UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
6-K
Report
of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16
Under
the Securities Exchange Act of 1934
For the
month of April 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 April
1st,
2008, EXFO Electro-Optical Engineering Inc., a Canadian corporation, reported
its results of operations for the second fiscal quarter ended February 29,
2008. This report on Form 6-K sets forth the news release relating to
EXFO’s announcement and certain information relating to EXFO’s financial
condition and results of operations for the second fiscal quarter of the 2008
fiscal year. This press release and information relating to EXFO’s
financial condition and results of operations for the second 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:
April 4, 2008
EXFO Reports Significant Increases in Sales, Bookings and Gross
Margin
|
§
|
Sales
increase 22.9% year-over-year to US$43.3 million (slightly above
guidance)
|
|
§
|
Net
bookings improve 22.0% to record-high of US$44.5 million (book-to-bill
ratio of 1.03)
|
|
§
|
Gross
margin reaches 58.3%, highest level since Q4
2001
|
|
§
|
Nine
products launched (new products accounted for 44.4% of total
sales)
|
|
§
|
Acquisition
of Navtel Communications, IMS and VoIP test supplier to
NEMs
|
QUEBEC
CITY, CANADA, April 1, 2008 – EXFO Electro-Optical Engineering Inc. (NASDAQ:
EXFO; TSX: EXF) reported today significant year-over-year growth in sales,
bookings and gross margin for the second quarter ended February 29,
2008.
Sales
increased 22.9% to US$43.3 million in the second quarter of fiscal 2008 from
US$35.2 million in the second quarter of 2007 and 5.6% from US$41.0 million in
the first quarter of 2008. Net bookings improved by 22.0% year-over-year to
attain a record-high of US$44.5 million for a book-to-bill ratio of 1.03 in the
second quarter of fiscal 2008 from US$36.5 million in the same period last year
and 1.8% from US$43.7 million in the first quarter of 2008.
Gross
margin reached 58.3% of sales in the second quarter of fiscal 2008, the highest
level since the fourth quarter of fiscal 2001. In comparison, gross margin
amounted to 57.5% in the second quarter of 2007 and 55.7% in the first quarter
of 2008.
GAAP net
earnings in the second quarter of fiscal 2008 totaled US$4.0 million, or US$0.06
per diluted share, compared to GAAP net earnings of US$2.7 million, or US$ 0.04
per diluted share, in the same period last year and a GAAP net loss of US$0.1
million, or US$0.00 per diluted share, in the first quarter of 2008. GAAP net
earnings in the second quarter of fiscal 2008 included a one-time income tax
recovery of US$2.7 million following a review of the company’s tax strategy,
based on new Canadian federal tax rates enacted in the second quarter, to
minimize income taxes payable on future years’ taxable income. This tax recovery
was partially offset by a one-time income tax expense of US$1.5 million to
account for these reduced tax rates on future income tax assets in Canada as
well as US$0.3 million in stock-based compensation costs and US$0.5 million in
after-tax amortization of intangible assets.
“I’m
quite pleased with our progress on almost all fronts as both revenue and
earnings finished above our guidance range for the second quarter,” said Germain
Lamonde, EXFO’s Chairman, President and CEO. “We also delivered record bookings
while sales and gross margin attained their highest levels in nearly seven
years – and
all this during a seasonally weak quarter. On a segmented basis, our
Telecom Division grew 28% year-over-year in the second quarter with our protocol
test business reaching a major milestone by surpassing 20% of the division’s
sales for the first time. Given these data points, our strategic positioning and
strong organic sales guidance for the next quarter, I’m looking forward to the
second half of our fiscal year with a great deal of confidence.”
Following
the quarter-end, EXFO announced the acquisition of Navtel Communications, a
leading provider of Internet Protocol Multimedia Subsystem (IMS) and
Voice-over-Internet Protocol (VoIP) test solutions for network equipment
manufacturers and network service provider labs. Consideration paid
consisted of C$11.0 million in cash. The deal is expected to be neutral to
EXFO’s earnings for the remainder of fiscal 2008 and accretive in fiscal 2009,
excluding after-tax amortization of intangible assets.
“This
strategic acquisition will help us strengthen our product offering and business
relationships with network equipment manufacturers and carrier labs, create
several cross-selling opportunities, and expand our coverage in the protocol
technology lifecycle,” Mr. Lamonde added. “I’d like to welcome Navtel’s team,
whose product portfolio nicely complements our protocol offering by enabling us
to move higher up the protocol layers. These new test solutions will also help
increase our gross margin and accelerate sales in our fast-growing protocol test
business which grew at a compound annual growth rate of 64% in the last two
fiscal years.”
Selected
Financial Information
(In
thousands of US dollars)
|
Segmented
results:
|
Q2 2008 | Q1 2008 | Q2 2007 | |||||||||
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
||||||||||
|
Sales:
|
||||||||||||
|
Telecom
Division
|
$ | 37,435 | $ | 35,365 | $ | 29,297 | ||||||
|
Life
Sciences and Industrial Division
|
5,846 | 5,620 | 5,910 | |||||||||
|
Total
|
$ | 43,281 | $ | 40,985 | $ | 35,207 | ||||||
|
Earnings
from operations:
|
||||||||||||
|
Telecom
Division
|
$ | 2,817 | $ | 21 | $ | 1,078 | ||||||
|
Life
Sciences and Industrial Division
|
818 | 281 | 1003 | |||||||||
|
Total
|
$ | 3,635 | $ | 302 | $ | 2,081 | ||||||
|
Other
selected information:
|
||||||||||||
|
GAAP
net earnings (loss)
|
$ | 4,024 | $ | (93 | ) | $ | 2,684 | |||||
|
After-tax
amortization of intangible assets
|
$ | 490 | $ | 499 | $ | 630 | ||||||
|
Stock-based
compensation costs
|
$ | 269 | $ | 301 | $ | 241 | ||||||
|
Future
income tax recovery
|
$ | (2,715 | ) | $ | – | $ | – | |||||
|
Effect
of changes in Canadian tax rates
|
$ | 1,524 | $ | – | $ | – | ||||||
Operating
Expenses
Selling
and administrative expenses amounted to US$13.7 million, or 31.6% of sales, in
the second quarter of fiscal 2008 compared to US$12.2 million, or 34.6% of
sales, in the same period last year and US$14.8 million, or 36.2% of sales, in
the first quarter of 2008.
Gross
research and development expenses totaled US$7.6 million, or 17.5% of sales, in
the second quarter of fiscal 2008 compared to US$5.9 million, or 16.9% of sales,
in the second quarter of 2007 and US$7.5 million, or 18.3% of sales, in the
first quarter of 2008.
Net
R&D expenses totaled US$6.2 million, or 14.3% of sales, in the second
quarter of fiscal 2008 compared to US$4.7 million, or 13.3% of sales, in the
same period last year and US$6.0 million, or 14.7% of sales, in the first
quarter of 2008.
Second-Quarter
Business Highlights
Market expansion – EXFO
delivered sales growth of 22.9% in the second quarter and 19.1% at the half-way
mark of fiscal 2008 mainly due to market-share gains in its optical and protocol
test segments. Growth was particularly strong in EXFO’s business outside of the
Americas, increasing 38.0% year-over-year in the second quarter, and within the
company’s protocol test business which surpassed 20% of Telecom Division sales
for the first time. The Telecom Division increased its sales 27.8%
year-over-year, while the Life Sciences and Industrial Division experienced a
1.1% drop during the same period. The corporate performance metric for sales
growth in fiscal 2008 has been established at 20% year-over-year.
Profitability – EXFO reported
GAAP net earnings of US$4.0 million, or US$0.06 per diluted share, in the second
quarter of fiscal 2008 including a one-time net income tax recovery of US$1.2
million. Increased sales of higher-margin protocol test solutions, a better
absorption of fixed manufacturing costs due to higher sales volume, and relative
stability in the US/Canadian exchange rate were largely responsible for the
increase in gross margin to 58.3% in the second quarter of 2008. In terms of
GAAP earnings from operations, it reached 8.4% in the second quarter of 2008 and
stood at 4.7% after six months versus the company’s stated goal of 8% for the
fiscal year.
Innovation – EXFO had a highly
productive second quarter with the launch of nine new products, including
amongst others a next-generation modular test platform for R&D and
manufacturing applications, 40G/43G SONET/SDH/OTN test modules for field and
manufacturing platforms, integrated modules that combine Ethernet and
SONET/SDH/OTN testing at rates up to 10 Gb/s for field and manufacturing
applications, an optical loss test module and a 30 MHz copper test module for
the new AXS-200 handheld platform, and a fiber inspection probe that serves as
an accessory on several portable test solutions. Sales from products that have
been on the market two years or less reached its highest level in nearly three
years at 44.4% of total sales in the second quarter of fiscal 2008 and 39.2%
after six months, while the company’s published goal is 30% for the fiscal
year.
Business
Outlook
EXFO
forecasted sales between US$45.0 million and US$48.0 million for the third
quarter of fiscal 2008. This anticipated sales increase should be largely
organic with a small revenue contribution from Navtel Communications for about
two months in the third quarter. GAAP net earnings should range between US$0.03
and US$0.06 per diluted share. GAAP net earnings include US$0.01 per diluted
share in stock-based compensation costs and after-tax amortization of intangible
assets.
Conference
Call and Webcast
EXFO will
host a conference call today at 5 p.m. (Eastern time) to review its financial
results for the second 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
April 8, 2008. The replay number is 1-402-977-9141 and the reservation number is
21378170. The audio Webcast and replay of the conference call will also be
available on EXFO’s Website at www.EXFO.com, under the
Investors section.
Forward-Looking
Statements
This news
release contains forward-looking statements within the meaning of the U.S.
Private Securities Litigation Reform Act of 1995, and we intend that such
forward-looking statements be subject to the safe harbors created thereby.
Forward-looking statements are statements other than historical information or
statements of current condition. Words such as may, will, expect, believe,
anticipate, intend, could, estimate, continue, or the negative or comparable
terminology are intended to identify forward-looking statements. In addition,
any statements that refer to expectations, projections or other
characterizations of future events and circumstances are considered
forward-looking statements. They are not guarantees of future performance and
involve risks and uncertainties. Actual results may differ materially from those
in forward-looking statements due to various factors including consolidation in
the global telecommunications test, measurement and monitoring industry; capital
spending levels in the telecommunications, life sciences and high-precision
assembly sectors; concentration of sales; fluctuating exchange rates and our
ability to execute in these uncertain conditions; the effects of the additional
actions we have taken in response to such economic uncertainty (including our
ability to quickly adapt cost structures with anticipated levels of business,
ability to manage inventory levels with market demand); market acceptance of our
new products and other upcoming products; limited visibility with regards to
customer orders and the timing of such orders; our ability to successfully
integrate our acquired and to-be-acquired businesses; our ability to
successfully expand international operations; the retention of key technical and
management personnel; and future economic, competitive and market conditions,
including any slowdown or recession in the global economy. Assumptions relating
to the foregoing involve judgments and risks, all of which are difficult or
impossible to predict and many of which are beyond our control. Other risk
factors that may affect our future performance and operations are detailed in
our Annual Report, on Form 20-F, and our other filings with the U.S. Securities
and Exchange Commission and the Canadian securities commissions. We believe that
the expectations reflected in the forward-looking statements are reasonable
based on information currently available to us, but we cannot assure you that
the expectations will prove to have been correct. Accordingly, you should not
place undue reliance on these forward-looking statements. These statements speak
only as of the date of this document. Unless required by law or applicable
regulations, we undertake no obligation to revise or update any of them to
reflect events or circumstances that occur after the date of this
document.
About
EXFO
EXFO is
the second-largest provider of portable test and measurement solutions in the
global telecommunications industry. 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-600 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-LSI.com.
For
more information
Vance
Oliver
Manager,
Investor Relations
(418)
683-0913, Ext. 3733
vance.oliver@exfo.com
EXFO Electro-Optical Engineering Inc.
Interim
Consolidated Balance Sheet
(in
thousands of US dollars)
|
As
at
February
29,
2008
|
As
at
August
31,
2007
|
|||||||
|
(unaudited)
|
||||||||
|
Assets
|
||||||||
|
Current
assets
|
||||||||
|
Cash
|
$ | 9,211 | $ | 5,541 | ||||
|
Short-term
investments (note 2)
|
133,549 | 124,217 | ||||||
|
Accounts
receivable
|
||||||||
|
Trade,
less allowance for doubtful accounts of $224
($206
as at August 31, 2007)
|
29,017 | 26,699 | ||||||
|
Other
(note 2)
|
5,129 | 2,479 | ||||||
|
Income
taxes and tax credits recoverable
|
2,778 | 6,310 | ||||||
|
Inventories
(note 3)
|
33,276 | 31,513 | ||||||
|
Prepaid
expenses
|
1,884 | 1,391 | ||||||
|
Future
income taxes
|
11,256 | 7,609 | ||||||
| 226,100 | 205,759 | |||||||
|
Other
receivable
|
805 | − | ||||||
|
Tax
credits recoverable
|
14,224 | − | ||||||
|
Property,
plant and equipment
|
20,563 | 18,117 | ||||||
|
Intangible
assets
|
9,341 | 9,628 | ||||||
|
Goodwill
|
30,546 | 28,437 | ||||||
|
Future
income taxes
|
4,180 | 17,197 | ||||||
| $ | 305,759 | $ | 279,138 | |||||
|
Liabilities
|
||||||||
|
Current
liabilities
|
||||||||
|
Bank
loan
|
$ | 703 | $ | − | ||||
|
Accounts
payable and accrued liabilities (note 4)
|
21,010 | 22,721 | ||||||
|
Income
taxes payable
|
368 | − | ||||||
|
Deferred
revenue
|
3,126 | 2,598 | ||||||
| 25,207 | 25,319 | |||||||
|
Deferred
revenue
|
3,841 | 3,414 | ||||||
|
Future
income taxes
|
− | 240 | ||||||
| 29,048 | 28,973 | |||||||
|
Contingency (note
5)
|
||||||||
|
Shareholders’
Equity
|
||||||||
|
Share
capital (note 6)
|
150,105 | 150,019 | ||||||
|
Contributed
surplus
|
4,827 | 4,453 | ||||||
|
Retained
earnings
|
46,222 | 42,275 | ||||||
|
Accumulated
other comprehensive income (note 2)
|
75,557 | 53,418 | ||||||
| 276,711 | 250,165 | |||||||
| $ | 305,759 | $ | 279,138 | |||||
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO Electro-Optical Engineering Inc.
Interim
Unaudited Consolidated Statements of Earnings
(in
thousands of US dollars, except share and per share data)
|
Three
months ended
February
29, 2008
|
Six
months ended
February
29, 2008
|
Three
months ended
February
28, 2007
|
Six
months ended
February
28, 2007
|
|||||||||||||
|
Sales
|
$ | 43,281 | $ | 84,266 | $ | 35,207 | $ | 70,754 | ||||||||
|
Cost of sales (1,2)
|
18,060 | 36,204 | 14,970 | 30,199 | ||||||||||||
|
Gross
margin
|
25,221 | 48,062 | 20,237 | 40,555 | ||||||||||||
|
Operating
expenses
|
||||||||||||||||
|
Selling
and administrative (1)
|
13,683 | 28,500 | 12,184 | 23,726 | ||||||||||||
|
Net
research and development (1)
(note 7)
|
6,185 | 12,197 | 4,678 | 9,032 | ||||||||||||
|
Amortization
of property, plant and equipment
|
998 | 1,974 | 664 | 1,445 | ||||||||||||
|
Amortization
of intangible assets
|
720 | 1,454 | 630 | 1,512 | ||||||||||||
|
Total
operating expenses
|
21,586 | 44,125 | 18,156 | 35,715 | ||||||||||||
|
Earnings
from operations
|
3,635 | 3,937 | 2,081 | 4,840 | ||||||||||||
|
Interest income
|
1,616 | 3,099 | 1,105 | 2,277 | ||||||||||||
|
Foreign
exchange gain (loss)
|
(232 | ) | (848 | ) | 352 | 735 | ||||||||||
|
Earnings
before income taxes
|
5,019 | 6,188 | 3,538 | 7,852 | ||||||||||||
|
Income taxes (note
8)
|
||||||||||||||||
|
Current
|
(8,373 | ) | (7,192 | ) | 854 | 1,635 | ||||||||||
|
Future
|
9,368 | 9,449 | – | – | ||||||||||||
| 995 | 2,257 | 854 | 1,635 | |||||||||||||
|
Net
earnings for the period
|
$ | 4,024 | $ | 3,931 | $ | 2,684 | $ | 6,217 | ||||||||
|
Basic
and diluted net earnings per share
|
$ | 0.06 | $ | 0.06 | $ | 0.04 | $ | 0.09 | ||||||||
|
Basic
weighted average number of shares outstanding (000’s)
|
68,984 | 68,992 | 68,839 | 68,807 | ||||||||||||
|
Diluted weighted average number
of shares outstanding (000’s) (note 9)
|
69,490 | 69,582 | 69,546 | 69,465 | ||||||||||||
|
(1)
Stock-based compensation
costs included in:
|
||||||||||||||||
|
Cost
of sales
|
$ | 38 | $ | 75 | $ | 27 | $ | 61 | ||||||||
|
Selling
and administrative
|
183 | 380 | 159 | 356 | ||||||||||||
|
Net
research and development
|
48 | 115 | 55 | 109 | ||||||||||||
| $ | 269 | $ | 570 | $ | 241 | $ | 526 | |||||||||
|
(2)
|
The
cost of sales is exclusive of amortization, shown
separately.
|
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO Electro-Optical Engineering Inc.
Interim
Unaudited Statements of Comprehensive Income (Loss)
and
Accumulated Other Comprehensive Income
(in
thousands of US dollars)
|
Comprehensive
income (loss)
|
||||||||||||||||
|
Three
months ended
February
29, 2008
|
Six
months ended
February
29, 2008
|
Three
months ended
February
28, 2007
|
Six
months ended
February
28, 2007
|
|||||||||||||
|
Net
earnings for the period
|
$ | 4,024 | $ | 3,931 | $ | 2,684 | $ | 6,217 | ||||||||
|
Foreign
currency translation adjustment
|
5,827 | 19,733 | (4,734 | ) | (10,760 | ) | ||||||||||
|
Changes
in unrealized losses on short-term investments
|
51 | 90 | – | – | ||||||||||||
|
Unrealized
gains on forward exchange contracts
|
600 | 2,549 | – | – | ||||||||||||
|
Reclassification
of realized gains on forward exchange contracts in net
earnings
|
(1,168 | ) | (1,927 | ) | – | – | ||||||||||
|
Future
income taxes effect of the above items
|
182 | (199 | ) | – | – | |||||||||||
|
Comprehensive
income (loss)
|
$ | 9,516 | $ | 24,177 | $ | (2,050 | ) | $ | (4,543 | ) | ||||||
|
Accumulated
other comprehensive income
|
||||||||
|
Six
months ended
February
29, 2008
|
Six
months ended
February
28, 2007
|
|||||||
|
Foreign
currency translation adjustment
|
||||||||
|
Cumulative
effect of prior periods
|
$ | 53,418 | $ | 43,537 | ||||
|
Current
period
|
19,733 | (10,760 | ) | |||||
| 73,151 | 32,777 | |||||||
|
Unrealized
gains on forward exchange contracts
|
||||||||
|
Adjustment
related to the implementation of new accounting standards (note
2)
|
1,948 | − | ||||||
|
Current
period, net of realized gains and future income taxes
|
423 | − | ||||||
| 2,371 | − | |||||||
|
Unrealized
losses on short-term investments
|
||||||||
|
Adjustment
related to the implementation of new accounting standards (note
2)
|
(55 | ) | − | |||||
|
Current
period, net of future income taxes
|
90 | − | ||||||
| 35 | − | |||||||
|
Accumulated
other comprehensive income
|
$ | 75,557 | $ | 32,777 | ||||
Total
retained earnings and accumulated other comprehensive income amounted to $38,994
and $121,779 as of February 28, 2007, and February 29, 2008,
respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO Electro-Optical Engineering Inc.
Interim
Unaudited Consolidated Statements of Retained Earnings
and
Contributed Surplus
(in
thousands of US dollars)
|
Retained
earnings
|
||||||||
|
Six
months
ended
February
29, 2008
|
Six
months
ended
February
28, 2007
|
|||||||
|
Balance
– Beginning of the period
|
$ | 42,275 | $ | − | ||||
|
Add
(deduct)
|
||||||||
|
Adjustment
related to the implementation of new accounting standards (note
2)
|
55 | − | ||||||
|
Net
earnings for the period
|
3,931 | 6,217 | ||||||
|
Premium
on redemption of share capital (note 6)
|
(39 | ) | − | |||||
|
Balance
– End of the period
|
$ | 46,222 | $ | 6,217 | ||||
|
Contributed
surplus
|
||||||||
|
Six
months
ended
February
29, 2008
|
Six
months
ended
February
28, 2007
|
|||||||
|
Balance
– Beginning of the period
|
$ | 4,453 | $ | 3,776 | ||||
|
Add
(deduct)
|
||||||||
|
Stock-based
compensation costs
|
585 | 499 | ||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards
|
(211 | ) | (174 | ) | ||||
|
Balance
– End of the period
|
$ | 4,827 | $ | 4,101 | ||||
The accompanying notes are an integral part of these consolidated financial
statements.
Interim
Unaudited Consolidated Statements of Cash Flows
(in
thousands of US dollars)
|
Three
months ended
February
29, 2008
|
Six
months ended
February
29, 2008
|
Three
months ended
February
28, 2007
|
Six
months ended
February
28, 2007
|
|||||||||||||
|
Cash
flows from operating activities
|
||||||||||||||||
|
Net
earnings for the period
|
$ | 4,024 | $ | 3,931 | $ | 2,684 | $ | 6,217 | ||||||||
|
Add
(deduct) items not affecting cash
|
||||||||||||||||
|
Discount
on short-term investments
|
86 | 988 | 364 | 778 | ||||||||||||
|
Stock-based
compensation costs
|
269 | 570 | 241 | 526 | ||||||||||||
|
Amortization
|
1,718 | 3,428 | 1,294 | 2,957 | ||||||||||||
|
Deferred
revenue
|
151 | 502 | 745 | 1,239 | ||||||||||||
|
Government
grants
|
− | − | − | (22 | ) | |||||||||||
|
Future
income taxes
|
9,368 | 9,449 | − | − | ||||||||||||
| 15,616 | 18,868 | 5,328 | 11,695 | |||||||||||||
|
Change
in non-cash operating items
|
||||||||||||||||
|
Accounts
receivable
|
(985 | ) | 181 | (210 | ) | (3,245 | ) | |||||||||
|
Income
taxes and tax credits
|
(9,190 | ) | (9,648 | ) | (513 | ) | (931 | ) | ||||||||
|
Inventories
|
794 | 707 | (510 | ) | (129 | ) | ||||||||||
|
Prepaid
expenses
|
216 | (396 | ) | 133 | 135 | |||||||||||
|
Accounts
payable and accrued liabilities
|
2,735 | (2,959 | ) | 2,736 | 2,772 | |||||||||||
| 9,186 | 6,753 | 6,964 | 10,297 | |||||||||||||
|
Cash
flows from investing activities
|
||||||||||||||||
|
Additions
to short-term investments
|
(197,607 | ) | (409,060 | ) | (296,237 | ) | (490,503 | ) | ||||||||
|
Proceeds
from disposal and maturity of short-term
investments
|
194,009 | 408,580 | 291,413 | 482,916 | ||||||||||||
|
Additions
to capital assets (1)
|
(2,113 | ) | (3,686 | ) | (835 | ) | (1,646 | ) | ||||||||
|
Net
proceeds from disposal of capital assets
|
− | − | − | 1,228 | ||||||||||||
| (5,711 | ) | (4,166 | ) | (5,659 | ) | (8,005 | ) | |||||||||
|
Cash
flows from financing activities
|
||||||||||||||||
|
Changes
in bank loan
|
− | 699 | − | − | ||||||||||||
|
Repayment
of long-term debt
|
− | − | (24 | ) | (51 | ) | ||||||||||
|
Redemption
of share capital (note 6)
|
− | (174 | ) | − | − | |||||||||||
|
Exercise
of stock options
|
10 | 10 | 362 | 483 | ||||||||||||
| 10 | 535 | 338 | 432 | |||||||||||||
|
Effect
of foreign exchange rate changes on cash
|
205 | 548 | (276 | ) | (469 | ) | ||||||||||
|
Change
in cash
|
3,690 | 3,670 | 1,367 | 2,255 | ||||||||||||
|
Cash
– Beginning of period
|
5,521 | 5,541 | 7,741 | 6,853 | ||||||||||||
|
Cash
– End of period
|
$ | 9,211 | $ | 9,211 | $ | 9,108 | $ | 9,108 | ||||||||
(1) As at
February 28, 2007 and February 29, 2008, unpaid purchases of capital assets
amounted to $344 and $94, respectively.
The accompanying notes are an integral part of these consolidated
financial statements.
EXFO Electro-Optical Engineering Inc.
Notes
to Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
|
1.
|
Interim
financial information
|
The
financial information as at February 29, 2008, and for the three- and six-month
periods ended February 28, 2007, and February 29, 2008, is unaudited. In
the opinion of management, all adjustments necessary to present fairly the
results of these periods in accordance with generally accepted
accounting principles (GAAP) in Canada have been included. The adjustments
made were of a normal and recurring nature. Interim results may not necessarily
be indicative of results anticipated for the entire year.
These
interim consolidated financial statements are prepared in accordance with
generally accepted accounting principles in Canada and use the same
accounting policies and methods used in the preparation of the company’s most
recent annual consolidated financial statements, except for changes as described
in note 2. However, all disclosures required for annual financial statements
have not been included in these financial statements. Consequently, these
interim consolidated financial statements should be read in conjunction with the
company’s most recent annual consolidated financial statements.
|
2.
|
New
accounting standards and
pronouncements
|
Adopted
in fiscal 2008
On
September 1, 2007, the company adopted the Canadian Institute of Chartered
Accountants (CICA) Handbook Section 1530, “Comprehensive Income”, Section 3251,
“Equity”, Section 3855, “Financial Instruments – Recognition and Measurement”,
and Section 3865, “Hedges”. Sections 3251 and 3865 have been adopted
prospectively while Section 3855 has been applied retroactively, without
restatement of prior years’ financial statements, and Section 1530 has been
applied retroactively with restatement of prior years’ financial
statements.
Following
the adoption of Section 3855, the company classified its financial instruments
as follows:
Cash
Cash is
classified as financial asset held for trading and is carried at fair value in
the balance sheet and any changes in its fair value is reflected in the
statements of earnings.
Short-term
investments
The
company has elected to classify its short-term investments as available-for-sale
securities, and therefore they are carried at fair value in the balance sheet
and any changes in their fair value are reflected in other comprehensive income.
Upon the disposal or maturity of these assets, accumulated changes in their fair
value are reclassified in the statements of earnings. Also, upon the adoption of
this new standard, unrealized losses on short-term investments as of August 31,
2007, in the amount of $55,000 (previously recorded in the statements of
earnings), have been reclassified from the opening balance of retained earnings
to the opening balance of accumulated other comprehensive income for the six
months ended February 29, 2008.
Interest
income on short-term investments is recorded in interest income in the
statements of earnings and in cash flows from operating activities in the
statements of cash flows.
The fair
value of these assets as of February 29, 2008, amounted to
$133,549,000.
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 measured at their fair value. Subsequent
measurements are at cost, net of amortization, using the effective interest rate
method. For the company, that value corresponds to cost either as a result of
their short-term maturity or the floating-rate nature of some
liabilities.
Forward
exchange contracts
Forward
exchange contracts, which qualify for hedge accounting, are entered into by the
company to hedge anticipated US-dollar-denominated sales and the
related accounts receivable. They are recorded at fair value in the balance
sheet, and changes in their fair value are reported in other comprehensive
income. Upon the recognition of related hedged sales, accumulated changes in
fair value are reclassified in the statements of earnings. Unrecognized gains on
forward exchange contracts as of August 31, 2007, in the amount of
$1,948,000, net of future income taxes of $916,000, have been reflected as an
adjustment to the opening balance of accumulated other comprehensive income for
the six months ended February 29, 2008. The forward exchange contracts
are presented in other receivables in the balance sheet.
Based on
the portfolio of forward exchange contracts as of February 29, 2008, the company
estimates that the portion of the unrecognized gains on these contracts as of
that date, which will be realized and reclassified from accumulated other
comprehensive income to net earnings over the next 12 months amounts to
$2,904,000.
Cumulative
foreign currency translation adjustment
The
cumulative foreign currency translation adjustment, which is solely the result
of the translation of the company’s consolidated financial statements in US
dollars (the reporting currency), represents a component of accumulated other
comprehensive income for all periods presented.
Transition
The
company has elected to use September 1, 2002, as the transition date for
embedded derivatives.
Other
than the adjustments described above for the short-term investments and the
forward exchange contracts, the recognition, derecognition and measurement
methods used to prepare the consolidated financial statements have not changed
from the methods of periods prior to the effective date of the new standards.
Consequently, there were no further adjustments to record on
transition.
Section
1506, “Accounting Changes”
On
September 1, 2007, the company adopted Section 1506, “Accounting Changes”. This
section establishes criteria for changes in accounting policies, accounting
treatment and disclosures regarding changes in accounting policies, estimates
and corrections of errors. In particular, this section allows for voluntary
changes in accounting policy only when they result in the financial statements
providing reliable and more relevant information. Furthermore, this section
requires disclosure 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 and the six months ended February 29,
2008.
To
be adopted after fiscal 2008
In
December 2006, the CICA issued three new sections, which provide a complete set
of disclosure and presentation requirements for financial instruments: Section
3862, “Financial Instruments − Disclosures”; Section 3863, “Financial
Instruments − Presentation”; and Section 1535, “Capital
Disclosures”.
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 replaces the disclosure portion of Section 3861, “Financial
Instruments − Disclosure and Presentation”. The new standard
places increased emphasis on disclosures regarding risks associated with both
recognized and unrecognized financial instruments and how these risks are
managed. It is also intended to remove any duplicate disclosures and simplify
the disclosures about concentrations of risk, credit risk, liquidity risk and
price risk currently found in Section 3861.
Section
3863 carries forward the presentation requirements from Section 3861,
unchanged.
Section
1535 applies to all entities regardless of whether they have financial
instruments and are subject to external capital requirements. The new section
requires disclosure of information about an entity’s objectives, policies and
processes for managing capital, as well as quantitative data about capital and
whether the entity has complied with any capital requirements.
Sections
1535, 3862 and 3863 apply to fiscal years beginning on or after October 1, 2007.
The company will adopt these new standards on September 1, 2008, and is
currently assessing the effects these new standards will have on its
consolidated financial statements.
In June
2007, the CICA issued Section 3031, “Inventories”, to harmonize accounting for
inventories under Canadian GAAP with IFRS. This standard requires the
measurement of inventories at the lower of cost and net realizable value and
includes guidance on the determination of cost, including allocation of
overheads and other costs to inventory. The standard also requires the
consistent use of either first-in, first-out (FIFO) or weighted average cost
formula to measure the cost of inventories and requires the reversal of previous
write-downs to net realizable value when there is a subsequent increase in the
value of inventories. The new standard applies to fiscal years beginning on or
after January 1, 2008. The company will adopt this new standard on
September 1, 2008, and is currently assessing the effects this new standard will
have on its consolidated financial statements.
In
February 2008, the CICA issued Section 3064, “Goodwill and intangible assets”,
which supersedes Section 3062, “Goodwill and other intangible assets” and
Section 3450, “Research and development costs”. Various changes have been made
to other sections of the CICA Handbook for consistency purposes. Section 3064
establishes standards for the recognition, measurement, presentation and
disclosure of goodwill subsequent to its initial recognition and of intangible
assets by profit-oriented enterprises. Standards concerning goodwill remain
unchanged from the standards included in the previous Section 3062. This new
section applies to fiscal years beginning on or after October 1, 2008.
The company will adopt this new standard on September 1, 2009 and it has not yet
determined the effects its adoption will have on its consolidated financial
statements.
|
3.
|
Inventories
|
|
As
at
February
29,
2008
|
As
at
August
31,
2007
|
|||||||
|
(unaudited)
|
||||||||
|
Raw
materials
|
$ | 16,513 | $ | 16,898 | ||||
|
Work
in progress
|
2,186 | 1,387 | ||||||
|
Finished
goods
|
14,577 | 13,228 | ||||||
| $ | 33,276 | $ | 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
February
29,
2008
|
As
at
August
31,
2007
|
|||||||
|
(unaudited)
|
||||||||
|
Trade
|
$ | 8,877 | $ | 11,749 | ||||
|
Salaries
and social benefits
|
8,406 | 7,929 | ||||||
|
Warranty
|
840 | 800 | ||||||
|
Commissions
|
788 | 824 | ||||||
|
Other
|
2,099 | 1,419 | ||||||
| $ | 21,010 | $ | 22,721 | |||||
Changes
in the warranty provision are as follows:
|
Six
months
ended
February
29,
2008
|
Six
months
ended
February
28,
2007
|
|||||||
|
(unaudited)
|
||||||||
|
Balance – Beginning of the
period
|
$ | 800 | $ | 1,006 | ||||
|
Provision
|
297 | 408 | ||||||
|
Settlements
|
(257 | ) | (625 | ) | ||||
|
Balance – End of the
period
|
$ | 840 | $ | 789 | ||||
|
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’ petition for rehearing of
that decision and, on May 18, 2007, the Second Circuit denied the plaintiffs’
petition for rehearing en banc. In light of the Second Circuit
opinion, liaison counsel for all issuer defendants, including the company,
informed the court that this settlement cannot be approved, because the defined
settlement class, like the litigation class, cannot be certified. On
June 25, 2007, the district court entered an order terminating the settlement
agreement. On August 14, 2007, the plaintiffs filed their second
consolidated amended class action complaints against the focus cases and, on
September 27, 2007, again moved for class certification.
On November 12, 2007, certain of the defendants in the focus
cases moved to dismiss the second consolidated amended class action complaints.
Briefing on the motions to dismiss was completed in January 2008, and briefing
on the class certification motion is scheduled to be completed in April
2008.
Due to
the inherent uncertainties of litigation, it is not possible to predict the
final outcome of the case, nor to determine the amount of any possible losses.
The company will continue to defend its position in this litigation that the
claims against it, and its officers, are without merit. Accordingly, no
provision for this case has been made in the interim consolidated financial
statements as at February 29, 2008.
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.
|
|
The
following tables summarize changes in share capital for the six months
ended February 28, 2007, and
February 29, 2008:
|
|
Six
months ended February 28, 2007
|
||||||||||||||||||||
|
Multiple
voting shares
|
Subordinate
voting shares
|
|||||||||||||||||||
|
Number
|
Amount
|
Number
|
Amount
|
Total
amount
|
||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||
|
Balance
as at August 31, 2006
|
37,143,000 | $ | 1 | 31,609,969 | $ | 148,920 | $ | 148,921 | ||||||||||||
|
Exercise
of stock options
|
– | – | 41,550 | 121 | 121 | |||||||||||||||
|
Redemption
of restricted share units
|
– | – | 88 | – | – | |||||||||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards
|
– | – | – | 47 | 47 | |||||||||||||||
|
Balance
as at November 30, 2006
|
37,143,000 | 1 | 31,651,607 | 149,088 | 149,089 | |||||||||||||||
|
Exercise
of stock options
|
– | – | 109,723 | 362 | 362 | |||||||||||||||
|
Redemption
of restricted share units
|
– | – | 976 | – | – | |||||||||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards
|
– | – | – | 127 | 127 | |||||||||||||||
|
Balance
as at February 28, 2007
|
37,143,000 | $ | 1 | 31,762,306 | $ | 149,577 | $ | 149,578 | ||||||||||||
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)
|
Six
months ended February 29, 2008
|
||||||||||||||||||||
|
Multiple
voting shares
|
Subordinate
voting shares
|
|||||||||||||||||||
|
Number
|
Amount
|
Number
|
Amount
|
Total
amount
|
||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||
|
Balance
as at August 31, 2007
|
36,643,000 | $ | 1 | 32,361,561 | $ | 150,018 | $ | 150,019 | ||||||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards
|
– | – | – | 2 | 2 | |||||||||||||||
|
Redemption
of share capital
|
– | – | (29,200 | ) | (135 | ) | (135 | ) | ||||||||||||
|
Balance
as at November 30, 2007
|
36,643,000 | 1 | 32,332,361 | 149,885 | 149,886 | |||||||||||||||
|
Exercise
of stock options
|
– | – | 4,000 | 10 | 10 | |||||||||||||||
|
Redemption
of restricted share units
|
– | – | 38,031 | – | – | |||||||||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards
|
– | – | – | 209 | 209 | |||||||||||||||
|
Balance
as at February 29, 2008
|
36,643,000 | $ | 1 | 32,374,392 | $ | 150,104 | $ | 150,105 | ||||||||||||
|
7.
|
Net
research and development expenses
|
|
Three
months ended
February
29, 2008
|
Six
months ended
February
29, 2008
|
Three
months ended
February
28, 2007
|
Six
months ended
February
28, 2007
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
Gross
research and development expenses
|
$ | 7,575 | $ | 15,061 | $ | 5,939 | $ | 11,448 | ||||||||
|
Research
and development tax credits and grants
|
(1,390 | ) | (2,864 | ) | (1,261 | ) | (2,416 | ) | ||||||||
| $ | 6,185 | $ | 12,197 | $ | 4,678 | $ | 9,032 | |||||||||
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)
|
8.
|
Income
taxes
|
For the
three and six-month periods ended February 28, 2007 and February 29, 2008, the
reconciliation of the income tax provision calculated using the combined
Canadian federal and provincial statutory income tax rate with the income tax
provision in the financial statements is as follows:
|
Three
months ended
February
29,
2008
|
Six
months ended
February
29,
2008
|
Three
months ended
February
28,
2007
|
Six
months ended
February
28,
2007
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
Income
tax provision at combined Canadian federal and provincial statutory tax
rate
|
$ | 1,606 | $ | 1,980 | $ | 1,132 | $ | 2,512 | ||||||||
|
Increase
(decrease) due to:
|
||||||||||||||||
|
Income
taxed at different rates
|
(11 | ) | 77 | (26 | ) | 33 | ||||||||||
|
Non-taxable
income
|
(290 | ) | (371 | ) | (36 | ) | (95 | ) | ||||||||
|
Non-deductible
expenses
|
368 | 590 | 192 | 446 | ||||||||||||
|
Change
in tax rates (1)
|
1,524 | 1,522 | 18 | 289 | ||||||||||||
|
Change
in tax strategy (2)
|
(2,715 | ) | (2,715 | ) | – | – | ||||||||||
|
Foreign
exchange effect of translation of foreign integrated
subsidiaries
|
67 | 194 | 6 | 86 | ||||||||||||
|
Other
|
232 | 391 | 163 | 40 | ||||||||||||
|
Utilization
of previously unrecognized future income tax assets
|
(1,881 | ) | (1,881 | ) | (660 | ) | (1,999 | ) | ||||||||
|
Unrecognized
future income tax assets on temporary deductible differences and unused
tax losses and deductions
|
2,095 | 2,470 | 65 | 323 | ||||||||||||
| $ | 995 | $ | 2,257 | $ | 854 | $ | 1,635 | |||||||||
The
income tax provision consists of the following:
|
Current
|
$ | (8,373 | ) | $ | (7,192 | ) | $ | 854 | $ | 1,635 | ||||||
|
Future
|
9,154 | 8,860 | 595 | 1,676 | ||||||||||||
|
Valuation
allowance
|
214 | 589 | (595 | ) | (1,676 | ) | ||||||||||
| 9,368 | 9,449 | – | – | |||||||||||||
| $ | 995 | $ | 2,257 | $ | 854 | $ | 1,635 |
|
(1)
|
During
the three months ended February 29, 2008, reductions to the Canadian
federal statutory tax rate, previously announced by the Canadian federal
Government, were enacted. Therefore, Canadian federal future income tax
assets decreased by
$1,524,000, and generated a future income
tax expense for the same amount during the three-
and six-month periods ended
February 29, 2008.
|
|
(2)
|
During
the three months ended February 29, 2008, based on new Canadian federal
enacted tax rates, the company reviewed its tax strategy for the future
use of its Canadian federal operating losses, research and development
expenses, certain timing differences and research and development tax
credits to minimize income taxes payable on future years’ taxable income,
by amending its prior year’s income tax returns to generate a net
operating loss to be carried back to prior years, which will release
previously used research and development tax credits. This resulted in an
increase of its tax related assets of $2,715,000 and in an income tax
recovery for the same amount in the statements of earnings for the three-
and six-month periods ended
February 29, 2008.
|
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 and six months ended February 28, 2007, the company recorded a full
valuation allowance against its future income tax assets. During these periods,
the company recorded an income tax expense of $854,000 and $1,635,000,
respectively. Most of this expense represents income taxes payable at the
Canadian federal level, which are reduced by research and development tax
credits that are recorded against gross research and development expenses
in the statements of earnings.
|
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
February
29,
2008
|
Six
months
ended
February
29,
2008
|
Three
months ended
February
28,
2007
|
Six
months
ended
February
28,
2007
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
Basic
weighted average number of shares outstanding (000’s)
|
68,984 | 68,992 | 68,839 | 68,807 | ||||||||||||
|
Plus
dilutive effect of:
|
||||||||||||||||
|
Stock
options (000’s)
|
241 | 321 | 468 | 451 | ||||||||||||
|
Restricted
share units (000’s)
|
188 | 195 | 190 | 161 | ||||||||||||
|
Deferred
share units (000’s)
|
77 | 74 | 49 | 46 | ||||||||||||
|
Diluted
weighted average number of shares outstanding (000’s)
|
69,490 | 69,582 | 69,546 | 69,465 | ||||||||||||
|
Stock
awards excluded from the calculation of diluted weighted average number of
shares because their exercise price was greater than the average market
price of the common shares (000’s)
|
1,697 | 1,415 | 1,213 | 1,299 | ||||||||||||
|
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 February 29, 2008
|
Six
months ended February 29, 2008
|
|||||||||||||||||||||||
|
Telecom
Division
|
Life
Sciences and Industrial Division
|
Total
|
Telecom
Division
|
Life
Sciences and Industrial Division
|
Total
|
|||||||||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||||||||||
|
Sales
|
$ | 37,435 | $ | 5,846 | $ | 43,281 | $ | 72,800 | $ | 11,466 | $ | 84,266 | ||||||||||||
|
Earnings
from operations
|
$ | 2,817 | $ | 818 | $ | 3,635 | $ | 2,838 | $ | 1,099 | $ | 3,937 | ||||||||||||
|
Unallocated
items:
|
||||||||||||||||||||||||
|
Interest
income
|
1,616 | 3,099 | ||||||||||||||||||||||
|
Foreign
exchange loss
|
(232 | ) | (848 | ) | ||||||||||||||||||||
|
Earnings
before income taxes
|
5,019 | 6,188 | ||||||||||||||||||||||
|
Income
taxes
|
995 | 2,257 | ||||||||||||||||||||||
|
Net
earnings for the period
|
$ | 4,024 | $ | 3,931 | ||||||||||||||||||||
|
Three
months ended February 28, 2007
|
Six
months ended February 28, 2007
|
|||||||||||||||||||||||
|
Telecom
Division
|
Life
Sciences and Industrial Division
|
Total
|
Telecom
Division
|
Life
Sciences and Industrial Division
|
Total
|
|||||||||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||||||||||
|
Sales
|
$ | 29,297 | $ | 5,910 | $ | 35,207 | $ | 58,819 | $ | 11,935 | $ | 70,754 | ||||||||||||
|
Earnings
from operations
|
$ | 1,078 | $ | 1,003 | $ | 2,081 | $ | 2,881 | $ | 1,959 | $ | 4,840 | ||||||||||||
|
Unallocated
items:
|
||||||||||||||||||||||||
|
Interest
income
|
1,105 | 2,277 | ||||||||||||||||||||||
|
Foreign
exchange gain
|
352 | 735 | ||||||||||||||||||||||
|
Earnings
before income taxes
|
3,538 | 7,852 | ||||||||||||||||||||||
|
Income
taxes
|
854 | 1,635 | ||||||||||||||||||||||
|
Net
earnings for the period
|
$ | 2,684 | $ | 6,217 | ||||||||||||||||||||
EXFO
Electro-Optical Engineering Inc.
Notes
to Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
Total
assets by reportable segment are detailed as follows:
|
As
at
February
29,
2008
|
As
at
August
31,
2007
|
|||||||
|
(unaudited)
|
||||||||
|
Total
assets
|
||||||||
|
Telecom
Division
|
$ | 116,528 | $ | 109,065 | ||||
|
Life
Sciences and Industrial Division
|
10,324 | 9,199 | ||||||
|
Unallocated
assets
|
178,907 | 160,874 | ||||||
| $ | 305,759 | $ | 279,138 | |||||
Unallocated
assets are comprised of cash, short-term investments, other receivable on
forward exchange contracts, income taxes and tax credits recoverable and future
income tax assets.
|
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.
Reconciliation
of net earnings and comprehensive income (loss) to U.S. GAAP
|
Three
months ended
February
29,
2008
|
Six
months ended
February
29,
2008
|
Three
months ended
February
28,
2007
|
Six
months ended
February
28,
2007
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
Net
earnings for the period in accordance with Canadian GAAP and U.S.
GAAP
|
$ | 4,024 | $ | 3,931 | $ | 2,684 | $ | 6,217 | ||||||||
|
Foreign
currency translation adjustment
|
5,540 | 18,722 | (4,472 | ) | (10,304 | ) | ||||||||||
|
Changes
in unrealized losses on available-for-sale securities
|
51 | 90 | – | – | ||||||||||||
|
Unrealized
gains (losses) on forward exchange contracts
|
600 | 2,549 | (3,718 | ) | (5,793 | ) | ||||||||||
|
Reclassification
of realized gains on forward exchange contracts in net
earnings
|
(1,168 | ) | (1,927 | ) | (108 | ) | (844 | ) | ||||||||
|
Future
income taxes effect of the above items
|
182 | (199 | ) | – | – | |||||||||||
|
Comprehensive
income (loss) under U.S. GAAP
|
$ | 9,229 | $ | 23,166 | $ | (5,614 | ) | $ | (10,724 | ) | ||||||
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)
Reconciliation
of shareholders’ equity to conform to U.S. GAAP
The
following summary sets out the significant differences between the company’s
reported shareholders’ equity under Canadian GAAP as compared to U.S.
GAAP:
|
As
at
February
29,
2008
|
As
at
August
31,
2007
|
|||||||
|
(unaudited)
|
||||||||
|
Shareholders’
equity in accordance with Canadian GAAP
|
$ | 276,711 | $ | 250,165 | ||||
|
Forward
exchange contracts (note 2)
|
– | 2,864 | ||||||
|
Goodwill
|
(13,708 | ) | (12,697 | ) | ||||
|
Future
income tax assets (note 2)
|
– | (916 | ) | |||||
|
Stock
appreciation rights
|
(73 | ) | (73 | ) | ||||
|
Shareholders’
equity in accordance with U.S. GAAP
|
$ | 262,930 | $ | 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 | ||||||||||||||||||
|
Unrealized
gains on forward exchange contracts, net of realized gains and future
income taxes
|
– | – | – | – | 809 | 809 | ||||||||||||||||||
|
Reclassification
of stock-based compensation costs upon exercise of stock
awards
|
2 | – | – | (2 | ) | – | – | |||||||||||||||||
|
Redemption
of share capital
|
(135 | ) | – | (39 | ) | – | – | (174 | ) | |||||||||||||||
|
Balance
as at November 30, 2007
|
599,386 | 1,537 | (416,819 | ) | 4,998 | 64,320 | 253,422 | |||||||||||||||||
|
Net
earnings for the period
|
– | – | 4,024 | – | – | 4,024 | ||||||||||||||||||
|
Stock-based
compensation costs
|
– | – | – | 269 | – | 269 | ||||||||||||||||||
|
Foreign
currency translation adjustment
|
– | – | – | – | 5,540 | 5,540 | ||||||||||||||||||
|
Unrealized
losses on available-for-sale securities
|
– | – | – | – | 51 | 51 | ||||||||||||||||||
|
Unrealized
gains on forward exchange contracts, net of realized gains and future
income taxes
|
– | – | – | – | (386 | ) | (386 | ) | ||||||||||||||||
|
Exercise
of stock options
|
10 | – | – | – | – | 10 | ||||||||||||||||||
|
Reclassification
of stock-based compensation costs upon exercise of stock
awards
|
209 | – | – | (209 | ) | – | – | |||||||||||||||||
|
Balance
as at February 29, 2008
|
$ | 599,605 | $ | 1,537 | $ | (412,795 | ) | $ | 5,058 | $ | 69,525 | $ | 262,930 | |||||||||||
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
February
29,
2008
|
As
at
August
31,
2007
|
|||||||
|
(unaudited)
|
||||||||
|
Foreign
currency translation adjustment
|
||||||||
|
Current
period
|
$ | 18,722 | $ | 9,218 | ||||
|
Cumulative
effect of prior periods
|
48,397 | 39,179 | ||||||
| 67,119 | 48,397 | |||||||
|
Unrealized
gains (losses) on forward exchange contracts
|
||||||||
|
Current
period, net of realized gains (losses) and future income
taxes
|
423 | (3,503 | ) | |||||
|
Cumulative
effect of prior periods, net of future income taxes
|
1,948 | 5,451 | ||||||
| 2,371 | 1,948 | |||||||
|
Unrealized
losses on available-for-sale securities
|
||||||||
|
Current
period, net of future incomes taxes
|
90 | (55 | ) | |||||
|
Cumulative
effect of prior periods, net of future income taxes
|
(55 | ) | − | |||||
| 35 | (55 | ) | ||||||
| $ | 69,525 | $ | 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 $776,000, $1,547,000, $808,000 and
$1,788,000 for the three- and six-month periods ended February 28, 2007, and February 29,
2008, respectively. This difference has no impact on the net earnings and the
net earnings per share for the reporting periods.
Statements
of cash flows
For the
three- and six-month periods ended February 28, 2007, and February 29, 2008,
there were no significant differences between the statements of cash flows
under Canadian GAAP as compared to U.S. GAAP, except for the subtotal before
change in non-cash operating items, whose presentation is not permitted under
U.S. GAAP.
New
accounting standards and pronouncements
Adopted
in fiscal 2008
In June
2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for
Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109”,
which clarifies the accounting for uncertainties in income taxes recognized in
accordance with SFAS 109, “Accounting for Income Taxes”. The interpretation is
effective for fiscal years beginning after December 15, 2006. The company
adopted this interpretation on September 1, 2007, and its adoption had no impact
on the company consolidated financial statements. Upon the adoption of FIN 48,
the company elected to classify interest and penalties in interest
expense.
EXFO
Electro-Optical Engineering Inc.
Notes
to Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
To
be adopted after fiscal 2008
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. In February 2008, the FASB amended SFAS 157 to exclude
leasing transactions and to delay the effective date by one year for
non-financial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a non-recurring basis. This statement is
effective for fiscal years beginning after November 15, 2007. The company will
adopt this statement on September 1, 2008, and is currently evaluating
the impact its adoption will have on its consolidated financial
statements.
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
events
|
On March
27, 2008, the company acquired all issued and outstanding shares of Navtel
Communications Inc., for a cash consideration of CA$11 million, subject to
adjustments on working capital of the acquired business. Navtel Communications
Inc., a privately held company in Toronto, Canada, specializes in testing
next-generation Internet Protocol networks. This acquisition will be accounted
for using the purchase method and, consequently, the results of operations of
the acquired business will be included in the consolidated financial statements
of the company starting March 27, 2008, being the date of acquisition. The
company expects to complete the purchase price allocation for this acquisition
in the third quarter of fiscal 2008.
On April
2, 2008, the company announced that is has reached an agreement to acquire all
issued and outstanding shares of Brix Networks Inc., for a cash consideration of
$28.5 million, plus a contingent cash consideration of up to a maximum of
$7.5 million, based upon the achievement of bookings volume exceeding $16
million in the 12 months following the acquisition. Consequently, the total
consideration to be paid could reach $37.5 million, including maximum contingent
consideration and other acquisition-related costs. Brix Networks Inc., a
privately held company from the Boston area (MA) offers VoIP and IPTV service
testing across the three areas that impact the success of a real-time service:
signaling quality (signaling path performance), delivery quality (media
transport performance) and content quality (overall quality of experience). This
acquisition will be accounted for using the purchase method and, consequently,
the results of operations of the acquired business will be included in the
consolidated financial statements of the company starting at the closing date,
being the date of acquisition, which is expected to occur during the third
quarter of fiscal 2008. The company will be renamed EXFO Service Assurance
Inc.
Management’s Discussion and Analysis of Financial
Condition
and
Results of Operations
This
discussion and analysis contains forward-looking statements within the meaning
of the U.S. Private Securities Litigation Reform Act of 1995, and we intend that
such forward-looking statements be subject to the safe harbors created thereby.
Forward-looking statements are statements other than historical information or
statements of current condition. Words such as may, will, expect, believe,
anticipate, intend, could, estimate, continue, or the negative or comparable
terminology are intended to identify forward-looking statements. In addition,
any statements that refer to expectations, projections or other
characterizations of future events and circumstances are considered
forward-looking statements. They are not guarantees of future performance and
involve risks and uncertainties. Actual results may differ materially from those
in forward-looking statements due to various factors including consolidation in
the global telecommunications test, measurement and monitoring industry; capital
spending levels in the telecommunications, life sciences and high-precision
assembly sectors; concentration of sales; fluctuating exchange rates and our
ability to execute in these uncertain conditions; the effects of the additional
actions we have taken in response to such economic uncertainty (including our
ability to quickly adapt cost structures with anticipated levels of business,
ability to manage inventory levels with market demand); market acceptance of our
new products and other upcoming products; limited visibility with regards to
customer orders and the timing of such orders; our ability to successfully
integrate our acquired and to-be-acquired businesses; our ability to
successfully expand international operations; the retention of key technical and
management personnel; and future economic, competitive and market conditions,
including any slow-down or recession in the global economy. Assumptions relating
to the foregoing involve judgments and risks, all of which are difficult or
impossible to predict and many of which are beyond our control. Other risk
factors that may affect our future performance and operations are detailed in
our Annual Report, on Form 20-F, and our other filings with the U.S. Securities
and Exchange Commission and the Canadian securities commissions. We believe that
the expectations reflected in the forward-looking statements are reasonable
based on information currently available to us, but we cannot assure you that
the expectations will prove to have been correct. Accordingly, you should not
place undue reliance on these forward-looking statements. These statements speak
only as of the date of this document. Unless required by law or applicable
regulations, we undertake no obligation to revise or update any of them to
reflect events or circumstances that occur after the date of this
document.
The
following discussion and analysis of financial condition and results of
operations is dated March 28, 2008.
All
dollar amounts are expressed in US dollars, except as otherwise
noted.
INDUSTRY
OVERVIEW
The
fundamentals of the wireline telecom industry are fairly robust in most regions
of the world, except in the United States where an economic slowdown could
potentially reduce investments. These fundamentals are based upon exponential
growth in bandwidth demand, intense competition between telecom operators
(telcos) and cable companies (cablecos) pushing massive network investments to
capitalize on significant operational efficiencies and service revenues
generated by fully converged IP (Internet protocol) networks.
Global
Internet bandwidth grew at a compound annual growth rate (CAGR) of 45% from 2003
to 2006, according to TeleGeography Research. This trend is likely to
remain steady, if not accelerate, with the upcoming deployments of IPTV
(Internet protocol television), HD-IPTV (high-definition Internet protocol
television) and increased online video streaming, since these applications,
amongst others, will consume a colossal amount of additional bandwidth. As a
result, telcos and cablecos are investing substantially in their access networks
in order to provide differentiated, revenue-generating services to attract
and retain consumers who are increasingly relying on broadband network services
for their work, entertainment and everyday activities. From a telco perspective,
it is now clear that fiber-to-the-home (FTTH) will become the access
network architecture of choice, which will allow them to meet heightened
bandwidth requirements and future-proof their access networks as residential
bandwidth requirements are growing from the 1 to 5 Mbit/s (megabits per second)
of the past to the 30 to 100 Mbit/s required in the long-term to assure multiple
HD-IPTV channels, online gaming, high-speed content-rich Internet, VoIP
(voice-over-Internet-protocol) telephony, and a myriad of other IP-based
applications. Hybrid architectures, combining copper and fiber
(fiber-to-the-curb, or FTTC, and fiber-to-the-node, or FTTN), will also
keep expanding in the short term, since they are less expensive methods to
increase bandwidth and can be mass-deployed faster.
These
investment decisions are applicable not only to green-field deployments and
high-rise buildings, but also to larger-scale rollouts as long-term operating
costs are less than FTTC and FTTN. It is important to mention that the cost of
deploying FTTH has largely been falling over the last three years as volume
increased and deployment tools, like those we offer, are making the task
increasingly easy. We are only at the early stages of fiber deployments in
access networks both in the Americas and around the world. It is also worth
noting that Western Europe has become very committed to deploying FTTH networks,
given their high population density.
As
bandwidth growth in access networks continues to increase, it has begun placing
a strain on metro rings and core networks. It is also driving the need for
higher-speed technologies, such as 43 Gbit/s (gigabits per
second) SONET/SDH
that are now in their early deployments and the upcoming 100 Gbit/s Ethernet,
because these solutions are expected to be significantly more economical,
especially if trenches need to be dug in order to deploy new fiber in metro or
long-distance routes.
As
telecommunication networks are being transformed to provide IP-based voice,
video and data capabilities, legacy SONET/SDH networks, which were designed in
the 1980s and 1990s and implemented until 2005, will not be capable of
efficiently carrying these emerging IP-based services as they are based on
design standards aimed at public switched telephone network (PSTN),
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 second quarter of fiscal 2008; however, deteriorating macro-economic
conditions in the United States could instigate a slowdown in capital spending
among leading telcos and necessarily reduce demand for our test
solutions.
COMPANY
OVERVIEW
We
reported sales of $43.3 million in the second quarter of fiscal 2008, which
represented an increase of 22.9% over the second quarter of 2007. At the
half-way mark of fiscal 2008, sales increased 19.1% year-over-year to $84.3
million, while our corporate performance metric for sales growth is 20% for
fiscal 2008. Net accepted orders amounted to $44.5 million in the second quarter
of fiscal 2008 for a book-to-bill ratio of 1.03.
Looking
at the bottom line, we generated GAAP net earnings of $4.0 million, or $0.06 per
diluted share, in the second quarter of fiscal 2008, compared to net
earnings of $2.7 million, or $0.04 per diluted share, in the same period last
year. GAAP net earnings per diluted share in the second quarter of 2008 included
a net one-time income tax recovery of $0.02 per diluted share to account for the
effect of the newly enacted Canadian federal tax rates on our future income tax
assets and the effect of the changes in our tax strategy for the future use of
our tax pools and deductions in light of these new tax rates. GAAP
results for the second quarter of fiscal 2008 also include $0.01 per diluted
share for stock-based compensation costs and the after-tax amortization expense
for intangible assets. In terms of earnings from operations, it reached
8.4% of sales in the second quarter and 4.7% at the mid-point of fiscal
2008, while our stated goal is 8% for the whole fiscal year.
During
the first half 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 15.8% and 14.8%, respectively, in the second quarter and the first
half of fiscal 2008, compared to the same periods last year. Given that most of
our sales are denominated in US dollars but a significant portion of our
expenses are denominated in Canadian dollars, our financial results were
negatively affected by increasing our expenses incurred in Canadian dollars.
Secondly, we incurred an exchange loss of $232,000 and $848,000,
respectively, in the second quarter and the first half of fiscal 2008, which
represent the effect of the increase in the value of the Canadian dollar versus
the US dollar on our balance sheet items denominated in foreign currencies. In
comparison, we reported a foreign exchange gain of $352,000 and $735,000 for the
second quarter and the first half of fiscal 2007.
On
November 5, 2007, the Board of Directors approved a share repurchase program, by
way of normal course issuer bid on the open market, up to 9.9% of our public
float (as defined by the Toronto Stock Exchange), or 2.9 million
of subordinate voting shares, at the prevailing market price. We expect to
use cash, short-term investments, or future cash flows from operating activities
to fund the repurchase of shares. The normal course issuer bid started
on November 8, 2007, and will end on November 7, 2008, or an
earlier date if we repurchase the maximum number of shares permitted under
the bid. The program does not require that we repurchase any specific number of
shares, and it may be modified, suspended or terminated at any time, without
prior notice. All shares repurchased under the bid will be canceled. So far in
fiscal 2008, we redeemed 29,200 subordinated voting shares for a total
consideration of $174,000.
We
launched nine new products in the second quarter, including a next-generation
modular test platform for R&D and manufacturing applications; 40G/43G
SONET/SDH and OTN test modules for field and manufacturing applications;
integrated test modules that combine Ethernet, SONET/SDH/OTN testing for field
and manufacturing applications; an optical loss test module and 30 MHz copper
test module for the AXS-200 handheld platform; a single-end CD/PMD analyzer; and
a fiber inspection probe for all types of field network architectures. Sales
from products that have been on the market two years or less represented 44.4%
of total sales in the second quarter of fiscal 2008 and 39.2% after six months,
while the company’s published goal is 30% for the fiscal year. Subsequent to the
quarter-end, EXFO received the 2008 Technology Innovation Award from Frost &
Sullivan for two of its protocol test solutions: handheld AXS-200/850 Gigabit
Ethernet Test Set and FTB8120/8130NGE Ethernet/Next-Generation SONET/SDH/OTN
Multiservice Test Modules that support all rates up to 10 Gbit/s. Altogether, we
have introduced 15 new products since the beginning of fiscal 2008.
On March
27, 2008, we acquired all the shares issued and outstanding of Navtel
Communications Inc., for a cash consideration of CA$11 million, subject to
adjustments on working capital of the acquired business. Navtel Communications
Inc., a privately held company in Toronto, Canada, specializes in testing
next-generation Internet Protocol networks. This acquisition will be accounted
for using the purchase method and, consequently, the results of operations of
the acquired business will be included in our consolidated financial statements
starting March 27, 2008, being the date of acquisition. We expect to
complete the purchase price allocation for this acquisition in the third quarter
of fiscal 2008.
On April
2, 2008, we announced that we have reached an agreement to acquire all issued
and outstanding shares of Brix Networks Inc., for a cash consideration of $28.5
million, plus a contingent cash consideration of up to a maximum of $7.5
million, based upon the achievement of bookings volume exceeding $16 million in
the 12 months following the acquisition. Consequently, the total
consideration to be paid could reach $37.5 million, including maximum contingent
consideration and other acquisition-related costs. Brix Networks Inc., a
privately held company from the Boston area (MA), offers VoIP and IPTV service
testing across the three areas that impact the success of a real-time service:
signaling quality (signaling path performance), delivery quality (media
transport performance) and content quality (overall quality of experience). This
acquisition will be accounted for using the purchase method and, consequently,
the results of operations of the acquired business will be included in our
consolidated financial statements starting at the closing date, being the date
of acquisition, which is expected to occur during the third quarter of fiscal
2008. Brix Network Inc. will be renamed EXFO Service Assurance Inc.
OUR
STRATEGY, KEY PERFORMANCE INDICATORS AND CAPABILITY TO DELIVER
RESULTS
For a
complete description of our strategy and the related key performance indicators,
as well as our capability to deliver results in fiscal 2008, please refer to the
corresponding sections in our most recent Annual Report, filed with the
securities commissions.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
For a
complete description of our critical accounting policies and estimates, please
refer to the corresponding section in our most recent Annual Report, filed with
the securities commissions. The following details the changes in critical
accounting policies that were adopted in fiscal 2008 and those to be adopted
after 2008.
Adopted
in fiscal 2008
On
September 1, 2007, we adopted the Canadian Institute of Chartered Accountants
(CICA) Handbook Section 1530, “Comprehensive Income’’, Section 3251, “Equity’’,
Section 3855, “Financial Instruments – Recognition and Measurement’’, and
Section 3865, “Hedges’’. Sections 3251 and 3865 have been adopted prospectively
while Section 3855 has been applied retroactively, without restatement of prior
years’ financial statements and Section 1530 has been applied retroactively with
restatement of prior years’ financial statements.
Following
the adoption of Section 3855, the company classified its financial instruments
as follows:
Cash
Cash is
classified as financial asset held for trading and is carried at fair value in
the balance sheet and any changes in its fair value is reflected in the
statements of earnings.
Short-term
investments
We
elected to classify our short-term investments as available-for-sale securities,
and therefore they are carried at fair value with any changes in their fair
value being reflected in other comprehensive income. Upon the disposal or
maturity of these assets, accumulated changes in their fair value are
reclassified in the statements of earnings. Also, upon the adoption of this new
standard, unrealized losses on short-term investments as of
August 31, 2007, in the amount of $55,000 (previously recorded in the
statements of earnings), have been reclassified from the opening balance of
retained earnings to the opening balance of accumulated other comprehensive
income for the six months ended February 29, 2008.
Interest
income on short-term investments is recorded in interest income in the
statements of earnings and in cash flows from operating activities in the
statements of cash flows.
Accounts
receivable
Accounts
receivable are classified as loans and receivable. After their initial
measurement at fair value, they are carried at amortized cost, which generally
corresponds to cost due to their short-term maturity.
Bank
loan and accounts payable and accrued liabilities
Bank loan
and accounts payable and accrued liabilities are classified as other financial
liabilities. They are initially measured at their fair value. Subsequent
measurements are at cost, net of amortization, using the effective interest rate
method. For us, that value corresponds to cost either as a result of their
short-term maturity or the floating-rate nature of some
liabilities.
Forward
exchange contracts
Our
forward exchange contracts, which qualify for hedge accounting, are used to
hedge anticipated US-dollar-denominated sales and the related accounts
receivable. They are recorded at fair value in the balance sheet with changes in
their fair value being reported in other comprehensive income. Upon the
recognition of related hedged sales, accumulated changes in fair value are
reclassified in the statements of earnings. Unrecognized gains on forward
exchange contracts as of August 31, 2007, in the amount of $1.9
million, net of future income taxes of $916,000, have been reflected as an
adjustment to the opening balance of accumulated other comprehensive income for
the six months ended February 29, 2008. 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.
Transition
We
elected to use September 1, 2002, as the transition date for embedded
derivatives.
Other
than the adjustments described above for the short-term investments and the
forward exchange contracts, the recognition, derecognition and measurement
methods used to prepare the consolidated financial statements have not changed
from the methods of periods prior to the effective date of the new standards.
Consequently, there were no further adjustments to record on
transition.
Section
1506, “Accounting Changes”
On
September 1, 2007, we adopted Section 1506, “Accounting Changes”. This section
establishes criteria for changes in accounting policies, accounting treatment
and disclosures regarding changes in accounting policies, estimates and
corrections of errors. In particular, this section allows for voluntary changes
in accounting policy only when they result in the financial statements providing
reliable and more relevant information. Furthermore, this section requires
disclosure of when an entity has not applied a new source of GAAP that has been
issued but is not yet effective. The adoption of this section had no further
effects on our consolidated financial statements for the three and the six
months ended February 29, 2008.
To
be adopted after fiscal 2008
In
December 2006, the CICA issued three new sections, which provide a complete set
of disclosure and presentation requirements for financial instruments: Section
3862, “Financial Instruments − Disclosures”; Section 3863, “Financial
Instruments − Presentation”; and Section 1535, “Capital
Disclosures”.
Section
3862 replaces the disclosure portion of Section 3861, “Financial
Instruments − Disclosure and Presentation”. The new standard places
increased emphasis on disclosures regarding risks associated with both
recognized and unrecognized financial instruments and how these risks are
managed. It is also intended to remove any duplicate disclosures and simplify
the disclosures about concentrations of risk, credit risk, liquidity risk and
price risk currently found in Section 3861.
Section
3863 carries forward the presentation requirements from Section 3861,
unchanged.
Section
1535 applies to all entities regardless of whether they have financial
instruments and are subject to external capital requirements. The new section
requires disclosure of information about an entity’s objectives, policies and
processes for managing capital, as well as quantitative data about capital and
whether the entity has complied with any capital requirements.
Sections
1535, 3862 and 3863 apply to fiscal years beginning on or after October 1, 2007.
We will adopt these new standards on September 1, 2008, and are
currently assessing the effects these new standards will have on our
consolidated financial statements.
In June
2007, the CICA issued Section 3031, “Inventories”, to harmonize accounting for
inventories under Canadian GAAP with IFRS. This standard requires the
measurement of inventories at the lower of cost and net realizable value and
includes guidance on the determination of cost, including allocation of
overheads and other costs to inventory. The standard also requires the
consistent use of either first-in, first-out (FIFO) or weighted average cost
formula to measure the cost of inventories and requires the reversal of previous
write-downs to net realizable value when there is a subsequent increase in the
value of inventories. The new standard applies to fiscal years beginning on or
after January 1, 2008. We will adopt this new standard on September 1,
2008, and are currently assessing the effects this new standard will have on our
consolidated financial statements.
In
February 2008, the CICA issued Section 3064, “Goodwill and intangible assets’’,
which supersedes Section 3062, “Goodwill and other intangible assets’’ and
Section 3450, “Research and development costs’’. Various changes have been made
to other sections of the CICA Handbook for consistency purposes. Section 3064
establishes standards for the recognition, measurement, presentation and
disclosure of goodwill subsequent to its initial recognition of intangible
assets by profit-oriented enterprises. Standards concerning goodwill remain
unchanged from the standards included in the previous Section 3062. This new
section applies to fiscal years beginning on or after October 1, 2008. We will
adopt this new standard on September 1, 2009 and we have not yet determined the
effects its adoption will have on our consolidated financial
statements.
RESULTS
OF OPERATIONS
The
following discussion and analysis of our consolidated financial condition and
results of operations for the periods ended February 29, 2008, and
February 28, 2007, should be read in conjunction with our interim consolidated
financial statements and the related notes thereto. Our interim consolidated
financial statements have been prepared in accordance with Canadian generally
accepted accounting principles (Canadian GAAP) and significant differences in
measurement and disclosure from the United States generally accepted accounting
principles (U.S. GAAP) are set out in note 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 tables set
forth interim consolidated statements of earnings data in thousands of US
dollars, except per share data, and as a percentage of sales for the
periods indicated:
|
Three
months
ended
February
29,
2008
|
Three
months
ended
February
28,
2007
|
Six
months
ended
February
29,
2008
|
Six
months
ended
February
28,
2007
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
Sales
|
$ | 43,281 | $ | 35,207 | $ | 84,266 | $ | 70,754 | ||||||||
|
Cost
of sales (1)
|
18,060 | 14,970 | 36,204 | 30,199 | ||||||||||||
|
Gross
margin
|
25,221 | 20,237 | 48,062 | 40,555 | ||||||||||||
|
Operating
expenses
|
||||||||||||||||
|
Selling
and administrative
|
13,683 | 12,184 | 28,500 | 23,726 | ||||||||||||
|
Net
research and development
|
6,185 | 4,678 | 12,197 | 9,032 | ||||||||||||
|
Amortization
of property, plant and equipment
|
998 | 664 | 1,974 | 1,445 | ||||||||||||
|
Amortization
of intangible assets
|
720 | 630 | 1,454 | 1,512 | ||||||||||||
|
Total
operating expenses
|
21,586 | 18,156 | 44,125 | 35,715 | ||||||||||||
|
Earnings
from operations
|
3,635 | 2,081 | 3,937 | 4,840 | ||||||||||||
|
Interest
income
|
1,616 | 1,105 | 3,099 | 2,277 | ||||||||||||
|
Foreign
exchange gain (loss)
|
(232 | ) | 352 | (848 | ) | 735 | ||||||||||
|
Earnings
before income taxes
|
5,019 | 3,538 | 6,188 | 7,852 | ||||||||||||
|
Income
taxes (2)
|
995 | 854 | 2,257 | 1,635 | ||||||||||||
|
Net
earnings for the period
|
$ | 4,024 | $ | 2,684 | $ | 3,931 | $ | 6,217 | ||||||||
|
Basic
and diluted net earnings per share
|
$ | 0.06 | $ | 0.04 | $ | 0.06 | $ | 0.09 | ||||||||
|
Segmented
information:
|
||||||||||||||||
|
Sales:
|
||||||||||||||||
|
Telecom
Division
|
$ | 37,435 | $ | 29,297 | $ | 72,800 | $ | 58,819 | ||||||||
|
Life
Sciences and Industrial Division
|
5,846 | 5,910 | 11,466 | 11,935 | ||||||||||||
| $ | 43,281 | $ | 35,207 | $ | 84,266 | $ | 70,754 | |||||||||
|
Earnings
from operations:
|
||||||||||||||||
|
Telecom
Division
|
$ | 2,817 | $ | 1,078 | $ | 2,838 | $ | 2,881 | ||||||||
|
Life
Sciences and Industrial Division
|
818 | 1,003 | 1,099 | 1,959 | ||||||||||||
| $ | 3,635 | $ | 2,081 | $ | 3,937 | $ | 4,840 | |||||||||
|
Research
and development data:
|
||||||||||||||||
|
Gross
research and development
|
$ | 7,575 | $ | 5,939 | $ | 15,061 | $ | 11,448 | ||||||||
|
Net
research and development
|
$ | 6,185 | $ | 4,678 | $ | 12,197 | $ | 9,032 | ||||||||
|
(1)
|
The
cost of sales is exclusive of amortization, shown
separately.
|
|
(2)
|
Include
a one-time income tax expense of $1.5 million as a result of changes in
Canadian federal enacted tax rates and an income tax recovery of $2.7
million as a result of changes of our tax strategy, for the three and the
six months ended February 29,
2008.
|
|
Three
months
ended
February
29,
2008
|
Three
months
ended
February
28,
2007
|
Six
months
ended
February
29,
2008
|
Six
months
ended
February
28,
2007
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
Sales
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
|
Cost
of sales (1)
|
41.7 | 42.5 | 43.0 | 42.7 | ||||||||||||
|
Gross
margin
|
58.3 | 57.5 | 57.0 | 57.3 | ||||||||||||
|
Operating
expenses
|
||||||||||||||||
|
Selling
and administrative
|
31.6 | 34.6 | 33.8 | 33.5 | ||||||||||||
|
Net
research and development
|
14.3 | 13.3 | 14.5 | 12.8 | ||||||||||||
|
Amortization
of property, plant and equipment
|
2.3 | 1.9 | 2.3 | 2.0 | ||||||||||||
|
Amortization
of intangible assets
|
1.7 | 1.8 | 1.7 | 2.2 | ||||||||||||
|
Total
operating expenses
|
49.9 | 51.6 | 52.3 | 50.5 | ||||||||||||
|
Earnings
from operations
|
8.4 | 5.9 | 4.7 | 6.8 | ||||||||||||
|
Interest
income
|
3.7 | 3.1 | 3.6 | 3.2 | ||||||||||||
|
Foreign
exchange gain (loss)
|
(0.5 | ) | 1.0 | (1.0 | ) | 1.1 | ||||||||||
|
Earnings
before income taxes
|
11.6 | 10.0 | 7.3 | 11.1 | ||||||||||||
|
Income
taxes (2)
|
2.3 | 2.4 | 2.6 | 2.3 | ||||||||||||
|
Net
earnings for the period
|
9.3 | % | 7.6 | % | 4.7 | % | 8.8 | % | ||||||||
|
Segmented
information:
|
||||||||||||||||
|
Sales:
|
||||||||||||||||
|
Telecom
Division
|
86.5 | % | 83.2 | % | 86.4 | % | 83.1 | % | ||||||||
|
Life
Sciences and Industrial Division
|
13.5 | 16.8 | 13.6 | 16.9 | ||||||||||||
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||
|
Earnings
from operations:
|
||||||||||||||||
|
Telecom
Division
|
6.5 | % | 3.1 | % | 3.4 | % | 4.1 | % | ||||||||
|
Life
Sciences and Industrial Division
|
1.9 | 2.8 | 1.3 | 2.7 | ||||||||||||
| 8.4 | % | 5.9 | % | 4.7 | % | 6.8 | % | |||||||||
|
Research
and development data:
|
||||||||||||||||
|
Gross
research and development
|
17.5 | % | 16.9 | % | 17.9 | % | 16.2 | % | ||||||||
|
Net
research and development
|
14.3 | % | 13.3 | % | 14.5 | % | 12.8 | % | ||||||||
|
(1)
|
The
cost of sales is exclusive of amortization, shown
separately.
|
|
(2)
|
Include
a one-time income tax expense of $1.5 million as a result of changes in
Canadian federal enacted tax rates and an income tax recovery of $2.7
million as a result of changes of our tax strategy, for the three and the
six months ended February 29,
2008.
|
SALES
For the
three months ended February 29, 2008, our global sales increased 22.9% to $43.3
million from $35.2 million for the same period last year, with an 87%-13% split
in favor of our Telecom Division.
For the
six months ended February 29, 2008, our global sales increased 19.1% to
$84.3 million from $70.8 million for the same period last year, with
an 86%-14% split in favor of our Telecom Division. Our corporate
performance metric for sales growth is 20% for fiscal 2008.
Telecom
Division
For the
three months ended February 29, 2008, sales of our Telecom Division increased
27.8% to $37.4 million from $29.3 million for the same period last
year.
For the
six months ended February 29, 2008, sales of our Telecom Division increased
23.8% to $72.8 million from $58.8 million for the same period last
year.
During
the second quarter and the first half of fiscal 2008, we posted sales growth due
to the market acceptance of our next-generation IP test solutions and continued
market-share gains in optical test solutions as well as due to continued
spending in access networks fueled by the competitive dynamic between telephone
and cable companies. In fact, during the second quarter and the first half of
fiscal 2008, we posted record-high sales and bookings of next-generation IP test
solutions. So far in fiscal 2008, these test solutions represented our
fastest-growing product line with year-over-year sales increase of 111% and 53%
for the second quarter and the first half of fiscal 2008, respectively, and they
represented 20% and more than 15% of our telecom sales for these two periods,
respectively. With the recent launches of significant strategic protocol test
solutions; namely the compact multiservice transport test set that combines
next-generation SONET/SDH and Ethernet testing inside a single module
(FTB-8120NGE/FTB-8130NGE Power Blazer), the 40/43 Gbit/s SONET/SDH field-test
solution for high-speed optical networks (FTB-8140 Transport Blazer) as well as
the advanced IQS-600 Integrated Qualification System, a highly scalable modular
test platform for R&D and manufacturing applications, we have a much more
comprehensive offering in this market segment, which provides us with a
significant competitive advantage; this should help us further increase our
market share and sales in the upcoming quarters.
In
addition, during the second quarter and the first half of fiscal 2008, we posted
slight year-over-year sales increase for our copper-access test solutions as
large-scale IPTV deployments have been delayed until calendar 2008, which
affected our sales in the first two quarters of fiscal 2008 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.
It should
be noted however that during the second quarter of fiscal 2007, we benefited
from aggressive FTTH roll-outs and some year-end budget flush-outs from our top
customer and sales made to this customer represented 25.7% ($7.5 million) of our
telecom sales in the second quarter of fiscal 2007, compared to 6.9%
(2,4 millions $) during the same period this year. Excluding sales to this
customer, our telecom sales would have increased 60.9% in the second quarter of
fiscal 2008, compared to the same period last year.
Life
Sciences and Industrial Division
For the
three months ended February 29, 2008, sales of our Life Sciences and Industrial
Division were relatively flat year-over-year at $5.8 million, compared to
$5.9 million for the same period last year.
For the
six months ended February 29, 2008, sales of our Life Sciences and Industrial
Division slightly decreased year-over-year to $11.5 million, from $11.9
million for the same period last year.
The
decrease in sales in the first half 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 dependent, to some extent,
on the buying pattern of our customers and our sales may fluctuate
quarter-over-quarter.
Net
Bookings
Overall,
for the two divisions, net accepted orders increased 22.0% to $44.5 million in
the second quarter of fiscal 2008 from $36.5 million for the same period last
year. Our book-to-bill ratio reached 1.03 in the second quarter of fiscal 2008,
compared to 1.04 for the same period last year. In the previous quarter, the net
book-to-bill ratio was 1.07. Our 22.0% increase in net accepted orders in the
second quarter of fiscal 2008, compared to the same period last year, is mainly
due to the increased demand for our next-generation IP and optical test
solutions.
Geographic
distribution
For the
three months ended February 29, 2008, sales to the Americas, Europe-Middle
East-Africa (EMEA) and Asia-Pacific (APAC) accounted for 51%, 34% and 15% of
global sales, respectively. For the corresponding period last year, sales to the
Americas, EMEA and APAC accounted for 57%, 31% and 12% of global sales,
respectively. For the six months ended February 29, 2008, sales to the Americas,
EMEA and APAC accounted for 54%, 29% and 16% of global sales, respectively. For
the corresponding period last year, sales to the Americas, EMEA and APAC
accounted for 57%, 30% and 13% of global sales, respectively.
During the second quarter of fiscal
2008, we reported that sales increased (in dollars) in every geographic area
compared to the same period last year with increases of 11.4% in the Americas,
35.0% in EMEA and 45.4% in APAC. During the first half of fiscal 2008, we
reported that sales increased (in dollars) in every geographic area compared to
the same period last year with increases of 14.0% in the Americas, 16.4% in EMEA
and 46.9% in APAC.
In the
Americas, the increase in sales in dollars during the three months ended
February 29, 2008, compared to the same period last year comes from Canada and
Latin America as we experienced a decreased in sales in the United States
year-over-year. As mentioned above, during the second quarter of fiscal 2007, we
benefited from aggressive FTTH roll-outs and some year-end budget flush-outs
from our top customer, who is located in the United States, and sales made to
this customer represented 21.4% ($7.5 million) of our global sales in the second
quarter of fiscal 2007, compared to 5.6% ($2.4 million) during the same period
this year. We do not believe that we have lost market share with this particular
customer during the second quarter of fiscal 2008 as the sales level with this
customer may fluctuate quarter-over-quarter, based on amount of budget
available, allocation of such budget and timing and scope of projects. Excluding
sales to this customer, sales to United States would have increased 35.3% in
dollars year-over-year; this shows that, overall, we have diversified our
customer base year-over-year in this region. During the first half of fiscal
2008, sales to the Americas increased in every region. During that period, our
top customer, who is located in the United States accounted for 8.4% ($7.0
million) of our global sales while during the same period last year, our top
customer, who is also located in the United States, represented 17.6% ($12.5
million) of our global sales.
The
increase in sales in the EMEA market, in dollars, in the second quarter and the
first half of fiscal 2008, compared to the same periods last year, is a direct
result of our continued efforts to aggressively develop this market in the
last several years and investments to increase our sales presence as well as the
development of stronger support and service operations in this region. In
addition, many Tier-1 carriers in EMEA are migrating their traditional
circuit-switched core networks to higher-speed, dense wavelength-division
multiplexing (DWDM) and next-generation packet-based architectures, which is
creating a market demand for our protocol test solutions and fiber
characterization test kits. Furthermore, we are leveraging our FTTx leadership
gained in the United States to provide consultancy with many of the early
adopters in this field in EMEA.
In the
APAC market, we are seeing the return on investment of some specific optical,
protocol as well as life science and industrial products developed and targeted
for this important market. This increasingly competitive range, coupled with our
steadily increasing market presence, are responsible for the increase in sales
in this growth region in the second quarter and the first half of fiscal 2008,
compared to the corresponding periods last 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 February 29, 2008, no customer
accounted for more than 10% of our global sales, and our top three customers
accounted for 14.6% of our global sales. For the corresponding period last year,
our top customer accounted for 21.4% ($7.5 million) of our global sales, and our
top three customers accounted for 27.7% of our global sales. For the six months
ended February 29, 2008, no customer accounted for more than 10% of
our global sales, and our top three customers accounted for 14.8% of our global
sales. For the corresponding period last year, our top customer accounted for
17.6% ($12.5 million) of our global sales, and our top three customers accounted
for 23.0% of our global sales.
Gross
Margin
Gross
margin increased to 58.3% of sales for the three months ended February 29, 2008,
from 57.5% for the same period last year.
Gross
margin amounted to 57.0% of sales for the six months ended February 29, 2008,
compared to 57.3% for the same period last year.
The
increase in our gross margin in the second quarter of fiscal 2008, compared to
the corresponding period last year, can be explained by the following factors.
First, during the second quarter of fiscal 2008, our gross margin was positively
affected by the increased sales of our protocol test solutions year-over-year as
these products tend to have better margins than our other test solutions. In
addition, the significant increase in sales, year-over-year resulted in an
increase in manufacturing activities, allowing us to better absorb our fixed
manufacturing costs. Furthermore, we were able to reduce our cost of goods sold
by better leveraging our supplier base and by developing innovative new products
with cost-effective design. Also, our cost of goods was positively affected by
lower costs for raw material due to the significant increase in the value of the
Canadian dollar compared to the US dollar in the last quarters, as most of these
costs are incurred in US dollars. However, the shift in sales between the
Americas in favor of EMEA and APAC had a negative impact on our gross margin as
it tend to be lower in EMEA and APAC than in the Americas. Also, we are facing
continued aggressive pricing pressure worldwide. In addition, during the second
quarter of fiscal 2008, a stronger Canadian dollar, compared to the
US dollar year-over-year, prevented us from further improving our gross
margin as most of our overhead costs and a portion of our raw material purchases
are denominated in Canadian dollars. 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 second quarter of
fiscal 2008, compared to the same period last year.
The
slight decrease in our gross margin in the first half of fiscal 2008, compared
to the corresponding period last year, can be explained by the following
factors. The shift in the geographic distribution of sales in favor of APAC
versus the Americas had a negative impact on our gross margin in the first half
of fiscal 2008 compared to the same period last year. In fact, sales to APAC
tend to have lower margins than sales to the Americas since we are facing higher
pricing pressure in the APAC region. Furthermore, a stronger Canadian dollar,
compared to the US dollar year-over-year, had a negative impact on our
gross margin as most of our overhead costs and a portion of our raw material
purchases are denominated in Canadian dollars. Finally, the start-up of our own
manufacturing activities in China, over the last few months, resulted in
additional expenses, which reduced our gross margin in the first half 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. In addition, we were able to reduce our cost of
goods sold by better leveraging our supplier base and by developing innovative
new products with cost-effective design.
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 February 29, 2008, selling and administrative expenses were
$13.7 million, or 31.6% of sales, compared to $12.2 million, or 34.6%
of sales for the same period last year.
For the
six months ended February 29, 2008, selling and administrative expenses were
$28.5 million, or 33.8% of sales, compared to $23.7 million, or 33.5%
of sales for the same period last year.
During the second quarter and
the first half of fiscal 2008, the substancial 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 dollars and also because these expenses
increased year-over-year. In addition, during the second quarter and the first
half of fiscal
2008, we continued intensifying our sales and marketing activities
to develop our markets and leverage our significant research and development
investments; this resulted in higher sales and marketing expenditures (including
number of employees and expenses to support the launch of several new products
and to increase brand name recognition), compared to the corresponding periods
last year. Furthermore,
our overall commission expenses increased in the second
quarter and the first half of fiscal 2008, compared to
the same periods 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 the first half of fiscal 2008. 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 dollars during the second quarter and the
first half of fiscal 2008 compared to the same periods last 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 February 29, 2008, gross research and development expenses
totaled $7.6 million, or 17.5% of sales, compared to $5.9 million, or 16.9%
of sales for the same period last year.
For the
six months ended February 29, 2008, gross research and development expenses
totaled $15.1 million, or 17.9% of sales, compared to $11.4 million, or
16.2% of sales for the same period last year.
During the second quarter and the first half
of fiscal 2008,
the significant increase in the average value of the Canadian dollar compared to the US dollar
year-over-year had also a significant and negative
effect on our gross research and development expenses as most of these expenses
are denominated in Canadian dollars and also because these expenses increased
year-over-year. In
addition, we intensified our research and development activities, including
additional employees, which resulted in more gross research and development
expenses in both divisions during the second quarter and the first half of
fiscal 2008, compared to the same periods 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 of the first half of fiscal 2008 to increase
year-over-year.
The
increase in our gross research and development expenses as a percentage of sales
year-over-year is mainly due to the negative effect of the increased value
of the Canadian dollar versus the US dollar year-over-year and the severance
expenses incurred during the first quarter of fiscal 2008.
For the
three months ended February 29, 2008, tax credits and grants from the Canadian
federal and provincial governments for research and development activities were
$1.4 million, or 18.3% of gross research and development expenses, compared
to $1.3 million, or 21.2% of gross research and development expenses for the
same period last year. For the six months ended February 29, 2008, these tax
credits and grants were $2.9 million, or 19.0% of gross research and
development expenses, compared to $2.4 million, or 21.1% of gross research and
development expenses for the same period last year.
The
increase in dollars of our tax credits and grants in the second quarter and the
first half of fiscal 2008, compared to the same periods last year is directly
related to the increase in our gross research and development expenses as we
were entitled to the same tax credits and grants programs. However, the decrease
of research and development tax credits as a percentage of gross research and
development expenses is mainly due to the fact that since the beginning
of fiscal 2008, the portion of gross research and development incurred in
Canada, where we are entitled to tax credits was lower than the same periods
last year following the establishment of our new software development center in
India.
For the
first half of fiscal 2008, 39.2% 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 share and our goal
to exceed customer needs and expectations. Also, we are increasingly taking
advantage of talent pools around the world with the recent establishment of a
research and development center focused on software development in Pune,
India. Finally, any further increase in the strength of the Canadian dollar in
the upcoming quarters would cause our net research and development expenses to
increase, as most of these are incurred in Canadian dollars.
AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
For the
three months ended February 29, 2008, amortization of property, plant and
equipment was $998,000, compared to $664,000 for the same period last year. For
the six months ended February 29, 2008, amortization expenses amounted to $2.0
million, compared to $1.4 million for the same period last year. The recent start-up of
our own manufacturing and research and development facilities in China
and India as well as the upgrade of our IT system resulted in an increase
in our amortization expenses during the second quarter and the first half of
fiscal 2008 compared to the same periods last year. In addition, the increase in the average
value of the Canadian dollar versus to the US dollar in the
second quarter
and the first
half of fiscal
2008, compared to the same periods last year contributed
to
the increase in our amortization expenses
year-over-year
as most of these
expenses are denominated in Canadian dollars.
AMORTIZATION
OF INTANGIBLE ASSETS
For the
three months ended February 29, 2008, amortization of intangible assets was
$720,000, compared to $630,000 for the same period last year. For the six months
ended February 29, 2008, amortization of intangible assets was flat compared to
the same period last year at $1.5 million. The increase in the average
value of the Canadian dollar versus to the US dollar in the
second
quarter of fiscal 2008, compared to
the same period last year contributed to the increase in our amortization expenses
year-over-year
as most of these
expenses are denominated in Canadian dollars. The stability
in amortization expenses in the first half of fiscal 2008, compared to the
same period last year, despite the significant 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
INCOME
For the
three months ended February 29, 2008, interest income amounted to $1.6 million,
compared to $1.1 million for the same period last year. For the six
months ended February 29, 2008, interest income amounted to $3.1 million,
compared to $2.3 million for the same period last year. The increase in our
interest income in the second quarter and the first half of fiscal 2008,
compared to the same periods last year, is due in part to the increase in
interest rates year-over-year. Also, our average cash position increased in the
second quarter and the first half of fiscal 2008, compared to the same periods
last year, due to cash flows from operating activities, which contributed to the
further increase in interest revenue year-over-year. Furthermore, the increase
in the average value of the Canadian dollar, compared to the US dollar
year-over-year contributed to the increase in our interest income during the
second quarter and the first half of fiscal 2008, compared to the same periods
last year, as it is denominated in Canadian dollars. Finally, during the second
quarter of fiscal 2008, we received interest of $241,000 by the Canadian tax
authorities following the recovery during that period of prior years’ income tax
receivable.
FOREIGN
EXCHANGE GAIN (LOSS)
For the
three months ended February 29, 2008, the foreign exchange loss amounted to
$232,000, compared to a foreign exchange gain of $352,000 for the same period
last year.
For the
six months ended February 29, 2008, the foreign exchange loss amounted to
$848,000 compared to a foreign exchange gain of $735,000 for the same
period last year.
During
the second quarter of fiscal 2008, the value of the Canadian dollar increased
quarter-over-quarter compared to the US dollar, which resulted in a foreign
exchange loss of $232,000 during that period. In fact, the period-end value
of the Canadian dollar increased 2.1% in the second quarter of fiscal 2008,
compared to the previous quarter.
During
the second quarter of fiscal 2007, the value of the Canadian dollar decreased
2.4% quarter-over-quarter, compared to the US dollar, which resulted in a
foreign exchange gain of $352,000 during that period.
During
the first half of fiscal 2008, the value of the Canadian dollar significantly
increased compared to the US dollar, which resulted in a significant foreign
exchange loss of $848,000 during that period. In fact, the period-end value
of the Canadian dollar for the first half of fiscal 2008 increased 7.8%,
compared to August 31, 2007.
During
the first half of fiscal 2007, the value of the Canadian dollar decreased
compared to the US dollar, which resulted in a foreign exchange gain of $735,000
during that period. In
fact, the period-end value of the Canadian dollar for the first half
of fiscal 2007 decreased 5.4%, compared to August 31,
2006.
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 second quarter and the first half
of fiscal 2008,
compared to the same periods last year, resulted in a negative
impact on our financial results. This was amplified by the fact that our
operating activities incurred Canadian dollar increased
year-over-year. In fact, the average value of the Canadian dollar
compared to the
US dollar in the second quarter of fiscal 2008 was
CA$1.0066 = US$1.00 versus
CA$1.1656 = US$1.00 during the same
period last year, representing an increase of 15.8% in the average value of
the Canadian dollar compared to the US dollar year-over-year. During the first half of
fiscal 2008, the
average value of the Canadian dollar compared to the US dollar
was
CA$0.9984 = US$1.00 versus
CA$1.1463 = US$1.00 during the same
period last year, representing an increase of 14.8% 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 February 29, 2008, our income tax expense was $995,000
compared to $854,000 for the same period last year.
For the
six months ended February 29, 2008, our income tax expense was $2,3 million
compared to $1.6 million for the same period last year.
We
recorded a full valuation allowance against our future income tax assets until
August 31, 2007, and most of our income tax expenses of prior periods
represented income taxes payable at the Canadian federal level, which were
reduced by research and development tax credits that were recorded against gross
research and development expenses in the statements of earnings. However, on
August 31, 2007, we recorded a future income tax recovery of $24.6 million for
the reversal of a portion of our valuation allowance at the Canadian federal and
provincial levels and at the US federal level. Consequently, in the second
quarter and the first half of fiscal 2008, our income tax expense was affected
by the recognition of future income taxes in some tax jurisdictions, compared
to the same periods last year.
As
mentioned above, for the three months ended February 29, 2008, we reported an
income tax expense of $995,000 on earnings before income
taxes of $5.0 million. For the six months ended February 29, 2008, we reported
an income tax expense of $2.3 million on earnings before income taxes of $6.2
million. The distortion between the income tax expense and pre-tax income for
these periods can be explained by the following factors. First, on December 14,
2007, reductions to the Canadian federal statutory tax rate, previously
announced by the Canadian federal Government were enacted. Therefore, our
Canadian federal future income tax assets decreased by $1.5 million and
generate a one-time future income tax expense for the same amount during the
second quarter and the first half of fiscal 2008. However, during the second
quarter of fiscal 2008, based on these new enacted tax rates, we reviewed our
tax strategy for the future use of our Canadian federal operating losses, tax
deductions, timing differences and R&D tax credits to minimize income taxes
payable on future years’ taxable income, by amending our prior year’s income tax
returns to create a net operating loss to be carried back to prior years, which
will release previously used research and development tax credits. This resulted
in an increase of our tax-related assets of $2.7 million and a one-time
income tax recovery for the same amount during the second quarter and the first
half of fiscal 2008. These two offsetting elements represented a net income tax
recovery of $1.2 million in the statements of earnings for the three- and
six-month periods ended February 29, 2008. Also, during these periods, some
expenses were non-deductible for tax purposes (mainly stock-based compensation
expenses and foreign exchange losses created by the translation of financial
statements of our foreign integrated subsidiaries) and some revenue were
non-taxable (namely certain R&D tax credits). In addition, we continued
to maintain a valuation allowance for some of our subsidiaries at loss and we
utilize previously unrecognized future income tax assets. Finally, we recorded
income tax expenses for minimum taxes payable in certain tax jurisdictions,
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 and the six months ended February 29, 2008, and February 28, 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
February
29,
2008
|
Six
months
ended
February
29,
2008
|
Three
months
ended
February
28,
2007
|
Six
months
ended
February
28,
2007
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
Income
tax provision at combined Canadian federal and provincial statutory tax
rate
|
$ | 1,606,000 | $ | 1,980,000 | $ | 1,132,000 | $ | 2,512,000 | ||||||||
|
Increase
(decrease) due to:
|
||||||||||||||||
|
Income
taxed at different rates
|
(11,000 | ) | 77,000 | (26,000 | ) | 33,000 | ||||||||||
|
Non-taxable
income
|
(290,000 | ) | (371,000 | ) | (36,000 | ) | (95,000 | ) | ||||||||
|
Non-deductible
expenses
|
368,000 | 590,000 | 192,000 | 446,000 | ||||||||||||
|
Change
in tax rates (1)
|
1,524,000 | 1,522,000 | 18,000 | 289,000 | ||||||||||||
|
Change
in tax strategy (2)
|
(2,715,000 | ) | (2,715,000 | ) | – | – | ||||||||||
|
Foreign
exchange effect of translation of foreign integrated
subsidiaries
|
67,000 | 194,000 | 6,000 | 86,000 | ||||||||||||
|
Other
|
232,000 | 391,000 | 163,000 | 40,000 | ||||||||||||
|
Utilization
of previously unrecognized future income tax assets
|
(1,881,000 | ) | (1,881,000 | ) | (660,000 | ) | (1,999,000 | ) | ||||||||
|
Unrecognized
future income tax assets on temporary deductible differences and unused
tax losses and deductions
|
2,095,000 | 2,470,000 | 65,000 | 323,000 | ||||||||||||
|
Income
tax provision
|
$ | 995,000 | $ | 2,257,000 | $ | 854,000 | $ | 1,635,000 | ||||||||
|
(1)
|
During
the three months ended February 29, 2008, reductions to the Canadian
federal statutory tax rate, previously announced by the Canadian federal
Government were enacted. Therefore, Canadian federal future income tax
assets decreased by $1.5 million, and generated a future income tax
expense for the same amount during the three- and six-month periods ended
February 29, 2008.
|
|
(2)
|
During
the three months ended February 29, 2008, based on new Canadian federal
enacted tax rates, we reviewed our tax strategy for the future use of our
Canadian federal operating losses, research and development expenses,
certain timing differences and research and development tax credits to
minimize income taxes payable on future years’ taxable income, by amending
our prior year’s income tax returns to generate a net operating loss to be
carried back to prior years, which will release previously used research
and development tax credits. This resulted in an increase of our tax
related assets of $2.7 million and in an income tax recovery for the
same amount in the statements of earnings for the three- and six-month
periods ended
February 29, 2008.
|
LIQUIDITY
AND CAPITAL RESOURCES
Cash Requirements
and Capital Resources
As at
February 29, 2008, cash and short-term investments totalled $142.8 million,
while our working capital was at $200.9 million. Our cash and short-term
investments increased $10.1 million in the second quarter of fiscal 2008,
compared to the previous quarter, mainly due to the cash flows from operating
activities of $9.2 million, and an unrealized foreign exchange gain on our cash
and short-term investments of $3.0 million. On the other hand, we made cash
payments totalling $2.1 million for the purchase of capital assets. The $3.0
million 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.
Our
short-term investments consist of commercial paper and bank acceptances issued
by eight (eight as of November 30, 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,
including the cash consideration payable for the acquisition of Navtel
Communications Inc. In addition to these assets, we have unused available lines
of credit of $12.3 million for working capital and other general corporate
purposes and an unused line of credit of $11.5 million for foreign
currency exposure related to forward exchange contracts. However, possible
operating losses and/or possible investments in or acquisitions of complementary
businesses, products or technologies may require additional financing. There can
be no assurance that additional debt or equity financing will be available when
required or, if available, that it can be secured on satisfactory terms.
Our lines of credit bear interest at prime rate.
Sources
and Uses of Cash
We
finance our operations and meet our capital expenditure requirements mainly
through cash flows from operating activities, the use of our cash and short-term
investments as well as the issuance of subordinate voting shares.
Operating
Activities
Cash
flows provided by operating activities were $9.2 million for the three months
ended February 29, 2008, compared to $7.0 million for the same period
last year. Cash flows provided by operating activities in the second quarter of
fiscal 2008 were mainly attributable to the net earnings after items not
affecting cash of $15.6 million offset in part by the negative net change in
non-cash operating items of $6.4 million. The negative net change in
non-cash operating items was mainly due to the negative effect on cash of the
increase of $9.2 million of our income tax and tax credits recoverable as
well as the increase of $985,000 of our accounts receivable. The increase in our
income taxes and tax credits is mainly due to the increase of our tax credits
recoverable following the change in our tax strategy explained elsewhere in this
document. This increase was for the most part offset by the positive effect on
cash of the decrease of our future income tax assets, which also resulted from
the change in the tax strategy. The increase in our accounts receivable is due
to the increase in sales during the quarter. These negative effects
on cash were offset by the positive effect on cash of the decrease of $794,000
of our inventories and the increase of $2.7 million of our accounts payable and
accrued liabilities. The decrease in our inventories resulted from increased
sales activities during the quarter. The increase in our accounts payable and
accrued liabilities resulted from the timing of certain purchases and payments
as well as increased activities during the quarter.
Cash
flows provided by operating activities were $6.8 million for the six months
ended February 29, 2008, compared to $10.3 million for the same period last
year. Cash flows provided by operating activities in the first half of fiscal
2008 were mainly attributable to the net earnings after items not affecting cash
of $18.9 million, offset in part by the negative net change in non-cash
operating items of $12.1 million; this negative net change in non-cash operating
items was mainly due to the negative effect on cash of the $9.6 million increase
in our income tax and tax credits recoverable as well as the decrease the $3.0
million decrease in our accounts payable and accrued liabilities.
The increase in our income taxes and tax credits recoverable comes from the
increase in our tax credits as explained above. The decrease in our accounts
payable and accrued liabilities is due to timing of purchases and payments
during the period. These negative effects on cash flows were offset in part by
the positive effect on cash of the decrease of $707,000 of our inventories,
which resulted from increased sales activities during the period.
Investing
Activities
Cash
flows used by investing activities amounted to $5.7 million for the three months
ended February 29, 2008, i.e., flat compared to the same period last
year. In the second quarter of fiscal 2008, we acquired $3.6 million worth
of short-term investments and paid $2.1 million for the purchase of capital
assets. During the corresponding period last year, we acquired $4.8 million
worth of short-term investments and paid $835,000 for the purchase of capital
assets.
Cash
flows used by investing activities were $4.2 million for the six months ended
February 29, 2008, compared to $8.0 million for the same period last year. In
the first half of fiscal 2008, we acquired $480,000 worth of short-term
investments and paid $3.7 million for the purchase of capital assets. During the
corresponding period last year, we acquired $7.6 million worth of short-term
investments and paid $1.6 million for the purchase of capital assets. On the
other hand, during that same period, we received $1.2 million following the sale
of one of our buildings located in Rochester, NY.
Financing
activities
Cash
flows provided by financing activities amounted to $535,000 for the first half
of fiscal 2008, compared to $432,000 for the same period last year. During the
first half 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 for $483,000.
FORWARD
EXCHANGE CONTRACTS
We
utilize forward exchange contracts to manage our foreign currency exposure. Our
policy is not to utilize those derivative financial instruments for trading or
speculative purposes.
Our
forward exchange contracts, which are used to hedge anticipated
US-dollar-denominated sales, qualify for hedge accounting; therefore, foreign
exchange translation gains and losses on these contracts are recognized
as an adjustment of the revenues when the corresponding sales are
recorded.
As at
February 29, 2008, we held forward exchange contracts to sell US dollars at
various forward rates, which are summarized as follows:
|
Expiry
dates
|
Contractual
amounts
|
Weighted
average contractual forward rates
|
||
|
March
to August 2008
|
$18,100,000
|
1.1184
|
||
|
September
2008 to December 2009
|
$21,400,000
|
1.0961
|
As at
February 29, 2008, the fair value of our forward exchange contracts, which
represents the amount we would receive to settle the contracts, amounted to
unrealized gains of
$3.7
million
($4.1 million as at November 30, 2007). These unrealized gains
are recorded in other receivable in the balance sheet as at
February 29, 2008.
CONTINGENCY
On
November 27, 2001, a class action suit was filed in the United States District
Court for the Southern District of New York against EXFO, four of the
underwriters of our Initial Public Offering and some of our executive officers
pursuant to the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder and Sections 11, 12 and 16 of the Securities Act of
1933. This class action alleges that EXFO’s registration statement
and prospectus filed with the Securities and Exchange Commission on June 29,
2000, contained material misrepresentations and/or omissions resulting from (i)
the underwriters allegedly soliciting and receiving additional, excessive and
undisclosed commissions from certain investors in exchange for which they
allocated material portions of the shares issued in connection with EXFO’s
Initial Public Offering; and (ii) the underwriters allegedly entering into
agreements with customers whereby shares issued in connection with EXFO’s
Initial Public Offering would be allocated to those customers in exchange for
which customers agreed to purchase additional amounts of shares in the
after-market at pre-determined prices.
On April
19, 2002, the plaintiffs filed an amended complaint containing master
allegations against all of the underwriters in all of the 310 cases included in
this class action and also filed an amended complaint containing allegations
specific to four of 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’ petition for rehearing of
that decision and, on May 18, 2007, the Second Circuit denied the
plaintiffs’ petition for rehearing en banc. In light of the Second
Circuit opinion, liaison counsel for all issuer defendants, including EXFO,
informed the court that this settlement cannot be approved, because the defined
settlement class, like the litigation class, cannot be
certified. On June 25, 2007, the district court
entered an order terminating the settlement agreement. On August 14,
2007, the plaintiffs filed their second consolidated amended class action
complaints against the focus cases and, on September 27, 2007, again moved for
class certification. On November 12, 2007, certain of the defendants
in the focus cases moved to dismiss the second consolidated amended class
action complaints. Briefing on the motions to dismiss was completed in January
2008, and briefing on the class certification motion is scheduled to be
completed in April 2008.
Due to
the inherent uncertainties of litigation, it is not possible to predict the
final outcome of the case, nor to determine the amount of any possible losses.
We will continue to defend our position in this litigation that the claims
against us, and our officers, are without merit. Accordingly, no provision for
this case has been made in our interim consolidated financial statements as at
February 29, 2008.
SHARE
CAPITAL AND STOCK-BASED COMPENSATION PLANS
Share
Capital
As at
March 28, 2008, EXFO had 36,643,000 multiple voting shares outstanding,
entitling to ten votes each and 32,374,392 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 2,576,502 as at
February 29, 2008. The maximum number of subordinate voting shares issuable
under these two plans cannot exceed 6,306,153 shares. The following tables
summarize information about stock options, RSUs and DSUs granted to the members
of the Board of Directors and to Management and Corporate Officers of the
company and its subsidiaries as at February 29, 2008:
|
Stock
Options
|
Number
|
%
of issued and outstanding
|
Weighted
average exercise price
|
|||
|
Chairman
of the Board, President and CEO (one
individual)
|
179,642
|
10%
|
$9.05
|
|||
|
Board
of Directors (five individuals)
|
194,375
|
10%
|
$6.23
|
|||
|
Management
and Corporate Officers (eight
individuals)
|
212,139
|
11%
|
$14.49
|
|||
|
586,156
|
31%
|
$10.08
|
|
Restricted
Share Units (RSUs)
|
Number
|
%
of issued and outstanding
|
||||
|
Chairman
of the Board, President and CEO (one
individual)
|
85,460
|
14%
|
||||
|
Management
and Corporate Officers (ten
individuals)
|
265,176
|
42%
|
||||
|
350,636
|
56%
|
|
Deferred
Share Units (DSUs)
|
Number
|
%
of issued and outstanding
|
||||
|
Board
of Directors (five individuals)
|
85,797
|
100%
|
OFF-BALANCE
SHEET ARRANGEMENTS
As at
February 29, 2008, our off-balance sheet arrangements consisted of letters of
guarantee and forward exchange contracts. As at February 29, 2008, 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 of
February 29, 2008, we did not have interests in any variable interest
entities.
RISKS
AND UNCERTAINTIES
Over the
past few years, we have managed our business in a difficult environment; focused
on research and development programs for new and innovative products aimed at
expected growth pockets in our sector; continued the development of our domestic
and international markets; and made strategic acquisitions. However, we operate
in a highly competitive sector that is in constant evolution and, as a
result, we encounter various risks and uncertainties that must be given
appropriate consideration in our strategic management policies.
We are
exposed to currency risks due to the export of our Canadian-manufactured
products, the large majority of which are denominated in US dollars. These
risks are partially hedged by operating expenses denominated
in US dollars, and forward exchange contracts. The increased strength
of the Canadian dollar, compared to the US dollar, over the last few years,
caused our operating expenses to increase significantly. Any further
increase in the value of the Canadian dollar in the coming months would
negatively affect our results of operations.
In
addition, risks and uncertainties related to the telecommunications test,
measurement and monitoring industry involve the rapid development of new
products that may have short life cycles and require extensive research and
development; the difficulty of adequately predicting market size and trends; the
difficulty of retaining highly skilled employees; and the ability to quickly
adapt our cost structure to changing market conditions in order to achieve
profitability.
Furthermore,
given our strategic goals for growth and competitive positioning in our
industry, we are continuously expanding into international markets, namely the
setup of manufacturing facilities in China and a software development
center in India. This exposes us to certain risks and uncertainties, namely
changes in local laws and regulations, multiple technological standards,
protective legislation, pricing pressure, and the successful setup and
activation of new operations in China and India.
Also,
while strategic acquisitions, like those we have made in the past and possibly
others in the future, are essential to our long-term growth, they also expose us
to certain risks and uncertainties related to the rapid and effective
integration of these businesses as well as their products, technologies and
personnel. Finally, integration requires the dedication of management resources,
which may detract their attention from our day-to-day business and
operations.
Our
business is subject to the effects of general economic conditions in North
America and throughout the world and, more particularly, market conditions in
the telecommunications industry. In the past, our operating results were
adversely affected by reduced telecom capital spending in North America, Europe
and Asia and by general unfavorable economic conditions. In particular, sales to
network service providers in North America were significantly and adversely
affected by a downturn in 2001 in the telecommunications industry. If there
is a recession or slowdown in key geographic regions or markets, we
may experience a material adverse impact on our business, operating results
and financial condition.
The
economic environment of our industry could also result in some of our customers
experiencing difficulties and, consequently, this could have a negative effect
on our results especially in terms of future sales and recoverability
of accounts receivable. However, the sectorial and geographic diversity of
our customer base provides us with a reasonable level of protection in this
area. Finally, other financial instruments, which potentially subject
us to credit risks, consist mainly of cash, short-term investments and
forward exchange contracts. Our short-term investments consist of debt
instruments issued by high-credit quality corporations and trusts. Our cash and
forward exchange contracts are held with or issued by high-credit quality
financial institutions; therefore, we consider the risk of non-performance
on these instruments to be remote.
For a
more complete understanding of risk factors that may affect us, please refer to
the risk factors set forth in our disclosure documents published with securities
commissions at www.exfo.com or www.sedar.com in Canada
or www.sec.gov/edgar.shtml in the U.S.
QUARTERLY
SUMMARY FINANCIAL INFORMATION (Unaudited)
(tabular
amounts in thousands of US dollars, except per share data)
|
Q2-FY08
|
Q1-FY08
|
Q4-FY07
|
Q3-FY07
|
|||||||||||||
|
Sales
|
$ | 43,281 | $ | 40,985 | $ | 42,975 | $ | 39,205 | ||||||||
|
Cost
of sales
|
$ | 18,060 | $ | 18,144 | $ | 18,109 | $ | 16,828 | ||||||||
|
Gross
margin
|
$ | 25,221 | $ | 22,841 | $ | 24,866 | $ | 22,377 | ||||||||
|
Earnings
from operations
|
$ | 3,635 | $ | 302 | $ | 9,102 | $ | 2,840 | ||||||||
|
Net
earnings (loss)
|
$ | 4,024 | $ | (93 | ) | $ | 33,484 | $ | 2,574 | |||||||
|
Basic
net earnings (loss) per share
|
$ | 0.06 | $ | (0.00 | ) | $ | 0.49 | $ | 0.04 | |||||||
|
Diluted
net earnings (loss) per share
|
$ | 0.06 | $ | (0.00 | ) | $ | 0.48 | $ | 0.04 | |||||||
|
Q2-FY07
|
Q1-FY07
|
Q4-FY06
|
Q3-FY06
|
|||||||||||||
|
Sales
|
$ | 35,207 | $ | 35,547 | $ | 35,733 | $ | 35,410 | ||||||||
|
Cost
of sales
|
$ | 14,970 | $ | 15,229 | $ | 16,318 | $ | 15,453 | ||||||||
|
Gross
margin
|
$ | 20,237 | $ | 20,318 | $ | 19,415 | $ | 19,957 | ||||||||
|
Earnings
from operations
|
$ | 2,081 | $ | 2,759 | $ | 2,363 | $ | 3,608 | ||||||||
|
Net
earnings
|
$ | 2,684 | $ | 3,533 | $ | 2,910 | $ | 3,504 | ||||||||
|
Basic
and diluted net earnings per share
|
$ | 0.04 | $ | 0.05 | $ | 0.04 | $ | 0.05 | ||||||||
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