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, including trade wars; our ability to successfully integrate businesses that we acquire; capital spending and network deployment levels in the telecommunications industry (including our ability to quickly adapt cost structures to anticipated levels of business and our ability to manage inventory levels with market demand); future economic, competitive, financial and market conditions; consolidation in the global communications test, monitoring and analytics solutions markets and increased competition among vendors; capacity to adapt our future product offering to future technological changes; limited visibility with regard to the timing and nature of customer orders; delay in revenue recognition due to longer sales cycles for complex systems involving customers' acceptance; fluctuating exchange rates; concentration of sales; timely release and market acceptance of our new products and other upcoming products; our ability to successfully expand international operations and to conduct business internationally; and the retention of key technical and management personnel. Assumptions relating to the foregoing involve judgments and risks, all of which are difficult or impossible to predict and many of which are beyond our control. Other risk factors that may affect our future performance and operations are detailed in our Annual Report, on Form 20-F, and our other filings with the U.S. Securities and Exchange Commission and the Canadian securities commissions. We believe that the expectations reflected in the forward-looking statements are reasonable based on information currently available to us, but we cannot assure you that the expectations will prove to have been correct. Accordingly, you should not place undue reliance on these forward-looking statements. These statements speak only as of the date of this document. Unless required by law or applicable regulations, we undertake no obligation to revise or update any of them to reflect events or circumstances that occur after the date of this document. 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 November 27, 2018.
All dollar amounts are expressed in US dollars, except as otherwise noted.
COMPANY OVERVIEW
We are a leading provider of test, monitoring and analytics solutions for fixed and mobile communications service providers (CSPs), web-scale operators and network equipment manufacturers (NEMs) in the global communications industry. Our broad portfolio of intelligent hardware and software solutions enable network transformations related to fiber, 5G and 4G/LTE, virtualization and big data analytics. Ultimately, customers rely on our solutions to increase network capacity and improve quality of experience for end-users, while driving operational efficiencies.
Our success has been largely predicated on our core expertise in developing test equipment for fixed networks. These solutions are available as handheld test instruments, portable platforms with related modules, and as rack-mounted chassis with related modules. Our PC-centric, open-ended platforms, combined with cloud-based software applications, can be transformed into a fully connected test environment that allows CSPs to automate complex, labor-intensive tasks like fiber-to-the-antenna (FTTA), distributed antenna system (DAS) and small cell deployments. Leveraging platform connectivity, CSPs can also keep track of their entire test fleet, manage software updates and schedule calibration procedures. All test data can be stored in a central database and used as a point of reference against future measurements. Consequently, this enhanced test environment enables customers to increase productivity and reduce operating expenses.
Over the years, we have expanded our product portfolio into fiber monitoring, IP (Internet protocol) service assurance as well as testing of 2G, 3G, 4G/LTE and soon 5G mobile networks. Our fiber monitoring solution leverages EXFO's expertise and market leadership in optical time domain reflectometry (OTDR) by using this technology as remote test units (RTUs) to monitor an optical plant 24 hours per day, seven days per week. As such, this fiber monitoring solution proactively detects any fiber degradation or locates any fiber cut to optimize quality of service along long-haul, metro and access networks. Our IP service assurance solution is a probe-based hardware and software offering that delivers quality-of-service visibility as well as real-time service monitoring and verification of next-generation IP networks. We have enriched our IP service assurance offering, which can also be virtualized, with infrastructure performance management tools, analytics software and network topology discovery solutions via technology acquisitions.
Following the acquisition of Astellia S.A. in January 2018, EXFO offers monitoring solutions for multi-technology mobile networks (2G, 3G, 4G). The EXFO-Astellia portfolio provides mobile CSPs with capabilities to detect, correlate, analyze, report, geolocate and troubleshoot issues related to network performance, handset behavior and service usage. These solutions can be fully virtualized and combined with information from call traces, third-party probes, CRM, billing, etc., to optimize a big data framework.
EXFO intends to integrate fiber monitoring, IP service assurance, as well as mobile network monitoring and analytics solutions into a unified platform to bring a unique value proposition to customers.
Our mobile portfolio also consists of network simulators and optical radio frequency (RF) test solutions. Our network simulators simulate real-world, large-scale network traffic and end-user behavior in a laboratory environment to predict network behavior, uncover faults and optimize networks before mobile networks and services are deployed. Our optical RF test solutions are dedicated to turning up and troubleshooting fiber-based mobile networks.
These solutions are critical for locating and analyzing RF interference issues in FTTA, DAS, remote radio heads and baseband units that support 4G/LTE and upcoming 5G networks.
The competitive advantages of our products include a high degree of innovation, modularity (especially wireline products) and ease of use. Our products enable NEMs, CSPs and web-scale operators to design, deploy, troubleshoot and monitor fixed and mobile networks and, in the process, help them reduce the cost of operating their networks.
We have a staff of approximately 1,900 people in 25 countries, supporting more than 2,000 customers around the world.
We operate four main manufacturing sites, which are located in Quebec City, Canada, Shenzhen, China, Rennes, France, and Oulu, Finland. We also have five main research and development expertise centers in Montreal, Quebec City, Rennes, Oulu and London, supported by a software development center in India.
We launched seven major solutions in fiscal 2018. New product introductions included a compact 400G test solution for network equipment manufacturers, carrier labs and data centers. EXFO also introduced SkyRAN, a remote access monitoring solution for fiber-based fronthaul networks. Developed in collaboration with tier-1 mobile network operators, SkyRAN provides real-time, on-demand testing and 24/7 monitoring of optical networks and the radio frequency spectrum. Other key product introductions included EX1, a multipurpose test solution for validating bandwidth speeds up to full line rate Gigabit Ethernet and for monitoring quality of experience at customer premises; an optical spectrum analyzer delivering in-service optical signal-to-noise ratio (OSNR) measurements for high-speed networks; and an automated network troubleshooting solution that links performance measurements to network topology to deliver service degradation diagnosis.
Our sales, which include a seven-month contribution from newly acquired Astellia S.A. (Astellia), increased 10.8% to $269.5 million in fiscal 2018 compared to $243.3 million in 2017. Bookings (purchase orders received from customers), which include a seven-month contribution from Astellia, increased 6.3% to $267.7 million in fiscal 2018, for a book-to-bill ratio of 0.99, from $251.8 million in 2017. In fiscal 2018, Astellia sales and bookings amounted respectively to $16.4 million (including $2.1 million for the acquisition-related deferred revenue fair value adjustment) and $16.5 million. Non-IFRS sales, which represent total sales plus acquisition-related deferred revenue fair value adjustment, amounted to $271.6 million in fiscal 2018. See page 74 of this document for a complete reconciliation of non-IFRS sales to IFRS sales.
Net loss attributable to the parent interest amounted to $11.9 million, or $0.22 per share, in fiscal 2018, compared to net earnings of $0.9 million, or $0.02 per diluted share in fiscal 2017. Net loss attributable to the parent interest in fiscal 2018 included net expenses totaling $17.1 million, comprising $9.4 million in after-tax amortization of intangible assets, $1.7 million in stock-based compensation costs, $3.4 million in after-tax restructuring charges, $2.1 million for the acquisition-related deferred revenue fair value adjustment, $0.7 million in positive change in the fair value of the cash contingent consideration, $2.5 million in after-tax acquisition-related costs, and a foreign exchange gain of $1.3 million. Net earnings attributable to the parent interest in fiscal 2017 included net expenses totaling $10.6 million, comprising $2.7 million in after-tax amortization of intangible assets, $1.4 million in stock-based compensation costs, $4.8 million in after-tax restructuring charges, $0.4 million in positive change in the fair value of the cash contingent consideration, $1.1 million in after-tax acquisition-related costs, and a foreign exchange loss of $1.0 million.
Net loss attributable to the parent interest in fiscal 2018 included $12.9 million for the net loss of newly acquired Astellia, which included $5.1 million in after-tax amortization of acquired intangible assets. Excluding Astellia's net loss, our net earnings attributable to the parent interest would have amounted to $1.0 million, or $0.02 per diluted in fiscal 2018.
Adjusted EBITDA (net loss attributable to the parent interest before interest, income taxes, depreciation and amortization, stock-based compensation costs, restructuring charges, acquisition-related deferred revenue fair value adjustment, change in fair value of cash contingent consideration, share in net loss of an associate, gain on the deemed disposal of the investment in an associate, and foreign exchange gain or loss) amounted to $17.2 million, or 6.4% of sales, in fiscal 2018, compared to $22.0 million, or 9.1% of sales in 2017. In fiscal 2018, Astellia negatively impacted adjusted EBITDA by $5.1 million. Adjusted EBITDA is a non-IFRS measure. See page 74 of this document for a complete reconciliation of adjusted EBITDA to IFRS net loss attributable to the parent interest.
On September 8, 2017, we acquired a 33.1% interest in Astellia, a publicly traded company on the NYSE Euronext Paris stock exchange. Astellia is a provider of network and subscriber intelligence enabling mobile operators to drive service quality, maximize operational efficiency, reduce churn and increase revenue. Its vendor-independent, real-time monitoring and troubleshooting solution is used to optimize networks end-to-end from radio to core. The purchase price amounted to €10 per share for a total cash consideration of €8.6 million (US$10.3 million).
On October 10, 2017, we reached an agreement with Astellia to acquire Astellia's remaining shares, at a share price of €10, for a total consideration of €17.3 million (US$21.4 million) by way of a public tender offer. The public offering opened on December 15, 2017 and closed on January 26, 2018.
On December 21 and 22, 2017, we acquired additional interests of 6.0% and 1.2% respectively in Astellia at a purchase price of €10 per share for a total cash consideration of €1.9 million (US$2.2 million), which brought our investment in Astellia to 40.3%.
On January 26, 2018, upon the closing of the public tender offer, we acquired an additional interest of 48.1% in Astellia at a purchase price of €10 per share for a total cash consideration of €12.5 million (US$15.5 million), which brought our investment in Astellia to 88.4%, and provided us with control over Astellia.
We re-opened the public tender offer to acquire the remaining shares of Astellia from February 9, 2018 to February 22, 2018. During that period, we acquired an additional interest of 8.9% in Astellia at a purchase price of €10 per share for a total cash consideration of €2.3 million (US$2.8 million), which brought our investment in Astellia to 97.3%.
Finally, on February 28, 2018, we entered into a squeeze-out process to acquire the remaining 2.7% interest in Astellia at a share price of €10, for a total consideration of €0.7 million (US$0.8 million). The binding terms of the squeeze-out process gave us control over Astellia's remaining shares as at February 28, 2018 and consequently, as of that date we controlled 100% of Astellia's shares.
The fair value of the total consideration for all shares of Astellia amounted to €25.9 million (US$32.1 million) and consisted of €21.1 million (US$26.2 million), net of Astellia's cash of €4.8 million (US$5.9 million) at the date of acquisition of control.
From September 8, 2017 to January 25, 2018, the investment in Astellia provided us with significant influence over Astellia, and it was therefore accounted for under the equity method
as
required by IAS 28, "
Investments in Associates and Joint Ventures
". Under this method, on initial recognition this investment was recognized at cost, and the carrying amount decreased to recognize our share of the net loss of Astellia after the acquisition date. Included in the consolidated statement of earnings for fiscal 2018 is an equity loss pick-up of $2.1 million.
Upon the acquisition of an additional 48.1% interest in Astellia on January 26, 2018 (the "acquisition date"), the acquisition has been considered a business combination, and the acquisition was accounted for by applying the acquisition method as
required by IFRS 3, "
Business Combinations
", and the requirements of IFRS 10, "
Consolidated Financial Statements
". C
onsequently, the fair value of the total consideration transferred was allocated to the assets acquired and liabilities assumed based on management's estimate of their fair value as at the acquisition date. The results of operations of the acquired business have been included in the consolidated financial statements of the company since January 26, 2018. The company recognized the non-controlling interest in Astellia at fair value.
At the acquisition date,
the carrying value of the 40.3% interest in Astellia held prior to the business combination was re-measured at fair value, that is,
€10 per share,
and was deemed to have been disposed of on that date
. This re-measurement resulted in a gain of $2.1 million that was accounted for in the consolidated statement of earnings for fiscal 2018. In addition, upon the successive acquisitions of the non-controlling interest in February 2018, we recorded a gain in the amount of $0.4 million in shareholders' equity, representing the excess of the carrying value of the non-controlling interest and the purchase price paid.
On October 2, 2017, we acquired all issued and outstanding shares of Yenista Optics S.A.S., renamed EXFO Optics Inc. (EXFO Optics), a privately
held company located in France and a supplier of advanced optical test equipment for the research and development and manufacturing markets.
The acquisition-date fair value of the total consideration amounted to €9.4 million (US$11.1 million) and consisted of €8.1 million (US$9.5 million) in cash, net of EXFO Optics' cash of €1.3 million (US$1.5 million)
at the acquisition date. This acquisition was accounted for by applying the acquisition method as
required by IFRS 3, "
Business Combinations
", and the requirements of IFRS 10, "
Consolidated Financial Statements
";
consequently, the fair value of the total consideration transferred was allocated to the assets acquired and liabilities assumed based on management's estimate of their fair value as at the acquisition date. The results of operations of the acquired business have been included in our consolidated financial statements since October 2, 2017, being the date of acquisition.
On October 25, 2017, we modified certain credit facilities whereby existing lines of credit that provided advances up to CA$4.8 million (US$3.7 million) and up to US$6.0 million for operating purposes were cancelled and replaced with a credit facility of CA$28.9 million (US$22.2 million) mainly for the acquisition of the remaining shares of Astellia under the public tender offer.
In addition, on December 21, 2017, we cancelled and replaced this renewed credit facility (that provided advances up to CA$28.9 million (US$22.2 million)), with new revolving credit facilities of up to CA$70.0 million (US$53.6 million) and US$9.0 million. These modified credit facilities were used to finance a portion of the acquisition of Astellia's remaining shares and are used to finance working capital and for other general corporate purposes. As at August 31, 2018, an amount of $11.8 million was drawn from these credit facilities for bank loan and letters of guarantee.
On August 21, 2018, we announced
a restructuring plan to accelerate the integration of our newly acquired monitoring and analytics technologies from Astellia and simplify our cost structure and optimize resources as we converge toward fewer sites and reduce our workforce.
This plan will result in pre-tax expenses of approximately $8 million, mainly for severance expenses, costs for remaining non-cancellable operating leases, write-off of research and development income tax credits and impairment of long-lived assets, net of related income taxes. During the fourth quarter of fiscal 2018, we recorded severance expenses of $2.1 million, costs for remaining non-cancelable operating lease of $1.1 million, write-off of research and development income tax credits of $1.2 million and impairment of long-lived assets of $0.2 million, net of related income taxes of $1.2 million, for total after-tax restructuring charges of $3.4 million. The remainder of the restructuring charges, which mainly comprise severance expenses, will be recorded in the first half of fiscal 2019.
In September 2018, as part of our fiscal 2018 restructuring plan and the shutdown of our operations in Toronto, Canada, we entered into a binding agreement to sell one of our buildings for net proceeds of $3.3 million. The transfer of ownership is expected to occur in the second quarter of fiscal 2019 and will result in a pre-tax gain of $1.9 million that will be recorded in our consolidated statement of earnings for that quarter.
Adjusted EBITDA outlook
Short-term targets
Fiscal 2018
In fiscal 2017, we had established an adjusted EBITDA target of $26 million for fiscal 2018, which represented an increase of 18% compared to $22.0 million in 2017. This short-term adjusted EBITDA target had been established based on expected sales increases for both the physical-layer and protocol-layer product lines in fiscal 2018, expected cost savings following our restructuring plan implemented at the end of fiscal 2017, general inflation over our cost of sales and operating expenses, as well as constant currencies. This adjusted EBITDA target excluded the effect of newly acquired Astellia.
In the second quarter of fiscal 2018, considering the recent acquisition of Astellia, the significant impact its integration was expected to have on our business, as well as the seasonality of its sales and profitability, which are typically lower in the first half of the calendar year and stronger in the second half of the calendar year, we expected Astellia to have a negative impact our adjusted EBITDA by approximately $4 million in fiscal 2018, and consequently, in the second quarter of fiscal 2018, we revised our adjusted EBITDA target to $22 million for fiscal 2018.
In the third quarter of fiscal 2018, considering lower than expected sales for the fourth quarter of 2018, we further revised our adjusted EBITDA target to approximately $20 million for the fiscal year.
Actual adjusted EBITDA amounted to $17.2 million in fiscal 2018, below our revised target of $20 million, as actual sales were lower than expected and Astellia's adjusted EBITDA was $1.1 million lower in fiscal 2018 than anticipated.
Fiscal 2019
For fiscal 2019, considering results achieved in fiscal 2018 were below expectations, and the fact we expect a larger proportion of our sales to be subject to longer sales and revenue cycles, we have revised our adjusted EBITDA from at least $30 million to $24 million for that year.
Medium-term target
In fiscal 2017, we established an adjusted EBITDA margin target of 15% of sales for the next three years (2018 to 2020). This medium-term adjusted EBITDA target was established based on an expected sales increase mainly from our protocol-layer product line (which represented 34% of sales in fiscal 2017). This product line delivers a significantly higher gross margin before depreciation and amortization than our physical-layer product line (which represented 66% of our sales in fiscal 2017), due to its richer software content. In addition, we expect higher growth from our protocol-layer product line over the next three years, as it represents a much larger addressable market ($2 billion+) compared to our physical-layer product line ($600 million) and for which our market share is lower compared to our physical-layer product line. This growth is expected to come from organic growth as well as through acquisitions, like those completed in fiscal 2017 and 2018 (Absolute Analysis Inc., Ontology Partners Limited and Astellia) and from related synergies. Furthermore, this sales growth should result in better absorption of our fixed manufacturing costs, which would increase our gross margin before depreciation and amortization and our adjusted EBITDA. A large portion of our operating costs is fixed mainly for research and development expenses as well as administrative expenses. Our adjusted EBITDA target also takes into account constant currencies.
In the second quarter of fiscal 2018, considering the size of the acquisition of Astellia and the period of time required to fully integrate this new acquisition and fully materialize our expected synergies, we extended our medium-term adjusted EBITDA margin target of 15% to fiscal 2021.
These short-term and medium-term adjusted EBITDA targets are forward-looking statements. In addition, as they exclude items that pertain to future events that are not currently estimable with a reasonable degree of accuracy, such as foreign exchange gain or loss and income taxes, no corresponding IFRS measure has been provided.
Sales
We sell our products to a diversified customer base in approximately 100 countries through our direct sales force and channel partners, such as sales representatives and distributors. Most of our sales are denominated in US dollars, euros and Canadian dollars.
In fiscal 2016 and 2018, no customer accounted for more than 10% of our sales, with our top customer representing 7.1% and 9.1% of our sales respectively. In fiscal 2017, our top customer represented 10.1% of our sales.
We believe that we have a vast array of products, a diversified customer base and a good spread across geographical areas, which provides us with reasonable protection against concentration of sales and credit risk.
Cost of Sales
The cost of sales includes raw materials, salaries and related expenses for direct and indirect manufacturing personnel and professional services, as well as overhead costs. Excess, obsolete and scrapped materials are also included in the cost of sales. However, the cost of sales is presented exclusive of depreciation and amortization, which are shown separately in the consolidated statements of earnings.
Operating Expenses
We classify our operating expenses into three main categories: selling and administrative expenses, research and development expenses, as well as depreciation and amortization expenses.
Selling and administrative expenses consist primarily of salaries and related expenses for personnel, sales commissions, travel expenses, marketing programs, professional services, information systems, human resources and other corporate expenses.
Gross research and development expenses consist primarily of salaries and related expenses for engineers and other technical personnel, material component costs as well as fees paid to third-party consultants. We are eligible to receive research and development tax credits on research and development activities carried out in Canada and France. All related research and development tax credits are recorded as a reduction of gross research and development expenses.
RESULTS OF OPERATIONS
(in thousands of US dollars, except per share data, and as a percentage of sales for the years indicated)
Consolidated statement of earnings data
(1)
:
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Sales
|
|
$
|
269,546
|
|
|
$
|
243,301
|
|
|
$
|
232,583
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
(2)
|
|
|
105,004
|
|
|
|
94,329
|
|
|
|
87,066
|
|
|
|
39.0
|
|
|
|
38.8
|
|
|
|
37.4
|
|
Selling and administrative
|
|
|
98,794
|
|
|
|
86,256
|
|
|
|
82,169
|
|
|
|
36.7
|
|
|
|
35.5
|
|
|
|
35.3
|
|
Net research and development
|
|
|
57,154
|
|
|
|
47,168
|
|
|
|
42,687
|
|
|
|
21.2
|
|
|
|
19.4
|
|
|
|
18.4
|
|
Depreciation of property, plant and equipment
|
|
|
5,444
|
|
|
|
3,902
|
|
|
|
3,814
|
|
|
|
2.0
|
|
|
|
1.6
|
|
|
|
1.6
|
|
Amortization of intangible assets
|
|
|
10,327
|
|
|
|
3,289
|
|
|
|
1,172
|
|
|
|
3.8
|
|
|
|
1.4
|
|
|
|
0.5
|
|
Change in fair value of cash contingent consideration
|
|
|
(670
|
)
|
|
|
(383
|
)
|
|
|
–
|
|
|
|
(0.3
|
)
|
|
|
(0.2
|
)
|
|
|
–
|
|
Interest and other (income) expense
|
|
|
1,378
|
|
|
|
303
|
|
|
|
(828
|
)
|
|
|
0.5
|
|
|
|
0.1
|
|
|
|
(0.4
|
)
|
Foreign exchange (gain) loss
|
|
|
(1,309
|
)
|
|
|
978
|
|
|
|
(161
|
)
|
|
|
(0.5
|
)
|
|
|
0.4
|
|
|
|
–
|
|
Share in net loss of an associate
|
|
|
2,080
|
|
|
|
–
|
|
|
|
–
|
|
|
|
0.8
|
|
|
|
–
|
|
|
|
–
|
|
Gain on deemed disposal of the investment in an associate
|
|
|
(2,080
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
(0.8
|
)
|
|
|
–
|
|
|
|
–
|
|
Earnings (loss) before income taxes
|
|
|
(6,576
|
)
|
|
|
7,459
|
|
|
|
16,664
|
|
|
|
(2.4
|
)
|
|
|
3.0
|
|
|
|
7.2
|
|
Income taxes
|
|
|
5,678
|
|
|
|
6,608
|
|
|
|
7,764
|
|
|
|
2.1
|
|
|
|
2.7
|
|
|
|
3.4
|
|
Net earnings (loss) for the year
|
|
|
(12,254
|
)
|
|
|
851
|
|
|
|
8,900
|
|
|
|
(4.5
|
)
|
|
|
0.3
|
|
|
|
3.8
|
|
Net loss for the year attributable to non-controlling interest
|
|
|
(352
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
(0.1
|
)
|
|
|
–
|
|
|
|
–
|
|
Net earnings (loss) for the year attributable to the parent interest
(3)
|
|
$
|
(11,902
|
)
|
|
$
|
851
|
|
|
$
|
8,900
|
|
|
|
(4.4
|
)%
|
|
|
0.3
|
%
|
|
|
3.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net earnings (loss) attributable to the parent interest per share
|
|
$
|
(0.22
|
)
|
|
$
|
0.02
|
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net earnings (loss) attributable to the parent interest per share
|
|
$
|
(0.22
|
)
|
|
$
|
0.02
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other selected information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin before depreciation and amortization
(4)
|
|
$
|
164,542
|
|
|
$
|
148,972
|
|
|
$
|
145,517
|
|
|
|
61.0
|
%
|
|
|
61.2
|
%
|
|
|
62.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross research and development
|
|
$
|
65,243
|
|
|
$
|
53,124
|
|
|
$
|
47,875
|
|
|
|
24.2
|
%
|
|
|
21.8
|
%
|
|
|
20.6
|
%
|
Net research and development
|
|
$
|
57,154
|
|
|
$
|
47,168
|
|
|
$
|
42,687
|
|
|
|
21.2
|
%
|
|
|
19.4
|
%
|
|
|
18.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges included in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
517
|
|
|
$
|
1,697
|
|
|
$
|
–
|
|
|
|
0.2
|
%
|
|
|
0.7
|
%
|
|
|
–
|
%
|
Selling and administrative expenses
|
|
$
|
673
|
|
|
$
|
1,150
|
|
|
$
|
–
|
|
|
|
0.2
|
%
|
|
|
0.5
|
%
|
|
|
–
|
%
|
Net research and development expenses
|
|
$
|
3,219
|
|
|
$
|
2,232
|
|
|
$
|
–
|
|
|
|
1.2
|
%
|
|
|
0.9
|
%
|
|
|
–
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
(4,5,6)
|
|
$
|
17,198
|
|
|
$
|
22,041
|
|
|
$
|
22,039
|
|
|
|
6.4
|
%
|
|
|
9.1
|
%
|
|
|
9.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated balance sheet data
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
282,623
|
|
|
$
|
259,241
|
|
|
$
|
237,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Consolidated statement of earnings and balance sheet data has been derived from our consolidated financial statements prepared according with IFRS, as issued by the IASB, except for non-IFRS measures
(4)
.
|
(2)
|
The cost of sales is exclusive of depreciation and amortization, shown separately.
|
(3)
|
Includes net loss of Astellia of $12.9 million or 4.8% of sales in fiscal 2018 (nil in 2016 and 2017).
|
(4)
|
Refer to page 74 for non-IFRS measures.
|
(5)
|
Astellia negatively impacted the adjusted EBITDA by $5.1 million or 1.9% of sales in fiscal 2018 (nil in 2016 and 2017).
|
(6)
|
Includes acquisition-related costs of $2.2 million or 0.8% of sales in fiscal 2018 and $1.1 million or 0.4% of sales in 2017 (nil in 2016).
|
RESULTS OF OPERATIONS
Sales and Bookings
The following tables summarize sales and bookings by product line, in thousands of US dollars:
Sales
|
|
Years ended August 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Physical-layer product line
|
|
$
|
172,912
|
|
|
$
|
161,864
|
|
|
$
|
151,910
|
|
Protocol-layer product line
|
|
|
95,759
|
|
|
|
81,905
|
|
|
|
83,324
|
|
|
|
|
268,671
|
|
|
|
243,769
|
|
|
|
235,234
|
|
Foreign exchange gains (losses) on forward exchange contracts
|
|
|
875
|
|
|
|
(468
|
)
|
|
|
(2,651
|
)
|
Total sales
|
|
$
|
269,546
|
|
|
$
|
243,301
|
|
|
$
|
232,583
|
|
Bookings
|
|
Years ended August 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Physical-layer product line
|
|
$
|
172,094
|
|
|
$
|
165,886
|
|
|
$
|
155,320
|
|
Protocol-layer product line
|
|
|
94,724
|
|
|
|
86,348
|
|
|
|
87,631
|
|
|
|
|
266,818
|
|
|
|
252,234
|
|
|
|
242,951
|
|
Foreign exchange gains (losses) on forward exchange contracts
|
|
|
875
|
|
|
|
(468
|
)
|
|
|
(2,651
|
)
|
Total bookings
|
|
$
|
267,693
|
|
|
$
|
251,766
|
|
|
$
|
240,300
|
|
Sales by geographic region
The following table summarizes sales by geographic region:
|
|
Years ended August 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
|
50
|
%
|
|
|
55
|
%
|
|
|
55
|
%
|
Europe, Middle-East and Africa (EMEA)
|
|
|
32
|
|
|
|
26
|
|
|
|
25
|
|
Asia-Pacific (APAC)
|
|
|
18
|
|
|
|
19
|
|
|
|
20
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Fiscal 2018 vs. 2017
In fiscal 2018, our sales increased 10.8% to $269.5 million, compared to $243.3 million in 2017, while our bookings increased 6.3% year-over-year to $267.7 million in 2018 from $251.8 million in 2017, for a book-to-bill ratio of 0.99.
Sales
In fiscal 2018, the increase in total sales year-over-year comes from our physical-layer product line, the positive effect of our recent acquisitions of Astellia (seven-month contribution) and EXFO Optics (eleven-month contribution), as well as the positive currency impact. In fiscal 2018, total sales included $16.4 million from newly acquired Astellia. Otherwise, in fiscal 2018, excluding the positive effect of the recent acquisitions and the positive currency impact, our total sales would have been flat year-over-year, since the year-over-year increase in sales of our physical-layer product line was offset by the decrease of our protocol-layer product line.
In fiscal 2018, sales of our physical-layer product line (optical and copper testing) increased 6.8% year-over-year mainly due to the recent acquisition of EXFO Optics and the positive currency impact. In addition, we reported increased sales in the EMEA region, where we experienced higher sales for our copper-testing solutions and our network quality fiber-monitoring systems (NQMS) (a subgroup within our physical-layer product line) amongst other, as well as increased sales in the Americas for our optical product line, and increased in sales in the APAC region where we also experienced higher sales for our NQMS. Sales of copper-testing solutions and NQMS are characterized by large intermittent orders from customers.
Sales of our protocol-layer product line increased 16.9% year-over-year in fiscal 2018, due to the positive effect of the recent acquisition of Astellia, which contributed $16.4 million in sales, as well as the positive currency impact. Otherwise, sales of our protocol-layer product line decreased in all regions year-over-year mainly due to the streamlining of our passive monitoring product line in the second half of fiscal 2017, as well as the year-over-year decrease in sales of our legacy active monitoring product line.
Bookings
In fiscal 2018, the 6.3% increase in total bookings year-over-year comes from the positive effect of our recent acquisitions of Astellia (seven-month contribution), EXFO Optics (eleven-month contribution) and Ontology (full contribution in 2018 versus six-month contribution in 2017), a solid performance of our NQMS worldwide, as well as the positive currency impact, offset in part by lower bookings from our Transport and Datacom and passive monitoring product lines. In fiscal 2018, total bookings included $16.5 million from newly acquired Astellia.
In fiscal 2018, bookings of our physical-layer product line increased 3.7% year-over-year, due to higher bookings for our NQMS worldwide, the positive effect of the recent acquisition of EXFO Optics, as well as the positive currency impact year-over-year. Otherwise, bookings decreased year-over-year in APAC for both our optical (mainly in China due to delayed investments from NEMs as they prepare for 5G investments) and copper-access product lines, as well as in the Americas for our copper-access product line. Bookings of copper-testing solutions and NQMS are characterized by large intermittent orders from customers.
Bookings of our protocol-layer product line increased 9.7% year-over-year in fiscal 2018, due to the positive effect of the recent acquisitions of Astellia, which contributed $16.5 million in bookings, as well as the positive currency impact. Otherwise, bookings of our protocol-layer product line decreased year-over-year in the APAC region for our Transport and Datacom product line (a subgroup within our protocol-layer product line), which had delivered strong bookings in fiscal 2017 in this region. In addition, bookings of our protocol-layer product line decreased year-over-year in the EMEA region, mainly due to the streamlining of our passive-monitoring product line in the second half of fiscal 2017. Otherwise, despite streamlining of our passive-monitoring product line in 2017, bookings of our protocol-layer product line slightly increased year-over-year in the Americas, which offset in part the decrease in the EMEA and APAC regions.
As we gradually evolve from a supplier of dedicated test instruments to a supplier of end-to-end system-based solutions, our quarterly sales and bookings are becoming increasingly subject to quarterly fluctuations, as we are managing more complex, multimillion-dollar deals that have prolonged sales and revenue recognition cycles related to our protocol-layer products. This has been amplified with the recent acquisitions of Astellia and Ontology.
Fiscal 2017 vs. 2016
In fiscal 2017, our sales increased 4.6% to $243.3 million, compared to $232.6 million in 2016, while our bookings increased 4.8% year-over-year to $251.8 million in 2017 from $240.3 million in 2016, for a book-to-bill ratio of 1.03.
Sales
In fiscal 2017, we made progress in sales (6.6%) for our physical-layer product line, mainly in the Americas, compared to 2016, mostly due to our leadership position in portable optical testing, a 100G investment cycle among CSPs in this region, and growing business with web-scale operators for their data center interconnects. In addition, in fiscal 2017, we benefited to some extent from calendar year-end budget spending on the part of some CSPs in the Americas, versus a nominal amount in 2016. To a lesser extent, sales of our physical-layer product line increased in EMEA despite the negative currency impact year-over-year, which had to some extent a negative impact on our sales and bookings to this region in 2017 compared to 2016. In the APAC region, sales of our physical-layer product line decreased year-over-year in fiscal 2017, especially in China, mainly due to delayed investments from NEMs.
In fiscal 2017, sales of our protocol-layer product line decreased 1.7% year-over-year, mainly in the Americas, despite the positive impact of newly acquired Absolute. In fiscal 2016, we also had recognized a large order from a North American Tier-1 network operator for our EXFO Xtract solution, and we did not close any such large order in fiscal 2017. In addition, the streamlining of our passive monitoring product line in fiscal 2017 had a negative impact on our sales in 2017 compared to 2016. Furthermore, in fiscal 2016, our Transport and Datacom product line (a subgroup within our protocol-layer product line) benefited, to a greater extent, from the 100G investment cycle, especially in the United States, compared to 2017. Otherwise, sales of our protocol-layer product line increased in the EMEA year-over-year, mainly due to the positive impact of recently acquired Ontology, despite the negative currency impact year-over-year. Sales of our protocol-layer product line were flat overall in APAC year-over-year in fiscal 2017.
Finally, in fiscal 2017, we reported lower losses on our forward exchange contracts, which had a $2.2 million positive impact on our total sales year-over-year.
Bookings
In fiscal 2017, we reported a year-over-year increase in total bookings, which mainly comes from the Americas for our physical-layer product line and from the EMEA for our protocol-layer product line, despite negative currency impacts.
In fiscal 2017, our physical-layer product line reported a significant year-over-year increase in bookings in the Americas as we benefited from heightened penetration of mobile network operators for their fronthaul and backhaul networks, increased traction with fixed network operators for their 100G long-haul and metro links and growing business with web-scale operators for their data center interconnects. In addition, as mentioned earlier, in fiscal 2017, we benefited to some extent from calendar year-end budget spending on the part of some CSPs in the Americas, versus a nominal amount in 2016. Otherwise, bookings for our physical-layer product line were flat in the EMEA and APAC year-over-year. The EMEA was to some extent negatively impacted by the decrease in the average value of the British pound and the euro compared to the US dollar year-over-year. In APAC, bookings were negatively impacted by the decrease in bookings in China, mainly due to delayed investments from NEMs, offset by traction gained in the rest of APAC.
Our protocol-layer product lines reported a decrease in total bookings in fiscal 2017 compared to 2016 (-1.5%). Most of the decrease comes from the Americas, despite the positive impact our newly acquired Absolute and Ontology businesses, as our Transport and Datacom product line (a subgroup within our protocol-layer product line) did not reach the same level of orders from the 100G investment cycle, especially in the United States compared to 2016. In addition, in 2016, we received a large order from a North American Tier 1 network operator for our EXFO Xtract solution, and we did not close any such large order in 2017. Otherwise, we made progress in bookings in the EMEA thanks to the recent acquisition of Ontology. In addition, in fiscal 2017, bookings in APAC slightly increased year-over-year. Finally, the streamlining of our passive monitoring product line in fiscal 2017 negatively impacted the bookings of our protocol-layer product line compared to 2016.
GROSS MARGIN BEFORE DEPRECIATION AND AMORTIZATION
(non-IFRS measure – refer to page 74 of this document)
Gross margin before depreciation and amortization amounted to 61.0%, 61.2% and 62.6% of sales in fiscal 2018, 2017 and 2016 respectively.
Fiscal 2018 vs. 2017
In fiscal 2018, gross margin before depreciation and amortization included a negative impact of 0.3% of sales for the acquisition-related deferred revenue fair value adjustment from the acquisition of Astellia (nil in 2017).
In fiscal 2018, gross margin before depreciation and amortization included $0.5 million, or 0.2% of sales in restructuring charges for severance expenses, compared to $1.7 million or 0.7% of sales in 2017.
However, in fiscal 2018, we recorded in our sales foreign exchange gains on our forward exchange contracts, compared to foreign exchange losses in 2017, which contributed to an increase of 0.2% in gross margin before depreciation and amortization year-over-year.
Excluding these items, gross margin before depreciation and amortization would have amounted to 61.3% of sales in fiscal 2018, compared to 61.9% of sales in 2017, slightly lower (0.6%) year-over-year.
In fiscal 2018, newly acquired Astellia, a subgroup within our protocol-product line, delivered lower margins than our typical average margin, and we recorded slightly higher write-offs (excluding those in restructuring expenses) compared to 2017, which had a negative impact on our gross margin before depreciation and amortization year-over-year.
Fiscal 2017 vs. 2016
In fiscal 2017, gross margin before depreciation and amortization included $1.7 million or 0.7% of sales in restructuring charges for severance expenses and inventory writeoffs. Excluding those charges, gross margin before depreciation and amortization would have amounted to 61.9% of sales in fiscal 2017, slightly lower (0.7%) compared to 2016.
In fiscal 2017, our gross margin before depreciation and amortization (excluding the impact of our restructuring charges) was unfavorably affected by product mix within both product lines compared to 2016. In particular, in fiscal 2016, we recognized a large order with a Tier-1 network operator for our EXFO Xtract solution, which had a positive impact on our gross margin before depreciation and amortization during that year as this product delivers strong margins. We did not have any such high-margin deals this year. In addition, in fiscal 2017, our physical-layer product line represented a larger portion of our sales year-over-year, and this product line delivers lower margins than our protocol-layer product line (protocol-layer products have a richer software content), which had a negative impact on our gross margin before depreciation and amortization year-over-year.
However, in fiscal 2017, we recorded in our sales lower foreign exchange losses on our forward exchange contracts, compared to 2016, which contributed to increasing our gross margin before depreciation and amortization by 0.3% year-over-year.
In addition, in fiscal 2017, we recorded lower inventory writeoffs compared to 2016, which contributed to increase our gross margin before depreciation and amortization by an additional 0.2% year-over-year.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses amounted to $98.8 million, $86.3 million and $82.2 million for fiscal 2018, 2017 and 2016 respectively. As a percentage of sales, selling and administrative expenses amounted to 36.7%, 35.5% and 35.3% for fiscal 2018, 2017 and 2016 respectively.
Fiscal 2018 vs. 2017
In fiscal 2018, our selling and administrative expenses increased $12.5 million year-over-year, mainly due to additional expenses following the acquisitions of Astellia (seven-month contribution), EXFO Optics (eleven-month contribution) and Ontology (full contribution in 2018 versus six-month contribution in 2017), inflation, salary increases, as well as increased acquisition-related costs of $1.1 million following the recent business acquisitions. In addition, in fiscal 2018, the decrease in the average value of the US dollar compared to other currencies had a negative impact on our selling and administrative expenses year-over-year.
However, in fiscal 2018, selling and administrative expenses included $0.7 million in restructuring charges compared to $1.2 million in 2017. In addition, the positive impact of our 2017 restructuring plan reduced our selling and administrative expenses year-over-year in fiscal 2018.
Excluding restructuring charges and acquisition-related costs for business combinations, our selling and administrative expenses would have represented 35.7% of sales, 1.1% higher compared to 34.6% of sales in 2017, due to the impact of the recent acquisitions and the negative currency impact.
Fiscal 2017 vs. 2016
In fiscal 2017, our selling and administrative expenses increased $4.1 million year-over-year due to restructuring charges of $1.2 million, additional expenses following the acquisitions of Absolute and Ontology and to support the growth of our business, inflation, salary increases, as well as acquisition-related costs of $1.1 million following the recent business acquisitions.
Excluding restructuring charges and acquisition-related costs for business combinations, which represent 0.9% of sales, our selling and administrative expenses would have represented 34.6% of sales, lower compared to 35.3% of sales in 2016.
RESEARCH AND DEVELOPMENT EXPENSES
Gross research and development expenses
Gross research and development expenses totaled $65.2 million, $53.1 million and $47.9 million for fiscal 2018, 2017 and 2016 respectively. As a percentage of sales, gross research and development expenses amounted to 24.2%, 21.8% and 20.6% for fiscal 2018, 2017 and 2016 respectively, while net research and development expenses accounted for 21.2%, 19.4% and 18.4% of sales for these respective years.
Fiscal 2018 vs. 2017
In fiscal 2018, our gross research and development expenses increased $12.1 million year-over-year, mainly due to additional expenses following the acquisitions of Astellia (seven-month contribution), EXFO Optics (eleven-month contribution) and Ontology (full contribution in 2018 versus six-month contribution in 2017), as well as inflation and salary increases.
In addition, in fiscal 2018, our gross research and development expenses included $3.2 million in restructuring charges compared to $2.2 million in 2017.
Finally, in fiscal 2018, the decrease in the average value of the US dollar compared to other currencies had a negative impact on our gross research and development expenses year-over-year.
However, our gross research and development expenses decreased year-over-year due to the positive impact of our 2017 recent restructuring plan.
Excluding restructuring charges, which represent 1.2% of sales in fiscal 2018 compared to 0.9% of sales in 2017, our gross research and development expenses would have represented 23.0% of sales in 2018, 2.1% higher compared to 20.9% of sales in 2017, due to the impact of the recent acquisitions and the negative currency impact.
Fiscal 2017 vs. 2016
In fiscal 2017, our gross research and development expenses increased $5.2 million year-over-year due to restructuring charges of $2.2 million, additional expenses following the acquisitions of Absolute and Ontology and to support the growth of our business, inflation, salary increases, as well as a shift in the mix and timing of research and development projects, compared to 2016.
Excluding restructuring charges, which represent 0.9% of sales, our gross research and development expenses would have represented 20.9% of sales, almost flat compared to 20.6% of sales in 2016.
Tax Credits and Grants
We are entitled to tax credits for eligible research and development activities conducted in Canada and France.
Tax credits and grants for research and development activities were $8.1 million, $6.0 million and $5.2 million for fiscal 2018, 2017 and 2016 respectively. As a percentage of gross research and development expenses, tax credits and grants reached 12.4%, 11.2% and 10.8% for fiscal 2018, 2017 and 2016 respectively.
Fiscal 2018 vs. 2017
The increase in our tax credits and grants in fiscal 2018, compared to 2017, mainly comes from newly acquired Astellia (seven-month contribution) and EXFO Optics (eleven-month contribution) that are entitled to tax credits and grants on research and development activities carried out in France. This also explains the increase in tax credits and grants as a percentage of gross research and development expenses year-over-year.
Fiscal 2017 vs. 2016
The increase in our tax credits and grants in fiscal 2017, compared to 2016, mainly results from the increase in our gross research and development expenses year-over-year.
In fiscal 2017, the increase in tax credits and grants as a percentage of gross research and development expenses, compared to 2016, mainly comes from the shift in the mix of eligible projects.
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
Depreciation of property, plant and equipment totaled $5.4 million, $3.9 million and $3.8 million for fiscal 2018, 2017 and 2016 respectively.
In fiscal 2018, the year-over-year increase in our depreciation expense, compared to 2017, is due to the acquisitions of Astellia (seven-month contribution), EXFO Optics (eleven-month contribution) and Ontology (full contribution in 2018 compared to six-month contribution in 2017) as well as the decrease in the average value of the US dollar compared to other currencies year-over-year.
AMORTIZATION OF INTANGIBLE ASSETS
In conjunction with the business combinations we completed, we recorded intangible assets primarily consisting of core technologies and customer relationships. In addition, intangible assets include software and brand names. These intangible assets resulted in amortization expenses of $10.3 million, $3.3 million and $1.2 million for fiscal 2018, 2017 and 2016 respectively.
The increase in our amortization expense in fiscal 2018, compared to 2017, is due to the acquisitions of Astellia (seven-month contribution), EXFO Optics (eleven-month contribution) and Ontology (full contribution in 2018 compared to six-month contribution in 2017), as well as the decrease in the average value of the US dollar compared to other currencies year-over-year.
Fiscal 2017 vs. 2016
The increase in our amortization expense in fiscal 2017, compared to 2016, was due to the acquisitions of Absolute (ten-month contribution in 2017) and Ontology (six-month contribution).
FOREIGN EXCHANGE GAIN (LOSS)
Foreign exchange gains and losses are mainly the result of the translation of operating activities denominated in currencies other than our functional currency, which is the Canadian dollar. A portion of our foreign exchange gains or losses results from the translation of cash balances and deferred income taxes denominated in US dollars. We manage our exposure to currency risk in part with forward exchange contracts. In addition, some of our entities' operating activities are denominated in US dollars, euros and British pounds, which further hedges this risk. However, we remain exposed to a currency risk; namely, any increase in the value of the Canadian dollar compared to the US dollar would have a negative impact on our operating results.
We reported a foreign exchange gain of $1.3 million in fiscal 2018 compared to a loss of $1.0 million in 2017 and a gain of $0.2 million in 2016.
Fiscal 2018
In fiscal 2018, the period-end value of the Canadian dollar decreased versus the US dollar, compared to the previous year-end, which resulted in a foreign exchange gain of $1.3 million during that year. The period-end value of the Canadian dollar decreased 4.0% versus the US dollar to CA$1.3055 = US$1.00 in fiscal 2018, compared to CA$1.2536 = US$1.00 at the end of the previous year. In fiscal 2018, the average value of the Canadian dollar versus the US dollar was CA$1.2768 = US$1.00.
Fiscal 2017
In fiscal 2017, the period-end value of the Canadian dollar increased versus the US dollar compared to the previous year-end, which resulted in a foreign exchange loss of $1.0 million during the year. The period-end value of the Canadian dollar increased 4.6% versus the US dollar to CA$1.2536 = US$1.00 in fiscal 2017 compared to CA$1.3116 = US$1.00 at the end of the previous year. In fiscal 2017, the average value of the Canadian dollar versus the US dollar was CA$1.3212 = US$1.00.
Fiscal 2016
In fiscal 2016, we witnessed some volatility in the value of the Canadian dollar as it fluctuated compared to the US dollar, which overall resulted in a foreign exchange gain of $0.2 million during that period. The period-end value of the Canadian dollar slightly increased 0.3% versus the US dollar to CA$1.3116 = US$1.00 in fiscal 2016 compared to CA$1.3157 = US$1.00 at the end of the previous year. In fiscal 2016, the average value of the Canadian dollar versus the US dollar was CA$1.3278 = US$1.00.
Foreign exchange rate fluctuations also flow through the P&L line items as portions of our sales are dominated in Canadian dollars and euros and significant portions of our cost of sales and operating items are denominated in Canadian dollars, euros, Indian rupees and British pounds, and we report our results in US dollars. In fiscal 2018, the decrease in the average value of the US dollar compared to the Canadian dollar, the euro and the British pound year-over-year, resulted in a negative impact on our financial results. The average value of the US dollar decreased 3.4%, 8.0% and 6.1% respectively year-over-year, compared to the Canadian dollar, the euro and the British pound.
INCOME TAXES
In fiscal 2018, we reported income tax expenses of $5.7 million on a loss before income taxes of $6.6 million, compared to income tax expenses of $6.6 million on earnings before income taxes of $7.5 million in 2017 and income tax expenses of $7.8 million on earnings before income taxes of $16.7 million in 2016.
On December 22, 2017, the US tax reform ("Tax Cuts and Jobs Act") was substantively enacted and reduced the maximum corporate income tax rate from 35% to 21%, effective January 1, 2018. Based on our estimate of deferred tax assets expected to be used in fiscal 2018 and beyond against taxable income in the United States, we recorded a deferred income tax expense of $1.5 million in the consolidated statement of earnings for fiscal 2018 to account for the effect of this new substantively enacted tax rate.
Excluding this one-time income tax expense in fiscal 2018, our distorted tax rates for all periods mainly resulted from the fact that we did not recognize deferred income tax assets for some of our subsidiaries at loss and acquisition-related costs for business combinations are non-deductible for tax purposes. In addition, we had some other non-deductible losses and expenses, such as stock-based compensation costs. However, a significant portion of our foreign exchange gain was a result of the translation of the financial statements of our foreign subsidiaries from their local currency to the functional currency and was therefore non-taxable. Otherwise, our effective tax rate would have been closer to the combined Canadian and provincial statutory tax rate of 27% for this year.
Please refer to note 20 to our consolidated financial statements for a full reconciliation of our income tax provision.
LIQUIDITY AND CAPITAL RESOURCES
Cash Requirements and Capital Resources
As at August 31, 2018, cash and short-term investments totaled $15.0 million, while our working capital was at $32.3 million. Our cash and short-term investments decreased $24.2 million in fiscal 2018, compared to 2017.
The following table summarizes the decrease of cash and short-term investments in fiscal 2018 in thousands of US dollars:
Cash flows provided by operating activities
|
|
$
|
14,370
|
|
Bank loan
|
|
|
11,061
|
|
Acquisition of Astellia (including non-controlling interest)
|
|
|
(25,767
|
)
|
Acquisition of EXFO Optics
|
|
|
(9,540
|
)
|
Acquisition of Ontology (contingent consideration)
|
|
|
(480
|
)
|
Purchases of capital assets
|
|
|
(10,452
|
)
|
Repayment of long-term debt and other liabilities
|
|
|
(3,137
|
)
|
Unrealized foreign exchange loss on cash and short-term investments
|
|
|
(225
|
)
|
|
|
|
|
|
|
|
$
|
(24,170
|
)
|
The 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 accumulated other comprehensive income in the consolidated balance sheet.
Our short-term investments consist of debt instruments issued by high-credit quality corporations; therefore, we consider the risk of non-performance of these financial instruments to be limited. These debt instruments are not expected to be affected by a significant liquidity risk. For the purpose of managing our cash position, we have established a cash management policy, which we follow and monitor on a regular basis.
We believe that our cash balances and short-term investments totaling $15.0 million, combined with our available revolving credit facilities of up to $52.7 million, will be sufficient to meet our liquidity and capital requirements for the foreseeable future, including any possible working capital requirements from our new acquisitions. In addition to these assets and credit facilities, we have unused available lines of credit of $25.1 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 as well as the issuance of subordinate voting shares.
Operating activities
Cash flows provided by operating activities were $14.4 million in fiscal 2018, compared to $12.9 million in 2017 and $24.4 million in 2016.
Fiscal 2018 vs. 2017
Cash flows provided by operating activities in fiscal 2018 were attributable to net earnings after items not affecting cash of $8.4 million, and the positive net change in non-cash operating items of $6.0 million; this was mainly due to the positive effect on cash of the decrease of $7.3 million in our accounts receivable due to the timing of receipts and sales during the year, and the increase of $1.0 million in our accounts payable and accrued liabilities and provisions due to timing of purchases and payments during the year. These positive effects on cash were offset in part by the negative effect on cash of the $1.0 million increase in our inventories to meet future demand and the negative effect on cash of the $1.3 million increase in our other assets due to the timing of payments during the year.
Fiscal 2017 vs. 2016
Cash flows provided by operating activities in fiscal 2017 were attributable to net earnings after items not affecting cash of $13.0 million, slightly offset by the negative net change in non-cash operating items of $0.1 million; this was mainly due to the positive effect on cash of the decrease of $4.0 million in our accounts receivable due to the timing of receipts and sales during the year and by the positive effect on cash of the decrease of $0.9 million in our inventories due to improved inventory turns during the year; these positive effects on cash were more than offset by the negative effect on cash of the $2.4 million increase in our income tax and tax credits recoverable due to tax credits earned during the year not yet recovered, the negative effect on cash of the increase of $0.9 million in our prepaid expenses due to timing of payments during the year, and by the negative effect on cash of the decrease of $1.7 million in our accounts payable, accrued liabilities and provisions due to timing of purchases and payments during the year.
Investing activities
Cash flows used by investing activities amounted to $43.9 million in fiscal 2018, compared to $16.5 million in 2017 and $7.0 million in 2016.
Fiscal 2018
In fiscal 2018, we made cash payments of $10.5 million and $32.1 million respectively for the purchase of capital assets and the acquisitions of EXFO Optics and Astellia. In addition, we acquired (net of disposal) $1.3 million worth of short-term investments during the year.
Fiscal 2017
In fiscal 2017, we made cash payments of $12.8 million and $7.2 million respectively for the acquisitions of Absolute and Ontology and the purchase of capital assets. Otherwise, we disposed (net of acquisitions) of $3.5 million worth of short-term investments.
Fiscal 2016
In fiscal 2016, we paid $4.4 million for the purchase of capital assets, and we acquired (net of disposal) $2.6 million worth of short-term investments.
Financing activities
Cash flows provided by financing activities amounted to $4.3 million in fiscal 2018, compared to cash flows used of $1.5 million in 2017 and $1.6 million in 2016.
Fiscal 2018
In fiscal 2018, our bank loan increased by $11.1 million, but we repaid $3.1 million of our long-term debt and other liabilities and paid $3.7 million for the purchase of the non-controlling interest in Astellia.
Fiscal 2017
In fiscal 2017, we repaid the long-term debt of $1.5 million assumed as part of the acquisition of Ontology.
Fiscal 2016
In fiscal 2016, we redeemed share capital under our share repurchase program for a cash consideration of $1.6 million.
Contractual obligations
We are committed under the terms of contractual obligations which have various expiration dates, primarily for the rental of premises and equipment, licensing of intellectual property and long-term debt. The following table summarizes our contractual obligations, on an undiscounted basis, as at August 31, 2018 in thousands of US dollars:
|
|
Long-term
debt
|
|
|
Operating
leases
|
|
|
Licensing
agreements
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No later than one year
|
|
$
|
2,921
|
|
|
$
|
3,365
|
|
|
$
|
1,492
|
|
|
$
|
7,778
|
|
Later than one year and no later than five years
|
|
|
5,745
|
|
|
|
9,519
|
|
|
|
1,982
|
|
|
|
17,246
|
|
Later than five years
|
|
|
162
|
|
|
|
502
|
|
|
‒
|
|
|
|
664
|
|
|
|
$
|
8,828
|
|
|
$
|
13,386
|
|
|
$
|
3,474
|
|
|
$
|
25,688
|
|
In addition, on August 31, 2018, we had letters of guarantee amounting to $1.7 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, France and Finland, 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 August 31, 2018, we held forward exchange contracts to sell US dollars for Canadian dollars and Indian rupees at various forward rates, which are summarized as follows:
US dollars – Canadian dollars
Expiry dates
|
|
Contractual
amounts
|
|
|
Weighted average
contractual
forward rates
|
|
|
|
|
|
|
|
|
September 2018 to August 2019
|
|
$
|
26,400,000
|
|
|
|
1.3029
|
|
September 2019 to August 2020
|
|
|
15,700,000
|
|
|
|
1.2756
|
|
September 2020 to May 2021
|
|
|
3,700,000
|
|
|
|
1.2703
|
|
Total
|
|
$
|
45,800,000
|
|
|
|
1.2909
|
|
US dollars – Indian rupees
Expiry dates
|
|
Contractual
amounts
|
|
|
Weighted average
contractual
forward rates
|
|
|
|
|
|
|
|
|
September 2018 to May 2019
|
|
$
|
4,600,000
|
|
|
|
67.68
|
|
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 $2.3 million and net losses of $0.5 million as at August 31, 2017 and 2018 respectively. The US dollar – Canadian dollar year-end exchange rate was
CA$1.3055 = US$1.00 as at August 31, 2018.
SHARE CAPITAL
As at November 12, 2018, EXFO had 31,643,000 multiple voting shares outstanding, entitling to 10 votes each and 23,590,515 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 August 31, 2018, our off-balance sheet arrangements consisted of letters of guarantee amounting to $1.7 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.
STRUCTURED ENTITIES
As at August 31, 2018, we did not have interests in any structured entities.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with IFRS requires us to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosures of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, we evaluate these estimates and assumptions, including those related to the fair value of assets and liabilities acquired in business combinations, the fair value of financial instruments, the allowance for doubtful accounts receivable, the amount of tax credits recoverable, the provision for excess and obsolete inventories, the estimated useful lives of capital assets, the valuation of long-lived assets, the impairment of goodwill, the recoverable amount of deferred income tax assets, the amount of certain accrued liabilities, provisions and deferred revenue as well as stock-based compensation costs. We base our estimates and assumptions on historical experience and on other factors that we believe to be reasonable under the circumstances.
Critical Judgments in Applying Accounting Policies
(a)
|
Determination of functional currency
|
We operate in multiple countries and generate revenue and incur expenses in several currencies, namely the Canadian dollar, the US dollar, the euro, the British pound, the Indian rupee and the CNY (Chinese currency). The determination of the functional currency of EXFO and its subsidiaries may require significant judgment. In determining the functional currency of EXFO and its subsidiaries, we take into account primary, secondary and tertiary indicators. When indicators are mixed, and the functional currency is not obvious, we use our judgment to determine the functional currency.
(b)
|
Determination of cash generating units and allocation of goodwill
|
For the purpose of impairment testing, goodwill must be allocated to each cash-generating unit (CGU) or group of CGUs that are expected to benefit from the synergies of the business combination. Initial allocation and possible reallocation of goodwill to a CGU or a group of CGUs requires judgment.
Critical Estimates and Assumptions
We state our inventories at the lower of cost, determined on an average cost basis and net realizable value, and we provide reserves for excess and obsolete inventories. We determine our reserves for excess and obsolete inventories based on the quantities on hand at the reporting dates compared to foreseeable needs, taking into account changes in demand, technology or market. It is possible that additional inventory reserves may occur if future sales are less than our forecasts or if there is a significant shift in product mix compared to our forecasts, which could adversely affect our results.
We are subject to income tax laws and regulations in several jurisdictions. Under these laws and regulations, uncertainties exist with respect to the interpretation of complex tax regulations and the amount and timing of future taxable income. We maintain provisions for uncertain tax positions that we believe appropriately reflect our risk based on our interpretation of laws and regulations. In addition, we make reasonable estimates and assumptions to determine the amount of deferred tax assets that can be recognized in our consolidated financial statements, based upon the likely timing and level of anticipated future taxable income together with tax planning strategies. The ultimate realization of our deferred income tax assets is dependent upon the generation of sufficient future taxable income during the periods in which those assets are expected to be realized.
(c)
|
Tax credits recoverable
|
Tax credits are recorded provided that there is reasonable assurance that we have complied and will comply with all the conditions related to the tax credits and that the tax credits will be received. The ultimate recovery of our Canadian non-refundable tax credits is dependent upon the generation of sufficient future taxable income during the tax credits carry-forward periods. We have made reasonable estimates and assumptions to determine the amount of non-refundable tax credits that can be recognized in our consolidated financial statements, based upon the likely timing and level of anticipated future taxable income together with tax planning strategies.
As at August 31, 2018, our Canadian non-refundable research and development tax credits recognized in the consolidated balance sheet amounted to $40.0 million. To recover these non-refundable research and development tax credits, we need to generate approximately $267 million (CA$348 million) in pre-tax earnings at the Canadian federal level. To generate $267 million in pre-tax earnings at the Canadian federal level over the estimated recovery period of 15 years, we must generate a
pre-tax earnings compound annual growth rate of
2
%, which we believe is probable. Our non-refundable research and development tax credits can be carried forward over a twenty-year period.
(d)
|
Impairment of non-financial assets
|
Impairment exists when the carrying value of an asset or group of assets (cash generating unit (CGU)) exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The fair value less costs of disposal calculation for our CGUs is based on a market approach that relies on input from implicit valuation multiples and recent transactions for comparable assets or businesses, within the same industry. We apply judgment in making adjustments for factors such as size, risk profile or profitability and also consider EXFO's value derived from its market capitalization considering a control premium based on comparable situations. Depending on the market evidence available, we, from time to time, may further supplement this market approach with an income approach that considers discounted cash flows to determine fair value less costs of disposal, as well as the nature and magnitude of research and development activities carried out by the CGU.
In the fourth quarter of fiscal 2018, we performed our annual goodwill impairment test for all CGUs.
For the purposes of the impairment test, goodwill has been allocated to the lowest level within the company at which it is monitored by management to make business decisions, which are the following CGUs:
|
EXFO CGU
|
|
$
|
13,185,000
|
|
|
Brix CGU
|
|
|
13,327,000
|
|
|
Ontology CGU
|
|
|
7,471,000
|
|
|
Yenista CGU
|
|
|
3,562,000
|
|
|
Astellia CGU
|
|
|
2,347,000
|
|
|
Total
|
|
$
|
39,892,000
|
|
In performing the goodwill impairment review of our CGUs, we determined the recoverable amount of goodwill based on fair value less costs of disposal. In estimating the recoverable amount of our CGUs, we used a market approach, which is based on sales multiples, within the range of 1.7 to 3.4 times sales, for comparable businesses with similar operations within the same industry over the past year. We applied judgment in making certain adjustments for factors such as size, risk profile or profitability of the comparable businesses, when compared to our CGU. In addition, for the Brix CGU, we used a liquidation approach based on the level of research and development expenses incurred over the last three years.
As at August 31, 2018, the recoverable amount for all CGUs exceeded their carrying value.
(e)
|
Purchase price allocation in business combinations
|
The fair value of the total consideration transferred in business combinations (purchase price) must be allocated based on the estimated fair value of acquired net assets at the date of acquisition. Allocating the purchase price requires management to make estimates and judgments to determine assets acquired and liabilities assumed, useful lives of certain long-lived assets and the respective fair value of assets acquired, and liabilities assumed; this may require the use of unobservable inputs, including management's expectations of future revenue growth, operating costs and profit margins as well as discount rates.
The assumptions used are based on acquired companies' historical growth, expectations of future revenue growth, expected synergies as well as industry and market trends.
We use a discount rate to calculate the present value of estimated future cash flows, which represents our weighted average cost of capital (WACC).
NEW IFRS PRONOUNCEMENTS NOT YET ADOPTED
Financial Instruments
The final version of IFRS 9, "
Financial Instruments
", was issued in July 2014 and will replace IAS 39, "
Financial Instruments: Recognition and Measurement
". IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of its financial assets. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39. Requirements relating to hedge accounting, representing a new hedge accounting model, have also been added to IFRS 9. The new standard is effective for annual periods beginning on or after January 1, 2018 and must be applied retrospectively. We will adopt this new standard on September 1, 2018, and its adoption will not have a significant impact on our consolidated financial statements.
Revenue from Contracts with Customers
IFRS 15, "
Revenue from Contracts with Customers
", was issued in May 2014. The objective of this new standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability. This new standard contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. This new standard is effective for annual periods beginning on or after January 1, 2018. We will adopt this new standard on September 1, 2018 using the modified retrospective method, with the cumulative effect of the initial application of the standard recognized as an adjustment to the opening balance of retained earnings as at the date of initial application. We will apply this standard retrospectively only to contracts that are not completed at the date of initial application.
We performed an assessment to identify significant areas of impact between our current accounting treatment under IAS 18, "
Revenue
" and the new requirements of IFRS 15. Based on the assessment, we concluded that the main areas of impact relate to the allocation of the transaction price to the various performance obligations under the contracts, the timing of revenue recognition for sales arrangement that contain customer acceptance clauses, and the sale of licenses that provide customers with the "right to use" our intellectual property.
We performed a quantitative analysis of the main areas of impact as of September 1, 2018, and we do not expect the new standard to materially impact our consolidated financial statements.
Leases
IFRS 16,
"
Leases
", was issued in January 2016.
IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, that is the customer (lessee) and the supplier (lessor). IFRS 16 will supersede IAS 17, "
Leases
", and related Interpretations. This new standard is effective for annual periods beginning on or after January 1, 2019, with earlier adoption permitted if IFRS 15, "
Revenue from Contracts with Customers
", is also applied.
We have not yet assessed the impact that the new standard will have on our consolidated financial statements.
Foreign Currency Transactions and Advance Consideration
IFRIC 22, "
Foreign Currency Transactions and Advance Consideration
", was issued in December 2016. IFRIC 22 addresses how to determine the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part of it) and on the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration in a foreign currency. IFRIC 22 is effective for annual periods beginning on or after January 1, 2018. Early adoption is permitted. We will adopt this interpretation on September 1, 2018 and its adoption will not have a material impact on our consolidated financial statements.
Uncertainty over Income Tax Treatments
IFRIC 23, "
Uncertainty over Income Tax Treatments
", was issued in June 2017. IFRIC 23 provides guidance on how to value uncertain income tax positions based on the probability of whether the relevant tax authorities will accept the company's tax treatments. A company is to assume that a taxation authority with the right to examine any amounts reported to it will examine those amounts and will have full knowledge of all relevant information when doing so. IFRIC 23 is effective for annual periods beginning on or after January 1, 2019. We will adopt this interpretation on September 1, 2019 and are currently assessing the impact that it will have on our consolidated financial statements.
INTERNAL CONTROL
The Chief Executive Officer and the Chief Financial Officer have limited the scope of their design of disclosure controls and procedures and internal control over financial reporting to exclude controls, policies and procedures of the EXFO Optics and Astellia business acquisitions, which were completed on October 2, 2017 and January 26, 2018 respectively.
Refer to note 3 to our consolidated financial statements for fiscal 2018, for summary financial information about these business acquisitions.
RISKS AND UNCERTAINTIES
Over the past several years, we have managed our business in a difficult environment; gradually evolved from a supplier of dedicated test instruments to a supplier of end-to-end solutions, focused on research and development programs for new and innovative solutions aimed at expected growth pockets in our sector; continued the development of our domestic and international markets; and made strategic acquisitions such as the recent acquisitions of Astellia, EXFO Optics, and Ontology. However, we operate in a highly competitive and complex sector that is in constant evolution, and, as a result, we encounter various risks and uncertainties that must be given appropriate consideration in our strategic management plans and policies.
While strategic acquisitions, like those we made in fiscal 2017 and 2018, and possibly others in the future, are essential to our long-term growth, they also expose us to certain risks and uncertainties related to the rapid and effective integration of these businesses, their products, technologies and personnel as well as key personnel retention. Finally, integration of new acquisitions requires the dedication of management resources, which may attract management's attention away from our day-to-day business and operations.
Our business is subject to the effects of general global and regional economic conditions, particularly conditions in the telecommunications test, service assurance and analytics markets. In the past, our operating results have been adversely affected as a result of unfavorable economic conditions and reduced or delayed capital spending in the Americas, EMEA and APAC. Global and regional economic conditions continue to be volatile and uncertain as reflected by Britain's decision to exit the European Union and trade actions by the US Government. If global and/or regional economic and market conditions, or economic conditions in key markets, remain uncertain or deteriorate, we may experience material adverse impacts on our business. Unfavorable and/or uncertain economic and market conditions may result in lower capital spending or delayed spending by our customers on network test, service assurance and analytics solutions and, therefore, demand for our products could decline and adversely impact our revenue.
Our functional currency is the Canadian dollar. We are exposed to a currency risk because of our export sales of products manufactured in Canada, China, France and Finland, the majority of which are denominated in US dollars and euros, while a significant portion of our cost of sales and operating expenses are denominated in Canadian dollars and currencies such as the euro, British pound, rupee (India) and CNY (China). As a result, even though we manage our exposure to currency risk to some extent with forward exchange contracts (by selling US dollars for Canadian dollars and US dollars for Indian rupees) and certain cost of sales and operating expenses are denominated in currencies other than the Canadian dollar, namely the US dollar and euro, we are exposed to fluctuations in the exchange rates between the Canadian dollar on one hand and the US dollar, euro and other currencies on the other. Any increase in the value of the Canadian dollar relative to the US dollar and other currencies, or any unfavorable variance between the value of the Canadian dollar and the contractual rates of our US dollar - Canadian dollar forward exchange contracts, could result in foreign exchange losses and have a material adverse effect on our operating results. Foreign exchange rate fluctuations also flow through the consolidated statement of earnings line items as a significant portion of cost of sales and our operating expenses are denominated in Canadian dollars, euros and Indian rupees, and we report our results in US dollars. Any decrease in the value of the US dollar relative to the Canadian dollar and other currencies, could have a material adverse effect on our operating results.
Risks and uncertainties related to the communications test, monitoring and analytics industry involve the rapid and timely development of new products that may have short lifecycles and require extensive research and development; the difficulty of adequately predicting market size, trends and customer needs; the ability to quickly adapt our cost structure to changing market conditions to achieve profitability; and the challenge of retaining highly skilled employees.
Given our strategic goals for growth and competitive positioning in our industry, we are continually expanding into international markets, such as the operation of our manufacturing facilities in China and our software development center in India as well as operating other subsidiaries in many countries. This exposes us to certain risks and uncertainties, namely changes in local laws and regulations, multiple technological standards, protective legislation, inter-company transfer price audits, pricing pressure, cultural differences and the management of operations in different countries.
The economic environment of our industry could also result in some of our customers experiencing difficulties, which, consequently, could have a negative effect on our results, especially in terms of future sales and recoverability of accounts receivable. However, the sectorial and geographic diversity of our customer base provides us with a reasonable level of protection in this area. Finally, other financial instruments, which potentially subject us to credit risks, consist mainly of cash, short-term investments and forward exchange contracts. Our short-term investments consist of debt instruments issued by high-credit quality corporations. Our cash and forward exchange contracts are held with or issued by high-credit quality financial institutions; therefore, we consider the risk of non-performance on these instruments to be limited.
We depend on a single supplier or a limited number of suppliers for some of the parts used to manufacture our products for which alternative sources may not be readily available. In addition, all our orders are placed through individual purchase orders, and, therefore, our suppliers may experience difficulties, suffer from natural disasters, delays or stop supplying parts to us at any time. The reliance on a single source or limited number of suppliers could result in increased costs, delivery problems and reduced control over product pricing and quality. Any interruption or delay in the supply of any of these parts could significantly harm our ability to meet scheduled product deliveries to our customers and cause us to lose sales. Furthermore, the process of qualifying a new manufacturer for complex parts designed to our specifications, such as our optical, electronic or mechanical parts, is lengthy and would consume a substantial amount of time for our technical personnel and management. If we were required to change a supplier in a short period of time, our business would be disrupted. In addition, we may be unsuccessful in identifying a new supplier capable of meeting and willing to meet our needs on terms that we would find acceptable.
For a more complete understanding of risk factors that may affect us, please refer to the risk factors set forth in our Annual Report, on Form 20-F published with securities commissions at
www.EXFO.com
, or at www.sedar.com in Canada or
www.sec.gov/edgar.shtml in the U.S
.
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) attributable to the parent interest before interest, income taxes, depreciation and amortization, stock-based compensation costs, restructuring charges, acquisition-related deferred revenue fair value adjustment, change in fair value of cash contingent consideration, share in net loss of an associate, gain on the deemed disposal of the investment in an associate, and foreign exchange gain or loss.
These non-IFRS measures eliminate the effect on our IFRS results of non-cash and/or non-operating statement of earnings elements, 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 non-IFRS sales to IFRS sales, in thousands of US dollars:
|
|
Years ended August 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
IFRS sales
|
|
$
|
269,546
|
|
|
$
|
243,301
|
|
|
$
|
232,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related deferred revenue fair value adjustment
|
|
|
2,095
|
|
|
|
–
|
|
|
|
–
|
|
Non-IFRS sales
|
|
$
|
271,641
|
|
|
$
|
243,301
|
|
|
$
|
232,583
|
|
The following table summarizes the reconciliation of adjusted EBITDA to IFRS net earnings (loss) attributable to the parent interest, in thousands of US dollars:
|
|
Years ended August 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
IFRS net earnings (loss) attributable to the parent interest for the year
|
|
$
|
(11,902
|
)
|
|
$
|
851
|
|
|
$
|
8,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add (deduct):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of property, plant and equipment
|
|
|
5,444
|
|
|
|
3,902
|
|
|
|
3,814
|
|
Amortization of intangible assets
|
|
|
10,327
|
|
|
|
3,289
|
|
|
|
1,172
|
|
Interest and other (income) expense
|
|
|
1,378
|
|
|
|
303
|
|
|
|
(828
|
)
|
Income taxes
|
|
|
5,678
|
|
|
|
6,608
|
|
|
|
7,764
|
|
Stock-based compensation costs
|
|
|
1,748
|
|
|
|
1,414
|
|
|
|
1,378
|
|
Restructuring charges
|
|
|
4,409
|
|
|
|
5,079
|
|
|
|
–
|
|
Change in fair value of cash contingent consideration
|
|
|
(670
|
)
|
|
|
(383
|
)
|
|
|
–
|
|
Acquisition-related deferred revenue fair value adjustment
|
|
|
2,095
|
|
|
|
–
|
|
|
|
–
|
|
Share in net loss of an associate
|
|
|
2,080
|
|
|
|
–
|
|
|
|
–
|
|
Gain on deemed disposal of the investment in an associate
|
|
|
(2,080
|
)
|
|
|
–
|
|
|
|
–
|
|
Foreign exchange (gain) loss
|
|
|
(1,309
|
)
|
|
|
978
|
|
|
|
(161
|
)
|
Adjusted EBITDA for the year
(1)(2)
|
|
$
|
17,198
|
|
|
$
|
22,041
|
|
|
$
|
22,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA in percentage of total sales
|
|
|
6.4
|
%
|
|
|
9.1
|
%
|
|
|
9.5
|
%
|
(1)
|
Astellia negatively impacted adjusted EBITDA by $5.1 million in fiscal 2018 (nil in 2017).
|
(2)
|
Include acquisition-related costs of $1.1 million and $2.2 million in fiscal 2017 and 2018 respectively.
|
QUARTERLY SUMMARY FINANCIAL INFORMATION
(1)
(tabular amounts in thousands of US dollars, except per share data)
|
|
1
st
quarter
|
|
|
2
nd
quarter
|
|
|
3
rd
quarter
|
|
|
4
th
quarter
|
|
|
Year ended
August 31,
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
63,391
|
|
|
$
|
64,722
|
|
|
$
|
72,217
|
|
|
$
|
69,216
|
|
|
$
|
269,546
|
|
Cost of sales
(2)
|
|
$
|
23,289
|
|
|
$
|
25,326
|
|
|
$
|
28,963
|
|
|
$
|
27,426
|
|
|
$
|
105,004
|
|
Net earnings (loss) attributable to the parent interest
|
|
$
|
2,679
|
|
|
$
|
(4,660
|
)
|
|
$
|
(5,970
|
)
|
|
$
|
(3,951
|
)
|
|
$
|
(11,902
|
)
|
Basic and diluted net earnings (loss) attributable to the parent interest per share
(3)
|
|
$
|
0.05
|
|
|
$
|
(0.08
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.22
|
)
|
|
|
1
st
quarter
|
|
|
2
nd
quarter
|
|
|
3
rd
quarter
|
|
|
4
th
quarter
|
|
|
Year ended
August 31,
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
61,785
|
|
|
$
|
60,030
|
|
|
$
|
58,505
|
|
|
$
|
62,981
|
|
|
$
|
243,301
|
|
Cost of sales
(2)
|
|
$
|
22,813
|
|
|
$
|
22,989
|
|
|
$
|
24,555
|
|
|
$
|
23,972
|
|
|
$
|
94,329
|
|
Net earnings (loss) attributable to the parent interest
|
|
$
|
3,303
|
|
|
$
|
1,008
|
|
|
$
|
(4,304
|
)
|
|
$
|
844
|
|
|
$
|
851
|
|
Basic and diluted net earnings (loss) attributable to the parent interest per share
|
|
$
|
0.06
|
|
|
$
|
0.02
|
|
|
$
|
(0.08
|
)
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
(1)
|
Quarterly financial information has been derived from our unaudited condensed interim consolidated financial statements, which are prepared in accordance with IFRS, as issued by the IASB, applicable to the preparation of interim financial statements, including IAS 34, "
Interim Financial Reporting
". The presentation currency is the US dollar, which differs from the functional currency of the company (Canadian dollar).
|
(2)
|
The cost of sales is exclusive of depreciation and amortization.
|
(3)
|
Per share data is calculated independently for each quarter presented. Therefore, the sum of this quarterly information does not equal the corresponding annual information.
|
Quarterly Sales Analysis
Overall in fiscal 2018, our sales increased 10.8% to $269.5 million compared to $243.3 million in 2017. Refer to section ''Sales and bookings'' elsewhere in this document for explanations about the year-over-year annual increase in sales. On a quarterly basis, our sales fluctuate from quarter to quarter due to timing and magnitude of orders.
Fourth-Quarter Results
Gross margin before depreciation and amortization
In the fourth quarter of fiscal 2018, our gross margin before depreciation and amortization reached 60.4%, 1.5% lower compared to 61.9% for the same period last year.
In the fourth quarter of fiscal 2018, gross margin before depreciation and amortization included $0.5 million, or 0.7% of sales in restructuring charges for severance expenses, compared to $0.1 million or 0.2% of sales in the same period last year.
Excluding restructuring charges, gross margin before depreciation and amortization would have amounted to 61.1% of sales in the fourth quarter of fiscal 2018, compared to 62.1% of sales during the same period last year, 1.0% lower year-over-year.
In the fourth quarter of fiscal 2018, our physical-layer product line represented a larger portion of our sales year-over-year, and this product line delivers lower margins than our protocol-layer product line (protocol-layer products have a richer software content), which had a negative impact on our gross margin before depreciation and amortization year-over-year. In addition, in the fourth quarter of fiscal 2018, our gross margin before depreciation and amortization was unfavorably affected by product mix within our protocol-layer product line (excluding Astellia) compared to the same period last year, which further reduced our gross margin before depreciation and amortization year-over-year. Finally, newly acquired Astellia (a sub-group of our protocol-layer product line) delivered lower margins than our typical average margin.
However, in the fourth quarter of fiscal 2018, we recorded lower inventory writeoffs compared to the same period last year, which increased our gross margin before depreciation and amortization by 0.3% year-over-year.
Net earnings (loss) attributable to the parent interest
Net loss attributable to the parent interest amounted to $4.0 million, or $0.07 per share, in the fourth quarter of fiscal 2018 compared to net earnings attributable to the parent interest of $0.8 million, or $0.02 per diluted share, for the same period last year.
First, in the fourth quarter of fiscal 2018, we recorded net restructuring charges of $3.4 million compared to $1.3 million in the same period last year.
In addition, in the fourth quarter of fiscal 2018, our net loss attributable to the parent interest included a net loss of newly acquired Astellia of $3.9 million compared to nil for the same period last year.
Furthermore, in the fourth quarter of fiscal 2018, excluding restructuring charges and the impact of newly acquired Astellia, our operating expenses (selling, administrative, net research and development, depreciation and amortization expenses) were $1.2 million higher compared to the same period last year, mainly due to general inflation and salary increases as well as the impact of our other recent acquisitions, despite the positive effects of our fiscal 2017 restructuring plan.
Finally, in the fourth quarter of fiscal 2018, we recorded a nominal positive change in the fair value of the cash contingent consideration payable for the acquisition of Ontology, compared to $0.4 million for the same period last year.
However, in the fourth quarter of fiscal 2018, we incurred a foreign exchange loss of $0.1 million compared to $2.9 million in the same period last year
due to the fluctuation of the period-end foreign exchange rates.
Quebec City, Canada, November 1, 2018
RE: Annual General and Special Meeting of Shareholders
Dear Shareholder,
I would like to invite you to our upcoming Annual General and Special Meeting of Shareholders (the "Meeting"). Consider this letter as a formal invitation to attend our Meeting, which will be held on January 9, 2019, 9:00 a.m., at the Vantage Venues, Room Caledonia (27
th
floor), located at 150 King Street West, in Toronto.
Details of the business to be conducted at the Meeting are provided in the attached Management Proxy Circular and Notice of Annual General and Special Meeting of Shareholders.
Please be advised that my annual Letter to Shareholders will be available on our website as well as the letter of our CEO, Philippe Morin (EXFO.com/en/AR2018), from November 27, 2018.
It is important that your shares be represented at the Meeting. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE VOTE BY TELEPHONE OR ELECTRONICALLY OR COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE ACCOMPANYING PROXY BY FAX OR EMAIL OR IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
If you send in your proxy card and then decide to attend the Meeting to vote your shares in person, you may still do so. Your proxy is revocable in accordance with the procedures set forth in the Management Proxy Circular.
On behalf of the Board of Directors, I would like to express our appreciation for your continued interest in EXFO. We look forward to seeing you at the Meeting.
Sincerely,
Germain Lamonde
Executive Chairman of the Board
EXFO Inc.
_________________________
NOTICE OF ANNUAL AND SPECIAL MEETING
OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN
that the Annual and Special Meeting of Shareholders (the "Meeting") of EXFO Inc. (the "Corporation") will be held at 9:00 a.m. (Eastern Standard Time), on Wednesday, January 9, 2019, at the Vantage Venues, Caledonia Room (27
th
Floor), 150 King Street West, Toronto
,
Ontario, Canada for the following purposes:
1.
|
to receive the consolidated financial statements of the Corporation for the financial year ended August 31, 2018, and the Auditor's report thereon;
|
2.
|
to elect Directors of the Corporation;
|
3.
|
to appoint PricewaterhouseCoopers LLP as auditors and to authorize the Audit Committee to fix their remuneration;
|
4.
|
to approve the
amendments to the Long-Term Incentive Plan as set forth in Schedule A to the Proxy Circular
;
|
5.
|
to transact such further or other business as may properly come before the Meeting or any adjournment or adjournments thereof.
|
Enclosed is a copy of the 2018 consolidated financial statements, management's discussion and analysis and the Auditor's Report thereon, together with the Management Proxy Circular and a form of Proxy.
DATED at Quebec, Province of Quebec, this 1
st
day of November 2018.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Benoit Ringuette
Benoit Ringuette
Secretary
Shareholders unable to attend the Meeting are requested to vote by telephone or electronically or to complete the enclosed proxy form and return it by fax, email or in the envelope provided. To be valid, votes or proxies must reach the office of AST Trust Company (Canada), no later than the close of business on the last day prior to the date of the Meeting or any reconvening of the Meeting in case of adjournment. Shareholders may also have the proxy form delivered to the Chairman of the Meeting prior to the time of voting on the day of the Meeting or any adjournment thereof.
|
|
|
|
Under Canadian Securities Law, you are entitled to receive certain investor documents. If you wish to receive such material, please tick the applicable boxes below. You may also go to AST
website
https://ca.astfinancial.com/financialstatements
an
d input code 1629a.
q
I would like to receive quarterly financial statements
q
I do not want to receive annual financial statements
q
I would like to receive future mailings by email at ______________________
I/We authorize you to act in accordance with my/our instructions set out above. I/We hereby revoke any proxy previously given with respect to the Meeting.
If no voting instructions are indicated above, this Proxy will be voted FOR a matter by Management's appointees or, if you appoint another proxyholder, as that other proxyholder sees fit. On any amendments or variations proposed or any new business properly submitted before the Meeting, I/We authorize you to vote as you see fit.
________________________________________________
__________________
Signature(s)
Date
Please sign exactly as your name(s) appear on this proxy. Please see reverse for instructions. All proxies must be received by January 8
th
, 2019 at 5:00 p.m. (Eastern time).
Control Number
|
Appointment of Proxyholder
I/We, being holder(s)
of subordinate voting shares of EXFO Inc. (the "Company"), hereby appoint: Germain Lamonde, Executive Chairman, or, failing him, Philippe Morin, Chief Executive Officer OR
__________________________________________________________________________________________
Print the name of the person you are appointing if this person is someone other than the individuals listed above
as proxy of the undersigned, to attend, act and vote on behalf of the undersigned in accordance with the below direction (or if no directions have been given, as the proxy sees fit) on all the following matters and any other matter that may properly come before the Annual and Special Meeting of Shareholders of
the Compan
y to be held at 9:00 a.m. (Eastern Time) on January 9, 2019, at the Vantage Venues, 150 King Street West, 27
th
Floor, Caledonia Room, Toronto, Ontario, Canada (the "Meeting"), and at any and all adjournments or postponements thereof in the same manner, to the same extent and with the same powers as if the undersigned was/were personally present, with full power of substitution.
|
|
Management recommends voting FOR Resolutions 1, 2 and 3. Please use a dark black pencil or pen.
|
|
1.
Election of Directors
|
FOR
|
|
WITHHOLD
|
|
1.
François Côté
|
☐
|
|
☐
|
|
2.
Germain Lamonde
|
☐
|
|
☐
|
|
3.
Angela Logothetis
|
☐
|
|
☐
|
|
4.
Philippe Morin
|
☐
|
|
☐
|
|
5.
Claude Séguin
|
☐
|
|
☐
|
|
6.
Randy E. Tornes
|
☐
|
|
☐
|
|
2.
Appointment of Auditors
|
FOR
|
|
WITHHOLD
|
|
Appointment of PricewaterhouseCoopers LLP
as Auditors
|
☐
|
|
☐
|
|
3
.
Long-Term Incentive Plan
Amendments Resolution
|
FOR
|
|
AGAINST
|
|
To approve the amendments to the Long-Term Incentive Plan
and as set forth in Schedule A to the Proxy Circular.
|
☐
|
|
☐
|
|
|
|
|
|
|
How to Vote
|
Proxy Form – Annual and Special Meeting of Shareholders of EXFO Inc. to be held on January 9, 2019 (the "Meeting")
|
|
INTERNET
·
Go to
www.astvotemyproxy.com
·
Cast your vote online
·
View Meeting documents
|
TELEPHONE
Use any touch-tone phone, call toll free in Canada and United States
1-888-489-7352
and follow the voice instructions
|
1.
This proxy must be signed by a holder or his or her attorney duly authorized in writing. If you are an individual, please sign exactly as your name appears on this proxy. If the holder is a corporation, a duly authorized officer or attorney of the corporation must sign this proxy, and if the corporation has a corporate seal, its corporate seal should be affixed.
|
|
To vote using your smartphone,
please scan this QR Code
è
|
|
2.
If the securities are registered in the name of an executor, administrator or trustee, please sign exactly as your name appears on this proxy. If the securities are registered in the name of a deceased or other holder, the proxy must be signed by the legal representative with his or her name printed below his or her signature, and evidence of authority to sign on behalf of the deceased or other holder must be attached to this proxy.
|
|
To vote by telephone or Internet you will need your control number. If you
vote by Internet or telephone, do not return this proxy.
MAIL, FAX or EMAIL
|
3.
Some holders may own securities as both a registered and a beneficial holder; in which case you may receive more than one Circular and will need to vote separately as a registered and beneficial holder. Beneficial holders may be forwarded either a form of proxy already signed by the intermediary or a voting instruction form to allow them to direct the voting of securities they beneficially own. Beneficial holders should follow instructions for voting conveyed to them by their intermediaries.
|
|
·
Complete and return your signed proxy in the envelope provided
or send to:
AST Trust Company (Canada) ("AST")
P.O. Box 721
Agincourt, ON M1S 0A1
|
4.
If a security is held by two or more individuals, any one of them present or represented by proxy at the Meeting may, in the absence of the other or others, vote at the Meeting. However, if one or more of them are present or represented by proxy, they must vote together the number of securities indicated on the proxy.
|
|
·
You
may alternatively fax your proxy to 416-368-2502 or toll free in Canada
and the United States
to 1-866-781-3111 or scan and email t
o
proxy@astfinancial.com
|
All holders should refer to the Proxy Circular for further information regarding completion and use of this proxy and other information pertaining to the Meeting.
This proxy is solicited by and on behalf of Management of the Company.
|
|
An undated proxy is deemed to bear the date on which it is mailed by management to you.
If you wish to receive investor documents electronically in future, please visit
https://ca.astfinancial.com/edelivery
to
enroll.
|
|
|
All proxies must be received by January 8, 2019 at 5:00 p.m. (Eastern time).
|
NOTICE OF ANNUAL AND SPECIAL
MEETING OF SHAREHOLDERS
AND
MANAGEMENT PROXY CIRCULAR
November 1, 2018
TABLE OF CONTENTS
Solicitation of Proxies
Appointment and Revocation of Proxies and Attendance of Beneficial Shareholders
Voting of Proxies
Voting Shares and Principal Holders Thereof
Electronic Delivery
Presentation of the Financial Statements
Election of the Directors and Nomination Process
Appointment and Remuneration of Auditors
Amendments to the Long-Term Incentive Plan
Compensation Discussion and Analysis
Compensation Elements
Executive Chairman Performance Compensation during Last Three (3) Financial Years
CEO Performance Compensation during Last Three (3) Financial Years
Summary Compensation Table of Named Executive Officers
Incentive Plan Awards
Pension Plan Benefits
Termination and Change of Control Benefits
Compensation of Directors
Securities Authorized for Issuance under Equity Compensation Plans
Annual Burn Rate
Corporate Governance Developments in Canada
EXFO's Corporate Governance Practices
EXFO Inc.
MANAGEMENT PROXY CIRCULAR
VOTING INFORMATION AND PROXIES
Solicitation of Proxies
This Management Proxy Circular ("Circular") is provided in connection with the solicitation by the Management of EXFO Inc. (the "Corporation" or "EXFO") of proxies to be used at the Annual and Special Meeting of shareholders (the "Meeting") of the Corporation to be held at the time and place and for the purposes stated in the accompanying Notice of Meeting and at any adjournment thereof. Unless otherwise indicated, the information contained herein is given as at November 1,
2018.
It is expected that the solicitation will be made primarily by mail and e-mail, but proxies may also be solicited personally by officers, employees or agents of the Corporation. The Corporation may also reimburse brokers and other persons holding shares in their names or in the names of nominees, for their costs incurred in sending proxy material to principals and obtaining their proxies. The cost of solicitation will be borne by the Corporation and is expected to be nominal.
Appointment and Revocation of Proxies and Attendance of Beneficial Shareholders
The persons named in the enclosed Form of Proxy (the "Form of Proxy") are officers of the Corporation.
A shareholder desiring to appoint some other person (who need not be a shareholder) to represent him or her at the Meeting may do so by inserting such person's name in the blank space provided in the Form of Proxy and checking item (B).
To be valid, votes or proxies must be received at the Toronto, Canada office of AST Trust Company (Canada), 1 Toronto Street, Suite 1200, Toronto, Ontario, M5C 2V6, the transfer agent of the Corporation, no later than the close of business on the last business day preceding the day of the Meeting or any adjournment thereof, or proxies may be delivered to the Chairman of the Meeting on the day of the Meeting or any adjournment thereof. A beneficial shareholder who completes a Form of Proxy and who wishes to attend and vote at the Meeting personally must appoint himself or herself proxy holder in the foregoing manner.
A proxy given pursuant to this solicitation may be revoked by instrument in writing executed by the shareholder or by his or her attorney authorized in writing if such instrument is deposited either at the registered office of the Corporation to the attention of the Corporate Secretary or at the Toronto, Canada office of the Corporation's transfer agent no later than the close of business on the last business day preceding the day of the Meeting or any adjournment thereof or with the Chairman of the Meeting on the day of the Meeting or any adjournment thereof.
Voting of Proxies
The shares represented by proxies appointing the persons, or any one of them, designated by Management thereon to represent the shareholder at the Meeting will be voted in accordance with the instructions given by the shareholder.
Unless otherwise indicated, the voting rights attached to the shares represented by a Form of Proxy will be voted "FOR" in respect of all the proposals described herein.
The Form of Proxy confers discretionary authority upon the persons named therein with respect to amendments or variations to matters identified in the accompanying Notice of Meeting. As at the date hereof, Management is not aware that any other matter is to be presented at the Meeting. If, however, other matters properly come before the Meeting, the persons designated in the Form of Proxy will vote thereon in accordance with their judgment pursuant to the discretionary authority conferred by such proxy with respect to such matters. A shareholder desiring to vote by telephone should call 1-888-489-7352 or to vote electronically must go to the following site:
www.astvotemyproxy.com
and enter the personalized 13-digit control number printed on the enclosed Form of Proxy and follow the instructions on the screen or otherwise fax or e-mail or mail the enclosed Form of Proxy.
Voting Shares and Principal Holders Thereof
As at November 1, 2018, 23,590,515 Subordinate Voting Shares and 31,643,000 Multiple Voting Shares were outstanding, being the only classes of shares of the Corporation entitled to be voted at the Meeting. Each holder of Subordinate Voting Shares is entitled to one (1) vote and the holder of Multiple Voting Shares is entitled to ten (10) votes for each share registered in his or her name at the close of business on November 12, 2018, being the date fixed by the Board of Directors for the purpose of determining registered shareholders entitled to receive the accompanying Notice of Meeting and to vote (the "Record Date"). A list of shareholders entitled to vote as of the Record Date, showing the number of shares held by each shareholder, shall be prepared within ten (10) days of the Record Date. This list of shareholders will be available for inspection during normal business hours at the Montreal office of AST Trust Company (Canada), the transfer agent of the Corporation, 2001 Robert-Bourassa Boulevard, Suite 1600, Montreal, Quebec, Canada, H3A 2A6, and at the Meeting.
Unless otherwise indicated, the resolutions submitted to a vote at the Meeting must be passed by a majority of the votes cast by the holders of Subordinate Voting Shares and Multiple Voting Shares, as a single class, present at the Meeting in person or by proxy and voting in respect of all resolutions to be voted on by the shareholders of the Corporation.
To the knowledge of executive officers and directors of the Corporation, as at November 1, 2018, the only persons who are beneficial owners or who exercise control or direction, directly or indirectly, over shares carrying more than 10% of the voting rights attaching to any class of shares of the Corporation are:
Name of Shareholder
|
Number of
Subordinate
Voting Shares
|
Percentage of Voting
Rights Attached to
All Subordinate
Voting Shares
|
Number of
Multiple Voting
Shares
(1)
|
Percentage of Voting
Rights Attached to
All Multiple
Voting Shares
|
Percentage of Voting
Rights Attached to All
Subordinate and
Multiple Voting Shares
|
Germain Lamonde
|
3,561,174
|
(2)
|
15.10%
|
31,643,000
|
(3)
|
100%
|
94.11%
|
|
(1)
|
The holder of Multiple Voting Shares is entitled to ten (10) votes for each share.
|
(2)
|
Mr. Lamonde exercises control over 3,191,666 Subordinate Voting Shares through G. Lamonde Investissements Financiers Inc., a company controlled by Mr. Lamonde. Mr. Lamonde exercises control over 316,247 Subordinate Voting Shares through 9356-8988 Québec Inc., a company controlled by Mr. Lamonde. Mr. Lamonde exercises direct control over 53,261 Subordinate Voting Shares.
|
(3)
|
Mr. Lamonde exercises control over 29,743,000 Multiple Voting Shares through G. Lamonde Investissements Financiers Inc., a company controlled by Mr. Lamonde. Mr. Lamonde exercises control over 1,900,000 Multiple Voting Shares through 9356-8988 Québec Inc., a company controlled by Mr. Lamonde.
|
Electronic Delivery
The Corporation has a voluntary program for e-mail notification to its shareholders advising them that documents which must be delivered pursuant to securities legislation are available on the Corporation's website. Every year, as required by law governing public companies, the Corporation delivers documentation to shareholders, such as this Circular and the Corporation's annual consolidated financial statements together with the auditor's report thereon. The Corporation has made the delivery of such documents more convenient for its shareholders, as shareholders who so wish may be notified by e-mail when the Corporation's documentation is posted in the "Investors" section on its website (
www.EXFO.com
). Accordingly, such documentation will not be sent to such shareholders in paper form by mail. The Corporation believes that electronic delivery will benefit the environment and reduce its costs. Shareholders who do not consent to receive documentation by e-mail will continue to receive such documentation by mail. Shareholders may also notify the Corporation in writing of their intention not to receive the annual consolidated financial statements together with the auditor's report thereon, neither by e-mail nor by mail.
Registered shareholders can consent to electronic delivery by visiting AST Trust Company (Canada)'s web site:
https://ca.astfinancial.com/InvestorServices/Financial-Statements?lang=en. Unregistered shareholders (i.e. shareholders whose shares are held through a
securities broker, bank, trust company or other nominee) can consent to electronic delivery by completing and returning the appropriate form received from the applicable intermediary.
BUSINESS TO BE TRANSACTED AT THE MEETING
Presentation of the Financial Statements
The consolidated financial statements of the Corporation for the financial year ended August 31, 2018 and the auditor's report thereon will be submitted to shareholders at the Meeting but no vote with respect thereto is required or proposed to be taken.
Election of the Directors and Nomination Process
According to the articles of the Corporation, the Board of Directors shall consist of a minimum of three (3) and a maximum of twelve (12) directors. The number of directors is currently fixed at six (6) pursuant to a resolution of the Board of Directors. At the Meeting, Management proposes the six (6) persons named hereafter on pages 89 to 94 as nominees for election as directors to hold office until the next annual meeting or until the office is otherwise vacated in accordance with the Corporation's by-laws.
Management does not anticipate that any of the nominees will be unable or, for any reason whatsoever, reluctant to fulfill their duties as directors. Should this occur for any reason whatsoever before the election, the persons named in the Form of Proxy reserve the right to vote for another nominee of their choice unless the shareholder specifies on the Form of Proxy to abstain from voting for the election of the directors. The election of the directors must be approved by a majority of the votes cast on the matter at the Meeting.
The Corporation's Majority Voting Policy applies to this election. Under such policy, a director who is elected in an uncontested election with a greater number of votes "withheld" than votes "for" such director will be required to tender his or her resignation to the Chair of the Board. This resignation will be effective when accepted by the Board of Directors. Unless extraordinary circumstances apply, the Board of Directors will accept the resignation. The Board of Directors will announce its decision (including the reason for not accepting a resignation) by press release within ninety (90) days of the meeting during which the election was held. A copy of the Majority Voting Policy is available on the Corporation's website (
www.EXFO.com
).
The Human Resources Committee assists the Board of Directors by identifying individuals qualified to become members of the Board of Directors and making recommendations to the Board of Directors as to selection of director nominees for the next annual meeting of shareholders.
In making its recommendations, the Human Resources Committee objectively considers, among other things, the competencies and skills that: (i) the Board of Directors considers to be necessary for the Board, as a whole, to possess; (ii) the Board of Directors considers each existing director to possess; and (iii) each new nominee will bring to the board room. Therefore, the competencies and skills, identified by the Human Resources Committee, as a whole, include the skill sets of current board members such as financial literacy, proficiency with test, service assurance and network visibility solutions and technologies, telecommunications industry experience, international business experience and other related competencies. Any additional skill sets deemed to be beneficial are considered, assessed and identified in light of the opportunities and risks facing the Corporation when candidates for director positions are considered.
Appointment and Remuneration of Auditors
A firm of auditors is to be appointed by vote of the shareholders at the Meeting to serve as auditors of the Corporation until the close of the next annual general meeting of the shareholders. The Audit Committee is to be authorized to fix the remuneration of the auditors so appointed. The Board of Directors and Management, upon the advice of the Audit Committee, recommend that PricewaterhouseCoopers LLP be re-appointed as auditors of the Corporation. The re-appointment of PricewaterhouseCoopers LLP must be approved by a majority of the votes cast on the matter at the Meeting.
Amendments to the Long-Term Incentive Plan
The Corporation's Long-Term Incentive Plan (the "LTIP"), which is further described herein under the heading "Long-Term Incentive Compensation", is designed to better align the interests of the directors, officers, employees, consultants as well as non-employee directors with those of the Corporation's shareholders.
On October 11, 2018, the Board of Directors of the Corporation, on the recommendation of the Human Resources Committee authorized, subject to regulatory and shareholders' approvals, certain amendments to the current LTIP. The proposed amendments include the adoption of provisions for the issuance of Performance Share Units ("PSUs") redeemable for either (a) Subordinate Voting Shares issued from treasury or (b) an amount in cash or (c) Subordinate Voting Shares purchased on the open market as well as the modification of the amending provisions in respect to such adoption of PSUs, as more detailed below.
Adoption of Performance Share Units
The current LTIP provides for the issuance of options to purchase Subordinate Voting Shares and the issuance of Restricted Share Units ("RSUs") redeemable for actual Subordinate Voting Shares to participating directors, officers, employees and other persons or companies providing ongoing management or consulting services of the Corporation and its subsidiaries.
The purpose of the adoption of PSUs under the LTIP, in addition to options and RSUs, is to allow the Board to establish specific performance objectives which must be attained for any PSUs to be earned, and any applicable reduction or increase in the number of Subordinate Voting Shares underlying any PSU depending on the level of attainment of the relevant performance objectives. Unlike RSUs, the number of PSUs that will ultimately vest will adjust based on the performance objectives as measured against pre-determined targets by the Board of Directors. As the Corporation's performance improves, as measured against the pre-determined targets, the number of units that will ultimately vest increases, capping out at a predetermined maximum number of units. PSUs will be settled in Subordinate Voting Shares on the vesting date.
The following is a detailed summary of the new provisions for the issuance of PSUs proposed to be included in the LTIP, copy of which plan is provided in Schedule "B" hereto.
The Board of Directors, upon recommendation from the Human Resources Committee, will designate the recipients of PSUs and determine the number of Subordinate Voting Shares covered by such PSUs, the date(s) of vesting, the performance objective(s) which must be attained for any PSUs to be earned, any applicable reduction or increase in the number of Subordinate Voting Shares underlying any PSU depending on the level of attainment of the relevant performance objective(s), the expiry date and any other conditions relating to the PSUs, in each case in accordance with the applicable legislation of the securities regulatory authorities. The Board of Directors will also determine the level of attainment of the performance objective(s), the number of PSUs earned and eligible to vest and the number of Subordinate Voting Shares underlying such PSUs, no later than the fifth business day following the public release of the Corporation's financial results for the financial year in respect of which the performance objective(s) have been set (or the last financial year in respect of which the performance objective(s) have been set in the case of objective(s) covering more than one financial year).
The adoption of PSUs shall not increase the number of Subordinate Voting Shares subject to the LTIP. The fair value at the time of grant of a PSU is equal to the market value of Subordinate Voting Shares at the time the PSU is granted. The grant date market value is equal to the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and the NASDAQ Global Select Market on the last trading day preceding the grant date, using the daily exchange rate of the Bank of Canada on the last trading day preceding the grant date to convert either the NASDAQ Global Select Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars. Any PSU issued is non-transferable, except in the event of death, for legal representative.
Unless otherwise determined by the Board of Directors, any PSU granted pursuant to the LTIP will expire: (i) on the vesting date where the performance objectives have not been attained as determined by the Board of Directors; (ii) immediately, upon the termination of the relationship with the Corporation or one of its subsidiaries for a good and sufficient cause for employees or officers; and (iii) at the date on which an employee or an officer resigns or leaves his employment with the Corporation or one of its subsidiaries.
The amended LTIP will provide that any PSU award will be eligible to the regular vesting as established by the Board of Directors at the time of grant, to a certain proportion as determined by the LTIP, upon the termination of the relationship of an employee or officer with the Corporation or one of its subsidiaries for reasons not related to cause. The amended LTIP will also provide that any PSU award will be eligible to the regular vesting as established by the Board of Directors at the time of grant, upon: (i) the termination of the relationship of an employee or officer with the Corporation or one of its subsidiaries because of permanent disability; and (ii) participant attainment of the retirement conditions established by the Corporation and continued compliance with the confidentiality, non-solicitation and non-competition obligations of the PSU holder. The amended LTIP will also provide that any PSU award will be eligible to accelerated vesting assuming 100% of the level of attainment of the performance objective(s), as established by the Board of Directors at the time of grant, upon the termination of the relationship of an employee or officer with the Corporation or one of its subsidiaries because of death. Furthermore, in case of a PSU holder employment with the Corporation is terminated following a change of control, the Board of Directors or the Human Resources Committee may, at its own discretion, increase the number of Subordinate Voting Shares to which a PSU holder is entitled.
With the adoption of PSUs, the amending provisions of the LTIP will refer to "Units" instead of RSUs, making the amending provisions applicable, without other changes, to such Units. A Unit is defined as a PSU or a RSU granted under the LTIP. The amending provisions are further described herein under the heading "Long-Term Incentive Compensation" and the full text of the proposed amendments to the LTIP is provided in Schedule "B" to this Circular.
The Board of Directors recommends that the shareholders vote FOR the adoption of the resolution to approve the proposed amendments to the LTIP, appended hereto as Schedule "A" to this Circular.
In order to adopt the foregoing resolution, at least a majority of the votes cast by holders of Subordinate Voting Shares and Multiple Voting Shares, voting as a single class, present in person or by proxy, must be voted in favor of the resolution.
NOMINEES FOR ELECTION AS DIRECTORS AND THEIR BENEFICIAL OWNERSHIP OF VOTING SECURITIES
The following charts and notes set out the name of each of the individuals proposed to be nominated at the Meeting for election as a director of the Corporation. Included in these charts is information relating to the proposed directors' committee memberships, meeting attendance, period of service as a director, principal directorships with other organizations and equity ownership (or securities over which each of them exercises control or direction) in the Corporation.
GERMAIN LAMONDE
|
|
St-Augustin-de-Desmaures,
Quebec, Canada
Director since
September 1985
Not Independent
(Management)
Principal Occupation:
Executive Chairman of the Board of Directors
|
Germain Lamonde
, Germain Lamonde, founder of EXFO, is Executive Chairman of the Board and served as the company's Chief Executive Officer (CEO) for over 30 years. During his tenure as CEO, Mr. Lamonde grew the company from the ground up, turning it into a global leader in the communications test, monitoring and analytics market and the world's #1 fiber/highspeed testing company, with customers in over one hundred countries. Today as Executive Chairman, Mr. Lamonde leads EXFO's acquisitions strategy and is actively involved in defining the company's growth and investment strategies, strategic direction and corporate governance policies. Mr. Lamonde has served on the board of directors of several public and private organizations, fulfilled numerous speaking engagements, and received several industry awards for his leadership, innovation and global development. Mr. Lamonde presently serves on the Board of QG100 and was recently appointed Chairman of the Quebec Digital Transformation Council and Chairman of ENCQOR the Canada–Quebec-Ontario partnership focused on research and innovation in the field of 5G/IoT innovation. Mr. Lamonde holds a bachelor's degree in engineering physics from Université de Montréal's school of engineering (Polytechnique Montréal) and a master's degree in optics from Université Laval in Québec City. He is a graduate of the Ivey Executive Program at Western University in London, Ontario, and a Fellow of the Canadian Academy of Engineering.
|
Board/Committee Membership
|
Attendance
(1)
|
Board Memberships of Another Reporting Issuer
|
Chairman of the Board of Directors
|
7/7
|
100%
|
–
|
Securities Held
|
As at
|
Subordinate
Voting Shares (#)
|
Multiple Voting
Shares (#)
|
RSUs (#)
|
Total Shares
(2)
and RSUs (#)
|
Total Market Value
(3)
of Shares
(2)
and RSUs (US$)
|
August 31, 2018
|
3,561,174
(4)
|
31,643,000
(5)
|
‒
|
35,204,174
|
155,602,449
|
(1)
|
From September 1, 2017 until November 1, 2018, Mr. Lamonde attended five (5) board meetings in person and two (2) board meetings by telephone.
|
(2)
|
Includes both Subordinate Voting Shares and Multiple Voting Shares.
|
(3)
|
The value of unvested RSUs at the financial year-end is the market value of the Subordinate Voting Shares on August 31, 2018, which was US$4.42 (CA$5.77). The market value of the Subordinate Voting Shares and Multiple Voting Shares was calculated by using the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and on the NASDAQ Global Select Market on August 31, 2018 using the daily exchange rate of the Bank of Canada to convert either the NASDAQ Global Select Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars as required. The actual gains on vesting of RSUs will depend on the value of the Subordinate Voting Shares on the date of vesting. There can be no assurance that these values will be realized.
|
(4)
|
Mr. Lamonde exercises control over 2,791,666 Subordinate Voting Shares through 9356-9036 Québec Inc., a company controlled by Mr. Lamonde. Mr. Lamonde exercises control over 400,000 Subordinate Voting Shares through 9356-9010 Québec Inc., a company controlled by Mr. Lamonde. Mr. Lamonde exercises control over 316,247 Subordinate Voting Shares through 9356-8988 Québec Inc., a company controlled by Mr. Lamonde. Mr. Lamonde exercises direct control over 53,261 Subordinate Voting Shares.
|
(5)
|
Mr. Lamonde exercises control over 24,743,000 Multiple Voting Shares through G. Lamonde Investissements Financiers Inc., a company controlled by Mr. Lamonde. Mr. Lamonde exercises control over 5,000,000 Multiple Voting Shares through 9356-9036 Québec Inc., a company controlled by Mr. Lamonde. Mr. Lamonde exercises control over 1,900,000 Multiple Voting Shares through 9356-8988 Québec Inc., a company controlled by Mr. Lamonde
.
|
FRANÇOIS CÔTÉ
|
|
Montreal, Quebec, Canada
Director since
January 2015
Lead Director
Independent
Principal Occupation:
Director
|
François Côté
was appointed a member of our Board of Directors in January 2015. Mr. Côté is a director as a full-time occupation, for corporations in the public, private and non-profit sectors, bringing his expertise in strategy, M&A, governance and passion for growth. Mr. Côté held a variety of executive positions at Bell Canada prior to becoming President and Chief Executive Officer of Emergis. Following the acquisition of Emergis by TELUS in January 2008, he was appointed President of TELUS Quebec, TELUS Health and TELUS Ventures. In this role, Mr. Côté was responsible for broadening TELUS Quebec's presence and driving the company's national health strategy through timely investments in information technology and innovative wireless solutions. Mr. Côté holds a bachelor's degree in Industrial Relations from Laval University. In 2007, he was named Entrepreneur of the Year by Ernst & Young, in the Corporate Restructuring category for the province of Quebec. Mr. Côté serves on the boards of Alithya, Aspire Food Group, the Fondation Martin Matte and Purkinje, a Montreal health IT growth company as lead Director. Mr. Côté serves on the Advisor Committee of Groupe Morneau and is also acting as an advisor to different companies' CEOs
.
|
Board/Committee Membership
|
Attendance
(1)
|
Board Memberships of Another Reporting Issuer
|
Board of Directors
Audit Committee
Human Resources Committee
Independent Board of Directors
|
7/7
5/5
5/5
5/5
|
90%
100%
100%
100%
|
–
|
Securities Held
|
As at
|
Subordinate
Voting Shares (#)
|
DSUs (#)
|
Total Shares
and DSUs (#)
|
Total Market Value
(2)
of Shares
(3)
and DSUs (US$)
|
August 31, 2018
|
6,500
|
27,710
|
34,210
|
151,208
|
(1)
|
From September 1, 2017 until November 1, 2018, Mr. Côté attended five (5) board meetings in person and two (2) board meetings by telephone.
|
(2)
|
The value of unvested DSUs at the financial year-end is the market value of the Subordinate Voting Shares on August 31, 2018, which was US$4.42 (CA$5.77). The market value of the Subordinate Voting Shares was calculated by using the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and on the NASDAQ Global Select Market on August 31, 2018 using the daily exchange rate of the Bank of Canada to convert either the NASDAQ Global Select Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars as required. The actual gains on vesting of DSUs will depend on the value of the Subordinate Voting Shares on the date of vesting. There can be no assurance that these values will be realized.
|
(3)
|
Refers to Subordinate Voting Shares
.
|
ANGELA LOGOTHETIS
|
|
Bath
United Kingdom
Director since
January 2017
Independent
Principal Occupation:
Vice-President and CTO, Amdocs Open Network
(1)
|
Angela Logothetis
has more than twenty-five (25) years of international experience in the telecommunications industry. She has been strategically engaged in the industry's major network transformations. Ms. Logothetis has an outstanding software pedigree having worked for market-leading software companies including Amdocs, Cramer, PricewaterhouseCoopers and Accenture as well as start-up software companies Clarity and Time Quantum Technology. She has held senior leadership positions in ANZ, APAC and EMEA and has held global responsibility for the past ten (10) years. Ms. Logothetis is the CTO for Amdocs Open Network. Amdocs is the market leader in customer experience software solutions and services for the world's largest communications, entertainment and media service providers. Ms. Logothetis has held several senior leadership positions at Amdocs including Head of OSS Product and Technology, Vice-President of OSS Product Management and Executive Site Lead for Amdocs Bath. She has chaired high-caliber software forums in Amdocs including the Divisional Leadership Team, the Technical Advisory Council, and has served as an executive on the Product Business Management Team and the Product Leadership Forum. Ms. Logothetis holds a Bachelor of Science degree, with first class honors, in Business Information Technology from the University of New South Wales, Australia. She completed dual majors in accountancy and information technology
.
|
Board/Committee Membership
|
Attendance
(2)
|
Board Memberships of Another Reporting Issuer
|
Board of Directors
Audit Committee
Human Resources Committee
Independent Board of Directors
|
7/7
5/5
5/5
5/5
|
80%
100%
100%
100%
|
–
|
Securities Held
|
As at
|
Subordinate
Voting Shares (#)
|
DSUs (#)
|
Total Shares
and DSUs (#)
|
Total Market Value
(3)
of Shares
(4)
and DSUs (US$)
|
August 31, 2018
|
‒
|
27,958
|
27,958
|
123,574
|
(1)
|
Amdocs is a market leader in software solutions and services for communications, media and entertainment service providers.
|
(2)
|
From September 1, 2017 until November 1, 2018, Ms. Logothetis attended five (5) board meetings in person and two (2) board meetings by telephone.
|
(3)
|
The value of unvested DSUs at the financial year-end is the market value of the Subordinate Voting Shares on August 31, 2018, which was US$4.42 (CA$5.77). The market value of the Subordinate Voting Shares was calculated by using the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and on the NASDAQ Global Select Market on August 31, 2018 using the daily exchange rate of the Bank of Canada to convert either the NASDAQ Global Select Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars as required. The actual gains on vesting of DSUs will depend on the value of the Subordinate Voting Shares on the date of vesting. There can be no assurance that these values will be realized.
|
(4)
|
Refers to Subordinate Voting Shares.
|
PHILIPPE MORIN
|
|
Montreal, Quebec
Canada
Director since
January 2018
Not Independent
(Management)
Principal Occupation:
CEO of the Corporation
|
Philippe Morin
was appointed Chief Executive Officer (CEO) of EXFO in April 2017 and is responsible for the Corporation's strategy and financial directions, goals and results. He has more than thirty (30) years of experience in the telecommunications industry and joined EXFO in November 2015 as Chief Operating Officer (COO) leading the company's global sales leadership, market development, and product strategy. Before joining EXFO, Mr. Morin was Senior Vice-President of Worldwide Sales and Field Operations at Ciena. He previously held senior leadership roles at Nortel Networks, including President of Metro Ethernet Networks and Vice-President and General Manager of Optical Networks. Philippe Morin holds a bachelor's degree in electrical engineering from Université Laval in Quebec City, Canada, and a master's degree in business administration (MBA) from McGill University in Montreal, Canada.
|
Board/Committee Membership
|
Attendance
(1)
|
Board Memberships of Another Reporting Issuer
|
Board of Directors
|
4/4
|
100%
|
–
|
Securities Held
|
As at
|
Subordinate
Voting Shares (#)
|
RSUs (#)
|
Total Shares
and RSUs (#)
|
Total Market Value
(2)
of Shares
(3)
and RSUs (US$)
|
August 31, 2018
|
600,000
|
306,591
|
906,591
|
4,007,132
|
(1)
|
Mr. Morin joined our Board of Directors in January 2018. From January 10, 2018 until November 1, 2018, Mr. Morin attended three (3) board meetings in person and one (1) board meeting by telephone.
|
(2)
|
The value of unvested RSUs at the financial year-end is the market value of the Subordinate Voting Shares on August 31, 2018, which was US$4.42 (CA$5.77). The market value of the Subordinate Voting Shares and Multiple Voting Shares was calculated by using the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and on the NASDAQ Global Select Market on August 31, 2018 using the daily exchange rate of the Bank of Canada to convert either the NASDAQ Global Select Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars as required. The actual gains on vesting of RSUs will depend on the value of the Subordinate Voting Shares on the date of vesting. There can be no assurance that these values will be realized.
|
(3)
|
Refers to Subordinate Voting Shares.
|
CLAUDE SÉGUIN
|
|
Westmount, Quebec,
Canada
Director since
February 2013
Independent
Principal Occupation:
Director
|
Claude Séguin
was appointed a member of EXFO's Board of Directors in February 2013. He brings to EXFO nearly forty (40) years of corporate, financial, executive and provincial government experience gained through senior management positions in major corporations and government departments. Mr. Séguin was Special advisor to the Founder and Executive Chairman at CGI Group Inc., a global leader in information technology and business process services, until March 2018. He was, until November 2016, Senior Vice-President, Corporate Development and Strategic Investments. In this position, he was responsible for all merger and acquisition activities. Prior to joining CGI in 2003, he served as President of CDP Capital—Private Equity, and prior to this position, he served as Teleglobe Inc.'s Executive Vice-President, Finance and Chief Financial Officer, a position that he held from 1992 to 2000. Mr. Séguin also has extensive senior-level government experience, having served as Deputy Finance Minister of the Province of Quebec from 1987 to 1992, in addition to Assistant Deputy Finance Minister in prior years. Prior to that, he held senior positions at the Province of Quebec Treasury Board. Mr. Séguin is a member of the boards of HEC-Montréal, Centraide of Greater Montreal Foundation and was recently elected Chairman of the Fonds de solidarité FTQ, a $14B Labour Sponsored Investment Fund in Québec. Claude Séguin graduated from HEC-Montréal and earned a master's and a Ph.D. in public administration from Syracuse University in New York State. He also followed the Advanced Management Program at Harvard Business School.
|
Board/Committee Membership
|
Attendance
(2)
|
Board Memberships of Another Reporting Issuer
|
Board of Directors
Audit Committee
Human Resources Committee
Independent Board of Directors
|
7/7
5/5
5/5
5/5
|
100%
100%
100%
100%
|
–
|
Securities Held
|
As at
|
Subordinate
Voting Shares (#)
|
DSUs (#)
|
Total Shares
and DSUs (#)
|
Total Market Value
(3)
of Shares
(4)
and DSUs (US$)
|
August 31, 2018
|
–
|
46,299
|
46,299
|
204,642
|
(1)
|
From September 1, 2017 until November 1, 2018, Mr. Séguin attended
five
(
5
) board meetings in person and
two
(
2
) board meetings by telephone.
|
(2)
|
The value of unvested DSUs at the financial year-end is the market value of the Subordinate Voting Shares on August 31, 2018, which was US$4.42 (CA$5.77). The market value of the Subordinate Voting Shares was calculated by using the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and on the NASDAQ Global Select Market on August 31, 2018 using the daily exchange rate of the Bank of Canada to convert either the NASDAQ Global Select Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars as required. The actual gains on vesting of DSUs will depend on the value of the Subordinate Voting Shares on the date of vesting. There can be no assurance that these values will be realized.
|
(3)
|
Refers to Subordinate Voting Shares.
|
RANDY E. TORNES
|
|
Frisco, Texas, USA
Director since
February 2013
Independent
Principal Occupation:
Vice-President, Client Partner for AT&T
at Aricent
(1)
|
Randy E. Tornes
was appointed a member of EXFO's Board of Directors in February 2013. He brings to EXFO over thirty (30) years of telecommunications experience gained through senior management positions at leading network equipment manufacturers. Mr. Tornes is Vice-President, Client Partner for AT&T at Aricent, An Altran Company. Prior to joining Aricent, Mr. Tornes was Vice-President Strategic Alliances at Juniper Networks, a worldwide leader in high-performance networking and telecommunications equipment. Mr. Tornes has also worked as the Operating Area Leader for AT&T and responsible for all sales, service and support of Juniper products and services. Prior to joining Juniper Networks in May 2012, he spent two (2) years at Ericsson, where he was Vice-President Sales (AT&T account). Previous to that position, he worked for Nortel for twenty-six (26) years, holding various sales management positions, including Vice-President Sales, GSM Americas. Mr. Tornes also served as member of the Board of Governors at 3G Americas LLC. Randy E. Tornes holds a Bachelor of Science degree in business—organizational development and production and operations management, from the University of Colorado in Colorado Springs
.
|
Board/Committee Membership
|
Attendance
(2)
|
Board Memberships of Another Reporting Issuer
|
Board of Directors
Audit Committee
Human Resources Committee
Independent Board of Directors
|
7/7
5/5
5/5
5/5
|
100%
100%
100%
100%
|
–
|
Securities Held
|
As at
|
Subordinate
Voting Shares (#)
|
DSUs (#)
|
Total Shares
and DSUs (#)
|
Total Market Value
(3)
of Shares
(4)
and DSUs (US$)
|
August 31, 2018
|
–
|
79,722
|
79,722
|
352,371
|
(1)
|
Aricent is a global design and engineering company.
|
(2)
|
From September 1, 2017 until November 1, 2018, Mr. Tornes attended
five
(5) board meetings in person and
two
(
2
) board meetings by telephone.
|
(3)
|
The value of unvested DSUs at the financial year-end is the market value of the Subordinate Voting Shares on August 31, 2018, which was US$4.42 (CA$5.77). The market value of the Subordinate Voting Shares was calculated by using the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and on the NASDAQ Global Select Market on August 31, 2018 using the daily exchange rate of the Bank of Canada to convert either the NASDAQ Global Select Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars as required. The actual gains on vesting of DSUs will depend on the value of the Subordinate Voting Shares on the date of vesting. There can be no assurance that these values will be realized.
|
(4)
|
Refers to Subordinate Voting Shares.
|
The information as to Subordinate Voting Shares and Multiple Voting Shares beneficially owned or over which the above-named individuals exercise control or direction is not within the direct knowledge of the Corporation and has been furnished by the respective individuals. The information as to the Principal Board Memberships is also not within the direct knowledge of the Corporation and has been furnished by the respective individuals.
With the exception of Mr. Philippe Morin (as disclosed below), none of the individuals who are proposed to be nominated at the Meeting for election as a director of the Corporation:
a)
|
is, as at the date hereof, or has been, within ten (10) years before the date hereof, a director, chief executive officer or chief financial officer of any company that (i) was subject to an order that was issued while such individual was acting in the capacity as director, chief executive officer or chief financial officer, or (ii) was subject to an order that was issued after such individual ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer;
|
b)
|
is, as at the date hereof, or has been within ten (10) years before the date hereof, a director or executive officer of any company that, while such individual was acting in that capacity, or within a year of that individual ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets;
|
c)
|
has, within the ten (10) years before the date hereof, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold his assets; or
|
d)
|
has been subject to (i) any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority, or (ii) any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable security holder in deciding whether to vote for such individual.
|
Mr. Philippe Morin acted as an executive officer of Nortel Networks Corporation ("Nortel") and its affiliates from 2006 to 2010 as President Metro Ethernet Networks. Nortel and certain of its affiliates filed for bankruptcy protection in a number of jurisdictions in January 2009.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Compensation Discussion and Analysis
This Compensation Discussion and Analysis focuses primarily on: (i) significant elements of the Corporation's executive compensation program; (ii) principles on which the Corporation makes compensation decisions and determines the amount of each element of executive and director compensation; and (iii) an analysis of the material compensation decisions made by the Human Resources Committee for the financial year ended August 31, 2018.
The following is a discussion of the compensation arrangements with the Corporation's Executive Chairman, Chief Executive Officer ("CEO"), Chief Financial Officer ("CFO") and each of the two most highly compensated executive officers of the Corporation and its subsidiaries whose total compensation was, individually, more than CA$150,000 (collectively with the Executive Chairman, CEO and CFO, the "Named Executive Officers" or "NEOs"). The NEOs for the financial year ended August 31, 2018 were Mr. Germain Lamonde (Executive Chairman), Mr. Philippe Morin (CEO), Mr. Pierre Plamondon (CFO and Vice-President, Finance), Mr. Willem Jan te Niet (Vice-President, Sales — Europe Middle East and Africa) and Mr. Dana Yearian (Vice-President, Sales — Americas). Mr. Lamonde stepped down as CEO as of April 1, 2017 and was nominated Executive Chairman of the Corporation. Mr. Morin was promoted from Chief Operating Officer of the Corporation to CEO of the Corporation as of April 1, 2017.
Members of the Human Resources Committee
During the financial year ended August 31, 2018, the Human Resources Committee was composed of:
·
|
Mr. François Côté (Chairman)
|
·
|
Mr. Pierre-Paul Allard (until January 9, 2018)
|
None of these members were officers or employees, or former officers or employees of the Corporation or its subsidiaries. All of the members of the Human Resources Committee are considered "independent", as defined in applicable securities legislation and regulations. They each have experience in executive compensation either as a chief executive officer or a senior executive officer of a publicly-traded corporation. Mr. François Côté held a variety of executive positions, including president and chief executive officer, for approximately twenty (20) years. Mr. Côté also holds a Bachelor's degree in Industrial Relations. Ms. Angela Logothetis holds
a Bachelor of Science degree, with first class honors, in Business Information Technology. She completed dual majors in accountancy and information technology.
She has more than twenty-five (25) years of international experience in the telecommunications industry. Mr. Claude Séguin has held various senior management and executive positions in major corporations in the last forty (40) years. Mr. Randy E. Tornes has approximately thirty (30) years of management experience through senior sales management positions. Over the course of their careers, all members have been exposed at various degrees to the complexity of balancing efficient executive compensation strategies with the evolution of business requirements, having to manage directly or indirectly impacts and consequences of executive compensation decisions. The Board of Directors believes that the Human Resources Committee collectively has the knowledge, experience and background required to fulfill its mandate.
Mandate of the Human Resources Committee
The Human Resources Committee of the Board of Directors is responsible for establishing the annual compensation and assessing the risks related thereto and overseeing the assessment of the performance of all the Corporation's executive officers, including the Executive Chairman and CEO. The Human Resources Committee also reviews and submits to the Board of Directors recommendations for the salary structure and the short-term and long-term incentive compensation programs for all employees of the Corporation. The Human Resources Committee also evaluates and makes recommendations to the Board of Directors regarding the compensation of directors, including the number of Deferred Share Units credited to the non-employee directors pursuant to the Deferred Share Unit Plan. The Human Resources Committee's goal is to develop and monitor executive compensation programs that are consistent with strategic business objectives and shareholders' interests. Though the Human Resources Committee is responsible for the review of employees' performance and approval of the identity of the employees that will receive Restricted Share Units or options to purchase shares of the Corporation, in accordance with policies established by the Board of Directors and the terms of the Long-Term Incentive Plan, these functions may be shared between the Board of Directors and the Human Resources Committee. During the period from September 1, 2017 to August 31, 2018, these functions have been shared by the Board of Directors and the Human Resources Committee but have mainly been performed by the Human Resources Committee.
The Human Resources Committee has reviewed and discussed with the Executive Chairman, the CEO and the Vice-President, Human Resources of the Corporation, the compensation disclosure in this document, and has recommended to the Board of Directors that the disclosure be included in this Circular.
From September 1, 2017 to November 1, 2018, the Human Resources Committee held five (5) meetings and at all of those meetings executive compensation was discussed. The Human Resources Committee meetings were attended by all the members of the Human Resources Committee. The following table outlines the main activities of the Human Resources Committee during the period from September 1, 2017 to November 1, 2018:
Meeting
|
Main Activities of the Human Resources Committee
|
October 11 & 12, 2017
|
●
|
Review of the Business Performance Measures results for the financial year ended August 31, 2017;
|
●
|
Review of the Business Performance Measures for the financial year started September 1, 2017;
|
●
|
Review of the Short-Term Incentive Plan results for the financial year ended August 31, 2017;
|
●
|
Update on the Short-Term Incentive Plan for the financial year started September 1, 2017;
|
●
|
Review of the proposed salary scales and salary increases for the year started September 1, 2017;
|
●
|
Review of the compensation plans of executive officers for the financial year started September 1, 2017 being the Base Salary, the Short-Term Incentive Plan and the stock-based compensation delivered through the Long-Term Incentive Plan;
|
●
|
Review and approval of the executive compensation section of the Management proxy circular for the financial year ended August 31, 2017;
|
●
|
Review and approval of the CEO and Executive Chairman objectives and compensation plan;
|
●
|
Key staffing update;
|
●
|
Annual Sales Force Achievement;
|
●
|
Annual Review of the Human Resources Committee Charter;
|
●
|
Review of the Risk Assessment of Executive Compensation;
|
●
|
Review and approval of the stock-based compensation for executive officers delivered through the Long-Term Incentive Plan for the financial year started September 1, 2017.
|
January 9, 2018
|
●
|
Review of the Short-Term Incentive Plan results
of some executive officers for the financial year ended August 31, 2017;
|
●
|
Review and approval of the Short-Term Incentive Plan of some executive officers for the financial year started September 1, 2017, including the CEO and Executive Chairman;
|
●
|
Review of the quarterly results under the Short-Term Incentive Plan for the financial year started September 1, 2017 and being part of the Short-Term Incentive Plan;
|
●
|
Review and approval of the stock-based compensation for performing employees delivered through the Long-Term Incentive Plan for the financial year started September 1, 2017;
|
●
|
Leadership program and
Talent Management;
|
●
|
Review of the Risk Assessment of Executive Compensation.
|
April 10, 2018
|
●
|
Review of the quarterly results under the Short-Term Incentive Plan for the financial year started September 1, 2017 and being part of the Short-Term Incentive Plan;
|
●
|
Succession Planning;
|
●
|
Review of the Key Human Resources Initiatives;
|
●
|
Compensation Review;
|
●
|
Review of the Talent Management and Leadership program.
|
July 10, 2018
|
●
|
Review of the quarterly results under the Short-Term Incentive Plan for the financial year started September 1, 2017 and being part of the Short-Term Incentive Plan;
|
●
|
Global Compensation Review;
|
●
|
Review of the Talent Management and Leadership program;
|
●
|
Review of the Key Human Resources Initiatives.
|
Meeting
|
Main Activities of the Human Resources Committee
|
October 11, 2018
|
●
|
Review of the Business Performance Measures results for the financial year ended August 31, 2018;
|
●
|
Review of the Business Performance Measures for the financial year started September 1, 2018;
|
●
|
Review of the Short-Term Incentive Plan results for the financial year ended August 31, 2018;
|
●
|
Review of the Short-Term Incentive Plan for the financial year started September 1, 2018;
|
●
|
Review of the proposed salary scales and salary increases for the year started September 1, 2018;
|
●
|
Review of the compensation plans of executive officers for the financial year started September 1, 2018 being the Base Salary, the Short-Term Incentive Plan and the stock-based compensation delivered through the Long-Term Incentive Plan;
|
●
|
Review and approval of the executive compensation section of the Management proxy circular for the financial year ended August 31, 2018;
|
●
|
Review and approval of the CEO and Executive Chairman objectives and compensation plan;
|
●
|
Review and approval of the stock-based compensation for executive officers delivered through the Long-Term Incentive Plan for the financial year started September 1, 2018;
|
●
|
Annual Sales Force Achievement;
|
●
|
Annual Review of the Human Resources Committee Charter;
|
●
|
Review of the Risk Assessment of Executive Compensation.
|
Compensation Plan Control – Compensation Consultant and Internal Review
As a general practice, the Corporation's relative position in terms of compensation levels is determined periodically through studies performed by independent consulting firms using a selected reference market of comparable companies. The benchmarking activities are further detailed below under the heading – "Benchmarking".
For the financial year ended on August 31, 2018, the Human Resources Committee retained the services of Willis Towers Watson to evaluate the establishment of a performance share plan and Lee Hecht Harrison Knightsbridge in connection with outplacement services for an executive.
For the financial year that ended on August 31, 2017, the Human Resources Committee retained the services of Willis Towers Watson to evaluate the market competitiveness of the compensation package that is currently offered to the external members of its Board of Directors. The compensation elements covered by the analysis were: annual board retainer, committee chair and member retainers, board and committee meeting fees and stock-based compensation. Willis Towers Watson's work included assistance in benchmarking, assessing potential gaps between the market and the external Board members' compensation levels and proposing potential changes to ensure alignment with the market and with the Corporation's compensation policy. With a few exceptions, Willis Towers Watson used the same compensation group to benchmark the external members of the Board of Directors as it used to benchmark executive compensation (as further described below).
For the financial year that ended on August 31, 2017, the Human Resources Committee also retained the services of Willis Towers Watson to evaluate the market competitiveness of the compensation package that is currently offered to its Chief Executive Officer and its Executive Chairman. The compensation elements covered by the analysis were: base salary; target bonus; long-term incentive; perquisites and pension (hereinafter in this Circular referred to as the "Target Total Compensation"). Willis Towers Watson's work included assistance in benchmarking, assessing potential gaps between the market and the executives' compensation levels and proposing potential changes to ensure alignment with the market and with the Corporation's compensation policy.
In addition, internal pay equity studies are a key factor used by the Corporation to complete the compensation review process and indicate where necessary adjustments may be required. During the financial year ended August 31, 2018, this practice continued, and certain compensation adjustments were made as have been made in previous years.
The Human Resources Committee has the authority to retain any independent consultants of its choice to advise its members on total executive compensation policy matters, and to determine the fees and the terms and conditions of the engagement of these consultants. The Human Resources Committee is ultimately responsible for its own decisions, which may take into consideration more than the information and recommendations provided by its compensation consultants or Management.
For the financial years that ended on August 31, 2017 and 2018, the Corporation also retained the services of Willis Towers Watson, Mercer, Eckler, Aon, Great Place to Work, Lee Hecht Harrison Knightsbridge, RecrutXL Inc., and Xactly Corporation for services which were not related to executive compensation. The services provided by Willis Towers Watson concerned the access to benefits and compensation data and surveys for employees in Canada, United States and United Kingdom and review of last year's Circular. The services provided by Eckler related to pension plan analysis, retirement policy, governance and communication to employees. The services provided by Aon related to the access to compensation data and surveys for sales employees in various countries. The Corporation retained the services of Great Place to Work for culture audit services. The services provided by Lee Hecht Harrison Knightsbridge related to outplacement services. The Corporation consulted Mercer for assistance with compensation data for expatriate employees and assistance with the compliance of the Pay Equity Act established by the Government of Quebec, Canada. The Corporation consulted RecrutXL Inc. for assistance with employees' training. The Corporation consulted Xactly Corporation for the software improvement with respect to commission calculation. Fees for the services performed that are not related to executive compensation are not required to be approved by the Human Resources Committee.
The aggregate fees paid to Willis Towers Watson, Eckler, Aon, Great Place to Work, Lee Hecht Harrison Knightsbridge, Mercer, RecrutXL Inc. and Xactly Corporation for consulting services provided to the Human Resources Committee related to determining compensation for any of the Corporation's directors and executive officers and to the Corporation for all other services provided during the financial years ended August 31, 2017 and 2018 were as follows:
Type of Fee
|
Financial 2017 Fees
|
Percentage of
Financial 2017 Fees
|
Financial 2018 Fees
|
Percentage of
Financial 2018 Fees
|
Executive Compensation – Related Fees
|
CA$25,107
|
|
10%
|
|
CA$5,736
|
|
7%
|
|
All Other Fees
|
CA$230,417
|
|
90%
|
|
CA$76,774
|
|
93%
|
|
Total
|
CA$255,524
|
|
100%
|
|
CA$82,510
|
|
100%
|
|
Benchmarking
For the purpose of assessing the competitiveness of the Target Total Compensation of senior executives, the Corporation considered compensation data from a comparator group including private and publicly-traded companies of comparable size and similar industry, operations in multiple countries and attracting similar profiles of employees, professionals and experts. The comparator group has been revised in 2016 with the guidance and advice from Willis Towers Watson.
·
|
Canada executives
: For the executives based in Canada, the Corporation used the following comparator group: 5N Plus Inc., ACCEO Solutions, AgJunction Inc, Atos IT Services and Solutions, Inc., Avigilon Corporation, Callian Technologies Ltd., Ciena, COM DEV International Ltd., Constellation Software inc., Evertz Technologies Ltd., GTECH, Open Text Corporation, Redline Communications Group Inc., Sandvine Corporation, Sierra Wireless Inc., Smart Technologies Inc., Vecima Networks Inc., Vidéotron Ltée and Wi-Lan Inc.
|
·
|
United States executives
: For the executives based in the United States, the Corporation used the following comparator group: AMETEK, Avangate, BMC Software, CDK Global, Communications Systems, Crown Castle, Intelsat, Itron, Keysight Technologies, Laird Technologies, MTS Systems, Plexus, SAS Institute, SunGard Data Systems, Teradata, TomTom, Total System Services, Truphone and Verint Systems.
|
·
|
United Kingdom executives
: For the executives based in the United Kingdom, the Corporation used the following comparator group: BAE Systems Applied Intelligence, COLT Telecom, Flextronics, Fujitsu, Irdeto, McCain Foods, PepsiCo, Premier Food Group, QinetiQ, Qualcomm, Rentokil Initial, Talk Talk Group and Viacom.
|
·
|
Asia executives
: For the executives based in Asia, the Corporation used a broader comparator group, based on general industry data: A.Menarini Asia-Pacific, Abbott Laboratories, AbbVie, Accenture, ACE Asia Pacific Services, ACE Insurance, ACE Life Insurance Company Ltd, ACR Capital Holdings, AIA Company, Aimia, Alcatel-Lucent, Amazon.com, ANZ Banking Group, ASML, AstraZeneca, Avanade, Aviva Ltd, AXA Insurance Singapore, AXA Life Insurance Singapore, Bank of New York Mellon, Baxter, Beckman Coulter, Becton Dickinson, BHP Billiton, Bio-Rad Laboratories, Biosensors, BT Global Services, Cerebos Pacific Limited, Chubb Pacific Underwriting, Cigna, CommScope, DHL, DHL Express, DHL GBS, DHL Global Forwarding, DHL Mail, DHL Supply Chain, Discovery Communications, Experian, Federal Insurance Company, Fujitsu, GE Energy, GE Healthcare, General Electric, Great Eastern Life Insurance, Hap Seng Consolidated, HSBC Holdings, IHS Global, IMI, Ingenico, Intel, Intercontinental Hotels Group, International Flavors & Fragrances, ITT Corporation, Johnson & Johnson, Lexmark, Liberty Insurance, M1 Limited, Manulife, MasterCard, Merck KgaA, Microsoft, Molex, MSD International GMBH (Singapore Branch), National Australia Bank, NBC Universal, NCR, Overseas Assurance Corporation, Pfizer, Pramerica Financial Asia HQ, Proximus, Prudential Assurance Company, Prudential Services, QBE Insurance, Qualcomm, Reinsurance Group of America, RELX Group, Rio Tinto, Roche Pharmaceuticals, Sabre Holdings, Sealed Air, Smiths Group, Spirax Sarco, Standard Chartered Bank, StarHub, Starwood Hotels & Resorts, Straits Developments, Swiss Reinsurance International, Teva Pharmaceutical Industries, Thermo Fisher Scientific, Trayport, TUI, UBS, Unilever, United Overseas Bank, Verizon, Zurich Insurance Company and Zurich Life Insurance.
|
To be considered in the comparator group, a company had to meet the following specific criteria:
a)
|
Similar industry: Technology Hardware and Equipment, Telecommunications Equipment and Services or Software and Services; and
|
b)
|
Comparable in size: revenues under CA$1 billion. Only one publicly traded company had revenues above the equivalent of CA$1 billion. The compensation market comparison is done using the regression analysis which is a method to predict the "size-adjusted" competitive level of compensation to reflect the size of the Corporation in relation to that of the other companies of the reference group. This method mitigates the impact that larger companies may have on the competitive compensation levels for the Corporation.
|
The Corporation also participates in two (2) major surveys on an annual basis and accordingly is permitted to purchase the results in order to continue the benchmarking of our compensation on a regular basis. The first one is Willis Towers Watson High Tech Middle Management, Professional and Support Compensation Survey, providing and receiving data for Canada, USA, UK, Finland and Lebanon. The other one is Radford (AON) Global Sales Survey, providing and receiving data for all the countries where the Corporation employs sales force.
Guiding Principles for Compensation of Executive Officers
The Corporation's executive compensation plans are designed to attract, retain and motivate key executives who directly impact the Corporation's long-term success and the creation of shareholder value. In determining executive compensation, the Human Resources Committee considers the following four (4) principles:
·
|
Performance-based
: Executive compensation levels reflect both the results of the Corporation and individual results based on specific quantitative and qualitative objectives established at the beginning of each financial year in keeping with the Corporation's long-term strategic objectives.
|
·
|
Aligned with shareholder interests
: An important portion of incentive compensation for executives is composed of equity awards to ensure that executives are aligned with the principles of sustained long-term shareholder value growth.
|
·
|
Market competitive
: Compensation of executives is designed to be externally competitive when compared against executives of comparable peer companies, and in consideration of the Corporation's results.
|
·
|
Individually equitable
: Compensation levels are also designed to reflect individual factors such as scope of responsibility, experience, and performance against individual measures.
|
Compensation Policies and Practices
In April 2007, the Corporation adopted a Best Practice Regarding the Granting Date of Stock Incentive Compensation. The purpose of this best practice is to ensure that the Corporation complies with securities regulation and avoids the back-dating of equity-based incentive compensation. The best practice states that the Corporation shall: (i) grant recurrent equity-based incentive compensation pursuant to its Long-Term Incentive Plan on the fifth business day following the public release of the Corporation's financial results; and (ii) grant recurrent stock-based incentive compensation pursuant to its Deferred Share Unit Plan on the last business day of each quarter. In October 2014, the Corporation amended the Human Resources Committee Charter in order to adapt it to the latest NASDAQ Rules on independency of directors, nomination and compensation committees and to better describe the nomination of directors' process and in October 2017 the Corporation amended the Human Resources Committee Charter in order to specifically add the compensation review of the Executive Chairman.
Risk-Assessment of Executive Compensation Program
The Human Resources Committee Charter provides that it is the responsibility of the Human Resources Committee to conduct an annual assessment of the risks associated with the Corporation's executive compensation policies and procedures. The Human Resources Committee considers the implications of the risks associated with the Corporation's compensation policies and practices when establishing recommendations for the compensation of executive officers. As such, for the financial year ended August 31, 2018, the Human Resources Committee conducted an internal risk assessment for executive compensation. The Human Resources Committee individually examined the compensation plans for each potential NEO against a list of elements that could trigger executives taking inappropriate or excessive risks. For the financial year ended August 31, 2018, the Human Resources Committee did not identify any risks associated with the Corporation's executive compensation policies and practices that are reasonably likely to have a material adverse effect on the Corporation.
Purchase of Hedging Financial Instruments by an Executive Officer or Director
While the Corporation has not adopted a policy prohibiting or restricting its executive officers and directors from purchasing financial instruments, including prepaid variable forward contracts, equity swaps, collars, or units of exchange funds, that are designated to hedge or offset a decrease in market value of equity securities granted as compensation or held, directly or indirectly, by the executive officer or director, to Management's knowledge, no executive officer or director has purchased any such financial instruments as of November 1, 2018. In addition, according to the Security Trading Policy of the Corporation, executive officers and directors are required to pre-clear with the Corporation's legal counsel's office any transaction concerning the Corporation's securities, which includes the entering into any of the above-mentioned financial instruments.
Compensation Elements
The key elements of the Corporation's 2018 executive compensation program were (i) base salary, (ii) short-term incentive compensation (by way of the Short-Term Incentive Plan or the Sales Incentive Plan) and (iii) the stock-based incentive compensation delivered through the Long-Term Incentive Plan. In addition, the Corporation has also offered benefit plans and, if applicable, contributed to a Deferred Profit-Sharing Plan or a 401K Plan. To determine appropriate compensation levels for each compensation component, the Human Resources Committee considered all key elements of the executive compensation program. The Human Resources Committee did not assign specific weightings to any key element of the Corporation's 2018 executive compensation program.
Base Salaries
In establishing the base salaries of senior officers, including the Executive Chairman of the board of directors and the CEO, the Corporation takes into consideration responsibilities, job descriptions and salaries paid by other similar organizations for positions similar in magnitude, scope and complexity. The Human Resources Committee's objective is to align executive compensation levels with the target compensation positioning ("Target Compensation Positioning") offered within a reference market of comparable companies that are similar in size to the Corporation, with a particular focus on those within the high-technology/telecommunications and manufacturing-durable goods industries. The Human Resources Committee reviews the base salary of each executive officer on an annual basis at the beginning of each financial year and recommends that the Board of Directors approve appropriate adjustments, if required, within the salary range in order to maintain a competitive position within the market place.
Short-Term Incentive Compensation
The Short-Term Incentive Plan ("STIP"), or the Sales Incentive Plan ("SIP") for the executive officers that are included within the sales force, provides executive officers with the opportunity to earn annual bonuses based on the Corporation's financial performance and the achievement of strategic corporate and departmental objectives established on a yearly basis (the "Business Performance Measures") as well as the achievement of individual performance objectives ("Individual Performance Measures"). The Business Performance Measures under the STIP also apply to all other employees of the Corporation, except the sales force, for which the SIP applies. The Individual Performance Measures only apply to executive officers and directors' levels of the Corporation.
Annually the Human Resources Committee determines the annual incentive target for each executive officer, being a percentage of the executive's base salary ("Annual Incentive Target"). The Annual Incentive Targets for executive officers eligible for incentive bonuses in the financial year ended August 31, 2018 were established to be progressively in line with the objective of the Human Resources Committee of aligning compensation with the Target Compensation Positioning offered in the reference market. For the most recently ended financial year, the Annual Incentive Target for the NEOs was:
Name & Position
|
Annual Incentive Target as % of Base Salary
|
Germain Lamonde, Executive Chairman
|
65.0%
|
Philippe Morin, CEO
|
52.5%
|
Pierre Plamondon, CFO and Vice President, Finance
|
45.0%
|
Willem Jan te Niet,
Vice President
, Sales — EMEA
|
73.0%
|
Dana Yearian, Vice President, Sales — Americas
|
90.0%
|
Short-Term Incentive Plan
The STIP awards (for executive officers not in sales force) are calculated as follows:
Base Salary
|
X
|
Annual Incentive Target (%)
|
X
|
Business Performance Measures (%)
|
X
|
Individual Performance Measures (%)
|
At the beginning of each financial year, the Human Resources Committee recommends for approval by the Board of Directors the Business Performance Measures that will account for the annual incentive compensation. The following table provides the Business Performance Measures, their weight and result within the overall Business Performance Measures applicable to all executive officers and employees of the Corporation except those executives and employees that are within the sale force:
Business Performance Measures
(1)
|
Weight
|
Result in % of the Weight
|
Result of the Metrics
|
Consolidated revenues
(2)
|
30%
|
|
14.43%
|
|
US$253.2 million
|
Profitability
(3)
|
45%
|
|
14.27%
|
|
US$23.9 million
|
Quality
(4)
|
15%
|
|
15.15%
|
|
107.00%
|
Net Promoter Score
(5)
|
5%
|
|
5.65%
|
|
72.00
|
On-time delivery
(6)
|
5%
|
|
3.61%
|
|
93.83%
|
Total
|
100%
|
|
53.11%
|
|
|
|
|
|
|
(1)
|
The corporate Profitability result for the year must be positive (above 0) for the whole Business Performance Measure to trigger a payout. The corporate Profitability represents net earnings before interest, income taxes, depreciation and amortization, restructuring charges, change in fair value of cash contingent consideration, stock-based compensation costs, foreign exchange gain and certain one-time items. All metrics exclude the results of Astellia and its subsidiaries, acquired during the financial year.
|
(2)
|
For consolidated revenues metric, results will range from 25% to 100% of the weight upon attainment of a minimum threshold of the revenues attained in the previous financial year (US$243.3 million) up to the target defined at the beginning of the financial year (US$275.3 million) and from 100% to 125% of the weight from such annual target to the maximum threshold (US$286.0 million).
|
(3)
|
For Profitability metric, results will range from 25% to 100% of the weight upon attainment of a minimum threshold of the corporate Profitability attained in the previous financial year (US$23.0 million) up to the target defined at the beginning of the financial year (US$32.5 million) and from 100% to 125% of the weight from such annual target to the maximum threshold (US$35.7 million).
|
(4)
|
For quality, results will range from 25% to 100% of the weight upon attainment of a minimum threshold of 50% up to the annual target defined at the beginning of the financial year (106.25%) and from 100% to 125% of the weight from such annual target to the maximum threshold of 125%.
|
(5)
|
For Net Promoter Score metrics, results will range from 25% to 100% of the weight upon attainment of a minimum threshold of 50 up to the annual target defined at the beginning of the financial year (68.75) and from 100% to 125% of the weight from such annual target to the maximum threshold of 75.
|
(6)
|
For on-time delivery, results will range from 25% to 100% of the weight upon attainment of a minimum threshold of 91%, up to the annual target defined at the beginning of the financial year (95.5%) and from 100% to 125% of the weight from such annual target to the maximum threshold of 97%.
|
The Individual Performance Measures are determined annually by the executive's supervisor or the Human Resources Committee and approved by the Board of Directors of the Corporation. They are based upon the position, role and responsibilities of each executive within the Corporation, departmental objectives and personal management objectives. At the conclusion of each year, the executive's supervisor or the Human Resources Committee evaluates the performance of the executive against the pre-determined objectives and the executive's performance is evaluated by progress, achievements and contributions. The following tables provide for each NEO subject to the STIP an overview of the elements included within the Individual Performance Measures, their weight and result for financial year 2018 within the overall Individual Performance Measures:
Germain Lamonde, Executive Chairman
|
Elements of Individual Performance Measures
(1)
|
Weight
(from 0% to 110%)
(2)
|
Result
(%)
|
Financial objectives
|
Corporate EBITDA
|
From 0% to 30%
|
19.17%
|
|
Corporate revenues
|
From 0% to 15%
|
10.33%
|
|
Corporate cash flow from operations
|
From 0% to 10%
|
7.11%
|
|
Strategic contribution
|
Delivering the strategies and objectives set forth in the Corporation's strategic plan
|
From 0% to 25%
|
20.23%
|
|
Positioning and transforming the Corporation's systems offerings set forth in the Corporation's strategic plan
|
From 0% to 20%
|
16.33%
|
|
Maximizing the value of the Corporation's Mergers & Acquisitions activities
|
From 0% to 10%
|
6.00%
|
|
Total
|
|
79.17%
|
|
Total of Business Performance Measures (53.11%) X Individual Performance Measures (79.17%)
|
|
42.05%
|
|
|
|
|
|
(1)
|
If the minimum level of the Corporate EBITDA, as determined at the beginning of the financial year, is not achieved, payment of any variable compensation to the Executive Chairman will be at the discretion of the Human Resources Committee.
|
(2)
|
The weight of each individual objective is not capped but the total is capped at 150%.
|
Philippe Morin, CEO
|
Elements of Individual Performance Measures
(1)
|
Weight
(from 0% to 110%)
(2)
|
Result
(%)
|
Financial objectives
|
Corporate EBITDA
|
From 0% to 30%
|
19.17%
|
|
Corporate revenues
|
From 0% to 15%
|
10.33%
|
|
Corporate cash flow from operations
|
From 0% to 10%
|
7.11%
|
|
Strategic contribution
|
Delivering the strategies and objectives set forth in the Corporation's strategic plan
|
From 0% to 25%
|
20.23%
|
|
Positioning and transforming the Corporation's systems offerings set forth in the Corporation's strategic plan
|
From 0% to 20%
|
16.33%
|
|
Maximizing the value of the Corporation's Mergers & Acquisitions activities
|
From 0% to 10%
|
6.00%
|
|
Total
|
|
79.17%
|
|
Total of Business Performance Measures (53.11%) X Individual Performance Measures (79.17%)
|
|
42.05%
|
|
|
|
|
|
(1)
|
If the minimum level of the Corporate EBITDA, as determined at the beginning of the financial year, is not achieved, payment of any variable compensation to the CEO will be at the discretion of the Human Resources Committee.
|
(2)
|
The weight of each individual objective is not capped but the total is capped at 150%.
|
Pierre Plamondon, CFO and Vice-President of Finance
|
Elements of Individual Performance Measures
(
1)
|
Weight
(from 0% to 110%)
(2)
|
Result
(%)
|
Financial objectives
|
Corporate EBITDA
|
From 0% to 30%
|
20.02%
|
|
Corporate revenues
|
From 0% to 15%
|
10.63%
|
|
Corporate cash flow from operations
|
From 0% to 10%
|
7.10%
|
|
Strategic contribution
|
Contribute to the Corporation's Mergers & Acquisitions activities and integration
|
From 0% to 35%
|
35.00%
|
|
Contribute to the Corporation's digital transformation set forth in the Corporation's strategic plan
|
From 0% to 10%
|
10.00%
|
|
Leadership performance
|
From 0% to 10%
|
8.00%
|
|
Total
|
|
90.75%
|
|
Total of Business Performance Measures (53.11%) X Individual Performance Measures (90.75%)
|
|
48.20%
|
|
(1)
|
If the minimum level of the Corporate EBITDA, as determined at the beginning of the financial year, is not achieved, payment of any variable compensation to the CFO and Vice-President of Finance will be at the discretion of the Human Resources Committee.
|
(2)
|
The weight of each individual objective is not capped but the total is capped at 137.5%.
|
Sales Incentive Plan
The SIP objectives for executive officers in the sales force are aimed to reward three (3) elements that are shareholder oriented (contribution margins, bookings and EBITDA). The objectives are determined by the executive's supervisor and are for the territory under the executive's supervision. The following tables outline the SIP objectives for each NEO who is within the sales force:
Willem Jan te Niet, Vice-President, Sales — EMEA
|
Business Performance Measures
|
Incentive Targets (US$)
|
Results (US$)
|
Contribution Margin Bonus
(1)
|
99,458
|
|
98,818
|
|
Bonus on Bookings Achievement
(2)
|
33,153
|
|
31,963
|
|
Corporate EBITDA
(3)
|
33,153
|
|
10,515
|
|
Total
|
165,764
|
|
141,296
|
|
(1)
|
The amount of bonus for the attainment of the quarterly contribution margin targets for the territory of EMEA is based on the percentage of achievement up to 100% of the quarterly and annual contribution margin targets defined at the beginning of the financial year. An accelerated amount of bonus based on the percentage of attainment of the quarterly and annual contribution margin targets above 100% is also payable.
|
(2)
|
The amount of bonus for the attainment of the bookings targets for the territory of EMEA is based on the percentage of achievement up to 100% of the quarterly and annual bookings targets defined at the beginning of the financial year. An additional amount of bonus based on the percentage of attainment above 100% of the quarterly bookings targets is also payable. An additional amount of bonus based on the percentage of attainment from above 100% of the annual bookings target is also payable.
|
(3)
|
If the minimum level of the Corporate EBITDA, as determined at the beginning of the financial year, is not achieved, payment of any variable compensation to the NEO will be at the discretion of the Human Resources Committee.
|
Dana Yearian, Vice-President, Sales — Americas
|
Business Performance Measures
|
Incentive Targets (US$)
|
Results (US$)
|
Contribution Margin Bonus
(1)
|
131,094
|
|
102,005
|
|
Bonus on Bookings Achievement
(2)
|
43,698
|
|
36,421
|
|
Corporate EBITDA
(3)
|
43,698
|
|
13,859
|
|
Total
|
218,490
|
|
152,285
|
|
(1)
|
The amount of bonus for the attainment of the quarterly contribution margin targets for the territory of the Americas is based on the percentage of achievement up to 100% of the quarterly and annual contribution margin targets defined at the beginning of the financial year. An accelerated amount of bonus based on the percentage of attainment of the quarterly and annual contribution margin targets above 100% is also payable.
|
(2)
|
The amount of bonus for the attainment of the bookings' targets for the territory of the Americas is based on the percentage of achievement up to 100% of the quarterly and annual bookings targets defined at the beginning of the financial year. An additional amount of bonus based on the percentage of attainment from above 100% of the quarterly bookings targets is also payable. An additional amount of bonus based on the percentage of attainment from above 100% of the annual bookings target is also payable.
|
(3)
|
If the minimum level of the Corporate EBITDA, as determined at the beginning of the financial year, is not achieved, payment of any variable compensation to the NEO will be at the discretion of the Human Resources Committee.
|
Long-Term Incentive Compensation
The long-term incentive compensation offered by the Corporation is made up of two (2) main initiatives: i) the Long-Term Incentive Plan (the "LTIP") for directors, officers, employees and other persons or companies providing ongoing management or consulting services ("Consultants") of the Corporation and its subsidiaries and ii) the Deferred Share Unit Plan (the "DSU Plan") for non-employee directors of the Corporation. It is proposed this year to adopt certain changes to the LTIP. For a summary of the proposed amendments to the LTIP, see "Amendments to the Long-Term Incentive Plan - Adoption of Performance Share Units" on pages 87 and 88 of this Circular.
Under the amending provisions adopted in January 2018, the Board of Directors may amend the LTIP and the DSU Plan or any options, Restricted Share Units ("RSUs") and Deferred Share Units ("DSUs") issuable thereunder at any time without the consent of the holders of such securities provided that such amendment shall (i) not adversely alter or impair any securities previously granted except as permitted by the terms of the plans, (ii) be subject to any required approval of any securities regulatory authority or stock exchange, and (iii) be subject to shareholder approval, where required, by law, stock exchange requirements or the plans themselves, provided however that actions which do not require shareholder approval include, without limitation, the following actions:
·
|
amendments of a general housekeeping or clerical nature that, among others, clarify, correct or rectify any ambiguity, defective provision, error or omission in the LTIP or the DSU Plan;
|
·
|
amendments necessary to comply with applicable laws or the requirements of any securities regulatory authority or stock exchange;
|
·
|
changing the eligibility for, and limitations on, participation in the LTIP and the DSU Plan;
|
·
|
modifying the terms and conditions of any options, RSUs and DSUs, including restrictions, not inconsistent with the terms of the LTIP and the DSU Plan, which terms and conditions may differ among individual grants and holders of such securities;
|
·
|
modifying the periods referred to in the LTIP during which vested options may be exercised, provided that the option period is not extended beyond ten years after the date of the granting of the option;
|
·
|
amendments with respect to the vesting period, with respect to circumstances that would accelerate the vesting of options or RSUs, or the redemption of DSUs;
|
·
|
any amendment resulting from or due to the alteration of share capital as more fully set out in the LTIP and the DSU Plan;
|
·
|
amendments to the provisions relating to the administration of the LTIP and the DSU Plan; and
|
·
|
suspending or terminating the LTIP and the DSU Plan.
|
For greater certainty, the Board of Directors shall be required to obtain shareholder approval to make the following amendments:
·
|
a reduction in the exercise price of options held by an insider;
|
·
|
an extension of the exercise period of options held by an insider;
|
·
|
any amendment to remove or to exceed the limits on insider participation;
|
·
|
an increase to the maximum number of Subordinate Voting Shares issuable under the LTIP and the DSU Plan; and
|
·
|
any amendment to the amendment provisions of the LTIP and the DSU Plan.
|
For the first three bullet points above, the votes attached to shares held directly or indirectly by insiders benefiting directly or indirectly from the amendment must be excluded. In addition, with respect to the last bullet point above, where the amendment will disproportionately benefit one or more insiders over other holders of options, RSUs or DSUs, the votes of shares held directly or indirectly by those insiders receiving the disproportionate benefit must be excluded. If the proposed amendments are adopted, the amending provisions will also apply to PSUs, in the same manner as for the RSUs, in accordance with the LTIP. The amending provisions of the LTIP will refer to "Units" instead of RSUs, making the amending provisions applicable, without other changes, to such Units. A Unit is defined as a PSU or a RSU granted under the LTIP. The full text of the proposed amendments to the LTIP is provided in Schedule "B" to this Circular.
Long-Term Incentive Plan (LTIP)
The principal component of the long-term incentive compensation offered by the Corporation is the LTIP. Introduced in May 2000, the LTIP is designed to provide directors, officers, employees and Consultants of the Corporation and its subsidiaries with an incentive to create value and accordingly ensures that their interests are aligned with those of the Corporation's shareholders and to further attract, motivate and retain all of its employees, including the NEOs with the exception of the Executive Chairman who, as of August 31, 2012, is no longer participating. The LTIP is subject to review by the Human Resources Committee to ensure maintenance of its market competitiveness. The LTIP was amended in January 2005, in January 2016 and in January 2018.
The Board of Directors has full and complete authority to interpret the LTIP and to establish the rules and regulations applying to it and to make all other determinations it deems necessary or useful for the administration of the LTIP, provided that such interpretations, rules, regulations and determinations are consistent with the rules of all stock exchanges on which the securities of the Corporation are then traded and with all applicable securities legislation and regulations.
The LTIP provides for the issuance of options to purchase Subordinate Voting Shares and the issuance RSUs redeemable for Subordinate Voting Shares issued from treasury to participating directors, officers, employees and Consultants of the Corporation and its subsidiaries. For a summary of the proposed adoption of Performance Share Units, see Section "Amendments to the Long-Term Incentive Plan - Adoption of Performance Share Units". The Board of Directors, upon recommendation from the Human Resources Committee, designates the recipients of options or RSUs and determines the number of Subordinate Voting Shares covered by options or RSUs, the dates of vesting, the expiry date and any other conditions relating to these options or RSUs, in each case in accordance with the applicable legislation of the securities regulatory authorities.
During the financial year ended August 31, 2018, target awards for eligible officers under the LTIP were established to be in line with the objective of the Human Resources Committee to align compensation with the Target Compensation Positioning offered in the reference market. Each NEO, with the exception of the Executive Chairman since the end of the financial year ended August 31, 2012, is entitled to receive RSUs annually in accordance with the following policy:
Name & Position
|
Grant Levels
(1)
(% of Previous Year Base Salary)
|
Philippe Morin, CEO
|
50.0%
|
|
Pierre Plamondon, CFO and Vice President, Finance
|
45.0%
|
|
Willem Jan te Niet, Vice President, Sales ─ EMEA
|
35.0%
|
|
Dana Yearian, Vice President, Sales ─ Americas
|
42.5%
|
|
|
|
|
|
(1)
|
Actual grant value may differ from the grant level guidelines as the stock price may vary between the time of the grant and its approval.
|
RSU awards are based on the expected impact of the role of the executive officer on the Corporation's performance and strategic development as well as market benchmarking. The Human Resources Committee undertakes an analysis from time to time to determine the possible payouts pursuant to the LTIP under various scenarios and at various levels of share price growth to ensure that the LTIP is aligned with the interests of the Corporation's shareholders.
RSUs are also used to attract and retain top executives, as well as in business acquisitions. For the year ended August 31, 2018, the Corporation determined the number of RSUs granted to each executive officer according to their individual contribution, specifically with respect to additional responsibilities as the case may be. As disclosed under the section "Summary Compensation Table" hereof, all of the NEOs, with the exception of the Executive Chairman as described earlier, were granted RSUs during the last financial year. The purpose of the grants was to focus the executives on developing and successfully implementing the continuing growth strategy of the Corporation and to align the executives with the principles of sustained long-term shareholder value growth. The grants were also considered to contribute to the Corporation's objective to align the compensation of the executives with the reference market. The Corporation did not take into account the amount and terms of outstanding options or RSUs or the restrictions on resale of such units when determining the grants mentioned above.
The exercise price of the options is determined by the Board of Directors at the time of granting the options, subject to compliance with the rules of all stock exchanges on which the Subordinate Voting Shares are listed and with all applicable securities legislation and regulation. In any event, the exercise price may not be lower than the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and the NASDAQ Global Select Market on the last trading day preceding the grant date, using the daily exchange rate of the Bank of Canada on the last trading day preceding the grant date to convert either the NASDAQ Global Select Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars. Any option issued is non-transferable, except in the event of death, for legal representative. As at November 1, 2018, there were no options granted and none outstanding.
The fair value at the time of grant of a RSU is equal to the market value of Subordinate Voting Shares at the time the RSU is granted. The grant date market value is equal to the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and the NASDAQ Global Select Market on the last trading day preceding the grant date, using the daily exchange rate of the Bank of Canada on the last trading day preceding the grant date to convert either the NASDAQ Global Select Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars. Any RSU issued is non-transferable, except in the event of death, for legal representative. If the proposed amendments are adopted, this paragraph will also apply to any PSU granted pursuant to the LTIP. As at August 31, 2018, there were a total of 1,615,152 RSUs granted and outstanding pursuant to the LTIP having a weighted average fair value at the time of grant of US$4.02 (CA$5.10) per RSU.
The maximum number of Subordinate Voting Shares that are issuable under the LTIP and DSU Plan shall not exceed 11,792,893 Subordinate Voting Shares, which represents 21.4% of the Corporation's issued and outstanding voting shares as of August 31, 2018. The adoption of PSUs, if approved, shall not increase the number of Subordinate Voting Shares subject to the LTIP and DSU Plan. From this total, 4,489,738 Subordinate Voting Shares have been issued and 1,796,841 Subordinate Voting Shares are issuable under actual awards held by participants, which represents 11% of the Corporation's issued and outstanding voting shares as of August 31, 2018, leaving 5,506,314 Subordinate Voting Shares available for grant under the LTIP and DSU Plan, representing 10% of the issued and outstanding voting shares as of August 31, 2018.
All of the Subordinate Voting Shares covered by options that expire or are cancelled become reserved Subordinate Voting Shares for the purposes of options or RSUs that may be subsequently granted under the terms of the LTIP. No participant shall hold in total options to purchase, RSUs and DSUs representing more than 5% of the number of Subordinate Voting Shares issued and outstanding from time to time. There are additional limitations for insiders of the Corporation. The number of Subordinate Voting Shares issuable at any time pursuant to options, RSUs and DSUs granted to insiders of the Corporation shall not exceed 10% of the total issued and outstanding Subordinate Voting Shares. The number of Subordinate Voting Shares issued to insiders, within a one (1) year period, pursuant to the exercise, settlement or redemption of options, RSUs and DSUs shall not exceed 10% of the number of issued and outstanding Subordinate Voting Shares, and the number of Subordinate Voting Shares issued to any one insider and such insider's associates, within a one-year period, pursuant to the exercise, settlement or redemption of options, RSUs and DSUs shall not exceed 5% of the total issued and outstanding Subordinate Voting Shares of the Corporation. If the proposed amendments are adopted, PSUs shall be calculated in the limitations described above together with options, RSUs and DSUs. Options vest at a rate as determined by the Board of Directors. Options may be exercised in whole or in part once vested. Options that are granted under the LTIP must be exercised within a maximum period of ten (10) years following the date of their grant (the "Option Period") or they will be forfeited provided however that the Option Period shall be automatically extended if the date on which it is scheduled to terminate falls during a blackout period or within ten (10) business days after the last day of a blackout period. In such cases, the Option Period shall terminate ten (10) business days after the last day of a blackout period.
The vesting dates of RSUs are subject to a minimum term of three (3) years and a maximum term of ten (10) years from the award date. The following table presents, for the last five (5) financial years, the RSUs granted and their respective vesting schedule.
Financial
Year Ended
|
Grant Date
|
RSUs
Granted
(#)
|
Fair Value
at the Time
of Grant
(US$/RSU)
|
Vesting Schedule
|
August 31, 2018
|
October 19, 2017
|
15,000
|
|
4.00
|
50% on each of the third and fourth anniversary dates of the grant.
|
January 16, 2018
|
154,833
|
|
4.45
|
February 2, 2018
|
30,000
|
|
4.62
|
October 19, 2017
|
211 155
|
|
4.00
|
100% on the fifth anniversary date of the grant subject to early vesting of up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if performance objectives namely related to long-term growth of revenue and profitability, as determined by the Board of Directors of the Corporation, are fully attained.
|
November 13, 2017
|
9,633
|
|
4.30
|
|
Total
|
420,621
|
|
|
|
August 31, 2017
|
October 19, 2016
|
38,300
|
|
4.01
|
50% on each of the third and fourth anniversary dates of the grant.
|
January 18, 2017
|
153,700
|
|
5.10
|
April 5, 2017
|
123,110
|
|
4.89
|
October 19, 2016
|
207,269
|
|
4.01
|
100% on the fifth anniversary date of the grant subject to early vesting of up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if performance objectives namely related to long-term growth of revenue and profitability, as determined by the Board of Directors of the Corporation, are fully attained.
|
April 5, 2017
|
4,764
|
|
4.89
|
|
Total
|
527,143
|
|
|
|
Financial
Year Ended
|
Grant Date
|
RSUs
Granted
(#)
|
Fair Value
at the Time
of Grant
(US$/RSU)
|
Vesting Schedule
|
August 31, 2016
|
October 15, 2015
|
36,900
|
|
3.23
|
50% on each of the third and fourth anniversary dates of the grant.
|
November 9, 2015
|
109,890
|
|
3.43
|
January 13, 2016
|
151,400
|
|
3.00
|
July 7, 2016
|
2,500
|
|
3.30
|
August 15, 2016
|
10,000
|
|
3.33
|
October 15, 2015
|
206,373
|
|
3.23
|
100% on the fifth anniversary date of the grant subject to early vesting of up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if performance objectives namely related to long-term growth of revenue and profitability, as determined by the Board of Directors of the Corporation, are fully attained.
|
November 9, 2015
|
54,945
|
|
3.43
|
|
Total
|
572,008
|
|
|
|
August 31, 2015
|
October 16, 2014
|
29,150
|
|
3.71
|
50% on each of the third and fourth anniversary dates of the grant.
|
January 14, 2015
|
163,400
|
|
3.55
|
March 31, 2015
|
5,000
|
|
3.78
|
July 2, 2015
|
12,299
|
|
3.27
|
October 16, 2014
|
197,726
|
|
3.71
|
100% on the fifth anniversary date of the grant subject to early vesting of up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if performance objectives namely related to long-term growth of revenue and profitability, as determined by the Board of Directors of the Corporation, are fully attained.
|
July 2, 2015
|
1,946
|
|
3.27
|
|
Total
|
409,521
|
|
|
|
August 31, 2014
|
October 16, 2013
|
36,950
|
|
5.28
|
50% on each of the third and fourth anniversary dates of the grant.
|
January 15, 2014
|
132,000
|
|
4.36
|
July 3, 2014
|
29,502
|
|
4.77
|
October 16, 2013
|
138,233
|
|
5.28
|
100% on the fifth anniversary date of the grant subject to early vesting of up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if performance objectives namely related to long-term growth of revenue and profitability, as determined by the Board of Directors of the Corporation, are fully attained.
|
|
Total
|
336,685
|
|
|
|
If any vesting dates fall into any blackout period or any other restrictive period during which the RSU holder is not entitled to trade the Corporation's Subordinate Voting Shares, the RSUs shall: (i) vest on the fifth trading day the RSU holder is entitled to trade after such blackout period or restrictive period; or (ii) if the RSU holder decides, prior to such vesting date, to pay his/her income tax without using any of the Subordinate Voting Shares' proceeds, then and only then, the vesting date shall remain the one determined on the granting date for such RSUs.
With the exceptions mentioned under the section entitled "Termination and Change of Control Benefits", unless otherwise determined by the Board of Directors, any option granted pursuant to the LTIP will lapse: (i) immediately upon the termination of the relationship with the Corporation or one of its subsidiaries for a good and sufficient cause for employees or officers or at the date on which an employee or an officer resigns or leaves his employment with the Corporation or one of its subsidiaries (or within thirty (30) days if the holder's employment is terminated for reasons not related to cause); and (ii) thirty (30) days after a director ceases to be a member of the Board of Directors of the Corporation or one of its subsidiaries for any reason other than death or permanent disability. The LTIP provides that, in the event of death or permanent disability, any option held by the optionee lapses six (6) months after the date of permanent disability and the option shall become exercisable no later than the date of termination by reason of death or permanent disability of the employee or the officer. In the event of retirement, any option held by an employee lapses thirty (30) days after the date of any such retirement. Nevertheless, in case of retirement or early retirement of an officer or employee, the Board of Directors or the Human Resources Committee may at its own discretion extend the period an option will lapse in accordance with the terms of the LTIP.
With the exceptions mentioned under the section entitled "Termination and Change of Control Benefits", unless otherwise determined by the Board of Directors, any RSU granted pursuant to the LTIP will lapse: (i) immediately, where vesting of a unit is subject to the attainment of performance objectives, if such performance objectives have not been attained (or postponed at a further vesting date as determined by the Board of Directors); and (ii) immediately, whether or not subject to attainment of performance objectives, upon the termination of the relationship with the Corporation or one of its subsidiaries for a good and sufficient cause for employees or officers or at the date on which an employee or an officer resigns or leaves his employment with the Corporation or one of its subsidiaries.
The LTIP provides that any RSU granted will vest immediately, to a certain proportion as determined by the LTIP, upon the termination of the relationship of an employee or officer with the Corporation or one of its subsidiaries for reasons not related to cause. The LTIP provides that any RSU granted pursuant to the LTIP will vest immediately upon the termination of the relationship of an employee or officer with the Corporation or one of its subsidiaries because of death or permanent disability. The LTIP also provides that upon participant attainment of the retirement conditions established by the Corporation and continued compliance with the confidentiality, non-solicitation and non-competition obligations of the RSU holder, the RSU holder shall be entitled to the regular vesting as established by the Board of Directors at the time of grant pursuant to the LTIP. Furthermore, in case of a RSU holder employment with the Corporation is terminated following a change of control, the Board of Directors or the Human Resources Committee may, at its own discretion, increase the number of Subordinate Voting Shares to which a RSU holder is entitled.
In the event of a change of control, the Board of Directors or the Human Resources Committee may, prior or following the change of control, accelerate the time at which an option or RSU may first be exercised or the time during which an option or RSU or any part thereof will become exercisable.
The full text of the proposed LTIP is included in our 2018 Annual Information Form on Form 20-F under Exhibit 4.59, which was filed on November 27, 2018 on SEDAR at
www.sedar.com
in Canada or on EDGAR at
www.sec.gov/edgar.shtml
in the U.S. The LTIP, as proposed to be amended, is appended hereto as Schedule "B" to this Circular.
Restricted Share Unit Grants in Last Financial Year
The aggregate number of RSUs granted from September 1, 2017 to August 31, 2018, was 420,621 having a weighted average fair value at the time of grant of US$4.22 (CA$5.25) per RSU. The fair value at the time of grant of a RSU is equal to the market value of Subordinate Voting Shares at the time RSUs are granted. At August 31, 2018, there were a total of 1,615,152 RSUs granted and outstanding pursuant to the LTIP having a weighted average fair value at the time of grant of US$4.02 (CA$5.10) per RSU.
The RSUs are redeemed for Subordinate Voting Shares issued from treasury on the vesting dates established by the Board of Directors of the Corporation at the time of grant in its sole discretion.
Therefore, the value at vesting of a RSU, when converted to Subordinate Voting Shares, is equivalent to the market value of a Subordinate Voting Share at the time the conversion takes place and is taxable as employment income. The table above shows information regarding RSU grants made under the LTIP during the financial year ended August 31, 2018.
During the financial year ended August 31, 2018, the following RSUs were granted to the following NEOs:
Name
|
RSUs
Granted
(#)
|
Percentage of Total
RSUs Granted to
Employees in
Financial Year (%)
(1)
|
Fair Value
at the Time
of Grant
(US$/RSU)
(2)
|
Grant Date
|
Vesting Schedule
(3)
|
|
Philippe Morin
|
51,353
|
12.21%
|
4.00
|
October 19, 2017
|
100% on the fifth anniversary date of the grant subject to early vesting up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if performance objectives namely related to long-term growth of revenue and profitability, as determined by the Board of Directors of the Corporation are fully attained.
(4)
|
|
Pierre Plamondon
|
27,266
|
6.48%
|
4.00
|
October 19, 2017
|
100% on the fifth anniversary date of the grant subject to early vesting up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if performance objectives namely related to long-term growth of revenue and profitability, as determined by the Board of Directors of the Corporation are fully attained.
(4)
|
|
Willem Jan te Niet
|
20,153
|
4.79%
|
4.00
|
October 19, 2017
|
100% on the fifth anniversary date of the grant subject to early vesting up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if performance objectives namely related to long-term growth of revenue and profitability, as determined by the Board of Directors of the Corporation are fully attained.
(4)
|
|
Dana Yearian
|
25,302
|
6.02%
|
4.00
|
October 19, 2017
|
100% on the fifth anniversary date of the grant subject to early vesting up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if performance objectives namely related to long-term growth of revenue and profitability, as determined by the Board of Directors of the Corporation are fully attained.
(4)
|
|
(1)
|
Such percentage does not include any cancelled RSUs.
|
(2)
|
The fair value at the time of grant of a RSU is equal to the market value of Subordinate Voting Shares at the time RSUs are granted. The grant date market value is equal to the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and the NASDAQ Global Select Market on the last trading day preceding the grant date, using the daily exchange rate of the Bank of Canada on the last trading day preceding the grant date to convert
either the NASDAQ Global Select Market closing price to Canadian dollars or
the Toronto Stock Exchange closing price to United States dollars as required.
|
(3)
|
All RSUs first vesting cannot be earlier than the third anniversary date of their grant.
|
(4)
|
Those RSUs granted in the financial year ended August 31, 2018 vest on the fifth anniversary date of the grant but are subject to early vesting on the third and fourth anniversary date of the grant on the attainment of performance objectives, as determined by the Board of Directors of the Corporation. Accordingly, subject to the attainment of performance objectives, the first early vesting is up to 1/3 of the units on the third anniversary date of the grant and the second early vesting is up to 50% of the remaining units on the fourth anniversary date of the grant. The early vesting shall be subject to the attainment of performance objectives. Such performance objectives are based on the attainment of a sales growth metric combined with profitability metric. The sales growth metric is determined by the Compound Annual Growth Rate of sales of the Corporation for the period described below (SALES CAGR). The profitability metric is determined as the Cumulative Corporation's IFRS net earnings before interest, income taxes, depreciation of property, plant and equipment, amortization of intangible assets, foreign exchange gain or loss, change in fair value of cash contingent consideration, and extraordinary gain or loss over the Cumulative Sales for the same period (LTIP EBITDA). Accordingly, the first early vesting performance objectives will be attained, calculated on a pro-rated basis as follows: i) 100% for a SALES CAGR of 15% or more and 0% for a SALES CAGR of 5% or less for the three-year period ending on August 31, 2020; cumulated with ii) 100% for a LTIP EBITDA of 15% and 0% for a LTIP EBITDA of 7.5% or less for the three-year period ending on August 31, 2020. The second early vesting performance objectives will be attained on the same premises as described above but for the four-year period ending on August 31, 2021.
|
The following table summarizes information about RSUs granted to the members of the Board of Directors and to Management and Corporate Officers of the Corporation and its subsidiaries as at August 31, 2018:
|
Number of
RSUs (#)
|
% of Issued and
Outstanding RSUs
|
Weighted Average Fair Value at
the Time of Grant ($US/RSU)
|
Executive Chairman (one (1) individual)
|
–
|
|
–
|
|
–
|
|
CEO (one (1) individual)
|
306,951
|
|
18.98%
|
|
3.82
|
|
Board of Directors (four (4) individuals)
|
–
|
|
–
|
|
–
|
|
Management and Corporate Officers (ten (10) individuals)
|
666,204
|
|
41.25%
|
|
3.64
|
|
Option Grants in Last Financial Year
There were no options to purchase the Corporation's Subordinate Voting Shares granted during the financial year ended August 31, 2018 and thereafter until November 1, 2018. As at November 1, 2018, there were no options granted and none outstanding.
Deferred Share Unit Plan (DSU Plan)
Introduced in October 2004 and effective as of January 2005, the Corporation's DSU Plan (the Deferred Share Unit Plan) is designed to align more closely the interests of the Corporation's non-employee directors with those of its shareholders.
Under the DSU Plan, non-employee directors may elect to receive up to 100% of their retainer fees in the form of DSUs, each of which has
an estimated value determined based on the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and the NASDAQ Global Select Market on the last trading day preceding the grant date, using
the daily exchange rate of the Bank of Canada
on the last trading day preceding the grant date to convert either the NASDAQ Global Select Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars, as required.
DSUs entitle the holder thereof to dividends in the form of additional DSUs at the same rate as dividends on Subordinate Voting Shares. Any DSU issued is non-transferable, except by will or other testamentary document or according to the laws respecting the devolution and allotment of estates.
When a participant ceases to act as a director, the participant (or in the case of death, the beneficiary of the DSUs) may cause the Corporation to redeem the DSUs by filing a notice of redemption with the Corporation's Secretary specifying the redemption date. If the participant or his/her beneficiary or legal representative, as the case may be, fails to file such a notice, the redemption date shall be December 15 of the first calendar year commencing after the year the participant ceased to act as a director. Within ten business days after the redemption date, the participant shall receive, at the discretion of the Corporation, in satisfaction of the number of DSUs credited to his or her account on such date, any of the following: (a) a number of Subordinate Voting Shares purchased on the open market having a value, net of any applicable withholdings, equal to the market value of a Subordinate Voting Share on the redemption date multiplied by the number of DSUs credited to his or her notional account on the payment date, (b) a number of Subordinate Voting Shares issued by the Corporation equal to the number of DSUs credited to his or her notional account on the payment date, or (c) any combination of clauses (a) and (b). If a participant dies after ceasing to act as a director, but before filing a redemption notice, these provisions shall apply with such modifications as the circumstances require.
Subordinate Voting Shares issued by the Corporation will be issued from the same pool of Subordinate Voting Shares reserved for issuance pursuant to the LTIP. There are additional limitations for insiders of the Corporation. The number of Subordinate Voting Shares issuable at any time pursuant to options, RSUs and DSUs granted to insiders of the Corporation shall not exceed 10% of the total issued and outstanding Subordinate Voting Shares. The number of Subordinate Voting Shares issued to insiders, within a one (1) year period, pursuant to the exercise, settlement or redemption of options, RSUs and DSUs shall not exceed 10% of the number of issued and outstanding Subordinate Voting Shares, and the number of Subordinate Voting Shares issued to any one insider and such insider's associates, within a one-year period, pursuant to the exercise, settlement or redemption of options, RSUs and DSUs shall not exceed 5% of the total issued and outstanding Subordinate Voting Shares of the Corporation.
Deferred Share Unit Grants in Last Financial Year
The aggregate number of DSUs credited to non-employee directors during the financial year ended August 31, 2018 was 65,745. The estimated value at the time of grant of a DSU is determined based on the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and the NASDAQ Global Select Market on the last trading day preceding the grant date, using the daily exchange rate of the Bank of Canada on the last trading day preceding the grant date to convert either the NASDAQ Global Select Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars, as required. The value at vesting of a DSU is equivalent to the market value of the Subordinate Voting Shares when a DSU is converted to such Subordinate Voting Shares. As at August 31, 2018, there were a total of 181,689 DSUs credited and outstanding pursuant to the DSU Plan having a weighted average fair value at the time of grant of US$4.01 (CA$5.05).
During the financial year ended August 31, 2018, the following DSUs were granted to the non-employee members of the Board of Directors:
DSUs
Granted (#)
|
Weighted Average Fair Value
at the Time of Grant (US$/DSU)
|
Total of the Fair Value
at the Time of Grant (US$)
|
Vesting
|
65,745
|
4.10
|
269,555
|
At the time director ceases to be a member of the Board of Directors of the Corporation
|
The following table summarizes information about DSUs granted to the non-employee members of the Board of Directors as at November
1
, 2018:
|
Number of
DSUs (#)
|
% of Issued and
Outstanding DSUs
|
Total of the Fair Value at
the Time of Grant (US$)
|
Weighted Average Fair Value
at the Time of Grant (US$/DSU)
|
Board of Directors (four (4) individuals)
|
181,689
|
100%
|
728,573
|
4.01
|
Number of Subordinate Voting Shares Reserved for Future Issuance
During the financial year ended August 31, 2018, 65,745 DSUs and 420,621 RSUs were granted to directors, officers and employees. Such awards were issued from the pool of Subordinate Voting Shares reserved for issuance pursuant to the LTIP and the DSU Plan of which the maximum number of Subordinate Voting Shares issuable shall not exceed 11,792,893, which represents 21.4% of the Corporation's issued and outstanding voting shares as at August 31, 2018. If the proposed amendments are adopted, the awards of PSUs will be issued from the same pool of Subordinate Voting Shares and the adoption of PSUs will not increase the number of Subordinate Voting Shares subject to the LTIP. As at August 31, 2018, the number of Subordinate Voting Shares reserved for future issuance is 5,506,314 representing 10% of the Corporation's issued and outstanding voting shares as at August 31, 2018.
Stock Appreciation Rights Plan
On August 4, 2001, the Corporation established a Stock Appreciation Rights Plan (the "SAR Plan"), as amended on January 12, 2010, for the benefit of certain employees residing in countries where the granting of stock-based compensation under the LTIP is not feasible in the opinion of the Corporation. The Board of Directors has full and complete authority to interpret the SAR Plan and to establish the rules and regulations applying to it and to make all other determinations it deems necessary or useful for the administration of the SAR Plan.
Under the SAR Plan, eligible employees are entitled to receive a cash amount equivalent to the difference between the market price of the Subordinate Voting Shares on the date of exercise or the date of vesting and the exercise price determined on the date of grant. No Subordinate Voting Shares are issuable under the SAR Plan.
The Board of Directors has delegated to Management the task of designating the recipients of stock appreciation rights, the date of exercise or vesting, the expiry date and other conditions. Under the terms of the SAR Plan, the exercise price determined on the date of grant of the stock appreciation right is equal to zero (0) if the stock appreciation right is to reflect a RSU under the LTIP or, if the stock appreciation right is to reflect an option under the LTIP, the exercise price determined on the date of grant may not be lower than the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and on the NASDAQ Global Select Market on the last trading day preceding the grant date, using the daily exchange rate of the Bank of Canada on the last trading day preceding the grant date to convert either the NASDAQ Global Select Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars. Stock appreciation rights are non‑transferable.
The stock appreciation rights, reflecting a RSU under the LTIP, vest at a rate of 50% annually commencing on the third anniversary date of the date of grants made in October 2014, January 2015, October 2015, January 2016, October 2016, January 2017 and January 2018.
The stock appreciation rights, reflecting a RSU under the LTIP, will: i) lapse immediately upon the termination of the relationship with the Corporation or one (1) of its subsidiaries for a good and sufficient cause or at the date on which an employee resigns or leaves his employment with the Corporation or one (1) of its subsidiaries; and ii) vest immediately, to a certain proportion as determined by the SAR Plan, upon the termination without cause of the relationship of an employee with the Corporation or one (1) of its subsidiaries.
The stock appreciation rights, reflecting an option under the LTIP, vest over a four-year period, with 25% vesting annually commencing on the first anniversary date of the date of grant. However, since October 2007, some stock appreciation rights, representing an option under the LTIP, vest at a rate of 50% annually commencing on the third anniversary date of the grants made in October 2009.
For stock appreciation rights, reflecting an option under the LTIP, once vested, such right may be exercised between the second and the fifteenth business day following each release of the Corporation's quarterly financial results and will lapse immediately upon the termination of the relationship with the Corporation or one (1) of its subsidiaries for a good and sufficient cause or at the date on which an employee resigns or leaves his employment with the Corporation or one (1) of its subsidiaries (or within thirty (30) days if the holder is dismissed without cause). In the event of retirement or disability, any stock appreciation right held by an employee lapses thirty (30) days after the date of any such disability or retirement. In the event of death, any stock appreciation right lapses six (6) months after the date of death.
All of the stock appreciation rights that are granted under the SAR Plan may be exercised within a maximum period of ten (10) years following the date of their grant.
From September 1, 2017 until November 1, 2018, 5,550 Stock Appreciation Rights ("SARs") were exercised.
During the financial year ended August 31, 2018, 3,800 SARs were granted to employees. As at August 31, 2018, there were 25,046 SARs outstanding.
Benefits and Perquisites
Certain employees of the Corporation, including the NEOs, are eligible to participate in the Corporation's benefits programs, which may include life insurance, extended health and dental coverage, short and long-term disability coverage, accidental death and dismemberment (AD&D) compensation and emergency travel assistance. Although the majority of costs of the benefits are paid by the Corporation, employees (including the NEOs) may also be required to contribute to obtain such benefits.
With the exception of car allowances that are provided to the Corporation's Executive Chairman and Vice Presidents of Sales, executive officers, including other NEOs, do not receive any perquisites. The value of the perquisites for each of the NEOs, if applicable, is less than CA$50,000 or 10% of total annual salary and bonus for the financial year and, as such, is not included in the table provided under the heading "Summary Compensation Table" and in the table provided under the heading "Termination and Change of Control Benefits".
Deferred Profit-Sharing Plan
The Corporation maintains a deferred profit-sharing plan (the "DPSP") for certain eligible Canadian resident employees, including NEOs but excluding the Corporation's Executive Chairman, under which the Corporation may elect to match the employees' contributions up to a maximum of 4% of an employee's gross salary, provided that the employee has contributed to a tax-deferred registered retirement savings plan. Cash contributions, for eligible employees to the DPSP, and expenses for the years ended August 31, 2016, 2017 and 2018 amounted to US$1,374,000, US$1,571,000 and US$1,610,000, respectively. The amounts contributed to the DPSP are invested at the employee's will in the investment vehicles offered by Manufacturers Life Insurance Company (Manulife), the Corporation's fund administrator. Withdrawals of funds from the DPSP account are not permitted. In the event of termination of the employment, if the employee has been a member of the DPSP for more than two (2) years, the employee is entitled to receive the funds accumulated in his DPSP account.
401K Plan
The Corporation maintains a 401K plan for eligible United States resident employees of its subsidiaries. Employees become eligible to participate in the 401K plan on the date they are hired. Under this plan, the Corporation must contribute an amount equal to 3% of an employee's current compensation. In addition, employees may elect to defer their current compensation up to the lesser of 1% of eligible compensation or the statutorily prescribed annual limit and have the deferral contributed to the 401K plan. The 401K plan permits, but does not require, the Corporation to make additional matching contributions to the 401K plan on behalf of the eligible participants, subject to a maximum of 50% of the first 6% of the participant's current compensation subject to certain legislated maximum contribution limits. The Corporation contributes up to 3% of the participant's current compensation, subject to certain legislated maximum contribution limits. In the years ended August 31, 2016, 2017 and 2018, the Corporation made aggregate contributions of US$622,000, US$630,000 and US$591,000 respectively, to the 401K plan. Contributions by participants or by the Corporation to the 401K plan and income earned on plan contributions are generally not taxable to the participant until withdrawn and contributions by the Corporation are generally deductible by the Corporation when made. At the direction of each participant, the trustees of the 401K plan invest the assets of the 401K plan in selected investment options.
2018 Performance and Compensation
Compensation for the NEOs is awarded through the Corporation's executive compensation plan, which aligns compensation with key strategic objectives and individual performance. The Corporation has established Business Performance Measures outlining key performance indicators which are applicable to all employees. You will find more information on such indicators under the heading "Short-Term Incentive Compensation". These performance indicators focus efforts, communicate priorities and enable performance to be benchmarked.
The following table highlights the NEOs early vesting achievement in accordance with the Corporation's LTIP:
Long-Term Incentive Plan (LTIP) - RSUs
|
|
Date of Grant
|
Vesting Date
|
% of Early Vesting Achievement
(1)
|
October 16, 2014
|
October 16, 2018
|
7%
|
October 15, 2015
|
October 15, 2018
|
17%
|
|
|
|
|
(1)
|
The vesting schedules are provided in the table under the heading "Long-Term Incentive Plan".
|
Conclusion
By way of application of the Corporation's executive compensation policy, an important part of executive compensation is linked to corporate performance and long-term value creation. The Human Resources Committee continuously reviews executive compensation programs to ensure that they maintain their competitiveness and continue to focus on the Corporation's objectives, values and business strategies.
For the financial year ending August 31, 2012, we made a significant change to the Executive Chairman compensation structure. Following the evaluation of the share ownership of the Executive Chairman, it was decided by the Human Resources Committee that the Executive Chairman should no longer receive equity-based compensation within his compensation as the share ownership of the Executive Chairman has been determined to be sufficient and that equity-based compensation was no longer reasonably considered as an incentive to performance.
Depending on specific circumstances, the Human Resources Committee may also recommend employment terms and conditions that deviate from the policies and the execution by the Corporation or its subsidiaries of employment contracts on a case-by-case basis.
Executive Chairman Performance Compensation during Last Three (3) Financial Years
The following table compares the compensation awarded to Mr. Germain Lamonde in respect of his performance as CEO until April 1, 2017 and then as Executive Chairman to the Total Market Capitalization Growth for the last three (3) financial years. The compensation includes base salary, short-term incentive payments, as well as long-term incentive payments at grant date pursuant to the LTIP.
Compensation Elements
|
2018
|
2017
(1)
|
2016
|
Three-Year Total
|
Cash
|
Base Salary
|
CA$588,350
|
|
CA$717,500
|
|
CA$700,000
|
|
CA$2,005,850
|
|
Short-Term Incentive
|
CA$160,800
|
|
CA$262,962
|
|
CA$331,115
|
|
CA$754,877
|
|
Equity
|
Long-Term Incentive
|
–
|
|
–
|
|
–
|
|
–
|
|
Total Direct Compensation
|
CA$749,150
|
|
CA$980,462
|
|
CA$1,031,115
|
|
CA$2,760,727
|
|
Contribution to DPSP
|
–
|
|
–
|
|
–
|
|
–
|
|
All Other Compensation
|
–
|
|
–
|
|
–
|
|
–
|
|
Total Compensation
|
CA$749,150
|
|
CA$980,462
|
|
CA$1,031,115
|
|
CA$2,760,727
|
|
Annual Average
|
–
|
|
–
|
|
–
|
|
CA$920,242
|
|
Total Market Capitalization (CA$ millions) as at August 31
|
318.0
|
|
322.3
|
|
231.9
|
|
290.7
|
|
Total Cost as a % of Market Capitalization
|
0.24%
|
|
0.30%
|
|
0.44%
|
|
0.32%
|
|
|
|
|
|
(1)
|
On April 1, 2017, Mr. Germain Lamonde stepped down as CEO and became Executive Chairman of the Corporation.
|
CEO Performance Compensation during Last Three (3) Financial Years
The following table compares the compensation awarded to Mr. Philippe Morin in respect of his performance as COO until April 1, 2017 and then as CEO to the Total Market Capitalization Growth for the last three (3) financial years. The compensation includes base salary, short-term incentive payments, as well as long-term incentive payments at grant date pursuant to the LTIP.
Compensation Elements
|
2018
|
2017
(1)
|
2016
(2)
|
Three-Year Total
|
Cash
|
Base Salary
|
CA$522,750
|
|
CA$512,500
|
|
CA$394,231
|
|
CA$1,429,481
|
|
Short-Term Incentive
|
CA$115,396
|
|
CA$118,531
|
|
CA$142,590
|
|
CA$376,517
|
|
Equity
|
Long-Term Incentive
|
CA$256,251
|
|
CA$531,256
|
|
CA$749,999
|
|
CA$1,537,506
|
|
Total Direct Compensation
|
CA$894,397
|
|
CA$1,162,287
|
|
CA$1,286,820
|
|
CA$3,343,504
|
|
Contribution to DPSP
|
CA$986
|
|
CA$14,346
|
|
CA$9,135
|
|
CA$24,467
|
|
All Other Compensation
|
–
|
|
–
|
|
–
|
|
–
|
|
Total Compensation
|
CA$895,383
|
|
CA$1,176,633
|
|
CA$1,295,955
|
|
CA$3,367,971
|
|
Annual Average
|
–
|
|
–
|
|
–
|
|
CA$1,122,657
|
|
Total Market Capitalization (CA$ millions) as at August 31
|
318.0
|
|
322.3
|
|
231.9
|
|
290.7
|
|
Total Cost as a % of Market Capitalization
|
0.28%
|
|
0.37%
|
|
0.56%
|
|
0.39%
|
|
|
|
|
|
(1)
|
Mr. Philippe Morin was nominated CEO on April 1, 2017.
|
(2)
|
Mr. Philippe Morin was nominated COO on November 9, 2015.
|
Summary Compensation Table of Named Executive Officers
The table below shows compensation information during the three (3) most recently completed financial years for the NEOs. This information includes, as applicable, the Canadian and US dollar and Euro value of base salaries, share-based and option-based awards, non-equity incentive plan compensations, pension value and all other compensation, if any, whether paid or deferred.
Name and
Principal Position
|
Financial
Year
|
Salary
(1) (2)
($)
|
Share-Based
Awards
(2)
(3)
($)
|
Option-
Based
Awards
($)
|
Non-Equity Incentive
Plan Compensation ($)
|
Pension
Value
($)
|
All Other
Compensation
($)
(2) (5)
|
Total
Compensation
($)
|
Annual
Incentive
Plans
(2) (4)
|
Long-Term
Incentive
Plan
|
Germain Lamonde,
Executive
Chairman
(6)
|
2018
|
|
460,800
(US)
588,350
(CA)
|
─
─
|
(US)
(CA)
|
–
|
125,940
160,800
|
(US)
(CA)
|
–
|
–
|
–
|
|
586,740
749,150
|
(US)
(CA)
|
2017
|
|
543,067
(US)
717,500
(CA)
|
─
─
|
(US)
(CA)
|
–
|
199,032
262,962
|
(US)
(CA)
|
–
|
–
|
–
|
|
742,099
980,462
|
(US)
(CA)
|
2016
|
|
527,188
(US)
700,000
(CA)
|
─
─
|
(US)
(CA)
|
–
|
249,371
331,115
|
(US)
(CA)
|
–
|
–
|
–
|
|
776,559
1,031,115
|
(US)
(CA)
|
Philippe Morin,
CEO
(7)
|
2018
|
|
409,422
(US)
522,750
(CA)
|
200,698
256,251
|
(US)
(CA)
|
–
|
90,379
115,396
|
(US)
(CA)
|
–
|
–
|
772
986
|
(US)
(CA)
|
701,271
895,383
|
(US)
(CA)
|
2017
|
|
387,905
(US)
512,500
(CA)
|
402,101
531,256
|
(US)
(CA)
|
–
|
89,715
118,531
|
(US)
(CA)
|
–
|
–
|
10,858
14,346
|
(US)
(CA)
|
890,579
1,176,633
|
(US)
(CA)
|
2016
|
|
296,905
(US) (8)
394,231
(CA)
|
564,844
749,999
|
(US)
(CA)
|
–
|
107,388
142,589
|
(US)
(CA)
|
–
|
–
|
6,879
9,135
|
(US)
(CA)
|
976,016
1,295,954
|
(US)
(CA)
|
Name and
Principal Position
|
Financial
Year
|
Salary
(1) (2)
($)
|
Share-Based
Awards
(2)
(3)
($)
|
Option-
Based
Awards
($)
|
Non-Equity Incentive
Plan Compensation ($)
|
Pension
Value
($)
|
All Other
Compensation
($)
(2) (5)
|
Total
Compensation
($)
|
Annual
Incentive
Plans
(2) (4)
|
Long-Term
Incentive
Plan
|
Pierre Plamondon,
CFO and Vice-President, Finance
|
2018
|
|
241,535
(US)
308,392
(CA)
|
106,561
136,057
|
(US)
(CA)
|
–
|
60,189
76,850
|
(US)
(CA) (9)
|
–
|
–
|
7,833
10,002
|
(US)
(CA)
|
416,118
531,301
|
(US)
(CA)
|
2017
|
|
228,841
(US)
302,345
(CA)
|
100,176
132,352
|
(US)
(CA)
|
–
|
46,116
60,928
|
(US)
(CA)
|
–
|
–
|
11,006
14,541
|
(US)
(CA)
|
386,139
510,166
|
(US)
(CA)
|
2016
|
|
221,502
(US)
294,110
(CA)
|
91,220
121,122
|
(US)
(CA)
|
–
|
82,291
109,266
|
(US)
(CA)
|
–
|
–
|
9,064
12,035
|
(US)
(CA)
|
404,077
536,533
|
(US)
(CA)
|
Willem Jan te Niet,
Vice-President,
Sales — EMEA
(10)
|
2018
|
|
243,191
(US)
310,506
(CA)
203,940
(€)
|
80,612
102,925
67,601
|
(US)
(CA)
(€)
|
–
|
141,296
180,406
118,491
|
(US)
(CA)
(€)
|
–
|
–
|
19,455
24,841
16,315
|
(US)
(CA)
(€)
|
484,554
618,678
406,347
|
(US)
(CA)
(€)
|
2017
|
|
226,587
(US)
299,367
(CA)
206,625
(€)
|
66,891
88,376
60,998
|
(US)
(CA)
(€)
|
–
|
104,094
137,529
94,923
|
(US)
(CA)
(€)
|
–
|
–
|
7,912
10,454
7,215
|
(US)
(CA)
(€)
|
405,484
535,726
369,761
|
(US)
(CA)
(€)
|
2016
|
|
9,160
(US) (11)
12,162
(CA)
8,250
(€)
|
32,384
43,000
29,168
|
(US)
(CA)
(€)
|
–
|
–
|
|
–
|
–
|
–
|
|
41,544
55,162
37,418
|
(US)
(CA)
(€)
|
Dana Yearian,
Vice-President,
Sales — Americas
|
2018
|
|
242,897
(US)
310,131
(CA)
|
101,208
129,222
|
(US)
(CA)
|
–
|
152,285
194,438
|
(US)
(CA)
|
–
|
–
|
7,667
9,789
|
(US)
(CA)
|
504,057
643,580
|
(US)
(CA)
|
2017
|
|
238,134
(US)
314,623
(CA)
|
99,223
131,094
|
(US)
(CA)
|
–
|
156,675
206,999
|
(US)
(CA)
|
–
|
–
|
7,049
9,314
|
(US)
(CA)
|
501,081
662,030
|
(US)
(CA)
|
2016
|
|
233,465
(US)
309,995
(CA)
|
97,087
128,913
|
(US)
(CA)
|
–
|
181,465
240,949
|
(US)
(CA)
|
–
|
–
|
7,049
9,360
|
(US)
(CA)
|
519,066
689,217
|
(US)
(CA)
|
(1)
|
Base salary earned in the financial year, regardless when paid.
|
(2)
|
The compensation information for Canadian residents has been converted from Canadian dollars to US dollars based upon an average foreign exchange rate of CA$1.2768 = US$1.00 for the financial year ended August 31, 2018, CA$1.3212= US$1.00 for the financial year ended August 31, 2017 and CA$1.3278= US$1.00 for the financial year ended August 31, 2016. The compensation information for the Netherlands resident has been converted from Euros to US dollars based upon an average foreign exchange rate of €0.8386 = US$1.00 for the financial year ended August 31, 2018, €0.9119 = US$1.00 for the financial year ended August 31, 2017 and €0.9007 = US$1.00 for the financial year ended August 31, 2016 and the conversion from US dollars to Canadian dollars is made as described above.
|
(3)
|
Indicates the dollar amount based on the grant date fair value of the RSUs awarded under the LTIP for the financial year. The fair value at the time of grant of a RSU is equal to the market value of Subordinate Voting Shares at the time RSUs are granted. The grant date market value is equal to the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and the NASDAQ Global Select Market on the last trading day preceding the grant date, using the daily exchange rate of the Bank of Canada on the last trading day preceding the grant date to convert
either the NASDAQ Global Select Market closing price to Canadian dollars or
the Toronto Stock Exchange closing price to United States dollars as required. Grants of RSUs to NEOs are detailed under section "Compensation Discussion and Analysis – Long-Term Incentive Plan".
|
(4)
|
Indicates the total bonus earned during the financial year whether paid during the financial year or payable on a later date:
|
|
Name
|
Paid during the
Financial Year Ended
August 31, 2018
(i)
($)
|
Paid in the First Quarter
of the Financial Year
Ending on August 31, 2019
(i)
($)
|
Total Bonus Earned during
the Financial Year
Ended August 31, 2018
(i)
($)
|
|
Germain Lamonde
|
‒
‒
|
(US)
(CA)
|
125,940
160,800
|
(US)
(CA)
|
125,940
160,800
|
(US)
(CA)
|
|
Philippe Morin
|
‒
‒
|
(US)
(CA)
|
90,379
115,396
|
(US)
(CA)
|
90,379
115,396
|
(US)
(CA)
|
|
Pierre Plamondon
|
‒
‒
|
(US)
(CA)
|
60,189
76,850
|
(US)
(CA)
|
60,189
76,850
|
(US)
(CA)
|
|
Name
|
Paid during the
Financial Year Ended
August 31, 2018
(i)
($)
|
Paid in the First Quarter
of the Financial Year
Ending on August 31, 2019
(i)
($)
|
Total Bonus Earned during
the Financial Year
Ended August 31, 2018
(i)
($)
|
|
Willem Jan te Niet
|
98,431
125,676
82,544
|
(US)
(CA)
(€)
|
42,865
54,730
35,947
|
(US)
(CA)
(€)
|
141,296
180,406
118,491
|
(US)
(CA)
(€)
|
|
Dana Yearian
|
101,781
129,954
|
(US)
(CA)
|
50,504
64,484
|
(US)
(CA)
|
152,285
194,438
|
(US)
(CA)
|
(i)
|
Refer to note 2 above.
|
(5)
|
Indicates the amount contributed by the Corporation during the financial year to the DPSP as detailed under section "Compensation Discussion and Analysis – Deferred Profit-Sharing Plan", the 401K plan as detailed under section "Compensation Discussion and Analysis – 401K plan", as applicable, for the benefit of the NEOs. Mr. Lamonde is not eligible to participate in the DPSP.
|
(6)
|
Mr. Lamonde stepped down as CEO as of April 1, 2017 and was nominated Executive Chairman of the Corporation.
|
(7)
|
Mr. Morin was promoted from Chief Operating Officer of the Corporation to CEO of the Corporation as of April 1, 2017. He joined the Corporation as COO on November 9
, 2015.
|
(8)
|
This amount represents the salary paid to Mr. Philippe Morin from November 9, 2015 to August 31, 2016 which is based on an annual salary of US$376,563 (CA$500,000) for the financial year ended August 31, 2016.
|
(9)
|
Including a discretionary bonus of CA$10,000 (US$12,768).
|
(10)
|
Mr. Willem Jan te Niet joined the Corporation as
Vice President, Sales — EMEA on August 15, 2016.
|
(11)
|
This amount represents the salary paid to Mr. te Niet from August 15, 2016 to August 31, 2016 which is based on an annual salary of €198,000 (US$219,829, CA$291,889) for the financial year ended August 31, 2016.
|
Incentive Plan Awards
The significant terms of all plan-based awards and non-equity incentive plan awards, issued or vested, or under which options have been exercised, during the financial year, or outstanding at the end of the financial year are described herein under the section entitled "Compensation Discussion and Analysis – Long-Term Incentive Plan" and "Compensation Discussion and Analysis – Short Term Incentive Compensation".
Outstanding Share-Based Awards and Option-Based Awards
The following sets out for each NEO all option and RSU awards outstanding as at August 31, 2018, if any, including those granted before August 31, 2018.
Name
|
Outstanding Option-Based Awards (Options)
|
Outstanding Share-Based Awards (RSUs)
|
Number of
Securities
Underlying
Unexercised
Options
(#)
|
Option
Exercise
Price
|
Option
Expiration
Date
|
Value of
Unexercised
"in-the-money"
Options
|
Number of
Shares
or Units of
Shares
that Have Not
Vested (#)
|
Market or
Payout Value of
Share-Based
Awards that
Have Not Vested
(US$)
(1)
|
Market or
Payout Value of
Vested Share-
Based Awards
Not Paid Out or
Distributed
(US$)
|
Germain Lamonde
|
–
|
–
|
–
|
–
|
–
|
|
–
|
|
–
|
Philippe Morin
|
–
|
–
|
–
|
–
|
306,591
|
|
1,355,132
|
|
–
|
Pierre Plamondon
|
–
|
–
|
–
|
–
|
128,189
|
|
566,595
|
|
–
|
Willem Jan te Niet
|
–
|
–
|
–
|
–
|
46,834
|
|
207,006
|
|
–
|
Dana Yearian
|
–
|
–
|
–
|
–
|
122,707
|
|
542,365
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The value of unvested RSUs at the financial year-end is the market value of the Subordinate Voting Shares on August 31, 2018, which was US$4.42 (CA$5.77). The market value of the Subordinate Voting Shares was calculated by using the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and on the NASDAQ Global Select Market on August 31, 2018 using the daily exchange rate of the Bank of Canada to convert either the NASDAQ Global Select Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars as required. The actual gains on vesting will depend on the value of the Subordinate Voting Shares on the date of vesting. There can be no assurance that these values will be realized.
|
Exercised Option-Based Awards
No option-based awards of the Corporation were held during the financial year ended August 31, 2018 by the NEOs.
Incentive Plan Awards – Value Vested or Earned during the Year
The following table summarizes, for each of the NEOs, the value of share-based awards vested during the financial year ended August 31, 2018, if any, and the value of non-equity incentive plan compensation earned during the financial year ended August 31, 2018, if any.
Name
|
Share-Based Awards – Value
Vested during the Year (US$)
(1)
|
Non-Equity Incentive Plan Compensation –
Value Earned during the Year (US$)
(2)
|
Germain Lamonde
|
‒
|
|
125,940
|
|
Philippe Morin
|
‒
|
|
90,379
|
|
Pierre Plamondon
|
82,610
|
|
60,189
|
|
Willem Jan te Niet
|
‒
|
|
141,296
|
|
Dana Yearian
|
76,134
|
|
152,285
|
|
|
|
|
|
(1)
|
The aggregate dollar value realized is equivalent to the market value of the Subordinate Voting Shares underlying the RSUs at vesting. This value, as the case may be, has been converted from Canadian dollars to US dollars based upon the daily exchange rate of the Bank of Canada on the day of vesting.
|
(2)
|
Includes total non-equity incentive plan compensation earned by each NEO in respect to the financial year ended on August 31, 2018 (as indicated under the "Summary Compensation Table").
|
Pension Plan Benefits
The Corporation does not have a defined benefit pension plan. The significant terms of the DPSP and the 401K plan of the Corporation are described herein under the sections entitled "Compensation Discussion and Analysis – Deferred Profit-Sharing Plan" and "Compensation Discussion and Analysis – 401K plan". The amounts paid by the Corporation to the NEOs under such plans are detailed in the column entitled "All other compensation" in the "Summary Compensation Table".
Termination and Change of Control Benefits
The Corporation has an employment agreement with Mr. Germain Lamonde, the Corporation's Executive Chairman. The agreement is for an indeterminate period and compensation is reviewed annually. In the event of the termination of Mr. Lamonde's employment without cause, Mr. Lamonde will be entitled to a severance payment equal to twenty-four (24) months of his current rate of remuneration (base salary, STIP compensation and benefits) and the immediate vesting of all stock options and RSUs. In addition, in the event that Mr. Lamonde's employment is terminated following a merger or an acquisition by a third party of substantially all of the Corporation's assets or of the majority of its share capital, he will be entitled to a severance payment equal to twenty-four (24) months of his current rate of remuneration (base salary, STIP compensation and benefits) and to the immediate vesting of all stock options and RSUs. If Mr. Lamonde voluntarily resigns, he will be entitled to immediate vesting of all stock options and RSUs.
The Corporation has an employment agreement with Mr. Philippe Morin, the Corporation's Chief Executive Officer. The agreement is for an indeterminate period and compensation is reviewed annually. In the event of termination of Mr. Morin's employment without cause, Mr. Morin will be entitled to a severance payment equal to twelve (12) months of his current base salary. In addition, in the event Mr. Morin's employment is terminated following a merger or an acquisition by a third party of substantially all of the Corporation's assets or of the majority of its share capital, he will be entitled to a severance payment equal to twelve (12) months of his current base salary and to the immediate vesting of all stock options and RSUs.
The Corporation has an employment agreement with Mr. Pierre Plamondon, the Corporation's CFO and Vice-President, Finance. The agreement is for an indeterminate period and compensation is reviewed annually. In the event of termination of Mr. Plamondon's employment without cause, Mr. Plamondon will be entitled to a severance payment equal to twelve (12) months of his current base salary. In addition, in the event Mr. Plamondon's employment is terminated following a merger or an acquisition by a third party of substantially all of the Corporation's assets or of the majority of its share capital, he will be entitled to a severance payment equal to eighteen (18) months of his current rate of remuneration (base salary, STIP compensation and benefits) and to the immediate vesting of all stock options and RSUs.
The Corporation has an employment agreement with Mr. Willem Jan te Niet, the Corporation's Vice-President, Sales
—
EMEA. The agreement is for an indeterminate period and compensation is reviewed annually. In the event of termination of Mr. te Niet's employment without cause, Mr. te Niet will be entitled to severance payments equal to one (1) month per year of service as a Vice-President of the Corporation with a minimum of six (6) months but in no case exceeding twelve (12) months of his current base salary. In addition, in the event Mr. te Niet's employment is terminated following a merger or an acquisition by a third party of substantially all of the Corporation's assets or of the majority of its share capital, he will be entitled to severance payments equal to one (1) month per year of service as a Vice-President of the Corporation with a minimum of six (6) months but in no case exceeding twelve (12) months of his current rate of remuneration (base salary, SIP compensation and benefits) and to the immediate vesting of all RSUs.
The Corporation has an employment agreement with Mr. Dana Yearian, the Corporation's Vice President, Sales — Americas. The agreement is for an indeterminate period and compensation is reviewed annually. In the event of termination of Mr. Yearian's employment without cause, Mr. Yearian will be entitled to a severance payment equal to twelve (12) months of his current base salary. In addition, in the event Mr. Yearian's employment is terminated following a merger or an acquisition by a third party of substantially all of the Corporation's assets or of the majority of its share capital, he will be entitled to a severance payment equal to eighteen (18) months of his current rate of remuneration (base salary, SIP compensation and benefits) and to the immediate vesting of all stock options and RSUs.
The following table outlines the estimated incremental payments NEOs would be entitled to receive if a termination payment event occurred on August 31, 2018, which includes all payments, payables and benefits that would be given by the Corporation to a NEO upon such termination payment event.
Named Executive Officer
|
Termination Payment Event
|
Without Cause ($)
(1) (2)
|
Change of Control ($)
(2) (3) (4)
|
Voluntary ($)
|
Germain Lamonde
|
1,299,404
1,702,624
|
(US) (5)
(CA)
|
1,299,404
1,702,624
|
(US)
(CA)
|
0
|
(6)
|
Philippe Morin
|
1,127,657
1,472,105
|
(US)
(CA)
|
1,755,553
2,291,780
|
(US)
(CA)
|
–
|
|
Pierre Plamondon
|
549,824
717,774
|
(US)
(CA)
|
990,107
1,293,631
|
(US)
(CA)
|
–
|
|
Willem Jan te Niet
|
227,726
297,291
195,456
|
(US)
(CA)
(€)
|
365,413
477,032
313,632
|
(US)
(CA)
(€)
|
–
|
|
Dana Yearian
|
540,907
706,133
|
(US)
(CA)
|
1,141,723
1,494,171
|
(US)
(CA)
|
–
|
|
|
|
|
|
(1)
|
The aggregate amount disclosed includes an evaluation of the amount that the NEO would have been entitled to should a termination of employment without cause have occurred on August 31, 2018 and includes, as the case may be for each NEO, the base salary that would have been received and total value of RSUs and options that would have vested (with the exception of Mr. Lamonde's evaluation which is described in note 6 below and includes: the base salary, STIP compensation, and total value of RSUs and options that would have vested). The amount for base salary compensation is calculated according to those amounts provided under the section entitled "Summary Compensation Table" included in this Circular. The amount for the total value attached to the vesting of RSUs and options determined pursuant to the LTIP as described in the section entitled "Long-Term Incentive Compensation – Long-Term Incentive Plan" for termination without cause.
|
(2)
|
The aggregate amount for Canadian residents has been converted from Canadian dollars to US dollars based upon a foreign exchange rate of CA$1.2768 = US$1.00 as of August 31, 2018. The aggregate amount for Netherlands resident has been converted from Euros to US dollars based upon a foreign exchange rate of €0.8386 = US$1.00 as of August 31, 2018.
|
(3)
|
"Change of Control" is defined as a merger or an acquisition by a third party of substantially all of the Corporation's assets or of the majority of its share capital.
|
(4)
|
The aggregate amount disclosed includes, as the case may be for each NEO, an evaluation of the amount that the NEO would have been entitled to should a termination of employment for Change of Control have occurred on August 31, 2018 and includes, as the case may be, namely, the base salary, STIP or SIP compensation and total value of RSUs and options that would have vested. The amount for base salary and STIP or SIP compensation are calculated according to those amounts provided under the section entitled "Summary Compensation Table" included in this Circular, the total value attached to the vesting of RSUs and options is calculated according to those amounts provided in the columns named "Value of unexercised "in-the-money" options" and "Market or payout value of share-based awards that have not vested" of the table included under the heading entitled "Outstanding share-based awards and option-based awards".
|
(5)
|
The aggregate amount disclosed includes an evaluation of the amount that Mr. Lamonde would have been entitled to should a termination of employment without cause have occurred on August 31, 2018 and includes: the base salary, STIP compensation, and total value of RSUs and options that would have vested. The amount for base salary and STIP compensation are calculated according to those amounts provided under the section entitled "Summary Compensation Table" included in this Circular; the total value attached to the vesting of RSUs and options are calculated according to those amounts provided in the columns named "Value of unexercised "in-the-money" options" and "Market or payout value of share-based awards that have not vested" of the table included under the heading entitled – "Outstanding share-based awards and option-based awards".
|
(6)
|
Mr. Lamonde did not hold any RSUs or options on August 31, 2018.
|
Compensation of Directors
Director Compensation Table
In the financial year ended August 31, 2014, the decision was made to increase the Annual Retainer and eliminate the attendance fees and each Director who was not an employee of the Corporation or any of its subsidiaries received an Annual Retainer as set forth in the following table, payable in a combination of cash and DSUs as chosen by the director pursuant to the DSU Plan. Since June 2017 pursuant to our internal policy, our Directors have the obligation to elect to receive at least seventy-five (75%) of their Annual Retainer in form of DSUs until their cumulative Annual Retainers equal or exceed three (3) times the sum of: i) the Annual Retainer for Directors; ii) the Annual Retainer for Audit Committee Members; and iii) the Annual Retainer for Human Resources Committee Members. The significant terms of the DSU Plan are described herein under the section entitled "Long-Term Incentive Compensation – Deferred Share Unit Plan".
|
From September 1, 2017
to August 31, 2018
|
Annual Retainer for Directors
(1)
|
CA$70,000
|
(2)
|
US$54,825
|
(3)
|
Annual Retainer for Lead Director
|
CA$10,000
|
|
US$7,832
|
(3)
|
Annual Retainer for Audit Committee Chairman
|
CA$12,000
|
|
US$9,398
|
(3)
|
Annual Retainer for Audit Committee Members
|
CA$4,500
|
(4)
|
US$3,524
|
(3)
|
Annual Retainer for Human Resources Committee Chairman
|
CA$7,000
|
|
US$5,482
|
(3)
|
Annual Retainer for Human Resources Committee Members
|
CA$4,500
|
(4)
|
US$3,524
|
(3)
|
|
|
|
|
(1)
|
All the Directors elected to receive 100% of their Annual Retainer for Directors in form of DSUs except Mr. Pierre-Paul Allard who elected to receive 50% of his Annual Retainer in form of DSUs and Mr. François Côté, who elected to receive 75% of his Annual Retainer in form of DSUs.
|
(2)
|
The Annual Retainer for Mr. François Côté and Mr. Claude Séguin is CA$70,000 (US$54,825). The Annual Retainer for Mr. Pierre-Paul Allard, Ms. Angela Logothetis and Mr. Randy E. Tornes is US$70,000 (CA$89,376).
|
(3)
|
The compensation information has been converted from Canadian dollars to US dollars based upon an average foreign exchange rate of CA$1.2768 = US$1.00 for the financial year ended August 31, 2018.
|
(4)
|
The Annual Retainer for Audit Committee Members and Human Resources Committee Members is CA$4,500 (US$3,524) for Mr. François Côté and Mr. Claude Séguin and US$4,500 (CA$5,746) for Mr. Pierre-Paul Allard, Ms. Angela Logothetis and Mr. Randy Tornes.
|
In the financial year ended August 31, 2018, the Directors who were not employees of the Corporation earned the following compensation:
Name
|
Fees
Earned
(1)
($)
|
Share-Based
Awards
($)
|
Option-
Based
Awards
($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Pension
Value
($)
|
All Other
Compensation
($)
|
Total
($)
|
Pierre-Paul Allard
|
28,528
36,424
|
(US)
(CA)
|
–
|
–
|
–
|
–
|
–
|
28,528
36,424
|
(US)
(CA)
|
François Côté
|
71,663
91,500
|
(US)
(CA)
|
–
|
–
|
–
|
–
|
–
|
71,663
91,500
|
(US)
(CA)
|
Angela Logothetis
|
79,000
100,867
|
(US)
(CA)
|
–
|
–
|
–
|
–
|
–
|
79,000
100,867
|
(US)
(CA)
|
Claude Séguin
|
67,747
86,500
|
(US)
(CA)
|
–
|
–
|
–
|
–
|
–
|
67,747
86,500
|
(US)
(CA)
|
Randy E. Tornes
|
79,000
100,867
|
(US)
(CA)
|
–
|
–
|
–
|
–
|
–
|
79,000
100,867
|
(US)
(CA)
|
(1)
|
The compensation information has been converted from Canadian dollars to US dollars based upon an average foreign exchange rate of CA$1.2768 = US$1.00 for the financial year ended August 31, 2018 except for compensation amounts paid to Mr. Pierre-Paul Allard, Ms. Angela Logothetis and Mr. Randy E. Tornes which were paid in US dollars. Subject to our internal policy, the fees are always payable in cash, but executives are provided the opportunity to elect to exchange all or a portion of their Annual Retainer for Directors into DSUs. The following table identifies the portion of the fees earned by the directors that were paid in DSUs and the portion that were paid in cash.
|
|
Name
|
Fees Earned
|
|
DSUs ($)
(i)
|
Cash ($)
|
Total ($)
|
|
Pierre-Paul Allard
|
12,639
16,137
|
(US)
(CA)
|
15,889
20,287
|
(US)
(CA)
|
28,528
36,424
|
(US)
(CA)
|
|
François Côté
|
41,118
52,500
|
(US)
(CA)
|
30,545
39,000
|
(US)
(CA)
|
71,663
91,500
|
(US)
(CA)
|
|
Angela Logothetis
|
79,000
100,867
|
(US)
(CA)
|
‒
‒
|
(US)
(CA)
|
79,000
100,867
|
(US)
(CA)
|
|
Claude Séguin
|
67,747
86,500
|
(US)
(CA)
|
‒
‒
|
(US)
(CA)
|
67,747
86,500
|
(US)
(CA)
|
|
Randy E. Tornes
|
70,000
89,376
|
(US)
(CA)
|
9,000
11,491
|
(US)
(CA)
|
79,000
100,867
|
(US)
(CA)
|
(i)
|
The estimated value at the time of grant of a DSU is determined based on the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and the NASDAQ Global Select Market on the last trading day preceding the grant date, using the daily exchange rate of the Bank of Canada on the last trading day preceding the grant date to convert either the NASDAQ Global Select Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars, as required. The value at vesting of a DSU is equivalent to the market value of a Subordinate Voting Share when a DSU is converted to such Subordinate Voting Share.
|
Director Incentive Plan Awards
The significant terms of all plan-based awards and non-equity-incentive plan awards, issued or vested, or under which options have been exercised, during the year, or outstanding at the end of the financial year are described herein under section entitled "Compensation Discussion and Analysis – Long-Term Incentive Plan".
Outstanding Share-Based Awards and Option-Based Awards
The following table sets out for each Director of the Corporation all awards outstanding as at August 31, 2018, if any, including awards granted before August 31, 2018.
Name
|
Outstanding Share-Based Awards (DSUs)
|
Number of Shares or Units of
Shares that Have Not Vested
(#)
|
Market or Payout Value of
Share-Based Awards that
Have Not Vested
(US$)
(1)
|
Market or Payout Value of
Vested Share-Based Awards
Not Paid Out or Distributed
(US$)
|
François Côté
|
27,710
|
|
122,478
|
|
–
|
Angela Logothetis
|
27,958
|
|
123,574
|
|
–
|
Claude Séguin
|
46,299
|
|
204,642
|
|
–
|
Randy E. Tornes
|
79,722
|
|
352,371
|
|
–
|
|
|
|
|
(1)
|
The value of unvested DSUs at the financial year-end is the market value of the Subordinate Voting Shares on August 31, 2018, which was US$4.42 (CA$5.77). The market value of the Subordinate Voting Shares was calculated by using the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and on the NASDAQ Global Select Market on August 31, 2018 using the daily exchange rate of the Bank of Canada to convert either the NASDAQ Global Select Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars as required. The actual gains on vesting will depend on the value of the Subordinate Voting Shares on the date of vesting. There can be no assurance that these values will be realized.
|
Exercised Share-Based Awards
In the financial year that ended August 31, 2018, none of the DSUs of Directors vested with the exception of Mr. Pierre-Paul Allard, a former Director,
as detailed below
and the Directors did not receive any non-equity incentive compensation from the Corporation.
The following table summarizes information about DSUs converted and paid in Subordinate Voting Shares when a Director ceased to be a member of the Board for the financial year that ended August 31, 2018:
Name
|
Number of DSUs Converted
|
Aggregate Value Realized (US$)
(1)
|
Pierre-Paul Allard
(2)
|
58,335
|
|
250,291
|
|
|
|
|
|
(1)
|
The aggregate value realized is equivalent to the market value of the securities underlying the DSUs at conversion.
|
(2)
|
Mr. Allard ceased to be a member of the Board of Directors as of January 9, 2018
.
|
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth the number of Subordinate Voting Shares of the Corporation issued and outstanding as at August 31, 2018, or that may be issued, under the Corporation's LTIP and DSU Plan, both of which were approved by the Corporation's shareholders.
Plan Category
|
Number of Securities to Be
Issued upon Exercise of
Outstanding Options,
RSUs and DSUs (#)
(a)
|
Weighted-Average Exercise
Price of Outstanding Options,
RSUs and DSUs (US$)
(b)
|
Number of Securities Remaining
Available for Future Issuance under
Equity Compensation Plans (Excluding
Securities Reflected in Column (a)) (#)
(c)
|
LTIP – RSUs
|
1,615,152
|
|
n/a
(1)
|
|
5,506,314
|
LTIP – Options
|
–
|
|
–
|
|
DSU Plan – DSUs
|
181,689
|
|
n/a
(1)
|
|
|
|
|
|
(1)
|
The value of RSUs and DSUs will be equal to the market value of the Subordinate Voting Shares of the Corporation on the date of vesting.
|
Annual Burn Rate
In accordance with the requirements of section 613 of the TSX Company Manual the following table sets out the burn rate of the awards granted under the Corporation's security-based compensation arrangements as of the end of the financial years ended August 31, 2018, August 31, 2017 and August 31, 2016. As at November 1, 2018 the only security-based compensation arrangements are the LTIP and the DSU Plan. The table below sets out the burn rate for such security-based compensation arrangements. The burn rate is calculated by dividing the number of options or RSUs, as applicable, granted under the respective plans during the relevant fiscal year by the weighted average number of securities outstanding for the applicable fiscal year:
|
Year ended
August 31, 2018
|
Year ended
August 31, 2017
|
Year ended
August 31, 2016
|
Number of RSUs granted
|
420,621
|
|
527,143
|
|
572,008
|
|
Number of Options granted
|
‒
|
|
‒
|
|
‒
|
|
Number of DSUs granted
|
65,745
|
|
45,058
|
|
44,970
|
|
Weighted average number of securities outstanding for the applicable year
|
54,998,000
|
|
54,423,000
|
|
53,863,000
|
|
Annual burn rate of RSUs
|
0.8%
|
|
1.0%
|
|
1.1%
|
|
Annual burn rate of Options
|
‒
|
|
‒
|
|
‒
|
|
Annual burn rate of the DSUs
|
0.1%
|
|
0.1%
|
|
0.1%
|
|
The below line graph compares the cumulative total shareholder return of the Corporation's Subordinate Voting Shares with the cumulative shareholder return of the S&P/TSX Composite Index for the last five (5) financial years ended August 31, 2018. It assumes that the initial value of the investment in the Corporation's Subordinate Voting Shares and in the S&P/TSX Composite Index was CA$100 on September 1, 2013. The bar chart below illustrates the trend in total compensation paid to the NEOs in office during such periods; the Executive Chairman, CEO and CFO are included in each period but the other named executive officers changed from one period to another. For further information about the identity and compensation of the NEOs, please refer to our previous five (5) Management Proxy Circulars and this Circular under the section "Summary Compensation Table".
The Corporation's Stock Performance
(September 1, 2013 to August 31, 2018)