UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16
Under the Securities Exchange Act of 1934
For the month of July 2010
EXFO Inc.
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.
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Form 20-F þ
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Form 40-F o
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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.
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Yes o
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No þ
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If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-______.
On June 29, 2010, EXFO Inc., a Canadian corporation, reported its results of operations for the third fiscal quarter ended May 31, 2010. This report on Form 6-K sets forth the news release relating to EXFO’s announcement and certain information relating to EXFO’s financial condition and results of operations for the third fiscal quarter of the 2010 fiscal year. This press release and information relating to EXFO’s financial condition and results of operations for the third 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.
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EXFO INC.
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|
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By: /s/ Germain Lamonde
Name: Germain Lamonde
Title: President and Chief Executive Officer
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Date: July 6, 2010
EXFO Reports Record Sales and Bookings for Third Quarter of Fiscal 2010
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§
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Sales increase 44.9% year-over-year to US$63.2 million
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§
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Bookings improve 58.2% year-over-year to US$63.6 million, book-to-bill ratio of 1.01
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§
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Gross margin reaches 62.3%
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§
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EBITDA amounts to US$5.7 million or 9.1% of sales
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QUEBEC CITY, CANADA, June 29, 2010—EXFO Inc. (NASDAQ: EXFO; TSX: EXF) reported today record sales and bookings for its third quarter ended May 31, 2010.
Sales increased 44.9% to US$63.2 million in the third quarter of fiscal 2010 from US$43.6 million in the third quarter of 2009 and 16.8% from US$54.1 million in the second quarter of 2010. NetHawk Oyj, which was acquired in mid-March, contributed US$6.0 million to EXFO’s revenues in the third quarter of 2010. After three quarters into fiscal 2010, sales increased 19.4% to US$162.9 million from US$136.4 million for the same period in 2009.
Net bookings improved 58.2% to US$63.6 million in the third quarter of fiscal 2010 from US$40.2 million in the same period last year and 10.0% from US$57.8 million in the second quarter of 2010. The company’s book-to-bill ratio was 1.01 in the third quarter of 2010 and 1.07 after three quarters into 2010.
Gross margin reached 62.3% of sales in the third quarter of fiscal 2010 compared to 62.3% in the third quarter of 2009 and 60.0% in the second quarter of 2010. After three quarters into fiscal 2010, gross margin attained 62.0% compared to 61.7% after three quarters into 2009.
GAAP net earnings in the third quarter of fiscal 2010 totaled US$0.2 million, or US$0.00 per diluted share, compared to a net loss of US$23.3 million, or US$0.39 per share, in the same period last year and net earnings of US$1.2 million, or US$0.02 per diluted share, in the second quarter of fiscal 2010. It should be noted that EXFO recorded a pre-tax foreign exchange loss of US$1.2 million in the third quarter of fiscal 2010 compared to a loss of US$4.7 million in the third quarter of 2009 and a loss of US$1.0 million in the second quarter of 2010. EXFO also incurred US$21.7 million in impairment of goodwill in the third quarter of 2009. GAAP net earnings in the third quarter of fiscal 2010 included US$2.4 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$0.2 million.
After three quarters into fiscal 2010, GAAP net earnings amounted to US$1.7 million, or US$0.03 per diluted share, compared to a loss of US$15.4 million, or US$0.25 per share, for the same period in 2009. GAAP net earnings after three quarters into 2010 included US$5.3 million in amortization of intangible assets and US$1.3 million in stock-based compensation costs. The former item resulted in an income tax recovery of US$1.2 million.
“I’m quite pleased with our execution so far in fiscal 2010 as we continue to outperform our industry through robust organic sales growth, while initiating key transformations like the recent acquisition of wireless test leader NetHawk to benefit from exciting growth opportunities for years to come,” said Germain Lamonde, EXFO’s Chairman, President and CEO. “Within the wireline and wireless markets, our positioning and ability to make a real difference for our global customer base keeps improving, largely due to highly differentiated solutions and the significant synergies that exist between our various product lines. As our revenue mix gradually shifts towards higher-margin transport and datacom, service assurance and wireless test solutions, earnings leverage will improve which is aligned with our commitment to increase EBITDA (in dollars) faster than sales.”
Unaudited Selected Financial Information
(In thousands of US dollars)
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Segmented results:
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Q3 2010 | Q3 2009 | Q2 2010 | |||||||||
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Sales:
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||||||||||||
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Telecom Division
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$ | 55,930 | $ | 39,047 | $ | 47,951 | ||||||
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Life Sciences and Industrial Division
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7,280 | 4,589 | 6,159 | |||||||||
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Total
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$ | 63,210 | $ | 43,636 | $ | 54,110 | ||||||
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Earnings (loss) from operations:
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||||||||||||
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Telecom Division
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$ | 1,932 | $ | (21,990 | ) | $ | 2,748 | |||||
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Life Sciences and Industrial Division
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1,031 | 438 | 1,187 | |||||||||
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Total
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$ | 2,963 | $ | (21,552 | ) | $ | 3,935 | |||||
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Other selected information:
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||||||||||||
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GAAP net earnings (loss)
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$ | 169 | $ | (23,346 | ) | $ | 1,154 | |||||
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Selected items included in GAAP net earnings (loss):
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||||||||||||
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Amortization of intangible assets
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$ | 2,354 | $ | 1,355 | $ | 1,502 | ||||||
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Stock-based compensation costs
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$ | 426 | $ | 383 | $ | 469 | ||||||
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Impairment of goodwill
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$ | – | $ | 21,713 | $ | – | ||||||
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Income tax effect of the above selected items
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$ | (208 | ) | $ | (2,273 | ) | $ | (484 | ) |
Operating Expenses
Selling and administrative expenses totaled US$20.6 million, or 32.5% of sales, in the third quarter of fiscal 2010 compared to US$16.7 million, or 38.3% of sales, in the same period last year and US$16.9 million, or 31.3% of sales, in the second quarter of 2010.
Gross research and development expenses amounted to US$14.0 million, or 22.1% of sales, in the third quarter of fiscal 2010 compared to US$9.3 million, or 21.4% of sales, in the third quarter of 2009 and US$10.4 million, or 19.2% of sales, in the second quarter of 2010.
Net R&D expenses totaled US$11.9 million, or 18.8% of sales, in the third quarter of fiscal 2010 compared to US$7.8 million, or 17.8% of sales, in the same period last year and US$8.8 million, or 16.3% of sales, in the second quarter of 2010.
Third-Quarter Highlights
IP Fixed-Mobile Network Convergence and Broadband Deployments — EXFO closed the acquisition of NetHawk Oyj, a leading supplier of 2G, 3G and 4G/LTE protocol analyzers and simulators for the wireless industry, in the third quarter of fiscal 2010. This strategic acquisition transforms EXFO into a major force in the 3G and 4G/LTE wireless test market, and positions the company among the top-five suppliers in the global telecom test and service assurance industry with end-to-end assessment of the performance and reliability of converged, IP fixed and mobile networks.
In terms of new product introductions, EXFO released optical transport network (OTN) testing capabilities for its 40G and 100G Packet Blazer product line as well as software for characterizing the transport of Fibre Channel services over OTN.
Profitable Growth Path — EXFO reported EBITDA of US$5.7 million, or 9.1% of sales, in the third quarter of fiscal 2010 on revenue of US$63.2 million compared to negative EBITDA of $2.0 million in the third quarter of 2009 on revenue of US$43.6 million. It should be noted the company recorded a pre-tax foreign exchange loss of US$1.2 million in the third quarter of 2010 and US$4.7 million in the same period in 2009. Foreign exchange losses or gains are included in EBITDA. After three quarters into fiscal 2010, EXFO posted EBITDA of US$15.8 million, or 9.7% of sales, on revenue of US$162.9 million. See the section below entitled, “Non-GAAP Financial Measure,” for a reconciliation of EBITDA with GAAP net earnings (loss).
Business Outlook
EXFO forecasted sales between US$61 million and US$66 million and GAAP net results between a loss of US$0.01 per share and earnings of US$0.03 per share for the fourth quarter of 2010. GAAP net results assume a pre-tax foreign exchange loss of US$0.01 per share and include US$0.04 per share in after-tax amortization of intangible assets and stock-based compensation costs.
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 and volatile 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 third quarter of fiscal 2010. To listen to the conference call and participate in the question period via telephone, dial 1-416-981-9076. Germain Lamonde, Chairman, President and CEO, and Pierre Plamondon, CA, Vice-President of Finance and Chief Financial Officer, will participate in the call. An audio replay of the conference call will be available one hour after the event until 7 p.m. on July 6, 2010. The replay number is 1-402-977-9141 and the reservation number is 21469623. 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 next-generation test and service assurance solutions for wireless and wireline network operators and equipment manufacturers in the global telecommunications industry. The Telecom Division, which accounts for about 90% of the company’s revenues, offers core-to-edge solutions that assess the performance and reliability of converged, IP fixed and mobile networks. Key technologies supported include 3G, 4G/LTE, IMS, Ethernet, OTN, xDSL, and various optical technologies accounting for an estimated 33% of the portable fiber-optic test market. The Life Sciences and Industrial Division provides solutions in medical device and opto-electronics assembly, fluorescence microscopy and other life science sectors. EXFO has a staff of approximately 1,600 people in 25 countries, supporting more than 2,000 customers worldwide. 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 our ability to successfully integrate our acquired and to-be-acquired businesses; fluctuating exchange rates; consolidation in the global telecommunications test, measurement and service assurance industry and increased competition among vendors; 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 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 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 press release. 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.
Non-GAAP Financial Measure
EXFO’s provide a non-GAAP financial measure (EBITDA*) as supplemental information regarding its operational performance. The company uses this measure for the purposes of evaluating historical and prospective financial performance, as well as its performance relative to competitors. This measure also helps EXFO to plan and forecast future periods as well as to make operational and strategic decisions. EXFO believes that providing this information, in addition to GAAP measures, allows investors to see the company’s results through the eyes of management, and to better understand historical and future financial performance.
The presentation of this additional information is not prepared in accordance with GAAP. Therefore, the information may not necessarily be comparable to that of other companies and should be considered as a supplement to, not a substitute for, the corresponding measures calculated in accordance with GAAP.
The following table summarizes the reconciliation of EBITDA to GAAP net earnings (loss) in thousands of US dollars:
|
Three months
ended
May 31, 2010
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Nine months
ended
May 31, 2010
|
Three months
ended
May 31, 2009
|
Nine months
ended
May 31, 2009
|
|||||||||||||
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GAAP net earnings (loss) for the period
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$ | 169 | $ | 1,657 | $ | (23,346 | ) | $ | (15,404 | ) | ||||||
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Add (deduct):
|
||||||||||||||||
|
Amortization of property, plant and equipment
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1,643 | 4,246 | 1,166 | 3,374 | ||||||||||||
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Amortization of intangible assets
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2,354 | 5,325 | 1,355 | 3,920 | ||||||||||||
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Interest expense (income)
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59 | 177 | (42 | ) | (683 | ) | ||||||||||
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Income taxes (recovery)
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1,524 | 4,435 | (2,851 | ) | 198 | |||||||||||
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Impairment of goodwill
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– | – | 21,713 | 21,713 | ||||||||||||
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EBITDA for the period
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$ | 5,749 | $ | 15,840 | $ | (2,005 | ) | $ | 13,118 | |||||||
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EDITDA in percentage of sales
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9.1 | % | 9.7 | % | (4.6 | )% | 9.6 | % | ||||||||
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*
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EBITDA is defined as net earnings (loss) before interest, income taxes, amortization of property, plant and equipment, amortization of intangible assets and impairment of goodwill.
|
For more information
Vance Oliver
Manager, Investor Relations
(418) 683-0913, Ext. 3733
vance.oliver@exfo.com
EXFO Inc.
Unaudited Interim Consolidated Balance Sheet
(in thousands of US dollars)
|
As at
May 31,
2010
|
As at
August 31,
2009
|
|||||||
|
Assets
|
||||||||
|
Current assets
|
||||||||
|
Cash
|
$ | 18,456 | $ | 10,611 | ||||
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Short-term investments
|
6,762 | 59,105 | ||||||
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Accounts receivable (note 6)
|
||||||||
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Trade
|
47,357 | 22,946 | ||||||
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Other
|
6,267 | 2,752 | ||||||
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Income taxes and tax credits recoverable
|
4,201 | 2,353 | ||||||
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Inventories (note 7)
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41,742 | 30,863 | ||||||
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Prepaid expenses
|
3,304 | 2,043 | ||||||
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Future income taxes
|
6,670 | 5,538 | ||||||
| 134,759 | 136,211 | |||||||
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Tax credits recoverable
|
31,382 | 26,762 | ||||||
|
Forward exchange contracts (note 6)
|
559 | 428 | ||||||
|
Property, plant and equipment
|
23,119 | 19,100 | ||||||
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Intangible assets
|
28,788 | 16,859 | ||||||
|
Goodwill (note 4)
|
34,293 | 22,478 | ||||||
|
Future income taxes
|
13,837 | 18,533 | ||||||
| $ | 266,737 | $ | 240,371 | |||||
|
Liabilities
|
||||||||
|
Current liabilities
|
||||||||
|
Accounts payable and accrued liabilities (note 8)
|
$ | 30,653 | $ | 21,650 | ||||
|
Current portion of long-term debt (note 9)
|
551 | − | ||||||
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Deferred revenue
|
10,482 | 6,481 | ||||||
| 41,686 | 28,131 | |||||||
|
Future income taxes
|
446 | − | ||||||
|
Deferred revenue
|
4,754 | 4,195 | ||||||
|
Long-term debt (note 9)
|
1,654 | − | ||||||
| 48,540 | 32,326 | |||||||
|
Contingencies (note 10)
|
||||||||
|
Shareholders’ equity
|
||||||||
|
Share capital (note 11)
|
106,018 | 104,846 | ||||||
|
Contributed surplus
|
18,159 | 17,758 | ||||||
|
Retained earnings
|
45,566 | 43,909 | ||||||
|
Accumulated other comprehensive income
|
48,454 | 41,532 | ||||||
| 218,197 | 208,045 | |||||||
| $ | 266,737 | $ | 240,371 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
Page 7 of 57
EXFO Inc.
Unaudited Interim Consolidated Statements of Earnings
(in thousands of US dollars, except share and per share data)
|
Three months ended
May 31, 2010
|
Nine months ended
May 31, 2010
|
Three months ended
May 31, 2009
|
Nine months ended
May 31, 2009
|
|||||||||||||
|
Sales
|
$ | 63,210 | $ | 162,880 | $ | 43,636 | $ | 136,371 | ||||||||
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Cost of sales (1,2) (note 7)
|
23,832 | 61,903 | 16,441 | 52,274 | ||||||||||||
|
Gross margin
|
39,378 | 100,977 | 27,195 | 84,097 | ||||||||||||
|
Operating expenses
|
||||||||||||||||
|
Selling and administrative (1)
|
20,562 | 52,842 | 16,732 | 49,623 | ||||||||||||
|
Net research and development (1) (note 12)
|
11,856 | 28,938 | 7,781 | 22,327 | ||||||||||||
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Amortization of property, plant and equipment
|
1,643 | 4,246 | 1,166 | 3,374 | ||||||||||||
|
Amortization of intangible assets
|
2,354 | 5,325 | 1,355 | 3,920 | ||||||||||||
|
Impairment of goodwill (note 4)
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− | − | 21,713 | 21,713 | ||||||||||||
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Total operating expenses
|
36,415 | 91,351 | 48,747 | 100,957 | ||||||||||||
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Earnings (loss) from operations
|
2,963 | 9,626 | (21,552 | ) | (16,860 | ) | ||||||||||
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Interest income (expense), net
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(59 | ) | (177 | ) | 42 | 683 | ||||||||||
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Foreign exchange gain (loss)
|
(1,211 | ) | (3,357 | ) | (4,687 | ) | 971 | |||||||||
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Earnings (loss) before income taxes
|
1,693 | 6,092 | (26,197 | ) | (15,206 | ) | ||||||||||
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Income taxes (note 13)
|
||||||||||||||||
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Current
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326 | 177 | (88 | ) | 148 | |||||||||||
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Future
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1,198 | 4,258 | (2,763 | ) | 50 | |||||||||||
| 1,524 | 4,435 | (2,851 | ) | 198 | ||||||||||||
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Net earnings (loss) for the period
|
$ | 169 | $ | 1,657 | $ | (23,346 | ) | $ | (15,404 | ) | ||||||
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Basic and diluted net earnings (loss) per share
|
$ | 0.00 | $ | 0.03 | $ | (0.39 | ) | $ | (0.25 | ) | ||||||
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Basic weighted average number of shares outstanding (000’s)
|
59,532 | 59,448 | 59,613 | 62,609 | ||||||||||||
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Diluted weighted average number of shares outstanding (000’s) (note 14)
|
60,894 | 60,516 | 59,613 | 62,609 | ||||||||||||
|
(1) Stock-based compensation costs included in:
|
||||||||||||||||
|
Cost of sales
|
$ | 20 | $ | 104 | $ | 37 | $ | 97 | ||||||||
|
Selling and administrative
|
269 | 839 | 238 | 637 | ||||||||||||
|
Net research and development
|
137 | 370 | 108 | 296 | ||||||||||||
| $ | 426 | $ | 1,313 | $ | 383 | $ | 1,030 | |||||||||
(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 57
Unaudited Interim Consolidated Statements of Comprehensive Income (Loss)
and Accumulated Other Comprehensive Income
(in thousands of US dollars)
|
Comprehensive income (loss)
|
||||||||||||||||
|
Three months ended
May 31, 2010
|
Nine months ended
May 31, 2010
|
Three months ended
May 31, 2009
|
Nine months ended
May 31, 2009
|
|||||||||||||
|
Net earnings (loss) for the period
|
$ | 169 | $ | 1,657 | $ | (23,346 | ) | $ | (15,404 | ) | ||||||
|
Foreign currency translation adjustment
|
(2,656 | ) | 6,146 | 31,986 | (9,593 | ) | ||||||||||
|
Changes in unrealized losses on short-term investments
|
− | − | − | 22 | ||||||||||||
|
Unrealized gains (losses) on forward exchange contracts
|
545 | 1,867 | 7,425 | (1,238 | ) | |||||||||||
|
Reclassification of realized gains (losses) on forward exchange contracts in net earnings (loss)
|
(436 | ) | (741 | ) | 1,849 | 3,083 | ||||||||||
|
Future income taxes effect of the above items
|
(34 | ) | (350 | ) | (2,875 | ) | (572 | ) | ||||||||
|
Comprehensive income (loss)
|
$ | (2,412 | ) | $ | 8,579 | $ | 15,039 | $ | (23,702 | ) | ||||||
|
Accumulated other comprehensive income
|
||||||||
|
Nine months ended
May 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Foreign currency translation adjustment
|
||||||||
|
Cumulative effect of prior periods
|
$ | 40,458 | $ | 51,129 | ||||
|
Current period
|
6,146 | (9,593 | ) | |||||
| 46,604 | 41,536 | |||||||
|
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
|
776 | 1,273 | ||||||
| 1,852 | 1,177 | |||||||
|
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
|
$ | 48,454 | $ | 42,711 | ||||
Total retained earnings and accumulated other comprehensive income amounted to $87,801 and $94,020 as at May 31, 2009 and 2010, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
Page 9 of 57
Unaudited Interim Consolidated Statements of Retained Earnings
and Contributed Surplus
(in thousands of US dollars)
|
Retained earnings
|
||||||||
|
Nine months ended
May 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Balance – Beginning of the period
|
$ | 43,909 | $ | 60,494 | ||||
|
Add (deduct)
|
||||||||
|
Net earnings (loss) for the period
|
1,657 | (15,404 | ) | |||||
|
Balance – End of the period
|
$ | 45,566 | $ | 45,090 | ||||
|
Contributed surplus
|
||||||||
|
Nine months ended
May 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Balance – Beginning of the period
|
$ | 17,758 | $ | 5,226 | ||||
|
Add (deduct)
|
||||||||
|
Stock-based compensation costs
|
1,293 | 1,012 | ||||||
|
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards (note 11)
|
(895 | ) | (460 | ) | ||||
|
Discount on redemption of share capital (note 11)
|
3 | 11,257 | ||||||
|
Balance – End of the period
|
$ | 18,159 | $ | 17,035 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
Page 10 of 57
|
Three months ended
May 31, 2010
|
Nine months ended
May 31, 2010
|
Three months ended
May 31, 2009
|
Nine months ended
May 31, 2009
|
|||||||||||||
|
Cash flows from operating activities
|
||||||||||||||||
|
Net earnings (loss) for the period
|
$ | 169 | $ | 1,657 | $ | (23,346 | ) | $ | (15,404 | ) | ||||||
|
Add (deduct) items not affecting cash
|
||||||||||||||||
|
Change in discount on short-term investments
|
16 | 25 | (18 | ) | 573 | |||||||||||
|
Stock-based compensation costs
|
426 | 1,313 | 383 | 1,030 | ||||||||||||
|
Amortization
|
3,997 | 9,571 | 2,521 | 7,294 | ||||||||||||
|
Deferred revenue
|
(515 | ) | 2,408 | (178 | ) | 3,245 | ||||||||||
|
Write-down of capital assets
|
− | − | 237 | 237 | ||||||||||||
|
Impairment of goodwill (note 4)
|
− | − | 21,713 | 21,713 | ||||||||||||
|
Future income taxes
|
1,198 | 4,258 | (2,763 | ) | 50 | |||||||||||
|
Change in unrealized foreign exchange gain/loss
|
(1,090 | ) | (47 | ) | 2,516 | (1,541 | ) | |||||||||
| 4,201 | 19,185 | 1,065 | 17,197 | |||||||||||||
|
Change in non-cash operating items
|
||||||||||||||||
|
Accounts receivable
|
(9,028 | ) | (18,257 | ) | 3,456 | 639 | ||||||||||
|
Income taxes and tax credits
|
(1,644 | ) | (5,015 | ) | (1,845 | ) | (2,189 | ) | ||||||||
|
Inventories
|
(3,984 | ) | (7,097 | ) | 568 | 689 | ||||||||||
|
Prepaid expenses
|
458 | (157 | ) | (104 | ) | (338 | ) | |||||||||
|
Accounts payable and accrued liabilities
|
(1,723 | ) | 1,952 | (1,301 | ) | (539 | ) | |||||||||
| (11,720 | ) | (9,389 | ) | 1,839 | 15,459 | |||||||||||
|
Cash flows from investing activities
|
||||||||||||||||
|
Additions to short-term investments
|
(32,285 | ) | (212,882 | ) | (94,435 | ) | (349,899 | ) | ||||||||
|
Proceeds from disposal and maturity of short-term investments
|
82,887 | 269,149 | 97,936 | 374,042 | ||||||||||||
|
Additions to capital assets (1)
|
(3,411 | ) | (6,220 | ) | (1,507 | ) | (5,967 | ) | ||||||||
|
Business combinations, net of cash acquired (note 3)
|
(32,696 | ) | (32,696 | ) | (2,414 | ) | (2,414 | ) | ||||||||
| 14,495 | 17,351 | (420 | ) | 15,762 | ||||||||||||
|
Cash flows from financing activities
|
||||||||||||||||
|
Exercise of stock options
|
167 | 294 | 10 | 41 | ||||||||||||
|
Redemption of share capital
|
− | (14 | ) | − | (26,078 | ) | ||||||||||
| 167 | 280 | 10 | (26,037 | ) | ||||||||||||
|
Effect of foreign exchange rate changes on cash
|
(365 | ) | (397 | ) | 424 | (15 | ) | |||||||||
|
Change in cash
|
2,577 | 7,845 | 1,853 | 5,169 | ||||||||||||
|
Cash – Beginning of period
|
15,879 | 10,611 | 9,230 | 5,914 | ||||||||||||
|
Cash – End of period
|
$ | 18,456 | $ | 18,456 | $ | 11,083 | $ | 11,083 | ||||||||
(1) As at May 31, 2009 and 2010, unpaid purchases of capital assets amounted to $324,000 and $286,000, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
Page 11 of 57
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 Infornation |
The financial information as at May 31, 2010, and for the three- and nine-month periods ended May 31, 2009 and 2010, 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.
In February 2010, the company changed its name from EXFO Electro-Optical Engineering Inc. to EXFO Inc.
| 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 adoption had no significant impact on its consolidated financial statements. The new requirements are equivalent to the new U.S. GAAP requirement as disclosed in note 16.
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 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 at the same date.
On December 24, 2009, the CICA’s Emerging Issues Committee (EIC) issued EIC-175, “Multiple Deliverable Revenue Arrangements”, which will be applicable prospectively (with retrospective adoption permitted) to revenue arrangements with multiple deliverables entered into or materially modified in the first annual period beginning on January 1, 2011. EIC-175 amends the guidance contained in EIC-142, “Revenue Arrangements with Multiple Deliverables“, and establishes additional requirements regarding revenue recognition related to multiple deliverables as well as supplementary disclosures. The company will adopt this standard on September 1, 2010 at the same time it will adopt similar new U.S GAAP requirements (note 16), and is currently evaluating the impact EIC-175 will have on its consolidated financial statements.
| 3 | Business Combination |
On March 12, 2010, the company acquired 91% of the issued and outstanding common shares of NetHawk Oyj. Headquartered in Oulu, Finland, NetHawk Oyj was a privately owned company providing 2G, 3G and 4G/LTE protocol analyzers and simulators aimed mostly at network equipment manufacturers and wireless network operators.
On March 15, 2010, the company made a voluntary offer to purchase the remaining issued and outstanding shares; this offer expired on April 30, 2010. Simultaneously, the company entered into a statutory procedure under the Finnish Companies Act to acquire the remaining issued and outstanding common shares that were not tendered under the voluntary offer. Under this procedure, the company is effectively entitled to acquire the remaining of the issued and outstanding common shares. As at May 31, 2010, the company held 99% of all issued and outstanding common shares of NetHawk Oyj, and are entitled to acquired the remaining 1% under the statutory procedure and as such, has accounted for this amount as consideration payable.
Total consideration was comprised of a cash consideration of €37,264,000 (US$51,139,000), including estimated acquisition-related costs of $2,842,000, or €25,121,000 (US$34,438,000), excluding NetHawk’s cash of €12,143,000 (US$16,701,000) at the acquisition date, plus a cash contingent consideration of up to €8,700,000 (US$12,000,000) based on certain sales volume of NetHawk Oyj over the next three years. The cash contingent consideration will be accounted for as additional goodwill when the amounts of any contingent consideration can be reasonably estimated and the outcome of the contingency is resolved. Acquisition-related costs include an amount of $780,000 for a statutory transfer tax payable in Finland based on the purchase price of shares.
This acquisition was accounted for using the purchase method under CICA Handbook Section 1581, “Business Combinations”, and the requirements of Section 1600, “Consolidated Financial Statements”; consequently, the purchase price was allocated to the assets acquired and liabilities assumed based on management’s preliminary estimate of their fair value as of the acquisition date. The results of operations of the acquired business have been included in the consolidated financial statements of the company since March 12, 2010, being the date of acquisition.
EXFO 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 purchase price, including acquisition related costs, was allocated based on a preliminary estimate of fair value of acquired net assets at the date of acquisition as follows:
|
Assets acquired, net of cash acquired
|
||||
|
Accounts receivable
|
$ | 8,427 | ||
|
Inventories
|
2,315 | |||
|
Other current assets
|
797 | |||
|
Property, plant and equipment
|
2,518 | |||
|
Core technology
|
8,638 | |||
|
Customer relationship
|
6,230 | |||
|
Other intangible assets
|
1,799 | |||
|
Current liabilities assumed
|
||||
|
Accounts payable and accrued liabilities
|
(5,097 | ) | ||
|
Deferred revenue
|
(1,615 | ) | ||
|
Long-term debt
|
(2,464 | ) | ||
|
Net identifiable assets acquired
|
21,548 | |||
|
Goodwill
|
12,890 | |||
|
Purchase price, net of cash acquired
|
$ | 34,438 | ||
Acquired intangible assets are amortized on a straight-line basis over their estimated useful life of five years.
The allocation of the purchase price is preliminary because the acquisition was closed during the quarter and because certain information required to complete the final purchase price allocation remains outstanding. The company expects to complete the final purchase price allocation for this acquisition in the first quarter of fiscal 2011. Assets and liabilities likely to change upon completing a more detailed valuation and the finalization of the purchase price allocation are intangible assets, future income taxes, deferred revenue and goodwill.
Acquired goodwill reflects the competitive advantages the company expected to realize from NetHawk’s standing in the wireless protocol testing industry as well as synergies with the company’s service assurance products. It also reflects NetHawk’s acquired work force. Acquired goodwill is not deductible for tax purposes.
This business, including acquired goodwill, reports to the Telecom Division.
| 4 | Impairment of Goodwill |
Recoverability of goodwill is determined at the reporting unit level, using a two-step approach. First, the carrying value of the reporting units is compared to their fair value. If the carrying value of a reporting unit exceeds its fair value, the second step is performed to determine the amount of the impairment loss. In the third quarter of fiscal 2009, the company performed its annual impairment test for goodwill for all reporting units. Following the decrease in the company’s stock price in June, 2009, the company came to the conclusion that the carrying value of one of its reporting unit exceeded its fair value. The company recorded an impairment charge of $21,713,000 during the three and nine months ended May 31, 2009 to bring the goodwill of this reporting unit to its fair value. This reporting unit reports to the Telecom Division.
This impairment resulted in a future income tax recovery of $2,070,000.
EXFO 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)
| 5 | 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 $169,743,000 as at August 31, 2009 and May 31, 2010, respectively.
Of the capital, an amount of $25,218,000 represented cash and short-term investments as at May 31, 2010 ($69,716,000 as at August 31, 2009).
| 6 | 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 May 31, 2010, 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
|
|||||||
|
June 2010 to August 2010
|
$ | 9,000 | 1.0941 | ||||||
|
September 2010 to August 2011
|
29,500 | 1.0897 | |||||||
|
September 2011 to August 2012
|
20,400 | 1.0802 | |||||||
|
September 2012 to January 2013
|
1,500 | 1.0722 | |||||||
|
Total
|
$ | 60,400 | 1.0867 | ||||||
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 $2,121,000 as at May 31, 2010.
EXFO 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)
Based on the portfolio of forward exchange contracts as at May 31, 2010, the company estimates that the portion of the net 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 $1,209,000.
As at May 31, 2010, forward exchange contracts in the amount of $1,209,000 are presented as current assets in other receivable in the balance sheet and forward exchange contracts, in the amount of $559,000, are presented as long-term assets in forward exchange contracts in the balance sheet. These forward exchange contracts are not yet recorded within sales.
During the three months ended May 31, 2009 and 2010, the company recognized within its sales foreign exchange gains (losses) on forward exchange contracts of $(1,425,000) and $733,000, respectively. During the nine months ended May 31, 2009 and 2010, the company recognized within its sales foreign exchange gains (losses) on forward exchange contracts of $(2,959,000) and $1,232,000, respectively.
The following table summarizes significant financial assets and liabilities that are subject to currency risk as at May 31, 2010:
|
Carrying/nominal amount
(in thousands of US dollars)
|
Carrying/nominal amount
(in thousands
of euros)
|
|||||||
|
Financial assets
|
||||||||
|
Cash
|
$ | 3,666 | € | 1,257 | ||||
|
Accounts receivable
|
27,335 | 3,819 | ||||||
| 31,001 | 5,076 | |||||||
|
Financial liabilities
|
||||||||
|
Accounts payable and accrued liabilities
|
8,876 | 355 | ||||||
|
Forward exchange contracts (nominal amount)
|
6,300 | – | ||||||
| 15,176 | 355 | |||||||
|
Net exposure
|
$ | 15,825 | € | 4,721 | ||||
The value of the Canadian dollar compared to the US dollar was CA$1.0435 = US$1.00 as at May 31, 2010.
The value of the Canadian dollar compared to the euro was CA$1.2843 = €1.00 as at May 31, 2010.
The following sensitivity analysis summarizes the effect that a change in the value of the Canadian dollar (compared to the 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 May 31, 2010:
|
·
|
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 $1,568,000 or $0.03 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 $600,000 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) other comprehensive income by $3,833,000.
|
EXFO 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 and its long-term debt.
Short-term investments
As at May 31, 2010, the company’s short-term investments, in the amount of $6,762,000, bear interest at rates ranging between 0.3% and 0.6% and mature in June and July 2010.
A change of 0.5% in the interest rate of the company’s short-term investments would increase (decrease) net earnings by $6,000, 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.
Long-term debt
As at May 31, 2010, the company’s long-term debt, in the amount of $2,205,000, bears interest at an annual rate of 2.95% and matures December 2013 (note 9).
A change of 0.5% in the interest rate of the company’s long-term debt would increase (decrease) net earnings by $2,000, or $0.00 per diluted share on a quarterly basis.
Other financial instruments
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 May 31, 2010, the company’s short-term investments consist of debt instruments issued by nine (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. 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.
EXFO 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)
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 $1,143,000 as at August 31, 2009 and May 31, 2010, respectively. Bad debt expenses (recovery) amounted to $625,000 and ($60,000) for the three months ended May 31, 2009 and 2010, respectively, and $980,000 and ($77,000) for the nine months ended May 31, 2009 and 2010, respectively.
For the three and the nine months ended May 31, 2010, no customer represented more than 10% of consolidated sales.
The following table summarizes the age of trade accounts receivable as at May 31, 2010:
|
Current
|
$ | 31,561 | ||
|
Past due, 0 to 30 days
|
10,643 | |||
|
Past due, 31 to 60 days
|
1,766 | |||
|
Past due, more than 60 days, less allowance for doubtful accounts of $1,143
|
3,387 | |||
|
Total accounts receivable
|
$ | 47,357 |
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 derivative and non-derivative financial liabilities as at May 31, 2010:
|
0-12
months
|
13-24
months
|
25-36
months
|
Over 36
months
|
|||||||||||||
|
Accounts payable and accrued liabilities
|
$ | 29,440 | $ | – | $ | – | $ | – | ||||||||
|
Long-term debt
|
551 | 551 | 551 | 552 | ||||||||||||
|
Forward exchange contracts
|
||||||||||||||||
|
Outflow
|
32,200 | 25,800 | 2,400 | – | ||||||||||||
|
Inflow
|
(33,654 | ) | (26,782 | ) | (2,466 | ) | – | |||||||||
|
Total
|
$ | 28,537 | $ | (431 | ) | $ | 485 | $ | 552 | |||||||
| 7 | Inventories |
|
As at
May 31,
2010
|
As at
August 31,
2009
|
|||||||
|
Raw materials
|
$ | 18,042 | $ | 14,497 | ||||
|
Work in progress
|
2,372 | 1,955 | ||||||
|
Finished goods
|
21,328 | 14,411 | ||||||
| $ | 41,742 | $ | 30,863 | |||||
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.
EXFO 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)
Inventory write-down amounted to $581,000 and $467,000 for the three months ended May 31, 2009 and 2010, respectively and $2,390,000 and $1,706,000 for the nine months ended May 31, 2009 and 2010, respectively.
| 8 | Accounts Payable and Accrued Liabilities |
|
As at
May 31,
2010
|
As at
August 31,
2009
|
|||||||
|
Trade
|
$ | 12,934 | $ | 9,063 | ||||
|
Salaries and social benefits
|
12,451 | 8,863 | ||||||
|
Warranty
|
887 | 699 | ||||||
|
Commissions
|
1,037 | 647 | ||||||
|
Restructuring charges
|
– | 24 | ||||||
|
Forward exchange contracts
|
– | 704 | ||||||
|
Other
|
3,344 | 1,650 | ||||||
| $ | 30,653 | $ | 21,650 | |||||
Changes in the warranty provision are as follows:
|
Nine months ended
May 31,
|
||||||||
|
2010
|
2009
|
|||||||
|
Balance – Beginning of period
|
$ | 699 | $ | 974 | ||||
|
Provision
|
660 | 438 | ||||||
|
Settlements
|
(472 | ) | (658 | ) | ||||
|
Balance – End of period
|
$ | 887 | $ | 754 | ||||
| 9 | Long-Term Debt |
|
As at
May 31,
2010
|
As at
August 31,
2009
|
|||||||
|
Loan secured by assets of NetHawk Oyj, bearing interest at 2.95%, repayable in semi-annual instalments of $276 (€224), maturing in December 2013 (note 3)
|
$ | 2,205 | $ | – | ||||
|
Less: current portion
|
(551 | ) | – | |||||
| $ | 1,654 | $ | – | |||||
EXFO 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 | 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.
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.
EXFO 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 6, 2007, the Second Circuit denied the plaintiffs’ petition for rehearing of that decision and, on May 18, 2007, the Second Circuit denied the plaintiffs’ petition for rehearing en banc. In light of the Second Circuit’s opinion, liaison counsel for all issuer defendants, including the company, informed the court that this settlement cannot be approved, because the defined settlement class, like the litigation class, cannot be certified. On June 25, 2007, the district court entered an order terminating the settlement agreement. On August 14, 2007, the plaintiffs filed their second consolidated amended class action complaints against the focus cases and, on September 27, 2007, again moved for class certification. On November 12, 2007, certain defendants in the focus cases moved to dismiss the second consolidated amended class action complaints. On March 26, 2008, the district court denied the motions to dismiss, except as to Section 11 claims raised by those plaintiffs who sold their securities for a price in excess of the initial offering price and those who purchased outside of the previously certified class period. Briefing on the class certification motion was completed in May 2008. That motion was withdrawn without prejudice on October 10, 2008.
On April 2, 2009, a stipulation and agreement of settlement between the plaintiffs, issuer defendants and underwriter defendants was submitted to the Court for preliminary approval. The Court granted the plaintiffs’ motion for preliminary approval and preliminarily certified the settlement classes on June 10, 2009. The settlement fairness hearing 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- and nine-month periods ended May 31, 2010 to be immaterial.
Contingent consideration
|
|
Following the purchase of assets in fiscal 2009, the company has a contingent cash consideration of up to $850,000, payable based upon the achievement of a certain booking volume in the next nine months.
|
| 11 | 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 at 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.
EXFO Inc.
Notes to Unaudited Interim Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
The following tables summarize changes in share capital for the nine months ended May 31, 2009 and 2010.
|
Nine months ended May 31, 2009
|
||||||||||||||||||||
|
Multiple voting shares
|
Subordinate voting shares
|
|||||||||||||||||||
|
Number
|
Amount
|
Number
|
Amount
|
Total
amount
|
||||||||||||||||
|
Balance as at August 31, 2008
|
36,643,000 | $ | 1 | 30,783,705 | $ | 142,785 | $ | 142,786 | ||||||||||||
|
Exercise of stock options
|
– | – | 12,500 | 26 | 26 | |||||||||||||||
|
Redemption of share capital
|
– | – | (176,914 | ) | (821 | ) | (821 | ) | ||||||||||||
|
Balance as at November 30, 2008
|
36,643,000 | 1 | 30,619,291 | 141,990 | 141,991 | |||||||||||||||
|
Exercise of stock options
|
– | – | 2,500 | 5 | 5 | |||||||||||||||
|
Redemption of restricted share units
|
– | – | 92,682 | − | − | |||||||||||||||
|
Redemption of share capital
|
– | – | (7,745,379 | ) | (36,514 | ) | (36,514 | ) | ||||||||||||
|
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
|
– | – | − | 452 | 452 | |||||||||||||||
|
Balance as at February 28, 2009
|
36,643,000 | 1 | 22,969,094 | 105,933 | 105,934 | |||||||||||||||
|
Exercise of stock options
|
– | – | 2,500 | 10 | 10 | |||||||||||||||
|
Redemption of restricted share units
|
– | – | 724 | – | – | |||||||||||||||
|
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
|
– | – | − | 8 | 8 | |||||||||||||||
|
Balance as at May 31, 2009
|
36,643,000 | $ | 1 | 22,972,318 | $ | 105,951 | $ | 105,952 | ||||||||||||
EXFO Inc.
Notes to Unaudited Interim Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
|
Nine months ended May 31, 2010
|
||||||||||||||||||||
|
Multiple voting shares
|
Subordinate voting shares
|
|||||||||||||||||||
|
Number
|
Amount
|
Number
|
Amount
|
Total
amount
|
||||||||||||||||
|
Balance as at August 31, 2009
|
36,643,000 | $ | 1 | 22,736,302 | $ | 104,845 | $ | 104,846 | ||||||||||||
|
Redemption of restricted share units
|
− | − | 13,663 | − | − | |||||||||||||||
|
Redemption of share capital
|
– | – | (3,600 | ) | (17 | ) | (17 | ) | ||||||||||||
|
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
|
– | – | – | 86 | 86 | |||||||||||||||
|
Balance as at November 30, 2009
|
36,643,000 | 1 | 22,746,365 | 104,914 | 104,915 | |||||||||||||||
|
Exercise of stock options
|
– | – | 31,700 | 127 | 127 | |||||||||||||||
|
Redemption of restricted share units
|
– | – | 75,537 | – | – | |||||||||||||||
|
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
|
– | – | – | 541 | 541 | |||||||||||||||
|
Balance as at February 28, 2010
|
36,643,000 | 1 | 22,853,602 | 105,582 | 105,583 | |||||||||||||||
|
Exercise of stock options
|
– | – | 41,000 | 167 | 167 | |||||||||||||||
|
Redemption of restricted share units
|
– | – | 26,690 | – | – | |||||||||||||||
|
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
|
– | – | – | 268 | 268 | |||||||||||||||
|
Balance as at May 31, 2010
|
36,643,000 | $ | 1 | 22,921,292 | $ | 106,017 | $ | 106,018 | ||||||||||||
| 12 | Net Research and Development Expenses |
Net research and development expenses comprise the following:
|
Three months ended
May 31, 2010
|
Nine months ended
May 31 2010
|
Three months ended
May 31, 2009
|
Nine months ended
May 31 2009
|
|||||||||||||
|
Gross research and development expenses
|
$ | 13,998 | $ | 34,149 | $ | 9,347 | $ | 26,750 | ||||||||
|
Research and development tax credits and grants
|
(2,142 | ) | (5,211 | ) | (1,566 | ) | (4,423 | ) | ||||||||
| $ | 11,856 | $ | 28,938 | $ | 7,781 | $ | 22,327 | |||||||||
EXFO 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)
| 13 | Income Taxes |
For the three and the nine months ended May 31, 2009 and 2010, the reconciliation of the income tax provision calculated using the combined Canadian federal and provincial statutory income tax rate with the income tax provision in the financial statements is as follows:
|
Three months ended
May 31, 2010
|
Nine months ended
May 31, 2010
|
Three months ended
May 31, 2009
|
Nine months ended
May 31, 2009
|
|||||||||||||
|
Income tax provision at combined Canadian federal and provincial statutory tax rate (31% in 2009 and 30% in 2010)
|
$ | 508 | $ | 1,850 | $ | (8,100 | ) | $ | (4,701 | ) | ||||||
|
Increase (decrease) due to:
|
||||||||||||||||
|
Foreign income taxed at different rates
|
(57 | ) | (237 | ) | 39 | 75 | ||||||||||
|
Non-taxable income
|
(66 | ) | (181 | ) | (46 | ) | (160 | ) | ||||||||
|
Non-deductible expenses
|
202 | 636 | 4,757 | 5,125 | ||||||||||||
|
Change in tax rates
|
9 | 164 | – | – | ||||||||||||
|
Foreign exchange effect of translation of foreign integrated subsidiaries
|
(18 | ) | 159 | 972 | 24 | |||||||||||
|
Utilization of previously unrecognized future income tax assets
|
(151 | ) | (394 | ) | (438 | ) | (513 | ) | ||||||||
|
Unrecognized future income tax assets on temporary deductible differences and unused tax losses and deductions
|
1,114 | 2,422 | (32 | ) | 235 | |||||||||||
|
Other
|
(17 | ) | 16 | (3 | ) | 113 | ||||||||||
| $ | 1,524 | $ | 4,435 | $ | (2,851 | ) | $ | 198 | ||||||||
The income tax provision consists of the following:
|
Current
|
$ | 326 | $ | 177 | $ | (88 | ) | $ | 148 | |||||||
|
Future
|
235 | 2,230 | (2,293 | ) | 328 | |||||||||||
|
Valuation allowance
|
963 | 2,028 | (470 | ) | (278 | ) | ||||||||||
| 1,198 | 4,258 | (2,763 | ) | 50 | ||||||||||||
| $ | 1,524 | $ | 4,435 | $ | (2,851 | ) | $ | 198 |
EXFO 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)
| 14 | Earnings per Share |
The following table summarizes the reconciliation of the basic weighted average number of shares outstanding and the diluted weighted average number of shares outstanding:
|
Three months ended
May 31, 2010
|
Nine months
ended
May 31, 2010
|
Three months ended
May 31, 2009
|
Nine months
ended
May 31, 2009
|
|||||||||||||
|
Basic weighted average number of shares outstanding (000’s)
|
59,532 | 59,448 | 59,613 | 62,609 | ||||||||||||
|
Plus dilutive effect of:
|
||||||||||||||||
|
Stock options (000’s)
|
303 | 219 | 155 | 135 | ||||||||||||
|
Restricted share units (000’s)
|
933 | 711 | 448 | 303 | ||||||||||||
|
Deferred share units (000’s)
|
126 | 138 | 99 | 90 | ||||||||||||
|
Diluted weighted average number of shares outstanding (000’s)
|
60,894 | 60,516 | 60,315 | 63,137 | ||||||||||||
|
Stock awards excluded from the calculation of diluted weighted average number of shares because their exercise price was greater than the average market price of the common shares (000’s)
|
865 | 1,031 | 1,280 | 1,663 | ||||||||||||
For the three and nine months ended May 31, 2009, the diluted amount per share was the same amount as the basic amount per share since the dilutive effect of stock options, restricted share units and deferred share units was not included in the calculation; otherwise, the effect would have been anti-dilutive. Accordingly, the diluted amount per share for these periods was calculated using the basic weighted average number of shares outstanding.
| 15 | Segment Information |
The company is organized under two reportable segments. The Telecom Division, which represents the company’s main business activity, offers core-to-edge solutions that assess the performance and reliability of converged, IP fixed and mobile networks. Key technologies supported include 3G, 4G/LTE, IMS, Ethernet, OTN, xDSL, and various optical technologies. 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.
EXFO Inc.
Notes to Unaudited Interim Consolidated Financial Statements
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
The following tables present information by segment:
|
Three months ended May 31, 2010
|
Nine months ended May 31, 2010
|
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|
Telecom
Division
|
Life
Sciences
and
Industrial
Division
|
Total
|
Telecom
Division
|
Life
Sciences
and
Industrial
Division
|
Total
|
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