UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
6-K
Report
of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16
Under
the Securities Exchange Act of 1934
For the
month of July 2009
EXFO
Electro-Optical Engineering Inc.
(Translation
of registrant’s name into English)
400
Godin Avenue, Quebec, Quebec, Canada G1M 2K2
(Address
of principal executive offices)
Indicate
by check mark whether the registrant files or will file annual reports under
cover of Form 20-F or Form 40-F.
|
Form
20-F þ
|
Form
40-F o
|
Indicate
by check mark whether the registrant by furnishing the information contained in
this Form is also thereby furnishing the information to the Commission pursuant
to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
|
Yes
o
|
No
þ
|
If “Yes”
is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-______.
On June
30, 2009, EXFO Electro-Optical Engineering Inc., a Canadian corporation,
reported its results of operations for the third fiscal quarter ended
May 31, 2009. This report on Form 6-K sets forth the news
release relating to EXFO’s announcement and certain information relating to
EXFO’s financial condition and results of operations for the third fiscal
quarter of the 2009 fiscal year. This press release and information
relating to EXFO’s financial condition and results of operations for the third
fiscal quarter of the 2009 fiscal year are hereby incorporated as a document by
reference to Form F-3 (Registration Statement under the Securities Act of 1933)
declared effective as of July 30, 2001 and to Form F-3 (Registration Statement
under the Securities Act of 1933) declared effective as of
March 11, 2002 and to amend certain material information as set forth
in these two Form F-3 documents.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
EXFO
ELECTRO-OPTICAL ENGINEERING INC.
|
|
|
By:
/s/ Germain
Lamonde
Name: Germain
Lamonde
Title: President
and Chief Executive Officer
|
|
Date:
July 7, 2009
EXFO Reports Third-Quarter Results for Fiscal 2009
|
§
|
Sales
reach US$43.6 million despite a challenging economic
environment
|
|
§
|
Gross
margin improves to 62.3%, equaling highest level since
2001
|
|
§
|
Non-cash
goodwill impairment charge of US$21.7 million and foreign exchange loss of
US$4.7 million contribute to GAAP net loss of US$23.3
million
|
|
§
|
Implements
cost-reduction plan providing US$6 million in annualized pre-tax
savings
|
QUEBEC
CITY, CANADA, June 30, 2009 – EXFO Electro-Optical Engineering Inc. (NASDAQ:
EXFO; TSX: EXF) reported today financial results for the third quarter ended May
31, 2009.
Sales
decreased 10.2% to US$43.6 million in the third quarter of fiscal 2009 from
US$48.6 million in the third quarter of 2008 and 5.9% from
US$46.4 million in the second quarter of 2009. Net bookings dropped 20.7%
to US$40.2 million for a book-to-bill ratio of 0.92 in the third quarter of
fiscal 2009 from US$50.7 million in the same period last year and 14.9% from
US$47.3 million in the second quarter of 2009.
Gross
margin improved to 62.3% of sales in the third quarter of fiscal 2009 from 60.9%
in the third quarter of 2008 and 60.4% in the second quarter of
2009.
GAAP net
loss in the third quarter of fiscal 2009 amounted to US$23.3 million, or US$0.39
per diluted share, compared to net earnings of US$11.2 million, or US$0.16
per diluted share, in the same period last year and net earnings of US$2.7
million, or US$0.04 per diluted share, in the second quarter of fiscal
2009.
It should
be noted that EXFO recorded a non-cash charge of US$21.7 million for impairment
of goodwill in the third quarter of fiscal 2009, following a significant drop in
the company’s market capitalization since June 1, 2009. EXFO also incurred a
pre-tax, foreign exchange loss of US$4.7 million in the third quarter of 2009
mainly due to the impact of a 16.4% increase in the period-end value of the
Canadian/US exchange rate on the company’s balance sheet items. GAAP net loss in
the third quarter of 2009 included US$1.2 million in after-tax amortization
of intangible assets and US$0.4 million in stock-based compensation
costs.
“EXFO
delivered a solid sales quarter despite an increasingly challenging economic
environment and I remain confident that we’re continuing to gain market share,”
said Germain Lamonde, EXFO’s Chairman, President and CEO. “The fundamental
trends towards bandwidth growth and IP convergence remain intact and EXFO is
among the best-positioned companies to take advantage of these key growth
drivers, considering our strong product offering, strengthened by several key
new product introductions, along with targeted sales, channel and marketing
initiatives.
“In the
meantime, we continue to maintain a strong balance sheet, generate positive cash
flow and have taken actions to protect our earnings through a cost-reduction
plan that will provide approximately US$6 million in annualized pre-tax savings,
while we carefully balance short-term profitability with mid/long-term
strategy.”
As part
of this plan, EXFO tightened cost controls and reduced its workforce by
approximately 5% (65 employees). The company has also applied for a Canadian
federal program that will allow certain employees to work four days per week for
a maximum of 52 weeks. EXFO will incur severance and other pre-tax related
charges of about US$1.3 million that will be accounted for in the fourth
quarter of fiscal 2009.
Unaudited
Selected Financial Information
(In
thousands of US dollars)
|
Segmented
results:
|
Q3 2009 | Q3 2008 | Q2 2009 | |||||||||
|
Sales:
|
||||||||||||
|
Telecom
Division
|
$ | 39,047 | $ | 42,843 | $ | 41,367 | ||||||
|
Life
Sciences and Industrial Division
|
4,589 | 5,738 | 5,005 | |||||||||
|
Total
|
$ | 43,636 | $ | 48,581 | $ | 46,372 | ||||||
|
Earnings
(loss) from operations:
|
||||||||||||
|
Telecom
Division
|
$ | (21,990 | ) | $ | 3,819 | $ | 2,117 | |||||
|
Life
Sciences and Industrial Division
|
438 | 639 | 482 | |||||||||
|
Total
|
$ | (21,552 | ) | $ | 4,458 | $ | 2,599 | |||||
|
Other
selected information:
|
||||||||||||
|
GAAP
net earnings (loss)
|
$ | (23,346 | ) | $ | 11,179 | $ | 2,655 | |||||
|
Amortization
of intangible assets
|
$ | 1,355 | $ | 1,015 | $ | 1,246 | ||||||
|
Tax
effect on amortization of intangible assets
|
$ | (203 | ) | $ | (224 | ) | $ | (212 | ) | |||
|
Stock-based
compensation costs
|
$ | 383 | $ | 334 | $ | 325 | ||||||
|
Recognition
of previously unrecognized
future
income tax assets
|
$ | – | $ | (5,324 | ) | $ | – | |||||
|
Extraordinary
gain
|
$ | – | $ | (3,036 | ) | $ | – | |||||
|
Impairment
of goodwill
|
$ | 21,713 | $ | – | $ | – | ||||||
|
Tax
effect on impairment of goodwill
|
$ | (2,070 | ) | $ | – | $ | – |
Operating
Expenses
Selling
and administrative expenses amounted to US$16.7 million, or 38.3% of sales, in
the third quarter of fiscal 2009 compared to US$15.7 million, or 32.2% of sales,
in the same period last year and US$15.8 million, or 34.1% of sales, in the
second quarter of 2009.
Gross
research and development expenses totaled US$9.3 million, or 21.4% of sales, in
the third quarter of fiscal 2009 compared to US$8.8 million, or 18.2% of sales,
in the third quarter of 2008 and US$8.8 million, or 19.0% of sales, in the
second quarter of 2009.
Net
R&D expenses totaled US$7.8 million, or 17.8% of sales, in the third quarter
of fiscal 2009 compared to US$7.4 million, or 15.2% of sales, in the same
period last year and US$7.3 million, or 15.8% of sales, in the second
quarter of 2009.
Third-Quarter
Business Highlights
Market expansion – EXFO’s sales decreased
10.2% year-over-year to US$43.6 million in the third quarter of 2009. Telecom
Division sales were down 8.9% year-over-year, while Life Sciences &
Industrial Division sales were more affected by the global recession with a
year-over-year decrease of 20.0%. EXFO’s top customer accounted for 10.8% of
sales in the third quarter and its top three customers 22.2%. After nine months
into fiscal 2009, the company’s top customer represented 11.6% of sales and its
top three customers 18.9%.
Profitability – GAAP net loss amounted
to US$23.3 million, or US$0.39 per diluted share, in the third quarter of 2009
largely due to a non-cash charge of US$21.7 million for impairment of goodwill
and an unfavorable Canada/US exchange rate. On the other hand, the company
generated US$1.8 million in cash flows from operating activities in the third
quarter of 2009 and US$15.5 million since the beginning of the fiscal
year.
Innovation – EXFO launched an
unprecedented 11 new products in the third quarter and 23 since the beginning of
fiscal 2009. Key product launches in the third quarter included a portable test
solution for characterizing 100 Gbit/s Ethernet and 40/43 Gbit/s SONET/OTN
networks; 1 Gbit/s and 10 Gbit/s test heads for carrier Ethernet and mobile
backhaul testing applications in Service Assurance; IPv6 testing capabilities
across the company’s Transport and DataCom product portfolio; and the
next-generation FTB-500 multi-layer platform for high-end test applications in
the field and central office. Sales from products that have been on the market
two years or less accounted for 40.6% of total sales in the third quarter of
2009 and 38.3% since the beginning of fiscal 2009.
Business
Outlook
Given the
current challenging economic environment and typical seasonality of the summer
months, EXFO forecasted sales between US$33 million and US$38 million and GAAP
net loss between US$0.10 and US$0.06 per diluted share for the fourth quarter of
2009. GAAP net loss includes US$0.04 per share in after-tax amortization of
intangible assets, after-tax restructuring expenses and stock-based compensation
costs.
This
guidance was established by management based on existing backlog as of the date
of this press release, expected bookings for the remaining of the quarter, as
well as stability in exchange rates compared to the end of the previous
quarter.
Conference
Call and Webcast
EXFO will
host a conference call today at 5 p.m. (Eastern time) to review its financial
results for the third quarter of fiscal 2009. To listen to the conference call
and participate in the question period via telephone, dial 1-416-620-5690. Germain Lamonde,
Chairman, President and CEO, and Pierre Plamondon, CA, Vice-President of Finance
and Chief Financial Officer, will participate in the call. An audio replay of
the conference call will be available one hour after the event until 7 p.m. on
July 7, 2009. The replay number is 1-402-977-9141 and the reservation number is
21424856. The audio Webcast and replay of the conference call will also be
available on EXFO’s Website at www.EXFO.com, under the Investors
section.
Forward-Looking
Statements
This
press release contains forward-looking statements within the meaning of the U.S.
Private Securities Litigation Reform Act of 1995, and we intend that such
forward-looking statements be subject to the safe harbors created thereby.
Forward-looking statements are statements other than historical information or
statements of current condition. Words such as may, will, expect, believe,
anticipate, intend, could, estimate, continue, or the negative or comparable
terminology are intended to identify forward-looking statements. In addition,
any statements that refer to expectations, projections or other
characterizations of future events and circumstances are considered
forward-looking statements. They are not guarantees of future performance and
involve risks and uncertainties. Actual results may differ materially from those
in forward-looking statements due to various factors including the effect of the
actual worldwide recession on the telecom market for our customers and
suppliers; fluctuating exchange rates and our ability to execute in these
uncertain conditions; consolidation in the global telecommunications test,
measurement and service assurance industry; capital spending levels
in the telecommunications, life sciences and high-precision assembly sectors;
concentration of sales; the effects of the additional actions we have taken in
response to such economic uncertainty (including our ability to quickly adapt
cost structures with anticipated levels of business, ability to manage inventory
levels with market demand); market acceptance of our new products and other
upcoming products; limited visibility with regards to customer orders and the
timing of such orders; our ability to successfully integrate our acquired and
to-be-acquired businesses; our ability to successfully expand international
operations; the retention of key technical and management personnel; and future
economic, competitive, financial and market condition. Assumptions relating to
the foregoing involve judgments and risks, all of which are difficult or
impossible to predict and many of which are beyond our control. Other risk
factors that may affect our future performance and operations are detailed in
our Annual Report, on Form 20-F, and our other filings with the U.S. Securities
and Exchange Commission and the Canadian securities commissions. We believe that
the expectations reflected in the forward-looking statements are reasonable
based on information currently available to us, but we cannot assure you that
the expectations will prove to have been correct. Accordingly, you should not
place undue reliance on these forward-looking statements. These statements speak
only as of the date of this document. Unless required by law or applicable
regulations, we undertake no obligation to revise or update any of them to
reflect events or circumstances that occur after the date of this
document.
About
EXFO
EXFO is a
leading provider of test and service assurance solutions for network service
providers and equipment manufacturers in the global telecommunications industry.
The Telecom Division offers a wide range of innovative solutions extending
across the full technology lifecycle – from design to technology deployment and
onto service assurance – and covering all layers on a network infrastructure to
enable triple-play services and next-generation, converged IP networking. The
Life Sciences and Industrial Division offers solutions in medical device and
opto-electronics assembly, fluorescence microscopy and other life science
sectors. For more information, visit www.EXFO.com.
For
more information
Vance
Oliver
Manager,
Investor Relations
(418)
683-0913, Ext. 3733
vance.oliver@exfo.com
EXFO Electro-Optical Engineering Inc.
Interim
Consolidated Balance Sheet
(in
thousands of US dollars)
|
As
at
May
31,
2009
|
As
at
August
31,
2008
|
|||||||
|
(unaudited)
|
||||||||
|
Assets
|
||||||||
|
Current
assets
|
||||||||
|
Cash
|
$ | 11,083 | $ | 5,914 | ||||
|
Short-term
investments
|
53,412 | 81,626 | ||||||
|
Accounts
receivable (note 5)
|
||||||||
|
Trade
|
32,295 | 31,473 | ||||||
|
Other
|
2,997 | 4,753 | ||||||
|
Income
taxes and tax credits recoverable
|
4,263 | 4,836 | ||||||
|
Inventories
(note 6)
|
32,999 | 34,880 | ||||||
|
Prepaid
expenses
|
2,034 | 1,774 | ||||||
|
Future
income taxes
|
9,115 | 9,140 | ||||||
| 148,198 | 174,396 | |||||||
|
Tax
credits recoverable
|
23,817 | 20,657 | ||||||
|
Forward
exchange contracts (note
5)
|
578 | – | ||||||
|
Property,
plant and equipment
|
19,355 | 19,875 | ||||||
|
Intangible
assets
|
17,933 | 19,945 | ||||||
|
Goodwill
(note 3)
|
22,521 | 42,653 | ||||||
|
Future
income taxes
|
14,522 | 15,540 | ||||||
| $ | 246,924 | $ | 293,066 | |||||
|
Liabilities
|
||||||||
|
Current
liabilities
|
||||||||
|
Accounts
payable and accrued liabilities (note 7)
|
$ | 23,843 | $ | 24,713 | ||||
|
Deferred
revenue
|
7,716 | 5,079 | ||||||
| 31,559 | 29,792 | |||||||
|
Deferred
revenue
|
4,577 | 3,759 | ||||||
| 36,136 | 33,551 | |||||||
| Contingencies (note 8) | ||||||||
|
Shareholders’
equity
|
||||||||
|
Share
capital (note 9)
|
105,952 | 142,786 | ||||||
|
Contributed
surplus
|
17,035 | 5,226 | ||||||
|
Retained
earnings
|
45,090 | 60,494 | ||||||
|
Accumulated
other comprehensive income
|
42,711 | 51,009 | ||||||
| 210,788 | 259,515 | |||||||
| $ | 246,924 | $ | 293,066 | |||||
The
accompanying notes are an integral part of these consolidated financial
statements.
Page 7 of
53
EXFO Electro-Optical Engineering Inc.
Unaudited
Interim Consolidated Statements of Earnings
(in
thousands of US dollars, except share and per share data)
|
Three
months ended
May
31, 2009
|
Nine
months ended
May
31, 2009
|
Three
months ended
May
31, 2008
|
Nine
months ended
May
31 2008
|
|||||||||||||
|
Sales
|
$ | 43,636 | $ | 136,371 | $ | 48,581 | $ | 132,847 | ||||||||
|
Cost of sales (1,2)
(note 6)
|
16,441 | 52,274 | 19,004 | 55,208 | ||||||||||||
|
Gross
margin
|
27,195 | 84,097 | 29,577 | 77,639 | ||||||||||||
|
Operating
expenses
|
||||||||||||||||
|
Selling
and administrative (1)
|
16,732 | 49,623 | 15,660 | 44,160 | ||||||||||||
|
Net
research and development (1)
(note 10)
|
7,781 | 22,327 | 7,373 | 19,570 | ||||||||||||
|
Amortization
of property, plant and equipment
|
1,166 | 3,374 | 1,071 | 3,045 | ||||||||||||
|
Amortization
of intangible assets
|
1,355 | 3,920 | 1,015 | 2,469 | ||||||||||||
|
Impairment
of goodwill (note 3)
|
21,713 | 21,713 | − | − | ||||||||||||
|
Total
operating expenses
|
48,747 | 100,957 | 25,119 | 69,244 | ||||||||||||
|
Earnings
(loss) from operations
|
(21,552 | ) | (16,860 | ) | 4,458 | 8,395 | ||||||||||
|
Interest
income
|
42 | 683 | 964 | 4,063 | ||||||||||||
|
Foreign
exchange gain (loss)
|
(4,687 | ) | 971 | (59 | ) | (907 | ) | |||||||||
|
Earnings
(loss) before income taxes
|
(26,197 | ) | (15,206 | ) | 5,363 | 11,551 | ||||||||||
|
Income
taxes (note 11)
|
||||||||||||||||
|
Current
|
(88 | ) | 148 | 112 | (7,080 | ) | ||||||||||
|
Future
|
(2,763 | ) | 50 | 2,432 | 11,881 | |||||||||||
|
Recognition
of previously unrecognized future income tax assets
|
– | – | (5,324 | ) | (5,324 | ) | ||||||||||
| (2,851 | ) | 198 | (2,780 | ) | (523 | ) | ||||||||||
|
Earnings
(loss) before extraordinary gain
|
(23,346 | ) | (15,404 | ) | 8,143 | 12,074 | ||||||||||
|
Extraordinary
gain
|
– | – | 3,036 | 3,036 | ||||||||||||
|
Net
earnings (loss) for the period
|
$ | (23,346 | ) | $ | (15,404 | ) | $ | 11,179 | $ | 15,110 | ||||||
|
Basic
earnings (loss) before extraordinary gain per share
|
$ | (0.39 | ) | $ | (0.25 | ) | $ | 0.12 | $ | 0.18 | ||||||
|
Diluted
earnings (loss) before extraordinary gain per share
|
$ | (0.39 | ) | $ | (0.25 | ) | $ | 0.12 | $ | 0.17 | ||||||
|
Basic
and diluted net earnings (loss) per share
|
$ | (0.39 | ) | $ | (0.25 | ) | $ | 0.16 | $ | 0.22 | ||||||
|
Basic
weighted average number of shares outstanding (000’s)
|
59,613 | 62,609 | 68,907 | 68,964 | ||||||||||||
|
Diluted
weighted average number of shares outstanding (000’s) (note 12)
|
59,613 | 62,609 | 69,467 | 69,543 | ||||||||||||
|
(1)
Stock-based compensation
costs included in:
|
||||||||||||||||
|
Cost
of sales
|
$ | 37 | $ | 97 | $ | 37 | $ | 112 | ||||||||
|
Selling
and administrative
|
238 | 637 | 218 | 598 | ||||||||||||
|
Net
research and development
|
108 | 296 | 79 | 194 | ||||||||||||
| $ | 383 | $ | 1,030 | $ | 334 | $ | 904 | |||||||||
(2) The
cost of sales is exclusive of amortization, shown separately.
The accompanying notes are an integral part of these consolidated
financial statements.
Page 8 of
53
EXFO
Electro-Optical Engineering Inc.
Unaudited
Interim Statements of Comprehensive Income (Loss)
and
Accumulated Other Comprehensive Income
(in
thousands of US dollars)
|
Comprehensive
income (loss)
|
||||||||||||||||
|
Three
months ended
May
31, 2009
|
Nine
months ended
May
31, 2009
|
Three
months ended
May
31, 2008
|
Nine
months ended
May
31 2008
|
|||||||||||||
|
Net
earnings (loss) for the period
|
$ | (23,346 | ) | $ | (15,404 | ) | $ | 11,179 | $ | 15,110 | ||||||
|
Foreign
currency translation adjustment
|
31,986 | (9,593 | ) | (3,511 | ) | 16,222 | ||||||||||
|
Changes
in unrealized losses on short-term investments
|
– | 22 | (50 | ) | 40 | |||||||||||
|
Unrealized
gains (losses) on forward exchange contracts
|
7,425 | (1,238 | ) | 295 | 2,844 | |||||||||||
|
Reclassification
of realized gains (losses) on forward exchange contracts in net
earnings
|
1,849 | 3,083 | (1,218 | ) | (3,145 | ) | ||||||||||
|
Future
income taxes effect of the above items
|
(2,875 | ) | (572 | ) | 286 | 87 | ||||||||||
|
Comprehensive
income (loss)
|
$ | 15,039 | $ | (23,702 | ) | $ | 6,981 | $ | 31,158 | |||||||
|
Accumulated
other comprehensive income
|
||||||||
|
Nine
months ended
May
31, 2009
|
Nine
months ended
May
31, 2008
|
|||||||
|
Foreign
currency translation adjustment
|
||||||||
|
Cumulative
effect of prior periods
|
$ | 51,129 | $ | 53,418 | ||||
|
Current
period
|
(9,593 | ) | 16,222 | |||||
| 41,536 | 69,640 | |||||||
|
Unrealized
gains (losses) on forward exchange contracts
|
||||||||
|
Cumulative
effect of prior periods
|
(96 | ) | 1,948 | |||||
|
Current
period, net of realized gains (losses) and future income
taxes
|
1,273 | (214 | ) | |||||
| 1,177 | 1,734 | |||||||
|
Unrealized
losses on short-term investments
|
||||||||
|
Cumulative
effect of prior periods
|
(24 | ) | (55 | ) | ||||
|
Current
period, net of future income taxes
|
22 | 40 | ||||||
| (2 | ) | (15 | ) | |||||
|
Accumulated
other comprehensive income
|
$ | 42,711 | $ | 71,359 | ||||
Total
retained earnings and accumulated other comprehensive income amounted to
$128,141 and $87,801 as at May 31, 2008, and 2009,
respectively.
The accompanying notes are an integral part of these consolidated
financial statements.
Page 9 of
53
EXFO Electro-Optical Engineering Inc.
Unaudited
Interim Consolidated Statements of Retained Earnings
and
Contributed Surplus
(in
thousands of US dollars)
|
Retained
earnings
|
||||||||
|
Nine
months
ended
May
31, 2009
|
Nine
months
ended
May
31, 2008
|
|||||||
|
Balance
– Beginning of the period
|
$ | 60,494 | $ | 42,330 | ||||
|
Add
(deduct)
|
||||||||
|
Net
earnings (loss)for the period
|
(15,404 | ) | 15,110 | |||||
|
Premium
on redemption of share capital (note 9)
|
– | (658 | ) | |||||
|
Balance
– End of the period
|
$ | 45,090 | $ | 56,782 | ||||
|
Contributed
surplus
|
||||||||
|
Nine
months
ended
May
31, 2009
|
Nine
months
ended
May
31, 2008
|
|||||||
|
Balance
– Beginning of the period
|
$ | 5,226 | $ | 4,453 | ||||
|
Add
(deduct)
|
||||||||
|
Stock-based
compensation costs
|
1,012 | 919 | ||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards (note 9)
|
(460 | ) | (387 | ) | ||||
|
Discount
on redemption of share capital (note 9)
|
11,257 | − | ||||||
|
Balance
– End of the period
|
$ | 17,035 | $ | 4,985 | ||||
The accompanying notes are an integral part of these consolidated
financial statements.
Page 10
of 53
EXFO Electro-Optical Engineering Inc.
Unaudited
Interim Consolidated Statements of Cash Flows
(in
thousands of US dollars)
|
Three
months
ended
May
31, 2009
|
Nine
months
ended
May
31, 2009
|
Three
months
ended
May
31, 2008
|
Nine
months
ended
May
31, 2008
|
|||||||||||||
|
Cash
flows from operating activities
|
||||||||||||||||
|
Net
earnings (loss) for the period
|
$ | (23,346 | ) | $ | (15,404 | ) | $ | 11,179 | $ | 15,110 | ||||||
|
Add
(deduct) items not affecting cash
|
||||||||||||||||
|
Change
in discount on short-term investments
|
(18 | ) | 573 | 533 | 1,521 | |||||||||||
|
Stock-based
compensation costs
|
383 | 1,030 | 334 | 904 | ||||||||||||
|
Amortization
|
2,521 | 7,294 | 2,086 | 5,514 | ||||||||||||
|
Deferred
revenue
|
(178 | ) | 3,245 | (937 | ) | (435 | ) | |||||||||
|
Write-down
of capital assets
|
237 | 237 | – | – | ||||||||||||
|
Impairment
of goodwill (note 3)
|
21,713 | 21,713 | − | − | ||||||||||||
|
Future
income taxes
|
(2,763 | ) | 50 | (2,892 | ) | 6,557 | ||||||||||
|
Extraordinary
gain
|
– | – | (3,036 | ) | (3,036 | ) | ||||||||||
|
Change
in unrealized foreign exchange (gain) loss
|
2,516 | (1,541 | ) | 86 | 526 | |||||||||||
| 1,065 | 17,197 | 7,353 | 26,661 | |||||||||||||
|
Change
in non-cash operating items
|
||||||||||||||||
|
Accounts
receivable
|
3,456 | 639 | (326 | ) | (145 | ) | ||||||||||
|
Income
taxes and tax credits
|
(1,845 | ) | (2,189 | ) | (1,789 | ) | (11,437 | ) | ||||||||
|
Inventories
|
568 | 689 | (3,585 | ) | (2,878 | ) | ||||||||||
|
Prepaid
expenses
|
(104 | ) | (338 | ) | (110 | ) | (506 | ) | ||||||||
|
Accounts
payable and accrued liabilities
|
(1,301 | ) | (539 | ) | (116 | ) | (3,075 | ) | ||||||||
| 1,839 | 15,459 | 1,427 | 8,620 | |||||||||||||
|
Cash
flows from investing activities
|
||||||||||||||||
|
Additions
to short-term investments
|
(94,435 | ) | (349,899 | ) | (235,160 | ) | (644,220 | ) | ||||||||
|
Proceeds
from disposal and maturity of short-term
investments
|
97,936 | 374,042 | 277,791 | 686,371 | ||||||||||||
|
Additions
to capital assets (1)
|
(1,507 | ) | (5,967 | ) | (1,370 | ) | (5,056 | ) | ||||||||
|
Business
combinations, net of cash acquired
|
(2,414 | ) | (2,414 | ) | (40,938 | ) | (40,938 | ) | ||||||||
| (420 | ) | 15,762 | 323 | (3,843 | ) | |||||||||||
|
Cash
flows from financing activities
|
||||||||||||||||
|
Change
in bank loan
|
– | – | 786 | 1,485 | ||||||||||||
|
Exercise
of stock options (note 9)
|
10 | 41 | 51 | 61 | ||||||||||||
|
Redemption
of share capital (note 9)
|
– | (26,078 | ) | (3,219 | ) | (3,393 | ) | |||||||||
| 10 | (26,037 | ) | (2,382 | ) | (1,847 | ) | ||||||||||
|
Effect
of foreign exchange rate changes on cash
|
424 | (15 | ) | 3 | 111 | |||||||||||
|
Change
in cash
|
1,853 | 5,169 | (629 | ) | 3,041 | |||||||||||
|
Cash
– Beginning of period
|
9,230 | 5,914 | 9,211 | 5,541 | ||||||||||||
|
Cash
– End of period
|
$ | 11,083 | $ | 11,083 | $ | 8,582 | $ | 8,582 | ||||||||
(1) As
at May 31, 2008 and 2009, unpaid purchases of capital assets amounted to $35,000
and $324,000, respectively.
The accompanying notes are an integral part of these consolidated
financial statements.
Page 11
of 53
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 May 31, 2009, and for the three- and nine-month
periods ended May 31, 2008 and 2009, 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 described in
note 2. However, all disclosures required for annual financial statements have
not been included in these financial statements. Consequently, these interim
consolidated financial statements should be read in conjunction with the
company’s most recent annual consolidated
financial statements.
|
2.
|
New
Accounting Standards and
Pronouncements
|
Adopted
in fiscal 2009
In
December 2006, the Canadian Institute of Chartered Accountants (CICA) issued
three new sections, which provide a complete set of disclosure and
presentation requirements for financial instruments: Section 3862, “Financial
Instruments − Disclosures”; Section 3863, “Financial
Instruments − Presentation”; and Section 1535, “Capital
Disclosures”.
Section
3862 replaces the disclosure portion of Section 3861, “Financial
Instruments − Disclosure and Presentation”. The new standard
places increased emphasis on disclosures regarding risks associated with both
recognized and unrecognized financial instruments and how these risks are
managed. It is also intended to remove any duplicate disclosures and simplify
the disclosures about concentrations of risk, credit risk, liquidity risk and
price risk previously found in Section 3861.
Section
3863 carries forward the presentation requirements from Section 3861,
unchanged.
Section
1535 applies to all entities, regardless of whether they have financial
instruments or are subject to external capital requirements. The new section
requires disclosure of information about an entity’s objectives, policies and
processes for managing capital, as well as quantitative data about capital and
whether the entity has complied with any capital requirements.
The
company adopted these new standards on September 1, 2008 (notes 4 and
5).
In June
2007, the CICA issued Section 3031, “Inventories”. This standard requires the
measurement of inventories at the lower of cost and net realizable value and
includes guidance on the determination of cost, including allocation of
overheads and other costs to inventory. The standard also requires the
consistent use of either first-in, first-out (FIFO) or weighted average cost
formula to measure the cost of inventories and requires the reversal of previous
write-downs to net realizable value when there is a subsequent increase in the
value of inventories. The new standard applies to fiscal years beginning
on or after January 1, 2008. The company adopted this new standard on
September 1, 2008, and its adoption had no effect on its consolidated
financial statements.
In June
2007, the CICA amended Section 1400, “General Standards of Financial Statement
Presentation”, to include new requirements regarding an entity’s ability to
continue as a going concern. These amendments apply to fiscal years beginning on
or after January 1, 2008. The company adopted these amendments on September 1,
2008, and their adoption had no effect on its consolidated financial
statements.
EXFO
Electro-Optical Engineering Inc.
Notes
to 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 2009
In
February 2008, the CICA issued Section 3064, “Goodwill and Intangible Assets”,
which supersedes Section 3062, “Goodwill and Other Intangible Assets” and
Section 3450, “Research and Development Costs”. Various changes have been made
to other sections of the CICA Handbook for consistency purposes. Section 3064
establishes standards for the recognition, measurement, presentation and
disclosure of goodwill subsequent to its initial recognition and of intangible
assets by profit-oriented enterprises. Standards concerning goodwill remain
unchanged from the standards included in Section 3062. This new section
applies to fiscal years beginning on or after October 1, 2008. The company will
adopt this new standard on September 1, 2009, and has not yet determined the
effects its adoption will have on its consolidated financial
statements.
In
January 2009, the CICA issued Section 1582, “Business Combinations”, which
replaces Section 1581, “Business Combinations”. This new section establishes the
standards for the accounting of business combinations and states that all assets
and liabilities of an acquired business will be recorded at fair value.
Obligations for contingent consideration and contingencies will also be recorded
at fair value at the acquisition date. The standard also states that
acquisition-related costs will be expensed as incurred and that restructuring
charges will be expensed in the periods after the acquisition date. This
standard applies prospectively to business combinations with acquisition dates
on or after January 1, 2011; earlier adoption is
permitted.
In January 2009, the CICA issued
Section 1601, “Consolidated Financial Statements”, which replaces Section 1600,
“Consolidated Financial Statements”, and establishes the standards for preparing
consolidated financial statements. This new section applies to fiscal years
beginning on or after January 1, 2011; earlier adoption is permitted. The
company has not yet determined the impact, if any, that adopting this standard
will have on its consolidated financial statements.
In
January 2009, the CICA issued Section 1602, “Non-controlling Interests”, which
establishes standards for the accounting of non-controlling interests of a
subsidiary in the preparation of consolidated financial statements subsequent to
a business combination. This new section applies to fiscal years beginning on or
after January 1, 2011; earlier adoption is permitted as of the beginning of
a fiscal year.
Should
the company decide to early adopt one of these three new sections, it must adopt
all three on the same date.
|
3.
|
Impairment
of Goodwill
|
In the
third quarter of fiscal 2009, the company performed its annual impairment test
for goodwill for all reporting units. Recoverability of goodwill is determined
at the reporting unit level, using a two-step approach. First, the carrying
value of the reporting units is compared to their fair value. If the
carrying value of a reporting unit exceeds its fair value, the second step is
performed to determine the amount of the impairment loss. Following the
significant decrease in the company’s stock price following the pre-announcement
of its third quarter results on June 1, 2009, the company came to the
conclusion that the carrying value of one of its reporting unit exceeded its
fair value. Due to the extensive work involved in performing the second step of
the goodwill impairment test, the company had not completed its analysis at the
time its interim consolidated financial statements were due. However, the
company recorded an impairment charge of $21,713,000 during the three
months ended May 31, 2009, based on management’s best estimate, to bring the
goodwill of this reporting unit to its fair value. The company expects to
complete step two of the impairment test in the fourth quarter of 2009 and any
adjustment to the amount of impairment recorded during the three and nine months
ended May 31, 2009, will be recorded prospectively during that period.
This reporting unit reports to the Telecom Division.
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.
|
Capital
Disclosures
|
The
company is not subject to any external restrictions on its capital.
The
company’s objectives when managing capital are:
|
·
|
To
maintain a flexible capital structure, which optimizes the cost of capital
at acceptable risk;
|
|
·
|
To
sustain future development of the company, including research and
development activities, market development, and potential acquisitions of
complementary businesses or products;
and
|
|
·
|
To
provide the company’s shareholders with an appropriate return on their
investment.
|
The
company defines its capital as shareholders’ equity, excluding accumulated other
comprehensive income. Accumulated other comprehensive income’s main components
are the cumulative foreign currency translation adjustment, which is the result
of the translation of the company’s consolidated financial statements into
US dollars (the reporting currency) as well as after-tax unrealized gains
(loss) on forward exchange contracts.
The
capital of the company amounted to $208,506,000 and $168,077,000 as at August
31, 2008 and May 31, 2009, respectively.
Of this
capital, as at May 31, 2009, an amount of $64,495,000 represented cash and
short-term investments ($87,540,000 as at August 31, 2008), a portion
of which can be considered in excess of the company’s current and expected needs
(except for potential acquisitions of businesses). The company has
consequently been repurchasing shares from the open market via a normal course
issuer bid through the facilities of the Toronto Stock Exchange and NASDAQ.
Furthermore, on December 18, 2008, pursuant to a substantial issuer bid
(note 9), the company purchased for cancellation 7,692,307 subordinate
voting shares for an aggregate purchase price of CA$30,000,000 (US$24,879,000),
plus related fees of $576,000.
|
5.
|
Financial
Instruments
|
Market
risk
Currency
risk
The
principal measurement currency of the company is the Canadian dollar. The
company is exposed to currency risks as a result of its export sales
of products manufactured in Canada and China, the majority of which are
denominated in US dollars and euros. These risks are partially hedged
by forward exchange contracts (US dollars) and certain operating expenses
(US dollars and euros).
As at May
31, 2009, the company held contracts to sell US dollars for Canadian dollars at
various forward rates, which are summarized as follows:
|
Expiry
dates
|
Contractual
amounts
|
Weighted average contractual
forward
rates
|
||||||
|
(unaudited)
|
||||||||
|
June
2009 to August 2009
|
$ | 9,100 |
1.0651
|
|||||
|
September
2009 to August 2010
|
27,600 |
1.1016
|
||||||
|
September
2010 to August 2011
|
14,600 |
1.1221
|
||||||
|
September
2011
|
1,000 |
1.1278
|
||||||
|
Total
|
$ | 52,300 |
1.1015
|
|||||
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)
These
contracts are designated and accounted for as cash flow hedges.
The fair
value of forward exchange contracts, which represents the amount that the
company would receive or pay to settle the contracts based on the forward
exchange rate at period end, amounted to net gains of $62,000 as at August 31,
2008 and net gains of $566,000
as at May 31, 2009.
As at
May 31, 2009, forward exchange contracts, in the amount of $997,000,
are presented in other receivable in the balance sheet, forward exchange
contracts, in the amount of $578,000, are presented in forward exchange
contracts in the balance sheet, and forward exchange contracts, in the amount
of $828,000, are presented in the accounts payable and accrued
liabilities in the balance sheet (note 7).
The
following table summarizes significant financial assets and liabilities that are
subject to currency risk as at May 31, 2009:
|
Carrying/nominal
amount
(in
thousands of US dollars)
|
Carrying/nominal
amount
(in
thousands
of
euros)
|
|||||||
|
(unaudited)
|
||||||||
|
Financial
assets
|
||||||||
|
Cash
|
$ | 7,594 | € | 667 | ||||
|
Accounts
receivable
|
22,177 | 3,195 | ||||||
| 29,771 | 3,862 | |||||||
|
Financial
liabilities
|
||||||||
|
Accounts
payable and accrued liabilities
|
7,777 | 378 | ||||||
|
Forward
exchange contracts
|
52,300 | − | ||||||
| 60,077 | 378 | |||||||
|
Net
exposure
|
$ | (30,306 | ) | € | 3,484 | |||
The
period-end value of the Canadian dollar compared to the US dollar was CA$1.0917
= US$1.00 as at May 31, 2009.
The
period-end value of the Canadian dollar compared to the euro was CA$1.5422 =
€1.00 as at May 31, 2009.
The
following sensitivity analysis summarizes the effect that a change in the value
of the Canadian dollar (compared to US dollar and euro) would have on
financial assets and liabilities denominated in US dollars and euros, as well as
on net earnings, net earnings per diluted share and comprehensive income, based
on the foreign exchange rates
as at May 31, 2009:
|
·
|
An
increase (decrease) of 10% in the period-end value of the Canadian dollar
compared to the US dollar would decrease (increase) net earnings by
$1,357,000, or $0.02 per diluted
share.
|
|
·
|
An
increase (decrease) of 10% in the period-end value of the Canadian dollar
compared to the euro would decrease (increase) net earnings by $453,000,
or $0.01 per diluted share.
|
|
·
|
An
increase (decrease) of 10% in the period-end value of the Canadian dollar
compared to the US dollar would increase (decrease) comprehensive income
by $3,000,000.
|
EXFO
Electro-Optical Engineering Inc.
Notes
to Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
The
impact of the change in the value of the Canadian dollar compared to the US
dollar and the euro on these financial assets and liabilities is recorded in the
foreign exchange gain or loss line item in the consolidated statements of
earnings, except for outstanding forward contracts, which impact is recorded in
comprehensive income. The change in the value of the Canadian dollar
compared to the US dollar and the euro also impacts the company’s balances of
income tax and tax credits recoverable or payable and future income tax
assets and liabilities related to integrated foreign subsidiaries; this may
result in additional and significant foreign exchange gain or loss. However,
these assets and liabilities are not considered financial instruments and are
excluded from the sensitivity analysis above. The foreign exchange rate
fluctuations also flow through the statements of earnings line items, as a
significant portion of the company’s operating expenses is denominated
in Canadian dollars, and the company reports its results in US dollars;
that effect is not reflected in the sensitivity
analysis above.
Interest
rate risk
The
company is exposed to interest rate risks through its short-term investments. As
at May 31, 2009, the company’s short-term investments, in the amount
of $53,412,000, bear interest at rates ranging between 0.21% and 1.07% and
mature between June 2009 and September 2009.
|
·
|
An
increase (decrease) of 0.5% in the interest rate of the company’s
short-term investments would increase (decrease) net earnings by $46,000,
or $0.00 per diluted share, on a quarterly
basis.
|
Due to
their short-term maturity of usually three months or less, the company’s
short-term investments are not subject to significant fair value interest
rate risk. Accordingly, change in fair value has been nominal to the degree that
amortized cost has historically approximated the fair value. Any change in fair
value of the company’s short-term investments, all of which are
classified as available for sale, is recorded in comprehensive
income.
Cash,
accounts receivable and accounts payable and accrued liabilities are
non-interest-bearing financial assets and liabilities.
Credit
risk
Financial
instruments that potentially subject the company to credit risk consist
primarily of cash, short-term investments, accounts receivable and forward
exchange contracts (with a positive fair value). As at May 31, 2009,
the company’s short-term investments consist of debt instruments issued by 9 (10
as at August 31, 2008) high-credit quality corporations and trusts. None of
these debt instruments are expected to be affected by a liquidity
risk, and none of them represent asset-backed commercial paper. The company’s
cash and forward exchange contracts are held with or issued by high-credit
quality financial institutions; therefore, the company considers the risk of
non-performance on these instruments to be limited.
Generally,
the company does not require collateral or other security from customers for
trade accounts receivable; however, credit is extended to customers following an
evaluation of creditworthiness. In addition, the company performs ongoing credit
reviews of all its customers and establishes an allowance for doubtful accounts
receivable when accounts are determined to be uncollectible. Allowance for
doubtful accounts amounted to $305,000 and $1,254,000 as at
August 31, 2008 and May 31, 2009, respectively. Bad debt
expense amounted to $45,000 and $625,000 for the three months ended
May 31, 2008 and 2009, respectively, and $98,000 and $980,000 for the
nine months ended May 31, 2008 and 2009, respectively.
For the
three and the nine months ended May 31, 2009, one customer represented
more than 10% of global sales with 10.8% ($4,725,000) and 11.6% ($15,768,000),
respectively.
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 age of trade accounts receivable as at
May 31 2009:
|
(unaudited)
|
||||
|
Current
|
$ | 19,581 | ||
|
Past
due, 0 to 30 days
|
9,201 | |||
|
Past
due, 31 to 60 days
|
1,854 | |||
|
Past
due, more than 60 days
|
2,913 | |||
|
Total
accounts receivable
|
33,549 | |||
|
Allowance
for doubtful accounts
|
(1,254 | ) | ||
| $ | 32,295 | |||
Liquidity
risk
Liquidity
risk is defined as the potential that the company cannot meet its obligations as
they become due.
The
following table summarizes the contractual maturity of the company’s financial
liabilities as at May 31, 2009:
|
0-12
months
|
13-24
months
|
25-36
months
|
||||||||||
|
(unaudited)
|
||||||||||||
|
Accounts
payable and accrued liabilities
|
$ | 23,015 | $ | − | $ | − | ||||||
|
Forward
exchange contracts
|
||||||||||||
|
Outflow
|
32,300 | 15,400 | 4,600 | |||||||||
|
Inflow
|
(32,171 | ) | (15,879 | ) | (4,717 | ) | ||||||
|
Total
|
$ | 23,144 | $ | (479 | ) | $ | (117 | ) | ||||
In
addition, the company has a share repurchase program that may require additional
cash outflows during fiscal 2009 and 2010 (note 9). Also, the company has an
outstanding contingent consideration payable upon the acquisition of assets,
which is not yet recorded in the financial statements and may require additional
cash outflows in upcoming years.
As at
May 31, 2009, the company had $64,495,000 in cash and short-term
investments and $35,292,000 in accounts receivable. In addition to these
financial assets, the company has unused available lines of credit totalling
$13,547,000 for working capital and other general corporate purposes, including
potential acquisitions and its share repurchase program as well as unused
lines of credit of $16,289,000 for foreign currency exposure related to its
forward exchange contracts.
|
6.
|
Inventories
|
|
As
at
May
31,
2009
|
As
at
August
31,
2008
|
|||||||
|
(unaudited)
|
||||||||
|
Raw
materials
|
$ | 15,465 | $ | 17,651 | ||||
|
Work
in progress
|
2,149 | 1,961 | ||||||
|
Finished
goods
|
15,385 | 15,268 | ||||||
| $ | 32,999 | $ | 34,880 | |||||
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 cost
of sales comprised almost exclusively the amount of inventory recognized as an
expense during the reporting periods, except for the related amortization, which
is shown separately in operating expenses.
Inventory
write-down amounted to $737,000 and $581,000 for the three months ended
May 31, 2008 and 2009, respectively. For the nine months ended May 31,
2008 and 2009, it amounted to $1,324,000 and $2,390,000,
respectively.
|
7.
|
Accounts
Payable and Accrued Liabilities
|
|
As
at
May
31, 2009
|
As
at
August
31, 2008
|
|||||||
|
(unaudited)
|
||||||||
|
Trade
|
$ | 11,044 | $ | 10,303 | ||||
|
Salaries
and social benefits
|
8,514 | 8,888 | ||||||
|
Warranty
|
754 | 974 | ||||||
|
Commissions
|
612 | 761 | ||||||
|
Tax
on capital
|
220 | 923 | ||||||
|
Restructuring
charges
|
– | 292 | ||||||
|
Forward
exchange contracts (note 5)
|
828 | 714 | ||||||
|
Other
|
1,871 | 1,858 | ||||||
| $ | 23,843 | $ | 24,713 | |||||
Changes
in the warranty provision are as follows:
|
Nine
months
ended
May
31, 2009
|
Nine
months
ended
May
31, 2008
|
|||||||
|
(unaudited)
|
||||||||
|
Balance
– Beginning of period
|
$ | 974 | $ | 800 | ||||
|
Provision
|
438 | 470 | ||||||
|
Addition
from business combinations
|
− | 175 | ||||||
|
Settlements
|
(658 | ) | (480 | ) | ||||
|
Balance
– End of period
|
$ | 754 | $ | 965 | ||||
|
8.
|
Contingencies
|
Class
action
On
November 27, 2001, a class-action suit was filed in the United States District
Court for the Southern District of New York against the company, four
of the underwriters of its Initial Public Offering and some of its executive
officers pursuant to the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder and Sections 11, 12 and 16 of the Securities Act of 1933.
This class action alleges that the company’s registration statement and
prospectus filed with the Securities and Exchange Commission on June 29, 2000,
contained material misrepresentations and/or omissions resulting from (i) the
underwriters allegedly soliciting and receiving additional, excessive and
undisclosed commissions from certain investors in exchange for which they
allocated material portions of the shares issued in connection with the
company’s Initial Public Offering; and (ii) the underwriters allegedly
entering into agreements with customers whereby shares issued in connection with
the company’s Initial Public Offering would be allocated to those customers in
exchange for which customers agreed to purchase additional amounts of shares in
the after-market at predetermined prices.
EXFO
Electro-Optical Engineering Inc.
Notes
to 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 defendants in all of the 310 cases included
in this class action and also filed an amended complaint containing allegations
specific to four of the company’s underwriters, the company and two of its
executive officers. In addition to the allegations mentioned above, the amended
complaint alleges that the underwriters (i) used their analysts to manipulate
the stock market; and (ii) implemented schemes that allowed issuer insiders
to sell their shares rapidly after an initial public offering and benefit from
high market prices. As concerns the company and its two executive officers in
particular, the amended complaint alleges that (i) the company’s registration
statement was materially false and misleading because it failed to disclose
the additional commissions and compensation to be received by underwriters; (ii)
the two named executive officers learned of or recklessly disregarded the
alleged misconduct of the underwriters; (iii) the two named executive officers
had motive and opportunity to engage in alleged wrongful conduct due to personal
holdings of the company’s stock and the fact that an alleged artificially
inflated stock price could be used as currency for acquisitions; and (iv) the
two named executive officers, by virtue of their positions with the company,
controlled the company and the contents of the registration statement and had
the ability to prevent its issuance or cause it to be corrected. The plaintiffs
in this suit seek an unspecified amount for damages suffered.
In July
2002, the issuers filed a motion to dismiss the plaintiffs’ amended complaint
and a decision was rendered on February 19, 2003. Only one of the claims
against the company was dismissed. On October 8, 2002, the claims against
its officers were dismissed pursuant to the terms of Reservation of Rights and
Tolling Agreements entered into with the plaintiffs.
In June
2004, an agreement of partial settlement was submitted to the court for
preliminary approval. The proposed partial settlement was between the
plaintiffs, the issuer defendants in the consolidated actions, the issuer
officers and directors named as defendants, and the issuers’ insurance
companies. The court granted the preliminary approval motion
on February 15, 2005, subject to certain modifications. On
August 31, 2005, the court issued a preliminary order further approving the
modifications to the settlement and certifying the settlement classes. The court
also appointed the notice administrator for the settlement and ordered that
notice of the settlement be distributed to all settlement class members by
January 15, 2006. The settlement fairness hearing occurred on
April 24, 2006, and the court reserved decision at that time.
While the
partial settlement was pending approval, the plaintiffs continued to litigate
against the underwriter defendants. The district court directed that the
litigation proceed within a number of “focus cases” rather than in all of the
310 cases that have been consolidated. The company's case is not one
of these focus cases. On October 13, 2004, the district court
certified the focus cases as class actions. The underwriter defendants
appealed that ruling, and on December 5, 2006, the Court of Appeals for the
Second Circuit reversed the district court’s class certification
decision.
On April
6, 2007, the Second Circuit denied the plaintiffs’ petition for rehearing of
that decision and, on May 18, 2007, the Second Circuit denied the plaintiffs’
petition for rehearing en
banc. In light of the Second Circuit’s opinion, liaison counsel for all
issuer defendants, including the company, informed the court that this
settlement cannot be approved, because the defined settlement class, like the
litigation class, cannot be certified. On June 25, 2007, the district court
entered an order terminating the settlement agreement. On August 14, 2007, the
plaintiffs filed their second consolidated amended class-action complaints
against the focus cases and, on September 27, 2007, again moved for class
certification. On November 12, 2007, certain defendants in the
focus cases moved to dismiss the second consolidated amended class-action
complaints. On March 26, 2008, the district court denied the motions to dismiss,
except as to Section 11 claims raised by those plaintiffs who sold their
securities for a price in excess of the initial offering price and those who
purchased outside of the previously certified class period. Briefing on the
class certification motion was completed in May 2008. That motion was withdrawn
without prejudice on October 10, 2008. On April 2, 2009, a
stipulation and agreement of settlement between the plaintiffs, issuer
defendants and underwriter defendants was submitted to the Court for preliminary
approval. The Court granted the plaintiffs’ motion for preliminary
approval and preliminarily certified the settlement classes
on June 10, 2009. The settlement fairness hearing has been
scheduled for September 10, 2009. Following the hearing,
if the Court determines that the settlement is fair to the class members,
the settlement will be approved and the case against the Company and its
individual defendants will be dismissed with prejudice.
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)
Due to
the inherent uncertainties of litigation, the final outcome of the case
including the approval of the settlement described above is uncertain and it is
not possible to determine the amount of any possible losses. The company will
continue to defend its position in this litigation that the claims against
it, and its officers, are without merit. Accordingly, no provision for
this case has been made in the interim consolidated financial statements as at
May 31, 2009.
Contingent
consideration
Following
the purchase of assets during the nine months ended May 31, 2009, the company
has a contingent cash consideration of up to $1,000,000, payable based upon the
achievement of a certain booking volume in the next 24 months following the
purchase.
|
9.
|
Share
Capital
|
On
November 6, 2008, the company announced that its Board of Directors had
authorized a renewal of its share repurchase program, by way of a normal course
issuer bid on the open market, of up to 10% of its public float (as defined by
the Toronto Stock Exchange), or 2,738,518 subordinate voting shares,
at the prevailing market price. The company expects to use cash, short-term
investments or future cash flows from operations to fund the repurchase of
shares. The period of the normal course issuer bid commenced on November 10,
2008, and will end on November 9, 2009, or on an earlier date if the
company repurchases the maximum number of shares permitted under the bid. The
program does not require the company to repurchase any specific number
of shares, and it may be modified, suspended or terminated at any time and
without prior notice. All shares repurchased under the bid will be
cancelled.
On
November 10, 2008, the company announced that its Board of Directors had
authorized a substantial issuer bid (the “Offer”) to purchase for
cancellation subordinate voting shares for an aggregate purchase price not
to exceed CA$30,000,000. On December 18, 2008, pursuant to the Offer, the
company purchased for cancellation 7,692,307 subordinate voting shares for
the aggregate purchase price of CA$30,000,000 (US$24,879,000), plus related fees
of $576,000. The company used cash and short-term investments to fund the
purchase of shares.
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 summarize changes in share capital for the nine months ended
May 31, 2008 and 2009:
|
Nine
months ended May 31, 2008
|
||||||||||||||||||||
|
Multiple
voting shares
|
Subordinate
voting shares
|
|||||||||||||||||||
|
Number
|
Amount
|
Number
|
Amount
|
Total
amount
|
||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||
|
Balance
as at August 31, 2007
|
36,643,000 | $ | 1 | 32,361,561 | $ | 150,018 | $ | 150,019 | ||||||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards
|
– | – | – | 2 | 2 | |||||||||||||||
|
Redemption
of share capital
|
– | – | (29,200 | ) | (135 | ) | (135 | ) | ||||||||||||
|
Balance
as at November 30, 2007
|
36,643,000 | 1 | 32,332,361 | 149,885 | 149,886 | |||||||||||||||
|
Exercise
of stock options
|
– | – | 4,000 | 10 | 10 | |||||||||||||||
|
Redemption
of restricted share units
|
– | – | 38,031 | – | – | |||||||||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards
|
– | – | – | 209 | 209 | |||||||||||||||
|
Balance
as at February 29, 2008
|
36,643,000 | 1 | 32,374,392 | 150,104 | 150,105 | |||||||||||||||
|
Exercise
of stock options
|
– | – | 14,500 | 51 | 51 | |||||||||||||||
|
Redemption
of restricted share units
|
– | – | 27,839 | – | – | |||||||||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards
|
– | – | – | 176 | 176 | |||||||||||||||
|
Redemption
of share capital
|
– | – | (560,407 | ) | (2,600 | ) | (2,600 | ) | ||||||||||||
|
Balance
as at May 31, 2008
|
36,643,000 | $ | 1 | 31,856,324 | $ | 147,731 | $ | 147,732 | ||||||||||||
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)
|
Nine
months ended May 31, 2009
|
||||||||||||||||||||
|
Multiple
voting shares
|
Subordinate
voting shares
|
|||||||||||||||||||
|
Number
|
Amount
|
Number
|
Amount
|
Total
amount
|
||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||
|
Balance
as at August 31, 2008
|
36,643,000 | $ | 1 | 30,783,705 | $ | 142,785 | $ | 142,786 | ||||||||||||
|
Exercise
of stock options
|
– | – | 12,500 | 26 | 26 | |||||||||||||||
|
Redemption
of share capital
|
– | – | (176,914 | ) | (821 | ) | (821 | ) | ||||||||||||
|
Balance
as at November 30, 2008
|
36,643,000 | 1 | 30,619,291 | 141,990 | 141,991 | |||||||||||||||
|
Exercise
of stock options
|
– | – | 2,500 | 5 | 5 | |||||||||||||||
|
Redemption
of restricted share units
|
– | – | 92,682 | − | − | |||||||||||||||
|
Redemption
of share capital
|
– | – | (7,745,379 | ) | (36,514 | ) | (36,514 | ) | ||||||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards
|
– | – | − | 452 | 452 | |||||||||||||||
|
Balance
as at February 28, 2009
|
36,643,000 | 1 | 22,969,094 | 105,933 | 105,934 | |||||||||||||||
|
Exercise
of stock options
|
– | – | 2,500 | 10 | 10 | |||||||||||||||
|
Redemption
of restricted share units
|
– | – | 724 | – | – | |||||||||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards
|
– | – | − | 8 | 8 | |||||||||||||||
|
Balance
as at May 31, 2009
|
36,643,000 | $ | 1 | 22,972,318 | $ | 105,951 | $ | 105,952 | ||||||||||||
|
10.
|
Net
Research and Development Expenses
|
Net
research and development expenses comprise the following:
|
Three
months ended
May
31, 2009
|
Nine
months ended
May
31, 2009
|
Three
months ended
May
31, 2008
|
Nine
months ended
May
31, 2008
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
Gross
research and development expenses
|
$ | 9,347 | $ | 26,750 | $ | 8,843 | $ | 23,904 | ||||||||
|
Research
and development tax credits
|
(1,566 | ) | (4,423 | ) | (1,470 | ) | (4,334 | ) | ||||||||
| $ | 7,781 | $ | 22,327 | $ | 7,373 | $ | 19,570 | |||||||||
EXFO
Electro-Optical Engineering Inc.
Notes
to Unaudited Interim Consolidated Financial Statements
(tabular
amounts in thousands of US dollars, except share and per share data and as
otherwise noted)
|
11.
|
Income
Taxes
|
For the
three and the nine months ended May 31, 2008 and
May 31, 2009, the reconciliation of the income tax provision
calculated using the combined Canadian federal and provincial statutory income
tax rate with the income tax provision in the financial statements is as
follows:
|
Three
months ended
May
31, 2009
|
Nine
months ended
May
31, 2009
|
Three
months ended
May
31, 2008
|
Nine
months ended
May
31, 2008
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
Income
tax provision at combined Canadian federal and provincial statutory tax
rate (32% in 2008 and 31% in 2009)
|
$ | (8,100 | ) | $ | (4,701 | ) | $ | 1,638 | $ | 3,618 | ||||||
|
Increase
(decrease) due to:
|
||||||||||||||||
|
Foreign
income taxed at different rates
|
39 | 75 | 97 | 174 | ||||||||||||
|
Non-taxable
income
|
(46 | ) | (160 | ) | (30 | ) | (401 | ) | ||||||||
|
Non-deductible
expenses
|
4,757 | 5,125 | 233 | 823 | ||||||||||||
|
Change
in tax rates (1)
|
– | – | – | 1,522 | ||||||||||||
|
Change
in tax strategy (2)
|
– | – | – | (2,715 | ) | |||||||||||
|
Foreign
exchange effect of translation of foreign integrated
subsidiaries
|
972 | 24 | 33 | 227 | ||||||||||||
|
Other
|
(3 | ) | 113 | (113 | ) | 278 | ||||||||||
|
Recognition
of previously unrecognized future income tax assets (3)
|
– | – | (5,324 | ) | (5,324 | ) | ||||||||||
|
Utilization
of previously unrecognized future income tax assets
|
(438 | ) | (513 | ) | – | (1,881 | ) | |||||||||
|
Unrecognized
future income tax assets on temporary deductible differences and unused
tax losses and deductions
|
(32 | ) | 235 | 686 | 3,156 | |||||||||||
| $ | (2,851 | ) | $ | 198 | $ | (2,780 | ) | $ | (523 | ) | ||||||
The
income tax provision consists of the following:
|
Current
|
$ | (88 | ) | $ | 148 | $ | 112 | $ | (7,080 | ) | ||||||
|
Future
|
(2,293 | ) | 328 | 1,746 | 10,606 | |||||||||||
|
Valuation
allowance
|
(470 | ) | (278 | ) | (4,638 | ) | (4,049 | ) | ||||||||
| (2,763 | ) | 50 | (2,892 | ) | 6,557 | |||||||||||
| $ | (2,851 | ) | $ | 198 | $ | (2,780 | ) | $ | (523 | ) |
|
(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 nine months ended
May 31, 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 released
previously used research and development tax credits. This resulted in an
increase of its tax-related assets of $2,715,000 and in an income tax
recovery for the same amount in the statements of earnings for the nine
months ended
May 31, 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)
|
(3)
|
During
the three months ended May 31, 2008, considering the expected positive
impact of the acquisitions of Navtel Communications Inc. and Brix Networks
Inc. on future years’ taxable income at the United States federal level,
and because taxable income in the United States was greater than expected,
management concluded that it was more likely than not that all future
income tax assets of its consolidated US group would be recovered.
Consequently, it reversed its valuation allowance against future income
tax assets in the amount of $7,617,000. The portions of the valuation
allowance that were reversed, and that were attributable to the impact of
the acquisitions of Navtel Communications Inc. and Brix Networks Inc., in
the amount of $652,000 and $1,641,000, respectively, were included in the
purchase price allocation of the related acquired businesses. The
remaining of the reversal, in the amount of $5,324,000, has been recorded
in the income taxes in the statements of earnings for the three and nine
months ended
May 31, 2008.
|
|
12.
|
Earnings
per Share
|
The
following table summarizes the reconciliation of the basic weighted average
number of shares outstanding and the diluted weighted average number of shares
outstanding:
|
Three
months ended
May
31, 2009
|
Nine
months
ended
May
31, 2009
|
Three
months ended
May
31, 2008
|
Nine
months
ended
May
31, 2008
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
Basic
weighted average number of shares outstanding (000’s)
|
59,613 | 62,609 | 68,907 | 68,964 | ||||||||||||
|
Plus
dilutive effect of:
|
||||||||||||||||
|
Stock
options (000’s)
|
155 | 135 | 299 | 313 | ||||||||||||
|
Restricted
share units (000’s)
|
448 | 303 | 175 | 188 | ||||||||||||
|
Deferred
share units (000’s)
|
99 | 90 | 86 | 78 | ||||||||||||
|
Diluted
weighted average number of shares outstanding (000’s)
|
60,315 | 63,137 | 69,467 | 69,543 | ||||||||||||
|
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)
|
1,280 | 1,663 | 1,168 | 1,332 | ||||||||||||
For the
three and nine months ended March 31, 2009, the diluted amount per share was the
same amount as the basic amount per share since the dilutive effect of stock
options, restricted share units and deferred share units was not included in the
calculation; otherwise, the effect would have been anti-dilutive. Accordingly,
the diluted amount per share for these periods was calculated using the basic
weighted average number of shares outstanding.
|
13.
|
Segment
Information
|
The
company is organized under two reportable segments: the Telecom Division and the
Life Sciences and Industrial Division. The Telecom Division offers integrated
test solutions and network monitoring systems to network service providers,
cable TV operators, system vendors and component manufacturers throughout the
global telecommunications industry. The Life Sciences and Industrial Division
offers solutions in medical-device and opto-electronics assembly, fluorescence
microscopy and other life sciences sectors.
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 present information by segment:
|
Three
months ended May 31, 2009
|
Nine
months ended May 31, 2009
|
|||||||||||||||||||||||
|
Telecom
Division
|
Life
Sciences
and
Industrial
Division
|
Total
|
Telecom
Division
|
Life
Sciences
and
Industrial
Division
|
Total
|
|||||||||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||||||||||
|
Sales
|
$ | 39,047 | $ | 4,589 | $ | 43,636 | $ | 121,573 | $ | 14,798 | $ | 136,371 | ||||||||||||
|
Earnings
(loss) from operations
|
$ | (21,990 | ) | $ | 438 | $ | (21,552 | ) | $ | (18,518 | ) | $ | 1,658 | $ | (16,860 | ) | ||||||||
|
Unallocated
items:
|
||||||||||||||||||||||||
|
Interest
income
|
42 | 683 | ||||||||||||||||||||||
|
Foreign
exchange gain (loss)
|
(4,687 | ) | 971 | |||||||||||||||||||||
|
Loss
before income taxes
|
(26,197 | ) | (15,206 | ) | ||||||||||||||||||||
|
Income
taxes (recovery)
|
(2,851 | ) | 198 | |||||||||||||||||||||
|
Net
loss for the period
|
$ | (23,346 | ) | $ | (15,404 | ) | ||||||||||||||||||
|
Three
months ended May 31, 2008
|
Nine
months ended May 31, 2008
|
|||||||||||||||||||||||
|
Telecom
Division
|
Life
Sciences
and
Industrial
Division
|
Total
|
Telecom
Division
|
Life
Sciences
and
Industrial
Division
|
Total
|
|||||||||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||||||||||
|
Sales
|
$ | 42,843 | $ | 5,738 | $ | 48,581 | $ | 115,643 | $ | 17,204 | $ | 132,847 | ||||||||||||
|
Earnings
from operations
|
$ | 3,819 | $ | 639 | $ | 4,458 | $ | 6,657 | $ | 1,738 | $ | 8,395 | ||||||||||||
|
Unallocated
items:
|
||||||||||||||||||||||||
|
Interest
income
|
964 | 4,063 | ||||||||||||||||||||||
|
Foreign
exchange loss
|
(59 | ) | (907 | ) | ||||||||||||||||||||
|
Earnings
before income taxes and extraordinary gain
|
5,363 | 11,551 | ||||||||||||||||||||||
|
Income
taxes recovery
|
(2,780 | ) | (523 | ) | ||||||||||||||||||||
|
Earnings
before extraordinary gain
|
8,143 | 12,074 | ||||||||||||||||||||||
|
Extraordinary
gain
|
3,036 | 3,036 | ||||||||||||||||||||||
|
Net
earnings for the period
|
$ | 11,179 | $ | 15,110 | ||||||||||||||||||||
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
May
31,
2009
|
As
at
August
31,
2008
|
|||||||
|
(unaudited)
|
||||||||
|
Total
assets
|
||||||||
|
Telecom
Division
|
$ | 120,181 | $ | 145,168 | ||||
|
Life
Sciences and Industrial Division
|
8,956 | 9,571 | ||||||
|
Unallocated
assets
|
117,787 | 138,327 | ||||||
| $ | 246,924 | $ | 293,066 | |||||
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.
|
14.
|
Differences
between Canadian and U.S. GAAP
|
These
interim consolidated financial statements are prepared in accordance with
Canadian GAAP; significant differences in measurement and disclosure from
U.S. GAAP are set out in note 19 to the company’s most recent annual
consolidated financial statements. This note describes significant changes
occurring since the most recent annual consolidated financial statements and
provides a quantitative analysis of all significant differences. All disclosures
required in annual financial statements under U.S. GAAP and Regulation S-X of
the Securities and Exchange Commission in the United States have not been
provided in these interim consolidated financial statements.
Statements
of earnings
For the
three and nine months ended May 31, 2008 and May 31, 2009,
there were no significant differences between the net earnings (loss) under
Canadian GAAP as compared to U.S. GAAP.
Reconciliation
of shareholders’ equity to conform to U.S. GAAP
The
following summary sets out the significant differences between the company’s
reported shareholders’ equity under Canadian GAAP as compared to U.S.
GAAP:
|
As
at
May
31,
2009
|
As
at
August
31,
2008
|
|||||||
|
(unaudited)
|
||||||||
|
Shareholders’
equity in accordance with Canadian GAAP
|
$ | 210,788 | $ | 259,515 | ||||
|
Goodwill
|
(12,303 | ) | (12,640 | ) | ||||
|
Stock
appreciation rights
|
(73 | ) | (73 | ) | ||||
|
Shareholders’
equity in accordance with U.S. GAAP
|
$ | 198,412 | $ | 246,802 | ||||
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)
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 $985,000 and $2,773,000 for the
three and nine months ended May 31, 2008, respectively, and $887,000
and $2,515,000 for the three and nine months ended May 31, 2009,
respectively. This difference has no impact on the net earnings (loss) and the
net earnings (loss) per share for the reporting periods.
Statements
of cash flows
For the
three and nine months ended May 31, 2008 and 2009, there were no
significant differences between the statements of cash flows under Canadian
GAAP as compared to U.S. GAAP, except for the subtotal before change
in non-cash operating items, whose presentation is not permitted under U.S.
GAAP.
New
accounting standards and pronouncements
Adopted
in fiscal 2009
In
September 2006, the Financial Accounting Standard Board (FASB) issued SFAS 157,
“Fair Value Measurements”, which establishes a framework for measuring fair
value in GAAP and is applicable to other accounting pronouncements,
in which fair value is considered to be the relevant measurement attribute.
SFAS 157 also expands disclosures about fair value measurement. In February
2008, the FASB amended SFAS 157 to exclude leasing transactions and to delay the
effective date by one year for non-financial assets and liabilities that are
recognized or disclosed at fair value in the financial statements
on a non-recurring basis. This statement is effective for fiscal years
beginning after November 15, 2007. The company adopted this statement
on September 1, 2008, and its adoption had no effect on its
consolidated financial statements.
In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115”, which allows entities to measure many financial instruments and certain
other items at fair value. Most of the provisions of this statement apply only
to entities that elect the fair value option. However, the amendment to SFAS
115, “Accounting for Certain Investments in Debt and Equity Securities”, applies
to all entities with available-for-sale and trading securities. This statement
is effective for fiscal years beginning after November 15, 2007. The company
adopted this statement on September 1, 2008, and it did not elect
to use the fair value option as of the date of adoption.
In May
2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting
Principles”, which is intended to improve financial reporting by identifying a
consistent framework for selecting accounting principles to be used in preparing
financial statements that are presented in conformity with U.S. GAAP for
non-governmental entities. The guidance in SFAS 162 replaces that which is
prescribed by the American Institute of Certified Public Accountants’ (“AICPA”)
Statement on Auditing Standards (“SAS”) No. 69, “The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles, for Nongovernmental Entities”.
SFAS 162 became effective in January 2009, and the adoption of this standard has
not had any impact on the Company’s interim consolidated financial
statements.
To
be adopted after fiscal 2009
In
December 2007, the FASB issued SFAS 141(R), “Business Combinations”,
and SFAS 160, “Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51”. These new standards will
significantly change the accounting and reporting for business combination
transactions and noncontrolling (minority) interests in consolidated
financial statements. SFAS 141(R) and SFAS160 are required to be adopted
simultaneously and are effective for the first annual reporting period beginning
on or after December 15, 2008. Earlier adoption is prohibited. The company
will adopt this statement on September 1, 2009, and is currently evaluating the
impact the adoption of SFAS 141(R) and SFAS 160 will have on its
consolidated financial statements.
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)
In March
2008, the FASB issued SFAS 161, “Disclosure about Derivative Instruments and
Hedging Activities – an amendment of FASB Statement No. 133”, which will
require entities to provide enhanced disclosures about (a) how and why an entity
uses derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under SFAS 133 and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance and cash flow. SFAS 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged.
The company will adopt this statement on September 1, 2009, and is
currently evaluating the impact its adoption will have on its note disclosures
related to derivative instruments and hedging activities.
In April
2008, the FASB issued the FASB staff position (FSP) FAS 142-3, “Determination of
the Useful Lives of Intangible Assets”. This FSP amends
the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS
142, “Goodwill and Other
Intangible Assets”. The intent of
this FSP is to improve
the consistency between the useful life of a recognized intangible asset under
SFAS 142 and
the period of expected cash flows used to measure the fair value of the asset
under SFAS
141 (revised 2007), “Business
Combinations”, and other U.S.
generally accepted accounting
principles (GAAP). This
FSP shall be effective for financial statements issued for fiscal years
beginning after December 15,
2008, and interim periods within those fiscal years. Early adoption is
prohibited. The guidance for
determining the useful life of a recognized intangible asset in paragraphs 7–11
of this FSP shall be
applied prospectively to intangible assets acquired after the effective date.
The disclosure requirements
in paragraphs 13–15 shall be applied prospectively to all intangible assets
recognized as of, and subsequent to, the effective date. The company
will adopt this FSP on September 1, 2009, and is currently evaluating
the impact its adoption will have on its consolidated financial statements.
In April
2009, the FASB issued FASB Staff Position (FSP) SFAS 107-1 and Accounting
Principles Board (“APB”) Opinion 28-1 (“FSP FAS 107-1 and APB 28-1”),
“Interim Disclosures about Fair Value of Financial Instruments”. FSP
FAS 107-1 and APB 28-1 amends SFAS 107, “Disclosures about Fair Value of
Financial Instruments”, to require disclosures about fair value of financial
instruments for annual and interim reporting periods of publicly traded
companies and amends APB 28, “Interim Financial Reporting,” to require those
disclosures in summarized financial information at interim reporting periods.
FSP FAS 107-1 and APB 28-1 is effective for reporting periods ending after
June 15, 2009. The company is currently evaluating
the impact its adoption will have on its consolidated financial statements.
In May
2009, the FASB issued SFAS 165, “Subsequent Events”. This statement introduces
the concept of financial statements being available to be issued. It requires
the disclosure of the date through which an entity has evaluated subsequent
events and the basis for that date, i.e. whether that date represents the date
of the financial statements were issued or were available to be issued. This
statement is effective for financial statements issued for fiscal years and
interim periods ending after June 15, 2009.
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 the effect of the
actual worldwide recession on the telecom market for our customers and
suppliers; fluctuating exchange rates and our ability to execute in these
uncertain conditions; consolidation in the global telecommunications test,
measurement and service assurance industry; capital spending levels in the
telecommunications, life sciences and high-precision assembly sectors;
concentration of sales; the effects of the additional actions we have taken
in response to such economic uncertainty (including our ability to quickly adapt
cost structures with anticipated levels of business, ability to manage inventory
levels with market demand); market acceptance of our new products and other
upcoming products; limited visibility with regards to customer orders and the
timing of such orders; our ability to successfully integrate our acquired and
to-be-acquired businesses; our ability to successfully expand international
operations; the retention of key technical and management personnel; and future
economic, competitive, financial and market condition .Assumptions relating to
the foregoing involve judgments and risks, all of which are difficult or
impossible to predict and many of which are beyond our control. Other risk
factors that may affect our future performance and operations are detailed in
our Annual Report, on Form 20-F, and our other filings with the U.S.
Securities and Exchange Commission and the Canadian securities commissions. We
believe that the expectations reflected in the forward-looking statements are
reasonable based on information currently available to us, but we cannot
assure you that the expectations will prove to have been correct. Accordingly,
you should not place undue reliance on these forward-looking statements. These
statements speak only as of the date of this document. Unless required by law
or applicable regulations, we undertake no obligation to revise
or update any of them to reflect events or circumstances that occur
after the date of this document.
The
following discussion and analysis of financial condition and results of
operations is dated June 30, 2009.
All
dollar amounts are expressed in US dollars, except as otherwise
noted.
INDUSTRY
OVERVIEW
The
fundamental drivers for increased bandwidth and converged, IP networks in the
global telecommunications industry remain intact, but they are being constrained
by an economic recession that is forcing network operators and network equipment
manufacturers to reduce their capital and operating expenses. In fact, several
of these players have announced significant reductions in capital
expenditures and staffing levels for calendar year 2009 in anticipation of
lower revenue streams.
Despite
this challenging macro-economic environment, it should be noted that telecom
market dynamics in 2009 are completely different from those during the industry
downturn of 2001. First of all, there is currently a myriad
of bandwidth-intensive applications generating strong growth in bandwidth
demand, both in wireless and wireline networks. For example, monthly traffic is
at the exabyte level (1 exabyte equals 1 quintillion bytes) in 2009, while
in 2001 there were few applications outside of regular e-mail delivery.
Secondly, the ongoing demand for bandwidth has placed a strain on access,
metro rings and long-haul routes, whereas in 2001 there was
an overabundance of bandwidth capacity in optical backbone networks,
which drove bandwidth pricings down very significantly. Finally, most network
operators have healthy balance sheets today, while in 2001 many of them were
financially overextended with some declaring outright bankruptcy.
Notwithstanding
this current market downturn, telecom operators and cable companies will likely
maintain significant investments in their access networks in order to remain
competitive and 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.
According
to Cisco’s Visual Networking Index, global IP traffic will nearly double every
two years (compound annual growth rate of 46%) from 2007-2012, reaching just
under 44 exabytes per month in 2012. Global bandwidth demand is driven by a wide
range of applications including peer-to-peer file sharing, social networking,
Internet gaming as well as various forms of IP video. For example, YouTube
consumed more bandwidth in 2008 than traffic crossing the entire US network
backbone in 2000, according to Cisco.
As
telecommunication networks are being transformed to provide IP-based voice,
video and data capabilities, legacy SONET/SDH standards, which were first
established in the mid-1980s and implemented until 2005, do not have the payload
flexibility to seamlessly and efficiently mix and transport video with voice and
data. These networks are not capable of efficiently carrying emerging IP-based
services since they were designed for public switched telephone network (PSTN),
point-to-point voice transmission only. As a result, new OTN standards have been
defined to transport IP applications over Ethernet and are at the very
foundation of what the industry is calling next-generation networks. Network
operators are increasingly turning to such next-generation, IP-based networks
to allow for more flexible and efficient transport of applications and
services, and to offer customers higher-margin triple-play services ― and
even quadruple-play services ― as wireline and wireless technologies become
increasingly interconnected. Finally, as subscribers of these new
services reach a critical mass, network operators are relying on service
assurance solutions to ensure that the quality of service (QoS) and quality
of experience (QoE) demanded by users are optimal in the post-deployment
phase.
As well,
it is now clear that fiber-to-the-home (FTTH) is becoming the access network
architecture of choice for network operators wishing to provide a great user
experience in combined video, data and voice offering. This architecture allows
them to meet heightened bandwidth requirements and future-proof their access
networks, as residential bandwidth requirements are growing from the 1 to 5
Mbit/s (megabits per second) of the past to the 30 to 100 Mbit/s
required in the long term. Some projects, however, may be delayed based on the
ability to fund such projects. Hybrid architectures, combining copper and fiber
(fiber-to-the-curb, or FTTC, and fiber-to-the-node, or FTTN), will also
keep expanding in the short term, since they are less-expensive methods
to increase bandwidth and can be mass-deployed more quickly.
FTTH
investment decisions are applicable not only to green-field deployments and
high-rise buildings, but also to larger-scale rollouts as long-term
operating costs are less than FTTC and FTTN. It is noteworthy to mention that
the cost of deploying FTTH has largely fallen over the last few years as volume
increased and test tools, like those we offer, are rendering deployments
increasingly simple and efficient. Also, while deploying FTTH is more
capital intensive, it provides the benefits of very high bandwidth capabilities
and significantly lower cost of operation and superior reliability. We are only
at the early stages of fiber deployments in access networks, both in North
America and around the world. It is also worth noting that Western Europe and
even China have become increasingly committed to deploying FTTH networks, given
their high population density. FTTH is now also finding a new opportunity in
multi-dwelling units (MDUs) as a low cost alternative to bring very large
bandwidth at minimal cost/apartment.
As
bandwidth growth in access networks continues to increase, it has begun placing
a strain on metro rings and core networks. It is also driving the need for
higher-speed technologies. For example, 43 Gbit/s (gigabits per
second) SONET/SDH
is now being deployed and becoming mainstream, while upcoming 100 Gbit/s
Ethernet is being developed despite the difficult economic environment. A few
network operators are even expected to begin 100 Gbit/s Ethernet
field-trials later this calendar year. In the long run, the deployment of these
solutions is expected to be a significantly more economical way to add
capacity in saturated network portions, especially if trenches need to be dug in
order to deploy new fiber in metro and long-distance
routes.
These
market dynamics affected telecom test and service assurance suppliers in the
third quarter of fiscal 2009. On the other hand, the economic recession
mainly afflicting customers in the United States and Western Europe could
potentially delay network investments and necessarily reduce demand for our test
and service assurance solutions.
COMPANY
OVERVIEW
We
reported sales of $43.6 million in the third quarter of fiscal 2009, which
represented a decrease of 10.2% year-over-year. This decrease in sales mainly
results from the global economic recession as well as from currency fluctuations
since the beginning of the fiscal year. However, total sales for the third
quarter of fiscal 2009 included $7.3 million from Brix Networks Inc. and Navtel
Communications Inc, compared to $2.2 million $ for the same period last year,
which mitigated in part the decrease in sales year-over-year. These two
acquisitions were closed approximately one month and two months into the third
quarter of fiscal 2008, respectively. After nine months into fiscal 2009, sales
increased 2.7% year-over-year to $136.4 million, from $132.8 million
for the same period last year. Total sales for the first nine months of fiscal
2009 included $21.0 million from Brix Networks Inc. and Navtel Communications
Inc, compared to $2.2 million $for the same period last year. Excluding the
positive impacts of our two recent acquisitions, our organic sales would have
decreased 21.6% and 11.7% during the third quarter and the first nine months of
fiscal 2009, respectively, reflecting the impact of the global economic
recession and the negative effects of the currency fluctuations on our sales
during these periods, compared to the same periods last year.
We also
reported net accepted orders of $40.2 million in the third quarter of fiscal
2009 for a book-to-bill ratio of 0.92. Net bookings for the third
quarter of fiscal 2009 were also affected by the global economic
recession.
Looking
at the bottom line, we generated a GAAP net loss of $23.3 million, or $0.39 per
share, in the third quarter of fiscal 2009, compared to net earnings of
$11.2 million, or $0.16 per diluted share, for the same period last year.
Net loss for the third quarter of fiscal 2009 included a non-cash
impairment of goodwill in the amount of $21.7 million. GAAP net loss
was also negatively and significantly affected by the rapid strengthening of
value of the Canadian dollar, compared to the US dollar in the third
quarter of 2009. Indeed, during the third quarter of fiscal 2009, we
reported a significant foreign exchange loss of $4.7 million, compared to a
small foreign exchange loss of $59,000 for the same period last year. In fact,
this $4.7 million foreign exchange loss off-set the $4.6 million
foreign exchange gain reported in the first quarter of fiscal 2009, when the
value of the Canadian dollar sharply decreased compared to the US dollar during
that period. Net earnings for the third quarter of fiscal 2008 included
$5.3 million for the recognition of previously unrecognized future income
tax assets in the United States and an extraordinary gain of $3.0 million
related to the negative goodwill on the Navtel acquisition. Net loss in the
third quarter of 2009 included charges of $1.5 million for stock-based
compensation costs and the after-tax amortization expense for intangible assets.
EBITDA (net earnings (loss) before interest, income taxes, amortization of
property, plant and equipment, amortization of intangible assets, impairment of
goodwill and extraordinary gain) were negative at $2.0 million, or 4.6% of sales
in the third quarter of fiscal 2009, compared to $6.5 million
(positive), or 13.3% of sales for the same period last year. EBITDA were $13.1
million, or 9.6% of sales for the nine months ended May 31, 2009, compared to
$13.0 million, or 9.8% of sales for the same period last year (see further in
this document for a complete reconciliation of EBITDA to GAAP net earnings
(loss)).
The
foreign exchange loss recorded in the third quarter of fiscal 2009 mainly
represented the effect of the 16.4% increase (compared to
February 28, 2009) in the period-end value of the Canadian dollar
versus the US dollar on our balance sheet items. During the corresponding period
last year, we witnessed more stability in the period-end value of the Canadian
dollar, compared to the previous quarter (decrease of 1.4%), which resulted in a
smaller foreign exchange loss of $59,000. However, the average value of the
Canadian dollar decreased 17.3% in the third quarter of fiscal 2009, compared to
the corresponding period last year. Given that most of our sales are denominated
in US dollars but a significant portion of our expenses is denominated
in Canadian dollars, our financial results were positively affected as these
expenses (measured in Canadian dollars) increased when translated in
US dollars for reporting purposes.
On
November 6, 2008, we announced that our Board of Directors had authorized a
renewal of our share repurchase program, by way of a normal course
issuer bid on the open market, of up to 10% of our public float (as defined
by the Toronto Stock Exchange), or 2.7 million subordinate voting shares,
at the prevailing market price. We expect to use cash, short-term investments or
future cash flows from operations to fund the repurchase of shares. The period
of the normal course issuer bid started on November 10, 2008, and will end on
November 9, 2009, or on an earlier date if we repurchase the
maximum number of shares permitted under the bid. The program does not require
that we repurchase any specific number of shares, and it may be modified,
suspended or terminated at any time and without prior notice. All shares
repurchased under the bid will be cancelled.
On
November 10, 2008, we announced that our Board of Directors had authorized a
substantial issuer bid (the “Offer”) to purchase for cancellation subordinate
voting shares for an aggregate purchase price not to exceed
CA$30 million. On December 18, 2008, pursuant to the Offer, we purchased
for cancellation 7.7 million subordinate voting shares for the aggregate
purchase price of CA$30 million (US$24.9 million), plus related fees of
$576,000. We used cash and short-term investments to fund the purchase of
shares.
During
the second quarter of fiscal 2009, we closed the acquisition of Sweden-based
PicoSolve Inc., a supplier of ultra-high-speed optical sampling
oscilloscopes for 40G and 100G R&D, manufacturing and deployment
applications.
In the
third quarter of fiscal 2009, we performed our annual impairment test for
goodwill for all reporting units. Recoverability of goodwill is determined at
the reporting unit level, using a two-step approach. First, the carrying value
of the reporting units is compared to their fair value. If the carrying value of
a reporting unit exceeds its fair value, the second step is performed to
determine the amount of the impairment loss. Following the significant decrease
in our stock price following the pre-announcement of our third quarter results
on June 1, 2009, we came to the conclusion that the carrying value of one
of our reporting unit exceeded its fair value. Due to the extensive work
involved in performing the second step of the goodwill impairment test, we had
not completed our analysis at the time our interim consolidated financial
statements were due. However, we recorded an impairment charge of $21.7
million in the third quarter of fiscal 2009, based on our best estimate to bring
the goodwill of this reporting unit to its fair value. We expect to complete
step two of the impairment test in the fourth quarter of 2009 and any adjustment
to the amount of impairment recorded in the third quarter, will be recorded
prospectively during that period. This reporting unit reports to the Telecom
Division.
We launched
11 new products in the third quarter of fiscal 2009 and 23 since the beginning
of the year. Key product launches in the third quarter included a portable test
solution for characterizing 40 Gbit/s and 100 Gbit/s Ethernet networks; 1 Gbit/s
and 10 Gbit/s test heads for carrier Ethernet and mobile backhaul testing
applications; IPv6 testing capabilities across the company’s transport and
datacom product portfolio; a portable, multi-layer platform for high-end test
applications in the field and central office; and an optical time domain
reflectometer (OTDR) optimized for fiber-to-the-home (FTTH) applications and
live fiber troubleshooting. Sales from products that have been on the market two
years or less accounted for 40.6% of total sales in the third quarter of 2009
and 38.3% since the beginning of fiscal 2009.
During
the third quarter of fiscal 2009, we were named recipient of the Growth Strategy
Leadership Award by Frost & Sullivan for the fifth consecutive time. The
award is presented to the company whose growth strategy generates the largest
market-share gains in the global fiber-optic test equipment (FOTE) market during
the previous research period. According to Frost & Sullivan, a leading
global growth consulting firm, we captured first place overall in the FOTE
market with a market share of 18.0% in 2008, up from third place in 2006 with a
market share of 12.7% (Frost & Sullivan did not grant an award in 2008 for
market-share gains in 2007). Frost & Sullivan estimated the FOTE market to
be $567.4 million in 2008, including $247.9 million for the portable
installation and maintenance (I&M) test market. Based on Frost &
Sullivan’s market data, we improved our leadership position in the portable
I&M test market from 25.5% in 2006 to 33.3% in 2008.
In June
2009, we laid-off a certain number of employees across the organization as part
of a restructuring plan to cope with current difficult market conditions. This
will result in a one-time restructuring charge of $1.3 million that will be
recorded in the fourth quarter of fiscal 2009 and is expected to deliver about
$6 million in annual savings.
OUR
STRATEGY, KEY PERFORMANCE INDICATORS AND CAPABILITY TO DELIVER
RESULTS
For a
complete description of our strategy and the related key performance indicators,
as well as our capability to deliver results in fiscal 2009, please refer
to the corresponding sections in our most recent Annual Report, filed with the
securities commissions.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
For a
complete description of our critical accounting policies and estimates, please
refer to the corresponding section in our most recent Annual Report, filed with
the securities commissions. The following details the changes in critical
accounting policies that were adopted in fiscal 2009 and those to be adopted
after 2009.
Adopted
in fiscal 2009
In
December 2006, the Canadian Institute of Chartered Accountants (CICA) issued
three new sections, which provide a complete set of disclosure and
presentation requirements for financial instruments: Section 3862, “Financial
Instruments − Disclosures”; Section 3863, “Financial
Instruments − Presentation”; and Section 1535, “Capital
Disclosures”.
Section
3862 replaces the disclosure portion of Section 3861, “Financial
Instruments − Disclosure and Presentation”. The new standard
places increased emphasis on disclosures regarding risks associated with both
recognized and unrecognized financial instruments and how these risks are
managed. It is also intended to remove any duplicate disclosures and simplify
the disclosures about concentrations of risk, credit risk, liquidity risk and
price risk previously found in Section 3861.
Section
3863 carries forward the presentation requirements from Section 3861,
unchanged.
Section
1535 applies to all entities, regardless of whether they have financial
instruments and are subject to external capital requirements. The new section
requires disclosure of information about an entity’s objectives, policies and
processes for managing capital, as well as quantitative data about capital and
whether the entity has complied with any capital requirements.
We
adopted these new standards on September 1, 2008 and provided the required
disclosure in our interim consolidated financial statements.
In June
2007, the CICA issued Section 3031, “Inventories”. This standard requires the
measurement of inventories at the lower of cost and net realizable value and
includes guidance on the determination of cost, including allocation of
overheads and other costs to inventory. The standard also requires the
consistent use of either first-in, first-out (FIFO) or weighted average cost
formula to measure the cost of inventories and requires the reversal of previous
write-downs to net realizable value when there is a subsequent increase in the
value of inventories. The new standard applies to fiscal years beginning
on or after January 1, 2008. We adopted this new standard
on September 1, 2008, and its adoption had no effect on our
consolidated financial statements.
In June
2007, the CICA amended Section 1400, “General Standards of Financial Statement
Presentation” to include new requirements regarding an entity’s ability to
continue as a going concern. These amendments apply to fiscal years beginning on
or after January 1, 2008. We adopted these amendments on September 1, 2008, and
their adoption had no effect on our consolidated financial
statements.
To
be adopted after fiscal 2009
In
February 2008, the CICA issued Section 3064, “Goodwill and Intangible Assets”,
which supersedes Section 3062, “Goodwill and Other Intangible Assets” and
Section 3450, “Research and Development Costs”. Various changes have been made
to other sections of the CICA Handbook for consistency purposes. Section 3064
establishes standards for the recognition, measurement, presentation and
disclosure of goodwill subsequent to its initial recognition and
of intangible assets by profit-oriented enterprises. Standards concerning
goodwill remain unchanged from the standards included in Section 3062. This new
section applies to fiscal years beginning on or after October 1, 2008. We
will adopt this new standard on September 1, 2009, and have not yet determined
the effects its adoption will have on our consolidated
financial statements.
In
January 2009, the CICA issued Section 1582, “Business Combinations”, which
replaces Section 1581, “Business Combinations”. This new section establishes the
standards for the accounting of business combinations and states that all assets
and liabilities of an acquired business will be recorded at fair value.
Obligations for contingent considerations and contingencies will also be
recorded at fair value at the acquisition date. The standard also states that
acquisition-related costs will be expensed as incurred and that restructuring
charges will be expensed in the periods after the acquisition date. This
standard applies prospectively to business combinations with acquisition dates
on or after January 1, 2011; earlier adoption is permitted.
In January 2009, the CICA issued
Section 1601, “Consolidated Financial Statements”, which replaces Section 1600,
“Consolidated Financial Statements”, and establishes the standards for preparing
consolidated financial statements. This new section applies to fiscal years
beginning on or after January 1, 2011; earlier adoption is permitted. We are
currently evaluating the impact, if any, that adopting this standard will
have on our consolidated financial statements.
In
January 2009, the CICA issued Section 1602, “Non-controlling Interests”, which
establishes standards for the accounting of non-controlling interests of a
subsidiary in the preparation of consolidated financial statements
subsequent to a business combination. This new section applies to fiscal years
beginning on or after January 1, 2011; earlier adoption is permitted as of the
beginning of a fiscal year.
Should we
decide to early adopt one of these three new sections, we must adopt all three
on the same date.
RESULTS
OF OPERATIONS
The
following discussion and analysis of our consolidated financial condition and
results of operations for the periods ended May 31, 2008 and 2009, should be
read in conjunction with our interim consolidated financial statements and the
related notes thereto. Our interim consolidated financial statements have been
prepared in accordance with Canadian generally accepted accounting
principles (Canadian GAAP) and significant differences in measurement and
disclosure from United States generally accepted accounting principles
(U.S. GAAP) are set out in note 14 to our interim consolidated financial
statements. Our measurement currency is the Canadian dollar, although we
report our financial statements in US dollars. The following table sets
forth interim consolidated statements of earnings data in thousands of US
dollars, except per share data, and as a percentage of sales for the
periods indicated:
|
Three
months
ended
May
31, 2009
|
Three
months
ended
May
31, 2008
|
Nine
months
ended
May
31, 2009
|
Nine
months
ended
May
31, 2008
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
Sales
|
$ | 43,636 | $ | 48,581 | $ | 136,371 | $ | 132,847 | ||||||||
|
Cost
of sales (1)
|
16,441 | 19,004 | 52,274 | 55,208 | ||||||||||||
|
Gross
margin
|
27,195 | 29,577 | 84,097 | 77,639 | ||||||||||||
|
Operating
expenses
|
||||||||||||||||
|
Selling
and administrative
|
16,732 | 15,660 | 49,623 | 44,160 | ||||||||||||
|
Net
research and development
|
7,781 | 7,373 | 22,327 | 19,570 | ||||||||||||
|
Amortization
of property, plant and equipment
|
1,166 | 1,071 | 3,374 | 3,045 | ||||||||||||
|
Amortization
of intangible assets
|
1,355 | 1,015 | 3,920 | 2,469 | ||||||||||||
|
Impairment
of goodwill
|
21,713 | – | 21,713 | – | ||||||||||||
|
Total
operating expenses
|
48,747 | 25,119 | 100,957 | 69,244 | ||||||||||||
|
Earnings
(loss) from operations
|
(21,552 | ) | 4,458 | (16,860 | ) | 8,395 | ||||||||||
|
Interest
income
|
42 | 964 | 683 | 4,063 | ||||||||||||
|
Foreign
exchange gain (loss)
|
(4,687 | ) | (59 | ) | 971 | (907 | ) | |||||||||
|
Earnings
(loss) before income taxes and extraordinary gain
|
(26,197 | ) | 5,363 | (15,206 | ) | 11,551 | ||||||||||
|
Income
taxes
|
||||||||||||||||
|
Current
|
(88 | ) | 112 | 148 | (7,080 | ) | ||||||||||
|
Future
|
(2,763 | ) | 2,432 | 50 | 11,881 | |||||||||||
|
Recognition
of previously unrecognized future income tax assets
|
– | (5,324 | ) | – | (5,324 | ) | ||||||||||
| (2,851 | ) | (2,780 | ) | 198 | (523 | ) | ||||||||||
|
Earnings
(loss) before extraordinary gain
|
(23,346 | ) | 8,143 | (15,404 | ) | 12,074 | ||||||||||
|
Extraordinary
gain
|
– | 3,036 | - | 3,036 | ||||||||||||
|
Net
earnings (loss) for the period
|
$ | (23,346 | ) | $ | 11,179 | $ | (15,404 | ) | $ | 15,110 | ||||||
|
Basic
earnings (loss) before extraordinary gain per share
|
$ | (0.39 | ) | $ | 0.12 | $ | (0.25 | ) | $ | 0.18 | ||||||
|
Diluted
earnings (loss) before extraordinary gain per share
|
$ | (0.39 | ) | $ | 0.12 | $ | (0.25 | ) | $ | 0.17 | ||||||
|
Basic
and diluted net earnings (loss) per share
|
$ | (0.39 | ) | $ | 0.16 | $ | (0.25 | ) | $ | 0.22 | ||||||
|
Segmented
information:
|
||||||||||||||||
|
Sales:
|
||||||||||||||||
|
Telecom
Division
|
$ | 39,047 | $ | 42,843 | $ | 121,573 | $ | 115,643 | ||||||||
|
Life
Sciences and Industrial Division
|
4,589 | 5,738 | 14,798 | 17,204 | ||||||||||||
| $ | 43,636 | $ | 48,581 | $ | 136,371 | $ | 132,847 | |||||||||
|
Earnings
(loss) from operations:
|
||||||||||||||||
|
Telecom
Division
|
$ | (21,990 | ) | $ | 3,819 | $ | (18,518 | ) | $ | 6,657 | ||||||
|
Life
Sciences and Industrial Division
|
438 | 639 | 1,658 | 1,738 | ||||||||||||
| $ | (21,552 | ) | $ | 4,458 | $ | (16,860 | ) | $ | 8,395 | |||||||
|
Research
and development data:
|
||||||||||||||||
|
Gross
research and development
|
$ | 9,347 | $ | 8,843 | $ | 26,750 | $ | 23,904 | ||||||||
|
Net
research and development
|
$ | 7,781 | $ | 7,373 | $ | 22,327 | $ | 19,570 | ||||||||
|
(1)
|
The
cost of sales is exclusive of amortization, shown
separately.
|
|
Three
months
ended
May 31, 2009
|
Three
months
ended
May
31, 2008
|
Nine
months
ended
May
31, 2009
|
Nine
months
ended
May
31, 2008
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
Sales
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
|
Cost
of sales (1)
|
37.7 | 39.1 | 38.3 | 41.6 | ||||||||||||
|
Gross
margin
|
62.3 | 60.9 | 61.7 | 58.4 | ||||||||||||
|
Operating
expenses
|
||||||||||||||||
|
Selling
and administrative
|
38.3 | 32.2 | 36.4 | 33.2 | ||||||||||||
|
Net
research and development
|
17.8 | 15.2 | 16.4 | 14.7 | ||||||||||||
|
Amortization
of property, plant and equipment
|
2.7 | 2.2 | 2.5 | 2.3 | ||||||||||||
|
Amortization
of intangible assets
|
3.1 | 2.1 | 2.9 | 1.9 | ||||||||||||
|
Impairment
of goodwill
|
49.8 | – | 15.9 | − | ||||||||||||
|
Total
operating expenses
|
111.7 | 51.7 | 74.1 | 52.1 | ||||||||||||
|
Earnings
(loss) from operations
|
(49.4 | ) | 9.2 | (12.4 | ) | 6.3 | ||||||||||
|
Interest
income
|
0.1 | 1.9 | 0.5 | 3.1 | ||||||||||||
|
Foreign
exchange gain (loss)
|
(10.7 | ) | (0.1 | ) | 0.7 | (0.7 | ) | |||||||||
|
Earnings
(loss) before income taxes and extraordinary gain
|
(60.0 | ) | 11.0 | (11.2 | ) | 8.7 | ||||||||||
|
Income
taxes
|
||||||||||||||||
|
Current
|
(0.2 | ) | 0.2 | 0.1 | (5.3 | ) | ||||||||||
|
Future
|
(6.3 | ) | 5.0 | 0.0 | 8.9 | |||||||||||
|
Recognition
of previously unrecognized future income tax assets
|
– | (11.0 | ) | – | (4.0 | ) | ||||||||||
| (6.5 | ) | (5.8 | ) | 0.1 | (0.4 | ) | ||||||||||
|
Earnings
(loss) before extraordinary gain
|
(53.5 | ) | 16.8 | (11.3 | ) | 9.1 | ||||||||||
|
Extraordinary
gain
|
– | 6.2 | – | 2.3 | ||||||||||||
|
Net
earnings (loss) for the period
|
(53.5 | )% | 23.0 | % | (11.3 | )% | 11.4 | % | ||||||||
|
Segmented
information:
|
||||||||||||||||
|
Sales:
|
||||||||||||||||
|
Telecom
Division
|
89.5 | % | 88.2 | % | 89.1 | % | 87.0 | % | ||||||||
|
Life
Sciences and Industrial Division
|
10.5 | 11.8 | 10.9 | 13.0 | ||||||||||||
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||
|
Earnings
(loss) from operations:
|
||||||||||||||||
|
Telecom
Division
|
(50.4 | )% | 7.9 | % | (13.6 | )% | 5.0 | % | ||||||||
|
Life
Sciences and Industrial Division
|
1.0 | 1.3 | 1.2 | 1.3 | ||||||||||||
| (49.4 | )% | 9.2 | % | (12.4 | )% | 6.3 | % | |||||||||
|
Research
and development data:
|
||||||||||||||||
|
Gross
research and development
|
21.4 | % | 18.2 | % | 19.6 | % | 18.0 | % | ||||||||
|
Net
research and development
|
17.8 | % | 15.2 | % | 16.4 | % | 14.7 | % | ||||||||
|
(1)
|
The
cost of sales is exclusive of amortization, shown
separately.
|
SALES
For the
three months ended May 31, 2009, our global sales decreased 10.2% to $43.6
million from $48.6 million for the same period last year, with a 90%-10% split
in favor of our Telecom Division.
For the
nine months ended May 31, 2009, our global sales increased 2.7% to
$136.4 million from $132.8 million for the same period last year, with
an 89%-11% split in favor of our Telecom Division.
Telecom
Division
For the
three months ended May 31, 2009, sales of our Telecom Division decreased 8.9% to
$39.0 million from $42.8 million for the same period last
year.
The
following table summarizes information about sales of our Telecom Division for
the three months ended May 31, 2008 and 2009, in thousands of US
dollars:
|
Three
months
ended
May
31, 2009
|
Three
months
ended
May
31, 2008
|
Change
in
$
|
Change
in
%
|
|||||||||||||
|
(unaudited)
|
||||||||||||||||
|
Telecom
Division sales
|
$ | 39,047 | $ | 42,843 | $ | (3,796 | ) | (8.9 | )% | |||||||
|
(Gains)
losses on forward exchange contracts
|
1,425 | (1,020 | ) | 2,445 | 239.7 | |||||||||||
|
Telecom
Division sales, excluding gains/losses on forward exchange
contracts
|
40,472 | 41,823 | (1,351 | ) | (3.2 | ) | ||||||||||
|
Impact
of recent acquisitions
|
(7,266 | ) | (2,167 | ) | (5,099 | ) | (235.3 | ) | ||||||||
|
Organic
sales
|
$ | 33,206 | $ | 39,656 | $ | (6,450 | ) | (16.3 | )% | |||||||
For the
nine months ended May 31, 2009, sales of our Telecom Division increased 5.1% to
$121.6 million from $115.6 million for the same period
last year.
The
following table summarizes information about sales of our telecom Division for
the nine months ended May 31, 2008 and 2009, in thousands of US
dollars:
|
Nine
months
ended
May
31, 2009
|
Nine
months
ended
May
31, 2008
|
Change
in
$
|
Change
in
%
|
|||||||||||||
|
(unaudited)
|
||||||||||||||||
|
Telecom
Division sales
|
$ | 121,573 | $ | 115,643 | $ | 5,930 | 5.1 | % | ||||||||
|
(Gains)
losses on forward exchange contracts
|
2,959 | (3,507 | ) | 6,466 | 184.4 | |||||||||||
|
Telecom
Division sales, excluding gains/losses on forward exchange
contracts
|
124,532 | 112,136 | 12,396 | 11.1 | ||||||||||||
|
Impact
of recent acquisitions
|
(20,980 | ) | (2,167 | ) | (18,813 | ) | (868.2 | ) | ||||||||
|
Organic
sales
|
$ | 103,552 | $ | 109,969 | $ | (6,417 | ) | (5.8 | )% | |||||||
In the
third quarter of fiscal 2009, we reported year-over-year decrease in sales
mainly due to the impact of the worldwide economic recession that affected most
of our product lines during that period. In addition, as a portion of our
sales are denominated in Canadian dollars, euros or British pounds, the strength
of the US dollar against these currencies in the third quarter of fiscal 2009
compared to the third quarter of 2008, also had a negative impact on our sales
expressed in US dollars, which contributed to the decrease in sales compared to
the corresponding period last year. This was amplified by foreign exchange
losses on our forward exchange contracts, which are recorded in sales. In fact,
in the third quarter of fiscal 2009, foreign exchange losses on our forward
exchange contracts amounted to $1.4 million and accordingly reduced our
sales, compared to foreign exchange gains of $1.0 million for the same
period last year, which increased our sales; this represents a decrease in sales
of $2.4 million year-over-year.
However,
the decrease in sales in the third quarter of fiscal 2009 compared to the same
period last year was offset in part by the inclusion of the sales of
newly acquired Brix Networks and Navtel Communications products. In fact, sales
of Brix Network and Navtel Communications amounted to $7.3 million in the third
quarter of 2009, compared to $2.2 million for the same period last year.
Excluding sales of Brix Networks and Navtel Communications and the impact of the
foreign exchange gains or losses on our forward exchange contracts, our telecom
sales would have decreased 16.3% organically year-over-year during this period,
reflecting the impact of the global economic recession and the decrease of the
Canadian dollar, euro and British pound compared to the
US dollar.
During
the first nine months of fiscal 2009, we reported year-over-year sales increase
of 5.1% due to the contribution of newly acquired Brix Networks and Navtel
Communications. In fact, sales of Brix Network and Navtel Communications
amounted to $21.0 million for the first nine months of 2009, compared to $2.2
million for the same period last year. Our year over year growth would have
reached 11.1% if we exclude the impact of the foreign exchange gains and losses
on our forward exchange contracts that are recorded in our sales. In the first
nine months of fiscal 2009, foreign exchange losses on our forward exchange
contracts amounted to $3.0 million, compared to foreign exchange gains of $3.5
million for the same period last year, which represents a decrease in sales
of $6.5 million year-over-year. Excluding sales of Brix Networks and Navtel
Communications and the impact of the foreign exchange gains and losses on our
forward exchange contracts, our telecom sales would have decreased 5.8%
organically year-over-year during this period, reflecting the impact of the
global economic recession and the impact of a weaker Canadian dollar, euro and
British pound compared to the US dollar year-over-year. In fact, and
as mentioned above, the decrease in the value of these currencies versus
the US dollar year-over-year had a significant negative impact on our
sales, as a portion of these are denominated in Canadian dollars, euros and
British pounds and we report our results in US dollars.
During
the third quarter of fiscal 2009, our top customer represented 12.1% ($4.7
million) of our telecom sales, compared to 10.2% ($4.4 million) for the
same period last year. It represented 13.0% ($15.8 million) of our telecom sales
in the first nine months of fiscal 2009, compared to 9.9% ($11.4 million)
for the same period last year.
Life
Sciences and Industrial Division
For the
three months ended May 31, 2009, sales of our Life Sciences and Industrial
Division decreased $1.1 million, or 20.0% year-over-year to $4.6 million,
compared to $5.7 million for the same period last year.
For the
nine months ended May 31, 2009, sales of our Life Sciences and Industrial
Division decreased $2.4 million, or 14.0% year-over-year to
$14.8 million, from $17.2 million for the same period last
year.
A
significant portion of sales of that division are conducted through original
equipment manufacturer (OEM) agreements. Consequently, we are dependent, to some
extent, on the buying pattern of our customers. Moreover, a significant
part of our product offering is related to manufacturing applications of
consumer goods, which have been affected by the current state of the global
economy. Finally, the decrease in the value of the Canadian dollar, the euro and
the British pound versus the US dollar year-over-year had a negative impact on
sales of this division since a portion of these are denominated in currencies
other than the US dollars and we report our results
in US dollar.
Net
bookings
Overall,
for the two divisions, net accepted orders decreased 20.7% year-over-year to
$40.2 million in the third quarter of fiscal 2009, from
$50.7 million for the same period last year, for a book-to-bill ratio of
0.92.
This
decrease in bookings year-over-year is due to the global economic recession that
negatively impacted our orders in the third quarter of fiscal 2009. However, the
positive contribution of newly acquired Brix Networks product lines offset in
part the effect of the recession in our bookings.
Geographic
distribution
For the
three months ended May 31, 2009, sales to the Americas, Europe, Middle East and
Africa (EMEA) and Asia-Pacific (APAC) accounted for 57%, 29% and 14% of global
sales, respectively. For the corresponding period last year, sales to the
Americas, EMEA and APAC accounted for 60%, 28% and 12% of global sales,
respectively. For the nine months ended May 31, 2009, sales to the Americas,
EMEA and APAC accounted for 58%, 27% and 15% of global sales, respectively. For
the corresponding period last year, sales to the Americas, EMEA and APAC
accounted for 56%, 29% and 15% of global sales, respectively.
In the
third quarter of fiscal 2009, we reported year-over-year sales decreases (in
dollars) in the Americas and EMEA. In fact, sales to these regions
decreased (in dollars) 15.6% and 5.3%, respectively. Sales to APAC increased (in
dollars) 5.5% year-over-year. During the first nine months of fiscal 2009, we
reported year-over-year sales increases (in dollars) in the Americas and
APAC. Sales to these regions increased (in dollars) 5.0% and 4.6%, respectively.
Sales to EMEA decreased (in dollars) 3.1% year-over-year.
In the
Americas, the decrease in sales in the third quarter, compared to the same
period last year, comes from the United States where we posted a year-over-year
decrease in sales of 24.2%. The current global economic recession forced NSPs
and NEMs to reduce their capital and operating expenses and several customers
have announced significant reductions in capital expenditures and staffing
levels for calendar year 2009 in anticipation of lower revenue streams;
this directly affected our sales in the Unites States during the third quarter
of fiscal 2009, compared to the same period last year. Also, in the third
quarter of fiscal 2009, we recorded significant foreign exchange losses on our
forward exchange contracts, which are included in our sales to the Americas for
the most part, compared to forward exchange gains for the same period last
year. The decrease in sales to the United States in the third
quarter of fiscal 2009 was offset in part by a general increase of 29.5% of
sales made in Canada, despite the negative impact of a weaker Canadian dollar
versus the US dollar year-over-year on our Canadian-dollar-denominated sales.
Finally, the contribution of Brix Networks and Navtel Communications in the
third quarter also mitigated the effect of the recession on our sales in the
United States, as most of their sales are made in the United States
and Canada.
For the
nine months ended May 31, 2009, the increase in sales in the Americas compared
to the same period last year comes from Canada, where we posted sales growth of
our optical and protocol test solutions, especially with Tier-1 NSPs, despite
the negative impact of a weaker Canadian dollar versus the US dollar
year-over-year on our Canadian-dollar-denominated sales. This increase in sales
was offset in part by lower sales in the United States, mainly due to the
foreign exchange losses on our forward exchange contracts. However, excluding
the negative foreign exchange impact of our forward exchange contracts, sales to
the United States, which include sales from our recent acquisitions, would have
increased for the first nine months of fiscal 2009, compared to the same period
last year. Finally, the contribution of Brix Networks and Navtel
Communications in the first nine months of 2009 also mitigated the effect of the
recession on our sales in the United States.
The
decrease in sales in the EMEA market, in dollars, in the third quarter and the
first nine months of fiscal 2009, compared to the same periods last year, is due
to the impact of the global recession as we are witnessing caution from many of
our customers with their fiscal year budgets (calendar 2009). While we see this
as a delay and a change in spending patterns, we expect that investments in
next-generation access and transport networks will not be affected in the long
term, and we are positioning ourselves to capitalize on that, with recent
additions to our product portfolio and sales strategy. In fact, many Tier-1
carriers in EMEA are migrating their traditional circuit-switched core networks
to higher-speed, dense wavelength-division multiplexing (DWDM) and
next-generation packet-based architectures, which is creating a market
demand for our protocol test solutions as well as our DWDM, ROADM and fiber
characterization test kits. Furthermore, we are leveraging our FTTx leadership
gained in the United States to provide consultancy with many of the early
adopters in this field in EMEA. Also, as a portion of these orders in
this region are denominated in euros or British pounds, the strength of the US
dollar against these currencies in the third quarter and the first nine months
of fiscal 2009, had a negative impact on our sales expressed in US dollars for
this region, which contributed to the decrease in sales compared to the
corresponding periods last year.
In APAC,
we are seeing the continued return on investment of some specific optical,
protocol as well as life sciences and industrial products developed and
targeted for this important market. This increasingly competitive range, coupled
with our steadily expanding market presence, is responsible for the higher sales
in this region in the third quarter and the first nine months of fiscal
2009, compared to the same periods last year.
Through
our two divisions, we sell our products to a broad range of customers, including
network service providers, network equipment manufacturers, wireless operators,
cable TV operators, optical system and component manufacturers, as well as
customers in the life sciences and high-precision assembly sectors. In the third
quarter of fiscal 2009, our top customer accounted for 10.8% ($4.7 million)
of our global sales, and our top three customers accounted for 22.2% of our
global sales. In the corresponding period last year, no customer accounted for
more than 10% of our global sales, and our top three customers accounted for
14.9% of our global sales. For the nine months ended May 31, 2009, our top
customer accounted for 11.6% ($15.8 million) of our global sales, and our top
three customers accounted for 18.9% of our global sales. For the corresponding
period last year, no customer accounted for more than 10% of our global sales,
and our top three customers accounted for 14.5% of our
global sales.
GROSS
MARGIN
Gross
margin increased to 62.3% of sales for the three months ended May 31, 2009,
from 60.9% for the same period last year.
Gross
margin increased to 61.7% of sales for the nine months ended May 31, 2009,
compared to 58.4% for the same period last year.
The increase
in our gross margin in the third quarter and the first nine months of fiscal
2009, compared to the same periods last year, can be explained by the
following factors.
First, in
the third quarter and the first nine months of fiscal 2009, our gross margin was
positively affected by the significant increase in sales of our protocol
test solutions year-over-year, including those of newly acquired Brix Networks
and Navtel Communications, as these products have better margins than our
other test solutions.
Second,
during the third quarter and the first nine months of fiscal 2009, the value of
the Canadian dollar significantly fluctuated compared to the US dollar, which
impacted our gross margin for these periods, compared to the same periods
last year. In fact, since the beginning of fiscal 2009, the value of the
Canadian dollar significantly decreased compared to the US dollar; this resulted
in lower cost of good solds expressed in US dollars in the
statements of earnings, thus increasing our gross margin year-over-year.
However, the increase in the procurement costs of our raw materials purchased in
US dollars, as a result of the recent and significant decrease in the value
of the Canadian dollar compared to the US dollar, have begun
to materialize and will continue to materialize over time, in line
with the inventory turnover rate, as these raw materials are included in the
cost of goods sold of products manufactured with these parts.
In
addition, the operation of our manufacturing facilities in China resulted in a
larger portion of our sales coming from products manufactured in China; those
products have a lower cost of goods than those manufactured in our facilities in
Canada, thus resulting in an improvement in gross margin
year-over-year.
However,
foreign exchange losses on our forward exchange contracts, which are included in
our sales, had a negative impact on our gross margin in the third quarter
and in the first nine months of fiscal 2009, while this impact was positive
(foreign exchange gains) in the corresponding periods last year, thus reducing
our gross margin year-over-year.
Considering
the expected increase in sales of protocol products, including the full
contribution of Brix Networks and Navtel Communications in fiscal 2009 (which
tend to generate higher margins), the cost-effective design of our products, our
manufacturing activities in China and our tight control on operating costs,
we expect our gross margin to continue to improve in the future. However,
our gross margin may fluctuate quarter-over-quarter as our sales may fluctuate.
Furthermore, our gross margin can be negatively affected by the effects of the
actual worldwide recession, increased competitive pricing pressure, customer
concentration and/or consolidation, increased obsolescence costs, shifts in
customer and product mix, under-absorption of fixed manufacturing costs,
challenges encountered in the operation of our manufacturing facility in China
and increases in product offerings by other suppliers in our industry. Finally,
any increase in the strength of the Canadian dollar, compared to the
US dollar, would have a negative impact on our
gross margin for the remaining of 2009 and beyond.
SELLING
AND ADMINISTRATIVE
For the
three months ended May 31, 2009, selling and administrative expenses were $16.7
million, or 38.3% of sales, compared to $15.7 million, or 32.2% of
sales for the same period last year.
For the
nine months ended May 31, 2009, selling and administrative expenses were $49.6
million, or 36.4% of sales, compared to $44.2 million, or 33.2% of
sales for the same period last year.
Navtel
Communications and Brix Networks, which were acquired one month and two months
into the third quarter of fiscal 2008, respectively, contributed for the whole
periods to our selling and administrative expenses in the third quarter and the
first nine months of fiscal 2009, which caused these expenses to increase
compared to the same periods last year. In addition, selling expenses for Brix
Networks and Navtel Communications tend to be higher in percentage of sales
than the rest of our business, as their sales cycle is much longer and
complex than our other product lines.
In
addition, during the third quarter and the first nine months of fiscal 2009, we
maintained our sales and marketing activities to develop our markets and
leverage our significant research and development investments; this resulted
in higher sales and marketing expenditures (including additional employees
and expenses to support the launch of several new products and to increase
brand name recognition), compared to the corresponding periods last
year.
Finally,
during the third quarter of fiscal 2009, we had large orders sold directly to
international customers for which we had to pay commissions to distributors,
which increased our selling expenses year-over-year.
However,
during the third quarter and the first nine months of fiscal 2009, the
substantial and sudden decrease in the average value of the Canadian dollar,
compared to the US dollar year-over-year, had a significant positive impact
on our selling and administrative expenses, since a significant portion of
these expenses is denominated in Canadian dollars and since these expenses
increased year-over-year.
Also,
during the first quarter of fiscal 2008, we discontinued certain product
lines, which led to the layoff of some of our sales and marketing
personnel, resulting in severance expenses during the first nine months of
fiscal 2008.
For
fiscal 2009, considering the impact of the worldwide recession on our sales
level , the recent major increase in the value of the Canadian dollar and
the significant impact of the acquisitions of Brix Networks and Navtel
Communications on our selling and administrative expenses—whose selling expenses
tend to be higher, as their products deliver better margins compared to the
rest of our product lines—we expect our selling and administrative expenses
to increase in dollars and range between 37% and 39%. As these percentages are
higher than anticipated and in answer to the worldwide recession and the
increase strength of the Canadian dollar, we will adjust our selling and
administrative cost structure to account for the current economic environment,
while preserving as much as possible our sales and marketing efforts, both
domestic and international considering our goal of becoming the leading player
in the telecom test, measurement and monitoring space. Finally, any increase in
the strength of the Canadian dollar would also cause our selling and
administrative expenses to increase, as a significant portion of these
expenses are incurred in Canadian dollars.
RESEARCH
AND DEVELOPMENT
Gross
research and development expenses
For the
three months ended May 31, 2009, gross research and development expenses
totalled $9.3 million, or 21.4% of sales, compared to
$8.8 million, or 18.2% of sales for the same period last year.
For the
nine months ended May 31, 2009, gross research and development expenses totalled
$26.8 million, or 19.6% of sales, compared to $23.9 million, or
18.0% of sales for the same period last year.
Navtel
Communications and Brix Networks, which were acquired one month and two months
into the third quarter of fiscal 2008, respectively, contributed to our
gross research and development expenses during the entire periods in the
third quarter and the first nine months of fiscal 2009; this caused these
expenses to increase both in dollars and in percentage, compared to the same
periods last year. Indeed, Brix Networks and Navtel Communications tend
to incur a higher percentage of sales for research and development
expenses compared to our other product lines as their products are more
software-intensive, although they deliver higher margins than most of our
other product lines.
In
addition, we intensified our research and development activities by hiring
additional employees, namely in our software development center in Pune,
India, which resulted in increased gross research and development expenses
in the third quarter and the first nine months of fiscal 2009,
compared to the same periods last year.
However,
during the third quarter and the first nine months of fiscal 2009, the
significant and rapid decrease in the average value of the Canadian dollar,
compared to the US dollar, had a substantial positive effect on our gross
research and development expenses, as a significant portion of these expenses is
denominated in Canadian dollars and also because these expenses increased
year-over-year.
Also, in
the first quarter of fiscal 2008, we closed down our R&D operations in
Budapest, Hungary, and certain R&D projects, which resulted in severance
expenses during the first nine months of fiscal 2008.
Tax
credits
For the
three months ended May 31, 2009, tax credits from the Canadian federal and
provincial governments for research and development activities were
$1.6 million, or 16.8% of gross research and development expenses, compared
to $1.5 million, or 16.6% of gross research and development expenses for the
same period last year.
For the
nine months ended May 31, 2009, these tax credits were $4.4 million,
or 16.5% of gross research and development expenses, compared to $4.3
million, or 18.1% of gross research and development expenses for the same period
last year.
All our
research and development tax credits are denominated in Canadian dollars. The
significant decrease in the average value of the Canadian dollar, compared to
the US dollar, during the third quarter and the first nine months of fiscal
2009, compared to the same periods last year, had a negative impact on
these tax credits once expressed in US dollars.
However,
that decrease in tax credits was offset in part by increased research and
development activities in Canada, where we are eligible for tax
credits.
The
decrease in research and development tax credits as a percentage of gross
research and development expenses for the first nine months of fiscal 2009,
compared to the corresponding period last year, is mainly due to the fact
that the portion of gross research and development incurred in Canada, where we
are entitled to tax credits, was lower than last year following the
establishment of our new software development center in India as well as
the acquisition of Brix Networks, which is located in the United States. Our
research and development activities conducted outside Canada do not entitle us
to tax credits.
For
fiscal 2009, we expect that our net research and development expenses will
increase in dollars, and range between 16% and 18% of sales, given the impact of
the worldwide recession on our sales level, the recent major increase in
the value of the Canadian dollar, our focus on innovation, the addition of Brix
Networks and Navtel Communications (whose products are software-intensive), the
addition of software features in our products, our desire to gain market
share and our goal to exceed customer expectations. Also, we are increasingly
taking advantage of talent pools around the world with the establishment of a
research and development center focused on software development
in Pune, India. Finally, any increase in the strength of the Canadian
dollar in the upcoming quarters would cause our net research and development
expenses to increase, as a significant portion of these are incurred
in Canadian dollars.
AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
For the
three months ended May 31, 2009, amortization of property, plant and equipment
was $1.2 million, compared to $1.1 million for the same period last year. For
the nine months ended May 31, 2009, amortization expenses amounted to
$3.4 million, compared to $3.0 million for the same period last
year.
The
increased activities of our own manufacturing and research and development
facilities in China and India, the upgrade of our IT systems, and the impact of
the acquisition of Brix Networks and Navtel Communications in the third quarter
of fiscal 2008 resulted in an increase in our amortization expenses in
the third quarter and the first nine months of fiscal 2009, compared to the
corresponding periods last year. However, the significant decrease in the
average value of the Canadian dollar versus the US dollar in the third quarter
and the first nine months of fiscal 2009, compared to the same periods last
year, limited the increase in our amortization expenses year-over-year
as a significant portion of these expenses is denominated
in Canadian dollars.
AMORTIZATION
OF INTANGIBLE ASSETS
For the
three months ended May 31, 2009, amortization of intangible assets was $1.4
million, compared to $1.0 million for the same period last year. For
the nine months ended May 31, 2009, amortization of intangible assets was $3.9
million compared to $2.5 million for the same period last year.
The
increase in amortization expenses in the third quarter and the first nine months
of fiscal 2009, compared to the same periods last year, is mainly due to
the acquisition of Brix Networks core technology in the third quarter
of 2008.
IMPAIRMENT
OF GOODWILL
In the
third quarter of fiscal 2009, we performed our annual impairment test for
goodwill for all reporting units. Recoverability of goodwill is determined at
the reporting unit level, using a two-step approach. First, the carrying value
of the reporting units is compared to their fair value. If the carrying value of
a reporting unit exceeds its fair value, the second step is performed to
determine the amount of the impairment loss. Following the significant decrease
in our stock price following the pre-announcement of our third quarter results
on June 1, we came to the conclusion that the carrying value of one of our
reporting unit exceeded its fair value. Due to the extensive work involved in
performing the second step of the goodwill impairment test, we had not completed
our analysis at the time our interim consolidated financial statements were due.
However, we recorded an impairment charge of $21.7 million in the
third quarter of fiscal 2009, based on our best estimate to bring the goodwill
of this reporting unit to its fair value. We expect to complete step two of
the impairment test in the fourth quarter of 2009 and any adjustment to the
amount of impairment recorded in the third quarter will be recorded
prospectively during that period. This reporting unit reports to the Telecom
Division.
INTEREST
INCOME
Our
interest income mainly resulted from our short-term investments, less interests
and bank charges. For the three months ended May 31, 2009, interest income
amounted to $42,000, compared to $964,000 for the same period last year.
For the nine months ended May 31, 2009, interest income amounted to $683,000,
compared to $4.1 million for the same period last year.
The
decrease in interest income in the third quarter and the first nine months of
fiscal 2009, compared to the corresponding periods last year, is mainly due to
the decrease in our cash and short-term investments following the cash payment
of $41.0 million for the acquisitions of Brix Networks and Navtel Communications
in the third quarter of fiscal 2008, the redemption of share capital
amounting to $30.8 million over the last 12 months, in accordance with our share
buy-back programs as well as the significant reduction in interest rates
year-over-year. In addition, the significant decrease in the average value
of the Canadian dollar, compared to the US dollar year-over-year,
contributed to the decrease in our interest income in the third quarter and the
first nine months of fiscal 2009, compared to the same periods last year, as it
is denominated in Canadian dollars.
FOREIGN
EXCHANGE GAIN (LOSS)
Foreign
exchange gains and losses are mainly the result of the translation of operating
activities denominated in currencies other than the Canadian
dollar.
For the
three months ended May 31, 2009, the foreign exchange loss amounted to $4.7
million, compared to $59,000 for the same period last year.
For the
nine months ended May 31, 2009, the foreign exchange gain amounted to $971,000,
compared to a foreign exchange loss of $907,000 for the same period last
year.
During
the third quarter of fiscal 2009, the value of the Canadian dollar significantly
increased versus the US dollar compared to the previous quarter, which
resulted in a significant foreign exchange loss of $4.7 million during that
period. In fact, the period-end value of the Canadian dollar increased 16.4% to
CA$1.0917 = US$1.00 in the third quarter of fiscal 2009 compared to CA$1.2707 =
US$1.00 at the end of the previous quarter.
During
the first nine months of fiscal 2009, we witnessed huge volatility in the value
of the Canadian dollar as it fluctuated compared to the US dollar,
which overall resulted in a foreign exchange gain of $971,000. In fact, the
period-end value of the Canadian dollar significantly decreased 14.1% in the
first quarter of fiscal 2009 compared to the US dollar, which generated a
foreign exchange gain of $4.6 million, but increased 16.4 % in the third quarter
of 2009 compared to the previous quarter. Overall for the period, the period-end
value of the Canadian dollar decreased 2.7% to CA$1.0917 = US$1.00, compared to
CA$1.0626 = US$1.00 at the end of fiscal 2008.
During
the third quarter of fiscal 2008, the value of the Canadian dollar was
relatively stable (close to par) compared to the US dollar. This resulted in a
small foreign exchange loss of $59,000 during that period. In fact the
period-end value of the Canadian dollar slightly increased 1.4% in the third
quarter of fiscal 2008, compared to the
previous quarter.
During
the first nine months of fiscal 2008, the value of the Canadian dollar
significantly increased compared to the US dollar, which resulted in a
significant foreign exchange loss of $907,000 during that period. In fact, the period-end
value of the Canadian dollar for the first nine months of fiscal 2008
increased 6.3%, compared
to August 31, 2007.
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 decrease in the average value of the
Canadian dollar in the third quarter and the first nine months of fiscal
2009, compared to the same periods last year, resulted in a significant and
positive impact on our financial results for these periods. This was amplified
by the fact that our operating activities incurred in Canadian dollars increased
year-over-year. In fact, the average value of the Canadian dollar in the
third quarter of fiscal 2009 was CA$1.2153 = US$1.00 versus CA$1.0047 = US$1.00
for the same period last year, representing a decrease of 17.3% in the
average value of the Canadian dollar year-over-year. For the first nine months
of fiscal 2009, the average value of the Canadian dollar was CA$1.1996 =
US$1.00 versus CA$1.0005 = US$1.00 for the same period last year, representing
a decrease of 16.6% in the average value of the Canadian dollar
year-over-year.
We manage
our exposure to currency risks with forward exchange contracts. In addition,
some of our Canadian entities’ operating activities are denominated in US
dollars or other currencies, which further hedges these risks. However, any
increase in the value of the Canadian dollar compared to the US dollar in
upcoming quarters would have a negative impact on our operating
results.
INCOME
TAXES
For the
three months ended May 31, 2009, we recorded an income tax recovery of $2.9
million, compared to $2.8 million for the same period last
year.
For the
nine months ended May 31, 2009, we recorded an income tax expense of $198,000,
compared to an income tax recovery of $523,000 for the same period
last year.
For the
three months ended May 31, 2009, we reported an income tax recovery of $2.9
million on a loss before income taxes of $26.2 million, for an effective
income tax rate of 10.9%. For the nine months ended May 31, 2009,
we reported income tax expenses of $198,000 on a loss before income
taxes of $15.2 million, for an effective income tax rate of 1.3%. Our
combined Canadian and provincial statutory tax rate is 31%. First, a portion of
the impairment of goodwill is not deductible for tax purposes. In addition,
a significant portion of our foreign exchange gain (loss) is created by the
translation of financial statements of our foreign integrated subsidiaries, and
is therefore non-taxable or non-deductible. On the other hand, we continue
to maintain a valuation allowance for some of our subsidiaries at loss and we
have some non-deductible expenses, such as stock-based compensation costs.
Otherwise, the actual tax rate would have been closer to the statutory tax rate
for all periods.
For the
three months ended May 31, 2008, we reported an income tax recovery of $2.8
million on earnings before income taxes and extraordinary gain of $5.4
million, for an effective income tax rate of 51.8%. During the third quarter of
fiscal 2008, considering the expected positive impact of the acquisitions of
Brix Networks and Navtel Communications on future years’ taxable income of our
US subsidiaries (federal level), and because reported taxable income of these
subsidiaries was higher than expected, we concluded that is was more likely than
not that all future income taxes of our consolidated US group would be
recovered. Consequently, we reversed the valuation allowance previously recorded
against future income tax assets in the amount of $7.6 million. The portions of
the valuation allowance that was reversed during the quarter, and that was
attributable to the impact of the acquisitions of Brix Networks and Navtel
Communications, in the amount of $1.6 million and $652,000, respectively, were
included in the purchase price allocation of the related acquired businesses.
The remaining of the reversal, in the amount of $5.3 million, has been
recorded in the income taxes in the statements of earnings for the three and the
nine months ended May 31, 2008. Excluding this unusual tax recovery, we would
have reported an income tax expense of $2.5 million on earnings before income
taxes and extraordinary gain of $5.4 million, for an effective income tax rate
of 47.4%. In fact, during the third quarter of fiscal 2008, some expenses were
non-deductible for tax purposes (mainly stock-based compensation expenses and
foreign exchange losses created by the translation of financial statements
of our foreign integrated subsidiaries) and some revenues were non-taxable
(namely certain R&D tax credits). In addition, we continued to maintain
a valuation allowance for some of our subsidiaries at loss and we utilized
previously unrecognized future income tax assets, mainly in the United States.
Finally, we recorded income tax expenses for minimum taxes payable in certain
tax jurisdictions, whose taxes are not related to pre-tax earnings. Otherwise,
actual tax rate would have been closer to the statutory
tax rate.
For the
nine months ended May 31, 2008, we reported an income tax recovery of $523,000
on earnings before income taxes and extraordinary gain of $11.6 million, for an
effective income tax rate of 4.5%. The distortion between income taxes and
earnings before income taxes and extraordinary gain for that period can be
explained by the following factors. First and as previously mentioned,
during the third quarter of fiscal 2008, we reversed the valuation allowance
previously recorded in our US subsidiaries (US federal level), which resulted in
an unusual income tax recovery of $5.3 million during the first nine
months of fiscal 2008. In addition, on December 14, 2007, reductions to the
Canadian federal statutory tax rate, previously announced by the Canadian
federal government were enacted. Therefore, our Canadian federal future income
tax assets decreased by $1.5 million and generate a one-time future
income tax expense for the same amount during the first nine months of fiscal
2008. However, during the second quarter of fiscal 2008, based on these new
enacted tax rates, we reviewed our tax strategy for the future use of our
Canadian federal operating losses, tax deductions, timing differences and
R&D tax credits to minimize income taxes payable on future years’
taxable income, by amending our prior year’s income tax returns to create a net
operating loss to be carried back to prior years, which will release previously
used research and development tax credits. This resulted in an increase of our
tax-related assets of $2.7 million and a one-time income tax recovery for
the same amount during the first nine months of fiscal 2008. Excluding these
three unusual tax items, we would have reported an income tax expense of $6.0
million on earnings before income taxes and extraordinary gain of $11.6 million,
for an effective income tax rate of 51.9%. In fact, during the first nine months
of fiscal 2008, some expenses were non-deductible for tax purposes (mainly
stock-based compensation expenses and foreign exchange losses created by the
translation of financial statements of our foreign integrated subsidiaries) and
some revenues were non-taxable (namely certain R&D tax credits). In
addition, we continued to maintain a valuation allowance for some of
our subsidiaries at loss, and we utilize previously unrecognized future income
tax assets. Finally, we recorded income tax expenses for minimum taxes payable
in certain tax jurisdictions, whose taxes are not related to pre-tax earnings.
Otherwise, the actual tax rate would have been closer to the statutory
tax rate.
Please
refer to note 11 to our interim consolidated financial statements for details on
income taxes and a full reconciliation of the income tax
provision.
LIQUIDITY
AND CAPITAL RESOURCES
Cash requirements
and capital resources
As at May
31, 2009, our cash and short-term investments totalled $64.5 million, while our
working capital was at $116.6 million. Our cash and short-term investments
increased $6.4 million in the third quarter of fiscal 2009. During that period,
we recorded an unrealized foreign exchange gain of $8.4 million on our cash and
short-term investments. This unrealized foreign exchange gain resulted from the
translation, in US dollars, of our Canadian-dollar-denominated cash
and short-term investments and was included in the accumulated other
comprehensive income in the balance sheet. In addition, operating activities
generated cash flows of $1.8 million during the third quarter of fiscal 2009. On
the other hand, we made cash payments of $1.5 million for the purchase of
capital assets and $2.4 million for the payment of a contingent consideration
upon a business combination.
Our
short-term investments consist of commercial paper issued by 9 (14 as at
February 28, 2009) high-credit quality corporations and trusts; therefore, we
consider the risk of non-performance of these financial instruments
to be limited. None of these debt instruments are expected to be
affected by a liquidity risk, and none of them represent asset-backed commercial
paper. For the
purposes of managing our cash position, we have established a cash
management policy, which we follow and monitor on a regular basis. These
short-term investments will be used for working capital and other general
corporate purposes, including other potential acquisitions, the payment
of a contingent consideration and our share repurchase
program.
We
believe that our cash balances and short-term investments will be sufficient to
meet our liquidity and capital requirements for the foreseeable future,
including the cash contingent consideration payable for capital assets as well
as the effect of our normal course issuer bid. In addition to these assets, we
have unused available lines of credit totaling $13.5 million for working capital
and other general corporate purposes and unused lines of credit
of $16.3 million for foreign currency exposure related to forward
exchange contracts. However, possible operating losses and/or possible
investments in or acquisitions of complementary businesses, products
or technologies may require additional financing. There can be no assurance
that additional debt or equity financing will be available when required or,
if available, that it can be secured on satisfactory
terms.
Sources
and uses of cash
We
finance our operations and meet our capital expenditure requirements mainly
through cash flows from operating activities, the use of our cash and short-term
investments as well as the issuance of subordinate voting shares.
Operating
activities
Cash
flows provided by operating activities were $1.8 million for the three months
ended May 31, 2009, compared to $1.4 million for the same period last year.
Cash flows provided by operating activities were $15.5 million for the nine
months ended May 31, 2009, compared to $8.6 million for the same period
last year.
Cash
flows provided by operating activities in the third quarter of fiscal 2009 were
mainly attributable to the net earnings after items not affecting cash of $1.1
million, and to the positive net change in non-cash operating items
of $774,000, mainly due to the positive effect on cash of the
$3.5 million decrease in our accounts receivable (due to timing
of sales) and the $568,000 decrease in our inventories; this was mostly offset
by the negative effect on cash of the $1.8 million increase in our income taxes
and tax credits recoverable (tax credits earned during the quarter and not yet
recovered) and the $1.3 million decrease in our accounts payable and accrued
liabilities, mainly due to timing of purchases
and payments.
Cash
flows provided by operating activities in the first nine months of fiscal 2009
were mainly attributable to the net earnings after items not affecting cash of
$17.2 million, offset by the negative net change in non-cash operating items
of $1.7 million mainly due to the negative effect on cash of the $2.2
million increase in our income taxes and tax credits recoverable (tax credits
earned during the period and not yet recovered), the $338,000 increase in our
prepaid expenses and the $539,000 decrease in our accounts payable and accrued
liabilities, mainly due to timing of purchases and payments; this was
offset in part by the positive effect on cash of the $639,000 million decrease
in our accounts receivable (due to timing of sales) and the $689,000
decrease in our inventories.
Cash
flows provided by operating activities in the third quarter of fiscal 2008 were
mainly attributable to the net earnings after items not affecting cash of $7.4
million, offset in part by the negative net change in non-cash operating items
of $6.0 million. The negative net change in non-cash operating items was
mainly due to the negative effect on cash of the increase of $1.8
million of our income tax and tax credits recoverable as well as the increase
of $3.6 million of our inventories. The increase in our income taxes
and tax credits is mainly due to the increase of our tax credits
recoverable that were earned during the quarter but not yet recovered. The
increase in our inventories resulted from an expected increase in sales
activities for the next quarter.
Cash
flows provided by operating activities in the first nine months of fiscal 2008
were mainly attributable to the net earnings after items not affecting cash of
$26.7 million, offset in part by the negative net change in non-cash operating
items of $18.0 million; this negative net change in non-cash operating
items was mainly due to the negative effect on cash of the $11.4 million
increase in our income taxes and tax credits recoverable, the $2.9 million
increase in our inventories as well as the $3.1 million decrease in our accounts
payable and accrued liabilities. The increase in our income taxes and tax
credits recoverable is mainly due to the increase of our tax credits recoverable
following the change in our tax strategy explained elsewhere in this document.
This increase was for the most part offset by the positive effect on cash of the
decrease of our future income tax assets, which also resulted from the change in
the tax strategy. The increase in our income taxes and tax credits recoverable
is also due to tax credits earned during the period but not yet recovered. The
increase in our inventories resulted from expected increased sales activities
for the next quarter. The decrease in our accounts payable and accrued
liabilities is due to the timing of certain purchases and
payments.
Investing
activities
Cash
flows used by investing activities were $420,000 for the three months ended May
31, 2009, compared to cash flows provided by investing activities of
$323,000 for the same period last year. In the third quarter of fiscal
2009, we disposed (net of acquisitions) of $3.5 million worth of
short-term investments but paid $1.5 million for the purchase of capital
assets and $2.4 million for a contingent consideration on a business
combination. For the corresponding period last year, we disposed (net of
acquisitions) of $42.6 million worth of short-term investments to pay
for the cash consideration of $40.9 million for the two business
combinations closed during the quarter. On the other hand, we paid $1.4
million for the purchase of capital assets.
Cash
flows provided by investing activities were $15.8 million for the nine months
ended May 31, 2009, compared to cash flows used by investing activities of
$3.8 million for the same period last year. In the first nine months
of fiscal 2009, we disposed (net of acquisitions) of $24.1
million worth of short-term investments but paid $6.0 million for the
purchase of capital assets and $2.4 million for a contingent
consideration on a business combination. For the corresponding period last year,
we disposed (net of acquisitions) of $42.2 million worth
of short-term investments to pay $40.9 million for the cash consideration
of the two business combinations closed during that period. On the other hand,
we paid $5.1 million for the purchase of capital assets.
Financing
activities
Cash
flows provided by financing activities were $10,000 for the three months ended
May 31, 2009, compared to cash flows used by financing activities of $2.4
million for the same period last year. During the third quarter of fiscal
2009, we received $10,000 from the exercise of stock options. For the
corresponding period last year, we redeemed share capital for a cash
consideration of $3.2 million. However, our bank loan increased $786,000 during
that period.
Cash
flows used by financing activities were $26.0 million for the nine months ended
May 31, 2009, compared to $1.8 million for the same period last year.
During the first nine months of fiscal 2009, we paid $26.1 million for the
redemption of share capital under our share repurchase programs. For the
corresponding period last year, we redeemed share capital for $3.4 million.
However, our bank loan increased $1.5 million.
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. Foreign exchange
translation gains and losses on these contracts are recognized
as an adjustment of the revenues when the corresponding sales are
recorded.
As at May
31, 2009, we held forward exchange contracts to sell US dollars at various
forward rates, which are summarized as follows:
|
Expiry
dates
|
Contractual
amounts
|
Weighted average contractual
forward
rates
|
||||||
|
June
2009 to August 2009
|
$ | 9,100,000 |
1.0651
|
|||||
|
September
2009 to August 2010
|
27,600,000 | 1.1016 | ||||||
|
September
2010 to August 2011
|
14,600,000 | 1.1221 | ||||||
|
September
2011
|
1,000,000 | 1.1278 | ||||||
|
Total
|
$ | 52,300,000 | 1.1015 | |||||
The fair
value of forward exchange contracts, which represents the amount that the
company would receive or pay to settle the contracts based on the forward
exchange rate at period end, amounted to net gains of $62,000 and $566,000
as at August 31, 2008 and May 31, 2009,
respectively.
CONTINGENCIES
Class
action
On
November 27, 2001, a class-action suit was filed in the United States District
Court for the Southern District of New York against EXFO, four of the
underwriters of our Initial Public Offering and some of our executive officers
pursuant to the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder and Sections 11, 12 and 16 of the Securities Act of 1933. This class
action alleges that EXFO’s registration statement and prospectus filed with the
Securities and Exchange Commission on June 29, 2000, contained material
misrepresentations and/or omissions resulting from (i) the underwriters
allegedly soliciting and receiving additional, excessive and undisclosed
commissions from certain investors in exchange for which they allocated material
portions of the shares issued in connection with EXFO’s Initial Public
Offering; and (ii) the underwriters allegedly entering into agreements with
customers whereby shares issued in connection with EXFO’s Initial Public
Offering would be allocated to those customers in exchange for which customers
agreed to purchase additional amounts of shares in the after-market
at predetermined prices.
On April
19, 2002, the plaintiffs filed an amended complaint containing master
allegations against all of the defendants in all of the 310 cases included in
this class action and also filed an amended complaint containing allegations
specific to four of EXFO’s underwriters, EXFO and two of our executive officers.
In addition to the allegations mentioned above, the amended complaint alleges
that the underwriters (i) used their analysts to manipulate the stock
market; and (ii) implemented schemes that allowed issuer insiders to sell
their shares rapidly after an initial public offering and benefit from high
market prices. As concerns EXFO and our two executive officers in particular,
the amended complaint alleges that (i) EXFO’s registration statement was
materially false and misleading because it failed to disclose the additional
commissions and compensation to be received by underwriters; (ii) the two
named executive officers learned of or recklessly disregarded the alleged
misconduct of the underwriters; (iii) the two named executive officers
had motive and opportunity to engage in alleged wrongful conduct due to personal
holdings of EXFO’s stock and the fact that an alleged artificially inflated
stock price could be used as currency for acquisitions; and (iv) the two named
executive officers, by virtue of their positions with EXFO, controlled it and
the contents of the registration statement and had the ability to prevent its
issuance or cause it to be corrected. The plaintiffs in this suit seek an
unspecified amount for damages suffered.
In July
2002, the issuers filed a motion to dismiss the plaintiffs’ amended complaint
and a decision was rendered on February 19, 2003. Only one of the claims
against EXFO was dismissed. On October 8, 2002, the claims against its
officers were dismissed pursuant to the terms of Reservation of Rights and
Tolling Agreements entered into with the plaintiffs.
In June
2004, an agreement of partial settlement was submitted to the court for
preliminary approval. The proposed partial settlement was between the
plaintiffs, the issuer defendants in the consolidated actions, the issuer
officers and directors named as defendants, and the issuers’ insurance
companies. The court granted the preliminary approval motion on
February 15, 2005, subject to certain modifications. On August 31,
2005, the court issued a preliminary order further approving the modifications
to the settlement and certifying the settlement classes. The court also
appointed the notice administrator for the settlement and ordered that notice of
the settlement be distributed to all settlement class members by
January 15, 2006. The settlement fairness hearing occurred on
April 24, 2006, and the court reserved decision at that time.
While the
partial settlement was pending approval, the plaintiffs continued to litigate
against the underwriter defendants. The district court directed that the
litigation proceed within a number of “focus cases” rather than in all of the
310 cases that have been consolidated. EXFO's case is not one of
these focus cases. On October 13, 2004, the district court certified
the focus cases as class actions. The underwriter defendants appealed
that ruling, and on December 5, 2006, the Court of Appeals for the Second
Circuit reversed the district court’s class
certification decision.
On April
6, 2007, the Second Circuit denied the plaintiffs’ petition for rehearing of
that decision and, on May 18, 2007, the Second Circuit denied the
plaintiffs’ petition for rehearing en banc. In light
of the Second Circuit’s opinion, liaison counsel for all issuer defendants,
including EXFO, informed the court that this settlement could not be approved,
because the defined settlement class, like the litigation class, could not be
certified. On June 25, 2007, the district court entered an order
terminating the settlement agreement. On August 14, 2007,
the plaintiffs filed their second consolidated amended class action
complaints against the focus cases and, on September 27, 2007, again moved
for class certification. On November 12, 2007, certain defendants
in the focus cases moved to dismiss the second consolidated amended class action
complaints. On March 26, 2008, the district court denied the motions to dismiss,
except as to Section 11 claims raised by those plaintiffs who sold their
securities for a price in excess of the initial offering price and those
who purchased outside of the previously certified class period. Briefing on the
class certification motion was completed in May 2008. That motion was withdrawn
without prejudice on October 10, 2008. On April 2, 2009, a stipulation and
agreement of settlement between the plaintiffs, issuer defendants and
underwriter defendants was submitted to the Court for preliminary
approval. The Court granted the plaintiffs’ motion for preliminary
approval and preliminarily certified the settlement classes on June 10,
2009. The settlement fairness hearing has been scheduled for
September 10, 2009. Following the hearing, if the Court determines
that the settlement is fair to the class members, the settlement will
be approved and the case against EXFO and our individual defendants will be
dismissed with prejudice.
Due to
the inherent uncertainties of litigation, the final outcome of the case
including the approval of the settlement described above is uncertain and it is
not possible to determine the amount of any possible losses. We will
continue to defend our position in this litigation that the claims against EXFO,
and our officers, are without merit. Accordingly, no provision for this case has
been made in the interim consolidated financial statements
as at May 31, 2009.
Contingent
consideration
Following
the purchase of assets during the nine months ended May 31, 2009, we had a
contingent cash consideration of up to $1,000,000, payable based upon the
achievement of a certain booking volume in the next 24 months following the
purchase.
SHARE
CAPITAL AND STOCK-BASED COMPENSATION PLANS
Share
capital
As at
June 30, 2009, EXFO had 36,643,000 multiple voting shares outstanding, entitling
to ten votes each, and 22,978,402 subordinate voting shares outstanding. The
multiple voting shares and the subordinate voting shares are unlimited as to
number and without par value. On December 18, 2008, we redeemed
7.7 million subordinate voting shares for a total consideration of CA$30 million
(US$24.9 million), plus related fees of $576,000, in accordance with our
substantial issuer bid program.
Long-Term
Incentive Plan and Deferred Share Unit Plan
The
aggregate number of subordinate voting shares covered by stock options,
restricted share units (RSUs) and deferred share units (DSUs) granted under the
Long-Term Incentive Plan and the Deferred Share Unit Plan was 3,203,703 as at
May 31, 2009. 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 our
Board of Directors and to our Management and Corporate Officers
as at May 31, 2009:
|
Stock Options
|
Number
|
%
of issued and outstanding
|
Weighted
average exercise price
|
|||
|
Chairman
of the Board, President and CEO (one individual)
|
179,642
|
10%
|
$9.05
|
|||
|
Board
of Directors (four individuals)
|
148,807
|
9%
|
$6.19
|
|||
|
Management
and Corporate Officers (eight individuals)
|
212,139
|
12%
|
$14.49
|
|||
|
540,588
|
31%
|
$10.40
|
||||
|
Restricted Share
Units
|
Number
|
%
of issued and outstanding
|
||||
|
Chairman
of the Board, President and CEO (one individual)
|
140,459
|
10%
|
||||
|
Management
and Corporate Officers (eleven individuals)
|
481,554
|
35%
|
||||
|
622,013
|
45%
|
|||||
|
Deferred Share
Units
|
Number
|
%
of issued and outstanding
|
||||
|
Board
of Directors (five individuals)
|
105,213
|
100%
|
OFF-BALANCE
SHEET ARRANGEMENTS
As at May
31, 2009, our off-balance sheet arrangements consisted of letters of guarantee.
As at May 31, 2009, our letters of guarantee amounted to $6.1
million; these letters of guarantee expire at various dates through fiscal
2011. From this amount, we had $1.3 million worth of letters of guarantee for
our own selling and purchase requirements, which were reserved from one of our
lines of credit. The remainder in the amount of $4.8 million was used to
secure our line of credit in Chinese currency. This line of credit was unused
as at May 31, 2009.
VARIABLE
INTEREST ENTITY
As of May
31, 2009, we did not have interests in any variable interest
entities.
RISKS
AND UNCERTAINTIES
Over the
past several years, we have managed our business in a difficult environment;
focused on research and development programs for new and innovative products
aimed at expected growth pockets in our sector; continued the development of our
domestic and international markets; and made strategic acquisitions. However, we
operate in a highly competitive sector that is in constant evolution and,
as a result, we encounter various risks and uncertainties that must be given
appropriate consideration in our strategic management policies.
We are
exposed to currency risks due to the export of our Canadian-manufactured
products, the large majority of which are denominated
in US dollars. These risks are partially hedged by operating expenses
denominated in US dollars and forward exchange contracts. The
increased strength of the Canadian dollar, compared to the US dollar, over
the last few years, has caused our operating expenses to increase significantly.
Any further increase in the value of the Canadian dollar in the coming
months would negatively affect our results of operations.
In
addition, our business is subject to the effects of general economic conditions
in North America and throughout the world and, more particularly, market
conditions in the telecommunications industry. In the past, our operating
results were adversely affected by reduced telecom capital spending in North
America, Europe and Asia and by general unfavorable economic conditions. In
particular, sales to network service providers in North America were
significantly and adversely affected by a downturn in 2001 in the
telecommunications industry. With the recession in key geographic
regions or markets, we may experience a material adverse impact on our
business, operating results and financial condition.
Also,
risks and uncertainties related to the telecommunications test, measurement and
monitoring industry involve the rapid development of new products that may have
short life cycles and require extensive research and development; the difficulty
of adequately predicting market size and trends; the difficulty of retaining
highly skilled employees; and the ability to quickly adapt our cost structure to
changing market conditions in order to achieve profitability.
Furthermore,
given our strategic goals for growth and competitive positioning in our
industry, we are continuously expanding into international markets, including
our manufacturing facilities in China and our software development center
in India. This exposes us to certain risks and uncertainties, namely changes in
local laws and regulations, multiple technological standards, protective
legislation, pricing pressure, cultural differences and the management
of operations in China and India.
Also,
while strategic acquisitions, like those we have made in the past, those closed
in fiscal 2008 and possibly others in the future, are essential to our long-term
growth, they also expose us to certain risks and uncertainties related to the
rapid and effective integration of these businesses as well as their products,
technologies and personnel. Finally, integration requires the dedication of
management resources, which may detract their attention from our day-to-day
business and operations.
The
current economic environment of our industry could also result in some of our
customers experiencing difficulties and, consequently, this could have a
negative effect on our results, especially in terms of future sales and
recoverability of accounts receivable. However, the sectorial and
geographic diversity of our customer base provides us with a reasonable
level of protection in this area. Finally, other financial instruments, which
potentially subject us to credit risks, consist mainly of cash,
short-term investments and forward exchange contracts. Our short-term
investments consist of debt instruments issued by high-credit quality
corporations and trusts. Our cash and forward exchange contracts are held with
or issued by high-credit quality financial institutions; therefore,
we consider the risk of non-performance on these instruments to be
limited.
For a
more complete understanding of risk factors that may affect us, please refer to
the risk factors set forth in our disclosure documents published with securities
commissions at www.EXFO.com or www.sedar.com in Canada
or at www.sec.gov/edgar.shtml in the U.S.
Non-GAAP
financial measure
We
provide a non-GAAP financial measure (EBITDA*) as supplemental information
regarding our operational performance. We use EBITDA for the purposes of
evaluating our historical and prospective financial performance, as well as our
performance relative to our competitors. This measure also helps us to plan and
forecast future periods as well as to make operational and strategic decisions.
We believe that providing this information to our investors, in addition to
the GAAP measures, allows them to see the company’s results through the eyes of
management, and to better understand our historical and future financial
performance.
The
presentation of this additional information is not prepared in accordance with
GAAP. Therefore, the information may not necessarily be comparable to that of
other companies and should be considered as a supplement
to, not a substitute for, the corresponding measures calculated
in accordance with GAAP.
The
following table summarizes the reconciliation of EBITDA to GAAP net earnings
(loss), in thousands of US dollars:
|
Three months
ended
May
31,
2009
|
Nine
months
ended
May
31,
2009
|
Three
months
ended
May
31,
2008
|
Nine
months
ended
May
31,
2008
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
|
GAAP
net earnings (loss) for the period
|
$ | (23,346 | ) | $ | (15,404 | ) | $ | 11,179 | $ | 15,110 | ||||||
|
Add
(deduct):
|
||||||||||||||||
|
Amortization
of property, plant and equipment
|
1,166 | 3,374 | 1,071 | 3,045 | ||||||||||||
|
Amortization
of intangible assets
|
1,355 | 3,920 | 1,015 | 2,469 | ||||||||||||
|
Interest
income
|
(42 | ) | (683 | ) | (964 | ) | (4,063 | ) | ||||||||
|
Income
taxes
|
(2,851 | ) | 198 | (2,780 | ) | (523 | ) | |||||||||
|
Impairment
of goodwill
|
21,713 | 21,713 | – | – | ||||||||||||
|
Extraordinary
gain
|
– | – | (3,036 | ) | (3,036 | ) | ||||||||||
|
EBITDA
for the period
|
$ | (2,005 | ) | $ | 13,118 | $ | 6,485 | $ | 13,002 | |||||||
|
EDITDA
in percentage of sales
|
(4.6 | )% | 9.6 | % | 13.3 | % | 9.8 | % | ||||||||
|
*
|
EBITDA
is defined as net earnings (loss) before interest, income taxes,
amortization of property, plant and equipment, amortization of intangible
assets, impairment of goodwill and extraordinary
gain.
|
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