As at November 30, 2016 and 2017, additions to capital assets amounted to $1,179 and $2,889 respectively, and unpaid purchases of capital assets amounted to $441 and $1,420 respectively.

The accompanying notes are an integral part of these condensed unaudited interim consolidated financial statements.

 

---

Assets acquired
Accounts receivable		$	1,889
Inventories			2,504
Property, plant and equipment			1,424
Intangible assets			3,374
Other assets			171
			9,362
Liabilities assumed
Accounts payable and accrued liabilities			1,035
Long-term debt (note 7)			2,143
Deferred income taxes			1,160
Net identifiable assets acquired			5,024
Goodwill			4,516
Fair value of the total consideration transferred, net of cash acquired		$	9,540

Balance – Beginning of the period		$	35,077
Business combination			4,516
Foreign currency translation adjustment			(389	)
Balance – End of the period		$	39,204

Balance – Beginning of the period		$	2,477
Payments			(1,085	)
Reversal			(356	)
Balance – End of the period		$	1,036

Derivative Financial Instruments

The functional currency of the company is the Canadian dollar. The company is exposed to currency risk as a result of its export sales of products manufactured in Canada, China and Finland, the majority of which are denominated in US dollars and euros. This risk is partially hedged by forward exchange contracts and certain cost of sales and operating expenses (US dollars and euros). In addition, the company is exposed to currency risk as a result of its research and development activities in India (Indian rupees). This risk is partially hedged by forward exchange contracts. The company's forward exchange contracts, which are designated as cash flow hedging instruments, qualify for hedge accounting.

As at November 30, 2017, the company held contracts to sell US dollars for Canadian dollars and Indian rupees at various forward rates, which are summarized below:

US dollars – Canadian dollars

 

	Expiry dates		Contractual amounts				Weighted average contractual forward rates
	December 2017 to August 2018		$	16,100				1.3349
	September 2018 to August 2019			11,100				1.3413
	Total		$	27,200				1.3375

	Expiry dates		Contractual amounts				Weighted average contractual forward rates
	December 2017 to August 2018		$	2,200				68.94
	September 2018 to February 2019			4,000				67.72
	Total		$	6,200				68.15

 

The carrying amount of forward exchange contracts is equal to their fair value, which is based on the amount at which they could be settled based on estimated current market rates. The fair value of forward exchange contracts amounted to net gains of $2,258,000 as at August 31, 2017, and $1,245,000 as at November 30, 2017.

 

As at November 30, 2017, forward exchange contracts in the amount of $1,041,000 are presented as current assets in other accounts receivable and forward exchange contracts in the amount of $204,000 are presented as long-term assets in other long-term assets in the consolidated balance sheet. Forward exchange contracts of $110,000 included in accounts receivable, for which related hedged sales are recognized, are recorded in the consolidated statement of earnings; otherwise, other forward exchange contracts are not yet recorded in the consolidated statement of earnings and are recorded in other comprehensive income.

Based on its portfolio of forward exchange contracts as at November 30, 2017, the company estimates that the portion of the net unrealized gains on these contracts as of that date, which will be realized and reclassified from accumulated other comprehensive income to net earnings (sales) over the next 12 months, amounts to $931,000.

During the three months ended November 30, 2017, the company recognized within its sales foreign exchange gains on forward exchange contracts of $237,000, compared to foreign exchange losses $240,000 for the three months ended November 30, 2016.

 

 

 

 

6	Credit Facilities

On October 25, 2017, the company modified certain credit facilities whereby existing lines of credits, that provided advances up to CA$4,800,000 (US$3,724,000) and up to US$6,000,000 for operating purposes, were cancelled and replaced with a credit facility of CA$28,929,000 (US$22,445,000) mainly for the acquisition of the remaining shares of Astellia under the public tender offer. On November 27, 2017, a letter of credit of €17,337,019 (US$20,622,000) was drawn from this credit facility to guarantee the execution of the public tender offer (note 3). As at November 30, 2017, that letter of credit was still outstanding and it expires on May 27, 2018. This credit facility bears interest at the Canadian prime rate and is secured by a movable mortgage of CA$65,000,000 (US$50,435,000) over the universality of the company's Canadian movable assets, present and future.

In addition, on December 21, 2017, the company cancelled and replaced this renewed credit facility (that provided advances up to CA$28,929,000 (US$22,445,000)), with new revolving credit facilities of up to CA$70,000,000 (approximately US$54,300,000) and US$9,000,000. These modified credit facilities are expected to be used to finance the acquisition of Astellia's remaining shares as well as working capital and other general corporate purposes. The Canadian dollar revolving credit facility bears interest at the Canadian prime rate or LIBOR, plus a margin, and the US dollar revolving credit facility bears interest at the US prime rate or LIBOR plus a margin. These revolving credit facilities are secured by a movable mortgage over the universality of the company's Canadian movable assets, present and future, as well as over the universality of movable assets, present and future, of certain US and UK subsidiaries. The letter of credit of €17,337,019 (US$20,622,000) issued on November 27, 2017 is now covered by these new revolving credit facilities.

7	Long-term Debt

As part of the acquisition of Yenista, the company assumed long-term debt (note 3). Long-term debt represents a non-derivative financial liability, and it is classified in other financial liabilities; it is initially measured at fair value plus transaction costs, and it is subsequently carried at amortized cost using the effective interest rate method.

 

		As at November 30, 2017				As at August 31, 2017
Unsecured, non-interest-bearing loan, denominated in euros, repayable in quarterly instalments of €17,250 (US$20,519) starting in June 2019, maturing in March 2024		$	380			$	‒
Unsecured, non-interest-bearing loan, denominated in euros, repayable in quarterly instalments of €22,850 (US$27,180) starting in June 2020, maturing in March 2025			500				‒
Loans, secured by the universality of the assets of a subsidiary, denominated in euros, repayable in monthly instalments, bearing interest at annual rates of 0.7% to 2.0%, maturing at different dates between December 2017 to August 2022			1,125				‒
Other long-term debt			100				‒
			2,105				‒
Current portion of long-term debt			510				‒
		$	1,595			$	‒

 

 

 

 

Principal repayments of long-term debt over the forthcoming years are as follows:

 

		As at November 30, 2017				As at August 31, 2017
No later than one year		$	510			$	‒
Later than one year and no later than five years			1,300				‒
Later than five years			395				‒
		$	2,205			$	‒

 

8	Share Capital

The following tables summarize changes in share capital for the three months ended November 30, 2016 and 2017.

		Three months ended November 30, 2016
		Multiple voting shares								Subordinate voting shares
		Number				Amount				Number				Amount				Total amount
Balance as at September 1, 2016			31,643,000			$	1				21,917,942			$	85,515			$	85,516
Issuance of share capital			−				−				793,070				3,490				3,490
Redemption of restricted share units			−				−				88,371				−				−
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards			−				−				−				346				346
Balance as at November 30, 2016			31,643,000			$	1				22,799,383			$	89,351			$	89,352

 

 

		Three months ended November 30, 2017
		Multiple voting shares								Subordinate voting shares
		Number				Amount				Number				Amount				Total amount
Balance as at September 1, 2017			31,643,000			$	1				23,068,777			$	90,410			$	90,411
Redemption of restricted share units			−				−				155,619				−				−
Reclassification of stock-based compensation costs to share capital upon exercise of stock awards			−				−				−				598				598
Balance as at November 30, 2017			31,643,000			$	1				23,224,396			$	91,008			$	91,009

 

 

 

9	Statements of Earnings

Net research and development expenses comprise the following:

		Three months ended November 30,
		2017				2016
Gross research and development expenses		$	13,063			$	12,640
Research and development tax credits and grants			(1,811	)			(1,326	)
Net research and development expenses for the period		$	11,252			$	11,314

Inventory write-down is as follows:

		Three months ended November 30,
		2017				2016
Inventory write-down for the period		$	703			$	494

Depreciation and amortization expenses by functional area are as follows:

		Three months ended November 30,
		2017				2016
Cost of sales
Depreciation of property, plant and equipment		$	472			$	359
Amortization of intangible assets			911				296
			1,383				655
Selling and administrative expenses
Depreciation of property, plant and equipment			164				118
Amortization of intangible assets			112				19
			276				137
Net research and development expenses
Depreciation of property, plant and equipment			518				426
Amortization of intangible assets			96				112
			614				538
		$	2,273			$	1,330
Depreciation of property, plant and equipment		$	1,154			$	903
Amortization of intangible assets			1,119				427
		$	2,273			$	1,330

 

 

 

 

EXFO Inc.

Notes to Condensed Unaudited Interim Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)

---

EXFO Inc.

Notes to Condensed Unaudited Interim Consolidated Financial Statements

(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)

---

Management's Discussion and Analysis of Financial Condition

and Results of Operations

 

This discussion and analysis contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, and we intend that such forward-looking statements be subject to the safe harbors created thereby. Forward-looking statements are statements other than historical information or statements of current condition. Words such as may, expect, believe, plan, anticipate, intend, could, estimate, continue, or similar expressions or the negative of such expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events and circumstances are considered forward-looking statements. They are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in forward-looking statements due to various factors including, but not limited to, macroeconomic uncertainty as well as capital spending and network deployment levels in the telecommunications industry (including our ability to quickly adapt cost structures to anticipated levels of business and our ability to manage inventory levels with market demand); future economic, competitive, financial and market conditions; consolidation in the global telecommunications test, service assurance and analytics solutions markets and increased competition among vendors; our ability to successfully integrate businesses that we acquire; 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 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 January 9, 2018.

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

COMPANY OVERVIEW AND RECENT DEVELOPMENTS

We are a leading provider of next-generation test, monitoring and analytics solutions for fixed and mobile communications service providers (CSPs), webscale operators as well as network equipment manufacturers (NEMs) in the global telecommunications industry. Our intelligent solutions are designed to improve end-user quality of experience, enhance network performance and drive operational efficiencies throughout the network and service delivery lifecycles. We target high-growth market opportunities related to increasing bandwidth capacity and improving quality of experience on network infrastructures: 5G, Internet of Things (IoT), 4G/LTE (long-term evolution), wireless backhaul, small cells and distributed antenna systems (DAS), 100G and 400G network upgrades, as well as fiber-to-the-home (FTTH)/fiber-to-the-curb (FTTC)/fiber-to-the-node (FTTN) deployments.

 

 

 

 

We launched four new products or major enhancements in the first quarter of fiscal 2018 including EX1, a multipurpose test solution for validating bandwidth speed up to full line rate Gigabit Ethernet and for monitoring quality of experience on customer's premises; a compact 400G test solution for NEMs, carrier labs and data centers; an optical spectrum analyzer delivering in-service optical signal-to-noise ratio (OSNR) measurements for networks up to 400G; and a power meter that automatically detects and adapts test parameters for the passive optical network (PON) technology in use at customer premises.

Our sales increased 2.6% to $63.4 million in the first quarter of fiscal 2018 from $61.8 million for the same period last year. Bookings, which represent purchase orders received from customers, amounted to $65.9 million in the first quarter of fiscal 2018, for a book-to-bill ratio of 1.04, flat compared to $65.9 million for the same period last year.

On September 8, 2017, we acquired a 33.1% interest in Astellia S.A. ("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 develop 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 €10 per share for a total cash consideration of €8.6 million (US$10.3 million). The investment in Astellia provides us with a significant influence over Astellia, and it is 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 increases or decreases to recognize our share of the profit or loss of Astellia after the acquisition date. For the three months ended November 30, 2017, our share in Astellia's net earnings was nominal.

On October 2, 2017, we acquired all issued and outstanding shares of Yenista Optics S.A.S (Yenista), a privately held company located in France, a supplier of advanced optical test equipment for the research and development and manufacturing markets. Its portfolio includes benchtop optical spectrum analyzers, tunable lasers, tunable filters and passive optical component test systems for NEMs and optical component vendors. 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 Yenista's cash of €1.3 million (US$1.6 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 preliminary estimate of their fair value as at the acquisition date. The results of operations of the acquired business were 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 credits, 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$22.4 million) mainly for the acquisition of the remaining shares of Astellia under the public tender offer. On November 27, 2017, a letter of credit of €17.3 million (US$20.6 million) was drawn from this credit facility to guarantee the execution of the public tender offer.

On December 21, 2017, we cancelled and replaced this renewed credit facility (that provided advances up to CA$28.9 million (US$22.4 million), with new revolving credit facilities of up to CA$70.0 million (approximately US$54.3 million) and $US9.0 million. These modified credit facilities are expected to be used to finance the acquisition of Astellia's remaining shares as well as working capital and other general corporate purposes. The letter of credit of €17.3 million (US$20.6 million) issued on November 27, 2017 to guarantee the execution of the public tender offer is now covered by these new revolving credit facilities.

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 brings our investment in Astellia to 40.3%.

 

 

 

RESULTS OF OPERATIONS

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

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

(2)	Refer to page 36 for non-IFRS measures.

 

 

 

RESULTS OF OPERATIONS

Sales and Bookings

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

Sales

 

Bookings

For the three months ended November 30, 2017, our sales increased 2.6% to $63.4 million, compared to $61.8 million for the same period last year, while our bookings amounted to $65.9 million, flat compared to the same period last year, for a book-to-bill ratio of 1.04.

Sales

In the first quarter of fiscal 2018, the increase in total sales year-over-year comes from the positive effect of our recent acquisitions of Yenista and Ontology Systems, as well as the positive impact on our sales of the decrease in the average value of the US dollars compared to other currencies.

Excluding the positive effect of the recent acquisition of Yenista and the positive currency impact, the year-over-year decrease in sales of our physical-layer product line mainly comes from the Americas, where we experienced lower sales and bookings for our copper-testing solutions (a subgroup within our physical-layer product line), compared to the same period last year; these solutions are characterized by large intermittent orders from customers. The decrease in sales in the Americas was offset in part by a stronger performance of this product line in Europe, Middle-East and Africa (EMEA), compared to the same period last year, as sales to the Asia-Pacific (APAC) region were mostly flat year-over-year.

Excluding the positive effect of the recent acquisition of Ontology and the positive currency impact, the year-over-year decrease in sales of our protocol-layer product line comes from the Americas and EMEA, mostly due to the streamlining of our passive monitoring product line in the second half of fiscal 2017.  Otherwise, this product line delivered year-over-year increase in sales in the APAC region.

 

 

 

 

Overall, the year-over-year increase in total sales in the first quarter of fiscal 2018 comes from APAC and to a lesser extent from EMEA and the United States.

Bookings

In the first quarter of fiscal 2018, total bookings were positively impacted by our recent acquisitions as well as by the positive impacts of the decrease in the average value of the US dollars compared to other currencies. Otherwise, the decrease in bookings of our protocol-layer product line slightly offset the increase in bookings of our physical-layer product line year-over-year.

The year-over-year increase in bookings of our physical-layer product line mainly comes from the Americas where we received large orders for our network quality fiber monitoring systems. In addition, the recent acquisition of Yenista resulted in increased bookings year-over-year for this product line. Finally, the decrease in the average value of the US dollars, compared to other currencies had a positive impact on our physical-layer bookings year-over-year. This was offset in part by lower bookings for our copper-testing solutions (a subgroup within our physical-layer product line), compared to the same period last year.

The year-over-year decrease in bookings of our protocol-layer product line, despite the positive impact of recently acquired Ontology and the positive currency impact, comes from the EMEA and APAC regions, due in part to the streamlining of our passive monitoring product line in the second half of fiscal 2017 and the timing of the renewal of annual maintenance contracts in the current quarter compared to the same period last year.

As we gradually evolve from a supplier of dedicated test instruments to a supplier of end-to-end solutions, our quarterly sales and bookings are 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 acquisition of Ontology.

Sales by geographic region

The following table summarizes sales by geographic region:

Customer concentration

In the first quarter of fiscal 2017 and 2018, our top customer accounted for 13.8% of our sales. In the first quarter of fiscal 2017 and 2018, our top three customers accounted for 23.3% and 21.6% of our sales, respectively.

 

 

 

GROSS MARGIN BEFORE DEPRECIATION AND AMORTIZATION

(non-IFRS measure — refer to page 36 of this document)

Gross margin before depreciation and amortization (gross margin) reached 63.3% of sales for the three months ended November 30, 2017, slightly up compared to 63.1% for the same period last year.

In the first quarter of fiscal 2018, a slightly more favorable product mix overall compared to the same period last year resulted in the slight increase of our gross margin year-over-year.

Otherwise, in the first quarter of fiscal 2018, the positive effect on our gross margin of higher foreign exchange gains on our forward exchange contracts, compared to the same period last year, were offset by higher inventory write-off year-over-year.

SELLING AND ADMINISTRATIVE EXPENSES

For the three months ended November 30, 2017, selling and administrative expenses were $23.2 million, or 36.6% of sales, compared to $21.6 million, or 35.0% of sales for the same period last year.

In the first quarter of fiscal 2018, our selling and administrative expenses increased $1.6 million year-over-year due to additional expenses following the acquisitions of Ontology and Yenista, inflation, salary increases, as well as acquisition-related costs following the recent business acquisitions.

In addition, 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.

Otherwise, the positive impact of our recent restructuring plan reduced our selling and administrative expenses year-over-year in the first quarter of fiscal 2018.

RESEARCH AND DEVELOPMENT EXPENSES

Gross Research and Development Expenses

For the three months ended November 30, 2017, gross research and development expenses totaled $13.1 million, or 20.6% of sales, compared to $12.6 million, or 20.5% of sales for the same period last year.

In the first quarter of fiscal 2018, our gross research and development expenses increased $0.5 million year-over-year due to additional expenses following the acquisitions of Ontology and Yenista, as well as inflation and salary increases.

In addition, 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.

Otherwise, the positive impact of our recent restructuring plan reduced our gross research and development expenses year-over-year in the first quarter of fiscal 2018.

Tax Credits and Grants

For the three months ended November 30, 2017, tax credits and grants for research and development activities were $1.8 million, or 13.9% of gross research and development expenses, compared to $1.3 million, or 10.5% of gross research and development expenses for the same period last year.

 

 

 

 

For the three months ended November 2017, a shift in project mix resulted in additional expenses eligible to tax credits and grants compared to the same period last year. In addition, newly acquired Ontology and Yenista are entitled to tax credits and grants on research and development activities carried out in the United Kingdom and France. These factors also explain the increase in tax credits and grants as a percentage of gross research and development expenses year-over-year.

AMORTIZATION OF INTANGIBLE ASSETS

In conjunction with the business combinations we completed, we recorded intangible assets primarily consisting of core technology and customer relationships. In addition, intangible assets include software.

For the three months ended November 30, 2017, amortization of intangible assets reached $1.1 million, compared to $0.4 million for the same period last year.

The year-over-year increase in our amortization expense in the first quarter of fiscal 2018, compared to the same period last year, was mainly due to the acquisitions of Ontology (March 2017) and Yenista (October 2017).

FOREIGN EXCHANGE GAIN

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

INCOME TAXES

 

For the three months ended November 30, 2017, we reported income tax expenses of $1.7 million on earnings before income taxes of $4.4 million. For the corresponding period last year, we reported income tax expenses of $2.0 million on earnings before income taxes of $5.3 million.

These distorted tax rates mainly resulted from the fact that we did not recognize deferred income tax assets for some of our subsidiaries at loss 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 these periods.

Please refer to note 10 to our condensed unaudited interim consolidated financial statements for a full reconciliation of our income tax provision.

On December 22, 2017, the US tax reform ("Tax Cuts and Jobs Act") was substantively enacted and would permanently reduce the maximum corporate income tax rate from 35% to 21%, effective for tax years beginning after December 31, 2017. 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 will record a deferred income tax expense of approximately $1,500,000 in the consolidated statement of earnings of the second quarter of fiscal 2018 to account for the effect of this new substantively enacted tax rate.

LIQUIDITY AND CAPITAL RESOURCES

Cash Requirements and Capital Resources

As at November 30, 2017, cash and short-term investments totaled $19.5 million, while our working capital was at $57.4 million. Our cash and short-term investments decreased by $19.8 million in the first quarter of fiscal 2018 compared to the previous quarter-end.

The following table summarizes the use of cash and short-term investments during the first quarter of fiscal 2018 in thousands of US dollars:

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 the accumulated other comprehensive income in the consolidated balance sheet.

Our short-term investments of $1.0 million consist of debt instruments issued by high-credit-quality corporations; therefore, we consider the risk of non-performance of these financial instruments to be limited. These debt instruments are not expected to be affected by a significant liquidity risk. For the purpose of managing our cash position, we have established a cash management policy, which we follow and monitor on a regular basis.

 

 

 

 

On December 21, 2017, we modified certain credit facilities whereby existing lines of credits, that provided advances up to CA$28.9 million (US$22.4 million), were replaced with revolving credit facilities of up to CA$70.0 million (approximately US$54.3 million) and US$9.0 million. These modified credit facilities will be used to finance the acquisition of Astellia's remaining shares by way of a public tender offer for an amount of €17.3 million (approximately US$20 million) as well as working capital and other general corporate purposes.

We believe that our cash balances and short-term investments totaling $19.5 million, combined with our available revolving credit facilities of up to $63.3 million, will be sufficient to meet our liquidity and capital requirements for the foreseeable future, including the cash payment for the acquisition of Astellia's remaining shares of approximately $20.6 million, as well as any possible working capital requirements for our new acquisitions. In addition to these assets and credit facilities, we have unused available lines of credit of $27.3 million for foreign currency exposure related to forward exchange contracts. However, possible operating losses, additional restructuring costs and/or possible investments in or acquisitions of complementary businesses, products or technologies may require additional financing. There can be no assurance that additional debt or equity financing will be available when required or, if available, that it can be secured on satisfactory terms.

Sources and Uses of Cash

We finance our operations and meet our capital expenditure requirements 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 $2.4 million for the three months ended November 30, 2017, compared to cash flows used of $0.9 million for the same period last year.

Cash flows provided by operating activities in the first quarter of fiscal 2018 were attributable to the net earnings after items not affecting cash of $4.1 million, offset in part by the negative net change in non-cash operating items of $1.7 million; this was mainly due to the negative effect on cash of the $2.0 million increase in our inventories required for specific orders received but not yet recognized in sales, and the $1.4 million decrease in our accounts payable, accrued liabilities and provisions due to the timing of purchases and payments during the quarter, as well as the payment during the quarter of the fiscal 2017 annual bonuses to employees. These negative effects on cash were offset in part by the positive effect on cash of the $1.1 million decrease in our accounts receivable due to the timing of sales and receipts during the quarter, the $0.3 million decrease in our prepaid expenses due to timing of payments during the quarter, as well as the $0.2 million increase in our other liabilities during the quarter.

Cash flows used by operating activities in the first quarter of fiscal 2017 were attributable to the net earnings after items not affecting cash of $4.4 million, more than offset by the negative net change in non-cash operating items of $5.3 million; this was mainly due to the negative effect on cash of the $2.6 million increase in our accounts receivable due to the timing of sales and receipts during the quarter, the $1.2 million increase in our inventories to meet future demand, the $0.3 million increase in our income tax and tax credits recoverable due to tax credits earned during the quarter not yet recovered, and the negative effect on cash of the $1.4 million decrease in our accounts payable, accrued liabilities and provisions due to the timing of purchases and payments during the quarter, as well as the payment during the quarter of the fiscal 2016 annual bonuses to employees. These negative effects on cash were offset in part by the positive effect on cash of the $0.3 million decrease in our prepaid expenses due to timing of payments during the quarter.

Investing activities

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 as at November 30, 2017 in thousands of US dollars: