Form 6-K EXFO INC. For: May 31

July 8, 2020 4:36 PM 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 July 2020

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 July 8, 2020, EXFO Inc., a Canadian corporation, reported its results of operations for the third fiscal quarter ended May 31, 2020. 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 third fiscal quarter of the 2020 fiscal year. This press release and information relating to EXFO’s financial condition and results of operations and certifications of interim filings for the third fiscal quarter of the 2020 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 49



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: July 8, 2020


Page 2 of 49






PRESS RELEASE
For immediate release


EXFO reports third quarter results for fiscal 2020

Sales reached US$66.1 million
IFRS net earnings totaled US$3.2 million
Adjusted EBITDA amounted to US$10.7 million, 16.1% of sales

QUEBEC CITY, CANADA, July 8, 2020 — EXFO Inc. (NASDAQ: EXFO; TSX: EXF), the communications industry's test, monitoring and analytics experts, reported today financial results for the third quarter ended May 31, 2020.

“Despite constraints and restrictive measures in many countries, EXFO navigated through the coronavirus pandemic with a solid financial performance in the third quarter of 2020,” said EXFO’s CEO Philippe Morin. “We delivered encouraging sales in a difficult environment and proactively implemented cost-controls, while benefiting from a Canadian government wage subsidy program. The end-result was strong earnings amid end-markets that will necessarily improve as long-term drivers like fiber and 5G deployments remain intact.”

Third Quarter Highlights
Sales. Sales decreased 10.1% year-over-year to US$66.1 million in the third quarter of fiscal 2020 mainly due to the ongoing impact of the coronavirus pandemic. Test and Measurement (T&M) sales accounted for 75% of revenue in the third quarter of 2020, while Service Assurance, Systems and Services (SASS) sales represented 25%. Revenue distribution among the three main selling regions amounted to 45% in the Americas, 33% in Europe, Middle East and Africa (EMEA) and 22% in Asia-Pacific. EXFO’s top customer accounted for 9.6% of sales, while the top three totaled 18.2%.

Profitability. IFRS net earnings amounted to US$3.2 million, or US$0.06 per share, in the third quarter of fiscal 2020, while adjusted EBITDA totaled US$10.7 million, or 16.1% of sales. Net earnings included a wage subsidy of US$3.3M (US$2.4M after-tax) under the Canada emergency wage subsidy program to help qualifying businesses alleviate the effects of the coronavirus pandemic.




Page 3 of 49






Selected Financial Information
(In thousands of US dollars)
   
Three months
ended
May 31, 2020
   
Three months
ended
May 31, 2019
   
Nine months
ended
May 31, 2020
   
Nine months
ended
May 31, 2019
 
                         
  Test and Measurement sales
 
$
50,309
   
$
54,359
   
$
143,733
   
$
154,530
 
  Service Assurance, Systems and Services sales
   
16,352
     
19,469
     
52,036
     
62,586
 
  Foreign exchange losses on forward exchange contracts
   
(514
)
   
(241
)
   
(758
)
   
(401
)
  Total sales
 
$
66,147
   
$
73,587
   
$
195,011
   
$
216,715
 
                                 
  Test and Measurement bookings
 
$
46,634
   
$
50,157
   
$
153,646
   
$
159,473
 
  Service Assurance, Systems and Services bookings
   
12,988
     
19,648
     
49,000
     
67,822
 
  Foreign exchange losses on forward exchange contracts
   
(514
)
   
(241
)
   
(758
)
   
(401
)
  Total bookings
 
$
59,108
   
$
69,564
   
$
201,888
   
$
226,894
 
  Book-to-bill ratio (bookings/sales)
   
0.89
     
0.95
     
1.04
     
1.05
 
  Gross margin before depreciation and amortization*
 
$
38,199
   
$
43,129
   
$
113,026
   
$
128,298
 
     
57.7
%
   
58.6
%
   
58.0
%
   
59.2
%
                                 
  Other selected information:
                               
  IFRS net earnings (loss)
 
$
3,177
   
$
21
   
$
(5,907
)
 
$
(2,253
)
  Amortization of intangible assets
 
$
1,698
   
$
2,072
   
$
5,025
   
$
7,142
 
  Stock-based compensation costs
 
$
523
   
$
475
   
$
1,446
   
$
1,354
 
  Restructuring charges (reversals)
 
$
   
$
(13
)
 
$
   
$
3,305
 
  Acquisition-related deferred revenue fair value adjustment
 
$
   
$
   
$
   
$
1,435
 
  Net income tax effect of the above items
 
$
(257
)
 
$
(344
)
 
$
(760
)
 
$
(1,115
)
  Foreign exchange (gain) loss
 
$
141
   
$
(146
)
 
$
649
   
$
55
 
  Adjusted EBITDA*
 
$
10,656
   
$
7,860
   
$
13,284
   
$
19,372
 

Quarterly Overview
Sales reached US$66.1 million in the third quarter of fiscal 2020 compared to US$73.6 million in the third quarter of 2019.

Bookings attained US$59.1 million in the third quarter of fiscal 2020 compared to US$69.6 million for the same period in 2019. The company's book-to-bill ratio was 0.89 in the third quarter of 2020.

Gross margin before depreciation and amortization* amounted to 57.7% of sales in the third quarter of fiscal 2020 compared to 58.6% in the third quarter of 2019.

Selling and administrative expenses totaled US$18.9 million, or 28.6% of sales in the third quarter of fiscal 2020 compared to US$23.8 million, or 32.3% of sales, in the third quarter of 2019.

Net R&D expenses attained US$9.2 million, or 13.9% of sales, in the third quarter of fiscal 2020 compared to US$12.0 million, or 16.3% of sales, in the same period last year.

IFRS net earnings totaled US$3.2 million, or US$0.06 per share, in the third quarter of fiscal 2020 compared to net earnings of US$21,000, or US$0.00 per share, in the third quarter of 2019. IFRS net earnings in the third quarter of 2020 included US$1.4 million in after-tax amortization of intangible assets, US$0.5 million in stock-based compensation costs, and US$0.1 million in foreign exchange loss. Net earnings in the third quarter of 2020 also included US$2.4 million for an after-tax wage subsidy granted by the Canadian government to help qualifying businesses alleviate the effects of the coronavirus pandemic.




Page 4 of 49


 


Adjusted EBITDA* amounted to US$10.7 million, or 16.1% of sales, in the third quarter of fiscal 2020 compared to US$7.9 million, or 10.7% of sales, in the third quarter of 2019.

During the third quarter of fiscal 2020, EXFO extended its revolving credit facilities, which had provided advances up to US$50.8 million (C$70.0 million), to US$65.3 million (C$90.0 million) until May 31, 2021, and will return to US$50.8 million (C$70.0 million) on June 1, 2021.

Conference Call and Webcast
EXFO will host a conference call today at 5 p.m. (Eastern time) to review third quarter results for fiscal 2020. 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: 8963518. 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 July 15, 2020. The replay number is 1-719-457-0820 and the participant passcode is 8963518. 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 5 of 49


 


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, namely the impact of the coronavirus pandemic on our employees, customers and global operations, including the ability of our suppliers to fulfil raw material requirements and services and our ability to manufacture and deliver our products and services to our customers; the effects of emergency measures related to isolation periods for individuals in affected areas, lockdown restrictions imposed by national governments on businesses in countries where we operate and have employees, and limitations on travel to attract new customers and serve existing ones; deteriorating financial and market conditions as well as a potential recession; trade wars, and our ability to successfully integrate businesses that we acquire; capital spending and network deployment levels in the communications 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.

*Non-IFRS Measures
EXFO provides non-IFRS measures (gross margin before depreciation and amortization and adjusted EBITDA) as supplemental information regarding its operational performance. Gross margin before depreciation and amortization represents sales, less cost of sales, excluding depreciation and amortization. Adjusted EBITDA represent net earnings (loss) before interest and other income/expense, income taxes, depreciation and amortization, stock-based compensation costs, restructuring charges, 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 statement of earnings elements, restructuring charges 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 used by financial analysts to evaluate and compare EXFO’s performance against that of competitors and industry players in the company’s sector.




Page 6 of 49


 


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 that of 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 adjusted EBITDA to IFRS net earnings (loss), in thousands of US dollars:

Adjusted EBITDA

   
Three months
ended
May 31, 2020
   
Three months
ended
May 31, 2019
   
Nine months
ended
May 31, 2020
   
Nine months
ended
May 31, 2019
 
                         
IFRS net earnings (loss) for the period (1)
 
$
3,177
   
$
21
   
$
(5,907
)
 
$
(2,253
)
                                 
Add (deduct):
                               
                                 
Depreciation and amortization
   
3,833
     
3,440
     
11,732
     
11,329
 
Interest and other (income) expense
   
291
     
698
     
975
     
(439
)
Income taxes
   
2,691
     
3,385
     
4,389
     
4,586
 
Stock-based compensation costs
   
523
     
475
     
1,446
     
1,354
 
Restructuring charges (reversals)
   
     
(13
)
   
     
3,305
 
Acquisition-related deferred revenue fair value adjustment
   
     
     
     
1,435
 
Foreign exchange (gain) loss
   
141
     
(146
)
   
649
     
55
 
Adjusted EBITDA for the period
 
$
10,656
   
$
7,860
   
$
13,284
   
$
19,372
 
                                 
Adjusted EBITDA as a percentage of sales
   
16.1
%
   
10.7
%
   
6.8
%
   
8.9
%

(1)
IFRS net earnings (loss) for the three months and the nine months ended May 31, 2020 takes into account the impact of the adoption of IFRS 16 on September 1, 2019. The adoption of IFRS 16 on September 1, 2019 had a positive impact on adjusted EBITDA of $844,000 or 1.3% of sales and $2,549,000 or 1.3% of sales respectively for the three months and the nine months ended May 31, 2020. Comparative figures were not adjusted.


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




Page 7 of 49


 
EXFO Inc.
Condensed Unaudited Interim Consolidated Balance Sheets

(in thousands of US dollars)


   
As at
May 31,
2020
   
As at
August 31,
2019
 
             
Assets
           
             
Current assets
           
Cash
 
$
17,070
   
$
16,518
 
Short-term investments
   
3,384
     
2,918
 
Accounts receivable
               
Trade
   
56,842
     
51,517
 
Other (note 3)
   
4,543
     
3,396
 
Income taxes and tax credits recoverable
   
4,912
     
3,159
 
Inventories
   
42,745
     
38,017
 
Prepaid expenses
   
5,553
     
6,510
 
Other assets
   
3,800
     
3,083
 
     
138,849
     
125,118
 
                 
Tax credits recoverable
   
45,203
     
46,704
 
Property, plant and equipment
   
37,814
     
39,364
 
Right-of-use assets (note 2)
   
10,636
     
 
Intangible assets
   
17,523
     
21,654
 
Goodwill
   
37,842
     
38,648
 
Deferred income tax assets
   
4,407
     
4,821
 
Other assets
   
1,257
     
1,293
 
   
$
293,531
   
$
277,602
 
Liabilities
               
                 
Current liabilities
               
Bank loan
 
$
33,821
   
$
5,000
 
Accounts payable and accrued liabilities
   
43,954
     
50,790
 
Provisions
   
706
     
1,065
 
Income taxes payable
   
249
     
704
 
Deferred revenue
   
21,634
     
24,422
 
Other liabilities
   
1,616
     
1,606
 
Current portion of lease liabilities (note 7)
   
3,188
     
 
Current portion of long-term debt (note 8)
   
2,043
     
2,449
 
     
107,211
     
86,036
 
                 
Provisions
   
2,490
     
2,737
 
Deferred revenue
   
7,669
     
9,056
 
Lease liabilities (note 7)
   
7,453
     
 
Long-term debt (note 8)
   
2,118
     
3,293
 
Deferred income tax liabilities
   
2,760
     
3,598
 
Other liabilities
   
878
     
318
 
     
130,579
     
105,038
 
                 
Shareholders’ equity
               
Share capital (note 9)
   
93,999
     
92,706
 
Contributed surplus
   
19,149
     
19,196
 
Retained earnings
   
106,266
     
112,173
 
Accumulated other comprehensive loss
   
(56,462
)
   
(51,511
)
     
162,952
     
172,564
 
   
$
293,531
   
$
277,602
 

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


Page 8 of 49



EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Earnings

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


   
Three months
ended
May 31, 2020
   
Nine months
ended
May 31, 2020
   
Three months
ended
May 31, 2019
   
Nine months
ended
May 31, 2019
 
                         
Sales
 
$
66,147
   
$
195,011
   
$
73,587
   
$
216,715
 
                                 
Cost of sales (1)
   
27,948
     
81,985
     
30,458
     
88,417
 
Selling and administrative
   
18,898
     
67,705
     
23,761
     
75,610
 
Net research and development
   
9,168
     
33,483
     
11,970
     
39,410
 
Depreciation of property, plant and equipment
   
1,291
     
4,158
     
1,368
     
4,187
 
Depreciation of lease right-of-use assets (note 2)
   
844
     
2,549
     
     
 
Amortization of intangible assets
   
1,698
     
5,025
     
2,072
     
7,142
 
Interest and other (income) expense
   
291
     
975
     
698
     
(439
)
Foreign exchange (gain) loss
   
141
     
649
     
(146
)
   
55
 
Earnings (loss) before income taxes
   
5,868
     
(1,518
)
   
3,406
     
2,333
 
                                 
Income taxes (note 11)
   
2,691
     
4,389
     
3,385
     
4,586
 
                                 
Net earnings (loss) for the period
 
$
3,177
   
$
(5,907
)
 
$
21
   
$
(2,253
)
                                 
Basic and diluted net earnings (loss) per share
 
$
0.06
   
$
(0.11
)
 
$
0.00
   
$
(0.04
)
                                 
Basic weighted average number of shares outstanding (000’s)
   
55,678
     
55,573
     
55,392
     
55,306
 
                                 
Diluted weighted average number of shares outstanding (000’s) (note 12)
   
56,724
     
55,573
     
56,437
     
55,306
 

 (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 9 of 49



EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Comprehensive Loss

(in thousands of US dollars)


   
Three months
ended
May 31, 2020
   
Nine months
ended
May 31, 2020
   
Three months
ended
May 31, 2019
   
Nine months
ended
May 31, 2019
 
                         
Net earnings (loss) for the period
 
$
3,177
   
$
(5,907
)
 
$
21
   
$
(2,253
)
Other comprehensive income (loss), net of income taxes
                               
Items that may be reclassified subsequently to net earnings
                               
Foreign currency translation adjustment
   
(3,317
)
   
(4,075
)
   
(4,611
)
   
(6,160
)
Unrealized gains/losses on forward exchange contracts
   
(1,052
)
   
(1,805
)
   
(1,046
)
   
(1,237
)
Reclassification of realized gains/losses on forward exchange contracts
   
251
     
607
     
(91
)
   
210
 
Deferred income tax effect on gains/losses on forward exchange contracts
   
206
     
322
     
314
     
356
 
                                 
Other comprehensive loss
   
(3,912
)
   
(4,951
)
   
(5,434
)
   
(6,831
)
                                 
Comprehensive loss for the period
 
$
(735
)
 
$
(10,858
)
 
$
(5,413
)
 
$
(9,084
)


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


Page 10 of 49


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

(in thousands of US dollars)


   
Nine months ended May 31, 2019
 
   
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
   
     
     
(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 9)
   
1,078
     
(1,078
)
   
     
     
 
Redemption of share capital (note 9)
   
(126
)
   
21
     
     
     
(105
)
Stock-based compensation costs
   
     
1,363
     
     
     
1,363
 
Net loss for the period
   
     
     
(2,253
)
   
     
(2,253
)
Other comprehensive loss
                                       
Foreign currency translation adjustment
   
     
     
     
(6,160
)
   
(6,160
)
Changes in unrealized gains/losses on forward exchange contracts, net of deferred income taxes of $356
   
     
     
     
(671
)
   
(671
)
                                         
Total comprehensive loss for the period
                                   
(9,084
)
                                         
Balance as at May 31, 2019
 
$
92,889
   
$
18,734
   
$
112,400
   
$
(54,181
)
 
$
169,842
 


   
Nine months ended May 31, 2020
 
   
Share
capital
   
Contributed
surplus
   
Retained
earnings
   
Accumulated other comprehensive loss
   
Total
shareholders’ equity
 
                               
Balance as at September 1, 2019
 
$
92,706
   
$
19,196
   
$
112,173
   
$
(51,511
)
 
$
172,564
 
Reclassification of stock-based compensation costs (note 9)
   
1,505
     
(1,505
)
   
     
     
 
Redemption of share capital (note 9)
   
(212
)
   
(13
)
   
     
     
(225
)
Stock-based compensation costs
   
     
1,471
     
     
     
1,471
 
Net loss for the period
   
     
     
(5,907
)
   
     
(5,907
)
Other comprehensive loss
                                       
Foreign currency translation adjustment
   
     
     
     
(4,075
)
   
(4,075
)
Changes in unrealized gains/losses on forward exchange contracts, net of deferred income taxes of $322
   
     
     
     
(876
)
   
(876
)
                                         
Total comprehensive loss for the period
                                   
(10,858
)
                                         
Balance as at May 31, 2020
 
$
93,999
   
$
19,149
   
$
106,266
   
$
(56,462
)
 
$
162,952
 


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


Page 11 of 49



EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Cash Flows

(in thousands of US dollars)


   
Three months
ended
May 31, 2020
   
Nine months
ended
May 31, 2020
   
Three months
ended
May 31, 2019
   
Nine months
ended
May 31, 2019
 
                         
Cash flows from operating activities
                       
Net earnings (loss) for the period
 
$
3,177
   
$
(5,907
)
 
$
21
   
$
(2,253
)
Add (deduct) items not affecting cash
                               
Stock-based compensation costs
   
523
     
1,446
     
475
     
1,354
 
Depreciation and amortization
   
3,833
     
11,732
     
3,440
     
11,329
 
Gain on disposal of capital assets
   
     
     
     
(1,732
)
Write-off of capital assets
   
     
216
     
     
261
 
Deferred revenue
   
(329
)
   
(3,144
)
   
1,676
     
11,619
 
Deferred income taxes
   
493
     
(161
)
   
(142
)
   
(2,295
)
Changes in foreign exchange gain/loss
   
869
     
1,750
     
143
     
(310
)
     
8,566
     
5,932
     
5,613
     
17,973
 
Changes in non-cash operating items
                               
Accounts receivable
   
(25,485
)
   
(6,874
)
   
(12,857
)
   
(7,038
)
Income taxes and tax credits
   
44
     
(2,618
)
   
1,596
     
1,629
 
Inventories
   
(2,282
)
   
(6,233
)
   
(306
)
   
(668
)
Prepaid expenses
   
(773
)
   
215
     
(585
)
   
(380
)
Other assets
   
(256
)
   
(712
)
   
(664
)
   
(1,003
)
Accounts payable, accrued liabilities and provisions
   
3,253
     
(6,020
)
   
1,995
     
2,013
 
Other liabilities
   
53
     
95
     
(6
)
   
(1,527
)
     
(16,880
)
   
(16,215
)
   
(5,214
)
   
10,999
 
Cash flows from investing activities
                               
Additions to short-term investments
   
(1,927
)
   
(2,074
)
   
(286
)
   
(578
)
Disposal of short-term investments
   
     
1,264
     
826
     
1,168
 
Purchases of capital assets
   
(1,880
)
   
(6,066
)
   
(1,639
)
   
(6,318
)
Proceeds from disposal of capital assets
   
     
     
     
3,318
 
     
(3,807
)
   
(6,876
)
   
(1,099
)
   
(2,410
)
Cash flows from financing activities
                               
Bank loan
   
19,934
     
28,304
     
(3,808
)
   
(5,052
)
Repayment of lease liabilities (note 7)
   
(844
)
   
(2,534
)
   
     
 
Repayment of long-term debt
   
(292
)
   
(1,607
)
   
(713
)
   
(2,165
)
Redemption of share capital
   
     
(225
)
   
     
(105
)
     
18,798
     
23,938
     
(4,521
)
   
(7,322
)
Effect of foreign exchange rate changes on cash
   
(167
)
   
(295
)
   
(306
)
   
(402
)
                                 
Change in cash during the period
   
(2,056
)
   
552
     
(11,140
)
   
865
 
Cash – Beginning of the period
   
19,126
     
16,518
     
24,763
     
12,758
 
Cash – End of the period
 
$
17,070
   
$
17,070
   
$
13,623
   
$
13,623
 
                                 
Supplementary information
                               
Income taxes paid
 
$
159
   
$
1,430
   
$
391
   
$
1,877
 
Additions to capital assets
 
$
1,444
   
$
5,390
   
$
1,898
   
$
5,269
 

As at May 31, 2019 and 2020, unpaid purchases of capital assets amounted to $739 and $218 respectively.


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


Page 12 of 49



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 smart test, monitoring and analytics solutions for fixed and mobile network operators, web-scale companies, and equipment manufacturers in the global communications 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 July 8, 2020.


2
Basis of Presentation

These condensed unaudited interim consolidated financial statements have been prepared in accordance with 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.

Critical estimates and assumptions

In December 2019, a novel strain of coronavirus was identified in China and resulted in preventive measures imposed by the Chinese public health authorities including an extended shutdown of businesses, restrictions on various forms of public transportation and lockdown periods for individuals—all of which affected the company’s factory and supply chain during a certain period. In March 2020, this coronavirus epidemic was declared a pandemic by the World Health Organization, and most countries have been imposing ongoing constraints and preventive measures that have affected and are still affecting the global economy. Significant declines in the stock market have occurred for various reasons linked to the coronavirus pandemic. Although constraints and preventive measures are progressively being relaxed in many countries, the breadth and duration of this pandemic are unknown and raise uncertainties that may impact the measurement of assets and liabilities in future periods.

This pandemic had a negative impact on the company’s sales and operating results in the second and third quarter of fiscal 2020, and the company believes it might continue to negatively impact its sales and operating results to a certain extent over an undetermined period. In addition, over the last months, the company’s stock price significantly decreased as aresult of the pandemic. As a result of these impacts, during the three months ended May 31, 2020, the company concluded they represented a triggering event and performed goodwill impairment testing for all cash generating units (CGUs).

In performing the goodwill impairment review of its CGUs, the company determined the recoverable amount of goodwill based on fair value less costs of disposal. In estimating the recoverable amount of EXFO Optics CGU, the company used a capitalized cash flows method. In addition, for the Service assurance, systems and services (SASS) CGU, the company used a cost approach based on the level of research and development expenses incurred over the last two years. Finally, as the sales and operations of the EXFO CGU constitutes the significant majority of the company’s sales and operations, the company compared the carrying amount of the EXFO CGU to the company’s overall market capitalization, after adjustment for a control premium and the adjustment to deduct the recoverable amount of the EXFO Optics and SASS CGU.

As at May 31, 2020, the recoverable amount for all CGUs exceeded their carrying value.


Page 13 of 49



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)


Otherwise, as at May 31, 2020, the company reviewed other critical estimates and assumptions considering the impact of the coronavirus outbreak and believes that it had no significant impact on the measurement of assets and liabilities as of that date.

Recently Issued IFRS Pronouncements

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 supersedes IAS 17, Leases, and related interpretations. Under IFRS 16, lessees recognize a right-of-use (ROU) asset and a lease liability measured at the present value of lease payments for virtually all their leases. Short-term leases with a term of 12 months or less are not required to be recognized. This new standard is effective for annual periods beginning on or after January 1, 2019.

The company adopted this new standard on September 1, 2019, using the modified retrospective method, which did not require adjustments to comparative periods. The company applied IFRS 16 at the adoption date and recognized lease ROU assets and lease liabilities in the period of adoption. The new standard provides several optional practical expedients in transition. Upon implementation of the new standard, the company elected the practical expedients to combine lease and non-lease components and to not recognize lease ROU assets and lease liabilities for short-term leases. Also, contracts that were not identified as leases under previous standards were not reassessed for whether there is a lease therein. The company identified appropriate changes to its accounting policies, information technology systems, business processes, and related internal controls to support recognition and disclosure requirements under IFRS 16.

The adoption of IFRS 16 on September 1, 2019 resulted in the recognition of lease ROU assets of $11,321,000, lease liabilities of $10,843,000, and the elimination of prepaid rent of $478,000 in the consolidated balance sheet as of that date. In addition, lease payments, previously reported in cash flows from operating activities, are now reported in cash flows from financing activities in the consolidated statements of cash flows. However, the adoption of this standard had no significant impact on net earnings (loss).

Upon the adoption of IFRS 16, the lease expense, previously recorded under the cost of sales, selling and administrative expenses and net research and development expenses line items, is recorded as depreciation expenses for the lease ROU assets and as interest expenses on the lease liabilities in the consolidated statements of earnings.

Finally, the adoption of IFRS 16 had no significant impact on liquidity and debt covenant compliance under existing debt agreements.

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 adopted this interpretation on September 1, 2019, and its adoption had no significant impact on its consolidated financial statements.


Page 14 of 49



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)


New Accounting Policy upon Adoption of Recently Issued IFRS

Leases

The company determines if an arrangement is a lease or contains a lease at inception. Operating lease liabilities are recognized based on the present value of the remaining lease payments, discounted using the discount rate for the lease at the commencement date, and are subsequently adjusted for interest and lease payments. When the rate implicit in the lease is not readily determinable, the company uses an incremental borrowing rate based on information available at the commencement date to determine the present value of future lease payments. The lease term is the non-cancelable period of the lease and includes options to extend or terminate the lease when it is reasonably certain that an option will be exercised. ROU assets are recognized at commencement based on the amount of the initial measurement of the lease liability. ROU assets also include any lease payments made prior to lease commencement and exclude lease incentives. ROU assets are depreciated on a straight-line basis over the lease term.

The company’s lease terms may include options to extend or terminate the lease where it is reasonably certain that the company will exercise those options. The company considers several economic factors when making this determination including, but not limited to, the significance of leasehold improvements incurred in the office space, the difficulty in replacing the asset, underlying contractual obligations, or specific characteristics unique to a lease.


3
Government Grants

During the three months ended May 31, 2020, the Government of Canada introduced the Canada emergency wage subsidy (CEWS) to help qualifying Canadian businesses facing hardship as a result of the coronavirus pandemic. The CEWS covers up to 75% of wages for a maximum period of 5.5 months starting March 15, 2020, for businesses that suffered a year‑over‑year drop in gross revenues above certain thresholds during a portion of or all that period.

The company qualified for the CEWS for the period from March 15 to May 9, 2020, and recorded grants of $3,262,000 in the condensed unaudited interim consolidated statements of earnings for the three months and nine months ended May 31, 2020. The company accounted for the CEWS as a government grant under IAS 20, “Government Grants”, and it was deducted from the same consolidated statement of earnings line item as the wages are recognized (note 10).

As at May 31, 2020, other accounts receivable included an amount of $1,688,000 related to the CEWS.


4
Restructuring Charges

In August 2018, the company implemented a restructuring plan to accelerate the integration of its acquired monitoring and analytics technologies from EXFO Solutions 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 and nine months ended May 31, 2020:

   
Three months
ended
May 31, 2020
   
Nine months
ended
May 31, 2020
 
             
  Balance – Beginning of the period
 
$
934
   
$
1,133
 
  Payments
   
(72
)
   
(271
)
                 
  Balance – End of the period
 
$
862
   
$
862
 


Page 15 of 49



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
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 observable prices and forward exchange rates at the consolidated 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 May 31, 2020
   
As at August 31, 2019
 
   
Level 1
   
Level 2
   
Level 1
   
Level 2
 
  Financial assets
                       
  Short-term investments
 
$
3,384
   
$
   
$
2,918
   
$
 
  Forward exchange contracts
 
$
   
$
218
   
$
   
$
79
 
                                 
  Financial liabilities
                               
  Forward exchange contracts
 
$
   
$
2,496
   
$
   
$
1,057
 

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.

As at May 31, 2020, the company held contracts to sell US dollars for Canadian dollars and Indian rupees at various forward rates, which are summarized below:


Page 16 of 49



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)


US dollars – Canadian dollars

 
Expiry dates
 
Contractual
amounts
   
Weighted average
contractual forward rates
 
               
 
June 2020 to August 2020
 
$
9,000
     
1.3077
 
 
September 2020 to August 2021
   
36,100
     
1.3283
 
 
September 2021 to August 2022
   
18,800
     
1.3492
 
 
September 2022 to February 2023
   
3,600
     
1.3324
 
 
Total
 
$
67,500
     
1.3316
 

US dollars – Indian rupees

 
Expiry dates
 
Contractual
amounts
   
Weighted average
contractual forward rates
 
               
 
June 2020 to August 2020
 
$
1,200
     
71.76
 
 
September 2020 to February 2021
   
1,500
     
77.56
 
 
Total
 
$
2,700
     
74.98
 

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 $978,000 as at August 31, 2019, and $2,278,000 as at May 31, 2020.

As at May 31, 2020, forward exchange contracts in the amount of $67,000 are presented as current assets in other accounts receivable, forward exchange contracts in the amount of $151,000 are presented as long-term assets in other long-term assets, forward exchange contracts in the amount of $1,773,000 are presented as short-term liabilities in accounts payable and accrued liabilities, and forward exchange contracts in the amount of $723,000 are presented as long-term liabilities in other long-term liabilities in the consolidated balance sheet. Forward exchange contracts of $353,000 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 loss.

Based on its portfolio of forward exchange contracts as at May 31, 2020, 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 loss to net earnings (in sales) over the next 12 months, amounts to $1,353,000.

During the three months and the nine months ended May 31, 2019 and 2020, the company recognized within its sales the following foreign exchange losses on forward exchange contracts:

   
Three months
ended
May 31, 2020
   
Nine months
ended
May 31, 2020
   
Three months
ended
May 31, 2019
   
Nine months
ended
May 31, 2019
 
                         
Losses on forward exchange contracts
 
$
514
   
$
758
   
$
241
   
$
401
 


Page 17 of 49



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
Credit Facilities

During the three months ended May 31, 2020, the company modified certain credit facilities, whereby revolving credit facilities, which provided advances up to CA$70,000,000 (US$50,772,000) were extended to CA$90,000,000 (US$65,279,000) until May 31, 2021, to return to CA$70,000,000 on June 1, 2021.


7
Leases

The company has operating leases for certain of its premises under various non-cancelable lease agreements. The company’s operating leases have remaining lease terms ranging from 1 year to 8 years. The company’s operating lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Minimal rentals payable under operating leases are as follows as at May 31, 2020:

  No later than 1 year
 
$
3,188
 
  Later than 1 year and no later than 5 years
   
6,427
 
  Later than 5 years
   
1,026
 
  Total lease liabilities as at May 31, 2020
 
$
10,641
 

The difference between operating lease commitments disclosed applying IAS 17 as at August 31, 2019, discounted using the incremental borrowing rate of 2% at the date of the initial application of IFRS 16 as at September 1, 2019, and the lease liabilities recognized in the consolidated balance sheet as of that date is as follows:

  Discounted operating lease commitments under IAS 17 as at August 31, 2019
 
$
8,915
 
  Discounted impact of renewal options that are reasonably certain to be exercised
   
1,928
 
  Lease liabilities as at September 1, 2019
 
$
10,843
 

Depreciation of lease ROU assets for the three months and nine months ended May 31, 2020 amounted to $844,000 and $2,549,000, respectively (note 10).


Page 18 of 49



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
Long-term Debt

   
As at
May 31,
2020
   
As at
August 31,
2019
 
             
Unsecured, non-interest-bearing loans, denominated in euros, repayable in quarterly instalments, maturing in March 2024 and March 2025
 
$
833
   
$
866
 
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 August 2020 and September 2023
   
2,294
     
3,111
 
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 1.5%, maturing at different dates between June 2020 and August 2022
   
304
     
459
 
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 from 1.1% to 2.9%, maturing at different dates between December 2020 and July 2022
   
730
     
1,306
 
     
4,161
     
5,742
 
Less: current portion of long-term debt
   
2,043
     
2,449
 
   
$
2,118
   
$
3,293