Form 6-K EXFO INC. For: Feb 28

April 11, 2018 11:15 AM EDT

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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 April 2018

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-______.
 
 


 

 
 
 
 
 
 
On April 10, 2018, EXFO Inc., a Canadian corporation, reported its results of operations for the second fiscal quarter ended February 28, 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 second fiscal quarter of the 2018 fiscal year. This press release and information relating to EXFO's financial condition and results of operations and certifications of interim filings for the second fiscal quarter of the 2018 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 55

 
 
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: April 11, 2018
 
Page 2 of 55

 

 
 
 
PRESS RELEASE
For immediate release

EXFO reports second quarter results for fiscal 2018
 
§
Successfully closes acquisition of publicly traded Astellia
§
Sales increase 7.8% to US$64.7 million, including US$1.8 million from Astellia
§
Bookings improve 17.3% to US$65.6 million, including US$2.5 million from Astellia


QUEBEC CITY, CANADA, April 10, 2018 — EXFO Inc. (NASDAQ: EXFO, TSX: EXF), the network test, monitoring and analytics experts, reported today financial results for the second quarter and first half ended February 28, 2018.

Following a successful public tender offer, EXFO achieved majority control of Astellia's share capital on January 26, 2018 and assumed full control of the France-based company on February 28, 2018. Astellia is recognized as a global leader in the performance analysis of mobile networks and subscriber experience.

Sales increased 7.8% year-over-year to US$64.7 million in the second quarter of fiscal 2018 and 5.2% to US$128.1 million at the halfway mark of the fiscal year. Sales, excluding the one-month contribution of Astellia, attained US$62.9 million in the second quarter of 2018 compared to US$60.0 million in the second quarter of 2017. Astellia contributed US$1.8 million in sales in the second quarter and first half of 2018. Astellia's sales were reduced by US$0.3 million to account for acquisition-related fair value adjustment of deferred revenue.

Bookings improved 17.3% year-over-year to US$65.6 million for a book-to-bill ratio of 1.01 in the second quarter of fiscal 2018 and 8.0% to US$131.5 million for a book-to-bill ratio of 1.03 at the halfway mark of the fiscal year. Bookings, excluding the one-month contribution of Astellia, reached US$63.1 million in the second quarter of 2018 compared to US$55.9 million in the same period last year. Astellia contributed US$2.5 million in bookings in the second quarter and first half of 2018.

Gross margin before depreciation and amortization* amounted to 60.9% of sales in the second quarter of fiscal 2018 compared to 61.7% in the second quarter of 2017. Gross margin before depreciation and amortization amounted to 62.1% of sales at the halfway mark of fiscal 2018 compared to 62.4% for the same period in 2017.
 
 
 

 
 
Page 3 of 55

 
 
 
 
IFRS net loss attributable to the parent interest totaled US$4.7 million, or US$0.08 per share, in the second quarter of fiscal 2018 and US$2.0 million, or US$0.04 per share, at the halfway mark of the fiscal year. In comparison, net earnings attributable to the parent interest totaled US$1.0 million, or US$0.02 per diluted share, in the second quarter of 2017 and US$4.3 million, or US$0.08 per diluted share, in the first half of 2017. EXFO's share of Astellia's net loss amounted to US$2.7 million in the second quarter and first half of 2018.

IFRS net loss attributable to the parent interest in the second quarter of 2018 included US$2.7 million in after-tax amortization of intangible assets, US$0.4 million in stock-based compensation costs, US$0.6 million for the positive change in the fair value of the cash contingent consideration related to Ontology Systems, US$1.5 million in after-tax acquisition costs related to Astellia, US$0.3 million for the acquisition-related deferred revenue fair value adjustment, and US$1.5 million in income tax expenses to account for the effects of the recent US tax reform.

IFRS net loss attributable to the parent interest in the first half of 2018 included US$3.6 million in after-tax amortization of intangible assets, US$0.8 million in stock-based compensation costs, US$0.7 million for the positive change in the fair value of the cash contingent consideration related to Ontology Systems, US$2.3 million in after-tax acquisition costs related to Astellia, US$0.3 million for the acquisition-related deferred revenue fair value adjustment, and US$1.5 million in income tax expenses to account for the effects of the recent US tax reform.

Adjusted EBITDA* totaled US$2.5 million, or 3.9% of sales, in the second quarter of 2018 and US$8.6 million, or 6.7% of sales, in the first half of the fiscal year. In comparison, adjusted EBITDA amounted to US$4.9 million, or 8.1% of sales, in the second quarter of 2017 and US$11.2 million, or 9.2% of sales, in the first half of 2017. Astellia negatively affected adjusted EBITDA by US$1.3 million in the second quarter and first half of 2018. In addition, adjusted EBITDA included acquisition-related costs of US$1.4 million in the second quarter of 2018 and US$2.1 million in the first half of the fiscal year.

"I am thrilled with the closing of the Astellia acquisition as it positions EXFO among the top five providers worldwide of service assurance solutions," said Philippe Morin, EXFO's Chief Executive Officer. "Together, we have created a strong critical mass with solutions deployed at more than 250 network operators, while our global sales organizations have been merged to maximize cross-selling opportunities. Similarly, our unique portfolio of complementary technologies will be combined to deliver unmatched capabilities in high-growth markets like NFV/SDN, IoT and 5G. Although this transformative acquisition involves a short-term financial impact, we expect the additional sales volume, cross-selling opportunities, efficiencies as well as complementary technology and service offerings will contribute to earnings growth in fiscal 2019."
 
 
 
 
 
Page 4 of 55

 
 

 
 
"In addition, I am pleased with the strong performance from our Physical-layer product line in the second quarter of 2018," Mr. Morin added. "Despite a seasonally soft reporting period, we delivered robust sales and bookings due to our entrenched leadership position in optical testing and contributions from recent acquisitions."

Selected Financial Information
(In thousands of US dollars)
 
     
Q2 2018
     
Q2 2017
     
H1 2018
     
H1 2017
 
                                 
Physical-layer sales
 
$
43,461
   
$
38,038
   
$
85,974
   
$
80,054
 
Protocol-layer sales
   
20,880
     
22,097
     
41,521
     
42,106
 
Foreign exchange gains (losses) on forward exchange contracts
   
381
     
(105
)
   
618
     
(345
)
Total sales
 
$
64,722
   
$
60,030
   
$
128,113
   
$
121,815
 
                                 
Physical-layer bookings
 
$
41,431
   
$
34,031
   
$
89,783
   
$
78,121
 
Protocol-layer bookings
   
23,774
     
21,992
     
41,064
     
44,001
 
Foreign exchange gains (losses) on forward exchange contracts
   
381
     
(105
)
   
618
     
(345
)
Total bookings
 
$
65,586
   
$
55,918
   
$
131,465
   
$
121,777
 
Book-to-bill ratio (bookings/sales)
   
1.01
     
0.93
     
1.03
     
1.00
 
Gross margin before depreciation and amortization*
 
$
39,396
   
$
37,041
   
$
79,498
   
$
76,013
 
     
60.9
%
   
61.7
%
   
62.1
%
   
62.4
%
                                 
Other selected information:
                               
IFRS net earnings (loss) attributable to the parent interest
 
$
(4,660
)
 
$
1,008
   
$
(1,981
)
 
$
4,311
 
Amortization of intangible assets
 
$
3,056
   
$
768
   
$
4,175
   
$
1,195
 
Stock-based compensation costs
 
$
438
   
$
353
   
$
840
   
$
611
 
Change in fair value of cash contingent consideration
 
$
(561
)
 
$
   
$
(716
)
 
$
 
Acquisition-related deferred revenue fair value adjustment
 
$
309
   
$
   
$
309
   
$
 
Income tax expense for US tax reform
 
$
1,528
   
$
   
$
1,528
   
$
 
Net income tax effect of the above items
 
$
(394
)
 
$
(162
)
 
$
(566
)
 
$
(226
)
Foreign exchange (gain) loss
 
$
(8
)
 
$
272
   
$
(1,226
)
 
$
(240
)
Adjusted EBITDA*
 
$
2,492
   
$
4,875
   
$
8,551
   
$
11,196
 

 
 
 
Page 5 of 55

 
 

 
 
Operating Expenses
Selling and administrative expenses totaled US$24.9 million, or 38.5% of sales in the second quarter of fiscal 2017 compared to US$21.3 million, or 35.4% of sales, in the same period last year. At the halfway mark of fiscal 2018, selling and administrative expenses amounted to US$48.1 million, or 37.6% of sales, compared to US$42.9 million, or 35.2% of sales, in the first half of 2017.
 
Net R&D expenses totaled US$13.1 million, or 20.2% of sales, in the second quarter of fiscal 2018 compared to US$11.3 million, or 18.8% of sales, in the second quarter of 2017. At the halfway mark of fiscal 2018, net R&D expenses amounted to US$24.3 million, or 19.0% of sales, compared to US$22.6 million, or 18.5% of sales, in the first half of 2017.

Second-Quarter Highlights
·
Sales. Sales increased 7.8% year-over-year due to a solid performance of the Physical-layer product line, revenue contributions from the Astellia, Yenista Optics and Ontology Systems acquisitions, and the positive impact of the decrease in the average value of the US dollar versus other currencies. Physical-layer sales accounted for 68% of total revenue in the second quarter of 2018, while Protocol-layer sales totaled 32%. Revenue distribution among the three main selling regions amounted to 49% in the Americas, 33% in Europe, Middle East and Africa (EMEA) and 18% in Asia-Pacific EXFO's top customer accounted for 9.6% of sales, while the top three represented 16.9%.
 
·
Profitability. IFRS net loss attributable to the parent interest totaled US$4.7 million in the second quarter of 2018, while adjusted EBITDA amounted to US$2.5 million. The company also generated US$6.3 million in cash flows from operations in the second quarter.
 
·
Innovation. EXFO unveiled two key solutions in preparation for Mobile World Congress and Optical Fiber Conference, high-profile industry events held during and after the quarter-end. Major product introductions included SkyRAN, a scalable remote access monitoring solution for fiber-based fronthaul networks. Developed in collaboration with tier-1 mobile network operators, SkyRAN provides real-time, on-demand testing and 24/7 monitoring of optical networks and radio frequency spectrum. EXFO also introduced the CTP10 Component Test Platform with related modules, the fastest test system on the market for measuring insertion loss and return loss on a wide variety of passive optical components, including photonics integrated circuits.
 
Business Outlook
EXFO forecasts IFRS sales between US$68.0 million and US$73.0 million for the third quarter of fiscal 2018; the company anticipates that IFRS sales will be reduced by US$0.9 million to account for the acquisition-related fair value adjustment of deferred revenue.
 
 
 
Page 6 of 55

 

 
 
IFRS net loss is expected to range between US$0.19 and US$0.15 per share. IFRS net loss includes US$0.09 per share in after-tax amortization of intangible assets and stock-based compensation costs.

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, Astellia's preliminary purchase price allocation (PPA) as well as exchange rates as of the day of this news release.

Conference Call and Webcast
EXFO will host a conference call today at 5 p.m. (Eastern time) to review second quarter results for fiscal 2018. To listen to the conference call and participate in the question period via telephone, dial 1-323-794-2551. Please take note the following participant passcode will be required: 9600577. Germain Lamonde, founder and Executive Chairman, Philippe Morin, Chief Executive Officer, and Pierre Plamondon, Vice-President of Finance and Chief Financial Officer, will participate in the call. An audio replay of the conference call will be available two hours after the event until 8:00 p.m. on April 17, 2018. The replay number is 1-719-457-0820 and the required participant passcode is 9600577. 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 develops smarter network test, monitoring and analytics solutions for the world's leading communications service providers, network equipment manufacturers and webscale companies. Since 1985, we've worked side by side with our customers in the lab, field, data center, boardroom and beyond to pioneer essential technology and methods for each phase of the network lifecycle. Our portfolio of test orchestration and real-time 3D analytics solutions turns complex into simple and delivers business-critical insights from the network, service and subscriber dimensions. Most importantly, we help our customers flourish in a rapidly transforming industry where "good enough" testing, monitoring and analytics just aren't good enough anymore—they never were for us, anyway. For more information, visit EXFO.com and follow us on the EXFO Blog.
 

 
Page 7 of 55

 
 

 
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 guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in forward-looking statements due to various factors including, but not limited to, macroeconomic uncertainty as well as 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; our ability to successfully integrate businesses that we acquire; 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.
 
 
 
Page 8 of 55

 
 
 

*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 less 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) attributable to the parent interest before interest, income taxes, depreciation and amortization, stock-based compensation costs, change in fair value of cash contingent consideration, acquisition-related deferred revenue fair value adjustment, share in net loss of an associate, gain on the deemed disposal of the investment in an associate, 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
     
Q2 2018
     
Q2 2017
     
H1 2018
     
H1 2017
 
                                 
IFRS sales
 
$
64,722
   
$
60,030
   
$
128,113
   
$
121,815
 
Acquisition-related deferred revenue fair value adjustment
   
309
   
     
309
   
 
Non-IFRS sales
 
$
65,031
   
$
60,030
   
$
128,422
   
$
121,815
 

 
 
Page 9 of 55

 
 

 

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

Adjusted EBITDA

     
Q2 2018
     
Q2 2017
     
H1 2018
     
H1 2017
 
                                 
IFRS net earnings (loss) attributable to the parent interest for the period
 
$
(4,660
)
 
$
1,008
   
$
(1,981
)
 
$
4,311
 
                                 
Add (deduct):
                               
                                 
Depreciation of property, plant and equipment
   
1,263
     
962
     
2,417
     
1,865
 
Amortization of intangible assets
   
3,056
     
768
     
4,175
     
1,195
 
Interest and other (income) expense
   
334
     
(9
)
   
672
     
(29
)
Income taxes
   
2,321
     
1,521
     
4,061
     
3,483
 
Stock-based compensation costs
   
438
     
353
     
840
     
611
 
Change in fair value of cash contingent consideration
   
(561
)
 
     
(716
)
 
 
Acquisition-related deferred revenue fair value adjustment
   
309
   
     
309
   
 
Share in net loss of an associate
   
2,080
   
     
2,080
   
 
Gain on the deemed disposal of the investment in an associate
   
(2,080
)
 
     
(2,080
)
 
 
Foreign exchange (gain) loss
   
(8
)
   
272
     
(1,226
)
   
(240
)
Adjusted EBITDA for the period (1)(2)
 
$
2,492
   
$
4,875
   
$
8,551
   
$
11,196
 
                                 
Adjusted EBITDA in percentage of sales
   
3.9
%
   
9.6
%
   
6.7
%
   
9.2
%

(1)
Astellia negatively impacted adjusted EBITDA by $1.3 million for Q2 2018 and S1 2018 (nil for Q2 2017 and S1 2017)
(2)
Includes acquisition-related costs of $1.4 million for Q2 2018 and $2.1 million for S1 2018 ($0.6 million in Q2 2017 and $0.7 million for S1 2017)

EXFO-F

-30-

For more information
Vance Oliver
Director, Investor Relations
(418) 683-0913, Ext. 23733
vance.oliver@exfo.com
 
 
 
 
Page 10 of 55

 
 
EXFO Inc.
Unaudited Condensed Interim Consolidated Balance Sheets
 
(in thousands of US dollars)
 
 
   
As at
February 28,
2018
   
As at
August 31,
2017
 
Assets
           
             
Current assets
           
Cash
 
$
12,553
   
$
38,435
 
Short-term investments
   
1,022
     
775
 
Accounts receivable
               
Trade
   
49,837
     
41,130
 
Other
   
5,173
     
3,907
 
Income taxes and tax credits recoverable
   
9,261
     
4,955
 
Inventories
   
39,439
     
33,832
 
Prepaid expenses
   
5,253
     
4,202
 
Other assets
   
1,512
   
 
     
124,050
     
127,236
 
                 
Tax credits recoverable
   
47,615
     
38,111
 
Property, plant and equipment
   
44,182
     
40,132
 
Intangible assets
   
32,567
     
11,183
 
Goodwill
   
41,725
     
35,077
 
Deferred income tax assets
   
4,754
     
6,555
 
Other assets
   
852
     
947
 
                 
   
$
295,745
   
$
259,241
 
Liabilities
               
                 
Current liabilities
               
Bank loan (note 6)
 
$
2,000
   
$
 
Accounts payable and accrued liabilities
   
52,946
     
36,776
 
Provisions
   
466
     
3,889
 
Income taxes payable
   
689
     
663
 
Deferred revenue
   
18,626
     
11,554
 
Other liabilities
   
4,860
   
 
Current portion of long-term debt (note 7)
   
3,021
   
 
     
82,608
     
52,882
 
                 
Provisions
   
1,579
   
 
Deferred revenue
   
5,544
     
6,257
 
Long-term debt (note 7)
   
7,675
   
 
Deferred income tax liabilities
   
5,156
     
3,116
 
Other liabilities
   
544
     
196
 
     
103,106
     
62,451
 
                 
Shareholders' equity
               
Share capital (note 8)
   
91,684
     
90,411
 
Contributed surplus
   
17,767
     
18,184
 
Retained earnings
   
124,827
     
127,160
 
Accumulated other comprehensive loss
   
(41,639
)
   
(38,965
)
     
192,639
     
196,790
 
                 
   
$
295,745
   
$
259,241
 
 
 
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
 
Page 11 of 55

 
 
EXFO Inc.
Unaudited Condensed Interim Consolidated Statements of Earnings
 
(in thousands of US dollars, except share and per share data)
 
 
   
Three months
ended
February 28,
2018
   
Six months
ended
February 28,
2018
   
Three months
ended
February 28,
2017
   
Six months
ended
February 28,
2017
 
                         
Sales
 
$
64,722
   
$
128,113
   
$
60,030
   
$
121,815
 
                                 
Cost of sales (1) (note 9)
   
25,326
     
48,615
     
22,989
     
45,802
 
Selling and administrative (note 9)
   
24,916
     
48,109
     
21,255
     
42,850
 
Net research and development (note 9)
   
13,087
     
24,339
     
11,264
     
22,578
 
Depreciation of property, plant and equipment (note 9)
   
1,263
     
2,417
     
962
     
1,865
 
Amortization of intangible assets (note 9)
   
3,056
     
4,175
     
768
     
1,195
 
Change in fair value of cash contingent consideration (note 5)
   
(561
)
   
(716
)
 
   
 
Interest and other (income) expense
   
334
     
672
     
(9
)
   
(29
)
Foreign exchange (gain) loss
   
(8
)
   
(1,226
)
   
272
     
(240
)
Share in net loss of an associate (note 3)
   
2,080
     
2,080
   
   
 
Gain on deemed disposal of the investment in an associate (note 3)
   
(2,080
)
   
(2,080
)
 
   
 
Earnings (loss) before income taxes
   
(2,691
)
   
1,728
     
2,529
     
7,794
 
                                 
Income taxes (note 10)
   
2,321
     
4,061
     
1,521
     
3,483
 
                                 
Net earnings (loss) for the period
   
(5,012
)
   
(2,333
)
   
1,008
     
4,311
 
Net loss for the period attributable to non-controlling interest
   
(352
)
   
(352
)
 
   
 
                                 
Net earnings (loss) for the period attributable to parent interest
 
$
(4,660
)
 
$
(1,981
)
 
$
1,008
   
$
4,311
 
                                 
Basic and diluted net earnings (loss) attributable to parent interest per share
 
$
(0.08
)
 
$
(0.04
)
 
$
0.02
   
$
0.08
 
                                 
Basic weighted average number of shares outstanding (000's)
   
54,975
     
54,890
     
54,506
     
54,195
 
                                 
Diluted weighted average number of shares outstanding (000's) (note 11)
   
54,975
     
54,890
     
55,681
     
55,341
 

(1)
The cost of sales is exclusive of depreciation and amortization, shown separately.
 
 
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
 
 
Page 12 of 55

 
 
EXFO Inc.
Unaudited Condensed Interim Consolidated Statements of Comprehensive Income (Loss)
 
(in thousands of US dollars)
 
 
   
Three months
ended
February 28,
2018
   
Six months
ended
February 28,
2018
   
Three months
ended
February 28,
2017
   
Six months
ended
February 28,
2017
 
                         
Net earnings (loss) for the period
 
$
(5,012
)
 
$
(2,333
)
 
$
1,008
   
$
4,311
 
Other comprehensive income (loss), net of income taxes
                               
Items that may be reclassified subsequently to net earnings
                               
Foreign currency translation adjustment
   
2,286
     
(1,844
)
   
2,019
     
(2,198
)
Unrealized gains/losses on forward exchange contracts
   
39
     
(485
)
   
326
     
(235
)
Reclassification of realized gains/losses on forward exchange contracts in net earnings
   
(225
)
   
(608
)
   
139
     
320
 
Deferred income taxes on gains/losses on forward exchange contracts
   
48
     
263
     
(100
)
   
(8
)
Other comprehensive income (loss)
   
2,148
     
(2,674
)
   
2,384
     
(2,121
)
                                 
Comprehensive income (loss) for the period
   
(2,864
)
   
(5,007
)
   
3,392
     
2,190
 
                                 
Comprehensive loss for the period attributable to non-controlling interest
   
(352
)
   
(352
)
 
   
 
                                 
Comprehensive income (loss) for the period attributable to parent interest
 
$
(2,512
)
 
$
(4,655
)
 
$
3,392
   
$
2,190
 
                                 
 
 
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
 
Page 13 of 55

 
 
EXFO Inc.
Unaudited Condensed Interim Consolidated Statements of Changes in Shareholders' Equity
 
(in thousands of US dollars)
 
 
   
Six months ended February 28, 2017
 
   
Share
capital
   
Contributed surplus
   
Retained earnings
   
Accumulated other comprehensive loss
   
Total
shareholders' equity
 
                               
Balance as at September 1, 2016
 
$
85,516
   
$
18,150
   
$
126,309
   
$
(48,574
)
 
$
181,401
 
Issuance of share capital (note 8)
   
3,490
     
     
     
     
3,490
 
Reclassification of stock-based compensation costs (note 8)
   
835
     
(835
)
   
     
     
 
Stock-based compensation costs
   
     
528
     
     
     
528
 
Net earnings for the period
   
     
     
4,311
     
     
4,311
 
Other comprehensive income (loss)
                                       
Foreign currency translation adjustment
   
     
     
     
(2,198
)
   
(2,198
)
Changes in unrealized gains/losses on forward exchange contracts, net of deferred income taxes of $8
   
     
     
     
77
     
77
 
                                         
Comprehensive income for the period
                                   
2,190
 
                                         
Balance as at February 28, 2017
 
$
89,841
   
$
17,843
   
$
130,620
   
$
(50,695
)
 
$
187,609
 
 
 
   
Six months ended February 28, 2018
 
   
Share
capital
   
Contributed surplus
   
Retained earnings
   
Accumulated other comprehensive loss
   
Non-controlling interest
   
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 8)
   
1,273
     
(1,273
)
 
   
   
   
 
Stock-based compensation costs
 
     
856
   
   
   
     
856
 
Business combination (note 3)
 
   
   
   
     
(3,662
)
   
(3,662
)
Acquisition of non-controlling
interest (note 3)
 
   
     
(352
)
 
     
4,014
     
3,662
 
Net loss for the period
 
   
     
(1,981
)
 
     
(352
)
   
(2,333
)
Other comprehensive loss
                                               
Foreign currency translation adjustment
 
   
   
     
(1,844
)
 
     
(1,844
)
Changes in unrealized gains/losses on forward exchange contracts, net of deferred income taxes of $263
 
   
   
     
(830
)
 
     
(830
)
                                                 
Comprehensive loss for the period
                                           
(5,007
)
                                                 
Balance as at February 28, 2018
 
$
91,684
   
$
17,767
   
$
124,827
   
$
(41,639
)
 
$
   
$
192,639
 
 
 
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
 
Page 14 of 55

 
 
EXFO Inc.
Unaudited Condensed Interim Consolidated Statements of Cash Flows
 
(in thousands of US dollars)
 
 
   
Three months
ended
February 28,
2018
   
Six months
ended
February 28,
2018
   
Three months
ended
February 28,
2017
   
Six months
ended
February 28,
2017
 
                         
Cash flows from operating activities
                       
Net earnings (loss) for the period
 
$
(5,012
)
 
$
(2,333
)
 
$
1,008
   
$
4,311
 
Add (deduct) items not affecting cash
                               
Stock-based compensation costs
   
438
     
840
     
353
     
611
 
Depreciation and amortization
   
4,319
     
6,592
     
1,730
     
3,060
 
Write-off of capital assets
   
124
     
248
     
     
 
Change in fair value of cash contingent consideration
   
(561
)
   
(716
)
   
     
 
Deferred revenue
   
3,016
     
2,234
     
3,022
     
2,947
 
Deferred income taxes
   
2,384
     
2,144
     
312
     
459
 
Share in net loss of an associate
   
2,080
     
2,080
     
     
 
Gain on deemed disposal of the investment in an associate
   
(2,080
)
   
(2,080
)
   
     
 
Changes in foreign exchange gain/loss
   
611
     
364
     
107
     
(431
)
     
5,319
     
9,373
     
6,532
     
10,957
 
Changes in non-cash operating items
                               
Accounts receivable
   
4,255
     
5,340
     
5,160
     
2,602
 
Income taxes and tax credits
   
(3,018
)
   
(2,959
)
   
(46
)
   
(390
)
Inventories
   
779
     
(1,174
)
   
924
     
(324
)
Prepaid expenses
   
(129
)
   
189
     
(156
)
   
102
 
Other assets
   
(528
)
   
(524
)
   
(37
)
   
(24
)
Accounts payable, accrued liabilities and provisions
   
(447
)
   
(1,816
)
   
2,011
     
586
 
Other liabilities
   
22
     
210
     
1
     
1
 
     
6,253
     
8,639
     
14,389
     
13,510
 
Cash flows from investing activities
                               
Additions to short-term investments
   
(248
)
   
(482
)
   
(20
)
   
(316
)
Proceeds from disposal and maturity of short-term investments
   
234
     
234
     
298
     
298
 
Purchases of capital assets
   
(2,258
)
   
(4,249
)
   
(1,656
)
   
(2,893
)
Investment in an associate (note 3)
   
(2,219
)
   
(12,530
)
   
     
 
Business combinations, net of cash acquired (note 3)
   
(9,580
)
   
(19,120
)
   
     
(5,000
)
     
(14,071
)
   
(36,147
)
   
(1,378
)
   
(7,911
)
Cash flows from financing activities
                               
Bank loan
   
2,064
     
2,066
     
     
 
Repayment of long-term debt
   
(200
)
   
(270
)
   
     
 
     
1,864
     
1,796
     
     
 
                                 
Effect of foreign exchange rate changes on cash
   
56
     
(170
)
   
271
     
(464
)
                                 
Change in cash during the period
   
(5,898
)
   
(25,882
)
   
13,282
     
5,135
 
Cash – Beginning of the period
   
18,451
     
38,435
     
35,061
     
43,208
 
Cash – End of the period
 
$
12,553
   
$
12,553
   
$
48,343
   
$
48,343
 
                                 
Supplementary information
                               
Income taxes paid
 
$
587
   
$
1,269
   
$
603
   
$
1,561
 
Additions to capital assets
 
$
2,699
   
$
5,588
   
$
2,483
   
$
3,662
 

As at February 28, 2017 and 2018, unpaid purchases of capital assets amounted to $1,268 and $1,861 respectively.
 
 
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
 
Page 15 of 55

 
 
EXFO Inc.
Notes to Unaudited Condensed 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 next-generation 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, Québec City, Quebec, Canada, G1M 2K2.

These condensed unaudited interim consolidated financial statements were authorized for issue by the Board of Directors on April 10, 2018.


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 in note 3. 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.

New IFRS Pronouncements Not Yet Adopted

Financial Instruments

The final version of IFRS 9, "Financial Instruments", was issued in July 2014 and will replace 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 will adopt this new standard on September 1, 2018. The company is currently assessing the impact that the new standard will have on its consolidated financial statements.

 
Page 16 of 55

 
 
EXFO Inc.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)

 
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 will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize 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. Early adoption is permitted. The company has performed an assessment to identify significant areas of impact, if any, between the company's current accounting treatment under IAS 18, "Revenue" and the new requirements of IFRS 15. Based on the assessments to date, the company anticipates that the main areas of impact will relate to the allocation of the transaction price to the various performance obligations under the contracts, the timing of revenue recognition for sales arrangements that contain customer acceptance clauses, whereby revenue could be recognized sooner, and the sale of licences that provides customers with the "right to use" the company's intellectual property, where revenue will be recognized at a point in time rather than over time. The company will adopt this new standard on September 1, 2018 using the modified retrospective method, with the cumulative effect of the initial application of the standard recognized as an adjustment to the opening balance of retained earnings as at the date of initial application. The company will apply this standard retrospectively only to contracts that are not completed at the date of initial application.

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, with earlier adoption permitted if IFRS 15, "Revenue from Contracts with Customers", is also applied. The company has not yet assessed the impact that the new standard will have on its 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. Early adoption is permitted. The company will adopt this interpretation on September 1, 2018 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.
 
 
 
Page 17 of 55

 
 
EXFO Inc.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 

3
Business Combinations

Astellia S.A. (business combination achieved in stages)

On September 8, 2017, the company acquired a 33.1% interest in Astellia S.A. (Astellia), a publicly traded company on the NYSE Euronext Paris stock exchange. Astellia is a provider of network and subscriber intelligence enabling mobile operators to drive service quality, maximize operational efficiency, reduce churn and increase revenue. Its vendor-independent, real-time monitoring and troubleshooting solution is used to optimize networks end-to-end from radio to core. The purchase price amounted €10 per share for a total cash consideration of €8,567,500 (US$10,311,100).

On October 10, 2017, the company reached an agreement with Astellia to acquire Astellia's remaining shares, at a share price of €10, for total consideration of €17,321,380 (US$21,357,500) by way of a public tender offer. The public offering opened on December 15, 2017 and closed on January 26, 2018.

On December 21 and 22, 2017, the company acquired additional interests of 6.0% and 1.2% respectively in Astellia at a purchase price of €10 per share for a total cash consideration of €1,878,610 (US$2,218,600), which brought the company's investment in Astellia to 40.3%.

On January 26, 2018, upon the closing of the public tender offer, the company acquired additional interest of 48.1% in Astellia at a purchase price of €10 per share for a total cash consideration of €12,452,090 (US$15,476,900), which brought the company's investment in Astellia to 88.4% and provided the company with the control over Astellia.

The company re-opened the public tender offer to acquire the remaining shares of Astellia from February 9, 2018 to February 22, 2018. During that period, the company acquired an additional interest of 8.9% in Astellia at a purchase price of €10 per share for a total cash consideration of €2,318,530 (US$2,841,400), which brought the company's investment in Astellia to 97.3%. That amount was unpaid as at February 28, 2018.

Finally, on February 28, 2018, the company entered into a squeeze-out process to acquire the remaining 2.7% interest in Astellia at a share price of €10, for total cash consideration of €672,150 (US$820,600). The binding terms of the squeeze-out process gave the company control over Astellia's remaining shares as at February 28, 2018 and consequently, as of that date, the company controlled 100% of Astellia's shares. That amount was unpaid as at February 28, 2018.

The fair value of the total consideration paid for all shares of Astellia amounted to €25,888,880 (US$32,137,800) and consisted of €21,102,880 (US$26,241,000) in cash, net of Astellia's cash of €4,786,000 (US$5,896,800) at the date of acquisition of control.

From September 8, 2017 to January 25, 2018, the investment in Astellia provided the company with a significant influence over Astellia, and it was therefore accounted for under the equity method as required by IAS 28, "Investments in Associates and Joint Ventures". Under this method, on initial recognition, this investment was recognized at cost, and the carrying amount increased or decreased to recognize the company's share of the profit or loss of Astellia after the acquisition date. Included in the statements of earnings for the three and the six months ended February 28, 2018 is an equity loss pick-up of $2,079,800.
 

 
Page 18 of 55

 
 
EXFO Inc.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 
 
Since January 26, 2018, the acquisition of Astellia has been considered a business combination and the acquisition was accounted for by applying the acquisition method as required by IFRS 3, "Business Combinations", and the requirements of IFRS 10, "Consolidated Financial Statements"; consequently, the fair value of the total consideration was allocated to the assets acquired and liabilities assumed based on management's preliminary estimate of their fair value as at the acquisition date. The results of operations of the acquired business were included in the consolidated financial statements of the company since January 26, 2018, being the acquisition date. The company recognised the non-controlling interest in Astellia at fair value. At the acquisition date, the carrying value of the 40.3% interest in Astellia held prior to the business combination was re-measured at fair value, that is €10 per share, and was deemed to have been disposed of on that date. This acquisition-date re-measurement and deemed disposal resulted in a gain of $2,079,800 that was accounted for in the statements of earnings for the three and the six months ended February 28, 2018.
 
In addition, upon the successive acquisitions of the non-controlling interest in February 2018, the company recorded a gain in the amount of $352,000 in the shareholders' equity, representing the excess of the carrying value of the non-controlling interest and the purchase price paid.

Astellia's sales and net loss attributable to the parent interest for the three months and the six months ended February 28, 2018 amounted to $1,832,000 and $2,651,000 respectively. The disclosure of sales and net earnings of the combined entities for the three months and the six months ended February 28, 2018 as if the acquisition had occurred on September 1, 2017 was impracticable because the acquisition was closed near the end of the quarter and because certain information required to prepare such information was not available.

The fair value of the total consideration was allocated based on a preliminary estimate of fair value of acquired net assets at the date of acquisition as follows:

Assets acquired
     
Accounts receivable
 
$
15,877
 
Income taxes and tax credits recoverable
   
11,259
 
Inventories
   
3,045
 
Prepaid expenses
   
1,229
 
Property, plant and equipment
   
1,944
 
Intangible assets
   
19,150
 
Other assets
   
1,402
 
     
53,906
 
Liabilities assumed
       
Accounts payable and accrued liabilities
   
10,571
 
Deferred revenue
   
4,748
 
Long-term debt (note 7)
   
8,888
 
Other liabilities
   
6,715
 
Net identifiable assets acquired
   
22,984
 
         
Goodwill
   
3,257
 
Fair value of the total consideration, net of cash acquired
 
$
26,241
 

The fair value of the total consideration, net of cash acquired, consisted of the following at the acquisition date:

Cash paid net of cash acquired
 
$
9,580
 
Fair value of shares held
   
12,967
 
Non-controlling interest
   
3,694
 
   
$
26,241
 
 
 
Page 19 of 55

 
 
EXFO Inc.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 

As at February 28, 2018, the unpaid portion of total consideration amounted to $3,651,000 and was included in accounts payable and accrued liabilities.

The estimated fair value of accounts receivable amounted to $15,877,000 as at January 26, 2018. The gross contractual amount of accounts receivable amounted to $ 18,261,000 as at January 26, 2018. The estimate at the acquisition date of the gross contractual cash flows not expected to be collected amounted to $2,384,000.

Acquired intangible assets, which mainly comprise core technologies and customer relationships, are amortized on a straight-line basis over their estimated useful lives of one to five years.

Acquired goodwill mainly represents synergies with the company's products as well as Astellia's acquired workforce. Acquired goodwill is not deductible for tax purposes. Goodwill is allocated to the Astellia cash-generating unit.

The allocation of the fair value of the total consideration is preliminary because the acquisition was closed during the quarter and because certain information required to complete the final allocation remains outstanding. The company expects to complete the final allocation for this acquisition in the fourth quarter of fiscal 2018. Assets acquired and liabilities assumed that are likely to change upon completing a more detailed valuation and the finalization of the allocation are comprised of accounts receivable, intangible assets, goodwill, deferred revenue and related deferred income taxes.

The functional currency of Astellia is the euro and as such it is considered a foreign operation. The financial statements of Astellia were translated into Canadian dollars as follows: assets and liabilities were translated at the exchange rate in effect on the date of the balance sheet; revenue and expenses were translated at the monthly average exchange rate. The foreign currency translation adjustment arising from such translation was included in accumulated other comprehensive income in shareholders' equity.

Yenista Optics S.A.S.

On October 2, 2017, the company acquired all issued and outstanding shares of Yenista Optics S.A.S. (Yenista), a privately held company located in France, and a supplier of advanced optical test equipment for the research and development and manufacturing markets. The acquisition-date fair value of the total consideration amounted to €9,400,000 (US$11,052,000) and consisted of €8,114,000 (US$9,540,000) in cash, net of Yenista's cash of €1,286,000 (US$1,512,000) at the acquisition date.

This acquisition was accounted for by applying the acquisition method as required by IFRS 3, "Business Combinations", and the requirements of IFRS 10, "Consolidated Financial Statements"; consequently, the fair value of the total consideration was allocated to the assets acquired and liabilities assumed based on management's preliminary estimate of their fair value as at the acquisition date. The results of operations of the acquired business were included in the consolidated financial statements of the company since October 2, 2017, being the acquisition date.

 
Page 20 of 55

 
 
EXFO Inc.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 

The fair value of the total consideration was allocated based on the fair value of acquired net assets at the date of acquisition as follows:

Assets acquired
     
Accounts receivable
 
$
1,889
 
Inventories
   
2,384
 
Property, plant and equipment
   
1,424
 
Core technologies
   
3,686
 
Customer relationships
   
811
 
In-process research and development
   
305
 
Other intangible assets
   
132
 
Prepaid expenses
   
171
 
     
10,802
 
Liabilities assumed
       
Accounts payable and accrued liabilities
   
1,035
 
Long-term debt (note 7)
   
2,143
 
Deferred income taxes
   
1,510
 
Net identifiable assets acquired
   
6,114
 
Goodwill
   
3,426
 
Fair value of the total consideration, net of cash acquired
 
$
9,540
 

Acquired intangible assets are amortized on a straight-line basis over their estimated useful life of two to five years for core technologies and six months for customer relationships. In-process research and development is an indefinite-lived intangible asset until the underlying research and development project is completed. It will be amortized on a straight-line basis over its estimated useful life when the project will be completed.

Acquired goodwill mainly represents synergies with the company's products as well as Yenista's acquired workforce. Acquired goodwill is not deductible for tax purposes. Goodwill is allocated to the Yenista cash-generating unit.

During the second quarter of fiscal 2018, the company completed the detailed valuation and finalized the allocation of the purchase price; this resulted in a decrease of $120,000 in inventories, an increase of $1,560,000 in intangible assets, an increase of $350,000 in deferred income tax liabilities and a corresponding decrease of $1,090,000 in goodwill.

The functional currency of Yenista is the euro, and, as such, it is considered a foreign operation. The financial statements of Yenista were translated into Canadian dollars as follows: assets and liabilities were translated at the exchange rate in effect on the date of the balance sheet; revenue and expenses were translated at the monthly average exchange rate. The foreign currency translation adjustment arising from such translation was included in accumulated other comprehensive income in shareholders' equity.
 

 
Page 21 of 55

 
 
EXFO Inc.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 

The following table summarizes changes in goodwill during the three months and six months ended February 28, 2018:

   
Three months
ended
February 28,
2018
   
Six months
ended
February 28,
2018
 
             
Balance – Beginning of the period
 
$
39,204
   
$
35,077
 
Business combinations
   
2,167
     
6,683
 
Foreign currency translation adjustment
   
354
     
(35
)
                 
Balance – End of the period
 
$
41,725
   
$
41,725
 


4
Restructuring Charges

In fiscal 2017, the company implemented a restructuring plan to streamline its passive monitoring solutions portfolio.

The following table summarizes changes in restructuring charges payable during the three months and six months ended February 28, 2018:

   
Three months
ended
February 28,
2018
   
Six months
ended
February 28,
2018
 
             
Balance – Beginning of the period
 
$
1,036
   
$
2,477
 
Payments
   
(827
)
   
(1,912
)
Reversal
   
(19
)
   
(375
)
                 
Balance – End of the period
 
$
190
   
$
190
 


5
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
 
 
Page 22 of 55

 
 
EXFO Inc.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 

The company's short-term investments, forward exchange contracts and contingent liability 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 company's contingent liability is classified within Level 3 of the fair value hierarchy because it is valued using unobservable inputs such as expected future sales of Ontology Partners Limited.

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 February 28, 2018
   
As at August 31, 2017
 
   
Level 1
   
Level 2
   
Level 3
   
Level 1
   
Level 2
   
Level 3
 
  Financial assets
                                   
  Short-term investments
 
$
1,022
   
$
   
$
   
$
775
   
$
   
$
 
  Forward exchange contracts
 
$
   
$
1,157
   
$
   
$
   
$
2,258
   
$
 
                                                 
  Financial liabilities
                                               
  Contingent liability
 
$
   
$
   
$
453
   
$
   
$
   
$
1,092
 
  Forward exchange contracts
 
$
   
$
120
   
$
   
$
   
$
   
$
 
 
During the three months and six months ended February 28, 2018, the fair value of the contingent liability decreased by $561,000 and $716,000 respectively, which was recorded in the consolidated statements of earnings for these periods.

Derivative Financial Instruments

The functional currency of the company is the Canadian dollar. The company is exposed to currency risk because of its export sales of products manufactured in Canada, China 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 because 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.

As at February 28, 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
 
               
 
March 2018 to August 2018
 
$
14,500
     
1.3180
 
 
September 2018 to August 2019
   
20,400
     
1.3078
 
 
September 2019 to August 2020
   
2,400
     
1.2490
 
 
September 2020 to November 2020
   
600
     
1.2446
 
 
Total
 
$
37,900
     
1.3070
 
 
 
Page 23 of 55

 
 
EXFO Inc.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)


US dollars – Indian rupees

 
Expiry dates
 
Contractual
amounts
   
Weighted average
contractual forward rates
 
               
 
March 2018 to August 2018
 
$
1,200
     
67.77
 
 
September 2018 to May 2019
   
4,600
     
67.68
 
 
Total
 
$
5,800
     
67.70
 
 
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 gains of $2,258,000 as at August 31, 2017, and $1,037,000 as at February 28, 2018.

As at February 28, 2018, forward exchange contracts in the amount of $1,016,000 are presented as current assets in other accounts receivable; forward exchange contracts in the amount of $141,000 are presented as long-term assets in other long-term assets in the consolidated balance sheet; and forward exchange contracts in the amount of $120,000 are presented as current liabilities in accounts payable and accrued liabilities. Forward exchange contracts of $149,000 included in accounts receivable, for which related hedged sales are recognized, are recorded in the consolidated statements of earnings; otherwise, other forward exchange contracts are not yet recorded in the consolidated statements of earnings and are recorded in other comprehensive income.

Based on its portfolio of forward exchange contracts as at February 28, 2018, the company estimates that the portion of the net unrealized gains on these contracts as of that date, which will be realized and reclassified from accumulated other comprehensive income to net earnings (sales) over the next 12 months, amounts to $747,000.

For the three and six months ended February 28, 2018 and 2017, the company recognized within its sales the following foreign exchange gains or losses on forward exchange contracts:

   
Three months
ended
February 28,
2018
   
Six months
ended
February 28,
2018
   
Three months
ended
February 28,
2017
   
Six months
ended
February 28,
2017
 
                         
Gains (losses) on forward exchange contracts
 
$
381
   
$
618
   
$
(105
)
 
$
(345
)


6
Credit Facilities

On October 25, 2017, the company modified certain credit facilities whereby existing lines of credits that provided advances up to CA$4,800,000 (US$3,724,000) and up to US$6,000,000 for operating purposes, were cancelled and replaced with a credit facility of CA$28,929,000 (US$22,445,000), mainly for the acquisition of the remaining shares of Astellia under the public tender offer.

 
Page 24 of 55

 
 
EXFO Inc.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)

 
In addition, on December 21, 2017, the company cancelled and replaced this renewed credit facility (that provided advances up to CA$28,929,000 (US$22,445,000)), with new revolving credit facilities of up to CA$70,000,000 (approximately US$54,300,000) and US$9,000,000. These modified credit facilities were used to finance a portion of the acquisition of Astellia's remaining shares and will be used to finance working capital and for other general corporate purposes. The Canadian dollar revolving credit facility bears interest at the Canadian prime rate or LIBOR, plus a margin, and the US dollar revolving credit facility bears interest at the US prime rate or LIBOR plus a margin. These revolving credit facilities are secured by a movable mortgage over the universality of the company's Canadian movable assets, present and future, as well as over the universality of movable assets, present and future, of certain US and UK subsidiaries. The company is subject to covenants under this credit facility that were met as at February 28, 2018. As at February 28, 2018, an amount of $2,000,000 was drawn from this credit facility.

As at February 28, 2018, a letter of credit of €17,337,010 (US$21,167,400) was drawn from these credit facilities. This letter of credit expires on May 27, 2018.


7
Long-term Debt

As part of the acquisitions of Yenista and Astellia, the company assumed long-term debt (note 3). Long-term debt represents
a non-derivative financial liability, and it is classified in other financial liabilities; it is initially measured at fair value plus transaction costs, and it is subsequently carried at amortized cost using the effective interest rate method.
 
   
As at
February 28,
2018
   
As at
August 31,
2017
 
             
Unsecured, non-interest-bearing loans, denominated in euros, repayable in quarterly instalments, maturing in March 2024 and March 2025
 
$
913
   
$
 
Unsecured loans, denominated in euros, repayable in monthly and quarterly instalments, bearing interest at annual rates of nil to 5.0%, maturing at different dates between December 2018 and September 2023
   
5,827
   
 
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 June 2019 and August 2022
   
1,045
   
 
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
   
2,834
   
 
                 
Other long-term debt
   
77
   
 
     
10,696
   
 
Current portion of long-term debt
   
3,021
   
 
   
$
7,675
   
$
 
 

The company is subject to certain covenants under its long-term debt that were met as at February 28, 2018.
 
Page 25 of 55

 
 
EXFO Inc.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 
 
Principal repayments of long-term debt over the forthcoming years are as follows:
 
   
As at
February 28,
2018
   
As at
August 31,
2017
 
             
No later than one year
 
$
3,021
   
$
 
Later than one year and no later than five years
   
7,092
   
 
Later than five years
   
583
   
 
   
$
10,696
   
$
 
 

8
Share Capital

The following tables summarize changes in share capital for the six months ended February 28, 2017 and 2018.
 
   
Six months ended February 28, 2017
 
   
Multiple voting shares
   
Subordinate voting shares
       
   
Number
   
Amount
   
Number
   
Amount
   
Total
amount
 
                               
Balance as at September 1, 2016
   
31,643,000
   
$
1
     
21,917,942
   
$
85,515
   
$
85,516
 
Issuance of share capital
   
     
     
793,070
     
3,490
     
3,490
 
Redemption of restricted share units
   
     
     
88,371
     
     
 
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
   
     
     
     
346
     
346
 
Balance as at November 30, 2016
   
31,643,000
     
1
     
22,799,383
     
89,351
     
89,352
 
Redemption of restricted share units
   
     
     
97,900
     
     
 
Redemption of deferred share units
   
     
     
29,456
     
     
 
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
   
     
     
     
489
     
489
 
                                         
Balance as at February 28, 2017
   
31,643,000
   
$
1
     
22,926,739
   
$
89,840
   
$
89,841
 

 
Page 26 of 55

 
 
EXFO Inc.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 
 
   
Six months ended February 28, 2018
 
   
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
 
Redemption of restricted share units
   
     
     
182,725
     
     
 
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
   
     
     
     
675
     
675
 
                                         
Balance as at February 28, 2018
   
31,643,000
   
$
1
     
23,407,121
   
$
91,683
   
$
91,684
 


9
Statements of Earnings

Net research and development expenses comprise the following:

   
Three months
ended
February 28,
2018
   
Six months
ended
February 28,
2018
   
Three months
ended
February 28,
2017
   
Six months
ended
February 28,
2017
 
                         
Gross research and development expenses
 
$
15,180
   
$
28,243
   
$
12,716
   
$
25,356
 
Research and development tax credits and grants
   
(2,093
)
   
(3,904
)
   
(1,452
)
   
(2,778
)
Net research and development expenses for the period
 
$
13,087
   
$
24,339
   
$
11,264
   
$
22,578
 

Inventory write-down is as follows:

   
Three months
ended
February 28,
2018
   
Six months
ended
February 28,
2018
   
Three months
ended
February 28,
2017
   
Six months
ended
February 28,
2017
 
                         
Inventory write-down for the period
 
$
566
   
$
1,269
   
$
482
   
$
976
 

 
Page 27 of 55

 
 
EXFO Inc.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 
 
Depreciation and amortization expenses by functional area are as follows:

   
Three months
ended
February 28,
2018
   
Six months
ended
February 28,
2018
   
Three months
ended
February 28,
2017
   
Six months
ended
February 28,
2017
 
                         
Cost of sales
                       
Depreciation of property, plant and equipment
 
$
466
   
$
938
   
$
371
   
$
730
 
Amortization of intangible assets
   
2,816
     
3,727
     
672
     
969
 
     
3,282
     
4,665
     
1,043
     
1,699
 
                                 
Selling and administrative expenses
                               
Depreciation of property, plant and equipment
   
203
     
367
     
139
     
257
 
Amortization of intangible assets
   
135
     
247
     
17
     
36
 
     
338
     
614
     
156
     
293
 
                                 
Net research and development expenses
                               
Depreciation of property, plant and equipment
   
594
     
1,112
     
452
     
878
 
Amortization of intangible assets
   
105
     
201
     
79
     
190
 
     
699
     
1,313
     
531
     
1,068
 
                                 
   
$
4,319
   
$
6,592
   
$
1,730
   
$
3,060
 
                                 
Depreciation of property, plant and equipment
 
$
1,263
   
$
2,417
   
$
962
   
$
1,865
 
Amortization of intangible assets
   
3,056
     
4,175
     
768
     
1,195
 
                                 
Total depreciation and amortization expenses for the period
 
$
4,319
   
$
6,592
   
$
1,730
   
$
3,060
 

Employee compensation comprises the following:

   
Three months
ended
February 28,
2018
   
Six months
ended
February 28,
2018
   
Three months
ended
February 28,
2017
   
Six months
ended
February 28,
2017
 
                         
Salaries and benefits
 
$
33,527
   
$
63,149
   
$
29,244
   
$
58,022
 
Stock-based compensation costs
   
438
     
840
     
353
     
611
 
                                 
Total employee compensation for the period
 
$
33,965
   
$
63,989
   
$
29,597
   
$
58,633
 

 
Page 28 of 55

 
 
EXFO Inc.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)

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

   
Three months
ended
February 28,
2018
   
Six months
ended
February 28,
2018
   
Three months
ended
February 28,
2017
   
Six months
ended
February 28,
2017
 
                         
Cost of sales
 
$
35
   
$
71
   
$
27
   
$
54
 
Selling and administrative expenses
   
309