EXFO Electro-Optical Engineering Inc.
TSX : EXF.SV
NASDAQ : EXFO

EXFO Electro-Optical Engineering Inc.

October 20, 2005 16:00 ET

EXFO Reports Sales Growth of 30.3% for Fiscal 2005

QUEBEC CITY, CANADA--(CCNMatthews - Oct. 20, 2005) - EXFO Electro-Optical Engineering Inc. (TSX:EXF.SV)(NASDAQ:EXFO)



- Achieves GAAP profitability in the last three quarters
- Generates US$14.0 million in cash flows from operating activities
- Derives 42.4% of sales from new products
- Increases sales for eighth consecutive quarter


EXFO Electro-Optical Engineering Inc. reported today sales growth of 30.3% year-over-year for fiscal 2005.

Sales improved to US$97.2 million in the fiscal year ended August 31, 2005 from US$74.6 million in 2004. In the fourth quarter of 2005, sales reached US$26.3 million compared to US$26.2 million in the previous quarter and US$21.3 million in the fourth quarter of 2004. Net bookings totaled US$24.6 million for a book-to-bill ratio of 0.94 in the fourth quarter of fiscal 2005 compared to US$28.9 million in the third quarter of 2005 and US$20.4 million in the fourth quarter of 2004.

Gross margin increased to 54.7% of sales in fiscal 2005 from 53.7% in 2004. In the fourth quarter of 2005, gross margin amounted to 54.7% compared to 56.2% in the previous quarter and 55.1% in the fourth quarter of 2004.

GAAP net loss totaled US$1.6 million, or US$0.02 per diluted share, in fiscal 2005 compared to a net loss of US$8.4 million, or US$0.13 per diluted share, in 2004. GAAP net loss included US$4.8 million in amortization of intangible assets, US$1.0 million in stock-based compensation costs and US$0.3 million in restructuring and other charges in 2005. GAAP net loss was negatively affected by a foreign-exchange loss of US$1.3 million in fiscal 2005.

In the fourth quarter of 2005, GAAP net earnings amounted to US$0.5 million, or US$0.01 per diluted share, compared to net earnings of US$0.3 million, or US$0.00 per diluted share, in the third quarter of 2005 and a net loss of US$2.3 million, or US$0.03 per diluted share, in the fourth quarter of 2004. GAAP net earnings included US$1.2 million in amortization of intangible assets and US$0.3 million in stock-based compensation costs in the fourth quarter.

"Upon celebrating our 20th anniversary, I am delighted with EXFO's exceptional growth, progress towards profitability, as well as uniquely strong strategic position and balance sheet," said Germain Lamonde, EXFO's Chairman, President and CEO. "I am equally pleased with our market-driven ability to turn new business opportunities into solid operational and financial results. We increased sales 30.3% year-over-year and sequentially in the last eight quarters. We reduced our GAAP net loss by more than 80% year-over-year and were profitable in the last three quarters of 2005. As well, we generated US$14.0 million in cash flows from operating activities. Clearly, these results are among the strongest in our industry. All of these performance highlights are the result of EXFO's long-term focus to tap into new, revenue-generating market opportunities, such as FTTx and converged, IP network testing, and the commitment of all our dedicated EXFO employees, whom I thank for making the difference year-in and year-out for the last 20 years."



Selected Financial Information
(In millions of US dollars)

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Segmented results: Q4 2005 Q3 2005 Q4 2004 FY 2005 FY 2004
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(unaudited)(unaudited)(unaudited)
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Sales:
Telecom Division $21,174 $22,046 $16,776 $80,120 $58,882
Photonics & Life
Sciences Division 5,130 4,134 4,556 17,096 15,748
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Total $26,304 $26,180 $21,332 $97,216 $74,630
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Operating earnings
(loss):
Telecom Division $523 $645 $59 $763 $(5,557)
Photonics & Life
Sciences Division 288 (136) (2,111) (962) (5,013)
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Total $811 $509 $(2,052) $(199)$(10,570)
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Other selected
information:
GAAP net earnings
(loss) $454 $276 $(2,343) $(1,634) $(8,424)
Amortization of
intangible assets $1,198 $1,191 $1,243 $4,836 $5,080
Stock-based
compensation costs $288 $294 $160 $963 $449
Impairment of
long-lived assets $- $- $620 $- $620
Restructuring and
other charges $- $38 $1,729 $292 $1,729
Unusual tax recovery $- $- $- $- $(1,406)
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Operating Expenses

Selling and administrative expenses amounted to US$31.8 million, or 32.7% of sales, in fiscal 2005 compared to US$25.9 million, or 34.7% of sales, in 2004. In the fourth quarter of 2005, selling and administrative expenses totaled US$8.1 million, or 30.7% of sales, compared to US$8.6 million, or 32.7% of sales, in the third quarter of 2005 and US$6.3 million, or 29.8% of sales, in the fourth quarter of 2004.

Gross research and development (R&D) expenses amounted to US$15.9 million, or 16.3% of sales, in fiscal 2005 compared to US$15.7 million, or 21.0% of sales, in 2004. In the fourth quarter of 2005, gross R&D expenses reached US$4.1 million, or 15.8% of sales, compared to US$4.1 million or, 15.7% of sales, in the previous quarter and US$3.6 million, or 17.0% of sales, in the fourth quarter of 2004.

Net R&D expenses totaled US$12.2 million, or 12.5% of sales in fiscal 2005, compared to US$12.4 million, or 16.6% of sales, in 2004. In the fourth quarter of 2005, net R&D expenses amounted to US$3.3 million, or 12.5% of sales, compared to US$3.3 million, or 12.8% of sales, in the third quarter of 2005 and US$2.7 million, or 12.9% of sales, in the fourth quarter of 2004.



Fiscal 2005 and Fourth-Quarter Business Highlights

Sales Growth
- Confirming its market-share gains, EXFO received in 2005 the Growth
Strategy Leadership Award from Frost and Sullivan for the second
consecutive year and entrenched itself as the leader in the optical
fiber-to-the-x (FTTx) test industry with significant revenue
recognition from two leading US carriers deploying fiber into their
access networks.
- EXFO reported that its top customer represented 16.1% of sales in
the fourth quarter of 2005 and its top three customers 23.7%. For
the full fiscal year, EXFO's top customer accounted for 23.3% of
sales and its top three customers 28.4%.

Profitability
- Maximizing profitability, EXFO was GAAP profitable in the last
three quarters of 2005 on the strength of higher sales volumes,
richer business mix and a heightened focus on cost of goods.
- Overall, the company reduced its GAAP net loss from US$8.4 million
in fiscal 2004 to US$1.6 million in 2005, despite aggressive
pricing pressure and a significant impact on the earnings statement
caused by the increase in the Canadian versus US dollar. GAAP net
loss in 2005 included US$1.3 million in foreign-exchange losses and
US$1.0 million in stock-based compensation costs.
- From a balance sheet standpoint, EXFO generated US$14.0 million in
cash flows from operating activities in 2005 and completed the
fiscal year with a cash position of US$112.0 million.

Innovation
- Focusing on market-driven innovation, EXFO launched 15 new products
in 2005, including a next-generation SONET/SDH analyzer and a 10
Gigabit Ethernet tester aimed at characterizing converged, IP-based
networks. Altogether, new products that have been on the market two
years or less represented 42.4% of sales in 2005, up from 31.7% in
2004.

Business Outlook
EXFO forecasts sales between US$25.0 million and US$28.0 million and
GAAP net earnings (loss) between a net loss of US$0.01 per diluted
share and net earnings of US$0.02 per diluted share for the first
quarter of fiscal 2006. GAAP net earnings (loss) include amortization
of intangible assets and stock-based compensation costs totaling
US$0.02 per diluted share.

Corporate Performance Objectives for Fiscal 2006
EXFO disclosed the following three corporate objectives for fiscal
2006:

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Goal Metric
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Increase sales through 15% sales growth year-over-year
market-share gains
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Maximize profitability 5% in earnings from operations
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Focus on innovation 40% of sales from new products
(less than two years on the market)
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Conference Call and Webcast

EXFO will host a conference call today at 5 p.m. (Eastern time) to review its fourth-quarter and year-end financial results for fiscal 2005. To listen to the conference call and participate in the question period via telephone, dial 1-416-620-2406. 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 will be available one hour after the end of the conference call until 7 p.m. on October 27, 2005. The replay number is 1-402-977-9141. The live audio Webcast and replay of the conference call will also be available on EXFO's Website at www.exfo.com/investors.

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. Words such as may, will, expect, believe, anticipate, intend, could, estimate, continue, or the negative or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events and circumstances are considered forward-looking statements. They are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in forward-looking statements due to various factors including consolidation in the global telecommunications test and measurement industry; capital spending levels in the telecommunications, life sciences and high-precision assembly sectors; concentration of sales with a single customer; 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. We undertake no obligation to revise or update any of them to reflect events or circumstances that occur after the date of this document.



EXFO Electro-Optical Engineering Inc.
Interim Consolidated Balance Sheet

(in thousands of US dollars)

As at As at
August 31, August 31,
2005 2004
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(unaudited)

Assets

Current assets
Cash $7,119 $5,159
Short-term investments 104,883 83,969
Accounts receivable
Trade, less allowance for doubtful
accounts of $352 ($510 as at
August 31, 2004) 13,945 12,080
Other 2,007 1,532
Income taxes and tax credits recoverable 2,392 7,836
Inventories 17,749 15,371
Prepaid expenses 1,112 1,513
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149,207 127,460

Income taxes and tax credits recoverable 459 449

Property, plant and equipment 13,719 15,442

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

Intangible assets 5,602 9,447

Goodwill 20,370 18,393
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$190,957 $172,791
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Liabilities

Current liabilities
Accounts payable and accrued liabilities $12,201 $11,393
Deferred revenue 1,584 805
Current portion of long-term debt 134 121
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13,919 12,319

Deferred revenue 1,568 1,123

Government grants 1,872 1,690

Long-term debt 198 332
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17,557 15,464
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Shareholders' Equity

Share capital 521,875 521,733
Contributed surplus 2,949 1,986
Deficit (381,846) (380,212)
Cumulative translation adjustment 30,422 13,820
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173,400 157,327
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$190,957 $172,791
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EXFO Electro-Optical Engineering Inc.
Interim Unaudited Consolidated Statements of Earnings

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


Three months Twelve months Three months Twelve months
ended ended ended ended
August 31, August 31, August 31, August 31,
2005 2005 2004 2004
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Sales $26,304 $97,216 $21,332 $74,630

Cost of
sales (1,2) 11,925 44,059 9,576 34,556
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Gross margin 14,379 53,157 11,756 40,074
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Operating expenses
Selling and
administrative (1) 8,072 31,782 6,347 25,890
Net research and
development (1) 3,287 12,190 2,748 12,390
Amortization of
property, plant
and equipment 1,011 4,256 1,121 4,935
Amortization of
intangible
assets 1,198 4,836 1,243 5,080
Impairment of
long-lived
assets - - 620 620
Restructuring
and other charges - 292 1,729 1,729
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Total operating
expenses 13,568 53,356 13,808 50,644
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Earnings (loss)
from operations 811 (199) (2,052) (10,570)

Interest and
other income 558 2,524 370 1,438
Foreign
exchange loss (507) (1,336) (402) (278)
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Earnings (loss)
before income taxes 862 989 (2,084) (9,410)

Income taxes 408 2,623 259 (986)
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Net earnings (loss)
for the period $454 $(1,634) $(2,343) $(8,424)
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Basic and diluted
net earnings (loss)
per share $0.01 $(0.02) $(0.03) $(0.13)

Basic weighted
average number of
shares outstanding
(000's) 68,562 68,526 68,431 66,020

Diluted weighted
average number of
shares outstanding
(000's) 68,996 68,981 68,983 66,615

(1) Stock-based
compensation costs
included in:
Cost of sales $42 $143 $25 $62
Selling and
administrative 184 626 91 265
Net research and
development 62 194 44 122
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$288 $963 $160 $449
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(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 Twelve months Three months Twelve months
ended ended ended ended
August 31, August 31, August 31, August 31,
2005 2005 2004 2004
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Cash flows
from operating
activities
Net earnings
(loss) for
the period $454 $(1,634) $(2,343) $(8,424)
Add (deduct) items
not affecting cash
Discount on
short-term
investments (565) (302) (164) 197
Stock-based
compensation
costs 288 963 160 449
Amortization 2,209 9,092 2,364 10,015
Impairment of
long-lived assets - - 620 620
Restructuring
and other charges - - 1,261 1,261
Deferred revenue 133 977 118 1,404
Government grants - - 369 154
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2,519 9,096 2,385 5,676

Change in non-cash
operating items
Accounts
receivable 382 (838) (506) (2,677)
Income taxes and
tax credits 1,023 6,096 (843) (2,464)
Inventories 2,616 (699) 1,297 1,016
Prepaid expenses 258 544 (193) (449)
Accounts payable
and accrued
liabilities (1,227) (164) (627) (351)
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5,571 14,035 1,513 751
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Cash flows from
investing activities
Additions to
short-term
investments (96,710) (585,665) (146,604) (653,348)
Proceeds from
disposal and
maturity of
short-term
investments 94,345 574,207 145,983 624,722
Additions to
property, plant
and equipment and
intangible assets (275) (1,501) (278) (851)
Business
combination - - - (241)
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(2,640) (12,959) (899) (29,718)
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Cash flows from
financing activities
Repayment of
long-term debt (32) (121) (29) (109)
Net proceeds
of offering - - - 29,164
Share issue
expenses - (6) 34 (137)
Exercise of
stock options 18 148 8 254
Redemption of
share capital - - (2) (5)
Resale of
share capital - - 10 23
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(14) 21 21 29,190

Effect of foreign
exchange rate
changes on cash 245 863 218 (430)
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Change in cash 3,162 1,960 853 (207)

Cash - Beginning
of period 3,957 5,159 4,306 5,366
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Cash - End
of period $7,119 $7,119 $5,159 $5,159
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Contact Information

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