UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
6-K
Report
of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16
Under
the Securities Exchange Act of 1934
For
the
month of January 2008
EXFO
Electro-Optical Engineering Inc.
(Translation
of registrant’s name into English)
400
Godin Avenue, Quebec, Quebec, Canada G1M 2K2
(Address
of principal executive offices)
Indicate
by check mark whether the registrant files or will file annual reports under
cover of Form 20-F or Form 40-F.
|
Form
20-F þ
|
Form
40-F o
|
Indicate
by check mark whether the registrant by furnishing the information contained
in
this Form is also thereby furnishing the information to the Commission pursuant
to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
|
Yes
o
|
No
þ
|
If
“Yes”
is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-______.
TABLE OF CONTENTS
On
January 8, 2008, EXFO Electro-Optical Engineering Inc., a Canadian corporation,
reported its results of operations for the first fiscal quarter ended November
30, 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 first fiscal quarter
of
the 2008 fiscal year. This press release and information relating to
EXFO’s financial condition and results of operations for the first fiscal
quarter of the 2008 fiscal year are hereby incorporated as a document by
reference to Form F-3 (Registration Statement under the Securities Act of 1933)
declared effective as of July 30, 2001 and to Form F-3 (Registration Statement
under the Securities Act of 1933) declared effective as of
March 11, 2002 and to amend certain material information as set forth
in these two Form F-3 documents.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
EXFO
ELECTRO-OPTICAL ENGINEERING INC.
|
|
|
By:
/s/ Germain
Lamonde
Name: Germain
Lamonde
Title: President
and Chief Executive Officer
|
|
Date:
January 14, 2008
EXFO
Reports First-Quarter Results
for Fiscal
2008
|
§
|
Sales
increase 15.3% year-over-year to US$41.0 million, top of guidance
range
|
|
§
|
Net
bookings improve 18.2% year-over-year for a book-to-bill ratio of
1.07
|
|
§
|
GAAP
net results amount to US$0.00 per share, given high Canadian/US exchange
rate
|
|
§
|
Several
major products launched, including AXS-200 test platform, 40G/43G
SONET/SDH test module for FTB-400 platform and a combined single-end
CD
and PMD test module
|
QUEBEC
CITY, CANADA, January 8, 2008—EXFO Electro-Optical Engineering Inc. (NASDAQ:
EXFO; TSX: EXF) reported today financial results for the first quarter ended
November 30, 2007.
Sales
increased 15.3.% to US$41.0 million in the first quarter of fiscal 2008 from
US$35.5 million in the first quarter of 2007, but decreased 4.6% from US$43.0
million in the fourth quarter of 2007. Net bookings improved by 18.2%
year-over-year to US$43.7 million for a book-to-bill ratio of 1.07 in the first
quarter of fiscal 2007 from US$37.0 million in the same period last year and
10.5% from US$39.5 million in the fourth quarter of 2007.
Gross
margin amounted to 55.7% of sales in the first quarter of fiscal 2008 compared
to 57.2% in the first quarter of 2007 and 57.9% in the fourth quarter of 2007.
The drop in gross margin is mainly due to the significant and rapid increase
in
the Canadian/US exchange rate, product and geographical mix, as well as ramp-up
costs related to a manufacturing plant in China.
GAAP
net
loss in the first quarter of fiscal 2008 totaled US$0.1 million, or US$0.00
per
share, compared to GAAP net earnings of US$3.5 million, or US$ 0.05 per diluted
share, in the same period last year and GAAP net earnings of US$33.5 million,
or
US$0.48 per diluted share in the fourth quarter of 2007 (including US$24.6
million in recognition of previously unrecognized future income taxes, US$3.2
million for the recognition of previously unrecognized R&D tax credits and
US$1.1 million from a government grant recovery). GAAP net loss in the first
quarter of fiscal 2008 included US$0.3 million in stock-based compensation
costs
and US$0.5 million in after-tax amortization of intangible assets.
“I’m
satisfied sales reached the high end of our guidance range and that bookings
were solid in the first quarter, especially with 19.8% and 18.2% year-over-year
growth in sales and bookings for our Telecom Division,” said Germain Lamonde,
EXFO’s Chairman, President and CEO. “We are following an aggressive profitable
growth strategy that allowed us to increase our gross margin and profitability
in each of the last five fiscal years, despite an average annual increase of
6.4% in the Canadian/US exchange rate. In addition, we implemented corrective
actions to absorb the 6.9% surge of the exchange rate in the first quarter.
We
now expect that earnings in the second half of fiscal 2008 will be comparable
(excluding one-time items) to the second half of 2007, assuming the Canadian
dollar remains at par or below.”
“We
remain committed to achieving our 20% sales growth target for the fiscal year
based on our key market-driven product launches, increased intensity in our
sales and marketing activities worldwide, and strong execution that strengthen
competitive advantages in our optical, protocol and access businesses, where
we
anticipate making market-share gains.,” Mr. Lamonde added.
Selected
Financial Information
(In
thousands of US dollars)
|
Segmented
results:
|
Q1 2008 | Q4 2007 | Q1 2007 | |||||||||
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
||||||||||
|
Sales:
|
||||||||||||
|
Telecom
Division
|
$ | 35,365 | $ | 37,199 | $ | 29,522 | ||||||
|
Life
Sciences and Industrial Division
|
5,620 | 5,776 | 6,025 | |||||||||
|
Total
|
$ | 40,985 | $ | 42,975 | $ | 35,547 | ||||||
|
Earnings
from operations:
|
||||||||||||
|
Telecom
Division
|
$ | 21 | $ | 8,108 | $ | 1,803 | ||||||
|
Life
Sciences and Industrial Division
|
281 | 994 | 956 | |||||||||
|
Total
|
$ | 302 | $ | 9,102 | $ | 2,759 | ||||||
|
Other
selected information:
|
||||||||||||
|
GAAP
net earnings (loss)
|
$ | (93 | ) | $ | 33,484 | $ | 3,533 | |||||
|
After-tax
amortization of intangible assets
|
$ | 499 | $ | 699 | $ | 882 | ||||||
|
Stock-based
compensation costs
|
$ | 301 | $ | 277 | $ | 285 | ||||||
|
Government
grants
|
$ | – | $ | (1,079 | ) | $ | – | |||||
|
Recognition
of previously unrecognized future income taxes
|
$ | – | $ | (24,566 | ) | $ | – | |||||
|
Recognition
of previously unrecognized R&D tax credits
|
$ | – | $ | (3,162 | ) | $ | – | |||||
Operating
Expenses
Selling
and administrative expenses amounted to US$14.8 million, or 36.2% of sales,
in
the first quarter of fiscal 2008 compared to US$11.5 million, or 32.5% of sales,
in the same period last year and US$13.0 million, or 30.3% of sales, in the
fourth quarter of 2007.
Gross
research and development expenses totaled US$7.5 million, or 18.3% of sales,
in
the first quarter of fiscal 2008 compared to US$5.5 million, or 15.5% of sales,
in the first quarter of 2007 and US$7.1 million, or 16.6% of sales, in the
fourth quarter of 2007.
Net
R&D expenses totaled US$6.0 million, or 14.7% of sales, in the first quarter
of fiscal 2008 compared to US$4.4 million, or 12.2% of sales, in the same period
last year and US$2.3 million (including US$3.2 million for the recognition
of
previously unrecognized R&D tax credits), or 5.4% of sales, in the fourth
quarter of 2007.
First-Quarter
Business Highlights
Market
expansion — EXFO
delivered sales growth of 15.3% and bookings growth of 18.2% year-over-year
mainly due to market-share gains in optical and protocol testing and a positive
spending environment. The Telecom Division increased its sales 19.8%
year-over-year, while the Life Sciences and Industrial Division experienced
a
6.7% drop during the same period due to less sales of fluorescence microscopy
and light-based spot curing products. The corporate performance metric for
sales
growth in fiscal 2008 has been established at 20% year-over-year. Sales and
marketing teams were expanded in recent quarters in order to exploit the launch
of several new products.
Profitability
—
EXFO reported
a GAAP net loss of US$0.1 million, or US$0.00 per share, mainly due to
fluctuations in the Canadian/US exchange rate, which impacted the company’s
operating expenses and foreign exchange loss. Gross margin pressure― created
by more
sales to the Asia-Pacific region and less shipments
of protocol
products ― higher operating costs, one-time cost-reduction measures and
non-deductible tax items also negatively affected earnings in the first quarter.
In terms of GAAP earnings from operations, it reached 0.7% in the first quarter
versus the company’s stated goal of 8% for the fiscal year.
Innovation
—EXFO
launched six
new products in the first quarter including a multi-service, multi-medium
modular
handheld platform for characterizing and troubleshooting access networks
(AXS-200 SharpTESTER) with cost-effective modules for the rapid installation
and
maintenance of ADSL/ADSL2/ADSL2+ (AXS-200/620) and Ethernet/IP services
(AXS-200/850), as well as a compact multi-service transport test set that
combines next-generation SONET/SDH and Ethernet testing inside a single module
for its FTB-200, FTB-400 and IQS-500 test platforms (8120NGE
at 2.5 Gbit/s and 8130NGE
at 10 Gbit/s). Following the
quarter-end, the company released two additional key products, namely a 40/43
Gbit/s SONET/SDH and OTN field-test module (hosted in the FTB-400 test platform)
for high-speed optical networks and an all-in-one, single-end CD and PMD
Analyzer (for the FTB-200 and FTB-400 test platforms) that requires only one
technician to characterize a link from a single end. Sales from products
that have
been on the market two years or less represented 33.8% of total sales in the
first quarter of fiscal 2008, while the company’s published goal is 30% for the
fiscal year.
Business
Outlook
Although
EXFO’s second quarter, which includes the months of December, January and
February, is usually seasonally weak, the company forecasted sales between
US$40.0 million and US$43.0 million and GAAP net results between a loss of
US$0.02 per share and earnings of US$0.01 per share. GAAP net results include
US$0.01 per share in stock-based compensation costs and after-tax amortization
of intangible assets as well as US$0.02 per share to account for the reduced
tax
rate on future income tax assets that was recently enacted in
Canada.
Conference
Call and Webcast
EXFO
will
host a conference call today at 5 p.m. (Eastern time) to review its financial
results for the first quarter of fiscal 2008. 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 midnight
on January 15,
2008.
The replay number is 1-402-977-9141
and the reservation number
is 21361059. The
audio Webcast and replay of the conference call will also be available on EXFO’s
Website at www.EXFO.com,
under the Investors section.
Forward-Looking
Statements
This
news
release contains forward-looking statements within the meaning of the U.S.
Private Securities Litigation Reform Act of 1995, and we intend that such
forward-looking statements be subject to the safe harbors created thereby.
Forward-looking statements are statements other than historical information
or
statements of current condition. Words such as may, will, expect, believe,
anticipate, intend, could, estimate, continue, or the negative
or
comparable terminology are intended to identify forward-looking statements.
In
addition, any statements that refer to expectations, projections or other
characterizations of future events and circumstances are considered
forward-looking statements. They are not guarantees of future performance and
involve risks and uncertainties. Actual results may differ materially from
those
in forward-looking statements due to various factors including consolidation
in
the global telecommunications test 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. Unless required by law or applicable regulations, we undertake no
obligation to revise or update any of them to reflect events or circumstances
that occur after the date of this document.
About
EXFO
EXFO
is a Tier-1 test and measurement expert in the
global telecommunications industry, especially in the portable test market
segment. The Telecom Division, which represents about 85% 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 with an estimated 25.5% market share
and a leading supplier of protocol and access test solutions to enable
triple-play deployments and converged IP networking. Its Windows-based modular
AXS-200, 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 offers value-added light-based solutions in
high-precision medical device and opto-electronics assembly sectors, and
advanced fluorescence microscopy and electrophysiology solutions for the life
sciences sector. For more information about EXFO’s Telecom Division, visit
www.EXFO.com,
and for its Life Sciences and Industrial Division, visit www.EXFO-lifesciences.com.
For
more information
Vance
Oliver
Manager,
Investor Relations
(418)
683-0913, Ext. 3733
vance.oliver@exfo.com
Interim
Consolidated Balance Sheet
(in
thousands of US dollars)
|
As
at
November
30
2007
|
As
at
August
31,
2007
|
|||||||
|
(unaudited)
|
||||||||
|
Assets
|
||||||||
|
Current
assets
|
||||||||
|
Cash
|
$ | 5,521 | $ | 5,541 | ||||
|
Short-term
investments (note 2)
|
127,185 | 124,217 | ||||||
|
Accounts
receivable
|
||||||||
|
Trade,
less allowance for doubtful accounts of $211($206
as at August 31, 2007)
|
26,572 | 26,699 | ||||||
|
Other
(note 2)
|
7,057 | 2,479 | ||||||
|
Income
taxes and tax credits recoverable
|
7,108 | 6,310 | ||||||
|
Inventories
(note 3)
|
33,369 | 31,513 | ||||||
|
Prepaid
expenses
|
2,062 | 1,391 | ||||||
|
Future
income taxes
|
6,725 | 7,609 | ||||||
| 215,599 | 205,759 | |||||||
|
Property,
plant and equipment
|
20,099 | 18,117 | ||||||
|
Intangible
assets
|
9,527 | 9,628 | ||||||
|
Goodwill
|
29,905 | 28,437 | ||||||
|
Future
income taxes
|
17,980 | 17,197 | ||||||
| $ | 293,110 | $ | 279,138 | |||||
|
Liabilities
|
||||||||
|
Current
liabilities
|
||||||||
|
Bank
loan
|
$ | 676 | $ | − | ||||
|
Accounts
payable and accrued liabilities (note 4)
|
18,578 | 22,721 | ||||||
|
Deferred
revenue
|
2,948 | 2,598 | ||||||
| 22,202 | 25,319 | |||||||
|
Deferred
revenue
|
3,720 | 3,414 | ||||||
|
Future
income taxes
|
272 | 240 | ||||||
| 26,194 | 28,973 | |||||||
|
Contingency
(note
5)
|
||||||||
|
Shareholders’
Equity
|
||||||||
|
Share
capital (note 6)
|
149,886 | 150,019 | ||||||
|
Contributed
surplus
|
4,767 | 4,453 | ||||||
|
Retained
earnings
|
42,198 | 42,275 | ||||||
|
Accumulated
other comprehensive income (note 2)
|
70,065 | 53,418 | ||||||
| 266,916 | 250,165 | |||||||
| $ | 293,110 | $ | 279,138 | |||||
The
accompanying notes are an integral part of these consolidated financial
statements.
Page
9 of
44
EXFO
Electro-Optical Engineering Inc.
Interim
Unaudited Consolidated Statements of Earnings
(in
thousands of US dollars, except share and per share
data)
|
Three
months ended
November
30,
|
||||||||
|
2007
|
2006
|
|||||||
|
Sales
|
$ | 40,985 | $ | 35,547 | ||||
|
Cost
of sales(1,
2)
|
18,144 | 15,229 | ||||||
|
Gross
margin
|
22,841 | 20,318 | ||||||
|
Operating
expenses
|
||||||||
|
Selling
and administrative(1)
|
14,817 | 11,542 | ||||||
|
Net
research and development(1)
(note 7)
|
6,012 | 4,354 | ||||||
|
Amortization
of property, plant and equipment
|
976 | 781 | ||||||
|
Amortization
of intangible assets
|
734 | 882 | ||||||
|
Total
operating expenses
|
22,539 | 17,559 | ||||||
|
Earnings
from operations
|
302 | 2,759 | ||||||
|
Interest
income
|
1,483 | 1,172 | ||||||
|
Foreign
exchange gain (loss)
|
(616 | ) | 383 | |||||
|
Earnings
before income taxes
|
1,169 | 4,314 | ||||||
|
Income
taxes (note
8)
|
||||||||
|
Current
|
1,181 | 781 | ||||||
|
Future
|
81 | − | ||||||
| 1,262 | 781 | |||||||
|
Net
earnings (loss) for the period
|
$ | (93 | ) | $ | 3,533 | |||
|
Basic
and diluted net earnings (loss) per share
|
$ | (0.00 | ) | $ | 0.05 | |||
|
Basic
weighted average number of shares outstanding (000’s)
|
69,000 | 68,775 | ||||||
|
Diluted
weighted average number
of shares outstanding (000’s) (note 9)
|
69,000 | 69,385 | ||||||
|
(1) Stock-based
compensation costs
included in:
|
||||||||
|
Cost
of sales
|
$ | 37 | $ | 34 | ||||
|
Selling
and
administrative
|
197 | 197 | ||||||
|
Net
research and
development
|
67 | 54 | ||||||
| $ | 301 | $ | 285 | |||||
|
(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 44
EXFO
Electro-Optical Engineering Inc.
Interim
Unaudited Statements of Comprehensive Income (Loss)
and
Accumulated Other Comprehensive Income
(in
thousands of US dollars)
|
Comprehensive
income (loss)
|
||||||||
|
Three
months ended
November
30,
|
||||||||
|
2007
|
2006
|
|||||||
|
Net
earnings (loss) for the period
|
$ | (93 | ) | $ | 3,533 | |||
|
Foreign
currency translation adjustment
|
13,906 | (6,026 | ) | |||||
|
Changes
in unrealized losses on short-term investments
|
39 | − | ||||||
|
Unrealized
gains on forward exchange contracts, net of future income taxes of
$624
|
1,325 | − | ||||||
|
Reclassification
of realized gains on forward exchange contracts in net loss, net
of future
income taxes of $243
|
(516 | ) | − | |||||
|
Comprehensive
income (loss)
|
$ | 14,661 | $ | (2,493 | ) | |||
|
Accumulated
other comprehensive income
|
||||||||
|
Three
months ended
November
30,
|
||||||||
|
2007
|
2006
|
|||||||
|
Foreign
currency translation adjustment
|
||||||||
|
Cumulative
effect of prior periods
|
$ | 53,418 | $ | 43,537 | ||||
|
Current
period
|
13,906 | (6,026 | ) | |||||
| 67,324 | 37,511 | |||||||
|
Unrealized
gains on forward exchange contracts
|
||||||||
|
Adjustment
related to the implementation of new accounting standards (note
2)
|
1,948 | − | ||||||
|
Current
period, net of future income taxes of $381
|
809 | − | ||||||
| 2,757 | − | |||||||
|
Unrealized
losses on short-term investments
|
||||||||
|
Adjustment
related to the implementation of new accounting standards (note
2)
|
(55 | ) | − | |||||
|
Current
period
|
39 | − | ||||||
| (16 | ) | − | ||||||
|
Accumulated
other comprehensive income
|
$ | 70,065 | $ | 37,511 | ||||
Total
retained earnings and accumulated other comprehensive income amounted to $41,044
and $112,263 as of November 30, 2006 and 2007, respectively.
The
accompanying notes are an integral part of these consolidated financial
statements.
Page
11
of 44
EXFO
Electro-Optical Engineering Inc.
Interim
Unaudited Consolidated Statements of Retained Earnings and Contributed
Surplus
(in
thousands of US dollars)
|
Retained
earnings
|
||||||||
|
Three
months ended
November
30,
|
||||||||
|
2007
|
2006
|
|||||||
|
Balance
– Beginning of the period
|
$ | 42,275 | $ | − | ||||
|
Add
(deduct)
|
||||||||
|
Adjustment
related to the implementation of new accounting standards (note
2)
|
55 | − | ||||||
|
Net
earnings (loss) for the period
|
(93 | ) | 3,533 | |||||
|
Premium
on redemption of share capital (note 6)
|
(39 | ) | − | |||||
|
Balance
– End of the period
|
$ | 42,198 | $ | 3,533 | ||||
|
Contributed
surplus
|
||||||||
|
Three
months ended
November
30,
|
||||||||
|
2007
|
2006
|
|||||||
|
Balance
– Beginning of the period
|
$ | 4,453 | $ | 3,776 | ||||
|
Add
(deduct)
|
||||||||
|
Stock-based
compensation costs
|
316 | 282 | ||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise
of stock
awards
|
(2 | ) | (47 | ) | ||||
|
Balance
– End of the period
|
$ | 4,767 | $ | 4,011 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
Page
12
of 44
EXFO
Electro-Optical Engineering Inc.
Interim
Unaudited Consolidated Statements of Cash Flows
(in
thousands of US dollars)
|
Three
months ended
November
30,
|
||||||||
|
2007
|
2006
|
|||||||
|
Cash
flows from operating activities
|
||||||||
|
Net
earnings (loss) for the period
|
$ | (93 | ) | $ | 3,533 | |||
|
Add
(deduct) items not affecting cash
|
||||||||
|
Discount
on short-term investments
|
902 | 414 | ||||||
|
Stock-based
compensation costs
|
301 | 285 | ||||||
|
Amortization
|
1,710 | 1,663 | ||||||
|
Deferred
revenue
|
351 | 494 | ||||||
|
Government
grants
|
− | (22 | ) | |||||
|
Future
income taxes
|
81 | − | ||||||
| 3,252 | 6,367 | |||||||
|
Change
in non-cash operating items
|
||||||||
|
Accounts
receivable
|
1,166 | (3,035 | ) | |||||
|
Income
taxes and tax credits
|
(458 | ) | (418 | ) | ||||
|
Inventories
|
(87 | ) | 381 | |||||
|
Prepaid
expenses
|
(612 | ) | 2 | |||||
|
Accounts
payable and accrued liabilities
|
(5,694 | ) | 36 | |||||
| (2,433 | ) | 3,333 | ||||||
|
Cash
flows from investing activities
|
||||||||
|
Additions
to short-term investments
|
(211,453 | ) | (194,266 | ) | ||||
|
Proceeds
from disposal and maturity of short-term investments
|
214,571 | 191,503 | ||||||
|
Additions
to capital assets (1)
|
(1,573 | ) | (811 | ) | ||||
|
Net
proceeds from disposal of capital assets
|
− | 1,228 | ||||||
| 1,545 | (2,346 | ) | ||||||
|
Cash
flows from financing activities
|
||||||||
|
Changes
in bank loan
|
699 | − | ||||||
|
Repayment
of long-term debt
|
− | (27 | ) | |||||
|
Redemption
of share capital (note 6)
|
(174 | ) | − | |||||
|
Exercise
of stock options
|
− | 121 | ||||||
| 525 | 94 | |||||||
|
Effect
of foreign exchange rate changes on cash
|
343 | (193 | ) | |||||
|
Change
in cash
|
(20 | ) | 888 | |||||
|
Cash
– Beginning of the period
|
5,541 | 6,853 | ||||||
|
Cash
– End of the period
|
$ | 5,521 | $ | 7,741 | ||||
(1)
As at November 30, 2006 and 2007, unpaid purchases of capital assets amounted
to
$184 and $852, respectively.
The
accompanying notes are an integral part of these consolidated
financial
statements.
Page
13
of 44
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 November 30, 2007, and for the three-month periods
ended November 30, 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, except for changes as described
in note 2. However, all disclosures required for annual financial statements
have not been included in these financial statements. Consequently, these
interim consolidated financial statements should be read in conjunction with
the
company’s most recent annual consolidated financial statements.
|
2.
|
New
accounting standards and
pronouncements
|
Adopted
in fiscal 2008
On
September 1, 2007, the company adopted the Canadian Institute of Chartered
Accountants (CICA) Handbook Section 1530, ‘’Comprehensive Income’’, Section
3251, Equity’’, Section 3855, ‘’Financial Instruments – Recognition and
Measurement’’, and Section 3865, ‘’Hedges’’. Sections 3251 and 3865 have been
adopted prospectively while Section 3855 has been applied retroactively, without
restatement of prior years’ financial statements, and Section 1530 has been
applied retroactively with restatement of prior years’ financial
statements.
Following
the adoption of Section 3855, the company classified its financial instruments
as follows:
Cash
Cash
is
classified as financial assets held for trading and is carried at fair value
in
the balance sheet and any changes in its fair value is reflected in net
earnings.
Short-term
investments
The
company has elected to classify its short-term investments as available-for-sale
securities, and therefore they are carried at fair value in the balance sheet
and any changes in their fair value are reflected in accumulated other
comprehensive income. Upon the disposal or maturity of these assets, accumulated
changes in their fair value are reclassified in the statements of earnings.
Also, upon the adoption of this new standard, unrealized losses on short-term
investments as of August 31, 2007, in the amount of $55,000 (previously recorded
in the statements of earnings), have been reclassified from the opening balance
of retained earnings to the opening balance of accumulated other comprehensive
income for the three months ended November 30, 2007.
Interest
income on short-term investments is recorded in interest income in the
statements of earnings and in cash flows from operating activities in the
statements of cash flows.
The
fair
value of these assets as of November 30, 2007, amounted to
$127,185,000.
Accounts
receivable
Accounts
receivable are classified as loans and receivable. After their initial
measurement at fair value, they are carried at amortized cost, which generally
corresponds to cost due to their short-term maturity.
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)
Bank
loan and accounts payable and accrued liabilities
Bank
loan
and accounts payable and accrued liabilities are classified as other financial
liabilities. They are initially presented at their fair value. Subsequent
measurements are at cost, net of amortization, using the effective interest
rate
method. For the company, that value corresponds to cost either as a result
of
their short-term maturity or the floating-rate nature of some
loans.
Forward
exchange contracts
Forward
exchange contracts, which qualify for hedge accounting, are entered into by
the
company to hedge anticipated US-dollar-denominated sales and the related
accounts receivable. They are recorded at fair value in the balance sheet,
and
changes in their fair value are reported in accumulated other comprehensive
income. Upon the recognition of related hedged sales, accumulated changes in
fair value are reclassified in the statements of earnings. Unrecognized gains
on
forward exchange contracts as of August 31, 2007, in the amount of
$1,948,000, net of future income taxes of $916,000, have been reflected as
an
adjustment to the opening balance of accumulated other comprehensive income
for
the three months ended November 30, 2007. The forward exchange contracts are
presented in other receivables in the balance sheet.
Based
on
the portfolio of forward exchange contracts as of November 30, 2007, the company
estimates that the portion of the unrecognized gains on these contracts as
of
that date, which will be realized and reclassified from accumulated other
comprehensive income to net earnings over the next twelve months amounts to
$3,458,000.
Cumulative
foreign currency translation adjustment
The
cumulative foreign currency translation adjustment, which is solely the result
of the translation of the company’s consolidated financial statements in US
dollars (the reporting currency), represents a component of accumulated other
comprehensive income for all periods presented. This item was previously
presented as a separate component of shareholders’ equity.
Transition
The
company has elected to use September 1, 2002, as the transition date for
embedded derivatives.
Other
than the adjustments described above for the short-term investments and the
forward exchange contracts, the recognition, derecognition and measurement
methods used to prepare the consolidated financial statements have not changed
from the methods of periods prior to the effective date of the new standards.
Consequently, there were no further adjustments to record on
transition.
On
September 1, 2007, the company adopted Section 1506, “Accounting Changes”. This
Section establishes criteria for changes in accounting policies, accounting
treatment and disclosures regarding changes in accounting policies, estimates
and corrections of errors. In particular, this Section allows for voluntary
changes in accounting policy only when they result in the financial statements
providing reliable and more relevant information. Furthermore, this section
requires disclosure of when an entity has not applied a new source of GAAP
that
has been issued but is not yet effective. Such disclosure is provided below.
The
adoption of this Section had no effects on the company’s consolidated financial
statements for the three months ended November 30, 2007.
To
be adopted after fiscal 2008
In
December 2006, the CICA issued three new sections, which provide a complete
set
of disclosure and presentation requirements for financial instruments: Section
3862, “Financial Instruments − Disclosures”; Section 3863, “Financial
Instruments − Presentation”; and Section 1535, “Capital
Disclosures”.
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)
Section
3862 is the Canadian equivalent to International Financial Reporting Standards
(IFRS) 7, “Financial Instruments − Disclosures”, and replaces the
disclosure portion of Section 3861, “Financial
Instruments − Disclosure and Presentation”. The new standard places
increased emphasis on disclosures regarding risks associated with both
recognized and unrecognized financial instruments and how these risks are
managed. It is also intended to remove any duplicate disclosures and simplify
the disclosures about concentrations of risk, credit risk, liquidity risk and
price risk currently found in Section 3861.
Section
3863 carries forward the presentation requirements from Section 3861,
unchanged.
Section
1535 converges with the capital disclosures amendments to International
Accounting Standards (IAS) 1, “Presentation of Financial Statements”. Section
1535 applies to all entities regardless of whether they have financial
instruments and are subject to external capital requirements. The new section
requires disclosure of information about an entity’s objectives, policies and
processes for managing capital, as well as quantitative data about capital
and
whether the entity has complied with any capital requirements.
Sections
1535, 3862 and 3863 apply to fiscal years beginning on or after October 1,
2007.
The company will adopt these new standards on September 1, 2008, and is
currently assessing the effects these new standards will have on its
consolidated financial statements.
In
June
2007, the CICA issued Section 3031, “Inventories”, to harmonize accounting for
inventories under Canadian GAAP with IFRS. This standard requires the
measurement of inventories at the lower of cost and net realizable value and
includes guidance on the determination of cost, including allocation of
overheads and other costs to inventory. The standard also requires the
consistent use of either first-in, first-out (FIFO) or weighted average cost
formula to measure the cost of inventories and requires the reversal of previous
write-downs to net realizable value when there is a subsequent increase in
the
value of inventories. The new standard applies to fiscal years beginning on
or
after January 1, 2008. The company will adopt this new standard on September
1,
2008, and is currently assessing the effects this new standard will have on
its
consolidated financial statements.
|
3.
|
Inventories
|
|
As
at
November
30,
2007
|
As
at
August
31,
2007
|
|||||||
|
(unaudited)
|
||||||||
|
Raw
materials
|
$ | 17,806 | $ | 16,898 | ||||
|
Work
in progress
|
1,356 | 1,387 | ||||||
|
Finished
goods
|
14,207 | 13,228 | ||||||
| $ | 33,369 | $ | 31,513 | |||||
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)
|
4.
|
Accounts
payable and accrued liabilities
|
|
As
at
November
30,
2007
|
As
at
August
31,
2007
|
|||||||
|
(unaudited)
|
||||||||
|
Trade
|
$ | 8,723 | $ | 11,749 | ||||
|
Salaries
and social benefits
|
6,603 | 7,929 | ||||||
|
Warranty
|
850 | 800 | ||||||
|
Commissions
|
868 | 824 | ||||||
|
Other
|
1,534 | 1,419 | ||||||
| $ | 18,578 | $ | 22,721 | |||||
Changes
in the warranty provision are as follows:
|
Three
months ended
November
30,
|
||||||||
|
2007
|
2006
|
|||||||
|
(unaudited)
|
||||||||
|
Balance
–
Beginning
of the period
|
$ | 800 | $ | 1,006 | ||||
|
Provision
|
159 | 270 | ||||||
|
Settlements
|
(109 | ) | (421 | ) | ||||
|
Balance
–
End of the
period
|
$ | 850 | $ | 855 | ||||
|
5.
|
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
2004, an agreement of partial settlement was submitted to the court for
preliminary approval. The proposed partial settlement was between the
plaintiffs, the issuer defendants in the consolidated actions, the issuer
officers and directors named as defendants, and the issuers’ insurance
companies. The court granted the preliminary approval motion on
February 15, 2005, subject to certain modifications. On
August 31, 2005, the court issued a preliminary order further approving the
modifications to the settlement and certifying the settlement classes. The
court also appointed the notice administrator for the settlement and ordered
that notice of the settlement be distributed to all settlement class members
by
January 15, 2006. The settlement fairness hearing occurred on
April 24, 2006, and the court reserved decision at that time.
While
the
partial settlement was pending approval, the plaintiffs continued to litigate
against the underwriter defendants. The district court directed that the
litigation proceed within a number of “focus cases” rather than in all of the
310 cases that have been consolidated. The company's case is not one
of these focus cases. On October 13, 2004, the district court
certified the focus cases as class actions. The underwriter
defendants appealed that ruling, and on December 5, 2006, the Court of Appeals
for the Second Circuit reversed the district court’s class certification
decision.
On
April 6, 2007, the Second Circuit
denied the plaintiffs’
petitionfor
rehearing of that
decisionand,on
May 18, 2007, the Second Circuit
denied the plaintiffs’ petition for rehearing en banc. In light of
the Second Circuit opinion, liaison counsel for all issuer defendants,
including the company, informed the court that this settlement cannot be
approved, because the defined
settlement class, like the litigation class, cannot be
certified. On June 25, 2007, the district court entered an
order terminating the settlement agreement. On August 14, 2007, the
plaintiffs filed their second consolidated amended class action complaints
against the focus cases and, on September 27, 2007, again moved for class
certification. On November 12, 2007, certain of the defendants in the
focus cases moved to dismiss the second consolidated amended class action
complaints. Briefing on the motions to dismiss is scheduled to be completed
in
January 2008, and briefing on the class certification motion is
ongoing.
Due
to the inherent uncertainties of
litigation, it is not possible to predict the final outcome of the case,
nor to determine the amount of any possible losses. The company will continue
to
defend its position in this litigation that the claims against it, and its
officers, are without merit. Accordingly, no provision for this case has
been
made in the interim consolidated financial statements as at November 30,
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)
|
6.
|
Share
capital
|
On
November 5, 2007, the Board of Directors of the company approved a share
repurchase program, by way of a normal course issuer bid on the open market,
of
up to 9.9% of the company’s public float (as defined by the Toronto Stock
Exchange), or 2,869,585 subordinate voting shares, at the prevailing market
price. The company expects to use cash, short-term investments or future cash
flows from operations to fund the repurchase of shares. The normal course issuer
bid started on November 8, 2007, and will end on November 7, 2008, or
on an earlier date if the company repurchases the maximum number of shares
permitted under the bid. The program does not require the company to repurchase
any specific number of shares, and it may be modified, suspended or terminated
at any time and without prior notice. All shares repurchased by the company
under the bid will be canceled.
|
|
From
November 8 to November 30, 2007, the company redeemed 29,200 subordinate
voting shares for a total amount of $174,000. The excess of the redemption
price over the stated value of the subordinate voting shares of $39,000
has been recorded as a reduction of retained earnings.
|
|
|
The
following tables summarize changes in share capital for the three
months
ended November 30, 2006 and 2007:
|
|
Three
months ended November 30, 2006
|
||||||||||||||||||||
|
Multiple
voting shares
|
Subordinate
voting shares
|
|||||||||||||||||||
|
Number
|
Amount
|
Number
|
Amount
|
Total
amount
|
||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||
|
Balance
as at August 31, 2006
|
37,143,000 | $ | 1 | 31,609,969 | $ | 148,920 | $ | 148,921 | ||||||||||||
|
Exercise
of stock options
|
– | – | 41,550 | 121 | 121 | |||||||||||||||
|
Redemption
of restricted share units
|
– | – | 88 | – | – | |||||||||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise
of stock
awards
|
– | – | – | 47 | 47 | |||||||||||||||
|
Balance
as at November 30, 2006
|
37,143,000 | $ | 1 | 31,651,607 | $ | 149,088 | $ | 149,089 | ||||||||||||
|
Three
months ended November 30, 2007
|
||||||||||||||||||||
|
Multiple
voting shares
|
Subordinate
voting shares
|
|||||||||||||||||||
|
Number
|
Amount
|
Number
|
Amount
|
Total
amount
|
||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||
|
Balance
as at August 31, 2007
|
36,643,000 | $ | 1 | 32,361,561 | $ | 150,018 | $ | 150,019 | ||||||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise
of stock
awards
|
– | – | – | 2 | 2 | |||||||||||||||
|
Redemption
of share capital
|
– | – | (29,200 | ) | (135 | ) | (135 | ) | ||||||||||||
|
Balance
as at November 30, 2007
|
36,643,000 | $ | 1 | 32,332,361 | $ | 149,885 | $ | 149,886 | ||||||||||||
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.
|
Net
research and development expenses
|
|
Three
months ended
November
30,
|
||||||||
|
2007
|
2006
|
|||||||
|
(unaudited)
|
||||||||
|
Gross
research and development expenses
|
$ | 7,486 | $ | 5,509 | ||||
|
Research
and development tax credits and grants
|
(1,474 | ) | (1,155 | ) | ||||
| $ | 6,012 | $ | 4,354 | |||||
|
8.
|
Income
taxes
|
For
the
three months ended November 30, 2006 and 2007, the reconciliation of the income
tax provision calculated using the combined Canadian federal and provincial
statutory income tax rate with the income tax provision in the financial
statements is as follows:
|
Three
months ended
November
30,
|
||||||||
|
2007
|
2006
|
|||||||
|
(unaudited)
|
||||||||
|
Income
tax provision at combined Canadian federal and provincial statutory
tax
rate (32%)
|
$ | 374 | $ | 1,380 | ||||
|
Increase
(decrease) due to:
|
||||||||
|
Income
taxed at different rates
|
88 | 59 | ||||||
|
Non-taxable
income
|
(81 | ) | (59 | ) | ||||
|
Non-deductible
expenses
|
222 | 254 | ||||||
|
Change
in tax rates
|
(2 | ) | 271 | |||||
|
Foreign
exchange effect of translation of foreign integrated
subsidiaries
|
127 | 80 | ||||||
|
Other
|
159 | (123 | ) | |||||
|
Utilization
of previously unrecognized future income tax assets
|
− | (1,339 | ) | |||||
|
Unrecognized future
income tax assets on temporary deductible differences and unused
tax
losses and deductions
|
375 | 258 | ||||||
| $ | 1,262 | $ | 781 | |||||
The
income tax provision consists of the following:
|
Current
|
$ | 1,181 | $ | 781 | ||||
|
Future
|
(294 | ) | 1,081 | |||||
|
Valuation
allowance
|
375 | (1,081 | ) | |||||
| 81 | − | |||||||
| $ | 1,262 | $ | 781 |
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)
For
the
three months ended November 30, 2006, the company recorded a full valuation
allowance against its future income tax assets. During that period, the company
recorded an income tax expense of $781,000. Most of this expense represents
income taxes payable at the Canadian federal level, which are reduced by
research and development tax credits that are recorded against gross research
and development expenses in the statements of earnings.
|
9.
|
Earnings
per share
|
The
following table summarizes the reconciliation of the basic weighted average
number of shares outstanding and the diluted weighted average number of shares
outstanding:
|
Three
months ended
November
30,
|
||||||||
|
2007
|
2006
|
|||||||
|
(unaudited)
|
||||||||
|
Basic
weighted average number of shares outstanding (000’s)
|
69,000 | 68,775 | ||||||
|
Plus
dilutive effect of:
|
||||||||
|
Stock
options (000’s)
|
401 | 435 | ||||||
|
Restricted
share units (000’s)
|
201 | 132 | ||||||
|
Deferred
share units (000’s)
|
70 | 43 | ||||||
|
Diluted
weighted average number of shares outstanding (000’s)
|
69,672 | 69,385 | ||||||
|
Stock
awards excluded from the calculation of the diluted weighted average
number of shares because their exercise price was greater than the
average
market price of the common shares (000’s)
|
1,118 | 1,385 | ||||||
The
diluted net loss per share for the three months ended November 30, 2007, was
the
same as the basic net loss per share since the dilutive effect of stock options,
restricted share units and deferred share units should not be included in the
calculation; otherwise, the effect would be anti-dilutive. Accordingly, the
diluted net loss per share for that period was calculated using the basic
weighted average number of shares outstanding.
|
10.
|
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 November 30, 2007
|
||||||||||||
|
Telecom
Division
|
Life
Sciences and Industrial Division
|
Total
|
||||||||||
|
(unaudited)
|
||||||||||||
|
Sales
|
$ | 35,365 | $ | 5,620 | $ | 40,985 | ||||||
|
Earnings
from operations
|
$ | 21 | $ | 281 | $ | 302 | ||||||
|
Unallocated
items
|
||||||||||||
|
Interest
income
|
1,483 | |||||||||||
|
Foreign
exchange loss
|
(616 | ) | ||||||||||
|
Earnings
before income taxes
|
1,169 | |||||||||||
|
Income
taxes
|
1,262 | |||||||||||
|
Net
loss for the period
|
$ | (93 | ) | |||||||||
|
Three
months ended November 30, 2006
|
||||||||||||
|
Telecom
Division
|
Life
Sciences and Industrial Division
|
Total
|
||||||||||
|
(unaudited)
|
||||||||||||
|
Sales
|
$ | 29,522 | $ | 6,025 | $ | 35,547 | ||||||
|
Earnings
from operations
|
$ | 1,803 | $ | 956 | $ | 2,759 | ||||||
|
Unallocated
items
|
||||||||||||
|
Interest
income
|
1,172 | |||||||||||
|
Foreign
exchange loss
|
383 | |||||||||||
|
Earnings
before income taxes
|
4,314 | |||||||||||
|
Income
taxes
|
781 | |||||||||||
|
Net
loss for the period
|
$ | 3,533 | ||||||||||
Total
assets by reportable segment are detailed as follows:
|
As
at
November
30,
2007
|
As
at
August
31,
2007
|
|||||||
|
(unaudited)
|
||||||||
|
Total
assets
|
||||||||
|
Telecom
Division
|
$ | 118,668 | $ | 109,065 | ||||
|
Life
Sciences and Industrial Division
|
9,923 | 9,199 | ||||||
|
Unallocated
assets
|
164,519 | 160,874 | ||||||
| $ | 293,110 | $ | 279,138 | |||||
Unallocated
assets are comprised of cash, short-term investments, income taxes and tax
credits recoverable and future income tax assets.
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)
|
11.
|
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.
Comprehensive
income (loss) under U.S. GAAP
|
Three
months ended
November
30,
|
||||||||
|
2007
|
2006
|
|||||||
|
(unaudited)
|
||||||||
|
Net
earnings (loss) for the period in accordance with Canadian GAAP and
U.S. GAAP
|
$ | (93 | ) | $ | 3,533 | |||
|
Foreign
currency translation adjustment
|
13,182 | (5,832 | ) | |||||
|
Changes
in unrealized losses on available-for-sale securities
|
39 | − | ||||||
|
Unrealized
gains (losses) on forward exchange contracts, net of future income
taxes
of $624 (nil in 2007)
|
1,325 | (2,075 | ) | |||||
|
Reclassification
of realized gains on forward exchange contracts in net earnings (loss),
net of future income taxes of
$243
(nil in 2007)
|
(516 | ) | (736 | ) | ||||
|
Comprehensive
income (loss)
|
$ | 13,937 | $ | (5,110 | ) | |||
|
Basic
and diluted net earnings (loss) per share in accordance with U.S.
GAAP
|
$ | (0.00 | ) | $ | 0.05 | |||
|
Basic
weighted average number of shares outstanding (000’s)
|
69,000 | 68,775 | ||||||
|
Diluted
weighted average number of shares outstanding (000’s)
|
69,000 | 69,385 | ||||||
Reconciliation
of shareholders’ equity to conform to U.S. GAAP
The
following summary sets out the significant differences between the company’s
reported shareholders’ equity under Canadian GAAP as compared to U.S.
GAAP:
|
As
at
November
30,
2007
|
As
at
August
31,
2007
|
|||||||
|
(unaudited)
|
||||||||
|
Shareholders’
equity in accordance with Canadian GAAP
|
$ | 266,916 | $ | 250,165 | ||||
|
Forward
exchange contracts (note 2)
|
– | 2,864 | ||||||
|
Goodwill
|
(13,421 | ) | (12,697 | ) | ||||
|
Future
income tax assets (note 2)
|
– | (916 | ) | |||||
|
Stock
appreciation rights
|
(73 | ) | (73 | ) | ||||
|
Shareholders’
equity in accordance with U.S. GAAP
|
$ | 253,422 | $ | 239,343 | ||||
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, 2007:
|
Share
capital
|
Contributed
surplus
|
Deficit
|
Other
capital
|
Accumulated
other comprehensive income
|
Shareholders’
equity
|
|||||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||||||
|
Balance
as at August 31, 2007
|
$ | 599,519 | $ | 1,537 | $ | (416,687 | ) | $ | 4,684 | $ | 50,290 | $ | 239,343 | |||||||||||
|
Net
loss for the period
|
– | – | (93 | ) | – | – | (93 | ) | ||||||||||||||||
|
Stock-based
compensation costs
|
– | – | – | 316 | – | 316 | ||||||||||||||||||
|
Foreign
currency translation adjustment
|
– | – | – | – | 13,182 | 13,182 | ||||||||||||||||||
|
Unrealized
losses on available-for-sale securities
|
– | – | – | – | 39 | 39 | ||||||||||||||||||
|
Net
unrealized gains on forward exchange contracts, net of future income
taxes
|
– | – | – | – | 809 | 809 | ||||||||||||||||||
|
Reclassification
of stock-based compensation costs upon exercise of stock
awards
|
2 | – | – | (2 | ) | – | – | |||||||||||||||||
|
Redemption
of share capital
|
(135 | ) | – | (39 | ) | – | – | (174 | ) | |||||||||||||||
|
Balance
as at November 30, 2007
|
$ | 599,386 | $ | 1,537 | $ | (416,819 | ) | $ | 4,998 | $ | 64,320 | $ | 253,422 | |||||||||||
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 under U.S. GAAP is comprised of the
following:
|
As
at
November
30,
2007
|
As
at
August
31,
2007
|
|||||||
|
(unaudited)
|
||||||||
|
Foreign
currency translation adjustment
|
||||||||
|
Current
period
|
$ | 13,182 | $ | 9,218 | ||||
|
Cumulative
effect of prior periods
|
48,397 | 39,179 | ||||||
| 61,579 | 48,397 | |||||||
|
Unrealized
gains (losses) on forward exchange contracts
|
||||||||
|
Current
period, net of future income taxes of $381 ($916 as at August 31,
2007)
|
809 | (3,503 | ) | |||||
|
Cumulative
effect of prior periods, net of future income taxes of $916 (nil
as at
August 31, 2007)
|
1,948 | 5,451 | ||||||
| 2,757 | 1,948 | |||||||
|
Unrealized
losses on available-for-sale securities
|
||||||||
|
Current
period
|
39 | (55 | ) | |||||
|
Cumulative
effect of prior periods
|
(55 | ) | − | |||||
| (16 | ) | (55 | ) | |||||
| $ | 64,320 | $ | 50,290 | |||||
Research
and development tax credits
Under
Canadian GAAP, all research and development tax credits are recorded as a
reduction of gross research and development expenses. Under U.S. GAAP, tax
credits that are utilizable against income taxes payable are recorded in the
income taxes. These tax credits amounted to $771,000 and $980,000 for the three
months ended November 30, 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 months ended November 30, 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
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)
New
accounting standards and pronouncements
Adopted
in fiscal 2008
In
June
2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for
Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109”,
which clarifies the accounting for uncertainties in income taxes recognized
in
accordance with SFAS 109, “Accounting for Income Taxes”. The interpretation is
effective for fiscal years beginning after December 15, 2006. The company
adopted this interpretation on September 1, 2007, and its adoption had no impact
on the company consolidated financial statements. Upon the adoption of FIN
48,
the company elected to classify interest and penalties in interest
expense.
To
be adopted after fiscal 2008
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 consolidated 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. The company will adopt this statement on
September 1, 2008 and has not yet determined if it will elect to use
the fair value option.
On
December 4, 2007, the FASB issued SFAS 141(R), “Business
Combinations”, and SFAS 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51”. These
new standards will significantly change the accounting and reporting for
business combination transactions and noncontrolling (minority) interests
in
consolidated financial statements. SFAS 141(R) and SFAS160 are required to
be adopted simultaneously and are effective for the first annual reporting
period beginning on or after December 15, 2008. Earlier adoption is
prohibited. The company is currently evaluating the impact of adopting
SFAS 141(R) and SFAS 160 on its consolidated financial
statements.
|
12.
|
Subsequent
event
|
On
December 14, 2007, reductions to the Canadian federal statutory tax rate,
previously announced by the Canadian federal Government were enacted. Therefore,
based on the company’s best estimates, Canadian federal future income tax assets
should decrease by approximately $1,500,000, and generate a future income
tax
expense for the same amount. This reduction in future income tax assets will
be
recorded in the company’s interim consolidated financial statements for the
three- and six-month periods ending February 29, 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 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. Unless required by law or applicable regulations, we undertake
no
obligation to revise or update any of them to reflect events or circumstances
that occur after the date of this document.
The
following discussion and analysis of financial condition and results of
operations is dated January 3, 2008.
All
dollar amounts are expressed in US dollars, except as otherwise
noted.
INDUSTRY
OVERVIEW
The
fundamentals of the wireline telecom industry are fairly robust in most regions
of the world, based upon exponential growth in bandwidth demand, intense
competition – mainly in the United States – between telecom operators (telcos)
and cable companies (cablecos) pushing massive network investments, and
significant operational efficiencies and service revenues generated by fully
converged IP (Internet protocol) networks.
Global
Internet bandwidth grew at a compound annual growth rate (CAGR) of 45% from
2003
to 2006, according to TeleGeography Research. This trend is likely to
remain steady, if not accelerate, with the upcoming anticipation and explosion
of IPTV (Internet protocol
television) and HD-IPTV (high-definition Internet protocol television),
as this will consume a colossal amount of additional bandwidth. As a
result, telcos and cablecos are investing substantially in their access networks
in order to provide differentiated, revenue-generating services to attract
and
retain consumers who are increasingly relying on broadband network services
for
their work, entertainment and everyday activities. From a telco perspective,
it
is now clear that fiber-to-the-premises (FTTP) will become the access
network architecture of choice, which will allow them to meet heightened
bandwidth requirements and future-proof their access networks as residential
bandwidth requirements are growing from the 1 to 5 Mbit/s (megabits per second)
of the past to the 30 to 100 Mbit/s required in the future to assure multiple
HD-IPTV channels, online gaming, high-speed content-rich Internet, VoIP
(voice-over-Internet-protocol) telephony, and a myriad of additional
IP-based applications. Hybrid architectures, combining copper and fiber
(fiber-to-the-curb, or FTTC, and fiber-to-the-node, or FTTN), will also
keep expanding in the short term, since they are less expensive methods to
increase bandwidth and can be mass-deployed faster.
These
investment decisions are applicable not only to green-field deployments and
high-rise buildings, but also to larger-scale rollouts as operating costs
are
less than FTTC and FTTN. It is important to mention that the cost of deploying
fiber-to-the-home (FTTH) has largely been falling over the last three years
as
volume increased and deployment tools, like those we offer, are making the
task
increasingly easier. We are only at the early stages of fiber deployments
in
access networks both in the Americas and around the world.
As
bandwidth growth in access networks continues to increase, it has begun placing
a strain on metro rings and core networks. It is also driving the need for
higher-speed technologies, such as 43 Gbit/s (gigabits per
second) SONET/SDH
and 100 Gbit/s Ethernet, because these solutions are expected to be
significantly more economical, especially if one will be forced to dig trenches
to deploy new fiber in metro or long-distance routes.
As
telecommunication networks are being transformed to provide IP-based voice,
video and data capabilities, the legacy SONET/SDH networks, which were designed
in the 1980s and 1990s and implemented until 2005, will not be capable of
efficiently carrying these emerging IP-based services as they are based on
design standards aimed at public switched telephone network (PSTN)
point-to-point voice transmission only. As a result, telcos are increasingly
turning to more flexible and future-proof IP-based, next-generation networks
to
allow for more versatile and efficient transport of a new range of applications
and services, and to offer customers higher-margin triple-play services while
reducing their operating costs.
These
market dynamics positively affected telecom test and measurement suppliers
in the first quarter of 2008 and should persist in following quarters,
unless global macro-economic forces, especially in the United States, instigate
a slowdown in capital spending.
COMPANY
OVERVIEW
We
reported sales of $41.0 million in the first quarter of fiscal 2008, which
represented an increase of 15.3% year-over-year. Our corporate performance
metric for sales growth in fiscal 2008 was established at 20% year-over-year.
Net accepted orders amounted to $43.7 million in the first quarter of fiscal
2008 for a book-to-bill ratio of 1.07.
Looking
at the bottom line, we incurred a GAAP net loss of $93,000, or $0.00 per
share,
in the first quarter of fiscal 2008, compared to net earnings of $3.5
million, or $0.05 per diluted share, for the same period last
year. Net loss per share in the first quarter of 2008 included
charges of $0.01 for stock-based compensation costs and the after-tax
amortization expense for intangible assets. In terms of earnings from
operations, it reached 0.7% of sales in the first quarter of fiscal 2008
compared to our stated goal of 8% for the whole fiscal year.
During
the first quarter of fiscal 2008, we faced a substantial and sudden increase
in
the value of the Canadian dollar versus the US dollar, which had a two-fold
impact on our financial results. Firstly, the average value of the Canadian
dollar increased 13.8% in the first quarter of fiscal 2008, compared to
the same
period last year. Given that most of our sales are denominated in US dollars
but
a significant portion of our expenses are denominated in Canadian dollars,
our
financial resulted were negatively affected. Secondly, we incurred an exchange
loss of $616,000, or $0.01 per share in the first quarter of fiscal 2008,
which
represents the effect of the increase in the value of the Canadian dollar
versus
the US dollar on our balance sheet items denominated in foreign currencies.
In
comparison, for the same period last year, we reported a foreign exchange
gain
of $383,000, or $0.01 per share.
On
November 5, 2007, the Board of Directors approved a share repurchase program,
by
way of normal course issuer bid on the open market, up to 9.9% of our public
float (as defined by the Toronto Stock Exchange), or 2.9 million
of subordinate voting shares, at the prevailing market price. We expect to
use cash, short-term investments, or future cash flows from operating activities
to fund the repurchase of shares. The normal course issuer bid started
on November 8, 2007, and will end on November 7, 2008, or an
earlier date if we repurchase the maximum number of shares permitted under
the bid. The program does not require that we repurchase any specific number
of
shares, and it may be modified, suspended or terminated at any time, without
prior notice. All shares repurchased under the bid will be canceled. During
the
first quarter of fiscal 2008, we redeemed 29,200 subordinated voting shares
for
a total consideration of $174,000.
During
the first quarter of fiscal 2008, we launched six new products, including
a multiservice, multimedium
modular handheld platform for
characterizing and troubleshooting access networks (AXS-200 SharpTESTER)
with
related modules for the rapid installation and maintenance of ADSL/ADSL2/ADSL2+
(AXS-200/620) and Ethernet/IP services (AXS-200/850), as well as a
compact
multiservice transport
test
set that combines next-generation SONET/SDH and Ethernet testing inside
a single
module (FTB-8120NGE/FTB-8130NGE Power Blazer). Following the quarter-end,
we
released two additional key products, namely a 40/43 Gbit/s SONET/SDH field-test
solution for high-speed optical networks (FTB-8140 Transport Blazer) and
an
all-in-one CD and PMD Analyzer (FTB-5700 Single-End Dispersion Analyzer)
that
requires only one technician to characterize a link from a single end.
Sales from products that have been on the market two years or less represented
33.8% of total sales in the first quarter of fiscal 2008, while our published
goal is 30% for the fiscal year.
On
December 14, 2007, reductions to the Canadian federal statutory tax
rate,
previously announced by the Canadian federal Government were enacted.
Therefore,
based on our best estimates, our Canadian federal future income tax
assets
should decrease by approximately $1,500,000, and generate a future
income tax
expense for the same amount. This reduction in future income tax assets
will be
recorded in our interim consolidated financial statements for the three-
and
six-month periods ending February 29, 2008.
OUR
STRATEGY, KEY PERFORMANCE INDICATORS AND CAPABILITY TO DELIVER
RESULTS
For
a complete description of our
strategy and the related key performance indicators, as well as our capability
to deliver results in fiscal 2008, please refer to the corresponding sections
in
our most recent Annual Report, filed with the securities
commissions.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES AND CHANGES IN ACCOUNTING
POLICIES
For
a
complete description of our critical accounting policies and estimates,
please
refer to the corresponding section in our most recent Annual Report, filed
with
the securities commissions. The following details the changes in critical
accounting policies that were adopted in fiscal 2008 and those to be adopted
after 2008.
Adopted
in fiscal 2008
On
September 1, 2007, we adopted the Canadian Institute of Chartered Accountants
(CICA) Handbook Section 1530, ‘’Comprehensive Income’’, Section 3251, Equity’’,
Section 3855, ‘’Financial Instruments – Recognition and Measurement’’, and
Section 3865, ‘’Hedges’’. Sections 3251 and 3865 have been adopted prospectively
while Section 3855 has been applied retroactively, without restatement of
prior
years’ financial statements and Section 1530 has been applied retroactively with
restatement of prior years’ financial statements.
Following
the
adoption of Section 3855, the company classified its financial instruments
as
follows:
Cash
Cash
is
classified as financial assets held for trading and is carried at fair value
in
the balance sheet and any changes in its fair value is reflected in net
earnings.
Short-term
investments
We
elected to classify our short-term investments as available-for-sale securities,
and therefore, they are carried at fair value with any changes in their fair
value being reflected in accumulated other comprehensive income. Upon the
disposal or maturity of these assets, accumulated changes in their fair value
are reclassified in the statements of earnings. Also, upon the adoption of
this
new standard, unrealized losses on short-term investments as of August 31,
2007,
in the amount of $55,000 (previously recorded in the statements of earnings),
have been reclassified from the opening balance of retained earnings to the
opening balance of accumulated other comprehensive income.
Accounts
receivable
Accounts
receivable are classified as loans and receivable. After their initial
measurement at fair value, they are carried at amortized cost, which generally
corresponds to cost due to their short-term maturity.
Bank
loan and accounts payable and accrued liabilities
Bank
loan
and accounts payable and accrued liabilities are classified as other financial
liabilities. They are initially presented at their fair value. Subsequent
measurements are at cost, net of amortization, using the effective interest
rate
method. For the company, that value corresponds to cost either as a result
of
their short-term maturity or the floating-rate nature of some
loans.
Forward
exchange contracts
Our
forward exchange contracts, which qualify for hedge accounting, are used
to
hedge anticipated US-dollar-denominated sales and the related accounts
receivable. They are recorded at fair value in the balance sheet with changes
in
their fair value being reported in accumulated other comprehensive income.
Upon
the recognition of related hedged sales, accumulated changes in fair value
are
reclassified in the statements of earnings. Unrecognized gains on forward
exchange contracts as of August 31, 2007, in the amount of $1.9
million, net of future income taxes of $916,000, have been reflected as an
adjustment to the opening balance of accumulated other comprehensive income.
The
forward exchange contracts are presented in other receivables in the balance
sheet.
Cumulative
translation adjustment
The
cumulative translation adjustment, which is solely the result of the translation
of our consolidated financial statements in US dollars (our reporting currency),
represents a component of accumulated other comprehensive income for all
periods
presented. This item was previously presented as a separate component of
shareholders’ equity.
Transition
We elected to use September 1, 2002, as the transition date for embedded
derivatives.
Other than the adjustments described above for the short-term investments
and
the forward exchange contracts, the recognition, derecognition and measurement
methods used to prepare the consolidated financial statements have not changed
from the methods of periods prior to the effective date of the new standards.
Consequently, there were no further adjustments to record on
transition.
On
September 1, 2007, we adopted Section 1506, “Accounting Changes”. This Section
establishes criteria for changes in accounting policies, accounting treatment
and disclosures regarding changes in accounting policies, estimates and
corrections of errors. In particular, this Section allows for voluntary changes
in accounting policy only when they result in the financial statements providing
reliable and more relevant information. Furthermore, this section requires
disclosure of when an entity has not applied a new source of GAAP that has
been
issued but is not yet effective. The adoption of this Section had no further
effects on our consolidated financial statements for the three months ended
November 30, 2007.
To
be adopted after fiscal 2008
In
December 2006, the CICA issued three new sections, which provide a complete
set
of disclosure and presentation requirements for financial instruments: Section
3862, “Financial Instruments − Disclosures”; Section 3863, “Financial
Instruments − Presentation”; and Section 1535, “Capital
Disclosures”.
Section
3862 is the Canadian equivalent to International Financial Reporting Standards
(IFRS) 7, “Financial Instruments − Disclosures”, and replaces the
disclosure portion of Section 3861, “Financial
Instruments − Disclosure and Presentation”. The new standard places
increased emphasis on disclosures about risks associated with both recognized
and unrecognized financial instruments and how these risks are managed. It
is
also intended to remove any duplicate disclosures and simplify the disclosures
about concentrations of risk, credit risk, liquidity risk and price risk
currently found in Section 3861.
Section
3863 carries forward the presentation requirements from Section 3861,
unchanged.
Section
1535 converges with the capital disclosures amendments to International
Accounting Standards (IAS) 1, “Presentation of Financial Statements”. Section
1535 applies to all entities regardless of whether they have financial
instruments and are subject to external capital requirements. The new section
requires disclosure of information about an entity’s objectives, policies and
processes for managing capital, as well as quantitative data about capital
and
whether the entity has complied with any capital requirements.
Sections
1535, 3862 and 3863 apply to fiscal years beginning on or after October 1,
2007.
We will adopt these new standards on September 1, 2008, and are currently
assessing the effects these new standards will have on our consolidated
financial statements.
In
June
2007, the CICA issued Section 3031, “Inventories” to harmonize accounting for
inventories under Canadian GAAP with IFRS. This standard requires the
measurement of inventories at the lower of cost and net realizable value
and
includes guidance on the determination of cost, including allocation of
overheads and other costs to inventory. The standard also requires the
consistent use of either first-in, first-out (FIFO) or weighted average cost
formula to measure the cost of inventories and requires the reversal of previous
write-downs to net realizable value when there is a subsequent increase in
the
value of inventories. The new standard applies to fiscal years beginning
on or
after January 1, 2008. We will adopt this new standard on September 1, 2008,
and
are currently assessing the effects this new standard will have on our
consolidated financial statements.
RESULTS
OF OPERATIONS
The
following discussion and analysis of our consolidated financial condition
and
results of operations for the three months ended November 30, 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 United States generally accepted accounting principles
(U.S. GAAP) are set out in note 11 to our interim consolidated financial
statements. Our measurement currency is the Canadian dollar although we report
our financial statements in US dollars. The following table sets forth
interim consolidated statements of earnings data in thousands of US dollars,
except per share data, and as a percentage of sales for the periods
indicated:
|
Three
months ended
November
30,
|
Three
months ended
November
30,
|
|||||||||||||||
|
2007
|
2006
|
2007
|
2006
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
Consolidated
statements of earnings data:
|
||||||||||||||||
|
Sales
|
$ | 40,985 | $ | 35,547 | 100.0 | % | 100.0 | % | ||||||||
|
Cost
of sales (1)
|
18,144 | 15,229 | 44.3 | 42.8 | ||||||||||||
|
Gross
margin
|
22,841 | 20,318 | 55.7 | 57.2 | ||||||||||||
|
Operating
expenses
|
||||||||||||||||
|
Selling
and administrative
|
14,817 | 11,542 | 36.2 | 32.5 | ||||||||||||
|
Net
research and development
|
6,012 | 4,354 | 14.7 | 12.2 | ||||||||||||
|
Amortization
of property, plant and equipment
|
976 | 781 | 2.3 | 2.2 | ||||||||||||
|
Amortization
of intangible assets
|
734 | 882 | 1.8 | 2.5 | ||||||||||||
|
Total
operating expenses
|
22,539 | 17,559 | 55.0 | 49.4 | ||||||||||||
|
Earnings
from operations
|
302 | 2,759 | 0.7 | 7.8 | ||||||||||||
|
Interest
income
|
1,483 | 1,172 | 3.7 | 3.3 | ||||||||||||
|
Foreign
exchange gain (loss)
|
(616 | ) | 383 | (1.5 | ) | 1.1 | ||||||||||
|
Earnings
before income taxes
|
1,169 | 4,314 | 2.9 | 12.2 | ||||||||||||
|
Income
taxes
|
||||||||||||||||
|
Current
|
1,181 | 781 | 2.9 | 2.2 | ||||||||||||
|
Future
|
81 | − | 0.2 | − | ||||||||||||
| 1,262 | 781 | 3.1 | 2.2 | |||||||||||||
|
Net
earnings (loss) for the period
|
$ | (93 | ) | $ | 3,533 | (0.2 | )% | 10.0 | % | |||||||
|
Basic
and diluted net earnings (loss) per share
|
$ | (0.00 | ) | $ | 0.05 | |||||||||||
|
Segment
information:
|
||||||||||||||||
|
Sales:
|
||||||||||||||||
|
Telecom
Division
|
$ | 35,365 | $ | 29,522 | 86.3 | % | 83.1 | % | ||||||||
|
Life
Sciences and Industrial Division
|
5,620 | 6,025 | 13.7 | 16.9 | ||||||||||||
| $ | 40,985 | $ | 35,547 | 100.0 | % | 100.0 | % | |||||||||
|
Earnings
from operations:
|
||||||||||||||||
|
Telecom
Division
|
$ | 21 | $ | 1,803 | 0.1 | % | 5.1 | % | ||||||||
|
Life
Sciences and Industrial Division
|
281 | 956 | 0.6 | 2.7 | ||||||||||||
| $ | 302 | $ | 2,759 | 0.7 | % | 7.8 | % | |||||||||
|
Research
and development data:
|
||||||||||||||||
|
Gross
research and development
|
$ | 7,486 | $ | 5,509 | 18.3 | % | 15.5 | % | ||||||||
|
Net
research and development
|
$ | 6,012 | $ | 4,354 | 14.7 | % | 12.2 | % | ||||||||
(1)
The
cost of sales is exclusive of amortization, shown
separately.
SALES
For
the
three months ended November 30, 2007, our global sales increased 15.3% to
$41.0 million from $35.5 million for the same period last year, with
an 86%-14% split in favor of our Telecom Division (83%-17% in 2007).
Telecom
Division
For
the three months ended November 30,
2007, our Telecom Division sales increased 19.8% to $35.4 million from
$29.5 million for the same period last year.
During
the first quarter of fiscal
2008, we posted significant sales growth due to market-share gains in optical
testing and due to continued spending in access networks fueled by the
competitive dynamic between telephone and cable companies.
During
the first quarter of fiscal
2008, sales of our protocol test solutions were flat year-over-year. The
stability in sales of protocol test solutions was more of a timing issue
as
bookings for that product line for the first quarter of fiscal 2008 increased
27.4% in the first quarter of 2008, compared to the same period last year.
In
addition, we recently launched two major and strategic protocol test solutions
with the compact multiservice
transport test set that combines
next-generation SONET/SDH and Ethernet testing inside a single module
(FTB-8120NGE/FTB-8130NGE
Power Blazer) and the 40/43
Gbit/s SONET/SDH field-test solution for high-speed optical networks (FTB-8140
Transport Blazer).
These new products provide significant competitive advantage and should
contribute to the top line in the upcoming quarters. As a percentage of
telecom
sales, protocol test solutions represented more than 10% during the three
months
ended November 30, 2007.
Sales
of our copper-access test
solutions slightly increased year-over-year as large-scale IPTV deployments
have
been delayed until calendar 2008, which impacted our sales of the quarter
to
some extent. Also, during the first three months of fiscal 2008, we launched
new
added-value products that integrate Consultronics core knowledge and
intellectual property; namely, the new AXS-200 SharpTESTER. These new innovative
products have yet to contribute to our sales for this market
segment.
Life
Sciences and Industrial Division
For
the
three months ended November 30, 2007, sales of our Life Sciences and Industrial
Division decreased 6.7% to $5.6 million from $6.0 million for the same
period
last year.
The
decrease in sales in the first quarter of fiscal 2008, compared to the
same
period last year, comes from both curing and fluorescence illumination
markets.
A significant portion of sales of that Division is made via Original Equipment
Manufacturer (OEM) agreements. Consequently, we are dependant, to some
extent,
on the buying pattern of our customers and our sales may fluctuate
quarter-over-quarter.
Net
Bookings
Overall,
for the two divisions, net accepted orders increased 18.2% to $43.7 million
in
the first quarter of fiscal 2008 from $37.0 million for the same period
last
year. Our book-to-bill ratio rose to 1.07 in the first quarter of fiscal
2008,
compared to 1.04 for the same period last year.
Geographic
distribution
For
the
three months ended November 30, 2007, sales to the Americas, Europe-Middle
East-Africa (EMEA) and Asia-Pacific (APAC) accounted for 58%, 24% and 18%
of
global sales, respectively. For the corresponding period last year, sales
to the
Americas, EMEA and APAC accounted for 57%, 29% and 14% of global sales,
respectively.
For
the
three months ended November 30, 2007, we reported sales increases in dollars
in
the Americas and APAC while sales to EMEA slightly decreased year-over-year.
In
fact, sales to the Americas and APAC increased (in dollars) 16.5% and 48.2%,
respectively while sales to EMEA decreased 3.0% year-over-year.
In
the
Americas, the increase in sales in dollars during the three months ended
November 30, 2007, compared to the same period last year comes from every
region, where we witnessed an increase in sales of our optical test solutions.
Despite the fact that sales to our top customer, who is located in the United
States, decreased year-over-year, we were able to increase our sales to the
Americas by 16.5% (in dollars) during the first quarter of fiscal 2008; this
means that we have diversified our customer base year-over-year in this market.
Sales to this customer represented $4.6 million, or 11.3% of global sales
in the
first quarter of 2008, compared to $4.9 million, or 13.9% of our global
sales during the same period last year.
The
slight decrease in sales in EMEA comes from Africa, where we shipped large
orders in the first quarter of fiscal 2007. Otherwise, we reported sales
growth
in Europe, which is the main market in this geographic region. In fact, during
the first quarter of fiscal 2008, we reported high bookings in EMEA market,
following our efforts to aggressively develop this market in the last several
years and investments to increase our sales presence and develop 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 addition, we are leveraging
our FTTx leadership gained in the United States to provide consultancy with
many
of the early adopters in this field in EMEA.
In
the
APAC market, we are starting to see the impact of the introduction of some
specific optical, protocol and life science and industrial products as we
steadily increase our market presence in this growth region. Many of our
new
products are tailored for the Asian market and this allows us to be highly
competitive in many opportunities; this explains the increase in sales in
this
region in the first quarter of fiscal 2008, compared to the corresponding
period
last year. However, a significant portion of our sales to this market are
made
through tenders, which vary in number and importance
year-over-year.
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 November 30, 2007, our
top
customer accounted for 11.3% ($4.6 million) of our global sales and our top
three customers accounted for 16.5% of our global sales. For the corresponding
period last year, the same single customer accounted for 13.9% ($4.9 million)
of
our global sales and our top three customers accounted for 19.5% of our
global
sales.
GROSS
MARGIN
Gross
margin amounted to 55.7% of sales for the three months ended
November 30, 2007, compared to 57.2% for the same period last
year.
The
decrease in our gross margin in the first quarter of fiscal 2008, compared
to
the same period last year, can be explained by the following factors. First,
the
shift in product mix in favour of our optical test solutions compared to
protocol and copper-access test solutions resulted in a lower gross margin
in
the first quarter of fiscal 2008, compared to the same period last year.
Optical
test solutions tend to have lower margins than protocol and copper-access
product lines. In addition, the shift in the geographic distribution of sales
in
favour of APAC versus EMEA had a negative impact on our gross margin in the
first quarter of fiscal 2008 compared to the same period last year. In fact,
sales to APAC tend to have lower margins than sales to EMEA since we are
facing
higher pricing pressure in the APAC region. Furthermore, a stronger Canadian
dollar, compared to the US dollar year-over-year, had a negative impact on
our gross margin as some cost of sales items are denominated in Canadian
dollars. Finally, the start-up of our own manufacturing activities in China,
over the last few months, resulted in additional expenses, which reduced
our
gross margin in the first quarter of fiscal 2008, compared to the same period
last year.
However,
the increase in sales year-over-over resulted in an increase in manufacturing
activities, allowing us to better absorb our fixed manufacturing costs,
which
had a positive impact on our gross margin year-over-year.
Considering
the expected sales growth in fiscal 2008, the expected increase in sales
of
protocol products (which tend to generate higher margins), the cost-effective
design of our products, our manufacturing activities in China (which we
believe
should lower our cost of goods over time), our tight control on operating
costs,
we expect our gross margin to improve in 2008 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, challenges encountered in
the
ramp-up of our manufacturing facilities in China, and increases in product
offerings by other suppliers in our industry. Finally, any further increase
in
the strength of the Canadian dollar would have a negative impact on our
gross
margin in fiscal 2008.
SELLING
AND ADMINISTRATIVE
For
the
three months ended November 30, 2007, selling and administrative expenses
were
$14.8 million, or 36.2% of sales, compared to $11.5 million, or 32.5% of
sales
for the same period last year.
During
the first quarter of
fiscal 2008, the substantial and sudden increase in the
average value of the Canadian dollar compared to the US dollar
had a significant and negative impact on our selling and administrative
expenses as
more than half of these expenses are denominated in Canadian dollarsand also
because these
expenses increased year-over-year.In
addition, during
the first quarter of
fiscal 2008, we continued intensifying our sales and marketing activities
to develop our markets and leverage our significant research and development
investments; this resulted in higher sales and marketing expenditures (including
number of employees and expenses to support the launch of several new products
and to increase brand name recognition), compared to the corresponding
period
last year. Furthermore,
our overall commission expenses increased in the first quarter of fiscal
2008,
compared to the same period last year, due to the increase in sales
year-over-year. Finally, during the first quarter of fiscal 2008, we
discontinued certain product lines, which led to the lay-off of some of
our
sales and marketing personnel, resulting in severance expenses during
that period. However, despite the significant increase in the average value
of
the Canadian dollar versus the US dollar and the growth of our business
year-over-year (with among other things manufacturing and R&D activities in
China and India), our G&A expenses remained relatively flat in dollar
year-over-year due to tight control over these expenses.
For
fiscal 2008, considering the actual value of the Canadian dollar compared
to the
US dollar, we expect our selling and administrative expenses to increase
in
dollars and reach the top of our expected range of 30% and 32% of sales.
In
particular, in fiscal 2008, we expect our commission expenses to increase
as
sales volume increases. Furthermore, considering our goal of becoming the
leading player in the telecom test, measurement and monitoring space, we
plan to
continue intensifying our sales and marketing efforts, both domestic and
international, which will also cause our expenses to rise. Finally, any further
increase in the strength of the Canadian dollar would also cause our selling
and
administrative expenses to increase, as more than half of these expenses
are
incurred in Canadian dollars.
RESEARCH
AND DEVELOPMENT
For
the
three months ended November 30, 2007, gross research and development expenses
totalled $7.5 million, or 18.3% of sales, compared to $5.5 million, or
15.5% of sales for the same period last year.
During
the first
quarterof fiscal
2008, the significant and rapidincrease
in the average value
of the Canadian dollar compared to the US dollar had also a
significant and negative
effect on our gross research and development expenses as most of these expenses
are denominated in Canadian dollars and also because these expenses increased
year-over-year. In
addition, we intensified our research and development activities, including
additional employees, which resulted in more gross research and development
expenses in both divisions during the first quarter of fiscal 2008, compared
to
the same period last year. Furthermore,
we established a
research and development center focused on software development in Pune,
India, which resulted in increased expenses year-over-year. Finally, during
the
first quarter of fiscal 2008, we closed down our R&D operations in Budapest,
Hungary, and certain R&D projects, which resulted in severance expenses
during that period, causing our expenses to increase
year-over-year.
The
increase in our gross research and development expenses as a percentage of
sales
year-over-year is mainly due to the negative effect of the increased value
of
the Canadian dollar versus the US dollar year-over-year and the severance
expenses incurred during the first quarter of fiscal 2008.
For
the
three months ended November 30, 2007, tax credits and grants from the Canadian
federal and provincial governments for research and development activities
were
$1.5 million, or 19.7% of gross research and development expenses, compared
to
$1.2 million, or 21.0% of gross research and development expenses for the
same
period last year.
The
increase in dollars of our tax credits and grants in the first quarter
of fiscal
2008, compared to the same period last year is directly related to the
increase
in our gross research and development expenses as we were entitled to the
same
tax credits and grants programs. However, the decrease of research and
development tax credits as a percentage of gross research and development
expenses is mainly due to the fact that since the beginning of fiscal 2008,
the
portion of gross research and development incurred in Canada, where we
are
entitled to tax credits was lower than the same period last year following
the
establishment of our new software development center in
India.
For
the
first quarter of fiscal 2008, 33.8% of our sales originated from products
that
have been on the market for two years or less, which is above our stated
goal of
30% for fiscal 2008.
For
fiscal 2008, we plan to increase our research and development expenses at
about
the same rate we grow our sales, given our focus on innovation, the addition
of
software features in our products, our desire to gain market shares and our
goal
to exceed customer needs and expectations. Also, we are increasingly taking
advantage of talent pools around the world with the recent establishment
of a
research and development center focused on software development in Pune,
India. Finally, any further increase in the strength of the Canadian dollar
in
the upcoming quarters would cause our net research and development expenses
to
increase, as most of these are incurred in Canadian dollars.
AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
For
the three months ended
November 30, 2007, amortization of property, plant and equipment was
$976,000,
compared to $781,000 for the same period last year. The increase
in the average
value of
the
Canadian dollar versus to
the US dollar in
the first quarter of
fiscal 2008, compared to the same period last year contributed to increase
our
amortization expenses as
most of these
expenses
are denominated in Canadian
dollars. In
addition, the recent start-up of our own manufacturing and research and
development facilities in China and India resulted in an increase in
our
amortization expenses during the first quarter of fiscal 2008 compared
to the
same period last year.
AMORTIZATION
OF INTANGIBLE ASSETS
In
conjunction with the business combinations we completed over the past several
years, we recorded intangible assets, primarily consisting of core technology.
These intangible assets resulted in amortization expense of $734,000 during
the first quarter of fiscal 2008, compared to $882,000 for the same period
last
year. The decrease in amortization expenses in the first quarter of fiscal
2008, compared to the same period last year, despite the increased strength
of
the Canadian dollar compared to the US dollar year-over-year is mainly due
to
the fact that some of our core technologies became fully amortized during
the
first quarter of fiscal 2007; namely, those related to our protocol
activities.
INTEREST
AND OTHER INCOME
For
the
three months ended November 30, 2007, interest income amounted to $1.5 million,
compared to $1.2 million for the same period last year. The increase in our
interest income in the first quarter of fiscal 2008, compared to the same
period
last year, is mainly due to the increase in interest rates year-over-year.
Also,
our average cash position increased in the first quarter of fiscal 2008,
compared to the same period last year, due to cash flows from operating
activities, which contributed to the further increase in interest revenue
year-over-year.
FOREIGN
EXCHANGE GAIN (LOSS)
Foreign
exchange gains and losses are the result of the translation of operating
activities denominated in currencies other than the Canadian
dollar.
For
the
three months ended November 30, 2007, the foreign exchange loss amounted
to
$616,000 compared to a foreign exchange gain of $383,000 for the same period
last year.
During
the first quarter of
fiscal 2008, the value of the Canadian dollar significantly and rapidly
increased
versusthe
US dollar compared
tothe previous
quarter, which
resulted in a significant foreign exchange loss in the first
quarter of fiscal
2008.In
fact, the period-end value
of the Canadian dollar increased 5.6% in the first quarter of fiscal 2008,
compared to the previous quarter. We also have to consider that the volume
of
operations denominated in foreign currency increased year-over-year, further
increasing the exchange loss compared to the same period
last year.
During
the first quarter of fiscal 2007, the period-end value of the Canadian
dollar
decreased 3.1% compared to the US dollar versus the previous quarter, which
resulted in a foreign exchange gain in the first quarter of fiscal
2007.
It
should be noted that
foreign exchange rate fluctuations also flow through the P&L line items as
a significant portion of our operating items are denominated in Canadian
dollars and we report our results in US dollars. Consequently, the
significant increase in the average value of the Canadian dollar in the
first
quarter of fiscal 2008, compared to the same period last year resulted
in a
negative impact on our financial results. This was amplified by the fact
that
our operating activities incurred Canadian dollar increased
year-over-year. In fact, the average value of the Canadian dollar
compared to the US dollar in the first quarter of fiscal 2008 was CA$0.9901
=
US$1.00 versus CA$1.1270 = US$1.00 during the same period last year,
representing an increase of 13.8% in the average value of the Canadian
dollar compared to the US dollar year-over-year.
We
manage
our exposure to currency risks with forward exchange contracts. In addition,
some of our Canadian entities’ operating activities are denominated in US
dollars or other currencies, which further hedges these risks. However, any
further increase in the value of the Canadian dollar, compared to the US
dollar,
would have a negative impact on our operating results.
INCOME
TAXES
For
the
three months ended November 30, 2007, our income tax expense was $1.3 million
compared to $781,000 for the same period last year.
We
recorded a full valuation allowance against our future income tax assets
until
August 31, 2007, and most of our income tax expenses of prior periods
represented income taxes payable at the Canadian federal level, which were
reduced by research and development tax credits that were recorded against
gross
research and development expenses in the statements of earnings. However,
on
August 31, 2007, we recorded a future income tax recovery of $24.6 million
for
the reversal of a portion of our valuation allowance at the Canadian federal
and
provincial levels and the US federal level. Consequently, in the first
quarter
of fiscal 2008, our income tax expense was impacted by the recognition
of future
income taxes in some tax jurisdictions.
For
the
three months ended November 30, 2007, we reported an income tax expense
of $1.3
million on earnings before income taxes of $1.2 million. This unusual situation
mainly resulted from the fact that some expenses were non-deductible for
tax
purposes (mainly stock-based compensation expenses and foreign exchange
losses
created by the translation of financial statements of our foreign integrated
subsidiaries) and the fact that we continue to maintain a valuation allowance
for some of our subsidiaries at loss. In addition, we recorded income tax
expenses for minimum taxes payable in certain tax jurisdictions, which
taxes are
not related to pre-tax earnings. Otherwise, actual tax rate would have
been
closer to the statutory tax rate.
For
the
three months ended November 30, 2006 and 2007, the reconciliation of the
income
tax provision calculated using the combined Canadian federal and provincial
statutory income tax rate with the income tax provision in the financial
statements is as follows:
|
Three
months ended
November
30,
|
||||||||
|
2007
|
2006
|
|||||||
|
(unaudited)
|
||||||||
|
Income
tax provision at combined Canadian federal and provincial statutory
tax
rate (32%)
|
$ | 374,000 | $ | 1,380,000 | ||||
|
Increase
(decrease) due to:
|
||||||||
|
Income
taxed at different rates
|
88,000 | 59,000 | ||||||
|
Non-taxable
income
|
(81,000 | ) | (59,000 | ) | ||||
|
Non-deductible
expenses
|
222,000 | 254,000 | ||||||
|
Change
in tax rates
|
(2,000 | ) | 271,000 | |||||
|
Foreign
exchange effect of translation of foreign integrated
subsidiaries
|
127,000 | 80,000 | ||||||
|
Other
|
159,000 | (123,000 | ) | |||||
|
Utilization
of previously unrecognized future income tax assets
|
− | (1,339,000 | ) | |||||
|
Unrecognized future
income tax assets on temporary deductible differences and unused
tax
losses and deductions
|
375,000 | 258,000 | ||||||
|
Income
taxes
|
$ | 1,262,000 | $ | 781,000 | ||||
Finally, On December 14, 2007, reductions
to
the Canadian federal statutory tax rate, previously announced by the Canadian
federal Government were enacted. Therefore, based on our best estimates,
Canadian federal future income tax assets should decrease by approximately
$1,500,000, and generate a future income tax expense for the same amount.
This
reduction in future income tax assets will be recorded in our interim
consolidated financial statements for the three- and six-month periods ending
February 29, 2008.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
Requirements
and Capital Resources
As
at November 30, 2007, cash and
short-term investments consisted of $132.7 million, compared to $129.8 million
as at August 31, 2007, while our working capital was at $193.4 million. During
the first quarter of fiscal 2008, we recorded an unrealized foreign exchange
gain of $6.4 million on our cash and short-term investments. In addition,
net
changes in our bank loan resulted in an increase in our cash position of
$699,000 during that period. On the other hand, during that same period,
operating activities used $2.4 million
in
cash and we paid $1.6 million for the purchase of capital assets and $174,000
for the redemption of share capital. The unrealized foreign exchange gain
resulted from the translation, in US dollars, of our
Canadian-dollar-denominated cash and short-term investments and was recorded
in
the accumulated other comprehensive income in the balance sheet. This gain
resulted solely from the increase of the period-end value of the Canadian
dollar
versus to the US dollar compared to the previous quarter.
Our
short-term investments consist of commercial paper and bank acceptances issued
by eight (seven as of August 31, 2007) high-credit quality
corporations and trusts; therefore, we consider the risk of non-performance
of
these financial instruments to be remote. None of these debt instruments
are expected to be affected by a liquidity risk; 54% of or short-term
investments represent bank acceptances and none of our commercial paper
represents asset-backed commercial paper. For the purposes
of
managing our cash position, we have established a cash management policy,
which
we follow and monitor on a regular basis. These short-term investments will
be
used for working capital and other general corporate purposes, including
other
potential acquisitions.
We
believe that our cash balances and short-term investments will be sufficient
to
meet our liquidity and capital requirements for the foreseeable future.
In
addition to these assets, we have unused available lines of credit of $12.0
million for working capital and other general corporate purposes and an
unused
line of credit of $11.4 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 used by operating activities were $2.4 million for the three months
ended
November 30, 2007, compared to cash flows provided of $3.3 million for
the same period last year. Cash flows used by operating activities in the
first
quarter of fiscal 2008 were mainly attributable to the net earnings after
items
not affecting cash of $3.3 million, offset by the negative net change in
non-cash operating items of $5.7 million mainly due to the negative effect
on
cash of the increase of $458,000 in our income taxes and tax credits recoverable
(mainly tax credits earned during the quarter not yet recovered), the increase
of $612,000 in our prepaid expenses, and the decrease of $5.7 million in
our
accounts payable and accrued liabilities, mainly due to timing of purchases
and
payments. The decrease of $1.2 million in our accounts receivable (timing
and
sequential decrease of sales) offset in part these negative effects on
cash.
Investing
Activities
Cash
flows provided by investing activities were $1.5 million for the three
months
ended November 30, 2007, compared to cash flows used of $2.3 million
for the same period last year. In the first quarter of fiscal 2008,
we disposed of $3.1 million worth of short-term investments but paid $1.6
million for the purchase of capital assets. For the corresponding period
last
year, we acquired $2.8 million worth of short-term investments and paid
$811,000
for the purchase of capital assets but received $1.2 million following
the sale
of one of our buildings located in Rochester, NY.
Financing
activities
Cash
flows provided by financing activities were $525,000 for the three
months ended
November 30, 2007, compared to $94,000 for the same period last year.
During the first quarter of fiscal 2008, changes in bank loan provided
$699,000.
However, during that same period, we paid $174,000 for the redemption
of share capital under our share repurchase program. For the corresponding
period last year, cash flows provided by financing activities were mainly
due to the exercise of stock options.
FORWARD
EXCHANGE CONTRACTS
We
utilize forward exchange contracts to manage our foreign currency exposure.
Our
policy is not to utilize those derivative financial instruments for trading
or
speculative purposes.
Our
forward exchange contracts, which are used to hedge anticipated
US-dollar-denominated sales, qualify for hedge accounting; therefore, foreign
exchange translation gains and losses on these contracts are recognized
as an
adjustment of the revenues when the corresponding sales are
recorded.
As
at
November 30, 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
|
||
|
December
2007 to August 2008
|
$27,400,000
|
1.1240
|
||
|
September
2008 to December 2009
|
$15,400,000
|
1.1199
|
As
at
November 30, 2007, the fair value of our forward exchange contracts, which
represents the amount we would receive to settle the contracts, amounted
to
unrealized gains
of $4.1
million ($3.4 million
as at August 31, 2007).
These unrealized gains are
recorded in other receivable in the balance sheet as at November 30, 2007,
and
in the accumulated other comprehensive income for the three months ended
as of
that date.
CONTINGENCY
On
November 27, 2001, a class action suit was filed in the United States District
Court for the Southern District of New York against EXFO, four of the
underwriters of our Initial Public Offering and some of our executive officers
pursuant to the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
there under and Sections 11, 12 and 16 of the Securities Act of
1933. This class action alleges that EXFO’s registration statement
and prospectus filed with the Securities and Exchange Commission on June
29,
2000, contained material misrepresentations and/or omissions resulting from
(i)
the underwriters allegedly soliciting and receiving additional, excessive
and
undisclosed commissions from certain investors in exchange for which they
allocated material portions of the shares issued in connection with EXFO’s
Initial Public Offering; and (ii) the underwriters allegedly entering into
agreements with customers whereby shares issued in connection with EXFO’s
Initial Public Offering would be allocated to those customers in exchange
for
which customers agreed to purchase additional amounts of shares in the
after-market at pre-determined prices.
On
April
19, 2002, the plaintiffs filed an amended complaint containing master
allegations against all of the underwriters in all of the 310 cases included
in
this class action and also filed an amended complaint containing allegations
specific to four of our underwriters, EXFO and two of our executive officers.
In
addition to the allegations mentioned above, the amended complaint alleges
that
the underwriters (i) used their analysts to manipulate the stock market;
and
(ii) implemented schemes that allowed issuer insiders to sell their shares
rapidly after an initial public offering and benefit from high market prices.
As
concerns the EXFO and our two executive officers in particular, the amended
complaint alleges that (i) EXFO’s registration statement was materially false
and misleading because it failed to disclose the additional commissions and
compensation to be received by underwriters; (ii) the two named executive
officers learned of or recklessly disregarded the alleged misconduct of the
underwriters; (iii) the two named executive officers had motive and opportunity
to engage in alleged wrongful conduct due to personal holdings of EXFO’s stock
and the fact that an alleged artificially inflated stock price could be used
as
currency for acquisitions; and (iv) the two named executive officers, by
virtue
of their positions with EXFO, controlled 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 EXFO was dismissed. On October 8, 2002, the claims against our
officers were dismissed pursuant to the terms of Reservation of Rights and
Tolling Agreements entered into with the plaintiffs.
In
June
2004, an agreement of partial settlement was submitted to the court for
preliminary approval. The proposed partial settlement was between the
plaintiffs, the issuer defendants in the consolidated actions, the issuer
officers and directors named as defendants, and the issuers’ insurance
companies. The court granted the preliminary approval motion on
February 15, 2005, subject to certain modifications. On
August 31, 2005, the court issued a preliminary order further approving the
modifications to the settlement and certifying the settlement
classes. The court also appointed the notice administrator for the
settlement and ordered that notice of the settlement be distributed to all
settlement class members by January 15, 2006. The settlement
fairness hearing occurred on April 24, 2006, and the court reserved
decision at that time.
While
the
partial settlement was pending approval, the plaintiffs continued to litigate
against the underwriter defendants. The district court directed that the
litigation proceed within a number of “focus cases” rather than in all of the
310 cases that have been consolidated. EXFO's case is not one of
these focus cases. On October 13, 2004, the district court certified
the focus cases as class actions. The underwriter defendants appealed
that ruling, and on December 5, 2006, the Court of Appeals for the Second
Circuit reversed the district court’s class certification
decision.
On
April 6, 2007, the Second Circuit
denied the plaintiffs’
petitionfor
rehearing of that
decisionand,on
May 18, 2007, the Second Circuit
denied the plaintiffs’ petition for rehearing en banc. In light of
the Second Circuit opinion, liaison counsel for all issuer defendants,
including EXFO, informed the court that this settlement cannot be approved,
because the defined settlement
class, like the litigation class, cannot be certified. On June
25, 2007, the district court entered an order terminating the settlement
agreement. On August 14, 2007, the plaintiffs filed their second
consolidated amended class action complaints against the focus cases and,
on
September 27, 2007, again moved for class certification. On
November 12, 2007, certain of the defendants in the focus cases moved
to dismiss the second consolidated amended class action complaints. Briefing
on
the motions to dismiss is scheduled to be completed in January 2008, and
briefing on the class certification motion is ongoing.
Due
to the inherent uncertainties of
litigation, it is not possible to predict the final outcome of the case,
nor to determine the amount of any possible losses. We will continue to defend
our position in this litigation that the claims against us, and our officers,
are without merit. Accordingly, no provision for this case has been made
in our
interim consolidated financial statements as at November 30, 2007.
SHARE
CAPITAL AND STOCK-BASED COMPENSATION PLANS
Share
Capital
As
at
January 3, 2008, EXFO had 36,643,000 multiple voting shares outstanding,
entitling to ten votes each and 32,334,679 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 2,582,728 as
at
November 30, 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 November 30, 2007:
|
Stock
Options
|
Number
|
%
of issued and outstanding
|
Weighted
average exercise price
|
|||
|
Chairman
of the Board, President and CEO (one
individual)
|
179,642
|
9%
|
$9.05
|
|||
|
Board
of Directors (five individuals)
|
194,375
|
10%
|
$6.23
|
|||
|
Management
and Corporate Officers (eight
individuals)
|
212,139
|
11%
|
$14.49
|
|||
|
586,156
|
30%
|
$10.08
|
|
Restricted
Share Units (RSUs)
|
Number
|
%
of issued and outstanding
|
||||
|
Chairman
of the Board, President and CEO (one
individual)
|
89,823
|
15%
|
||||
|
Management
and Corporate Officers (ten
individuals)
|
292,442
|
49%
|
||||
|
382,265
|
64%
|
|
Deferred
Share Units (DSUs)
|
Number
|
%
of issued and outstanding
|
||||
|
Board
of Directors (five individuals)
|
77,378
|
100%
|
OFF-BALANCE
SHEET ARRANGEMENTS
As
at
November 30, 2007, our off-balance sheet arrangements consisted of letters
of
guarantee and forward exchange contracts. As at November 30, 2007, our
letters
of guarantee amounted to $3.8 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
at
November 30, 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, and forward exchange contracts. The increased strength
of the Canadian dollar, compared to the US dollar, over the last few years,
caused our operating expenses to increase significantly. Any further increase
in
the value of the Canadian dollar in the coming months would negatively affect
our results of operations.
In
addition, risks and uncertainties related to the telecommunications test
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, namely
the
setup of manufacturing facilities in China and a software development center
in
India. This exposes us to certain risks and uncertainties, namely changes
in
local laws and regulations, multiple technological standards, protective
legislation, pricing pressure, and the successful setup and activation of
new
operations in China and India.
Also,
while strategic acquisitions, like those we have made in the past and possibly
others in the future, are essential to our long-term growth, they also expose
us
to certain risks and uncertainties related to the rapid and effective
integration of these businesses as well as their products, technologies and
personnel. Finally, integration requires the dedication of management resources,
which may detract their attention from our day-to-day business and
operations.
Our
business is subject to the effects of general economic conditions in North
America and throughout the world and, more particularly, market conditions
in
the telecommunications industry. In the past, our operating results were
adversely affected by reduced telecom capital spending in North America,
Europe
and Asia and by general unfavorable economic conditions. In particular, sales
to
network service providers in North America were significantly and adversely
affected by a downturn in 2001 in the telecommunications industry. If there
is a
recession or slowdown in key geographic regions or markets, we may experience
a
material adverse impact on our business, operating results and financial
condition.
The
economic environment of our industry could also result in some of our customers
experiencing difficulties and, consequently, this could have a negative effect
on our results especially in terms of future sales and recoverability
of accounts receivable. However, the sectorial and geographic diversity of
our customer base provides us with a reasonable level of protection in this
area. Finally, other financial instruments, which potentially subject
us to credit risks, consist mainly of cash, short-term investments and
forward exchange contracts. Our short-term investments consist of debt
instruments issued by eight high-credit quality corporations and trusts.
Our
cash and forward exchange contracts are held with or issued by high-credit
quality financial institutions; therefore, we consider the risk of
non-performance on these instruments to be remote.
For a more complete understanding of risk factors that may affect us, please
refer to the risk factors set forth in our disclosure documents published
with
securities commissions at www.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)
|
Q1-FY08
|
Q4-FY07
|
Q3-FY07
|
Q2-FY07
|
|||||||||||||
|
Sales
|
$ | 40,985 | $ | 42,975 | $ | 39,205 | $ | 35,207 | ||||||||
|
Cost
of sales
|
$ | 18,144 | $ | 18,109 | $ | 16,828 | $ | 14,970 | ||||||||
|
Gross
margin
|
$ | 22,841 | $ | 24,866 | $ | 22,377 | $ | 20,237 | ||||||||
|
Earnings
from operations
|
$ | 302 | $ | 9,102 | $ | 2,840 | $ | 2,081 | ||||||||
|
Net
earnings (loss)
|
$ | (93 | ) | $ | 33,484 | $ | 2,574 | $ | 2,684 | |||||||
|
Basic
net earnings (loss) per share
|
$ | (0.00 | ) | $ | 0.49 | $ | 0.04 | $ | 0.04 | |||||||
|
Diluted
net earnings (loss) per share
|
$ | (0.00 | ) | $ | 0.48 | $ | 0.04 | $ | 0.04 | |||||||
|
Q1-FY07
|
Q4-FY06
|
Q3-FY06
|
Q2-FY06
|
|||||||||||||
|
Sales
|
$ | 35,547 | $ | 35,733 | $ | 35,410 | $ | 35,410 | ||||||||
|
Cost
of sales
|
$ | 15,229 | $ | 16,318 | $ | 15,453 | $ | 15,453 | ||||||||
|
Gross
margin
|
$ | 20,318 | $ | 19,415 | $ | 19,957 | $ | 19,957 | ||||||||
|
Earnings from
operations
|
$ | 2,759 | $ | 2,363 | $ | 3,608 | $ | 3,608 | ||||||||
|
Net
earnings
|
$ | 3,533 | $ | 2,910 | $ | 3,504 | $ | 3,504 | ||||||||
|
Basic
and diluted net earnings per share
|
$ | 0.05 | $ | 0.04 | $ | 0.05 | $ | 0.02 | ||||||||
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