UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
6-K
Report
of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16
Under
the Securities Exchange Act of 1934
For the
month of January 2010
EXFO
Electro-Optical Engineering Inc.
(Translation
of registrant’s name into English)
400
Godin Avenue, Quebec, Quebec, Canada G1M 2K2
(Address
of principal executive offices)
Indicate
by check mark whether the registrant files or will file annual reports under
cover of Form 20-F or Form 40-F.
|
Form
20-F þ
|
Form
40-F o
|
Indicate
by check mark whether the registrant by furnishing the information contained in
this Form is also thereby furnishing the information to the Commission pursuant
to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
|
Yes
o
|
No
þ
|
If “Yes”
is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-______.
On
January 12, 2010, EXFO Electro-Optical Engineering Inc., a Canadian corporation,
reported its results of operations for the first fiscal quarter ended November
30, 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 first fiscal quarter of
the 2010 fiscal year. This press release and information relating to
EXFO’s financial condition and results of operations for the first fiscal
quarter of the 2010 fiscal year are hereby incorporated as a document by
reference to Form F-3 (Registration Statement under the Securities Act of 1933)
declared effective as of July 30, 2001 and to Form F-3 (Registration Statement
under the Securities Act of 1933) declared effective as of
March 11, 2002 and to amend certain material information as set forth
in these two Form F-3 documents.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
EXFO
ELECTRO-OPTICAL ENGINEERING INC.
|
|
|
By:
/s/ Germain
Lamonde
Name: Germain
Lamonde
Title: President
and Chief Executive Officer
|
|
Date:
January 13, 2010
EXFO Reports Strong Financial Results for First Quarter of Fiscal
2010
|
§
|
Sales
amount to US$45.6 million, up 24.8% from previous
quarter
|
|
§
|
Bookings
increase 28.2% from previous quarter, book-to-bill ratio reaches
1.14
|
|
§
|
Gross
margin improves to 63.9%, highest level in almost nine
years
|
|
§
|
EBITDA
margin attains 9.6% despite foreign exchange loss of US$1.1
million
|
QUEBEC
CITY, CANADA, January 12, 2010—EXFO Electro-Optical Engineering Inc. (NASDAQ:
EXFO; TSX: EXF) reported today strong financial results for the first quarter
ended November 30, 2009.
Sales
reached US$45.6 million in the first quarter of fiscal 2010, down 1.7% from
US$46.4 million in the first quarter of 2009 but up 24.8% from US$36.5 million
in the fourth quarter of 2009. Net bookings were US$52.2 million for a
book-to-bill ratio of 1.14 in the first quarter of fiscal 2010, compared to a
record level of US$52.3 million in the same period last year, but increased
28.2% from US$40.7 million in the fourth quarter of 2009.
Gross
margin improved to 63.9% of sales in the first quarter of fiscal 2010, its
highest level since the second quarter of 2001, from 62.3% in the first quarter
of 2009 and 60.0% in the fourth quarter of 2009.
GAAP net
earnings in the first quarter of fiscal 2010 were US$0.3 million, or US$0.01 per
diluted share, compared to GAAP net earnings of US$5.3 million, or US$0.08
per diluted share, in the same period last year and a GAAP net loss of US$1.2
million, or US$0.02 per share, in the fourth quarter of fiscal 2009. It should
be noted that EXFO recorded a pre-tax, foreign exchange loss of US$1.1 million
in the first quarter of fiscal 2010 compared to a gain of US$4.6
million in the first quarter of 2009 and a gain of US$1.2 million in the fourth
quarter of 2009. GAAP net earnings in the first quarter of 2010 included US$1.5
million in amortization of intangible assets and US$0.4 million in stock-based
compensation costs. The former item resulted in an income tax recovery of US$0.5
million.
“I’m
extremely pleased with our strong sales, bookings and gross margin performance
in the first quarter of fiscal 2010,” said Germain Lamonde, EXFO’s Chairman,
President and CEO. “Given that almost all our product lines and geographic
regions met or exceeded expectations, I believe that we’ve successfully
navigated through the economic recession while continuing to strengthen our
market position to greatly benefit from IP fixed-mobile network convergence and
broadband deployments — key trends driving our business. I’m especially
encouraged that a string of major contract wins bolstered our backlog entering
our second quarter, which is typically the most challenging due to seasonality.
The Canadian/US exchange rate turned into a headwind in the first quarter, but
I’m confident our EBITDA will continue to improve in the long run as the twofold
impact of increased sales volume and a strong gross margin trickles down to the
bottom line.”
Unaudited
Selected Financial Information
(In
thousands of US dollars)
|
Segmented
results:
|
Q1 2010 | Q1 2009 | Q4 2009 | |||||||||
|
Sales:
|
||||||||||||
|
Telecom
Division
|
$ | 40,292 | $ | 41,159 | $ | 31,509 | ||||||
|
Life
Sciences and Industrial Division
|
5,268 | 5,204 | 4,998 | |||||||||
|
Total
|
$ | 45,560 | $ | 46,363 | $ | 36,507 | ||||||
|
Earnings
(loss) from operations:
|
||||||||||||
|
Telecom
Division
|
$ | 2,041 | $ | 1,355 | $ | (3,238 | ) | |||||
|
Life
Sciences and Industrial Division
|
687 | 738 | 2,020 | |||||||||
|
Total
|
$ | 2,728 | $ | 2,093 | $ | (1,218 | ) | |||||
|
Other
selected information:
|
||||||||||||
|
GAAP
net earnings (loss)
|
$ | 334 | $ | 5,287 | $ | (1,181 | ) | |||||
|
Selected
items included in GAAP net earnings (loss):
|
||||||||||||
|
Recognition
of previously unrecognized R&D tax credits
|
$ | – | $ | – | $ | (1,902 | ) | |||||
|
Amortization
of intangible assets
|
$ | 1,469 | $ | 1,319 | $ | 1,147 | ||||||
|
Restructuring
charges
|
$ | – | $ | – | $ | 1,171 | ||||||
|
Stock-based
compensation costs
|
$ | 418 | $ | 322 | $ | 379 | ||||||
|
Net
recovery of income tax
|
$ | – | $ | – | $ | (943 | ) | |||||
|
Net
income tax effect of the above selected items
|
$ | (471 | ) | $ | (221 | ) | $ | 93 |
Operating
Expenses
Selling
and administrative expenses amounted to US$15.4 million, or 33.7% of sales, in
the first quarter of fiscal 2010 compared to US$17.1 million, or 36.9% of sales,
in the same period last year and US$14.2 million, or 38.9% of sales, in the
fourth quarter of 2009.
Gross
research and development expenses totaled US$9.8 million, or 21.5% of sales, in
the first quarter of fiscal 2010 compared to US$8.6 million, or 18.6% of sales,
in the first quarter of 2009 and US$9.0 million, or 24.7% of sales, in the
fourth quarter of 2009.
Net
R&D expenses totaled US$8.3 million, or 18.2% of sales, in the first quarter
of fiscal 2010 compared to US$7.2 million, or 15.6% of sales, in the
same period last year and US$5.4 million, or 14.7% of sales, in the fourth
quarter of 2009.
First-Quarter
Highlights
IP Fixed-Mobile Network Convergence
and Broadband Deployments — EXFO announced several new product
introductions and contract wins related to its key growth drivers: IP
fixed-mobile network convergence and broadband deployments.
Major product launches related to these market trends included a
complete wireless backhaul testing and service assurance offering, a new
end-to-end IP video service assurance solution, an optical modulation analyzer
for characterizing signals up to 100G, and expanded optical transport network
(OTN) test capabilities on the Transport Blazer for characterizing 40G and 10G
networks. Following the quarter-end, EXFO announced that its AXS-200/635
Triple-Play Test Set had been approved by four tier-1 network operators to
support their respective deployments of next-generation VDSL2 services and
applications. The combined deals could reach US$15 million over the next several
years. The company previously reported that its VoIP service assurance solution
had been selected by a large broadband wireless operator in a million-dollar
deal. Overall, EXFO launched eight new products in the first quarter of fiscal
2010 and 41.0% of sales were derived from products on the market two years
or less.
Profitable Growth Path — EXFO
reported a gross margin of 63.9% in the first quarter of 2010, its highest level
since the second quarter of 2001, on sales volume of US$45.6 million. Quarterly
bookings reached US$52.2 million for a book-to-bill ratio of 1.14. EBITDA
amounted to US$4.4 million or 9.6% of sales. EBITDA included a foreign exchange
loss of US$1.1 million (2.4% of sales).
Business
Outlook
EXFO
forecasted sales between US$50 million and US$55 million and GAAP net earnings
between US$0.03 and US$0.07 per diluted share for the second quarter of 2010.
GAAP net earnings include US$0.02 per diluted share in after-tax
amortization of intangible assets and stock-based compensation
costs.
This
guidance was established by management based on existing backlog as of the date
of this press release, seasonality, expected bookings for the remainder of the
quarter, as well as current exchange rates.
Conference
Call and Webcast
EXFO will
host a conference call today at 5 p.m. (Eastern time) to review its financial
results for the first quarter of fiscal 2010. To listen to the conference call
and participate in the question period via telephone, dial 1-416-981-9077. Germain Lamonde,
Chairman, President and CEO, and Pierre Plamondon, CA, Vice-President of Finance
and Chief Financial Officer, will participate in the call. An audio replay of
the conference call will be available one hour after the event until 7 p.m. on
January 19, 2010. The replay number is 1-402-977-9141 and the reservation number
is 21448595. The audio Webcast and replay of the conference call will also
be available on EXFO’s Website at www.EXFO.com, under the Investors
section.
About
EXFO
EXFO is a
leading provider of test and service assurance solutions for network operators
and equipment manufacturers in the global telecommunications industry. The
Telecom Division, which accounts for almost 90% of the company’s revenues,
offers a wide range of innovative solutions to assess optical networks, from the
core to access, as well as next-generation IP infrastructures and related
triple-play services. 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.
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
worldwide recession and the length of the recovery 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.
Page 5 of
42
Non-GAAP
Financial Measure
EXFO
provides a non-GAAP financial measure (EBITDA*) as
supplemental information regarding its operational performance. EXFO uses EBITDA
for the purposes of evaluating its historical and prospective financial
performance, as well as its performance relative to its competitors. This
measure also helps EXFO’s management to plan and forecast future periods as
well as to make operational and strategic decisions. EXFO believes that
providing this information to investors, in addition to the GAAP measures,
allows them to see the company’s results through the eyes of management,
and to better understand its 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, in
thousands of US dollars:
|
Three months ended November 30,
|
||||||||
|
2009
|
2008
|
|||||||
|
GAAP
net earnings for the period
|
$ | 334 | $ | 5,287 | ||||
|
Add
(deduct):
|
||||||||
|
Amortization
of property, plant and equipment
|
1,291 | 1,159 | ||||||
|
Amortization
of intangible assets
|
1,469 | 1,319 | ||||||
|
Interest
(income) expense
|
42 | (466 | ) | |||||
|
Income
taxes
|
1,243 | 1,840 | ||||||
|
EBITDA**
for the period
|
$ | 4,379 | $ | 9,139 | ||||
|
EDITDA**
in percentage of sales
|
9.6 | % | 19.7 | % | ||||
|
*
|
EBITDA
is defined as net earnings before interest, income taxes, amortization of
property, plant and equipment and amortization of intangible
assets.
|
|
**
|
EBITDA
in the first quarter of fiscal 2009 included a foreign exchange gain of
US$4.6 million, or 9.9% of sales, compared to a foreign exchange loss of
US$1.1 million, or 2.4% of sales, in the first quarter of fiscal
2010.
|
For
more information
Vance
Oliver
Manager,
Investor Relations
(418)
683-0913, Ext. 3733
vance.oliver@exfo.com
EXFO Electro-Optical Engineering Inc.
Interim
Consolidated Balance Sheet
(in thousands of US dollars)
|
As
at
November
30, 2009
|
As
at
August
31,
2009
|
|||||||
|
(unaudited)
|
||||||||
|
Assets
|
||||||||
|
Current
assets
|
||||||||
|
Cash
|
$ | 9,102 | $ | 10,611 | ||||
|
Short-term
investments
|
58,914 | 59,105 | ||||||
|
Accounts
receivable (note 4)
|
||||||||
|
Trade
|
28,107 | 22,946 | ||||||
|
Other
|
3,080 | 2,752 | ||||||
|
Income
taxes and tax credits recoverable
|
2,961 | 2,353 | ||||||
|
Inventories
(note 5)
|
34,370 | 30,863 | ||||||
|
Prepaid
expenses
|
2,734 | 2,043 | ||||||
|
Future
income taxes
|
6,257 | 5,538 | ||||||
| 145,525 | 136,211 | |||||||
|
Tax
credits recoverable
|
28,753 | 26,762 | ||||||
|
Forward exchange contracts
(note 4)
|
592 | 428 | ||||||
|
Property,
plant and equipment
|
19,274 | 19,100 | ||||||
|
Intangible
assets
|
16,336 | 16,859 | ||||||
|
Goodwill
|
23,313 | 22,478 | ||||||
|
Future
income taxes
|
16,728 | 18,533 | ||||||
| $ | 250,521 | $ | 240,371 | |||||
|
Liabilities
|
||||||||
|
Current
liabilities
|
||||||||
|
Accounts
payable and accrued liabilities (note 6)
|
$ | 22,545 | $ | 21,650 | ||||
|
Deferred
revenue
|
6,391 | 6,481 | ||||||
| 28,936 | 28,131 | |||||||
|
Deferred
revenue
|
4,138 | 4,195 | ||||||
| 33,074 | 32,326 | |||||||
|
Contingencies (note
7)
|
||||||||
|
Shareholders’
equity
|
||||||||
|
Share
capital (note 8)
|
104,915 | 104,846 | ||||||
|
Contributed
surplus
|
18,088 | 17,758 | ||||||
|
Retained
earnings
|
44,243 | 43,909 | ||||||
|
Accumulated
other comprehensive income
|
50,201 | 41,532 | ||||||
| 217,447 | 208,045 | |||||||
| $ | 250,521 | $ | 240,371 | |||||
The
accompanying notes are an integral part of these consolidated financial
statements.
Page 7 of
42
EXFO Electro-Optical Engineering Inc.
Interim
Unaudited Consolidated Statements of Earnings
(in thousands of US dollars, except share and
per share data)
|
Three
months ended
November
30,
|
||||||||
|
2009
|
2008
|
|||||||
|
Sales
|
$ | 45,560 | $ | 46,363 | ||||
|
Cost of sales (1,2)
(note 5)
|
16,438 | 17,480 | ||||||
|
Gross
margin
|
29,122 | 28,883 | ||||||
|
Operating
expenses
|
||||||||
|
Selling
and administrative(1)
|
15,361 | 17,091 | ||||||
|
Net
research and development(1)
(note 9)
|
8,273 | 7,221 | ||||||
|
Amortization
of property, plant and equipment
|
1,291 | 1,159 | ||||||
|
Amortization
of intangible assets
|
1,469 | 1,319 | ||||||
|
Total
operating expenses
|
26,394 | 26,790 | ||||||
|
Earnings
from operations
|
2,728 | 2,093 | ||||||
|
Interest
income (expense)
|
(42 | ) | 466 | |||||
|
Foreign
exchange gain (loss)
|
(1,109 | ) | 4,568 | |||||
|
Earnings
before income taxes
|
1,577 | 7,127 | ||||||
|
Income taxes (note
10)
|
||||||||
|
Current
|
87 | (61 | ) | |||||
|
Future
|
1,156 | 1,901 | ||||||
| 1,243 | 1,840 | |||||||
|
Net
earnings for the period
|
$ | 334 | $ | 5,287 | ||||
|
Basic
and diluted net earnings per share
|
$ | 0.01 | $ | 0.08 | ||||
|
Basic
weighted average number of shares outstanding (000’s)
|
59,386 | 67,340 | ||||||
|
Diluted weighted average number
of shares outstanding (000’s) (note 11)
|
60,122 | 67,717 | ||||||
|
(1) Stock-based compensation costs
included in:
|
||||||||
|
Cost of sales
|
$ | 41 | $ | 29 | ||||
|
Selling and
administrative
|
268 | 201 | ||||||
|
Net research and
development
|
109 | 92 | ||||||
| $ | 418 | $ | 322 | |||||
|
(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
42
EXFO Electro-Optical Engineering Inc.
Interim
Unaudited Consolidated Statements of Comprehensive Income (Loss)
and Accumulated Other
Comprehensive Income
(in thousands of US dollars)
|
Comprehensive
income (loss)
|
||||||||
|
Three
months ended
November
30,
|
||||||||
|
2009
|
2008
|
|||||||
|
Net
earnings for the period
|
$ | 334 | $ | 5,287 | ||||
|
Foreign
currency translation adjustment
|
7,813 | (36,933 | ) | |||||
|
Changes
in unrealized losses on short-term investments
|
− | 22 | ||||||
|
Unrealized
gains (losses) on forward exchange contracts
|
1,164 | (6,929 | ) | |||||
|
Reclassification
of realized gains (losses) on forward exchange contracts in net
earnings
|
77 | (137 | ) | |||||
|
Future
income tax effect of the above items
|
(385 | ) | 2,190 | |||||
|
Comprehensive
income (loss)
|
$ | 9,003 | $ | (36,500 | ) | |||
|
Accumulated
other comprehensive income
|
||||||||
|
Three
months ended
November
30,
|
||||||||
|
2009
|
2008
|
|||||||
|
Foreign
currency translation adjustment
|
||||||||
|
Cumulative
effect of prior periods
|
$ | 40,458 | $ | 51,129 | ||||
|
Current
period
|
7,813 | (36,933 | ) | |||||
| 48,271 | 14,196 | |||||||
|
Unrealized
gains (losses) on forward exchange contracts
|
||||||||
|
Cumulative
effect of prior periods
|
1,076 | (96 | ) | |||||
|
Current
period, net of realized gains (losses) and future income
taxes
|
856 | (4,876 | ) | |||||
| 1,932 | (4,972 | ) | ||||||
|
Unrealized
losses on short-term investments
|
||||||||
|
Cumulative
effect of prior periods
|
(2 | ) | (24 | ) | ||||
|
Current
period, net of future income taxes
|
− | 22 | ||||||
| (2 | ) | (2 | ) | |||||
|
Accumulated
other comprehensive income
|
$ | 50,201 | $ | 9,222 | ||||
Total
retained earnings and accumulated other comprehensive income amounted to $75,003
and $94,444 as at November 30, 2008 and 2009,
respectively.
The
accompanying notes are an integral part of these consolidated financial
statements.
Page 9 of
42
EXFO Electro-Optical Engineering Inc.
Interim
Unaudited Consolidated Statements of Retained Earnings
and Contributed
Surplus
(in thousands of US dollars)
|
Retained
earnings
|
||||||||
|
Three
months ended
November
30,
|
||||||||
|
2009
|
2008
|
|||||||
|
Balance
– Beginning of the period
|
$ | 43,909 | $ | 60,494 | ||||
|
Add
|
||||||||
|
Net
earnings for the period
|
334 | 5,287 | ||||||
|
Balance
– End of the period
|
$ | 44,243 | $ | 65,781 | ||||
|
Contributed
surplus
|
||||||||
|
Three
months ended
November
30,
|
||||||||
|
2009
|
2008
|
|||||||
|
Balance
– Beginning of the period
|
$ | 17,758 | $ | 5,226 | ||||
|
Add
(deduct)
|
||||||||
|
Stock-based
compensation costs
|
413 | 321 | ||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards (note 8)
|
(86 | ) | – | |||||
|
Discount
on redemption of share capital (note 8)
|
3 | 374 | ||||||
|
Balance
– End of the period
|
$ | 18,088 | $ | 5,921 | ||||
The
accompanying notes are an integral part of these consolidated financial
statements.
Page 10
of 42
EXFO Electro-Optical Engineering Inc.
Interim
Unaudited Consolidated Statements of Cash Flows
(in thousands of US dollars)
|
Three
months ended
November
30,
|
||||||||
|
2009
|
2008
|
|||||||
|
Cash
flows from operating activities
|
||||||||
|
Net
earnings for the period
|
$ | 334 | $ | 5,287 | ||||
|
Add
(deduct) items not affecting cash
|
||||||||
|
Change
in discount on short-term investments
|
2 | 456 | ||||||
|
Stock-based
compensation costs
|
418 | 322 | ||||||
|
Amortization
|
2,760 | 2,478 | ||||||
|
Deferred
revenue
|
(542 | ) | 353 | |||||
|
Future
income taxes
|
1,156 | 1,901 | ||||||
|
Change
in unrealized foreign exchange loss (gain)
|
770 | (3,456 | ) | |||||
| 4,898 | 7,341 | |||||||
|
Change
in non-cash operating items
|
||||||||
|
Accounts
receivable
|
(4,102 | ) | (7,325 | ) | ||||
|
Income
taxes and tax credits
|
(1,505 | ) | (696 | ) | ||||
|
Inventories
|
(2,351 | ) | (367 | ) | ||||
|
Prepaid
expenses
|
(605 | ) | (542 | ) | ||||
|
Accounts
payable and accrued liabilities
|
1,030 | (1,087 | ) | |||||
| (2,635 | ) | (2,676 | ) | |||||
|
Cash
flows from investing activities
|
||||||||
|
Additions
to short-term investments
|
(78,954 | ) | (122,100 | ) | ||||
|
Proceeds
from disposal and maturity of short-term investments
|
81,336 | 126,605 | ||||||
|
Additions
to capital assets (1)
|
(1,345 | ) | (1,514 | ) | ||||
| 1,037 | 2,991 | |||||||
|
Cash
flows from financing activities
|
||||||||
|
Redemption
of share capital (note 8)
|
(14 | ) | (447 | ) | ||||
|
Exercise
of stock options
|
− | 26 | ||||||
| (14 | ) | (421 | ) | |||||
|
Effect
of foreign exchange rate changes on cash
|
103 | (367 | ) | |||||
|
Change
in cash
|
(1,509 | ) | (473 | ) | ||||
|
Cash
– Beginning of the period
|
10,611 | 5,914 | ||||||
|
Cash
– End of the period
|
$ | 9,102 | $ | 5,441 | ||||
(1) As
at November 30, 2008 and 2009, unpaid purchases of capital assets amounted to
$312 and $147, respectively.
The
accompanying notes are an integral part of these consolidated financial
statements.
Page 11
of 42
EXFO Electro-Optical Engineering Inc.
Notes
to Unaudited Interim Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
1 Interim
Financial Information
The
financial information as at November 30, 2009, and for the three-month periods
ended November 30, 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 as described
in note 2. However, all disclosures required for annual financial statements
have not been included in these financial statements. Consequently, these
interim consolidated financial statements should be read in conjunction with the
company’s most recent annual consolidated financial statements.
2 New
Accounting Standards and Pronouncements
Adopted
in fiscal 2010
In
February 2008, the Canadian Institute of Chartered Accountants (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 adopted this new standard on September 1,
2009, and its adoption had no material effect on its consolidated financial
statements.
In June
2009, the CICA amended section 3862, "Financial Instruments − Disclosures", to
include enhanced disclosures
on liquidity risk of financial instruments and new disclosures on fair
value measurements of financial instruments.
The amendments apply to fiscal years ending after September 30, 2009, with early
adoption permitted. The company adopted amendments on September 1,
2009, and their adopting had no significant impact on its consolidated
financial statements.
To
be adopted after fiscal 2010
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 September 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 that adopting this standard 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
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 adopt one of these three new sections earlier, it must
adopt all three on the same date.
3 Capital
Disclosures
The
company is not subject to any external restrictions on its capital.
The
company’s objectives when managing capital are:
|
·
|
To
maintain a flexible capital structure, which optimizes the cost of capital
at acceptable risk;
|
|
·
|
To
sustain future development of the company, including research and
development activities, 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
(losses) on forward exchange contracts.
The
capital of the company amounted to $166,513,000 and $167,246,000 as at August
31, 2009 and November 30, 2009, respectively.
Of the
capital, as at November 30, 2009, an amount of $68,016,000 represented cash and
short-term investments ($69,716,000 as at August 31, 2009),
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 can repurchase shares from the open market via a normal
course issuer bid through the facilities of the Toronto Stock Exchange and the
NASDAQ (note 8).
4 Financial
Instruments
Market
risk
Currency
risk
The
principal measurement currency of the company is the Canadian dollar. The
company is exposed to a currency risk 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. This risk is partially hedged by
forward exchange contracts (US dollars) and certain operating expenses
(US dollars and euros). Forward exchange contracts, which are designated as
cash flow hedging instruments, qualify for hedge accounting.
As at
November 30, 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)
|
|||||||||
|
December
2009 to August 2010
|
$ | 24,000 | 1.1005 | ||||||
|
September
2010 to August 2011
|
21,500 | 1.1047 | |||||||
|
September
2011
|
1,000 | 1.1278 | |||||||
|
Total
|
$ | 46,500 | 1.1030 | ||||||
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
carrying amount of forward exchange contracts is equal to fair value, which is
based on the amount at which they could be settled based on estimated current
market rates.The fair value of forward exchange contracts amounted to net gains
of $530,000 as at August 31, 2009 and $2,024,000 as at November
30, 2009.
Based on
the portfolio of forward exchange contracts as at November 30, 2009, the company
estimates that the portion of the unrealized gains on these contracts as of
that date, which will be realized and reclassified from accumulated other
comprehensive income to net earnings over the next 12 months, amounts to
$1,270,000.
As at
November 30, 2009, forward exchange contracts, in the amount of
$1,312,000, are presented as current assets in other receivable in the balance
sheet, forward exchange contracts, in the amount of $592,000, are presented
as long-term assets in forward exchange contracts in the balance sheet, and
forward exchange contracts, in the amount of $42,000, are presented as
current liabilities in the accounts payable and accrued liabilities in the
balance sheet (note 6).
The
following table summarizes significant financial assets and liabilities that are
subject to currency risk
as at November 30, 2009:
|
Carrying/nominal
amount
(in
thousands of
US
dollars)
|
Carrying/nominal
amount
(in
thousands
of
euros)
|
|||||||
|
(unaudited)
|
||||||||
|
Financial
Assets
|
||||||||
|
Cash
|
$ | 5,570 | € | 577 | ||||
|
Accounts
receivable
|
20,803 | 2,980 | ||||||
| 26,373 | 3,557 | |||||||
|
Financial
Liabilities
|
||||||||
|
Accounts
payable and accrued liabilities
|
7,956 | 329 | ||||||
|
Forward
exchange contracts
|
5,900 | − | ||||||
| 13,856 | 329 | |||||||
|
Net
exposure
|
$ | 12,517 | € | 3,228 | ||||
The value
of the Canadian dollar compared to the US dollar was CA$1.0574 = US$1.00
as at November 30, 2009.
The value
of the Canadian dollar compared to the euro was CA$1.5853 = €1.00 as at
November 30, 2009.
The
following sensitivity analysis summarizes the effect that a change in the value
of the Canadian dollar (compared to US dollar and euro) on financial
assets and liabilities denominated in US dollars and euros would have on net
earnings, net earnings per diluted share and comprehensive income, based on the
foreign exchange rates as at November 30, 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
$1,203,000, 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 $490,000,
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 $2,773,000.
|
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
other 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 of its 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 November 30, 2009, the company’s short-term investments, in the amount of
$58,914,000, bear interest at rates ranging between 0.2% and 0.6% and mature
between December 2009 and January 2010.
A change
of 0.5% in the interest rate of the company’s short-term investments would
increase (decrease) net earnings by $51,000, 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 other comprehensive income.
Cash,
accounts receivable and accounts payable and accrued liabilities are
non-interest-bearing financial assets and liabilities. Accounts receivable
and accounts payable and accrued liabilities are financial instruments whose
carrying value approximates their fair value due to their short-term
maturity.
Credit
risk
Financial
instruments that potentially subject the company to credit risk consist
primarily of cash, short-term investments, accounts receivable and forward
exchange contracts (with a positive fair value). As at
November 30, 2009, the company’s short-term investments consist of
debt instruments issued by 9 (11 as at August 31, 2009) high-credit quality
corporations and trusts. None of these debt instruments are expected
to be affected by a significant 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 $1,220,000 and $1,202,000
as at August 31, 2009 and November 30, 2009, respectively
and bad debt expense (recovery) amounted to $40,000 and $(17,000) for the three
months ended November 30, 2008 and 2009, respectively.
For the
three months ended November 30, 2009, no customer represented more than 10% of
consolidated sales.
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 November
30, 2009:
|
(unaudited)
|
||||
|
Current
|
$ | 23,293 | ||
|
Past
due, 0 to 30 days
|
3,214 | |||
|
Past
due, 31 to 60 days
|
673 | |||
|
Past
due, more than 60 days
|
2,129 | |||
|
Total
accounts receivable
|
29,309 | |||
|
Allowance
for doubtful accounts
|
(1,202 | ) | ||
| $ | 28,107 | |||
Liquidity
risk
Liquidity
risk is defined as the potential that the company cannot meet its obligations as
they become due.
The
following table summarizes the contractual maturity of the company’s financial
liabilities as at November 30, 2009:
|
0-12
months
|
13-24
months
|
|||||||
|
(unaudited)
|
||||||||
|
Accounts
payable and accrued liabilities
|
$ | 22,503 | $ | – | ||||
|
Forward
exchange contracts
|
||||||||
|
Outflow
|
30,100 | 16,400 | ||||||
|
Inflow
|
(31,314 | ) | (17,192 | ) | ||||
|
Total
|
$ | 21,289 | $ | (792 | ) | |||
In
addition, the company has a share repurchase program that may require additional
cash outflows during fiscal 2010 and 2011 (note 8). Also, the company has an
outstanding contingent consideration payable upon the acquisition of assets,
which is not fully recorded in the financial statements and may require
additional cash outflows in upcoming quarters.
As at
November 30, 2009, the company had $68,016,000 in cash and short-term
investments and $31,187,000 in accounts receivable. In addition to these
financial assets, the company has unused available lines of credit totaling
$14,612,000 for working capital and other general corporate purposes, including
potential acquisitions and its share repurchase program as well as unused
lines of credit of $15,823,000 for foreign currency exposure related to its
forward exchange contracts.
5 Inventories
|
As
at
November
30,
2009
|
As
at
August
31,
2009
|
|||||||
|
(unaudited)
|
||||||||
|
Raw
materials
|
$ | 15,783 | $ | 14,497 | ||||
|
Work
in progress
|
2,414 | 1,955 | ||||||
|
Finished
goods
|
16,173 | 14,411 | ||||||
| $ | 34,370 | $ | 30,863 | |||||
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 $917,000 and $603,000 for the three months ended November
30, 2008 and 2009, respectively.
6 Accounts
Payable and Accrued Liabilities
|
As
at
November
30,
2009
|
As
at
August
31,
2009
|
|||||||
|
(unaudited)
|
||||||||
|
Trade
|
$ | 11,057 | $ | 9,063 | ||||
|
Salaries
and social benefits
|
8,535 | 8,863 | ||||||
|
Warranty
|
703 | 699 | ||||||
|
Commissions
|
650 | 647 | ||||||
|
Restructuring
charges
|
− | 24 | ||||||
|
Forward
exchange contracts (note 4)
|
42 | 704 | ||||||
|
Other
|
1,558 | 1,650 | ||||||
| $ | 22,545 | $ | 21,650 | |||||
Changes
in the warranty provision are as follows:
|
Three
months ended
November
30,
|
||||||||
|
2009
|
2008
|
|||||||
|
(unaudited)
|
||||||||
|
Balance
– Beginning of period
|
$ | 699 | $ | 974 | ||||
|
Provision
|
139 | 142 | ||||||
|
Settlements
|
(135 | ) | (420 | ) | ||||
|
Balance
– End of period
|
$ | 703 | $ | 696 | ||||
7 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.
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 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 was held
on September 10, 2009. On October 6, 2009, the Court entered an opinion
granting final approval to the settlement and directing that the Clerk of
the Court close these actions. Notices of appeal of the opinion granting final
approval have been filed. Given that the settlement remains subject to appeal as
of the date of issuance of these financial statements, the ultimate outcome
of the contingency is uncertain. However, based on the
settlement approved on October 6, 2009, and the related insurance against such
claims, management has determined the impact to its financial position and
results of operations as at and for the three-month period ended November
30, 2009 to be immaterial.
Contingent
consideration
|
|
Following
the purchase of assets in fiscal 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 24 months following the
purchase.
|
8 Share
Capital
On
November 6, 2009, the company announced that its Board of Directors had
authorized the second 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 2,256,431
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 started on
November 10, 2009, and will end on November 9, 2010, or on an
earlier date if the company repurchases the maximum number of shares
permitted under the bid. The program does not require that the
company repurchases 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.
The
following tables summarize changes in share capital for the three months ended
November 30, 2008 and 2009.
|
Three
months ended November 30, 2008
|
||||||||||||||||||||
|
Multiple
voting shares
|
Subordinate
voting shares
|
|||||||||||||||||||
|
Number
|
Amount
|
Number
|
Amount
|
Total
amount
|
||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||
|
Balance
as at August 31, 2008
|
36,643,000 | $ | 1 | 30,783,705 | $ | 142,785 | $ | 142,786 | ||||||||||||
|
Exercise
of stock options
|
– | – | 12,500 | 26 | 26 | |||||||||||||||
|
Redemption
of share capital
|
– | – | (176,914 | ) | (821 | ) | (821 | ) | ||||||||||||
|
Balance
as at November 30, 2008
|
36,643,000 | $ | 1 | 30,619,291 | $ | 141,990 | $ | 141,991 | ||||||||||||
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)
|
Three
months ended November 30, 2009
|
||||||||||||||||||||
|
Multiple
voting shares
|
Subordinate
voting shares
|
|||||||||||||||||||
|
Number
|
Amount
|
Number
|
Amount
|
Total
amount
|
||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||
|
Balance
as at August 31, 2009
|
36,643,000 | $ | 1 | 22,736,302 | $ | 104,845 | $ | 104,846 | ||||||||||||
|
Redemption
of restricted share units
|
− | − | 13,663 | − | − | |||||||||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards
|
– | – | – | 86 | 86 | |||||||||||||||
|
Redemption
of share capital
|
– | – | (3,600 | ) | (17 | ) | (17 | ) | ||||||||||||
|
Balance
as at November 30, 2009
|
36,643,000 | $ | 1 | 22,746,365 | $ | 104,914 | $ | 104,915 | ||||||||||||
9 Net
Research and Development Expenses
Net
research and development expenses comprise the following:
|
Three
months ended
November
30,
|
||||||||
|
2009
|
2008
|
|||||||
|
(unaudited)
|
||||||||
|
Gross
research and development expenses
|
$ | 9,780 | $ | 8,612 | ||||
|
Research
and development tax credits
|
(1,507 | ) | (1,391 | ) | ||||
| $ | 8,273 | $ | 7,221 | |||||
EXFO
Electro-Optical Engineering Inc.
Notes
to Unaudited Interim Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
| 10 | Income Taxes |
For the
three months ended November 30, 2008 and 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
November
30,
|
||||||||
|
2009
|
2008
|
|||||||
|
(unaudited)
|
||||||||
|
Income
tax provision at combined Canadian federal and provincial statutory tax
rate (31% in 2009 and 2008)
|
$ | 489 | $ | 2,203 | ||||
|
Increase
(decrease) due to:
|
||||||||
|
Foreign
income taxed at different rates
|
(9 | ) | (19 | ) | ||||
|
Non-taxable
income
|
(59 | ) | (48 | ) | ||||
|
Non-deductible
expenses
|
201 | 172 | ||||||
|
Change
in tax rates
|
139 | − | ||||||
|
Foreign
exchange effect of translation of foreign integrated
subsidiaries
|
207 | (836 | ) | |||||
|
Utilization
of previously unrecognized future income tax assets
|
(90 | ) | (47 | ) | ||||
|
Unrecognized
future income tax assets on temporary deductible differences and unused
tax losses and deductions
|
214 | 191 | ||||||
|
Other
|
151 | 224 | ||||||
| $ | 1,243 | $ | 1,840 | |||||
The
income tax provision consists of the following:
|
Current
|
$ | 87 | $ | (61 | ) | |||
|
Future
|
1,032 | 1,757 | ||||||
|
Valuation
allowance
|
124 | 144 | ||||||
| 1,156 | 1,901 | |||||||
| $ | 1,243 | $ | 1,840 |
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
|
Earnings
per Share
|
The
following table summarizes the reconciliation of the basic weighted average
number of shares outstanding and the diluted weighted average number of shares
outstanding:
|
Three
months ended
November
30,
|
||||||||
|
2009
|
2008
|
|||||||
|
(unaudited)
|
||||||||
|
Basic
weighted average number of shares outstanding (000’s)
|
59,386 | 67,340 | ||||||
|
Plus
dilutive effect of:
|
||||||||
|
Stock
options (000’s)
|
140 | 125 | ||||||
|
Restricted
share units (000’s)
|
430 | 173 | ||||||
|
Deferred
share units (000’s)
|
166 | 79 | ||||||
|
Diluted
weighted average number of shares outstanding (000’s)
|
60,122 | 67,717 | ||||||
|
Stock
awards excluded from the calculation of the diluted weighted average
number of shares outstanding because their exercise price was greater than
the average market price of the common shares (000’s)
|
1,297 | 2,045 | ||||||
|
12
|
Segment
Information
|
The
company is organized under two reportable segments. The Telecom Division,
which represents the company’s main business activity, offers a wide range of
innovative solutions to assess optical networks, from the core to access, as
well as next-generation IP infrastructures and related triple-play
services. The Life
Sciences and Industrial Division offers solutions for medical-device and
opto-electronics assembly, fluorescence microscopy and other life sciences
sectors.
The
reporting structure reflects how the company manages its business and how it
classifies its operations for planning and measuring performance.
The
following tables present information by segment:
|
Three
months ended November 30, 2009
|
||||||||||||
|
Telecom Division
|
Life
Sciences and Industrial Division
|
Total
|
||||||||||
|
(unaudited)
|
||||||||||||
|
Sales
|
$ | 40,292 | $ | 5,268 | $ | 45,560 | ||||||
|
Earnings
from operations
|
$ | 2,041 | $ | 687 | $ | 2,728 | ||||||
|
Unallocated
items:
|
||||||||||||
|
Interest
expense
|
(42 | ) | ||||||||||
|
Foreign
exchange loss
|
(1,109 | ) | ||||||||||
|
Earnings
before income taxes
|
1,577 | |||||||||||
|
Income
taxes
|
1,243 | |||||||||||
|
Net
earnings for the period
|
$ | 334 | ||||||||||
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)
|
Three
months ended November 30, 2008
|
||||||||||||
|
Telecom Division
|
Life
Sciences and Industrial Division
|
Total
|
||||||||||
|
(unaudited)
|
||||||||||||
|
Sales
|
$ | 41,159 | $ | 5,204 | $ | 46,363 | ||||||
|
Earnings
from operations
|
$ | 1,355 | $ | 738 | $ | 2,093 | ||||||
|
Unallocated
items:
|
||||||||||||
|
Interest
income
|
466 | |||||||||||
|
Foreign
exchange gain
|
4,568 | |||||||||||
|
Earnings
before income taxes
|
7,127 | |||||||||||
|
Income
taxes
|
1,840 | |||||||||||
|
Net
earnings for the period
|
$ | 5,287 | ||||||||||
Total
assets by reportable segment are detailed as follows:
|
As
at
November
30,
2009
|
As
at
August
31,
2009
|
|||||||
|
(unaudited)
|
||||||||
|
Telecom
Division
|
$ | 145,087 | $ | 135,015 | ||||
|
Life
Sciences and Industrial Division
|
12,529 | 10,267 | ||||||
|
Unallocated
assets
|
92,905 | 95,089 | ||||||
| $ | 250,521 | $ | 240,371 | |||||
Unallocated
assets are comprised of cash, short-term investments, receivable on forward
exchange contracts as well as future income tax assets.
|
13
|
Differences
between Canadian and U.S. GAAP
|
These
interim consolidated financial statements are prepared in accordance with
Canadian GAAP and significant differences in measurement and disclosure from
U.S. GAAP are set out in note 20 to the company’s most recent annual
consolidated financial statements. This note describes significant changes
occurring since the most recent annual consolidated financial statements and
provides a quantitative analysis of all significant differences. All disclosures
required in annual financial statements under U.S. GAAP and Regulation S-X of
the Securities and Exchange Commission (SEC) in the United States have not
been provided in these interim consolidated financial statements.
Statements
of earnings
For the
three months ended November 30, 2008 and 2009, there were no significant
differences in the net earnings under Canadian GAAP as compared to U.S.
GAAP.
EXFO
Electro-Optical Engineering Inc.
Notes
to Unaudited Interim Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
Reconciliation
of shareholders’ equity to conform to U.S. GAAP
The
following summary sets out the significant differences in the company’s reported
shareholders’ equity under Canadian GAAP as compared to U.S. GAAP:
|
As
at
November
30,
2009
|
As
at
August
31,
2009
|
|||||||
|
(unaudited)
|
||||||||
|
Shareholders’
equity in accordance with Canadian GAAP
|
$ | 217,447 | $ | 208,045 | ||||
|
Goodwill
|
(4,022 | ) | (3,879 | ) | ||||
|
Stock
appreciation rights
|
(73 | ) | (73 | ) | ||||
|
Shareholders’
equity in accordance with U.S. GAAP
|
$ | 213,352 | $ | 204,093 | ||||
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 in the statements of
earnings. Under U.S. GAAP, tax credits that are refundable against taxable
income are recorded in the income taxes. These tax credits amounted to $896,000
and $931,000 for the three months ended November 30, 2008 and 2009,
respectively. This difference has no impact on the net earnings and the net
earnings per share for the reporting periods.
Statements
of cash flows
For the
three months ended November 30, 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 2010
In
June 2009, the Financial Accounting Standard Board (FASB) issued guidance
now codified as Accounting Standards Codification (ASC) Topic 105, “Generally
Accepted Accounting Principles”, which became the single source
of authoritative U.S. accounting and reporting standards, along with rules
and interpretative releases of the SEC which are considered sources of
authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC
accounting literature not included in the ASC became non-authoritative. Topic
105 did not result in any accounting changes. The company adopted Topic 105 in
the first quarter of fiscal 2010 and its adoption had no significant impact
on its balance sheets or statements of earnings, but has and will continue
to impact its reporting process by eliminating all references to
pre-codification standards.
In
December 2007, the FASB issued guidance now codified as ASC Topic 805,
“Business Combinations”, and ASC Topic 810, “Consolidation”. These new
standards significantly change the accounting and reporting for business
combination transactions and noncontrolling (minority) interests
in consolidated financial statements. These topics are required to
be adopted simultaneously and are effective for the first annual reporting
period beginning on or after December 15, 2008. The company will adopt the
provisions of Topic 805 and Topic 810 to any business combinations entered into,
where applicable, in the future.
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 guidance now codified as ASC Topic 815, “Derivatives and
Hedging”, which requires 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 Topic 815, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance and cash flows. Topic 815 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. The company adopted Topic 815 on September 1, 2009, and
its adoption had no significant measurement impact on its consolidated financial
statements.
In April
2008, the FASB issued guidance now codified as ASC Topic 350, “Intangibles –
Goodwill and Other”,
which amends the factors that should be considered in developing
renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset. The intent of this guidance is to improve
the consistency between the useful life of a recognized intangible
asset and the period of expected cash flows used to measure the fair value of
the asset under Topic 805. Topic
350 is effective for financial statements issued for fiscal years beginning
after December 15,
2008, and interim periods within those fiscal years. The guidance for
determining the useful life of a recognized intangible asset shall be
applied prospectively to intangible assets acquired after the effective date.
The disclosure requirements
shall be applied prospectively to all intangible assets recognized
as of, and subsequent to, the effective date. The company adopted
Topic 350 on September 1, 2009, and its adoption had no
significant impact on its consolidated financial statements.
In April
2009, the FASB issued guidance now codified as ASC Topic 825, “Financial
Instruments”, which requires disclosures about fair value of financial
instruments for annual and interim reporting periods of publicly traded
companies and requires those disclosures in summarized financial information at
interim reporting periods. The company adopted Topic 825 on September 1, 2009,
and its adoption had no significant impact on its consolidated financial
statements.
In August
2009, the FASB amended ASC Topic 820, “Fair Value Measurement”, to provide
clarification as to how to measure the fair value of liabilities in
circumstances when a quoted price in an active market for the identical
liability is not available. These amendments are effective for the
company in the first quarter of fiscal 2010. The company
adopted these amendments on September 1, 2009, and their adoption had no
significant impact on its consolidated financial statements.
Topic 820
establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets or
liabilities (level 1 measurements) and the lowest priority to unobservable
inputs (level 3 measurements). The three levels of the fair value hierarchy
under topic 820 are described below:
|
·
|
Level
1 –
Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical assets or
liabilities;
|
|
·
|
Level
2 –
Quoted prices in markets that are not active, or inputs that are
observable, either directly or indirectly, for substantially the full
term of the asset or liability;
|
|
·
|
Level
3 –
Prices or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable (supported by
little or no market activity).
|
The
company’s cash, short-term investments and forward exchange contracts are
measured at fair value at each balance sheet date. The company’s short-term
investments are classified within Level 1 of the fair value hierarchy because
they are valued using quoted market prices in active markets. The company’s
forward exchange contracts are classified within Level 2 of the hierarchy
because they are valued using quoted forward foreign exchange rates at the
balance sheet date.
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 2010
In
October 2009, the FASB issued guidance now codified as ASC Topic 985 “Software”,
to change the accounting model for revenue arrangements that include both
tangible products and software elements. Under this guidance, tangible products
containing software components and nonsoftware components that function together
to deliver the tangible product's essential functionality are excluded from the
software revenue guidance. In addition, hardware components of a tangible
product containing software components are always excluded from the software
revenue guidance. This guidance is effective prospectively for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010. Early adoption is permitted. The company is currently
evaluating the impact that this guidance may have on its consolidated
financial statements.
In
October 2009, the FASB amended guidance now codified as Topic 605, “Revenue
Recognition, to include a consensus relating to multiple-deliverable revenue
arrangements. These amendments significantly change certain guidance pertaining
to revenue arrangements with multiple deliverables and modify the separation
criteria of Topic 605 by eliminating the criterion for objective and reliable
evidence of fair value for the undelivered products or services. The amendments
also eliminate the use of the residual method of allocation and require,
instead, that arrangement consideration be allocated, at the inception of
the arrangement, to all deliverables based on their relative selling price. This
guidance is effective for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. Early adoption is
permitted. The company is currently evaluating the impact that this guidance may
have on its consolidated financial statements.
|
14
|
Subsequent
Events
|
Subsequent
events have been evaluated until January 12, 2010, which is the date the interim
consolidated financial statements of the company were available to be
issued.
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
recent worldwide recession and the length of the recovery 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 January 12, 2010.
All
dollar amounts are expressed in US dollars, except as otherwise
noted.
INDUSTRY
OVERVIEW
The
fundamental drivers for increased bandwidth and Internet protocol (IP)
fixed-mobile convergence in the global telecommunications industry remain
intact, but they were constrained by an economic recession that forced network
operators and network equipment manufacturers to reduce their capital and
operating expenses in calendar 2009. In fact, several of these players
announced significant reductions in capital expenditures and staffing levels
during the course of the year. Although the economic outlook seems brighter,
most industry analysts are forecasting a moderate improvement rather than
an immediate snap back to previous revenue levels.
Despite
this challenging macro-economic environment, the telecom market dynamics in 2009
are completely different from those during the industry downturn of 2001. First
of all, there is a myriad of bandwidth-intensive applications generating
strong growth in bandwidth demand, both in wireless and wireline networks. For
example, monthly traffic was 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 links, metro rings and long-haul routes,
whereas in 2001 there was an overabundance of bandwidth capacity in
optical backbone networks, which drove bandwidth prices down significantly.
Finally, most network operators have healthy balance sheets today, while in 2001
many of them were financially overextended with some declaring outright
bankruptcy.
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 U.S. network
backbone in 2000.
As
telecommunication networks are being transformed to deliver 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 mix and transport these services. Such networks are
not capable of efficiently carrying IP-based services, since they were designed
for public switched telephone network (PSTN), point-to-point voice transmission
only. As a result, new optical transport network (OTN) standards have been
defined to carry IP applications over Ethernet and are at the very
foundation of what the industry is labeling 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) 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 superior user
experience for a combined video, data and voice offering. This architecture
allows them to meet heightened bandwidth requirements and future-proof their
access networks, as residential bandwidth demands are growing from the 1 to
5 Mbit/s (megabits per second) of the past
to 30 to 100 Mbit/s required for the long term. Hybrid
architectures, combining copper and fiber (fiber-to-the-curb, or FTTC, and
fiber-to-the-node, or FTTN), will also expand 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 should be noted that FTTH
deployment costs have largely dropped over the years as increased volume and
improved test tools, like those we offer, are rendering rollouts
increasingly simple and efficient. FTTH is also proving to be a low-cost
alternative for multidwelling units (MDUs) as this network architecture can
deliver large amounts of bandwidth at a minimal cost per apartment. We are
merely 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.
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 becoming mainstream, while a few network operators have already begun
100 Gbit/s Ethernet field trials. In the long run, these solutions will
offer a more economical way to add capacity on saturated network sections,
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
first quarter of fiscal 2010. However, the tail end of the economic
recession in the United States and Western Europe could potentially continue to
delay network investments and necessarily reduce demand for our test and service
assurance solutions.
COMPANY
OVERVIEW
We
reported sales of $45.6 million in the first quarter of fiscal 2010, only 1.7%
lower compared to $46.4 million for the same period last year. We also reported
net accepted orders of $52.2 million in the first quarter of fiscal 2010, almost
flat compared to a record-high $52.3 million during the same period last year,
for a book-to-bill ratio of 1.14. During the second half of fiscal 2009,
our global sales suffered from the global economic recession and significantly
decreased compared to the same period in 2008. However, during the first quarter
of fiscal 2010, we benefited from improving economic and market conditions, our
strong product offering as well as year-end budget flush-outs from some of our
customers; this resulted in a significant increase in sales and bookings
compared to the previous quarter, and only in a very slight decrease compared to
the same period last year, showing a strong recovery for EXFO in the first
quarter of fiscal 2010.
Looking
at the bottom line, we generated GAAP net earnings of $334,000, or $0.01 per
diluted share, in the first quarter of fiscal 2010, compared to $5.3
million, or $0.08 per diluted share, for the same period last year.
Net earnings for the first quarter of fiscal 2010 were negatively affected
by the stronger value of the Canadian dollar compared to the US dollar. In fact,
during the first quarter of fiscal 2010, we reported a foreign exchange loss
of $1.1 million, compared to a significant foreign exchange gain of $4.6
million for the same period last year. The period-end value of the Canadian
dollar increased 17.0% year-over-year compared to the US dollar. Net earnings
per diluted share in the first quarter of 2010 included charges of $0.02 for
stock-based compensation costs and the after-tax amortization expense for
intangible assets. Earnings from operations improved year-over-year from
$2.1 million, or 4.5% of sales in the first quarter of fiscal 2009 to $2.7
million, or 6.0% of sales for the same period this year. EBITDA (earnings before
interest, income taxes, depreciation and amortization) reached $4.4 million,
or 9.6% of sales in the first quarter of fiscal 2010, compared
to $9.1 million, or 19.7% of sales for the same period last year (see
further in this document for a complete reconciliation of EBITDA to GAAP net
earnings).
During
the first quarter of fiscal 2010, we faced a substantial and sudden increase in
the value of the Canadian dollar versus the US dollar year-over-year, which had
a two-fold negative impact on our financial results. Firstly, the average value
of the Canadian dollar vs. the US dollar increased 8.1% in the first quarter of
fiscal 2010, compared to the same period last year. Given that most of our
sales are denominated in US dollars but a significant portion of our
expenses are denominated in Canadian dollars, our financial results were
negatively affected as these expenses (denominated in Canadian dollars)
increased when translated in US dollars for reporting purposes. Secondly, we
recorded a foreign exchange loss of $1.1 million, which represents the
effect of the 3.7% increase (compared to August 31, 2009) in the period-end
value of the Canadian dollar versus the US dollar on our balance sheet items. In
comparison, for the same period last year, we reported a significant foreign
exchange gain of $4.6 million. During that period, the average value
of the Canadian dollar decreased 13.9% compared to the US dollar
year-over-year, and the period-end value of the Canadian dollar decreased 14.1%
compared to August 31, 2008.
On
November 6, 2009, we announced that our Board of Directors had authorized the
second 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 2.3 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, 2009,
and will end on November 9, 2010, 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.
In the
first quarter of fiscal 2010, we launched eight new products, including a
complete mobile backhaul testing and service assurance offering, a new
end-to-end IP video assurance solution, an optical modulation analyzer for
characterizating of signals up to 100G, as well as expanded optical transport
network (OTN) test capabilities on the Transport Blazer for characterizing 40G
and 10G networks. During the quarter, we also announced that our VoIP service
assurance solution was selected by a large broadband wireless provider in a
million-dollar deal. Following the quarter-end, we reported that our AXS-200/635
Triple-Play Test Set had been approved by four tier-1 network operators to
support their deployment of next-generation VDSL2 services and applications. The
combined deals among the three operators are expected to reach
15 millions $ in the next several years. Altogether, we derived 41.0%
of sales in the first quarter from products that have been on the market two
years or less.
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 2010, 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 2010 and those to be adopted
after 2010.
Adopted
in fiscal 2010
In
February 2008, the Canadian Institute of Chartered Accountants (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 adopted this new standard on September 1,
2009, and its adoption had no material effect on our consolidated financial
statements.
In June
2009, the CICA amended section 3862, "Financial Instruments − Disclosures", to
include enhanced disclosures on liquidity risk of financial instruments and
new disclosures on fair value measurements of financial instruments.
The amendments apply to fiscal years ending after September 30, 2009, with
early adoption permitted. We adopted these amendments on September 1,
2009, and their adoption had no significant impact on our consolidated
financial statements.
To
be adopted after fiscal 2010
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 September 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 have
not yet determined the impact 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 adopt one of these three new sections earlier, we must adopt all three
on the same date.
In
February 2008, the Canadian Accounting Standards Board announced that the use of
International Financial Reporting Standards (IFRS) established by the
International Accounting Standard Board (IASB) will be required for fiscal years
beginning January 1, 2011, for publicly accountable profit-oriented enterprises.
Accordingly, we will adopt these new standards during our fiscal year beginning
on September 1, 2011. The IASB has also stated that during the transition
period, companies will be required to provide comparative data for the previous
year established under IFRS. IFRS issued by the IASB require the submission of
additional information in the financial statements and, although the conceptual
framework of IFRS is similar to Canadian GAAP, companies must take into account
differences in accounting principles. We are currently evaluating the impact of
adopting these new standards on our consolidated financial statements. In fact,
we have completed the diagnostic phase to assess and scope the significant
differences between existing Canadian GAAP and IFRS and the impact on our
consolidated financial statements. Following the diagnostic phase, we have begun
a detailed analysis of the accounting policies impacted by the adoption of IFRS,
which is expected to be completed throughout fiscal 2010. Some transitional
options permitted under IFRS are currently under analysis. A summary analysis
indicates that in most cases, we would opt for a
prospective application when the choice is available. The changeover to IFRS may
result in changes to our accounting and internal control
systems.
RESULTS
OF OPERATIONS
The
following discussion and analysis of our consolidated financial condition and
results of operations for the three months ended November 30, 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 13 to our interim consolidated
financial statements. Our principal measurement currency is the Canadian dollar,
although we report our financial statements in US dollars. The following
table sets forth interim consolidated statements of earnings data in thousands
of US dollars, except per share data, and as a percentage of sales for the
periods indicated:
|
Three
months ended
November
30,
|
Three
months ended
November
30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||
|
Consolidated
statements of earnings data:
|
||||||||||||||||
|
Sales
|
$ | 45,560 | $ | 46,363 | 100.0 | % | 100.0 | % | ||||||||
|
Cost
of sales (1)
|
16,438 | 17,480 | 36.1 | 37.7 | ||||||||||||
|
Gross
margin
|
29,122 | 28,883 | 63.9 | 62.3 | ||||||||||||
|
Operating
expenses
|
||||||||||||||||
|
Selling
and administrative
|
15,361 | 17,091 | 33.7 | 36.9 | ||||||||||||
|
Net
research and development
|
8,273 | 7,221 | 18.2 | 15.6 | ||||||||||||
|
Amortization
of property, plant and equipment
|
1,291 | 1,159 | 2.8 | 2.5 | ||||||||||||
|
Amortization
of intangible assets
|
1,469 | 1,319 | 3.2 | 2.8 | ||||||||||||
|
Total
operating expenses
|
26,394 | 26,790 | 57.9 | 57.8 | ||||||||||||
|
Earnings
from operations
|
2,728 | 2,093 | 6.0 | 4.5 | ||||||||||||
|
Interest
income (expense)
|
(42 | ) | 466 | (0.1 | ) | 1.0 | ||||||||||
|
Foreign
exchange gain (loss)
|
(1,109 | ) | 4,568 | (2.4 | ) | 9.9 | ||||||||||
|
Earnings
before income taxes
|
1,577 | 7,127 | 3.5 | 15.4 | ||||||||||||
|
Income
taxes
|
||||||||||||||||
|
Current
|
87 | (61 | ) | 0.2 | (0.1 | ) | ||||||||||
|
Future
|
1,156 | 1,901 | 2.6 | 4.1 | ||||||||||||
| 1,243 | 1,840 | 2.8 | 4.0 | |||||||||||||
|
Net
earnings for the period
|
$ | 334 | $ | 5,287 | 0.7 | % | 11.4 | % | ||||||||
|
Basic
and diluted net earnings per share
|
$ | 0.01 | $ | 0.08 | ||||||||||||
|
Segment
information:
|
||||||||||||||||
|
Sales:
|
||||||||||||||||
|
Telecom
Division
|
$ | 40,292 | $ | 41,159 | 88.4 | % | 88.8 | % | ||||||||
|
Life
Sciences and Industrial Division
|
5,268 | 5,204 | 11.6 | 11.2 | ||||||||||||
| $ | 45,560 | $ | 46,363 | 100.0 | % | 100.0 | % | |||||||||
|
Earnings
from operations:
|
||||||||||||||||
|
Telecom
Division
|
$ | 2,041 | $ | 1,355 | 4.5 | % | 2.9 | % | ||||||||
|
Life
Sciences and Industrial Division
|
687 | 738 | 1.5 | 1.6 | ||||||||||||
| $ | 2,728 | $ | 2,093 | 6.0 | % | 4.5 | % | |||||||||
|
Research
and development data:
|
||||||||||||||||
|
Gross
research and development
|
$ | 9,780 | $ | 8,612 | 21.5 | % | 18.6 | % | ||||||||
|
Net
research and development
|
$ | 8,273 | $ | 7,221 | 18.2 | % | 15.6 | % | ||||||||
|
(1)
|
The
cost of sales is exclusive of amortization, shown
separately.
|
SALES
For the
three months ended November 30, 2009, our global sales decreased 1.7% to
$45.6 million from $46.4 million for the same period last year, with
an 88%-12% split in favor of our Telecom Division (89%-11% for the same period
last year).
Telecom
Division
For the
three months ended November 30, 2009, our Telecom Division sales reached $40.3
million, 2.1% lower compared to $41.2 million during the same period last
year.
The
following table summarizes information about sales of our Telecom Division for
the three-month periods ended November 30, 2008 and 2009, in
thousands of US dollars:
|
Three
months ended
November
30, 2009
|
Three
months ended
November
30, 2008
|
Change
in
$
|
Change
in
%
|
|||||||||||||
|
Telecom
Division sales
|
$ | 40,292 | $ | 41,159 | $ | (867 | ) | (2.1 | )% | |||||||
|
Losses
(gains) on forward exchange contracts
|
(67 | ) | 211 | 278 | ||||||||||||
|
Telecom
Division sales, excluding gains/losses on forward exchange
contracts
|
$ | 40,225 | $ | 41,370 | $ | (1,145 | ) | (2.8 | )% | |||||||
During the second half of fiscal 2009, our telecom sales suffered from the global economic recession and dropped to $31.5 million in the last quarter of the year. However, during the first quarter of fiscal 2010, we benefited from improving economic and market conditions, our strong product offering as well as year-end budget flush-outs from some of our customers; this resulted in a 27.9% increase of our telecom sales compared to the previous quarter as they reached $40.3 million, a decrease of only 2.1% compared to the same period last year, showing a strong recovery for EXFO in the first quarter of fiscal 2010.
Despite
the slight decrease in our telecom sales year-over-year, sales of protocol test
solutions, buoyed by network capacity upgrades on wireline and wireless
networks, increased in the first quarter of fiscal 2010 compared to the same
period last year and represented more than 35% of our telecom sales, compared to
more than 30% during the same period last year; this made this business unit our
fastest growing during that period.
On the
other hand, sales of optical and copper-access test solutions decreased during
the first quarter of fiscal 2010, compared to the same period last year. Our
optical and our copper-access businesses were more affected by the difficult
market conditions of the last few quarters, as many network operators delayed
capital-intensive deployment decisions on FTTx rollouts and capacity expansion,
opting to increase speed rather than digging trenches to add new fiber-optic
cables. However, during the first quarter of fiscal 2010, sales of our optical
and copper-access test solutions increased compared to the previous quarter, as
network operators restarted investing worldwide in capital- intensive
deployments on the basis of the current recovery in the telecom
market.
No
customer accounted for more than 10% of our telecom sales in the first quarter
of fiscal 2009 and 2010.
Life
Sciences and Industrial Division
For the
three months ended November 30, 2009, our Life Sciences and Industrial Division
sales slightly increased 1.2% to $5.3 million from $5.2 million
for the same period last year, and increased 5.4% from the previous quarter. In
the first quarter of fiscal 2010, this Division benefited from improving market
conditions.
A
significant portion of sales of that division are conducted through original
equipment manufacturer (OEM) agreements. Consequently, we are dependent, to some
extent, on the buying pattern of our customers. Moreover, a significant
part of our product offering is related to manufacturing applications of
consumer goods, which have been more susceptible to the state of the global
economy.
Net
bookings
Overall,
for the two divisions, we reported very strong bookings with net accepted orders
of $52.2 million in the first quarter of fiscal 2010, almost flat
compared to record-high bookings of $52.3 million for the same period last year,
for a book-to-bill ratio of 1.14.
As
explained earlier, during the first quarter of fiscal 2010, we benefited from
improving economic and market conditions, from our strong product offering as
well as year-end budget flush-outs from some of our customers; this resulted in
a 28.2% increase of our global bookings compared to the previous quarter, and a
very slight 0.3% decrease compared to the same period last year, showing a
strong recovery for EXFO in the first quarter of fiscal 2010. It should be noted
that net bookings in the first quarter of fiscal 2009 included a major order of
up to $4 million from a Tier-1 wireless operator in North America for
our converged service assurance solution. We did not have such a single order in
the first quarter of fiscal 2010.
Geographic
distribution
In the
first quarter of fiscal 2010, sales to the Americas, Europe, Middle-East and
Africa (EMEA) and Asia-Pacific (APAC) respectively accounted for 59%, 25% and
16% of global sales, compared to 56%, 27% and 17%, respectively for the same
period last year.
In the
first quarter of fiscal 2010, we reported a slight year-over-year sales increase
(in dollars) in the Americas while we reported sales decreases (in dollars) in
EMEA and APAC. In fact, sales to the Americas increased 1.7% year-over-year
while sales to EMEA and APAC respectively decreased 8.4% and 2.8%; this resulted
in a lower percentage of sales coming from international markets during the
first quarter of fiscal 2010 compared to the same period last year. We believe
that the first signs of the economic recovery have been seen in United States
and Canada compared to the rest of the world.
In the
Americas, the increase in sales in the first quarter of fiscal 2010, compared
to the same period last year, comes from Canada and the United States,
where we posted sales growth of 17.9% and 2.1% respectively. In Latin America,
we posted a year-over-year sales decrease of 21.2%. During the first quarter of
fiscal 2010, we made progress in Canada and the United States thanks to our
protocol test solutions, especially our service assurance business, which
reported a significant year-over-year increase. Also, sales to our top customer,
who is located in the United States, increased in the first quarter of fiscal
2010 compared to the same period last year, which contributed to increasing our
sales to the Americas year-over-year. Finally, sales to Latin America fluctuate
depending on the timing and scope of our customers’ projects. However, although
sales to Latin America decreased year-over-year, they significantly improved
from the previous quarter as we benefited from an improving telecom market
environment in this area.
In the
EMEA market, our sales decreased 8.4% in the first quarter of fiscal 2010
compared to the same period last year. In fact, since the last few quarters, due
to the impact of the global economic recession, we have been witnessing caution
from many of our customers in EMEA with their fiscal year budgets (calendar
2009). Many tier-1 carriers in EMEA have postponed or significantly reduced
their spending. Although we saw some improvement in market conditions during the
first quarter of fiscal 2010, there is still a delay and a change in spending
patterns from our customers. However, 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 the
recent additions to our product portfolio and sales strategy.
In the
APAC market, sales decreased 2.8% year-over-year during the first quarter of
fiscal 2010. Despite the negative impact of the global economic recession on our
sales to the APAC market over the last few quarters, sales to this market in the
first quarter of fiscal 2010 were almost flat compared to the same period last
year. As explained above, we benefited from improving market conditions
worldwide during the first quarter of fiscal 2010, which had a positive impact
on sales to the APAC market during that period. We are committed to carrying out
our strategy to increase our market share with products and solutions
developed and targeted for this important market, as well as to expand our
market presence.
Through
our two divisions, we sell our products to a broad range of customers, including
network service providers, network equipment manufacturers, wireless operators,
cable TV operators, optical system and component manufacturers, as well as
customers in the life sciences and high-precision assembly sectors. In the first
quarter of fiscal 2010, no customer accounted for more than 10% of our
global sales, and our top three customers accounted for 10.9% 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 10.4% of our global sales.
GROSS
MARGIN
Gross
margin reached 63.9% of sales for the three months ended
November 30, 2009, compared to 62.3% for the same period last
year.
In the
first quarter of fiscal 2010, gross margin reached its highest level since the
second quarter of fiscal 2001. The increase in our gross margin in the
first quarter of fiscal 2010, compared to the same period last year, can
be explained by the following factors.
First, in
the first quarter of fiscal 2010, our gross margin was positively affected by
the shift in product mix year-over-year in favor of our protocol test solutions,
including those of our service assurance business and maintenance contracts,
as these products and services have better margins than our other test
solutions, especially our optical ones.
In
addition, a larger portion of our sales came from products manufactured in our
facilities 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.
Finally,
during the first quarter of fiscal 2010, there has been a shift in the
geographic distribution of our sales in favor of the Americas compared to
EMEA and APAC, which resulted in an improvement in our gross margin
year-over-year; sales made to the Americas tend to deliver better margins than
those made in EMEA and APAC, as they are mostly done directly with the
end-customers instead of being made through distribution channels.
Considering
the expected sales growth in fiscal 2010, the expected increase in sales of
protocol products, the cost-effective design of our products, our increased
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 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 operations of our manufacturing facilities 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, may have
a negative impact on our gross margin in fiscal 2010 and
beyond.
SELLING
AND ADMINISTRATIVE EXPENSES
For the
three months ended November 30, 2009, selling and administrative expenses were
$15.4 million, or 33.7% of sales, compared to $17.1 million, or 36.9% of
sales for the same period last year.
Given the
restructuring actions taken in the last quarter of fiscal 2009 to reduce our
costs, we have been able to reduce our selling and administrative expenses
during the first quarter of fiscal 2010 compared to the same period last year.
Also, given that current economic conditions are still challenging, we have been
prudent and applied tight control over our selling and administrative costs.
This resulted in lower expenses year-over-year. It should be noted that during
the first quarter of fiscal 2009, we had intensified our sales and marketing
activities, which resulted in higher sales and marketing expenditures
during that period.
However,
during the first quarter of fiscal 2010, the substantial increase in the average
value of the Canadian dollar compared to the US dollar had a significant
negative impact on our selling and administrative expenses, since a significant
portion of these expenses are denominated in Canadian dollars and we report our
results in US dollars.
For
fiscal 2010, considering the current value of the Canadian dollar compared to
the US dollar, we expect our selling and administrative expenses to increase in
dollars and range between 33% and 35% of sales. In particular,
in fiscal 2010, we expect our commission expenses to increase as sales
volume increases. Furthermore, considering our goal of becoming the leading
player in the telecom test, measurement, monitoring and service assurance space,
we plan to continue intensifying our sales and marketing efforts, both domestic
and international, which will also cause our expenses to rise. Finally, any
increase in the strength of the Canadian dollar would also cause our selling and
administrative expenses to increase, as a large portion of these expenses are
incurred in Canadian dollars.
RESEARCH
AND DEVELOPMENT EXPENSES
Gross
research and development expenses
For the
three months ended November 30, 2009, gross research and development expenses
totaled $9.8 million, or 21.5% of sales, compared
to $8.6 million, or 18.6% of sales for the same period last
year.
During
the first quarter of fiscal 2010, the significant increase in the average value
of the Canadian dollar compared to the US dollar had a substantial negative
effect on our gross research and development expenses as a large portion of
these expenses are denominated in Canadian dollars.
In
addition, we intensified our research and development activities, namely in our
software development center in Pune, India and in our service assurance
business development center, which resulted in increased gross research and
development expenses in the first quarter of fiscal 2010, compared to
the same period last year.
Tax credits
For the
three months ended November 30, 2009, tax credits from the Canadian federal and
provincial governments for research and development activities were $1.5
million, or 15.4% of gross research and development expenses, compared to $1.4
million, or 16.2% 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 increase in the average value of the Canadian dollar versus the US
dollar during the first quarter of fiscal 2010, compared to the same period last
year had a positive impact on these tax credits once expressed in US
dollars.
The
decrease in research and development tax credits as a percentage of gross
research and development expenses in the first quarter of fiscal 2010,
compared to the same 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 because we continued
intensifying our activities in our software development center in India
as well as in our service assurance development center, which is located in
the United States. Our research and development activities conducted outside
Canada do not entitle us to tax credits.
For
fiscal 2010, considering the current value of the Canadian dollar compared to
the US dollar, we expect our research and development expenses to increase in
dollars, and range between 15% and 17% of sales, given our focus on innovation,
the addition of software features in our products, our desire to gain market
share and our goal to exceed customer needs and expectations. Also, we are
increasingly taking advantage of talent pools around the world, namely through
our software development center in Pune, India. Finally, any increase in
the strength of the Canadian dollar in the upcoming quarters would also
cause our net research and development expenses to increase, as most
of these are incurred in Canadian dollars.
INTEREST
INCOME (EXPENSE)
Our
interest income (expense) mainly resulted from our short-term investments, less
interests and bank charges. For the three months ended November 30, 2009, the
net interest expense amounted to $42,000, compared to net interest income
of $466,000 for the same period last year.
The
decrease in interest income in the first quarter of fiscal 2010, compared to the
same period last year, is mainly due to the decrease of our cash and short-term
investments following the cash payment of $26.4 million for the redemption
of share capital over the last 12 months, in accordance with our share
buy-back programs as well as the general reduction in interest rates
year-over-year.
FOREIGN
EXCHANGE GAIN (LOSS)
Foreign
exchange gains and losses are mainly the result of the translation of operating
activities denominated in currencies other than the Canadian
dollar.
For the
three months ended November 30, 2009, the foreign exchange loss amounted to $1.1
million compared to a foreign exchange gain of $4.6 million for
the same period last year.
During
the first quarter of fiscal 2010, the value of the Canadian dollar increased
versus the US dollar, compared to the previous quarter, which resulted in a
significant foreign exchange loss during that period. In fact, the period-end
value of the Canadian dollar increased 3.7% to CA$1.0574 = US$1.00 in the first
quarter of fiscal 2010, compared to CA$1.0967 = US$1.00 at the end of the
previous quarter.
On the
other hand, during the first quarter of fiscal 2009, the value of the Canadian
dollar significantly and rapidly decreased versus the US dollar compared to
the previous quarter, which resulted in a record-high foreign exchange gain
during that period. In fact, the period-end value of the Canadian dollar
decreased 14.1% to CA$1.2372 = US$1.00 in the first quarter of fiscal 2009,
compared to CA$1.0626 = US$1.00 at the end of the previous quarter. This
represented the largest quarterly change in the value of the Canadian dollar
compared to the US dollar in our history.
It should
be noted that foreign exchange rate fluctuations also flow through the P&L
line items as a significant portion of our operating items are
denominated in Canadian dollars, and we report our results
in US dollars. Consequently, the significant increase in the average
value of the Canadian dollar in the first quarter of fiscal 2010, compared to
the same period last year, resulted in a significant and negative impact on our
financial results. In fact, the average value of the Canadian dollar in the
first quarter of fiscal 2010 was CA$1.0643 = US$1.00 versus CA$1.1501 = US$1.00
for the same period last year, representing an increase of 8.1% in the
average value of the Canadian dollar versus the US dollar
year-over-year.
We manage
our exposure to currency risks with forward exchange contracts. In addition,
some of our Canadian entities’ operating activities are denominated in US
dollars or other currencies, which further hedges these risks. However, any
increase in the value of the Canadian dollar, compared to the US dollar, would
have a negative impact on our operating results.
INCOME
TAXES
For the
three months ended November 30, 2009, our income tax expense totaled $1.2
million compared to $1.8 million for the same period last
year.
For the
three months ended November 30, 2009, we reported income tax expenses of $1.2
million on earnings
before income taxes of $1.6 million, for an effective income tax rate of 78.8%.
Our combined Canadian and provincial statutory tax rate is 31%. This situation
mainly results from the fact that a significant portion of our foreign exchange
loss is created by the translation of financial statements of our foreign
integrated subsidiaries, and is therefore non-deductible. In addition,
we continue to maintain a valuation allowance for some of our subsidiaries
at loss and we have some non-deductible expenses, such as stock-based
compensation costs. Otherwise, the actual tax rate would have been closer to the
statutory tax rate.
For the
three months ended November 30, 2008, we reported income tax expenses of $1.8
million on earnings
before income taxes of $7.1 million, for an effective income tax rate of 25.8%.
Our combined Canadian and provincial statutory tax rate was 31%. This situation
mainly results from the fact that a significant portion of our foreign exchange
gain is created by the translation of financial statements of our foreign
integrated subsidiaries, and is therefore non-taxable. On the other hand,
we continue to maintain a valuation allowance for some of our subsidiaries
at loss and we have some non-deductible expenses, such as stock-based
compensation costs. Otherwise, the actual tax rate would have been closer to the
statutory tax rate.
Please
refer to note 10 to our interim consolidated financial statements for details on
income taxes and a full reconciliation of the income tax
provision.
LIQUIDITY
AND CAPITAL RESOURCES
Cash requirements
and capital resources
As at
November 30, 2009, cash and short-term investments totaled $68.0 million, while
our working capital was at $116.6 million. Our cash and short-term
investments decreased $1.7 million in the first quarter of fiscal 2010, compared
to the previous quarter, mainly due to the cash flows used by operating
activities in the amount of $2.6 million and the cash payments of $1.3
million for the purchase of capital assets. On the other hand, we recorded
an unrealized foreign exchange gain on our cash and short-term investments
of $2.2 million. 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.
Our
short-term investments consist of commercial paper issued by 9 (11 as at
August 31, 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 significant liquidity risk, and none of them represent
asset-backed commercial paper. For the purposes of
managing our cash position, we have established a cash management policy,
which we follow and monitor on a regular basis. These short-term investments
will be used for working capital and other general corporate purposes,
including other potential acquisitions and our share repurchase
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 effect of our normal course issuer bid. In addition to these
assets, we have unused available lines of credit totaling $14.6 million for
working capital and other general corporate purposes and unused lines of credit
of $15.8 million for foreign currency exposure related to forward
exchange contracts. However, possible operating losses and/or possible
investments in or acquisitions of complementary businesses, products
or technologies may require additional financing. There can be no assurance
that additional debt or equity financing will be available when required or,
if available, that it can be secured on satisfactory
terms.
Sources
and uses of cash
We
finance our operations and meet our capital expenditure requirements mainly
through cash flows from operating activities, the use of our cash and short-term
investments as well as the issuance of subordinate voting shares.
Operating
activities
Cash
flows used by operating activities were $2.6 million for the three months ended
November 30, 2009, compared to $2.7 million for the same period last
year.
Cash
flows used by operating activities in the first quarter of fiscal 2010 were
mainly attributable to the net earnings after items not affecting cash of $4.9
million, offset by the negative net change in non-cash operating items
of $7.5 million; this was mainly due to the negative effect on cash of
the increase of $4.1 million in our accounts receivable (increase and timing of
sales), the increase of $1.5 million in our income taxes and tax credits
recoverable (mainly tax credits earned during the quarter and not yet
recovered), the increase of $2.4 million in our inventories, to sustain
increased sales activities and the increase of $605,000 in prepaid expenses (IT
maintenance). However, accounts payable and accrued liabilities increased $1.1
million due to timing of purchases and payments during
the quarter.
Cash
flows used by operating activities in the first quarter of fiscal 2009 were
mainly attributable to the net earnings after items not affecting cash of $7.3
million, offset by the negative net change in non-cash operating items
of $10.0 million; this was mainly due to the negative effect on cash
of the increase of $7.3 million in our accounts receivable (timing of sales, as
sales mainly occurred at the end of the quarter), the increase of $696,000 in
our income taxes and tax credits recoverable (mainly tax credits earned during
the quarter and not yet recovered), the increase of $542,000 in our prepaid
expenses (fees paid for the substantial issuer bid), and the decrease
of $1.1 million in our accounts payable and accrued liabilities,
mainly due to the timing of purchases and payments during the
quarter.
Investing
activities
Cash
flows provided by investing activities were $1.0 million for the three months
ended November 30, 2009, compared to $3.0 million for the same period
last year. In the first quarter of fiscal 2010, we disposed
(net of acquisitions) of $2.3 million worth of short-term investments
but paid $1.3 million for the purchase of capital assets.
For the
corresponding period last year, we disposed (net of acquisitions) $4.5 million
worth of short-term investments but paid $1.5 million for the purchase of
capital assets.
Financing
activities
Cash
flows used by financing activities were $14,000 for the three months ended
November 30, 2009, compared to $421,000 for the same period last year.
During the first quarter of fiscal 2010, we redeemed share capital for $14,000
pursuant to our normal course issuer bid program. During the corresponding
period last year, we paid $447,000 for the redemption of share capital
under our normal course issuer bid program and received $26,000 from the
exercise of stock options.
FORWARD
EXCHANGE CONTRACTS
We
utilize forward exchange contracts to manage our foreign currency exposure. Our
policy is not to utilize those derivative financial instruments for trading or
speculative purposes.
Our
forward exchange contracts, which are used to hedge anticipated
US-dollar-denominated sales, qualify for hedge accounting; therefore, realized
foreign exchange translation gains and losses on these contracts are recognized
as an adjustment of the revenues when the corresponding sales are
recorded.
As at
November 30, 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
|
||||||
|
December
2009 to August 2010
|
$ | 24,000,000 | 1.1005 | |||||
|
September
2010 to August 2011
|
21,500,000 | 1.1047 | ||||||
|
September
2011
|
1,000,000 | 1.1278 | ||||||
|
Total
|
$ | 46,500,000 | 1.1030 | |||||
The carrying amount of forward exchange contracts is equal to fair value, which is based on the amount at which they could be settled based on estimated current market rates.The fair value of forward exchange contracts amounted to net gains of $530,000 as at August 31, 2009 and $2.0 million as at November 30, 2009, following the increase in the value of the Canadian dollar compared to the US dollar during the quarter.
CONTINGENCY
On
November 27, 2001, a class action suit was filed in the United States District
Court for the Southern District of New York against EXFO, four of the
underwriters of our Initial Public Offering and some of our executive officers
pursuant to the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder and Sections 11, 12 and 16 of the Securities Act of 1933. This class
action alleges that EXFO’s registration statement and prospectus filed with the
Securities and Exchange Commission on June 29, 2000, contained
material misrepresentations and/or omissions resulting from (i) the
underwriters allegedly soliciting and receiving additional, excessive and
undisclosed commissions from certain investors in exchange for which they
allocated material portions of the shares issued in connection with EXFO’s
Initial Public Offering; and (ii) the underwriters allegedly entering into
agreements with customers whereby shares issued in connection with EXFO’s
Initial Public Offering would be allocated to those customers in exchange
for which customers agreed to purchase additional amounts of shares
in the after-market at predetermined prices.
On April
19, 2002, the plaintiffs filed an amended complaint containing master
allegations against all of the defendants in all of the 310 cases included in
this class action and also filed an amended complaint containing allegations
specific to four of EXFO’s underwriters, EXFO and two of our executive officers.
In addition to the allegations mentioned above, the amended complaint alleges
that the underwriters (i) used their analysts to manipulate the stock
market; and (ii) implemented schemes that allowed issuer insiders to sell
their shares rapidly after an initial public offering and benefit from high
market prices. As concerns EXFO and our two executive officers in particular,
the amended complaint alleges that (i) EXFO’s registration statement was
materially false and misleading because it failed to disclose the additional
commissions and compensation to be received by underwriters; (ii) the two
named executive officers learned of or recklessly disregarded the alleged
misconduct of the underwriters; (iii) the two named executive officers had
motive and opportunity to engage in alleged wrongful conduct due to personal
holdings of EXFO’s stock and the fact that an alleged artificially inflated
stock price could be used as currency for acquisitions; and (iv) the two named
executive officers, by virtue of their positions with EXFO, controlled it and
the contents of the registration statement and had the ability to prevent its
issuance or cause it to be corrected. The plaintiffs in this suit seek an
unspecified amount for damages suffered.
In July
2002, the issuers filed a motion to dismiss the plaintiffs’ amended complaint
and a decision was rendered on February 19, 2003. Only one of the claims
against EXFO was dismissed. On October 8, 2002, the claims against its
officers were dismissed pursuant to the terms of Reservation of Rights and
Tolling Agreements entered into with the plaintiffs.
In June
2004, an agreement of partial settlement was submitted to the court for
preliminary approval. The proposed partial settlement was between the
plaintiffs, the issuer defendants in the consolidated actions, the issuer
officers and directors named as defendants, and the issuers’ insurance
companies. The court granted the preliminary approval motion on
February 15, 2005, subject to certain modifications. On August 31,
2005, the court issued a preliminary order further approving the modifications
to the settlement and certifying the settlement classes. The court also
appointed the notice administrator for the settlement and ordered that notice of
the settlement be distributed to all settlement class members by
January 15, 2006. The settlement fairness hearing occurred on
April 24, 2006, and the court reserved decision at that time.
While the
partial settlement was pending approval, the plaintiffs continued to litigate
against the underwriter defendants. The district court directed that the
litigation proceed within a number of “focus cases” rather than in all of the
310 cases that have been consolidated. EXFO's case is not one of these
focus cases. On October 13, 2004, the district court certified the focus
cases as class actions. The underwriter defendants appealed that ruling,
and on December 5, 2006, the Court of Appeals for the Second Circuit
reversed the district court’s class certification decision.
On April
6, 2007, the Second Circuit denied the plaintiffs’ petition for rehearing of
that decision and, on May 18, 2007, the Second Circuit denied the
plaintiffs’ petition for rehearing en banc. In light of the
Second Circuit’s opinion, liaison counsel for all issuer defendants, including
EXFO, informed the court that this settlement 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 was held on
September 10, 2009. On October 6, 2009, the Court entered an opinion granting
final approval to the settlement and directing that the Clerk of the Court close
these actions. Notices of appeal of the opinion granting final approval have
been filed. Given that the settlement remains subject to appeal as of the date
of issuance of these financial statements, the ultimate outcome of the
contingency is uncertain. However, based on the settlement approved on October
6, 2009, and the related insurance against such claims, we have determined the
impact to our financial position and results of operations
as at and for the period ended November 30, 2009
to be immaterial.
SHARE
CAPITAL AND STOCK-BASED COMPENSATION PLANS
Share
capital
As at
January 12, 2010, EXFO had 36,643,000 multiple voting shares outstanding,
entitling to 10 votes each and 22,757,001 subordinate voting shares outstanding.
The multiple voting shares and the subordinate voting shares are unlimited
as to number and without par value.
Long-Term
Incentive Plan and Deferred Share Unit Plan
The
aggregate number of subordinate voting shares covered by stock options,
restricted share units (RSUs) and deferred share units (DSUs) granted under the
Long-Term Incentive Plan and the Deferred Share Unit Plan was 3,281,878 as at
November 30, 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 the Board of Directors and to Management and Corporate Officers of the
company and its subsidiaries as at November 30, 2009:
|
Stock Options
|
Number
|
%
of issued and outstanding
|
Weighted
average exercise price
|
|||||||||
|
Chairman
of the Board, President and CEO (one individual)
|
179,642 | 11 | % | $ | 9.05 | |||||||
|
Board
of Directors (four individuals)
|
148,807 | 9 | 6.19 | |||||||||
|
Management
and Corporate Officers (eight individuals)
|
212,139 | 13 | 14.49 | |||||||||
| 540,588 | 33 | % | $ | 10.40 | ||||||||
|
Restricted Share
Units
|
Number
|
%
of issued and outstanding
|
||||||
|
Chairman
of the Board, President and CEO (one individual)
|
205,019 | 13 | % | |||||
|
Management
and Corporate Officers (eleven individuals)
|
577,372 | 38 | ||||||
| 782,391 | 51 | % | ||||||
|
Deferred Share
Units
|
Number
|
%
of issued and outstanding
|
||||||
|
Board
of Directors (five individuals)
|
121,341 | 100 | % | |||||
OFF-BALANCE
SHEET ARRANGEMENTS
As at
November 30, 2009, our off-balance sheet arrangements consisted of letters of
guarantee. As at November 30, 2009, our letters of guarantee
amounted to $5.6 million; these letters of guarantee expire at various
dates through fiscal 2016. From this amount, we had $1.2 million worth of
letters of guarantee for our own selling and purchasing requirements, which were
for the most part reserved from one of our lines of credit. The remainder, in
the amount of $4.4 million, was used to secure our line of credit in CNY
(Chinese currency). This line of credit was unused as at November 30,
2009.
VARIABLE
INTEREST ENTITY
As of
November 30, 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 plans and
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 and due to the fact that a significant portion of our
operational costs are incurred in Canadian dollars. These risks are partially
hedged by operating expenses denominated in US dollars and forward
exchange contracts. Any 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 unfavorable general 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 and by the global economic recession in 2009.
This recession affected our key geographic regions or markets, and we
experienced and may continue to experience a material adverse impact on our
business, operating results and financial conditions.
Also,
risks and uncertainties related to the telecommunications test, measurement,
monitoring and service assurance 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, which
requires certain actions, such as the operation of our manufacturing facilities
in China and 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 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, which, consequently, 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 at
www.sedar.com in Canada or www.sec.gov/edgar.shtml
in the U.S.
NON-GAAP
FINANCIAL MEASURE
We
provide a non-GAAP financial measure (EBITDA*) as supplemental information
regarding our operational performance. We use EBITDA for the purposes of
evaluating our historical and prospective financial performance, as well as our
performance relative to our competitors. This measure also helps us to plan and
forecast future periods as well as to make operational and strategic decisions.
We believe that providing this information to our investors, in addition to
the GAAP measures, allows them to see the company’s results through the eyes of
management, and to better understand our historical and future financial
performance.
The
presentation of this additional information is not prepared in accordance with
GAAP. Therefore, the information may not necessarily be comparable to that of
other companies and should be considered as a supplement
to, not a substitute for, the corresponding measures calculated
in accordance with GAAP.
The
following table summarizes the reconciliation of EBITDA to GAAP net earnings, in
thousands of US dollars:
|
Three months ended November 30,
|
||||||||
|
2009
|
2008
|
|||||||
|
GAAP
net earnings for the period
|
$ | 334 | $ | 5,287 | ||||
|
Add
(deduct):
|
||||||||
|
Amortization
of property, plant and equipment
|
1,291 | 1,159 | ||||||
|
Amortization
of intangible assets
|
1,469 | 1,319 | ||||||
|
Interest
(income) expense
|
42 | (466 | ) | |||||
|
Income
taxes
|
1,243 | 1,840 | ||||||
|
EBITDA
for the period
|
$ | 4,379 | $ | 9,139 | ||||
|
EDITDA
in percentage of sales
|
9.6 | % | 19.7 | % | ||||
|
*
|
EBITDA
is defined as net earnings before interest, income taxes, amortization of
property, plant and equipment and amortization of intangible
assets.
|
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