Form 6-K EXFO INC. For: Nov 30

January 12, 2021 5:31 PM EST

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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 January 2021

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 January 12, 2021, EXFO Inc., a Canadian corporation, reported its results of operations for the first fiscal quarter ended November 30, 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 first fiscal quarter of the 2021 fiscal year. This press release and information relating to EXFO’s financial condition and results of operations and certifications of interim filings for the first fiscal quarter of the 2021 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 38



SIGNATURES


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



                                          EXFO INC.


                                          By:       /s/ Philippe Morin
                                          Name:  Philippe Morin
                                          Title:    Chief Executive Officer


Date: January 12, 2021


Page 2 of 38





PRESS RELEASE
For immediate release

EXFO reports first quarter results for fiscal 2021

Sales reached US$71.5 million
Bookings attained US$69.0 million
IFRS net earnings totaled US$3.6 million, US$0.06 per share
Adjusted EBITDA amounted to US$9.9 million, 13.9% of sales

QUEBEC CITY, CANADA, January 12, 2021 — EXFO Inc. (NASDAQ: EXFO; TSX: EXF), the communications industry's test, monitoring and analytics experts, reported today financial results for the first quarter ended November 30, 2020.

“EXFO delivered a strong first-quarter performance in fiscal 2021 as compared to a coronavirus-free opening quarter in 2020,” said EXFO’s CEO Philippe Morin. “Robust sales and earnings results confirm market acceptance of our highly differentiated solutions related to fiber, cloud-native and 5G network deployments as we continue to develop new ways to engage and serve our global customer base in this virtualized environment. We’re particularly pleased with our SASS offering’s penetration into new accounts through the recently announced fiber monitoring deal with BT’s subsidiary, Openreach, and five service assurance contracts secured in the fourth quarter of 2020.”

First-Quarter Highlights
Sales. Sales decreased 2.8% year-over-year in the first quarter of 2021 mainly due to the impact of the coronavirus pandemic, which was partially offset by stronger year-end calendar spending on the part of communications service providers. Test and Measurement (T&M) sales dropped 9.8% from a record US$55.9 million in first quarter of 2020, while Service Assurance, Systems and Services (SASS) sales increased 18.6% year-over-year. Sales in Europe, Middle East and Africa (EMEA) and Asia-Pacific improved 23.3% and 9.2% year-over-year, respectively, while sales in the Americas fell 20.4%.  EXFO’s top customer accounted for 4.3% of sales, while the top three represented 12.6%.

Profitability. IFRS net earnings totaled US$3.6 million, or US$0.06 per share, in the first quarter of 2021, while adjusted EBITDA amounted to US$9.9 million, or 13.9% of sales. Net earnings included an after-tax wage subsidy of US$1.4 million under the Canada emergency wage subsidy program to help qualifying businesses alleviate the effects of the pandemic, as well as an after-tax insurance recovery of US$2.5 million related to the loss of assets.




Page 3 of 38





Selected Financial Information
(In thousands of US dollars)

   
Three months ended
November 30,
 
   
2020
   
2019
 
             
  Test and measurement sales
 
$
50,473
   
$
55,947
 
  Service assurance, systems and services sales
   
21,046
     
17,749
 
  Foreign exchange losses on forward exchange contracts
   
(7
)
   
(145
)
  Total sales
 
$
71,512
   
$
73,551
 
                 
  Test and measurement bookings
 
$
51,248
   
$
55,009
 
  Service assurance, systems and services bookings
   
17,802
     
15,049
 
  Foreign exchange losses on forward exchange contracts
   
(7
)
   
(145
)
  Total bookings
 
$
69,043
   
$
69,913
 
  Book-to-bill ratio (bookings/sales)
   
0.97
     
0.95
 
  Gross margin before depreciation and amortization*
 
$
41,643
   
$
43,310
 
     
58.2
%
   
58.9
%
                 
  Other selected information:
               
  IFRS net earnings (loss)
 
$
3,554
   
$
(63
)
  Amortization of intangible assets
 
$
2,549
   
$
1,632
 
  Stock-based compensation costs
 
$
568
   
$
487
 
  Restructuring charges
 
$
543
   
$
 
  Net income tax effect of the above items
 
$
(530
)
 
$
(249
)
  Foreign exchange loss
 
$
246
   
$
126
 
  Adjusted EBITDA*
 
$
9,949
   
$
7,544
 

Quarterly Overview
Sales decreased 2.8% to US$71.5 million in the first quarter of fiscal 2021 from US$73.6 million in the first quarter of 2020.

Bookings dropped 1.2% to US$69.0 million in the first quarter of fiscal 2021 from US$69.9 million for the same period in 2020. The company's book-to-bill ratio was 0.97 in the first quarter of 2021.

Gross margin before depreciation and amortization* amounted to 58.2% of sales in the first quarter of fiscal 2021 compared to 58.9% in the first quarter of 2020.

Selling and administrative expenses totaled US$21.6 million, or 30.2% of sales in the first quarter of fiscal 2021 compared to US$24.5 million, or 33.3% of sales, in the first quarter of 2020.

Net R&D expenses amounted to US$11.2 million, or 15.7% of sales, in the first quarter of fiscal 2021 compared to US$11.7 million, or 16.0% of sales, in the same period last year.




Page 4 of 38





IFRS net earnings totaled US$3.6 million, or US$0.06 per share, in the first quarter of fiscal 2021 compared to a net loss of US$0.1 million, or US$0.00 per share, in the first quarter of 2020. IFRS net earnings in the first quarter of 2021 included US$2.0 million in after-tax amortization of intangible assets, US$0.6 million in stock-based compensation costs, US$0.5 million in after-tax restructuring charges and a foreign exchange loss of US$0.2 million. IFRS net earnings also included an after-tax wage subsidy of US$1.4 million under the Canada emergency wage subsidy program to help qualifying businesses alleviate the effects of the coronavirus pandemic, as well as an after-tax insurance recovery of US$2.5 million related to the loss of assets.

For the first quarter of 2020, net loss included US$1.4 million in after-tax amortization of intangible assets, US$0.5 million in stock-based compensation costs and a foreign exchange loss of US$0.1 million.

Adjusted EBITDA* amounted to US$9.9 million, or 13.9% of sales, in the first quarter of fiscal 2021 compared to US$7.5 million, or 10.3% of sales, in the first quarter of 2020.

Conference Call and Webcast
EXFO will host a conference call today at 5 p.m. (Eastern time) to review first-quarter results for fiscal 2021. To listen to the conference call and participate in the question period via telephone, dial 1-323-289-6576. Please take note the following participant passcode will be required: 2900379. Executive Chairman Germain Lamonde, CEO Philippe Morin and Pierre Plamondon, CPA, Chief Financial Officer and Vice-President of Finance, will participate in the call. An audio replay of the conference call will be available two hours after the event until 8 p.m. on January 19, 2021. The replay number is 1-719-457-0820 and the participant passcode is 2900379. 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 38





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 represents net earnings (loss) before interest and other income/expenses, income taxes, depreciation and amortization, stock-based compensation costs, restructuring charges and foreign exchange loss.




Page 6 of 38





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 its historical and prospective financial performance, as well as its performance relative to competitors. These non-IFRS measures are also used by financial analysts who evaluate and compare EXFO’s performance against that of competitors and industry players in the sector.

Finally, these measures help EXFO to plan and forecast future periods as well as make operational and strategic decisions. EXFO believes that providing this information to investors, in addition to IFRS measures, allows them 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) loss in thousands of US dollars:
Adjusted EBITDA
   
Three months ended
November 30,
 
   
2020
   
2019
 
             
IFRS net earnings (loss) for the period
 
$
3,554
   
$
(63
)
                 
Add (deduct):
               
                 
Depreciation and amortization
   
4,723
     
3,926
 
Interest and other (income) expenses
   
(1,866
)
   
399
 
Income taxes
   
2,181
     
2,669
 
Stock-based compensation costs
   
568
     
487
 
Restructuring charges
   
543
     
 
Foreign exchange loss
   
246
     
126
 
Adjusted EBITDA for the period
 
$
9,949
   
$
7,544
 
                 
Adjusted EBITDA in percentage of sales
   
13.9
%
   
10.3
%


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




Page 7 of 38



EXFO Inc.
Condensed Unaudited Interim Consolidated Balance Sheets

(in thousands of US dollars)


   
As at
November 30,
2020
   
As at
August 31,
2020
 
             
Assets
           
             
Current assets
           
Cash
 
$
15,392
   
$
32,818
 
Short-term investments
   
1,106
     
919
 
Accounts receivable
               
Trade
   
55,541
     
56,291
 
Other
   
6,090
     
4,055
 
Income taxes and tax credits recoverable
   
2,337
     
4,203
 
Inventories
   
41,769
     
38,865
 
Prepaid expenses
   
5,422
     
5,631
 
Other assets
   
4,009
     
5,493
 
     
131,666
     
148,275
 
                 
Tax credits recoverable
   
49,961
     
48,812
 
Property, plant and equipment
   
39,303
     
39,722
 
Lease right-of-use assets
   
9,228
     
10,758
 
Intangible assets
   
15,481
     
17,616
 
Goodwill
   
40,451
     
40,290
 
Deferred income tax assets
   
4,147
     
3,633
 
Other assets
   
1,521
     
1,548
 
   
$
291,758
   
$
310,654
 
Liabilities
               
                 
Current liabilities
               
Bank loan
 
$
16,314
   
$
32,737
 
Accounts payable and accrued liabilities
   
39,405
     
41,348
 
Provisions
   
2,333
     
3,792
 
Income taxes payable
   
242
     
43
 
Deferred revenue
   
24,345
     
25,785
 
Other liabilities
   
4,040
     
4,032
 
Current portion of lease liabilities (note 7)
   
2,870
     
3,249
 
Current portion of long-term debt (note 8)
   
1,880
     
2,076
 
     
91,429
     
113,062
 
                 
Provisions
   
2,784
     
2,782
 
Deferred revenue
   
8,887
     
8,858
 
Lease liabilities (note 7)
   
6,715
     
7,334
 
Long-term debt (note 8)
   
1,759
     
2,144
 
Deferred income tax liabilities
   
2,925
     
3,760
 
Other liabilities
   
144
     
151
 
     
114,643
     
138,091
 
                 
Shareholders’ equity
               
Share capital (note 9)
   
94,190
     
94,024
 
Contributed surplus
   
19,724
     
19,680
 
Retained earnings
   
106,187
     
102,633
 
Accumulated other comprehensive loss
   
(42,986
)
   
(43,774
)
     
177,115
     
172,563
 
                 
   
$
291,758
   
$
310,654
 


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


Page 8 of 38



EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Earnings

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


   
Three months ended
November 30,
 
   
2020
   
2019
 
             
Sales
 
$
71,512
   
$
73,551
 
                 
Cost of sales (1)
   
29,869
     
30,241
 
Selling and administrative
   
21,606
     
24,504
 
Net research and development
   
11,199
     
11,749
 
Depreciation of property, plant and equipment
   
1,341
     
1,443
 
Depreciation of lease right-of-use assets
   
833
     
851
 
Amortization of intangible assets
   
2,549
     
1,632
 
Interest and other (income) expense (note 10)
   
(1,866
)
   
399
 
Foreign exchange loss
   
246
     
126
 
                 
Earnings before income taxes
   
5,735
     
2,606
 
                 
Income taxes (note 11)
   
2,181
     
2,669
 
                 
Net earnings (loss) for the period
 
$
3,554
   
$
(63
)
                 
Basic and diluted net earnings (loss) per share
 
$
0.06
   
$
(0.00
)
                 
Basic weighted average number of shares outstanding (000’s)
   
55,749
     
55,439
 
                 
Diluted weighted average number of shares outstanding (000’s) (note 12)
   
57,023
     
55,439
 

(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 38



EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Comprehensive Income

(in thousands of US dollars)


   
Three months ended
November 30,
 
   
2020
   
2019
 
             
Net earnings (loss) for the period
 
$
3,554
   
$
(63
)
Other comprehensive income (loss), net of income taxes
               
Items that may be reclassified subsequently to net earnings (loss)
               
Foreign currency translation adjustment
   
722
     
561
 
Unrealized gains/losses on forward exchange contracts
   
256
     
(35
)
Reclassification of realized gains/losses on forward exchange contracts in net earnings (loss)
   
(156
)
   
183
 
Deferred income tax effect of gains/losses on forward exchange contracts
   
(34
)
   
(30
)
                 
Other comprehensive income
   
788
     
679
 
                 
Comprehensive income for the period
 
$
4,342
   
$
616
 


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


Page 10 of 38



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

(in thousands of US dollars)


   
Three months ended November 30, 2019
 
   
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)
   
861
     
(861
)
   
     
     
 
Redemption of share capital (note 9)
   
(212
)
   
(13
)
   
     
     
(225
)
Stock-based compensation costs
   
     
494
     
     
     
494
 
Net loss for the period
   
     
     
(63
)
   
     
(63
)
Other comprehensive income
                                       
Foreign currency translation adjustment
   
     
     
     
561
     
561
 
Changes in unrealized gains/losses on forward exchange contracts, net of deferred income taxes of $30
   
     
     
     
118
     
118
 
                                         
Total comprehensive income for the period
                                   
616
 
                                         
Balance as at November 30, 2019
 
$
93,355
   
$
18,816
   
$
112,110
   
$
(50,832
)
 
$
173,449
 


   
Three months ended November 30, 2020
 
   
Share
capital
   
Contributed surplus
   
Retained earnings
   
Accumulated other comprehensive loss
   
Total
shareholders’ equity
 
                               
Balance as at September 1, 2020
 
$
94,024
   
$
19,680
   
$
102,633
   
$
(43,774
)
 
$
172,563
 
Reclassification of stock-based compensation costs (note 9)
   
704
     
(704
)
   
     
     
 
Redemption of share capital (note 9)
   
(538
)
   
158
     
     
     
(380
)
Stock-based compensation costs
   
     
590
     
     
     
590
 
Net earnings for the period
   
     
     
3,554
     
     
3,554
 
Other comprehensive income
                                       
Foreign currency translation adjustment
   
     
     
     
722
     
722
 
Changes in unrealized gains/losses on forward exchange contracts, net of deferred income taxes of $34
   
     
     
     
66
     
66
 
                                         
Total comprehensive income for the period
                                   
4,342
 
                                         
Balance as at November 30, 2020
 
$
94,190
   
$
19,724
   
$
106,187
   
$
(42,986
)
 
$
177,115
 


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


Page 11 of 38



EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Cash Flows

(in thousands of US dollars)


   
Three months ended
November 30,
 
   
2020
   
2019
 
             
Cash flows from operating activities
           
Net earnings (loss) for the period
 
$
3,554
   
$
(63
)
Add (deduct) items not affecting cash
               
Stock-based compensation costs
   
568
     
487
 
Depreciation and amortization
   
4,723
     
3,926
 
Write-off of capital assets
   
10
     
216
 
Deferred revenue
   
(1,600
)
   
(4,372
)
Deferred income taxes
   
(1,318
)
   
(442
)
Changes in foreign exchange gain/loss
   
212
     
(21
)
     
6,149
     
(269
)
                 
Changes in non-cash operating items
               
Accounts receivable
   
(831
)
   
72
 
Income taxes and tax credits
   
1,220
     
516
 
Inventories
   
(2,605
)
   
(3,493
)
Prepaid expenses
   
579
     
378
 
Other assets
   
1,391
     
35
 
Accounts payable, accrued liabilities and provisions
   
(3,833
)
   
(3,693
)
Other liabilities
   
(8
)
   
(16
)
     
2,062
     
(6,470
)
Cash flows from investing activities
               
Additions to short-term investments
   
(230
)
   
(147
)
Disposal of short-term investments
   
30
     
563
 
Purchases of capital assets
   
(1,111
)
   
(2,040
)
     
(1,311
)
   
(1,624
)
Cash flows from financing activities
               
Bank loan
   
(16,338
)
   
8,354
 
Repayment of lease liabilities
   
(833
)
   
(844
)
Repayment of long-term debt
   
(581
)
   
(676
)
Redemption of share capital
   
(380
)
   
(225
)
     
(18,132
)
   
6,609
 
                 
Effect of foreign exchange rate changes on cash
   
(45
)
   
12
 
                 
Change in cash
   
(17,426
)
   
(1,473
)
Cash – Beginning of the period
   
32,818
     
16,518
 
Cash – End of the period
 
$
15,392
   
$
15,045
 
                 
Supplementary information
               
Income taxes cash outflow
 
$
372
   
$
741
 

As at November 30, 2019 and 2020, unpaid purchases of capital assets amounted to $1,140 and $358 respectively.


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


Page 12 of 38



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, Quebec City, Quebec, Canada, G1M 2K2.

These condensed unaudited interim consolidated financial statements were authorized for issue by the Board of Directors on January 12, 2021.


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. 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.


3
Business Combination

On December 31, 2020, the company acquired all of the issued and outstanding shares of InOpticals Inc. (InOpticals), a Taiwan-based company that offers ultra-high-speed test instruments for the laboratory and manufacturing markets.

In consideration for the shares acquired, the company will issue approximately 1,552,795 subordinate voting shares valued at $5,000,000, out of which 1,424,224 subordinate voting share, valued at $4,586,000, will be released over a five-year period, starting on December 31, 2020, contingent to certain conditions from InOpticals’ former  shareholders over that period, and will not be part of the consideration for the business combination. In addition, in consideration for the shares acquired, the company might pay a cash-contingent consideration based on certain sales volumes of InOpticals’ products over a five-year period starting December 31, 2020, subject to certain conditions from InOpticals’ former shareholders over that period; this cash-contingent consideration will not be part of the consideration for the business combination.

These considerations will be adjusted on a dollar-for-dollar basis for any difference to IFRS-based InOpticals shareholders’ equity in the amount of $750,000 as of the acquisition date. The difference will be paid in cash and will form part of the consideration for this business combination.

The fair value of the cash consideration and management’s estimate of the fair value of net assets acquired is not yet available because the acquisition was closed late after the quarter end and information required to estimate these amounts remains unavailable. The company expects to assess the fair value of the cash consideration and the fair value of net assets acquired and complete the purchase price allocation in the third quarter of fiscal 2021.



Page 13 of 38



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)
 

This acquisition will be accounted for by applying the acquisition method as required by IFRS 3, Business Combinations, and the requirements of IFRS 10, Consolidated Financial Statements. The results of operations of the acquired business will be included in the consolidated financial statements of the company starting December 31, 2020, being the acquisition date.


4
Government Grants

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 has been covering wages up to certain limits since March 15, 2020 and extends until June 2021, provided eligible businesses have suffered a drop in gross revenues above certain thresholds during these periods.

During the three months ended November 30, 2020, the CEWS covered up to 50% of eligible wages for the period starting August 30 and ending September 26, 2020, up to 40% for the period starting September 27 and ending October 24, 2020, and up to 40% for the period starting October 25 and ending November 21, 2020.

The company qualified for the CEWS for the periods from August 30 to November 21, 2020, and recorded grants of $1,885,000 in the condensed unaudited interim consolidated statement of earnings for the three months ended November 30, 2020. The company accounted for the CEWS as a government grant under IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, and it was deducted from the same interim condensed consolidated statement of earnings line item as the wages were recognized (note 10).


5
Restructuring Charges

The following table summarizes changes in restructuring charges payable during the three months ended November 30, 2020:

  Balance – Beginning of the period
 
$
3,626
 
  Additions (1)
   
543
 
  Payments
   
(1,742
)
  Balance – End of the period
 
$
2,427
 

(1)
Additions are recorded in selling and administrative expenses in the condensed unaudited consolidated statement of earnings.


6
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 14 of 38



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)


The company’s short-term investments and forward exchange contracts are measured at fair value at each consolidated 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 November 30, 2020
   
As at August 31, 2020
 
   
Level 1
   
Level 2
   
Level 1
   
Level 2
 
  Financial assets
                       
  Short-term investments
 
$
1,106
   
$
   
$
919
   
$
 
  Forward exchange contracts
 
$
   
$
1,708
   
$
   
$
1,587
 
                                 
  Financial liabilities
                               
  Forward exchange contracts
 
$
   
$
42
   
$
   
$
110
 

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 November 30, 2020, the company held contracts to sell US dollars for Canadian dollars and Indian rupees at various forward rates, which are summarized below:

US dollars – Canadian dollars

 
Expiry dates
 
Contractual
amounts
   
Weighted average
contractual forward rates
 
               
 
December 2020 to August 2021
 
$
26,800
     
1.3329
 
 
September 2021 to August 2022
   
18,800
     
1.3492
 
 
September 2022 to February 2023
   
3,600
     
1.3324
 
 
Total
 
$
49,200
     
1.3391
 

US dollars – Indian rupees

 
Expiry dates
 
Contractual
amount
   
Weighted average
contractual forward rate
 
               
 
December 2020 to February 2021
 
$
750
     
77.88
 


Page 15 of 38



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)


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 $1,477,000 as at August 31, 2020, and $1,666,000 as at November 30, 2020.

As at November 30, 2020, forward exchange contracts in the amount of $1,288,000 are presented as current assets in other accounts receivable, forward exchange contracts in the amount of $420,000 are presented as long-term assets in other long-term assets, and forward exchange contracts in the amount of $42,000 are presented as current liabilities in accounts payable and other liabilities in the consolidated balance sheet. Forward exchange contracts of $123,000 included in other accounts receivable, for which related hedged sales are recognized, are recorded in the consolidated statement of earnings; otherwise, other forward exchange contracts are not yet recorded in the consolidated statement of earnings and are recorded in other comprehensive income.

Based on its portfolio of forward exchange contracts as at November 30, 2020, 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 $1,123,000.


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 November 30, 2020:

  No later than 1 year
 
$
2,870
 
  Later than 1 year and no later than 5 years
   
5,810
 
  Later than 5 years
   
905
 
  Total lease liabilities as at November 30, 2020
 
$
9,585
 

Depreciation of lease ROU assets for the three months ended November 30, 2019 and 2020 amounted to $851,000 and $833,000 (note 10).


Page 16 of 38



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
November 30,
2020
   
As at
August 31,
2020
 
             
  Unsecured, non-interest-bearing loans, denominated in euros, repayable in quarterly instalments, maturing in September 2024 and September 2025
 
$
877
   
$
896
 
  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 July 2021 and September 2023
   
2,123
     
2,443
 
  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 December 2020 and March 2023
   
233
     
295
 
  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 December 2020 and July 2022
   
406
     
586
 
     
3,639
     
4,220
 
  Current portion of long-term debt
   
1,880
     
2,076
 
   
$
1,759
   
$
2,144
 

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

   
As at
November 30,
2020
 
       
  No later than 1 year
 
$
1,880
 
  Later than 1 year and no later than 5 years
   
1,759
 
   
$
3,639
 


Page 17 of 38



EXFO Inc.
Notes to Condensed Unaudited Interim Consolidated Financial Statements

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


9
Share Capital

The following tables summarize changes in share capital for the three months ended November 30, 2019 and 2020.

   
Three months ended November 30, 2019
 
   
Multiple voting shares
   
Subordinate voting shares
       
   
Number
   
Amount
   
Number
   
Amount
   
Total
amount
 
                               
  Balance as at September 1, 2019
   
31,643,000
   
$
1
     
23,703,675
   
$
92,705
   
$
92,706
 
  Redemption of restricted share units
   
     
     
255,822
     
     
 
  Redemption of share capital
   
     
     
(54,528
)
   
(212
)
   
(212
)
  Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
   
     
     
     
861
     
861
 
  Balance as at November 30, 2019
   
31,643,000
   
$
1
     
23,904,969
   
$
93,354
   
$
93,355
 


   
Three months ended November 30, 2020
 
   
Multiple voting shares
   
Subordinate voting shares
       
   
Number
   
Amount
   
Number
   
Amount
   
Total
amount
 
                               
  Balance as at September 1, 2020
   
31,643,000
   
$
1
     
24,060,766
   
$
94,023
   
$
94,024
 
  Redemption of restricted share units
   
     
     
204,506
     
     
 
  Redemption of performance share units
   
     
     
2,704
     
     
 
  Redemption of share capital
   
     
     
(138,255
)
   
(538
)
   
(538
)
  Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
   
     
     
     
704
     
704
 
  Balance as at November 30, 2020
   
31,643,000
   
$
1
     
24,129,721
   
$
94,189
   
$
94,190
 


10
Statements of Earnings

Sales are as follows:

   
Three months ended
November 30,
 
   
2020
   
2019
 
             
  Test and measurement
 
$
50,473
   
$
55,947
 
  Service assurance, systems and services
   
21,046
     
17,749
 
  Foreign exchange losses on forward exchange contracts
   
(7
)
   
(145
)
  Total sales for the period
 
$
71,512
   
$
73,551
 


Page 18 of 38



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)


Interest and other (income) expense

During the three months ended November 30, 2020, other income included an amount of $2,546,000 for an insurance recovery related to the loss of assets (nil in 2020).

Net research and development expenses comprise the following:

   
Three months ended
November 30,
 
   
2020
   
2019
 
             
  Gross research and development expenses
 
$
14,153
   
$
13,832
 
  Research and development tax credits and grants
   
(2,954
)
   
(2,083
)
  Net research and development expenses for the period
 
$
11,199
   
$
11,749
 

For the three months ended November 30, 2020, tax credits and grants include $835,000 for the CEWS (nil in 2020).

Inventory write-down is as follows:

   
Three months ended
November 30,
 
   
2020
   
2019
 
             
  Inventory write-down for the period
 
$
495
   
$
534
 


Page 19 of 38



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)


Depreciation and amortization expenses by functional area are as follows:

   
Three months ended
November 30,
 
   
2020
   
2019
 
             
  Cost of sales
           
  Depreciation of property, plant and equipment
 
$
449
   
$
455
 
  Depreciation of lease ROU assets
   
281
     
288
 
  Amortization of intangible assets
   
2,162
     
1,318
 
     
2,892
     
2,061
 
                 
  Selling and administrative expenses
               
  Depreciation of property, plant and equipment
   
277
     
295
 
  Depreciation of lease ROU assets
   
341
     
362
 
  Amortization of intangible assets
   
205
     
152
 
     
823
     
809
 
                 
  Net research and development expenses
               
  Depreciation of property, plant and equipment
   
615
     
693
 
  Depreciation of lease ROU assets
   
211
     
201
 
  Amortization of intangible assets
   
182
     
162
 
     
1,008
     
1,056
 
   
$
4,723
   
$
3,926
 
                 
  Depreciation of property, plant and equipment
 
$
1,341
   
$
1,443
 
  Depreciation of lease ROU assets
   
833
     
851
 
  Amortization of intangible assets
   
2,549
     
1,632
 
   
$
4,723
   
$
3,926
 

Employee compensation comprises the following:

   
Three months ended
November 30,
 
   
2020
   
2019
 
             
Salaries and benefits
 
$
35,900
   
$
34,307
 
Restructuring charges
   
543
     
 
Stock-based compensation costs
   
568
     
487
 
Grants (CEWS)
   
(1,885
)
   
 
Total employee compensation for the period
 
$
35,126
   
$
34,794
 

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

   
Three months ended
November 30,
 
   
2020
   
2019
 
             
Cost of sales
 
$
30
   
$
40
 
Selling and administrative expenses
   
447
     
380
 
Net research and development expenses
   
91
     
67
 
Total stock-based compensation for the period
 
$
568
   
$
487
 


Page 20 of 38



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)


CEWS by functional area are as follows (note 4):

   
Three months ended
November 30,
 
   
2020
   
2019
 
             
  Cost of sales
 
$
(430
)
 
$
 
  Selling and administrative expenses
   
(620
)
   
 
  Net research and development expenses
   
(835
)
   
 
  Total CEWS for the period
 
$
(1,885
)
 
$
 


11
Income Taxes

For the three months ended November 30, 2019 and 2020, the reconciliation of the income tax provision calculated using the combined Canadian federal and provincial statutory income tax rate with the income tax provision in the consolidated financial statements is as follows:

   
Three months ended
November 30,
 
   
2020
   
2019
 
             
  Income tax provision at combined Canadian federal and provincial statutory tax rate (27%)
 
$
1,548
   
$
704
 
                 
  Increase (decrease) due to:
               
  Foreign income taxed at different rates
   
(96
)
   
178
 
  Non-deductible loss (non-taxable income)
   
(107
)
   
14
 
  Non-deductible expenses
   
168
     
178
 
  Foreign exchange effect of translation of foreign subsidiaries
   
(11
)
   
(115
)
  Utilization of previously unrecognized deferred income tax assets
   
(825
)
   
(16
)
  Unrecognized deferred income tax assets on temporary deductible differences and unused tax losses
   
1,569
     
1,442
 
  Other
   
(65
)
   
284
 
  Income tax provision for the period
 
$
2,181
   
$
2,669
 

The income tax provision consists of the following:

   
Three months ended
November 30,
 
   
2020
   
2019
 
             
  Current
 
$
3,499
   
$
3,111
 
  Deferred
   
(1,318
)
   
(442
)
   
$
2,181
   
$
2,669
 


Page 21 of 38



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)


12
Earnings per Share

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

   
Three months ended
November 30,
 
   
2020
   
2019
 
             
  Basic weighted average number of shares outstanding (000’s)
   
55,749
     
55,439
 
  Plus dilutive effect of (000’s):
               
  Restricted share units
   
942
     
 
  Deferred share units
   
332
     
 
                 
  Diluted weighted average number of shares outstanding (000’s)
   
57,023
     
55,439
 
                 
  Stock awards excluded from the calculation of the diluted weighted average number of shares outstanding because their exercise price was greater than the average market price of the common shares, or their   inclusion would be antidilutive (000’s)
   
22
     
1,385
 

For the three months ended November 30, 2019, the diluted amount per share was the same amount as the basic amount per share since the dilutive effect of restricted share units and deferred share units was not included in the calculation; otherwise, the effect would have been antidilutive. Accordingly, the diluted amount per share for this period was calculated using the basic weighted average number of shares outstanding.


Page 22 of 38



Management’s Discussion and Analysis of Financial Condition
and Results of Operations
This discussion and analysis contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, and we intend that such forward-looking statements be subject to the safe harbors created thereby. Forward-looking statements are statements other than historical information or statements of current condition. Words such as may, expect, believe, plan, anticipate, intend, could, estimate, continue, or similar expressions or the negative of such expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events and circumstances are considered forward-looking statements. They are not 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 and length 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 potential recession; trade wars; 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); 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 in our other filings with the U.S. Securities and Exchange Commission and the Canadian securities commissions. We believe that the expectations reflected in the forward-looking statements are reasonable based on information currently available to us, but we cannot assure you that the expectations will prove to have been correct. Accordingly, you should not place undue reliance on these forward-looking statements. These statements speak only as of the date of this document. Unless required by law or applicable regulations, we undertake no obligation to revise or update any of them to reflect events or circumstances that occur after the date of this document. This discussion and analysis should be read in conjunction with the consolidated financial statements.

The following discussion and analysis of financial condition and results of operations is dated January 12, 2021.

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


Page 23 of 38



COMPANY OVERVIEW AND RECENT DEVELOPMENTS

We are a leading provider of test, monitoring and analytics solutions for fixed and mobile network operators, web‑scale companies, as well as for optical component and network equipment manufacturers in the global communications industry. Our broad portfolio of intelligent hardware and software solutions enables transformations related to fiber, 5G, and cloud-native network deployments. Ultimately, customers rely on our solutions to increase network capacity and improve quality of experience for end-users while driving operational efficiencies.

Our sales decreased 2.8% to $71.5 million in the first quarter of fiscal 2021 compared to $73.6 million for the same period last year. Bookings (purchase orders received from customers) slightly decreased 1.2% to $69.0 million in the first quarter of fiscal 2021, for a book-to-bill ratio of 0.97, from $69.9 million for the same period last year.

Net earnings amounted to $3.6 million, or $0.06 per diluted share, in the first quarter of fiscal 2021, compared to a net loss of $63,000, or $0.00 per share, for the same period last year. Net earnings for the first quarter of fiscal 2021 included after-tax expenses totaling $3.3 million, comprising $2.0 million in after-tax amortization of intangible assets, $0.6 million in stock-based compensation costs, $0.5 million in after-tax restructuring charges and a foreign exchange loss of $0.2 million. Net earnings for the first quarter of fiscal 2021 also included an amount of $1.4 million in after-tax (pre-tax $1.9 million) wage subsidy granted by the Canadian government as a result of the coronavirus pandemic, as well as an amount of $2.5 million insurance recovery related to the loss of assets. For the same period last year, net loss included net expenses totaling $2.0 million, comprising $1.4 million in after-tax amortization of intangible assets, $0.5 million in stock-based compensation costs and a foreign exchange loss of $0.1 million.

Adjusted EBITDA (net earnings (loss) before interest and other income/expense, income taxes, depreciation and amortization, stock‑based compensation costs, restructuring charges and foreign exchange loss) reached $9.9 million, or 13.9% of sales, in the first quarter of fiscal 2021, compared to $7.5 million, or 10.3% of sales for the same period last year. Adjusted EBITDA is a non-IFRS measure. See page 33 of this document for a complete reconciliation of adjusted EBITDA to IFRS net earnings (loss).

On December 31, 2020, we acquired all of the issued and outstanding shares of InOpticals Inc. (InOpticals), a Taiwan-based company that offers ultra-high-speed test instruments for the laboratory and manufacturing markets. The fair value of the total consideration for this acquisition is not expected to be material. This acquisition will be accounted for by applying the acquisition method as required by IFRS 3, Business Combinations, and the requirements of IFRS 10, Consolidated Financial Statements. The results of operations of the acquired business will be included in our consolidated financial statements starting December 31, 2020, being the acquisition date.


Page 24 of 38



RESULTS OF OPERATIONS
(in thousands of US dollars, except per share data, and as a percentage of sales for the periods indicated)
   
Three months ended
November 30,
   
Three months ended
November 30,
 
                         
   
2020
   
2019
   
2020
   
2019
 
                         
Sales
 
$
71,512
   
$
73,551
     
100.0
%
   
100.0
%
                                 
Cost of sales (1)
   
29,869
     
30,241
     
41.8
     
41.1
 
Selling and administrative
   
21,606
     
24,504
     
30.2
     
33.3
 
Net research and development
   
11,199
     
11,749
     
15.7
     
16.0
 
Depreciation of property, plant and equipment
   
1,341
     
1,443
     
1.9
     
2.0
 
Depreciation of lease right-of-use assets
   
833
     
851
     
1.1
     
1.2
 
Amortization of intangible assets
   
2,549
     
1,632
     
3.6
     
2.2
 
Interest and other (income) expense
   
(1,866
)
   
399
     
(2.6
)
   
0.5
 
Foreign exchange loss
   
246
     
126
     
0.3
     
0.2
 
Earnings before income taxes
   
5,735
     
2,606
     
8.0
     
3.5
 
Income taxes
   
2,181
     
2,669
     
3.0
     
3.6
 
Net earnings (loss) for the period
 
$
3,554
   
$
(63
)
   
5.0
%
   
(0.1
)%
                                 
Basic and diluted net earnings (loss) per share
 
$
0.06
   
$
(0.00
)
               
                                 
                                 
Other selected information:
                               
                                 
Gross margin before depreciation and amortization (2)
 
$
41,643
   
$
43,310
     
58.2
%
   
58.9
%
                                 
Gross research and development
 
$
14,153
   
$
13,832
     
19.8
%
   
18.8
%
                                 
Canadian emergency wage subsidy included in:
                               
Cost of sales
 
$
(430
)
 
$
     
0.6
%
   
%
Selling and administrative expenses
 
$
(620
)
 
$
     
0.9
%
   
%
Net research and development expenses
 
$
(835
)
 
$
     
1.1
%
   
%
 
Adjusted EBITDA (2)
 
$
9,949
   
$
7,544
     
13.9
%
   
10.3
%
(1)
Cost of sales is exclusive of depreciation and amortization, shown separately.
(2)
Refer to page 33 for non-IFRS measures.


Page 25 of 38



RESULTS OF OPERATIONS

Sales and Bookings

The following tables summarize sales and bookings by product line in thousands of US dollars:

Sales

   
Three months ended
November 30,
 
   
2020
   
2019
 
             
Test and measurement
 
$
50,473
   
$
55,947
 
Service assurance, systems and services
   
21,046
     
17,749
 
     
71,519
     
73,696
 
Foreign exchange losses on forward exchange contracts
   
(7
)
   
(145
)
Total sales
 
$
71,512
   
$
73,551
 

Bookings

   
Three months ended
November 30,
 
   
2020
   
2019
 
             
Test and measurement
 
$
51,248
   
$
55,009
 
Service assurance, systems and services
   
17,802
     
15,049
 
     
69,050
     
70,058
 
Foreign exchange losses on forward exchange contracts
   
(7
)
   
(145
)
Total bookings
 
$
69,043
   
$
69,913
 

Sales by geographic region

The following table summarizes sales by geographic region:

   
Three months ended
November 30,
 
   
2020
   
2019
 
             
Americas
   
44
%
   
54
%
Europe, Middle East and Africa (EMEA)
   
37
     
29
 
Asia-Pacific (APAC)
   
19
     
17
 
     
100
%
   
100
%

For the three months ended November 30, 2020, our sales decreased 2.8% to $71.5 million, compared to $73.6 million for the same period last year, while our bookings decreased 1.2% to $69.0 million, compared to $69.9 million for the same period last year, for a book-to-bill ratio of 0.97.


Page 26 of 38



Sales

In the first quarter of fiscal 2021, the 2.8% year-over-year decrease in our total sales comes from our test and measurement (T&M) product line, which delivered decrease in sales of 9.8%, while sales of our service assurance, systems and services (SASS) product line increased 18.6% compared to the same period last year.

In the first quarter of fiscal 2021, sales of our T&M product line decreased 9.8% year-over-year to $50.5 million, down from a record-high $55.9 million for the same period last year. This year-over-year decrease in sales is mainly due to ongoing reduction in large-scale network deployment in favor of maintenance projects due to the coronavirus pandemic, which reduced sales of our physical and transport and datacom solutions year-over-year, especially in the Americas and APAC region. This was offset in part by a catchup in spending to enable network deployment in EMEA following a slowdown over the last quarters due to the coronavirus pandemic, and from larger calendar year-end budget spending on the part of some communication service providers (CSPs) in the Americas. Finally, sales of our T&M product line were to some extent positively affected by currency fluctuations year-over-year.

In the first quarter of fiscal 2021, sales of our SASS product line increased 18.6% year-over-year to $21.0 million, from $17.7 million for the same period last year. In the first quarter of fiscal 2021, we received customer acceptance for certain large orders in the EMEA and APAC regions for our network optimization, monitoring and real-time topology solutions, which increased our sales year-over-year. In addition, sales of our SASS product line were to some extent positively affected by currency fluctuations year-over-year. Otherwise, in the first quarter of fiscal 2021, the ongoing coronavirus pandemic had a negative impact on sales of our SASS product line worldwide, as delivery and commissioning of our solutions were more difficult to execute. Sales and bookings of our SASS product line are characterized by large intermittent orders from customers that may have prolonged sales and revenue recognition cycles; therefore, our quarterly sales and bookings are subject to quarterly fluctuations.

Bookings

In the first quarter of fiscal 2021, the 1.2% year-over-year decrease in our total bookings comes from our T&M product line, which delivered decrease in bookings of 6.8%, while bookings of our SASS product line increased 18.3% during the same period.

In the first quarter of fiscal 2021, bookings of our T&M product line decreased 6.8% year-over-year. This year-over-year decrease in bookings is mainly due to the ongoing reduction in large-scale network deployments in favor of maintenance projects as a result of the coronavirus pandemic, which reduced bookings of our physical and transport and datacom solutions year-over-year especially in the Americas and APAC region. This was offset in part by a catchup in spending to enable network deployment in EMEA following a slowdown over the last quarters due to the coronavirus pandemic, and from larger calendar year-end budget spending on the part of some communication service providers (CSPs) in the Americas. Finally, bookings of our T&M product line were to some extent positively affected by currency fluctuations year-over-year.

In the first quarter of fiscal 2021, bookings of our SASS product line increased 18.3% year-over-year. In the first quarter of fiscal 2021, most of the year-over increase in bookings comes from the EMEA region, as we received a higher level of orders for our monitoring solutions. In addition, bookings of our SASS product line were to some extent positively affected by currency fluctuations year-over-year. Otherwise, in the first quarter of fiscal 2021, the ongoing coronavirus pandemic had a negative impact on bookings of our SASS product line, as we experienced longer delays to close certain deals.

Customer concentration

In the first quarters of fiscal 2020 and 2021, our top customer accounted for 11.9% and 4.3% of our sales respectively. In the first quarters of fiscal 2020 and 2021, our top three customers accounted for 19.7% and 12.6% of our sales, respectively.


Page 27 of 38



GROSS MARGIN BEFORE DEPRECIATION AND AMORTIZATION
(non-IFRS measure — refer to page 33 of this document)

Gross margin before depreciation and amortization reached 58.2% of sales for the three months ended November 30, 2020, compared to 58.9% for the same period last year.

In the first quarter of fiscal 2021, gross margin before depreciation and amortization included $0.4 million for the wage subsidy granted by the Canadian government as a result of the coronavirus pandemic; this represented a positive impact of 0.6% of sales on our gross margin before depreciation and amortization year-over-year.

Otherwise, in the first quarter of fiscal 2021, our gross margin before depreciation and amortization was negatively impacted by a less favorable sales mix overall compared to the same period last year.


SELLING AND ADMINISTRATIVE EXPENSES

For the three months ended November 30, 2020, selling and administrative expenses were $21.6 million, or 30.2% of sales, compared to $24.5 million, or 33.3% of sales, for the same period last year.

In the first quarter of fiscal 2021, our selling and administrative expenses decreased $2.9 million compared to the same period last year.

In the first quarter of fiscal 2021, worldwide constraints and preventive measures leading to restrictions on travel and lockdown periods due to the coronavirus pandemic resulted in lower travel expenses year‑over-year.

In addition, in the first quarter of fiscal 2021, we had the full impact of our 2020 restructuring plan, which reduced our selling and administrative expenses year-over-year.

Finally, in the first quarter of fiscal 2021, our selling and administrative expenses included $0.6 million for the wage subsidy granted by the Canadian government as a result of the coronavirus pandemic; this represented a positive impact of 0.9% of sales on our selling and administrative expenses year‑over‑year.

Otherwise, in the first quarter of fiscal 2021, we incurred restructuring charges of $0.5 million or 0.8% of sales (nil in 2020).

Also, in the first quarter of fiscal 2021, the decrease in the average value of the US dollar compared to other currencies had to some extent a negative impact on our selling and administrative expenses year-over-year.

In the first quarter of fiscal 2021, our selling and administrative expenses amounted to 30.2% of sales, 3.1% lower compared to 33.3% of sales in the same period last year, as a travel expenses decreased faster than sales year-over-year, and because of the wage subsidy.


RESEARCH AND DEVELOPMENT EXPENSES

Gross Research and Development Expenses

For the three months ended November 30, 2020, gross research and development expenses totaled $14.2 million, or 19.8% of sales, compared to $13.8 million, or 18.8% of sales for the same period last year.

In the first quarter of fiscal 2021, our gross research and development expenses increased $0.4 million year‑over‑year.


Page 28 of 38



In the first quarter of fiscal 2021, inflation and salary increases contributed to increasing our gross research and development expenses year-over-year.

In addition, in the first quarter of fiscal 2021, the decrease in the average value of the US dollar compared to other currencies had to some extent a negative impact on our gross research and development expenses year-over-year.

In the first quarter of fiscal 2021, our gross research and development expenses amounted to 19.8% of sales, 1.0% higher compared to 18.8% of sales in the same period last year, as these expenses slightly increased while our sales decreased year-over-year.

Tax Credits and Grants

For the three months ended November 30, 2020, tax credits for research and development activities were $3.0 million, or 20.9% of gross research and development expenses, compared to $2.1 million, or 15.1% of gross research and development expenses, for the same period last year.

In the first quarter of fiscal 2021, our tax credits and grants included $0.8 million, or 5.9% of gross research and development expenses, for the wage subsidy granted by the Canadian government as a result of the coronavirus pandemic (nil in 2020).

For the three months ended November 30, 2020, the increase in our tax credits and grants in dollars and as a percentage of gross research and development, compared to the same period last year mainly comes from the wage subsidy recorded during the quarter.


AMORTIZATION OF INTANGIBLE ASSETS

In conjunction with the business combinations we completed, we recorded intangible assets primarily consisting of core technology and customer relationships. In addition, intangible assets include software.

For the three months ended November 30, 2020, amortization of intangible assets reached $2.5 million, compared to $1.6 million for the same period last year.

The year-over-year increase in our amortization expense in the first quarter of fiscal 2021, compared to the same period last year, is due to increased amortization expense for acquired backlog (customer relationship) as related sales were recognized during the quarter.


INTEREST AND OTHER (INCOME) EXPENSES

For the three months ended November 30, 2020, interest and other income totaled $1.9 million, compared to interest and other expenses of $0.4 million for the same period last year.

During the first quarter of fiscal 2021, other income included an insurance recovery of $2.5 million related to the loss of assets (nil in 2020).


INCOME TAXES

For the three months ended November 30, 2020, we reported income tax expenses of $2.2 million on earnings before income taxes of $5.7 million. For the corresponding period last year, we reported income tax expenses of $2.7 million on earnings before income taxes of $2.6 million.


Page 29 of 38



These distorted tax rates mainly resulted from the fact that we did not recognize deferred income tax assets for some of our subsidiaries at loss. In addition, we had some other non-deductible losses and expenses, such as stock-based compensation costs. Otherwise, our effective tax rate would have been closer to the combined Canadian and provincial statutory tax rate of 27% for these periods.

Please refer to note 11 to our condensed unaudited interim consolidated financial statements for a full reconciliation of our income tax provision.


LIQUIDITY AND CAPITAL RESOURCES

Cash Requirements and Capital Resources

As at November 30, 2020, cash and short-term investments totaled $16.5 million, while our working capital was at $40.2 million. Our cash and short-term investments decreased by $17.2 million in the first quarter of fiscal 2021 compared to the previous quarter-end.

The following table summarizes the decrease in cash and short-term investments during the first quarter of fiscal 2021 in thousands of US dollars:

Decrease in bank loan
 
$
(16,338
)
Purchases of capital assets
   
(1,111
)
Repayment of lease liabilities and long-term debt
   
(1,414
)
Redemption of share capital
   
(380
)
Cash flows provided by operating activities
 

2,062
 
Other
   
(58
)
         
   
$
(17,239
)

Our short-term investments of $1.1 million consist of debt instruments issued by high-credit-quality corporations; therefore, we consider the risk of non-performance of these financial instruments to be limited. These debt instruments are not expected to be affected by a significant liquidity risk. For the purpose of managing our cash position, we have established a cash management policy, which we follow and monitor on a regular basis.

We believe that our cash balances and short-term investments totaling $16.5 million, combined with our available revolving credit facilities of up to $61.4 million until May 2021 and $ 46.0 million thereafter, will be sufficient to meet our liquidity and capital requirements for the foreseeable future. In addition to these assets and credit facilities, we have unused available lines of credit of $23.0 million for foreign currency exposure related to forward exchange contracts. However, possible operating losses, additional restructuring costs and/or possible investments in or acquisitions of complementary businesses, products or technologies may require additional financing. There can be no assurance that additional debt or equity financing will be available when required or, if available, that it can be secured on satisfactory terms.

Sources and Uses of Cash

We finance our operations and meet our capital expenditure requirements through a combination of cash flows from operating activities, the use of our cash and short-term investments, borrowing under our existing credit facilities and the issuance of subordinate voting shares.

Operating activities

Cash flows provided by operating activities were $2.1 million for the three months ended November 30, 2020, compared to cash flows used of $6.5 million for the same period last year.


Page 30 of 38



Cash flows provided by operating activities in the first quarter of fiscal 2021 were attributable to the net earnings after items not affecting cash of $6.1 million, partially offset by the negative net change in non-cash operating items of $4.0 million; this was mainly due to the negative effect on cash of the $0.8 million increase in our accounts receivable due to the Canadian emergency wage subsidy recorded during the quarter but not yet recovered, the $2.6 million increase in inventories to meet future demand and the $3.8 million decrease in our accounts payable, accrued liabilities and provisions due to the $1.9 million payment of restructuring charges during that quarter, as well as the timing of purchases and payments. These negative effects on cash were offset in part by the positive effect on cash of the $1.2 million decrease in our income taxes and tax credits due to tax credits and income taxes recovered during the quarter, the $0.6 million decrease in our prepaid expenses due to the timing of payments made during the quarter, and the $1.4 million decrease in our other assets as contract assets decreased following the recognition of related sales during the quarter.

Cash flows used by operating activities in the first quarter of fiscal 2020 were attributable to the net loss after items not affecting cash of $0.3 million, and the negative net change in non-cash operating items of $6.2 million; this was mainly due to the negative effect on cash of the $3.5 million increase in inventories to meet future demand and the $3.7 million decrease in our accounts payable, accrued liabilities and provisions due to the timing of purchases and payments during the quarter. These negative effects on cash were offset in part by the positive effect on cash of the $0.5 million decrease in our income taxes and tax credits due to tax credits and income taxes recovered during the quarter, and the $0.4 million decrease in our prepaid expenses due to the timing of payments made during the quarter.

Investing activities

Cash flows used by investing activities were $1.3 million for the three months ended November 30, 2020, compared to $1.6 million for the same period last year.

In the first quarter of fiscal 2021, we made cash payments of $1.1 million for the purchase of capital assets, and we acquired $0.2 million worth of short-term investments during the quarter.

For the corresponding period last year, we made cash payments of $2.0 million for the purchase of capital assets. However, we disposed of $0.4 million worth of short-term investments during the quarter.

Financing activities

Cash flows used by financing activities amounted to $18.1 million in the first quarter of fiscal 2021, compared to cash flows provided of $6.6 million during the same period last year.

In the first quarter of fiscal 2021, our bank loan decreased by $16.3 million, we repaid $1.4 million of our lease liabilities and long-term debt and we redeemed share capital for $0.4 million.

For the corresponding period last year, our bank loan increased by $8.4 million, but we repaid $1.5 million of our lease liabilities and long-term debt and we redeemed share capital for $0.2 million.

Contractual Obligations

We are committed under the terms of contractual obligations, which have various expiration dates, primarily for our lease liabilities, long-term debt and licensing of intellectual property. The following table summarizes our contractual obligations as at November 30, 2020 in thousands of US dollars:


Page 31 of 38



   
Lease liabilities
   
Long-term
debt
   
Licensing
agreements
   
Total
 
                         
No later than 1 year
 
$
2,870
   
$
1,880
   
$
1,862
   
$
6,612
 
Later than 1 year and no later than 5 years
   
5,810
     
1,759
     
288
     
7,857
 
Later than 5 years
   
905
   
   
     
905
 
   
$
9,585
   
$
3,639
   
$
2,150
   
$
15,374
 

In addition, as at November 30, 2020, we had letters of guarantee amounting to $1.2 million for our own selling and purchasing requirements, which were reserved from our lines of credit; these letters of guarantee expire at various dates through fiscal 2022.


FORWARD EXCHANGE CONTRACTS

We are exposed to currency risk as a result of our export sales of products manufactured in Canada, China, Finland and France, the majority of which are denominated in US dollars and euros. In addition, we are exposed to currency risk as a result of our research and development activities in India (Indian rupees). These risks are partially hedged by forward exchange contracts. Forward exchange contracts, which are designated as cash flow hedging instruments, qualify for hedge accounting.

As at November 30, 2020, we held forward exchange contracts to sell US dollars for Canadian dollars and Indian rupees at various forward rates, which are summarized as follows:

US dollars – Canadian dollars

Expiry dates
 
Contractual
amounts
   
Weighted average
contractual
forward rates
 
             
December 2020 to August 2021
 
$
26,800,000
     
1.3329
 
September 2021 to August 2022
   
18,800,000
     
1.3492
 
September 2022 to February 2023
   
3,600,000
     
1.3324
 
Total
 
$
49,200,000
     
1.3391
 

US dollars – Indian rupees

Expiry dates
 
Contractual
amounts
   
Weighted average
contractual
forward rates
 
             
December 2020 to February 2021
 
$
750,000
     
77.88
 

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 $1.5 million as at August 31, 2020, and $1.7 million as at November 30, 2020, mainly for our US dollar/Canadian dollar forward exchange contracts. The quarter-end exchange rate was CA$1.2965 = US$1.00 as at November 30, 2020.


Page 32 of 38



SHARE CAPITAL

As at January 12, 2021, EXFO had 31,643,000 multiple voting shares outstanding, entitling to 10 votes each and 25,684,370 subordinate voting shares outstanding. The multiple voting shares and the subordinate voting shares are unlimited as to number and are without par value.


STRUCTURED ENTITIES

As at November 30, 2020, we did not have interests in any structured entities.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Coronavirus pandemic

The second wave of the coronavirus pandemic worldwide impacts the global economy, as preventive measures and extended restrictions on transportation and lockdowns for individuals are still being imposed in most 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.

For a description of the critical accounting policies, judgments in applying accounting policies as well as estimates and assumptions used in the preparation of our consolidated financial statements, refer to our Annual Report on Form 20-F for the year ended August 31, 2020, filed with the U.S. Securities and Exchange Commission and the Canadian securities commissions.


RISKS AND UNCERTAINTIES

For the first quarter of fiscal 2021, there have been no material changes from the risk factors disclosed in our Annual Report on Form 20-F for the year ended August 31, 2020.


NON-IFRS MEASURES

We provide non-IFRS measures (gross margin before depreciation and amortization and adjusted EBITDA) as supplemental information regarding our 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/expenses, income taxes, depreciation and amortization, stock-based compensation costs, restructuring charges and foreign exchange loss.

These non-IFRS measures eliminate the effect on our 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. We use these measures for evaluating our historical and prospective financial performance, as well as our performance relative to our competitors. These non-IFRS measures are also used by financial analysts that evaluate and compare our performance against that of our competitors and industry players in our sector.

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


Page 33 of 38



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
November 30,
 
   
2020
   
2019
 
             
IFRS net earnings (loss) for the period
 
$
3,554
   
$
(63
)
                 
Add (deduct):
               
                 
Depreciation and amortization
   
4,723
     
3,926
 
Interest and other (income) expense
   
(1,866
)
   
399
 
Income taxes
   
2,181
     
2,669
 
Stock-based compensation costs
   
568
     
487
 
Restructuring charges
   
543
   
 
Foreign exchange loss
   
246
     
126
 
Adjusted EBITDA for the period
 
$
9,949
   
$
7,544
 
                 
Adjusted EBITDA in percentage of sales
   
13.9
%
   
10.3
%


QUARTERLY SUMMARY FINANCIAL INFORMATION (1)
(tabular amounts in thousands of US dollars, except per share data)

   
Quarters ended
 
   
November 30,
2020
   
August 31,
2020
   
May 31,
2020
   
February 29,
2020
 
                         
Sales
 
$
71,512
   
$
70,572
   
$
66,147
   
$
55,313
 
Cost of sales (2)
 
$
29,869
   
$
32,573
   
$
27,948
   
$
23,796
 
Net earnings (loss)
 
$
3,554
   
$
(3,633
)
 
$
3,177
   
$
(9,021
)
Basic and diluted net earnings (loss) per share
 
$
0.06
   
$
(0.07
)