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TABLE OF CONTENTS

 

 

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PRESS RELEASE

For immediate release

EXFO reports third quarter results for fiscal 2018

§	Sales increase 23.4% to US$72.2 million, including US$8.6 million from Astellia

§	Bookings improve 14.8% to US$73.1 million, including US$7.6 million from Astellia

§	Cash flows from operations total US$4.7 million

 

Selected Financial Information

(In thousands of US dollars)

 

		Three months ended May 31, 2018				Three months ended May 31, 2017				Nine months ended May 31, 2018				Nine months ended May 31, 2017
Physical-layer sales		$	43,760			$	41,007			$	129,734			$	121,061
Protocol-layer sales			28,278				17,678				69,799				59,784
Foreign exchange gains (losses) on forward exchange contracts			179				(180	)			797				(525	)
Total sales		$	72,217			$	58,505			$	200,330			$	180,320
Physical-layer bookings		$	44,796			$	47,157			$	134,579			$	125,278
Protocol-layer bookings			28,115				16,691				69,179				60,692
Foreign exchange gains (losses) on forward exchange contracts			179				(180	)			797				(525	)
Total bookings		$	73,090			$	63,668			$	204,555			$	185,445
Book-to-bill ratio (bookings/sales)			1.01				1.09				1.02				1.03
Gross margin before depreciation and amortization*		$	43,254			$	33,950			$	122,752			$	109,963
			59.9	%			58.0	%			61.3	%			61.0	%
Other selected information:
IFRS net earnings (loss) attributable to the parent interest		$	(5,970	)		$	(4,304	)		$	(7,951	)		$	7
Amortization of intangible assets		$	4,210			$	1,046			$	8,385			$	2,241
Stock-based compensation costs		$	440			$	372			$	1,280			$	983
Restructuring charges		$	–			$	3,813			$	–			$	3,813
Change in fair value of cash contingent consideration		$	–			$	–			$	(716	)		$	–
Acquisition-related deferred revenue fair value adjustment		$	913			$	–			$	1,222			$	–
Income tax expense for US tax reform		$	–			$	–			$	1,528			$	–
Net income tax effect of the above items		$	(138	)		$	(357	)		$	(704	)		$	(583	)
Foreign exchange gain		$	(160	)		$	(1,725	)		$	(1,386	)		$	(1,965	)
Adjusted EBITDA*		$	2,549			$	2,300			$	11,100			$	13,496

 

 

 

 

 

 

 

Conference Call and Webcast

EXFO will host a conference call today at 5 p.m. (Eastern time) to review third quarter results for fiscal 2018. To listen to the conference call and participate in the question period via telephone, dial 1-323-994-2093. Please take note the following participant passcode will be required: 7503033. Germain Lamonde, founder and Executive Chairman, Philippe Morin, Chief Executive Officer, and Pierre Plamondon, Vice-President of Finance and Chief Financial Officer, will participate in the call. An audio replay of the conference call will be available two hours after the event until 8:00 p.m. on July 17, 2018. The replay number is 1-719-457-0820 and the required participant passcode is 7503033. The audio Webcast and replay of the conference call will also be available on EXFO's Website at www.EXFO.com, under the Investors section.

About EXFO

EXFO (NASDAQ: EXFO) (TSX: EXF) develops smarter test, monitoring and analytics solutions for fixed and mobile network operators, webscale companies and equipment manufacturers in the global communications industry. Our customers count on us to deliver superior network performance, service reliability and subscriber insights. They count on our unique blend of equipment, software and services to accelerate digital transformations related to fiber, 4G/LTE and 5G deployments. They count on our expertise with automation, real-time troubleshooting and big data analytics, which are critical to their business performance. We've spent over 30 years earning this trust, and today more than 2,000 EXFO employees in over 25 countries work side by side with our customers in the lab, field, data center and beyond. For more information, visit EXFO.com and follow us on the EXFO Blog.

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Forward-Looking Statements

This news release contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, and we intend that such forward-looking statements be subject to the safe harbors created thereby. Forward-looking statements are statements other than historical information or statements of current condition. Words such as may, 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, 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 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.

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*Non-IFRS Measures

EXFO provides non-IFRS measures (non-IFRS sales, gross margin before depreciation and amortization and adjusted EBITDA) as supplemental information regarding its operational performance. Non-IFRS sales represent total sales plus acquisition-related deferred revenue fair value adjustment. 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, change in fair value of cash contingent consideration, acquisition-related deferred revenue fair value adjustment, share in net loss of an associate, gain on the deemed disposal of the investment in an associate, and foreign exchange gain or loss.

		Three months ended May 31, 2018				Three months ended May 31, 2017				Nine months ended May 31, 2018				Nine months ended May 31, 2017
IFRS sales		$	72,217			$	58,505			$	200,330			$	180,320
Acquisition-related deferred revenue fair value adjustment			913				–				1,222				–
Non-IFRS sales		$	73,130			$	58,505			$	201,552			$	180,320

 

 

 

The following table summarizes the reconciliation of adjusted EBITDA to IFRS net earnings (loss) attributable to the parent interest, in thousands of US dollars:

Adjusted EBITDA

(1)	Astellia negatively impacted adjusted EBITDA by $2.2 million and $3.4 million respectively for the three and nine months ended May 31, 2018 (nil in 2017).

(2)	Includes acquisition-related costs of $2.1 million for the nine months ended May 31, 2018 and $0.1 million and $0.8 million respectively for the three and nine months ended May 31, 2017.

EXFO-F

 

-30-

For more information

Vance Oliver

Director, Investor Relations

(418) 683-0913, Ext. 23733

vance.oliver@exfo.com

 

EXFO Inc.

Unaudited Condensed Interim Consolidated Balance Sheets

(in thousands of US dollars)

 

 

 

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

 

 

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

 

 

 

EXFO Inc.

Unaudited Condensed Interim Consolidated Statements of Comprehensive Loss

(in thousands of US dollars)

 

 

 

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

Unaudited Condensed Interim Consolidated Statements of Changes in Shareholders' Equity

(in thousands of US dollars)

		Nine months ended May 31, 2017
		Share capital				Contributed surplus				Retained earnings				Accumulated other comprehensive loss				Total shareholders' equity
Balance as at September 1, 2016		$	85,516			$	18,150			$	126,309			$	(48,574	)		$	181,401
Issuance of share capital (note 8)			3,490				–				–				–				3,490
Reclassification of stock-based compensation costs (note 8)			1,370				(1,370	)			–				–				–
Stock-based compensation costs			–				941				–				–				941
Net earnings for the period			–				–				7				–				7
Other comprehensive income (loss)
Foreign currency translation adjustment			–				–				–				(4,766	)			(4,766	)
Changes in unrealized gains/losses on forward exchange contracts, net of deferred income taxes of $31			–				–				–				28				28
Total comprehensive loss for the period																			(4,731	)
Balance as at May 31, 2017		$	90,376			$	17,721			$	126,316			$	(53,312	)		$	181,101

		Nine months ended May 31, 2018
		Share capital				Contributed surplus				Retained earnings				Accumulated other comprehensive loss				Non-controlling interest				Total shareholders' equity
Balance as at September 1, 2017		$	90,411			$	18,184			$	127,160			$	(38,965	)		$	‒			$	196,790
Reclassification of stock-based compensation costs (note 8)			1,499				(1,499	)		‒				‒				‒				‒
Stock-based compensation costs		‒					1,322			‒				‒				‒					1,322
Business combination (note 3)		‒				‒				‒				‒					(3,662	)			(3,662	)
Acquisition of non-controlling interest (note 3)		‒				‒					(352	)		‒					4,014				3,662
Net loss for the period		‒				‒					(7,951	)		‒					(352	)			(8,303	)
Other comprehensive loss
Foreign currency translation adjustment		‒				‒				‒					(5,033	)		‒					(5,033	)
Changes in unrealized gains/losses on forward exchange contracts, net of deferred income taxes of $418		‒				‒				‒					(1,393	)		‒					(1,393	)
Comprehensive loss for the period																							(14,729	)
Balance as at May 31, 2018		$	91,910			$	18,007			$	118,857			$	(45,391	)		$	‒			$	183,383

 

As at May 31, 2017 and 2018, unpaid purchases of capital assets amounted to $492 and $1,801 respectively.

 

 

1	Nature of Activities and Incorporation

EXFO Inc. and its subsidiaries (together, "EXFO" or the "company") develops, manufactures and markets next-generation test, monitoring and analytics solutions for fixed and mobile communications service providers (CSPs), web-scale operators as well as network equipment manufacturers in the global telecommunications industry.

EXFO is a company incorporated under the Canada Business Corporations Act and is domiciled in Canada. The address of its headquarters is 400 Godin Avenue, Québec City, Quebec, Canada, G1M 2K2.

These unaudited condensed interim consolidated financial statements were authorized for issue by the Board of Directors on July 10, 2018.

2	Basis of Presentation

These unaudited condensed interim consolidated financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB) applicable to the preparation of interim financial statements, including IAS 34, "Interim Financial Reporting", and using the same accounting policies and methods used in the preparation of the company's most recent annual consolidated financial statements, except as described in note 3. Consequently, these condensed unaudited interim consolidated financial statements should be read in conjunction with the company's most recent annual consolidated financial statements, which have been prepared in accordance with IFRS as issued by the IASB.

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. The company will adopt this new standard on September 1, 2018. The company is currently assessing the impact that the new standard will have on its 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. Early adoption is permitted. The company has performed an assessment to identify significant areas of impact, if any, between the company's current accounting treatment under IAS 18, "Revenue" and the new requirements of IFRS 15. Based on the assessments to date, the company anticipates that the main areas of impact will relate to the allocation of the transaction price to the various performance obligations under the contracts, the timing of revenue recognition for sales arrangements that contain customer acceptance clauses, whereby revenue could be recognized sooner, and the sale of licences that provides customers with the "right to use" the company's intellectual property, where revenue will be recognized at a point in time rather than over time. The company 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. The company will apply this standard retrospectively only to contracts that are not completed at the date of initial application.

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, i.e., 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. The company has not yet assessed the impact that the new standard will have on its 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. The company will adopt this interpretation on September 1, 2018 and its adoption is not expected to have a material impact on the company's 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. The company will adopt this interpretation on September 1, 2019 and is currently assessing the impact that it will have on its consolidated financial statements.

 

 

 

3	Business Combinations

Astellia S.A. (business combination achieved in stages)

On September 8, 2017, the company 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 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 €8,567,500 (US$10,311,100).

On October 10, 2017, the company reached an agreement with Astellia to acquire Astellia's remaining shares, at a share price of €10, for a total consideration of €17,321,380 (US$21,357,500) 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, the company 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 €1,878,610 (US$2,218,600), which brought the company's investment in Astellia to 40.3%.

On January 26, 2018, upon the closing of the public tender offer, the company acquired additional interest of 48.1% in Astellia at a purchase price of €10 per share for a total cash consideration of €12,452,090 (US$15,476,900), which brought the company's investment in Astellia to 88.4% and provided the company with control over Astellia.

The company re-opened the public tender offer to acquire the remaining shares of Astellia from February 9, 2018 to February 22, 2018. During that period, the company acquired an additional interest of 8.9% in Astellia at a purchase price of €10 per share for a total cash consideration of €2,318,530 (US$2,841,400), which brought the company's investment in Astellia to 97.3%.

Finally, on February 28, 2018, the company entered into a squeeze-out process to acquire the remaining 2.7% interest in Astellia at a share price of €10, for a total cash consideration of €672,150 (US$820,600). The binding terms of the squeeze-out process gave the company control over Astellia's remaining shares as at February 28, 2018 and consequently, as of that date the company controlled 100% of Astellia's shares.

The fair value of the total consideration paid for all shares of Astellia amounted to €25,888,880 (US$32,137,800) and consisted of €21,102,880 (US$26,241,000) in cash, net of Astellia's cash of €4,786,000 (US$5,896,800) at the date of acquisition of control.

From September 8, 2017 to January 25, 2018, the investment in Astellia provided the company 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 increased or decreased to recognize the company's share of the profit or loss of Astellia after the acquisition date. Included in the statements of earnings for the nine months ended May 31, 2018 is an equity loss pick-up of $2,079,800.

 

 

 

 

Since January 26, 2018, the acquisition of Astellia 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"; consequently, the fair value of the total consideration 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 the consolidated financial statements of the company since January 26, 2018, being the acquisition date. 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 acquisition-date re-measurement and deemed disposal resulted in a gain of $2,079,800 that was accounted for in the statements of earnings for the nine months ended May 31, 2018.

In addition, upon the successive acquisitions of the non-controlling interest in February 2018, the company recorded a gain in the amount of $352,000 in shareholders' equity, representing the excess of the carrying value of the non-controlling interest and the purchase price paid.

The following table summarizes Astellia's sales and net loss attributable to the parent interest for the three months and the nine months ended May 31, 2018:

Sales and net loss of the combined entities for the nine months ended May 31, 2018 as if the acquisition had occurred on September 1, 2017 amounted to $222,900,000 and $13,997,000 respectively.

(1)	Include acquisition-related deferred revenue fair value adjustment of $913,000 and $1,222,000 respectively for the three months and the nine months ended May 31, 2018.

(2)	Includes amortization of acquired intangible assets of $3,104,000 and $4,154,000 respectively for the three months and the nine months ended May 31, 2018.

 

 

The fair value of the total consideration was allocated based on a preliminary estimate of fair value of acquired net assets at the date of acquisition as follows:

The fair value of the total consideration, net of cash acquired, consisted of the following at the acquisition date:

The estimated fair value of accounts receivable amounted to $15,877,000 as at January 26, 2018. The gross contractual amount of accounts receivable amounted to $18,261,000 as at January 26, 2018. The estimate at the acquisition date of the gross contractual cash flows not expected to be collected amounted to $2,384,000.

Acquired intangible assets, which mainly comprise customer relationships and core technologies, are amortized on a straight-line basis over their estimated useful lives of one to five years.

Acquired goodwill mainly represents synergies with the company's products as well as Astellia's acquired workforce. Acquired goodwill is not deductible for tax purposes. Goodwill is allocated to the Astellia cash-generating unit.

The allocation of the fair value of the total consideration is preliminary because certain information required to complete the final allocation remains outstanding. The company expects to complete the final allocation for this acquisition in the fourth quarter of fiscal 2018. Assets acquired and liabilities assumed that are likely to change upon completing a more detailed valuation and the finalization of the allocation comprise accounts receivable, intangible assets, goodwill, deferred revenue and related deferred income taxes.

The functional currency of Astellia is the euro and as such it is considered a foreign operation. The financial statements of Astellia were translated into Canadian dollars as follows: assets and liabilities were translated at the exchange rate in effect on the date of the balance sheet; revenue and expenses were translated at the monthly average exchange rate. The foreign currency translation adjustment arising from such translation was included in accumulated other comprehensive loss in shareholders' equity.

Yenista Optics S.A.S. (renamed EXFO Optics Inc.)

On October 2, 2017, the company acquired all issued and outstanding shares of Yenista Optics S.A.S. (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 €9,400,000 (US$11,052,000) and consisted of €8,114,000 (US$9,540,000) in cash, net of EXFO Optics' cash of €1,286,000 (US$1,512,000) 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 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 the consolidated financial statements of the company since October 2, 2017, being the acquisition date.

The fair value of the total consideration was allocated based on the fair value of acquired net assets at the date of acquisition as follows:

Acquired intangible assets are amortized on a straight-line basis over their estimated useful life of two to five years for core technologies and six months for customer relationships. In-process research and development is an indefinite-lived intangible asset until the underlying research and development project is completed. It will be amortized on a straight-line basis over its estimated useful life when the project will be completed.

Acquired goodwill mainly represents synergies with the company's products as well as EXFO Optics' acquired workforce. Acquired goodwill is not deductible for tax purposes. Goodwill is allocated to the EXFO Optics cash-generating unit.

The functional currency of EXFO Optics is the euro, and, as such, it is considered a foreign operation. The financial statements of EXFO Optics were translated into Canadian dollars as follows: assets and liabilities were translated at the exchange rate in effect on the date of the balance sheet; revenue and expenses were translated at the monthly average exchange rate. The foreign currency translation adjustment arising from such translation was included in accumulated other comprehensive loss in shareholders' equity.

 

 

The following table summarizes changes in goodwill during the three months and nine months ended May 31, 2018:

4	Restructuring Charges

In fiscal 2017, the company implemented a restructuring plan to streamline its passive monitoring solutions portfolio.

The following table summarizes changes in restructuring charges payable during the three months and nine months ended May 31, 2018:

5	Financial Instruments

Fair Value of Financial Instruments

The company classifies its derivative and non-derivative financial assets and liabilities measured at fair value using the fair value hierarchy as follows:

Level 1:

Quoted prices (unadjusted) in active markets for identical assets or liabilities

Level 2:

Inputs other than quoted prices included within Level 1 that are observable for the asset and liability, either directly or indirectly

Level 3:

Unobservable inputs for the asset or liability

The company's short-term investments, forward exchange contracts and contingent liability are measured at fair value at each balance sheet date. The company's short-term investments are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets. The company's forward exchange contracts are classified within Level 2 of the fair value hierarchy because they are valued using quoted prices and forward exchange rates at the balance sheet dates. The company's contingent liability is classified within Level 3 of the fair value hierarchy because it is valued using unobservable inputs such as expected future sales of Ontology Partners Limited.

 

The fair value of forward exchange contracts represents the amount at which they could be settled based on estimated current market rates.

The fair value of derivative and non-derivative financial assets and liabilities measured at fair value by level of fair value hierarchy, is as follows:

 

 

		As at May 31, 2018												As at August 31, 2017
		Level 1				Level 2				Level 3				Level 1				Level 2				Level 3
Financial assets
Short-term investments		$	990			$	‒			$	‒			$	775			$	‒			$	‒
Forward exchange contracts		$	‒			$	667			$	‒			$	‒			$	2,258			$	‒
Financial liabilities
Contingent liability		$	‒			$	‒			$	437			$	‒			$	‒			$	1,092
Forward exchange contracts		$	‒			$	432			$	‒			$	‒			$	‒			$	‒

 

During the nine months ended May 31, 2018, the fair value of the contingent liability decreased by $716,000, which was recorded in the consolidated statement of earnings for this period.

Derivative Financial Instruments

The functional currency of the company is the Canadian dollar. The company is exposed to currency risk because of its export sales of products manufactured in Canada, China, France 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 because 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 May 31, 2018, 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

US dollars – Indian rupees

 

 

 

The carrying amount of forward exchange contracts is equal to their fair value, which is based on the amount at which they could be settled based on estimated current market rates. The fair value of forward exchange contracts amounted to net gains of $2,258,000 as at August 31, 2017, and $235,000 as at May 31, 2018.

As at May 31, 2018, forward exchange contracts in the amount of $667,000 are presented as current assets in other accounts receivable; forward exchange contracts in the amount of $294,000 are presented as current liabilities in accounts payable and accrued liabilities; and forward exchange contracts in the amount of $138,000 are presented as long-term liabilities in other liabilities in the consolidated balance sheet. Forward exchange contracts of $88,000 included in accounts receivable, for which related hedged sales are recognized, are recorded in the consolidated statements of earnings; otherwise, other forward exchange contracts are not yet recorded in the consolidated statements of earnings and are recorded in other comprehensive loss.

Based on its portfolio of forward exchange contracts as at May 31, 2018, 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 loss to net earnings (sales) over the next 12 months, amounts to $285,000.

For the three and nine months ended May 31, 2018 and 2017, the company recognized within its sales the following foreign exchange gains or losses on forward exchange contracts:

6	Credit Facilities

On October 25, 2017, the company modified certain credit facilities whereby existing lines of credit 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.

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 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. 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 company is subject to covenants under this credit facility that were met as at May 31, 2018. As at May 31, 2018, an amount of $10,982,000 was drawn from these credit facilities.

 

7	Long-term Debt

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

 

		As at May 31, 2018				As at August 31, 2017
Unsecured, non-interest-bearing loans, denominated in euros, repayable in quarterly instalments, maturing in March 2024 and March 2025		$	872			$	‒
Unsecured loans, denominated in euros, repayable in monthly, quarterly or bi-annual instalments, bearing interest at annual rates of nil to 5.0%, maturing at different dates between December 2018 and September 2023			5,196			‒
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 June 2019 and August 2022			909			‒
Loans, secured by the universality of the assets of a subsidiary, denominated in euros, repayable in monthly or quarterly instalments, bearing interest at annual rates of 1.1% to 2.9%, maturing at different dates between March 2020 and July 2022			2,491			‒
Other long-term debt			49			‒
			9,517			‒
Current portion of long-term debt			2,938			‒
		$	6,579			$	‒

 

The company is subject to certain covenants under its long-term debt that were met as at May 31, 2018.

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

 

8	Share Capital

The following tables summarize changes in share capital for the nine months ended May 31, 2017 and 2018.