EXFO Electro-Optical Engineering Inc.

EXFO Electro-Optical Engineering Inc.

March 29, 2005 16:04 ET

EXFO Achieves GAAP Break-Even in Second Quarter


NEWS RELEASE TRANSMITTED BY CCNMatthews

FOR: EXFO ELECTRO-OPTICAL ENGINEERING INC.

TSX SYMBOL: EXF.SV
NASDAQ SYMBOL: EXFO

MARCH 29, 2005 - 16:04 ET

EXFO Achieves GAAP Break-Even in Second Quarter

QUEBEC CITY, QUEBEC--(CCNMatthews - March 29, 2005) - EXFO
Electro-Optical Engineering Inc.(NASDAQ:EXFO)(TSX:EXF.SV) -

- Sales increase 37.1% year-over-year to US$23.1 million

- Bookings improve 39.8% year-over-year to US$24.9 million

- Recipient of 2005 Growth Strategy Leadership Award for market-share
gains

- Leadership position in fiber-to-the-premises test market

EXFO Electro-Optical Engineering Inc. (NASDAQ:EXFO)(TSX:EXF.SV)
announced today that it achieved GAAP break-even in the second quarter
of fiscal 2005.

Sales increased 37.1% to US$23.1 million in the second quarter ended
February 28, 2005, from US$16.9 million in the second quarter of 2004
and 7.1% from US$21.6 million in the first quarter of 2005. Net bookings
improved 39.8% to US$24.9 million in the second quarter of fiscal 2005
from US$17.7 million in the same period last year and 6.5% from US$23.3
million in the first quarter of 2005.

Gross margin accounted for 54.9% of sales in the second quarter of
fiscal 2005 compared to 55.4% in the second quarter of 2004 and 52.7% in
the first quarter of 2005.

GAAP net earnings in the second quarter of fiscal 2005 totaled US$9
thousand, or US$0.00 per share, compared to a net loss of US$2.9
million, or US$ 0.04 per share, in the same period last year and a net
loss of US$2.4 million, or US$0.03 per share, in the first quarter of
2005.

On a pro forma basis(i), net earnings in the second quarter of fiscal
2005 amounted to US$1.5 million or US$0.02 per share, compared to a net
loss of US$1.5 million, or US$0.02 per share, in the second quarter of
2004 and a net loss of US$0.8 million, or US$0.01 per share, in the
first quarter of 2005.

"I am delighted that we achieved GAAP break-even, posted our sixth
consecutive quarterly increase in sales and bookings, while being
recognized by Frost & Sullivan for capturing the largest market-share
gains in the optical test and measurement industry in calendar 2004,"
said Germain Lamonde, EXFO's Chairman, President and CEO. "These
milestones, combined with 36% sales growth in the first half of fiscal
2005 compared to the same period last year, represent clear-cut evidence
that EXFO gained sizeable market-share, established a leadership
position in fiber-to-the-premises testing, and strengthened its unique
value proposition for next-generation IP networking through sustained
R&D spending during the telecom downturn."



Segmented Results
(In millions of US dollars)

Earnings (loss)
Sales from operations
--------------------------------------------------------------------
Q2 2005 Q1 2005 Q2 2004 Q2 2005 Q1 2005 Q2 2004
--------------------------------------------------------------------
Business
Segment
Telecom
Division $19.4 $17.4 $13.3 $0.6 $(1.0) $(2.5)
Photonics and
Life Sciences
Division 3.7 4.2 3.6 (0.8) (0.3) (1.0)
--------------------------------------------------------------------
Total $23.1 $21.6 $16.9 $(0.2) $(1.3) $(3.5)
--------------------------------------------------------------------
--------------------------------------------------------------------


Operating Expenses

Selling and administrative expenses amounted to US$7.7 million, or 33.4%
of sales, in the second quarter of fiscal 2005 compared to US$6.8
million, or 40.0% of sales, in the same period last year and US$7.4
million, or 34.3% of sales, in the first quarter of 2005.

Gross research and development expenses totaled US$3.8 million, or 16.5%
of sales, in the second quarter of fiscal 2005 compared to US$4.3
million, or 25.4% of sales, in the second quarter of 2004 and US$3.8
million, or 17.6% of sales, in the first quarter of 2005.

Second-Quarter Business Highlights

- Growing through market-share gains, EXFO received for the second
consecutive year the Growth Strategy Leadership Award from Frost &
Sullivan following the quarter-end. The award is presented annually to
the company whose visionary growth strategy generates the largest
market-share gains in the global fiber-optic test equipment (FOTE)
market. Based on a report by Frost & Sullivan, EXFO increased its market
share from 8.4% to 10.4% overall in 2004 to attain the second overall
position worldwide, while expanding its leadership position from 17.4%
to 22.2% of the network service provider market.

- Continuing its leadership in the FTTx (fiber-to-the-premises,
fiber-to-the-node, fiber-to-the curb) test market, EXFO shipped several
such orders to a US-based, Tier-1 telecom carrier, who accounted for
21.4% of sales in the second quarter of 2005, and the company received
long-term, sole-source approval for a suite of FTTx test solutions from
a second Tier-1 carrier in the United States.

- Focusing on profitability, EXFO reached GAAP break-even in the second
quarter of 2005 and was profitable on a pro forma basis(i) for the third
time in the last four quarters.

- Taking advantage of its strong R&D program, EXFO launched five new
products in the second quarter, including amongst others an All-Band
Component Analyzer for FTTx and coarse-wavelength division multiplexing
(CWDM) manufacturing/R&D applications. Sales of new products that have
been on the market two years or less accounted for 45.5% of sales in the
second quarter of 2005.

Business Outlook

EXFO forecasts sales between US$23.0 million and US$26.0 million and
GAAP net earnings (loss) between a net loss of US$0.02 per share and net
earnings of US$0.01 per share for the third quarter of fiscal 2005.
Excluding stock-based compensation costs, amortization of intangible
assets, restructuring charges and other unusual items, the company
expects to report pro forma net earnings between US$0.00 per share and
US$0.03 per share.

Conference Call and Webcast

EXFO will host a conference call today at 5 p.m. (Eastern time) to
review its financial results for the second quarter of fiscal 2005. To
listen to the conference call and participate in the question period via
telephone, dial 1-416-695-9716. 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 until April 5, 2005. The replay number
is 1-416-695-5275. The audio Webcast of the conference call will also be
available on EXFO's Website at www.exfo.com, under the Investors section.


Reconciliation of pro forma net earnings (loss) with GAAP net earnings
(loss)

(i) Pro forma net earnings (loss) represents net earnings (loss)
excluding stock-based compensation costs, amortization of intangible
assets, restructuring charges and an unusual tax recovery. All figures
are in thousands of US dollars except per share data.



Actual Results
Three months Six months Three months Six months
ended ended ended ended
February 28, February 28, February 29, February 29,
2005 2005 2004 2004
---------------------------------------------------------------------
(unaudited)
Net earnings
(loss) in
accordance
with GAAP $9 $(2,364) $(2,885) $(4,893)

Pro forma
adjustments:
Stock-based
compensation costs 224 381 84 89
Amortization of
intangible assets 1,225 2,447 1,291 2,576
Restructuring charges 54 254 - -
Unusual tax recovery - - - (1,406)
---------------------------------------------------------------------

Pro forma net
earnings (loss) $1,532 $718 $(1,510) $(3,634)
---------------------------------------------------------------------
---------------------------------------------------------------------

Basic and diluted
net earnings
(loss) per share
in accordance
with GAAP $- $(0.03) $(0.04) $(0.08)
---------------------------------------------------------------------
---------------------------------------------------------------------

Basic and diluted
pro forma net
earnings (loss)
per share $0.02 $ 0.01 $(0.02) $(0.06)
---------------------------------------------------------------------
---------------------------------------------------------------------

Outlook

Three months ending
May 31, 2005
---------------------------------------------------------------------
(unaudited)

Basic and diluted net earnings (loss)
per share in accordance with GAAP From $(0.02) To $0.01

Pro forma adjustments:
Stock-based compensations costs 0.00 0.00
Amortization of intangible assets 0.02 0.02
Restructuring charges 0.00 0.00
--------------------------------------------------------------------

Basic and diluted pro forma net earning
per share From $0.00 To $0.03
--------------------------------------------------------------------
--------------------------------------------------------------------


EXFO discloses pro forma financial data in order to provide supplemental
information regarding its results of operations and to enhance
investors' overall understanding of its core financial performance and
its prospects for the future. EXFO believes that investors benefit from
seeing its results through the eyes of management in addition to seeing
the GAAP information. This non-GAAP information facilitates management's
comparison of current results with the company's historical results of
operations and strategic plan and with those of its peers. This
information is not in accordance with, or an alternative to, GAAP and
should be considered in addition to, but not as a substitute for, other
measures of financial performance reported in accordance with GAAP, such
as net earnings (loss). As a result, EXFO's pro forma net earnings
(loss) may not be comparable to similarly titled measures reported by
other companies.

About EXFO

EXFO is a recognized test and measurement expert in the global
telecommunications industry through the design and manufacture of
advanced and innovative solutions as well as best-in-class customer
support. The Telecom Division, which represents the company's main
business activity, offers fully integrated and complete test solutions
to network service providers, system vendors and component manufacturers
in approximately 70 countries. One of EXFO's strongest competitive
advantages is its PC/Windows-based modular platforms that host a wide
range of tests across optical, physical, data and network layers, while
maximizing technology reuse across several market segments. The
Photonics and Life Sciences Division mainly leverages core telecom
technologies to offer value-added solutions in the life sciences and
high-precision assembly sectors. For more information about EXFO, visit
www.exfo.com.

Forward-Looking Statements

This news release contains forward-looking statements within the meaning
of the U. S. Private Securities Litigation Reform Act of 1995 and we
intend that such forward-looking statements be subject to the safe
harbors created thereby. Forward-looking statements are statements other
than historical information or statements of current condition that
refer to expectations, projections or other characterizations of future
events and circumstances. 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 economic uncertainty; capital spending levels in the
telecommunications, life sciences and high-precision assembly sectors;
fluctuating exchange rates and our ability to execute in these uncertain
conditions; the effects of the additional actions we have taken in
response to such economic uncertainty (including workforce reductions,
ability to quickly adapt cost structures with anticipated levels of
business, ability to manage inventory levels with market demand); market
acceptance of our new products and other upcoming products; limited
visibility with regards to customer orders and the timing of such
orders; our ability to successfully integrate our acquired and
to-be-acquired businesses; the retention of key technical and management
personnel; and future economic, competitive and market conditions.
Assumptions relating to the foregoing involve judgments and risks, all
of which are difficult or impossible to predict and many of which are
beyond our control. Other risk factors that may affect our future
performance and operations are detailed in our Annual Report on Form
20-F and our other filings with the U. S. Securities and Exchange
Commission and the Canadian securities commissions. We believe that the
expectations reflected in the forward-looking statements are reasonable
based on information currently available to us, but we cannot assure you
that the expectations will prove to have been correct. Accordingly, you
should not place undue reliance on these forward-looking statements.
These statements speak only as of the date of this document and shall
not be revised or updated to reflect events after the date of this
document.




EXFO Electro-Optical Engineering Inc.
Interim Consolidated Balance Sheet

(in thousands of US dollars)

As at As at
February 28, August 31,
2005 2004
---------------------------------------------------------------------
(unaudited)

Assets

Current assets
Cash $4,258 $5,159
Short-term investments 94,515 83,969
Accounts receivable
Trade, less allowance for doubtful
accounts of $571 ($510 as at August
31, 2004) 13,227 12,080
Other 1,425 1,532
Income taxes and tax credits recoverable 4,118 7,836
Inventories 18,345 15,371
Prepaid expenses 1,226 1,513
---------------------------------------------------------------------

137,114 127,460

Income taxes and tax credits recoverable 2,489 449

Property, plant and equipment 14,853 15,442

Long-lived asset held for sale 1,600 1,600

Intangible assets 7,699 9,447

Goodwill 19,667 18,393
---------------------------------------------------------------------

$183,422 $172,791
---------------------------------------------------------------------
---------------------------------------------------------------------
Liabilities

Current liabilities
Accounts payable and accrued liabilities $12,447 $11,393
Deferred revenue 1,341 805
Current portion of long-term debt 122 121
---------------------------------------------------------------------

13,910 12,319

Deferred revenue 1,385 1,123

Deferred grants 1,807 1,690

Long-term debt 273 332
---------------------------------------------------------------------

17,375 15,464
---------------------------------------------------------------------

Contingency

Shareholders' Equity

Share capital 521,832 521,733
Contributed surplus 2,367 1,986
Cumulative translation adjustment 24,424 13,820
Deficit (382,576) (380,212)
---------------------------------------------------------------------

166,047 157,327
---------------------------------------------------------------------

$183,422 $172,791
---------------------------------------------------------------------


EXFO Electro-Optical Engineering Inc.
Interim Unaudited Consolidated

(in thousands of US dollars, except share and per share data)

Three months Six months Three months Six months
ended ended ended ended
February 28, February 28, February 29, February 29,
2005 2005 2004 2004
---------------------------------------------------------------------

Sales $23,135 $44,732 $16,880 $32,842

Cost of sales
(1,2) 10,431 20,656 7,528 15,343
---------------------------------------------------------------------

Gross margin 12,704 24,076 9,352 17,499
---------------------------------------------------------------------

Operating expenses
Selling and
administrative (1) 7,728 15,141 6,759 12,616
Net research and
development (1) 2,781 5,561 3,492 6,321
Amortization of
property, plant
and equipment 1,098 2,192 1,295 2,616
Amortization of
intangible assets 1,225 2,447 1,291 2,576
Restructuring
charges 54 254 - -
---------------------------------------------------------------------

Total operating
expenses 12,886 25,595 12,837 24,129
---------------------------------------------------------------------

Loss from
operations (182) (1,519) (3,485) (6,630)

Interest and
other income 625 1,349 514 670
Foreign exchange
gain (loss) 263 (772) 427 (43)
---------------------------------------------------------------------

Earnings (loss)
before income
taxes 706 (942) (2,544) (6,003)

Income taxes 697 1,422 341 (1,110)
---------------------------------------------------------------------

Net earnings (loss)
for the period $9 $(2,364) $(2,885) $(4,893)
---------------------------------------------------------------------
---------------------------------------------------------------------

Basic and diluted
net earnings (loss)
per share $- $(0.03) $(0.04) $(0.08)

Basic weighted
average number of
shares
outstanding
(000's) 68,528 68,495 64,129 63,594

Diluted weighted
average number
of shares
outstanding
(000's) 68,968 68,978 64,772 64,217

(1) Stock-based
compensation
costs
included in:
Cost of sales $32 $57 $8 $8
Selling and
administrative 165 252 54 59
Net research
and development 47 72 22 22
---------------------------------------------------------------------

$244 $381 $84 $89
---------------------------------------------------------------------
---------------------------------------------------------------------

(2) The cost of sales is exclusive of amortization, shown separately.


EXFO Electro-Optical Engineering Inc.
Interim Unaudited Consolidated Statements of Cash Flows

(in thousands of US dollars)

Three months Six months Three months Six months
ended ended ended ended
February 28, February 28, February 29, February 29,
2005 2005 2004 2004
---------------------------------------------------------------------
Cash flows
from operating
activities
Net earnings
(loss) for
the period $9 $(2,364) $(2,885) $(4,893)
Add (deduct) items
not affecting cash
Discount on
short-term
investments 470 320 101 332
Stock-based
compensation
costs 244 381 84 89
Amortization 2,323 4,639 2,586 5,192
Deferred revenue 275 660 252 783
Deferred grants - - (90) (212)
---------------------------------------------------------------------
3,321 3,636 48 1,291

Change in non-cash
operating items
Accounts
receivable (381) (91) 2,088 227
Income taxes and
tax credits 1,914 2,260 1,231 (1,916)
Inventories (1,001) (1,948) (1,818) (968)
Prepaid expenses 380 396 284 1,014
Accounts payable
and accrued
liabilities (82) 377 (224) (1,015)
---------------------------------------------------------------------

4,151 4,630 1,609 (1,367)
---------------------------------------------------------------------
---------------------------------------------------------------------
Cash flows from
investing activities
Additions to
short-term
investments (223,561) (288,647) (166,987) (246,912)
Proceeds from
disposal of
short-term
investments 218,943 283,273 135,668 218,509
Additions to
property, plant
and equipment
and intangible
assets (246) (823) (171) (576)
---------------------------------------------------------------------

(4,864) (6,197) (31,490) (28,979)
---------------------------------------------------------------------
---------------------------------------------------------------------
Cash flows from
financing activities
Repayment of
long-term debt (30) (58) (27) (52)
Net proceeds of
offering - - 29,164 29,164
Share issue expenses - - (166) (166)
Exercise of
stock options 13 99 157 218
Redemption of
share capital - - (1) (3)
Resale of
share capital - - 5 13
---------------------------------------------------------------------

(17) 41 29,132 29,174

Effect of foreign
exchange rate
changes on cash 140 625 (1,007) (628)
---------------------------------------------------------------------

Change in cash (590) (901) (1,756) (1,800)

Cash - Beginning
of period 4,848 5,159 5,322 5,366
---------------------------------------------------------------------

Cash - End
of period $4,258 $4,258 $3,566 $3,566
---------------------------------------------------------------------
---------------------------------------------------------------------



-30-

Contact Information

  • FOR FURTHER INFORMATION PLEASE CONTACT:
    EXFO Electro-Optical Engineering Inc.
    Vance Oliver
    Manager, Investor Relations
    (418) 683-0913, Ext. 3733
    vance.oliver@exfo.com