Management’s
Discussion and Analysis of Financial Condition
and Results of Operations
This discussion and analysis contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, and we intend that such
forward-looking statements be subject to the safe harbors created thereby. Forward-looking statements are statements other than historical information or statements of current condition. Words such as may, expect, believe, plan,
anticipate, intend, could, estimate, continue, or similar expressions or the negative of such expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or
other characterizations of future events and circumstances are considered forward-looking statements. They are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from
those in forward-looking statements due to various factors including, but not limited to, macroeconomic uncertainty, namely the impact of the coronavirus pandemic on our employees, customers and global operations, including the
ability of our suppliers to fulfil raw material requirements and services, and our ability to manufacture and deliver our products and services to our customers; the effects and length of emergency measures related to isolation
periods for individuals in affected areas, lockdown restrictions imposed by national governments on businesses in countries where we operate and have employees, and limitations on travel to attract new customers and serve existing
ones; deteriorating financial and market conditions as well as potential recession; trade wars; our ability to successfully integrate businesses that we acquire; capital spending and network deployment levels in the communications
industry (including our ability to quickly adapt cost structures to anticipated levels of business and our ability to manage inventory levels with market demand); consolidation in the global communications test, monitoring and
analytics solutions markets and increased competition among vendors; capacity to adapt our future product offering to future technological changes; limited visibility with regard to the timing and nature of customer orders; delay
in revenue recognition due to longer sales cycles for complex systems involving customers’ acceptance; fluctuating exchange rates; concentration of sales; timely release and market acceptance of our new products and other upcoming
products; our ability to successfully expand international operations and to conduct business internationally; and the retention of key technical and management personnel. Assumptions relating to the foregoing involve judgments
and risks, all of which are difficult or impossible to predict and many of which are beyond our control. Other risk factors that may affect our future performance and operations are detailed in our Annual Report on Form 20-F, and
in our other filings with the U.S. Securities and Exchange Commission and the Canadian securities commissions. We believe that the expectations reflected in the forward-looking statements are reasonable based on information
currently available to us, but we cannot assure you that the expectations will prove to have been correct. Accordingly, you should not place undue reliance on these forward-looking statements. These statements speak only as of the
date of this document. Unless required by law or applicable regulations, we undertake no obligation to revise or update any of them to reflect events or circumstances that occur after the date of this document. This discussion and
analysis should be read in conjunction with the consolidated financial statements.
The following discussion and analysis of financial condition and results of operations is dated January 12, 2021.
All financial data are expressed in US dollars, except as otherwise noted, and are determined based on International Financial Reporting Standards (IFRS) as issued by the International Accounting
Standards Board (IASB). This discussion and analysis also contains financial data that do not comply with IFRS. Where such measures are presented, they are defined, and the reader is informed.
COMPANY OVERVIEW AND RECENT DEVELOPMENTS
We are a leading provider of test, monitoring and analytics solutions for fixed and mobile network operators, web‑scale companies, as well as for optical component and network equipment
manufacturers in the global communications industry. Our broad portfolio of intelligent hardware and software solutions enables transformations related to fiber, 5G, and cloud-native network deployments. Ultimately, customers rely
on our solutions to increase network capacity and improve quality of experience for end-users while driving operational efficiencies.
Our sales decreased 2.8% to $71.5 million in the first quarter of fiscal 2021 compared to $73.6 million for the same period last year. Bookings (purchase orders received from customers) slightly
decreased 1.2% to $69.0 million in the first quarter of fiscal 2021, for a book-to-bill ratio of 0.97, from $69.9 million for the same period last year.
Net earnings amounted to $3.6 million, or $0.06 per diluted share, in the first quarter of fiscal 2021, compared to a net loss of $63,000, or $0.00 per share, for the same period last year. Net
earnings for the first quarter of fiscal 2021 included after-tax expenses totaling $3.3 million, comprising $2.0 million in after-tax amortization of intangible assets, $0.6 million in stock-based compensation costs, $0.5
million in after-tax restructuring charges and a foreign exchange loss of $0.2 million. Net earnings for the first quarter of fiscal 2021 also included an amount of $1.4 million in after-tax (pre-tax $1.9 million) wage subsidy
granted by the Canadian government as a result of the coronavirus pandemic, as well as an amount of $2.5 million insurance recovery related to the loss of assets. For the same period last
year, net loss included net expenses totaling $2.0 million, comprising $1.4 million in after-tax amortization of intangible assets, $0.5 million in stock-based compensation costs and a foreign exchange loss of $0.1 million.
Adjusted EBITDA (net earnings (loss) before interest and other income/expense, income taxes, depreciation and amortization, stock‑based compensation costs, restructuring charges and foreign
exchange loss) reached $9.9 million, or 13.9% of sales, in the first quarter of fiscal 2021, compared to $7.5 million, or 10.3% of sales for the same period last year. Adjusted EBITDA is a non-IFRS measure. See page 33 of this
document for a complete reconciliation of adjusted EBITDA to IFRS net earnings (loss).
On December 31, 2020, we acquired all of the issued and outstanding shares of InOpticals Inc. (InOpticals), a Taiwan-based company that offers ultra-high-speed test instruments for the laboratory
and manufacturing markets. The fair value of the total consideration for this acquisition is not expected to be material. This acquisition will be accounted for by applying the acquisition method as required by IFRS 3, Business
Combinations, and the requirements of IFRS 10, Consolidated Financial Statements. The results of operations of the acquired business will be included in our consolidated financial statements starting December 31, 2020, being the
acquisition date.
RESULTS OF OPERATIONS
(in thousands of US dollars, except per share data, and as a percentage of sales for the periods indicated)
RESULTS OF OPERATIONS
Sales and Bookings
The following tables summarize sales and bookings by product line in thousands of US dollars:
Sales
Bookings
Sales by geographic region
The following table summarizes sales by geographic region:
For the three months ended November 30, 2020, our sales decreased 2.8% to $71.5 million, compared to $73.6 million for the same period last year, while our bookings decreased 1.2% to $69.0 million,
compared to $69.9 million for the same period last year, for a book-to-bill ratio of 0.97.
Sales
In the first quarter of fiscal 2021, the 2.8% year-over-year decrease in our total sales comes from our test and measurement (T&M) product line, which delivered decrease in sales of 9.8%, while
sales of our service assurance, systems and services (SASS) product line increased 18.6% compared to the same period last year.
In the first quarter of fiscal 2021, sales of our T&M product line decreased 9.8% year-over-year to $50.5 million, down from a record-high $55.9 million for the same period last year. This
year-over-year decrease in sales is mainly due to ongoing reduction in large-scale network deployment in favor of maintenance projects due to the coronavirus pandemic, which reduced sales of our physical and transport and datacom
solutions year-over-year, especially in the Americas and APAC region. This was offset in part by a catchup in spending to enable network deployment in EMEA following a slowdown over the last quarters due to the coronavirus
pandemic, and from larger calendar year-end budget spending on the part of some communication service providers (CSPs) in the Americas. Finally, sales of our T&M product line were to some extent positively affected by currency
fluctuations year-over-year.
In the first quarter of fiscal 2021, sales of our SASS product line increased 18.6% year-over-year to $21.0 million, from $17.7 million for the same period last year. In the first quarter of fiscal
2021, we received customer acceptance for certain large orders in the EMEA and APAC regions for our network optimization, monitoring and real-time topology solutions, which increased our sales year-over-year. In addition, sales of
our SASS product line were to some extent positively affected by currency fluctuations year-over-year. Otherwise, in the first quarter of fiscal 2021, the ongoing coronavirus pandemic had a negative impact on sales of our SASS
product line worldwide, as delivery and commissioning of our solutions were more difficult to execute. Sales and bookings of our SASS product line are characterized by large intermittent orders from customers that may have
prolonged sales and revenue recognition cycles; therefore, our quarterly sales and bookings are subject to quarterly fluctuations.
Bookings
In the first quarter of fiscal 2021, the 1.2% year-over-year decrease in our total bookings comes from our T&M product line, which delivered decrease in bookings of 6.8%, while bookings of our
SASS product line increased 18.3% during the same period.
In the first quarter of fiscal 2021, bookings of our T&M product line decreased 6.8% year-over-year. This year-over-year decrease in bookings is mainly due to the ongoing reduction in
large-scale network deployments in favor of maintenance projects as a result of the coronavirus pandemic, which reduced bookings of our physical and transport and datacom solutions year-over-year especially in the Americas and
APAC region. This was offset in part by a catchup in spending to enable network deployment in EMEA following a slowdown over the last quarters due to the coronavirus pandemic, and from larger calendar year-end budget spending on
the part of some communication service providers (CSPs) in the Americas. Finally, bookings of our T&M product line were to some extent positively affected by currency fluctuations year-over-year.
In the first quarter of fiscal 2021, bookings of our SASS product line increased 18.3% year-over-year. In the first quarter of fiscal 2021, most of the year-over increase in bookings comes from the
EMEA region, as we received a higher level of orders for our monitoring solutions. In addition, bookings of our SASS product line were to some extent positively affected by currency fluctuations year-over-year. Otherwise, in the
first quarter of fiscal 2021, the ongoing coronavirus pandemic had a negative impact on bookings of our SASS product line, as we experienced longer delays to close certain deals.
Customer concentration
In the first quarters of fiscal 2020 and 2021, our top customer accounted for 11.9% and 4.3% of our sales respectively. In the first quarters of fiscal 2020 and 2021, our top three customers
accounted for 19.7% and 12.6% of our sales, respectively.
GROSS MARGIN BEFORE DEPRECIATION AND AMORTIZATION
(non-IFRS measure — refer to page 33 of this document)
Gross margin before depreciation and amortization reached 58.2% of sales for the three months ended November 30, 2020, compared to 58.9% for the same period last year.
In the first quarter of fiscal 2021, gross margin before depreciation and amortization included $0.4 million for the wage subsidy granted by the Canadian government as a result of the coronavirus
pandemic; this represented a positive impact of 0.6% of sales on our gross margin before depreciation and amortization year-over-year.
Otherwise, in the first quarter of fiscal 2021, our gross margin before depreciation and amortization was negatively impacted by a less favorable sales mix overall compared to the same period last year.
SELLING AND ADMINISTRATIVE EXPENSES
For the three months ended November 30, 2020, selling and administrative expenses were $21.6 million, or 30.2% of sales, compared to $24.5 million, or 33.3% of sales, for the same period last year.
In the first quarter of fiscal 2021, our selling and administrative expenses decreased $2.9 million compared to the same period last year.
In the first quarter of fiscal 2021, worldwide constraints and preventive measures leading to restrictions on travel and lockdown periods due to the coronavirus pandemic resulted in lower travel
expenses year‑over-year.
In addition, in the first quarter of fiscal 2021, we had the full impact of our 2020 restructuring plan, which reduced our selling and administrative expenses year-over-year.
Finally, in the first quarter of fiscal 2021, our selling and administrative expenses included $0.6 million for the wage subsidy granted by the Canadian government as a result of the coronavirus
pandemic; this represented a positive impact of 0.9% of sales on our selling and administrative expenses year‑over‑year.
Otherwise, in the first quarter of fiscal 2021, we incurred restructuring charges of $0.5 million or 0.8% of sales (nil in 2020).
Also, in the first quarter of fiscal 2021, the decrease in the average value of the US dollar compared to other currencies had to some extent a negative impact on our selling and administrative
expenses year-over-year.
In the first quarter of fiscal 2021, our selling and administrative expenses amounted to 30.2% of sales, 3.1% lower compared to 33.3% of sales in the same period last year, as a travel expenses
decreased faster than sales year-over-year, and because of the wage subsidy.
RESEARCH AND DEVELOPMENT EXPENSES
Gross Research and Development Expenses
For the three months ended November 30, 2020, gross research and development expenses totaled $14.2 million, or 19.8% of sales, compared to $13.8 million, or 18.8% of sales for the same period last
year.
In the first quarter of fiscal 2021, our gross research and development expenses increased $0.4 million year‑over‑year.
In the first quarter of fiscal 2021, inflation and salary increases contributed to increasing our gross research and development expenses year-over-year.
In addition, in the first quarter of fiscal 2021, the decrease in the average value of the US dollar compared to other currencies had to some extent a negative impact on our gross research and
development expenses year-over-year.
In the first quarter of fiscal 2021, our gross research and development expenses amounted to 19.8% of sales, 1.0% higher compared to 18.8% of sales in the same period last year, as these expenses
slightly increased while our sales decreased year-over-year.
Tax Credits and Grants
For the three months ended November 30, 2020, tax credits for research and development activities were $3.0 million, or 20.9% of gross research and development expenses, compared to $2.1 million, or
15.1% of gross research and development expenses, for the same period last year.
In the first quarter of fiscal 2021, our tax credits and grants included $0.8 million, or 5.9% of gross research and development expenses, for the wage subsidy granted by the Canadian government as
a result of the coronavirus pandemic (nil in 2020).
For the three months ended November 30, 2020, the increase in our tax credits and grants in dollars and as a percentage of gross research and development, compared to the same period last year
mainly comes from the wage subsidy recorded during the quarter.
AMORTIZATION OF INTANGIBLE ASSETS
In conjunction with the business combinations we completed, we recorded intangible assets primarily consisting of core technology and customer relationships. In addition, intangible assets include
software.
For the three months ended November 30, 2020, amortization of intangible assets reached $2.5 million, compared to $1.6 million for the same period last year.
The year-over-year increase in our amortization expense in the first quarter of fiscal 2021, compared to the same period last year, is due to increased amortization expense for acquired backlog
(customer relationship) as related sales were recognized during the quarter.
INTEREST AND OTHER (INCOME) EXPENSES
For the three months ended November 30, 2020, interest and other income totaled $1.9 million, compared to interest and other expenses of $0.4 million for the same period last year.
During the first quarter of fiscal 2021, other income included an insurance recovery of $2.5 million related to the loss of assets (nil in 2020).
INCOME TAXES
For the three months ended November 30, 2020, we reported income tax expenses of $2.2 million on earnings before income taxes of $5.7 million. For the corresponding period last year, we reported
income tax expenses of $2.7 million on earnings before income taxes of $2.6 million.
These distorted tax rates mainly resulted from the fact that we did not recognize deferred income tax assets for some of our subsidiaries at loss. In addition, we had some other non-deductible
losses and expenses, such as stock-based compensation costs. Otherwise, our effective tax rate would have been closer to the combined Canadian and provincial statutory tax rate of 27% for these periods.
Please refer to note 11 to our condensed unaudited interim consolidated financial statements for a full reconciliation of our income tax provision.
LIQUIDITY AND CAPITAL RESOURCES
Cash Requirements and Capital Resources
As at November 30, 2020, cash and short-term investments totaled $16.5 million, while our working capital was at $40.2 million. Our cash and short-term investments decreased by $17.2 million in the
first quarter of fiscal 2021 compared to the previous quarter-end.
The following table summarizes the decrease in cash and short-term investments during the first quarter of fiscal 2021 in thousands of US dollars:
Our short-term investments of $1.1 million consist of debt instruments issued by high-credit-quality corporations; therefore, we consider the risk of non-performance of these financial instruments
to be limited. These debt instruments are not expected to be affected by a significant liquidity risk. For the purpose of managing our cash position, we have established a cash management
policy, which we follow and monitor on a regular basis.
We believe that our cash balances and short-term investments totaling $16.5 million, combined with our available revolving credit facilities of up to $61.4 million until May 2021 and $ 46.0 million
thereafter, will be sufficient to meet our liquidity and capital requirements for the foreseeable future. In addition to these assets and credit facilities, we have unused available lines of credit of $23.0 million for foreign
currency exposure related to forward exchange contracts. However, possible operating losses, additional restructuring costs and/or possible investments in or acquisitions of complementary businesses, products or technologies may
require additional financing. There can be no assurance that additional debt or equity financing will be available when required or, if available, that it can be secured on satisfactory terms.
Sources and Uses of Cash
We finance our operations and meet our capital expenditure requirements through a combination of cash flows from operating activities, the use of our cash and short-term investments, borrowing under
our existing credit facilities and the issuance of subordinate voting shares.
Operating activities
Cash flows provided by operating activities were $2.1 million for the three months ended November 30, 2020, compared to cash flows used of $6.5 million for the same period last year.
Cash flows provided by operating activities in the first quarter of fiscal 2021 were attributable to the net earnings after items not affecting cash of $6.1 million, partially offset by the negative
net change in non-cash operating items of $4.0 million; this was mainly due to the negative effect on cash of the $0.8 million increase in our accounts receivable due to the Canadian emergency wage subsidy recorded during the
quarter but not yet recovered, the $2.6 million increase in inventories to meet future demand and the $3.8 million decrease in our accounts payable, accrued liabilities and provisions due to the $1.9 million payment of
restructuring charges during that quarter, as well as the timing of purchases and payments. These negative effects on cash were offset in part by the positive effect on cash of the $1.2 million decrease in our income taxes and tax
credits due to tax credits and income taxes recovered during the quarter, the $0.6 million decrease in our prepaid expenses due to the timing of payments made during the quarter, and the $1.4 million decrease in our other assets
as contract assets decreased following the recognition of related sales during the quarter.
Cash flows used by operating activities in the first quarter of fiscal 2020 were attributable to the net loss after items not affecting cash of $0.3 million, and the negative net change in non-cash
operating items of $6.2 million; this was mainly due to the negative effect on cash of the $3.5 million increase in inventories to meet future demand and the $3.7 million decrease in our accounts payable, accrued liabilities and
provisions due to the timing of purchases and payments during the quarter. These negative effects on cash were offset in part by the positive effect on cash of the $0.5 million decrease in our income taxes and tax credits due to
tax credits and income taxes recovered during the quarter, and the $0.4 million decrease in our prepaid expenses due to the timing of payments made during the quarter.
Investing activities
Cash flows used by investing activities were $1.3 million for the three months ended November 30, 2020, compared to $1.6 million for the same period last year.
In the first quarter of fiscal 2021, we made cash payments of $1.1 million for the purchase of capital assets, and we acquired $0.2 million worth of short-term investments during the quarter.
For the corresponding period last year, we made cash payments of $2.0 million for the purchase of capital assets. However, we disposed of $0.4 million worth of short-term investments during the
quarter.
Financing activities
Cash flows used by financing activities amounted to $18.1 million in the first quarter of fiscal 2021, compared to cash flows provided of $6.6 million during the same period last year.
In the first quarter of fiscal 2021, our bank loan decreased by $16.3 million, we repaid $1.4 million of our lease liabilities and long-term debt and we redeemed share capital for $0.4 million.
For the corresponding period last year, our bank loan increased by $8.4 million, but we repaid $1.5 million of our lease liabilities and long-term debt and we redeemed share capital for $0.2
million.
Contractual Obligations
We are committed under the terms of contractual obligations, which have various expiration dates, primarily for our lease liabilities, long-term debt and licensing of intellectual property. The
following table summarizes our contractual obligations as at November 30, 2020 in thousands of US dollars:
In addition, as at November 30, 2020, we had letters of guarantee amounting to $1.2 million for our own selling and purchasing requirements, which were reserved from our lines of credit; these
letters of guarantee expire at various dates through fiscal 2022.
FORWARD EXCHANGE CONTRACTS
We are exposed to currency risk as a result of our export sales of products manufactured in Canada, China, Finland and France, the majority of which are denominated in US dollars and euros. In
addition, we are exposed to currency risk as a result of our research and development activities in India (Indian rupees). These risks are partially hedged by forward exchange contracts. Forward exchange contracts, which are
designated as cash flow hedging instruments, qualify for hedge accounting.
As at November 30, 2020, we held forward exchange contracts to sell US dollars for Canadian dollars and Indian rupees at various forward rates, which are summarized as follows:
US dollars – Canadian dollars
US dollars – Indian rupees
The carrying amount of forward exchange contracts is equal to their fair value, which is based on the amount at which they could be settled based on estimated current market rates. The fair value of
forward exchange contracts amounted to net gains of $1.5 million as at August 31, 2020, and $1.7 million as at November 30, 2020, mainly for our US dollar/Canadian dollar forward exchange contracts. The
quarter-end exchange rate was CA$1.2965 = US$1.00 as at November 30, 2020.
SHARE CAPITAL
As at January 12, 2021, EXFO had 31,643,000 multiple voting shares outstanding, entitling to 10 votes each and 25,684,370 subordinate voting shares outstanding. The multiple voting shares and the subordinate voting shares are unlimited as to
number and are without par value.
STRUCTURED ENTITIES
As at November 30, 2020, we did not have interests in any structured entities.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Coronavirus pandemic
The second wave of the coronavirus pandemic worldwide impacts the global economy, as preventive measures and extended restrictions on transportation and lockdowns for individuals are still being
imposed in most countries. The breadth and duration of this pandemic are unknown and raise uncertainties that may impact the measurement of assets and liabilities in future periods.
For a description of the critical accounting policies, judgments in applying accounting policies as well as estimates and assumptions used in the preparation of our consolidated financial
statements, refer to our Annual Report on Form 20-F for the year ended August 31, 2020, filed with the U.S. Securities and Exchange Commission and the Canadian securities commissions.
RISKS AND UNCERTAINTIES
For the first quarter of fiscal 2021, there have been no material changes from the risk factors disclosed in our Annual Report on Form 20-F for the year ended August 31, 2020.
NON-IFRS MEASURES
We provide non-IFRS measures (gross margin before depreciation and amortization and adjusted EBITDA) as supplemental information regarding our operational performance. Gross margin before
depreciation and amortization represents sales, less cost of sales, excluding depreciation and amortization. Adjusted EBITDA represent net earnings (loss) before interest and other income/expenses, income taxes, depreciation and
amortization, stock-based compensation costs, restructuring charges and foreign exchange loss.
These non-IFRS measures eliminate the effect on our IFRS results of non-cash statement of earnings elements, restructuring charges as well as elements subject to significant volatility such as
foreign exchange gain or loss. We use these measures for evaluating our historical and prospective financial performance, as well as our performance relative to our competitors. These non-IFRS measures are also used by financial
analysts that evaluate and compare our performance against that of our competitors and industry players in our sector.
Finally, these measures help us plan and forecast future periods as well as make operational and strategic decisions. We believe that providing this information to our investors, in addition to the
IFRS measures, allows them to see the company’s results through the eyes of management, and to better understand our historical and future financial performance. More importantly, it enables the comparison of our performance on a
relatively similar basis against that of other public and private companies in our industry worldwide.
The presentation of this additional information is not prepared in accordance with IFRS. Therefore, the information may not necessarily be comparable to that of other companies and should be
considered as a supplement to, not a substitute for, the corresponding measures calculated in accordance with IFRS.
The following table summarizes the reconciliation of adjusted EBITDA to IFRS net earnings (loss) in thousands of US dollars:
Adjusted EBITDA
QUARTERLY SUMMARY FINANCIAL INFORMATION (1)
(tabular amounts in thousands of US dollars, except per share data)