EXFO Inc.
EXFO INC. (Form: 6-K, Received: 03/29/2017 16:55:45)
 
 

 
 
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 March 2017

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

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


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


Form 20-F
 
Form 40-F

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

Yes
 
No


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

 


 
 
 
Table of Contents
 
 
Signatures
Press Release
Condensed Unaudited Interim Consolidated Balance Sheets
Condensed Unaudited Interim Consolidated Statements of Earnings
Condensed Unaudited Interim Consolidated Statements of Comprehensive Income
Condensed Unaudited Interim Consolidated Statements of Changes in Shareholders' Equity
Condensed Unaudited Interim Consolidated Statements of Cash Flows
Notes to Condensed Unaudited Interim Consolidated Financial Statements
Management's Discussion and Analysis of Financial Condition and Results of Operations
Form 52-109F2 - Certification of Interim Filings - Full Certificate - CEO
Form 52-109F2 - Certification of Interim Filings - Full Certificate - CFO
 
 
 
 
 
On March 29, 2017, EXFO Inc., a Canadian corporation, reported its results of operations for the second fiscal quarter ended February 28, 2017 . This report on Form 6-K sets forth the news release relating to EXFO's announcement and certain information relating to EXFO's financial condition and results of operations as well as certifications of interim filings for the second fiscal quarter of the 2017 fiscal year. This press release and information relating to EXFO's financial condition and results of operations and certifications of interim filings for the second fiscal quarter of the 2017 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 41

 
 
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/ Germain Lamonde
Name:  Germain Lamonde
Title:    President and Chief Executive Officer
   


Date: March 29, 2017
 
 
Page 2 of 41

 
 

EXFO Reports Second-Quarter Results for Fiscal 2017

§
Sales increase 12.0% year-over-year to US$60.0 million
§
Adjusted EBITDA reaches US$4.9 million, or 8.1% of sales
§
Cash flows from operating activities total US$14.4 million

QUEBEC CITY, CANADA, March 29, 2017 — EXFO Inc. (NASDAQ: EXFO; TSX: EXF), the global network test, data and analytics experts, reported today financial results for the second quarter ended February 28, 2017.
Sales reached US$60.0 million in the second quarter of fiscal 2017 compared to US$53.6 million in the second quarter of 2016 and US$61.8 million in the first quarter of 2017. At the halfway mark of fiscal 2017, sales increased 11.9% year-over-year to US$121.8 million.
Bookings attained US$55.9 million in the second quarter of fiscal 2017 compared to US$59.7 million in the same period last year and US$65.9 million in the first quarter of 2017. The company's book-to-bill ratio was 0.93 in the second quarter of 2017 and 1.00 at the half-way point of 2017, leading to year-over-year bookings growth of 3.0% after two quarters.
Gross margin before depreciation and amortization * amounted to 61.7% of sales in the second quarter of fiscal 2017 compared to 64.7% in the second quarter of 2016 and 63.1% in the first quarter of 2017. After six months into fiscal 2017, gross margin accounted for 62.4% of sales.
IFRS net earnings in the second quarter of fiscal 2017 totaled US$1.0 million, or US$0.02 per diluted share, compared US$4.0 million, or US$0.07 per diluted share, in the same period last year and US$3.3 million, or US$0.06 per diluted share, in the first quarter of 2017. IFRS net earnings in the second quarter of 2017 included US$0.6 million in after-tax amortization of intangible assets, US$0.4 million in stock-based compensation costs and a foreign exchange loss of US$0.3 million. IFRS net earnings totaled US$4.3 million in the first half of fiscal 2017 compared to US$5.7 million in the first half of 2016. IFRS net earnings in the first half of 2017 included a foreign exchange gain of US$0.2 million compared to a foreign exchange gain of US$1.4 million in the first half of 2016.
Adjusted EBITDA * totaled US$4.9 million, or 8.1% of sales, in the second quarter of fiscal 2017 compared to US$5.3 million, or 9.9% of sales, in the second quarter of 2016 and US$6.3 million, or 10.2% of sales, in the first quarter of 2017. At the halfway point of fiscal 2017, adjusted EBITDA totaled US$11.2 million, or 9.2% of sales, compared to US$10.6 million, or 9.7% of sales, in the first half of 2016.
EXFO generated US$14.4 million in cash flows from operating activities in the second quarter of fiscal 2017 and closed the quarter with a cash position of US$52.4 million and no debt.
Following the quarter-end, EXFO acquired Ontology Systems, a technology leader in real-time network topology discovery and service-chain mapping, for a consideration of US$7.6 million, net of cash, plus an earnout based on future sales.
"I am particularly pleased we delivered double-digit, year-over-year revenue growth for a third consecutive quarter, even though bookings were softer than anticipated due to delays in new calendar year budget approvals and deal pushouts," said Germain Lamonde, EXFO's Founder, Chairman and CEO. "We delivered strong sales growth in the optical and 100 Gbit/s transport markets, both in the field and lab, and continued strengthening our leadership position with major product launches in the 200 Gbit/s and 400 Gbit/s test segments at the recent Optical Fiber Conference. Earlier at Mobile World Congress, we announced the acquisition of Ontology Systems' automated network topology discovery technology and the introduction of accurate, one-way latency monitoring capabilities. Once combined with our 3D analytics platform, these technologies will significantly enhance our real-time monitoring of VoWiFi, OTT video and VoIP services over hybrid physical-virtual networks and strengthen our positioning in the strategic NFV/SDN, 5G and IoT markets."

 
Page 3 of 41

 


 
 
Selected Financial Information
(In thousands of US dollars)

     
Q2 2017
     
Q1 2017
     
Q2 2016
 
                         
  Physical-layer sales
 
$
38,038
   
$
42,016
   
$
32,582
 
  Protocol-layer sales
   
22,097
     
20,009
     
21,990
 
  Foreign exchange losses on forward exchange contracts
   
(105
)
   
(240
)
   
(975
)
  Total sales
 
$
60,030
   
$
61,785
   
$
53,597
 
                         
  Physical-layer bookings
 
$
34,031
   
$
44,090
   
$
34,874
 
  Protocol-layer bookings
   
21,992
     
22,009
     
25,804
 
  Foreign exchange losses on forward exchange contracts
   
(105
)
   
(240
)
   
(975
)
  Total bookings
 
$
55,918
   
$
65,859
   
$
59,703
 
  Book-to-bill ratio (bookings/sales)
   
0.93
     
1.07
     
1.11
 
  Gross margin before depreciation and amortization *
 
$
37,041
   
$
38,972
   
$
34,693
 
     
61.7
%
   
63.1
%
   
64.7
%
                         
  Other selected information:
                       
  IFRS net earnings
 
$
1,008
   
$
3,303
   
$
3,963
 
  Amortization of intangible assets
 
$
768
   
$
427
   
$
286
 
  Stock-based compensation costs
 
$
353
   
$
258
   
$
314
 
  Net income tax effect of the above items
 
$
(162
)
 
$
(64
)
 
$
(30
)
  Foreign exchange (gain) loss
 
$
272
   
$
(512
)
 
$
(1,101
)
  Adjusted EBITDA *
 
$
4,875
   
$
6,321
   
$
5,280
 

Operating Expenses
Selling and administrative expenses totaled US$21.3 million, or 35.4% of sales in the second quarter of fiscal 2017 compared to US$19.6 million, or 36.5% of sales, in the same period last year and US$21.6 million, or 35.0% of sales, in the first quarter of 2017.
Net R&D expenses totaled US$11.3 million, or 18.8% of sales, in the second quarter of fiscal 2017 compared to US$10.2 million, or 19.0% of sales, in the second quarter of 2016 and US$11.3 million, or 18.3% of sales, in the first quarter of 2017.
Second-Quarter and First-Half Highlights
·
Sales and bookings. EXFO experienced strong demand for its optical and high-speed transport test solutions, mainly in the Americas, and continued traction of its LTB-8 rackmount platform for lab and manufacturing floor applications in the second quarter of 2017. Bookings decreased 6.3% year-over-year in the second quarter primarily because the company had secured two large monitoring and analytics orders in the second quarter of 2016, but witnessed delays in network operator budget releases and deal approvals in the most recent quarter. In the first half of 2017, bookings improved 3.0% year-over-year. In terms of segmented sales, Physical-layer sales surged 16.7% year-over-year in the second quarter of 2017, while Protocol-layer sales were flat. On a geographical basis, sales increased 14.5% year-over in the Americas, 12.4% in EMEA and 6.1% in Asia Pacific. Revenue distribution among these three regions in the second quarter amounted to 50% from the Americas, 29% from EMEA and 21% from Asia-Pacific. EXFO's top customer accounted for 10.0% of sales in the second quarter and 12.0% of sales in the first half of 2017, while the top three customers represented 16.6% and 19.2% of sales, respectively.
·
Profitability . EXFO generated adjusted EBITDA of US$4.9 million, or 8.1% of sales, in the second quarter of 2017 and US$11.2 million, or 9.2% of sales, after six months into fiscal 2017. EXFO also delivered US$14.4 million in cash flows from operating activities in the second quarter of 2017 to raise its cash position to US$52.4 million at the quarter end.
 
 
Page 4 of 41

 
 

 
 
·
Innovation. EXFO launched several new products during the second quarter and following the quarter-end while taking part in two key industry events: Mobile World Congress and Optical Fiber Conference. Major product introductions included a 400 Gbit/s optical transport test solution, 200 Gbit/s optical spectrum analyzer and FTB-4 test platform—all focused on optical high-speed networking applications in the lab and field; an automated inspection probe for testing multifiber connectors in data centers and radio access networks (RANs); optical RF over OBSAI (open base station architecture initiative) link test capabilities to complement recently acquired optical RF over CPRI (common public radio interface) test technology for C-RAN deployments; and the company integrated Ookla's Speedtest technology into its MaxTester residential broadband test solution. Finally, EXFO received Frost & Sullivan's Market Share Leadership Award for the sixth consecutive year by building on its No. 1 position in the portable fiber-optic test equipment market.
Business Outlook
EXFO forecasts sales between US$58.0 million and US$63.0 million for the third quarter of fiscal 2017, while IFRS net results are expected to range between a loss of US$0.02 per share and earnings of US$0.02 per share. IFRS net results include US$0.02 per share in after-tax amortization of intangible assets and stock-based compensation costs as well as an anticipated foreign exchange gain of US$0.01 per share.
This guidance was established by management based on existing backlog as of the date of this press release, seasonality, expected bookings for the remaining of the quarter, as well as exchange rates as of the day of this press release.
Conference Call and Webcast
EXFO will host a conference call today at 5 p.m. (Eastern time) to review second-quarter results for fiscal 2017. To listen to the conference call and participate in the question period via telephone, dial 1- 719-457-1036.   Please take note the following participant passcode will be required: 6277231. Germain Lamonde, Executive Chairman, Philippe Morin, Chief Operating Officer, and Pierre Plamondon, CPA, Vice-President of Finance and Chief Financial Officer, will participate in the call. An audio replay of the conference call will be available two hours after the event until 8:00 p.m. on April 5, 2017. The replay number is 1-719-457-0820 and the required participant passcode is 6277231. The audio Webcast and replay of the conference call will also be available on EXFO's Website at  www.EXFO.com , under the Investors section.
About EXFO
EXFO develops smarter network test, data and analytics solutions for the world's leading communications service providers, network equipment manufacturers and web-scale companies. Since 1985, we've worked side by side with our clients in the lab, field, data center, boardroom and beyond to pioneer essential technology and methods for each phase of the network lifecycle. Our portfolio of test orchestration and real-time 3D analytics solutions turn complex into simple and deliver business-critical insights from the network, service and subscriber dimensions. Most importantly, we help our clients flourish in a rapidly transforming industry where "good enough" testing and data analytics just isn't good enough anymore—it never was for us, anyway. For more information, visit EXFO.com and follow us on the EXFO Blog .
 
 
Page 5 of 41

 
 

 
 
Forward-Looking Statements
This press 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 statement that refers to expectations, projections or other characterizations of future events and circumstances are considered forward-looking statements. They are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in forward-looking statements due to various factors including, but not limited to, macroeconomic uncertainty as well as capital spending and network deployment levels in the telecommunications industry (including our ability to quickly adapt cost structures with anticipated levels of business and our ability to manage inventory levels with market demand); future economic, competitive, financial and market conditions; consolidation in the global telecommunications test and service assurance industry and increased competition among vendors; capacity to adapt our future product offering to future technological changes; limited visibility with regards to timing and nature of customer orders; longer sales cycles for complex systems involving customers' acceptances delaying revenue recognition; 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; our ability to successfully integrate businesses that we acquire; 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 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. The company uses these measures for the purpose of evaluating historical and prospective financial performance, as well as its performance relative to competitors. These measures also help the company to plan and forecast for future periods as well as to make operational and strategic decisions. EXFO believes that providing this information, in addition to IFRS measures, allows investors to see the company's results through the eyes of management, and to better understand its historical and future financial performance.
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.
Gross margin before depreciation and amortization represents sales less cost of sales, excluding depreciation and amortization.
Adjusted EBITDA represents net earnings before interest, income taxes, depreciation and amortization, stock-based compensation costs and foreign exchange gain or loss.
 
 
Page 6 of 41

 
 

 
 
The following table summarizes the reconciliation of adjusted EBITDA to IFRS net earnings, in thousands of US dollars:
Adjusted EBITDA
     
Q2 2017
     
Q1 2017
     
Q2 2016
 
                         
IFRS net earnings for the period
 
$
1,008
   
$
3,303
   
$
3,963
 
                         
Add (deduct):
                       
                         
Depreciation of property, plant and equipment
   
962
     
903
     
924
 
Amortization of intangible assets
   
768
     
427
     
286
 
Interest (income) expense
   
(9
)
   
(20
)
   
(470
)
Income taxes
   
1,521
     
1,962
     
1,364
 
Stock-based compensation costs
   
353
     
258
     
314
 
Foreign exchange (gain) loss
   
272
     
(512
)
   
(1,101
)
Adjusted EBITDA for the period
 
$
4,875
   
$
6,321
   
$
5,280
 
                         
Adjusted EBITDA in percentage of sales
   
8.1
%
   
10.2
%
   
9.9
%


For more information
Vance Oliver
Director, Investor Relations
(418) 683-0913, Ext. 23733
 
 
Page 7 of 41

 
 
EXFO Inc.
Condensed Unaudited Interim Consolidated Balance Sheets
 
(in thousands of US dollars)
 
 
   
As at
February 28,
2017
   
As at
August 31,
2016
 
Assets
           
             
Current assets
           
Cash
 
$
48,343
   
$
43,208
 
Short-term investments
   
4,074
     
4,087
 
Accounts receivable
               
Trade
   
36,818
     
42,993
 
Other
   
5,435
     
2,474
 
Income taxes and tax credits recoverable
   
4,131
     
4,208
 
Inventories
   
33,039
     
33,004
 
Prepaid expenses
   
2,971
     
3,099
 
     
134,811
     
133,073
 
                 
Tax credits recoverable
   
34,159
     
34,594
 
Property, plant and equipment
   
36,843
     
35,978
 
Intangible assets (note 3)
   
7,034
     
3,391
 
Goodwill (note 3)
   
26,094
     
21,928
 
Deferred income tax assets
   
7,078
     
8,240
 
Other assets
   
435
     
589
 
                 
   
$
246,454
   
$
237,793
 
Liabilities
               
                 
Current liabilities
               
Accounts payable and accrued liabilities
 
$
37,803
   
$
37,174
 
Provisions
   
258
     
299
 
Income taxes payable
   
545
     
971
 
Deferred revenue
   
11,335
     
9,486
 
     
49,941
     
47,930
 
                 
Deferred revenue
   
6,433
     
5,530
 
Deferred income tax liabilities
   
2,441
     
2,857
 
Other liabilities
   
30
     
75
 
     
58,845
     
56,392
 
                 
Shareholders' equity
               
Share capital (note 5)
   
89,841
     
85,516
 
Contributed surplus
   
17,843
     
18,150
 
Retained earnings
   
130,620
     
126,309
 
Accumulated other comprehensive loss
   
(50,695
)
   
(48,574
)
                 
     
187,609
     
181,401
 
                 
   
$
246,454
   
$
237,793
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
Page 8 of 41

 
 
EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Earnings
 
(in thousands of US dollars, except share and per share data)
 
 
   
Three months
ended
February 28,
2017
   
Six months
ended
February 28,
2017
   
Three months
ended
February 29,
2016
   
Six months
ended
February 29,
2016
 
                         
Sales
 
$
60,030
   
$
121,815
   
$
53,597
   
$
108,829
 
                                 
Cost of sales   (1)
   
22,989
     
45,802
     
18,904
     
39,041
 
Selling and administrative
   
21,255
     
42,850
     
19,565
     
39,817
 
Net research and development
   
11,264
     
22,578
     
10,162
     
20,095
 
Depreciation of property, plant and equipment
   
962
     
1,865
     
924
     
1,899
 
Amortization of intangible assets
   
768
     
1,195
     
286
     
586
 
Interest and other income
   
(9
)
   
(29
)
   
(470
)
   
(407
)
Foreign exchange (gain) loss
   
272
     
(240
)
   
(1,101
)
   
(1,411
)
Earnings before income taxes
   
2,529
     
7,794
     
5,327
     
9,209
 
                                 
Income taxes (note 7)
   
1,521
     
3,483
     
1,364
     
3,480
 
                                 
Net earnings for the period
 
$
1,008
   
$
4,311
   
$
3,963
   
$
5,729
 
                                 
Basic net earnings per share
 
$
0.02
   
$
0.08
   
$
0.07
   
$
0.11
 
                                 
Diluted net earnings per share
 
$
0.02
   
$
0.08
   
$
0.07
   
$
0.10
 
                                 
Basic weighted average number of shares outstanding (000's)
   
54,506
     
54,195
     
53,927
     
53,870
 
                                 
Diluted weighted average number of shares outstanding (000's) (note 8)
   
55,681
     
55,341
     
54,615
     
54,575
 

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

Page 9 of 41

 
 
EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Comprehensive Income
 
(in thousands of US dollars)
 
 
   
Three months
ended
February 28,
2017
   
Six months
ended
February 28,
2017
   
Three months
ended
February 29,
2016
   
Six months
ended
February 29,
2016
 
                         
Net earnings for the period
 
$
1,008
   
$
4,311
   
$
3,963
   
$
5,729
 
Other comprehensive income (loss), net of income taxes
                               
Items that will not be reclassified subsequently to net earnings
                               
Foreign currency translation adjustment
   
2,019
     
(2,198
)
   
(2,204
)
   
(4,713
)
Items that may be reclassified subsequently to net earnings
                               
Unrealized gains/losses on forward exchange contracts
   
326
     
(235
)
   
50
     
(220
)
Reclassification of realized gains/losses on forward exchange contracts in net earnings
   
139
     
320
     
839
     
1,717
 
Deferred income tax effect of gains/losses on forward exchange contracts
   
(100
)
   
(8
)
   
(242
)
   
(390
)
Other comprehensive income (loss)
   
2,384
     
(2,121
)
   
(1,557
)
   
(3,606
)
                                 
Comprehensive income for the period
 
$
3,392
   
$
2,190
   
$
2,406
   
$
2,123
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
Page 10 of 41

 
 
EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Changes in Shareholders' Equity
 
(in thousands of US dollars)
 
 
   
Six months ended February 29, 2016
 
   
Share
capital
   
Contributed surplus
   
Retained earnings
   
Accumulated other comprehensive loss
   
Total
shareholders' equity
 
                               
Balance as at September 1, 2015
 
$
86,045
   
$
17,778
   
$
118,933
   
$
(52,005
)
 
$
170,751
 
Redemption of share capital (note 5)
   
(244
)
   
57
     
     
     
(187
)
Reclassification of stock-based compensation costs (note 5)
   
1,230
     
(1,230
)
   
     
     
 
Stock-based compensation costs
   
     
681
     
     
     
681
 
Net earnings for the period
   
     
     
5,729
     
     
5,729
 
Other comprehensive income (loss)
                                       
Foreign currency translation adjustment
   
     
     
     
(4,713
)
   
(4,713
)
Changes in unrealized losses on forward exchange contracts, net of deferred income taxes of $390
   
     
     
     
1,107
     
1,107
 
                                         
Total comprehensive income for the period
                                   
2,123
 
                                         
Balance as at February 29, 2016
 
$
87,031
   
$
17,286
   
$
124,662
   
$
(55,611
)
 
$
173,368
 


   
Six months ended February 28, 2017
 
   
Share
capital
   
Contributed surplus
   
Retained earnings
   
Accumulated other comprehensive loss
   
Total
shareholders' equity
 
                               
Balance as at September 1, 2016
 
$
85,516
   
$
18,150
   
$
126,309
   
$
(48,574
)
 
$
181,401
 
Issuance of share capital (notes 3 and 5)
   
3,490
     
     
     
     
3,490
 
Reclassification of stock-based compensation costs (note 5)
   
835
     
(835
)
   
     
     
 
Stock-based compensation costs
   
     
528
     
     
     
528
 
Net earnings for the period
   
     
     
4,311
     
     
4,311
 
Other comprehensive income (loss)
                                       
Foreign currency translation adjustment
   
     
     
     
(2,198
)
   
(2,198
)
Changes in unrealized gains/losses on forward exchange contracts, net of deferred income taxes of $8
   
     
     
     
77
     
77
 
                                         
Total comprehensive income for the period
                                   
2,190
 
                                         
Balance as at February 28, 2017
 
$
89,841
   
$
17,843
   
$
130,620
   
$
(50,695
)
 
$
187,609
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
Page 11 of 41

 
 
EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Cash Flows
 
(in thousands of US dollars)
 
 
   
Three months
ended
February 28,
2017
   
Six months
ended
February 28,
2017
   
Three months
ended
February 29,
2016
   
Six months
ended
February 29,
2016
 
                         
Cash flows from operating activities
                       
Net earnings for the period
 
$
1,008
   
$
4,311
   
$
3,963
   
$
5,729
 
Add (deduct) items not affecting cash
                               
Stock-based compensation costs
   
353
     
611
     
314
     
690
 
Depreciation and amortization
   
1,730
     
3,060
     
1,210
     
2,485
 
Deferred revenue
   
3,022
     
2,947
     
2,162
     
3,673
 
Deferred income taxes
   
312
     
459
     
101
     
674
 
Changes in foreign exchange gain/loss
   
107
     
(431
)
   
(615
)
   
(959
)
     
6,532
     
10,957
     
7,135
     
12,292
 
Changes in non-cash operating items
                               
Accounts receivable
   
5,160
     
2,602
     
11,305
     
9,281
 
Income taxes and tax credits
   
(46
)
   
(390
)
   
1,211
     
933
 
Inventories
   
924
     
(324
)
   
(2,642
)
   
(5,868
)
Prepaid expenses
   
(156
)
   
102
     
(20
)
   
34
 
Other assets
   
(37
)
   
(24
)
   
10
     
203
 
Accounts payable, accrued liabilities and provisions
   
2,011
     
586
     
(1,644
)
   
1,731
 
Other liabilities
   
1
     
1
     
(26
)
   
(54
)
     
14,389
     
13,510
     
15,329
     
18,552
 
Cash flows from investing activities
                               
Additions to short-term investments
   
(20
)
   
(316
)
 
     
(21
)
Proceeds from disposal and maturity of short-term investments
   
298
     
298
     
501
     
501
 
Purchases of capital assets
   
(1,656
)
   
(2,893
)
   
(927
)
   
(2,236
)
Business combination (note 3)
   
     
(5,000
)
 
   
 
     
(1,378
)
   
(7,911
)
   
(426
)
   
(1,756
)
Cash flows from financing activities
                               
Bank loan
   
     
     
153
     
468
 
Redemption of share capital (note 5)
   
     
     
(186
)
   
(187
)
     
     
     
(33
)
   
281
 
Effect of foreign exchange rate changes on cash
   
271
     
(464
)
   
674
     
477
 
                                 
Change in cash
   
13,282
     
5,135
     
15,544
     
17,554
 
Cash – Beginning of the period
   
35,061
     
43,208
     
27,874
     
25,864
 
Cash – End of the period
 
$
48,343
   
$
48,343
   
$
43,418
   
$
43,418
 
                                 
Supplementary information
                               
Income taxes paid
 
$
603
   
$
1,561
   
$
508
   
$
1,116
 
Additions to capital assets
 
$
2,483
   
$
3,662
   
$
1,066
   
$
2,375
 

As at February 29, 2016 and February 28, 2017, unpaid purchases of capital assets amounted to $516 and $1,268 respectively.
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
Page 12 of 41

 
 
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 (collectively "EXFO" or the company") design, manufacture and market test, service assurance and network visibility solutions for fixed and mobile network operators, web-scale service providers as well as equipment manufacturers in the global telecommunications industry.

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

These condensed interim consolidated financial statements were authorized for issue by the Board of Directors on March 29, 2017.


2
Basis of Presentation

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

New IFRS Pronouncements Not Yet Adopted

Financial Instruments

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

Revenue from Contracts with Customers

IFRS 15, "Revenue from Contracts with Customers", was issued in May 2014. The objective of this new standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability. This new standard contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. This   new standard is effective for annual periods beginning on or after January 1, 2018. Early adoption is permitted. The company is currently assessing the impact that the new standard will have on its consolidated financial statements and whether or not to adopt early the new standard.
 
 
Page 13 of 41

 
 
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)
 

Leases
 
IFRS 16, "Leases", was issued in January 2016.   IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, i.e., the customer (lessee) and the supplier (lessor). IFRS 16 will supersede IAS 17, "Leases", and related Interpretations. This new standard is effective for annual periods beginning on or after January 1, 2019, with earlier adoption permitted if IFRS 15, "Revenue from Contracts with Customers", is also applied. The company has not yet assessed the impact that the new standard will have on its consolidated financial statements.


3
Business Combination

On October 31, 2016, the company acquired substantially all the assets of Absolute Analysis Inc. (Absolute), a privately held company located in the United States, supplying solutions for radio frequency testing of fiber-based radio access networks. The acquisition-date fair value of the total consideration transferred amounted to $8,490,000, and consisted of $5,000,000 in cash and the issuance of 793,070 subordinate voting shares, valued at $3,490,000.

This acquisition was accounted for by applying the acquisition method as required by IFRS 3, "Business Combinations", and the requirements of IFRS 10, "Consolidated Financial Statements"; consequently, the fair value of the total consideration transferred was allocated to the assets acquired and liability assumed based on management's estimate of their fair value as at the acquisition date.  The results of operations of the acquired business have been included in the consolidated financial statements of the company since October 31, 2016, being the date of acquisition.

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

Assets acquired
     
Core technology
 
$
4,130
 
Other assets
   
236
 
     
4,366
 
Liability assumed
       
Deferred income taxes
   
279
 
Net identifiable assets acquired
   
4,087
 
Goodwill
   
4,403
 
Fair value of the total consideration transferred
 
$
8,490
 

Intangible assets are amortized on a straight-line basis over their estimated useful lives of one to five years.

Acquired goodwill mainly represents synergies with the company's products as well as Absolute acquired workforce. Acquired goodwill is deductible for tax purposes. Goodwill is allocated to the EXFO cash generating unit.
 
 
Page 14 of 41

 
 
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 following table summarizes changes in goodwill during the three and six months ended February 28, 2017:

   
Three months
ended
February 28, 2017
   
Six months
ended
February 28, 2017
 
             
Balance – beginning of the period
 
$
21,418
   
$
21,928
 
Business combination
   
4,403
     
4,403
 
Foreign currency translation adjustment
   
273
     
(237
)
                 
Balance – end of the period
 
$
26,094
   
$
26,094
 


4
Financial Instruments

Fair Value of Financial Instruments

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

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

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

Level 3:
Unobservable inputs for the asset or liability

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

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

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

   
As at February 28, 2017
   
As at August 31, 2016
 
   
Level 1
   
Level 2
   
Level 1
   
Level 2
 
Financial assets
                       
Short-term investments
 
$
4,074
   
$
   
$
4,087
   
$
 
Forward exchange contracts
 
$
   
$
646
   
$
   
$
980
 
                                 
Financial liabilities
                               
Forward exchange contracts
 
$
   
$
491
   
$
   
$
1,120
 
 
 
Page 15 of 41

 
 
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)
 
 
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 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 February 28, 2017, the company held 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
 
               
 
March 2017 to August 2017
 
$
12,000
     
1.3068
 
 
September 2017 to August 2018
   
12,700
     
1.3376
 
 
September 2018 to December 2018
   
2,500
     
1.3585
 
 
Total
 
$
27,200
     
1.3259
 

US dollars – Indian rupees

 
Expiry dates
 
Contractual
amounts
   
Weighted average
contractual forward rates
 
               
 
March 2017 to August 2017
 
$
2,400
     
70.81
 
 
September 2017 to January 2018
   
2,000
     
70.76
 
 
Total
 
$
4,400
     
70.79
 

The carrying amount of forward exchange contracts is equal to 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 a net loss of $140,000 as at August 31, 2016, and to a net gain of $155,000 as at February 28, 2017.

As at February 28, 2017, forward exchange contracts in the amount of $474,000 are presented as current assets in other accounts receivable; forward exchange contracts in the amount of $172,000 are presented as long-term assets in other long-term assets; and forward exchange contracts in the amount of $491,000 are presented as current liabilities in accounts payable and accrued liabilities in the balance sheet. Forward exchange contracts of $61,000 included in accounts payable and accrued liabilities, for which related hedged sales are recognized, are recorded in the consolidated statement of earnings; otherwise, other forward exchange contracts are not yet recorded in the consolidated statement of earnings and are recorded in other comprehensive income.

Based on the portfolio of forward exchange contracts as at February 28, 2017, the company estimates that the portion of the net unrealized gain on these contracts as of that date, which will be realized and reclassified from accumulated other comprehensive income to net earnings over the next 12 months, amounted to $44,000.
 
 
Page 16 of 41

 
 
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)
 
 
During the three and six months ended February 29, 2016 and February 28, 2017, the company recognized within its sales the following foreign exchange losses on forward exchange contracts:

   
Three months
ended
February 28,
2017
   
Six months
ended
February 28,
2017
   
Three months
ended
February 29,
2016
   
Six months
ended
February 29,
2016
 
                         
Losses on forward exchange contracts
 
$
105
   
$
345
   
$
975
   
$
1,849
 


5
Share Capital

The following tables summarize changes in share capital for the three months ended February 29, 2016 and February 28, 2017.
 
   
Six months ended February 29, 2016
 
   
Multiple voting shares
   
Subordinate voting shares
       
   
Number
   
Amount
   
Number
   
Amount
   
Total
amount
 
                               
Balance as at September 1, 2015
   
31,643,000
   
$
1
     
22,092,034
   
$
86,044
   
$
86,045
 
Redemption of restricted share units
   
     
     
155,784
     
     
 
Redemption of deferred share units
   
     
     
653
     
     
 
Redemption of share capital
   
     
     
(200
)
   
(1
)
   
(1
)
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
   
     
     
     
723
     
723
 
Balance as at November 30, 2015
   
31,643,000
     
1
     
22,248,271
     
86,766
     
86,767
 
Redemption of restricted share units
   
     
     
119,973
     
     
 
Redemption of share capital
   
     
     
(62,442
)
   
(243
)
   
(243
)
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
   
     
     
     
507
     
507
 
                                         
Balance as at February 29, 2016
   
31,643,000
   
$
1
     
22,305,802
   
$
87,030
   
$
87,031
 
 
 
Page 17 of 41

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


6
Statements of Earnings

Net research and development expenses comprise the following:

   
Three months
ended
February 28,
2017
   
Six months
ended
February 28,
2017
   
Three months
ended
February 29,
2016
   
Six months
ended
February 29,
2016
 
                         
Gross research and development expenses
 
$
12,716
   
$
25,356
   
$
11,472
   
$
22,751
 
Research and development tax credits and grants
   
(1,452
)
   
(2,778
)
   
(1,310
)
   
(2,656
)
Net research and development expenses for the period
 
$
11,264
   
$
22,578
   
$
10,162
   
$
20,095
 

Inventory write-down is as follows:

   
Three months
ended
February 28,
2017
   
Six months
ended
February 28,
2017
   
Three months
ended
February 29,
2016
   
Six months
ended
February 29,
2016
 
                         
Inventory write-down for the period
 
$
482
   
$
976
   
$
609
   
$
1,456
 
 
 
Page 18 of 41

 
 
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
February 28,
2017
   
Six months
ended
February 28,
2017
   
Three months
ended
February 29,
2016
   
Six months
ended
February 29,
2016
 
                         
Cost of sales
                       
Depreciation of property, plant and equipment
 
$
371
   
$
730
   
$
312
   
$
635
 
Amortization of intangible assets
   
672
     
969
     
168
     
345
 
     
1,043
     
1,699
     
480
     
980
 
                                 
Selling and administrative expenses
                               
Depreciation of property, plant and equipment
   
139
     
257
     
114
     
260
 
Amortization of intangible assets
   
17
     
36
     
18
     
36
 
     
156
     
293
     
132
     
296
 
                                 
Net research and development expenses
                               
Depreciation of property, plant and equipment
   
452
     
878
     
498
     
1,004
 
Amortization of intangible assets
   
79
     
190
     
100
     
205
 
     
531
     
1,068
     
598
     
1,209
 
                                 
   
$
1,730
   
$
3,060
   
$
1,210
   
$
2,485
 
                                 
Depreciation of property, plant and equipment
 
$
962
   
$
1,865
   
$
924
   
$
1,899
 
Amortization of intangible assets
   
768
     
1,195
     
286
     
586
 
                                 
Total depreciation and amortization expenses for the period
 
$
1,730
   
$
3,060
   
$
1,210
   
$
2,485
 

Employee compensation comprises the following:

   
Three months
ended
February 28,
2017
   
Six months
ended
February 28,
2017
   
Three months
ended
February 29,
2016
   
Six months
ended
February 29,
2016
 
                         
Salaries and benefits
 
$
29,244
   
$
58,022
   
$
27,794
   
$
54,758
 
Stock-based compensation costs
   
353
     
611
     
314
     
690
 
                                 
Total employee compensation for the period
 
$
29,597
   
$
58,633
   
$
28,108
   
$
55,448
 
 
 
Page 19 of 41

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

   
Three months
ended
February 28,
2017
   
Six months
ended
February 28,
2017
   
Three months
ended
February 29,
2016
   
Six months
ended
February 29,
2016
 
                         
Cost of sales
 
$
27
   
$
54
   
$
24
   
$
55
 
Selling and administrative expenses
   
251
     
430
     
224
     
490
 
Net research and development expenses
   
75
     
127
     
66
     
145
 
                                 
Total stock-based compensation for the period
 
$
353
   
$
611
   
$
314
   
$
690
 


7
Income Taxes

For the three months ended February 29, 2016 and February 28, 2017, 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 financial statements is as follows:

   
Three months
ended
February 28,
2017
   
Six months
ended
February 28,
2017
   
Three months
ended
February 29,
2016
   
Six months
ended
February 29,
2016
 
                         
Income tax provision at combined Canadian federal and provincial statutory tax rate (27%)
 
$
683
   
$
2,105
   
$
1,438
   
$
2,486
 
                                 
Increase (decrease) due to:
                               
Foreign income taxed at different rates
   
(408
)
   
(580
)
   
(242
)
   
(400
)
Non-deductible loss (non-taxable income)
   
(5
)
   
189
     
(274
)
   
(70
)
Non-deductible expenses
   
180
     
353
     
145
     
315
 
Change in tax rates
   
64
     
(25
)
   
     
 
Foreign exchange effect of translation of foreign subsidiaries in the functional currency
   
4
     
(118
)
   
251
     
101
 
Utilization of previously unrecognized deferred income tax assets
   
(133
)
   
(289
)
   
(32
)
   
(32
)
Unrecognized deferred income tax assets on temporary deductible differences and unused tax losses
   
1,130
     
1,980
     
330
     
1,342
 
Other
   
6
     
(132
)
   
(252
)
   
(262
)
                                 
Income tax provision for the period
 
$
1,521
   
$
3,483
   
$
1,364
   
$
3,480
 
 
 
Page 20 of 41

 
 
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 income tax provision consists of the following:

   
Three months
ended
February 28,
2017
   
Six months
ended
February 28,
2017
   
Three months
ended
February 29,
2016
   
Six months
ended
February 29,
2016
 
                         
Current
 
$
1,209
   
$
3,024
   
$
1,263
   
$
2,806
 
Deferred
   
312
     
459
     
101
     
674
 
                                 
   
$
1,521
   
$
3,483
   
$
1,364
   
$
3,480
 


8
Earnings per Share

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

   
Three months
ended
February 28,
2017
   
Six months
ended
February 28,
2017
   
Three months
ended
February 29,
2016
   
Six months
ended
February 29,
2016
 
                         
Basic weighted average number of shares outstanding (000's)
   
54,506
     
54,195
     
53,927
     
53,870
 
Plus dilutive effect of (000's):
                               
Restricted share units
   
1,022
     
990
     
563
     
585
 
Deferred share units
   
153
     
156
     
125
     
120
 
                                 
Diluted weighted average number of shares outstanding (000's)
   
55,681
     
55,341
     
54,615
     
54,575
 
Stock awards excluded from the calculation of diluted weighted average number of shares because their exercise price was greater than the average market price of the common shares (000's)
   
     
     
244
     
152
 


9
Subsequent Event

On March 2, 2017, the company acquired all issued and outstanding shares of Ontology Partners Limited (Ontology), a privately held company located in the United Kingdom, a supplier of real-time network topology discovery and service-chain mapping.

The acquisition-date fair value of the total consideration transferred amounted to $9,025,000 and consisted of $7,625,000 in cash, net of Ontology's cash of $2,030,000 at the acquisition date, plus a cash contingent consideration based on certain sales volume of Ontology products over the 12-month period following the acquisition, valued at $1,400,000 at the acquisition date.
 
 
Page 21 of 41

 
 
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"; consequently, the fair value of the total consideration transferred will be allocated to the assets acquired and liabilities assumed based on management's estimate of their fair value as at the acquisition date. The results of operations of the acquired business will be included in the consolidated financial statements of the company starting on March 2, 2017, being the date of acquisition.

Due to the proximity of the acquisition date to the release date of the company's consolidated financial statements, the company has not finalized the initial accounting for the acquisition as the valuation of assets acquired and liabilities assumed has not been completed. The company expects to complete the purchase price allocation in the fourth quarter of fiscal 2017.
 
 
Page 22 of 41

 
 
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 as well as capital spending and network deployment levels in the telecommunications industry (including our ability to quickly adapt cost structures to anticipated levels of business and our ability to manage inventory levels with market demand); future economic, competitive, financial and market conditions; consolidation in the global telecommunications test, service assurance and analytics solutions markets and increased competition among vendors; 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; our ability to successfully integrate businesses that we acquire; 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 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 March 29, 2017.

All dollar amounts are expressed in US dollars, except as otherwise noted.


COMPANY OVERVIEW AND RECENT DEVELOPMENTS

We are a leading provider of next-generation test, service assurance and analytics solutions for fixed and mobile communications service providers (CSPs), web-scale operators as well as network equipment manufacturers in the global telecommunications industry. Our intelligent solutions with contextually relevant analytics are designed to improve end-user quality of experience, enhance network performance and drive operational efficiencies throughout the network and service delivery lifecycles. We target high-growth market opportunities related to increasing bandwidth and improving quality of experience on network infrastructures: 4G/LTE (long-term evolution), wireless backhaul, small cells and distributed antenna systems (DAS), 100G network upgrades and fiber-to-the-home (FTTH)/fiber-to-the-curb (FTTC)/fiber-to-the-node (FTTN) deployments.
 

Page 23 of 41

 
 
We launched four new solutions in the second quarter of fiscal 2017 including an automated inspection tip for testing multifiber connectors on network infrastructures; optical RF over OBSAI (open base station architecture initiative) link test capabilities to complement RF analysis over CPRI (common public radio interface); Fast Short Link, a new feature of our iOLM software on our industry-leading OTDRs that characterizes high-count, optical short links five times faster (less than 10 seconds per fiber) than other industry solutions; and we integrated Ookla's Speedtest technology into our MaxTester broadband test solution to measure throughput (upload and download speeds) over a subscriber's G.fast/DSL or Ethernet circuit.

Our sales increased 12.0% to $60.0 million in the second quarter of fiscal 2017 compared to $53.6 million for the same period last year. Bookings decreased 6.3% to $55.9 million in the second quarter of fiscal 2017, for a book-to-bill ratio of 0.93, from $59.7 million for the same period last year.

Net earnings amounted to $1.0 million, or $0.02 per diluted share, in the second quarter of fiscal 2017, compared to $4.0 million, or $0.07 per diluted share, for the same period last year. Net earnings for the second quarter of fiscal 2017 included $0.6 million in after-tax amortization of intangible assets, $0.4 million in stock-based compensation costs and a foreign exchange loss of $0.3 million. For the same period, last year, net earnings included $0.3 million in after-tax amortization of intangible assets, $0.3 million in stock-based compensation costs and a foreign exchange gain of $1.1 million.

Adjusted EBITDA (net earnings before interest, income taxes, depreciation and amortization, stock-based compensation costs and foreign exchange gain or loss) decreased 7.7% to $4.9 million, or 8.1% of sales, in the second quarter of fiscal 2017, compared to $5.3 million, or 9.9% of sales for the same period last year. See page 36 of this document for a complete reconciliation of adjusted EBITDA to IFRS net earnings.
 
On October 31, 2016, we acquired substantially all the assets of Absolute Analysis Inc. (Absolute), a privately held company located in the United States, supplying solutions for radio frequency testing of fiber-based radio access networks. The acquisition-date fair value of the total consideration transferred amounted to $8.5 million, and consisted of $5.0 million in cash and the issuance of 793,070 subordinate voting shares, valued at $3.5 million. This acquisition was accounted for by applying the acquisition method as required by IFRS 3, "Business Combinations", and the requirements of IFRS 10, "Consolidated Financial Statements"; consequently, the fair value of the total consideration transferred was allocated to the assets acquired and liabilities assumed based on management's estimate of their fair value as at the acquisition date.  The results of operations of the acquired business have been included in our consolidated financial statements since October 31, 2016, being the date of acquisition.

On March 2, 2017, we acquired all issued and outstanding shares of Ontology Partners Limited (Ontology), a privately held company located in the United Kingdom, a supplier of real-time network topology discovery and service-chain mapping. The acquisition-date fair value of the total consideration transferred amounted to $9.0 million and consisted of $7.6 million in cash, net of Ontology's cash of $2.0 million at the acquisition date, plus a cash contingent consideration based on certain sales volume of Ontology products over the 12-month period following the acquisition, valued at $1.4 million at the acquisition date. 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"; consequently, the fair value of the total consideration transferred will be allocated to the assets acquired and liabilities assumed based on management's estimate of their fair value as at the acquisition date. The results of operations of the acquired business will be included in our consolidated financial statements starting on March 2, 2017, being the date of acquisition. Due to the proximity of the acquisition date to the release date of our interim consolidated financial statements, we have not finalized the initial accounting for the acquisition as the valuation of assets acquired and liabilities assumed has not been completed. We expect to complete the purchase price allocation in the fourth quarter of fiscal 2017.
 

Page 24 of 41

 
 
RESULTS OF OPERATIONS
(in thousands of US dollars, except per share data for the periods indicated)

   
Three months
ended
February 28,
2017
   
Three months
ended
February 29,
2016
   
Six months
ended
February 28,
2017
   
Six months
ended
February 29,
2016
 
                         
Sales
 
$
60,030
   
$
53,597
   
$
121,815
   
$
108,829
 
                                 
Cost of sales (1)
   
22,989
     
18,904
     
45,802
     
39,041
 
Selling and administrative
   
21,255
     
19,565
     
42,850
     
39,817
 
Net research and development
   
11,264
     
10,162
     
22,578
     
20,095
 
Depreciation of property, plant and equipment
   
962
     
924
     
1,865
     
1,899
 
Amortization of intangible assets
   
768
     
286
     
1,195
     
586
 
Interest and other income
   
(9
)
   
(470
)
   
(29
)
   
(407
)
Foreign exchange (gain) loss
   
272
     
(1,101
)
   
(240
)
   
(1,411
)
                                 
Earnings before income taxes
   
2,529
     
5,327
     
7,794
     
9,209
 
                                 
Income taxes
   
1,521
     
1,364
     
3,483
     
3,480
 
                                 
Net earnings for the period
 
$
1,008
   
$
3,963
   
$
4,311
   
$
5,729
 
                                 
Basic net earnings per share
 
$
0.02
   
$
0.07
   
$
0.08
   
$
0.11
 
Diluted net earnings per share
 
$
0.02
   
$
0.07
   
$
0.08
   
$
0.10
 
                                 
Other selected information:
                               
                                 
Gross margin before depreciation and amortization (2)
 
$
37,041
   
$
34,693
   
$
76,013
   
$
69,788
 
                                 
Research and development:
                               
Gross research and development
 
$
12,716
   
$
11,472
   
$
25,356
   
$
22,751
 
Net research and development
 
$
11,264
   
$
10,162
   
$
22,578
   
$
20,095
 
                                 
Adjusted EBITDA (2)
 
$
4,875
   
$
5,280
   
$
11,196
   
$
10,566
 

(1)
The cost of sales is exclusive of depreciation and amortization, shown separately.
(2)
Refer to page 36 for non-IFRS measures.

 
Page 25 of 41


 
RESULTS OF OPERATIONS
(as a percentage of sales for the periods indicated)

   
Three months
ended
February 28,
2017
   
Three months
ended
February 29,
2016
   
Six months
ended
February 28,
2017
   
Six months
ended
February 29,
2016
 
                         
Sales
   
100.0
%
   
100.0
%
   
100.0
%
   
100.0
%
                                 
Cost of sales (1)
   
38.3
     
35.3
     
37.6
     
35.9
 
Selling and administrative
   
35.4
     
36.5
     
35.2
     
36.6
 
Net research and development
   
18.8
     
19.0
     
18.5
     
18.5
 
Depreciation of property, plant and equipment
   
1.6
     
1.7
     
1.5
     
1.7
 
Amortization of intangible assets
   
1.3
     
0.5
     
1.0
     
0.5
 
Interest and other income
   
     
(0.9
)
   
     
(0.4
)
Foreign exchange (gain) loss
   
0.4
     
(2.0
)
   
(0.1
)
   
(1.3
)
                                 
Earnings before income taxes
   
4.2
     
9.9
     
6.3
     
8.5
 
                                 
Income taxes
   
2.5
     
2.5
     
2.8
     
3.2