form6-k20130531.htm
 


 
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 June 2013

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 þ
Form 40-F o

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 o
No þ


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 Loss
Condensed Unaudited Interim Consolidated Statements of Change in Shareholder’s 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


 

On June 26, 2013, EXFO Inc., a Canadian corporation, reported its results of operations for the third fiscal quarter ended May 31, 2013. 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 third fiscal quarter of the 2013 fiscal year. This press release and information relating to EXFO’s financial condition and results of operations for the third fiscal quarter of the 2013 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 32

 
 
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: June 28, 2013


 
Page 2 of 32


 
 
 
EXFO Reports Third-Quarter Results for Fiscal 2013

§  
Sales reach US$58.9 million
§  
Bookings attain US$61.8 million (book-to-bill ratio of 1.05)
§  
Adjusted EBITDA totals US$3.1 million

QUEBEC CITY, CANADA, June 26, 2013 — EXFO Inc. (NASDAQ: EXFO; TSX: EXF) reported today financial results for the third quarter ended May 31, 2013.
 
Sales reached US$58.9 million in the third quarter of fiscal 2013 compared to US$59.5 million in the third quarter of 2012 and US$62.6 million in the second quarter of 2013.
 
Bookings attained US$61.8 million in the third quarter of fiscal 2013 for a book-to-bill ratio of 1.05 compared to US$57.5 million in the same period last year and US$53.4 million in the second quarter of 2013.
 
Gross margin* amounted to 61.7% of sales in the third quarter of fiscal 2013 compared to 60.4% in the third quarter of 2012 and 62.2% in the second quarter of 2013.
 
IFRS net loss in the third quarter of fiscal 2013 totaled US$0.9 million, or US$0.01 per share, compared to a net loss of US$3.7 million, or US$0.06 per share, in the same period last year and net earnings of US$39,000, or US$0.00 per diluted share, in the second quarter of 2013. IFRS net loss in the third quarter of 2013 included US$1.5 million in after-tax amortization of intangible assets, US$0.4 million in stock-based compensation costs and a foreign exchange gain of US$0.3 million.
 
Adjusted EBITDA** totaled US$3.1 million, or 5.3% of sales, in the third quarter of fiscal 2013 compared to -US$0.5 million, or -0.8% of sales, in the third quarter of 2012 and US$4.4 million, or 7.1% of sales, in the second quarter of 2013.
 
“Although we increased bookings 7% year-over-year and 16% sequentially in the third quarter, our financial performance clearly ended below our expectations,” said Germain Lamonde, EXFO’s Chairman, President and CEO. “Network operator spending remained muted in the telecom industry with bookings soft in EMEA and uneven in Asia-Pacific, while rather strong in the Americas based on 4G/LTE and 100G deployments. Given market uncertainty, we reduced our SG&A and net R&D expenses by $7.5 million after nine months into fiscal 2013 —despite normal salary increases and inflation — without sacrificing the growth engine of the company. I am confident that our enhanced competitive position, sharpened market focus and newly launched products will combine with strong industry fundamentals to deliver robust revenue growth and profitability in the near future.”
 
 
 
Page 3 of 32

 
 
 
 
Selected Financial Information
(In thousands of US dollars)
 
      Q3 2013       Q2 2013       Q3 2012  
                         
 Sales
  $ 58,865     $ 62,576     $ 59,505  
                         
 Gross margin*
  $ 36,291     $ 38,912     $ 35,956  
      61.7 %     62.2 %     60.4 %
                         
 Other selected information:
                       
IFRS net earnings (loss)
  $ (862 )   $ 39     $ (3,720 )
Amortization of intangible assets
  $ 1,586     $ 1,922     $ 1,993  
Stock-based compensation costs
  $ 415     $ 468     $ 370  
Restructuring charges
  $     $ 89     $  
Net income tax effect of the above items
  $ (68 )   $ (95 )   $ (60 )
Foreign exchange gain
  $ (314 )   $ (1,700 )   $ (1,090 )
Adjusted EBITDA**
  $ 3,131     $ 4,435     $ (472 )

Operating Expenses
Selling and administrative expenses totaled US$22.0 million, or 37.4% of sales in the third quarter of fiscal 2013 compared to US$23.6 million, or 39.7% of sales, in the same period last year and US$23.1 million, or 36.9% of sales, in the second quarter of 2013.

Gross research and development expenses amounted to US$13.8 million, or 23.4% of sales, in the third quarter of fiscal 2013 compared to US$15.6 million, or 26.2% of sales, in the third quarter of 2012 and US$14.1 million, or 22.6% of sales, in the second quarter of 2013.

Net R&D expenses totaled US$11.6 million, or 19.7% of sales, in the third quarter of fiscal 2013 compared to US$13.2 million, or 22.1% of sales, in the same period last year and US$12.0 million, or 19.1% of sales, in the second quarter of 2013.

Third-Quarter Highlights
·  
Growth. EXFO’s bookings improved 7.4% year-over-year and 15.8% quarter-over-quarter to US$61.8 million in the third quarter. Bookings strengthened particularly in the United States in the last month of the quarter. EXFO’s top customer accounted for 6.6% of sales in the third quarter, while the top three represented 15.7%. Bookings progressed particularly in EXFO’s wireless and high-speed optical product lines.

·  
Profitability. EXFO delivered adjusted EBITDA of US$3.1 million in the third quarter of 2013 compared to  -US$0.5 million in the same period last year. The company also generated US$1.3 million in cash flows from operating activities. EXFO continues to maintain a tight control on expenses, while core technologies related to the Brix Networks acquisition became fully amortized in April.

·  
Innovation. Altogether, EXFO has released 13 new products or major enhancements since the beginning of the fiscal year, including significant features in its Protocol product line in which innovation is largely driven by ongoing software releases. New product introductions garnered strong traction in the market, especially with tier-1 wireless operators.
 

 
Page 4 of 32


 

 
Business Outlook
EXFO forecasts sales between US$58.0 million and US$63.0 million for the fourth quarter of fiscal 2013, while IFRS net earnings are expected to range between US$0.00 and US$0.04 per diluted share. Net earnings include US$0.03 per share in after-tax amortization of intangible assets and stock-based compensation costs.
 
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 at May 31, 2013.
 
Conference Call and Webcast
EXFO will host a conference call today at 5 p.m. (Eastern time) to review its financial results for the third quarter of fiscal 2013.  To listen to the conference call and participate in the question period via telephone, dial 1-416-981-9004. Germain Lamonde, Chairman, President and CEO, and Pierre Plamondon, CPA, CA, Vice-President of Finance and Chief Financial Officer, will participate in the call. An audio replay of the conference call will be available one hour after the event until 7 p.m. on July 3, 2013. The replay number is 1-402-977-9141 and the reservation number is 21658380. 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
Listed on the NASDAQ and TSX stock exchanges, EXFO is among the leading providers of next-generation test and service assurance solutions for wireline and wireless network operators and equipment manufacturers in the global telecommunications industry. The company offers innovative solutions for the development, installation, management and maintenance of converged, IP fixed and mobile networks—from the core to the edge. Key technologies supported include 3G, 4G/LTE, IMS, Ethernet, OTN, FTTx, VDSL2, ADSL2+ and various optical technologies accounting for more than 35% of the portable fiber-optic test market. EXFO has a staff of approximately 1700 people in 25 countries, supporting more than 2000 telecom customers worldwide. For more information, visit www.EXFO.com.

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, will, expect, believe, anticipate, intend, could, estimate, continue, or the negative or comparable terminology 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 macro-economic uncertainty and/or recession (including our ability to quickly adapt cost structures with anticipated levels of business and our ability to manage inventory levels with market demand); capital spending and network deployment levels in the telecommunications industry; future economic, competitive, financial and market conditions; limited visibility with regards to customer orders and the timing of such orders; fluctuating exchange rates; consolidation in the global telecommunications test and service assurance industry and increased competition among vendors; concentration of sales; timely release and market acceptance of our new products and other upcoming products; our ability to successfully integrate our acquired and to-be-acquired businesses; our ability to successfully expand international operations; and the retention of key technical and management personnel. Assumptions relating to the foregoing involve judgments and risks, all of which are difficult or impossible to predict and many of which are beyond our control. Other risk factors that may affect our future performance and operations are detailed in our Annual Report, on Form 20-F, and our other filings with the U.S. Securities and Exchange Commission and the Canadian securities commissions. We believe that the expectations reflected in the forward-looking statements are reasonable based on information currently available to us, but we cannot assure you that the expectations will prove to have been correct. Accordingly, you should not place undue reliance on these forward-looking statements. These statements speak only as of the date of this document. Unless required by law or applicable regulations, we undertake no obligation to revise or update any of them to reflect events or circumstances that occur after the date of this document.
 

 
Page 5 of 32


 

 
Non-IFRS Measures
EXFO provides non-IFRS measures (gross margin* and adjusted EBITDA**) as supplemental information regarding its operational performance. The company uses these measures for the purposes of evaluating historical and prospective financial performance, as well as performance relative to competitors. These measures also help EXFO to plan and forecast 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 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 represents sales less cost of sales, excluding depreciation and amortization.
 
**
Adjusted EBITDA represents net earnings (loss) before interest, income taxes, depreciation of property, plant and equipment, amortization of intangible assets, restructuring charges, stock-based compensation costs and foreign exchange gain.

The following table summarizes the reconciliation of adjusted EBITDA to IFRS net earnings (loss), in thousands of US dollars:
 
Adjusted EBITDA
      Q3 2013       Q2 2013       Q3 2012  
                         
IFRS net earnings (loss) for the period
  $ (862 )   $ 39     $ (3,720 )
                         
Add (deduct):
                       
                         
Depreciation of property, plant and equipment
    1,473       1,504       1,520  
Amortization of intangible assets
    1,586       1,922       1,993  
Interest (income) expense
    (68 )     25       (85 )
Income taxes
    901       2,088       540  
Restructuring charges
          89        
Stock-based compensation costs
    415       468       370  
Foreign exchange gain
    (314 )     (1,700 )     (1,090 )
Adjusted EBITDA for the period
  $ 3,131     $ 4,435     $ (472 )
                         
Adjusted EBITDA in percentage of sales
    5.3 %     7.1 %     (0.8 )%

 

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

 
Page 6 of 32


 
EXFO Inc.
Condensed Unaudited Interim Consolidated Balance Sheets

(in thousands of US dollars)
 

   
As at
May 31,
2013
   
As at
August 31,
2012
 
Assets
           
             
Current assets
           
Cash
  $ 49,858     $ 58,868  
Short-term investments
    4,939       8,236  
Accounts receivable
               
Trade
    46,794       37,643  
    Other
    2,802       4,283  
Income taxes and tax credits recoverable
    5,915       9,024  
Inventories
    38,399       41,212  
Prepaid expenses
    4,465       3,800  
      153,172       163,066  
                 
Tax credits recoverable
    41,894       38,397  
Property, plant and equipment
    45,775       49,848  
Intangible assets
    8,664       14,132  
Goodwill
    27,740       29,160  
Deferred income taxes
    10,867       12,080  
                 
    $ 288,112     $ 306,683  
Liabilities
               
                 
Current liabilities
               
Accounts payable and accrued liabilities
  $ 30,255     $ 32,392  
Provisions
    902       952  
Income taxes payable
    1,502       917  
Current portion of long-term debt
    580       565  
Deferred revenue
    10,869       10,583  
      44,108       45,409  
                 
Deferred revenue
    4,245       4,997  
Long-term debt
 
      282  
Other liabilities
    357       609  
Deferred income taxes
    2,452       2,105  
      51,162       53,402  
                 
Shareholders’ equity
               
Share capital (note 4)
    110,510       110,965  
Contributed surplus
    16,872       17,298  
Retained earnings
    109,050       111,511  
Accumulated other comprehensive income
    518       13,507  
                 
      236,950       253,281  
                 
    $ 288,112     $ 306,683  
 

The accompanying notes are an integral part of these condensed interim consolidated financial statements.
Page 7 of 32


 
EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Earnings
 
(in thousands of US dollars, except share and per share data)
 
 
   
Three months
ended
May 31, 2013
   
Nine months
ended
May 31, 2013
   
Three months
ended
May 31, 2012
   
Nine months
ended
May 31, 2012
 
                         
Sales
  $ 58,865     $ 181,262     $ 59,505     $ 192,810  
                                 
Cost of sales (1) (note 5)
    22,574       69,895       23,549       70,535  
Selling and administrative (note 5)
    22,002       67,366       23,625       71,919  
Net research and development  (note 5)
    11,573       35,135       13,173       37,963  
Depreciation of property, plant and equipment (note 5)
    1,473       4,582       1,520       4,634  
Amortization of intangible assets (note 5)
    1,586       5,470       1,993       5,888  
Changes in fair value of cash contingent consideration
 
   
   
      (311 )
Earnings (loss) from operations
    (343 )     (1,186 )     (4,355 )     2,182  
                                 
Interest income
    68       76       85       68  
Foreign exchange gain
    314       2,770       1,090       1,283  
Earnings (loss) before income taxes
    39       1,660       (3,180 )     3,533  
                                 
Income taxes (note 6)
    901       4,121       540       3,412  
                                 
Net earnings (loss) for the period
  $ (862 )   $ (2,461 )   $ (3,720 )   $ 121  
                                 
Basic and diluted net earnings (loss) per share
  $ (0.01 )   $ (0.04 )   $ (0.06 )   $ 0.00  
                                 
Basic weighted average number of shares outstanding (000’s)
    60,377       60,386       60,537       60,440  
                                 
Diluted weighted average number of shares outstanding (000’s) (note 7)
    60,377       60,386       60,537       61,694  

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

 The accompanying notes are an integral part of these condensed interim consolidated financial statements.
Page 8 of 32


 
EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Comprehensive Loss
 
(in thousands of US dollars)
 
 
   
Three months
ended
May 31, 2013
   
Nine months
ended
May 31, 2013
   
Three months
ended
May 31, 2012
   
Nine months
ended
May 31, 2012
 
                         
Net earnings (loss) for the period
  $ (862 )   $ (2,461 )   $ (3,720 )   $ 121  
Other comprehensive income (loss), net of income taxes
                               
Items that will not be reclassified subsequently to net earnings
                               
Foreign currency translation adjustment
    (1,252 )     (12,144 )     (12,307 )     (17,934 )
Items that may be reclassified subsequently to net earnings
                               
Unrealized gains/losses on forward exchange contracts
    (112 )     (874 )     (1,066 )     (922 )
Reclassification of realized gains/losses on forward exchange contracts in net earnings (loss)
    48       (281 )     (285 )     (1,265 )
Deferred income tax effect of gains/losses on forward exchange contracts
    17       310       362       594  
Other comprehensive loss
    (1,299 )     (12,989 )     (13,296 )     (19,527 )
                                 
Comprehensive loss for the period
  $ (2,161 )   $ (15,450 )   $ (17,016 )   $ (19,406 )


 The accompanying notes are an integral part of these condensed interim consolidated financial statements.
Page 9 of 32


 
EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Changes in Shareholders’ Equity
 
(in thousands of US dollars)
 
 
   
Nine months ended May 31, 2012
 
   
Share
capital
   
Contributed surplus
   
Retained earnings
   
Accumulated other comprehensive income
   
Total
shareholders’ equity
 
                               
Balance as at September 1, 2011
  $ 110,341     $ 18,017     $ 115,104     $ 21,049     $ 264,511  
Exercise of stock options (note 4)
    118                         118  
Redemption of share capital (note 4)
    (404 )     (222 )                 (626 )
Reclassification of stock-based compensation costs (note 4)
    1,835       (1,835 )                  
Stock-based compensation costs
          1,362                   1,362  
Net earnings for the period
                121             121  
Other comprehensive loss
                                       
Foreign currency translation adjustment
                      (17,934 )     (17,934 )
Changes in unrealized gains on forward exchange contracts, net of deferred income taxes of $594
                      (1,593 )     (1,593 )
                                         
Total comprehensive income (loss) for the period
                121       (19,527 )     (19,406 )
                                         
Balance as at May 31, 2012
  $ 111,890     $ 17,322     $ 115,225     $ 1,522     $ 245,959  

 
   
Nine months ended May 31, 2013
 
   
Share
capital
   
Contributed surplus
   
Retained earnings
   
Accumulated other comprehensive income
   
Total
shareholders’ equity
 
                               
Balance as at September 1, 2012
  $ 110,965     $ 17,298     $ 111,511     $ 13,507     $ 253,281  
Exercise of stock options (note 4)
    87                         87  
Redemption of share capital (note 4)
    (1,892 )     (409 )                 (2,301 )
Reclassification of stock-based compensation costs (note 4)
    1,350       (1,350 )                  
Stock-based compensation costs
          1,333                   1,333  
Net loss for the period
                (2,461 )           (2,461 )
Other comprehensive loss
                                       
Foreign currency translation adjustment
                      (12,144 )     (12,144 )
Changes in unrealized gains/losses on forward exchange contracts, net of deferred income taxes of $310
                      (845 )     (845 )
                                         
Total comprehensive loss for the period
                (2,461 )     (12,989 )     (15,450 )
                                         
Balance as at May 31, 2013
  $ 110,510     $ 16,872     $ 109,050     $ 518     $ 236,950  


The accompanying notes are an integral part of these condensed interim consolidated financial statements.
Page 10 of 32


 
EXFO Inc.
Condensed Unaudited Interim Consolidated Statements of Cash Flows
 
(in thousands of US dollars)
 
 
   
Three months
ended
May 31, 2013
   
Nine months
ended
May 31, 2013
   
Three months
ended
May 31, 2012
   
Nine months
ended
May 31, 2012
 
                         
Cash flows from operating activities
                       
Net earnings (loss) for the period
  $ (862 )   $ (2,461 )   $ (3,720 )   $ 121  
Add (deduct) items not affecting cash
                               
Change in discount on short-term investments
    1                   43  
Stock-based compensation costs
    415       1,331       370       1,433  
Depreciation and amortization
    3,059       10,052       3,513       10,522  
Changes in fair value of cash contingent consideration
                      (311 )
Deferred revenue
    1,661       241       2,629       1,976  
Deferred income taxes
    263       1,984       445       2,020  
Change in foreign exchange gain/loss
    (78 )     (876 )     (1,091 )     (2,130 )
      4,459       10,271       2,146       13,674  
                                 
Change in non-cash operating items
                               
Accounts receivable
    (4,569 )     (10,657 )     (2,339 )     268  
Income taxes and tax credits
    985       (2,201 )     (2,308 )     (3,566 )
Inventories
    (262 )     791       1,930       9,573  
Prepaid expenses
    (804 )     (859 )     (238 )     (451 )
Accounts payable, accrued liabilities and provisions
    1,553       1,503       3,478       3,443  
Other liabilities
    (25 )     (235 )     163       11  
      1,337       (1,387 )     2,832       22,952  
Cash flows from investing activities
                               
Additions to short-term investments
    (9,934 )     (44,703 )     (24,170 )     (91,968 )
Proceeds from disposal and maturity of short-term investments
    9,921       47,731       21,135       128,901  
Additions to capital assets
    (1,459 )     (5,952 )     (6,826 )     (18,003 )
      (1,472 )     (2,924 )     (9,861 )     18,930  
Cash flows from financing activities
                               
Bank loan
                3       (782 )
Repayment of long-term debt
          (293 )           (296 )
Exercise of stock options
          87       40       118  
Redemption of share capital
    (1,161 )     (2,301 )           (626 )
      (1,161 )     (2,507 )     43       (1,586 )
                                 
Effect of foreign exchange rate changes on cash
    (271 )     (2,192 )     (2,354 )     (1,158 )
                                 
Change in cash
    (1,567 )     (9,010 )     (9,340 )     39,138  
Cash – Beginning of the period
    51,425       58,868       71,249       22,771  
Cash – End of the period
  $ 49,858     $ 49,858     $ 61,909     $ 61,909  
                                 
Supplementary information
                               
Interest paid
  $ 2     $ 28     $ 3     $ 61  
Income taxes paid
  $ 118     $ 1,055     $ 367     $ 1,357  

As at May 31, 2012 and 2013, unpaid purchases of capital assets amounted to $2,601 and $279 respectively.
 
 

The accompanying notes are an integral part of these condensed interim consolidated financial statements.
Page 11 of 32


 
EXFO Inc.
Notes to Condensed Unaudited Interim Consolidated Financial Statements
 
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
 
 
1  Nature of Activities and Incorporation
 
EXFO Inc. and its subsidiaries (together “EXFO” or the company) design, manufacture and market test and service assurance solutions for wireless and wireline network operators and equipment manufacturers in the global telecommunications industry. The company offers core-to-edge solutions to assess the performance and reliability of converged Internet protocol (IP) fixed and mobile networks.
 
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, Province of Quebec, Canada, G1M 2K2.
 
These condensed interim consolidated financial statements were authorized for issue by the Board of Directors on June 26, 2013.
 
 
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. Interim results may not necessarily be indicative of results anticipated for the entire year.
 
New Accounting Standard
 
Financial statement presentation
 
The IASB amended IAS 1, “Financial Statement Presentation”. The amendments to IAS 1 require entities to separate items presented in other comprehensive income into two groups, based on whether or not they may be recycled to the statement of earnings in the future. Items that will not be reclassified will be presented separately from items that may be reclassified in the future, such as unrealized gains and losses on cash-flow hedges. The amendments are effective for annual periods beginning on or after July 1, 2012. The company adopted this new standard on September 1, 2012 and classified items of other comprehensive income accordingly.
 
 
3  Derivative Financial Instruments
 
The functional currency of the company is the Canadian dollar. The company is exposed to a 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 (US dollars) and certain operating expenses (US dollars and euros). Forward exchange contracts, which are designated as cash-flow hedging instruments, qualify for hedge accounting.
 

 
Page 12 of 32


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)

 
As at May 31, 2013, the company held contracts to sell US dollars for Canadian dollars at various forward rates, which are summarized as follows:
 
 
Expiry dates
 
Contractual
amounts
   
Weighted average contractual
forward rates
 
               
 
June 2013 to August 2013
  $ 5,700       1.0317  
 
September 2013 to August 2014
    18,600       1.0243  
 
September 2014 to February 2015
    6,600       1.0401  
                   
 
Total
  $ 30,900       1.0290  
 
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 gains of $932,000 as at August 31, 2012 and net losses of $416,000 as at May 31, 2013.
 
Based on the portfolio of forward exchange contracts as at May 31, 2013, the company estimates that the portion of the net unrealized losses on these contracts as of that date, which will be realized and reclassified from accumulated other comprehensive income to net earnings over the next 12 months, amounts to $379,000.
 
As at May 31, 2013, forward exchange contracts in the amount of $379,000 are presented as current liabilities in accounts payable and accrued liabilities in the balance sheet. These forward exchange contracts are not yet recorded within sales.
 
During the three months ended May 31, 2012 and 2013, the company recognized within its sales foreign exchange gains on forward exchange contracts of $278,000 and $44,000 respectively. During the nine months ended May 31, 2012 and 2013, the company recognized within its sales foreign exchange gains on forward exchange contracts of $1,150,000 and $399,000 respectively.
 
 
4  Share Capital
 
On November 7, 2012, the company announced that its Board of Directors approved the renewal of its share repurchase program, by way of a normal course issuer bid on the open market of up to 10% of the issued and outstanding subordinate voting shares, representing 2,072,721 subordinate voting shares at the prevailing market price. The company uses cash, short-term investments or future cash flow from operations to fund the repurchase of shares. The normal course issuer bid started on November 12, 2012, and will end on November 11, 2013, or on an earlier date if the company repurchases the maximum number of shares permitted under the bid. The program does not require that the company repurchases any specific number of shares, and it may be modified, suspended or terminated at any time and without prior notice. All shares repurchased under the bid are cancelled.
 

 
Page 13 of 32

 

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 tables summarize changes in share capital for the nine months ended May 31, 2012 and 2013.
 
   
Nine months ended May 31, 2012
 
   
Multiple voting shares
   
Subordinate voting shares
       
   
Number
   
Amount
   
Number
   
Amount
   
Total
amount
 
                               
Balance as at September 1, 2011
    31,643,000     $ 1       28,621,999     $ 110,340     $ 110,341  
Redemption of restricted share units
                184,167              
Redemption of share capital
                (63,146 )     (244 )     (244 )
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
                      848       848  
                                         
Balance as at November 30, 2011
    31,643,000       1       28,743,020       110,944       110,945  
Exercise of stock options
                25,250       78       78  
Redemption of restricted share units
                127,632              
Redemption of share capital
                (41,651 )     (160 )     (160 )
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
                      558       558  
                                         
Balance as at February 29, 2012
    31,643,000       1       28,854,251       111,420       111,421  
Exercise of stock options
                9,500       40       40  
Redemption of restricted share units
                70,052              
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
                      429       429  
                                         
Balance as at May 31, 2012
    31,643,000     $ 1       28,933,803     $ 111,889     $ 111,890  
 
 
 
Page 14 of 32

 

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)
 
 
   
Nine months ended May 31 2013
 
   
Multiple voting shares
   
Subordinate voting shares
         
   
Number
   
Amount
   
Number
   
Amount
   
Total
amount
 
                                         
Balance as at September 1, 2012
    31,643,000     $ 1       28,710,891     $ 110,964     $ 110,965  
Exercise of stock options
                23,275       51       51  
Redemption of restricted share units
                127,949              
Redemption of share capital
                (205,123 )     (793 )     (793 )
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
                      612       612  
                                         
Balance as at November 30, 2012
    31,643,000       1       28,656,992       110,834       110,835  
Exercise of stock options
                7,400       36       36  
Redemption of restricted share units
                141,725              
Redemption of deferred share units
                37,054              
Redemption of share capital
                (31,210 )     (120 )     (120 )
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
                      649       649  
                                         
Balance as at February 28, 2013
    31,643,000       1       28,811,961       111,399       111,400  
Redemption of restricted share units
                16,752              
Redemption of share capital
                (252,974 )     (979 )     (979 )
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards
                      89       89  
                                         
Balance as at May 31, 2013
    31,643,000     $ 1       28,575,739     $ 110,509     $ 110,510  
 
 
5  Statements of Earnings
 
Net research and development expenses comprise the following:
 
   
Three months
ended
May 31, 2013
   
Nine months
ended
May 31, 2013
   
Three months
ended
May 31, 2012
   
Nine months
ended
May 31, 2012
 
                         
Gross research and development expenses
  $ 13,782     $ 41,806     $ 15,575     $ 45,188  
Research and development tax credits and grants
    (2,209 )     (6,671 )     (2,402 )     (7,225 )
                                 
    $ 11,573     $ 35,135     $ 13,173     $ 37,963  
 

 
Page 15 of 32


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)

 
Gross research and development expenses for the nine months ended May 31, 2013 include $89,000 in restructuring charges (nil for all other periods).
 
Depreciation and amortization expenses by functional area are as follows:
 
   
Three months
ended
May 31, 2013
   
Nine months
ended
May 31, 2013
   
Three months
ended
May 31, 2012
   
Nine months
ended
May 31, 2012
 
                         
Cost of sales
                       
Depreciation of property, plant and equipment
  $ 398     $ 1,265     $ 482     $ 1,534  
Amortization of intangible assets
    938       3,469       1,278       3,828  
      1,336       4,734       1,760       5,362  
                                 
Selling and administrative expenses
                               
Depreciation of property, plant and equipment
    272       844       251       774  
Amortization of intangible assets
    417       1,291       450       1,377  
      689       2,135       701       2,151  
                                 
Net research and development expenses
                               
Depreciation of property, plant and equipment
    803       2,473       787       2,326  
Amortization of intangible assets
    231       710       265       683  
      1,034       3,183       1,052       3,009  
                                 
    $ 3,059     $ 10,052     $ 3,513     $ 10,522  
                                 
Depreciation of property, plant and equipment
  $ 1,473     $ 4,582     $ 1,520     $ 4,634  
Amortization of intangible assets
    1,586       5,470       1,993       5,888  
                                 
    $ 3,059     $ 10,052     $ 3,513     $ 10,522  
 
Employee compensation comprises the following:
 
   
Three months
ended
May 31, 2013
   
Nine months
ended
May 31, 2013
   
Three months
ended
May 31, 2012
   
Nine months
ended
May 31, 2012
 
                         
Salaries and benefits
  $ 30,732     $ 93,962     $ 32,504     $ 98,094  
Stock-based compensation costs
    415       1,331       370       1,433  
                                 
Total employee compensation for the period
  $ 31,147     $ 95,293     $ 32,874     $ 99,527  
 

 
Page 16 of 32

 
 
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
May 31, 2013
   
Nine months
ended
May 31, 2013
   
Three months
ended
May 31, 2012
   
Nine months
ended
May 31, 2012
 
                         
Cost of sales
  $ 58     $ 170     $ 64     $ 183  
Selling and administrative expenses
    252       875       183       888  
Net research and development expenses
    105       286       123       362  
                                 
    $ 415     $ 1,331     $ 370     $ 1,433  
 
 
6  Income taxes
 
For the three months and the nine months ended May 31, 2012 and 2013, 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
May 31, 2013
   
Nine months
ended
May 31, 2013
   
Three months
ended
May 31, 2012
   
Nine months
ended
May 31, 2012
 
                         
Income tax provision at combined Canadian federal and provincial statutory tax rate (27% in 2013 and 28% in 2012)
  $ 11     $ 448     $ (891 )   $ 989  
                                 
Increase (decrease) due to:
                               
Foreign income taxed at different rates
    (45 )     (323 )     12       75  
Non-taxable (income)/loss
    (227 )     (1,391 )     746       1,229  
Non-deductible expenses
    184       607       158       840  
Foreign exchange effect of translation of foreign operations
    (223 )     61       (1,246 )     (2,680 )
Recognition of previously unrecognized deferred income tax assets
 
   
   
      (557 )
Utilization of previously unrecognized deferred income tax assets
 
   
      19       (7 )
Unrecognized deferred income tax assets on temporary deductible differences and unused tax losses
    1,226       3,920       1,618       3,305  
Other
    (25 )     799       124       218  
                                 
    $ 901     $ 4,121     $ 540     $ 3,412  
 

 
Page 17 of 32

 
 
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
May 31, 2013
   
Nine months
ended
May 31, 2013
   
Three months
ended
May 31, 2012
   
Nine months
ended
May 31, 2012
 
                         
Current
  $ 638     $ 2,137     $ 95     $ 1,392  
Deferred
    263       1,984       445       2,020  
                                 
    $ 901     $ 4,121     $ 540     $ 3,412  
 
 
7  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
May 31, 2013
   
Nine months
ended
May 31, 2013
   
Three months
ended
May 31, 2012
   
Nine months
ended
May 31, 2012
 
                         
Basic weighted average number of shares outstanding (000’s)
    60,377       60,386       60,537       60,440  
Plus dilutive effect of (000’s):
                               
Stock options
    20       28       169       166  
Restricted share units
    619       640       887       972  
Deferred share units
    107       116       122       116  
                                 
Diluted weighted average number of shares outstanding (000’s)
    61,123       61,170       61,715       61,694  
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)
    9       71    
      64  
 
For the three months ended May 31, 2012 and 2013 and for the nine months ended May 31, 2013, the diluted amount per share was the same amount as the basic amount per share since the dilutive effect of stock options, restricted share units and deferred share units was not included in the calculation; otherwise, the effect would have been antidilutive. Accordingly, the diluted amount per share for these periods was calculated using the basic weighted average number of shares outstanding.
 

 
Page 18 of 32


 
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 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, macro-economic 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; limited visibility with regards to customer orders and the timing of such orders; fluctuating exchange rates; consolidation in the global telecommunications test and service assurance industry and increased competition among vendors; 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.
 
The following discussion and analysis of financial condition and results of operations is dated June 26, 2013.
 
All dollar amounts are expressed in US dollars, except as otherwise noted.
 
 
COMPANY OVERVIEW AND RECENT DEVELOPMENTS
 
We are a leading provider of test and service assurance solutions for network operators and equipment manufacturers in the global telecommunications industry. We offer core-to-edge solutions that assess the performance and reliability of converged, IP (Internet Protocol) fixed and mobile networks. Our test and service assurance solutions specifically target high-growth market opportunities related to increasing bandwidth and improving quality of experience on next-generation IP networks: 4G/LTE (long-term evolution), wireless backhaul, 40G/100G network upgrades and fiber-to-the-home (FTTH)/fiber-to-the-curb (FTTC)/fiber-to-the-node (FTTN) deployments. Customers on a global basis rely on our test and service assurance solutions to enable their fixed and mobile networks to perform optimally during their complete lifecycles: research, development, manufacturing, installation, maintenance and monitoring.
 
We reported sales of $58.9 million in the third quarter of fiscal 2013, which represents a decrease of 1.1% compared to the same period last year. We reported bookings of $61.8 million in the third quarter of fiscal 2013, for a book-to-bill ratio of 1.05, compared to $57.5 million for the same period last year.
 

 
Page 19 of 32

 

Net loss amounted to $862,000, or $0.01 per share, in the third quarter of fiscal 2013, compared to $3.7 million, or $0.06 per share for the same period last year. Net loss for the third quarter of fiscal 2013 included $1.5 million in after-tax amortization of intangible assets, $415,000 in stock-based compensation costs and a foreign exchange gain of $314,000. Loss from operations amounted to $343,000, or 0.6% of sales in the third quarter of fiscal 2013, compared to $4.4 million, or 7.3% of sales for the same period last year.
 
Adjusted EBITDA (net loss before interest, income taxes, depreciation of property, plant and equipment, amortization of intangible assets, stock-based compensation costs and foreign exchange gain) reached $3.1 million, or 5.3% of sales in the third quarter of fiscal 2013, compared to minus $472,000, or 0.8% of sales for the same period last year. See further in this document for a complete reconciliation of adjusted EBITDA to IFRS net earnings (loss).
 
Sales and results for the third quarter of fiscal 2013 were lower than the third-quarter guidance that we issued on March 27, 2013. On June 4, 2013, we issued a press release to announce preliminary third-quarter sales and results below our guidance. This press release is available at www.sedar.com and at www.EXFO.com.
 
On November 7, 2012, we announced that our Board of Directors approved the renewal of our share repurchase program, by way of a normal course issuer bid on the open market of up to 10% of the issued and outstanding subordinate voting shares, representing 2,072,721 subordinate voting shares at the prevailing market price. We use cash, short-term investments or future cash flows from operations to fund the repurchase of shares. The normal course issuer bid started on November 12, 2012, and will end on November 11, 2013, or on an earlier date if we repurchase the maximum number of shares permitted under the bid. The program does not require that we repurchase any specific number of shares, and it may be modified, suspended or terminated at any time and without prior notice. All shares repurchased under the bid are cancelled.
 
We launched two new products in the third quarter of fiscal 2013, including a tunable laser source for network equipment manufacturers in the design and testing of ultra-high-capacity optical networks. We also introduced an optical switch based on an all-optical, cross-connect technology that provides a unique combination of low insertion loss, fast switching and high reliability that engineers require in lab and manufacturing environments. Altogether, we have released 13 new products or major enhancements since the beginning of the fiscal year.
 
 
 
Page 20 of 32

 
 
RESULTS OF OPERATIONS
(in thousands of US dollars, except per share data, and as a percentage of sales for the periods indicated)
 
   
Three months
ended
May 31, 2013
   
Three months
ended
May 31, 2012
   
Nine months
ended
May 31, 2013
   
Nine months
ended
May 31, 2012
 
                         
Sales
  $ 58,865     $ 59,505     $ 181,262     $ 192,810  
                                 
Cost of sales (1)
    22,574       23,549       69,895       70,535  
Selling and administrative
    22,002       23,625       67,366       71,919  
Net research and development
    11,573       13,173       35,135       37,963  
Depreciation of property, plant and equipment
    1,473       1,520       4,582       4,634  
Amortization of intangible assets
    1,586       1,993       5,470       5,888  
Changes in the fair value of cash contingent consideration
 
   
   
      (311 )
Earnings (loss) from operations
    (343 )     (4,355 )     (1,186 )     2,182  
Interest income
    68       85       76       68  
Foreign exchange gain
    314       1,090       2,770       1,283  
Earnings (loss) before income taxes
    39       (3,180 )     1,660       3,533  
Income taxes
    901       540       4,121       3,412  
Net earnings (loss) for the period
  $ (862 )   $ (3,720 )   $ (2,461 )   $ 121  
                                 
Basic and diluted net earnings (loss) per share
  $ (0.01 )   $ (0.06 )   $ (0.04 )   $ 0.00  
                                 
Other selected information:
                               
                                 
Gross margin (2)
  $ 36,291     $ 35,956     $ 111,367     $ 122,275  
                                 
Research and development:
                               
Gross research and development (3)
  $ 13,782     $ 15,575     $ 41,806     $ 45,188  
Net research and development (3)
  $ 11,573     $ 13,173     $ 35,135     $ 37,963  
                                 
Adjusted EBITDA (2)
  $ 3,131     $ (472 )   $ 10,286     $ 13,826  
 
(1)  
The cost of sales is exclusive of depreciation and amortization, shown separately.
(2)  
Refer to page 31 for non-IFRS measures.
(3)  
Includes $89 in restructuring charges for the nine months ended May 31, 2013 (nil for all other periods).
 
 
 
Page 21 of 32

 
 
   
Three months
ended
May 31, 2013
   
Three months
ended
May 31, 2012
   
Nine months
ended
May 31, 2013
   
Nine months
ended
May 31, 2012
 
                         
Sales
    100.0 %     100.0 %     100.0 %     100.0 %
                                 
Cost of sales (1)
    38.3       39.6       38.6       36.6  
Selling and administrative
    37.4       39.7       37.2       37.3  
Net research and development
    19.7       22.1       19.4       19.7  
Depreciation of property, plant and equipment
    2.5       2.6       2.5       2.4  
Amortization of intangible assets
    2.7       3.3       3.0       3.1  
Changes in fair value of cash contingent consideration
         
            (0.2 )
Earnings (loss) from operations
    (0.6 )     (7.3 )     (0.7 )     1.1  
Interest income
    0.1       0.1       0.1      
 
Foreign exchange gain
    0.5       1.8       1.5       0.7  
Earnings (loss) before income taxes
          (5.4 )     0.9       1.8  
Income taxes
    1.5       0.9       2.3       1.7  
Net earnings (loss) for the period
    (1.5 )%     (6.3 )%     (1.4 )%     0.1 %
                                 
                                 
Other selected information:
                               
                                 
Gross margin (2)
    61.7 %     60.4 %     61.4 %     63.4 %
                                 
Research and development:
                               
Gross research and development
    23.4 %     26.2 %     23.1 %     23.4 %
Net research and development
    19.7 %     22.1 %     19.4 %     19.7 %
                                 
Adjusted EBITDA (2)
    5.3 %     (0.8 )%     5.7 %     7.2 %
 
(1)  
The cost of sales is exclusive of depreciation and amortization, shown separately.
(2)  
Refer to page 31 for non-IFRS measures.
 
 
 
Page 22 of 32

 
 
SALES AND BOOKINGS
 
For the three months ended May 31, 2013, our sales slightly decreased by 1.1% to $58.9 million, compared to $59.5 million for the same period last year; however, our bookings increased by 7.4% to $61.8 million, compared to $57.5 million for the same period last year, for a book-to-bill ratio of 1.05.
 
For the nine months ended May 31, 2013, our sales decreased by 6.0% to $181.3 million, compared to $192.8 million for the same period last year. For the first nine months of fiscal 2013, our book-to-bill ratio amounted to 0.99.
 
Over the last quarters, market conditions in the telecommunications industry have been tenuous due to macro-economic uncertainty, the European debt crisis and its ripple effects on other economies, the tightening of capital spending among network operators as well as delays in customers’ orders. These market conditions have affected our sales and bookings since the third quarter of fiscal 2012. Although we witnessed some improvements in the United States in the third quarter of fiscal 2013, global market conditions continue to be difficult.
 
In the United States, we believe that capital spending budgets were released a little later than usually in fiscal 2013 because some network operators are moving ahead with large-scale, multi-billion dollar deployments that require additional scrutiny and planning; consequently, certain investment decisions were pushed back beyond the first quarter of the 2013 calendar year. Although we believe our bookings benefited to some extent from budget releases in the last portion of the third quarter of fiscal 2013, these late releases have affected our sales and bookings for the first nine months of fiscal 2013 compared to the same period last year.
 
Finally, in fiscal 2013, calendar year-end budget spending from network operators was even more limited than last year, which reduced our sales and bookings for the nine months ended May 31, 2013, compared to the same period last year.
 
Geographic distribution
 
In the third quarter of fiscal 2013, sales to the Americas, Europe, Middle-East and Africa (EMEA) and Asia-Pacific (APAC) accounted for 55%, 28% and 17% of sales respectively, compared to 51%, 29% and 20% for the same period last year respectively. In the first nine months of fiscal 2013, sales to the Americas, EMEA and APAC accounted for 53%, 28% and 19% of sales respectively, compared to 52%, 29% and 19% 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 third quarters of fiscal 2012 and 2013, no customer accounted for more than 10% of our sales, and our top three customers accounted for 14.5% and 15.7% of our sales respectively. In the first nine months of fiscal 2012 and 2013, no customer accounted for more than 10% of our sales, and our top three customers accounted for 11.2% and 13.6% of our sales respectively.
 
 
GROSS MARGIN (non-IFRS measure – refer to page 31 of this document)
 
Gross margin reached 61.7% of sales for the three months ended May 31, 2013, compared to 60.4% for the same period last year.
 
Gross margin amounted to 61.4% of sales for the first nine months ended May 31, 2013, compared to 63.4% for the same period last year.
 
In the third quarter of fiscal 2013, a more favorable product mix resulted in an increase in our gross margin compared to the same period last year.
 

 
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In addition, during the third quarter of fiscal 2013, a larger portion of our sales came from products manufactured in our facilities in China compared to the same period last year; those products have a lower cost of goods than those manufactured in our facilities in Canada, thus further improving our gross margin year-over-year.
 
However, in the third quarter of fiscal 2012, our warranty expenses were lower compared to the same period this year; this resulted in a positive impact on our gross margin in the third quarter of fiscal 2012.
 
In addition, increased pricing pressure in the third quarter of fiscal 2013, compared to the same period last year, had to some extent a negative impact on our gross margin year-over-year.
 
The decrease in our gross margin in the first nine months of fiscal 2013, compared to the same period last year, can be explained by the following factors.
 
In the first nine months of fiscal 2013, our gross margin was negatively affected by the shift in product mix in favor of our physical-layer solutions, compared to the same period last year. In fact, sales of these products, which typically deliver lower margins than our protocol-layer solutions, represented a larger portion of our sales in the first nine months of fiscal 2013, compared to the same period last year. Namely, in the first nine months of fiscal 2013, we shipped large orders of our copper-access test solutions (included in our physical-layer solutions); that product line typically delivers lower margins.
 
In addition, a lower sales volume in the first nine months of fiscal 2013 compared to the same period last year resulted in a lower absorption of our fixed manufacturing costs, which resulted in a lower gross margin year-over-year.
 
Furthermore, in the first nine months of fiscal 2012, our warranty expenses were lower compared to the same period this year; this resulted in a positive impact on our gross margin in the first nine months of fiscal 2012.
 
Finally, increased pricing pressure in the first nine months of fiscal 2013, compared to the same period last year, had to some extent a negative impact on our gross margin year-over-year.
 
However, during the first nine months of fiscal 2013, a larger portion of our sales came from products manufactured in our facilities in China compared to the same period last year, thus offsetting in part the year-over-year decrease in our gross margin.
 
Considering the expected sales growth, the expected increase in sales of protocol products as well as software-intensive products and services, the cost-effective design of our products, our increased manufacturing activities in China and our tight control over operating costs, we expect our gross margin to improve in the future. However, our gross margin may fluctuate quarter-over-quarter due to the mix of our products and as our sales may fluctuate. Furthermore, our gross margin can be negatively affected by increased competitive pricing pressure, customer concentration and/or consolidation, increased obsolescence and warranty costs, shifts in customers, under-absorption of fixed manufacturing costs and increases in product offerings by other suppliers in our industry.
 
 
SELLING AND ADMINISTRATIVE EXPENSES
 
For the three months ended May 31, 2013, selling and administrative expenses were $22.0 million, or 37.4% of sales, compared to $23.6 million, or 39.7% of sales for the same period last year.
 
For the nine months ended May 31, 2013, selling and administrative expenses were $67.4 million, or 37.2% of sales, compared to $71.9 million, or 37.3% of sales for the same period last year.
 
In the third quarter and the first nine months of fiscal 2013, our selling and administrative expenses, especially salaries and benefits as well as travel expenses, decreased year-over-year due in part to the impact of our restructuring plan implemented in the fourth quarter of fiscal 2012.
 

 
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In addition, in the third quarter and first nine months of fiscal 2013, commission expenses to our sales channels were lower compared to the same periods last year, due to a lower sales volume and a shift in mix of products and territories year-over-year.
 
Finally, in the third quarter of fiscal 2013, the year-over-year increase in the average value of the US dollar compared to the Canadian dollar and the euro had a positive impact on our selling and administrative expenses, as a portion of these expenses are incurred in these currencies and we report our results in US dollars.
 
For fiscal 2013, we expect our selling and administrative expenses to decrease as a percentage of sales and range between 36% and 37% of sales. However, any increase in the strength of the Canadian dollar and the euro versus the US dollar would cause our selling and administrative expenses to increase, as a significant portion of these expenses are incurred in these currencies and we report our results in US dollars.
 
 
RESEARCH AND DEVELOPMENT EXPENSES
 
Gross research and development expenses
 
For the three months ended May 31, 2013, gross research and development expenses totaled $13.8 million, or 23.4% of sales, compared to $15.6 million, or 26.2% of sales for the same period last year.
 
For the nine months ended May 31, 2013, gross research and development expenses totaled $41.8 million, or 23.1% of sales, compared to $45.2 million, or 23.4% of sales for the same period last year.
 
In the third quarter and the first nine months of fiscal 2013, our gross research and development expenses decreased year-over-year, especially salaries and benefits, due in part to the impact of our restructuring plan implemented in the fourth quarter of fiscal 2012.
 
In addition, in the third quarter and the first nine months of fiscal 2013, a shift in the mix and timing of research and development projects resulted in decreased gross research and development expenses compared to the same periods last year, mainly from consultants, subcontracting and material expenses.
 
Finally, in the third quarter of fiscal 2013, the year-over-year increase in the average value of the US dollar compared to the Canadian dollar, the euro and the Indian rupee had a positive impact on our gross research and development expenses, as most of these expenses are incurred in these currencies and we report our results in US dollars.
 
However, in the first nine months of in fiscal 2013, our gross research and development expenses included $89,000 in restructuring charges (nil in 2012).
 
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 to grants by a Finnish technology organization on certain research and development projects conducted in Finland.
 
For the three months ended May 31, 2013, tax credits and grants for research and development activities were $2.2 million, or 16.0% of gross research and development expenses, compared to $2.4 million, or 15.4% of gross research and development expenses for the same period last year.
 
For the nine months ended May 31, 2013, tax credits and grants for research and development activities were $6.7 million, or 16.0% of gross research and development expenses, compared to $7.2 million, or 16.0% of gross research and development expenses for the same period last year.
 

 
Page 25 of 32

 
 
In the third quarter and the first nine months of fiscal 2013, tax credits and grants decreased compared to the same periods last year mainly due to the decrease in our gross research and development expenses and mix of projects year-over-year.
 
For fiscal 2013, we expect our net research and development expenses to decrease as a percentage of sales to about 19% of sales. However, any increase in the strength of the Canadian dollar, the euro and the Indian rupee versus the US dollar in the upcoming quarters would cause our net research and development expenses to increase, as most of these expenses are incurred in these currencies and we report our results in US dollars.
 
 
AMORTIZATION OF INTANGIBLE ASSETS
 
For the three months ended May 31, 2013, amortization of intangible assets totaled $1.6 million, compared to $2.0 million for the same period last year. For the nine months ended May 31, 2013, amortization of intangible assets totaled $5.5 million, compared to $5.9 million for the same period last year.
 
The decrease in amortization expenses in the third quarter and the first nine months of fiscal 2013 compared to the same periods last year comes from the fact that core technologies related to the acquisition of Brix Networks Inc. became fully amortized during the third quarter of 2013.
 
 
FOREIGN EXCHANGE GAIN
 
Foreign exchange gains and losses are the result of the translation of operating activities denominated in currencies other than our functional currency, which is the Canadian dollar. A large portion of our foreign exchange gains and losses results from the translation of cash balances and deferred income tax assets denominated in US dollars and euros. We manage our exposure to currency risks in part with forward exchange contracts. In addition, some of our entities’ operating activities are denominated in US dollars, euros or other currencies, which further hedges these risks. However, we remain exposed to currency risks; namely, any increase in the value of the Canadian dollar, compared to the US dollar, would have a negative impact on our operating results.
 
For the three months ended May 31, 2013, we recorded a foreign exchange gain of $314,000 compared to $1.1 million for the same period last year.
 
For the nine months ended May 31, 2013, we recorded a foreign exchange gain of $2.8 million compared to $1.3 million for the same period last year.
 
During the third quarter of fiscal 2013, the period-end value of the Canadian dollar slightly decreased versus the US dollar, compared to the previous quarter, which resulted in a foreign exchange gain of $314,000 during that period. The period-end value of the Canadian dollar decreased 0.5% to CA$1.0368 = US$1.00 in the third quarter of fiscal 2013, compared to CA$1.0314 = US$1.00 at the end of the previous quarter.
 
During the same period last year, the period-end value of the Canadian dollar significantly decreased versus the US dollar, compared to the previous quarter, which resulted in a significant foreign exchange gain of $1.1 million during that period. The period-end value of the Canadian dollar decreased 4.4% to CA$1.0349 = US$1.00 in the third quarter of fiscal 2012, compared to CA$0.9895 = US$1.00 at the end of the previous quarter.
 
During the first nine months of fiscal 2013, the period-end value of the Canadian dollar significantly decreased versus the US dollar and the euro, compared to the previous year end, which resulted in a foreign exchange gain of $2.8 million during that period. Namely, the period-end value of the Canadian dollar decreased 4.9% to CA$1.0368 = US$1.00 in the first nine months of fiscal 2013, compared to CA$0.9863 = US$1.00 at the end of the previous year.
 

 
Page 26 of 32


 
During the same period last year, the period-end value of the Canadian dollar also significantly decreased versus the US dollar, compared to August 31, 2011, which resulted in a significant foreign exchange gain during that period; in fact, the period-end value of the Canadian dollar decreased 5.5% to CA$1.0349 = US$1.00 in the first nine months of fiscal 2012, compared to CA$0.9784 = US$1.00 as at August 31, 2011. However, this gain was offset in part by a foreign exchange loss created by the increase of the period-end value of the Canadian dollar versus the euro, compared to the previous quarter. Overall, we reported a foreign exchange gain of $1.3 million during that period.
 
Foreign exchange rate fluctuations also flow through the P&L line items as a significant portion of cost of sales and our operating items are denominated in Canadian dollars, euros and Indian rupees, and we report our results in US dollars. Consequently, the increase in the average value of the US dollar in the third quarter of fiscal 2013, compared to these currencies year-over-year, resulted in a positive impact on our financial results. In fact, the average value of the US dollar in the third quarter of fiscal 2013 increased 2.2%, 0.6% and 2.6% respectively year-over-year, compared to the Canadian dollar, the euro and the Indian rupee.
 
 
INCOME TAXES
 
For the three months ended May 31, 2013, our income tax expenses totaled $901,000, compared to $540,000 for the same period last year.
 
For the nine months ended May 31, 2013, our income tax expenses amounted to $4.1 million, compared to $3.4 million for the same period last year.
 
For the three months ended May 31, 2013, we reported income tax expenses of $901,000 on a loss before income taxes of $39,000. For the nine months ended May 31, 2013, we reported income tax expenses of $4.1 million on earnings before income taxes of $1.7 million. This situation mainly resulted from the fact that we did not recognize deferred income tax assets for some of our subsidiaries at loss and we had some non-deductible loss and expenses, such as stock-based compensation costs. However, a significant portion of our foreign exchange gain was created by the translation of financial statements of our foreign operations, and was therefore non-taxable. Otherwise, the actual tax rate would have been closer to the combined Canadian and provincial statutory tax rate of 27% for these periods.
 
For the three months ended May 31, 2012, we reported income tax expenses of $540,000 on a loss before income taxes of $3.2 million. For the nine months ended May 31, 2012, we reported income tax expenses of $3.4 million on earnings before income taxes of $3.5 million. This situation mainly resulted from the fact that we did not recognize deferred income taxes for some of our subsidiaries at loss and we had some non-deductible loss and expenses, such as stock-based compensation costs. However, a significant portion of our foreign exchange gain was created by the translation of financial statements of our foreign operations, and was therefore non-taxable. Finally, during the first nine months of fiscal 2012, we recognized previously unrecognized deferred income tax assets of one of our subsidiaries, which resulted in a one-time income tax recovery of $557,000, which reduced our income tax expense for that period. Otherwise, the actual tax rate would have been closer to the combined Canadian and provincial statutory tax rate of 28% for these periods.
 
Please refer to note 6 to our condensed interim consolidated financial statements for a full reconciliation of our income tax provision.
 

 
Page 27 of 32


 
LIQUIDITY AND CAPITAL RESOURCES
 
Cash requirements and capital resources
 
As at May 31, 2013, cash and short-term investments totaled $54.8 million, while our working capital was at $109.1 million. Our cash and short-term investments decreased $1.6 million in the third quarter of fiscal 2013, compared to the previous quarter. During the third quarter of fiscal 2013, we made cash payments of $1.5 million and $1.2 million respectively for the purchase of capital assets and the redemption of share capital pursuant to our share repurchase program. In addition, we recorded an unrealized foreign exchange loss on our cash and short-term investments of $0.2 million. 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. However, operating activities generated $1.3 million in cash, which offset in part the decrease in cash and short-term investment compared to the previous quarter.
 
Our short-term investments consist of a banker acceptance issued by a high-credit quality corporation; therefore, we consider the risk of non-performance of this financial instrument to be limited. This debt instrument is 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, any other potential acquisition, as well as our share repurchase program. As at May 31, 2013, cash balances included an amount of $33.7 million that bears interest at a rate of 1.45%.
 
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 $15.6 million for working capital and other general corporate purposes, and unused lines of credit of $23.3 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 $1.3 million for the three months ended May 31, 2013, compared to $2.8 million for the same period last year.
 
Cash flows used by operating activities were $1.4 million for the nine months ended May 31, 2013, compared to cash flows provided of $23.0 million for the same period last year.
 

 
Page 28 of 32


 
Cash flows provided by operating activities in the third quarter of fiscal 2013 were attributable to the net earnings after items not affecting cash of $4.5 million offset in part by the negative net change in non-cash operating items of $3.2 million; this was mainly due to the negative effect on cash of the increase of $4.6 million in our accounts receivable due to the timing of sales during the quarter as well as the negative effect on cash of the increase of $804,000 in our prepaid expenses due to the timing of payments during the quarter. These negative effects on cash were offset in part by the positive effect on cash of the decrease of $985,000 in our income taxes and tax credits as, during the quarter, we cashed tax credits earned in previous periods as well as the positive effect on cash of the increase of $1.6 million in our accounts payable, accrued liabilities and provisions due to timing of purchases and payments during the quarter.
 
Cash flows used by operating activities in the first nine months of fiscal 2013 were attributable to the net earnings after items not affecting cash of $10.3 million more than offset by the negative net change in non-cash operating items of $11.7 million; this was mainly due to the negative effect on cash of the increase of $10.7 million in our accounts receivable due to the timing of sales during the period, the negative effect on cash of the increase of $2.2 million in our income tax and tax credits recoverable due to tax credits earned during the period not yet recovered as well as the negative effect on cash of the increase of $859,000 in our prepaid expenses due to timing of payments during the period. These negative effects on cash were offset in part by the positive effect on cash of the decrease of $791,000 in our inventories due to an improved inventory turn during the period as well as the positive effect on cash of the increase of $1.5 million in our accounts payable, accrued liabilities and provisions due to timing of purchases and payments during the period.
 
Investing activities
 
Cash flows used by investing activities were $1.5 million for the three months ended May 31, 2013, compared to $9.9 million for the same period last year.
 
Cash flows used by investing activities were $2.9 million for the nine months ended May 31, 2013, compared to cash flows provided of $18.9 million for the same period last year.
 
In the third quarter of fiscal 2013, we paid $1.5 million for the purchase of capital assets.
 
In the first nine months of fiscal 2013, we paid $5.9 million for the purchase of capital assets but we disposed (net of acquisitions) of $3.0 million worth of short-term investments.
 
Financing activities
 
Cash flows used by financing activities were $1.2 million for the three months ended May 31, 2013, compared to cash flows provided of $43,000 for the same period last year.
 
Cash flows used by financing activities were $2.5 million for the nine months ended May 31, 2013, compared to $1.6 million for the same period last year.
 
In the third quarter of fiscal 2013, we redeemed share capital for a cash consideration of $1.2 million.
 
In the first nine months of fiscal 2013, we repaid $293,000 of our long-term debt and redeemed share capital for a cash consideration of $2.3 million. However, we received $87,000 from the exercise of stock options.
 
 
FORWARD EXCHANGE CONTRACTS
 
We utilize forward exchange contracts to manage our foreign currency exposure. Our policy is not to utilize those derivative financial instruments for trading or speculative purposes.
 

 
Page 29 of 32


 
Our forward exchange contracts, which are used to hedge anticipated US-dollar-denominated sales, qualify for hedge accounting; therefore, realized foreign exchange translation gains and losses on these contracts are recognized as an adjustment of the revenues when the corresponding sales are recorded.
 
As at May 31, 2013, we held forward exchange contracts to sell US dollars at various forward rates, which are summarized as follows:
 
Expiry dates
 
Contractual
amounts
   
Weighted average
contractual
forward rates
 
             
June 2013 to August 2013
  $ 5,700,000       1.0317  
September 2013 to August 2014
    18,600,000       1.0243  
September 2014 to February 2015
    6,600,000       1.0401  
Total
  $ 30,900,000       1.0290  
 
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 gains of $932,000 as at August 31, 2012 and net losses of $416,000 as at May 31, 2013. The quarter-end exchange rate was CA$1.0368 = US$1.00 as at May 31, 2013.
 
 
SHARE CAPITAL
 
Share capital
 
As at June 26, 2013, EXFO had 31,643,000 multiple voting shares outstanding, entitling to 10 votes each and 28,575,739 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 May 31, 2013, our off-balance sheet arrangements consisted of letters of guarantee amounting to $5.0 million; these letters of guarantee expire at various dates through fiscal 2017. From this amount, we had $0.6 million worth of letters of guarantee for our own selling and purchasing requirements, which were for the most part reserved from one of our lines of credit. The remainder, in the amount of $4.4 million, was used to secure our line of credit in CNY (Chinese currency) of $4.0 million plus any accrued interest. This line of credit was unused as at May 31, 2013.
 
 
SPECIAL PURPOSES ENTITIES
 
As at May 31, 2013, we did not have interests in any special purposes entities.
 
 
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
For a description of the critical accounting policies and estimates used in the preparation of our consolidated financial statements, refer to our Annual Report on Form 20-F for the year ended August 31, 2012 filed with the U.S. Securities and Exchange Commission and the Canadian securities commissions.
 
 
 
Page 30 of 32


 
NEW IFRS PRONOUNCEMENTS AND AMENDMENTS
 
Refer to note 2 to our condensed interim consolidated financial statements for the three months and nine months ended May 31, 2013 and to our consolidated financial statements for the year ended August 31, 2012 for the effect of certain recent accounting pronouncements on our consolidated financial statements.
 
 
RISK FACTORS
 
There have been no material changes from the risk factors disclosed in our Annual Report in Form 20-F for the year ended August 31, 2012.
 
 
NON-IFRS MEASURES
 
We provide non-IFRS measures (gross margin* and adjusted EBITDA**) as supplemental information regarding our operational performance. We use these measures for the purposes of evaluating our historical and prospective financial performance, as well as our performance relative to our competitors. These measures also help us to plan and forecast future periods as well as to 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.
 
*
Gross margin represents sales less cost of sales, excluding depreciation and amortization.
 
**
Adjusted EBITDA represents net earnings (loss) before interest, income taxes, depreciation of property, plant and equipment, amortization of intangible assets, restructuring charges, changes in the fair value of the cash contingent consideration, stock-based compensation costs and foreign exchange gain.
 

 
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The following table summarizes the reconciliation of adjusted EBITDA to IFRS net earnings (loss), in thousands of US dollars:
 
Adjusted EBITDA
 
   
Three months
ended
May 31, 2013
   
Three months
ended
May 31, 2012
   
Nine months
ended
May 31, 2013
   
Nine months
ended
May 31, 2012
 
                         
IFRS net earnings (loss) for the period
  $ (862 )   $ (3,720 )   $ (2,461 )   $ 121  
                                 
Add (deduct):
                               
                                 
Depreciation of property, plant and equipment
    1,473       1,520       4,582       4,634  
Amortization of intangible assets
    1,586       1,993       5,470       5,888  
Interest income
    (68 )     (85 )     (76 )     (68 )
Income taxes
    901       540       4,121       3,412  
Restructuring charges
         
      89      
 
Changes in fair value of cash contingent consideration
         
            (311 )
Stock-based compensation costs
    415       370       1,331       1,433  
Foreign exchange gain
    (314 )     (1,090 )     (2,770 )     (1,283 )
Adjusted EBITDA for the period
  $ 3,131     $ (472 )   $ 10,286     $ 13,826  
                                 
Adjusted EBITDA in percentage of sales
    5.3 %     (0.8 )%     5.7 %     7.2 %
 
 
 
QUARTERLY SUMMARY FINANCIAL INFORMATION (unaudited)
(tabular amounts in thousands of US dollars, except per share data)
 
   
Quarters ended
 
   
May 31,
2013
   
February 28,
2013
   
November 30,
2012
   
August 31,
2012
 
                         
Sales
  $ 58,865     $ 62,576     $ 59,821     $ 57,156  
Cost of sales (1)
  $ 22,574     $ 23,664     $ 23,657     $ 21,257  
Earnings (loss) from operations
  $ (343 )   $ 452     $ (1,295 )   $ (1,678 )
Net earnings (loss)
  $ (862 )   $ 39     $ (1,638 )   $ (3,714 )
Basic and diluted net earnings (loss) per share
  $ (0.01 )   $ 0.00     $ (0.03 )   $ (0.06 )

   
Quarters ended
 
   
May 31,
2012
   
February 29,
2012
   
November 30,
2011
   
August 31,
2011
 
                         
Sales
  $ 59,505     $ 66,917     $ 66,388     $ 64,414  
Cost of sales (1)
  $ 23,549     $ 23,616     $ 23,370     $ 23,447  
Earnings (loss) from operations
  $ (4,355 )   $ 4,109     $ 2,428     $ 5,878  
Net earnings (loss)
  $ (3,720 )   $ 954     $ 2,887     $ 4,597  
Basic and diluted net earnings (loss) per share
  $ (0.06 )   $ 0.02     $ 0.05     $ 0.08  
 
(1) The cost of sales is exclusive of depreciation and amortization.

 
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