UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.   20549


FORM 6-K


Report of Foreign Private Issuer Pursuant to Rule 13a-16 or 15d-16
Under the Securities Exchange Act of 1934

For the month of January 2019

EXFO Inc.
(Translation of registrant’s name into English)

400 Godin Avenue, Quebec, Quebec, Canada   G1M 2K2
(Address of principal executive offices)


Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.


Form 20-F ☑
Form 40-F ☐

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes ☐
No ☑


If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-______.







Table of contents


Signatures
Press Release
Condensed Unaudited Interim Consolidated Balance Sheets
Condensed Unaudited Interim Consolidated Statements of Earnings
Condensed Unaudited Interim Consolidated Statements of Comprehensive Loss
Condensed Unaudited Interim Consolidated Statements of Changes in Shareholders’ Equity
Condensed Unaudited Interim Consolidated Statements of Cash Flows
Notes to Condensed Unaudited Interim Consolidated Financial Statements
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Form 52-109F2 - Certificate of Interim Filings - Full Certificate - CEO
Form 52-109F2 - Certificate of Interim Filings - Full Certificate - CFO




On January 8, 2019, EXFO Inc., a Canadian corporation, reported its results of operations for the first fiscal quarter ended November 30, 2018. This report on Form 6-K sets forth the news release relating to EXFO’s announcement and certain information relating to EXFO’s financial condition and results of operations as well as certifications of interim filings for the first fiscal quarter of the 2019 fiscal year. This press release and information relating to EXFO’s financial condition and results of operations and certifications of interim filings for the first fiscal quarter of the 2019 fiscal year are hereby incorporated as a document by reference to Form F-3 (Registration Statement under the Securities Act of 1933) declared effective as of July 30, 2001 and to Form F‑3 (Registration Statement under the Securities Act of 1933) declared effective as of March 11, 2002 and to amend certain material information as set forth in these two Form F-3 documents.


Page 1 of 48


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



 
EXFO INC.
 
 
 
By:        /s/ Philippe Morin
Name:   Philippe Morin
Title:     Chief Executive Officer
   


Date: January 8, 2019


Page 2 of 48





PRESS RELEASE
For immediate release

EXFO reports first-quarter results for fiscal 2019

Sales increased 9.2% to US$69.2 million, above midpoint of guidance range
Bookings improved 23.3% to US$81.2 million, book-to-bill ratio of 1.17
Announced multi-million-dollar deal with a tier-1 service provider after quarter-end

QUEBEC CITY, CANADA, January 8, 2019 — EXFO Inc. (NASDAQ: EXFO; TSX: EXF), the communications industry's test, monitoring and analytics experts, reported today financial results for the first quarter ended November 30, 2018.

IFRS sales increased 9.2% to US$69.2 million in the first quarter of fiscal 2019 from US$63.4 million in the first quarter of 2018. First-quarter sales for 2019 included a $7.5 million contribution from Astellia, reduced by US$0.9 million to account for acquisition-related fair value adjustment of deferred revenue.

Bookings, which included a US$7.8 million contribution from Astellia, improved 23.3% year-over-year to US$81.2 million in the first quarter of fiscal 2019 from US$65.9 million in the same period of 2018. The company's book-to-bill ratio was 1.17 in the first quarter of 2019.

Gross margin before depreciation and amortization* amounted to 58.2% of sales in the first quarter of fiscal 2019 compared to 63.3% in the first quarter of 2018.

IFRS net loss in the first quarter of fiscal 2019 totaled US$7.5 million, or US$0.14 per share, compared to net earnings of US$2.7 million, or US$0.05 per share, in the first quarter of 2018. IFRS net loss in the first quarter of 2019 included net expenses totaling US$6.3 million: US$2.5 million in after-tax amortization of intangible assets, US$0.4 million in stock-based compensation costs, US$2.7 million in after-tax restructuring charges, US$0.9 million for acquisition-related fair value adjustment of deferred revenue and a foreign exchange gain of US$0.2 million.

Adjusted EBITDA* totaled US$2.7 million, or 3.9% of sales, in the first quarter of fiscal 2019 compared to US$6.1 million, or 9.6% of sales, in the first quarter of 2018.






Page 3 of 48





Beginning with the first quarter of fiscal 2019, EXFO is reporting revenues and bookings based on two newly created product families: Test and Measurement (T&M) as well as Service Assurance, Systems and Services (SASS).

-
Optical, transport and copper test solutions make up the T&M product family, including portable equipment for the field and benchtop units for the lab and manufacturing environments. EXFO is No. 1 worldwide in optical testing and a top-2 provider of portable telecom T&M solutions.

-
The SASS family mainly consists of service assurance, fiber monitoring, analytics and professional services as well as other systems-related solutions like network simulation and network topology discovery. EXFO is well positioned for virtualization and 5G network transformations and is now part of the top-5 global SASS suppliers based on its acquisitions of Ontology and Astellia.

This classification replaces the former Physical-Layer and Protocol-Layer product groups. EXFO believes this breakdown better reflects the company’s long-term strategy, while enhancing comparisons against industry peers and investors’ understanding EXFO’s business.

“EXFO delivered solid results in the first quarter of 2019 with revenue above the midpoint of our guidance range, while benefitting from robust calendar year-end spending for our T&M solutions to achieve the second-highest bookings level in company history,” said EXFO’s CEO Philippe Morin. “Our announced strategic transformation, focused on heightened efficiency and profitability, is progressing according to plan and should be completed by the end of the second quarter. This new structure is starting to pay off internally, but also externally with a better value proposition and more relevant engagement with SASS customers as reflected by a US$4.9 million contract win for real-time active topology software with a tier-1 service provider after the quarter-end.”




Page 4 of 48





Selected Financial Information
(In thousands of US dollars)

   
Three months ended November 30,
 
   
2019
   
2018
 
             
  Test and measurement sales
 
$
49,764
   
$
50,186
 
  Service assurance, systems and services sales
   
19,416
     
12,968
 
  Foreign exchange gains on forward exchange contracts
   
21
     
237
 
  Total sales
 
$
69,201
   
$
63,391
 
                 
  Test and measurement bookings
 
$
63,996
   
$
52,854
 
  Service assurance, systems and services bookings
   
17,221
     
12,788
 
  Foreign exchange gains on forward exchange contracts
   
21
     
237
 
  Total bookings
 
$
81,238
   
$
65,879
 
  Book-to-bill ratio (bookings/sales)
   
1.17
     
1.04
 
  Gross margin before depreciation and amortization*
 
$
40,304
   
$
40,102
 
     
58.2
%
   
63.3
%
                 
  Other selected information:
               
  IFRS net earnings (loss)
 
$
(7,467
)
 
$
2,679
 
  Amortization of intangible assets
 
$
2,940
   
$
1,119
 
  Stock-based compensation costs
 
$
418
   
$
402
 
  Restructuring charges
 
$
2,741
   
$
 
  Changes in fair value of cash contingent consideration
 
$
   
$
(155
)
  Acquisition-related deferred revenue fair value adjustment
 
$
864
   
$
 
  Net income tax effect of the above items
 
$
(423
)
 
$
(172
)
  Foreign exchange gain
 
$
(215
)
 
$
(1,218
)
  Adjusted EBITDA*
 
$
2,728
   
$
6,059
 

Operating Expenses
Selling and administrative expenses totaled US$26.4 million, or 38.1% of sales in the first quarter of fiscal 2019 compared to US$23.2 million, or 36.6% of sales, in the first quarter of 2018.

Net R&D expenses totaled US$15.2 million, or 22.0% of sales, in the first quarter of fiscal 2019 compared to US$11.3 million, or 17.8% of sales, in the same period last year. Net R&D expenses included US$2.1 million in restructuring charges in the first quarter of 2019.




Page 5 of 48





First-Quarter Highlights
Sales. Sales increased 9.2% year-over-year mainly due to the Astellia acquisition (US$7.5 revenue contribution in the quarter), partially offset by a negative currency impact. Test and Measurement sales accounted for 72% of revenue in the first quarter of 2019, while Service Assurance, Systems and Services sales totaled 28%. Revenue distribution among the three main selling regions in the first quarter amounted to 51% in the Americas, 33% in Europe, Middle East and Africa (EMEA) and 16% in Asia-Pacific EXFO’s top customer accounted for 9.0% of sales, while the top three represented 19.6%.

Profitability. IFRS net loss totaled US$7.5 million in the first quarter of 2019, including US$5.1 million for newly acquired Astellia. Of that number, US$1.8 million is attributable to after-tax amortization of acquired intangible assets. Adjusted EBITDA amounted to US$2.7 million in the first quarter of 2019.

Innovation. EXFO received two separate innovation-related awards from the Metro Ethernet Forum (MEF) in the first quarter of fiscal 2019. EXFO’s software verifier agent, a software solution providing advanced layer-2 to layer-7 testing and end-to-end visibility, received the Technology Solutions Award for Service Assurance from the MEF. EXFO also accepted a Proof of Concept Award from the MEF for its contribution to a collaborative project, named Blade Runner, delivering augmented reality over a 5G wireless network. EXFO covered service assurance by providing virtual probes to enable closed-loop automation and seamless service continuity. EXFO had previously obtained the TM Forum Outstanding Catalyst Innovation Award for its involvement in the Blade Runner project.

EXFO also expanded its 400G test portfolio with the release of a module featuring an Open Transceiver System. This modular design enables compatibility between current and future high-speed transceivers with EXFO’s field and lab test platforms. The company also introduced an automated fiber inspection tool for testing polarity, continuity and connector cleanliness on multifiber cables.

Business Outlook
EXFO forecasts sales between US$70.0 million and US$75.0 million for the second quarter of fiscal 2019, while IFRS net earnings are expected to range between US$0.05 and US$0.09 per share. IFRS net earnings include net expenses of US$0.06 per share in after-tax amortization of intangible assets, stock-based compensation costs, acquisition-related fair value adjustment of deferred revenue, after tax restructuring charges, and an anticipated foreign exchange gain. IFRS net earnings also include US$0.03 per share for an after-tax gain on disposal of a capital asset and US$0.04 per share for a one-time deferred income tax recovery.




Page 6 of 48





This guidance, which is a forward-looking statement, was established by management based on existing backlog as of the date of this news release, seasonality, expected bookings for the remaining of the quarter as well as exchange rates as of the date of this news release.

Conference Call and Webcast
EXFO will host a conference call today at 5 p.m. (Eastern time) to review first-quarter results for fiscal 2019. To listen to the conference call and participate in the question period via telephone, dial 1-323-794-2093. Please take note the following participant passcode will be required: 9817746. Executive Chairman Germain Lamonde, CEO Philippe Morin and Pierre Plamondon, CPA, Chief Financial Officer and Vice-President of Finance, will participate in the call. An audio replay of the conference call will be available two hours after the event until 8 p.m. on January 15, 2019. The replay number is 1-719-457-0820 and the participant passcode is 9817746. The audio Webcast and replay of the conference call will also be available on EXFO’s Website at www.EXFO.com, under the Investors section.

About EXFO
EXFO (NASDAQ: EXFO) (TSX: EXF) develops smarter test, monitoring and analytics solutions for fixed and mobile network operators, webscale companies and equipment manufacturers in the global communications industry. Our customers count on us to deliver superior network performance, service reliability and subscriber insights. They count on our unique blend of equipment, software and services to accelerate digital transformations related to fiber, 4G/LTE and 5G deployments. They count on our expertise with automation, real-time troubleshooting and big data analytics, which are critical to their business performance. We’ve spent over 30 years earning this trust, and today 1,900 EXFO employees in over 25 countries work side by side with our customers in the lab, field, data center and beyond.




Page 7 of 48





Forward-Looking Statements
This news release contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, and we intend that such forward-looking statements be subject to the safe harbors created thereby. Forward-looking statements are statements other than historical information or statements of current condition. Words such as may, expect, believe, plan, anticipate, intend, could, estimate, continue, or similar expressions or the negative of such expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events and circumstances are considered forward-looking statements. They are not guarantee of future performance and involve risks and uncertainties. Actual results may differ materially from those in forward-looking statements due to various factors including, but not limited to, macroeconomic uncertainty, including trade wars; our ability to successfully integrate businesses that we acquire; capital spending and network deployment levels in the telecommunications industry (including our ability to quickly adapt cost structures to anticipated levels of business and our ability to manage inventory levels with market demand); future economic, competitive, financial and market conditions; consolidation in the global telecommunications test, service assurance and analytics solutions markets and increased competition among vendors; capacity to adapt our future product offering to future technological changes; limited visibility with regard to the timing and nature of customer orders; delay in revenue recognition due to longer sales cycles for complex systems involving customers’ acceptance; fluctuating exchange rates; concentration of sales; timely release and market acceptance of our new products and other upcoming products; our ability to successfully expand international operations and to conduct business internationally; and the retention of key technical and management personnel. Assumptions relating to the foregoing involve judgments and risks, all of which are difficult or impossible to predict and many of which are beyond our control. Other risk factors that may affect our future performance and operations are detailed in our Annual Report, on Form 20-F, and our other filings with the U.S. Securities and Exchange Commission and the Canadian securities commissions. We believe that the expectations reflected in the forward-looking statements are reasonable based on information currently available to us, but we cannot assure you that the expectations will prove to have been correct. Accordingly, you should not place undue reliance on these forward-looking statements. These statements speak only as of the date of this document. Unless required by law or applicable regulations, we undertake no obligation to revise or update any of them to reflect events or circumstances that occur after the date of this document.




Page 8 of 48





*Non-IFRS Measures
EXFO provides non-IFRS measures (non-IFRS sales, gross margin before depreciation and amortization and adjusted EBITDA) as supplemental information regarding its operational performance. Non-IFRS sales represent total sales plus acquisition-related deferred revenue fair value adjustment. Gross margin before depreciation and amortization represents sales, less cost of sales, excluding depreciation and amortization. Adjusted EBITDA represent net earnings (loss) before interest, income taxes, depreciation and amortization, stock-based compensation costs, restructuring charges, change in fair value of cash contingent consideration, acquisition-related deferred revenue fair value adjustment, and foreign exchange gain or loss.

These non-IFRS measures eliminate the effect on IFRS results of non-cash and/or non-operating statement of earnings elements, as well as elements subject to significant volatility such as foreign exchange gain or loss. EXFO uses these measures for evaluating historical and prospective financial performance, as well as its performance relative to competitors. These non-IFRS measures are also the financial measures used by financial analysts to evaluate and compare EXFO’s performance against competitors and industry players in the company’s sector.

Finally, these measures help EXFO plan and forecast future periods as well as make operational and strategic decisions. EXFO believes that providing this information, in addition to the IFRS measures, allows investors to see the company’s results through the eyes of management, and to better understand historical and future financial performance. More importantly, it enables the comparison of EXFO’s performance on a relatively similar basis against other public and private companies in the industry worldwide.

The presentation of this additional information is not prepared in accordance with IFRS. Therefore, the information may not necessarily be comparable to that of other companies and should be considered as a supplement to, not a substitute for, the corresponding measures calculated in accordance with IFRS.

The following table summarizes the reconciliation of non-IFRS sales to IFRS sales, in thousands of US dollars:

Non-IFRS Sales
   
Three months ended
November 30,
 
   
2018
   
2017
 
             
IFRS sales
 
$
69,201
   
$
63,391
 
Acquisition-related deferred revenue fair value adjustment
   
864
   
 
Non-IFRS sales
 
$
70,065
   
$
63,391
 




Page 9 of 48





The following table summarizes the reconciliation of adjusted EBITDA to IFRS net earnings (loss) in thousands of US dollars:

Adjusted EBITDA
   
Three months ended
November 30,
 
   
2018
   
2017
 
             
IFRS net earnings (loss) for the period
 
$
(7,467
)
 
$
2,679
 
                 
Add (deduct):
               
                 
Depreciation
   
1,429
     
1,154
 
Amortization
   
2,940
     
1,119
 
Interest and other expense
   
377
     
338
 
Income taxes
   
1,641
     
1,740
 
Stock-based compensation costs
   
418
     
402
 
Restructuring charges
   
2,741
   
 
Change in fair value of cash contingent consideration
 
     
(155
)
Acquisition-related deferred revenue fair value adjustment
   
864
   
 
Foreign exchange gain
   
(215
)
   
(1,218
)
Adjusted EBITDA for the period
 
$
2,728
   
$
6,059
 
                 
Adjusted EBITDA in percentage of sales
   
3.9
%
   
9.6
%

For more information
Vance Oliver
Director, Investor Relations
(418) 683-0913, Ext. 23733
vance.oliver@exfo.com




Page 10 of 48



EXFO Inc.
Condensed Unaudited Interim Consolidated Balance Sheets

(in thousands of US dollars)


   
As at
November 30,
2018
   
As at
August 31,
2018
 
             
Assets
           
             
Current assets
           
Cash
 
$
18,087
   
$
12,758
 
Short-term investments
   
1,976
     
2,282
 
Accounts receivable
               
Trade
   
50,364
     
47,273
 
Other
   
3,693
     
4,137
 
Income taxes and tax credits recoverable
   
4,694
     
4,790
 
Inventories
   
39,186
     
38,589
 
Prepaid expenses
   
5,019
     
5,291
 
Other assets
   
2,264
     
2,279
 
     
125,283
     
117,399
 
                 
Tax credits recoverable
   
47,527
     
47,677
 
Property, plant and equipment
   
43,687
     
44,310
 
Intangible assets
   
26,507
     
29,866
 
Goodwill
   
39,115
     
39,892
 
Deferred income tax assets
   
4,270
     
4,714
 
Other assets
   
661
     
686
 
   
$
287,050
   
$
284,544
 
Liabilities
               
                 
Current liabilities
               
Bank loan
 
$
21,399
   
$
10,692
 
Accounts payable and accrued liabilities
   
49,590
     
47,898
 
Provisions
   
2,338
     
2,954
 
Income taxes payable
   
557
     
873
 
Deferred revenue
   
18,564
     
16,556
 
Other liabilities
   
3,109
     
3,197
 
Current portion of long-term debt (note 5)
   
2,808
     
2,921
 
     
98,365
     
85,091
 
                 
Provisions
   
2,605
     
2,347
 
Deferred revenue
   
8,320
     
6,947
 
Long-term debt (note 5)
   
5,185
     
5,907
 
Deferred income tax liabilities
   
5,117
     
5,910
 
Other liabilities
   
540
     
421
 
     
120,132
     
106,623
 
                 
Shareholders’ equity
               
Share capital (note 6)
   
92,580
     
91,937
 
Contributed surplus
   
18,245
     
18,428
 
Retained earnings
   
107,186
     
114,906
 
Accumulated other comprehensive loss
   
(51,093
)
   
(47,350
)
     
166,918
     
177,921
 
                 
   
$
287,050
   
$
284,544
 


The accompanying notes are an integral part of these condensed unaudited interim consolidated financial statements.


Page 11 of 48



EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Earnings

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


   
Three months ended
November 30,
 
   
2018
   
2017
 
             
Sales
 
$
69,201
   
$
63,391
 
                 
Cost of sales (1)
   
28,897
     
23,289
 
Selling and administrative
   
26,375
     
23,193
 
Net research and development
   
15,224
     
11,252
 
Depreciation of property, plant and equipment
   
1,429
     
1,154
 
Amortization of intangible assets
   
2,940
     
1,119
 
Change in fair value of cash contingent consideration
 
     
(155
)
Interest and other expense
   
377
     
338
 
Foreign exchange gain
   
(215
)
   
(1,218
)
                 
Earnings (loss) before income taxes
   
(5,826
)
   
4,419
 
                 
Income taxes (note 8)
   
1,641
     
1,740
 
                 
Net earnings (loss) for the period
 
$
(7,467
)
 
$
2,679
 
                 
Basic and diluted net earnings (loss) per share
 
$
(0.14
)
 
$
0.05
 
                 
Basic weighted average number of shares outstanding (000’s)
   
55,184
     
54,805
 
                 
Diluted weighted average number of shares outstanding (000’s) (note 9)
   
55,184
     
55,793
 

(1)
The cost of sales is exclusive of depreciation and amortization, shown separately.


The accompanying notes are an integral part of these condensed unaudited interim consolidated financial statements.


Page 12 of 48



EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Comprehensive Loss

(in thousands of US dollars)


   
Three months ended
November 30,
 
   
2018
   
2017
 
             
Net earnings (loss) for the period
 
$
(7,467
)
 
$
2,679
 
Other comprehensive income (loss), net of income taxes
               
Items that may be reclassified subsequently to net earnings (loss)
               
Foreign currency translation adjustment
   
(3,356
)
   
(4,130
)
Unrealized gains/losses on forward exchange contracts
   
(687
)
   
(524
)
Reclassification of realized gains/losses on forward exchange contracts in net earnings (loss)
   
91
     
(383
)
Deferred income tax effect of gains/losses on forward exchange contracts
   
209
     
215
 
                 
Other comprehensive loss
   
(3,743
)
   
(4,822
)
                 
Comprehensive loss for the period
 
$
(11,210
)
 
$
(2,143
)


The accompanying notes are an integral part of these condensed unaudited interim consolidated financial statements.


Page 13 of 48



EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Changes in Shareholders' Equity

(in thousands of US dollars)


   
Three months ended November 30, 2017
 
   
Share
capital
   
Contributed surplus
   
Retained earnings
   
Accumulated other comprehensive loss
   
Total
shareholders’ equity
 
                               
Balance as at September 1, 2017
 
$
90,411
   
$
18,184
   
$
127,160
   
$
(38,965
)
 
$
196,790
 
Reclassification of stock-based compensation costs (note 6)
   
598
     
(598
)
 
   
   
 
Stock-based compensation costs
 
     
430
   
   
     
430
 
Net earnings for the period
 
   
     
2,679
   
     
2,679
 
Other comprehensive loss
                                       
Foreign currency translation adjustment
 
   
   
     
(4,130
)
   
(4,130
)
Changes in unrealized gains/losses on forward exchange contracts, net of deferred income taxes of $215
 
   
   
     
(692
)
   
(692
)
                                         
Total comprehensive loss for the period
                                   
(2,143
)
                                         
Balance as at November 30, 2017
 
$
91,009
   
$
18,016
   
$
129,839
   
$
(43,787
)
 
$
195,077
 


   
Three months ended November 30, 2018
 
   
Share
capital
   
Contributed surplus
   
Retained earnings
   
Accumulated other comprehensive loss
   
Total
shareholders’ equity
 
                               
Balance as at September 1, 2018
 
$
91,937
   
$
18,428
   
$
114,906
   
$
(47,350
)
 
$
177,921
 
Adoption of IFRS 9 (note 2)
 
   
     
(253
)
 
     
(253
)
Adjusted balance as at September 1, 2018
   
91,937
     
18,428
     
114,653
     
(47,350
)
   
177,668
 
Reclassification of stock-based compensation costs (note 6)
   
643
     
(643
)
 
   
   
 
Stock-based compensation costs
 
     
460
   
   
     
460
 
Net loss for the period
 
   
     
(7,467
)
 
     
(7,467
)
Other comprehensive loss
                                       
Foreign currency translation adjustment
 
   
   
     
(3,356
)
   
(3,356
)
Changes in unrealized gains/losses on forward exchange contracts, net of deferred income taxes of $209
 
   
   
     
(387
)
   
(387
)
                                         
Total comprehensive loss for the period
                                   
(11,210
)
                                         
Balance as at November 30, 2018
 
$
92,580
   
$
18,245
   
$
107,186
   
$
(51,093
)
 
$
166,918
 


The accompanying notes are an integral part of these condensed unaudited interim consolidated financial statements.


Page 14 of 48



EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Cash Flows

(in thousands of US dollars)


   
Three months ended
November 30,
 
   
2018
   
2017
 
             
Cash flows from operating activities
           
Net earnings (loss) for the period
 
$
(7,467
)
 
$
2,679
 
Add (deduct) items not affecting cash
               
Stock-based compensation costs
   
418
     
402
 
Depreciation and amortization
   
4,369
     
2,273
 
Write-off of capital assets
 
     
124
 
Change in fair value of cash contingent consideration
 
     
(155
)
Deferred revenue
   
3,922
     
(782
)
Deferred income taxes
   
(29
)
   
(240
)
Changes in foreign exchange gain/loss
   
(529
)
   
(247
)
     
684
     
4,054
 
                 
Changes in non-cash operating items
               
Accounts receivable
   
(4,052
)
   
1,085
 
Income taxes and tax credits
   
(998
)
   
59
 
Inventories
   
(1,361
)
   
(1,953
)
Prepaid expenses
   
183
     
318
 
Other assets
   
(12
)
   
4
 
Accounts payable, accrued liabilities and provisions
   
3,132
     
(1,369
)
Other liabilities
   
(51
)
   
188
 
     
(2,475
)
   
2,386
 
Cash flows from investing activities
               
Additions to short-term investments
 
     
(234
)
Proceeds from disposal of short-term investments
   
342
   
 
Purchases of capital assets
   
(2,882
)
   
(1,991
)
Investment in an associate
 
     
(10,311
)
Business combination, net of cash acquired
 
     
(9,540
)
     
(2,540
)
   
(22,076
)
Cash flows from financing activities
               
Bank loan
   
11,257
     
2
 
Repayment of long-term debt
   
(717
)
   
(70
)
     
10,540
     
(68
)
                 
Effect of foreign exchange rate changes on cash
   
(196
)
   
(226
)
                 
Change in cash
   
5,329
     
(19,984
)
Cash – Beginning of the period
   
12,758
     
38,435
 
Cash – End of the period
 
$
18,087
   
$
18,451
 
                 
                 
Supplementary information
               
Income taxes paid
 
$
871
   
$
682
 



The accompanying notes are an integral part of these condensed unaudited interim consolidated financial statements.


Page 15 of 48



EXFO Inc.
Notes to Condensed Unaudited Interim Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)


1
Nature of Activities and Incorporation

EXFO Inc. and its subsidiaries (together “EXFO” or the “company”) develops, manufactures and markets smart network test, monitoring and analytics solutions for fixed and mobile communications service providers (CSPs), web-scale operators, as well as network equipment manufacturers in the global telecommunications industry.

EXFO is a company incorporated under the Canada Business Corporations Act and is domiciled in Canada. The address of its headquarters is 400 Godin Avenue, Quebec City, Quebec, Canada, G1M 2K2.

These condensed unaudited interim consolidated financial statements were authorized for issue by the Board of Directors on January 8, 2019.


2
Basis of Presentation

These condensed unaudited interim consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB) applicable to the preparation of interim financial statements, including IAS 34, “Interim Financial Reporting”, and using the same accounting policies and methods used in the preparation of the company’s most recent annual consolidated financial statements, except as described below. Consequently, these condensed unaudited interim consolidated financial statements should be read in conjunction with the company’s most recent annual consolidated financial statements, which have been prepared in accordance with IFRS as issued by the IASB.

Recently Issued IFRS Pronouncements

Recently issued IFRS Pronouncements Adopted in Fiscal 2019

Financial instruments

The final version of IFRS 9, “Financial Instruments”, was issued in July 2014 replaces IAS 39, “Financial Instruments: Recognition and Measurement”. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of its financial assets. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39. Requirements relating to hedge accounting, representing a new hedge accounting model, have also been added to IFRS 9. The new standard is effective for annual periods beginning on or after January 1, 2018 and must be applied retrospectively. The company adopted this new standard on September 1, 2018 using the modified retrospective method. The following table summarizes the impact of its adoption on the company’s consolidated balance sheet as at September 1, 2018:

   
As reported
as at August 31, 2018
   
Adjustments
   
As adjusted
As at September 1, 2018
 
                   
  Accounts receivables trade
 
$
47,273
   
$
(303
)
 
$
46,970
 
  Income taxes recoverable
 
$
4,790
   
$
50
   
$
4,840
 
  Total assets
 
$
284,544
   
$
(253
)
 
$
284,291
 
                         
  Retained earnings
 
$
114,906
   
$
(253
)
 
$
114,653
 
  Shareholders’ equity
 
$
177,921
   
$
(253
)
 
$
177,668
 


Page 16 of 48



EXFO Inc.
Notes to Condensed Unaudited Interim Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)


In addition, the company’s financial instruments are accounted for as follows under IFRS 9 as compared to the company’s previous accounting policy with IAS 39:

  Financial assets
Classification – IAS 39
Classification – IFRS 9
     
  Cash
Loans and receivables
Amortized cost
  Short-term investments
Available for sale
Fair value through other comprehensive income
  Accounts receivable
Loans and receivables
Amortized cost
  Other assets
Loans and receivables
Amortized cost
  Forward exchange contracts
Derivatives used for hedging
Derivatives used for hedging

Financial liabilities

  Bank loan
Other financial liabilities
Amortized cost
  Accounts payable and accrued liabilities
Other financial liabilities
Amortized cost
  Other liabilities
Other financial liabilities
Amortized cost
  Long-term debt
Other financial liabilities
Amortized cost
  Forward exchange contracts
Derivatives used for hedging
Derivatives used for hedging

Hedge accounting

All existing hedge relationships that were designated as effective hedging relationships under IAS 39, continue to qualify for hedge accounting under IFRS 9. IFRS 9 does not change the general principles of how the company accounts for effective hedges.

Revenue from contracts with customers

IFRS 15, “Revenue from Contracts with Customers”, was issued in May 2014. The objective of this new standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability. This new standard contains principles that an entity must apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity recognizes revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. This new standard is effective for annual periods beginning on or after January 1, 2018. The company adopted this new standard on September 1, 2018 using the modified retrospective method. The company applied this standard retrospectively only to contracts that were not completed at the date of initial application.

The company concluded that the main areas of impact relate to the allocation of the transaction price to the various performance obligations under the contracts, the timing of revenue recognition for sales arrangement that contain customer acceptance clauses, and the sale of licenses that provide customers with the “right to use” the company’s intellectual property. The adoption of the new standard had no material impact on the company’s consolidated financial statements.

Foreign Currency Transactions and Advance Consideration

IFRIC 22, “Foreign Currency Transactions and Advance Consideration”, was issued in December 2016. IFRIC 22 addresses how to determine the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) and on the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration in a foreign currency. IFRIC 22 is effective for annual periods beginning on or after January 1, 2018. The company adopted this interpretation retrospectively on September 1, 2018 and its adoption did not have a material impact on its consolidated financial statements.


Page 17 of 48



EXFO Inc.
Notes to Condensed Unaudited Interim Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)


Recently issued IFRS Pronouncements Not Yet Adopted

Leases

IFRS 16, Leases”, was issued in January 2016. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, i.e., the customer (lessee) and the supplier (lessor). IFRS 16 will supersede IAS 17, “Leases”, and related interpretations. This new standard is effective for annual periods beginning on or after January 1, 2019. The company will adopt this new standard on September 1, 2019 and is currently assessing the impact that it will have on its consolidated financial statements.

Uncertainty over Income Tax Treatments

IFRIC 23, “Uncertainty over Income Tax Treatments”, was issued in June 2017. IFRIC 23 provides guidance on how to value uncertain income tax positions based on the probability of whether the relevant tax authorities will accept the company's tax treatments. A company is to assume that a taxation authority with the right to examine any amounts reported to it will examine those amounts and will have full knowledge of all relevant information when doing so. IFRIC 23 is effective for annual periods beginning on or after January 1, 2019. The company will adopt this interpretation on September 1, 2019 and is currently assessing the impact that it will have on its consolidated financial statements.

New Accounting Policy upon Adoption of Recently Issued IFRS

Revenue Recognition

The company exercises judgment and use estimates in connection with determining the amounts of product and services revenues to be recognized in each accounting period.

The company accounts for revenue once a legally enforceable contract with a customer has been approved by the parties and the related promises to transfer products or services have been identified. A contract is defined by the company as an arrangement with commercial substance identifying payment terms, each party’s rights and obligations regarding the products or services to be transferred and collection is probable. The company’s contracts usually take form of a customer purchase order.

Customer contracts may include promises to transfer multiple products and services to a customer. Determining whether the products and services are considered distinct performance obligations that should be accounted for separately or as one single performance obligation may require significant judgment. The company assesses whether each promised good or service is distinct for the purpose of identifying the various performance obligations in each contract. Promised goods and services are considered distinct provided that: (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer; and (ii) the company's promise to transfer the good or service to the customer is separately identifiable or distinct from other promises in the contract. The company derives revenues from goods and services. Sales of goods, which represent the majority of the sales of the company, consist of standalone hardware products, hardware products with embedded software that are essential to providing customers the intended functionality of the solutions, stand-alone software licenses, as well as hardware products bundled with a software license. Sales of services mainly consist of professional services, consulting, stand-ready software-as-a-service (SAAS), maintenance contracts, extended warranties, installation, integration and training. The company’s performance obligations consist of a variety of products and services.


Page 18 of 48



EXFO Inc.
Notes to Condensed Unaudited Interim Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)


Revenue is recognized when control of the products or services are transferred to the customers, in an amount that reflects the consideration the company expects to be entitled to in exchange for products and services. Revenue is recognized at the point in time control is transferred to the customer. For hardware sales, transfer of control to the customer typically occurs at the point the product is shipped or delivered to the customer’s designated location. For ‘’right of use’’ software license sales, transfer of control to the customer typically occurs upon shipment, electronic delivery, or when the software is available for download by the customer. For instances where software is sold along with essential services, such as integration or installation, transfer of control occurs, and revenue is typically recognized upon customer acceptance. In certain instances, acceptance is deemed to have occurred if all acceptance provisions lapse, or if the company has evidence that all acceptance provisions will be, or have been, satisfied. Revenue from software and hardware support is recognized ratably over the support period. Support services generally include rights to unspecified upgrades (when and if available), telephone and internet-based support, updates, bug fixes and hardware repair and replacement. SAAS services are recognized ratably over the contract term.

If the contract contains a single performance obligation, the entire transaction price is attributed to that performance obligation. Some of the company’s contracts include multiple distinct performance obligations with a combination of products and services, maintenance and support, professional services and/or training. The company allocates the transaction price among the performance obligations in an amount that depicts the relative standalone selling prices (SSP) of each obligation. Judgment is required to determine the SSP for each distinct performance obligation. The company assesses SSP based on historical pricing for products and services, whether sold alone or as part of a multiple element transaction. The company reviews sales of the product and services elements on a regular basis and updates, when appropriate, its SSP for such elements to ensure that it reflects recent pricing experience.

Financial Instruments

Financial assets are measured at amortized cost if they are held within a business model whose objective is to hold assets to collect contractual cash flows, and their contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Otherwise, they are designated at fair value through profit or loss.

Financial liabilities are measured at amortized cost unless they must be measured at fair value through profit or loss or if the company elects to measure them at fair value through profit or loss.


3
Restructuring Charges

In August 2018, the company implemented a restructuring plan to accelerate the integration of its newly acquired monitoring and analytics technologies from Astellia S.A. and simplify its cost structure and optimize resources as the company converges toward fewer sites and reduces its workforce.

The following table summarizes changes in restructuring charges payable during the three months ended November 30, 2018:

  Balance – Beginning of the period
 
$
3,167
 
  Additions (note 7)
   
2,741
 
  Payments
   
(2,984
)
         
  Balance – End of the period
 
$
2,924
 


Page 19 of 48



EXFO Inc.
Notes to Condensed Unaudited Interim Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)


On September 9, 2018, as part of its fiscal 2018 restructuring plan and the shutdown of its facilities in Toronto, Canada, the company entered into a binding agreement to sell one of its buildings for net proceeds of $3,200,000. The transfer of ownership is expected to occur in the second quarter of fiscal 2019, as the company will continue to use the facility to finalize projects until then. The transaction will result in a pre-tax gain of $1,800,000 that will be recorded in the consolidated statement of earnings for that quarter.


4
Financial Instruments

Fair Value of Financial Instruments

The company classifies its derivative and non-derivative financial assets and liabilities measured at fair value using the fair value hierarchy as follows:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities

Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset and liability, either directly or indirectly

Level 3: Unobservable inputs for the asset or liability

The company’s short-term investments and forward exchange contracts are measured at fair value at each balance sheet date. The company’s short-term investments are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets. The company’s forward exchange contracts are classified within Level 2 of the fair value hierarchy because they are valued using quoted prices and forward exchange rates at the balance sheet dates.

The fair value of forward exchange contracts represents the amount at which they could be settled based on estimated current market rates.

The fair value of derivative and non-derivative financial assets and liabilities measured at fair value by level of fair value hierarchy, is as follows:

   
As at November 30, 2018
   
As at August 31, 2018
 
   
Level 1
   
Level 2
   
Level 1
   
Level 2
 
  Financial assets
                       
  Short-term investments
 
$
1,976
   
$
   
$
2,282
   
$
 
  Forward exchange contracts
 
$
   
$
37
   
$
   
$
318
 
                                 
  Financial liabilities
                               
  Forward exchange contracts
 
$
   
$
1,271
   
$
   
$
807
 

Derivative Financial Instruments

The functional currency of the company is the Canadian dollar. The company is exposed to currency risk as a result of its export sales of products manufactured in Canada, China, France and Finland, the majority of which are denominated in US dollars and euros. This risk is partially hedged by forward exchange contracts and certain cost of sales and operating expenses (US dollars and euros). In addition, the company is exposed to currency risk as a result of its research and development activities in India (Indian rupees). This risk is partially hedged by forward exchange contracts. The company’s forward exchange contracts, which are designated as cash flow hedging instruments, qualify for hedge accounting.


Page 20 of 48



EXFO Inc.
Notes to Condensed Unaudited Interim Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)


As at November 30, 2018, the company held contracts to sell US dollars for Canadian dollars and Indian rupees at various forward rates, which are summarized below:

US dollars – Canadian dollars

 
Expiry dates
 
Contractual
amounts
   
Weighted average
contractual forward rates
 
               
 
December 2018 to August 2019
 
$
22,200
     
1.2969
 
 
September 2019 to August 2020
   
19,500
     
1.2795
 
 
September 2020 to August 2021
   
5,100
     
1.2751
 
 
Total
 
$
46,800
     
1.2873
 

US dollars – Indian rupees

 
Expiry dates
 
Contractual
amount
   
Weighted average
contractual forward rate
 
               
 
December 2018 to August 2019
 
$
4,000
     
68.77
 

The carrying amount of forward exchange contracts is equal to their fair value, which is based on the amount at which they could be settled based on estimated current market rates. The fair value of forward exchange contracts amounted to net losses of $489,000 as at August 31, 2018, and $1,234,000 as at November 30, 2018.

As at November 30, 2018, forward exchange contracts in the amount of $37,000 are presented as current assets in other accounts receivable, forward exchange contracts in the amount of $881,000 are presented as current liabilities in accounts payable and accrued liabilities, and forward exchange contracts in the amount of $390,000 are presented as long-term liabilities in other long-term liabilities in the consolidated balance sheet. Forward exchange contracts of $84,000 included in accounts payable and accrued liabilities, for which related hedged sales are recognized, are recorded in the consolidated statement of earnings; otherwise, other forward exchange contracts are not yet recorded in the consolidated statement of earnings and are recorded in other comprehensive income.

Based on its portfolio of forward exchange contracts as at November 30, 2018, the company estimates that the portion of the net unrealized losses on these contracts as of that date, which will be realized and reclassified from accumulated other comprehensive income to net earnings (sales) over the next 12 months, amounts to $760,000.

During the three months ended November 30, 2018, the company recognized within its sales foreign exchange gains on forward exchange contracts of $21,000, compared to $237,000 for the three months ended November 30, 2017.


Page 21 of 48



EXFO Inc.
Notes to Condensed Unaudited Interim Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)


5
Long-term Debt

   
As at
November 30,
2018
   
As at
August 31,
2018
 
             
Unsecured, non-interest-bearing loans, denominated in euros, repayable in quarterly instalments, maturing in March 2024 and March 2025
 
$
909
   
$
883
 
Unsecured loans, denominated in euros, repayable in monthly, quarterly
or bi-annual instalments, bearing interest at annual rates of nil to 5.0%, maturing at different dates between December 2018 and September 2023
   
4,366
     
4,853
 
Loans, secured by the universality of the assets of a subsidiary, denominated in euros, repayable in monthly instalments, bearing interest at annual rates of 0.7% to 2.0%, maturing at different dates between December 2018 and August 2022
   
716
     
828
 
Loans, secured by the universality of the assets of a subsidiary, denominated in euros, repayable in monthly or quarterly instalments, bearing interest at annual rates of 1.1% to 2.9%, maturing at different dates between March 2020 and July 2022
   
2,002
     
2,264
 
     
7,993
     
8,828
 
Current portion of long-term debt
   
2,808
     
2,921
 
   
$
5,185
   
$
5,907
 

Principal repayments of long-term debt over the forthcoming years are as follows:

   
As at
November 30,
2018
   
As at
August 31,
2018
 
             
No later than one year
 
$
2,808
   
$
2,921
 
Later than one year and no later than five years
   
4,966
     
5,745
 
Later than five years
   
219
     
162
 
   
$
7,993
   
$
8,828
 


Page 22 of 48



EXFO Inc.
Notes to Condensed Unaudited Interim Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)


6
Share Capital

The following tables summarize changes in share capital for the three months ended November 30, 2017 and 2018.

   
Three months ended November 30, 2017
 
   
Multiple voting shares
   
Subordinate voting shares
       
   
Number
   
Amount
   
Number
   
Amount
   
Total
amount
 
                               
Balance as at September 1, 2017
   
31,643,000
   
$
1
     
23,068,777
   
$
90,410
   
$
90,411
 
Redemption of restricted share units
   
     
     
155,619
     
     
 
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
   
     
     
     
598
     
598
 
                                         
Balance as at November 30, 2017
   
31,643,000
   
$
1
     
23,224,396
   
$
91,008
   
$
91,009
 

   
Three months ended November 30, 2018
 
   
Multiple voting shares
   
Subordinate voting shares
       
   
Number
   
Amount
   
Number
   
Amount
   
Total
amount
 
                               
Balance as at September 1, 2018
   
31,643,000
   
$
1
     
23,472,995
   
$
91,936
   
$
91,937
 
Redemption of restricted share units
   
     
     
176,729
     
     
 
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
   
     
     
     
643
     
643
 
                                         
Balance as at November 30, 2018
   
31,643,000
   
$
1
     
23,649,724
   
$
92,579
   
$
92,580
 


7
Statements of Earnings

Sales are as follows:

   
Three months ended
November 30,
 
   
2018
   
2017
 
             
Test and measurement
 
$
49,764
   
$
50,186
 
Service assurance, systems and services
   
19,416
     
12,968
 
Foreign exchange gains on forward exchange contracts
   
21
     
237
 
                 
Total sales for the period
 
$
69,201
   
$
63,391
 


Page 23 of 48



EXFO Inc.
Notes to Condensed Unaudited Interim Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)


Net research and development expenses comprise the following:

   
Three months ended
November 30,
 
   
2018
   
2017
 
             
Gross research and development expenses
 
$
17,225
   
$
13,063
 
Research and development tax credits
   
(2,001
)
   
(1,811
)
                 
Net research and development expenses for the period
 
$
15,224
   
$
11,252
 

Inventory write-down is as follows:

   
Three months ended
November 30,
 
   
2018
   
2017
 
             
Inventory write-down for the period
 
$
1,045
   
$
703
 

Depreciation and amortization expenses by functional area are as follows:

   
Three months ended
November 30,
 
   
2018
   
2017
 
             
Cost of sales
           
Depreciation of property, plant and equipment
 
$
524
   
$
472
 
Amortization of intangible assets
   
2,523
     
911
 
     
3,047
     
1,383
 
                 
Selling and administrative expenses
               
Depreciation of property, plant and equipment
   
264
     
164
 
Amortization of intangible assets
   
232
     
112
 
     
496
     
276
 
                 
Net research and development expenses
               
Depreciation of property, plant and equipment
   
641
     
518
 
Amortization of intangible assets
   
185
     
96
 
     
826
     
614
 
   
$
4,369
   
$
2,273
 
                 
Depreciation of property, plant and equipment
 
$
1,429
   
$
1,154
 
Amortization of intangible assets
   
2,940
     
1,119
 
   
$
4,369
   
$
2,273
 


Page 24 of 48



EXFO Inc.
Notes to Condensed Unaudited Interim Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)


Employee compensation comprises the following:

   
Three months ended
November 30,
 
   
2018
   
2017
 
             
Salaries and benefits
 
$
35,741
   
$
29,622
 
Restructuring charges
   
2,226
     
 
Stock-based compensation costs
   
418
     
402
 
Total employee compensation for the period
 
$
38,385
   
$
30,024
 

Stock-based compensation costs by functional area are as follows:

   
Three months ended
November 30,
 
   
2018
   
2017
 
             
Cost of sales
 
$
36
   
$
36
 
Selling and administrative expenses
   
284
     
276
 
Net research and development expenses
   
98
     
90
 
Total stock-based compensation for the period
 
$
418
   
$
402
 

Restructuring charges by functional area are as follows:

   
Three months ended
November 30,
 
   
2018
   
2017
 
             
Cost of sales
 
$
287
   
$
 
Selling and administrative expenses
   
397
     
 
Net research and development expenses
   
2,057
     
 
Income taxes
   
3
     
 
Total restructuring charges for the period
 
$
2,744
   
$
 


Page 25 of 48



EXFO Inc.
Notes to Condensed Unaudited Interim Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)


8
Income Taxes

For the three months ended November 30, 2017 and 2018, the reconciliation of the income tax provision (recovery) calculated using the combined Canadian federal and provincial statutory income tax rate with the income tax provision in the financial statements is as follows:

   
Three months ended
November 30,
 
   
2018
   
2017
 
             
Income tax provision (recovery) at combined Canadian federal and provincial statutory tax rate (27%)
 
$
(1,573
)
 
$
1,193
 
                 
Increase (decrease) due to:
               
Foreign income taxed at different rates
   
234
     
(103
)
Non-deductible loss (non-taxable income)
   
100
     
(54
)
Non-deductible expenses
   
226
     
381
 
Foreign exchange effect of translation of foreign subsidiaries
   
(160
)
   
(92
)
Utilization of previously unrecognized deferred income tax assets
   
(84
)
   
(244
)
Unrecognized deferred income tax assets on temporary deductible differences and unused tax losses
   
2,553
     
1,035
 
Other
   
345
     
(376
)
                 
Income tax provision for the period
 
$
1,641
   
$
1,740
 

The income tax provision consists of the following:

   
Three months ended
November 30,
 
   
2018
   
2017
 
             
Current
 
$
1,670
   
$
1,980
 
Deferred
   
(29
)
   
(240
)
                 
   
$
1,641
   
$
1,740
 


Page 26 of 48



EXFO Inc.
Notes to Condensed Unaudited Interim Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)


9
Earnings per Share

The following table summarizes the reconciliation of the basic weighted average number of shares outstanding to the diluted weighted average number of shares outstanding:

   
Three months ended
November 30,
 
   
2018
   
2017
 
             
Basic weighted average number of shares outstanding (000’s)
   
55,184
     
54,805
 
Plus dilutive effect of (000’s):
               
Restricted share units
   
     
813
 
Deferred share units
   
     
175
 
                 
Diluted weighted average number of shares outstanding (000’s)
   
55,184
     
55,793
 
                 
Stock awards excluded from the calculation of the diluted weighted average number of shares outstanding because their exercise price was greater than the average market price of the common shares, or their inclusion would be antidilutive (000’s)
   
1,721
     
124
 

For the three months ended November 30, 2018, the diluted amount per share was the same amount as the basic amount per share since the dilutive effect of restricted share units and deferred share units was not included in the calculation; otherwise, the effect would have been antidilutive. Accordingly, the diluted amount per share for this period was calculated using the basic weighted average number of shares outstanding.


Page 27 of 48



Management's Discussion and Analysis of Financial Condition
and Results of Operations


This discussion and analysis contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, and we intend that such forward-looking statements be subject to the safe harbors created thereby. Forward-looking statements are statements other than historical information or statements of current condition. Words such as may, expect, believe, plan, anticipate, intend, could, estimate, continue, or similar expressions or the negative of such expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events and circumstances are considered forward-looking statements. They are not guarantee of future performance and involve risks and uncertainties. Actual results may differ materially from those in forward-looking statements due to various factors including, but not limited to, macroeconomic uncertainty, including trade wars; our ability to successfully integrate businesses that we acquire; capital spending and network deployment levels in the telecommunications industry (including our ability to quickly adapt cost structures to anticipated levels of business and our ability to manage inventory levels with market demand); future economic, competitive, financial and market conditions; consolidation in the global communications test, monitoring and analytics solutions markets and increased competition among vendors; capacity to adapt our future product offering to future technological changes; limited visibility with regard to the timing and nature of customer orders; delay in revenue recognition due to longer sales cycles for complex systems involving customers’ acceptance; fluctuating exchange rates; concentration of sales; timely release and market acceptance of our new products and other upcoming products; our ability to successfully expand international operations and to conduct business internationally; and the retention of key technical and management personnel. Assumptions relating to the foregoing involve judgments and risks, all of which are difficult or impossible to predict and many of which are beyond our control. Other risk factors that may affect our future performance and operations are detailed in our Annual Report, on Form 20-F, and our other filings with the U.S. Securities and Exchange Commission and the Canadian securities commissions. We believe that the expectations reflected in the forward-looking statements are reasonable based on information currently available to us, but we cannot assure you that the expectations will prove to have been correct. Accordingly, you should not place undue reliance on these forward-looking statements. These statements speak only as of the date of this document. Unless required by law or applicable regulations, we undertake no obligation to revise or update any of them to reflect events or circumstances that occur after the date of this document. This discussion and analysis should be read in conjunction with the consolidated financial statements.

The following discussion and analysis of financial condition and results of operations is dated January 8, 2019.

All financial data are expressed in US dollars, except as otherwise noted, and determined based on International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). This discussion and analysis also contains financial data that do not comply with IFRS. Where such measures are presented, they are defined, and the reader is informed.


COMPANY OVERVIEW AND RECENT DEVELOPMENTS

We are a leading provider of test, monitoring and analytics solutions for fixed and mobile communications service providers (CSPs), web-scale operators and network equipment manufacturers (NEMs) in the global communications industry. Our broad portfolio of intelligent hardware and software solutions enable network transformations related to fiber, 5G and 4G/LTE, virtualization and big data analytics. Ultimately, customers rely on our solutions to increase network capacity and improve quality of experience for end-users, while driving operational efficiencies.


Page 28 of 48



We received two separate innovation-related awards from the Metro Ethernet Forum (MEF) in the first quarter of fiscal 2019. Our software verifier agent, a software solution providing advanced layer-2 to layer-7 testing and end-to-end visibility, received the Technology Solutions Award for Service Assurance from the MEF. We also accepted a Proof of Concept Award from the MEF for our contribution to a collaborative project, named Blade Runner, delivering augmented reality over a 5G wireless network. We covered service assurance by providing virtual probes to enable closed-loop automation and seamless service continuity. We had previously obtained the TMForum Outstanding Catalyst Innovation Award for our involvement in the Blade Runner project. We also expanded our 400G test portfolio with the release of a module featuring an Open Transceiver System. This modular design enables compatibility between current and future high-speed transceivers with our field and lab test platforms. We also introduced an automated fiber inspection tool for testing polarity, continuity and connector cleanliness on multifiber cables.

Our sales, which include the contribution from newly acquired Astellia S.A. (Astellia), increased 9.2% to $69.2 million in the first quarter of fiscal 2019 compared to $63.4 million for the same period last year. Bookings (purchase orders received from customers), which include the contribution from Astellia, increased significantly by 23.3% to $81.2 million in the first quarter of fiscal 2019, for a book-to-bill ratio of 1.17, from $65.9 million for the same period last year. In the first quarter of fiscal 2019, Astellia’s sales and bookings amounted respectively to $7.5 million (or $8.4 million before the $0.9 million adjustment for the acquisition-related deferred revenue fair value) and $7.8 million. Non-IFRS sales, which represent total sales plus acquisition-related deferred revenue fair value adjustment, amounted to $70.1 million in the first quarter of fiscal 2019. See page 42 of this document for a complete reconciliation of non-IFRS sales to IFRS sales.

Net loss amounted to $7.5 million, or $0.14 per share, in the first quarter of fiscal 2019, compared to net earnings of $2.7 million, or $0.05 per diluted share, for the same period last year. Net loss for the first quarter of fiscal 2019 included net expenses totaling $6.3 million, comprising $2.5 million in after-tax amortization of intangible assets, $0.4 million in stock-based compensation costs, $2.7 million in after-tax restructuring charges, $0.9 million for the acquisition-related deferred revenue fair value adjustment, and a foreign exchange gain of $0.2 million. For the same period last year, net earnings included net expenses totaling $0.7 million, comprising $0.9 million in after-tax amortization of intangible assets, $0.4 million in stock-based compensation costs, $0.2 million for positive change in the fair value of the cash contingent consideration, $0.8 million in after-tax acquisition-related costs, and a foreign exchange gain of $1.2 million.

Net loss in the first quarter of fiscal 2019 included $5.1 million for the net loss of newly acquired Astellia, which included $1.8 million in after-tax amortization of acquired intangible assets. Excluding Astellia’s net loss, our net loss would have amounted to $2.4 million, or $0.04 per share in the first quarter of fiscal 2019, which included after-tax restructuring charges of $2.6 million.

Adjusted EBITDA (net earnings (loss) before interest, income taxes, depreciation and amortization, stock-based compensation costs, restructuring charges, acquisition-related deferred revenue fair value adjustment, change in fair value of cash contingent consideration, and foreign exchange gain) reached $2.7 million, or 3.9% of sales, in the first quarter of fiscal 2019, compared to $6.1 million, or 9.6% of sales for the same period last year. Adjusted EBITDA is a non-IFRS measure. See page 42 of this document for a complete reconciliation of adjusted EBITDA to IFRS net earnings (loss).

In September 2018, as part of our fiscal 2018 restructuring plan and the shutdown of our operations in Toronto, Canada, we entered into a binding agreement to sell one of our buildings for net proceeds of $3.2 million. The transfer of ownership is expected to occur in the second quarter of fiscal 2019 and will result in a pre-tax gain of $1.8 million that will be recorded in our consolidated statement of earnings for that quarter.


Page 29 of 48



Forward-looking statements – expected net loss for the first quarter of fiscal 2019

For the three months ended November 30, 2018, we had forecasted our net loss to range between $0.20 and $0.16 per share. Actual net loss per share amounted to $0.14, that is $0.02 lower than the low-end of our net loss range, mainly due to lower than expected restructuring charges during the quarter, as well as higher than expected foreign exchange gain due to more favorable period-end foreign exchange rates. In addition, some planned hiring in the first quarter of 2019 was postponed or cancelled.


Page 30 of 48



RESULTS OF OPERATIONS
(in thousands of US dollars, except per share data, and as a percentage of sales for the periods indicated)
   
Three months ended
November 30,
   
Three months ended
November 30,
 
                         
   
2018
   
2017
   
2018
   
2017
 
             
                         
Sales
 
$
69,201
   
$
63,391
     
100.0
%
   
100.0
%
                                 
Cost of sales (1)
   
28,897
     
23,289
     
41.8
     
36.7
 
Selling and administrative
   
26,375
     
23,193
     
38.1
     
36.6
 
Net research and development
   
15,224
     
11,252
     
22.0
     
17.8
 
Depreciation of property, plant and equipment
   
1,429
     
1,154
     
2.1
     
1.8
 
Amortization of intangible assets