
(418)
683-0913, Ext. 3733
vance.oliver@exfo.com
EXFO
Electro-Optical Engineering Inc.
(in
thousands of US dollars)
|
As
at
February
28,
2007
|
As
at
August
31,
2006
|
||||||
|
|
(unaudited)
|
||||||
|
Assets
|
|||||||
|
Current
assets
|
|||||||
|
Cash
|
$
|
9,108
|
$
|
6,853
|
|||
|
Short-term
investments
|
105,521
|
104,437
|
|||||
|
Accounts
receivable
|
|||||||
|
Trade,
less allowance for doubtful accounts of $272
($451
as at August 31, 2006)
|
21,793
|
20,891
|
|||||
|
Other
|
3,088
|
2,792
|
|||||
|
Income
taxes and tax credits recoverable
|
2,138
|
2,201
|
|||||
|
Inventories
(note 4)
|
23,428
|
24,623
|
|||||
|
Prepaid
expenses
|
1,191
|
1,404
|
|||||
|
166,267
|
163,201
|
||||||
|
Income
taxes and tax credits recoverable
|
1,309
|
476
|
|||||
|
Property,
plant and equipment
|
15,695
|
17,392
|
|||||
|
Intangible
assets
|
9,459
|
10,948
|
|||||
|
Goodwill
|
25,675
|
27,142
|
|||||
|
$
|
218,405
|
$
|
219,159
|
||||
|
Liabilities
|
|||||||
|
Current
liabilities
|
|||||||
|
Accounts
payable and accrued liabilities (note 5)
|
$
|
19,302
|
$
|
17,337
|
|||
|
Deferred
revenue
|
2,089
|
1,772
|
|||||
|
Current
portion of long-term debt
|
104
|
107
|
|||||
|
21,495
|
19,216
|
||||||
|
Deferred
revenue
|
3,294
|
2,632
|
|||||
|
Government
grants
|
661
|
723
|
|||||
|
Long-term
debt
|
282
|
354
|
|||||
|
25,732
|
22,925
|
||||||
|
Contingency
(note 6)
|
|||||||
|
Shareholders’
Equity
|
|||||||
|
Share
capital
|
149,578
|
148,921
|
|||||
|
Contributed
surplus
|
4,101
|
3,776
|
|||||
|
Retained
earnings (note 7)
|
6,217
|
−
|
|||||
|
Cumulative
translation adjustment
|
32,777
|
43,537
|
|||||
|
192,673
|
196,234
|
||||||
|
$
|
218,405
|
$
|
219,159
|
||||
EXFO
Electro-Optical Engineering Inc.
(in
thousands of US dollars, except share and per share data)
|
Three
months ended
February
28, 2007
|
Six
months
ended
February
28, 2007
|
Three
months ended
February
28, 2006
|
Six
months
ended
February
28, 2006
|
||||||||||
|
Sales
|
$
|
35,207
|
$
|
70,754
|
$
|
30,066
|
$
|
57,110
|
|||||
|
Cost
of sales (1,2)
|
14,970
|
30,199
|
13,440
|
25,504
|
|||||||||
|
Gross
margin
|
20,237
|
40,555
|
16,626
|
31,606
|
|||||||||
|
Operating
expenses
|
|||||||||||||
|
Selling
and administrative (1)
|
12,184
|
23,726
|
9,303
|
18,361
|
|||||||||
|
Net
research and development (1)
(note 8)
|
4,678
|
9,032
|
3,906
|
7,028
|
|||||||||
|
Amortization
of property, plant and equipment
|
664
|
1,445
|
873
|
1,769
|
|||||||||
|
Amortization
of intangible assets
|
630
|
1,512
|
1,136
|
2,357
|
|||||||||
|
Total
operating expenses
|
18,156
|
35,715
|
15,218
|
29,515
|
|||||||||
|
Earnings
from operations
|
2,081
|
4,840
|
1,408
|
2,091
|
|||||||||
|
Interest
and other income
|
1,105
|
2,277
|
828
|
1,383
|
|||||||||
|
Foreign
exchange gain (loss)
|
352
|
735
|
(213
|
)
|
(531
|
)
|
|||||||
|
Earnings
before income taxes
|
3,538
|
7,852
|
2,023
|
2,943
|
|||||||||
|
Income
taxes (note
9)
|
854
|
1,635
|
657
|
1,222
|
|||||||||
|
Net
earnings for the period
|
$
|
2,684
|
$
|
6,217
|
$
|
1,366
|
$
|
1,721
|
|||||
|
Basic
net earnings per share
|
$
|
0.04
|
$
|
0.09
|
$
|
0.02
|
$
|
0.03
|
|||||
|
Diluted
net earnings per share
|
$
|
0.04
|
$
|
0.09
|
$
|
0.02
|
$
|
0.02
|
|||||
|
Basic
weighted average number of shares outstanding
(000’s)
|
68,839
|
68,807
|
68,591
|
68,581
|
|||||||||
|
Diluted
weighted average number of shares outstanding (000’s)
(note
10)
|
69,546
|
69,465
|
69,152
|
69,105
|
|||||||||
|
(1) Stock-based
compensation costs included in:
|
|||||||||||||
|
Cost
of sales
|
$
|
27
|
$
|
61
|
$
|
30
|
$
|
72
|
|||||
|
Selling
and administrative
|
159
|
356
|
198
|
379
|
|||||||||
|
Net
research and development
|
55
|
109
|
53
|
104
|
|||||||||
|
$
|
241
|
$
|
526
|
$
|
281
|
$
|
555
|
||||||
(2)
The
cost of sales is exclusive of amortization, shown separately.
The
accompanying notes are an integral part of these consolidated financial
statements.
Page
10 of
40
EXFO
Electro-Optical Engineering Inc.
(in
thousands of US dollars)
|
Retained
earnings (Deficit)
|
|||||||
|
Six
months ended
February
28,
|
|||||||
|
2007
|
2006
|
||||||
|
Balance
- Beginning of period
(note 7)
|
$
|
−
|
$
|
(381,846
|
)
|
||
|
Add
|
|||||||
|
Net
earnings for the period
|
6,217
|
1,721
|
|||||
|
Balance
- End of period
|
$
|
6,217
|
$
|
(380,125
|
)
|
||
|
Contributed
surplus
|
|||||||
|
Six
months ended
February
28,
|
|||||||
|
2007
|
2006
|
||||||
|
Balance
- Beginning of period
|
$
|
3,776
|
$
|
2,949
|
|||
|
Add
(deduct)
|
|||||||
|
Stock-based
compensation costs
|
499
|
555
|
|||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise
of stock
awards
|
(174
|
)
|
−
|
||||
|
Balance
- End of period
|
$
|
4,101
|
$
|
3,504
|
|||
The
accompanying notes are an integral part of these consolidated financial
statements.
Page
11 of
40
EXFO
Electro-Optical Engineering Inc.
(in
thousands of US dollars)
|
Three
months ended
February
28, 2007
|
Six
months
ended
February
28, 2007
|
Three
months ended
February
28, 2006
|
Six
months
ended
February
28, 2006
|
||||||||||
|
Cash
flows from operating activities
|
|||||||||||||
|
Net
earnings for the period
|
$
|
2,684
|
$
|
6,217
|
$
|
1,366
|
$
|
1,721
|
|||||
|
Add
(deduct) items not affecting cash
|
|||||||||||||
|
Discount
on short-term investments
|
364
|
778
|
447
|
618
|
|||||||||
|
Stock-based
compensation costs
|
241
|
526
|
281
|
555
|
|||||||||
|
Amortization
|
1,294
|
2,957
|
2,009
|
4,126
|
|||||||||
|
Deferred
revenue
|
745
|
1,239
|
(193
|
)
|
100
|
||||||||
|
Government
grants
|
−
|
(22
|
)
|
−
|
−
|
||||||||
|
5,328
|
11,695
|
3,910
|
7,120
|
||||||||||
|
Change
in non-cash operating items
|
|||||||||||||
|
Accounts
receivable
|
(210
|
)
|
(3,245
|
)
|
4,120
|
927
|
|||||||
|
Income
taxes and tax credits
|
(513
|
)
|
(931
|
)
|
(461
|
)
|
(749
|
)
|
|||||
|
Inventories
|
(510
|
)
|
(129
|
)
|
(1,775
|
)
|
(2,908
|
)
|
|||||
|
Prepaid
expenses
|
133
|
135
|
88
|
(28
|
)
|
||||||||
|
Accounts
payable and accrued liabilities
|
2,736
|
2,772
|
(446
|
)
|
1,972
|
||||||||
|
6,964
|
10,297
|
5,436
|
6,334
|
||||||||||
|
Cash
flows from investing activities
|
|||||||||||||
|
Additions
to short-term investments
|
(296,237
|
)
|
(490,503
|
)
|
(279,670
|
)
|
(411,045
|
)
|
|||||
|
Proceeds
from disposal and maturity of short-term investments
|
291,413
|
482,916
|
288,500
|
420,899
|
|||||||||
|
Additions
to property, plant and equipment and intangible assets
|
(835
|
)
|
(1,646
|
)
|
(933
|
)
|
(1,568
|
)
|
|||||
|
Net
proceeds from disposal of property, plant and equipment
|
−
|
1,228
|
−
|
−
|
|||||||||
|
Business
combination (note 3)
|
−
|
−
|
(17,497
|
)
|
(17,497
|
)
|
|||||||
|
(5,659
|
)
|
(8,005
|
)
|
(9,600
|
)
|
(9,211
|
)
|
||||||
|
Cash
flows from financing activities
|
|||||||||||||
|
Repayment
of long-term debt
|
(24
|
)
|
(51
|
)
|
(42
|
)
|
(74
|
)
|
|||||
|
Exercise
of stock options
|
362
|
483
|
137
|
156
|
|||||||||
|
338
|
432
|
95
|
82
|
||||||||||
|
Effect
of foreign exchange rate changes on cash
|
(276
|
)
|
(469
|
)
|
359
|
453
|
|||||||
|
Change
in cash
|
1,367
|
2,255
|
(3,710
|
)
|
(2,342
|
)
|
|||||||
|
Cash
- Beginning of period
|
7,741
|
6,853
|
8,487
|
7,119
|
|||||||||
|
Cash
- End of period
|
$
|
9,108
|
$
|
9,108
|
$
|
4,777
|
$
|
4,777
|
|||||
The
accompanying notes are an integral part of these consolidated financial
statements.
Page
12 of
40
EXFO
Electro-Optical Engineering Inc.
Notes
to
Unaudited Interim Consolidated Financial
Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
| 1. |
Interim
financial information
|
The
financial information as at February 28, 2007 and for the three- and six-month
periods ended February 28, 2006 and 2007 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. 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
|
In
January 2005, the Canadian Institute of Chartered Accountants (CICA) issued
four
new accounting standards in relation to financial instruments: Section 3855,
“Financial Instruments - Recognition and Measurement”; Section 3865, “Hedges”;
Section 1530, “Comprehensive Income”; and Section 3251, “Equity”.
Section
3855 expands on Section 3860, “Financial Instruments - Disclosure and
Presentation”, by prescribing when a financial instrument is to be
recognized on the balance sheet and at what amount. It also specifies how
financial instrument gains and losses are to be presented in the financial
statements.
Section
3865 provides an alternative to Section 3855 for entities that choose to
designate qualifying transactions as hedges for accounting purposes. It replaces
and expands on Accounting Guideline 13, “Hedging Relationships”, and on the
hedging guidance in Section 1650, “Foreign Currency Translation”, by specifying
how hedge accounting is applied and what disclosures it requires.
Section
1530, “Comprehensive Income”, introduces a new requirement to temporarily
present certain gains and losses outside net income.
Consequently,
Section 3250, “Surplus”, has been revised as Section 3251, “Equity”.
Sections
1530, 3251, 3855 and 3865 apply to fiscal years beginning on or after October
1,
2006. The company will adopt these new standards on September 1, 2007. Although
the final adjustments will be based on the financial instruments that the
company will be a party to on the adoption date, the company is currently
assessing the effects of these new standards and impacts consistent with
the
adjustments described under note 20 item b) of the company’s most recent annual
consolidated financial statements are expected.
| 3. |
Business
Combination
|
On
January 26, 2006, the company acquired substantially all the assets of
Consultronics Limited. Based in Toronto, Canada, and with operations in the
United Kingdom and Hungary, Consultronics was a privately held company
specializing in x-Digital Subscriber Line (xDSL), Internet Protocol TV and
Voice-over-Internet Protocol (VoIP) test solutions for broadband access
networks.
This
acquisition was settled for a total cash consideration valued at $19,093,000,
or
$18,838,000 net of $255,000 of cash acquired. The total consideration included
severance expenses of $660,000 for the termination of employees of the acquired
business as well as other acquisition-related costs of
$822,000.
EXFO
Electro-Optical Engineering Inc.
Notes
to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
This
acquisition was accounted for using the purchase method and, consequently,
the
results of operations of the acquired business have been included in the
consolidated statements of earnings of the company since January 26, 2006,
being
the date of acquisition.
The
purchase price, including acquisition-related costs, was allocated based
on the
estimated fair value of acquired net assets at the date of acquisition as
follows:
|
Assets
acquired
|
||||
|
Current
assets
|
$
|
5,135
|
||
|
Property,
plant and equipment
|
3,115
|
|||
|
Core
technology
|
8,709
|
|||
|
Current
liabilities assumed
|
(2,826
|
)
|
||
|
Loans
assumed
|
(402
|
)
|
||
|
Net
identifiable assets acquired
|
13,731
|
|||
|
Goodwill
|
5,107
|
|||
|
Purchase
price, net of cash acquired
|
$
|
18,838
|
||
Acquired
core technology is amortized on a straight-line basis over its estimated
useful
life of five years.
This
business, including acquired goodwill, reports to the Telecom Division. Acquired
goodwill is deductible for tax purposes.
| 4. |
Inventories
|
|
As
at
February
28,
2007
|
As
at
August
31,
2006
|
||||||
|
(unaudited)
|
|||||||
|
Raw
materials
|
$
|
12,828
|
$
|
14,353
|
|||
|
Work
in progress
|
1,226
|
1,043
|
|||||
|
Finished
goods
|
9,374
|
9,227
|
|||||
|
$
|
23,428
|
$
|
24,623
|
||||
| 5. |
Accounts
payable and accrued liabilities
|
|
As
at
February
28,
2007
|
As
at
August
31,
2006
|
||||||
|
(unaudited)
|
|||||||
|
Trade
|
$
|
9,848
|
$
|
7,487
|
|||
|
Salaries
and social benefits
|
6,174
|
5,991
|
|||||
|
Warranty
|
789
|
1,006
|
|||||
|
Commissions
|
1,014
|
835
|
|||||
|
Restructuring
charges
|
174
|
691
|
|||||
|
Other
|
1,303
|
1,327
|
|||||
|
$
|
19,302
|
$
|
17,337
|
||||
EXFO
Electro-Optical Engineering Inc.
Notes
to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
Changes
in the warranty provision are as follows:
|
Six
months ended February 28,
|
|||||||
|
2007
|
2006
|
||||||
|
(unaudited)
|
|||||||
|
Balance
- Beginning of period
|
$
|
1,006
|
$
|
725
|
|||
|
Provision
|
408
|
543
|
|||||
|
Settlements
|
(625
|
)
|
(440
|
)
|
|||
|
Addition
from business combination
|
−
|
31
|
|||||
|
Balance
- End of period
|
$
|
789
|
$
|
859
|
|||
Changes
in the restructuring charges payable are as follows:
|
Balance
as at
August
31,
2006
|
Payments
|
Balance
as at
February
28,
2007
|
||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||
|
Fiscal
2006 plan
|
||||||||||
|
Severance
expenses
|
$
|
631
|
$
|
(472
|
)
|
$
|
159
|
|||
|
Fiscal
2003 plan
|
||||||||||
|
Exited
leased facilities
|
60
|
(45
|
)
|
15
|
||||||
|
Total
for all plans
|
$
|
691
|
$
|
(517
|
)
|
$
|
174
|
|||
| 6. |
Contingency
|
On
November 27, 2001, a class action suit was filed in the United States District
Court for the Southern District of New York against the company, four of
the underwriters of its Initial Public Offering and some of its executive
officers pursuant to the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder and Sections 11, 12 and 16 of the Securities Act of
1933.
This class action alleges that the company’s registration statement and
prospectus filed with the Securities and Exchange Commission on June 29,
2000,
contained material misrepresentations and/or omissions resulting from (i)
the
underwriters allegedly soliciting and receiving additional, excessive and
undisclosed commissions from certain investors in exchange for which they
allocated material portions of the shares issued in connection with the
company’s Initial Public Offering; and (ii) the underwriters allegedly
entering into agreements with customers whereby shares issued in connection
with
the company’s Initial Public Offering would be allocated to those customers in
exchange for which customers agreed to purchase additional amounts of shares
in
the after-market at pre-determined prices.
EXFO
Electro-Optical Engineering Inc.
Notes
to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
On
April
19, 2002, the plaintiffs filed an amended complaint containing master
allegations against all of the underwriters in all of the 310 cases included
in
this class action and also filed an amended complaint containing allegations
specific to four of the company’s underwriters, the company and two of its
executive officers. In addition to the allegations mentioned above, the amended
complaint alleges that the underwriters (i) used their analysts to manipulate
the stock market; and (ii) implemented schemes that allowed issuer insiders
to sell their shares rapidly after an initial public offering and benefit
from
high market prices. As concerns the company and its two executive officers
in
particular, the amended complaint alleges that (i) the company’s registration
statement was materially false and misleading because it failed to disclose
the
additional commissions and compensation to be received by underwriters; (ii)
the
two named executive officers learned of or recklessly disregarded the alleged
misconduct of the underwriters; (iii) the two named executive officers had
motive and opportunity to engage in alleged wrongful conduct due to personal
holdings of the company’s stock and the fact that an alleged artificially
inflated stock price could be used as currency for acquisitions; and (iv)
the
two named executive officers, by virtue of their positions with the company,
controlled the company and the contents of the registration statement and
had
the ability to prevent its issuance or cause it to be corrected. The plaintiffs
in this suit seek an unspecified amount for damages suffered.
In
July
2002, the issuers filed a motion to dismiss the plaintiffs’ amended complaint
and a decision was rendered on February 19, 2003. Only one of the claims
against the company was dismissed. On October 8, 2002, the claims against
its officers were dismissed pursuant to the terms of Reservation of Rights
and
Tolling Agreements entered into with the plaintiffs.
In
June
2003, a committee of the company’s Board of Directors conditionally approved a
proposed settlement between the issuer defendants, the individual defendants,
and the plaintiffs. If approved, the settlement would provide, among other
things, a release of the company and of the individual defendants for the
conduct alleged in the action to be wrongful in the amended complaint. The
company would agree to undertake other responsibilities under the settlement,
including agreeing to assign away, not assert, or release certain potential
claims the company may have against its underwriters.
On
June 25, 2004, the Plaintiffs moved for preliminary approval of the
settlement. 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 beginning on November
15, 2005. A settlement fairness hearing was held on April 24, 2006;
however, no ruling has been issued yet by the court.
The
plaintiffs have continued to litigate against the underwriter defendants.
The district court has 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. Because the
company's settlement with the plaintiffs involves the certification of the
case
as a class action as part of the approval process, the impact of the Court
of Appeals' ruling on the company's settlement is unclear. On
January 5, 2007, the plaintiffs filed a petition for rehearing en banc by
the
Second Circuit. That request is still pending.
If
the
court determines that the settlement is fair to the class members, and that
the
settlement classes can be certified, the settlement will be
approved. The
settlement provides that, if the plaintiffs do not obtain any
recovery from the underwriter defendants, the members of the class
action would receive an amount not expected to exceed $2,507,678. Any direct
financial impact plus any legal fees are expected to be borne by the company’s
insurance carriers. However, there can be no assurance that this proposed
settlement would be approved and implemented in its current form, or at
all. Therefore, it is not possible to predict the final outcome of the
case, nor to determine the amount of any possible losses. If the settlement
process fails, 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 February 28, 2007.
EXFO
Electro-Optical Engineering Inc.
Notes
to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and
as
otherwise noted)
| 7. |
Elimination
of deficit
|
On
August
31, 2006, upon the approval of the Board of Directors on that date, the company
eliminated its deficit of $373,711,000 against its share
capital.
| 8. |
Net
research and development
expenses
|
|
Three
months ended
February
28, 2007
|
Six
months ended
February
28, 2007
|
Three
months ended
February
28, 2006
|
Six
months ended
February
28, 2006
|
||||||||||
|
(unaudited)
|
(unaudited)
|
||||||||||||
|
Gross
research and development expenses
|
$
|
5,939
|
$
|
11,448
|
$
|
4,940
|
$
|
8,946
|
|||||
|
Research
and development tax credits and grants
|
(1,261
|
)
|
(2,416
|
)
|
(1,034
|
)
|
(1,918
|
)
|
|||||
|
$
|
4,678
|
$
|
9,032
|
$
|
3,906
|
$
|
7,028
|
||||||
| 9. |
Income
taxes
|
During
the three- and six-month periods ended February 28, 2006 and 2007, the company
recorded income taxes of $657,000, $1,222,000, $854,000 and $1,635,000,
respectively. Most of these income taxes represent income taxes payable at
the
Canadian federal level, which are reduced by research and development tax
credits that are recorded against gross research and development expenses
in the statements of earnings.
The
company records a full valuation allowance against its future income tax
assets
because it is more likely than not that these assets will not be recovered.
This
causes its income tax rate to be distorted in relation to its pre-tax accounting
income.
EXFO
Electro-Optical Engineering Inc.
Notes
to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and
as
otherwise noted)
| 10. |
Earnings
per share
|
The
following table summarizes the reconciliation of the basic weighted average
number of shares outstanding and the diluted weighted average number of shares
outstanding:
|
Three
months ended
February
28, 2007
|
Six
months
ended
February
28, 2007
|
Three
months ended
February
28, 2006
|
Six
months
ended
February
28, 2006
|
||||||||||
|
(unaudited)
|
(unaudited)
|
||||||||||||
|
Basic
weighted average number of shares outstanding (000’s)
|
68,839
|
68,807
|
68,591
|
68,581
|
|||||||||
|
Plus
dilutive effect of:
|
|||||||||||||
|
Stock
options (000’s)
|
468
|
451
|
466
|
446
|
|||||||||
|
Restricted
share units (000’s)
|
190
|
161
|
65
|
51
|
|||||||||
|
Deferred
share units (000’s)
|
49
|
46
|
30
|
27
|
|||||||||
|
Diluted
weighted average number of shares outstanding (000’s)
|
69,546
|
69,465
|
69,152
|
69,105
|
|||||||||
|
Stock
awards excluded from the calculation of diluted weighted average
number of
shares outstanding because their exercise price was greater than
the
average market price of the common shares (000’s)
|
1,213
|
1,299
|
1,829
|
1,816
|
|||||||||
| 11. |
Segment
information
|
The
company is organized under two reportable segments: the Telecom Division
and the
Life Sciences and Industrial Division. The Telecom Division offers integrated
test solutions to network service providers, cable TV operators, system vendors
and component manufacturers throughout the global telecommunications industry.
The Life Sciences and Industrial Division mainly leverages developed and
acquired core telecom technologies for high-precision assembly and research
sectors.
EXFO
Electro-Optical Engineering Inc.
Notes
to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
The
following tables set out information by segment:
|
Three
months ended February 28, 2007
|
Six
months ended February 28, 2007
|
||||||||||||||||||
|
Telecom
Division
|
Life
Sciences and Industrial Division
|
Total
|
Telecom
Division
|
Life
Sciences and Industrial Division
|
Total
|
||||||||||||||
|
(unaudited)
|
(unaudited)
|
||||||||||||||||||
|
Sales
|
$
|
29,297
|
$
|
5,910
|
$
|
35,207
|
$
|
58,819
|
$
|
11,935
|
$
|
70,754
|
|||||||
|
Earnings
from operations
|
$
|
1,078
|
$
|
1,003
|
$
|
2,081
|
$
|
2,881
|
$
|
1,959
|
$
|
4,840
|
|||||||
|
Unallocated
items:
|
|||||||||||||||||||
|
Interest
and other income
|
1,105
|
2,277
|
|||||||||||||||||
|
Foreign
exchange gain
|
352
|
735
|
|||||||||||||||||
|
Earnings
before income taxes
|
3,538
|
7,852
|
|||||||||||||||||
|
Income
taxes
|
854
|
1,635
|
|||||||||||||||||
|
Net
earnings for the period
|
$
|
2,684
|
$
|
6,217
|
|||||||||||||||
|
Three
months ended February 28, 2006
|
Six
months ended February 28, 2006
|
||||||||||||||||||
|
Telecom
Division
|
Life
Sciences and Industrial Division
|
Total
|
Telecom
Division
|
Life
Sciences and Industrial Division
|
Total
|
||||||||||||||
|
(unaudited)
|
(unaudited)
|
||||||||||||||||||
|
Sales
|
$
|
25,254
|
$
|
4,812
|
$
|
30,066
|
$
|
47,330
|
$
|
9,780
|
$
|
57,110
|
|||||||
|
Earnings
from operations
|
$
|
1,220
|
$
|
188
|
$
|
1,408
|
$
|
1,708
|
$
|
383
|
$
|
2,091
|
|||||||
|
Unallocated
items:
|
|||||||||||||||||||
|
Interest
and other income
|
828
|
1,383
|
|||||||||||||||||
|
Foreign exchange loss
|
(213
|
)
|
(531
|
)
|
|||||||||||||||
|
Earnings
before income taxes
|
2,023
|
2,943
|
|||||||||||||||||
|
Income
taxes
|
657
|
1,222
|
|||||||||||||||||
|
Net
earnings for the period
|
$
|
1,366
|
$
|
1,721
|
|||||||||||||||
EXFO
Electro-Optical Engineering Inc.
Notes
to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
Total
assets by reportable segment are detailed as follows:
|
As
at
February
28,
2007
|
As
at
August
31,
2006
|
||||||
|
(unaudited)
|
|||||||
|
Total
assets
|
|||||||
|
Telecom
Division
|
$
|
91,124
|
$
|
93,853
|
|||
|
Life
Sciences and Industrial Division
|
9,205
|
11,339
|
|||||
|
Unallocated
assets
|
118,076
|
113,967
|
|||||
|
$
|
218,405
|
$
|
219,159
|
||||
Unallocated
assets are comprised of cash, short-term investments and income taxes and
tax
credits recoverable.
| 12. |
Stock-based
compensation
|
On
September 1, 2003, the company adopted the amendment made to the CICA Handbook
Section 3870, “Stock-Based Compensation and Other Stock-Based Payments”.
Accordingly, employee stock awards granted on or after
September 1, 2003, were accounted for using the fair value-based
method. However, if the fair value-based method had been applied to employee
stock awards granted prior to September 1, 2003, and outstanding as at February
28, 2006 and 2007, the pro forma net earnings per share would have been the
same as the net earnings per share for all reporting periods.
| 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 20 to the company’s most recent annual
consolidated financial statements. This note describes significant changes
occurring since the most recent annual consolidated financial statements
and
provides a quantitative analysis of all significant differences. All disclosures
required in annual financial statements under U.S. GAAP and Regulation S-X
of
the Securities and Exchange Commission in the United States have not been
provided in these interim consolidated financial statements.
EXFO
Electro-Optical Engineering Inc.
Notes
to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
Comprehensive
income (loss) under U.S. GAAP
Comprehensive
income (loss) under U.S. GAAP is as follows:
|
Three
months ended
February
28, 2007
|
Six
months ended
February
28, 2007
|
Three
months ended
February
28, 2006
|
Six
months ended
February
28, 2006
|
||||||||||
|
(unaudited)
|
(unaudited)
|
||||||||||||
|
Net
earnings for the period in accordance with Canadian GAAP and U.S.
GAAP
|
$
|
2,684
|
$
|
6,217
|
$
|
1,366
|
$
|
1,721
|
|||||
|
Other
comprehensive income (loss)
|
|||||||||||||
|
Foreign
currency translation adjustment
|
(4,472
|
)
|
(10,304
|
)
|
4,263
|
7,311
|
|||||||
|
Unrealized
gains (losses) on forward exchange contracts
|
(3,718
|
)
|
(5,793
|
)
|
1,699
|
2,796
|
|||||||
|
Reclassification
of realized gains on forward exchange contracts in net
earnings
|
(108
|
)
|
(844
|
)
|
(582
|
)
|
(1,017
|
)
|
|||||
|
Comprehensive
income (loss) under U.S. GAAP
|
$
|
(5,614
|
)
|
$
|
(10,724
|
)
|
$
|
6,746
|
$
|
10,811
|
|||
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
February
28,
2007
|
As
at
August
31,
2006
|
||||||
|
(unaudited)
|
|||||||
|
Shareholders’
equity in accordance with Canadian GAAP
|
$
|
192,673
|
$
|
196,234
|
|||
|
Forward
exchange contracts
|
(1,186
|
)
|
5,451
|
||||
|
Goodwill
|
(11,465
|
)
|
(11,908
|
)
|
|||
|
Shareholders’
equity in accordance with U.S. GAAP
|
$
|
180,022
|
$
|
189,777
|
|||
EXFO
Electro-Optical Engineering Inc.
Notes
to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
The
following table summarizes the shareholders’ equity activity under U.S. GAAP
since August 31, 2006:
|
Share
capital
|
Contributed
surplus
|
Deficit
|
Deferred
stock-based
compensation costs
|
Other
capital
|
Accumulated
other comprehensive income
|
Shareholders’
equity
|
||||||||||||||||
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
||||||||||||||||
|
Balance as at August 31, 2006
|
$
|
598,421
|
$
|
1,537
|
$
|
(458,944
|
)
|
$
|
(1,371
|
)
|
$
|
5,504
|
$
|
44,630
|
$
|
189,777
|
||||||
|
Net earnings for the period
|
−
|
−
|
3,533
|
−
|
−
|
−
|
3,533
|
|||||||||||||||
|
Stock-based compensation costs
|
−
|
−
|
−
|
(347
|
)
|
593
|
−
|
246
|
||||||||||||||
|
Foreign currency translation adjustment
|
−
|
−
|
−
|
−
|
−
|
(5,832
|
)
|
(5,832
|
)
|
|||||||||||||
|
Unrealized losses on forward exchange contracts
|
−
|
−
|
−
|
−
|
−
|
(2,811
|
)
|
(2,811
|
)
|
|||||||||||||
|
Exercise of stock options
|
121
|
−
|
−
|
−
|
−
|
−
|
121
|
|||||||||||||||
|
Reclassification of stock-based compensation costs upon exercise
of stock
awards
|
47
|
−
|
−
|
−
|
(47
|
)
|
−
|
−
|
||||||||||||||
|
Balance as at November 30, 2006
|
$
|
598,589
|
$
|
1,537
|
$
|
(455,411
|
)
|
$
|
(1,718
|
)
|
$
|
6,050
|
$
|
35,987
|
$
|
185,034
|
||||||
|
Net earnings for the period
|
−
|
−
|
2,684
|
−
|
−
|
−
|
2,684
|
|||||||||||||||
|
Stock-based compensation costs
|
−
|
−
|
−
|
(510
|
)
|
750
|
−
|
240
|
||||||||||||||
|
Foreign currency translation adjustment
|
−
|
−
|
−
|
−
|
−
|
(4,472
|
)
|
(4,472
|
)
|
|||||||||||||
|
Unrealized losses on forward exchange contracts
|
−
|
−
|
−
|
−
|
−
|
(3,826
|
)
|
(3,826
|
)
|
|||||||||||||
|
Exercise of stock options
|
362
|
−
|
−
|
−
|
−
|
−
|
362
|
|||||||||||||||
|
Reclassification of stock-based compensation costs upon exercise
of
stock awards
|
127
|
−
|
−
|
−
|
(127
|
)
|
−
|
−
|
||||||||||||||
|
Balance as at February 28, 2007
|
$
|
599,078
|
$
|
1,537
|
$
|
(452,727
|
)
|
$
|
(2,228
|
)
|
$
|
6,673
|
$
|
27,689
|
$
|
180,022
|
||||||
EXFO
Electro-Optical Engineering Inc.
Notes
to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
Accumulated
other comprehensive income is comprised of the following:
|
As
at
February
28,
2007
|
As
at
August
31,
2006
|
||||||
|
(unaudited)
|
|||||||
|
Foreign
currency translation adjustment
|
|||||||
|
Current
period
|
$
|
(10,304
|
)
|
$
|
12,322
|
||
|
Cumulative
effect of prior periods
|
39,179
|
26,857
|
|||||
|
28,875
|
39,179
|
||||||
|
Unrealized
gains (losses) on forward exchange contracts
|
|||||||
|
Current
period
|
(6,637
|
)
|
2,514
|
||||
|
Cumulative
effect of prior periods
|
5,451
|
2,937
|
|||||
|
(1,186
|
)
|
5,451
|
|||||
|
$
|
27,689
|
$
|
44,630
|
||||
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 refundable against taxable income are recorded in the income
taxes. These tax credits amounted to $659,000, $1,195,000, $776,000, and
$1,547,000 for the three- and six- month periods ended February 28, 2006
and 2007, respectively. This difference has no impact on the net earnings
and the net earnings per share for the reporting periods.
Statements
of cash flows
For
the
three- and six-month periods ended February 28, 2006 and 2007, 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
In
May
2005, the Financial Accounting Standard Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) 154, “Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No.
3”.
This statement replaces APB Opinion No. 20, “Accounting Changes”,
and FASB
Statement No. 3, “Reporting Accounting Changes in Interim Financial
Statements”,
and
changes the requirements for the accounting and reporting of a change in
accounting principle. This statement applies to all voluntary changes
in accounting principle. It also applies to changes required by an
accounting pronouncement in the unusual instance that the pronouncement does
not
include specific transition provisions. In general, this statement requires
a
company to account for the adoption of a new accounting policy by applying
the
new principle to prior accounting periods as if that principle had always
been
adopted. The company adopted this new statement on September 1, 2006, and
its
adoption had no effect on its financial statements.
In
June
2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for
Uncertainty in Income Taxes”, which clarifies the accounting for uncertainties
in income taxes recognized in accordance with SFAS 109, “Accounting for Income
Taxes”. The interpretation is effective for fiscal years beginning after
December 15, 2006. The company will adopt this interpretation on September
1,
2007, and is currently assessing the impact its adoption will have on its
financial statements.
EXFO
Electro-Optical Engineering Inc.
Notes
to
Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
On
September 15, 2006, the FASB issued SFAS 157, “Fair Value Measurements”, which
establishes a framework for measuring fair value in GAAP, and is applicable
to
other accounting pronouncements, in which fair value is considered to be
the
relevant measurement attribute. SFAS 157 also expands disclosures about fair
value measurement. This statement is effective for fiscal years beginning
after
November 15, 2007. The company will adopt this statement on
September 1, 2008, and has not yet assessed the impact its adoption
will have on its financial statements.
On
February 15, 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, but the company has not yet determined if it will adopt
this
statement, nor the impact it might have on its financial statements. Should
the
company decide to adopt SFAS 159, it will be adopted on
September 1, 2008.
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 or circumstances
are
forward-looking statements. They are not guarantees of future performance
and
involve risks and uncertainties. Actual results may differ materially from
those
in the forward-looking statements due to various factors, including
consolidation in the global telecommunications test and measurement 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 regard to customer orders and the timing of such
orders;
our ability to successfully integrate our acquired and to-be-acquired businesses
and to operate and manage businesses in foreign countries; the retention
of key
technical and management personnel; and future economic, competitive and
market
conditions. Assumptions relating to the foregoing involve judgments and risks,
all of which are difficult or impossible to predict accurately 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 commission. 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 at the date of
this
document. 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 March 28, 2007.
All
dollar amounts are expressed in US dollars, except as otherwise
noted.
INDUSTRY
OVERVIEW
Global
market demand for telecom test and measurement equipment should remain strong
in
the years to come as most network service providers (NSPs) are reassigning
their
capital expenditures to convert their networks to converged Internet protocol
(IP)-based services, and to significantly increase network capacity to enable
triple-play (voice, data and video) offerings. These market forces create
needs
for differentiated test solutions to help NSPs accelerate deployment and
ensure
service quality in their network build-outs.
With
the
ongoing globalization of the world’s economy and the emergence of new consumer
markets, NSPs are poised to capitalize on growing demand for communications
and
entertainment services. In 2006, some smaller telecom operators launched
broadcast-quality video services based on IP communications. This technology,
better known as IPTV, allows telephone companies (telcos) to efficiently
offer
TV, HDTV and interactive TV services to their broadband subscribers. Tier-1
and Tier-2 telcos are expected to launch similar IPTV services on a large
scale
in calendar 2007. While Web-based streaming video is offered for free on
a
best-effort basis, IPTV, whom many regard as the broadband “killer application,”
will require a high level of performance to ensure a quality user experience.
NSPs, after all, do not want customer churn to prevent a meaningful return
on
their massive investments.
To
deliver a wide range of differentiated IP services, NSPs will continue
transforming their legacy, circuit-switched networks into highly efficient,
flexible and scalable packet-based IP architectures. Telcos and cablecos
have
already proven that they can generate significant revenues from higher-margin
services on hybrid networks, while reducing operating costs. IPTV should
only
accelerate the migration towards fully converged, IP-based networks, since
it
typically allows NSPs to nearly double average revenue per user (ARPU).
The
increasing reliance on telecom and IP-related services will continue driving
bandwidth consumption, thus pushing the deployment of fiber deeper into access
networks. Competition between telcos and cablecos has intensified as triple-play
offerings are announced almost daily. Hybrid architectures combining copper
and
fiber (fiber-to-the-curb, or FTTC, and fiber-to-the-node, or FTTN), will
keep
expanding worldwide, since this is the quickest and least expensive method
to
increase bandwidth. To remain competitive with cablecos, telcos are migrating
from former asymmetric digital subscriber line (ADSL), to current ADSL2+,
and
onto future very-high-data-rate digital subscriber line standard version
2
(VDSL2) technologies as interoperability becomes a reality. Telcos, however,
will increasingly opt for all-fiber, passive optical network (PON)-based
architectures (fiber-to-the-premises, or FTTP), with GPON becoming their
preferred implementation, to meet heightened bandwidth requirements and to
future-proof their networks. These decisions will apply not only to green-field
deployments and high-rise buildings, but also to larger-scale rollouts as
operating costs are less than FTTC and FTTN and cost of deployments are falling.
We are still in the early stages of building access networks around the world.
Metro
network deployments, taking advantage of carrier-grade Ethernet and
metro-Ethernet technologies, are moving ahead to handle large increases in
bandwidth consumption in access networks. These network upgrades, in turn,
will
eventually place a strain on long-haul networks, where excess capacity created
by massive overspending in the late-90s is gradually being consumed. NSPs
are
more than ever committed to deploying next-generation SONET/SDH transport
technologies, while 40 Gb/s deployments are expected to start in early 2008,
creating new testing requirements at the optical and protocol layers.
These
key
market trends affected multiple segments of the global telecommunications
supply
chain in the last few months. System
vendors benefited from orders by both telcos and cablecos for next-generation,
converged IP networks as well as from major investments by telcos in access
networks. Component vendors saw demand for optical components that support
FTTx
and IP-based systems. Some test and measurement equipment vendors attracted
the
attention of telcos, cablecos, system manufacturers and component vendors,
especially ones offering test solutions for IP networking and/or FTTx
applications.
COMPANY
OVERVIEW
We
reported sales of $35.2 million in the second quarter of fiscal 2007, which
represented an increase of 17.1% year-over-year. At the half-way mark of
our
fiscal year, sales reached $70.8 million for a growth of 23.9% year-over-year.
In comparison, our corporate performance metric for sales growth for fiscal
2007
was established at 20% year-over-year. Sales during the first half of fiscal
2007 included those of Consultronics Limited, a leading supplier of xDSL,
IPTV
and VoIP test equipment for copper-based broadband access networks, which
was
integrated into our Telecom Division following the closing of the acquisition
in
January 2006. Excluding these sales, we would have reported organic growth
of
16.7% year-over-year at the half-way mark of fiscal 2007.
Looking
at the bottom line, we recorded GAAP net earnings of $2.7 million, or $0.04
per
diluted share, in the second quarter of fiscal 2007 compared to $1.4
million, or $0.02 per diluted share, for the same period in 2006. Midway
through
our fiscal year, we generated GAAP net earnings of $6.2 million, or $0.09
per
diluted share, compared to $1.7 million, or $0.02 per diluted share, for
the
same period in 2006. As for earnings from operations, they reached 5.9% in
the
second quarter of fiscal 2007 and 6.8% midway through the fiscal year, close
to
our stated goal of 7% for the whole fiscal year.
During
the second quarter of fiscal 2007, we launched seven new products including
Internet protocol television (IPTV) test capabilities for our Packet Blazer
Ethernet product line, an enhanced Packet Blazer test module for advanced
Ethernet and higher-layer test applications, a very-high-speed digital
subscriber loop, version 2 (VDSL2) test module to characterize IPTV and
high-definition television (HDTV) over copper access links, a software upgrade
for optical time-domain reflectometry (OTDR) characterization using the FTB-200
Compact Platform, as well as a new variable optical attenuator (VOA) for
optical
network testing and active component manufacturing
applications.
Subsequent
to the quarter-end, we received a US patent entitled “Method and Apparatus for
Testing Optical Networks,” which serves as the basis of our series of passive
optical network (PON) power meters designed for field-testing applications.
These test solutions are widely used by technicians characterizing
fiber-to-the-home (FTTH) PONs, particularly near the optical network terminal
(ONT) at the customer premises where triple-play services need to be
activated.
During
the first half of fiscal 2007, we have launched 12 new products. Sales
derived from products that have been on the market two years or less represented
30.5% of total sales in the first half of fiscal 2007. Our published goal
for
fiscal 2007 is 35%.
During
the first quarter of fiscal 2007, we implemented SAP at the Toronto, Canada
and
the Southampton, United Kingdom facilities of newly acquired Consultronics.
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 2007, 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 will be adopted in fiscal 2008.
In
January 2005, the Canadian Institute of Chartered Accountants (CICA) issued
four
new accounting standards in relation to financial instruments: Section 3855,
"Financial Instruments - Recognition and Measurement"; Section 3865, "Hedges";
Section 1530, "Comprehensive Income"; and Section 3251, "Equity".
Section
3855 expands on Section 3860, "Financial Instruments - Disclosure and
Presentation", by prescribing when a financial instrument is to be recognized
on
the balance sheet and at what amount. It also specifies how financial instrument
gains and losses are to be presented in the financial statements.
Section
3865 provides an alternative to Section 3855 for entities that choose to
designate qualifying transactions as hedges for accounting purposes. It replaces
and expands on Accounting Guideline 13, "Hedging Relationships", and on the
hedging guidance in Section 1650, "Foreign Currency Translation", by specifying
how hedge accounting is applied and what disclosures it requires.
Section
1530, "Comprehensive Income", introduces a new requirement to temporarily
present certain gains and losses outside net income.
Consequently,
Section 3250, "Surplus", has been revised as Section 3251, "Equity".
Sections
1530, 3251, 3855 and 3865 apply to fiscal years beginning on or after October
1,
2006. We will adopt these new standards on September 1, 2007. Although the
final
adjustments will be based on the financial instruments that we will be a
party
to on the adoption date, we are currently assessing the effects of these
new
standards, and impacts consistent with the adjustments described under note
20
item b) of our most recent annual consolidated financial statements are
expected.
RESULTS
OF OPERATIONS
The
following discussion and analysis of our consolidated financial condition
and
results of operations for the periods ended February 28, 2006 and 2007, 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 the 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 tables set forth
interim consolidated statements of earnings data in thousands of US dollars,
except per share data, and as a percentage of sales for the periods
indicated:
|
Three
months ended
February
28, 2007
|
Three
months ended
February
28, 2006
|
Six
months
ended
February
28, 2007
|
Six
months
ended
February
28, 2006
|
||||||||||
|
(unaudited)
|
(unaudited)
|
||||||||||||
|
Sales
|
$
|
35,207
|
$
|
30,066
|
$
|
70,754
|
$
|
57,110
|
|||||
|
Cost
of sales (1)
|
14,970
|
13,440
|
30,199
|
25,504
|
|||||||||
|
Gross
margin
|
20,237
|
16,626
|
40,555
|
31,606
|
|||||||||
|
Operating
expenses
|
|||||||||||||
|
Selling
and administrative
|
12,184
|
9,303
|
23,726
|
18,361
|
|||||||||
|
Net
research and development
|
4,678
|
3,906
|
9,032
|
7,028
|
|||||||||
|
Amortization
of property, plant and equipment
|
664
|
873
|
1,445
|
1,769
|
|||||||||
|
Amortization
of intangible assets
|
630
|
1,136
|
1,512
|
2,357
|
|||||||||
|
Total
operating expenses
|
18,156
|
15,218
|
35,715
|
29,515
|
|||||||||
|
Earnings
from operations
|
2,081
|
1,408
|
4,840
|
2,091
|
|||||||||
|
Interest
and other income
|
1,105
|
828
|
2,277
|
1,383
|
|||||||||
|
Foreign
exchange gain (loss)
|
352
|
(213
|
)
|
735
|
(531
|
)
|
|||||||
|
Earnings
before income taxes
|
3,538
|
2,023
|
7,852
|
2,943
|
|||||||||
|
Income
taxes
|
854
|
657
|
1,635
|
1,222
|
|||||||||
|
Net
earnings for the period
|
$
|
2,684
|
$
|
1,366
|
$
|
6,217
|
$
|
1,721
|
|||||
|
Basic
net earnings per share
|
$
|
0.04
|
$
|
0.02
|
$
|
0.09
|
$
|
0.03
|
|||||
|
Diluted
net earnings per share
|
$
|
0.04
|
$
|
0.02
|
$
|
0.09
|
$
|
0.02
|
|||||
|
Segmented
information:
|
|||||||||||||
|
Sales:
|
|||||||||||||
|
Telecom
Division
|
$
|
29,297
|
$
|
25,254
|
$
|
58,819
|
$
|
47,330
|
|||||
|
Life
Sciences and Industrial Division
|
5,910
|
4,812
|
11,935
|
9,780
|
|||||||||
|
$
|
35,207
|
$
|
30,066
|
$
|
70,754
|
$
|
57,110
|
||||||
|
Earnings
from operations:
|
|||||||||||||
|
Telecom
Division
|
$
|
1,078
|
$
|
1,220
|
$
|
2,881
|
$
|
1,708
|
|||||
|
Life
Sciences and Industrial Division
|
1,003
|
188
|
1,959
|
383
|
|||||||||
|
$
|
2,081
|
$
|
1,408
|
$
|
4,840
|
$
|
2,091
|
||||||
|
Research
and development data:
|
|||||||||||||
|
Gross
research and development
|
$
|
5,939
|
$
|
4,940
|
$
|
11,448
|
$
|
8,946
|
|||||
|
Net
research and development
|
$
|
4,678
|
$
|
3,906
|
$
|
9,032
|
$
|
7,028
|
|||||
(1)
The
cost of sales is exclusive of amortization, shown separately.
|
Three
months ended
February
28, 2007
|
Three
months ended
February
28, 2006
|
Six
months
ended
February
28, 2007
|
Six
months
ended
February
28, 2006
|
||||||||||
|
(unaudited)
|
(unaudited)
|
||||||||||||
|
Sales
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
|||||
|
Cost
of sales (1)
|
42.5
|
44.7
|
42.7
|
44.7
|
|||||||||
|
Gross
margin
|
57.5
|
55.3
|
57.3
|
55.3
|
|||||||||
|
Operating
expenses
|
|||||||||||||
|
Selling
and administrative
|
34.6
|
30.9
|
33.5
|
32.2
|
|||||||||
|
Net
research and development
|
13.3
|
13.0
|
12.8
|
12.3
|
|||||||||
|
Amortization
of property, plant and equipment
|
1.9
|
2.9
|
2.0
|
3.0
|
|||||||||
|
Amortization
of intangible assets
|
1.8
|
3.8
|
2.2
|
4.1
|
|||||||||
|
Total
operating expenses
|
51.6
|
50.6
|
50.5
|
51.6
|
|||||||||
|
Earnings
from operations
|
5.9
|
4.7
|
6.8
|
3.7
|
|||||||||
|
Interest
and other income
|
3.1
|
2.7
|
3.2
|
2.4
|
|||||||||
|
Foreign
exchange gain (loss)
|
1.0
|
(0.7
|
)
|
1.1
|
(0.9
|
)
|
|||||||
|
Earnings
before income taxes
|
10.0
|
6.7
|
11.1
|
5.2
|
|||||||||
|
Income
taxes
|
2.4
|
2.2
|
2.3
|
2.2
|
|||||||||
|
Net
earnings for the period
|
7.6
|
%
|
4.5
|
%
|
8.8
|
%
|
3.0
|
%
|
|||||
|
Segmented
information:
|
|||||||||||||
|
Sales:
|
|||||||||||||
|
Telecom
Division
|
83.2
|
%
|
84.0
|
%
|
83.1
|
%
|
82.9
|
%
|
|||||
|
Life
Sciences and Industrial Division
|
16.8
|
16.0
|
16.9
|
17.1
|
|||||||||
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
||||||
|
Earnings
from operations:
|
|||||||||||||
|
Telecom
Division
|
3.1
|
%
|
4.1
|
%
|
4.1
|
%
|
3.0
|
%
|
|||||
|
Life
Sciences and Industrial Division
|
2.8
|
0.6
|
2.7
|
0.7
|
|||||||||
|
5.9
|
%
|
4.7
|
%
|
6.8
|
%
|
3.7
|
%
|
||||||
|
Research
and development data:
|
|||||||||||||
|
Gross
research and development
|
16.9
|
%
|
16.4
|
%
|
16.2
|
%
|
15.7
|
%
|
|||||
|
Net
research and development
|
13.3
|
%
|
13.0
|
%
|
12.8
|
%
|
12.3
|
%
|
|||||
(1)
The
cost of sales is exclusive of amortization, shown separately.
SALES
For
the
three months ended February 28, 2007, our global sales increased 17.1% to
$35.2
million from $30.1 million for the same period last year, with an 83%-17%
split
in favor of our Telecom Division.
For
the
six months ended February 28, 2007, our global sales increased 23.9% to
$70.8 million from $57.1 million for the same period last year, with
an 83%-17% split in favor of our Telecom Division.
Telecom
Division
For
the
three months ended February 28, 2007, sales of our Telecom Division increased
16.0% to $29.3 million from $25.3 million for the same period last year.
For
the
six months ended February 28, 2007, sales of our Telecom Division increased
24.3% to $58.8 million from $47.3 million for the same period last year.
During
the second quarter and the first half of fiscal 2007, we posted organic growth
due to some market-share gains in optical and protocol testing and continued
spending in access networks fueled by the competitive dynamic between North
American telephone and cable companies. Also, during the second quarter of
fiscal 2007, we benefited from year-end revenue from our top customer, which
contributed to the increase in sales year-over-year. Sales made to this customer
represented 25.7% of our telecom sales in the second quarter of fiscal 2007,
compared to 10.2% for the same period last year. They represented 21.2% of
our
telecom sales for the first half of fiscal 2007, compared to 13.0% for the
same
period last year.
In
addition, Consultronics, which we acquired in January 2006, contributed to
the
increase in our telecom sales year-over-year (for both the second quarter
and
the first half of 2007). Although sales of Consultronics products were lower
than at the time of the acquisition, we expect sales of these test solutions
to
increase over time. In addition, these solutions are now better leveraged
by our
global sales channels and we are also developing and launching new products
that
will integrate Consultronics’ core knowledge and intellectual property. It
should be noted that during the second quarter and the first half of fiscal
2007, a significant portion of sales of Consultronics’ products were made to our
top customer.
Finally,
during the second quarter and the first half of fiscal 2007, we benefited
from a
significant increase in the demand for our protocol test solutions, which
also
contributed to the increase in our telecom sales year-over-year. Sales of
our
protocol test solutions represented more than 10% of our telecom sales for
the
second quarter and the first half of fiscal 2007. Based on these data points
and
given the much larger addressable market for protocol test solutions, we
believe
that protocol revenues should grow faster than our optical revenues.
Life
Sciences and Industrial Division
For
the
three months ended February 28, 2007, sales of our Life Sciences and Industrial
Division increased 22.8% to $5.9 million from $4.8 million for the same period
last year.
For
the
six months ended February 28, 2007, sales of our Life Sciences and Industrial
Division increased 22.0% to $11.9 million from $9.8 million for the same
period
last year.
The
increase in sales in fiscal 2007, compared to 2006, is mainly due to increased
sales activities in the curing and the fluorescence illumination
markets.
Net
Bookings
Overall,
for the two divisions, net accepted orders increased 28.8% to $36.5 million
in
the second quarter of fiscal 2007 from $28.3 million for the same period
last
year. Our book-to-bill ratio reached 1.04 in the second quarter of fiscal
2007,
compared to 0.94 for the same period last year. In the previous quarter,
the net
book-to-bill ratio was 1.04. Our 28.8% increase in net accepted orders in
the
second quarter of fiscal 2007, compared to the same period last year, reflects
the increased demand in our test solutions (especially in the Americas and
in
the Europe-Middle East-Africa (EMEA) regions), some market-share
gains in
the
telecommunications and life sciences markets as well as the improvement in
the
telecommunications market environment.
Geographic
distribution
For
the
three months ended February 28, 2007, sales to the Americas, Europe-Middle
East-Africa (EMEA) and Asia-Pacific (APAC) accounted for 57%, 31% and 12%
of
global sales, respectively. For the corresponding period last year, sales
to the
Americas, EMEA and APAC accounted for 57%, 26% and 17% of global sales,
respectively. For the six months ended February 28, 2007, sales to the Americas,
EMEA and APAC accounted for 57%, 30% and 13% of global sales, respectively.
For
the corresponding period last year, sales to the Americas, EMEA and APAC
accounted for 58%, 26% and 16% of global sales, respectively.
During
the second quarter of fiscal 2007, sales to EMEA and the Americas increased
(in
dollars) 38.8% and 16.4%, respectively, while sales to APAC decreased 13.6%.
During the first half of fiscal 2007, sales to EMEA, the Americas and APAC
increased (in dollars) 44.5%, 20.8% and 2.3%, respectively.
The
significant increase in sales in EMEA market, so far in fiscal 2007, is apparent
in the results for all our product lines, following our efforts to aggressively
develop this market in the last several years and investment in stronger
support
and service operations in this region. Many Tier-1 carriers in EMEA are
migrating their traditional circuit-switched core networks to higher speed,
dense wavelength division multiplexing (DWDM) and Next- Generation packet-based
architectures, which is creating a market demand for our protocol test solutions
and fiber characterization test kits.
In
the
Americas, sales to our top customer, who is located in the United States,
significantly increased in dollars in the second quarter and the first half
of
fiscal 2007, compared to the corresponding periods last year. In the second
quarter of fiscal 2007, we benefited from year-end revenue from this Tier-1
customer, which contributed to the significant increase in sales year-over-year.
Also, this customer, along with other leading carriers, have continued their
investments in access networks, fueled by the competitive pressure from cable
companies to offer triple-play services (voice, data and video) to
end-customers. Finally, Consultronics, whose customers are mainly located
in the
Americas, helped increase our sales to the Americas, year-over-year.
A
significant portion of our sales to the APAC market are made through tenders,
which vary in number and importance quarter-over-quarter, and typically
experience seasonal trends. Also, we face significant competitive pricing
pressure in this area, and as a result, we were unsuccessful on winning some
deals.
Through
our two divisions, we sell our products to a broad range of customers, including
network service providers, cable TV operators, optical system and component
manufacturers, as well as customers in the life sciences and high-precision
assembly sectors. During the three months ended February 28, 2007, our top
customer accounted for 21.4% ($7.5 million) of our global sales, and our
top
three customers accounted for 27.7% of our global sales. For the corresponding
period last year, no customer accounted for more than 10% of our global sales,
and our top three customers accounted for 20.3% of our global sales. For
the six
months ended February 28, 2007, our top customer accounted for 17.6% ($12.5
million) of our global sales, and our top three customers accounted for 23.0%
of
our global sales. For the corresponding period last year, our top customer
accounted for 10.7% ($6.1 million) of our global sales, and our top three
customers accounted for 19.8% of our global sales. As mentioned above, during
the second quarter of fiscal 2007, we benefited from year-end revenue from
our
top customer, which contributed to the increase in sales to this customer
during
that period, as well as the increase in the percentage it
represents.
Gross
Margin
Gross
margin improved to 57.5% of sales for the three months ended
February 28, 2007, from 55.3% for the same period last year.
Gross
margin improved to 57.3% of sales for the six months ended
February 28, 2007, from 55.3% for the same period last year.
The
increase in our gross margin in the second quarter and the first half of
fiscal
2007, compared to the corresponding periods last year, can be explained by
the
following factors. First, the increase in sales, year-over-year, resulted
in an
increase in manufacturing activities, allowing us to better absorb our fixed
manufacturing costs. In addition, during the second quarter and the first
half
of fiscal 2007, our gross margin was positively affected by the increased
sales
of our protocol test solutions and by the contribution of Consultronics.
Protocol and copper-access test solutions tend to have better margins than
our
optical ones. Furthermore, we were able to reduce our cost of goods sold
by
better leveraging our supplier base and by developing innovative new products
with cost-effective design. Also, the shift in sales between EMEA and APAC
had a
positive impact on our gross margin as gross margin tend to be better in
EMEA
than in APAC. However, we are facing continued aggressive pricing pressure
worldwide. Finally, during the first half of fiscal 2007, a stronger Canadian
dollar, compared to the US dollar year-over-year, prevented us from further
improving our gross margin as some cost of sales items are denominated in
Canadian dollars.
Considering
the expected sales growth in fiscal 2007, the expected increase in sales
of
protocol products (which tend to generate higher margins), the cost-effective
design of our products, our tight control on operating costs as well as the
full
contribution of Consultronics, whose products have slightly higher margins
than
our optical ones, we expect our gross margin to improve in 2007 and beyond.
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 and increases in product offerings
by other suppliers in our industry. Finally, any further increase in the
strength of the Canadian dollar would have a negative impact on our gross
margin in fiscal 2007.
SELLING
AND ADMINISTRATIVE
For
the
three months ended February 28, 2007, selling and administrative expenses
were
$12.2 million, or 34.6% of sales, compared to $9.3 million, or 30.9% of sales
for the same period last year.
For
the
six months ended February 28, 2007, selling and administrative expenses were
$23.7 million, or 33.5% of sales, compared to $18.4 million, or 32.2% of
sales
for the same period last year.
During
the second quarter of fiscal 2007, we continued intensifying our sales and
marketing activities to develop our markets and leverage the significant
research and development investments of the prior years; this resulted in
higher
sales and marketing expenditures (including number of employees) year-over-year.
In addition, our overall commission expenses increased in the second quarter
of
fiscal 2007, compared to the same period last year, due to the increase in
sales
year-over-year, and the shift in customer mix. In fact, during the second
quarter of fiscal 2007, we had large orders sold directly to international
customers for which we had to pay commissions to distributors. Furthermore,
Consultronics, which we acquired in January 2006, contributed for the whole
period to our selling and administrative expenses, compared to approximately
one
month in 2006, and therefore caused these expenses to increase year-over-year.
However, a slightly weaker Canadian dollar, compared to the US dollar
year-over-year, caused our selling and administrative expenses to slightly
decrease, as more than half of these are incurred in Canadian dollars.
During
the first half of fiscal 2007, intensified sales and marketing activities
and
the acquisition of Consultronics, as explained above, contributed to the
increase in our selling and administrative expenses, compared to the same
period
last year. In addition, our overall commission expenses increased in the
second
half of fiscal 2007, compared to the same period last year, due to an increase
in sales year-over-year, and the shift in customer mix. Also, a stronger
Canadian dollar on average for the period, compared to the US dollar
year-over-year, caused our selling and administrative expenses to increase
year-over-year.
Finally,
during the second quarter and the first half of fiscal 2007, and despite
an
increase in sales, our selling and administrative expenses increased in
percentage of sales, compared to the corresponding periods last year. Larger
commissions on international sales as well as our efforts to develop
international markets and operations contributed to the increase in these
expenses as a percentage of sales.
For
fiscal 2007, we expect our selling and administrative expenses to increase
in
dollars, and slightly exceed our initial range of 30% to 32% of sales for
the whole fiscal year. In particular, in fiscal 2007, we will have the full
impact of the acquisition of Consultronics on our selling and administrative
expenses. Also, we expect our commission expenses to increase as the sales
volume increases. Furthermore, considering our goal of becoming the leading
player in the telecom test and measurement space, we will intensify our sales
and marketing efforts, both domestic and international, which will also cause
our expenses to rise. Finally, any further increase in the strength of the
Canadian dollar would also cause our selling and administrative expenses
to
increase, as more than half of these expenses are incurred in Canadian dollars.
RESEARCH
AND DEVELOPMENT
For
the
three months ended February 28, 2007, gross research and development expenses
totalled $5.9 million, or 16.9% of sales, compared to $4.9 million, or
16.4% of sales for the same period last year.
For
the
six months ended February 28, 2007, gross research and development expenses
totalled $11.4 million, or 16.2% of sales, compared to $8.9 million, or
15.7% of sales for the same period last year.
The
increase in our gross research and development expenses in dollars in the
second
quarter and the first half of fiscal 2007, compared to the corresponding
periods
last year, is mostly due to the contribution of the Consultronics acquisition.
In addition, over the last few quarters, we intensified our research and
development activities in both divisions, which resulted in more gross research
and development expenses, including additional employees, during the second
quarter and the first half of fiscal 2007, compared to the corresponding
periods
last year. During the second quarter of fiscal 2007, a slightly weaker
Canadian dollar, compared to the US dollar year-over-year, caused our gross
research and development expenses to slightly decrease, as most of these
are
incurred in Canadian dollars. During the first half of fiscal 2007, the
increased strength of the Canadian dollar, compared to the US dollar
year-over-year, contributed to the increase in our gross research and
development expenses.
The
above-mentioned factors explain the increase of our gross research and
development expenses as a percentage of sales for the second quarter and
the
first half of fiscal 2007, compared to the corresponding periods last
year.
For
the
three months ended February 28, 2007, tax credits and grants from the Canadian
federal and provincial governments for research and development activities
were
$1.3 million, or 21.2% of gross research and development expenses, compared
to $1.0 million, or 20.9% of gross research and development expenses for
the
same period last year. For the six months ended February 28, 2007, these
tax
credits and grants were $2.4 million, or 21.1% of gross research and development
expenses, compared to $1.9 million, or 21.4% of gross research and development
expenses for the same period last year.
During
the second quarter and the first half of fiscal 2007, tax credits and grants
increased at the same rate as our gross research and development expenses
compared to the corresponding periods last year as we were entitled to the
same
tax credits and grant programs year-over-year.
For
the
first half of fiscal 2007, 30.5% of our sales originated from products that
have
been on the market for two years or less, which is below our stated goal
of 35%
for fiscal 2007. Over the last few months, our successful FTTx products moved
down to the denominator part of the ratio as they have been on the market
for
more than two years. These products still contributed strongly to our sales
in
the first half of fiscal 2007.
For
fiscal 2007, we expect to increase our research and development expenses
at
almost the same rate as we grow our sales, given our focus on innovation,
our
desire to gain market shares and our goal to exceed customer needs and
expectations and the full impact of the acquisition of Consultronics. We
also
intend to increasingly take advantage of talent pools around the world by
establishing a research and development center focused on software development,
in Pune, India. Finally, any further increase in the strength of the Canadian
dollar would cause our net research and development expenses to increase,
as
most of these are incurred in Canadian dollars.
AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
For
the
three months ended February 28, 2007, amortization of property, plant and
equipment was $664,000, compared to $873,000 for the same period last year.
For
the six months ended February 28, 2007, amortization expenses amounted to
$1.4
million, compared to $1.8 million for the same period last year. The
decrease in amortization expenses in fiscal 2007, compared to 2006, despite
the
acquisition of Consultronics, is mainly due to the fact that some of our
property, plant and equipment became fully amortized during fiscal
2006.
AMORTIZATION
OF INTANGIBLE ASSETS
For
the
three months ended February 28, 2007, amortization of intangible assets was
$630,000, compared to $1.1 million for the same period last year. For the
six
months ended February 28, 2007, amortization of intangible assets was $1.5
million, compared to $2.4 million for the same period last year. The decrease
in
amortization expenses in fiscal 2007, compared to 2006, despite the acquisition
of Consultronics, is mainly due to the fact that some of our intangible assets
became fully amortized during fiscal 2006 and the first quarter of 2007;
namely,
those related to our Life Sciences and Industrial Division and our protocol
activities.
INTEREST
AND OTHER INCOME
For
the
three months ended February 28, 2007, interest and other income amounted
to $1.1
million, compared to $828,000 for the same period last year. During the second
quarter of fiscal 2007, our interest income was higher than the corresponding
period of 2006, mainly because of the increase in our average cash position
due
to cash flows from operating activities and because of the increase in interest
rates. However, the decrease in the value of the Canadian dollar, compared
to
the US dollar year-over-year contributed to the decrease in our interest
income
to some extent as it is denominated in Canadian dollars.
For
the
six months ended February 28, 2007, interest and other income amounted to
$2.3
million compared to $1.4 million for the same period last year. The increase
in
interest income year-over-year is the result of the increase in our average
cash
position due to cash flows from operating activities and the increase in
interest rates. Also, the increased strength of the Canadian dollar compared
to
the US dollar year-over-year contributed to the increase in our interest
income
to some extent.
FOREIGN
EXCHANGE GAIN (LOSS)
For
the
three months ended February 28, 2007, the foreign exchange gain amounted
to
$352,000, compared to a foreign exchange loss of $213,000 for the same period
last year.
During
the second quarter of fiscal 2007, the value of the Canadian dollar decreased
quarter-over-quarter, compared to the US dollar, which resulted in a
foreign exchange gain during the second quarter of 2007. On the other hand,
during the second quarter of fiscal 2006, the value of the Canadian dollar
increased quarter-over-quarter, compared to the US dollar, which resulted
in a
foreign exchange loss in the second quarter of fiscal 2006.
For
the
six months ended February 28, 2007, the foreign exchange gain amounted to
$735,000 compared to a foreign exchange loss of $531,000 for the same period
last year. The significant foreign exchange gain recorded in the first half
of
fiscal 2007 is the result of the significant decrease in the value of the
Canadian dollar compared to the US dollar during this period. During the
corresponding period last year, the value of the Canadian dollar increased
compared to the US dollar, which resulted in a foreign exchange loss of
$531,000.
Foreign
exchange gains and losses are the result of the translation of operating
activities denominated in currencies other than the Canadian dollar. 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.
The average value of the Canadian dollar compared to the US dollar in the
second
quarter of fiscal 2007 was CA$1.1656 = US$1.00 versus CA$1.1554 = $US1.00
during
the same period last year, representing a decrease of 1% in the value of
the Canadian dollar compared to the US dollar. The average value of the Canadian
dollar compared to the US dollar in the first half of fiscal 2007 was CA$1.1463
= US$1.00 versus CA$1.1674 = $US1.00 during the same period last year,
representing an increase of 2% in the value of the Canadian dollar compared
to the US dollar.
We
manage
our exposure to currency risks with forward exchange contracts. In addition,
some of our Canadian entities’ operating activities are denominated in US
dollars or other currencies, which further hedges these risks. However, any
further increase in the value of the Canadian dollar, compared to the US
dollar,
would have a negative impact on our operating results.
INCOME
TAXES
For
the
three months ended February 28, 2007, we recorded an income tax expense of
$854,000 compared to $657,000 for the same period last year. For the six
months
ended February 28, 2007, we recorded an income tax expense of $1.6 million
compared to $1.2 million for the same period last year.
Most
of
the income tax expense recorded in fiscal 2006 and 2007 represents income
taxes
payable at the Canadian federal level, which are reduced by research and
development tax credits that are recorded against gross research and development
expenses in the statements of earnings.
We
record
a full valuation allowance against our future income tax assets because it
is
more likely than not that these assets will not be recovered. The valuation
allowance will be reversed once we will have concluded that realization of
future income tax assets is more likely than not. Consequently, our income
tax
rates are distorted compared to statutory rates.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
Requirements and Capital Resources
As
at
February 28, 2007, cash and short-term investments totalled $114.6 million,
while our working capital was at $144.8 million. Our cash and short-term
investments increased $3.3 million in the second quarter of fiscal 2007,
compared to the previous quarter, mainly due to the cash flows from operating
activities of $7.0 million, offset by an unrealized foreign exchange loss
on our
cash and short-term investments of $2.8 million as well as the cash payment
of
$835,000 for the purchase of property, plant and equipment and intangible
assets. The $2.8 million unrealized foreign exchange loss resulted from the
translation, in US dollars, of our Canadian-dollar-denominated cash and
short-term investments and was recorded in the cumulative translation adjustment
in the balance sheet.
Our
short-term investments consist of commercial paper issued by twelve (fourteen
as
of November 30, 2006) quality, high-credit corporations and trusts;
therefore, we consider the risk of non-performance of these financial
instruments to be remote. For the purposes of managing our cash position,
we
have established a cash management policy, which we follow and monitor on
a
regular basis. These short-term investments will be used for working capital
and
other general corporate purposes, including other potential
acquisitions.
We
believe that our cash balances and short-term investments will be sufficient
to
meet our liquidity and capital requirements for the foreseeable future. In
addition to these assets, we have unused available lines of credit of $10.5
million for working capital and other general corporate purposes and an unused
line of credit of $10.3 million for foreign currency exposure related to
forward exchange contracts. However, possible operating losses and/or possible
investments in or acquisitions of complementary businesses, products or
technologies may require additional financing. There can be no assurance
that
additional debt or equity financing will be available when required or, if
available, that it can be secured on satisfactory terms. Our lines of credit
bear interest at prime rate.
Sources
and Uses of Cash
We
finance our operations and meet our capital expenditure requirements mainly
through cash flows from operating activities, the use of our cash and short-term
investments as well as the issuance of subordinate voting shares.
Operating
Activities
Cash
flows provided by operating activities were $7.0 million for the three months
ended February 28, 2007, compared to $5.4 million for the same period
last year. Cash flows provided by operating activities in the second quarter
of
fiscal 2007 were mainly attributable to the net earnings before items not
affecting cash of $5.3 million and the positive net change in non-cash operating
items of $1.7 million. During the second quarter of 2007, our accounts payable
and accrued liabilities increased, resulting in a positive effect on cash
flows
of $2.7 million. However, our income taxes and tax credits recoverable and
our
inventories increased during that period, resulting in negative effects on
cash
flows of $513,000 and $510,000, respectively. Timing of certain purchases
and
payments explain the increase in our accounts payable and accrued liabilities
during the second quarter of fiscal 2007. Our income taxes and tax credits
recoverable increased due to tax credits earned during the quarter but not
yet
recovered. Finally, our inventory slightly increased to support increased
sales
activities.
Cash
flows provided by operating activities were $10.3 million for the six months
ended February 28, 2007, compared to $6.3 million for the same period last
year.
Cash flows provided by operating activities in the first half of fiscal 2007
were mainly attributable to the net earnings before items not affecting cash
of
$11.7 million, offset in part by the negative net change in non-cash operating
items of $1.4 million. During the first half of 2007, our accounts receivable
and our income taxes and tax credits recoverable increased, resulting in
negative effects on cash flows of $3.2 million and $931,000, respectively.
On
the other hand, our accounts payable and accrued liabilities increased during
that period, resulting in a positive effect on cash flows of $2.8 million.
The
timing of our sales in 2007 explains the increase in our accounts receivable.
Our income taxes and tax credits recoverable increased due to tax credits
earned
during the period but not yet recovered. Finally, our inventory slightly
increased to support increased sales activities.
Investing
Activities
Cash
flows used by investing activities were $5.7 million for the three months
ended
February 28, 2007, compared to $9.6 million for the same period last year.
In
the second quarter of fiscal 2007, we acquired $4.8 million worth of
short-term investments and paid $835,000 for the purchase of property, plant
and
equipment. During the corresponding period last year, we made cash payments
of
$17.5 million and $933,000 for the acquisition of Consultronics and the purchase
of property, plant and equipment, respectively. In order to finance a portion
of
these payments, we disposed of $8.8 million worth of short-term investments
during that quarter.
Cash
flows used by investing activities were $8.0 million for the six months ended
February 28, 2007, compared to $9.2 million for the same period last year.
In
the first half of fiscal 2007, we acquired $7.6 million worth of short-term
investments and paid $1.6 million for the purchase of property, plant and
equipment. On the other hand, during that same period, we received $1.2 million
following the sale of one of our buildings located in Rochester, NY. For
the
corresponding period last year, similar reasons as those described above
for the
second quarter of 2006 explain the use of cash by investing activities during
the first half of fiscal 2006.
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
February 28, 2007, 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
|
||
|
March
2007 to August 2007
|
$21,700,000
|
1.1520
|
||
|
September
2007 to December 2009
|
$48,300,000
|
1.1312
|
As
at
February 28, 2007, the fair value of our forward exchange contracts, which
represents the difference between their contractual amounts and their current
trading value, amounted to an unrecognized loss of $1.3 million.
CONTINGENCY
As
discussed in note 6 to our interim consolidated financial statements, EXFO
was
named as a defendant in a U.S. securities class action related to its initial
public offering (IPO) in June 2000. The complaints allege that the prospectus
and the registration statement for the IPO failed to disclose that the
underwriters allegedly received excessive commissions and that the underwriters
and some investors collaborated in order to inflate the price of EXFO’s stock in
the after-market.
In
June
2003, a committee of EXFO’s Board of Directors conditionally approved a proposed
settlement between the issuer defendants, the individual defendants, and
the
plaintiffs. If approved, the settlement would provide, among other things,
a
release of EXFO and of the individual defendants for the conduct alleged
in the
action to be wrongful in the amended complaint. EXFO would agree to undertake
other responsibilities under the settlement, including agreeing to assign
away,
not assert, or release certain potential claims EXFO may have against its
underwriters. Any direct financial impact of the proposed settlement is expected
to be borne by EXFO’s insurance carriers.
On
June
25, 2004, the Plaintiffs moved for preliminary approval of the settlement.
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 beginning on November 15, 2005. A settlement fairness
hearing was held on April 24, 2006; however, no ruling has been issued yet
by
the court.
The
plaintiffs have continued to litigate against the underwriter
defendants. The district court has 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. Because the
company's settlement with the plaintiffs involves the certification of the
case
as a class action as part of the approval process, the impact of the Court
of Appeals' ruling on the company's settlement is unclear. On
January 5, 2007, the plaintiffs filed a petition for rehearing en banc by
the
Second Circuit. That request is still pending.
If
the
court determines that the settlement is fair to the class members, and that
the
settlement classes can be certified, the settlement will be
approved. The
settlement provides that, if the plaintiffs do not obtain any
recovery from the underwriter defendants, the members of the class
action would receive an amount not expected to exceed $2,507,678. Any direct
financial impact plus any legal fees are expected to be borne by the company’s
insurance carriers. However, there can be no assurance that this proposed
settlement would be approved and implemented in its current form, or at
all. Therefore, it is not possible to predict the final outcome of the
case, nor to determine the amount of any possible losses. If the settlement
process fails, 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 February 28, 2007.
SHARE
CAPITAL AND STOCK-BASED COMPENSATION PLANS
Share
Capital
As
at
March 28, 2007, EXFO had 37,143,000 multiple voting shares outstanding,
entitling to ten votes each and 31,765,556 subordinate voting shares
outstanding. The multiple voting shares and the subordinate voting shares
are
unlimited as to number and without par value.
Long-Term
Incentive Plan and Deferred Share Unit Plan
The
aggregate number of subordinate voting shares covered by stock options,
restricted share units (RSUs) and deferred share units (DSUs) granted under
the
Long-Term Incentive Plan and the Deferred Share Unit Plan was 2,738,331 as
at
February 28, 2007. 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 February 28, 2007:
|
Stock
Options
|
Number
|
%
of issued and outstanding
|
Weighted
average exercise price
|
|||
|
Chairman
of the Board, President and CEO (one
individual)
|
179,642
|
8%
|
$9.05
|
|||
|
Board
of Directors (five individuals)
|
194,375
|
9%
|
$6.23
|
|||
|
Management
and Corporate Officers (eight
individuals)
|
297,718
|
14%
|
$16.10
|
|||
|
671,735
|
31%
|
$11.36
|
|
Restricted
Share Units (RSUs)
|
Number
|
%
of issued and outstanding
|
||||
|
Chairman
of the Board, President and CEO (one
individual)
|
59,913
|
11%
|
||||
|
Management
and Corporate Officers (ten
individuals)
|
272,399
|
52%
|
||||
|
332,312
|
63%
|
|
Deferred
Share Units (DSUs)
|
Number
|
%
of issued and outstanding
|
||||
|
Board
of Directors (five individuals)
|
54,305
|
100%
|
OFF-BALANCE
SHEET ARRANGEMENTS
As
at
February 28, 2007, our off-balance sheet arrangements consisted of letters
of
guarantee and forward exchange contracts. As at February 28, 2007, our letters
of guarantee amounted to $1.9 million; these letters of guarantee expire
at
various dates through fiscal 2010 and the full amount was reserved from one
of
our lines of credit. Our forward exchange contracts are described
above.
VARIABLE
INTEREST ENTITY
As
of
February 28, 2007, we did not have interests in any variable interest
entities.
RISKS
AND UNCERTAINTIES
Over
the
past few years, we have managed our business in a difficult environment;
focused
on research and development programs for new and innovative products aimed
at
expected growth pockets in our sector; continued the development of our domestic
and international markets; and made strategic acquisitions. However, we operate
in a highly competitive sector that is in constant evolution and, as a result,
we encounter various risks and uncertainties that must be given appropriate
consideration in our strategic management policies.
We
are
exposed to currency risks due to the export of our Canadian-manufactured
products, the large majority of which are denominated in US dollars. These
risks
are partially hedged by operating expenses denominated in US dollars, the
purchase of raw materials in US dollars and forward exchange contracts. The
increased strength of the Canadian dollar, compared to the US dollar, over
the
last few years, caused our operating expenses and our foreign exchange loss
to
increase. 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
and
measurement 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. This
exposes
us to certain risks and uncertainties related to changes in local laws and
regulations, multiple technological standards, protective legislation and
pricing pressure.
Also,
while strategic acquisitions, like those we have made in the past, the recent
acquisition of Consultronics 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.
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
twelve quality, high-credit corporations and trusts. Our cash and forward
exchange contracts are held with or issued by quality high-credit financial
institutions; therefore, we consider the risk of non-performance on these
instruments to be remote.
For
a
more complete understanding of risk factors that may affect us, please refer
to
the risk factors set forth in our disclosure documents published with securities
commissions at www.sedar.com in Canada or www.edgar.com in the U.S.
QUARTERLY
SUMMARY FINANCIAL INFORMATION (Unaudited)
(tabular
amounts in thousands of US dollars, except per share data)
|
Q2-FY07
|
Q1-FY07
|
Q4-FY06
|
Q3-FY06
|
||||||||||
|
Sales
|
$
|
35,207
|
$
|
35,547
|
$
|
35,733
|
$
|
35,410
|
|||||
|
Cost
of sales
|
$
|
14,970
|
$
|
15,229
|
$
|
16,318
|
$
|
15,453
|
|||||
|
Gross
margin
|
$
|
20,237
|
$
|
20,318
|
$
|
19,415
|
$
|
19,957
|
|||||
|
Earnings
from operations
|
$
|
2,081
|
$
|
2,759
|
$
|
2,363
|
$
|
3,608
|
|||||
|
Net
earnings
|
$
|
2,684
|
$
|
3,533
|
$
|
2,910
|
$
|
3,504
|
|||||
|
Basic
and diluted net earnings per share
|
$
|
0.04
|
$
|
0.05
|
$
|
0.04
|
$
|
0.05
|
|||||
|
Q2-FY06
|
Q1-FY06
|
Q4-FY05
|
Q3-FY05
|
||||||||||
|
Sales
|
$
|
30,066
|
$
|
27,044
|
$
|
26,304
|
$
|
26,180
|
|||||
|
Cost
of sales
|
$
|
13,440
|
$
|
12,064
|
$
|
11,925
|
$
|
11,478
|
|||||
|
Gross
margin
|
$
|
16,626
|
$
|
14,980
|
$
|
14,379
|
$
|
14,702
|
|||||
|
Earnings
from operations
|
$
|
1,408
|
$
|
683
|
$
|
811
|
$
|
509
|
|||||
|
Net
earnings
|
$
|
1,366
|
$
|
355
|
$
|
454
|
$
|
276
|
|||||
|
Basic
and diluted net earnings per share
|
$
|
0.02
|
$
|
0.01
|
$
|
0.01
|
$
|
−
|
|||||
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