EXFO EXFO Inc

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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 2016

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.

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.

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

 

 

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On January 6, 2016, EXFO Inc., a Canadian corporation, reported its results of operations for the first fiscal quarter ended November 30, 2015. 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 for the first fiscal quarter of the 2016 fiscal year.  This press release and information relating to EXFO's financial condition and results of operations for the first fiscal quarter of the 2016 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.

 

 

 

 

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.

Date: January 8, 2016

 

 

 

 

 

 

			Q1 2016				Q4 2015				Q1 2015
Physical-layer sales		$	37,477			$	34,967			$	37,848
Protocol-layer sales			18,629				22,419				19,168
Foreign exchange losses on forward exchange contracts			(874	)			(792	)			(292	)
Total sales		$	55,232			$	56,594			$	56,724
Physical-layer bookings		$	38,878			$	35,521			$	37,394
Protocol-layer bookings			20,469				20,187				17,142
Foreign exchange losses on forward exchange contracts			(874	)			(792	)			(292	)
Total bookings		$	58,473			$	54,916			$	54,244
Book-to-bill ratio			1.06				0.97				0.96
Gross margin*		$	35,095			$	34,619			$	35,487
			63.5	%			61.2	%			62.6	%
Other selected information:
IFRS net earnings		$	1,766			$	2,323			$	1,481
Amortization of intangible assets		$	300			$	322			$	1,098
Stock-based compensation costs		$	376			$	133			$	400
Restructuring charges		$	−			$	1,637			$	−
Net income tax effect of the above items		$	(28	)		$	(371	)		$	(58	)
Foreign exchange gain		$	310			$	2,425			$	1,975
Adjusted EBITDA*		$	5,286			$	4,962			$	3,197

			Q1 2016				Q4 2015				Q1 2015
IFRS net earnings for the period		$	1,766			$	2,323			$	1,481
Add (deduct):
Depreciation of property, plant and equipment			975				1,171				1,245
Amortization of intangible assets			300				322				1,098
Interest (income) expense			63				61				(217	)
Income taxes			2,116				1,740				1,165
Restructuring charges		−					1,637			−
Stock-based compensation costs			376				133				400
Foreign exchange gain			(310	)			(2,425	)			(1,975	)
Adjusted EBITDA for the period		$	5,286			$	4,962			$	3,197
Adjusted EBITDA in percentage of sales			9.6	%			8.8	%			5.6	%

 

As at November 30, 2014 and 2015, additions to capital assets amounted to $1,045 and $1,309 respectively, and unpaid purchases of capital assets amounted to $492 and $377 respectively.

		As at November 30, 2015								As at August 31, 2015
		Level 1				Level 2				Level 1				Level 2
Financial assets
Short-term investments		$	1,490			$	–			$	1,487			$	–
Forward exchange contracts		$	–			$	19			$	–			$	–
Financial Liabilities
Forward exchange contracts		$	–			$	3,512			$	–			$	4,154

		Three months ended November 30, 2014
		Multiple voting shares								Subordinate voting shares
		Number				Amount				Number				Amount				Total amount
Balance as at September 1, 2014			31,643,000			$	1				28,703,750			$	111,490			$	111,491
Redemption of restricted share units			−				−				115,669				−				−
Redemption of share capital			−				−				(236,486	)			(919	)			(919	)
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards			−				−				−				443				443
Balance as at November 30, 2014			31,643,000			$	1				28,582,933			$	111,014			$	111,015

		Three months ended November 30, 2015
		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

		Three months ended November 30,
		2015				2014
Gross research and development expenses		$	11,279			$	13,309
Research and development tax credits and grants			(1,346	)			(1,651	)
Net research and development expenses for the period		$	9,933			$	11,658

		Three months ended November 30,
		2015				2014
Inventory write-down for the period		$	847			$	933

		Three months ended November 30,
		2015				2014
Cost of sales
Depreciation of property, plant and equipment		$	323			$	395
Amortization of intangible assets			177				671
			500				1,066
Selling and administrative expenses
Depreciation of property, plant and equipment			146				142
Amortization of intangible assets			18				364
			164				506
Net research and development expenses
Depreciation of property, plant and equipment			506				708
Amortization of intangible assets			105				63
			611				771
		$	1,275			$	2,343
Depreciation of property, plant and equipment		$	975			$	1,245
Amortization of intangible assets			300				1,098
		$	1,275			$	2,343

		Three months ended November 30,
		2015				2014
Salaries and benefits		$	26,964			$	30,210
Stock-based compensation costs			376				400
Total employee compensation for the period		$	27,340			$	30,610

		Three months ended November 30,
		2015				2014
Cost of sales		$	31			$	45
Selling and administrative expenses			266				263
Net research and development expenses			79				92
Total stock-based compensation for the period		$	376			$	400

		Three months ended November 30,
		2015				2014
Income tax provision at combined Canadian federal and provincial statutory tax rate (27%)		$	1,048			$	714
Increase (decrease) due to:
Foreign income taxed at different rates			(158	)			(5	)
Non-taxable (income)/loss			204				831
Non-deductible expenses			170				202
Foreign exchange effect of translation of foreign subsidiaries			(150	)			(993	)
Unrecognized deferred income tax assets on temporary deductible differences and unused tax losses			1,012				604
Other			(10	)			(188	)
Income tax provision for the period		$	2,116			$	1,165

		Three months ended November 30,
		2015				2014
Current		$	1,543			$	1,497
Deferred			573				(332	)
		$	2,116			$	1,165

		Three months ended November 30,
		2015		2014
Basic weighted average number of shares outstanding (000's)		53,814		60,335
Plus dilutive effect of (000's):
Restricted share units		607		527
Deferred share units		114		118
Diluted weighted average number of shares outstanding (000's)		54,535		60,980
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)		57		109

 

 

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 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, service assurance and network visibility markets and increased competition among vendors; capacity to adapt our future product offering to future technological changes; limited visibility with regards 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 January 6, 2016.

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 network visibility solutions for fixed and mobile network operators, web-scale service providers as well as 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.

 

 

We launched two new products in the first quarter of fiscal 2016: the MaxTester 940 Fiber Certifier OLTS (optical loss test set) for data center and enterprise markets and iSAM, an intelligent service activation application bringing speed and simplicity to testing Ethernet services.

We reported sales of $55.2 million in the first quarter of fiscal 2016 compared to $56.7 million for the same period last year, due to a significant headwind from a stronger US dollar versus other currencies. Otherwise, in the first quarter of fiscal 2016, in constant currency, our sales would have slightly increased year-over-year. Bookings increased 7.8% to $58.5 million in the first quarter of fiscal 2016, for a book-to-bill ratio of 1.06, from $54.2 million for the same period last year, despite a stronger US dollar versus other currencies.

 

 

RESULTS OF OPERATIONS

(in thousands of US dollars, except per share data, and as a percentage of sales for the periods indicated)

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

(2)	Refer to page 29 for non-IFRS measures.

 

RESULTS OF OPERATIONS

SALES AND BOOKINGS

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

Sales

Bookings

For the three months ended November 30, 2015, our sales decreased 2.6% to $55.2 million, compared to $56.7 million for the same period last year, while our bookings increased 7.8% to $58.5 million, compared to $54.2 million for the same period last year, for a book-to-bill ratio of 1.06.

In the first quarter of fiscal 2016, however, we faced a significant headwind from a stronger US dollar, compared to the same period last year. Given that we generate a portion of our revenue in Canadian dollars (Americas) and in euros (Europe, Middle East and Africa (EMEA)), but report our results in US dollars, it had a negative impact on our total sales and bookings year-over-year. In fact, in the first quarter of fiscal 2016, excluding the negative currency impact, our total sales would have slightly increased year-over-year and our total bookings would have increased by more than 10% year-over-year.

In addition, in the first quarter of fiscal 2016, despite the significant increase in our total bookings year-over-year, a larger portion of these bookings was back-end-loaded, which did not give us enough time to turn these orders into revenue before the quarter-end and deliver year-over-year increase in total sales. Furthermore, in the first quarter of fiscal 2015, we had benefited from a strong backlog at the end of the preceding fiscal year, which was not the case this quarter.

In the first quarter of fiscal 2016, we made strong progress in sales and bookings in the United States (Americas), mainly for our Physical-layer product line, and to a lesser extent for our Protocol-layer product line, compared to the same period last year. Our robust performance in this region was manifested through heightened penetration of mobile network operators for their fronthaul and backhaul networks, increased traction with fixed network operators for their 100G long-haul and metro links and growing business with web-scale operators for their data center interconnects. In fact, in the first quarter of fiscal 2016, sales to the Americas represented 56% of our sales compared to 48% for the same period last year.

 

 

In addition, despite the year-over-year increase in sales and bookings in the EMEA and Asia-Pacific regions in the first quarter of fiscal 2016 in constant currency, Europe, overall, remained a challenging market due to weaker currencies, economic uncertainties and delays in investments in the first quarter of fiscal 2016, while Asia-Pacific benefited from stronger bookings in China.

As we gradually evolve from a supplier of dedicated test instruments to a supplier of end-to-end solutions, our quarterly sales and bookings are increasingly subject to quarterly fluctuations, as we are managing more complex, multi-million dollar deals that have prolonged sales and revenue recognition cycles related to our Protocol-layer products.

Geographic distribution

In the first quarter of fiscal 2016, sales to the Americas, EMEA and Asia-Pacific accounted for 56%, 26% and 18% of sales respectively, compared to 48%, 32% and 20% for the same period last year respectively.

Customer concentration

We sell our products to a broad range of customers, including network service providers, network equipment manufacturers, wireless operators and cable TV operators. In the first quarter of fiscal 2015 and 2016, no customer accounted for more than 10% of our sales, and our top three customers accounted for 11.1% and 18.2% of our sales respectively.

GROSS MARGIN BEFORE DEPRECIATION AND AMORTIZATION (non-IFRS measure — refer to page 29 of this document)

Gross margin before depreciation and amortization (gross margin) reached 63.5% of sales for the three months ended November 30, 2015, compared to 62.6% for the same period last year.

In the first quarter of fiscal 2016, our gross margin was favorably affected by product and geographic mix compared to the same period last year.

In addition, in the first quarter of fiscal 2016, a stronger US dollar compared to other currencies reduced our manufacturing costs and had a positive impact on our gross margin year-over-year.

However, in the first quarter of fiscal 2016, we recorded in our sales foreign exchange losses of $874,000 on our forward exchange contracts, compared to $292,000 for the same period last year, which contributed to the decrease in gross margin by 0.4% year-over-year.

SELLING AND ADMINISTRATIVE EXPENSES

For the three months ended November 30, 2015, selling and administrative expenses were $20.3 million, or 36.7% of sales, compared to $21.0 million, or 37.1% of sales for the same period last year.

 

RESEARCH AND DEVELOPMENT EXPENSES

Gross research and development expenses

For the three months ended November 30, 2015, gross research and development expenses totaled $11.3 million, or 20.4% of sales, compared to $13.3 million, or 23.5% of sales for the same period last year.

Tax credits and grants

We are entitled to tax credits from the Canadian federal and provincial governments for eligible research and development activities conducted in Canada. We are also eligible for grants issued by a Finnish technology organization on certain research and development projects conducted in Finland.

For the three months ended November 30, 2015, tax credits and grants for research and development activities were $1.3 million, or 11.9% of gross research and development expenses, compared to $1.7 million, or 12.4% of gross research and development expenses for the same period last year.

In the first quarter of fiscal 2016, the decrease in our tax credits and grants mainly results from the increase in the average value of the US dollar, compared to the Canadian dollar year-over-year, as our tax credits are denominated in Canadian dollars and we report our results in US dollars.

DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT

For the three months ended November 30, 2015, depreciation of property, plant and equipment amounted to $975,000 compared to $1.2 million for the same period last year. In the first quarter of fiscal 2016, the year-over-year increase in the average value of the US dollar, compared to the Canadian dollar had a positive impact on our depreciation expenses as these expenses are incurred in Canadian dollars and we report our results in US dollars.

AMORTIZATION OF INTANGIBLE ASSETS

 

FOREIGN EXCHANGE GAIN

Foreign exchange gains and losses are mainly the result of the translation of operating activities denominated in currencies other than our functional currency, which is the Canadian dollar. A portion of our foreign exchange gains or losses result from the translation of cash balances and deferred income taxes denominated in US dollars. We manage our exposure to currency risk in part with forward exchange contracts. In addition, some of our entities' operating activities are denominated in US dollars, euros and British pounds, which further hedges this risk. However, we remain exposed to a currency risk; namely, any increase in the value of the Canadian dollar, compared to the US dollar, would have a negative impact on our operating results.

INCOME TAXES

 

LIQUIDITY AND CAPITAL RESOURCES

Cash requirements and capital resources

As at November 30, 2015, cash and short-term investments totaled $29.4 million, while our working capital was at $72.8 million. Our cash and short-term investments increased by $2.0 million in the first quarter of fiscal 2016, compared to the previous quarter. During the first quarter of fiscal 2016, our operating activities generated $3.2 million in cash. In addition, our bank loan increased by 315,000. However, we made cash payments of $1.3 million for the purchase of capital assets, and we recorded an unrealized foreign exchange loss on our cash and short-term investments of $215,000. This unrealized foreign exchange loss resulted from the translation, in US dollars, of our Canadian-dollar-denominated cash and short-term investments and was included in the accumulated other comprehensive income in the balance sheet.

Our short-term investments 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. Our cash and short-term investments will be used for working capital and other general corporate purposes, potential acquisitions as well as our share repurchase program.

We believe that our cash balances and short-term investments will be sufficient to meet our liquidity and capital requirements for the foreseeable future, including the effect of our normal course issuer bid. In addition to these assets, we have unused available lines of credit totaling $14.7 million for working capital and other general corporate purposes and unused lines of credit of $18.9 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 mainly through cash flows from operating activities, the use of our cash and short-term investments as well as the issuance of subordinate voting shares.

Operating activities

Cash flows provided by operating activities were $3.2 million for the three months ended November 30, 2015, compared to $1.9 million for the same period last year.

Cash flows provided by operating activities in the first quarter of fiscal 2016 were attributable to the net earnings after items not affecting cash of $5.2 million, offset in part by the negative net change in non-cash operating items of $2.0 million; this was mainly due to the negative effect on cash of the $2.0 million increase in our accounts receivable due to the timing of sales during the quarter, the $3.2 million increase in our inventories to meet future demand, and the $278,000 increase in our income tax and tax credits recoverable due to tax credits earned during the quarter not yet recovered. These negative effects on cash were offset in part by the positive effect on cash of the $3.4 million increase in our accounts payable, accrued liabilities and provisions due to the timing of purchases and payments during the quarter, as well as the $193,000 decrease in our other assets during the quarter.

 

 

Cash flows provided by operating activities in the first quarter of fiscal 2015 were attributable to the net earnings after items not affecting cash of $1.8 million, and the positive net change in non-cash operating items of $0.1 million; this was mainly due to the positive effect on cash of the $6.8 million increase in our accounts payable, accrued liabilities and provisions due to the timing of purchases and payments during the quarter. This positive effect on cash was mostly offset by the negative effect on cash of the $5.0 million increase in our accounts receivable due to the timing of sales during the quarter, the $1.2 million increase in our inventories to meet future demand, the $212,000 increase in our income tax and tax credits recoverable due to tax credits earned during the quarter not yet recovered, as well as the $336,000 increase in our prepaid expenses due to time of payments during the quarter.

Investing activities

Financing activities

FORWARD EXCHANGE CONTRACTS

 

 

 

US dollars – Indian rupees

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 net losses of $4,2 million as at August 31, 2015 and $3.5 million as at November 30, 2015, mainly for our US/Canadian dollars forward exchange contracts. The quarter-end exchange rate was CA$1.3353 = US$1.00 as at November 30, 2015.

SHARE CAPITAL

As at January 6, 2016, EXFO had 31,643,000 multiple voting shares outstanding, entitling to 10 votes each and 22,248,271 subordinate voting shares outstanding. The multiple voting shares and the subordinate voting shares are unlimited as to number and without par value.

OFF-BALANCE SHEET ARRANGEMENTS

As at November 30, 2015, our off-balance sheet arrangements consisted of letters of guarantee amounting to $442,000 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 2020.

STRUCTURED ENTITIES

As at November 30, 2015, we did not have interests in any structured entities.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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, 2015, filed with the U.S. Securities and Exchange Commission and the Canadian securities commissions.

NEW IFRS PRONOUNCEMENTS

Refer to note 2 to our condensed unaudited interim consolidated financial statements for the three months ended November 30, 2015 and to our consolidated financial statements for the year ended August 31, 2015, for the effect of certain recent accounting pronouncements on our consolidated financial statements.

 

 

RISKS AND UNCERTAINTIES

For the first quarter of fiscal 2016, 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, 2015.

NON-IFRS MEASURES

We provide non-IFRS measures (constant currency data, gross margin before depreciation and amortization and adjusted EBITDA) as supplemental information regarding our operational performance. We use these measures for the purpose of evaluating our historical and prospective financial performance, as well as our performance relative to our competitors. These measures also 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.

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.

Constant currency data represents data before foreign currency impact. Data for the current period is translated using foreign exchange rates of the corresponding period from the preceding year.

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.

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

Adjusted EBITDA (unaudited)

 

 

 

QUARTERLY SUMMARY FINANCIAL INFORMATION (unaudited)

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

 

 

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

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