Gennum Reports 2009 Third Quarter Results
(in millions of U.S. dollars except per share amounts)
2009 2008
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Third quarter
Revenue 21.4 33.5
Gross margin 14.7 25.6
Gross margin as a percentage of revenue 68.9% 76.3%
Restructuring charge 5.5 -
Operating income (loss), including restructuring charge (5.2) 7.5
EBITDA*, before restructuring charge 2.9 10.5
Net earnings (loss) - continuing (4.3) 6.4
Net earnings (loss) per share - continuing (0.12) 0.18
"In the third quarter we saw customer demand strengthen resulting in Gennum achieving 10% revenue growth compared to last quarter," said
Gennum revenue in fiscal 2009 has been significantly impacted by the economic downturn and related actions taken by customers to reduce inventory. In the third quarter of 2009, customers began to restock inventory, resulting in our consolidated revenue growing over 10% sequentially compared to the second quarter of 2009. This increased revenue allowed Gennum to deliver positive operating income of
On a year-over-year basis, consolidated revenue in the third quarter of 2009 was
Gross margin as a percentage of revenue in the third quarter of 2009 was 69%, down from 76% in the same quarter of 2008. This decrease was primarily caused by lower production in Gennum operations as we continue to adjust inventories for lower levels of demand. Gross margin is expected to return to average corporate levels as demand increases and costs in our operations are reduced as a result of the significant restructuring activity which we began to implement in August.
Total operating expenses of
Operating income in the third quarter of 2008 was
As the restructuring action demonstrates, we continue to proactively take steps to ensure the company returns to profitability by aggressively managing discretionary spending, minimizing capital expenditures, and aligning sales, marketing and administrative investment with short-term and mid-term customer revenue generation activities. We have maintained investment in key R&D programs enabling us to deliver a significant number of new products in 2009 and capitalize on new customer opportunities.
Net loss from continuing operations for the third quarter and for the first nine months of 2009 was
New product introductions and business developments
In the third quarter of 2009, Gennum participated in key technology demonstrations and launched new products and IP further expanding its PCI Express offerings.
- Gennum Debuts PCI Express 3.0 IP, Showcases Bridging Solutions for
HD Video - at the PCI-SIG Developers Conference, Gennum showcased
the industry's first public demonstration of a PCIe 3.0 PHY, as well
as demonstrations of PCIe 2.0 and SATA IP in a PCIe SATA bridge.
Gennum also demonstrated 3 gigabits live video capture using Gennum's
PCIe 2.0 solutions, underscoring the potential for PCIe in SDI video
applications.
- Gennum's Snowbush IP Group Delivers the Industry's First PCI Express
3.0 PHY IP on TSMC 40nm Process - Gennum introduced its Snowbush IP
PCIe 3.0 PHY and Controller. The new PCIe(R) 3.0 cores can be
licensed immediately by system-on-a-chip (SoC) and system companies,
enabling early deployment of PCIe 3.0 (Gen 3) in systems.
Dividend
Gennum's Board of Directors has declared a regular cash dividend of 3.5 cents per share Canadian to be paid on
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Management will hold a conference call to discuss third quarter results
on Wednesday, September 23, 2009 at 5:30 p.m. (ET). To access the call,
participants should dial 1-800-814-4859. The conference call will also be
Webcast live at www.gennum.com or www.newswire.ca/en/webcast and
subsequently archived on the Gennum site. A rebroadcast of the call will
be available until midnight on October 23, 2009. To access the
rebroadcast, dial 1-877-289-8525 and enter the passcode 4152632 followed
by the number sign.
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About Gennum Corporation
Gennum Corporation (TSX: GND) designs innovative semiconductor solutions and intellectual property (IP) cores for the world's most advanced consumer connectivity, enterprise, video broadcast and data communications products. Leveraging the company's proven optical, analog and mixed-signal products and IP, Gennum enables multimedia and data communications products to send and receive information without compromising the signal integrity. Recognized as an award winner for advances in high definition (HD) broadcasting, Gennum is headquartered in
* "EBITDA" is a non-GAAP financial measure which does not have any
standardized meaning under Canadian generally accepted accounting
principles ("GAAP") and is therefore unlikely to be comparable to
similar measures presented by other issuers. We define EBITDA as
earnings before interest, taxes, depreciation and amortization
(related to intangible assets and stock-based compensation). Further
information regarding this term, a description of why management
believes it is a useful measure, and a quantitative reconciliation to
the most directly comparable measure calculated in accordance with
GAAP is set forth under the heading "Non-GAAP Reporting" in our MD&A
for the quarter ended August 31, 2009.
Caution Regarding Forward-Looking Information
This document contains statements which constitute forward-looking statements. These forward-looking statements are not descriptive of historical matters and may refer to management's expectations or plans. These statements include but are not limited to statements concerning: Gennum's business objectives and plans including Gennum's corporate strategy and strategic priorities; Gennum's future financial performance and prospects including revenues, gross margins and earnings; future trends in the semiconductor and intellectual property licensing industries and, in particular, market trends for analog and mixed-signal products, optical products and intellectual property products and licensing; Gennum's expectations for sales and licensing of its products in these markets including anticipated costs, sales, size, duration, growth or decline of market opportunities and competitive and pricing pressures in these markets; Gennum's product roadmap and the speed at which Gennum is able to introduce new products; the adoption of new standards in the markets in which Gennum competes and the ability of Gennum to anticipate these changes and successfully address new opportunities; sales and capital spending plans and estimates, shipment levels and operating expenses; exchange rate fluctuations in, and the relative values of, the Canadian dollar, the U.S. dollar and the Japanese yen; Gennum's ability to finance its growth plans and make necessary investment; and litigation in which Gennum is involved.
Inherent in forward-looking statements are risks and uncertainties beyond Gennum's ability to predict or control including, but not limited to, risks associated with: competitive and pricing pressures in the increasingly competitive environment in which Gennum operates; economic cycles in the semiconductor industry including downturns which can result from adverse general economic conditions; our ability to anticipate needs for future products and successfully execute our product roadmap, including the possibility of the emergence of disruptive technologies which negatively impact our positioning in the marketplace; fluctuations in foreign exchange rates and their potential adverse impact upon our financial results; our reliance on external foundries and suppliers and the potential adverse effects of disruptions in any of these arrangements; the successful integration of acquisitions and the ability to achieve expected synergies and operating efficiencies within expected time-frames (or at all); our ability to attract and retain key personnel necessary for our business; our ability to successfully protect our intellectual property rights; and the initiation and outcome of legal proceedings. Readers should also refer to the sections entitled "Risks and Uncertainties" in our 2008 annual report and "Risk Factors" in our annual information form dated
Actual results and developments are likely to differ, and may differ materially, from those expressed or implied by the forward-looking statements contained in this document. Such statements are based on a number of assumptions which may prove to be incorrect including, but not limited to, the following assumptions: there is no material deterioration in the business and economic conditions in the marketplace for Gennum's products; Gennum's expectations regarding market trends for analog and mixed-signal products, optical products and intellectual property products and licensing are not materially incorrect; Gennum is able to execute its product roadmap without delays or disruptions having a material impact on Gennum; Gennum's expectations relating to the needs and direction of the marketplace for its products are within reasonable bounds of accuracy and Gennum is able to introduce products and capitalize on new opportunities generally as expected; material disruptions in the manufacture and supply of products and services to Gennum by foundries and suppliers will not materialize; Gennum's expectations relating to competitive pressures, including pricing pressures, are not materially incorrect; significant fluctuations in foreign exchange rates which materially adversely affect Gennum's financial results do not arise; customer demand for Gennum's products remains generally as anticipated; Gennum is able to successfully integrate acquisitions and to achieve synergies generally as anticipated; and Gennum is able to continue to retain and attract technical and other key employees.
Readers are cautioned that the foregoing list of important factors and assumptions is not exhaustive. Forward-looking statements are not guarantees of future performance. Events or circumstances could cause Gennum's actual results to differ materially from those estimated or projected and expressed in, or implied by, these forward-looking statements. Consequently, readers should not place any undue reliance on these forward-looking statements. Forward-looking statements are provided for the purpose of providing information about management's current expectations and plans relating to the future. Readers are cautioned that such information may not be appropriate for other purposes. In addition, these forward-looking statements relate to the date on which they are made. We disclaim any intention or obligation to update or revise any forward-looking statements or the foregoing list of factors, whether as a result of new information, future events or otherwise, except to the extent required by law. All financial results referenced are unaudited, in
2009 THIRD QUARTER MANAGEMENT'S DISCUSSION AND ANALYSIS
All amounts are in U.S. dollars, unless otherwise stated
Caution regarding forward-looking statements
This document contains statements which constitute forward-looking statements. These forward-looking statements are not descriptive of historical matters and may refer to management's expectations or plans. These statements include but are not limited to statements concerning: Gennum's business objectives and plans including Gennum's corporate strategy and strategic priorities; Gennum's future financial performance and prospects including revenues, gross margins and earnings; future trends in the semiconductor and intellectual property licensing industries and, in particular, market trends for analog and mixed-signal products, optical products and intellectual property products and licensing; Gennum's expectations for sales and licensing of its products in these markets including anticipated costs, sales, size, duration, growth or decline of market opportunities and competitive and pricing pressures in these markets; Gennum's product roadmap and the speed at which Gennum is able to introduce new products; the adoption of new standards in the markets in which Gennum competes and the ability of Gennum to anticipate these changes and successfully address new opportunities; sales and capital spending plans and estimates, shipment levels and operating expenses; exchange rate fluctuations in, and the relative values of, the Canadian dollar, the U.S. dollar and the Japanese yen; Gennum's ability to finance its growth plans and make necessary investment; and litigation in which Gennum is involved.
Inherent in forward-looking statements are risks and uncertainties beyond Gennum's ability to predict or control including, but not limited to, risks associated with: competitive and pricing pressures in the increasingly competitive environment in which Gennum operates; economic cycles in the semiconductor industry including downturns which can result from adverse general economic conditions; our ability to anticipate needs for future products and successfully execute our product roadmap, including the possibility of the emergence of disruptive technologies which negatively impact our positioning in the marketplace; fluctuations in foreign exchange rates and their potential adverse impact upon our financial results; our reliance on external foundries and suppliers and the potential adverse effects of disruptions in any of these arrangements; the successful integration of acquisitions; our ability to attract and retain key personnel necessary for our business; our ability to successfully protect our intellectual property rights; and the initiation and outcome of legal proceedings. Readers should also refer to the sections entitled "Risks and Uncertainties" in our 2008 annual report and "Risk Factors" in our annual information form dated
Actual results and developments are likely to differ, and may differ materially, from those expressed or implied by the forward-looking statements contained in this document. Such statements are based on a number of assumptions which may prove to be incorrect including, but not limited to, the following assumptions: there is no material deterioration in the business and economic conditions in the marketplace for Gennum's products; Gennum's expectations regarding market trends for analog and mixed-signal products, optical products and intellectual property products and licensing are not materially incorrect; Gennum is able to execute its product roadmap without delays or disruptions having a material impact on Gennum; Gennum's expectations relating to the needs and direction of the marketplace for its products are within reasonable bounds of accuracy and Gennum is able to introduce products and capitalize on new opportunities generally as expected; material disruptions in the manufacture and supply of products and services to Gennum by foundries and suppliers will not materialize; Gennum's expectations relating to competitive pressures, including pricing pressures, are not materially incorrect; significant fluctuations in foreign exchange rates which materially adversely affect Gennum's financial results do not arise; customer demand for Gennum's products remains generally as anticipated; Gennum is able to successfully integrate acquisitions; and Gennum is able to continue to retain and attract technical and other key employees.
Readers are cautioned that the foregoing list of important factors and assumptions is not exhaustive. Forward-looking statements are not guarantees of future performance. Events or circumstances could cause Gennum's actual results to differ materially from those estimated or projected and expressed in, or implied by, these forward-looking statements. Consequently, readers should not place any undue reliance on these forward-looking statements. Forward-looking statements are provided for the purpose of providing information about management's current expectations and plans relating to the future. Readers are cautioned that such information may not be appropriate for other purposes. In addition, these forward-looking statements relate to the date on which they are made. We disclaim any intention or obligation to update or revise any forward-looking statements or the foregoing list of factors, whether as a result of new information, future events or otherwise, except to the extent required by law.
The following discussion and analysis is intended to provide readers with an assessment of our performance for the third quarter of 2009 together with the comparable period in the prior year, as well as our financial position and future prospects. It should be read in conjunction with the Company's unaudited consolidated financial statements and accompanying notes for the third quarter of fiscal 2009 and 2008, and the fiscal 2008 and 2007 audited consolidated financial statements and accompanying notes, which have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") as well as the management's discussion and analysis contained in our 2008 annual report. Our public disclosure documents, including our historical financial statements and our annual information form, can be viewed on SEDAR at www.sedar.com.
In this discussion and analysis, "Gennum", the "Company", "we", "our" and similar references include Gennum Corporation and its subsidiaries, except where the context otherwise requires.
Effective
As a result of the Company's leadership and product portfolio realignment at the end of 2007, the Company began operating and tracking its results in one reportable segment, consisting of numerous product areas, effective
CORPORATE OVERVIEW AND BUSINESS STRATEGY
Gennum designs, develops and markets semiconductor products and intellectual property ("IP") cores for advanced consumer connectivity, enterprise, video broadcast and data communications applications. Our products are designed to ensure that signals used to transmit video and data in applications such as networking, home entertainment and broadcasting maintain their original integrity, and to eliminate the potential for errors in sending and receiving information.
Our corporate strategy involves leveraging core technological capabilities into selected high-growth markets that provide a competitive advantage for both the Company and our customers. During the remainder of 2009, we plan to continue to make strategic investments in research and development, capitalize on new customer opportunities with our expanded product portfolio, and grow our competitive position in our target markets.
New product introductions and business developments
In the third quarter of 2009, Gennum participated in key technology demonstrations and launched new products and IP further expanding its PCI Express offerings.
- Gennum Debuts PCI Express 3.0 IP, Showcases Bridging Solutions for HD
Video - at the PCI-SIG Developers Conference, Gennum showcased the
industry's first public demonstration of a PCIe 3.0 PHY, as well as
demonstrations of PCIe 2.0 and SATA IP in a PCIe SATA bridge. Gennum
also demonstrated 3 gigabits live video capture using Gennum's PCIe
2.0 solutions, underscoring the potential for PCIe in SDI video
applications.
- Gennum's Snowbush IP Group Delivers the Industry's First PCI Express
3.0 PHY IP on TSMC 40nm Process - Gennum introduced its Snowbush IP
PCIe 3.0 PHY and Controller. The new PCIe(R) 3.0 cores can be licensed
immediately by system-on-a-chip (SoC) and system companies, enabling
early deployment of PCIe 3.0 (Gen 3) in systems.
RESULTS FROM OPERATIONS
Overview
Gennum revenue in fiscal 2009 has been significantly impacted by the economic downturn and related actions taken by customers to reduce inventory. In the third quarter of 2009, customers began to restock inventory, resulting in our consolidated revenue growing over 10% sequentially compared to the second quarter of 2009. This increased revenue allowed Gennum to deliver positive operating income of
On a year-over-year basis, consolidated revenue in the third quarter of 2009 was
Gross margin as a percentage of revenue in the third quarter of 2009 was 69%, down from 76% in the same quarter of 2008. This decrease was primarily caused by lower production in Gennum operations as we continue to adjust inventories for lower levels of demand. Gross margin is expected to improve as demand increases and costs in our operations are reduced as a result of the significant restructuring activity which we began to implement in August.
Total operating expenses of
Operating income in the third quarter of 2008 was
As the restructuring action demonstrates, we continue to proactively take steps to ensure the company returns to profitability by aggressively managing discretionary spending, minimizing capital expenditures, and aligning sales, marketing and administrative investment with short-term and mid-term customer revenue generation activities and new product development.
Despite the continuation of severe economic conditions, we were able to produce positive EBITDA* again this quarter before the restructuring charge.
Net loss from continuing operations for the third quarter and for the first nine months of 2009 was
* "EBITDA" is a non-GAAP financial measure that does not have any
standardized meaning under GAAP and is therefore unlikely to be
comparable to similar measures presented by other issuers. A
definition of this term, a description of why management believes it
is a useful measure, and a quantitative reconciliation to the most
directly comparable measure calculated in accordance with GAAP is set
forth below under the heading "Non-GAAP Reporting".
Overall performance of continuing operations
(in millions of U.S. dollars except earnings (loss) per share or as
otherwise stated)
Three Months Ended Nine Months Ended
August 31 August 31
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% %
2009 2008 change 2009 2008 change
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Revenue 21.4 33.5 (36.1) 60.1 96.6 (37.7)
Gross margin 14.7 25.6 (42.3) 42.6 73.3 (41.9)
Restructuring charge and
deferred development impairment 5.5 - n/a 5.5 - n/a
Earnings (loss) from continuing
operations before income taxes (5.5) 9.4 n/a (9.4) 26.1 n/a
As a percentage of revenue n/a 28.1 n/a n/a 27.1 n/a
Net earnings (loss) from
continuing operations (4.3) 6.4 n/a (6.2) 16.9 n/a
Net earnings (loss) from
discontinued operations - - - - 7.6 n/a
Net earnings (loss) (4.3) 6.4 n/a (6.2) 24.5 n/a
Earnings (loss) per share:
continuing operations (0.12) 0.18 n/a (0.18) 0.48 n/a
discontinued operations - 0.00 - - 0.21 n/a
Net earnings (loss) per share
basic and diluted (0.12) 0.18 n/a (0.18) 0.69 n/a
Cash and cash equivalents* 34.9 48.7 (28.5) 34.9 48.7 (28.5)
Total debt* 2.3 2.0 12.8 2.3 2.0 12.8
Cash dividends per share(1) $0.031 $0.035 $0.088 $0.105
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* 2008 figures as of November 30, 2008
(1) Dividends were paid in Canadian dollars at a rate of $0.035 per share
per quarter
Revenue
(in millions of U.S. dollars)
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Three Months Ended Nine Months Ended
August 31 August 31
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% %
2009 2008 change 2009 2008 change
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Analog and Mixed Signal (AMS) 15.9 26.7 (40.4) 42.6 75.4 (43.5)
Optical 2.9 3.5 (18.8) 8.8 12.8 (31.0)
IP Licensing 2.6 3.3 (20.1) 8.7 8.4 3.6
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Total revenue 21.4 33.5 (36.1) 60.1 96.6 (37.7)
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Overall revenue in the third quarter and first nine months of 2009 declined 36.1% and 37.7% respectively, compared to the same periods in 2008 mainly due to the global economic downturn in the current fiscal year and its resultant effects upon the markets for these products.
AMS products
Revenue in the third quarter and first nine months of 2009 from our AMS product group declined by 40.4% and 43.5% respectively, compared to the same periods last year. Management's analysis of capital spending in the global media and television markets would suggest that capital spending began to show a significant slowdown in 2008. Capital spending in the broadcast market is generally thought to be a function of advertising revenue. Compared to the second quarter of 2009, revenue in the third quarter was up almost 24% as the end markets are beginning to show signs of a gradual recovery.
Optical products
Revenue was lower in our Optical product group at
IP licensing
IP revenue for the third quarter of 2009 was
Gross margin
(in millions of U.S. dollars)
Three Months Ended Nine Months Ended
August 31 August 31
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% %
2009 2008 change 2009 2008 change
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Gross margin 14.7 25.6 (42.3) 42.6 73.3 (41.9)
Percentage of revenue 68.9 76.3 70.8 75.9
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Gross margin as a percentage of revenue in the third quarter of 2009 was 69%, which was lower compared to the same period in 2008. The lower percentage was primarily the result of lower production levels in our test operations. In the first nine months of 2009, gross margin as a percentage of revenue at 71% was also lower compared to the same period in 2008 primarily due to the impact of lower production volume in our test operations. Despite this, we believe that our gross margins continue to reside at the high end of industry benchmarks.
Sales, marketing and administration expenditures
(in millions of U.S. dollars)
Three Months Ended Nine Months Ended
August 31 August 31
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% %
2009 2008 change 2009 2008 change
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Sales, marketing and
administration expense 7.6 9.5 (19.7) 22.7 26.3 (13.6)
Percentage of revenue 35.5 28.2 37.8 27.3
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Sales, marketing and administration expenditures in the third quarter of 2009 were lower by
In the first nine months of 2009, sales, marketing and administration expenditures were lower by
Research and development (R&D) expenditures
(in millions of U.S. dollars)
Three Months Ended Nine Months Ended
August 31 August 31
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% %
2009 2008 change 2009 2008 change
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R&D expense (gross) 7.4 9.4 (21.5) 22.8 27.4 (16.8)
Percentage of revenue 34.5 28.1 38.0 28.4
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In the third quarter of 2009, R&D spending was lower by
For the first nine months of 2009, R&D expenditures were lower by
Eligible R&D expenditures capitalized in the third quarter and first nine months of 2009 were
Restructuring charge and deferred development impairment
(in millions of U.S. dollars)
Three Months Ended Nine Months Ended
August 31 August 31
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% %
2009 2008 change 2009 2008 change
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Severance costs 3.5 - - 3.5 - -
Deferred development cost
impairment 1.2 - - 1.2 - -
Inventory and other asset
impairments 0.8 - - 0.8 - -
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Total restructuring charge and
deferred development impairment 5.5 - - 5.5 - -
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During the third quarter of 2009, the Company announced the implementation of a restructuring plan to improve profitability and cash flow and help achieve its business model targets. The Company's plans include realigning its investment to maintain its R&D programs while reducing corporate infrastructure and business operations costs and capital expenditures. Additionally, Gennum is focusing its marketing, sales and administrative investment on short and mid-term customer revenue generation activities and new product development.
This plan resulted in a restructuring charge and deferred development impairment of
Other income (expense)
(in millions of U.S. dollars)
Three Months Nine Months
Ended Ended
August 31 August 31
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2009 2008 2009 2008
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Realized gain (loss) on foreign exchange
hedges 0.8 (0.1) (2.4) 0.7
Foreign exchange gain (loss) on translation (0.5) 1.8 (3.0) 2.2
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Gain (loss) on foreign exchange, net 0.3 1.7 (5.4) 2.9
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Gain on sale of building 1.0 - 1.0 -
Corporate development charges (1.2) - (1.2) -
Tundra termination fee, net - - 2.2 -
Gain on sale of BST technology group - - 1.6 -
Gain on sale of Toumaz investment - - 0.3 -
Provision on long-term investment (0.1) - (0.8) -
Fair value loss on instruments held for trading - - (0.3) -
Other (0.3) (0.1) (0.6) (0.2)
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(0.6) (0.1) 2.2 (0.2)
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Total other income (expense) (0.4) 1.6 (3.2) 2.7
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Other expense in the third quarter of 2009 was
During the quarter, the Company completed the sale of land and a vacant building in
Income taxes
(in millions of U.S. dollars)
Three Months Nine Months
Ended Ended
August 31 August 31
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2009 2008 2009 2008
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Income tax (recovery) expense (1.2) 3.0 (3.2) 9.3
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In the third quarter and first nine months of 2009, there was an income tax recovery compared to an income tax expense for the same periods in 2008. The effective tax rate in the third quarter and first nine months of 2009 was 22.6% and 33.7% respectively, compared to the Canadian statutory rate of 33.0%. The reduction in the rate for the quarter was driven mainly by a permanent difference from stock option amortization.
Net (loss) earnings from continuing operations
(in millions of U.S. dollars except earnings per share)
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Three Months Nine Months
Ended Ended
August 31 August 31
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2009 2008 2009 2008
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Net (loss) earnings from
continuing operations (4.3) 6.4 (6.2) 16.9
Percentage of revenue n/a 19.0 n/a 17.5
Basic (loss) earnings per share
from continuing operations (0.12) 0.18 (0.18) 0.48
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In the third quarter of 2009, the Company incurred a net loss of
Discontinued operations, net of tax
(in millions of U.S. dollars except earnings per share)
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Three Months Nine Months
Ended Ended
August 31 August 31
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2009 2008 2009 2008
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Hearing/Manufacturing - - - (1.1)
VXP(R), including gain on sale - - - 8.7
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Total earnings (loss) on discontinued
operations, net of taxes - - - 7.6
Earnings (loss) per share
- basic and diluted - - - 0.21
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In the first quarter of 2008, the Company completed the sale of its VXP(R)
business to Sigma Designs for $18.2 million, which resulted in a pre-tax gain
on the sale of approximately $13.5 million.
Net (loss) earnings
(in millions of U.S. dollars except earnings per share)
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Three Months Nine Months
Ended Ended
August 31 August 31
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2009 2008 2009 2008
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Net (loss) earnings (4.3) 6.4 (6.2) 24.5
Percentage of revenue n/a 19.0 n/a 25.4
Basic (loss) earnings per share (0.12) 0.18 (0.18) 0.69
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In the third quarter of 2009, the Company incurred a net loss of
On a year-to-date basis, the net loss was
Quarterly results
(in millions of U.S. dollars except earnings per share)
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Third Second First Fourth
Quarter Quarter Quarter Quarter
2009 2008 2009 2008 2009 2008 2008 2007
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Revenue 21.4 33.5 19.4 33.0 19.4 30.1 30.3 29.9
Net earnings (loss) from
continuing operations (4.3) 6.4 (1.1) 5.9 (0.8) 4.6 2.7 4.4
Net earnings (loss) from
discontinued operations - - - (1.1) - 8.7 (0.2) (4.8)
Earnings (loss) per share:
Continuing operations
basic and diluted (0.12) 0.18 (0.03) 0.17 (0.02) 0.13 0.07 0.12
Discontinued operations
basic and diluted - (0.00) - (0.03) - 0.24 - (0.14)
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Revenue and net earnings performance can fluctuate on a quarterly basis due to a wide variety of factors, including economic conditions and exchange rates.
NON-GAAP REPORTING
The Company presents non-GAAP financial measures to assist the financial community in its analysis and comparison of historical results and assessment of the Company's future operating results.
EBITDA
We believe that financial analysts and investors use EBITDA to understand our financial results and to compare us with our industry peers. The term EBITDA refers to a non-GAAP financial measure that we define as earnings before interest, taxes, depreciation and amortization (related to intangible assets and stock-based compensation). In the current quarter, we have also excluded the restructuring charges from the EBITDA calculation as management believes that this would better represent the normal operations of the Company. Since EBITDA is not a measure defined under GAAP, it may not be comparable to definitions of EBITDA reported by other companies. EBITDA is presented here over the last five quarters to provide readers with a historical perspective regarding our operational performance. We believe this allows us to compare our operating performance on a more consistent basis. The most comparable GAAP financial measure is operating income from continuing operations. The table below reconciles EBITDA to operating income from continuing operations.
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EBITDA Last Five Quarters Q3 Q2 Q1 Q4 Q3
2009 2009 2009 2008 2008
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Revenue 21.4 19.4 19.4 30.3 33.5
Operating income (loss) from continuing
operations (5.2) (1.0) (0.3) 5.6 7.5
Restructuring and deferred development
charges 5.5 - - - -
Operating income (loss) from continuing
operations before restructuring and
deferred development charges 0.3 (1.0) (0.3) 5.6 7.5
Adjustments to reconcile to EBITDA:
Depreciation expense 1.3 1.3 1.3 1.4 1.4
Amortization of:
Intangibles 0.5 0.4 0.4 0.5 0.5
Stock-based compensation 0.8 0.7 0.6 1.4 1.1
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EBITDA 2.9 1.4 2.0 8.9 10.5
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EBITDA as a percentage of revenue 14% 7% 10% 29% 31%
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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents
The cash and cash equivalents balance at
The Company is in a strong liquidity position and is able to meet its cash flow obligations as they come due. The Company's cash and accounts receivable represents a combined balance of
Cash flow used in operating activities was
Accounts receivable
At
As of
The aging of trade receivable balances as of
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% of total % of total
before before
August 31, 2009 allowance November 30, 2008 allowance
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Not past due 13.8 75.8 18.4 80.2
Past due 0-30 days 2.8 15.4 2.9 12.7
Past due 31-60 days 0.3 1.6 1.1 4.7
Past due over 61 days 1.3 7.2 0.5 2.4
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Trade receivables 18.2 22.9
Less allowance for
doubtful accounts (1.0) (0.2)
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17.2 22.7
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The Company is exposed to commercial credit risk from its customers in the normal course of business. However, this risk is mitigated by the Company's credit management policies. Advance payments from customers are required in certain circumstances.
No material write-offs occurred in the third quarter and first nine months of 2009 or 2008.
Inventories
At
Instruments held for trading and long-term investments
Trading of the CellPoint shares were halted on the Aktie Torget stock exchange in
The CellPoint shares classified as available for sale were impaired for the remaining value of
In the second quarter of 2009, the Company sold its investment in Toumaz for
Future income tax assets
Net future income tax assets increased by
Accounts payable and accrued liabilities
Accounts payable and accrued liabilities at
Total assets
Total assets at the end of the third quarter of 2009 were
Capital expenditures
Purchases of capital assets in the first nine months of 2009 were
Dividends
Total dividends of
Derivative financial instruments
The objective of the Company's foreign exchange risk management activities is to minimize translation exposures and the resulting volatility of the Company's earnings. The Company utilizes financial instruments to manage the risk associated with fluctuations in foreign exchange rates by entering into foreign exchange forward contracts.
Cash, receivables and payables on the Canadian entity's books are primarily denominated in U.S. dollars while the functional currency of this entity is Canadian dollars. Therefore, translation gains or losses can occur when these net monetary assets are translated to Canadian dollars at the exchange rate in effect on the balance sheet date. A volatile exchange rate can create significant swings in periodic income. To help mitigate this risk, starting in the third quarter of 2009, the Company entered into foreign exchange forward contracts equal to the forecasted U.S. dollar denominated net monetary assets and excess U.S. dollar cash balances. These contracts mature in one month and help to offset the impact of translation gains or losses due to currency movements.
In the year to date for 2009, the Canadian dollar strengthened compared to the U.S. dollar ($0.8083 on
During the third quarter, the Company cancelled foreign exchange contracts entered into under its previous hedging policy which resulted in a gain of
The Company has entered into a foreign exchange forward contract to sell an aggregate amount of U.S.
The Company's reporting currency is the U.S. dollar. Therefore, financial results are first consolidated into the Canadian dollar functional currency and then translated into U.S. dollars using the current rate method. The translation to the reporting currency does not generate any cash impact and is not hedged by the Company. Any gains or losses created by translating from the functional currency to the reporting currency are captured as a change in unrealized gains (losses) on translating financial statements and are captured in the consolidated statement of Other Comprehensive Income. A year-to-date foreign currency translation gain of
CONTRACTUAL OBLIGATIONS
(in millions of U. S. dollars)
Payments Due by Period
--------------------------------------------
Less than More than
Total 1 year 1-3 years 4-5 years 5 years
---------------------------------------------------
Operating leases 29.4 3.9 6.9 4.4 14.2
Purchase obligations(1) 7.1 6.7 0.4 - -
Other obligations 0.1 0.1 - - -
-------------------------------------------------------------------------
Total contractual
obligations 36.6 10.7 7.3 4.4 14.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Agreements to purchase goods or services that are enforceable and
legally binding and that specify all significant terms, including
fixed or minimum quantities to be purchased, fixed or variable price
provisions and the approximate timing of the transactions. The
purchase obligations relate primarily to inventory, product
development, license agreements, general operating costs and
$1.0 million in authorized capital projects.
There are no off-balance sheet arrangements that have or are likely to have an effect on the results of operations or the financial condition of the Company.
RELATED PARTY TRANSACTIONS
The Company did not have any related party transactions during the year.
LITIGATION
In the ordinary course of business activities, the Company may become involved in litigation or claims with customers, suppliers, former employees and third parties.
NEW ACCOUNTING POLICIES AND CRITICAL ESTIMATES
A summary of significant accounting policies is presented in note 1 to our audited
Changes in Significant Accounting Policies
Effective
General Standards of Financial Statement Presentation - The CICA amended Section 1400 "General Standards of Financial Statement Presentation", to include requirements to assess and disclose an entity's ability to continue as a going concern. The Company adopted the amendments to this standard beginning
Inventories - The CICA issued a new standard, Section 3031 "Inventories", which requires inventory to be measured at the lower of cost and net realizable value. The standard provides guidance on the types of costs that can be capitalized and requires reversal of previous inventory write-downs if economic circumstances have changed to support the higher inventory values. The Company adopted this standard beginning
Goodwill and Intangible Assets - The CICA issued a new accounting standard, Section 3064 "Goodwill and Intangible Assets", which clarifies that costs can be deferred only when they relate to an item that meets the definition of an asset. The Company adopted the new standard beginning
Financial Statement Concepts - Section 1000 "Financial Statement Concepts", was amended to provide consistency with the new standard, Section 3064. The amended standard was effective for the Company beginning
Recently issued accounting pronouncements
Business Combinations, Consolidated Financial Statements and Non-Controlling Interests - In
International Financial Reporting Standards - In
CONTROLS AND PROCEDURES
There have been no changes in the Company's internal control over financial reporting during the second quarter of 2009 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
COMMON SHARES OUTSTANDING
At
At the end of the third quarter of 2009, there were 2,587,894 outstanding options, each entitling the holder to purchase one common share of Gennum. Of these outstanding options, 845,467 were exercisable as at
RISKS AND UNCERTAINTIES
We are subject to a number of risks and uncertainties that could significantly affect our financial condition and performance. As we grow, continue our commitment to R&D, and enter into new markets, these risks can increase. For a discussion of these risks, please refer to our annual information form dated
OUTLOOK
Our third fiscal quarter was a period in which we saw customer demand strengthen, resulting in a 10% revenue growth compared to the second quarter of 2009 and improved backlog for the fourth quarter.
For the fourth quarter, we have better visibility as customer lead times continue to increase. We are encouraged by continued increasing market demand for our products, enabling our ability to deliver improved revenue performance in the final quarter of our fiscal year.
We continue to be focused on improving profitability and cash flow. With the increased manufacturing activity in our test operations and actions to reduce costs, we expect gross margin percentage to return to average corporate levels. We also expect our cost structure to continue to benefit from the cost initiatives that were announced in
Turning to the economic environment, and specifically our industry outlook, we do see some improvement in the overall economic environment and end markets. We are particularly seeing improvement in broadcast and data communications markets due to the continued build out of the global 3Gb/s video broadcast infrastructure and the migration to data rates above 10Gb/s in data center, enterprise and storage applications. We expect this market demand improvement to continue into fiscal 2010.
Looking ahead to 2010, we believe that the cost initiatives, improvement in our market segments and early volume ramps of new products should result in us achieving operating ratios in line with our 2008 performance.
We remain confident in our strategy and will continue to deliver more new products, capitalize on new customer opportunities and grow our leadership in our target markets.
GENNUM CORPORATION
Unaudited Consolidated Financial Statements
For the Nine Months ended August 31, 2009
(Amounts in thousands of U.S. Dollars)
Gennum Corporation
CONSOLIDATED BALANCE SHEETS - (unaudited)
(U.S. dollars, amounts in thousands)
August 31, November 30,
2009 2008
-------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents 34,862 48,748
Instruments held for trading (note 9) - 268
Accounts receivable, net 17,167 22,726
Inventories (note 3) 23,184 14,219
Prepaid expenses and other assets 4,781 4,863
Promissory note receivable (note 10) 1,161 816
Consideration receivable (note 6) 500 -
Income taxes receivable 3,867 547
Future income taxes 9,824 13,428
Assets held for sale (note 6) - 142
-------------------------------------------------------------------------
Total current assets 95,346 105,757
-------------------------------------------------------------------------
Capital assets, net (note 4) 21,839 20,579
Long-term investment (note 9) - 1,300
Intangible assets, net (note 11) 11,503 8,652
Promissory note receivable (note 10) - 606
Consideration receivable (note 6) 845 -
Goodwill (note 11) 20,843 18,029
Future income taxes 13,909 2,915
Assets held for sale (note 6) - 1,616
-------------------------------------------------------------------------
164,285 159,454
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities
(note 17) 13,025 18,849
Deferred revenue (note 12) 719 308
Current portion of long-term payable (note 13) 1,142 1,013
Income taxes payable 814 1,138
Future income taxes 1,273 1,515
-------------------------------------------------------------------------
Total current liabilities 16,973 22,823
-------------------------------------------------------------------------
Long-term payable (note 13) 1,143 1,013
Deferred revenue (note 12) 3,628 3,430
Future income taxes 3,882 2,478
-------------------------------------------------------------------------
Shareholders' equity
Capital stock (note 14) 8,576 8,576
Deferred compensation (2,766) (2,092)
Retained earnings 104,522 113,658
Contributed surplus 3,466 2,493
Accumulated other comprehensive income 24,861 7,075
-------------------------------------------------------------------------
Total shareholders' equity 138,659 129,710
-------------------------------------------------------------------------
164,285 159,454
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Commitments and contingencies (note 21)
See accompanying notes
Gennum Corporation
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) - (unaudited)
(U.S. dollars, amounts in thousands except per share data)
Three Months Ended Nine Months Ended
August 31 August 31
-------------------------------------------------------------------------
2009 2008 2009 2008
-------------------------------------------------------------------------
Revenue (note 16) 21,389 33,496 60,140 96,583
Cost of goods sold 6,646 7,931 17,571 23,269
-------------------------------------------------------------------------
Gross margin 14,743 25,565 42,569 73,314
-------------------------------------------------------------------------
Sales, marketing and
administration expense 7,596 9,454 22,741 26,333
Research and development expense 7,377 9,401 22,834 27,428
Amortization of intangible
assets 491 454 1,326 1,348
Less government assistance (1,026) (1,206) (3,379) (4,387)
-------------------------------------------------------------------------
Operating expenses before
restructuring and deferred
development charge 14,438 18,103 43,522 50,722
Restructuring charge and
deferred development
impairment (note 17) 5,509 - 5,509 -
-------------------------------------------------------------------------
Operating income (loss) (5,204) 7,462 (6,462) 22,592
Investment income 58 259 272 881
Other income (expense)
(note 18) (364) 1,687 (3,201) 2,667
-------------------------------------------------------------------------
Earnings (loss) from
continuing operations before
income taxes (5,510) 9,408 (9,391) 26,140
Provision (recovery) of income
taxes (note 19) (1,244) 3,037 (3,168) 9,250
-------------------------------------------------------------------------
Net earnings (loss) for the
period, from continuing
operations (4,266) 6,371 (6,223) 16,890
Net earnings (loss) on
discontinued operations, net
of tax (note 5) - (18) - 7,626
-------------------------------------------------------------------------
Net earnings (loss) for the
period (4,266) 6,353 (6,223) 24,516
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) per share
(note 14)
Continuing operations - basic
and diluted (0.12) 0.18 (0.18) 0.48
Discontinued operations - basic
and diluted - 0.00 - 0.21
-------------------------------------------------------------------------
Net earnings (loss) - basic and
diluted (0.12) 0.18 (0.18) 0.69
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
Gennum Corporation
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - (unaudited)
(U.S. dollars, amounts in thousands)
Three Months Ended Nine Months Ended
August 31 August 31
-------------------------------------------------------------------------
2009 2008 2009 2008
-------------------------------------------------------------------------
Capital stock
Balance at beginning of the
period 8,576 8,627 8,576 8,680
Shares repurchased under normal
course issuer bid - - - (53)
-------------------------------------------------------------------------
Balance at end of the period 8,576 8,627 8,576 8,627
-------------------------------------------------------------------------
Deferred compensation
Balance at beginning of the
period (3,384) (3,902) (2,092) (3,404)
New awards (49) - (1,986) (1,680)
Forfeitures 234 59 250 413
Amortization 433 485 1,062 1,313
-------------------------------------------------------------------------
Balance at end of the period (2,766) (3,358) (2,766) (3,358)
-------------------------------------------------------------------------
Retained earnings
Balance at beginning of the
period (as restated - note 1) 109,905 108,555 113,658 93,200
Transitional adjustment on
adoption of new accounting
policies (note 1) - - 212 -
Net earnings (loss) (4,266) 6,353 (6,223) 24,516
Dividends (1,117) (1,231) (3,125 (3,723)
Repurchase of common shares - - - (316)
-------------------------------------------------------------------------
Balance at end of the period 104,522 113,677 104,522 113,677
-------------------------------------------------------------------------
Contributed surplus
Balance at beginning of the
period 3,094 1,729 2,493 1,078
Stock option amortization 372 412 973 1,063
-------------------------------------------------------------------------
Balance at end of the period 3,466 2,141 3,466 2,141
-------------------------------------------------------------------------
Accumulated other
comprehensive income, net of
income taxes
Balance at beginning of the
period 24,675 37,055 7,075 36,802
Other comprehensive income
(loss) for the period 186 (10,807) 17,786 (10,554)
-------------------------------------------------------------------------
Balance at end of the period 24,861 26,248 24,861 26,248
-------------------------------------------------------------------------
Total shareholders' equity at
end of the period 138,659 147,335 138,659 147,335
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes
Gennum Corporation
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - (unaudited)
(U.S. dollars, amounts in thousands)
Three Months Ended Nine Months Ended
August 31 August 31
-------------------------------------------------------------------------
2009 2008 2009 2008
-------------------------------------------------------------------------
Net earnings (loss) for the
period (4,266) 6,353 (6,223) 24,516
Other comprehensive income
(loss), net of income taxes
Change in unrealized gains
(losses) on translating
financial statements (175) (9,820) 14,848 (9,142)
Change in gains (losses) on
derivative instruments
designated as cash flow
hedges(1) 2,171 (806) 2,319 (1,242)
Reclassification to earnings
of gains (losses) on
settled cash flow hedges(2) (1,810) 25 405 402
Change in unrealized gains
(losses) on available for
sale financial assets(3) (62) (206) 1,365 (572)
Reclassification to earnings
of gains (losses) on
available for sale financial
assets(4) 62 - (1,151) -
-------------------------------------------------------------------------
Total other comprehensive
income (loss), net of income
taxes 186 (10,807) 17,786 (10,554)
-------------------------------------------------------------------------
Comprehensive income (loss) for
the period (4,080) (4,454) 11,563 13,962
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Net of income tax recovery of nil for the quarter and nil year to
date (2008 - tax recovery of $399 for the quarter and $618 year to
date)
(2) Net of income tax recovery of nil for the quarter and nil year to
date (2008 - tax of $12 for the quarter and $203 year to date)
(3) Net of income tax recovery of $10 for the quarter and $148 year to
date (2008 - nil for the quarter and year to date)
(4) Net of income tax recovery of $10 for the quarter and $148 year to
date (2008 - nil for the quarter and year to date)
See accompanying notes
Gennum Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS - (unaudited)
(U.S. dollars except as noted, amounts in thousands except per share
data)
Three Months Ended Nine Months Ended
August 31 August 31
-------------------------------------------------------------------------
2009 2008 2009 2008
-------------------------------------------------------------------------
OPERATING ACTIVITIES
Net (loss) earnings from
continuing operations for the
period (4,266) 6,371 (6,223) 16,890
Items not affecting cash
Depreciation and amortization 1,776 1,798 5,199 5,428
Impairment of deferred
development costs 1,164 - 1,308 -
Deferred compensation and
stock option amortization 794 864 2,039 2,320
Gain on sale of land and
building (1,002) - (1,002) -
Gain on sale of BST
technology group - - (1,601) -
Gain on sale of Toumaz
investment - - (268) -
Loss on CellPoint investments 96 - 1,110 -
Future income taxes (3,193) 2,054 (5,904) 2,045
Foreign exchange (gain) loss
on translation 556 (1,810) 3,015 (2,154)
Other 72 (57) (83) (177)
-------------------------------------------------------------------------
(4,003) 9,220 (2,410) 24,352
Net change in non-cash working
capital balances related to
continuing operations 3,687 989 (7,026) (6,949)
-------------------------------------------------------------------------
Cash (used in) provided by
operating activities of
continuing operations (316) 10,209 (9,436) 17,403
Cash used in operating
activities of discontinued
operations - 25 - (7,786)
-------------------------------------------------------------------------
Cash (used in) provided by
operating activities (316) 10,234 (9,436) 9,617
-------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of capital assets (1,069) (3,890) (3,155) (11,070)
Payment of license fees and
deferred development charges (1,606) (1,407) (4,161) (2,184)
Acquisition, cash acquired - 123 - 123
Acquisition, other than cash
acquired 162 (1,716) (432) (2,639)
Proceeds on sale of BST
technology group - cash 250 - 2,026 -
Proceeds on sale of Toumaz
investment - - 1,019 -
Proceeds from sale of VXP(R)
(note 7) - - - 18,302
Proceeds from sale of land and
building 1,437 13,285 1,437 17,575
Sale of CellPoint investment - - - 502
-------------------------------------------------------------------------
Cash provided by (used in)
investing activities of
continued operations (826) 6,395 (3,266) 20,609
Cash provided by investing
activities of discontinued
operations - - - 105
-------------------------------------------------------------------------
Cash provided by (used in)
investing activities (826) 6,395 (3,266) 20,714
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Deferred compensation paid,
net of forfeitures 185 66 (1,748) (1,509)
Shares repurchased under normal
course issuer bid - - - (370)
Dividends paid (1,117) (1,231) (3,125) (3,723)
-------------------------------------------------------------------------
Cash used in financing activities (932) (1,165) (4,873) (5,602)
-------------------------------------------------------------------------
Effect of exchange rate changes
on cash and cash equivalents 351 (3,471) 3,689 (3,731)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net (decrease) increase in cash
and cash equivalents during
the period (1,723) (11,993) (13,886) 20,998
Cash and cash equivalents,
beginning of the period 36,585 43,146 48,748 34,141
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cash and cash equivalents,
end of the period 34,862 55,139 34,862 55,139
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Dividends declared per share(1) $0.031 $0.035 $0.088 $0.105
-------------------------------------------------------------------------
-------------------------------------------------------------------------
No interest expense was paid in the third quarter or the nine months
ended August 31, 2009 or 2008. Income taxes paid in the third quarter was
$513 (2008 - $540) and in the year to date was $2,936 (2008 - $810). Cash
and cash equivalents at August 31, 2009 is comprised of $16,935 in cash
and $17,927 in cash equivalents (August 31, 2008 - Cash - $8,461 and cash
equivalents - $46,678).
(1) Dividends were paid in Canadian dollars at a rate of $0.035 per share
per quarter.
See accompanying notes
GENNUM CORPORATION
Notes to the Consolidated Financial Statements
(U.S. dollars except as noted, amounts in thousands except share and per
share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements of Gennum
Corporation (the "Company") have been prepared by the Company in
accordance with Canadian generally accepted accounting principles (GAAP)
on a basis consistent with those followed in the most recent audited
financial statements, except as noted below. These unaudited consolidated
financial statements do not include all the information and footnotes
required by GAAP for annual financial statements and therefore should be
read in conjunction with the audited consolidated financial statements
and notes included in the Company's Annual Report for the year ended
November 30, 2008.
Changes in accounting policies
Effective December 1, 2008, the Company adopted the following
Canadian Institute of Chartered Accountants (CICA) Handbook Sections:
General Standards of Financial Statement Presentation - The CICA
amended Section 1400 "General Standards of Financial Statement
Presentation", to include requirements to assess and disclose an
entity's ability to continue as a going concern. The Company adopted
the amendments to this standard beginning December 1, 2008. There was
no impact on the classification of the Company's consolidated
financial statements.
Inventories - The CICA issued a new accounting standard, Section 3031
"Inventories", which requires inventory to be measured at the lower
of cost and net realizable value. The standard provides guidance on
the types of costs that can be capitalized and requires reversal of
previous inventory write- downs if economic circumstances have
changed to support the higher inventory values. The Company adopted
this standard beginning December 1, 2008 and adjusted opening
inventory on this date by $234 with an adjustment of $212 net of tax
made as an increase to retained earnings for additional
transportation costs now required to be included in inventory. The
prior period was not restated. Inventories are recorded at the lower
of cost and net realizable value. Inventory cost is based on weighted
average cost and includes material, labour, transportation and
handling costs and manufacturing overhead where applicable.
Goodwill and Intangible Assets - The CICA issued a new accounting
standard, Section 3064 "Goodwill and Intangible Assets", which
clarifies that costs can be deferred only when they relate to an item
that meets the definition of an asset. The Company adopted the new
standard retrospectively. As a result of the new Section, the Company
reversed the deferred cost balance of $403 related to deferred
pre-opening costs as they are no longer eligible for capitalization.
The adjustment of $323 net of tax was made as a reduction to ending
retained earnings as at November 30, 2008.
Financial Statement Concepts - Section 1000 "Financial Statement
Concepts", was amended to provide consistency with the new standard,
Section 3064. The amended standard was effective for the Company
beginning December 1, 2008 and had no impact on the classification
and valuation of the Company's consolidated financial statements.
Recently issued accounting pronouncements
Business Combinations, Consolidated Financial Statements and
Non-Controlling Interests - In December 2008, the CICA approved three
new accounting standards; Handbook Section 1582, "Business
Combinations", Section 1601, "Consolidated Financial Statements", and
Section 1602, "Non-Controlling Interests", replacing Section 1581,
"Business Combinations" and Section 1600, "Consolidated Financial
Statements". Section 1582 provides the Canadian equivalent to IFRS 3
- "Business Combinations (January 2008)" and Sections 1601 and 1602
to IAS 27 - "Consolidated and Separate Financial Statements (January
2008)". Section 1582 requires additional use of fair value
measurements, recognition of additional assets and liabilities, and
increased disclosure for the accounting of a business combination.
The section applies prospectively to business combinations for which
the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after January 1, 2011. Entities
adopting Section 1582 will also be required to adopt Sections 1601
and 1602. Section 1601 establishes standards for the preparation of
consolidated financial statements. Section 1602 establishes standards
for accounting for a non-controlling interest in a subsidiary in
consolidated financial statements subsequent to a business
combination. These standards will require a change in the measurement
of non-controlling interest and will require the non-controlling
interest to be presented as part of shareholders' equity on the
balance sheet. In addition, the net earnings will include 100% of the
subsidiary's results and will be allocated between the controlling
interest and non-controlling interest. These standards apply to
interim and annual consolidated financial statements relating to
fiscal years beginning on or after January 1, 2011. Early adoption of
these Sections is permitted and all three Sections must be adopted
concurrently. All three standards are effective at the same time
Canadian public companies will have adopted IFRS, for fiscal years
beginning on or after January 1, 2011. The Company is currently
evaluating the impact of this standard on its consolidated financial
statements.
2. CHANGE OF REPORTING CURRENCY
Effective December 1, 2007, the Company adopted the U.S. dollar as its
reporting currency, but has retained the Canadian dollar as its
functional currency. Management believes that reporting in U.S. dollars
improves the comparability of the Company's financial position and
results of operations to others in its industry.
As a result of adopting the U.S. dollar as its reporting currency for
both the current and prior periods, the cumulative translation adjustment
effects of prior periods have been reflected in the opening balance for
the period in accumulated Other Comprehensive Income.
During the period, revenue and expenses have been translated from
Canadian dollars to U.S. dollars at the monthly average rates, and cash
flows at the quarterly average rates. Assets and liabilities have been
translated at the period end rate of $0.9118 Canadian dollars to U.S.
dollars (November 30, 2008 - $0.8083).
3. INVENTORIES
August 31, November 30,
2009 2008
-------------------------------------------------------------------------
Raw materials and supplies 338 301
Work in process 13,294 9,183
Finished goods 9,552 4,735
-------------------------------------------------------------------------
23,184 14,219
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Inventory is reviewed at least quarterly for obsolescence. The Company
recorded a write-down of $286 during the third quarter of 2009 and $428
year to date. The inventory write-down in the quarter was part of the
restructuring activity (see note 17).
4. CAPITAL ASSETS
August 31, November 30,
2009 2008
-------------------------------------------------------------------------
Land 897 1,133
Buildings - 3,641
Equipment and furniture 27,904 25,151
Computer software and hardware 10,550 13,938
Operating systems 9,008 7,099
Leasehold improvements 2,307 1,371
-------------------------------------------------------------------------
50,666 52,333
-------------------------------------------------------------------------
Less accumulated depreciation
Buildings - 3,588
Equipment and furniture 18,612 17,025
Computer software and hardware 9,163 11,063
Operating systems 682 59
Leasehold improvements 370 19
-------------------------------------------------------------------------
28,827 31,754
-------------------------------------------------------------------------
21,839 20,579
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The cost of capital asset additions year to date for 2009 was reduced by
government assistance of $290. Included in capital assets were assets
valued at $1,842 that were not in use as of August 31, 2009 and therefore
depreciation was not started (as at November 30, 2008 - $2,455).
Depreciation expense from continuing operations for the period was as
follows:
Three Months Ended Nine Months Ended
August 31 August 31
-------------------------------------------------------------------------
2009 2008 2009 2008
-------------------------------------------------------------------------
Buildings 4 73 16 321
Equipment and furniture 863 961 2,604 3,002
Computer software and hardware 171 246 482 759
Operating systems 238 - 669 -
Leasehold improvements 65 - 159 -
-------------------------------------------------------------------------
1,341 1,280 3,930 4,082
-------------------------------------------------------------------------
5. RECONCILIATION OF DISCONTINUED OPERATIONS
As part of the Company's 2007 strategic decision-making process, it was
determined that the Company would focus on its core business of
designing, developing and marketing innovative optical and analog and
mixed-signal products. As a result of this decision, divestitures of
non-core businesses, including Hearing and Manufacturing Operations and
VXP(R) Image Processing, were completed.
As a result, certain figures for 2008 and 2009 for operating results have
been re-classified to discontinued operations in accordance with CICA
Handbook Section 3475 "Disposal of Long-Lived Assets and Discontinued
Operations". The following table summarizes the reclassifications for the
third quarter of 2008 (there were no discontinued operations in the year
to date for 2009):
Discontinued Operations
-------------------------------------------------------------------------
Nine Months ended
August 31, 2008
-------------------------------------------------------------------------
Hearing/
Mfg(1) VXP(R)(1) TOTAL
-------------------------------------------------------------------------
Revenue - 1,290 1,290
Operating loss, before tax (423) (3,906) (4,329)
Gain (loss) on sale (1,173) 13,473 12,300
-------------------------------------------------------------------------
(1,596) 9,567 7,971
Income tax (expense) recovery 525 (870) (345)
-------------------------------------------------------------------------
Net earnings (loss) from discontinued
operations, net of tax (1,071) 8,697 7,626
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The gain and loss on sale are considered capital transactions and
therefore are only 50% taxable/deductible.
6. SALE OF THE BST TECHNOLOGY GROUP AND ASSOCIATED ASSETS
On March 4, 2009, the Company completed the sale of its BST technology
group and associated assets to Paratek Microwave, Inc. ("Paratek") for
cash on closing of $1,526 and future cash payments totaling $2,150. The
consideration receivable is non interest bearing with $250 payable
quarterly for the next year and a long-term portion of $1,150 payable by
March 4, 2012. The long-term portion was originally discounted to $796
using a rate of 12%. The balance at August 31, 2009 is $845.
The Company is also entitled to royalty payments based on Paratek's sales
of BST related products over the next 5 years, but royalty payments could
terminate earlier if Paratek were to undergo a change of control in that
time frame. In the event that a change of control occurred on or before
September 4, 2010, the royalty payments may only be terminated upon the
payment of $3,000 to the Company; in the event that any such transaction
occurs on or before March 4, 2012, the royalty payments may only be
terminated upon the payment of $2,000 to the Company. No accrual was made
for royalty payments at this time because an estimate cannot yet be made.
The Company does not have any continuing involvement in or retain any
ownership interest in these operations.
The sale of the BST technology group and associated assets resulted in a
gain of $1,601, calculated as follows:
Capital assets 1,436
Inventory 164
Transaction costs 121
-------------------------------------------------------------------------
1,721
-------------------------------------------------------------------------
Less proceeds:
Cash 1,526
Consideration receivable 1,796
-------------------------------------------------------------------------
Gain on sale recognized in 2009 1,601
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Inventory of $142 and capital assets (net) of $1,616 related to the BST
technology group have been reclassified to assets held for sale as at
November 30, 2008.
7. SALE OF VXP(R) IMAGE PROCESSING BUSINESS
On February 8, 2008, the Company completed the sale of its VXP(R) Image
Processing business to Sigma Designs for $18,200. The sale of the VXP(R)
Image Processing business resulted in the termination of approximately 30
employees in January 2008.
Following the close of the sale transaction, the Company received a final
payment of fees from Sigma Designs in June 2008 for providing certain
administrative functions and for the lease of office space. The Company
does not have any significant continuing involvement in or retain any
ownership interest in these operations and, therefore, the continuing
cash flows are not considered direct cash flows of the disposal group.
The sale of the VXP(R) Image Processing business resulted in a gain of
$13,473 and was calculated as follows:
Accounts receivable 886
Inventories 1,305
Prepaid and other assets 273
Capital assets, net 738
Intangible assets 382
Transaction costs 1,364
Accounts payable and accrued liabilities (221)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
4,727
-------------------------------------------------------------------------
Less proceeds:
Cash 18,200
-------------------------------------------------------------------------
Gain on sale recognized in fiscal year 2008 13,473
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The assets and liabilities and operating results related to the Company's
VXP(R) Image Processing business have been reclassified as assets held
for sale and discontinued operations in accordance with the CICA Handbook
Section 3475 "Disposal of Long-Lived Assets and Discontinued Operations"
(see note 5).
8. ACQUISITION - ASIC ARCHITECT, INC.
On July 25, 2008, the Company acquired all of the shares of ASIC
Architect, Inc. ("ASIC Architect"), a developer of high-speed controller
intellectual property, for a total initial cash consideration of $1,582
including transaction related costs of $82 and the following future cash
consideration:
a) Working capital surplus - a cash payment was required if the working
capital of ASIC Architect on completion of the transaction was in a
surplus position; a final payment of $36 has been made to account for
a working capital surplus and has been accounted for as an increase
in the purchase price and goodwill.
b) Earn-out - earn-out payments are required to be made based on
attaining certain annual IP sales thresholds in the first three years
past closing. This contingent consideration had not been accounted
for in the initial purchase price because a reasonably accurate
estimate could not be made at that time; however, payments made since
closing are treated as purchase price adjustments. To date, $118
related to the earn-out has been reflected as a purchase price
adjustment to goodwill.
The acquisition was accounted for under the purchase method from the
acquisition date. The purchase price allocation was assigned to the net
identifiable assets acquired based on their fair values as follows and is
adjusted quarterly for earn-out accruals:
Cash 122
Accounts receivable 164
Prepaids and other assets 14
Capital assets 33
Identifiable intangible assets subject to amortization:
Technology 339
Customer relationships 25
In process development 142
Customer value 290
Contracts in process 299
-------------------------------------------------------------------------
1,428
-------------------------------------------------------------------------
Accounts payable and accrued liabilities (263)
Future income taxes (438)
-------------------------------------------------------------------------
(701)
-------------------------------------------------------------------------
Excess of adjusted purchase price over fair value of
identifiable net assets acquired (goodwill) (note 11) 1,009
-------------------------------------------------------------------------
Total adjusted purchase price, including transaction costs 1,736
-------------------------------------------------------------------------
-------------------------------------------------------------------------
9. INSTRUMENTS HELD FOR TRADING AND LONG-TERM INVESTMENTS
The Company owns 1.7 million shares of CellPoint Connect ("CellPoint"),
received as partial consideration for the sale of its Consumer Headset
product line on August 24, 2007. The original book value of these shares
was Canadian $1,500.
One third of the shares have been classified as held for trading. Trading
of the shares was halted on the Aktie Torget stock exchange in Sweden
during the quarter and the Company wrote the shares down to a fair value
of nil as of August 31, 2009 (November 30, 2008 - $268). The fair value
adjustment for the quarter was a $32 loss recorded through earnings
(third quarter of 2008 - nil). On a year-to-date basis, the unrealized
loss recorded through earnings was $266 (year-to-date 2008 - nil).
The remaining 1.1 million shares have been classified as available for
sale and are recorded on the balance sheet at their fair market value of
nil (November 30, 2008 - $536) with fair value adjustments normally
deferred to Other Comprehensive Income. However, since the decrease in
the fair value of the shares was significant and prolonged, an impairment
of $64 was charged to earnings in the third quarter and $844 in the year
to date.
In November 2005, the Company received a 6% interest or $2,734 in shares
of Nanoscience Inc. (11.1 million shares) as consideration for the sale
of its investment in Toumaz Technology Limited to Nanoscience Inc. The
shares of Nanoscience Inc., which later changed its name to Toumaz
Technology Limited ("Toumaz"), are traded on the AIM exchange in London,
England. Since November 2005, the Company had recorded impairments
totaling $1,983 against the value of this investment. On May 26, 2009,
the Company sold its investment in Toumaz for $1,019, net of commissions,
creating a gain of $268 in the second quarter.
10. PROMISSORY NOTE RECEIVABLE
On October 19, 2007, the Company received $2,503 in an interest-bearing
promissory note as part of the consideration received from the sale of
its Hearing and Manufacturing Operations to Sound Design Technologies
Ltd. ("Sound Design"). The promissory note bears interest at a fixed
interest rate of 5% per annum with scheduled quarterly principal payments
of Canadian $250 which began in April 2008, and the remaining balance
plus accrued interest due in April 2010. In connection with the sale of
the BST technology group and associated assets (note 6), the Company
agreed to postpone the July 2009 payment to October 2009. All other
payments remain on the original schedule. The balance of $1,161 has been
classified as a current asset as at August 31, 2009 (November 30, 2008 -
$816 current and $606 long-term).
11. Goodwill and Intangible Assets
(i) Goodwill
Goodwill of $1,889 was acquired through the purchase of SiGe
Semiconductor Inc.'s LightCharger(TM) optical networking business in May
2004. In October 2007, goodwill of $16,895 was recognized through the
purchase of the shares of Snowbush Microelectronics Inc. and subsequent
to closing, further adjustments to goodwill occurred of $1,778 in 2008
and $379 to date in 2009. On July 25, 2008, goodwill of $855 was
recognized through the purchase of the shares of ASIC Architect and, as
discussed in note 8, goodwill was adjusted by $62 in 2008 and $92 to date
in 2009. Goodwill is reviewed annually for impairment.
For reconciliation purposes only, the following table summarizes goodwill
balances translated to U.S. dollars at the historical exchange rates in
effect at the dates of acquisition and the adjustment required to
translate from historical rates to the respective balance sheet rates:
August November
31, 2009 30, 2008
-------------------------------------------------------------------------
SiGe Semiconductor Inc. 1,889 1,889
Snowbush Microelectronics Inc. 19,052 18,673
ASIC Architect (note 8) 1,009 917
Exchange translation (1,107) (3,450)
-------------------------------------------------------------------------
20,843 18,029
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(ii) Intangible Assets
August November
31, 2009 30, 2008
-------------------------------------------------------------------------
License fees 216 192
Less accumulated amortization (105) (58)
-------------------------------------------------------------------------
111 134
SiGe acquired in 2004
Technology 2,025 1,795
Less accumulated amortization (1,543) (1,175)
-------------------------------------------------------------------------
482 620
Snowbush acquired in 2007
Technology 3,739 3,314
Supplier relationships 1,185 1,051
In process development 638 566
Customer value 100 89
Contracts in process 128 113
-------------------------------------------------------------------------
5,790 5,133
Less accumulated amortization (2,384) (1,250)
-------------------------------------------------------------------------
3,406 3,883
ASIC Architect acquired in 2008
Technology 315 279
Customer relationship 23 20
In process development 72 117
Customer value 269 238
Contracts in process 278 247
-------------------------------------------------------------------------
957 901
Less accumulated amortization (182) (49)
-------------------------------------------------------------------------
775 852
Deferred development cost 6,759 3,165
Less accumulated amortization (30) (2)
-------------------------------------------------------------------------
6,729 3,163
-------------------------------------------------------------------------
11,503 8,652
-------------------------------------------------------------------------
-------------------------------------------------------------------------
License fees are amortized using the straight-line method over the
estimated useful lives ranging from three to five years. No new license
fees were incurred in the first nine months of 2009 or 2008.
The intangible asset resulting from the SiGe Semiconductor Inc.
acquisition in May 2004 is amortized using the straight-line method over
the estimated useful life of seven years.
Intangible assets resulting from the Snowbush Microelectronics Inc.
acquisition in October 2007 are amortized using the straight-line method
over the estimated useful lives ranging from one to five years.
Intangible assets resulting from the ASIC Architect acquisition in July
2008 are amortized using the straight-line method over the estimated
useful lives ranging from five to seven years.
Deferred development charges represent expenditures that are directly
related to placing a new product into commercialization when the
expenditure is incremental in nature and it is probable that the
expenditure is recoverable from future sales of the associated product.
Upon commercial launch of the product, these costs are amortized to cost
of goods sold over the number of expected product life unit sales to a
maximum of five years. Additional deferred development costs of $1,606
and $4,008 were capitalized in the third quarter and the year to date for
2009 respectively (third quarter of 2008 - $1,412; year to date for 2008
- $2,034).
Impairments related to deferred development costs were $1,164 in the
third quarter and $1,330 for the year to date (no impairments were
recognized in 2008). The deferred development cost impairment in the
third quarter was part of the Company's restructuring activity and was
therefore recorded under restructuring and deferred development charge
(see note 17).
Amortization expense related to total intangible assets for the third
quarter and the year to date for 2009 was $501 and $1,352, respectively
(third quarter of 2008 - $454; year to date for 2008 - $1,348).
12. DEFERRED REVENUE
Deferred revenue is comprised of two components. The largest is the
unamortized gain created by the sale leaseback of the corporate
headquarters, which was completed in August 2008.
The second component is created in our IP product group when differences
occur between the timing of customer payments and the recognition of
revenue using the percentage of completion or the completed contract
methods. These methods of revenue recognition are prevalent when IP cores
sold to customers require customization to meet their specific
requirements.
As at August 31, 2009, deferred revenue related to the unamortized gain
was $3,908, of which $280 was classified as current and the balance of
$3,628 as long term (November 30, 2008 - $234 current and $3,430 long
term), and deferred revenue related to collections in excess of earned IP
revenue was $439, all classified as current (November 30, 2008 - $74).
13. LONG-TERM PAYABLE
As part of the consideration for the acquisition of Snowbush
Microelectronics Inc. on October 30, 2007, the Company negotiated
deferred purchase price payments to be paid in Canadian dollars. As at
August 31, 2009, $2,285 remains outstanding (Canadian $2,509), with
$1,143 due in the fourth quarter of 2010 and therefore classified as a
long-term payable and $1,142 due in the fourth quarter of 2009 and
classified as the current portion of the long-term payable (November 30,
2008 - long term $1,013 and current portion of the long-term payable
$1,013). The deferred cash payments have been discounted at 6% using the
effective interest rate method. The amortization of the discount is being
accounted for as a charge to net earnings over the term of the payable.
14. CAPITAL STOCK
The Company has authorized an unlimited number of common shares with no
par value, of which 35,429,086 common shares (November 30, 2008 -
35,429,086) were issued and outstanding as at August 31, 2009 with a
stated value of $8,576 (November 30, 2008 - $8,576). An unlimited number
of preferred shares have also been authorized, none of which have been
issued.
The Company announced a normal course issuer bid to acquire up to 3.4
million common shares between October 2, 2008 and October 1, 2009. No
repurchases have been made to date in 2009.
Options to purchase common shares
The Company has an incentive stock option plan which provides for the
granting of options for the benefit of employees and officers. The total
number of common shares that may be issued under this plan is 2,700,000,
of which 681,644 remain available for new grants. An additional 930,000
options were issued outside the plan to new officers upon hiring at
exercise prices ranging from Canadian $9.75 - $13.27. No stock options
were issued outside the plan to new officers upon hiring in 2008 or to
date in 2009.
All options are granted for a term of seven years from the grant date
with vesting of 25% at the end of each of the first, second, third and
fourth years from the date of grant. All options allow the holder to
purchase common shares at the exercise price of the options, which is set
at the closing price of a trade of at least a board lot of the common
shares on the Toronto Stock Exchange on the trading day preceding the
date of grant, unless otherwise determined by the Corporation, but in no
event may the option exercise price be less than the fair market value of
a common share on the date of grant of the option. The following table
presents a comparative summary of options outstanding as of August 31.
All exercise prices are presented in Canadian dollars:
YTD 2009 YTD 2008
-------------------------------------------------------------------------
Weighted
average Weighted
exercise average exercise
Number price Number price
of shares (Cdn.$) of shares (Cdn.$)
-------------------------------------------------------------------------
Outstanding, beginning
of year 2,117,077 10.99 2,065,885 11.65
Granted 660,150 4.55 536,867 10.07
Forfeited (186,833) 10.36 (373,175) 12.77
Expired (2,500) 13.25 - -
Exercised - - - -
-------------------------------------------------------------------------
Outstanding, end of third
quarter 2,587,894 9.39 2,229,577 11.68
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Options exercisable at
August 31 845,467 11.28 563,987 11.33
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The following table summarizes information about all options outstanding
to purchase common shares at August 31, 2009. Note, all exercise prices
are presented in Canadian dollars:
Options Outstanding Options Exercisable
-------------------------------------------------------------------------
Weighted Weighted Weighted
Range of average average average
exercise remaining exercise exercise
prices Number contractual price Number price
(Cdn.$) outstanding life (Cdn.$) exercisable (Cdn.$)
-------------------------------------------------------------------------
$4.55 - $7.53 677,550 6.8 years 4.71 - -
-------------------------------------------------------------------------
$7.54 - $10.51 1,086,743 5.0 years 9.84 414,167 9.82
-------------------------------------------------------------------------
$10.52 - $13.49 823,601 4.5 years 12.66 431,300 12.68
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The estimated weighted average fair value of stock options granted during
the year to date for 2009 was Canadian $1.67 (year to date for 2008 -
Canadian $2.82) per share using the Black-Scholes option-pricing model
with the following weighted average assumptions:
Nine Months Ended Nine Months Ended
August 31, 2009 August 31, 2008
-------------------------------------------------------------------------
Risk-free interest rate 1.93% 3.13%
Expected dividend yield 3.1% 1.4%
Expected volatility 50.9% 29.1%
Expected time until exercise 5.5 years 5.5 years
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Restricted share plan
The number and weighted average fair value of restricted shares of the
Company granted under employee incentive plans in the third quarter of
2009 were 12,964 and Canadian $4.24 respectively (no restricted shares
were issued in the third quarter of 2008). For the year to date for 2009,
the number and weighted average fair values were 483,431 and Canadian
$5.08 respectively (2008 - 187,088, Canadian $9.03).
The Company recorded compensation expense and credited to Contributed
Surplus $372 related to stock options during the third quarter of 2009
(third quarter of 2008 - $412) and $973 year to date (year to date 2008 -
$1,063). Compensation expense in the third quarter of 2009 related to the
restricted share plan was $425 (third quarter of 2008 - $431) and in the
year to date for 2009 was $1,069 (year to date 2008 - $1,139).
Earnings per share
The Company uses the treasury stock method of calculating the dilutive
effect of options on earnings per share. The following is a
reconciliation of the numerator and denominator of earnings per share
computations:
Three Months Ended Nine Months Ended
August 31 August 31
-------------------------------------------------------------------------
2009 2008 2009 2008
-------------------------------------------------------------------------
Net earnings (loss) from continuing
operations (4,266) 6,371 (6,223) 16,890
Net earnings from discontinued
operations - (18) - 7,626
-------------------------------------------------------------------------
Net earnings (loss) for the period (4,266) 6,353 (6,223) 24,516
-------------------------------------------------------------------------
Weighted average shares outstanding
(numbers in thousands) 35,429 35,607 35,429 35,618
Shares held in restricted share
plan trust fund (757) - (757) -
-------------------------------------------------------------------------
Basic weighted average shares
outstanding 34,672 35,607 34,672 35,618
Effect of dilutive stock options - 5 - 80
-------------------------------------------------------------------------
Diluted weighted average shares
outstanding 34,672 35,612 34,672 35,698
-------------------------------------------------------------------------
Earnings (loss) per share
Earnings (loss) per share from
continuing operations
- basic and diluted (0.12) 0.18 (0.18) 0.48
Earnings (loss) per share from
discontinued operations
- basic and diluted - 0.00 - 0.21
-------------------------------------------------------------------------
Earnings (loss) per share - basic
and diluted (0.12) 0.18 (0.18) 0.69
-------------------------------------------------------------------------
-------------------------------------------------------------------------
In net loss per common share situations, the diluted loss per common
share amount is the same as that for basic, as all factors are
anti-dilutive.
15. FINANCIAL INSTRUMENTS
Categories of financial assets and liabilities
Under Canadian generally accepted accounting principles, financial
instruments are classified into one of the following five categories:
held for trading; held to maturity investments; loans and receivables;
available for sale financial assets; and other financial liabilities. The
Company has also designated certain of its derivatives as effective
hedges. The carrying values of the Company's financial instruments,
including those held for sale on the consolidated balance sheet are
classified into the following categories:
August November
31, 2009 30, 2008
-------------------------------------------------------------------------
Held for trading(1) 34,923 49,016
Available for sale(2) - 1,300
Loans and receivables(3) 23,720 25,466
Other financial liabilities(4) 16,124 18,072
Derivatives designated as effective hedges
- gain (loss)(5) - (3,941)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Includes cash and cash equivalents, foreign exchange forward
contracts that are not effective hedges and the CellPoint investment
designated as held for trading
(2) Includes the CellPoint investment designated as available for sale
(3) Includes accounts receivable, promissory note receivable, income
taxes receivable, consideration receivable and certain financial
instruments included in prepaid expenses and other assets
(4) Includes accounts payable and accrued liabilities, long-term payable
and income taxes payable
(5) Includes the Company's foreign exchange forward contracts that are
effective hedges
The Company, through its financial assets and liabilities, is exposed to
various risks. The Company's overall risk management program focuses on
the unpredictability of financial markets and seeks to minimize potential
adverse effects on the Company's financial performance. The Company uses
derivative financial instruments to hedge certain risk exposures. The
Company does not purchase any derivative financial instruments for
speculative purposes.
Risk management is the responsibility of the corporate finance function.
The Company's domestic and foreign operations along with the corporate
finance function identify, evaluate and, where appropriate, hedge
financial risks. Material risks are monitored and are discussed with the
audit committee of the board of directors. The following analysis
provides information regarding certain financial risks as at August 31,
2009:
(a) Fair Value
The carrying amounts for cash and cash equivalents, accounts receivable,
other assets, promissory notes receivable and accounts payable and
accrued liabilities approximate fair value because of the short maturity
of these instruments.
The short-term and long-term payable resulting from the Snowbush
Microelectronics Inc. acquisition was recorded at its fair value with the
resulting discount being charged to earnings.
Instruments held for trading and long-term investments (classified as
available for sale) are recorded at fair value based on the quoted share
prices, where they exist and foreign exchange rates as at August 31,
2009.
(b) Foreign Exchange Rate Risk
The objective of the Company's foreign exchange risk management
activities is to minimize translation exposures and the resulting
volatility of the Company's earnings. The Company utilizes financial
instruments to manage the risk associated with fluctuations in foreign
exchange rates by entering into foreign exchange forward contracts.
As a result of the U.S. dollar profile, cash, receivables and payables on
the Canadian entity's books are primarily denominated in U.S. dollars
while the functional currency of this entity is Canadian dollars.
Therefore, translation gains or losses can occur when these net monetary
assets are translated to the Canadian dollar functional currency at the
exchange rate in effect on the balance sheet date. A volatile exchange
rate can create significant swings in periodic income. To help mitigate
this risk, starting in the third quarter of 2009, the Company entered
into foreign exchange forward contracts equal to the forecasted level of
U.S. dollar denominated net monetary assets and excess U.S. dollar cash
and cash equivalent balances. These contracts mature in one month and
help to offset the impact of translation gains or losses due to currency
movements from one balance sheet date to the next.
During the third quarter, the Company cancelled foreign exchange
contracts entered into under its old hedging policy which resulted in a
gain of $280. Realized gains on foreign exchange forward and spot
contracts, including the cancelled contracts, were $832 in the third
quarter of 2009 (2008 - losses of $61). For the first nine months of the
year, the realized losses were $2,355 (2008 - gains of $710).
In the year to date for 2009, the Canadian dollar strengthened compared
to the U.S. dollar ($0.8083 on November 30, 2008 Canadian to U.S. dollar
exchange rate compared to $0.9118 on August 31, 2009) and remained
consistent with the prior quarter ($0.9123 on May 31, 2009 Canadian to
U.S. dollar exchange rate compared to $0.9118 on August 31, 2009). The
net impact of this on our U.S.-based net monetary assets was a foreign
exchange translation loss of $556 in the third quarter of 2009 and $3,015
in the year to date for 2009 recorded to other income (expense) (see note
18).
The Company has entered into a foreign exchange forward contract to sell
an aggregate amount of U.S. $16,000 as at August 31, 2009. This contracts
mature on September 30, 2009 at an exchange rate of Canadian $1.0991
against the U.S. dollar. Management estimates that a before tax gain of
$61 would be realized if the contracts were terminated on August 31,
2009. The fair value of the foreign exchange forward contract is based on
market information from major financial institutions. This forward
contract is not considered a hedge for accounting purposes and therefore
the gain is included in Other Income on the Statement of Earnings.
The Company's reporting currency is the U.S. dollar. Therefore, financial
results are first consolidated into the Canadian dollar functional
currency and then translated into U.S. dollars using the current rate
method. The translation to the reporting currency does not generate any
cash impact and is not hedged by the Company. Any gains or losses created
by translating from the functional currency to the reporting currency are
captured as a change in unrealized gains (losses) on translating
financial statements and are captured in the consolidated statement of
Other Comprehensive Income.
The Company reported a foreign currency translation loss in the third
quarter of $175 from converting the Canadian dollar consolidation for
U.S. dollar reporting. This translation loss is recorded in Other
Comprehensive Income and is due to a slight weakening of the Canadian
dollar compared to the U.S. dollar in the third quarter. A year to date
foreign currency translation gain of $14,848 in Other Comprehensive
Income is the result of a significant strengthening of the Canadian
dollar over the past nine months.
(c) Credit Risk
The Company is exposed to commercial credit risk from its customers in
the normal course of business, which is mitigated by the Company's credit
management policies. The Company is exposed to credit risk from potential
default by any of its counterparties on its foreign exchange contracts
and manages this credit risk by dealing only with major financial
institutions with acceptable credit ratings. Credit risks associated with
holders of promissory notes and loans are managed through regular
communication with those holders.
As at August 31, 2009, two customers accounted for more than 10% of
revenue; one customer accounted for more than 10% of receivables.
The aging of trade receivable balances as of August 31, 2009 was as
follows:
-------------------------------------------------------------------------
2009
-------------------------------------------------------------------------
Not past due 13,839
Past due 0-30 days 2,827
Past due 31-60 days 270
Past due over 61 days 1,272
-------------------------------------------------------------------------
Trade receivables 18,208
Less allowance for doubtful accounts (1,041)
-------------------------------------------------------------------------
17,167
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(d) Liquidity Risk
Liquidity risk is the risk that the Company will not be able to meet its
obligations as they fall due. The Company manages its liquidity risk by
forecasting cash flows from operations and anticipated investing and
financing activities. As of August 31, 2009, the Company was holding cash
and cash equivalents of $34,862 and accounts receivable of $17,167. The
following are the undiscounted contractual maturities of financial
liabilities as at August 31, 2009:
-------------------------------------------------------------------------
Less than 1 year 1 to 2 years
-------------------------------------------------------------------------
Accounts payable and accrued liabilities 13,025 -
Current portion of long-term payable 1,142 -
Long-term payable - 1,143
-------------------------------------------------------------------------
14,167 1,143
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The current ratio for the Company as at August 31, 2009 was 5.6 times.
(e) Interest Rate Risk
Interest rate risk is the risk that interest-bearing financial
instruments will vary in value due to the variability of the interest
rates. Since the Sound Design promissory note has fixed interest rates,
the Company is not exposed to any interest rate risk on this financial
instrument.
(f) Price Risk
Price risk is the risk that the value of an investment will decline in
the future. The Company currently holds an investment in CellPoint (note
9) which is considered a start-up technology company with higher than
average financial volatility due to the nature of the business. The price
risk associated with this investment is high and the Company has written
the investment down to nil. An impairment of the CellPoint investment was
recognized through net earnings in the quarter, as management believes
the decline in share price is other-than-temporary (see note 9).
16. SEGMENTED INFORMATION
As a result of the Company's leadership and product portfolio realignment
at the end of 2007, the Company began operating and tracking its results
in one reportable segment, consisting of numerous product areas,
effective December 1, 2007. The Company's chief operating decision maker
is its Chief Executive Officer. The chief operating decision maker
allocates resources and assesses performance of the business and other
activities at the operating segment level.
The revenue by product portfolio within the single reportable segment and
revenue by geographic area is as follows:
Revenue by product portfolio is as follows:
Three Months Ended Nine Months Ended
August 31 August 31
------------------------------------------------------------------------
2009 2008 2009 2008
-------------------------------------------------------------------------
Analog and Mixed Signal 15,935 26,726 42,587 75,348
Optical 2,846 3,504 8,855 12,840
IP Licensing 2,608 3,266 8,698 8,395
-------------------------------------------------------------------------
21,389 33,496 60,140 96,583
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue by principal markets is as follows:
Three Months Ended Nine Months Ended
August 31 August 31
-------------------------------------------------------------------------
2009 2008 2009 2008
-------------------------------------------------------------------------
North America 14,658 19,580 41,685 57,201
Europe 2,103 4,122 4,921 11,590
Pacific Rim 4,628 9,794 13,534 27,792
-------------------------------------------------------------------------
21,389 33,496 60,140 96,583
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue is attributable to countries based upon the location of
customers.
Capital assets and goodwill by country are as follows:
August November
31, 2009 30, 2008
-------------------------------------------------------------------------
Canada* 40,576 36,696
UK 915 994
Other* 1,191 918
-------------------------------------------------------------------------
42,682 38,608
-------------------------------------------------------------------------
-------------------------------------------------------------------------
* Goodwill of $19,859 (November 30, 2008 - $17,266) is located in
Canada and $984 (November 30, 2008 - $763) is located in Other.
17. RESTRUCTURING CHARGE AND DEFERRED DEVELOPMENT IMPAIRMENT
During the third quarter of 2009, the Company announced the
implementation of a restructuring plan to improve profitability and cash
flow. The Company's plans include realigning its investment to maintain
its R&D programs while reducing corporate infrastructure and business
operations costs and capital expenditures. Additionally, Gennum is
focusing its marketing, sales and administrative investment on short-term
and mid-term customer revenue generation activities and new product
development.
This plan resulted in a restructuring charge and deferred development
impairment of $5,509 related to the termination of approximately 10% of
total headcount in August and additional restructuring actions to be
completed over the next few quarters.
Severance costs 3,528
Deferred development cost impairment 1,164
Inventory and other asset impairments 817
------------------------------------------------------------------------
Total restructuring charge and deferred development impairment 5,509
------------------------------------------------------------------------
------------------------------------------------------------------------
Severance costs incurred in the third quarter 3,528
Severance costs paid in the third quarter 556
------------------------------------------------------------------------
Severance costs included in accounts payable and
accrued liabilities at quarter end 2,972
------------------------------------------------------------------------
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18. OTHER INCOME (EXPENSE)
Three Months Ended Nine Months Ended
August 31 August 31
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2009 2008 2009 2008
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Realized gain (loss) on foreign
exchange hedge contracts 832 (61) (2,355) 710
Foreign exchange gain (loss)
on translation (556) 1,810 (3,015) 2,154
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Gain (loss) on foreign exchange, net 276 1,749 (5,370) 2,864
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Gain on sale of building(1) 1,002 - 1,002 -
Corporate development charges (1,191) - (1,191) -
Tundra termination fee, net(2) (7) - 2,205 -
Gain on sale of BST technology
group (note 6) - - 1,601 -
Gain on sale of Toumaz investment
(note 9) - - 268 -
Provision on long-term investment
(note 9) (64) - (844) -
Fair value loss on instruments
held for trading (note 9) (32) - (266) -
Other (348) (62) (606) (197)
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(640) (62) 2,169 (197)
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(364) 1,687 (3,201) 2,667
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(1) On August 14, 2009, the Company sold its land and vacant building
located at 980 Fraser Drive in Burlington, Ontario, which resulted in
a gain of $1,002.
(2) On March 19, 2009, Gennum Corporation announced it had entered into a
definitive agreement providing for the acquisition by Gennum of all
of the issued and outstanding shares of Tundra Semiconductor
Corporation ("Tundra"). Tundra subsequently received an acquisition
proposal which it determined to be a superior proposal and,
therefore, the agreement was terminated. Pursuant to the terms of the
agreement, Tundra paid Gennum a termination fee of $4,188 (Cdn
$5,000) upon the termination of the agreement. Transaction costs such
as legal, financial advisory and consulting fees have been netted
against this fee, which resulted in income of $2,205.
19. INCOME TAXES RELATED TO CONTINUING OPERATIONS
The following is a reconciliation of the expected income tax expense
obtained by applying the combined corporate tax rates to earnings before
income taxes:
Three Months Ended Nine Months Ended
August 31 August 31
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2009 2008 2009 2008
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Expected income tax expense
(recovery) using statutory
tax rates (1,818) 3,152 (3,099) 8,757
Permanent differences 246 140 (45) 400
Different income tax rates on
earnings of foreign
subsidiaries 274 (49) 91 (95)
Changes in tax rates and other 54 (206) (115) 188
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Provision for income taxes (1,244) 3,037 (3,168) 9,250
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Effective tax rate 22.6% 32.3% 33.7% 35.4%
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Permanent accounting to tax differences in the quarter relate mainly to
stock option amortization. Year to date, the difference relates mainly to
the inclusion of capital gains and losses and stock option amortization.
20. CAPITAL RISK MANAGEMENT
The Company's objectives when managing capital are to ensure that there
is adequate capital to achieve its business objectives in order to
provide returns for shareholders and benefits for other stakeholders and
to maintain a conservative capital structure. The Company's capital is
composed of shareholders' equity, and is not subject to any capital
requirements imposed by a regulator.
The Company manages the capital structure and makes adjustments for
changes in economic conditions and the risk characteristics of the
underlying assets. To maintain or adjust the capital structure, the
Company may determine to issue or re-acquire shares, acquire or dispose
of assets, and adjust the amount of cash and cash equivalents balances.
21. COMMITMENTS AND CONTINGENCIES
The Company is committed to future minimum payments under operating
leases for software design tools and buildings and equipment as at August
31, 2009 as follows:
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Buildings
and
Design Tools Equipment Total
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2009 274 798 1,072
2010 1,095 2,765 3,860
2011 1,095 2,324 3,419
2012 1,095 2,222 3,317
2013 and beyond 547 17,196 17,743
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4,106 25,305 29,411
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The Company has committed to approximately $7.1 million in purchase
obligations as at August 31, 2009, of which $1.0 million is related to
authorized capital projects. The remaining purchase obligations relate
primarily to inventory, product development and general operating costs.
In the ordinary course of business activities, the Company may be
contingently liable for litigation and claims with customers, suppliers,
former employees and third parties. Management believes that adequate
provisions have been recorded in the accounts where required. Although it
may not be possible to accurately estimate the extent of potential costs
and losses, if any, management believes that the ultimate resolution of
such contingencies would not have a material adverse effect on the
financial position of the Company.
22. Comparative Amounts
Certain of the comparative amounts have been reclassified to conform to
the presentation adopted in the current year. Certain amounts previously
classified as investing activities on the consolidated statement of cash
flows related to the Tundra termination fee and the sale of the BST
technology group have been reclassified to operating activities.
For further information: Gennum Media Contact: Robin Vaitonis, Director of Corporate Communications, Gennum Corporation, (905) 632-2999 x2110, [email protected]; Gennum Investor Relations Contact: Gord Currie, Senior Vice-President, Finance & Administration and Chief Financial Officer, Gennum Corporation, (905) 632-2999 x3060, [email protected]
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