UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
| ☐ | Registration statement pursuant to section 12(b) or (g) of the Securities Exchange Act of 1934 |
or
| ☒ | Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the 12 months ended October 31, 2019
or
| ☐ | Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
or
| ☐ | Shell company report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission file number 001-38187
Micro Focus International plc
| The Lawn | |
| 22-30 Old Bath Road | |
| Newbury | |
| Berkshire RG14 1QN | |
| United Kingdom | United Kingdom |
| Investor Relations and Corporate Communications | ||
| c/o Micro Focus International plc | ||
| The Lawn, 20-30 Old Bath Road | ||
| Newbury, Berkshire RG14 1QN | ||
| United Kingdom | ||
Tel: +44 (0) 1635 32646 | ||
Email: investors@microfocus.com | ||
Securities registered or to be registered pursuant to Section 12(b) of the Act.
| Title of each class: | Trading Symbol(s): | Name of each exchange on which registered: |
Ordinary Shares and* American Depository Shares, each representing one ordinary share of Micro Focus International plc | MFGP | New York Stock Exchange |
*Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
As of October 31, 2017, 152,775,7262019, 84,223,580 American Depository Shares were issued and outstanding.outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐☒ No ☒☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☐☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.filer, or an emerging growth company. See the definitions of “accelerated filerfiler”, “large accelerated filer” and large accelerated filer”“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☒ | Accelerated filer ☐ | Non-accelerated filer ☐ | Emerging growth company ☐ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.☐
†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
US GAAP ☐
International Financial Reporting Standards as issued by the International Accounting Standards Board ☒
Other ☐
If “Other” has been checked in the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ☐ No ☐
☒
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In connection with the completion (“Closing”) of the merger between Micro Focus International plc (the “Company”)(“the Company” or “the Group”, LSE: MCRO.L, NYSE: MFGP) and HPE Software’s business segment (“HPE Software”Software business”), together the “Enlarged Group” or “Enlarged Company”, the Board of Directors authorized a change of fiscal year end from April 30, 2018 to October 31, 2018 to allow the Company to launch the Enlarged Company’s financial year with effect from November 1, 2017.2018. As a result, the Company iswas required to file this transition reportthe prior Annual Report on Form 20-F for the transition period of May 1, 2017 to October 31, 2017.2018.
Exhibit 15.4 further presents the unaudited financial information presented for the 12-month period ended October 31, 2018 and the 6-month period ended October 31, 2017 and October 31, 2016. The Company notes that this transition report on Form 20-F is filed pursuant to Rule 13a-10(g)(4) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which permits the Company to respond to only Items 5, 8.A.7., 13, 14 and 18 of Form 20-F.2017.
Cautionary statement on forward looking statements
The Securities and Exchange Commission, or the SEC, encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. Except for the historical information contained in this transition reportAnnual Report on Form 20-F, the statements contained in this transitionannual report are “forward-looking statements” which reflect our current view with respect to future events and financial results.
Words such as “may,” “anticipate,” “estimate,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance used in connection with any discussion of future operating or financial performance, identify forward looking statements. Forward-looking statements represent management’s present judgment regarding future events and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.
These risks include, but are not limited to, risks and uncertainties regarding:
our ability to develop products and services that satisfy the needs of our customers;
the effectiveness of our sales force and distribution channels;
competition in the markets in which we operate;
our ability to attract and retain sufficiently qualified management and key employees;
the ongoing integration of HPE Software into the Company, which may impede the ability of the Enlarged Group to obtain the same types and levels of benefits, services and resources that have historically been provided to HPE Software by HPE, which could lead to a failure to realize the anticipated benefits of the merger;
our ability to identify, manage, complete and integrate acquisitions, divestitures and other significant transactions successfully;
the availability, integrity and security of our IT systems;
our ability to comply with national and regional laws and regulations across the various jurisdictions in which the Group operates;
our dependence on intellectual property, our ability to protect intellectual property and third-party claims of infringement on intellectual property;
our exposure to fluctuations in currency exchange rates and interest rates, which could affect our variable rate indebtedness;
restrictions on our ability to secure additional financing or refinance our existing financing;
our ability to comply with the covenants under our Credit Facilities (see note 20 of the consolidated financial statements in Item 18);
the possibility of being required, in certain circumstances, to make tax indemnification payments to the former owner of the HPE Software business;
the impact of future changes to, or interpretations of, US and non-US tax laws;
our exposure to political developments in the United Kingdom, including the terms and manner of the UK’s withdrawal from the EU;
Our exposure to prevailing macro economic trends;
our ability to protect the personal information of our customers;
our ability to discover and address any material weaknesses or deficiencies in the Group’s internal controls over financial reporting; and
our ability to manage the risks involved in the foregoing.
In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this transitionannual report might not occur. Investors are cautioned not to place undue reliance on the forward lookingforward-looking statements, which speak only as of the date of this transitionannual report. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-lookingforward- looking statements, whether as a result of new information, future events or otherwise. All subsequent forward-looking statements attributable to us or to any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this document.
| Not applicable. |
| Not applicable. |
Selected consolidated financial data
The table below shows the Group’s selected consolidated financial data prepared under International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
The selected consolidated income statement data for the 12-months ended October 31, 2019, the 18-months ended October 31, 2018 and the 12-months ended April 30, 2017 and the selected consolidated balance sheet data as at October 31, 2019 and October 31, 2018 have been derived from our audited consolidated financial statements included in “Item 18. Financial Statements” in this Annual Report on Form 20-F. The selected consolidated income statement data for the 12-months ended April 30, 2016 and April 30, 2015 and the selected consolidated balance sheet data as at April 30, 2017, 2016 and 2015 have been derived from our consolidated financial statements not included in this Annual Report on Form 20-F.
The Group’s financial statements reflect the trading performance of the continuing and discontinued operations for the 12-months ended October 31, 2019 compared to the 18-months ended October 31, 2018 and the 12-months ended April 30, 2017.
Within the 12-months, the Group has undertaken one corporate development activity, which has had a material impact on the Group’s reported results:
On March 15, 2019 the Group completed the disposal of SUSE, the profits from which have been reported within the profit from discontinued operations in the year. Previously on August 21, 2018, shareholders had voted to approve the proposed transaction whereby the Group agreed to sell its SUSE Product Portfolio at which point the SUSE operating segment met the definition of a discontinued operation under IFRS 5 and was treated as such in these financial statements. This meant that during the 18- months ended October 31, 2018, the SUSE results were excluded from the individual line items of the income statement and balance sheet. SUSE was instead included as a single line entitled “profits from discontinued operations” within the income statement and as an “asset held for sale” or “liability held for sale” on the balance sheet through to the date of disposal. The transaction was completed on March 15, 2019.
The selected consolidated financial information should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 20-F. The information provided below is not necessarily indicative of the results that may be expected from future operations.
Summarized Group consolidated statement of comprehensive income:
12 months ended October 31, 2019 | 18 months ended October 31, 20181 | 12 months ended April 30, 2017 | 12 months ended April 30, 2016 | 12 months ended April 30, 2015 | ||||||||||||||||
| $m | $m | $m | $m | $m | ||||||||||||||||
| Revenue | 3,348.4 | 4,754.4 | 1,077.3 | 991.2 | 733.4 | |||||||||||||||
| Cost of sales | (789.9 | ) | (1,302.7 | ) | (216.4 | ) | (202.5 | ) | (83.3 | ) | ||||||||||
| Gross Profit | 2,558.5 | 3,451.7 | 860.9 | 788.7 | 650.1 | |||||||||||||||
| Selling and distribution costs | (1,224.8 | ) | (1,764.2 | ) | (363.1 | ) | (312.6 | ) | (252.4 | ) | ||||||||||
| Research and development expenses | (491.2 | ) | (680.8 | ) | (122.8 | ) | (117.4 | ) | (141.9 | ) | ||||||||||
| Administrative expenses | (620.8 | ) | (629.9 | ) | (147.6 | ) | (111.5 | ) | (119.2 | ) | ||||||||||
| Operating profit | 221.7 | 376.8 | 227.4 | 247.2 | 136.6 | |||||||||||||||
| Finance costs | (282.4 | ) | (350.4 | ) | (96.8 | ) | (98.4 | ) | (56.2 | ) | ||||||||||
| Finance income | (26.6 | ) | 7.7 | 1.0 | 1.0 | 1.2 | ||||||||||||||
| (Loss)/profit before tax | (34.1 | ) | 34.1 | 131.6 | 149.8 | 81.6 | ||||||||||||||
| Taxation | 16.0 | 673.1 | (7.5 | ) | (13.9 | ) | 14.3 | |||||||||||||
| (Loss)/profit from continuing operations | (18.1 | ) | 707.2 | 124.1 | 135.9 | 95.9 | ||||||||||||||
| Profit from discontinued operation (attributable to equity shareholders of the Company) | 1,487.2 | 76.9 | 33.7 | 27.0 | 5.5 | |||||||||||||||
| Profit after tax | 1,469.1 | 784.1 | 157.8 | 162.9 | 101.4 | |||||||||||||||
| Other comprehensive (expense)/income | (306.0 | ) | 29.3 | (5.7 | ) | 0.6 | (11.3 | ) | ||||||||||||
| Total comprehensive income for the period | 1,163.1 | 813.4 | 152.1 | 163.5 | 90.1 | |||||||||||||||
| Attributable to: | ||||||||||||||||||||
| Equity shareholders of the Company | 1,162.8 | 813.3 | 152.2 | 163.4 | 90.4 | |||||||||||||||
| Non-controlling interest | 0.3 | 0.1 | (0.1 | ) | 0.1 | (0.3 | ) | |||||||||||||
| Total comprehensive income for the period | 1,163.1 | 813.4 | 152.1 | 163.5 | 90.1 | |||||||||||||||
| Continuing and Discontinued Operations | ||||||||||||||||||||
| Earnings per share | ||||||||||||||||||||
| Basic (cents) | 388.50 | 201.70 | 68.88 | 74.50 | 58.54 | |||||||||||||||
| Diluted (cents) | 384.35 | 196.17 | 66.51 | 71.61 | 56.71 | |||||||||||||||
| Continuing Operations | ||||||||||||||||||||
| Earnings per share | ||||||||||||||||||||
| Basic (cents) | (4.87 | ) | 181.91 | 54.17 | 62.40 | 55.36 | ||||||||||||||
| Diluted (cents) | (4.87 | ) | 176.92 | 52.31 | 59.97 | 53.64 | ||||||||||||||
1 In the 18 months ended October 31, 2018 certain costs were incorrectly presented as administrative expenses and should have been classified in costs of sale, selling and distribution expenses and research and development expenses. Management has therefore elected to correct the presentation and record these immaterial adjustments to revise the Consolidated Statement of comprehensive income for the 18 months ended October 31, 2018. The revision has no impact on the operating profit, profit for the period, assets and liabilities or cashflows for the 18 months ended October 31, 2018. For further information see the basis of preparation of the Consolidated financial statements in Item 18.
Summarized Group consolidated statement of financial position:
October 31, 2019 | October 31, 2018 | April 30, 2017 | April 30, 2016 | April 30, 2015 | ||||||||||||||||
$m | $m | $m | $m | $m | ||||||||||||||||
Non-current assets | 12,846.7 | 13,720.5 | 3,995.5 | 3,482.6 | 3,629.7 | |||||||||||||||
Current assets | 1,448.1 | 1,917.6 | 442.2 | 954.4 | 460.9 | |||||||||||||||
Current assets classified as held for sale | - | 1,142.5 | - | - | - | |||||||||||||||
| Total assets | 14,294.8 | 16,780.6 | 4,437.7 | 4,437.0 | 4,090.6 | |||||||||||||||
Current liabilities | 1,802.0 | 2,010.4 | 944.7 | 1,061.8 | 988.0 | |||||||||||||||
Current liabilities classified as held for sale | - | 437.7 | - | - | - | |||||||||||||||
Non-current liabilities | 6,216.5 | 6,540.5 | 1,879.5 | 1,781.4 | 1,824.6 | |||||||||||||||
| Total liabilities | 8,018.5 | 8,988.6 | 2,824.2 | 2,843.2 | 2,812.6 | |||||||||||||||
| Net Assets/(Liabilities) | 6,276.3 | 7,792.0 | 1,613.5 | 1,593.8 | 1,278.0 | |||||||||||||||
Share Capital | 47.2 | 65.8 | 39.7 | 39.6 | 39.6 | |||||||||||||||
Number of shares | 363,583,328 | 436,800,513 | 229,674,479 | 228,706,210 | 228,587,397 | |||||||||||||||
12 months ended October 31, 2019 | 18 months ended October 31, 2019 | 12 months ended April 30, 2017 | 12 months ended April 30, 2016 | 12 months ended April 30, 2015 | ||||||||||||||||
Interim dividend 1 | 58.33 | 34.60 | 29.73 | 16.94 | 15.40 | |||||||||||||||
Interim dividend 2 | - | 58.33 | - | - | - | |||||||||||||||
Final dividend | 58.33 | 58.33 | 58.33 | 49.74 | 33.00 | |||||||||||||||
Dividend declared per share (cents) | 116.66 | 151.26 | 88.06 | 66.68 | 48.40 | |||||||||||||||
Dividends
The Group’s dividend policy remains unchanged at two times covered by the Adjusted earnings of the Group (defined as profit after tax excluding the effects of share-based compensation, amortization of purchased intangible assets and exceptional items including gain on disposal of discontinued operation), of which one third will be paid as interim and two thirds as final.
The directors announced a final dividend of 58.33 cents per share on February 4, 2020. The total dividend per share in the 12-month period was 116.66 cents.
The dividend will be paid in Sterling equivalent to 44.53 pence per share, based on an exchange rate of £1 =1.31 being the rate applicable on February 3, 2020, the date on which the board resolved to propose the dividend. The dividend will be paid on May 7, 2020 to shareholders on the register at April 14, 2020.
This total dividend is 116.66 cents per share, which is growth of 15.7% on the full year annualized dividend for the 18-months ended October 31, 2018 of 100.84 cents per share.
Due to the change to an 18-month accounting period to October 31, 2018 in prior period, there were two interim dividends and a final dividend made in the prior period.
For further information on dividends please refer to note 8 of the Group financial statements within Item 18.
Not applicable.
Not applicable.
There are risks associated with owning Micro Focus ADSs. In addition to the other information included elsewhere in this Annual Report on Form 20-F, including in the section entitled ‘‘Cautionary Statement on Forward-Looking Statements,’’ you should carefully consider the following risk factors. The risks and uncertainties described below are not the only risks and uncertainties that the Enlarged Group and holders of Micro Focus ADSs may face. Additional risks and uncertainties not presently known to the Company, or that the Company currently considers immaterial, could also negatively affect the business, results of operation, financial condition and prospects of the Enlarged Group, as well as the value of Micro Focus ADSs.
The order in which the following risk factors are presented does not necessarily reflect the likelihood of their occurrence or the relative magnitude of their potential material adverse effect on the business, financial condition, results of operation or prospects of the Enlarged Group or the market price of the Micro Focus Shares or Micro Focus ADSs.
The information given is as of the date of this information statement/prospectus, and any forward-looking statements are made subject to the reservations specified under the section entitled ‘‘Cautionary Statement on Forward-Looking Statements”.
Principal risks and uncertainties
In common with all businesses, the Group could be affected by risks and uncertainties that may have a material adverse effect on its business operations and achieving its strategic objectives including its business model, future performance, solvency, liquidity and/or reputation. These risks could cause actual results to differ materially from forecasts or historic results. Accepting that risk is an inherent part of doing business, the Board is mindful of the interdependencies of some risks. Where possible, the Group seeks to mitigate risks through its RMF (“Risk Management Framework”), internal controls and insurance, but this can only provide reasonable assurance and not absolute assurance against material losses. In particular, insurance policies may not fully cover all of the consequences of any event, including damage to persons or property, business interruptions, failure of counterparties to conform to the terms of an agreement or other liabilities. The following are the principal risks and uncertainties and potential impacts that are relevant to the Group as a provider of software products and associated services at this time. They do not comprise all of the risks associated with the Group and are not set out in priority order. Additional risks not presently known to management, or currently deemed to be less material, may also have an adverse effect on the Group.
Products | ||
Principal Risk Description To remain successful, the Group must ensure that its products continue to meet the requirements of customers and investment must be effectively balanced between growth and mature products. Investment in research and innovation in product development is essential to meet customer and partner requirements in order to maximize customer value, revenues and corporate performance. The Group has a large number of products, at differing stages of their life-cycle. The extent of investment in each product set needs to be managed and prioritized considering the expected future prospects and market demand. | ||
Potential Impact If products do not meet the requirements of customers, they will seek alternative solutions, resulting in the loss of existing maintenance and new revenue opportunities and the cancellation of existing contracts. Insufficient focus on key research and development projects may damage the long- term growth prospects of the Group. The Group’s business and reputation may be harmed by innovation that falls behind competitors, or by errors or defects in its products. |
Go-To-Market (“GTM”) Models | ||
Principal Risk Description For the Group to succeed in meeting revenue and growth targets, it requires successful GTM models across the full product portfolio, with effective strategies and plans to exploit all routes to market, including direct and channel/partner led sales. In addition, the Group must focus the sales force on targeted customer segments and ensure appropriate responses to the market dynamics related to changes in customer buying behaviors. Effective GTM models may be more successful if accompanied by compelling Micro Focus brand awareness programs. The Group is dependent upon the effectiveness of its sales force and distribution channels to drive licence and maintenance sales and a reference-based selling model. | ||
Potential Impact Poor design and/or execution of GTM plans may limit the success of the Group by targeting the wrong customers through the wrong channels and positioning the wrong product or solution offerings, reducing the value that customers receive from Micro Focus. |
Competition | ||
Principal Risk Description Comprehensive information about the markets in which Micro Focus operates is required for the Group to assess competitive risks effectively and to perform successfully. The Group operates in a number of competitive markets and success in those markets depends on a variety of factors. | ||
Potential Impact Failure to understand the competitive landscape adequately and thereby identify where competitive threats exist may damage the successful sales of the Group’s products. If the Group is not able to compete effectively against its competitors, it is likely to lose customers and suffer a decrease in sales, which may result in lost market share and weaker financial performance. |
Employees and culture | ||
Principal Risk Description The retention and recruitment of highly skilled and motivated employees, at all levels of the Group, is critical to the success and future growth of the Group in all countries in which it operates. Employees require clear business objectives, and well-communicated vision and values, for the Group to achieve alignment and a common sense of corporate purpose among the workforce. | ||
Potential Impact Failure to retain and develop skill sets, particularly in sales, IT and research and development, may hinder the Group’s sales and development plans. Weak organizational alignment and inadequate incentivization may lead to poor performance and instability. It could also have an adverse impact on the realization of strategic plans. |
Business Strategy and Change Management | ||
Principal Risk Description The Group is engaged in a number of major change projects, including acquisitions and divestments, to shape and grow the business by strengthening the portfolio of products and capabilities and IT projects to standardize systems and processes. The continued integration of the HPE Software business is complex, with a range of integration and transformation risks. The integration of the HPE Software business with the existing businesses carried on by the Group may be more time consuming and costly than anticipated. The Group is also executing a series of operational transformation initiatives. These projects expose the Group to significant transformation risks. The Group’s strategy may involve the making of further acquisitions or divestments to protect or enhance its competitive position and failure to identify, manage, complete and integrate acquisitions, divestitures and other significant transactions successfully could have a material adverse effect on the Group’s business. Further, the Group has substantially completed a Strategic & Operational Review, which includes other initiatives that may increase disruption to business as usual activities across the Group. | ||
Potential Impact Failure to successfully analyze, execute and co-ordinate the implementation and delivery of the core systems and associated business processes with the various integration, divestment and transformation programs may result in the disruption of the on-going business without delivering the anticipated strategic and operational benefits of such transactions and/or initiatives. In addition, this may affect the ability to execute strategic plans for growth. |
IT Systems and information | ||
Principal Risk Description The Group’s operations, as with most businesses, are dependent on maintaining and protecting the integrity and security of the IT systems and management of information. Following the integration of the HPE Software business the Group continues to operate on two IT architectures with the attendant complexity to business operations and the control environment. As set out in Item 4.B. Business Overview, work is underway to transition to a simplified systems architecture. The transition may be more time consuming and costly than anticipated, given the amount of change management that is involved. | ||
Potential Impact Disruption to the IT systems could adversely affect business and Group operations in a variety of ways, which may result in an adverse impact on business operations, revenues, customer relations, supplier relations, and reputational damage. Dependency on IT providers could have an adverse impact on revenue and compliance in the event that they cannot resume business operations. |
Legal and Regulatory Compliance | ||
Principal Risk Description The Group operates across a number of jurisdictions and two regulated exchanges. Compliance with national and regional laws and regulations is essential to successful business operations. The Group may be involved in legal and other proceedings from time to time, and as a result may face damage to its reputation or legal liability. The Group has entered into various acquisitions and a disposal over recent years and may be subject to, or have the benefit of, certain residual representations, warranties, indemnities, covenants or other liabilities, obligations or rights. The Group has a variety of customer contracts in a variety of sectors, including Government clients. | ||
Potential Impact Failure to comply could result in civil or criminal sanctions (i.e. personal liability for directors), as well as possible claims, legal proceedings, fines, loss of revenue and reputational damage. |
Intellectual Property (“IP”) | ||
Principal Risk Description The Group is dependent upon its intellectual property, and its rights to such intellectual property may be challenged or infringed by others or otherwise prove insufficient to protect its business. The Group’s products and services depend in part on intellectual property and technology licensed from third parties, and third-party claims of intellectual property infringement against the Group may disrupt its ability to sell its products and services. | ||
Potential Impact Failure could adversely affect the ability of the Group to compete in the market place and affect the Group’s revenue and reputation. |
Treasury | ||
Principal Risk Description The Group operates across a number of jurisdictions and so is exposed to currency fluctuations. The risk of foreign exchange fluctuations may be increased as a result of Brexit. The Group targets a Net Debt 1 to Adjusted EBITDA 2 ratio of 2.7 times and may require additional debt funding in order to execute its acquisition strategy. The Group is exposed to interest rate risk related to its variable rate indebtedness, which could cause its indebtedness service obligations to increase significantly. The Group’s operational and financial flexibility may be restricted by its level of indebtedness and covenants and financing costs could increase or financing could cease to be available in the long-term. The Group may incur materially significant costs if it breaches its covenants under its banking arrangements. 1 Net Debt is defined as cash and cash equivalents less borrowings and finance lease obligations. 2 Adjusted EBITDA is defined as net earnings before finance costs, finance income, taxation, share of results of associates, depreciation of property, plant and equipment, amortization of intangible assets, exceptional items including the gain on disposal of discontinued operation, share-based compensation, product development intangible costs capitalized and foreign exchange (gains)/losses. | ||
Potential Impact The relative values of currencies can fluctuate and may have a significant impact on business results. Insufficient access to funding could limit the Group’s ability to achieve its desired capital structure or to complete acquisitions. An increase in interest rates could have a significant impact on business results. | ||
Tax | ||
Principal Risk Description The tax treatment of the Group’s operations is subject to the risk of challenge by tax authorities in all territories in which it operates. Cross-border transactions may be challenged under tax rules and initiatives targeting multinationals’ tax arrangements, including the OECD’s Base Erosion and Profit Shifting project and EU state aid rules. As a result of the HPE Software business acquisition, the Group may be required under the Tax Matters Agreement entered into with HPE (the “TMA”) to indemnify HPE, if actions undertaken by the Group affect the tax treatment of the separation of HPE Software business from HPE. Future changes to US and non-US tax laws could adversely affect the Group. The Group will be subject to tax laws of numerous jurisdictions, and the interpretation of those laws is subject to challenge by the relevant governmental authorities. | ||
Potential Impact Tax liabilities in various territories in which the Group operates, particularly as a result of the HPE Software business acquisition, could be significantly higher than expected. The Group may be obliged to make indemnification payments to HPE under the TMA, which, if payable, would likely be substantial. |
Macro-Economic Environment and Brexit | ||
Principal Risk Description The Group’s businesses may be subject to inherent risks arising from the general and sector specific economic and political conditions in one or more of the markets in which the Group operates, or by the interruptions posed by external forces such as natural disasters or pandemics. This is heightened by the fact the Group sells and distributes its software products globally. Exposure to political developments in the United Kingdom, including the terms and manner of the UK’s withdrawal from the EU, could have an adverse effect on the Group. Further deterioration of the macro environment could result in more conservatism and longer decision making cycles within the Group’s customer base. | ||
Potential Impact Adverse economic conditions could affect sales, and other external economic or political matters, such as price controls, could affect the business and revenues. |
| Cyber Security | ||
Principal Risk Description There could be a data security breach (Micro Focus data or customer data) involving personal, commercial or product data, either directly from Micro Focus or a third party. This could occur as a result of a malicious or criminal act, or an inadvertent system error. | ||
Potential Impact Data loss, which could harm client and customer relationships, compliance and/or perception of the effectiveness of the Group’s products. |
Internal Controls over financial reporting | ||
Principal Risk Description Internal controls over financial reporting may not prevent or detect an error, fraud, financial misstatement or other financial loss, leading to a material misstatement in the Group’s financial statements. | ||
Potential Impact Failure to discover and address any material weaknesses or deficiencies in the Group’s internal controls over financial reporting could result in material misstatement in the Group’s financial statements and impair the Group’s ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. Based on the assessment as at October 31, 2019, management identified a material weakness in the Group’s internal controls over financial reporting, relating to inadequate controls surrounding existing IT applications. As a result of those deficiencies, automated controls and controls over information produced by the entity could not be relied upon. Please refer to Item 5.B “Management’s annual report on internal control over financial reporting” and Item 15.C “Attestation report of the register public accounting firm”. Although the Group has already begun to implement measures to address and remediate this material weakness, failure to do so, and the risk that other deficiencies may be identified, could also result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of the Group’s financial statements and could have a material adverse effect on the Group’s business, financial condition, results of operation and prospects. |
Overview
Micro Focus International plc (“Micro Focus”) is a global enterprise software business delivering value to approximately 40,000 customers. Micro Focus helps organizations run and transform their business. Driven by customer-centric innovation, Micro Focus software provides the critical tools customers need to build, operate, secure and analyze the enterprise. Micro Focus delivered revenues of $3,348.4m and profit for the period of $1,469.1m for the 12 months ended October 31, 2019.
The Company is subject to the information requirements of the US Securities Exchange Act of 1934 applicable to foreign private issuers. In accordance with these requirements, the company files its Annual Report on Form 20-F and other documents with the SEC. The Company’s SEC filings are available to the public at the SEC’s website, www.sec.gov.
Our website – www.microfocus.com
Access comprehensive information about the Company and download shareholder publications at the corporate website; visit the Investor Relations section for the latest company news, dividend and share price data.
The Micro Focus Group, headquartered in Newbury, U.K., is a global enterprise software company supporting the technology needs and challenges of the Global 2000. The registered office of the Company is The Lawn, 22-30 Old Bath Road, Newbury, Berkshire, RG14 1QN, United Kingdom (Tel: +44 (0) 1635 565200). Its solutions help organizations leverage existing IT investments, enterprise applications and emerging technologies to address complex, rapidly evolving business requirements while protecting corporate information at all times.
Micro Focus was founded in 1976 and in 1981, it became the first company to win the Queen’s Award for Industry purely for developing a software product. The product was CIS COBOL, a standard-compliant COBOL implementation for microcomputers. Micro Focus’ COBOL products remain important components of the Micro Focus Product Portfolio, which now extends to more than 300 products.
Micro Focus is one of the world’s largest enterprise software providers. It helps customers digitally transform their organization and achieve growth, while also maintaining the ability to optimize their underlying business processes and overall business spend. Micro Focus offerings are by design, built to bridge the gap between existing and emerging technologies – enabling faster innovation, with less risk, in the race to digital transformation. The Company is at the heart of billions of transactions around the globe, and serves a central role in thousands of business-critical functions, such as testing, process automation, storage, hybrid cloud, security, analytics, compliance and more. Backed by a deep analytics ecosystem, Micro Focus combines a wide range of trusted and proven products and solutions with customer-centric innovation to deliver the speed, agility, security and insights necessary to succeed in today’s rapidly evolving marketplace.
Micro Focus International plc is listed on the London Stock Exchange and is a member of the FTSE 250 index. The Company’s American Depositary Shares (the “ADSs”) are listed on the New York Stock Exchange.
As of February 19, 2020 (the latest practicable date prior to the date of this Annual Report on Form 20-F), Micro Focus had a market capitalization of £2.67 billion ($3.45 billion).
Micro Focus has more than 40 years of experience in delivering proven, scalable and robust solutions.
The Group’s powering customers’ digital transformation with solutions spanning four key areas:
Enterprise DevOps (SPEED)
— Deliver at high speed with low risk
Hybrid IT Management (AGILITY)
— Simplify your IT transformation
Security, Risk, and Governance (SECURITY)
— Secure what matters most
Predictive Analytics (INSIGHTS)
— Analyze in time to act
The systematic application of the Micro Focus business model is driving better clarity of purpose, the alignment of goals and the creation of a more dynamic environment where execution is faster, operations simpler and people more accountable. Approximately 12,000 employees are working to common goals around our core ability to make, sell and support enterprise-class software across a broad and deep portfolio of more than 300 products. Our team is becoming more accustomed to this performance-based culture focused on delivering value to customers for the long-term.
Acquisitions and Investments
This annual report covers the 12-months ended October 31, 2019 with the comparative periods being the 18-months ended October 31, 2018, and 12-months ended April 30, 2017.
Within the 12-months ended October 31, 2019, the Group has undertaken one corporate development activity, which has had a material impact on the Group’s reported results:
On March 15, 2019 the Group completed the disposal of SUSE, the profits from which have been reported within the profit from discontinued operations in the year. Previously on August 21, 2018, shareholders had voted to approve the proposed transaction whereby the Group agreed to sell its SUSE Product Portfolio at which point the SUSE operating segment met the definition of a discontinued operation under IFRS 5 and was treated as such in these financial statements. This meant that during the 18- months ended October 31, 2018, the SUSE results were excluded from the individual line items of the income statement and balance sheet. SUSE was instead included as a single line entitled “profits from discontinued operations” within the income statement and as an “asset held for sale” or “liability held for sale” on the balance sheet through to the date of disposal. The transaction was completed on March 15, 2019.
This transaction had a material impact on the trading performance and presentation of the financial statements.
Details of business combinations including the transaction to acquire Interset Software Inc., for the 12-months ended October 31, 2019 and additional transactions in the 18-months ended October 31, 2018 and the 12-months ended April 30, 2017 can be found in note 38 of the financial statements in Item 18.
The Group is a global enterprise software provider supporting the technology needs and challenges of 40,000 customers, from small and medium size enterprises to many in the Forbes Global 2000. The Group’s solutions help organizations leverage existing IT investments, enterprise applications and emerging technologies to address complex, rapidly evolving business requirements, including the protection of corporate information at all times.
The period reported is the 12-months ended October 31, 2019. The prior period was 18-month ended October 31, 2018 as a result of moving our year-end from the end of April to the end of October.
This has been a disappointing year. Whilst a significant number of things have been achieved in the year the end result is not in line with the Group’s expectations. The integration of the HPE Software Business has proved more challenging than the Group anticipated resulting in delayed financial performance.
Whilst the Group continues to make progress, this has not been at the pace hoped for, with major IT system reimplementation compounding poor sales execution and productivity.
As a result, on August 29, 2019, the Board of Directors announced a wide-ranging Strategic & Operational review utilizing the expertise of independent third parties to work with the Micro Focus management team in the most extensive review of the business since 2011. This strategic review has re-affirmed the Group’s belief that there is a large section of the Enterprise Software market that is consolidating and that there are value creation opportunities for scale players with operational efficiency and disciplined capital allocation. Notwithstanding the current challenges in execution, the Group believes that Micro Focus remains well positioned to participate in this opportunity.
The review also highlighted some areas where the Group now needs to transform the way things are done in order to better align to the evolving needs of customers and partners. The work on the strategic review is well progressed and a full update on the review and the changes the Group intends to make are set out below.
During the year the Group completed the separation and sale of the SUSE business demonstrating the value of the Group’s approach to portfolio management. Through effective investment and management of the SUSE asset, from being 20% of total revenues of The Attachmate Group when acquired by Micro Focus in November 2014 for $2.3billion, the Group achieved a total cash consideration of $2.5billion for the SUSE asset alone just four years later, at an accounting profit on disposal before tax of $1.8 billion.
Over a number of years, the Group has played a lead role in consolidating a fragmented enterprise software market.
The Group continues to believe consolidation will play a key part in the shareholder value creation and announcements of other significant M&A in the Group’s market confirm that this consolidation is active and relevant.
Segments
The Group operates one segment under IFRS 8:
Micro Focus Product Portfolio – The Micro Focus Product Portfolio segment contains both mature software products and high growth offerings that are managed on a portfolio basis akin to a “fund of funds” investment portfolio. This portfolio is managed within a single Group – with five sub-portfolios based on industrial logic and management of the Micro Focus sub-portfolios: Application Modernization & Connectivity, Application Delivery Management, IT Operations Management, Security and Information Management & Governance. The software is sold and supported through a geographic Go-to-Market organization.
Principal markets
Details of the principal markets in which the Group operates including a breakdown of revenue by activity and geographic market is disclosed in note 2 of the financial statements in Item 18.
Seasonality
Micro Focus’ quarterly revenues have historically been affected by a variety of seasonal factors typical of an enterprise software business with a license fee model and the industry in which it operates.
The operating margins of its businesses are generally affected by seasonal factors in a similar manner because its base of largely fixed costs remains consistent throughout the year. Micro Focus believes that this trend will continue in the future and that its total revenue will continue to peak in the fourth fiscal quarter of each year. In aligning the financial year end of the Enlarged Group to October 31 following Closing in the prior year, Micro Focus the fourth quarter license fee peak moved from April 30, 2018 to October 31, 2018. Maintenance and subscription fee renewals are spread throughout the financial year, however, there is a seasonal peak in the quarter ending January 31 as a result of the calendar year end, which coincides with the financial year-end of a large number of other companies.
The Micro Focus Strategy and Business Model
The Group has undertaken the most comprehensive review of the business since 2011. A leading Global Investment Bank and other specialist advisors supported the work undertaken.
The review covered:
| - | Evaluation of the full range of the strategic alternatives for value creation; and |
| - | An assessment of where the Group stands now in of its efforts to fully integrate the HPE Software business and the overall execution capability within the Company and the improvements required to accelerate progress |
In order to enable better clarity and provide the necessary context, a summary of the key issues, the progress made within this reporting period and the outcome of the review is set out below.
Assessment of Key issues and Progress to Date
The key issues that have emerged related to overall execution, market changes and the integration of the HPE Software business acquisition. All of these issues are understood in detail, progress has been made and there is clear visibility of what remains to be done in the near term. This is set out below.
| 1. | Operational Systems and Business Processes |
The HPE Software business acquisition presented the typical challenges associated with making a large and complex acquisition and significant additional complexities relating specifically to this being a carve-out of a division from a much larger parent.
To enable this “carve out”, HPE designed and initiated the build of new IT systems, new business processes and identified the key functions and people required to support a standalone organization. The adoption of these purpose built systems and business processes across the enlarged group was one of the key benefits expected from the acquisition.
In reality, the systems were proven to be not fit for purpose, the business processes were overly complex, and the organizational design was highly fragmented. This has continued to have a material impact to core business operations, execution levels and overall productivity.
The Group has deployed significant resources to stabilize these systems and in parallel execute a comprehensive programme of work to address the more structural changes required.
The objective of these changes is to deliver a single set of business applications and infrastructure built on simplified or completely re-designed business processes which are anticipated to drive operational improvements and efficiencies.
Notable progress includes:
| - | The design, build and deployment of a fully standalone IT hardware infrastructure was completed on time and budget. This significant and critical undertaking allowed us to migrate from the shared environment with HPE. |
| - | Organizational consolidation in each of the Finance and HR functions has advanced and will consolidate operations from more than 60 locations into 5 global and regional Centers of Excellence to enable effective scale, lower costs and efficiency. |
| - | Rationalization of our legal entity structure and standardization of company policies and processes. When complete the Group expects to simplify the Group structure from over 300 companies to approximately 100 which will bring significant improvements in efficiency and cost. |
The remaining major work item is the completion of the project to build the single business application architecture. When complete this work is expected to deliver the platform for materially improved execution through more streamlined business operations and effective scale to drive operational and cost efficiencies creating a platform for future growth.
2. Go-to-Market Organization
Through multiple acquisitions, the business has inherited a mix of regional and product orientated go-to-market models. These differences have led to inconsistent approaches to customer engagement and the associated deployment of resources and when combined with the systems issues outlined above impacted overall levels of execution and predictability of performance. This led to reduced productivity and elevated levels of staff attrition.
Progress has been made in stabilising staff attrition and hiring levels have increased to drive towards stable sales headcount. The process of on-boarding new people has been improved and investments made in better enablement and training to reduce the time it takes to get new sales teams fully productive. Investments have also been made in delivering tactical improvements to systems and reporting tools whilst replacement business systems are developed.
The approach to date has been to drive improvement through iterative and incremental change. This has now been replaced by a more accelerated approach in order to drive fundamental changes on a global basis to deliver the necessary improvements to the organisation. The new model and approach is summarised later in this section.
| 3. | Product Portfolio |
The operating model for product development drove “siloed” execution leading to disconnected strategies and limited cross- portfolio leverage of skill or capability. Customer engagement in the development of product strategies was insufficient and resulted in product roadmaps that did not fully exploit the advantages of significant customer installed bases and strong market positions. This combination led to reduced adoption of our latest technology which in turn limits our ability to cross and upsell.
The operating model has been re-structured to drive collaboration and the leverage of innovation across portfolios to both strengthen existing offerings and reduce time to market. Core product roadmaps have been re-shaped in every portfolio with the major remedial, corrective actions in product design now complete.
The improved collaboration enabled our product teams to deliver over 500 product releases during the period with examples of this more customer centered innovation being delivered. Notably:
| - | New Robotic Process Automation, Artificial Intelligence and |
| - | Natural Language Processing capabilities, |
| - | Delivering container technology to enable flexible deployment, |
| - | User, Entity & Behavioural Analytics capabilities to enhance security capabilities |
| - | Enabling customers to process huge volumes of data in the cloud or within their own environment but with cloud scale economics. |
The immediate execution focus is to ensure customers fully understand our product strategy and are able to deploy our latest technology releases successfully.
| 4. | Revenue Composition & Alignment to Strategy |
Professional services revenue has needed to be realigned to support the Micro Focus product strategy rather than to generate standalone services revenue and some of the key SaaS offerings were not engineered correctly to create a profitable and sustainable source of incremental revenue.
The amount of revenue impacted and the actions and time required to correct this were greater than the Group initially anticipated but there is now a clear path to completion.
Professional services revenue has been broadly stable for the last 3 quarters and is on track to be stable on a year-over- year basis by the end of the 12 months ended October 31, 2020 (“FY20”). The remedial product roadmap work for the impacted SaaS offerings is complete and the remaining activities will be completed within the next six months. Impacted customers now have a clear path forward and delivery of the transition is driven by customer demand.
STRATEGIC & OPERATIONAL REVIEW: CONCLUSIONS AND NEXT STEPS
The Strategic & Operational review is substantially complete, and in the opinion of the Board, has confirmed that:
| - | The fundamentals underpinning the Group’s model and approach remain valid |
| - | The Group underestimated the challenges that have emerged in the integration of the HPE Software business. |
| - | The key issues in relation to execution and integration are understood in detail, progress has been made and there is clear visibility of what remains to be done and this now needs to be driven to conclusion |
| - | Whilst the Group has been addressing these challenges, the pace of change within the Enterprise software market has accelerated and the Group now needs to evolve our business model to capture the opportunities for significantly improved performance that exist within a number of our portfolios |
Given the above and having completed a full evaluation of the alternative strategic options available, the Board has concluded that, at this time, the greatest opportunity for value creation is through the successful execution of the following key initiatives:
Evolve – our operating model
Objective: improve product portfolio positioning and external visibility
Given the pace of change in our industry the Group needs to both accelerate and improve the visibility of our product strategies and drive a more differentiated approach to operational management and investment levels in certain portfolios.
When the Group acquired SUSE as part of The Attachmate Group, the Group recognised the need to run this portfolio differently and essentially as a separate business. The market opportunity for Security and Big Data is such that a similar, differentiated approach to investment and operational management will be adopted for these product lines.
Over the medium term the Group’s goal is to develop broadly autonomous businesses operating within the Group. This will happen in two phases and take 12-24 months to complete. During the first phase the Group will re-align organizational structures, build new capability within these portfolios and re-focus product and market positioning where required. In phase two the Group plans is to run these portfolios broadly autonomously and report performance discretely within the overall Group performance updates.
Accelerate – transition of certain portfolios to SaaS or subscription based revenue model
Objective: Improve portfolio positioning and revenue composition
The Strategic & Operational review has highlighted the need for a more definitive approach and accelerated transition to Subscription and SaaS based offerings as part of the Group’s future portfolio strategy. The transition will be managed over multiple financial periods with an initial focus on products where this model is the emerging or de-facto market standard.
The Group’s goal is to deliver incremental improvements in revenue trajectory alongside a structured and disciplined transition to SaaS and Subscription for some of our products. During FY20 the Group will begin the transition of Vertica, seek to grow existing and introduce new offerings in Security and build upon existing initiatives in ADM and ITOM with accelerated progress in these portfolios during 2021.
Driving this transition more systematically and faster will lead to improved competitiveness, higher contract value and customer retention rates combined with greater revenue predictability.
Transform – our Go-to-Market function
Objective: Improve overall productivity and predictability of performance
In order to drive consistent and sustained improvements in sales effectiveness a more fundamental restructuring of our go-to-market organisation is now underway. The Group has now accelerated the implementation of a new global operating plan and management system, supplemented by improved infrastructure and a single, consistent sales methodology and investment in the enablement of our teams. The goal of which is to drive significantly improved and increased levels of customer engagement.
Effective execution should over time ensure our resource alignment is better optimised to the opportunities in the marketplace for the Group’s portfolio and drive productivity improvements, improve renewal rates and exploit cross-selling opportunities within our broad portfolio.
Complete – core systems and operational simplification priorities
Objective: deliver the operational systems and business processes that form the platform for operational effectiveness and efficiencies
The review confirmed the critical priority of driving the Group’s systems work to successful conclusion to capture the significant operational improvements and associated efficiencies evident and achievable within the business.
The major piece of structural work outstanding is the project to deliver the single set of business application systems architecture required to fully integrate our business operations.
The Group is encouraged with progress made to date but as previously communicated this is a complex multi-period IT project, further complicated by our SOX requirements which limits the opportunity to make substantial system changes in the second half of FY20. As such a decision on whether the Group executes in line with the Group’s timetable or have to re-phase will be made in the second quarter and communicated as part of the Group’s interim results.
Business Model
The typical stages of a product life cycle are from new product introduction through to high growth to broad adoption and maturity, to decline and ultimately obsolescence.
The Group delivers trusted and proven enterprise software that helps customers address the four core pillars of digital transformation: Enterprise DevOps, Hybrid IT Management, Security, Risk & Governance and Predictive Analytics. This is accomplished not by chasing unproven opportunities, but instead by taking a customer-centric approach to investment and innovation and delivering software that addresses specific use cases that allow our customers to run and transform their businesses, while also protecting the investments they have already made in our offerings. In addition, the Group delivers solutions that are open and integrated, and help bridge existing and emerging technologies. This combination allows customers to build an eco-system that serves their long-term needs and ultimately achieve lasting success in an ever-evolving marketplace.
Current portfolio – underpinning the business model and clear execution and investment discipline
When considering investment priorities, both organic and inorganic, the Group first assess how added resources will influence the Group’s ability to deliver value within the four core pillars of digital transformation. Then the Group evaluates its options within each portfolio against a set of characteristics mapped to each stage of the adoption cycle, as represented in the table below.
New Models Products (Robotic Process Automation) or consumption models (cloud) that open new opportunities could become growth drivers or represent emerging use cases that the Group needs to be able to embrace. | Growth Drivers Products or enabling technology (Artificial Intelligence/ Machine Learning) with consistent growth performance and market opportunity to build the future revenue foundations of the Group. | ||
Optimize Products with declining revenue performance driven by the market or execution. Investments directed to correct trajectory to move back to the core category or focused to optimize long-term returns. | Core Products that have maintained broadly flat revenue performance but represent the current foundations of the Group and must be protected and extended. |
How the Group runs the business
Core to the Micro Focus strategy and operating model is the consistent delivery of “customer- centric innovation”. By delivering enterprise software that meets customers’ needs, and by allowing them to leverage their current investment while also taking advantage of the latest innovations, and applying emerging technologies (e.g. Artificial Intelligence/Machine Learning), Micro Focus helps customers derive added and sustained value and respond to changes in the marketplace much quicker without the need to re-skill the workforce and/or invest in cumbersome upgrades.
The Group’s success starts with a deep portfolio of intellectual property, and requires investment discipline, methodical execution, and a keen attention to delivery in all stages of the software lifecycle. The end result for customers is sustained long-term value, for the Group’s employees it offers a challenging and dynamic workplace and for our investors this leads to robust margins, value creation, and meaningful return on investment.
| The customer proposition | ||||||
| What sets us apart | What drives our business | What this means for our customers | ||||
Strong products and intellectual property with a track record of customer success The Group’s technology is trusted and proven in the market, and deeply embedded in customers’ core business systems and processes. | Bridging now and next The Group bridges the now and the next, future-proofing existing customer investments and enabling them to address new problems and take advantage of emerging technologies. | > | Improved return on investment and reduced risk so customers can extend productive use and maximize return on investment (“ROI”) and derive ongoing value without causing large scale disruption to the ongoing business needs. | |||
Broad portfolio While the Group’s portfolio is broad, the Group has focused its efforts to ensure that it is aligned around the key problem areas for customers. This allows the Group to deliver solutions across the four core pillars of digital transformation, which is a topic that is top-of-mind in virtually every boardroom | Intelligent innovation The Group makes smart and informed decisions about where and when to invest to ensure that the right trade-offs are made and the right innovations are delivered to customers in a consumable way across a variety of consumption models. | > | Greater agility so customers can ensure they are responding rapidly to market demands across a broad spectrum of domains in a way that works for their budget and planning. | |||
Customer-centric innovation The Group takes the time to listen to customers and fully understand their needs and use cases so that the Group can deliver solutions which meet their needs in the context of their operating environment. | The four-box model The Group’s investment priorities consider opportunities in all stages of the product lifecycle to ensure that the Group maximizes the value delivered to the customers over the entire life of a product and in the context in which it will be used. | > | Reliability and scalability so customers can scale to the needs of the enterprise while trusting that the solutions they are investing in will continue to evolve as the market and their needs change – thus allowing them to deliver on their current needs and adapt and change tomorrow. | |||
| What this means for our investors | |||||||
| What sets us apart | What drives our business | What this means for our investors | |||||
| 1 | The Group operates at size and scale As one of the world’s largest enterprise software providers, the Group has economies of scale – leveraging shared functions and resources across our portfolio. | A disciplined financial operating model The Group has a broad, highly experienced management team, skilled in applying the Micro Focus financial and operating model to help enable effective and timely decision making. | > | Return on investment Industry-leading operating margins and meaningful shareholder returns over the long-term. | |||
| 2 | Highly cash generative portfolio The Group has a broad portfolio of products with significant market positions and high switching costs. This generates significant recurring revenue streams and cash generation. | Efficiency in capital allocation Efficient investment in capital whether organic or inorganic. | > | Cash returns Exceptional levels of cash generation and returns to shareholders. | |||
Marketplace
Digital transformation is a necessity for market success
The software marketplace is rapidly evolving. A combination of technology advances, evolving customer expectations, process evolutions (e.g. digitization) and new business models are forcing executives to rethink prior IT strategies.
Until recently, these executives had to make top-line/bottom- line tradeoffs in determining how to evolve – deciding between investments that would help the organization derive value and those that will help optimize costs and manage risk.
Powering digital transformation
With the stakes so high and so many variables to consider, IT executives have to prioritize what will have the greatest impact to their businesses. Typically, four core elements are identified that they wish to achieve with their digital transformation initiatives: they want to move faster, have greater agility as an organization, secure what matters most, and leverage insights to streamline processes, speed decision making and drive value. These four core pillars align directly to established – yet historically disconnected – software markets: Enterprise DevOps, Hybrid IT Management, Security, Risk & Governance and Predictive Analytics.
Because digital transformation initiatives often overlap, organizations today are not just looking for software providers that can deliver these solutions in isolation, but instead can deliver a holistic and integrated set of offerings across these pillars.
With a broad portfolio that addresses all four core pillars of digital transformation, Micro Focus is in a strong position to deliver on customers’ primary digital transformation objectives.
HOW THE GROUP SUPPORTS EACH OBJECTIVE
Speed Deliver at high speed with low risk | Enterprise DevOps | DevOps is essential to the Digital Transformation of a business and is a foundational change in how an organization delivers value to its customers. With Micro Focus, organizations can reliably scale DevOps across all environments, from mainframe to cloud – quickly bringing innovative ideas to life at the pace your business demands. Now speed and quality can go hand in hand. | |
Agility Simplify your IT transformation | Hybrid IT Management | Diverse, unpredictable, and constantly changing, hybrid IT brings with it a new level of complexity that cannot be controlled by conventional management methods. With our solutions, customers can simplify that complexity and transform IT into an agile, services-driven organization. Business success in our digital-first world depends on it. | |
Security Secure what matters most | Security, Risk & Governance | Cyber threats are escalating. Aging apps and processes (along with new ones) are full of unforeseen risks. Privacy and compliance requirements are mounting. And point solutions don’t offer the scope, vision, or cross-silo analytics needed for these Company-wide challenges. With our solutions, you can take a holistic, analytics-driven approach to securing what matters most – identities, applications, and data. | |
Insights Analyze in time to act | Predictive Analytics | Lakes of data are valuable only if you can surface the insights hidden within their depths. With our solutions, you can leverage machine learning to transform unlimited volumes of data into accurate, actionable, automated insights – at the speed of your business. Now you’re ready to make predictions and influence business outcomes. | |
Building on the existing strength of this broad portfolio, Micro Focus has taken the next critical step in adapting to customer needs and delivering integrated solutions. Significant investments have been made to leverage intellectual property across product groups and to solve more complex challenges, including embedding our Vertica big data analytics platform into a number of solutions and combining portfolios to address broad-reaching privacy/GDPR requirements. The Group also provided customers with more choice in terms of consumption models (e.g. Software as a Service) and new offerings (e.g. Robotic Process Automation) to address the changing market demands
Product groups
The Micro Focus Product Portfolio consists of five product groups as set out below. Our product groups are uniquely positioned to deliver a holistic set of digital transformation solutions, while helping customers optimize their existing software investments.
Application Modernization & Connectivity (AMC)
Micro Focus’ Application Modernization and Connectivity solutions help customers unlock business value across a hybrid IT infrastructure. With software that is optimized to bridge the old and the new, these solutions help modernize core business systems – e.g., moving mainframe to the Cloud – to ultimately lower cost and improve speed and agility.
Case Study: Advanced
The Challenge:
This software and technology vendor wanted to bring a new SaaS accounting offering to market that had both scalability and high-availability built in. With millions of lines of code, rewriting was never an option – instead the company needed to evolve its offering to the Cloud.
Products and Services:
| - | Micro Focus Visual COBOL |
| - | Micro Focus COBOL Server with Docker Container support |
Results:
| - | Accelerated on-boarding of new customers – from days to minutes |
| - | Streamlines DevOps processes with continuous testing and deployment |
| - | Expedited time-to-market with Docker-based deployment to AWS |
| - | Integrated with a choice of RDBMS, including open-source |
Application Delivery Management (ADM)
Micro Focus’ Application Delivery Management solutions help organizations build an integrated, end-to-end software delivery process to achieve speed without compromising quality. By employing Artificial Intelligence (AI) and advanced analytics, and fostering automation and collaboration, Micro Focus enables IT and product teams to quickly bring ideas to life – regardless of their methodology, technology or delivery model.
Case Study: McGraw Hill
The Challenge:
This multi-national educational publisher found that managing test assets and load generators was a time-consuming operation, where issues and errors caused unacceptable delays and impacted market reputation.
Products and Services:
| - | Micro Focus LoadRunner Cloud |
Results:
| - | Automated testing to speed up processes and reduce time-to-market |
| - | Reduced project duration by eliminating the need to re-do work |
| - | Increased test levels to improve application quality |
| - | Freed up staff to conduct more creative engineering work |
IT Operations Management (ITOM)
Micro Focus ITOM solutions simplify the complexity of managing hybrid IT environments. They are built to accelerate the service fulfilment lifecycle, strengthen IT service assurance and governance, and help business users easily engage with IT. Powered by analytics and automation, they seamlessly connect Micro Focus and third-party solutions to enable IT transformation in support of digital transformation.
Case Study: Vodafone
The Challenge:
One of the world’s leading mobile communications providers needed to align IT closer to the business, as well as deliver new services fast by automating hybrid IT monitoring and achieving end-to-end visibility.
Products and Services:
| - | Micro Focus Operations Bridge |
Results:
| - | Reduced alarms by 70% |
| - | Minimized noise levels through event correlation and consolidation |
| - | Improved team collaboration with DevOps approach |
| - | Increased focus on development and service enhancement |
Security
Micro Focus Security software helps organizations take a holistic, relationship-based, analytics-driven approach to securing what matters most – identities, applications, and data. Common use cases include using these solutions to govern privileges, to enforce access controls, to unity identity stores, to embed strong security and best practices into DevOps processes, and to discover data, determine access, and guard it wherever it resides.
Case Study: Dubai Electricity and Water Authority
The Challenge:
The energy and utility organization, based in the United Arab Emirates, needed to merge its Information Technology and Operation Technology initiatives so that data could be shares between systems and improve threat intelligence and device monitoring.
Products and Services:
| - | Micro Focus ArcSight Data Platform |
| - | Micro Focus ArcSight Enterprise Security Manager |
| - | Micro Focus ArcSight Investigate |
Results:
| - | Reduced security alarms by 30% |
| - | Increased risk mitigation rate to 98% |
| - | Condensed meter fraud with AI-driven detection |
| - | Achieved 99% device availability through increase visibility |
Information Management & Governance (IM&G)
Micro Focus’ Information Management & Governance solutions help customers analyze, understand and control data – to derive value and manage risk associated with enterprise information. Solutions are typically used to address privacy, compliance, and governance requirements, as well as to attain actionable insights that enable customer behavior analytics, cognitive search, and Internet of Things operations, and security analytics.
Case Study: University of Bern
The Challenge:
One of the largest universities in Switzerland found that, without its own file-sharing system, its academics were instead using third-party offerings. This practice compromised security and placed the university and the individuals at risk.
Products and Services:
| - | Micro Focus Filr Advanced Edition |
Results
| - | Enhanced collaboration, facilitating teaching and research |
| - | Reduced reliance on third-party file-sharing services, minimizing information security risks |
| - | Improved data protection with complete control over storage and access |
The Group is organized to make software, sell software and support software. The Group’s parent company is Micro Focus International Plc, whose shares are listed on the London Stock Exchange. The Company’s American Depositary Shares (the “ADSs”) are listed on the New York Stock Exchange
As at October 31, 2019, the Group had a presence in 48 countries worldwide and employed approximately 12,100 people.
A full list of the Group’s subsidiaries can be found in Exhibit 8.1 of Item 19.
The Group leases various offices under non-cancellable operating lease agreements. The properties owned or leased and operated by the Group’s subsidiaries are maintained in good condition and are believed to be suitable and adequate for the Group’s present needs. The Group’s headquarters are located at premises in Newbury, England. The Group owns or leases properties amounting to over 2.4 million square feet of space, in over 40 countries worldwide. Two individual leased properties are material to the Group. One is located in Provo, Utah, where the Group currently leases approximately 405,700 square feet of office space. The lease on this facility expires in 2024, with an option to extend for a further three, 5-year periods. The Group’s current annual rent under this lease is $8.2 million. Since March 1, 2019, part of the property has been sublet. Current annual sub-lease income is $1.0 million. The other property is located in Santa Clara, California, where the Group currently leases approximately 635,000 square feet of office space. The lease on this facility expires in 2029, with an option to extend for one further 5-year period. The Group’s current annual rent under this lease is $4.6 million.
The information set forth under the headings:
“Property, plant and equipment” in note 12 of the “Notes to the consolidated financial statements” in Item 18;
“Operating lease commitments – minimum lease payments” in note 34 of the “Notes to the consolidated financial statements” in Item 18.
There are no unresolved written comments from the SEC staff regarding its periodic reports under the Exchange Act received more than 180 days before October 31, 2019.
The following discussion and analysis is intended to provide investors with an understanding of the historical performance of Micro Focus International plc (“the Company” or “the Group”, LSE: MCRO.L, NYSE: MFGP)Company and its financial condition. This discussion and analysis presents the factors that had a material effect on the results of operations of Micro Focus for for:
the interim12 month period from May 1, 2017 toended October 31, 2017. The following should be read in conjunction with2019, as compared to the Group’s unaudited consolidated financial statements18 month period ended October 31, 2018; and
the notes thereto included elsewhere in this transition report. 18 month period ended October 31, 2018, as compared to the 12 month period ended April 30, 2017.
The following discussion and analysis contains forward-looking statements. See ‘‘Special Note Regarding“Risk Factors” and “Cautionary Statement on Forward-Looking Statements’’ in this Form 20-F and “Risk Factors in our Form F-4 filed with the Securities and Exchange Commission on August 3, 2017Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. The following should be read in conjunction with the Group’s consolidated financial statements and the notes thereto included in Item 18. The following discussion and analysis contains forward-looking statements. See “Cautionary Statement on Forward-Looking Statements’’ on page 5 and “Risk Factors” in Item 3D on pages 10 to 15 in this Annual Report on Form 20-F for a discussion of the uncertainties, risks and assumptions associated with these statements.
Business Overview
The Group has two operating segments: Micro Focus Product Portfolio andundertaken one material corporate development activity within the 12 months ended October 31, 2019:
• On August 21, 2018, shareholders voted to approve the proposed transaction whereby the Group agreed to sell its SUSE Product Portfolio. On approval of this vote, the SUSE operating segment meets the definition of a discontinued operation under IFRS 5, which results in the SUSE performance being excluded from the individual line items of the income statement and balance sheet. SUSE is instead included as a single line entitled “profits from discontinued operations” within the income statement and as an “asset held for sale” or “liability held for sale” on the balance sheet. The transaction was completed on March 15, 2019 and the SUSE business segment has been treated as discontinued in these financial statements.
Results of Operations
The following discussion provides an analysis of our results of operations and should be read in conjunction with the condensed consolidated interim financial statements included under Item 18 in this Annual Report on Form 20-F. The condensed consolidated interim financial statements have been prepared in accordance with International Financial Reporting StandardsIFRS as issued by the International Accounting Standards Board (“IFRS”) applicable to interim reporting, International Accounting Standard 34 (“IAS 34”), “Interim Financial Reporting”.IASB.
The results of discontinued operations are shown as a single amount on the face of the Consolidated statement of comprehensive income in Item 18 comprising the post-tax profit or loss of discontinued operations and the post-tax gain or loss recognized either on measurement to fair value less costs to sell or on the disposal of the discontinued operation. The Consolidated statement of cash flows has been presented in Item 18 including the discontinued operations. Results and cash flows of the discontinued operation for the three reported periods are shown in note 37 of the financial measuresstatements in Item 18.
12 month period ended October 31, 2019, as compared to the 18 month period ended October 31, 2018
The Group changed accounting year end in the prior year from April 30, 2018 to October 31, 2018 as a result the comparative period is for the 18-month period ended on October 31, 2018. Therefore, substantial period-on-period decreases due to the shorter period of account in the current reporting period are shown. The presentation excludes the discontinued SUSE business from individual line items for each of the reporting periods presented below.
The 18-month period to October 31, 2018 also only included 14 months of results for the acquired HPE Software business.
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | |||||||
| Continuing operations | $m | $m | ||||||
| Revenue | 3,348.4 | 4,754.4 | ||||||
Operating profit (before exceptional items) | 515.9 | 915.0 | ||||||
Exceptional items | (294.2 | ) | (538.2 | ) | ||||
| Operating profit | 221.7 | 376.8 | ||||||
Net finance costs (excluding exceptional items) | (255.8 | ) | (336.9 | ) | ||||
Exceptional finance costs | - | (5.8 | ) | |||||
| (Loss)/profit before tax | (34.1 | ) | 34.1 | |||||
Taxation | 16.0 | 673.1 | ||||||
| (Loss)/profit from continuing operations | (18.1 | ) | 707.2 | |||||
Profit from discontinued operation | 1,487.2 | 76.9 | ||||||
| Profit for the period | 1,469.1 | 784.1 | ||||||
Revenue
In the 12 months ended October 31, 2019, the Group generated revenue of $3,348.4 million, which assist managementrepresents a decrease of $1,406.0 million (29.6%) on the $4,754.4 million in comparing our performance on a consistent basis for purposes of business decision-making by removing18 months ended October 31, 2018.
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | Period-on – period change | ||||||||||
| Continuing operations | $m | $m | % | |||||||||
Licence | 800.0 | 1,213.7 | (34.1 | )% | ||||||||
Maintenance | 2,057.6 | 2,861.6 | (28.1 | )% | ||||||||
SaaS & other recurring | 279.7 | 373.9 | (25.2 | )% | ||||||||
Consulting | 217.9 | 366.3 | (40.5 | )% | ||||||||
| Revenue before haircut | 3,355.2 | 4,814.5 | (30.3 | )% | ||||||||
Deferred revenue haircut | (6.8 | ) | (61.1 | ) | (88.9 | )% | ||||||
| Total Revenue | 3,348.4 | 4,754.4 | (29.6 | )% | ||||||||
Revenue in the table above and the subsequent trends in this section are presented before the impact of certain items that management believes dothe deferred revenue haircut, which represents the unwinding of a fair value adjustment to acquired deferred revenue.
Period-on-period movements in revenue are not directly reflect ourindicative of underlying operations. Includedtrading performance as the current period is for the 12 months ended October 31, 2019 and the comparative period is for the 18 month period October 31, 2018 therefore, revenue shows a significant decline as a result of this shorter accounting period. In addition, partially offsetting the impact of the shorter accounting period on the percentage revenue declines, the results of Hewlett Packard Enterprise (‘‘HPE’’) are included for the full period in the following discussion12 months ended October 31, 2019 where as they are only included for 14 months of the 18 month period ended October 31, 2018. The impact of the results of the HPE Software business acquisition has not been separately disclosed in this report as it is Adjusted Operating Profit, Adjusted Profit before taxnot practical to do so as it was been integrated into the Micro Focus Product Portfolio segment in the prior year and Adjusted EBITDA, allis not operated or reported separately.
As a result, the level of decline period on period, is not indicative of the underlying performance trend. However, the underlying trading performance of the four revenue streams if considered on a like-for-like basis would still show a declining trend in revenue in the period of review albeit to a lesser level. The underlying declining revenue trend in the period of review resulted from inconsistent execution and greater than expected complexities arising from the integration of HPE as well as volatile macro-economic conditions and changing buying behavior leading to the delay of customer investment decisions.
The narrative below focusses on the period-on-period decreases which are non-IFRSprimarily driven by the short period of account.
Revenue by stream performance
Licence revenue decreased by $413.7 million (34.1%) to $800.0 million in the 12 months ended October 31, 2019 compared with $1,213.7 million in the 18 months ended October 31, 2018.
The licence revenue decrease primarily related to the shorter period of account. In addition, underlying performance if considered on a like for like basis, would show a decline in revenue in the year, continued to be impacted by operational issues impacting sales execution and, as such, performance volatility. In particular in the third quarter of the financial measures. For additional informationyear the challenging macro environment resulted in a slowdown in customer purchases. This environment improved marginally in the fourth quarter but short-term volatility remains a continued risk to new business in future trading periods.
The stabilization of licence revenue is a key objective of the Strategic & Operational Review and the steps outlined within Item 4. B of this annual report are the focus areas required to improve the performance in future periods.
Maintenance revenue decreased by $804.0 million (28.1%) to $2,057.6 million in the 12 months ended October 31, 2019 compared with $2,861.6 million in the 18 months ended October 31, 2018.
The maintenance revenue decrease primarily related to the shorter period of account. In addition, underlying performance if considered on Adjusted Operating Profit, Adjusted Profit before taxa like for like basis, would show a decline in revenue in the year, was impacted by one-off events such as the disposal of Atalla and Adjusted EBITDA see “Non-IFRS Measures”.moving to selling to the US Government through a strategic partner rather than direct.
In addition, the following discussion also providesHPE Software business transaction brought a supplemental analysisgreater than anticipated level of revenuecomplexity, which has required us to address a range of specific legacy, issues which are taking time to work through. These have a distortive effect on the underlying trends within the business. For example, Winback initiatives, which the Group implemented to recover previous customer terminations, were paused for systems reasons and our non-IFRS financial measures, preparedthen restarted.
As such, the Group does not see the underlying decline if considered on a constant currency (“CCY”)like for like basis where management believes that discussing CCY results provides a better understandingto be indicative of our underlying maintenance revenue trend and the Group’s performance and trends because it allows for more meaningful comparisons anticipates an improvement in the underlying rate of current period to that of priordecline in future periods. For additional information on CCY and our non-IFRS financial measures see “Non-IFRS Measures.”
The following table sets forthSaaS and other recurring revenue decrease primarily related to the componentsshorter period of account. In addition, underlying performance during the year if considered on a like for like basis, would show a decline in revenue in the year, reflected deliberate actions taken by the Group to rationalize unprofitable operations and practices and refocus resources and investments to deliver the product enhancements required for long-term success. The resulting underlying recurring revenue decline if considered on a like for like basis was in line with the Group’s expectations during the current financial year, which will allow the Group to deliver a more sustainable expected growth in SaaS revenue at a higher profit formargin in the sixmedium-term.
As a result of the Strategic & Operational Review, outlined within Item 4. B, the Group will be accelerating the transition of certain aspects of the portfolio to subscription and SaaS revenue models. In the next financial year, the Group will begin the transition of Vertica to subscription and accelerate the transition of certain products within the Security portfolio to SaaS, before undertaking similar transitions in ADM and ITOM in future periods. This transition will be delivered over multiple financial periods in a controlled and disciplined manor prioritizing key products and will be undertaken alongside the intention to deliver incremental improvements in revenue performance year-on-year.
Consulting revenue decreased by $148.4 million (40.5%) to $217.9 million in the 12 months ended October 31, 2017 and 2016.
| Six months ended October 31, 2017 | Six months ended October 31, 2016 * | |||||||||||||||||||||||||||
Before exceptional items | Exceptional items | Total | Before exceptional items | Exceptional items | Total | Total (Decline) / Growth | ||||||||||||||||||||||
| (dollars in millions) | % | |||||||||||||||||||||||||||
| Revenue | 1,234.5 | - | 1,234.5 | 684.7 | - | 684.7 | 80.3 | % | ||||||||||||||||||||
| Cost of sales | (270.8 | ) | (3.1 | ) | (273.9 | ) | (122.2 | ) | (1.3 | ) | (123.5 | ) | 121.9 | % | ||||||||||||||
| Gross Profit | 963.7 | (3.1 | ) | 960.6 | 562.5 | (1.3 | ) | 561.2 | 71.1 | % | ||||||||||||||||||
| Selling and distribution costs | (390.1 | ) | (8.6 | ) | (398.7 | ) | (216.5 | ) | (2.0 | ) | (218.5 | ) | 82.4 | % | ||||||||||||||
| Research and development expenses | (166.2 | ) | (7.4 | ) | (173.6 | ) | (84.2 | ) | (2.2 | ) | (86.4 | ) | 101.0 | % | ||||||||||||||
| Administrative expenses | (89.0 | ) | (79.4 | ) | (168.4 | ) | (57.5 | ) | (35.6 | ) | (93.1 | ) | 80.9 | % | ||||||||||||||
| Operating Profit | 318.4 | (98.5 | ) | 219.9 | 204.3 | (41.1 | ) | 163.2 | 34.7 | % | ||||||||||||||||||
| Share of results of associates | (0.4 | ) | - | (0.4 | ) | (1.1 | ) | - | (1.1 | ) | 61.1 | % | ||||||||||||||||
| Finance costs | (69.2 | ) | (6.3 | ) | (75.5 | ) | (49.5 | ) | - | (49.5 | ) | 52.6 | % | |||||||||||||||
| Finance income | 1.2 | 0.6 | 1.8 | 0.5 | - | 0.5 | 238.4 | % | ||||||||||||||||||||
| Profit before tax | 250.0 | (104.2 | ) | 145.8 | 154.2 | (41.1 | ) | 113.1 | 28.7 | % | ||||||||||||||||||
| Taxation | (64.7 | ) | 25.5 | (39.2 | ) | (28.1 | ) | 5.6 | (22.5 | ) | 73.2 | % | ||||||||||||||||
| Profit for the period | 185.3 | (78.7 | ) | 106.6 | 126.1 | (35.5 | ) | 90.6 | 17.6 | % | ||||||||||||||||||
The consulting revenue decrease primarily related to Consolidated Statementthe shorter period of Comprehensive Income.account. In addition, underlying performance during the year if considered on a like for like basis, would show a decline in revenue in the year, reflected a managed decline as the Group continued to focus only on consulting engagements that are directly related to the Group’s software portfolio.
In the 12 months ending October 31, 2020, the decline in Consulting will moderate as the actions undertaken in the current financial year conclude and the current and prior reporting periods will both be for 12 months.
The Group acquired HPE Software on September 1, 2017.has more than 300 products reported under five product groups. These products are managed at a granular level using application of the Micro Focus four-box model. The Group results forcyclical nature of the sixsoftware order cycle means that when considering underlying revenue trends, year-on-year growth rates by portfolio are not always indicative of an underlying trend and will be impacted by the timing of customer projects. As such, revenue trends at the sub-portfolio level should be viewed over the longer term and revenue trends overall viewed in a similar fashion to that of a portfolio of funds. The table below presents the revenue performance by product group and revenue stream.
12 months ended October 31, 2017 contain the results for HPE Software from September 1, 2017 to October 31, 2017, while the Group results for the six2019:
Licence | Maintenance | SaaS & other recurring | Consulting | Total | ||||||||||||||||
| Continuing operations | $m | $m | $m | $m | $m | |||||||||||||||
Application Modernization & Connectivity (AMC) | 170.9 | 326.1 | - | 11.7 | 508.7 | |||||||||||||||
Application Delivery Management (ADM) | 130.3 | 485.4 | 87.8 | 18.2 | 721.7 | |||||||||||||||
IT Operations Management (ITOM) | 237.5 | 645.8 | 11.0 | 127.5 | 1,021.8 | |||||||||||||||
Security | 185.7 | 416.7 | 35.0 | 43.9 | 681.3 | |||||||||||||||
Information Management & Governance (IM&G) | 75.6 | 183.6 | 145.9 | 16.6 | 421.7 | |||||||||||||||
| Subtotal | 800.0 | 2,057.6 | 279.7 | 217.9 | 3,355.2 | |||||||||||||||
Deferred revenue haircut | - | (6.0 | ) | (0.8 | ) | - | (6.8 | ) | ||||||||||||
| Total Revenue | 800.0 | 2,051.6 | 278.9 | 217.9 | 3,348.4 | |||||||||||||||
The 18 months ended October 31, 2016 do not contain any results for HPE Software.2018 is shown in note 2 of the financial statements in Item 18.
Operating costs
Six months ended October 31, 2017 Actual | Six months ended October 31, 2016 Actual | Six months ended October 31, 2017 Actual (Decline)/ Growth | Six months ended October 31, 2017 Actual (Decline)/ Growth | Six months ended October 31, 2016 CCY | Six months ended October 31, 2017 CCY (Decline)/ Growth | Six months ended October 31, 2017 CCY (Decline)/ Growth | ||||||||||||||||||||||
| (dollars in millions) | % | (dollars in millions) | % | |||||||||||||||||||||||||
| Existing Micro Focus Product Portfolio | ||||||||||||||||||||||||||||
| Licence | 122.9 | 146.9 | (24.0 | ) | (16.3 | %) | 148.1 | (25.2 | ) | (17.0 | %) | |||||||||||||||||
| Maintenance | 354.1 | 364.2 | (10.1 | ) | (2.8 | %) | 363.2 | (9.1 | ) | (2.5 | %) | |||||||||||||||||
| Consultancy | 23.3 | 26.2 | (2.9 | ) | (11.1 | %) | 26.4 | (3.1 | ) | (11.7 | %) | |||||||||||||||||
| 500.3 | 537.3 | (37.0 | ) | (6.9 | %) | 537.7 | (37.4 | ) | (7.0 | %) | ||||||||||||||||||
| HPE Software | ||||||||||||||||||||||||||||
| Licence | 204.8 | - | 204.8 | - | - | 204.8 | - | |||||||||||||||||||||
| Maintenance | 257.4 | - | 257.4 | - | - | 257.4 | - | |||||||||||||||||||||
| Consultancy | 55.2 | - | 55.2 | - | - | 55.2 | - | |||||||||||||||||||||
| Software as a Service (‘‘SaaS”) | 52.4 | - | 52.4 | - | - | 52.4 | - | |||||||||||||||||||||
| 569.8 | - | 569.8 | - | - | 569.8 | - | ||||||||||||||||||||||
| Total Micro Focus Product Portfolio | ||||||||||||||||||||||||||||
| Licence | 327.7 | 146.9 | 180.8 | 123.1 | % | 148.1 | 179.6 | 121.3 | % | |||||||||||||||||||
| Maintenance | 611.5 | 364.2 | 247.3 | 67.9 | % | 363.2 | 248.3 | 68.4 | % | |||||||||||||||||||
| Consultancy | 78.5 | 26.2 | 52.3 | 199.6 | % | 26.4 | 52.1 | 197.3 | % | |||||||||||||||||||
| SaaS | 52.4 | - | 52.4 | - | - | 52.4 | - | |||||||||||||||||||||
| 1,070.1 | 537.3 | 532.8 | 99.2 | % | 537.7 | 532.4 | 99.0 | % | ||||||||||||||||||||
| SUSE Product Portfolio | ||||||||||||||||||||||||||||
| Subscription | 162.6 | 144.9 | 17.7 | 12.2 | % | 142.7 | 19.9 | 13.9 | % | |||||||||||||||||||
| Consultancy | 1.8 | 2.5 | (0.7 | ) | (28.0 | %) | 2.6 | (0.8 | ) | (30.8 | %) | |||||||||||||||||
| 164.4 | 147.4 | 17.0 | 11.5 | % | 145.3 | 19.1 | 13.1 | % | ||||||||||||||||||||
| Total Revenue | ||||||||||||||||||||||||||||
| Licence | 327.7 | 146.9 | 180.8 | 123.1 | % | 148.1 | 179.6 | 121.3 | % | |||||||||||||||||||
| Maintenance | 611.5 | 364.2 | 247.3 | 67.9 | % | 363.2 | 248.3 | 68.4 | % | |||||||||||||||||||
| Subscription | 162.6 | 144.9 | 17.7 | 12.2 | % | 142.7 | 19.9 | 13.9 | % | |||||||||||||||||||
| Consultancy | 80.3 | 28.7 | 51.6 | 179.8 | % | 29.0 | 51.3 | 176.9 | % | |||||||||||||||||||
| SaaS | 52.4 | - | 52.4 | - | - | 52.4 | - | |||||||||||||||||||||
| 1,234.5 | 684.7 | 549.8 | 80.3 | % | 683.0 | 551.5 | 80.7 | % | ||||||||||||||||||||
Six months ended October 31, 2017 Actual | Six months ended October 31, 2016 Actual | Six months ended October 31, 2017 Actual (Decline)/ Growth | Six months ended October 31, 2017 Actual (Decline)/ Growth | Six months ended October 31, 2016 CCY | Six months ended October 31, 2017 CCY (Decline)/ Growth | Six months ended October 31, 2017 CCY (Decline)/ Growth | ||||||||||||||||||||||
| (dollars in millions) | % | (dollars in millions) | % | |||||||||||||||||||||||||
| Micro Focus Product Portfolio | ||||||||||||||||||||||||||||
| North America | 267.9 | 299.8 | (31.9 | ) | (10.6 | %) | 300.2 | (32.3 | ) | (10.8 | %) | |||||||||||||||||
| International | 188.2 | 187.7 | 0.5 | 0.3 | % | 189.0 | (0.8 | ) | (0.4 | %) | ||||||||||||||||||
| Asia Pacific & Japan | 44.2 | 49.8 | (5.6 | ) | (11.2 | %) | 48.5 | (4.3 | ) | (8.9 | %) | |||||||||||||||||
| 500.3 | 537.3 | (37.0 | ) | (6.9 | %) | 537.7 | (37.4 | ) | (7.0 | %) | ||||||||||||||||||
| HPE Software acquisition | 569.8 | - | 569.8 | - | - | 569.8 | - | |||||||||||||||||||||
| Total | 1,070.1 | 537.3 | 532.8 | 99.2 | % | 537.7 | 532.4 | 99.0 | % | |||||||||||||||||||
| SUSE Product Portfolio | ||||||||||||||||||||||||||||
| North America | 65.1 | 59.9 | 5.2 | 8.7 | % | 59.9 | 5.2 | 8.7 | % | |||||||||||||||||||
| International | 76.0 | 70.0 | 6.0 | 8.6 | % | 68.2 | 7.8 | 11.4 | % | |||||||||||||||||||
| Asia Pacific & Japan | 23.3 | 17.5 | 5.8 | 33.1 | % | 17.2 | 6.1 | 35.5 | % | |||||||||||||||||||
| Total | 164.4 | 147.4 | 17.0 | 11.5 | % | 145.3 | 19.1 | 13.1 | % | |||||||||||||||||||
Total Group | ||||||||||||||||||||||||||||
| Existing Micro Focus | ||||||||||||||||||||||||||||
| North America | 333.0 | 359.7 | (26.7 | ) | (7.4 | %) | 360.1 | (27.1 | ) | (7.5 | %) | |||||||||||||||||
| International | 264.2 | 257.7 | 6.5 | 2.5 | % | 257.2 | 7.0 | 2.7 | % | |||||||||||||||||||
| Asia Pacific & Japan | 67.5 | 67.3 | 0.2 | 0.3 | % | 65.7 | 1.8 | 2.7 | % | |||||||||||||||||||
| 664.7 | 684.7 | (20.0 | ) | (2.9 | %) | 683.0 | (18.3 | ) | (2.7 | %) | ||||||||||||||||||
| HPE Software acquisition * | 569.8 | - | 569.8 | - | - | 569.8 | - | |||||||||||||||||||||
| Total revenue | 1,234.5 | 684.7 | 549.8 | 80.3 | % | 683.0 | 551.5 | 80.7 | % | |||||||||||||||||||
Six months ended October 31, 2017 Actual | Six months ended October 31, 2016 Actual | Six months ended October 31, 2017 Actual (Decline)/ Growth | Six months ended October 31, 2017 Actual (Decline)/ Growth | Six months ended October 31, 2016 CCY | Six months ended October 31, 2017 CCY (Decline)/ Growth | Six months ended October 31, 2017 CCY (Decline)/ Growth | 12 months ended October 31, 2019 | 18 months ended October 31, 2018 | Period-on- period change % | |||||||||||||||||||||||||||||||
| (dollars in millions) | % | (dollars in millions) | % | |||||||||||||||||||||||||||||||||||||
| Cost of goods sold | 273.9 | 123.4 | 150.5 | 122.0 | % | 123.8 | 150.1 | 121.2 | % | |||||||||||||||||||||||||||||||
| Continuing operations | $m | $m | ||||||||||||||||||||||||||||||||||||||
Cost of sales | 789.9 | 1,302.7 | (39.4 | )% | ||||||||||||||||||||||||||||||||||||
| Selling and distribution costs | 398.6 | 218.5 | 180.1 | 82.4 | % | 219.4 | 179.2 | 81.7 | % | 1,224.8 | 1,764.2 | (30.6 | )% | |||||||||||||||||||||||||||
| Research and development expenses | 173.6 | 86.4 | 87.2 | 100.9 | % | 87.4 | 86.2 | 98.6 | % | 491.2 | 680.8 | (27.8 | )% | |||||||||||||||||||||||||||
| Administrative expenses | 168.4 | 93.1 | 75.3 | 80.9 | % | 93.3 | 75.1 | 80.5 | % | 620.8 | 629.9 | (1.4 | )% | |||||||||||||||||||||||||||
| Total Operating Costs | 1,014.5 | 521.4 | 493.1 | 94.6 | % | 523.9 | 490.6 | 93.6 | % | |||||||||||||||||||||||||||||||
| Total operating costs | 3,126.7 | 4,377.6 | (28.6 | )% | ||||||||||||||||||||||||||||||||||||
Total operating costs. costs. Total operating costs for the period increaseddecreased by $493.1$1,250.9 million, or 94.6% ($490.6 million, or 93.6% on a CCY basis)28.6% to $1,014.5$3,126.7 million in the six12 months ended October 31, 20172019 as compared to $521.4$4,377.6 million in the six18 months ended October 31, 2016 (2016: $523.9 million on a CCY basis). As described below2018.
The single largest component of costs relates to employee costs therefore the shorter period of account in the individualcurrent year, only 12 months versus 18 months in the prior period, means that most cost categories are significantly reduced. The narrative below explains the increaseother key movements excluding employee costs. The exception to this is primarily in relation to the acquisition of HPE Software, increasing total operating costs by $457.7 million. Excluding HPE Software, total operating costs increased by $35.4 million, primarily due to an increase in exceptional items of $37.3 million.administrative expenses which is discussed further below.
Cost of sales. Cost of sales increaseddecreased by $150.5$512.8 million, or 122.0% ($150.1 million, or 121.2% on a CCY basis)39.4% to $273.9$789.9 million in the six12 months ended October 31, 20172019 as compared to $123.4$1,302.7 million in the six18 months ended October 31, 2016. 2018.
The acquisitioncosts in this category predominantly relate to our consulting and helpline support operations, amortization of HPE Software increased costproduct development costs and amortization of salesacquired technology intangibles all of which are directly reduced by $159.3 million. Costthe shorter period of sales excluding HPE Softwareaccount in the current period.
The amortization of intangible product development costs decreased by $8.8$15.3 million to $114.6 million. There was a decrease in the amortization of purchased intangibles of $3.0 million to $34.0 million as compared to $37.0from $42.0 million in the six18 months ended October 31, 2016, a reduction2018 to $26.7 million in staff-relatedthe 12 months ended October 31, 2019, primarily due to the change in period of account.
The amortization of intangible purchased technology costs decreased by $80.4 million from $280.5 million in the 18 months ended October 31, 2018 to $200.1 million in the 12 months ended October 31, 2019, primarily due to the change in period of $2.3 millionaccount and a reduction in travel coststhe halting of $0.5 million. amortization on SUSE related intangibles after the disposal was announced last year.
Exceptional items includeddecreased by $52.8 million from $65.4 million in cost of sales increased $1.9the 18 months ended October 31, 2018 to $12.6 million to $3.1 million.in the 12 months ended October 31, 2019. Exceptional items are discussed later in this section.
After excluding the above, the remaining reduction in costs of sales of $364.3 million relates primarily to the reduction in period of account.
Selling and distribution costs. Selling and distribution costs increased $180.1decreased $539.4 million, or 82.4% ($179.2 million, or 81.7% on a CCY basis)30.6% to $398.6$1,224.8 million in the six12 months ended October 31, 20172019 as compared to $218.5$1,764.2 million in the six18 months ended October 31, 2016. 2018.
The acquisition of HPE Software increased selling and distribution costs by $171.3 million. Selling and distribution costs excluding HPE Software increased by $8.8 million. This increase in selling and distribution costs includes an increase in exceptional items of $6.6 millionthis category predominantly relate to $8.6 million, and an increase inour sales organization, the amortization of purchased intangiblestrade names and amortization of $1.5acquired customer relationships all of which are directly reduced by the shorter period of account in the current period.
The amortization of intangible trade names and customer relationships costs decreased by $127.0 million from $572.7 million in the 18 months ended October 31, 2018 to $70.9 million.$445.7 million in the 12 months ended October 31, 2019, primarily due to the change in period of account.
Exceptional items decreased by $30.4 million from $39.2 million in the 18 months ended October 31, 2018 to $8.4 million in the 12 months ended October 31, 2019. Exceptional items are discussed later in this section.
After excluding the above, the remaining reduction in selling and distribution of $382.0 million relates primarily to the reduction in period of account.
Research and development expenses. Research and development expenses increaseddecreased by $87.2$189.6 million, or 100.9% ($86.2 million, or 98.6% on a CCY basis)27.8% to $173.6$491.2 million in the six12 months ended October 31, 20172019 as compared to $86.4$680.8 million in the six18 months ended October 31, 2016. 2018.
The acquisitioncapitalization of HPE Software increased research and development by $70.3 million. Research and development expenses excluding HPE Software increased by $16.9 million. This increase in research andintangible product development costs includes an increasedecreased by $27.9 million from $44.4 million in exceptionalthe 18 months ended October 31, 2018 to $16.5 million in the 12 months ended October 31, 2019.
Exceptional items of $5.2decreased by $17.4 million from $17.4 million in the 18 months ended October 31, 2018 to $7.4 million and an increasenil in staff-related costs of $14.2 million.the 12 months ended October 31, 2019. Exceptional items are discussed later in this section.
After excluding the above, the remaining decrease in research and development expenses of $189.9 million relates primarily to the 12 versus 18 months reporting period.
Administrative expenses. Administrative expenses increaseddecreased by $75.3$9.1 million, or 80.9% ($75.1 million, or 80.5% on a CCY basis)1.4% to $168.4$620.8 million in the six12 months ended October 31, 20172019 as compared to $93.1$629.9 million in the six18 months ended October 31, 2016. 2018.
The acquisitionamortization of HPE Software increased administrative expenses by $56.8 million. Administrative expenses excluding HPE Softwarepurchased software intangibles increased by $18.5 million. Exceptional items$3.4 million from $30.7 million in the 18 months ended October 31, 2018 to $34.1 million in the 12 months ended October 31, 2019 as the useful life of certain purchase software was revised resulting in an increased amortization charge. Share-based compensation costs increased by $4.5 million from $64.3 million in the 18 months ended October 31, 2018 to $68.8 million in the 12 months ended October 31, 2019 as a result of timing of the issue of share options under the Long-term Incentive Plan in the prior year which meant only 1 month charge was included in administrative expenses increased $43.8 million to $79.4 million, share-based payments increased by $2.8 million to $18.3 million and exchange gains increased by $1.9 million to $9.0 million. Excluding acquisitionsthe prior period versus a full years charge in the year,current period.
Foreign exchange movements have moved from a gain of $37.3 million in the 18 months ended October 31, 2018 to a loss of $11.2 million in the 12 months ended October 31, 2019 resulting in an increase in admin expenses period on period of $48.5 million.
Offsetting these movements, exceptional items share-based payments and exchange gains, administrative expenses decreased by $5.5$142.5 million from $416.2 million in the 18 months ended October 31, 2018 to $43.5 million. The decrease relates primarily to a reduction$273.7 million in staff-related costs of $13.5 million.the 12 months ended October 31, 2019. Exceptional items are discussed later in this section.
In addition, exceptional costs (included within operating profit) have decreased from $538.2 million in the 18 months ended October 31, 2018, to $294.2 million in the 12 months ended October 31, 2019. Exceptional costs are considered below.
In addition, the amortization of intangible assets decreased from $903.1 million in the 18 months ended October 31, 2018, to $716.5 million in the 12 months ended October 31, 2019, related to the additional amortization in the period of technology, trade names, customer relationships established on the acquisition of Interset Software Inc and the impact of the 18-month period of account. The reduction in amortization is not just a result of the reduction in the accounting period as the majority of the amortization is on the intangibles resulting from the HPE acquisition which were only included for 14 months of the 18 month period of account compared to 12 months in the period ended October 31, 2019. The main components of this reduction are included in the discussion on cost by category above.
Exceptional items (included within operating profit)
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | |||||||
| Exceptional items | $m | $m | ||||||
MF/ HPE Software business integration related: | ||||||||
System and IT infrastructure costs | 126.3 | 114.4 | ||||||
Integration costs | 119.6 | 147.6 | ||||||
Severance | 32.1 | 129.1 | ||||||
Property costs | 16.3 | 29.9 | ||||||
| MF/ HPE Software business integration related costs | 294.3 | 421.0 | ||||||
HPE Software business acquisition / pre-acquisition costs | (3.9 | ) | 70.1 | |||||
Integration in respect of previous acquisitions | - | 17.0 | ||||||
Other acquisition costs | 5.4 | - | ||||||
Property costs relating to previous acquisitions | - | 8.2 | ||||||
Divestiture gain on Atalla | (3.7 | ) | - | |||||
Severance costs relating to previous acquisitions | - | 0.6 | ||||||
Pre-disposal costs in relation to SUSE | - | 21.3 | ||||||
Other costs | 2.1 | - | ||||||
| Total exceptional costs (reported in Operating profit) | 294.2 | 538.2 | ||||||
In the 12 months ended October 31, 2019, exceptional costs totaled to $294.2 million. Exceptional costs predominantly relate to the integration of the HPE Software business and the costs incurred in the 12-month period include:
System and IT infrastructure costs of $126.3m principally reflect the IT migration of the Micro Focus business onto a single IT platform;
Integration costs of $119.6m across a wide range of projects undertaken to conform, simplify and increase efficiency across the two businesses;
Severance costs of $32.1m in relation to ongoing headcount reductions as the Group continues to remove duplication and streamline the continuing operations; and
Property costs of $16.3m as the Group continues the process of simplifying the real estate footprint.
As communicated previously, the Group anticipates total exceptional charges in relation to the HPE Software business integration of $960.0m of which $715.2m has been incurred to date. The Group initially expected to incur exceptional costs in relation to the HPE Software business integration of $420.0m in the 12 months ended October 31, 2019, which compares to an actual charge of $294.3m in the financial year. This decreasevariance is driven by the dilutionphasing of investmentintegration programs.
This is a complex multi-period IT project, complicated by our SOX requirements, which limits the opportunity to make substantial system changes in the associate from 14.3%second half of FY20. As such a decision on whether the Group executes the IT project in line with The Group’s timetable, the end of calendar year 2020, or have to 12.5%re-phase will be made in the six months to April 30, 2016.second quarter and communicated as part of the Group’s interim results.
Net finance costs increased by $20.0 million, or 40.4%, to $75.5(excluding exceptional items) were $255.8 million in the six12 months ended October 31, 20172019. The finance costs predominantly relate to the associated interest on the term loans put in place as comparedpart of the transaction to $49.5acquire the HPE Software business. Included within the $255.8 million is $46.7 million in relation to the sixamortization of facility costs and original issue discounts which were paid on initiation of the term loans.
The decline in net finance costs (excluding exceptional items) between the periods of $81.1m, 24.1% from $336.9 million for the 18 months ended October 31, 2016. This decrease2018 to $225.7 million for the 12 months ended October 31, 2019 reflects a $61.6 reduction in finance costs isand a $19.5m increase in finance income. The reduction in finance costs primarily attributablereflects a decrease in interest on bank borrowings of $51.1 million from $276.5 in the 18 months ended October 31, 2018 to $225.4 million in the increased loan interest and commitment fees12 months ended October 31, 2019 as a result of $17.9 million andthe shorter accounting period. The increase in finance income primarily reflects an increase in the amortizationbank interest earned of prepaid facility arrangements, original issue discounts and facility fees of $6.1$12.7 million as a result of the increased Group borrowings resulting from the acquisition of HPE Software.
The Group recognizes revenues from sales of software Licences (including Intellectual Property and Patent rights, to end-users, resellers and Independent Software Vendors (“ISV”)), software maintenance, subscription, SaaS, technical support, training and professional services, upon firm evidence of an arrangement, delivery of the software and determination that collection of a fixed or determinable fee is reasonably assured. ISV revenue includes fees based on end usage of ISV applications that have our software embedded in their applications. When the fees for software upgrades and enhancements, maintenance, consulting and training are bundled with the Licence fee, they are unbundled using the Group’s objective evidence of the fair value of the elements represented by the Group’s customary pricing for each element in separate transactions. If evidence of fair value exists for all undelivered elements and there is no such evidence of fair value established for delivered elements, revenue is first allocated to the elements where fair value has been established and the residual amount is allocated to the delivered elements. If evidence of fair value for any undelivered element of the arrangement does not exist, all revenue from the arrangement is deferred until such time that there is evidence of delivery.
The loss after tax from continuing operations was $18.1 million in the 12 months ended October 31, 2019, compared to a profit after tax from continuing operations of $707.2 million in the 18 months ended October 31, 2018.
Profit from discontinued operation
Profit from discontinued operation of $1,487.2 million in the 12 months ended October 31, 2019, reflects the profits generated from the SUSE portfolio of $28.7 million in the period to March 15, 2019 together with the profit on the sale of SUSE of $1,458.5 million when sold on March 15, 2019. In the 18 months ended October 31, 2018, the SUSE portfolio generated a profit from discontinued operation of $76.9 million.
Earnings per share
The table below sets out the Earnings per Share (“EPS”). The Group is also required to present EPS for both the continuing and discontinued operations.
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | |||||||||||||||
Basic Cents | Diluted 1 Cents | Basic Cents | Diluted Cents | |||||||||||||
Continuing operations | (4.87 | ) | (4.87 | ) | 181.91 | 176.92 | ||||||||||
Discontinued operation | 393.37 | 389.16 | 19.79 | 19.25 | ||||||||||||
| Total EPS | 388.50 | 384.35 | 201.70 | 196.17 | ||||||||||||
1 As there is a loss from continuing operations attributable to the ordinary equity shareholders of the Company for the 12 months ended October 31, 2019 ($18.4 million), the Diluted EPS is reported as equal to Basic EPS, as no account can be taken of the effect of dilutive securities under IAS 33. There was total earnings attributable to ordinary equity shareholders of the Company for the 12 months ended October 31, 2019 of $1,468.8 million and therefore the effect of dilutive securities can be reflected in the total Diluted EPS above.
In the 12 months ended October 31, 2019, the Group generated a Basic EPS from continuing operations of (4.87) cents. This compares to 181.91 cents in the 18 months ended October 31, 2018. The decrease was primarily driven by the lower overall of continuing earnings as previously explained.
Following the completion of the SUSE transaction, the Group returned $1.8 billion of proceeds to shareholders, in addition to the $540 million of share buy backs. As a result, the total share count has reduced from 426.9 million to 333.4 million during the period, which somewhat offset the decline in EPS due to reduced earnings.
18 months ended October 31, 2018 compared to the 12 months ended April 30, 2017
The Group uses certain measureschanged accounting year end from April 30, 2018 to assessOctober 31, 2018 as a result the financialperiod is for the 18-month period ended on October 31, 2018 and the comparative period is for 12 months ended April 30, 2017. As a result the movements, period on period presents substantial increases due to the longer period of account in the 18 months to October 31, 2018 reporting period. The presentation excludes the discontinued SUSE business from individual line items for each of the reporting periods presented below. In addition, the 18-month period to October 31, 2018 includes 14 months of results for the acquired HPE Software business which significantly increased the size of the Group and also results in substantially increases period on period.
18 months ended October 31, 2018 | 12 months ended April 30, 2017 | |||||||
| Continuing operations | $m | $m | ||||||
| Revenue | 4,754.4 | 1,077.3 | ||||||
Operating profit (before exceptional items) | 915.0 | 324.7 | ||||||
Exceptional items | (538.2 | ) | (97.3 | ) | ||||
| Operating profit | 376.8 | 227.4 | ||||||
Net finance costs (excluding exceptional items) | (336.9 | ) | (95.8 | ) | ||||
Exceptional finance costs | (5.8 | ) | - | |||||
| (Loss)/profit before tax | 34.1 | 131.6 | ||||||
Taxation | 673.1 | (7.5 | ) | |||||
| (Loss)/profit from continuing operations | 707.2 | 124.1 | ||||||
Profit from discontinued operation | 76.9 | 33.7 | ||||||
| Profit for the period | 784.1 | 157.8 | ||||||
Revenue
In the 18 months ended October 31, 2018, the Group generated revenue of $4,754.4 million, which represents an increase of $3,677.1 million (341.3%) on the $1,077.3 million in 12 months ended April 30, 2017. The increase in trading was driven by the acquisition of the HPE Software business, which materially increased the scale of the operations, combined with the longer period of account. The impact of the results of the HPE Software business acquisition has not been separately disclosed in this report as it is not practical to do so as it has been integrated into the Micro Focus Product Portfolio segment.
18 months ended October 31, 2018 | 12 months ended April 30, 2017 | Period-on – period change | ||||||||||
| Continuing operations | $m | $m | % | |||||||||
Licence | 1,213.7 | 308.4 | 293.5 | % | ||||||||
Maintenance | 2,861.6 | 727.6 | 293.3 | % | ||||||||
SaaS & other recurring | 373.9 | - | n/a | |||||||||
Consulting | 366.3 | 48.2 | 660.0 | % | ||||||||
| Revenue before haircut | 4,815.5 | 1,082.2 | 344.2 | % | ||||||||
Deferred revenue haircut | (61.1 | ) | (6.9 | ) | 785.5 | % | ||||||
| Total Revenue | 4,754.4 | 1,077.3 | 341.3 | % | ||||||||
Revenue in the table above and the subsequent trends in this section are presented before the impact of the deferred revenue haircut, which represents the unwinding of a fair value adjustment to acquired deferred revenue.
The HPE Software acquisition and the long period of account has resulted in revenue increasing 341.3% between the two reporting periods. However, this period-on-period increase is not indicative of the underlying trading performance of itsthe four revenue streams which if considered on a like-for-like basis would show a declining trend over the period of review. From November 1, 2017, the HPE Sof/tware operations were integrated with the Micro Focus Product Portfolio and the business was operated and reported on as one consolidated operating segment. The declining trend was further impacted by a number of factors, which management consider to be largely one-off transitional effects of the combination with the HPE Software business, rather than underlying issues with the end market of the product portfolio. Since identifying these issues, substantial investment was made in stabilizing the IT platform and the business re-structured the go-to-market organization to better align customer coverage and improve customer engagement levels. This re-structuring was supplemented with additional investment in better training and enablement and increased hiring of customer facing sales resources to ensure the function was fully staffed at October 31, 2018. Additional actions focused on driving improved execution discipline across the Company.
The narrative below focusses on the period-on-period increases which were all driven by the long period of account and the increase in scale following the acquisition of the HPE Software business. Certain
Revenue by stream performance
Licence revenue increased by $905.3 million (293.5%) to $1,213.7 million in the 18 months ended October 31, 2018 compared with $308.4 million in the 12 months ended April 30, 2017.
Maintenance revenue increased by $2,134.0 million (293.3%) to $2,861.6 million in the 18 months ended October 31, 2018 compared with $727.6 million in the 12 months ended April 30, 2017. Maintenance is a recurring revenue stream and is driven by the volume and value of maintenance revenue attached (or sold) with new license sales, the number of customers you are able to win back (following cancellation) and finally the level of renewals. The trend associated with all of these measureshas remained broadly consistent between the two periods with exception of License volume which if considered on a like-for-like basis would indicate a declining trend in the period for the reasons set out above.
The increase in revenue is primarily related to the acquisition of the HPE Software business and the long period of account.
SaaS and other recurring revenue was $373.9 million in the 18 months ended October 31, 2018. The Group had no SaaS and other recurring revenue in the 12 months ended April 30, 2017. This revenue stream was new to the Group with the acquisition of the HPE Software business. Performance in the last six months of the 18 month reporting period was impacted by actions to rationalize unprofitable operations and practices and the refocus of resources and investments to delivering the product enhancements required for long-term success.
Consulting revenue increased by $318.1 million (660.0%) to $366.3 million in the 18 months ended October 31, 2018 compared with $48.2 million in the 12 months ended April 30, 2017. The increase in revenue increase was primarily related to the acquisition of the HPE Software business. However, Group continues the previously communicated strategy to focus on consulting engagements which are termed “non-IFRS measures” because they exclude amounts that are included in, or include amounts that are excluded from,directly related to the most directly comparable measure calculated and presented in accordance with IFRS, or are calculated using financial measures that are not calculated in accordance with IFRS.software portfolio rather than pursuing growth on a standalone basis.
Revenue by product group performance
The Group useshas more than 300 products reported under five product groups. These products are managed at a granular level using application of the Micro Focus four-box model. The cyclical nature of the software order cycle means that when considering underlying revenue trends, year-on-year growth rates by portfolio are not always indicative of an underlying trend and will be impacted by the timing of customer projects. As such, measuresrevenue trends at the sub-portfolio level should be viewed over the longer term and revenue trends overall viewed in a similar fashion to measure operatingthat of a portfolio of funds. The table below presents the revenue performance by product group and liquidity,revenue stream. Following the acquisition of the HPE Software business. The product groups were realigned in presentationsthe 18 months ended October 31, 2018 and therefore cannot be compared to those in the 12 months ended April 30, 2017.
18 months ended October 31, 2018:
Licence | Maintenance | Consulting | SaaS & other recurring | Total | ||||||||||||||||
| Continuing operations | $m | $m | $m | $m | $m | |||||||||||||||
Application Modernization & Connectivity (AMC) | 256.3 | 497.6 | 17.9 | - | 771.8 | |||||||||||||||
Application Delivery Management (ADM) | 185.4 | 646.7 | 41.6 | 114.1 | 987.8 | |||||||||||||||
IT Operations Management (ITOM) | 363.2 | 869.9 | 192.8 | 15.1 | 1,441.0 | |||||||||||||||
Security | 291.6 | 580.2 | 81.4 | 41.6 | 994.8 | |||||||||||||||
Information Management & Governance (IM&G) | 117.2 | 267.2 | 32.6 | 203.1 | 620.1 | |||||||||||||||
| Subtotal | 1,213.7 | 2,861.6 | 366.3 | 373.9 | 4,815.5 | |||||||||||||||
Deferred revenue haircut | (7.6 | ) | (42.7 | ) | (2.0 | ) | (8.8 | ) | (61.1 | ) | ||||||||||
| Total Revenue | 1,206.1 | 2,818.9 | 364.3 | 365.1 | 4,754.4 | |||||||||||||||
Revenue by product group for the 12 month period ended April 30, 2017 is included in note 2 to the BoardConsolidated financial statements in Item 18.
Operating costs
18 months ended October 31, 2018 | 12 months ended April 30, 2017 | |||||||
| Continuing operations | $m | $m | ||||||
Cost of sales | 1,302.7 | 216.5 | ||||||
Selling and distribution costs | 1,764.2 | 363.1 | ||||||
Research and development expenses | 680.8 | 122.8 | ||||||
Administrative expenses | 629.9 | 147.5 | ||||||
| Total operating costs | 4,377.6 | 849.9 | ||||||
Total operating costs. Total operating costs increased by $3,527.7 million, or 415.1% to $4,377.6 million in the 18 months ended October 31, 2018 as compared to $849.9 million in the 12 months ended April 30, 2017.
As described below in the individual cost categories, the increase is primarily in relation to the acquisition of the HPE Software business. From November 1, 2017, the Micro Focus Product portfolio has been run as one operating segment and as such the cost base of the two legacy business has not been tracked separately. Given the nature of the Group’s operations, the single largest component of cost base relates to employee costs and in addition the number of employees is a basiskey driver for strategic planning and forecasting, as well as monitoring certain aspectsthe remaining aspect of its operating cash flow and liquidity. The Group believes that these and similar measures are used widely by certain investors, securities analysts and other interested parties as supplemental measuresthe cost base. Following the acquisition of performance and liquidity.HPE Software business, our average headcount increased from 4,663 in the twelve months ended April 30, 2017 to 12,713 in the 18 months ended October 31, 2018.
The non-IFRS measures may not be comparablecosts in this category predominantly relate to other similarly titled measures usedour consulting and helpline support operations, amortization of product development costs and amortization of acquired technology intangibles. The amortization of intangible product development costs increased by other companies and have limitations as analytical tools and should not be considered$19.6 million from $22.4 million in isolation or as a substitute for analysisthe 12 months ended April 30, 2017 to $42.0 million in the 18 months ended October 31, 2018. The amortization of intangible purchased technology costs increased by $221.4 million from $59.0 million in the 12 months ended April 30, 2017 to $280.5 million in the 18 months ended October 31, 2018, primarily due to the acquisition of the Group’s operating results as reported under IFRS.HPE Software business. Exceptional items increased by $62.5 million from $2.9 million in the 12 months ended April 30, 2017 to $65.4 million in the 18 months ended October 31, 2018. Exceptional items are discussed later in this section. After excluding the above, the remaining increase in cost of sales of $782.8 million relates primarily to the 18 versus 12 months reporting period and the transformational acquisition of the HPE Software business.
The amortization of intangible trade names and customer relationships costs increased by $425.6 million from $124.3 million in the 12 months ended April 30, 2017 to $549.8 million in the 18 months ended October 31, 2018, primarily due to the acquisition of the relevanceHPE Software business. Exceptional items increased by $33.7 million from $5.5 million in the 12 months ended April 30, 2017 to $39.2 million in the 18 months ended October 31, 2018. Exceptional items are discussed later in this section. After excluding the above, the remaining increase in selling and distribution costs of each$941.7 million relates primarily to the 18 versus 12 months reporting period and the transformational acquisition of the non-IFRS measures, a reconciliationHPE Software business.
The average monthly number of people in sales and distribution increased by 4,234 (197.6%) from 2,141 to 6,375 in the 18 months ended October 31, 2018 when compared with the 12 months ended April 30, 2017. This is reflected in the increases in both cost of sales and selling and distribution costs.
Research and development expenses. Research and development expenses increased by $558.0 million, or 454.4% to $680.8 million in the 18 months ended October 31, 2018 as compared to $122.8 million in the 12 months ended April 30, 2017.
The capitalization of intangible product development costs increased by $16.7 million from $27.7 million in the 12 months ended April 30, 2017 to $44.4 million in the 18 months ended October 31, 2018. Exceptional items increased by $10.6 million from $6.8 million in the 12 months ended April 30, 2017 to $17.4 million in the 18 months ended October 31, 2018. Exceptional items are discussed later in this section. After excluding the above, the remaining increase in research and development expenses of $564.1 million relates primarily to the 18 versus 12 months reporting period and the transformational acquisition of the non-IFRS measures to the most directly comparable measures calculated and presented in accordance with IFRS and a discussion of their limitations is set out below. The Group does not regard these non-IFRS measures as a substitute for, or superior to, the equivalent measures calculated and presented in accordance with IFRS or those calculated using financial measures that are calculated in accordance with IFRS.HPE Software business.
The average monthly number of people in research and Adjusted EBITDAdevelopment increased by 3,076 (164.0%) from 1,876 to 4,952 in the 18 months ended October 31, 2018 when compared with the 12 months ended April 30, 2017. This is reflected in the increase in research and development costs above.
The amortization of purchased software intangibles increased by $29.6 million from $1.1 million in the 12 months ended April 30, 2017 to $30.7 million in the 18 months ended October 31, 2018.Share-based compensation costs finance income, share of results of associates, taxation, depreciationincreased by $32.8 million from $31.5 million in the 12 months ended April 30, 2017 to $64.3 million in the 18 months ended October 31, 2018. Foreign exchange gains increased by $34.4 million from $2.9 million in the 12 months ended April 30, 2017 to $37.3 million in the 18 months ended October 31, 2018. Depreciation of property, plant and equipment and amortization of intangible assets. The Group presents EBITDA because it is widely usedincreased by securities analysts, investors and other interested parties$78.9 million from $9.7 million in the 12 months ended April 30, 2017 to evaluate$88.6 million in the profitability of companies. EBITDA eliminates potential differences in performance caused by variations in capital structures (affecting net finance costs), tax positions (such as the availability of net operating losses against which to relieve taxable profits), the cost and age of tangible assets (affecting relative depreciation expense) and the extent to which intangible assets are identifiable (affecting relative amortization expense).
The average monthly number of people in administration increased by 740 (114.6%) from 646 to 1,386 in the 18 months ended October 31, 2018 when compared with the 12 months ended April 30, 2017. This is reflected in the increase in administrative expenses above.
Operating profit
In the 18 months ended October 31, 2018, the Group has redefined its Adjusted EBITDA definition and this is nowgenerated operating profit of $376.8 million, which represents an increase of 65.7% on the only adjusted EBITDA measure presented12 months ended April 30, 2017. The operating profit increased due to the 18-month accounting period combined with the impact of the HPE Software business transaction in the Group results.period ended October 31, 2018. The new “Adjusted EBITDA” definition was previously reported as “Underlying Adjusted EBITDA”.acquisition has been transformational for the business and has substantially increased the scale of the Group’s operations. In addition, exceptional costs (included within operating profit) have increased from $97.3 million in the 12 months ended April 30, 2017, to $538.2 million in the 18 months ended October 31, 2018. Exceptional costs are considered below.
Six months ended 31 October 2017 | Six months ended 31 October 2016 | |||||||
| (dollars in thousands) | ||||||||
| Profit for the period | 106,605 | 90,617 | ||||||
| Finance costs | 75,487 | 49,455 | ||||||
| Finance income | (1,699 | ) | (502 | ) | ||||
| Taxation | 39,129 | 22,589 | ||||||
| Share of results of associates | 438 | 1,127 | ||||||
| Depreciation of property, plant and equipment | 16,289 | 5,712 | ||||||
| Amortization of intangible assets | 198,606 | 119,085 | ||||||
| EBITDA | 434,855 | 288,083 | ||||||
| Exceptional items (reported in Operating profit) | 98,480 | 41,048 | ||||||
| Share-based compensation charge | 18,302 | 15,521 | ||||||
| Amortization of and impairment of product development costs | (12,375 | ) | (12,117 | ) | ||||
| Foreign exchange gain | (4,699 | ) | (9,270 | ) | ||||
| Net capitalization of product development costs | (4,503 | ) | (2,931 | ) | ||||
| Adjusted EBITDA | 530,060 | 320,334 | ||||||
| Revenue | 1,234,520 | 684,743 | ||||||
| Adjusted EBITDA Margin | 42.9 | % | 46.8 | % | ||||
Exceptional items are those significant items which are separately disclosed by virtue(included within operating profit)
18 months ended October 31, 2018 | 12 months ended April 30, 2017 | |||||||
| Exceptional items | $m | $m | ||||||
MF/ HPE Software business integration related: | ||||||||
System and IT infrastructure costs | 114.4 | - | ||||||
Integration costs | 147.6 | - | ||||||
Severance | 129.1 | - | ||||||
Property costs | 29.9 | - | ||||||
| MF/ HPE Software business integration related costs | 421.0 | - | ||||||
SUSE and other divestiture costs | 21.3 | - | ||||||
HPE Software business acquisition / pre-acquisition costs | 70.1 | 58.0 | ||||||
Integration in respect of previous acquisitions | 17.0 | 27.7 | ||||||
Other acquisition costs | - | 2.6 | ||||||
Property costs relating to previous acquisitions | 8.2 | 5.6 | ||||||
Severance costs relating to previous acquisitions | 0.6 | 3.4 | ||||||
| Total exceptional costs (reported in Operating profit) | 538.2 | 97.3 | ||||||
In the 18 months ended October 31, 2018, exceptional costs totaled to enable a full understanding$538.2 million. Exceptional costs predominantly related to the integration of the Group’s financial performance. These items are collectively totaledHPE Software business and identifiedthe costs incurred in the 18-month period included:
System and IT infrastructure costs of $114.4 million principally reflect the cost of implementing and then stabilizing the IT platform acquired with the HPE Software business (“FAST”);
Integration costs of $147.6 million across a wide range of projects undertaken to conform, simplify and increase efficiency across the two businesses;
Severance costs of $129.1 million in relation to ongoing headcount reductions as “exceptional items”,we integrate the HPE Software business; and
Property costs of $29.9 million as set outthe Group began the process of simplifying the real estate footprint by exiting 27 offices since the completion of the transaction.
The Group anticipates exceptional charges in Notesrelation to the Consolidated Financial Statements- Note 7. Exceptional Items.HPE Software business integration of $960 million of which $421.0 million has been incurred at October 31, 2018.
Amortization and depreciation
The Group’s amortization and depreciation charges in the period increased due to the assets acquired as part of the HPE software acquisition and the 18-month period of account. Most notably:
Amortization of intangible assets increased from $206.8 million in the 12 months ended April 30, 2017, to $903.0 million in the 18 months ended October 31, 2018, predominately relating to the amortization of customer relationships and technology acquired from HPE; and
Depreciation of plant property and equipment increased from $9.7 million to $88.6 million, reflecting the assets associated with the larger headcount within the HPE business.
Net finance costs
Net finance costs were $342.7 million in the 18 months ended October 31, 2018. Finance costs predominantly relate to the associated interest on the new term loans put in place as part of the transaction to acquire the HPE Software business. Included within the $342.7 million is $60.4 million in relation to the amortization of facility costs and original issue discounts which were paid on initiation of the term loans.
The Group hold interest rate swaps to hedge against the cash flow risk in the LIBOR rate charged on $2,250.0 million of the debt issued by Seattle Spinco, Inc. (the company used to acquire the software business of HPE) from October 19, 2017 to September 30, 2022. Under the terms of the interest rate swaps, the Group pays a fixed rate of 1.94% and receives 1-month USD LIBOR.
Taxation
The Group’s reported tax charge for the 18 months ended October 31, 2018 was a credit of $673.1 million (12 months ended April 30, 2017: charge of $7.5 million) primarily due to the one-off impact of US tax reforms.
Profit before tax from continuing operations
Profit before tax decreased by $97.4 million, or 74.1% to $34.1 million in the 18 months ended October 31, 2018 as compared to $131.6 million in the 12 months ended April 30, 2017.
Profit from discontinued operations
Profit from discontinued operations reflects the profits generated from the SUSE portfolio. Profit before taxation for discontinued operations increased to $111.1 million from $64.8 million.
Earnings per share
The table below sets out the Earnings per Share (“EPS”). The Group is also required to present EPS for both the continuing and discontinued operations but note that SUSE is still under the ownership of Group until the end of the first calendar quarter 2019 and as such, we focus on total EPS.
18 months ended October 31, 2018 | 12 months ended April 30,2017 | |||||||||||||||
Basic Cents | Diluted Cents | Basic Cents | Diluted Cents | |||||||||||||
Continuing operations | 181.91 | 176.92 | 54.17 | 52.31 | ||||||||||||
Discontinued operation | 19.79 | 19.25 | 14.71 | 14.20 | ||||||||||||
Total EPS | 201.70 | 196.17 | 68.88 | 66.51 | ||||||||||||
Consolidated statement of financial position as at October 31, 2019 and October 31, 2018
Six months ended October 31, 2017 | Six months ended October 31, 2016 | |||||||
| (dollars in thousands) | ||||||||
| Operating profit | 219,960 | 163,286 | ||||||
| Exceptional items (reported in Operating Profit) | 98,480 | 41,048 | ||||||
| Share-based compensation charge | 18,302 | 15,521 | ||||||
| Amortization of purchased intangible assets | 183,478 | 106,394 | ||||||
| Adjusted Operating Profit | 520,220 | 326,249 | ||||||
Six months ended 31 October 2017 (unaudited) | Six months ended 31 October 2016 (unaudited) | |||||||
| (dollars in thousands) | ||||||||
| Profit before tax | 145,734 | 113,206 | ||||||
| Share-based compensation charge | 18,302 | 15,521 | ||||||
| Amortization of purchased intangibles | 183,478 | 106,394 | ||||||
| Exceptional items | 104,253 | 41,048 | ||||||
| Adjusted Profit before tax | 451,767 | 276,169 | ||||||
The Group’s reporting currency isConsolidated statements of financial position are presented in the U.S. dollar, however, the Group’s significant international operations give rise to fluctuationsfinancial statements in foreign exchange rates. To neutralize foreign exchange impact and to better illustrate the underlying change in revenue and profit from one year to the next, the Group has adopted the practice of discussing results in both reportable currency (local currency results translated into US dollars at the prevailing foreign exchange rate) and constant currency.item 18. Summarized versions are presented below.
| October 31, 2019 | October 31, 2018 | |||||||
| $m | ||||||||
Non-current assets | 12,846.7 | 13,720.5 | ||||||
Current assets | 1,448.1 | 1,917.6 | ||||||
Current assets classified as held for sale | - | 1,142.5 | ||||||
| Total assets | 14,294.8 | 16,780.6 | ||||||
Current liabilities | 1,802.0 | 2,010.4 | ||||||
Current liabilities classified as held for sale | - | 437.7 | ||||||
Non-current liabilities | 6,216.5 | 6,540.5 | ||||||
| Total liabilities | 8,018.5 | 8.988.6 | ||||||
| Net assets | 6,276.3 | 7,792.0 | ||||||
Total equity attributable to owners of the parent | 6,275.0 | 7,791.0 | ||||||
Non-controlling interests | 1.3 | 1.0 | ||||||
| Total equity | 6,276.3 | 7,792.0 | ||||||
The Group uses US dollar-based constant currency models to measure performance. These are calculated by restating the resultsnet assets of the Group for the six months endedhave decreased by $1,515.7 million from $7,792.0 million to $6,276.3 million between October 31, 2016 at the same average exchange rates as those used in reported results for the six months ended2018 and October 31, 2017. This gives a US-dollar denominated income statement which excludes any variances attributable to foreign exchange rate movements.2019.
Six months ended October 31, 2017 | Six months ended October 31, 2016 | |||||||||||||||
| Average | Closing | Average | Closing | |||||||||||||
| £1 = $ | 1.30 | 1.33 | 1.35 | 1.22 | ||||||||||||
| €1 = $ | 1.14 | 1.16 | 1.12 | 1.10 | ||||||||||||
| CAD$ 1 = $ | 0.78 | 0.78 | 0.76 | 0.75 | ||||||||||||
Non-current assets decreased by $873.8 million to $12,846.7 million primarily due to amortization of intangible assets of $716.5 million and a decrease in goodwill of $160.5 million following a review of the allocation of goodwill to foreign operations (note 10 of the “Notes to the consolidated financial statements” in Item 18)
Current assets decreased by $469.5 million from $1,917.6 million to $1,448.1 million primarily due to a decrease in cash and capital resourcescash equivalents of $265.2 million, a decrease in trade and other receivables of $239.1 million, offset by an increase in current tax receivables of $15.6 million and an increase contract-related costs of $19.3 million as a result of transition to IFRS 15. Trade and other receivables decreased due to a reduction of aged receivables of $100.8 million and a reduced current balance of $111.4 million. The reduction in the financial year has been a key focus of the finance team and an important part of the ongoing stabilization of the business and mitigation of potential risk on the balance sheet.
Current assets and current liabilities classified as held for sale as at October 31, 2018 reflected primarily the assets and liabilities of SUSE business segment, which were disposed of on March 15, 2019.
Current liabilities decreased by $208.4 million, primarily due to a $65.9 million reduction in trade and other payables driven by the bonus provision reducing to nil during the year and a $88.8 million decrease in contract liabilities (deferred revenue) balance due to the decline in sales.
Non-current liabilities decreased by $324.0 million from $6,540.5 million to $6,216.5 million, primarily due to a reduction of $171.6 million of borrowings (repayments of $212.6 million in the period), a reduction of $183.4 million in deferred tax liabilities, offset by a derivative liability of $36.5 million, which was previously recorded as a non-current asset but is now a liability as floating interest rates have declined period on period such that the rate received by the Group is below the fixed rates paid by the Group.
Total equity attributable to the owners of the parent decreased by $1,516.0 million from $7,791.0 million to $6,275.0 million, driven primarily by a Return of Value to shareholders of $1,800.0 million, dividends paid to shareholders of $439.2 million , share buy-backs from shareholders of $538.8 million, offset by $1,469.1 million of profit for the period.
Our principal ongoing uses of cash are to meet working capital requirements, to fund debt obligations, and to finance our capital expenditures and acquisitions.acquisitions and to pay dividends to shareholders. The board continues to target a modest level of leverage for a company with the cash generating qualities of Micro Focus with a target net debt (defined as the total of borrowings and finance lease obligations less cash and cash equivalents) to Adjusted EBITDA multiple of 2.7 times.Focus. We are confident that this level of debt will not reduce our ability to deliver our strategy, invest in products and/or make appropriate acquisitions. As the integration of the businesses continues the board will keep the appropriate level of debt under review.
The Group’s operations are diversified across a number of currencies. Changes in foreign exchange rates are monitored and exposures regularly reviewed and actions taken to review exposures where necessary. The Group has significant committed facilities in place, the earliest of which matures in November 2021 and sufficient headroom to meet its operational requirements. The Group seeks to maintain strong relationships with its key banking partners and lenders and to proactively monitor the loan markets. The Group also has strong engagement with the providers of equity capital, which represents an alternative source of capital.
As at October 31, 2017, we had2019, cash and cash equivalents of $730.3 million, which includes net cash and working capital adjustments to be paid to HPE of $289.0 million and other amounts due to HPE of $72.2 million, and excludes amounts due from HPE of $103.2was $355.7 million. The company also has a $500.0 million Revolving Credit Facility (which is undrawn as at October 31, 2017)2019). In addition, as a public listed company Micro Focus has access to equity capital markets for fund raising if required. There are no current plans to issue additional equity.
12 months ended October 31, 2019 compared to the 18 months ended October 31, 2018
The Group changed its year end in 2018 from April 30, 2018 to October 31, 2018 and as a result reported an 18-month accounting period for the period ended October 31, 2018. As a result, the comparison of the 12 months ended October 31, 2019 to the previously reported 18 months ended October 31, 2018 presents substantial period-on-period decreases due to the shorter period of account in the current reporting period.
Cash flows from operating activities
Net cash generated from operating activities decreased by $61.0$260.0 million, or 45.2%28.2%, to $74.0$661.8 million in the six12 months ended October 31, 20172019 as compared to $135.0$921.8 million in the six18 months ended October 31, 2016. 2018.
This is primarily due to ana decrease of $368.0 million in cash generated from operations, arising primarily from a $230.3 million decrease in operating profit (attributable to continuing and discontinued operations and discussed in operating results presented in Item 5.A). In addition, expenditure to settle amounts included in provisions reduced in the year partly as a result of the shorter accounting period and also as the level of restructuring spend reduced in the period. These were offset by a decrease in working capital outflows of $165.9 million and a $67.9 million increase of $39.5in tax paid as tax attributes used in the prior year to reduce the cash tax was fully utilized in the prior year, offset by a $74.7 million decrease in interest paid $84.5resulting from the shorter accounting period and $101.2 million ofdecrease in bank loan costs and an outflow of working capital of $142.2 million, which is partially offset by an increaserelated to the new term loans in operating profit after adding back the effect of non-cash items of $207.5 million.18 month period ended October 31, 2018.
The acquisitionworking capital outflow in the 12 months ended October 31, 2019 was $121.2 million, compared with a $287.0 million outflow in the 18 months ended October 31, 2018. This was primarily caused by significant improvements in the collection of HPE Software contributed $207.9trade receivables during the period, overdue trade receivables reduced by $100.8 million and current receivables by $111.4 million, this was offset by a reduction in trade and other payables due to the increase in operating profit after adding back the effecttiming of non-cash items and $133.5 million to the outflowpayment of working capital.exceptional costs.
Cash flows from investing activities
Net cash generated from investing activities increased by $842.7$1,903.3 million, or 148.9%1,064.5%, to $276.9$2,082.1 million in the six12 months ended October 31, 20172019 as compared to net cash used in investing activities of $565.8$178.8 million in the six18 months ended October 31, 2016. 2018.
Excluding the net cash received from the disposal of the SUSE business of $2,473.5 million, offset by the tax paid on the divestiture gain of $264.6 million, in the 12 months ended October 31, 2019 and the net cash of $321.7 million acquired with acquisitions in the 18 months ended October 31, 2018, the remaining movement in cash flows from investing activities remains broadly the same between the two periods.
Cash flows used in financing activities
Net cash used in financing activities increased by $2,364.2 million, or 367.6%, to $3,007.3 million in the 12 months ended October 31, 2019 as compared to $643.1 million in the 18 months ended October 31, 2018.
This increase in net cash used in financing activities of $2,364.2 million is primarily due to:
an increase of $373.0 million related to share buy-backs and related expenses being $544.7 million in the 12 months ended October 31, 2019 and $171.7 million in the 18 months ended October 31, 2018;
an increase of $1,300.0 million in relation to the Returns of Value to shareholders being $1,800.0 million in the 12 months ended October 31, 2019 and $500.0 million in the 18 months ended October 31, 2018;
a net decrease in bank borrowing proceeds or repayments of $1,003.5 million, being net repayments of $212.6 million in the 12 months ended October 31, 2019 and net proceeds of $790.9 million in the 18 months ended October 31, 2018;
a decrease of $103.0 million in dividends paid to shareholders being $439.2 million in the 12 months ended October 31, 2019 and $542.2 million in the 18 months ended October 31, 2018 as only one interim dividend was paid in the year ended October 31, 2019 compared to two in the longer prior period; and
the prior period included a $225.8 million repayment of working capital in respect of HPE Software acquisition, with no similar payments in the current period.
18 months ended October 31, 2018 compared to the 12 months ended April 30, 2017
Cash flows from operating activities
Net cash generated from operating activities increased by $469.4 million, or 103.8%, to $921.9 million in the 18 months ended October 31, 2018 as compared to $452.4 million in the twelve months ended April 30, 2017.
This was primarily due to an increase of $859.4 million in cash generated from operations, arising from a $196.4 million increase in operating profit from the enlarged group, together with an increased intangibles amortization charge add-back of $706.8 million offset by a $220.7 million increase in interest paid, $94.5 million increase in bank loan costs and $74.8 million increase in tax paid. This was primarily as a result of the transformational acquisition of the HPE Software business.
Cash flows from investing activities
Net cash from investing activities increased by $768.4 million, or 130.3%, to $178.7 million in the18 months ended October 31, 2018 as compared to net cash used in investing activities of $589.7 million in the twelve months ended April 30, 2017.
This increase in net cash generated from investing activities iswas primarily due to the net effect of an increase in net cash acquired with acquisitions of $252.6$253.5 million, an increase in payments for intangible assets of $60.7 million, an increase of $28.4 million in payments for property, plant and equipment, a decrease of repayment of bank borrowings on acquisitions of $316.7 million, and a decrease in payments for acquisitions of subsidiaries of $293.8$279.8 million, partially offset by an increase of $18.1 million in payments for intangible assets. This was primarily as a result of the transformational acquisition of the HPE Software business.
Cash flows from financing activities
This increase in net cash used in financing activities of $121.9$267.7 million in the six months ended October 31, 2016. This increase in net cash generated from financing activities iswas primarily due to an increase of $928.8$863.8 million in cash inflows associated with the proceeds from bank borrowings and a reduction of $119.1 million of repayment of bank borrowings, offset by cash outflows of $171.7m from the purchase of treasury shares, $500.0 million in relation to the returnReturn of value, increase inValue, $225.8 million repayment of bank borrowingsworking capital in respect of $88.6 million,HPE Software acquisition, and an increase in dividends paid to shareholders of $22.9$364.6 million.
Contractual Commitments
| October 31, 2019 | October 31, 2018 | |||||||
| $m | $m | |||||||
Bank loan secured | 4,775.0 | 4,996.9 | ||||||
Unamortized prepaid facility arrangement fees and original issue discounts | (104.3 | ) | (151.0 | ) | ||||
| 4,670.7 | 4,845.9 | |||||||
Term Loan B-2 | Term Loan B-3 | Seattle Spinco Term Loan B | Euro Term Loan B | Revolving Facility | Total | |||||||||||||||||||
| $m | $m | $m | $m | $m | $m | |||||||||||||||||||
| At May 1, 2017 | 1,515.2 | - | - | - | 80.0 | 1,595.2 | ||||||||||||||||||
Acquisitions | - | - | 2,600.0 | - | - | 2,600.0 | ||||||||||||||||||
Draw downs | - | 385.0 | - | 523.8 | 135.0 | 1,043.8 | ||||||||||||||||||
Repayments | (11.4 | ) | (2.9 | ) | (19.5 | ) | (4.1 | ) | (215.0 | ) | (252.9 | ) | ||||||||||||
Foreign exchange | - | - | - | 10.8 | - | 10.8 | ||||||||||||||||||
| At October 31, 2018 | 1,503.8 | 382.1 | 2,580.5 | 530.5 | - | 4,996.9 | ||||||||||||||||||
| At November 1, 2018 | 1,503.8 | 382.1 | 2,580.5 | 530.5 | - | 4,996.9 | ||||||||||||||||||
Draw downs | - | - | - | - | - | - | ||||||||||||||||||
Repayments | (89.1 | ) | (13.9 | ) | (94.2 | ) | (15.4 | ) | - | (212.6 | ) | |||||||||||||
Foreign exchange | - | - | - | (9.3 | ) | - | (9.3 | ) | ||||||||||||||||
| At October 31, 2019 | 1,414.7 | 368.2 | 2,486.3 | 505.8 | - | 4,775.0 | ||||||||||||||||||
In April 2019, early repayments totaling $200.0m in total were made against the existing term loans, utilizing some of the proceeds from the sale of the SUSE business. As a result of this no further repayments are expected within the next 12 months. The term of the loans remains unchanged.
The Company announced on April 21, 2017 the successful syndication of the new creditfollowing facilities (the “New Facilities”) on behalf of bothwere drawn as at October 31, 2019:
The $1,414.7m senior secured term loan B-2 issued by MA FinanceCo LLC a wholly owned subsidiary of Micro Focus, and Seattle SpinCo. Inc., the subsidiary that holds HPE Software which merged with a wholly owned subsidiary of Micro Focus at Completion.
The $368.2m senior secured seven year term loan B issued by Seattle SpinCo, Inc., $385.0 million term loan BB-3 issued by MA FinanceCo LLC and Eur 470.0 million (valuedis priced at $547.5 million as at October 31, 2017) issued by MA FinanceCo LLC.
0.25%;
The $2,486.3m senior secured seven year term loan B issued by Seattle SpinCo. Inc. is priced at LIBOR plus 2.50% (subject to October 31, 2017 the following New Facilities were drawn down:a LIBOR floor of 0.00%) with an original issue discount of 0.25%; and
The €452.8m m (equivalent to $505.8m) senior secured seven year term loan B issued by MA FinanceCo LLC is priced at EURIBOR plus 2.75% |
The balance will be used for general corporate and working capital purposes.following facilities were undrawn as at October 31, 2019:
A senior secured revolving credit facility of $500.0m, (“Revolving Facility”), with an interest rate of 3.25% above LIBOR on amounts drawn (and 0.375% on amounts undrawn) thereunder (subject to a LIBOR floor of 0.00%).
The only financial covenant attaching to these facilities relates to the Revolving Facility, which is subject to an aggregate net leverage covenant only in circumstances where more than 35% of the Revolving Facility is outstanding at a fiscal quarter end.
At October 31, 2017,2019, $nil of the Revolving Facility was undrawn and $5,047.7 milliondrawn together with $4,775.0m of Term Loan B-2Loans giving gross debt of $5,047.7 million$4,775.0m drawn.
As a covenant test is only applicable when the Revolving Facility is drawn down by 35% or more, and $nil of Revolving Facility was undrawndrawn at October 31, 2017,2019, no covenant test is applicable.
Derivative Financial Instruments
Derivatives are only used for economic hedging purposes and not as speculative investments. Four interest rate swaps are in place with a total notional value of $2.25bn to hedge against the impact of potential rises in interest rates until September 30, 2022. The swaps are designated against the $2,486.3m (note 20 of the “Notes to the consolidated financial statements” in Item 18) loan issued by Seattle SpinCo. Inc. and the notional value covers 52.7% of the overall dollar loan principal outstanding for the Group.
The swap contracts require settlement of net interest receivable or payable on a monthly basis. The fixed interest rate for each swap is 1.949 % and the Group entered intoreceives a variable rate in line with LIBOR. The Seattle loan is priced at LIBOR (with a floor) plus a current margin of 2.50% with the swaps aimed at addressing the risk of a rising LIBOR element. As such, the total interest cost of the hedged element of the Seattle loan is 4.44%. For the period to October 30, 2019, net interest received for the swaps amounted to $9.9m. For the life of the swap, net interest received amounted to $6.5m.
Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic effectiveness assessments (adjusted for credit risk) to ensure that an economic relationship exists between the hedged item and the hedging instrument. The testing determined that the hedge was highly effective throughout the financial reporting period for which the hedge was designated.
The impact of changes in the fair value of interest rate swaps in the six months toyear ended October 31, 2017, to hedge against the cash flow risk2019 is shown in the LIBOR rate charged on $2,250.0 millionConsolidated statement of comprehensive income. Note 31 of the debt issued by Seattle Spinco, Inc. from October 19. 2017“Notes to September 30, 2022, consistent with the Group’s strategyconsolidated financial statements” in Item 18 shows the derivative financial instruments relating to hedge the risk of cash flow fluctuations due to fluctuationshedging transactions entered into in the LIBOR rate for up to half of the Group’s US Dollar denominated borrowings. Under the terms of the interest rate swaps, the Group pays a fixed rate of 1.94% and receive 1 month USD LIBOR.period ended October 31, 2019 (other reserves).
| October 31, 2019 | October 31, 2018 | |||||||
| $m | $m | |||||||
Carrying amount | (36.5 | ) | 86.4 | |||||
Notional amount (4 x $562.5m) | 2,250.0 | 2,250.0 | ||||||
Maturity date | 30 September 2022 | 30 September 2022 | ||||||
Change in fair value of outstanding hedging instruments (note 31) | (122.9 | ) | 86.4 | |||||
Change in value of hedging instruments adjusted for credit risk | (121.9 | ) | 84.7 | |||||
The Micro Focus Group invests heavily in product developmentresearch and has seen significant enhancements to existing products and has accelerated the development of new products. New versions of products have been released in each sub-portfolio in the past year.development. Through its market knowledge and close contact with customers, Micro Focus has sought to refine products to respond to the changing needs of the Micro Focus Group’sGroup’s customers.
Research expenditure is recognized as an expense as incurred in the consolidated statement of comprehensive income in research and development expenses. Costs incurred on product development projects relating to the developing of new computer software programmesprograms and significant enhancement of existing computer software programmesprograms are recognized as intangible assets when it is probable that the project will generate future economic benefits, considering its commercial and technological feasibility, and costs can be measured reliably. Only direct costs are capitalized which are the software development employee costs and third partythird-party contractor costs. Product development costs previously recognized as an expense are not recognized as an asset in a subsequent period.
The assessment as to whether product development expenditure will achieve a complete product for which the technical feasibility is assured is a matter of judgment, as is the forecasting of how the product will generate future economic benefit. Finally, the period of time over which the economic benefit associated with the expenditure occurred will arise is also a matter of judgment. These judgments are made by evaluating the development plan prepared by the research and development department and approved by management, regularly monitoring progress by using an established set of criteria for assessing technical feasibility and benchmarking to other products.
Factors and Trends that affect our Results of Operations
New Models – Products or consumption models (cloud and subscription) that open new opportunities that could become growth drivers or represent emerging use cases that we needthe Group needs to be able to embrace;
Growth Drivers – Products with consistent growth performance and market opportunity to build the future revenue foundations of the Group;
Optimize – Products with declining revenue performance driven by the market or execution where the trajectory must be corrected to move back to the core category or investments focused to optimize long-term returns; and
Core – Products that have maintained broadly flat revenue performance but represent the current foundations of the Group and must be protected and extended.
• | Long-term and Sustainable Adjusted EBITDA1 growth; |
Strong free cash flow generation;
Efficient allocation of capital; and
Value accretive corporate actions through either acquisition or divestment.
The key initiatives and associated investments set out in Item 4.A, combined with existing but adjusted operational improvement actions resulting from the Strategic & Operational Review set out in Item 4.A are intended to drive an accelerated recovery in revenue trajectory such that are growing significantlythe revenue decline, excluding the impact of the shorter accounting period, moderates and others that are stable or in decline. Our business model means the way we manage the portfolio is analogousdelivers flat to a ‘‘fund of funds’’ with the objective of generating modest revenuelow single digit growth over the medium-term, delivering high levelsmedium term. Successful delivery of profitability and strong cash generation and cash conversion ratiothis when combined with a balanced portfolio approach. We will continuethe completion of work to focus investment in growth and core products and will not dispose of declining products unless we can achieve greater than the discounted cash flow they would generate in our ownership. Within the Enlarged Group we havebuild an effective operational platform, see Item 4.A, should also discovered areas in the portfolio with similar research and development efforts where a shared set of technologies and architectures (e.g. data ingestion, visualization, container platform, application programming interfaces) enable more innovation with less “duplicated” investment further contributingAdjusted EBITDA margins2 to our ability to drive higher efficiency without compromising innovation.be improved over time.
The combinationStrategic & Operational review set out in Item 4.A highlighted the need for a more definitive approach and accelerated transition to Subscription and SaaS based offerings as part of our future portfolio strategy. The transition will be managed over multiple financial periods with HPE Software may delayan initial focus on products where this model is emerging or de facto market standards. The Group’s goal is to deliver incremental improvements in revenue trajectory alongside a structured and disciplined transition to SaaS and Subscription for some of our products. During FY20 the returnGroup will begin the transition of Vertica, seek to revenue growthgrow existing and introduce new offerings in Security and build upon existing initiatives in ADM and ITOM.
Whilst the Group manages the portfolio as a “fund of funds” the Group recognizes the need to run certain portfolios differently and essentially as a separate business; as the HPE Software products are integrated. We expect HPE Software’s revenue trendGroup did with the SUSE portfolio acquired as part of The Attachmate Group. The market opportunity for Security and Big Data is such that a similar, differentiated approach to continue its historical decline until the transformation has been fully executedinvestment and the benefits take hold. This integrationoperational management will be delivered byadopted for these product lines. Over the four-year planmedium term the Group’s goal is to develop broadly autonomous businesses operating within the Group. This will happen in two phases and take 12-24 months to complete. During the six key strategic priorities that will consolidate and strengthen the combined business, with the goal of delivering modest revenue growth in the medium-term as well as underpinning our margin improvement objectives.
Also refer to Item 5.A of this Annual Report on Form 20-F for further discussion of trend information. The period-on-period movements presented in this section are distorted by the difference in accounting periods in the current and prior periods (12 months v 18 months) but the discussion of operating results identifies the main underlying trends.
2 Adjusted EBITDA margin, is Adjusted EBITDA as a percentage of actual revenue recorded in accordance with IFRS for the period.
There are no off-balance sheet arrangements, aside from those outlinedoperating leases, where accounting standards applicable in the period do not allow recognition of these on balance sheet. The Group’s commitments under operation leases are described in the contractual cash obligations table in Item 5.F of this Annual Report on Form 20-F, that have, or20-F. There are no other off-balance sheet arrangements which are reasonably likely to have, a current or future material effect on the Group’sGroup’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
The following table summarizes ourthe Group’s contractual obligations and other commercial commitments at October 31, 2017,2019, as well as the effect these obligations and commitments, specifically long-term debt and lease obligations, are expected to have on ourthe Group’s liquidity and cash flow in future periods:
| Payment due by period | ||||||||||||||||||||
Less than 1 year | 1-3 years | 3-5 years | After 5 years | Total | ||||||||||||||||
| $m | $m | $m | $m | $m | ||||||||||||||||
Debt principal repayment | - | 1,431.7 | 3,343.3 | - | 4,775.0 | |||||||||||||||
Interest payments on debt | 209.2 | 360.6 | 235.7 | - | 805.5 | |||||||||||||||
209.2 | 1,792.3 | 3,579.0 | - | 5,580.5 | ||||||||||||||||
Finance Leases | 11.8 | 10.8 | 0.9 | - | 23.5 | |||||||||||||||
Operating Leases | 78.6 | 123.6 | 61.4 | 37.6 | 301.2 | |||||||||||||||
299.6 | 1,926.7 | 3,641.3 | 37.6 | 5,905.2 | ||||||||||||||||
| Payments due by Period | ||||||||||||||||||||
Less than 1 year | 1 - 3 years | 3 -5 years | After 5 years | Total | ||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||
| Contractual cash obligations: | ||||||||||||||||||||
| Long-term debt | 37,858 | 100,954 | 1,544,170 | 3,364,711 | 5,047,693 | |||||||||||||||
| Finance leases | 14,306 | 16,817 | 1,426 | - | 32,549 | |||||||||||||||
| Operating leases | 80,573 | 129,887 | 101,087 | 39,537 | 351,084 | |||||||||||||||
| Interest payments | 194,391 | 383,707 | 323,523 | 213,102 | 1,114,723 | |||||||||||||||
| Total | 327,128 | 631,365 | 1,970,206 | 3,617,350 | 6,546,049 | |||||||||||||||
The interest payments within the above table are presented based on the prevailing one-month LIBOR and foreign exchange rates as of October 31, 2017.2019.
Refer to the information set forth under the heading “Forward Looking Statements” on page 1.5.
During the year ended October 31, 2019 our directors and senior management comprised the board of directors, details of the membership of the board and the related board committees they were involved in are disclosed below, and the following members of key management bodies who are not on the board of directors:
Paul Rodgers (Chief Operating Officer)
Ian Fraser (Chief Human Resources Officer)
Jane Smithard (Group General Counsel and Company Secretary)
Chris Livesey (Senior Vice President and General Manager AMC Product Group)
Susan Ferguson (Vice President Strategy and Planning)
John Delk (Chief Marketing Officer and Security Product Group Leader)
Tom Goguen (Chief Product Officer and General Manager ITOM Product Group)
Colin Mahony (Senior Vice President and General Manager Vertica Product Group)
John Hunter (Chief Revenue Officer)
Raffi Margaliot (Senior Vice President and General Manager ADM Product Group)
Board and board committee memberships as at October 31, 2019:
| Name | Role | Committee Membership |
Kevin Loosemore 1 | Executive Chairman | |
Stephen Murdoch | Chief Executive Officer | Executive Committee |
Brian McArthur-Muscroft 3 | Chief Financial Officer | Executive Committee |
Karen Slatford | Senior independent non-executive director | Audit Committee and Nomination Committee |
Richard Atkins | Independent non-executive director | Audit Committee, Nomination Committee and Remuneration Committee |
Amanda Brown | Independent non-executive director | Audit Committee, Nomination Committee and Remuneration Committee |
Silke Scheiber 2 | Independent non-executive director | Audit Committee, Nomination Committee and Remuneration Committee |
Lawton Fitt | Independent non-executive director | Audit Committee, Nomination Committee and Remuneration Committee |
1 Kevin Loosemore had the role of Executive Chairman during the 12 months end October 31, 2019 but stepped down from the board on February 14, 2020. Greg Lock joined the board as Non-executive Chairman on February 14, 2020.
2 Silke Scheiber had a role as an independent non-executive director during the 12 months ended October 31, 2019 but stepped down from the board on February 4, 2020 having held roles as a member of the Audit Committee, Nomination Committee and Remuneration Committee.
3 Chris Kennedy served as Executive director and Chief Financial Officer until February 21, 2019 and held a role as a member of the Executive Committee, when he was replaced by Brian McArthur-Muscroft.
Greg Lock
Greg Lock took up the role of non-executive Chairman on February 14, 2020. Greg has more than 45 years’ experience in the software and computer services industry, including 11 years as Chairman of Computacenter plc, seven years as Chairman of Kofax plc and four years as Chairman of SurfControl plc. In the last five years he has also been a director of Informa plc and UBM plc. From 1998 to 2000, he was General Manager of IBM’s Global Industrial sector. Greg also served as a member of IBM’s Worldwide Management Council and as a governor of the IBM Academy of Technology.
Kevin Loosemore
Kevin was Executive Chairman and a member of the Micro Focus board until he stepped down on February 14, 2020. He was appointed non-executive Chairman of Micro Focus in 2005 and Executive Chairman in April 2011. Kevin joined the board of De La Rue plc as a non-executive director on September 2, 2019 and became non-executive Chairman, of that company on October 1, 2019. Kevin is also non-executive director and former Chairman of IRIS Software Group Ltd, a role he relinquished on September 2, 2019.
Kevin was previously non-executive Chairman of Morse plc, a non-executive director of Nationwide Building Society and a non-executive director of the Big Food Group plc. His most recent executive roles were as Chief Operating Officer of Cable & Wireless plc, President of Motorola Europe, Middle East and Africa and before that, he was Chief Executive of IBM U.K. Limited.
He has a degree in politics and economics from Oxford University.
Stephen Murdoch
Stephen is our Chief Executive Officer and a member of the Micro Focus board, positions he has held since 19 March 2018. Stephen joined Micro Focus in 2012, first serving as General Manager of the Product Group and Chief Marketing Officer, responsible for all software product and services offerings development, customer services, corporate marketing and strategy. In 2014, he was appointed as Chief Operating Officer and Executive Director, having responsibility for sales and marketing, product strategy, development and management, services and business operations.
Prior to Micro Focus Stephen spent 7 years at Dell, first building Dell’s Global Infrastructure Consulting Services organization, and then leading its business in Europe, Middle East and Africa. Before Dell Stephen had 17 years’ experience at IBM, latterly serving as Vice President, Communications Sector with responsibility for the entire telco, media, and utilities industry portfolio. During his IBM career, Stephen held a number of Global, EMEA and UK senior management roles with experience spanning software and services, storage, and enterprise systems.
Brian McArthur-Muscroft
Brian is our Chief Financial Officer and a member of the Micro Focus board, positions he has held since 21 February 2019. Prior to joining Micro Focus Brian held a variety of senior management positions, including the role of Chief Financial Officer at TeleCity Group plc and most recently as Chief Financial Officer of Paysafe Group plc. Also a restructuring specialist, Brian was the Interim CFO on the successful turnaround of MCI Worldcom EMEA. He is a non-executive director and the senior independent director at Robert Walters plc, where he has been chair of the audit committee since 2013. In addition, Brian serves as the Responsible Officer for Hockerill Anglo-European College, a leading international secondary school in Hertfordshire.
Brian was named as Business Week’s Finance Director of the Year in both 2013 and 2017, and the CBI’s FTSE250 Finance Director of the Year in 2012. Brian holds a Law degree and qualified as a chartered accountant with PricewaterhouseCoopers in London.
Karen Slatford
Karen is Chair of Draper Esprit plc, an AIM-quoted venture capital firm and she is also a non-executive director of AIM-quoted Accesso Technology Group plc and Softcat plc, a FTSE250 IT infrastructure provider. Karen began her career at ICL before spending 20 years at Hewlett-Packard Company, where in 2000 she became Vice President and General Manager Worldwide Sales & Marketing for the Business Customer Organization, responsible for sales of all Hewlett-Packard products, services and software to business customers globally. Karen holds a BA Honors degree in European Studies from Bath University and a Diploma in Marketing.
Richard Atkins
Richard is Chairman of Acora, an IT Services outsourcing company and YSC, a leadership development consultancy company. He has spent the majority of his career within the IT industry. Previously, he was a Director at Data Sciences where he led its leveraged buyout from Thorn EMI in 1991 and then managed its successful sale to IBM in 1996. His final role at IBM was as General Manager for IBM Global Services Northern Europe where he was also a member of the IBM worldwide senior leadership team. Since leaving IBM in 2005 he has acted as a non-executive director for several companies including Compel, Message Labs, Global Crossing, Morse and Easynet. Richard qualified as a Chartered Accountant with Ernst & Young.
Amanda Brown
Amanda is currently Group Human Resources Director at Hiscox Ltd, a FTSE 250business and specialist insurer with offices in 14 countries.
Amanda has more than 20 years of international HR experience in a variety of industries, including consumer goods, leisure, hospitality, and financial services. Prior to Hiscox, Amanda held a number of leadership roles with Mars, PepsiCo, and Whitbread plc. She has expertise in human resources, remuneration strategy, and managing organizations through periods of significant change.
Lawton Fitt
Lawton is an investment banker and a highly experienced corporate director. She currently serves on the boards of Ciena Corporation, The Progressive Corporation and The Carlyle Group, and was previously a non-executive director at ARM plc and Thomson Reuters. Lawton worked at Goldman Sachs for over 23 years in investment banking, equities and asset management and for more than a decade she led the equity capital markets team, focused on technology companies. She was elected a Partner in 1994 and worked in the London and New York offices.
From 2002-2005 Lawton was the Secretary (Chief Executive Officer) of the Royal Academy of the Arts in London and has served as a trustee for a number of not-for-profit organizations and foundations, including the Goldman Sachs Foundation and the Thomson Reuters Foundation. She received her undergraduate degree in European History from Brown University and her MBA from the Darden School of the University of Virginia.
Silke Scheiber
Silke was an investment professional at Kohlberg Kravis Roberts & Co. Partners LLP, London, UK from July 1999 and became a member in 2012. She retired from KKR in 2015. Prior to KKR, Silke worked at Goldman, Sachs & Company oHG, Frankfurt, Germany from 1996 to 1999. Silke, who is Austrian, graduated from the University of St.Gallen, Switzerland. Silke is a director of CNH Industrial N.V., the Netherlands. Silke stepped down from the board on February 4, 2020.
Aggregate compensation paid to the Group’s directors and members of key management bodies are disclosed below. In addition, further information on the compensation of the Group’s directors is disclosed. This is based upon information extracted from the Remuneration report in the UK Annual Report and Accounts prepared in line with the recommendations of the UK Corporate Governance Code.
12 months ended October 31, 2019 | ||||
| Aggregate compensation including fees paid to non-executive directors | $m | |||
Short-term benefits | 10.0 | |||
Share based payments | 25.3 | |||
| Total compensation | 35.3 | |||
The Group’s directors and members of key management bodies participate in the Group’s Long-term Incentive Plan, Additional Share Grants and Deferred Share Bonus Plan. Descriptions of these plans including the vesting criteria and specific awards under each plan for the Group’s executive directors are included in the Directors’ Remuneration report below. Aggregate information in relation to each plan for the directors and members of key management bodies:
Number of awards | Range of exercise prices (pence) | Range of expiry dates | ||||
Long-term Incentive Plan | 2,991,930 | nil to 401.60 pence | June 30, 2020 to December 3, 2099 | |||
Additional Share Grants | 3,190,917 | nil | November 20, 2024 to September 1, 2027 | |||
Deferred Share Bonus Plan | 15,064 | nil | November 20, 2024 to February 28, 2099 | |||
In addition, the directors and senior management participate in the Sharesave and Employee Stock Purchase Plan. Descriptions of these plans are included in note 33 of the financial statements in Item 18. Aggregate information in relation to these schemes for the directors and members of key management bodies:
| Number of options | Exercise prices (pence) | Range of expiry dates | ||||
Aggregate share save options | 1,759 | 1,023.00 pence | April 1, 2022 | |||
Directors’ Remuneration report
Remuneration Statement
This Directors’ Remuneration Report covers the 12 months ended October 31, 2019. The Directors’ Remuneration report, is set out in two sections:
The first section relates to the proposed new Remuneration Policy for directors which will be subject to a binding shareholder vote at the 2020 Annual General Meeting (“AGM”) and, if approved, will apply for three years from the conclusion of the AGM.
The second section is the Annual Report on Remuneration, which provides details of the amounts earned in respect of the year ended October 31, 2019. These payments are governed by the current remuneration policy which was approved by shareholders at the 2017 Annual General Meeting and can be found at www.investors.microfocus.com.
The Annual Report on Remuneration also describes how the new remuneration policy will be implemented for the year ending October 31, 2020 (subject to shareholders approving the new remuneration policy) and will be subject to a non-binding advisory vote at the 2020 AGM.
Responding to shareholder feedback
At the AGM on March 2019, the Company received a 50.4% vote against the 2018 Annual Report on Remuneration. This was very disappointing and the committee and the board have taken this voting outcome extremely seriously. Since the AGM, the Company has spent considerable time understanding the views of shareholders, engaging with them and reviewing our current remuneration arrangements in order to design a new remuneration policy that addresses shareholder concerns and incorporates current corporate governance best practice for a UK-listed business. The key changes are listed below:
Removal of Additional Share Grant scheme
The ASG scheme was raised as an issue by a number of shareholders. The scheme had been introduced to reward exceptional shareholder value creation following major acquisitions. Following feedback from investors, the board has decided to remove this scheme, therefore there will be no future ASG grants. As the maximum bonus opportunity for directors will remain at the current level of 150% of base salary and the maximum LTIP grant level will stay at 200% of base salary, this represents a significant reduction in the maximum incentive opportunity for our executive directors under the new policy compared with the current one.
In addition, the current executive directors have agreed to surrender their outstanding HPE Software ASG awards and therefore these lapse with effect from 3 February 2020.
Introduction of a post-vesting holding period for LTIP
The Company has added a two-year post-vesting holding period which will apply to LTIP awards granted under the new policy.
Introduction of post-cessation shareholding
Executive directors will be required to hold their full shareholding requirement (200% of salary) for two years after leaving the Company. This new post-cessation shareholding requirement will apply to shares released from awards granted after the approval of the new policy and executive directors will be required to agree to the Company’s agreed holding mechanism.
Alignment of pension contribution rates for directors with those of the workforce
The Company proposes to reduce the current maximum defined contribution pension level (or cash in lieu) for new executive directors from 15% of base salary to the same level which is provided to employees generally in the same location as the executive director (the current level of employer contribution for UK employees is 5%). The existing CEO and CFO currently receive 15% of base salary as a cash allowance in lieu of pension contributions and the Executive Chairman receives 20%. Subject to approval of the new policy, the company contributions for all current executive directors will reduce to the general employee level for the UK by the end of 2022 in one step.
Enhancement of malus and claw-back
The Company has added corporate failure as an additional trigger event for malus and claw-back and have extended the claw-back period for annual bonus and deferred bonus shares from one to two years.
Introduction of additional performance measures for incentive schemes
Best practice is now to have more than one financial measure and this has been raised by a number of shareholders. Under the proposed remuneration policy, The Company intends to apply at least two financial performance measures for both the bonus and the LTIP which are appropriately linked to the Company’s strategy. The Company has commented later in this section on the decisions which have been made in respect of the performance measures for the 2020 financial year, given the timing of the outcome of the strategic review.
A complete list of all of the proposed policy changes, together with the rationale for the changes, is set out below.
In addition to the proposed policy changes, the Company has taken account of shareholder experience and sentiment when reviewing the implementation of the proposed policy for the year ending October 31, 2020:
Surrender of outstanding HPE Software ASGs
One of the most significant concerns raised when the Company consulted with shareholders was the decision to re-grant the HPE Software ASGs to reflect a three-year performance period from completion of the HPE Software acquisition, thereby changing the vesting date to September 2020. Many shareholders appreciated the need to retain the management team’s focus on delivering value from the HPE Software acquisition, despite the integration plan being about one year behind schedule.
A number of shareholders also noted that the challenging 50% to 100% shareholder return performance measure and the initial reference price of £18.17¾ were retained. The current executive directors have decided that they will surrender their outstanding ASGs, therefore these outstanding awards for the Executive Chairman, CEO and CFO lapse with effect from February 3, 2020.
Executive directors’ salaries unchanged for 2020
The committee determined that the salaries for executive directors will not be increased in 2020.
Corporate Governance
As well as incorporating shareholder feedback, the Group has aimed to reflect current corporate governance and best practice principles for a UK-listed business in the design of our new policy, for example reducing pension rates for executive directors and introducing post-cessation shareholding requirements.
The Group has also included new disclosures to reflect the 2018 Corporate Governance Code and new reporting requirements in this report, ahead of when the Group is technically required to do so, such as the table below which sets out how the committee took into account various factors in designing the proposed new policy for executive directors, undertaking a review of broader workforce remuneration and disclosing CEO pay ratios. The Group will continue to incorporate elements of the 2018 Corporate Governance Code throughout 2020, such as engagement with the workforce and explaining to employees about how the new executive directors’ remuneration policy aligns with wider pay policy.
Business performance in FY19 and incentive outcomes
FY19 was a challenging year, with Adjusted EBITDA1 declining over the year relative to the 12 month period ending October 31, 2018, which resulted in no FY19 bonus for executive directors. Over the three years to the end of April 2019, there was a 42.9% increase in Diluted Adjusted EPS2, resulting in the three- year aggregate EPS performance for the 2016 LTIP exceeding the stretch target of RPI plus 9% per annum and accordingly the performance target was met in full. There were no material Environmental, Social or Governance (ESG) events which the committee had to consider when determining the final vesting outcome. Accordingly the committee determined that the 2016 LTIP should vest in full. As the Executive Chairman and the CEO have not exercised these options and sold the resulting shares, their value has been impacted by the share price fall after the August 2019 trading update.
Overall, the committee believes that the remuneration policy has delivered an appropriate outcome in respect of FY19 for the company performance achieved and therefore that the company’s remuneration policy has operated as intended.
Further details on the bonus and LTIP outcomes are set out below.
1 See definition in Item 3.D
2 Diluted Adjusted Earnings per Share is defined as profit after tax attributable to ordinary shareholders are adjusted by adding back exceptional items including the gain on disposal of discontinued operation, share-based compensation charge and the amortization of purchased intangibles and the tax attributable to these charges, divided by the weighted average number of diluted shares in issue during the period.
Performance measures for the 2020 incentives
The Micro Focus strategy is to stabilize revenue whilst achieving mid-40s EBITDA margins. To achieve this, the management team has identified a number of critical strategic priorities which will need to be executed successfully over the next few years. In order to support this and in line with the proposed new remuneration policy, the committee has introduced an additional financial measure for the 2020 annual bonus, as well as an element of personal performance. The 2020 bonus will therefore have 60% subject to Adjusted EBITDA performance, 20% based on revenue performance and 20% will be based on non-financial or strategic individual key performance objectives (KPOs), in order to incorporate other business critical objectives aligned to the business plan. There will be no payout under the KPO element if there is no payout under any of the financial measures.
Under the proposed new remuneration policy, LTIP grants will be subject to a minimum of two financial performance measures. It is intended that the performance measures for the 2020 grants will comprise free cash flow and TSR. In light of the recently concluded strategic review and the announcement that the current Executive Chairman will be stepping down from the board on February 14, 2020 and will be replaced by a newly appointed non-executive Chairman, the committee has decided that a thorough shareholder consultation is required before confirming the financial measures and targets for the 2020 LTIP grants. The 2020 LTIP grants will therefore be delayed until after the AGM and, between now and making the grants, the Group will be consulting with shareholders and listening to your views on the proposed measures. When the Group has completed the consultation, we will finalize and publish the measures, weightings, targets and grant levels for the 2020 LTIP on our website in advance of granting the awards.
When setting the 2020 LTIP grant levels for the executive directors, the committee will take account of shareholder experience following the August 2019 trading update and subsequent share price decline.
The Group realizes that this is not a standard approach to disclosure and timing of consultation however, the LTIP is a forward looking, three year performance incentive, therefore ensuring that the Group applies the right measures, reflecting the appropriate value creation priorities is vital. The timing of the strategic review outcome simply did not allow enough time for meaningful consultation on LTIP measures in advance of the AGM. Therefore the committee has concluded that this is the most effective course of action given the circumstances.
In summary
The Group is absolutely committed to maintaining an open and transparent engagement with our investors and to rebuilding trust regarding directors’ remuneration. The Group believes and it has made significant changes in the proposed new policy to address shareholders’ concerns and reflect UK corporate governance best practice. The Group has also aimed to provide as full disclosure as possible in relation to the last financial year and in explaining the committee decisions which have been made. The Company therefore hopes to receive your support for the proposed new Directors’ Remuneration Policy report and the 2019 Annual Remuneration report at our upcoming AGM.
Directors’ Remuneration Policy
This section of the report sets out the proposed new Remuneration Policy for directors. A binding shareholder resolution to approve the Remuneration Policy will be proposed at the 2020 AGM on March 25, 2020 and, subject to shareholder approval, will be effective from the conclusion of the AGM for a period of three years. Subject to approval of the proposed new policy, the 2020 annual bonus plan and the 2020 LTIP grants will be operated under the new policy. The key changes from the previous Remuneration Policy (which was first published on pages 72 to 82 of the 2017 Annual Report and Accounts and which was approved by shareholders at the September 2017 Annual General Meeting) and the rationale for the changes are explained above. The policy will be available to view at www.microfocus.com.
The committee determines the Remuneration Policy and the individual remuneration packages for executive directors and the executive management team. No individual participates in discussions relating to the setting of their own remuneration.
The committee considers that the remuneration arrangements proposed under the new policy are appropriate based on internal and external measures. From an internal perspective, it has reviewed CEO to UK employee pay ratios and the percentage change from 2018 to 2019 in CEO salary, benefits and bonus relative to the wider global employee population and is comfortable that the overall remuneration opportunity for executive directors is appropriate, especially given the higher proportion of performance related pay which they have relative to employees generally, which reflects their increased ability to impact the business performance.
In terms of external benchmarking for the executive directors, the committee reviews relevant market data, for example for the FTSE 100, the FTSE 250, as well as for some US based technology companies of comparable size to Micro Focus. Benchmarking is only one factor which the committee takes into account when making decisions about pay. This benchmarking approach is broadly consistent with the approach applied more broadly to employees throughout the Group.
The remuneration policy for the wider employee group is based on broadly consistent principles to those for executive directors. All employees who are not eligible for commission based reward participate in an annual bonus plan, which is based on similar financial measures and targets as the executive directors. Performance measures are consistent for all participants in the LTIP. All employees globally have the ability to buy company shares under one of the Company’s all-employee share purchase plans. At its January 2020 meeting, the Committee considered various aspects of workforce remuneration and took these into account when determining the proposed new directors’ Remuneration Policy.
The table below shows how the committee addressed simplicity, clarity, risk, predictability, proportionality and alignment to culture when determining the directors’ Remuneration Policy.
| Factor | How this has been addressed | |
Clarity Remuneration arrangements should be transparent and promote effective engagement with shareholders and the workforce. | We have aimed to be completely transparent about the detail of our proposed new remuneration policy (for example when and how certain newly introduced features, such as holding periods and post-cessation shareholding requirements, take effect). We have complied with certain disclosure requirements ahead of when we are required to do so, for example CEO pay ratios, in the spirit of openness and transparency. We have engaged with shareholders to understand more about the reasons for the negative vote against the 2018 Annual Remuneration Report and to inform them of the key aspects of the proposed new Remuneration Policy. We will be undertaking a full consultation in advance of granting the 2020 LTIP awards. The Company currently engages with the broader employee population in connection with their remuneration through a variety of methods including explanatory guides and face-to-face briefings and seeks their views on reward via employee opinion surveys. | |
Simplicity Remuneration structures should avoid complexity and their rationale and operation should be easy to understand. | By removing ASGs from our new remuneration policy, we have simplified our incentive structure so that we only have one long-term incentive plan and an annual bonus plan (which incorporates share deferral). | |
Risk Remuneration arrangements should ensure that reputational and other risks from excessive rewards, and behavioral risks that can arise from target-based incentive plans, are identified and mitigated. | A number of design features exist under our new policy in order to take into account and minimize risk as follows: - The committee can apply discretion to override formulaic incentive outcomes if it believes this would result in a fairer outcome. - We operate bonus deferral and have added post-vesting holding periods to the LTIP and extended our shareholding requirement so that it applies for two years post-cessation. - Malus and claw-back provisions are in place in the bonus and LTIP. Under the proposed new policy, we are adding corporate failure as an additional malus and claw-back trigger event and the claw-back period is being extended to two years for all future bonuses and deferred bonus shares awarded under the new policy. | |
Predictability The range of possible values of rewards to individual directors and any other limits or discretions should be identified and explained at the time of approving the policy. | The proposed new Remuneration Policy sets out: - The maximum award levels and the range of vesting outcomes applicable to annual and long-term incentive arrangements. - The discretions which are available to the committee (for example to override formulaic incentive outcomes and to apply malus and claw-back). In the past, the ASGs have delivered significant value to executives in line with the value which has been created for shareholders. As no future ASGs will be granted, the executive directors’ packages are less leveraged and more predictable under the proposed new policy. | |
Proportionality The link between individual awards, the delivery of strategy and the long-term performance of the company should be clear. Outcomes should not reward poor performance. | Performance measures are designed to align to strategy and incentive plans provide for a range of payout levels which are dependent on and linked to company performance. Deferral periods and holding periods help to further align incentive outcomes for executives to the shareholder experience. No payment is made for poor performance and any individual leaving the company due to performance issues would not be entitled to any incentive payments. | |
Alignment to culture Incentive schemes should drive behaviors consistent with company purpose, values and strategy. | Under the new policy the Company will use at least two financial performance measures for the bonus plan and the LTIP. The performance measures will be chosen to reflect the annual business plan and the company’s strategy. |
The table below sets out the Remuneration Policy that shareholders will be asked to approve at the AGM on March 25, 2020
Remuneration Policy table – executive directors
All footnotes to the policy table can be found below.
BASE SALARY
Alignment with strategy
Supports the recruitment and retention of executive directors of the caliber required to deliver the Group’s strategy.
Operation
Salaries are normally reviewed annually and increases generally apply from the first quarter of the financial year.
When determining base salary levels, the committee considers the following:
| - | Pay increases for other employees of the Group; |
| - | The individual’s skills, experience and responsibilities; |
| - | Pay at companies of a similar size, complexity and international scope, in particular those within the technology sector, the appropriate FTSE index, US listed technology companies and privately owned software companies; and |
| - | Corporate and individual performance. |
Maximum opportunity
Ordinarily, salary increases will be in line with increases awarded to other employees of the Group. However, increases may be made above this level at the committee’s discretion to take account of individual circumstances such as:
| - | Increase in scope and responsibility; |
| - | Increase to reflect the individual’s development and performance in role (e.g. for a new appointment where base salary may be increased over time rather than set directly at the level of the previous incumbent or market level); and |
| - | Alignment with market level. |
Performance measures
None, although overall performance of the Company and the individual is considered by the committee when setting and reviewing salaries annually.
BENEFITS
Alignment with strategy
Provides a competitive and cost-effective benefits package to assist executive directors in carrying out their duties effectively.
Operation
The Group provides a range of benefits to executive directors which, subject to periodic review, may include car benefits (or cash equivalent), private medical and dental insurance, permanent health insurance, directors’ and officers’ liability insurance, life assurance, tax return preparation costs for non-home country filings arising as a result of employment with the Company and other benefits available to employees generally, including, where appropriate, the tax on such benefits. Additional benefits may also be provided in certain circumstances which may include (but are not limited to) relocation expenses, expatriate allowances, housing allowances, school fees and payment of incremental overseas tax liabilities.
Maximum opportunity
The maximum value for ongoing benefits for executive directors will not normally exceed 15% of base salary (excluding any one-off items such as relocation benefits and any tax-related charges met by the Company). However, the committee may provide reasonable benefits beyond this amount in exceptional situations, such as a change in the individual’s circumstances caused by the Company, or if there is a significant increase in the cost of providing an agreed benefit.
Performance measures
None
PENSION
Alignment with strategy
Provides a competitive post-retirement benefit, in a way that manages the overall cost to the Company.
Operation
The Company operates a defined contribution plan with contributions set as a percentage of base salary, such contribution rate being subject to review and change from time to time. An individual may elect to receive some or all of their pension contribution as a cash allowance.
Maximum opportunity
Maximum for new hires: For executive directors hired or promoted to the board after the effective date of this policy, the maximum value of the Company contribution is equivalent to the level of pension benefit provided to employees generally in the same location under the Company’s regular defined contribution plans in effect, or as amended, from time to time.
Maximum for existing executive directors: The existing executive directors will transition from their current pension contribution rates to the new hire pension maximum applicable to employees generally by the end of 2022. Currently, the existing CEO and CFO receive 15% of base salary as a cash allowance in lieu of pension contribution and the Executive Chairman receives 20%. Subject to approval of the new policy, the Company contributions for all current executive directors will reduce to the general employee level for the UK by the end of 2022 in one step. Therefore, by the end of 2022, the current executive directors will be subject to the same maximum as described above for new hire executive directors.
Performance measures
None
ANNUAL BONUS
Alignment with strategy
Rewards and incentivizes the achievement of annual financial targets which are chosen to align with the Company’s strategy. The compulsory deferral of one-third of any bonus earned into Company shares for three years promotes longer-term alignment of executive director interests with shareholders’ interests.
Operation
Financial measures and targets are set by the committee for each financial period and pay out levels are determined by the committee after the year end based on an assessment of performance against those targets and the application of any applicable committee discretion, if relevant. The targets, outcomes and the exercise of any committee discretion are fully disclosed in the Annual Remuneration Report published following the year end.
All executive directors are required to defer one-third of their bonus into an award over Company shares. The deferral period is three years.
Dividend equivalents are payable over the deferral period in respect of the deferred bonus shares which vest.
Maximum opportunity
The maximum potential bonus opportunity is 150% of annual base salary in any financial year for each executive director. This includes the deferred bonus shares, but excludes the dividend equivalents which are payable in respect of the deferred bonus shares.
Performance measures
Performance measures are set each year and normally include at least two financial measures chosen by the committee to support the current strategy and incentivize the executive directors to achieve the desired outcomes. The financial measures will have an overall weighting of at least 80% and the performance measures may also include non-financial or strategic individual key performance objectives (KPOs) with a weighting of up to 20%. The performance measures will be assessed independently and there will be no payout under the non-financial/individual measures if there is no payout under any of the financial measures.
The financial targets are set each year and are designed to be stretching. They are set by the committee by reference to various factors including the previous year’s performance outcomes, the strategic plan and internal and external forecasts for the upcoming year. The proposed financial measures for each operation of the annual bonus will be included in the Annual Report on Remuneration which is published in the early part of the bonus year.
Payout levels for different levels of performance against the performance measures and targets are as follows:
| - | The minimum and threshold payout is zero. |
| - | Payout for target performance is 50% of the maximum opportunity. |
Committee discretion applies. See footnotes 1, 2 and 3.
Recovery of sums paid
Malus provisions will apply prior to vesting and claw-back may be applied up to two years after vesting. See footnote 4.
LONG-TERM INCENTIVE PLAN
Alignment with strategy
Motivates and rewards the achievement of long-term business goals which support the strategy, the creation of shareholder value and aligns executive directors’ interests with those of long-term shareholders.
Operation
Conditional share awards or nil cost options are typically made annually with vesting subject to the achievement of financial performance conditions measured over three years and continued employment (subject to the provisions set out under policy on payments for loss of office).
If nil cost options are granted, the maximum length of the exercise period is typically 10 years from the date of grant.
Executive directors are required to retain any net (after tax) vested shares for a holding period of two years after vesting (including following cessation of employment).
The plan rules allow for dividend equivalents to be payable in respect of shares subject to awards which vest.
Maximum opportunity
The maximum face value of awards to be granted in respect of any financial year for each executive director is 200% of annual base salary.
Performance measures
There are normally at least two financial performance measures for each operation of the LTIP. The measures and/or the weightings can be changed for each annual grant during the policy period to reflect strategic priorities, although any significant changes from the previous year’s measures would only be made following engagement with shareholders.
The targets are designed to be challenging by providing high levels of reward for exceptional performance, but also a reasonable expectation of some reward at the lower end of the scale, subject to robust performance. The targets are set by the committee by reference to various factors including the previous year’s performance outcomes, the strategic plan and internal and external forecasts for the performance period.
Details of the measures and targets used for specific LTIP grants are typically included in the Annual Report on Remuneration for the year prior to grant.
Payout levels for different levels of performance against the annual measures and targets are as follows:
–– The minimum payout is zero;
–– The threshold payout is normally zero, but could be up to 25%, depending on the measures chosen; and
–– Payout in line with company expectations will normally be 50% of the maximum award.
Committee discretion applies. See footnotes 1, 2 and 3.
Recovery of sums paid
Malus provisions will apply prior to vesting and claw back may be applied up to two years after vesting. See footnote 4.
ALL-EMPLOYEE SHARE PLANS
Alignment with strategy
Provides an opportunity for executive directors to voluntarily invest in the Company on the same terms as other employees.
Operation
Executive directors are entitled to participate in any local all-employee share-based plans to the extent that these are offered by the Company and under the same terms as other employees.
Maximum opportunity
Participation limits are those set by the Company, which may be subject to local tax authority limits from time to time in force.
Performance measures
Not applicable
| 1. | Committee discretion in respect of bonus and LTIP payout levels. |
In determining the level of payout under the bonus and the LTIP, the committee takes into account the overall business performance during the performance period and any other relevant factors. Should the formulaic outcome of the agreed performance measures not, in the view of the committee, reflect overall business performance, the committee has discretion to adjust the payout or vesting levels (subject always to the stated policy maximums) if it believes this would result in a fairer and more appropriate outcome. This discretion will only be used in exceptional circumstances and any such adjustments would be disclosed in the next year’s Annual Report on Remuneration.
| 2. | Committee discretion to vary bonus and LTIP performance measures |
If an exceptional event occurs which causes the committee to consider that the measures set for a current bonus or LTIP award are no longer a fair measure of performance, the committee has discretion to adjust them, provided that the new measures are no easier or tougher to meet than the original measures. Any such adjustments would be disclosed in the next year’s Annual Report on Remuneration.
| 3. | Other discretions under the bonus plan, Deferred Share Bonus Plan (DSBP) and LTIP |
In relation to the bonus plan, the committee retains discretion over other matters such as the timing of the bonus payout, treatment on a change of control, treatment on termination of employment (see “Policy on payments for loss of office” section and the operation of malus and claw-back (see below under footnote 4):
In relation to the DSBP and the LTIP, the committee retains discretion over other matters such as treatment on a change of control, treatment on termination of employment (see “Policy on payments for loss of office” section), adjustments required in certain circumstances (e.g. rights issues, corporate restructuring events and special dividends) and the operation of malus and claw-back (see below under footnote 4).
| 4. | Malus and claw-back under the annual bonus plan, DSBP and LTIP |
The Committee has discretion under the annual bonus plan, the DSBP and the LTIP to apply malus and claw-back in the case of (i) material miss-statement of results, (ii) an error in calculation, (iii) fraud and gross misconduct, (iv) conduct causing serious harm to the Group’s reputation and/or significant financial loss, (v) a material failure of risk management causing serious harm to the reputation of the Group and (vi) corporate failure. If any of these events apply, the committee has discretion to take a number of actions in accordance with the applicable plan rules, including: reducing a payout (to nil if appropriate), lapsing unvested awards, requiring repayment of gains made or the transfer of shares acquired, delaying vesting. Claw-back can apply for up to two years after (i) an annual bonus cash payout, (ii) a release of deferred bonus shares and (iii) a vesting of LTIP awards.
| 5. | Explanation of the differences between the Company’s policy on executive directors’ remuneration and the policy for other employees |
The remuneration policy for the wider employee group is based on broadly consistent principles to those for executive directors, although a larger proportion of executive directors’ remuneration is performance related than that of other employees. All employees who are not eligible for commission-based reward participate in an annual bonus plan, which is based on similar measures and financial targets as the executive directors. Bonus opportunity levels vary according to role and seniority. Typically, around 450 of our senior managers and other key employees also receive LTIP awards annually. LTIP performance conditions are consistent for all participants, while award sizes vary according to role and seniority. In addition, selected employees below the board may receive non-performance related share awards. All UK employees are eligible to participate in a tax-favored share save plan and employees in other countries worldwide are able to participate in the Employee Share Purchase Plan (ESPP). The range and level of retirement and other benefits provided to employees varies according to local market practice, role and seniority. As noted in the pensions section of the policy table, the pension policy for executive directors results in full alignment of executive directors’ pension benefits with the wider workforce.
Executive directors’ shareholding requirement
Executive directors are subject to a shareholding requirement of 200% of annual base salary. On joining or promotion to the board, executive directors are given a period of time to build up to their requirement, typically five years.
On cessation of employment, executive directors are to maintain their full shareholding requirement (or, if lower, their actual level of shareholding at the time of leaving) for two years after leaving employment. This applies to shares delivered from awards granted after the approval of the new policy at the 2020 AGM. Post-cessation, executive directors will be required to hold shares subject to their shareholding requirement in accordance with the Company’s designated mechanism from time to time in place.
Remuneration Policy table – non-executive directors
The table below details the Company’s policy on how the non-executive directors, including a non-executive Chairman, will be remunerated.
FEES
Alignment with strategy
To enable the Company to attract and retain high-caliber non-executive directors who can make a major contribution to the board and committees of a global technology business.
Operation
Fees for non-executive directors (except a non-executive Chair) are determined by the Chair of the board and the executive directors. Individuals undertaking the roles of non-executive Chair of the board and senior independent director (SID) are typically paid an aggregate annual fee, which includes chairing committees. Other non-executive directors are paid a basic annual fee, with additional fees payable as appropriate for specific roles and duties. Currently, additional fees are paid for the chairmanship of board committees and for additional responsibilities related to the SEC and SOX compliance. In the future, additional fees could be payable for other specific roles and duties, for example, for membership of board committees, a workforce engagement fee and attendance fees.
Fees are currently paid in cash but the Company may choose to provide some of the fees in shares.
Fees are reviewed periodically. When reviewing fees, consideration is given to the commitment and contribution that is expected, the complexity of the role, the experience of the individual and market positioning against comparable roles in companies of a similar size and complexity to the Company, in particular those within the technology sector, the relevant FTSE index, US listed technology companies and privately owned software companies.
Maximum opportunity
The total base fees paid to non-executive directors will remain within the limit stated in the Company’s articles of association, currently £1m. Actual fee levels are disclosed in the Annual Report on Remuneration for the relevant financial year.
Additional fees for chairing, or membership of, board committees and all fees paid to a non-executive Chair of the board are not subject to this maximum limit.
OTHER BENEFITS
Alignment with strategy
To provide benefits at appropriate cost where necessary.
Operation
Other benefits for non-executive directors are kept to a minimum. They are reviewed periodically and may include additional tax return filing costs which arise as a result of the appointment with the Company, secretarial benefits, travel and related subsistence costs, including, where appropriate, the tax on such benefits. In addition, private medical cover may be considered for a non-executive Chairman. Non-executive directors may also be reimbursed for all necessary and reasonable expenses incurred in performance of their duties and tax (if any) thereon.Maximum opportunity
There is no prescribed maximum.
Changes from previous policy
The following table summarizes the changes between the proposed new Remuneration Policy set out in the preceding pages and the current Remuneration Policy which was approved at the 2017 AGM, together with the rationale for the changes.
| Policy change | Rationale for change | |||
| Incentive structure | No Additional Share Grants (ASGs). Incentives comprise bonus, bonus deferral and LTIP. | Simplification of incentive structure, reduce reputational risk and increase predictability of reward outcomes. | ||
| Pension maximum | New executive directors: maximum Company contribution reduced from 15% of base salary to the same level as employees in general in same location. Existing executive directors: reduce to employee level by end of 2022. | To align with the workforce and to meet corporate governance best practice. | ||
| Bonus Measures | Under the current policy, the bonus measure is Adjusted EBITDA, with the ability to change this if needed to support a change in strategy. Under the new policy, we will select performance measures each year and will normally have at least two financial measures with a minimum weighting of 80% and the ability to include individual KPOs up to a 20% weighting. | To ensure a balanced set of measures and the flexibility to change these each year to align with business priorities. | ||
| Bonus targets | Under the current policy, this is set at 0–10% year-on-year Adjusted EBITDA growth, with the ability to change this if needed to support a change in strategy. Under the new policy, targets will be set annually in the context of the Company’s annual business plan and other factors. | To introduce a more standard way of setting targets which are based on an assessment of various factors each year, in order to better align to and support the business plan. | ||
| Bonus deferral into shares | There will be no time-pro-rating for good leavers or on a change of control for new deferred bonus share awards granted after approval of the new policy. | To reflect that bonus has effectively already been earned by the executive directors. | ||
| LTIP measures | Under the current policy, measures and weightings may vary year-on-year to reflect strategic priorities, subject to retaining at least 50% on Diluted Adjusted EPS growth in excess of UK inflation (EPS). Under the new policy, there will normally be at least two financial measures and measures and/or weightings can be changed for each new grant to reflect strategic priorities (although any significant changes from the previous year would usually only be made following shareholder engagement). | To ensure a balanced set of suitably stretching measures appropriate to a global business, with the flexibility to change these for each grant to reflect the current strategy and business environment. | ||
| LTIP post-vesting holding period | Introduction of a two-year post-vesting holding period for LTIP awards granted after approval of the new policy (continues to apply post-cessation of employment). | Results in total five-year vest and hold period in line with corporate governance best practice. | ||
| Post-cessation shareholding requirement | Introduction of a post-cessation shareholding requirement at the lower of the full in-service requirement and the actual shareholding at cessation for two years post-cessation (applies to shares that vest from awards granted under the new policy). | Increase alignment with shareholders, improve risk management and meet corporate governance best practice. | ||
| Malus and claw-back | Corporate failure is added to the list of existing trigger events (which are material miss-statement, (ii) error in calculation, (iii) fraud and gross misconduct, (iv) conduct causing serious harm to the Group’s reputation and/or significant financial loss and (v) material failure of risk management causing serious harm to the reputation of the Group). The claw-back period for bonus and deferred bonus shares is extended from one to two years in line with the claw-back period applicable to LTIP awards. | Improve risk management and meet corporate governance best practice. | ||
| Benefits for executive directors | The list of benefits which may be provided has been changed (e.g. to include dental insurance in addition to medical insurance and to remove fees for a temporary increase in responsibilities). A maximum value on the provision of on-going benefits has been introduced. | To ensure that the Company has flexibility to offer a range of appropriate benefits to executive directors during the policy period. There are no current plans to add to the benefits currently received by executive directors. | ||
| LTIP – dividend equivalents | The possibility of including dividend equivalents has been included. | To provide flexibility during the policy period for further alignment of executive directors’ interests with those of shareholders. | ||
| Fees and benefits for non-executive directors | Under the current policy, additional fees are payable (above the non-executive director base fee) for chairing a committee and for the role of Senior Independent Director. Under the new policy, flexibility to introduce other additional fees where appropriate has been included, as has the possibility of paying certain specific benefits to non-executive directors. | To provide flexibility during the policy period to enable the Company to attract and retain high-caliber non-executive directors |
Previous Remuneration Policy and prior commitments
The committee reserves the right to make any remuneration payments and payments for loss of office (including exercising any discretions available to it in connection with such payments), notwithstanding that they are not in line with the policy set out in this report, where the terms of the payment were agreed:
| (i) | before 25 September 2014 (the date the Company’s first shareholder approved policy came into effect); |
| (ii) | before the policy set out in this report came into effect, provided that the terms of the payment were consistent with the shareholder-approved Directors’ Remuneration Policy in force at the time they were agreed; or |
| (iii) | at a time when the relevant individual was not a director of the Company and, in the opinion of the committee, the payment was not in consideration for the individual becoming a director of the Company. |
Consideration of employment conditions elsewhere in the Group
When the committee reviews salaries for the executive directors, one factor which it typically takes into account is the most recent annual salary increase budgets for employees generally in the Company’s major locations. These salary increase budgets for employees take into account Group performance, local pay and market conditions and salary levels for similar roles in comparable companies. When determining executive director salaries, the committee also considers pay at companies of a similar size, complexity and international scope, in particular those within the technology sector, the appropriate FTSE index, US listed technology companies and privately owned software companies. The benchmarking approach for the executive directors is broadly the same as the benchmarking approach applied throughout the organization. The committee also reviews and approves the overall annual LTIP grants for the wider executive population (around 450 employees globally) and the twice yearly launches of the Company’s all-employee share plans (the UK share save plan and the Employee Share Purchase Plan) and hence has visibility of wider employee share plan participation.
More recently, we have introduced an annual agenda item for the committee to review various aspects of workforce remuneration and related policies in order to deepen its understanding of pay across the Company. At its January 2020 meeting, the committee considered various aspects of workforce remuneration and took this into account when determining the proposed new Directors’ Remuneration Policy.
Although the committee did not consult directly with employees on the proposed Directors’ Remuneration Policy set out in this Report, going forward, in accordance with the 2018 Corporate Governance Code obligations around workforce engagement (which apply to the Company with effect from the financial year ending 31 October 2020) the Group will introduce a process for dialogue with employees about how the new executive Directors’ Remuneration Policy aligns with wider pay policy.
Approach to recruitment remuneration – executive directors
The remuneration package for a new executive director would be set in accordance with the terms of the approved Remuneration Policy in force at the time of appointment and taking account of the experience and skills of the individual and prevailing market conditions. In determining the appropriate remuneration structure and level, the committee would take into consideration all relevant factors to ensure that the arrangements are in the best interests of the Company and its shareholders. The committee would seek to not pay more than is necessary to secure the right candidate.
The various components and the Company’s approach are as follows:
Standard package on recruitment
The maximum aggregate value of incentives (excluding buyouts) on appointment will be 500% of salary for the first year after appointment. It is intended that any additional incentives offered in the first year after appointment which are above the regular on-going incentives policy limit would be delivered as LTIP awards rather than as additional bonus opportunity. All other elements of pay on recruitment will be in accordance with the policy table.
Compensation for forfeited entitlements
The committee may make an award in respect of a new appointment to “buy-out” incentive arrangements forfeited on leaving a previous employer and may rely on the one-person exemption from shareholder approval available under the UK Listing Rules to facilitate the grant of awards. Any such buy-out arrangements would:
| - | be based solely on the remuneration lost when leaving the former employer; |
| - | be no higher than the commercial value forfeited; and |
| - | reflect as closely as possible the delivery mechanism (i.e. cash, shares and options), time horizons and performance requirements attaching to that remuneration. |
Relocation allowances and expenses
The committee may agree that the Company will provide certain relocation allowances and expenses, as appropriate as determined by the specific circumstances of the new recruit.
In the case of an internal appointment to executive director, any variable pay element awarded in respect of the prior role may be allowed to pay out according to its terms on grant. In addition, any other on-going remuneration obligations existing prior to appointment may continue, provided that they are disclosed in the following year’s Annual Report on Remuneration.
Executive directors’ service agreements
The executive directors’ service agreements do not have a fixed expiry date and are terminable by either party on six months’ notice.
Executive directors’ policy on payments for loss of office Salary, benefits and pension:
The Company’s policy is that executive directors’ service agreements normally continue until the director’s agreed retirement date or such other date as the parties agree are terminable on no more than six months’ notice from the Company or the director and provide no entitlement to the payment of a pre-determined amount on termination of employment in any circumstances.
Compensation is based on what would be earned by way of salary, pension entitlement and other contractual benefits over the notice period. In the event that a contract is to be terminated and a payment in lieu of notice made, payments to the executive director would be a maximum of six months’ base pay, pension entitlement and cash supplement in lieu of other benefits. Payments may be staged over the notice period, at the same interval as salary would have been paid.
Executive directors must take all reasonable steps to obtain alternative employment during the notice period and payments made by the Company will be reduced to reflect any payments received in respect of alternative employment.
Annual bonus:
There is no automatic entitlement to an annual bonus and this is at the discretion of the committee. Where an executive director ceases to be employed by reason of death, ill-heath, injury or disability, redundancy or retirement or any other “good leaver” reason at the committee’s discretion, he or she may receive a pro-rata bonus for the year of cessation, paid on the normal payment date (with committee discretion to accelerate), subject to performance against predetermined targets and pro-rated to reflect time served during the year.
Deferred Share Bonus Plan (DSBP) and LTIP:
The treatment of leavers under our DSBP and LTIP is determined by the rules of the relevant plan. The committee has discretion to determine when and if awards vest and the period during which awards which are granted as nil-cost options may be exercised.
Awards granted under the DSBP after the approval of the new policy lapse if the participant leaves employment as a result of termination for cause or resignation on the date of dismissal/ notice of resignation, as applicable. In other cases, normally including death, ill health, injury or disability, redundancy and retirement, or any other “good leaver” reason at the committee’s discretion, deferred bonus shares would typically be released in full at the end of the three-year deferral period. The committee has discretion to release them earlier if it considers this appropriate in the circumstances.
For awards granted under the LTIP after the approval of the new policy, in cases of death, ill health, injury or disability, redundancy and retirement, or any other “good leaver” reason at the committee’s discretion, awards would typically be pro-rated to reflect time employed and vest subject to performance measured at the end of the relevant performance period. The committee has discretion to determine that awards vest earlier and to adjust the application of time pro- rating and performance measures, subject to the plan rules. The requirement to retain net (after tax) vested LTIP shares for a holding period of two years after vesting continues to apply post-cessation. On death, awards typically vest immediately. In all other leaver situations, including termination for cause or resignation, awards lapse on the date of dismissal/notice of resignation, as applicable.
Prior awards:
The treatment of awards granted before the approval of the current policy will be treated in accordance with the “Policy on payments for loss of office” and the plan rules applicable to those awards.
Change of control
Any unvested deferred bonus shares will be released in full to the executive director on a change of control. Alternatively, the committee may determine that deferred bonus shares will instead be exchanged for equivalent share awards in the acquiring company.
On a change of control, the default position under the LTIP is that outstanding awards vest on a time pro-rated basis and subject to an assessment of performance against targets at that time. However, the committee has discretion under the plan rules to vary the level of vesting if it believes that exceptional circumstances warrant this and taking into account any other factors it believes to be relevant in deciding to what extent an award will vest. Alternatively, the committee may determine that awards will not vest and will instead be exchanged for equivalent awards in the acquiring company.
Prior awards:
The treatment of awards granted before the approval of the current policy will be treated in accordance with the change of control policy and the plan rules applicable to those awards.
Policy in respect of external board appointments
The Group recognizes that external non-executive directorships are beneficial for both the executive director concerned and the Company. With prior approval from the board, each serving executive director can undertake external non-executive directorships. At the discretion of the board, executive directors are permitted to retain fees received in respect of any such non- executive directorship.
Non-executive directors’ terms of appointment, approach to recruitment remuneration and notice periods
The non-executive directors’ terms of appointment are recorded in letters of appointment. The non-executive directors are typically appointed for periods of three years, but they stand for election or re-election as appropriate at each AGM.
On recruitment, a new non-executive director will be entitled to fees and any other benefits if applicable from time to time in accordance with the Company’s remuneration policy. No additional remuneration is paid on recruitment.
The required notice from the Company and the non-executive director is 90 days in all cases, except in the case of a non- executive Chairman, in which case the notice period is six months. The non-executive directors are not entitled to any compensation for loss of office.
Service contracts and letters of appointment – directors
There are no further obligations in the directors’ service contracts and letters of appointment which are not otherwise disclosed in this Report which could give rise to a remuneration payment or loss of office payment. All directors’ service contracts and letters of appointment are available for inspection at the Company’s registered office.
Consideration of shareholder views
The committee considers developments in institutional investors’ best practice guidelines and the views expressed by shareholders when setting directors’ remuneration. The Group remains committed to on-going shareholder dialogue and the Group consults with shareholders and consider their views when formulating, or changing, our Remuneration Policy.
The Group engaged widely with shareholders following the announcement of the SUSE disposal in July 2018 and in the months following publication of the 2018 Annual Report. The Group has communicated with shareholders about the proposed new policy and will be undertaking a full consultation in advance of the 2020 LTIP grants.
Annual Report on Remuneration
The following section provides the details of how the Remuneration Policy was implemented during the financial year ended October 31, 2019.
Single figure for total remuneration of executive directors
The table below shows the single figure for total remuneration for executive directors for the financial year ended October 31, 2019, together with their respective figures for the 18 months ended October 31, 2018 as shown in last year’s report. The 18-month period arises due to the change in financial year end from 30 April to 31 October following the acquisition of the HPE Software business which completed on September 1, 2017.
| LTIPs and ASGs | |||||||||||||||||||||||||||||||||
Base Salary1 | Benefits in kind 2 | Annual bonus 3 | LTIPs 4 | ASGs 5 | Total | Pension 6 | Total | ||||||||||||||||||||||||||
| Executive Directors | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | £’000 | |||||||||||||||||||||||||
Kevin Loosemore | 2019 (12 months) | 750 | 35 | - | 1,205 | - | 1,205 | 150 | 2,140 | ||||||||||||||||||||||||
2018 (18 months) | 1,125 | 47 | 855 | 1,407 | 25,232 | 26,639 | 225 | 28,891 | |||||||||||||||||||||||||
Stephen Murdoch 7 | 2019 (12 months) | 850 | 20 | - | 565 | - | 565 | 128 | 1,563 | ||||||||||||||||||||||||
2018 (18 months) | 668 | 17 | 569 | 607 | 8 | 5,809 | 6,416 | 100 | 7,770 | ||||||||||||||||||||||||
Brian McArthur-Muscroft 9 | 2019 (12 months) | 600 | 20 | - | - | - | - | 90 | 710 | ||||||||||||||||||||||||
2018 (18 months) | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||
Chris Kennedy 10 | 2019 (12 months) | 233 | 7 | - | - | - | - | 47 | 287 | ||||||||||||||||||||||||
2018 (18 months) | 487 | 12 | - | - | - | - | 97 | 596 | |||||||||||||||||||||||||
| 1. | Base salary: the amount earned during the period in respect of service as a director. |
| 2. | Benefits in kind: including car, private medical insurance, permanent health insurance and life assurance. |
| 3. | Annual bonus: payment for performance during the year in respect of service as a director. One-third of the annual bonus is deferred into shares for three years with the exception of the Executive Chairman. |
| 4. | LTIPs: the value of LTIP awards (excluding those awarded under the ASG program) which vest based on performance conditions ending during the relevant period, pro-rated to reflect the period as a director during the relevant three-year performance period. The 2018 figures are based on the share price at vesting of £12.64 (17 July 2018) and £19.39 (23 March 2019). The 2019 figures are based on the share price at vesting of £17.418 (26 July 2019), which resulted in none of the vesting value being attributable to share price appreciation. |
| 5. | ASG: the value of the ASG award made in November 2014 following the Attachmate Group transaction which vested on 1 November 2017 at a share price of £26.64 (pro-rated to reflect the period as a director during the three-year performance period to 31 October 2017). |
| 6. | Pension: the Company’s pension contribution or cash allowance paid during the period in respect of service as a director. All pension amounts paid in the 2019 financial year are cash in lieu of pension allowances. |
| 7. | Stephen Murdoch left the board on 1 September 2017 to take on the role of Chief Operating Officer and rejoined the board on 19 March 2018 following his appointment as Chief Executive Officer. His salary, benefits, bonus and pension for the 18 month period ended 31 October 2018 reflect his service whilst a director and his LTIPs and ASG reflect the proportion of the performance period whilst a director. |
| 8. | The LTIP figure for 2018 has been restated to reflect the share price at vesting of £19.39 (23 March 2019). |
| 9. | Brian McArthur-Muscroft joined the Company on 5 November 2018 as Chief Financial Officer (elect) and joined the board on 21 February 2019. All figures represent pay for the period since joining the Company. |
| 10. | Chris Kennedy joined the board on 8 January 2018 on his appointment as Chief Financial Officer and resigned from the board on 21 February 2019. |
Annual bonus for the financial year ended October 31, 2019
The maximum bonus opportunity for executive directors for the 12 months ended October 31, 2019 was 150% of salary, with the exception of Brian McArthur-Muscroft whose maximum bonus opportunity for FY19 was 100% of salary.
The executive directors are on the same bonus plan as all non-commissioned employees. There is no bonus pay-out if Adjusted EBITDA on a constant currency basis, excluding the impact of in-year acquisitions, is the year and maximum bonuses are earned if the increase in this measure is 10% or more with pay-outs calculated on a straight-line basis between these two points.
The Adjusted EBITDA for continuing businesses for the financial year ended October 31, 2019 was $1,362.5 million, representing a 2.6% decline over the Adjusted EBITDA (on a constant currency basis) for the 12 months ended October 31, 2018 of $1,399.5 million. Accordingly no bonus was paid to executive directors for FY19.
Vesting of long-term incentives with performance periods ending in the financial year ended October 31, 2019
The LTIP awards granted on September 13, 2016 as nil cost options to Kevin Loosemore and Stephen Murdoch vested on July 26, 2019. Vesting of these awards was based on average aggregate EPS growth in excess of RPI over the three years ended April 30, 2019, as set out in the table below.
Average aggregate EPS growth of the Company in excess of RPI over the performance period | Vesting percentage of the shares subject to an award |
Less than 5% p.a. | 0% |
Equal to 3% p.a. | 25% |
Between 3% and 9% p.a. | Between 25% and 100% on a straight-line basis |
Equal to or above 9% p.a. | 100% |
The aggregate Diluted Adjusted EPS over the performance period of 572.98 cents exceeded the stretch target aggregate EPS of 558.34 cents for maximum vesting (allowing for EPS growth of 9% pa above RPI from the base year EPS figure of 261.40 cents for the year ending 30 April 2016), resulting in 100% vesting of these awards. The committee reviewed the level of vesting and concluded that it was a fair reflection of solid operational performance over the three-year performance period as a whole (see the committee Chair’s letter for further context). Furthermore, the committee reviewed the impact of the share buyback program and Return of Value exercise following completion of the sale of SUSE and concluded that neither has a material impact on the EPS performance. LTIP awards do not benefit from dividends until exercised or released.
Executive director | Interest held | % vesting | Interest vesting | Vesting date | |||||||||
Kevin Loosemore | 69,156 | 100 | % | 69,156 | July 26, 2019 | ||||||||
Stephen Murdoch | 39,640 | 100 | % | 39,640 | July 26, 2019 | ||||||||
Single figure for total remuneration of non-executive directors
No changes were made to the fee structure for non-executive directors. The following table sets out the single figure for total remuneration of non-executive directors for the financial year ended October 31, 2019, together with their respective figures for the 18-month period ended October 31, 2018 as shown in last year’s report. The 18-month period arises due to the change in financial year end from April 30, to October 31, following the acquisition of the HPE Software business which completed on September 1, 2017.
| Fees | |||||||||
Non-executive directors | 2019 (12 months) | 2018 (18 months) | |||||||
| £ | ’000 | £ | ’000 | ||||||
| Karen Slatford | 120 | 180 | |||||||
| Richard Atkins | 90 | 135 | |||||||
Amanda Brown 1 | 90 | 135 | |||||||
Silke Scheiber 2 | 70 | 103 | |||||||
Darren Roos 3 | 59 | 103 | |||||||
Lawton Fitt 4 | 80 | 83 | |||||||
| 1. | Prior to January 1, 2019, Amanda Brown’s fees were paid direct to her employer. |
| 2. | Silke Scheiber joined the board on May 15, 2017 and left on February 4, 2020. |
| 3. | Darren Roos joined the board on May 15, 2017 and left on September 2, 2019. |
| 4. | Lawton Fitt joined the board on October 17, 2017 and receives an additional fee of £10,000 per annum due to her SEC and SOX experience. |
Non-executive directors’ terms of appointment
The non-executive directors’ terms of appointment are recorded in letters of appointment. The required notice from the Company and the non-executive director is 90 days in all cases. The non- executive directors are not entitled to any compensation for loss of office and stand for election or re-election as appropriate at each AGM. Details of the letters of appointment of each non- executive director who has served as a director of the Company at any time during the financial year ended October 31, 2019 are set out below:
| Non-executive director | Appointment date | Expiration date |
Karen Slatford | July 5, 2010 | July 5, 2022 |
Richard Atkins | April 16, 2014 | April 16, 2020 |
Amanda Brown | July 1, 2016 | July 1, 2022 |
Silke Scheiber1 | May 15, 2017 | May 15, 2020 |
Darren Roos 2 | May 15, 2017 | May 15, 2020 |
Lawton Fitt | October 17, 2017 | October 17, 2020 |
| 1. | Silke Scheiber left the board on February 4, 2020. |
| 2. | Darren Roos left the board on September 2, 2019 |
All appointments of non-executive directors are subject to election by shareholders at the first AGM of the Company after appointment and to re-election on an annual basis thereafter
Implementation of non-executive director remuneration for the year ending October 31, 2020
The non-executive directors’ fees for FY20 are unchanged from FY19 and are set out in the table below:
Independent non-executive director base fee | £70,000 p.a. |
Additional fee for chairing a committee | £20,000 p.a. |
Additional fee for significant SEC/SOX experience | £10,000 p.a. |
Fee for the SID (including chairing committees) | £120,000 p.a. |
Remuneration committee membership during the financial year ended October 31, 2019
During the financial year ended October 31, 2019, the committee comprised only of independent non-executive directors. The committee met seven times during the period under review. The number of committee meetings attended by each director in the period was as follows:
| Committee member | Held | Number of meetings attended |
Amanda Brown (Chair) | 7 | 7 |
Karen Slatford 1 | 7 | 7 |
Silke Scheiber2 | 7 | 7 |
Darren Roos 3 | 5 | 4 |
Richard Atkins 4 | - | - |
Lawton Fitt 5 | - | - |
| 1. | Karen Slatford stepped down from the committee with effect from October 16, 2019. |
| 2. | Silke Scheiber left the board on February 4, 2020. |
| 3. | Darren Roos left the board on September 2, 2019. |
| 4. | Richard Atkins joined the committee on October 17, 2019. |
| 5. | Lawton Fitt joined the committee on October 17, 2019. |
The committee invited the Executive Chairman, Chief Executive Officer, Chief Financial Officer, Chief Human Resources Officer and Reward Director during the period to provide views and advice on specific questions raised by the committee and on matters relating to the performance and remuneration of senior managers. They did not participate in discussions relating to their own remuneration. The Company Secretary attended each meeting as secretary to the committee.
Terms of reference
The committee is responsible for the remuneration arrangements for executive directors and members of the executive management team, and for providing general guidance on aspects of remuneration policy throughout the Group. The terms of reference were reviewed and updated to reflect the 2018 Corporate Governance Code. The key aspects of the updated terms of reference are as follows:
| - | Determine the remuneration policy for the Company’s Chairman and the executive directors and review its on-going appropriateness and relevance; |
| - | Determine the total individual remuneration packages of the executive directors and the executive management team, including salary, bonuses, incentive payments, share awards, pensions and other benefits; |
| - | Review the terms of executive service contracts for executive directors and the executive management team; |
| - | Review any material changes to pension and benefit arrangements for executive directors and the executive management team; |
| - | Agree the expenses policy for the Company Chairman and executive directors |
| - | Develop the formal shareholding requirement policy, including post cessation, encompassing both vested and unvested shares; |
| - | Oversee the operation of the Company’s annual bonus plans, deferred bonus plans and long-term incentives as applied to executive directors and the executive management team, including award levels, performance conditions, payouts, and application of malus and claw-back where appropriate. |
| - | Review the design of all share incentive plans for approval by the board and shareholders; |
| - | Review the remuneration policies and practices across the Group and the alignment of workforce remuneration with culture; and |
| - | Produce the annual Directors’ Remuneration report. |
The full terms of reference of the committee are available from the Company Secretary and are on the Company’s website http://investors.microfocus.com /corporate-governance.
Agenda during the financial year ended October 31, 2019
The key activities of the committee were as follows:
| - | Approved the Directors’ Remuneration report for the 18-month period ended October 31, 2018; |
| - | Approved the remuneration packages of executive director joining and leaving the board; |
| - | Reviewed the salaries and remuneration packages of the executive directors and the executive management team; |
| - | Reviewed bonus payments and performance against targets under the LTIP; |
| - | Considered current guidelines on executive compensation from advisory bodies and institutional investors; |
| - | Engaged with major shareholders and advisory bodies to seek their views following publication of the 2018 Directors’ Remuneration report; |
| - | Undertook a review of the Remuneration Policy for executive directors, and developed a new Directors’ Remuneration Policy to be put to shareholders for approval at the 2020 AGM; |
| - | Undertook a review of the measures and targets for the annual bonus plan and LTIP for the financial year ending October 31, 2020; |
| - | Updated shareholders on key aspects of the proposed new Directors’ Remuneration Policy; |
| - | Reviewed the performance and terms of reference of the committee. |
External advisors
The committee and management seek advice on remuneration and legal matters from a number of firms as appropriate, including PwC, Deloitte and Travers Smith. The committee has direct access to these advisors who attend committee meetings as required. All provide other services to management including legal, tax, accounting and consulting services. The committee has satisfied itself that the advice it receives is objective and independent and is not conflicted by the advisors also working with management on remuneration and other matters.
In August 2019 the committee appointed PwC as their formal on-going remuneration committee advisors reporting directly to the Chair of the committee, with arrangements in place to provide the committee with oversight of the remuneration services provided by PwC to management. The committee reviewed the potential for conflicts of interest in connection with this appointment and is comfortable that there are no conflicts which might impair the independence of the PwC team that provide remuneration advice to the committee. In addition, as a founder member of the Remuneration Consultants Group, PwC operates under the Voluntary Code of Conduct in relation to executive remuneration consulting in the UK
PwC’s fees for the financial year ended October 31, 2019 relating to remuneration advice to the committee were determined on a time and materials basis and were £45,451 (excluding VAT).
Share interest awards made during the financial year ended 31 October 2019
Deferred Share Bonus Plan
On February 28, 2019, conditional awards were made under the Deferred Share Bonus Plan to Stephen Murdoch in respect of the one-third of his FY18 annual bonus earned whilst a director that was deferred into shares. The number of shares awarded was based on the closing mid-market share price of £18.945 on the day before the grant date.
Executive director | Date of grant | Awards made during the period | Share price at grant 1 | Face value at grant | |||||||||
Stephen Murdoch | February 28, 2019 | 10,013 | £ | 18.945 | £ | 189,696 | |||||||
| 1 | Share price at grant is the closing mid-market price on the day before grant. |
Long-term Incentive Plan
During the financial year ended October 31, 2019, executive directors (with the exception of Chris Kennedy) were granted nil-cost options under the LTIP as set out in the table below.
| Executive director | Date of grant | Performance period | Awards made during the period | Share price at grant 1 | Face value at grant | Grant basis | |||||||||
Kevin Loosemore | February 18,2019 | 3 years from November 1, 2018 | 89,285 | £ | 16.80 | £ | 1,499,988 | 200% of salary | |||||||
Stephen Murdoch | February 18, 2019 | 3 years from November 1, 2018 | 101,190 | £ | 16.80 | £ | 1,699,992 | 200% of salary | |||||||
Brian McArthur- Muscroft 2 | November 22, 2018 | 3 years from November 1, 2018 | 80,482 | £ | 14.91 | £ | 1,199,987 | 200% of salary | |||||||
Brian McArthur-Muscroft 3 | November 22, 2018 | 3 years from November 1, 2018 | 80,482 | £ | 14.91 | £ | 1,199,987 | 200% of salary | |||||||
| 1. | Share price at grant is the closing mid-market price on the day before grant. |
| 2. | Brian McArthur-Muscroft’s normal FY19 annual award was made shortly after joining. |
| 3. | Brian McArthur-Muscroft’s additional one-off new hire award was made shortly after joining but has a four-year performance period rather than the normal three years. |
The awards will be eligible to vest on the third (or fourth in the case of Brian McArthur-Muscroft’s new hire award) anniversary of the date of grant subject to achievement of a performance condition based on average growth, in excess of RPI, of the aggregate EPS over the relevant performance period.
Annualized EPS growth of the Company in excess of RPI over the performance period | Vesting percentage of the shares to an award | |||
Less than 3% p.a. | 0 | % | ||
Equal to 3% p.a. | 25 | % | ||
Between 3% and 9% p.a. | Between 25% and 100% on a straight-line basis | |||
Equal to or above 9% p.a. | 100 | % | ||
Additional Share Grants
During the financial year ended October 31, 2019, the remuneration committee exercised its discretion to make an award to Brian McArthur-Muscroft under the Additional Share Grant program implemented following the acquisition of the HPE Software business (“HPE Software ASG” award). This was set at half the level awarded to his predecessor to reflect the shorter period of employment during the three-year performance period and ensures his interests are aligned to those of the other executive directors in delivering value from the HPE Software business.
Executive director | Date of grant | Performance period | Awards made during the period | Share price at grant 1 | Face value at grant | Grant basis | |||||||||
Brian McArthur-Muscroft | November 22, 2018 | 3 years from September 1, 2017 | 338,000 | £ | 14.91 | £ | 5,039,580 | ½ of the award granted to his predecessor | |||||||
| 1. | Share price at grant is the closing mid-market price on the day before grant. |
In line with the other current executive directors, Brian McArthur-Muscroft surrendered his HPE Software ASG and it lapsed on February 3, 2020.
Changes to the board in the financial year ended October 31, 2019
On November 5, 2018, the Company announced that Chris Kennedy would be leaving the Company in early 2019 after closing out the accounts for the 18 months ended October 31, 2018 and that Brian McArthur-Muscroft had joined and would take up the role of Chief Financial Officer and be appointed to the board in early 2019. Chris Kennedy resigned from the board and left the Company on February 21, 2019, whereupon Brian McArthur-Muscroft was appointed to the board as Chief Financial Officer. Chris Kennedy continued to receive his salary and contractual benefits until his date of leaving but no FY18 annual bonus was payable and all his LTIP awards and HPE Software ASG award lapsed on leaving. No further payments were made for loss of office.
Payments for loss of office
There were no payments for loss of office during the financial year ended October 31, 2019.
Payments to past directors
Nils Brauckmann
As disclosed last year, Nils Brauckmann stepped down from the board on July 11, 2018 following the announcement of the sale of SUSE and that, on completion of the sale, he would be treated as for other SUSE employees with regard to his various share plan awards in accordance with the rules of the plans, with pro-rating for time and performance testing applied as required. Awards which had already vested but had yet to be exercised continued unaffected, details of which were set out in last year’s Directors’ Remuneration report. The table below sets out the treatment for awards that had not yet vested at the date of completion of the sale of SUSE on March 15, 2019.
| Award | Date of grant | Shares granted | Shares lost through time pro-ration 1 | Performance condition outcome | Shares vesting | Exercise/release date | ||||||||||||
| LTIPs | ||||||||||||||||||
Nil cost option | March 23, 2016 | 26,024 | - | Already vested 100% 2 | 26,024 | March 15, 2019 to September 14, 2019 | ||||||||||||
Nil cost option | September 13, 2016 | 33,476 | 1,860 | 100 | %3 | 31,616 | March 15, 2019 to September 14, 2019 | |||||||||||
Conditional award | September 16, 2017 | 33,633 | 13,079 | 100 | %4 | 20,554 | March 15, 2019 | |||||||||||
| Deferred Share Bonus Plan | ||||||||||||||||||
Conditional award | July 25, 2017 | 4,519 | 2,134 | n/a | 2,385 | 5 | March 15, 2019 | |||||||||||
Conditional award | February 28, 2019 | 6,565 | 6,565 | n/a | - | n/a | ||||||||||||
| 1. | Pro-ration for LTIP awards is assessed by reference to the proportion, in complete months, of the performance period completed. Pro-ration for Deferred Share Bonus Plan awards is by reference to the proportion, in complete months, of the three-year deferral period completed. |
| 2. | The EPS performance condition on this award had already been tested and fully achieved but the award would not have vested until March 23, 2019, which resulted in a shortening of the exercise period to six months from completion of the sale. |
| 3. | The Remuneration Committee exercised its discretion to early test the EPS performance condition based on the 2½ years to end October 2018, being the last financial year-end prior to completion of the sale of SUSE, which resulted in the performance condition being met in full. |
| 4. | The Remuneration Committee exercised its discretion to early test the EPS performance condition based on the 1½ years to end October 2018, being the last financial year-end prior to completion of the sale of SUSE, which resulted in the performance condition being met in full. |
| 5. | Accumulated dividends amounting to £2,735.83 were also payable on the pro-rated shares vesting. The total vesting value of the deferred bonus plan shares and dividends, which amounted to £48,290.34 was settled in cash, as these would otherwise have been settled by market purchase shares. The price used for valuing the shares was the average sale price used for all share sale transactions of SUSE employees with conditional awards on the date of completion of £19.100425 |
In addition, Nils voluntarily surrendered his HPE Software ASG award over 500,000 shares, which would otherwise have continued with a TSR performance condition over a performance period ending 1 September 2020, to ensure there were no outstanding unvested share based awards with a direct linkage to Micro Focus’ future performance.
Mike Phillips
As announced last year, Mike Phillips stepped down from the board on January 31, 2018 to take on a new role of Director of M&A after seven years as Chief Financial Officer, and retired from Micro Focus on May 31, 2019. On his retirement, he was treated as a “good leaver” under the rules of the various share plans. Awards which had already vested continue unaffected, details of which were set out in last years’ Directors’ Remuneration report; unvested awards were time pro-rated with vesting at their normal vesting dates subject to testing of any outstanding performance conditions. The table below sets out the treatment of unvested awards together with the LTIP award granted in 2016 which had a performance period that ended in the FY19 financial year.
| Award | Date of grant | Date of vesting | Shares granted | Shares lost through time pro- ration 1 | Shares outstanding | Performance condition outcome | Exercise/release date | ||||||||||||
| LTIPs | |||||||||||||||||||
Nil cost option | September 13, 2016 | July 26, 2019 | 37,262 | - | 37,262 | Already vested 100% 2 | July 26, 2019 to July 25, 2026 | ||||||||||||
Nil cost option | September 6, 2017 | July 17, 2020 | 34,464 | 8,616 | 25,848 | To be tested at vesting 3 | July 17, 2020 to January 16, 2021 | ||||||||||||
| Deferred Share Bonus Plan | |||||||||||||||||||
Conditional award | July 25, 2017 | July 25, 2020 | 4,758 | 1,583 | 3,165 | n/a | July 25, 2020 | ||||||||||||
Conditional award | February 28, 2019 | February 28, 2022 | 2,415 | 2,080 | 335 | n/a | February 28, 2022 | ||||||||||||
| HPE Software Additional Share Grant | |||||||||||||||||||
Nil cost option | September 20, 2018 | September 1, 2020 | 676,000 | 245,482 | 430,518 | To be tested at vesting 4 | September 1, 2020 to February 28, 2021 | ||||||||||||
| 1. | Pro-ration for LTIP awards is assessed by reference to the proportion, in complete months, of the performance period completed. Pro-ration for Deferred Share Bonus Plan awards is by reference to the proportion, in complete months, of the three-year deferral period completed. Pro-ration for ASG Award is by reference to days completed during the three-year performance period. |
| 2. | The EPS performance condition on this award had already been tested based on the performance period ending April 30, 2019 and fully achieved as set out in the section for the vesting of directors’ LTIP awards with performance periods ending in the financial year ended October 31, 2019. |
| 3. | The EPS performance condition on this LTIP award will be tested at the normal vesting date. |
| 4. | The TSR performance condition on this HPE Software ASG award will be tested at the normal vesting date. |
Chris Hsu
Chris Hsu received a payment of $14,378 under the Company’s tax equalization policy on completion and filing of his 2018 US tax return. This related to medical and other benefits that were subject to UK tax but would not have been subject to US tax.
There were no other payments made to past directors during the financial year ended 31 October 2019 relating to their previous service as a director.
Other directorships
Kevin Loosemore was appointed non-executive Chairman of De La Rue plc on September 2, 2019 and relinquished his role of Chairman of IRIS Software Group Ltd on the same date. The fees paid by De La Rue will be set out in next year’s report once they are disclosed by De La Rue. Brian McArthur-Muscroft is a non-executive director of Robert Walters plc and is paid a fee of £76,000 per annum (increased from £74,000 per annum with effect from January 1, 2019). Chris Kennedy was a non-executive director of Whitbread plc and was paid a fee of £80,000 per annum.
Implementation of Remuneration Policy for the financial year ended October 31, 2020
The following sections detail the proposed implementation of the new remuneration policy for the financial year ending October 31, 2020 (FY20).
Base salary
The committee decided not to award a salary increase to the executive directors for FY20. Therefore, the FY20 salaries are as follows: Kevin Loosemore: £750,000, Stephen Murdoch: £850,000 and Brian McArthur-Muscroft: £600,000.
Benefits
The benefits provided to the executive directors are unchanged for FY20.
Pension
The company pension contributions will remain at the same rates as currently for FY20 (20% of salary for the Executive Chairman and 15% of salary for the other Executive Directors). However, subject to approval of the new Remuneration Policy, it has been agreed between the executive directors and the committee that the pension contribution levels for all executive directors will reduce to the level for UK employees in general by the end of 2022 in one step. The current level of employer contribution for UK employees is 5%.
Annual bonus
In light of the current business context and the outcome of the strategic review, the committee has decided to add additional measures to the bonus plan for the 2020 financial year to ensure a more balanced set of measures are in place to support the delivery of key aspects of the business plan. Whilst Adjusted EBITDA continues to be the predominant performance measure, with a weighting of 60%, we are adding a revenue measure (weighted 20%) and individual key performance objectives (KPOs) (weighted 20%). The KPOs are set to focus the CEO and CFO on specific key deliverables aligned to the business plan and there will only be a payout under the KPO element if there is a payout under at least one of the financial measures. Given the announcement that the Executive Chairman will be stepping down from the board on February 14, 2020, the committee has determined that the Executive Chairman will not have specific key deliverables under the KPO element for the 2020 bonus but rather, the outcome under this element will be determined by reference to the performance under the financial measures
The Adjusted EBITDA and revenue targets for the FY20 bonus have been set to reflect the 2020 business plan, which takes into account all current factors impacting the business. The targets and the outcomes achieved will be fully disclosed in the FY20 Annual Remuneration Report, as will comprehensive details of the KPOs set and performance against those.
The maximum annual bonus opportunity for executive directors for the 2020 annual bonus remains the same as last year at 150% of salary. The requirement to defer one-third of the bonus earned into shares for three years will continue to apply to the CEO and CFO in respect of the 2020 bonus.
LTIP
It is intended that the performance measures for the 2020 LTIP grants will comprise free cash flow and TSR. In light of the recently concluded strategic review and the announcement that the current Executive Chairman will be stepping down from the board on February14, 2020 and will be replaced by a newly appointed non-executive Chairman, the committee has decided that a thorough shareholder consultation is required before confirming the financial measures and targets for the 2020 LTIP grants. The 2020 LTIP grants will therefore be delayed until after the AGM and, over the coming weeks, the Company will be consulting with shareholders and listening to their views on the proposed measures. Following the consultation, the measures, weightings, targets and grant levels for the 2020 LTIP will be finalized and published on the company website in advance of granting the awards.
Subject to the policy maximum of 200% of salary, when setting the 2020 grant levels for executive directors, the committee will take account of shareholder experience following the August 2019 trading update and subsequent share price decline. The Excutive Chairman will not be receiving an LTIP grant in 2020.
The awards are subject to a three-year performance period and, subject to approval of the new policy, the net (after tax) vested shares are to be held for a further two-year holding period.
Review of past performance until end of reporting period
The remuneration package is structured to help ensure alignment with shareholders. The graph and table below show how the Chief Executive Officer’s or Executive Chairman’s pay compares to total shareholder returns (TSR) over the last 10½ years.
The graph below shows the value, by October 31, 2019, of £100 invested in Micro Focus International plc on April 30, 2009 compared with the value of £100 invested in the FTSE 250, FTSE 100 and the FTSE All-Share Software and Computer Services indices. The dates shown are the Company’s financial year ends. The FTSE 250, FTSE 100 and the FTSE All-Share Software and Computer Services indices have been chosen as they are considered the most relevant indices for comparison with the Company.
HISTORICAL TSR PERFORMANCE
Growth in the value of a hypothetical £100 holding over the period from April 30, 2009
The table below details the Chief Executive Officer and Executive Chairman’s (for the period from April 14, 2011 until April 30, 2017) single figure of total remuneration over the same period:
| Year ended April 30, | 18 months ended October 31, | 12 months ended October 31, | ||||||||||||||||||||||||||||||||||||||
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | |||||||||||||||||||||||||||||||
£ | ’000 | £ | ’000 | £ | ’000 | £ | ’000 | £ | ’000 | £ | ’000 | £ | ’000 | £ | ’000 | £ | ’000 | £ | ’000 | |||||||||||||||||||||
Stephen Murdoch 1 | ||||||||||||||||||||||||||||||||||||||||
| Single total figure of remuneration | 2,739 | 1,333 | ||||||||||||||||||||||||||||||||||||||
| Annual bonus outcome (% of maximum) | 57 | % | Nil | |||||||||||||||||||||||||||||||||||||
| LTIP vesting (% of maximum) | 100 | % | 100 | % | ||||||||||||||||||||||||||||||||||||
Chris Hsu 2 | ||||||||||||||||||||||||||||||||||||||||
| Single total figure of remuneration | 4,963 | |||||||||||||||||||||||||||||||||||||||
| Annual bonus outcome (% of maximum) | 12 | % | ||||||||||||||||||||||||||||||||||||||
| LTIP vesting (% of maximum) | n/a | |||||||||||||||||||||||||||||||||||||||
| Kevin Loosemore | ||||||||||||||||||||||||||||||||||||||||
| Single total figure of remuneration | 23 | 1,291 | 1,304 | 12,468 | 4,315 | 4,231 | 4,226 | |||||||||||||||||||||||||||||||||
| Annual bonus outcome (% of maximum) | Nil | 90 | % | 92 | % | 100 | % | 100 | % | 100 | % | 45 | % | |||||||||||||||||||||||||||
| LTIP vesting (% of maximum) | Nil | Nil | Nil | 199 | % | 100 | % | 100 | % | 100 | % | |||||||||||||||||||||||||||||
| Nigel Clifford | ||||||||||||||||||||||||||||||||||||||||
| Single total figure of remuneration | 628 | |||||||||||||||||||||||||||||||||||||||
| Annual bonus outcome (% of maximum) | Nil | |||||||||||||||||||||||||||||||||||||||
| LTIP vesting (% of maximum) | Nil | |||||||||||||||||||||||||||||||||||||||
| Stephen Kelly | ||||||||||||||||||||||||||||||||||||||||
| Single total figure of remuneration | 3,696 | |||||||||||||||||||||||||||||||||||||||
| Annual bonus outcome (% of maximum) | Nil | |||||||||||||||||||||||||||||||||||||||
| LTIP vesting (% of maximum) | 100 | % | ||||||||||||||||||||||||||||||||||||||
| 1. | Stephen Murdoch assumed the CEO responsibilities from May 1, 2017 in the build up to the acquisition of the HPE Software business and stepped down on completion of the transaction on September 1, 2017 to take on the role of Chief Operating Officer. He was reappointed as CEO from March 16, 2018. The 2018 and 2019 figures are slightly different from those shown in the single figure for remuneration table as the value placed on the LTIPs and ASG reflect the period of the relevant performance period that he was undertaking the CEO role. The 2018 figure has also been adjusted to take account of the restatement in the LTIP value to reflect the share price at vesting on March 23, 2019 of £19.39. |
| 2. | Chris Hsu’s period as CEO was from September 1, 2017 to March 19, 2018. The 2018 single figure of remuneration includes the benefits in kind payment of $5,918,705 to cover the grossed-up cost of the excise tax incurred as a result of US “inversion” tax treatment of the HPE Software business transaction, and has been adjusted to include a $14,378 contractual tax equalization payment relating to medical and other benefits deemed taxable in the UK which would not have been taxable in the US, which was finalized on filing his 2018/19 tax returns. The figure for his annual bonus outcome as a percentage of maximum has been calculated by reference to a maximum bonus of 150% of his salary earned over the period as a director. |
Percentage change in Chief Executive Officer’s remuneration
The table below shows the percentage change in the Chief Executive Officer’s annualized remuneration from the 18 months ended October 31, 2018 to the 12 months ended October 31, 2019, as compared to the average annualized percentage change in remuneration over the same period for all staff that were on the corporate bonus scheme in both years and were employed throughout the period. For the 12 months ended October 31, 2019, this covers Stephen Murdoch but for the 18 months ended October 31, 2018 it covers a combination of Stephen Murdoch (covering the two periods before and after the HPE Software business acquisition) and Chris Hsu which has then been annualized to enable a year-on-year increase to be calculated. We have selected our staff on the corporate bonus scheme (unchanged from the 2018 report) for this comparison as it is considered the most relevant comparator group given the structure of that group’s remuneration.
| Chief Executive Officer | Other employees | |||||||||||||||||||
| Base package | 2019 12 month period | 2018 18 month period | 2018 Annualized | Annualized % change | Annualized % change | |||||||||||||||
£ | ’000 | £ | ’000 | £ | ’000 | |||||||||||||||
| Salary | 850 | 1,081 | 721 | 18 | % | 5 | % | |||||||||||||
| Taxable benefits | 20 | 4,493 | 2,995 | (99 | )% | 4 | % | |||||||||||||
| Annual performance bonus | - | 642 | 428 | (100 | )% | (58 | )% | |||||||||||||
| Total | 870 | 6,216 | 4,144 | (79 | )% | No change | ||||||||||||||
Chief Executive Officer pay ratios
The 2018 Reporting Regulations require disclosure of the ratio of total CEO remuneration to the median, 25th and 75th percentile UK employee total remuneration (calculated on a full-time equivalent basis). We are voluntarily disclosing pay ratios in this year’s report, earlier than we are required to do so. We have around 1,000 employees in the UK.
For the purposes of the pay ratios below, the CEO’s total remuneration is his 2019 single total figure of remuneration of £1,563,000. All pay figures are rounded to the nearest £1,000.
| Year | Method | 25th percentile pay ratio | Median pay ratio | 75Th percentile pay ratio | |||||||||
2019 | Option B | 35:1 | 24:1 | 14:1 | |||||||||
Total remuneration | £ | 45,000 | £ | 66,000 | £ | 111,000 | |||||||
Salary | £ | 40,000 | £ | 59,000 | £ | 83,000 | |||||||
The ratios have been calculated using Option B, meaning that the best equivalents of the median, 25th and 75th percentile UK employees were identified based on the latest published hourly rate gender pay gap information. This was deemed the most appropriate methodology for the company at this time, recognizing the different human resources and payroll systems in place.
To ensure that the total remuneration for the financial year ended October 31, 2019 for the selected best equivalents of the median, 25th and 75th percentile UK employee were sufficiently representative of those positions, we calculated the total remuneration for a number of employees above and below each of the selected median, 25th and 75th percentile UK employees. We excluded or adjusted for anomalies (such as employees who left part way through the year) and took the median of the remaining figures in order to provide a robust representation of each quartile.
The total remuneration calculations for the relevant representative employees, and those in the range above and below, were performed as at October 31, 2019 based on their total remuneration paid or receivable for the 2019 financial year, calculated (for all components other than benefits and pension) on the same basis as required for the CEO’s total remuneration for single total figure purposes. Benefits and pension were calculated based on the annual value of those benefits as at October 31, 2019, rather than the actual annual value of those benefits during the 2019 financial year, which is subject to changes in individual’s benefit choices during the year. No other estimates or adjustments have been used in the calculation of total remuneration and no components of pay have been omitted. For any employees who worked less than full-time during the year, their pay was adjusted to reflect a full-time equivalent basis
The committee is satisfied that the overall picture presented by the 2019 pay ratios is consistent with the pay, reward and progression policies for the company’s UK employees. Pay ratios for total remuneration are likely to vary, potentially significantly, over time since the CEO’s total remuneration comprises a significant proportion of variable pay and so remuneration each year is impacted by the performance-related pay outcomes and share price movements. There was no bonus payout for the CEO for the 2019 financial year. The CEO’s 2016 LTIP award vested during the year and is therefore included in his total remuneration. Whilst the representative employees in the calculation would not typically participate in the LTIP, they do have the opportunity to receive company shares by participating in the UK share save plan and they receive a higher proportion of their remuneration in the form of fixed pay.
Relative importance of spend on pay
The table below shows the percentage change in total employee pay expenditure and shareholder distributions (i.e. dividends and share buy-backs) from the 12 and 18-month periods ending October 31, 2018 to the 12 months ended October 31, 2019.
| 2019 | 2018 | % change from 2018 | ||||||||||||||||||
12 months ended October 31 | 18 months ended October 31, | 12 months ended October 31, | 18 months | 12 months | ||||||||||||||||
| $ | m | $ | m | $ | m | % | % | |||||||||||||
Distribution to shareholders | ||||||||||||||||||||
| - Dividends paid | 439.2 | 542.2 | 408.3 | (19.0 | )% | 7.6 | % | |||||||||||||
| - Share buy-backs | 538.8 | 171.2 | 171.2 | 214.7 | % | 214.7 | % | |||||||||||||
| - Return of Value | 1,800.0 | 500.0 | - | 260.0 | % | n/a | ||||||||||||||
| Total | 2,778.0 | 1,213.4 | 579.5 | 128.9 | % | 379.4 | % | |||||||||||||
Employee remuneration | 1,340.2 | 2,030.7 | n/a | (34.0 | )% | n/a | ||||||||||||||
The directors have proposed a final dividend for the financial year ended October 31, 2019 of 58.33 cents 44.53 pence per share (2018: final dividend of 58.33 cents 45.22 pence).
Directors’ shareholdings and share interests as at October 31, 2019
| Nil-cost options and conditional awards held | ||||||||||||||||||||||||||||
Director | Shares held (owned outright) | Vested but not exercised | Unvested and not subject to performance | Unvested and subject to performance | Shareholding requirement (% of salary) | Current shareholding (% of salary)1 | Requirement met? | |||||||||||||||||||||
| Kevin Loosemore | 631,983 | 69,156 | - | 1,257,250 | 200 | % | 945 | % | Yes | |||||||||||||||||||
Stephen Murdoch 2 | 276,151 | 39,640 | 15,064 | 1,152,391 | 200 | % | 371 | % | Yes | |||||||||||||||||||
Brian McArthur Muscroft 3 | - | - | - | 498,964 | 200 | % | - | Not yet due | ||||||||||||||||||||
| Karen Slatford | 14,687 | - | - | - | - | - | n/a | |||||||||||||||||||||
| Richard Atkins | 13,862 | - | - | - | - | - | n/a | |||||||||||||||||||||
| Amanda Brown | 3,841 | - | - | - | - | - | n/a | |||||||||||||||||||||
| Silke Scheiber | - | - | - | - | - | - | n/a | |||||||||||||||||||||
| Lawton Fitt | - | - | - | - | - | - | n/a | |||||||||||||||||||||
| 1. | Current shareholding includes the value of any shares held (owned outright) together with the net-after-tax value of any vested but unexercised nil-cost options using the closing mid-market quotation price on October 31, 2019 of £10.60. |
| 2. | Stephen Murdoch is required to have a 200% shareholding within three years of re-joining the board on March 19, 2018. |
| 3. | Brian McArthur-Muscroft is still within the time period (which is typically five years) to build up to his 200% shareholding requirement. |
Between November 1, 2019 and February 3, 2020, the “Unvested and subject to performance” figures in the table above have reduced by 1,100,000 for Kevin Loosemore, 947,000 for Stephen Murdoch and 338,000 for Brian McArthur-Muscroft in accordance with the surrender and lapse of the outstanding ASG awards on February 3, 2020. There were no other changes to the above interests between November 1, 2019 and February 3, 2020.
Micro Focus International plc Incentive Plan 2005 (“LTIP”)
The table below sets out the executive directors’ LTIP awards (which were granted as nil cost options) as at October 31, 2019 together with the movements in these awards during the 12-month period.
Number at November 1, 2018 | Number granted in the period | Number exercised in the period | Number lapsed in the period | Number at October 31, 2019 | Date for exercise | ||||||||||||||||
Kevin Loosemore 1 | 192,157 | - | 192,157 | - | - | June 27, 2015 to June 26, 2022 | |||||||||||||||
Kevin Loosemore 1 | 142,132 | - | 142,132 | - | - | June 26, 2016 to June 25, 2023 | |||||||||||||||
Kevin Loosemore 1 | 115,192 | - | 115,192 | - | - | June 27, 2017 to June 26, 2024 | |||||||||||||||
Kevin Loosemore 1 | 111,275 | - | 111,275 | - | - | July 17, 2018 to July 16, 2025 | |||||||||||||||
Kevin Loosemore 1 | 69,156 | - | - | - | 69,156 | July 26, 2019 to July 25, 2026 | |||||||||||||||
Kevin Loosemore 2 | 67,965 | - | - | - | 67,965 | July 17, 2020 to July 16, 2027 | |||||||||||||||
Kevin Loosemore 3 | - | 89,285 | - | - | 89,285 | February 18, 2022 to February 17, 2029 | |||||||||||||||
Stephen Murdoch 1 | 46,237 | - | 46,237 | - | - | December 27, 2015 to December 26, 2022 | |||||||||||||||
Stephen Murdoch 1 | 39,884 | - | 39,884 | - | - | June 26, 2016 to June 25, 2023 | |||||||||||||||
Stephen Murdoch 1 | 56,421 | - | 56,421 | - | - | June 27, 2017 to June 26, 2024 | |||||||||||||||
Stephen Murdoch 1 | 44,510 | - | 44,510 | - | - | July 17, 2018 to July 16, 2025 | |||||||||||||||
Stephen Murdoch 1 | 26,024 | - | 26,024 | - | - | March 23, 2019 to March 22, 2026 | |||||||||||||||
Stephen Murdoch 1 | 39,640 | - | - | - | 39,640 | July 26, 2019 to July 25, 2026 | |||||||||||||||
Stephen Murdoch 2 | 36,664 | - | - | - | 36,664 | July 17, 2020 to July 16, 2027 | |||||||||||||||
Stephen Murdoch 2 | 67,537 | - | - | - | 67,537 | September 20, 2021 to September 19, 2028 | |||||||||||||||
Stephen Murdoch 3 | - | 101,190 | - | - | 101,190 | February 18, 2022 to February 17, 2029 | |||||||||||||||
Brian McArthur-Muscroft 3 | - | 80,482 | - | - | 80,482 | November 22, 2021 to November 21, 2028 | |||||||||||||||
Brian McArthur-Muscroft 4 | - | 80,482 | - | - | 80,482 | November 22, 2022 to November 21, 2028 | |||||||||||||||
| 1. | This award vested in full as the performance condition was fully met. |
| 2. | Performance condition requires that cumulative EPS growth over a three-year performance period starting on the May 1, preceding the date of grant is at least equal to RPI plus 3% per annum (at which point 25% of awards will vest) and for full vesting the aggregate EPS growth will be required to be RPI plus 9% per annum. Straight-line vesting will apply between these points. |
| 3. | Performance condition requires that cumulative EPS growth over a three-year performance period starting on the November 1, preceding the date of grant is at least equal to RPI plus 3% per annum (at which point 25% of awards will vest) and for full vesting the aggregate EPS growth will be required to be RPI plus 9% per annum. Straight-line vesting will apply between these points. |
| 4. | Performance condition requires that cumulative EPS growth over a four-year performance period starting on the November 1, preceding the date of grant is at least equal to RPI plus 3% per annum (at which point 25% of awards will vest) and for full vesting the aggregate EPS growth will be required to be RPI plus 9% per annum. Straight-line vesting will apply between these points. |
In considering the likely vesting level under the outstanding unvested LTIPs noted in the table above (i.e. awards to which footnotes 2, 3 and 4 apply), due regard should be given to the performance conditions specified in footnotes 2, 3 and 4 as well as performance to date and broker forecasts.
LTIP awards exercised during the year ended October 31, 2019
The table below sets out the LTIP awards (which were granted as nil cost options) which executive directors exercised during the financial year ended October 31, 2019.
| Executive director | Date of exercise | Number of options exercised | Share price at exercise 1 | Gain on exercise | |||||||||
Kevin Loosemore | April 5, 2019 | 560,756 | £ | 19.545 | £ | 10,959,976 | |||||||
Stephen Murdoch | April 1, 2019 | 213,076 | £ | 20.010 | £ | 4,263,651 | |||||||
| 1 | The share price at exercise is the closing mid-market quotation price on the day of exercise. |
Deferred Share Bonus Plan (“DSBP”)
The table below sets out the executive directors’ awards of conditional shares under the DSBP as at October 31, 2019 together with the movements in these awards during the year.
Number at November 1, 2018 | Number granted in the period | Number exercised in the period | Number lapsed in the period | Number at October 31, 2019 | Date of release | ||||||||||||||||
Stephen Murdoch | 5,051 | - | - | - | 5,051 | July 25, 2020 | |||||||||||||||
Stephen Murdoch | - | 10,013 | - | - | 10,031 | February 28, 2022 | |||||||||||||||
Additional Share Grants (“ASG”)
The table below sets out the executive directors’ ASG awards (which were granted as nil cost options) as at October 31, 2019 together with the movements in these awards during year.
Number at November 1, 2018 | Number granted in the period | Number Exercised in the period | Number lapsed in the period | Number at October 31, 2019 | Date of exercise | ||||||||||||||||
Kevin Loosemore 1 | 947,140 | - | 947,140 | - | - | November 1, 2017 to October 31, 2024 | |||||||||||||||
Kevin Loosemore 2 | 1,100,000 | - | - | - | 1,100,000 | September 1, 2020 to August 31, 2027 | |||||||||||||||
Stephen Murdoch 1 | 405,917 | - | 405,917 | - | - | November 1, 2017 to October 31, 2024 | |||||||||||||||
Stephen Murdoch 2 | 947,000 | - | - | - | 947,000 | September 1, 2020 to August 31, 2027 | |||||||||||||||
Brian McArthur-Muscroft 2 | - | 338,000 | - | - | 338,000 | September 1, 2020 to August 31, 2027 | |||||||||||||||
| 1 | This award vested in full as the performance condition was fully met. |
| 2 | The performance condition is that the percentage of ordinary shares subject to the ASG which may be acquired on exercise on or after the vesting date is as follows: |
| a. | 0% if the Shareholder Return Percentage (as defined below) is 50% or less; |
| b. | 100% if the Shareholder Return Percentage is 100% or more; and |
| c. | a percentage determined on a straight-line basis between (i) and (ii) above. |
The “‘Shareholder Return Percentage” will be calculated by deducting £18.17¾ per share (the “Reference Price”), being the average of the 20 days to August 2, 2016 (being the date of the heads of agreement relating to the acquisition of the HPE Software business), from the sum of the “Vesting Price” (calculated as the average closing share price over the period of 20 days ending on the day prior to the vesting date) plus the total of all dividends per share between completion and the vesting date. This will be divided by the Reference Price, multiplying the resulting figure by 100 to obtain the Shareholder Return Percentage.
The executive directors listed in the table above have surrendered the outstanding ASG awards noted in the table and they lapsed on February 3, 2020.
Additional Share Grant awards exercised during the year ended October 31, 2019
The table below sets out the Attachmate ASG awards (which were granted as nil cost options) which executive directors exercised during the financial year ended October 31, 2019.
Executive director | Date of exercise | Number of Options exercised | Share price at exercise 1 | Gain on exercise | |||||||||
Kevin Loosemore | April 1, 2019 | 947,140 | £ | 20.010 | £ | 18,952,271 | |||||||
Stephen Murdoch | April 1,2019 | 405,917 | £ | 20.010 | £ | 8,122,399 | |||||||
| 1 | The share price at exercise is the closing mid-market quotation price on the day of exercise. |
Sharesave
Chris Kennedy’s share save options from the summer 2018 offer lapsed on leaving the Company at the end of February 2019. No other executive director is currently participating in Sharesave.
Share option schemes
Details of the Company’s share option schemes are given in note 33 of the financial statements in Item 18.
The mid-market closing price of the shares at October 31, 2019 was 1,060 pence per share and during the 12 months ended October 31, 2019 the mid-market closing price varied between 1,004 pence and 2,160 pence per share.
Statement of shareholder voting
The following table shows the results of the advisory vote on the 2018 Directors’ Remuneration report at the AGM held on March 29, 2019, together with the latest approval vote on the Directors’ Remuneration Policy at the AGM on September 4, 2017:
| Votes for | Votes against | |||||||||||||||||||||||
| Number | Percentage | Number | Percentage | Votes cast | Votes withheld | |||||||||||||||||||
2018 Director’s Remuneration report | 154,276,600 | 49.67 | % | 156,329,073 | 50.33 | % | 322,087,153 | 11,481,480 | ||||||||||||||||
2017 Director’s Remuneration Policy | 162,259,404 | 86.46 | % | 25,408,333 | 13.54 | % | 188,129,640 | 461,903 | ||||||||||||||||
A statement was issued on March 29, 2019 acknowledging the advisory vote against the 2018 Directors’ Remuneration report and committing to a thorough review of the reward strategy and continuing engagement with shareholders to fully understand their concerns. An update statement was issued on September 26, 2019 noting the shareholder feedback received and the concerns raised which led to this vote outcome.
Since the AGM in March 2019, the Board has undertaken a detailed review of all of the feedback received from our shareholders and proxy agencies on the 2018 Remuneration report and engaged with our largest shareholders on the changes being proposed to the Remuneration Policy. This feedback has been incorporated into the design of the proposed new Remuneration Policy. The Company will be undertaking a full shareholder consultation in advance of the 2020 LTIP grants.
Role of the board
The Board leads and controls the Company and has collective responsibility for promoting the long-term success of the Group. While the board delegates some responsibilities to its committees or, through the CEO, to management, it has agreed a formal schedule of matters that are specifically reserved for its consideration. These include constructively challenging and helping develop proposals on business strategy, financing arrangements, material acquisitions and divestments, approval of the annual budget, major capital expenditure projects, risk management, treasury policies and establishing and monitoring internal controls. At each meeting, the board reviews progress of the Group towards its objectives and receives papers on key subjects in advance of each board meeting.
These typically cover:
Strategy and budgets;
– Business and financial performance;
– Product plans and development;
– Corporate activities;
– Human resources; and
– Investor relations.
While the board retains overall accountability for and control of the Company, the executive directors are responsible for conducting the day-to-day management of the business. Review of the Group’s principal business activities is the responsibility of the operating committee. The operating committee comprises the Chief Executive Officer, Chief Financial Officer, Chief Human Resources Officer, Chief Operating Officer, Vice President Strategy and Planning and the Group General Counsel and Company Secretary and is chaired by the CEO, Stephen Murdoch.
Roles of board members
The Executive Chairman has responsibility for leading the board, including setting the board agenda (in conjunction with the senior independent director and the Company Secretary) and for the delivery of strategy, M&A activities, investor relations and executive director development. He chairs board meetings, facilitating the effective contribution of non-executive directors and ensuring that the board is effective in all aspects of its role, and for upholding the highest standards of integrity and probity. He also chairs shareholder meetings and is responsible for ensuring effective communication with shareholders, supported by his accountability for investor relations.
The Senior Independent Director, Karen Slatford, chairs the nomination committee and is therefore responsible for succession planning. Also, in her role as senior independent non- executive director, Karen Slatford leads on governance issues, including the annual review of overall board effectiveness and of the Executive Chairman’s performance. The senior independent non-executive director also acts as an intermediary, if necessary, between non-executive directors and the Executive Chairman and between the Company and its shareholders, providing a point of contact for those shareholders who wish to raise issues with the board, other than through the Executive Chairman. Each of the non-executive directors has been appointed for a specific term, subject to annual re-election by shareholders. The independent non-executive directors comprise a majority of the board.
The executive directors are responsible for developing the Group’s strategy and proposing the budget for board approval and are accountable to the board through the Chief Executive Officer. They are also responsible for the financial and operational performance of the Group and, in conjunction with the operating committee, they are collectively responsible for the day-to-day running of the business. There is a clear and documented division of responsibilities between the Executive Chairman, who is responsible for running the board and retains executive responsibility for strategy, M&A activities, investor relations and executive director development, and the Chief Executive Officer, who is responsible for the evolution and delivery of the strategy and the day-to-day operation of the business. This division of responsibilities has been considered and approved by the board, who are satisfied that no one individual has unfettered powers of decision-making.
The role of the non-executive directors is to ensure that independent judgement is brought to board deliberations and decisions and to provide constructive challenge as appropriate. They promote the highest standards of integrity, probity and corporate governance throughout the Company.
The non-executive directors possess a wide range of skills and experience, relevant to the development of the Company, which complement those of the executive directors.
The non-executive directors, led by the Senior Independent Director, met regularly throughout the year in private session without executive directors in attendance.
The Company Secretary is accountable to the board through the Executive Chairman, to whom she reports. It is the responsibility of the Company Secretary to ensure that agreed board procedures are followed and all rules and regulations are complied with. The Company Secretary’s responsibilities include facilitating the induction and professional development of directors and ensuring the smooth flow of information between board members, between the board and its committees and between non-executive directors and senior management.
In addition, all directors have direct access to the advice and services of the Company Secretary.
Non-executive directors’ terms of appointment
The non-executive directors’ terms of appointment are recorded in letters of appointment. The required notice from the Company and the non-executive director is 90 days in all cases. The non-executive directors are not entitled to any compensation for loss of office and stand for election or re-election as appropriate at each AGM. Details of the letters of appointment of each non-executive director who has served as a director of the Company at any time during the financial year ended October 31, 2019 are set out below:
| Non-executive director | Appointment date | Expiration date | |||
| Karen Slatford | July 5, 2010 | July 5, 2022 | |||
| Richard Atkins | April 16, 2014 | April 16, 2020 | |||
| Amanda Brown | July 1, 2016 | July 1, 2022 | |||
Silke Scheiber 1 | May 15, 2017 | May 15, 2020 | |||
Darren Roos 2 | May 15, 2017 | May 15, 2020 | |||
| Lawton Fitt | October 17, 2017 | October 17, 2020 |
1 Silke Scheiber left the board on February 4, 2020.
2 Darren Roos left the board on September 2, 2019.
Non-executive directors’ independence
Each of the non-executive directors who served during the period was considered by the board to be independent. Karen Slatford was appointed to the board in July 2010 and has now served for more than nine years. The board has specifically considered whether this was likely to affect, or could appear to affect, her independence and concluded that she continued to demonstrate independence in thought and judgement, noting that there were no other relationships or circumstances that could affect her independence.
The board also decided on October 17, 2019 that, in furtherance of good governance, all the non-executive directors would join each committee of which they were not already a member, save that Karen Slatford would no longer serve on the remuneration committee as she had completed the maximum term permitted under the committee’s terms of reference.
Board members’ external commitments
Each of the non-executive directors confirms on appointment that they will devote sufficient time to meet what is expected of them in their role. They have each disclosed their other significant commitments and the time involved in these, and advise the board of any changes.
Two of the executive directors have external roles.
Brian McArthur-Muscroft is a non-executive director of Robert Walters plc. Kevin Loosemore has had external roles for a number of years and on September 2, 2019 was appointed as a non-executive director of De La Rue plc, subsequently becoming non-executive chairman of that company on October 1, 2019. At the time of joining that board, Mr Loosemore relinquished his role as non-executive chairman of IRIS Software Group Ltd (though he continues to serve as a non-executive director of that company). The board is satisfied that there will be no adverse impact on the Company from this new appointment
Board meetings
The board schedules meetings approximately every two months, with a scheduled update call in the months with no formal meeting. Additional meetings are arranged as necessary, especially when circumstances or the nature of the matter means that the business could not be dealt with on a regular update call. All directors receive an agenda and board papers in a timely manner in advance of meetings, to help them make an effective contribution at the meetings. The board makes full use of appropriate technology as a means of updating and informing all its members, including the use of board portal software.
In the year ended October 31, 2019 the board met formally at six scheduled meetings. As described overleaf, the board also met on a further two occasions to receive interim updates or consider more urgent matters.
Attendance at board and committee meetings
The number of board and committee meetings attended by each director in the year ended October 31, 2019, relative to the number of meetings held during their time in office, was as follows:
Director | Board | Audit Committee | Nomination committee | Remuneration committee |
Kevin Loosemore | 8/8 | - | - | - |
Stephen Murdoch | 8/8 | - | - | - |
Brian McArthur-Muscroft 1 | 6/6 | - | - | - |
Karen Slatford | 7/8 | - | 5/5 | 7/7 |
Richard Atkins | 8/8 | 8/8 | 5/5 | - |
Amanda Brown | 8/8 | 8/8 | - | 7/7 |
Lawton Fitt | 8/8 | 7/8 | 5/5 | - |
Silke Scheiber | 8/8 | 8/8 | - | 7/7 |
Chris Kennedy 2 | 2/2 | - | - | - |
Darren Roos 3 | 5/6 | - | 3/3 | 4/5 |
| 1. | Brian McArthur-Muscroft served as a director from February 21, 2019. |
| 2. | Chris Kennedy ceased to serve as a director on February 21, 2019. |
| 3. | Darren Roos ceased to serve as a director on September 2, 2019. |
If any director is unable to attend a meeting, they provide feedback to the Executive Chairman, the chair of the committee or the Company Secretary, who will ensure that their comments are then communicated to the meeting.
Key matters considered by the board during the financial year
The key matters that the board discussed at each meeting and the key activities that have taken place throughout this period.
| Matters considered at all scheduled board meetings | Key activities for the board in the year to October 31, 2019 |
- Key Project status and progress - Strategy - Financial reports and statements - Operational reports, issues and highlights - Investor relations and capital markets update - Key legal updates - Key transactions - Assurance and risk management - Compliance reports - Committee reports | - Reviewed 2019 budget and approved 2020 preliminary budget approval - Completion of the disposal of the SUSE business - Approved the Return of Value to shareholders - Approved two further share buyback programs - Commenced a strategic review of the Group’s business - Approved revised Group policies - Conducted externally facilitated board review - Reviewed and approved changes to the membership of the board’s committees - Reviewed IT infrastructure changes - Reviewed compliance with debt covenants and liquidity - Reviewed risk and long-term viability and evolution of Risk Management Framework |
Independent advice
The board has agreed procedures for directors, including the non-executive directors, to follow if they believe they require independent professional advice in the furtherance of their duties. These procedures allow the directors to take such advice at the Company’s expense.
Operational management structure
Our organizational structure allocates individual responsibilities, the performance of which are monitored on an ongoing basis. The management of the Group as a whole is delegated to the Chief Executive Officer and, through him, to the operating committee. This body is chaired by the Chief Executive Officer, Stephen Murdoch, and also comprises the Chief Financial Officer, Chief Operating Officer, Chief Human Resources Officer, Senior Vice President Strategy and Planning and the Group General Counsel and Company Secretary. It meets regularly to develop strategic plans, monitor operational performance and consider key business issues. As part of these reviews, it considers the risks associated with the delivery of strategy and any material governance issues within the Group’s operating companies.
A number of Group administrative functions such as Finance, Tax & Treasury, Human Resources, IT, Corporate Communications and Legal report to the board through the operating committee. The conduct of Micro Focus’ business is delegated to local and regional executive management teams subject to a chart of approvals policy, which is approved by the board and communicated to all employees in the Group. These teams are accountable for the conduct and performance of their businesses within the agreed business strategy and a number of Group-wide policies, intended to drive compliance with key governance standards. These policies cover areas including finance, contract approvals, data protection, share dealing, business conduct, ethics and anti-bribery and corruption and anti-slavery and human trafficking.
EFFECTIVENESS
Board skills, experience, independence and knowledge of the Company
The board is satisfied that its current composition provides an appropriate blend and balance of skills, experience, independence and knowledge of the Company, such that the board and its committees can discharge their respective duties and responsibilities effectively. However, it is important that there is a progressive refreshing of the board, particularly when the strategic challenges we face are evolving. An explanation of how we manage succession planning at board level is included in the nomination committee report. There is a formal, rigorous and transparent procedure for the appointment of new directors to the board, led by the Senior Independent Director, Karen Slatford. As part of that process, each director confirms that they should be able to allocate sufficient time to the Company to discharge their responsibilities effectively.
On joining, each new director receives a comprehensive, formal and tailored induction into the Company’s operations. This includes briefings on the Company’s business, strategy, constitution and decision-making process, the roles and responsibilities of a director and the legislative and regulatory framework. New directors also meet with the Group’s CEO, CFO, senior product and other managers and have the opportunity to meet shareholders at the AGM. All directors regularly update and refresh their skills and knowledge and can request that appropriate training is provided, at the Company’s expense, as required. The executive directors ensure regular informal contact is maintained with non-executive directors throughout the year, including providing opportunities to visit Group offi es around the world. The non-executive directors have unrestricted access to anyone in the Company. The Executive Chairman also meets separately with the non-executive directors.
Conflicts of interest
In accordance with the Companies Act 2006, the Company has put in place procedures to deal with conflicts of interest, which have operated effectively. The board is aware of the other commitments of its directors and is satisfied that these do not conflict with their duties as directors of the Company. Any changes to these commitments are reported to the board.
Board information
As explained above, the directors are provided with the agenda and supporting papers in a timely manner in advance of the relevant board or committee meeting. The board is satisfied that the information provided is in an appropriate form and of a quality that should enable the directors to discharge their duties satisfactorily.
Board and committee evaluation
A comprehensive evaluation of the performance of the board, its committees and each of its directors is carried out annually.
This year the review of the board and its committees was externally facilitated, being led by the Executive Chairman and the senior independent non-executive director, supported by the Company Secretary. The external facilitator was Emma Fallon of No 4 consultancy, who had no other connection with. Following discussion with the Executive Chairman and senior independent non-executive director, a discussion guideline was prepared to steer, but not prescribe nor limit, the topics to be discussed individually with each of the interviewees. No 4 met individually with each director and those members of the senior leadership team who interact most with the Board. These were open, confidential and non-attributable conversations.
Initial findings and individual feedback was shared with the review leaders and a written report provided to all directors, The main conclusions from the review were presented to and discussed by the board
The majority of recommendations fell broadly into three areas:
| - | Mechanics of board meetings, including the volume and nature of information provided and holding formal discussions of Company culture |
| - | Board relationships, including the non-executive directors playing a more proactive role in supporting management and creating opportunities for informal discussions of topics, without the constraint of a formal agenda |
| - | Board composition and succession management, covering the future evolution of the board and the need to preserve the qualities that experienced directors bring to its discussions. |
The Board noted that progress had been seen with regard to actions from the previous review. Notable improvements were in relation to the presentation of information and to the positive impact from holding board and committee meetings on consecutive days, with the additional benefit of informal discussion at board dinners highlighted.
Director evaluation
In accordance with the recommendations of the Code, the Company’s articles of association require that all directors are subject to election by the shareholders at the first AGM of the Company after their appointment and to re-election by the shareholders on an annual basis thereafter. Prior to proposing any director for re-election, the board operates a formal process, led by the Chairman, to assess the effectiveness of each director and, in the case of the non-executive directors, their continued independence and to assess whether the individual is willing to continue in office.
Informed by individual feedback from the board review, a discussion on the contribution of each of the non-executive directors took place between the chairman and the senior independent non-executive director.
In addition, the senior independent non-executive director meets with the non-executive and executive directors at least once a year to review the performance and continuing commitment of the Executive Chairman and consider whether to recommend his re-election.
All the individuals proposed for re-appointment at the 2020 AGM have been subject to an evaluation procedure in the last 12 months. The board also believes that the skills and experience of each of the non-executive directors enables them to continue to provide valuable contributions to the board, and is satisfied that each of them continues to exercise rigorous and objective judgment.
ACCOUNTABILITY AND AUDIT
The board is responsible for the preparation of the Annual Report and Accounts. In doing so, it has established formal and transparent arrangements for considering how best to apply corporate reporting, risk management and internal control principles and for maintaining an appropriate relationship with the Company’s auditors, KPMG.
The board considers the Annual Report and Accounts, taken as a whole, to be fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and prospects, including its performance, business model and strategy. While this is the board’s responsibility, it is overseen by the Audit committee.
Board committees
Micro Focus has established Audit, Nomination and Remuneration committees, with written terms of reference for each that deal with their respective authorities and duties. The full terms of reference of all the committees are available upon request from the Micro Focus Group Company Secretary or can be viewed on Micro Focus’ website at http://investors.microfocus.com/corporategovernance.
Audit committee
Composition of the committee
The audit committee comprises Richard Atkins (who serves as its chair), Amanda Brown, Silke Scheiber and Lawton Fitt and, from October 17, 2019, Karen Slatford. All members of the committee are independent non-executive directors. The board considers that:
| - | for UK purposes, Richard Atkins, a chartered accountant, has recent and relevant financial experience by virtue of his previous executive and current non-executive responsibilities (details of which can be found in his biography) and that the audit committee as a whole has competence relative to the sector in which the Company operates; and |
| - | for US purposes, each of the audit committee members is independent under the SEC and NYSE definitions of that term; that Richard Atkins is an audit committee financial expert, is independent of management, and has accounting or related financial management expertise; and that all of the audit committee members are financially literate. |
Executive directors and senior executives (most often the Director of Finance, the Head of Tax and Treasury and the Director of Internal Audit and Risk) attend meetings by invitation as required, but do not do so as of right. Representatives of KPMG LLP (external auditor), PricewaterhouseCoopers LLP (internal auditor) and Deloitte LLP (external tax advisors) also attend the committee meetings and meet privately with committee members, in the absence of executive management, prior to each committee meeting.
The committee normally meets at least four times during each financial year and more frequently as required.
Role and responsibilities of the committee
The committee’s principal responsibilities are to:
| - | monitor the integrity of the financial statements of the Company and any formal announcements relating to the Company’s financial performance, reviewing significant financial reporting judgements contained in them. The committee also reviews the Group’s Annual Report and Accounts and Interim Report prior to submission to the full board for approval; |
| - | monitor the Group’s accounting policies and review the Company’s internal financial controls and financial reporting procedures and, on behalf of the board, the Company’s internal control and risk management systems; |
| - | monitor the adequacy and effectiveness of the Company’s internal controls and internal financial controls, risk management systems and insurance arrangements; |
| - | monitor and review the effectiveness of the Company’s internal audit function; |
| - | make recommendations to the board, for it to put to the shareholders for their approval in general meeting, in relation to the appointment, re-appointment and removal of the external auditor and to approve the remuneration and terms of engagement of the external auditor; |
| - | oversee the relationship with the external auditors and review and monitor their independence and objectivity and the effectiveness of the audit process, taking into consideration relevant UK and US professional and regulatory requirements; |
| - | develop and implement policy on the engagement of the external auditor to supply non-audit services, taking into account relevant ethical guidance regarding the provision of non-audit services by the external audit firm; and to report to the board, identifying any matters in respect of which it considers that action or improvement is needed and making recommendations as to the steps to be taken; |
| - | provide a forum through which the Group’s external and internal auditors and external tax advisors report to the board; and |
| - | report to the board on how it has discharged its responsibilities. |
The committee’s terms of reference (audit committee charter) are published on the Company’s website, www.microfocus.com.
Nomination committee
Composition of the committee
The Nomination committee comprises Karen Slatford (who serves as its Chair), Richard Atkins and Lawton Fitt and, from October 17, 2019, Amanda Brown and Silke Scheiber. Darren Roos also served as a member until September 2, 2019, on which date he ceased to serve as a director. All members of the committee are independent non-executive directors. Executive directors and senior executives are invited to attend the meetings by invitation, as required, but do not do so as of right.
The committee normally meets at least twice during each financial year, and more frequently as required.
Role and responsibilities
The committee’s principal responsibility is proposing candidates for appointment to the board, having regard to the balance and structure of the board and taking into consideration the benefits of diversity in all its forms, including gender, ethnicity, religion, disability, age and sexual orientation. The terms of reference of the committee include, among other matters, the following responsibilities:
| - | To review the structure, size and composition (including the skills, knowledge, experience and diversity) required of the board and make recommendations to the board with regard to any changes; |
| - | To identify and nominate, for the approval of the board, candidates to fill board vacancies as and when they arise; |
| - | To give full consideration to succession planning for directors and other senior executives; |
| - | To keep under review the leadership needs of the Group, both executive and non-executive, with a view to ensuring the continued ability of the Group to compete effectively in the marketplace; and |
| - | To review annually the time required from non-executives, evaluating whether they are spending enough time to fulfil their duties. |
The committee’s terms of reference are published on the Company’s website, www.microfocus.com.
Diversity
The board has considered diversity in broader terms than just gender and believes it is also important to reach the correct balance of skills, knowledge, experience and independence on the board. During the prior year, the committee reviewed the Company’s diversity policy to include a strategy to promote equal opportunity and attract a wider range of ethnicity, while continuing to attract and retain the most talented people who can deliver sustained outstanding performance. The Group has formal policies in place to promote equality of opportunity across the whole organization, regardless of gender, ethnicity, religion, disability, age or sexual orientation.
At October 31, 2019 the board comprised four men (50%) and four women (50%). The Company Secretary is also a woman. As opportunities arise the board will seek to broaden the wider diversity of the directorate, in line with its policy goals. Our most senior management forum, the operating committee, has four male members and two female members, so 33% of its members are female. Of the 44 employees who report directly to the operating committee members, 14 are female, being 32%.
Executive directors’ service agreements at October 31, 2019
| Executive director | Date of service contract | Notice period | |
Kevin Loosemore 1 | April 14, 2011 | The agreement is terminable by either party on six months’ notice | |
Stephen Murdoch 2 | April 16, 2014 | The agreement is terminable by either party on six months’ notice | |
Brian McArthur-Muscroft 3 | November 4, 2018 | The agreement is terminable by either party on six months’ notice |
| 1. | Kevin Loosemore’s service contract was amended December 9, 2015 and April 12, 2017. |
| 2. | Stephen Murdoch stepped down from the board on completion of the HPE Software business acquisition on September 1, 2017 to become Chief Operating Officer. He was reappointed to the board as Chief Executive Officer on March 19, 2018. |
| 3. | Brian McArthur-Muscroft joined the Company on November 5, 2018 and was appointed to the board as Chief Financial Officer on February 21, 2019. |
Remuneration committee
The remuneration committee comprises Amanda Brown (who serves as its chair), Karen Slatford and Silke Scheiber and, from October 17, 2019, Richard Atkins and Lawton Fitt. Darren Roos also served as a member until September 2, 2019, on which date he ceased to serve as a director. All members of the committee are independent non-executive directors. The committee met seven times during the period under review.
The committee invited the Executive Chairman, Chief Executive Officer, Chief Financial Officer, Chief Human Resources Officer and Reward Director during the period to provide views and advice on specific questions raised by the committee and on matters relating to the performance and remuneration of senior managers. They did not participate in discussions relating to their own remuneration. The Company Secretary attended each meeting as secretary to the committee.
Terms of reference
The committee is responsible for the remuneration arrangements for executive directors and members of the executive management team, and for providing general guidance on aspects of remuneration policy throughout the Group. The terms of reference were reviewed and updated to reflect the 2018 Corporate Governance Code. The key aspects of the updated terms of reference are as follows:
| - | Determine the remuneration policy for the Company’s Chairman and the executive directors and review its on-going appropriateness and relevance; |
| - | Determine the total individual remuneration packages of the executive directors and the executive management team, including salary, bonuses, incentive payments, share awards, pensions and other benefits; |
| - | Review the terms of executive service contracts for executive directors and the executive management team; |
| - | Review any material changes to pension and benefit arrangements for executive directors and the executive management team; |
| - | Agree the expenses policy for the Company Chairman and executive directors |
| - | Develop the formal shareholding requirement policy, including post cessation, encompassing both vested and unvested shares; |
| - | Oversee the operation of the Company’s annual bonus plans, deferred bonus plans and long-term incentives as applied to executive directors and the executive management team, including award levels, performance conditions, payouts, and application of malus and claw-back where appropriate. |
| - | Review the design of all share incentive plans for approval by the board and shareholders; |
| - | Review the remuneration policies and practices across the Group and the alignment of workforce remuneration with culture; and |
| - | Produce the annual Directors’ Remuneration report. |
The full terms of reference of the committee are available from the Company Secretary and are on the Company’s website http://investors.microfocus.com/corporate-governance.
The average monthly number of people employed by the Group (including executive directors for the 12 months ended October 31, 2019, the 18 months ended October 31, 2018 and 12 months ended April 30, 2017 was as follows:
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 2017 | ||||||||||
| Number | Number | Number | ||||||||||
| Average monthly number of people | ||||||||||||
| (including executive directors) employed by the Group: | ||||||||||||
| Continuing Operations | ||||||||||||
| Sales and distribution | 5,413 | 5,860 | 1,818 | |||||||||
| Research and development | 5,056 | 4,323 | 1,400 | |||||||||
| General and administration | 1,991 | 1,378 | 642 | |||||||||
| 12,460 | 11,561 | 3,860 | ||||||||||
| Discontinued Operation | ||||||||||||
| Sales and distribution | 164 | 515 | 323 | |||||||||
| Research and development | 170 | 629 | 476 | |||||||||
| General and administration | 3 | 8 | 4 | |||||||||
| 337 | 1,152 | 803 | ||||||||||
| Total | ||||||||||||
| Sales and distribution | 5,577 | 6,375 | 2,141 | |||||||||
| Research and development | 5,226 | 4,952 | 1,876 | |||||||||
| General and administration | 1,994 | 1,386 | 646 | |||||||||
| 12,797 | 12,713 | 4,663 | ||||||||||
Directors’ shareholdings and share interests as at October 31, 2019 are as follows. Further information in relation to share options is included in Item 6. B. including detailed information in relation to directors’ share options within the Directors Remuneration Report.
| Nil-cost options and conditional awards held | ||||||||||||||||||||||||
Director | Shares held (owned outright) | % of Group Ordinary shares | Vested but not exercised | Unvested and not subject to performance | Unvested and subject to performance | Other Share Save Options | ||||||||||||||||||
| Kevin Loosemore | 631,983 | 0.2 | 69,156 | - | 1,257,250 | - | ||||||||||||||||||
Stephen Murdoch 2 | 276,151 | 0.1 | 39,640 | 15,064 | 1,152,391 | - | ||||||||||||||||||
Brian McArthur-Muscroft 3 | - | - | - | - | 498,964 | - | ||||||||||||||||||
| Karen Slatford | 14,687 | 0.0 | - | - | - | - | ||||||||||||||||||
| Richard Atkins | 13,862 | 0.0 | - | - | - | - | ||||||||||||||||||
| Amanda Brown | 3,841 | 0.0 | - | - | - | - | ||||||||||||||||||
| Silke Scheiber | - | - | - | - | - | - | ||||||||||||||||||
| Lawton Fitt | - | - | - | - | - | - | ||||||||||||||||||
All members of key management bodies own less than 1% of the Group’s Ordinary shares.
Details of the share plans open to all employees are included in note 33 of the Consolidated financial statements in Item 18.
At the date of the most recent filed SC 13G/A, being the most recent practicable date, the following percentage interests in the ordinary share capital of the Company:
Ordinary shares of 10 pence each | Percentage of issued share capital % | |||||||
| Dodge & Cox | 58,978,116 | 17.70 | % | |||||
| Causeway Capital Management LLC | 29,945,679 | 8.98 | % | |||||
| BlackRock Inc. | 25,103,914 | 7.50 | % | |||||
At January 27, 2020 the Group had 1,615 Ordinary shareholders and 41,784 registered holders of the ADSs.
| Item 7. B. | Related party transactions. |
The Group’s related parties are its subsidiary undertakings, key management personnel and post-employment benefit plans.
Subsidiaries
Transactions between the Company and its subsidiaries have been eliminated on consolidation.
Remuneration of key management personnel
The remuneration of key management personnel of the Group (which is defined as members of the executive committee including executive directors) is set out in Note 33 of the consolidated financial statements in Item 18. There are no loans between the Group and the key management personnel.
Transactions with other related parties.
The following transactions occurred with other related parties:
Contributions made to pension plans by the Group on behalf of employees are set out in Note 25 of the consolidated financial statements in Item 18.
Sales and purchases of goods and services between related parties are not considered material.
| Interests of experts and counsel. |
Not applicable.
The Consolidated financial statements filed as part of this Annual Report on Form 20-F are included in Item 18.
The Group is involved in various lawsuits, claims, investigations and proceedings including those consisting of IP, commercial, employment, employee benefits and environmental matters, which arise in the ordinary course of business. The Separation and Distribution Agreement, dated as of September 7, 2016, between Seattle SpinCo, Inc. and HPE (the “SDA”) includes provisions that allocate potential financial responsibility for litigation involving the parties, as well as provide for cross-indemnification of the parties against potential liabilities to one party arising out of potential liabilities allocated to the other party. In addition, as part of the SDA, HPE and Seattle have agreed to cooperate with each other in managing litigation that relates to both parties’ businesses. The Group records a liability when it believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Significant judgment is required to determine both the probability of having incurred a liability and the estimated amount of the liability. Litigation is inherently unpredictable. However, the Group believes it has valid defenses with respect to legal matters pending against it. Nevertheless, cash flows or results of operations could be materiallysignificantly affected in any particular period by the resolution of one or more of these contingencies. The Group believes it has recorded adequate provisions for any such matters and, as of October 31, 2017,2019, it was not reasonably possible that a material loss had been incurred in connection with such matters in excess of the amounts recognized in its financial statements.
Litigation, Proceedings and Investigations
Forsyth, et al. vs. HP Inc. and HPE:
This purported class and collective action was filed on August 18, 2016 and an amended (and operative) complaint was filed on December 19, 2016 in the United States District Court for the Northern District of California, against HP Inc. and HPE alleging defendants violated the Federal Age Discrimination in Employment Act (“ADEA”(“ADEA”), the California Fair Employment and Housing Act, California public policy and the California Business and Professions Code by terminating older workers and replacing them with younger workers. Plaintiffs seek to certify a nationwide collective action under the ADEA comprised of all individuals aged 40 and older who had their employment terminated by an HP entity pursuant to a work force reduction (“WFR”(“WFR”) plan on or after December 9, 2014 for individuals terminated in deferral states and on or after April 8, 2015 in non-deferral states. Plaintiffs also seek to certify a Rule 23 class under California law comprised of all persons 40 years of age or older employed by defendants in the state of California and terminated pursuant to a WFR plan on or after August 18, 2012. On January 30, 2017, Defendants filed a partial motion to dismiss Plaintiff’s First Amended Complaint and motions to compel the claims of those three named Plaintiffs to individual arbitrations. On March 20, 2017, the Defendants filed additional motions to compel a number of the opt-in plaintiffs to individual arbitrations. On September 20, 2017, the Court granted the defendants’ motions to compel arbitration denied the motion to dismiss without prejudice, stayed the action and administratively closed the case pending the completionresolution of the compelled arbitrations. Plaintiffs moved for reconsideration on October 18,arbitration proceedings. During the period from November 30, 2017, through the present, the named and alsoopt-in plaintiffs who signed separation agreements that include class action waiver and mandatory arbitration provisions filed arbitration demands. On December 22, 2017, defendants filed a notice of appealmotion to stay the case pending arbitrationsOctober 20, 2017. Defendants’ opposition to Plaintiffs’ motion for reconsideration was filed on October 31, 2017. On DecemberFebruary 6, 2017, the Court entered an Order that requested further briefing on the limited issue of whether the2018. The claims of plaintiffs not subject tothe arbitration should be stayed. Asopt-ins have been resolved or dismissed from the District Court case. Plaintiffs filed a resultThird Amended complaint on January 27, 2020. The stay of the court ordered stay, no further activities will occurlitigation remains in the case until the Court rules on Plaintiffs’ Motion for Reconsideration and Defendants’ Motion to Stay.place.
Wall vs. HPE and HP Inc.:
This certified California class action and Private Attorney General Act action was filed against Hewlett-Packard Company on January17, 2012 and the fifth (and operative) amended complaint was filed against HP Inc. and HPE on June 28, 2016. The complaint alleges that the defendants paid earned incentive compensation late and failed to timely pay final wages.incentive compensation upon termination of employment. On August 9, 2016, the court ordered the class certified without prejudice to a future motion to amend or modify the class certification order or to decertify. On December 20, 2017, the parties filed a Notice of Provisional Settlement and Joint Stipulation to Vacate the Trial Date notifying the Court that Plaintiffs and Defendants have reached a settlement in principle in this matter and requesting that the Court vacate theThe scheduled January 22, 2018 trial whiledate was vacated following the parties’ notification to the court that they had reached an agreement to resolve the dispute. The parties work toward finalizingsubsequently finalized and executed a settlement. On December 28, 2017,settlement agreement and received preliminary approval of that agreement on June 29, 2018. After giving notice of the settlement to the class, to which there were no objections or opt-outs, the Court vacatedgranted final approval of the trial date.settlement on December 21, 2018. The Final Accounting Hearing was continued to March 6, 2020. The parties anticipate that the case will be dismissed shortly after the Final Accounting Hearing.
Jackson, et al. v. HP Inc. and Hewlett Packard Enterprise:
This putative nationwide class action was filed on July 24, 2017 in United States District Court in San Jose. Plaintiffs purport to bring the lawsuit on behalf of themselves and other similarly situated African-Americans and individuals over the age of forty. Plaintiffs allege that defendants engaged in a pattern and practice of racial and age discrimination in lay-offs and promotions. On September 29, 2017, Plaintiffs filed an amended complaint to add an additional plaintiff and a claim alleging that defendants engaged in a pattern and practice of racial discrimination in hiring. On January 12, 2018, defendants moved to transfer the matter to the United States District Court in the Northern District of Georgia. Defendants also moved to dismiss the claims on various grounds and to strike certain aspects of the proposed class definition. On July 11, 2018, the court granted defendants’ motion to dismiss this action for improper venue, and also partially dismissed and struck certain claims without prejudice to re-filing in the appropriate venue. On July 23, 2018, plaintiffs re-filed their lawsuit in the United States District Court for the Northern District of Georgia. On August 9, 2018, Plaintiffs filed a notice of appeal of the dismissal of the Northern District of California action with the Ninth Circuit Court of Appeals. On August 15, 2018, Plaintiffs filed a motion to stay their lawsuit in the Northern District of Georgia, which was granted by the court. On October 1, 2018, the Georgia court granted the plaintiffs’ unopposed motion to stay and administratively close the Georgia action until the Ninth Circuit appeal is decided. The parties are continuing to discuss a potential settlement, no further appellate briefing schedule has been set, and the stay in the Northern District of Georgia remains in place.
Araiza vs. HP Inc. and HPE:
On December 29, 2015, former PPS (HP Inc.) employee Daniel Araiza filed a California class action against HP Inc. and HPE in Santa Clara County Superior Court. Plaintiff alleges failure to (a) compensate Field Technical Support Representatives with minimum and overtime wages for all hours worked, (b) failure to pay exempt and non-exempt employees all accrued vacation and/or floating holidays upon separation of employment, (c) to provide meal breaks, and (d) derivate claims for inaccurate wage statements, waiting time penalties, unfair business practices, and Private Attorneys General Act (“PAGA”) penalties. Plaintiff sought to certify three patent infringement actionsgroups of California employees from December 29, 2011 to the present. The parties participated in settlement discussions and settled the lawsuit on March 19, 2019, subject to court approval. Plaintiff filed its motion for preliminary approval and the preliminary approval hearing is set for May 8, 2020.
Wapp Tech Limited Partnership et al. v. Micro Focus International plc:
On July 2, 2018, Wapp Tech Limited Partnership and Wapp Tech Corp. (collectively, “Wapp”) sued Micro Focus International plc in the Eastern District of Texas, against HPE. The first was filed on May 8, 2015 against Hewlett-Packardaccusing it of infringing claims of three patents in connection with Micro Focus International plc’s purported manufacture and sale of certain products in the ADM product line, including LoadRunner and Performance Center. Wapp also sued Hewlett Packard Enterprise Company, HP Enterprise ServicesWells Fargo & Company, and Oracle (“Oracle matter”) and accuses HP’s Proliant servers running Oracle’s Solaris, HPE’s StoreOnce, and HPE’s Vertica. Oracle has agreed to indemnify HPEBank of America Corporation for all claims against HPE related to Oracle’s Solaris, including databases running Solaris withtheir alleged use of the ZFS file system on HP ProLiant servers. Following a March 23, 2017 mediation, Oracle and Realtime reached a settlement. The second lawsuit was filed on May 8, 2015 against Hewlett-Packard Company, HP Enterprise Services, and SAP America Inc., Sybase Inc. (“SAP matter”) and accuses HP’s Converged Systems running SAP Hana. SAP agreed to indemnify HPE and HPES for the SAP relatedsame accused products. On June 16, 2016, SAP reachedOctober 15, 2018, Seattle SpinCo, Inc. and EntIT Software LLC, indirect subsidiaries of Micro Focus International plc, filed a settlement agreement with Realtime, which led to the dismissal of all of HPE’s products indemnified by SAP. The third lawsuit was filed on February 26, 2016 (amended on August 15, 2016) against HPE, HP Enterprise Services, and Silver Peak Systems, Inc. (“Silver Peak”), and accuses HPE’s StoreOnce, 3Par StoreServe, Connected MX, Connected Backup, and LiveVault. On November 17, 2016, the Magistrate Judge granted HPE and Realtime’s joint motion to sever and consolidate the Oracle and Silver Peak matters. There are seven patents asserted in the remaining lawsuit. The patents generally relate to data compression techniques used to conserve storage space. HPE and the joint defense group have filed several inter partes review petitions with the Patent Trial and Appeal Board (“PTAB”) on all seven asserted patents. On February 3, 2017, the Magistrate Judge granted HPE’s Motion to Stay Pending Inter Partes Review. In September and October, 2017, the PTAB found 3 patents (U.S. Patent Nos. 6,597,812; 7,378,992; and 8,643,513) to be unpatentable.
Securities Litigation:
• In re Micro Focus International plc Securities Litigation is another putative class action on behalf of holders of Micro Focus ADS filed on May 23, 2018 in the United States District Court for the Northern District of California against Micro Focus and certain current and former directors and officers, among others. On July 26, 2018, the court transferred the case to the United States District Court for the Southern District of New York. The lawsuit alleges violations of the Securities Act and of the Exchange Act. On September 30, 2019 the lead plaintiff filed a second amended complaint. On November 4, 2019, Micro Focus and other defendants filed a motion to dismiss the second amended complaint. That motion is pending before the Court.
| Item 8. A. 8 | Policy on dividend distributions. |
Our policy with respect to dividend distributions is described in response to “Item 3.A Selected financial data” above.
There has been no significant change to our financial condition or results of operations since October 31, 2019.
See “Item 8.A.7. Information on the Company — Legal Proceedings” for information with respect to legal proceedings to which we may be subject from time to time.
The principal trading market for our ordinary shares is the London Stock Exchange. Our ordinary shares also trade in the United States in the form of ADSs evidenced by American Depositary Receipts (“ADR”) under a sponsored ADR facility with Deutsche Bank, as depositary. We established this facility in March 2017. Each ADS represents one ordinary share.
Ordinary shares are traded on the London Stock Exchange under the symbol “”MCRO.L”. The ADSs trade on the New York Stock Exchange under the symbol “MFGP”.
Not applicable
Micro Focus International plc is listed on the London Stock Exchange. The Company’s American Depositary Shares (the “ADSs”) are listed on the New York Stock Exchange.
Not applicable.
Not applicable.
Not applicable.
Not applicable.
Articles of association
Directors authorized a
Subject to change of fiscal year end to October 31, 2018 to allow the Company to launch the Enlarged Group’s financial year with effect from November 1, 2017. As a result,by Ordinary Resolution, the Company is required to file this transition reporthave not less than three, and not more than eleven, directors in place at any time.
A Director shall not be required to hold any shares in the Company, nor are there any age limits for Directors.
Directors’ fees, expenses and other remuneration
The Articles provide that the ordinary remuneration of the Directors shall be determined by the Directors up to an amount of £1,000,000 per annum in aggregate, unless a higher amount is subject to an ordinary resolution. The remuneration may be divided amongst the Directors as they see fit. Any director that holds any executive office, or who serves on Form 20-Fany committee of the Directors may be paid extra remuneration in a manner determined by the Directors. The Directors may pay any Director all such reasonable expenses incurred in attending and returning from meetings of the Directors or any committee of the Directors.
Under the Companies Act, the company must propose a policy for the transitionremuneration of its executive and non-executive directors (the ‘Directors’ Remuneration Policy’) for approval by shareholders by way of an ordinary resolution at an Annual General Meeting. Once approved, the Directors’ Remuneration Policy is binding on the company and no payments can be promised or made to a director that are inconsistent with its terms. Any payments made that are outside those permitted by the Directors’ Remuneration Policy must be returned by the director who receives these, and any directors knowingly involved in approving such payments may also be personally liable to account to the company for the value of the payments made.
Powers of Executive Directors
The Directors may entrust to and confer upon any Director holding any executive office any of the powers exercisable by them as Directors under terms and conditions that they see fit and may revoke, withdraw or alter these powers at any time.
Interested directors
The Companies’ Act requires a director of a company who is in any way interested in a contract or proposed contract with the company to declare the nature of the director’s interest at a meeting of the directors of the company. The definition of ‘interest’ includes the interests of spouses, children, companies and trusts. The Companies’ Act also requires that a director must avoid a situation where a director has, or could have, a direct or indirect interest that conflicts, or possibly may conflict, with the company’s interests. The Companies’ Act allows directors of public companies to authorize such conflicts where appropriate, if a company’s Articles of Association so permit. Micro Focus’s Articles of Association permit the authorization of such conflicts.
Where a director has declared a transactional or situational conflict of interests to the board, and this has been authorized under the Articles of Association then the director concerned may count in a quorum at a board meeting to consider the matter in which he or she is interested, and may participate in discussions and vote on any proposal, arrangement or contract relating to that matter.
Borrowing powers
The directors may exercise all the powers of the company to borrow money. The Directors shall restrict the borrowings of the Company and its subsidiaries so as to secure that the aggregate amount of the external borrowings of the Group, less the aggregate amount of current asset investments shall not at any time, without the previous sanction of an ordinary resolution of the Company exceed an amount equal to $10,000,000,000.
This limit can only be altered by means of an amendment of the Articles which, as noted above, requires the approval of the shareholders of the Company, by a special resolution at a General Meeting.
Other provisions relating to directors
In accordance with the Company’s articles of association, all directors are subject to election by the shareholders at the first AGM of the Company after their appointment and to re-election by the shareholders on an annual basis at each AGM.
Therefore, all directors will retire, and seek election or re-election, as applicable, at the forthcoming AGM. This practice complies with the recommendations of the Corporate Governance Code. All the proposed appointees have been subject to a formal evaluation procedure in the last 12 months. Following that procedure, the Executive Chairman confirms the continuing commitment and effective contribution of the Directors and recommends their re-election. In addition, the Directors confirm the continuing commitment and effective contribution of the Executive Chairman and recommend his re-election. The board also believes in relation to the non-executive directors that their skills and experience enable them to continue to provide valuable contributions to the board. The board is satisfied that the non-executive directors exercise rigorous and objective judgment.
Annual general meetings
The Companies Act 2006 requires that a public limited company, such as Micro Focus, must convene an annual general meeting within six months from the end of its accounting reference date. In addition, the Micro Focus Articles permit the Micro Focus Board to convene a general meeting whenever it thinks fit. A general meeting may also be capable of being convened on requisition of members as described under “—Stockholder Proposals and Stockholder Nomination of Directors” above.
General meetings at which “special resolutions” are proposed and passed generally involve proposals to change the name of the company, change or amend the rights of shareholders, permit the company to issue new shares for cash without applying the shareholders’ pre-emptive rights, amend the company’s articles of association, or carry out other matters where either the company’s articles of association or the Companies Act 2006 prescribe that a “special resolution” is required. Other proposals relating to the ordinary course of the company’s business, such as the election of directors, would generally be the subject of an “ordinary resolution.”
Under the Companies Act, an ordinary resolution requires a simple majority of those attending and voting (in person or by proxy) and a special resolution requires not less than a 75% majority of those attending and voting (in person or by proxy). Under Section 303 of the Companies Act, members representing 5% or more of the paid-up share capital of Micro Focus can compel directors to convene a general meeting.
The Company’s AGM will be held on March 25, 2020 at 3pm (UK time) at the Company’s Headquarters at The Lawn, 22-30 Old Bath Road, Newbury, Berkshire RG14 1QN. The AGM will provide an opportunity for members of the board to meet with all shareholders and the participation of shareholders is encouraged. At the meeting, in addition to the statutory business, members of the board will be available for questions from shareholders.
In accordance with the Corporate Governance Code recommendations, a resolution will be proposed for each substantive issue and the chairs of the Audit, Remuneration and Nomination Committees will be available to answer questions.
All general meetings are open to all holders of the company’s shares or any duly appointed proxy or corporate representative. There are no conditions of admission, but the chairman of the meeting has powers under common law and the Articles to refuse admission or direct the removal of any person whose conduct may interfere with the orderly conduct of the meeting.
Share capital
The Micro Focus Articles do not specify an amount of authorized capital, as the requirement to have an authorized capital is no longer applicable under the Companies Act 2006. As of October 31, 2019, the issued ordinary share capital of Micro Focus was 363,583,328 ordinary shares, with a par value of £0.10 each, of which 30,200,905 ordinary shares were held in treasury. The Micro Focus Articles provide that (without prejudice to any existing rights attached to shares) new shares may be issued by Micro Focus carrying such rights as Micro Focus may determine provided the prior sanction of an ordinary resolution in general meeting is obtained.
In addition to the ordinary shares with a par value of £0.10 each, during the period Micro Focus created two further classes of share capital; B Shares with a par value of £3.36 each (the ‘B Shares’) and Deferred Shares with a par value of £0.10 each (‘Deferred Shares’).
The B Shares were issued by way of capitalization of reserves to facilitate the Return of Value transaction following the completion of the disposal of the SUSE business. On April 29, 2019, 413,784,754 B Shares were created and issued to holders of the Company’s ordinary shares on a pro-rata basis, which were subsequently redeemed for cash on the same date at a cost to the Company of $1.8bn. The B Shares were cancelled immediately following their redemption.
The Deferred Shares were allotted on April 30, 2019 following a consolidation of all 437,332,504 existing ordinary shares in issue into one share and a subsequent sub-division into 362,811,045 ordinary shares of 10 pence each and 74,521,459 Deferred Shares. All Deferred Shares were bought back by the Company on 30 April 2019.
There are currently no B Shares or Deferred Shares in issuance. Micro Focus does not have any class of preferred stock.
Redemption rights
Ordinary shares are non-redeemable.
Participation rights
Ordinary shares carry rights to participate in the profits of the Company.
Alteration of Share Capital
Micro Focus may by ordinary resolution alter its share capital in accordance with the Companies Act. The resolution may determine that, as between the holders of shares resulting from a sub-division, any of the shares may have any preference or advantage or be subject to any restriction as compared with the others.
Liability to further capital calls by the Company
All ordinary shares currently in issue are fully paid. The Company may, under its Articles and in accordance with the Companies Act, issue new ordinary shares either fully-paid (as to their par value) or partly-paid. Where shares are issued with a partly-paid par value then the registered holder of those shares will be liable to further cash calls in line with the provisions of the Articles and the Companies Act.
The board of directors typically seeks authority from shareholders at each Annual General Meeting to issue further shares in the company, including by way of a rights issue (which may be fully or partially pre-emptive). Shareholders who do not wish to take up their rights would generally be entitled to sell their rights, nil paid, in the market ahead of any such rights issue being closed.
Voting rights
Micro Focus Ordinary Shareholders shall be entitled, in respect of their holding of such shares and subject to relevant provisions of the Micro Focus Articles, to receive notice of any general meeting of Micro Focus and to attend and vote at any such general meeting. At any such meeting, on a show of hands, each Micro Focus Ordinary Shareholder present in person or by proxy shall have one vote and each such holder present in person or by proxy or by corporate representative shall upon a poll have one vote for every Micro Focus Share of which he or she is the holder.
At a General Meeting of the Company:
| ● | On a show of hands, every ordinary member present in person and every proxy or corporate representative duly appointed by a member shall have one vote; and |
| ● | On a poll, every member who is present in person and every proxy or corporate representative shall have one vote for every ordinary share of which he or she is the holder. |
No member shall be entitled to vote at any general meeting or class meeting in respect of shares held by him or her if any call or other sum then payable by him or her in respect of that share remains unpaid. Currently, all issued ordinary shares are fully paid.
Full details of the deadlines for exercising voting rights in respect of the resolutions to be considered at the Annual General Meeting (the ‘AGM’) to be held on March 25, 2020 are set out in the Notice of Meeting, which accompanies this report.
Dividends
Subject to the provisions of the Companies Act 2006, the Company may, by ordinary resolution, declare a dividend to be paid to ordinary members but no dividend shall exceed the amount recommended by the board. The board may pay interim dividends and any fixed rate dividend whenever the profits of the Company, in the opinion of the board, justifies its payment. All dividends shall be apportioned and paid pro-rata according to the amounts paid up on the shares. Any dividend unclaimed after a period of May 1, 20176 years from the date of declaration or from the date on which such dividends became due for payment shall be forfeited and shall revert to Micro Focus. The Micro Focus Board may, if authorized by an ordinary resolution, offer the holders of shares the right to elect to receive additional shares, credited as fully paid, instead of cash in respect of any dividend or any part of any dividend.
Liquidation rights
In the event of our liquidation, after payment of all liabilities, our remaining assets would be used to repay the holders of ordinary shares the amount they paid for their ordinary shares. Any balance would be divided among the holders of ordinary shares in proportion to the nominal amount of the ordinary shares held by them.
Provisions discriminating against the holders of ordinary shares or other securities
There are no provisions in the Articles which discriminate against any existing or prospective holder as a result of such holder owning a substantial number of shares. Under the Listing Rules made by the U.K.’s competent authority, the Financial Conduct Authority, in certain circumstances that company would be obliged to enter into a relationship agreement with a substantial shareholder.
Under the Companies Act, the company is able to serve a notice on any member, or any other person appearing to be interested in its shares under Section 793 of the Companies Act 2006, requiring them to provide confirmation of that person’s interest in the company’s shares. Where the recipient of such a notice is in default for a period of 14 days in supplying to the Company the information thereby required, then (unless the Directors otherwise determine) the company may suspend voting rights on (a) the shares comprising the shareholding account in the Register which comprises or includes the shares subject to the notice in relation to which the default occurred; and (b) any other shares held by the member.
Limitations affecting holders of ordinary shares or ADSs
Under English law and our Memorandum and Articles of Association, persons who are neither UK residents nor UK nationals may freely hold, vote and transfer ordinary shares in the same manner as UK residents or nationals.
With respect to the items discussed above, applicable UK law is not materially different from applicable US law.
SUSE Disposal
On July 2, 2018, the Group announced the proposed sale of the SUSE business segment to Blitz 18-679 GmbH (subsequently renamed to Marcel Bidco GmbH), a newly incorporated directly wholly-owned subsidiary of EQTVIII SCSp which is advised by EQT Partners. The total cash consideration of $2.5 billion was on a cash and debt free basis and subject to normalization of working capital.
On August 21, 2018, Shareholders voted to approve the proposed transaction whereby the Company agreed to sell its SUSE business segment to Marcel Bidco GmBH, for a total cash consideration of approximately $2.5bn, subject to customary closing adjustments. Following this vote all applicable antitrust, competition, merger control and governmental clearances were obtained. As set out in the circular to shareholders in advance of the vote, funds from the net sales proceeds after tax, transaction costs and customary closing adjustments would be used to make a required debt repayment in accordance with the new credit facilities.
On March 15, 2019 the Group completed the disposal of SUSE, the profits from which have been reported within the profit from discontinued operations in the year. Previously on August 21, 2018, shareholders had voted to approve the proposed transaction whereby the Group agreed to sell its SUSE business segment at which point the SUSE operating segment met the definition of a discontinued operation under IFRS 5 and was treated as such in these financial statements. This meant that during the 18- months ended October 31, 2017.2018, the SUSE results were excluded from the individual line items of the income statement and balance sheet. SUSE was instead included as a single line entitled “profits from discontinued operations” within the income statement and as an “asset held for sale” or “liability held for sale” on the balance sheet through to the date of disposal.
Refer to note 37 of the Consolidated financial statements in Item 18.
Bank borrowings
The Company announced on April 21, 2017 the successful syndication of the new credit facilities (the ‘‘New Facilities’’) with JP Morgan Chase Bank N.A. as administrative agent and collateral agent on behalf of both MA FinanceCo, LLC, a wholly owned subsidiary within the Micro Focus Group, and Seattle SpinCo, Inc., a wholly owned subsidiary of HPE that would hold the HPE Software business and be merged with a wholly owned subsidiary of Micro Focus in the transaction.
The following unaudited condensedFacilities were drawn as at October 31, 2019:
The $1,414.7 million senior secured term loan B-2 issued by MA FinanceCo LLC is priced at LIBOR plus 2.25% (subject to a LIBOR floor of 0.00%);
The $2,486.3 million senior secured seven-year term loan B issued by Seattle SpinCo. Inc. is priced at LIBOR plus 2.50% (subject to a LIBOR floor of 0.00%) with an original issue discount of 0.25%;
The $368.2 million senior secured seven-year term loan B-3 issued by MA FinanceCo LLC is priced at LIBOR plus 2.50% (subject to a LIBOR floor of 0.00%) with an original issue discount of 0.25%; and
The €452.8 million (equivalent to $505.8 million) senior secured seven-year term loan B issued by MA FinanceCo LLC is priced at EURIBOR plus 2.75% (subject to a EURIBOR floor of 0.00%) with an original issue discount of 0.25%.
The following Facilities were undrawn as at October 31, 2019:
A senior secured revolving credit facility of $500.0 million, (“Revolving Facility”), with an interest rate of 3.25% above LIBOR on amounts drawn (and 0.375% on amounts undrawn) thereunder (subject to a LIBOR floor of 0.00%).
The only financial covenant attaching to these facilities relates to the Revolving Facility, which is subject to an aggregate net leverage covenant only in circumstances where more than 35% of the Revolving Facility is outstanding at a fiscal quarter end. At October 31, 2019, $nil of the Revolving Facility was drawn together with $4,775.0 million of Term Loans giving gross debt of $4,775.0 million drawn. As a covenant test is only applicable when the Revolving Facility is drawn down by 35% or more, and $nil of Revolving Facility was drawn at October 31, 2019, no covenant test is applicable.
Details of foreign exchange rates are set out in Item 18 of this Annual Report on Form 20-F. There are currently no UK foreign exchange controls or restrictions on remittance of dividends on the ordinary shares or on the conduct of the Company’s operations, other than restrictions applicable to certain countries and persons subject to EU economic sanctions or those sanctions adopted by the UK Government which implement resolutions of the Security Council of the United Nations.
The following discussion summarizes certain material US federal income tax consequences and UK taxation consequences to US holders (as defined below) of owning and disposing of Micro Focus ordinary shares or ADSs. This discussion does not address any tax consequences arising under the laws of any state, local or non-US or non-UK jurisdiction, or under any US federal or UK laws other than those pertaining to income taxation.
Material US Federal Income Tax Consequences of Owning and Disposing of Micro Focus Ordinary Shares or ADSs
The following discussion summarizes certain material US federal income tax consequences to US holders (as defined below) of owning and disposing of Micro Focus ordinary shares or ADSs. This discussion is based upon the US Internal Revenue Code of 1986, as amended (the “US Tax Code”), the Treasury regulations promulgated under the US Tax Code and judicial and administrative rulings and decisions, all as in effect on the date hereof. These laws are subject to differing interpretations and may change, possibly retroactively, and any change could affect the accuracy of the statements and conclusions set forth in this discussion. No ruling has been sought from the US Internal Revenue Service (“IRS”) with respect to any US federal income tax consequences described below, and there can be no assurance that the IRS or a court will not take a contrary position.
This discussion does not constitute tax advice or an opinion, is for general information only and does not purport to consider all aspects of US federal income taxation that might be relevant to US holders in light of their personal investment or tax circumstances. This discussion does not apply to US holders who acquired ordinary shares or ADSs pursuant to the exercise of options or warrants or otherwise as compensation, or to US holders subject to special tax rules, including, without limitation, banks, insurance companies, tax-exempt entities, financial institutions, regulated investment companies, partnerships, S-corporations or other pass-through entities, broker-dealers, persons holding ordinary shares or ADSs as part of a hedging, conversion, or constructive sale transaction or as part of a “straddle,” US expatriates, persons subject to the alternative minimum tax, persons holding 10 per cent. or more of the voting power or value of Micro Focus’s stock, persons subject to “mark to market” accounting, persons holding ordinary shares or ADSs through a non-US account or financial institution and entities subject to the anti-inversion rules of Section 7874 of the US Tax Code. This discussion does not discuss US tax consequences to any person that is not a US holder or to any US holder having a functional currency other than the US dollar. Furthermore, this discussion does not discuss the so-called Medicare tax on net investment income, any US federal estate or gift tax laws or tax consequences under the laws of any state, local or non-US jurisdiction. Each holder of Micro Focus ordinary shares or ADSs is urged to consult its own tax advisor regarding the US federal, state, local and non-US income and other tax considerations of an investment in Micro Focus ordinary shares or ADSs.
As used in this discussion, a “US holder” means a beneficial owner of ordinary shares or ADSs that holds such ordinary shares or ADSs as capital assets within the meaning of the US Tax Code (generally, property held for investment) and is for US federal income tax purposes (i) an individual who is a citizen or resident of the United States, (ii) a corporation or other entity taxable as a corporation organized under the laws of the United States, any State thereof or the District of Columbia, (iii) a trust, if (a) a court within the United States is able to exercise primary jurisdiction over administration of the trust and one or more US persons have authority to control all substantial decisions of the trust or (b) a valid election is in place to treat such trust as a domestic trust, or (iv) an estate the income of which is subject to US federal income taxation regardless of its source.
In the case of a beneficial owner of ordinary shares or ADSs that is classified as a partnership for US federal income tax purposes, the tax treatment to a partner in the partnership generally will depend upon the tax status of the partner and the activities of the partner and the partnership. Partnerships and partners of partnerships holding Micro Focus ordinary shares and ADSs are urged to consult their independent professional tax advisors regarding an investment in such ordinary shares and ADSs.
The Company believes, and this discussion assumes, that it is not a passive foreign investment company (a “PFIC”) for US federal income tax purposes, although the inquiry is fact specific and no assurance is being given in that regard. A non-US corporation generally will be considered a PFIC for any taxable year in which (i) 75 per cent. or more of its gross income is passive income (e.g., certain dividends, interest, rents and royalties, and gain from the sale of property producing such income), or (ii) 50 per cent. or more of the average value of its assets are considered “passive assets” (generally, assets that generate passive income). For this purpose, the Company will be treated as owning its proportionate share of the assets and earning its proportionate share of the income of any other non-U.S. corporation in which it owns, directly or indirectly, stock representing more than 25% (by value) of all of the stock of such corporation. The Company’s possible status as a PFIC is based on an annual determinations that cannot be made until the close of a taxable year, involves extensive factual investigation, including ascertaining the fair market value of all of the Company’s assets on a periodic basis and the character of each item of income that the Company earns, and is subject to uncertainty in several respects. Therefore, the Company cannot assure US holders that it will not be treated as a PFIC for its current taxable year or for any future taxable year or that the IRS will not take a contrary position. If the Company were to be classified as a PFIC for any year during which a US holder held its ordinary shares or ADSs, the Company generally would continue to be treated as a PFIC for all succeeding years during which such US holder held ordinary shares or ADSs. In addition, special, possibly materially adverse, consequences would result for US holders and certain reporting requirements might apply to US holders. US holders should consult their own independent professional tax advisers regarding the potential application of the PFIC rules to their ownership and disposition of ordinary shares or ADSs.
The Company also believes, and this discussion also assumes, that the Company will be treated as a non-US corporation for US federal income tax purposes, taking into account the application of Section 7874 of the US Tax Code to the Company’s acquisition of HPE Software. For a further discussion of Section 7874 of the US Tax Code and the possibility that the Company could be treated as a US corporation for US federal income tax purposes, see the discussion entitled ‘‘U.S. Federal Income Tax Consequences Relating to Section 7874 of the Code” in the 2017 Form F-4.
Ownership of ADSs in General
For US federal income tax purposes, a US holder of Micro Focus ADSs generally will be treated as the owner of the Micro Focus ordinary shares represented by the ADSs.
The US Treasury Department has expressed concern that depositaries for American Depositary Shares, or other intermediaries between the holders of shares of an issuer and the issuer, may be taking actions that are inconsistent with the claiming of US foreign tax credits by US holders of those receipts or shares. Accordingly, the analysis regarding the availability of a US foreign tax credit for UK taxes and sourcing rules described below could be affected by future actions that may be taken by the US Treasury Department.
Dividends Paid on Ordinary Shares or ADSs
The gross amount of any cash distribution (including the amount of any tax withheld, as discussed below) paid to a US holder by Micro Focus out of its current or accumulated earnings and profits (as determined for US federal income tax purposes) is subject to US federal income taxation as a dividend. For certain non-corporate US holders, including individuals, dividends that constitute “qualified dividend income” will be taxable to such US holder at the preferential rates applicable to long-term capital gains, provided that the US holder holds the ordinary shares or ADSs on which the dividends are paid for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meets other holding period requirements. Dividends Micro Focus pays with respect to its ordinary shares or ADSs generally will be qualified dividend income if Micro Focus is eligible for benefits of the United States income tax treaty with the United Kingdom. Although Micro believes that it is currently eligible for such treaty benefits, there can be no assurance that this will be the case for any taxable year or that such position would not be challenged by the IRS or sustained by a court. Dividends received by a corporate US holder generally will not be eligible for the dividends-received deduction that is allowed to US corporations in respect of dividends received from other US corporations. However, a corporate US holder that owns 10 per cent or more of Micro Focus’s stock may, in certain circumstances, be entitled to a deduction in respect of a dividend received from Micro Focus pursuant to Section 245A of the US Tax Code.
A dividend is taxable to a US holder when the US holder receives the dividend, actually or constructively. The amount of the dividend that a US holder must include in its income will be the US dollar value of the payments made (including any withholding tax imposed thereon), determined at the spot Sterling/US dollar rate on the date the dividend is includible in the US holder’s income, regardless of whether the payment is in fact converted into US dollars at such time. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date a US holder includes the dividend payment in income to the date a US holder converts the payment into US dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. Such foreign exchange gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes.
The portion of any cash distribution received by a US holder that is in excess of Micro Focus’s current and accumulated earnings and profits, as determined for US federal income tax purposes, will be treated as a non-taxable return of capital to the extent of the US holder’s basis in the ordinary shares or ADSs on which such payment is received, and thereafter as capital gain. However, Micro Focus does not expect to calculate its earnings and profits in accordance with US federal income tax principles. Accordingly, a US holder should expect to generally treat distributions paid by Micro Focus as taxable dividends for US federal income tax purposes.
A US holder must include any foreign tax withheld from a cash distribution on its ordinary shares or ADSs in the gross amount included in income, even though the US holder does not in fact receive such withheld amount. Subject to certain limitations, UK tax withheld, if any, in accordance with the United Kingdom-United States Income Tax Convention (1975), as amended (the “Treaty”), and paid over to the United Kingdom will be deductible or creditable against a US holder’s US federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the preferential tax rates. To the extent a refund of the tax withheld is available to a US holder under UK law or under the Treaty, the amount of tax withheld that is refundable will not be eligible for credit against a US holder’s US federal income tax liability.
Dividends paid by Micro Focus on its ordinary shares or ADSs generally will be income from sources outside the United States and will, depending on a US holder’s circumstances, be either “passive” or “general” income for purposes of computing the foreign tax credit allowable to the US holder. The rules governing the foreign tax credit are complex and involve the application of rules that depend upon a US holder’s particular circumstances. Accordingly, US holders are urged to consult their own tax advisors regarding the availability of the foreign tax credit under their particular circumstances.
Sale or Disposition of Ordinary Shares or ADSs
If a US holder sells or otherwise disposes of its ordinary shares or ADSs in a taxable sale or other disposition, such US holder will generally recognize capital gain or loss for US federal income tax purposes equal to the difference between the US dollar value of the amount that the US holder realizes in such disposition and the US holder’s tax basis, determined in US dollars, in the US holder’s Micro Focus ordinary shares or ADSs. Capital gain of certain non-corporate US holders, including individuals, is generally taxed at preferential rates where the property disposed of is held for more than one year. Gain or loss recognized by a US holder on the sale or other disposition of ordinary shares or ADSs will generally be income or loss from sources within the United States for foreign tax credit limitation purposes. The deductibility of a capital loss may be subject to limitations under the US Tax Code.
Information with Respect to Foreign Financial Assets
US holders that are owners of “specified foreign financial assets” with an aggregate value in excess of $50,000 (and in some circumstances, a higher threshold) may be required to file an information report with respect to such assets with their tax returns and may be subject to penalties if they fail to file such information report. “Specified foreign financial assets” include financial accounts maintained by foreign financial institutions, as well as the following, but only if they are held for investment and not held in accounts maintained by financial institutions: (i) stocks and securities issued by non-U.S. persons, (ii) financial instruments and contracts that have non-U.S. issuers or counterparties, and (iii) interests in foreign entities. US holders are urged to consult their own tax advisors regarding the application of this reporting requirement to their ownership of ordinary shares or ADSs.
Backup Withholding and Information Reporting
In general, dividend payments with respect to ordinary shares and ADSs and proceeds from the sale or other disposition of ordinary shares or ADSs made (or deemed made) within the United States may be subject to information reporting to the IRS and US backup withholding currently at a rate of 24 per cent. Backup withholding will generally not apply to a US holder who:
• Furnishes a correct taxpayer identification number and certifies, under penalties of perjury, that such US holder is not subject to backup withholding on an IRS Form W-9, and otherwise complies with applicable requirements of the backup withholding rules; or
• Is a corporation or otherwise exempt from backup withholding and, when required, demonstrates this fact in accordance with applicable Treasury regulations.
Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may be allowed as a credit against a holder’s US federal income tax liability and may entitle the holder to a refund, provided the holder timely furnishes the required information to the IRS.
US holders should consult their own independent professional tax adviser regarding the application of the information reporting and backup withholding rules.
Credits or deductions for UK taxes
As indicated under ‘Material UK Tax Consequences’ below, distributions in respect of, and gains on the disposition of, ordinary shares or ADSs, may be subject to UK taxation in certain circumstances. A US holder may be eligible to claim a credit or deduction in respect of UK taxes attributable to such income or gain for purposes of computing the US holder’s US federal income tax liability, subject to certain limitations. The US foreign tax credit rules are complex, and US holders should consult their own tax advisors regarding the availability of US foreign tax credits and the application of the US foreign tax credit rules to their particular situation.
The summary set forth above is included for general information only. US holders are urged to consult their own tax advisors to determine the particular tax consequences to them of the ownership and disposition of ordinary shares and ADSs, including the applicability and effect of U.S. state, local and non-U.S. tax laws.
Material UK Tax Consequences of Owning and Disposing of Micro Focus Ordinary Shares or ADSs
The following paragraphs set out below summarize material aspects of the UK tax treatment of US holders of ordinary shares or ADSs and do not purport to be either a complete analysis of all tax considerations relating to holding ordinary shares or ADSs or an analysis of the tax position of Micro Focus. They are based on current UK legislation and what is understood to be current HM Revenue & Customs practice, both of which are subject to change, possibly with retrospective effect.
The comments are intended as a general guide and (otherwise than where expressly stated to the contrary) apply only to US holders of ordinary shares or ADSs (other than under a personal equity plan or individual savings account) and who are the absolute beneficial owners of such shares.
These comments do not deal with certain types of shareholders such as charities, dealers in securities, persons holding or acquiring shares in the course of a trade, persons who have or could be treated for tax purposes as having acquired their ordinary shares or ADSs by reason of their employment, collective investment schemes, persons subject to UK tax on the remittance basis and insurance companies. You are encouraged to consult an appropriate independent professional tax advisor with respect to your tax position.
Tax on chargeable gains as a result of disposals of ordinary shares or ADSs
Subject to the below, US holders will not generally be subject to UK tax on chargeable gains on a disposal of ordinary shares or ADSs provided that they do not carry on a trade, profession or vocation in the United Kingdom through a branch, agency or permanent establishment in connection with which the ordinary shares or ADSs are held.
A US holder who is an individual, who has ceased to be resident for tax purposes in the United Kingdom for a period of less than five years and who disposes of ordinary shares or ADSs during that period may be liable for UK tax on capital gains (in the absence of any available exemptions or reliefs). If applicable, the tax charge will arise in the tax year that the individual returns to the United Kingdom.
Tax on dividends
Micro Focus is not required to withhold UK tax at source from dividends paid on ordinary shares or ADSs.
US holders will not generally be subject to UK tax on dividends received from Micro Focus provided that they do not carry on a trade, profession or vocation in the United Kingdom through a branch, agency or permanent establishment in connection with which the ordinary shares or ADSs are held.
Stamp duty and stamp duty reserve tax, referred to as SDRT
Based on current published HM Revenue & Customs practice and recent case law, transfers of ADSs should not be subject to SDRT or stamp duty provided that any instrument of transfer is executed and remains outside the UK and the transfer of an underlying ordinary share to the ADS holder in exchange for the cancellation of an ADS should also not give rise to a stamp duty or SDRT charge.
Transfers of ordinary shares outside of the depositary bank, including the repurchase of ordinary shares by Micro Focus, will generally be subject to stamp duty or SDRT at the rate of 0.5% of the amount or value of the consideration given, except as described above in connection with the cancellation of an ADS. If ordinary shares are redeposited into a clearance service or depositary system, the redeposit will attract stamp duty or SDRT at the higher rate of 1.5%.
The purchaser or the transferee of the ordinary shares or ADSs will generally be responsible for paying any stamp duty or SDRT payable. Where stamp duty or SDRT is payable, it is payable regardless of the residence position of the purchaser.
Inheritance tax
A gift or settlement of ordinary shares or ADSs by, or on the death of, an individual shareholder may give rise to a liability to UK inheritance tax even if the shareholder is not a resident of or domiciled in the United Kingdom.
A charge to inheritance tax may arise in certain circumstances where ordinary shares or ADSs are held by close companies and trustees of settlements.
However, pursuant to the Estate and Gift Tax Treaty 1980, referred to as the Treaty, entered into between the United Kingdom and the United States, a gift or settlement of ordinary shares or ADSs by shareholders who are domiciled in the United States for the purposes of the Treaty may be exempt from any liability to UK inheritance tax.
Not applicable.
Not applicable.
Copies of our Memorandum and Articles of Association are filed as exhibits to this Annual Report and certain other documents referred to in this Annual Report on Form 20-F are available for inspection at our registered office at The Lawn, 22-30 Old Bath Road, Newbury, Berkshire, RG14 1QN, United Kingdom (c/o the Company Secretary) during usual business hours upon reasonable prior request.
Not applicable.
Quantitative and Qualitative Disclosures about Market Risk Financial risk factors
Micro Focus Group’s multi-national operations expose it to a variety of financial risks that include the effects of changes in credit risk, foreign currency risk, interest rate risk and liquidity risk. Risk management is carried out by a central treasury department under policies approved by the board of directors. Group treasury identifies and evaluates financial risks alongside the Group’s operating units. The board provides written principles for risk management together with specific policies covering areas such as foreign currency risk, interest rate risk, credit risk and liquidity risk, use of derivative financial instruments and non-derivative financial instruments as appropriate, and investment of excess funds.
The table below sets out the values of financial assets and liabilities.
Financial October 31, 2019 | Non- financial October 31, 2019 | Total October 31, 2019 | Financial October 31, 2018 | Non- financial October 31, 2018 | Total October 31, 2018 | |||||||||||||||||||
| $m | $m | $m | $m | $m | $m | |||||||||||||||||||
| Financial and non-financial assets | ||||||||||||||||||||||||
| Non-current | ||||||||||||||||||||||||
| Long-term pension assets | 17.1 | - | 17.1 | 16.7 | - | 16.7 | ||||||||||||||||||
| Derivative financial instruments – Interest rate swaps | - | - | - | - | 86.4 | 86.4 | ||||||||||||||||||
| Current | ||||||||||||||||||||||||
| Cash and cash equivalents | 355.7 | - | 355.7 | 620.9 | - | 620.9 | ||||||||||||||||||
| Trade and other receivables | 922.7 | 110.2 | 1,032.9 | 1,212.0 | 60.0 | 1,272.0 | ||||||||||||||||||
| 1,295.5 | 110.2 | 1,405.7 | 1,849.6 | 146.4 | 1,996.0 | |||||||||||||||||||
Financial October 31, 2019 | Non- financial October 31, 2019 | Total October 31, 2019 | Financial October 31, 2018 | Non- financial October 31, 2018 | Total October 31, 2018 | |||||||||||||||||||
| $m | $m | $m | $m | $m | $m | |||||||||||||||||||
| Financial and non-financial liabilities – financial liabilities at amortised cost | ||||||||||||||||||||||||
| Non-current | ||||||||||||||||||||||||
| Derivative financial instruments – interest rate swaps | 36.5 | - | 36.5 | - | - | - | ||||||||||||||||||
| Borrowings (gross) | 4,775.0 | - | 4,775.0 | 4,946.6 | - | 4,946.6 | ||||||||||||||||||
| Finance leases | 11.7 | - | 11.7 | 14.9 | - | 14.9 | ||||||||||||||||||
| Provisions | 49.1 | - | 49.1 | 35.4 | - | 35.4 | ||||||||||||||||||
| Current | ||||||||||||||||||||||||
| Borrowings (gross) | - | - | - | 50.3 | - | 50.3 | ||||||||||||||||||
| Finance leases | 11.8 | - | 11.8 | 13.6 | - | 13.6 | ||||||||||||||||||
| Trade and other payables | 530.3 | 80.7 | 611.0 | 676.9 | - | 676.9 | ||||||||||||||||||
| Provisions | 29.3 | - | 29.3 | 57.4 | - | 57.4 | ||||||||||||||||||
| 5,443.7 | 80.7 | 5,524.4 | 5,795.1 | - | 5,795.1 | |||||||||||||||||||
Fair value measurement
For trade and other receivables, cash and cash equivalents, trade and other payables, obligations under finance leases and provisions, fair values approximate to book values due to the short maturity periods of these financial instruments. For trade and other receivables, allowances are made for credit risk.
Long term borrowings with a carrying value of $4,775.0m before unamortized prepaid facility fees, have a fair value estimate of $4,686.0m based on trading prices as at October 31, 2019.
Derivative financial instruments measured at fair value are classified as level 2 in the fair value measurement hierarchy as they have been determined using significant inputs based on observable market data. The fair values of interest rate derivatives are derived from forward interest rates based on yield curves observable at the balance sheet date together with the contractual interest rates.
There were no transfers of assets or liabilities between levels of the fair value hierarchy during the period.
The Group has four interest rate swaps which are designated in a hedge relationship and also utilized forward exchange contracts to fix Sterling equivalent on the April 2019 Return of Value to shareholders and the April 2019 and September 2019 dividend payments. The forward contracts were not designated for formal hedge accounting and matured for delivery within the reporting period.
| October 31, 2019 | October 31, 2018 | |||||||
| $m | $m | |||||||
| Derivative financial instruments- non-current asset – interest rate swaps | - | 86.4 | ||||||
| Derivative financial instruments- non-current liabilities – interest rate swaps | (36.5 | ) | - | |||||
| (36.5 | ) | 86.4 | ||||||
Derivative financial instruments
Derivatives are only used for economic hedging purposes and not as speculative investments. Four interest rate swaps are in place with a total notional value of $2.25bn to hedge against the impact of potential rises in interest rates until September 30, 2022. The swaps are designated against the $2,486.3m loan issued by Seattle SpinCo. Inc. and the notional value covers 52.7% of the overall dollar loan principal outstanding for the Group. Details of the Group’s borrowings including maturities and interest rates are included in Item 10.C.
The swap contracts require settlement of net interest receivable or payable on a monthly basis. The fixed interest rate for each swap is 1.949 % and the Group receives a variable rate in line with LIBOR. The Seattle loan is priced at LIBOR (with a floor) plus a current margin of 2.50% with the swaps aimed at addressing the risk of a rising LIBOR element. As such, the total interest cost of the hedged element of the Seattle loan is 4.44%. For the period to October 31, 2019, net interest received for the swaps amounted to $9.9m. For the life of the swap, net interest received amounted to $6.5m.
Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic effectiveness assessments (adjusted for credit risk) to ensure that an economic relationship exists between the hedged item and the hedging instrument. The testing determined that the hedge was highly effective throughout the financial reporting period for which the hedge was designated.
The impact of changes in the fair value of interest rate swaps in the year ended October 31, 2019 is shown in the Consolidated statement of comprehensive income. Note 31 of the “notes to the consolidated financial statements” in Item 18 shows the derivative financial instruments relating to hedging transactions entered into in the period ended 31 October 2019 (other reserves).
| October 31, 2019 | October 31, 2018 | |||||||
| $m | $m | |||||||
| Carrying amount | (36.5 | ) | 86.4 | |||||
| Notional amount (4 x $562.5m) | 2,250.0 | 2,250.0 | ||||||
| Maturity date | September 30, 2022 | September 30, 2022 | ||||||
| Change in fair value of outstanding hedging instruments (note 31) | (122.9 | ) | 86.4 | |||||
| Change in value of hedging instruments adjusted for credit risk | (121.9 | ) | 84.7 | |||||
Credit risk
Financial instruments which potentially expose the Group to a concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash equivalents are deposited with high-credit quality financial institutions. The Group provides credit to customers in the normal course of business. Collateral is not required for those receivables, but on-going credit evaluations of customers’ financial conditions are performed. The Group maintains a provision for impairment based upon the expected credit losses. The Group sells products and services to a wide range of customers around the world and therefore believes there is no material concentration of credit risk.
The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at October 31, 2019 was:
| October 31, 2019 | October 31, 2018 | |||||||
| $m | $m | |||||||
| Trade receivables (gross) | 877.9 | 1,089.6 | ||||||
| Cash and cash equivalents | 355.7 | 620.9 | ||||||
| Total | 1,233.6 | 1,710.5 | ||||||
The Group applies the IFRS 9 expedited approach to measuring expected credit losses, which uses a lifetime expected credit loss allowance for all trade receivables.
A provision of the lifetime expected credit loss is established upon initial recognition of the underlying asset by predicting the future cash flows based upon the days past due status of an invoice and other relevant information. The model uses historical collection data along with historical credit losses experienced. The loss allowance is adjusted for forward-looking factors specific to the receivable and the economic environment.
Trade receivables are written off when there is no reasonable expectation of recovery. Impairment losses on trade receivables are presented as net impairment losses within operating profit. Subsequent recoveries of amounts previously written off are credited against the same line item.
On that basis, the loss allowance as at October 31, 2019 and November 31, 2018 (on adoption of IFRS 9) was determined as follows for trade receivables (note 16) of the “notes to the consolidated financial statements” in Item 18:
October 31, 2019 | October 31, 2018 | |||||||
| $’m | $’m | |||||||
| At November, 1 / May, 1 – calculated under IAS 39 | 41.9 | 2.6 | ||||||
| Accounting policy change – IFRS 9 (recognised against retained earnings on November 1, 2018) | 20.0 | - | ||||||
| 61.9 | 2.6 | |||||||
| Loss allowance provided in the period | 16.0 | 40.0 | ||||||
| Receivables written off as uncollectable | (35.5 | ) | (0.7 | ) | ||||
| At October ,31 | 42.4 | 41.9 | ||||||
In the prior period, the impairment of trade receivables was assessed based on the incurred loss model. Individual receivables, which were known to be uncollectable were written off by reducing the carrying amount directly. The other receivables were assessed collectively to determine whether there was objective evidence that an impairment had been incurred but not yet been identified. Receivables for which an impairment provision was recognised were written off against the provision when there was no expectation of recovering additional cash.
Market risk
The Group’s treasury function aims to reduce exposures to interest rate, foreign exchange and other financial risks, to ensure liquidity is available as and when required, and to invest cash assets safely and profitably. The Group does not engage in speculative trading in financial instruments. The treasury function’s policies and procedures are reviewed and monitored by the audit committee and are subject to internal audit review.
Foreign exchange risk
The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the Euro, UK Pound Sterling, Israeli Shekel, Japanese Yen and the Canadian Dollar. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign operations. Foreign exchange risk arises when future commercial transactions, recognised assets and liabilities are denominated in a currency that is not the entity’s functional currency.
There were no foreign currency hedging transactions in place at October 31, 2019. The Group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk.
The Group’s currency exposures comprise those that give rise to net currency gains and losses to be recognised in the Consolidated statement of comprehensive income as well as gains and losses on consolidation, which go to reserves. Such exposures reflect the monetary assets and liabilities of the Group that are not denominated in the operating or functional currency of the operating unit involved and the Group’s investment in net assets in currencies other than US dollar.
Note 3 of the “notes to the consolidated financial statements “ in Item 18 shows the impact on the Consolidated statement of comprehensive income of foreign exchange losses in the 12 months ended 31 October 2019 of $11.3m (18 months ended 31 October 2018: $37.4m gain).
Sensitivity analysis
The Group’s principal exposures in relation to market risks are the changes in the exchange rates between the US Dollar and transactions made in other currencies as well as changes in US Dollar LIBOR interest rates. Foreign exchange exposures for all re-measuring balances are tracked and reported to management.
The key drivers are cash, borrowings and inter-company positions with trade receivables and trade payables having less relative aggregate exposure. As at October 31, 2019, the key aggregate exposures involved the Euro, British Sterling, Japanese Yen, Israeli Shekel and Canadian Dollar. The table below illustrates the equity sensitivity analysis of the Group exposures to movements in currency and interest rates.
Group exposure | +/- 5 | % | +/- 10 | % | +/- 1% interest | |||||||||||
| Key aggregate currency exposures | $m | $m | $m | $m | ||||||||||||
| Euro | 512.6 | 25.6 | 51.2 | |||||||||||||
| GBP | 137.2 | 6.8 | 13.7 | |||||||||||||
| JPY | 69.6 | 3.5 | 6.9 | |||||||||||||
| ILS | 36.7 | 1.8 | 3.7 | |||||||||||||
| CAN$ | 26.1 | 1.3 | 2.6 | |||||||||||||
Borrowings -Interest rate LIBOR +1% (based on gross debt excluding the effects of hedging) | n/a | n/a | n/a | 47.75 | ||||||||||||
Capital risk management
The Group’s objective when managing its capital structures is to minimize the cost of capital while maintaining adequate capital to protect against volatility in earnings and net asset values. The strategy is designed to maximize shareholder return over the long-term.
The only financial covenant attaching to these facilities relates to the Revolving Facility, which is subject to an aggregate net leverage covenant only in circumstances where more than 35% of the Revolving Facility is outstanding at a fiscal quarter end. The facility was not utilized as at October 31, 2019 and therefore no covenant test is applicable.
The capital structure of the Group at the consolidated statement of financial position date is as follows:
October 31, 2019 | October 31, 2018 | |||||||
| $m | $m | |||||||
| Bank and other borrowings (net of arrangement fees) | 4,670.7 | 4,845.9 | ||||||
| Finance lease obligations | 23.5 | 28.5 | ||||||
| Less cash and cash equivalents | (355.7 | ) | (620.9 | ) | ||||
| Total net debt | 4,338.5 | 4,253.5 | ||||||
| Total equity | 6,276.3 | 7,792.0 | ||||||
| Debt/equity % | 69.1 | % | 54.6 | % | ||||
Borrowings are shown here net of unamortized prepaid facility arrangement fees of $104.3m (October 31, 2018: $151.0m). Gross borrowings are $4,775.0m (October 31, 2018: $4,996.9m).
Change in liabilities arising from financing activities for interest bearing loans and finance leases were as follows:
Interest bearing loans | Finance Leases | Total | ||||||||||
| $m | $m | $m | ||||||||||
At November 1, 2018 | 4,996.9 | 28.5 | 5,025.4 | |||||||||
Draw down/New leases | - | 9.0 | 9.0 | |||||||||
Repayments | (212.6 | ) | (14.9 | ) | (227.5 | ) | ||||||
Foreign exchange | (9.3 | ) | 0.6 | (8.7 | ) | |||||||
At October 31, 2019 | 4,775.0 | 23.5 | 4,798.2 | |||||||||
Not applicable
Not applicable
Not applicable.
Fees and charges payable by ADS holders
Deutsche Bank Trust Company Americas (Deutsche Bank) was appointed as the depositary bank (the Depositary) for Micro Focus’s ADS program pursuant to the Deposit Agreement dated August 11, 2017 between Micro Focus, the Depositary and the owners and holders of ADSs (the Deposit Agreement).
The Deposit Agreement provides that ADS holders may be required to pay various fees to the Depositary, and the Depositary may refuse to provide any service for which a fee is assessed until the applicable fee has been paid.
| Service | Fees | |
| Issuance of ADSs including issuance from a distribution of shares and distribution of ADSs pursuant to bonus distributions, stock splits or other distributions. | $5.00 (or less) per 100 ADSs (or portion of 100 ADSs). | |
| Distribution of cash dividends. | $5.00 (or less) per 100 ADSs (or portion of 100 ADSs). The current per ADS fee to be charged for an interim or final dividend is $0.02 per ADS. | |
| An annual fee for operation and maintenance of administering the ADSs. This fee is not currently charged. | $5.00 (or less) per 100 ADSs (or portion of 100 ADSs). | |
| Transfer and registration of shares on share register to or from the name of the depositary or its agent when you deposit or withdraw shares | Registration or transfer fees |
In addition, ADS holders may be required under the Deposit Agreement to pay the Depositary: (a) taxes (including applicable interest and penalties) and other governmental charges; (b) registration fees; (c) certain cable, telex and facsimile transmission and delivery expenses; (d) the expenses and charges incurred by the Depositary in the conversion of foreign currency; (e) such fees and expenses as are incurred by the Depositary in connection with compliance with applicable exchange control regulations and other regulatory requirements; and (f) the fees and expenses incurred by the Depositary, the custodian or any nominee in connection with the servicing or delivery of deposited securities. The Depositary may: (a) withhold dividends or other distributions or sell for the account of any ADS holder any or all of the shares underlying the ADSs in order to satisfy any tax or governmental charge; and (b) deduct from any cash distribution the applicable fees and charges of, and expenses incurred by, the Depositary and any taxes, duties or other governmental charges on account.
Fees and payments made by the Depositary to Micro Focus
Under the terms of the contractual arrangements set out in the separate agreement between Micro Focus and the Depositary referred to above, Micro Focus received a total of approximately US$6.6 million from the Depositary, comprising fees charged in respect of dividends and issuance and cancellation of ADSs during the year ended October 31, 2019.
Not applicable.
Not applicable.
Disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”)) are designed to provide reasonable assurance that the information required to be (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures.
Based on their most recent evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of October 31, 2019, the Company’s disclosure controls and procedures were not effective as a result of the material weakness in our internal control over financial reporting described below. Notwithstanding the material weakness described below, our management, including our Chief Executive Officer and Chief Financial Officer, believes that the audited consolidated financial statements contained in this Annual Report on Form 20-F, fairly present, in all material respects, our financial condition, results of operations and cash flows for the fiscal years presented in conformity with IFRS. In addition, the material weakness described below did not result in a misstatement to the financial statements.
Please see Exhibits 12.1 and 12.2 for the certifications required by this Item.
As a foreign issuer with American Depositary Shares listed on the New York Stock Exchange (“NYSE”) the Group, as part of its disclosure and reporting obligations in the United States, is required to furnish this annual report by its management on its internal controls over financial reporting, including an attestation report issued by its independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”) as at October 31, 2019.
Management is responsible for establishing and maintaining adequate internal controls over financial reporting for the Group. Internal control over financial reporting is defined in Rules13a-15(f) and 15d-15(f) promulgated under the Exchange Act. The Group’s internal controls over financial reporting include policies and procedures which:
| - | are designed to give reasonable assurance that the transactions are recorded as necessary to permit the preparation of financial statements in accordance with IFRS as adopted by the EU and IFRS as issued by the IASB, and that receipts and expenditures are being made only in accordance with authorization of management and the Directors; |
| - | relate to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and disposal of assets; and |
| - | give reasonable assurance regarding the prevention or timely detection of unauthorized use, acquisition or disposal of the Group’s assets that could have a material impact on the financial statements. |
Any internal control network will have inherent limitations, such that the possibility of human error and circumvention or overriding of controls, and procedures may not prevent or detect misstatements. In addition, the projection of any controls to future periods are subject to the risk that controls may become inadequate due to changes in conditions or because the degree of compliance with policies and procedures may deteriorate.
Management assessed the effectiveness of internal controls over financial reporting as at October 31, 2019 based on the Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013. Based on the assessment, management concluded that its internal control over financial reporting was not effective due to the following material weakness. The Company did not have adequate controls surrounding existing IT applications, in particular regarding change management and access controls. As a result of those deficiencies, automated controls and controls over information produced by the entity could not be relied upon. These deficiencies in aggregate constitute a material weakness. This material weakness did not result in misstatement to the financial statements.
Our consolidated financial statements have been audited by KPMG LLP, an independent registered public accounting firm, which has issued an attestation report on the Company’s internal control over financial reporting as at October 31, 2019 in this Annual Report on Form 20-F.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Micro Focus International plc:
Opinion on Internal Control Over Financial Reporting
We have audited Micro Focus International plc and subsidiaries (the Company) internal control over financial reporting as of October 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weakness, described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of October 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of October 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the twelve month period ended October 31, 2019 and eighteen month period ended October 31, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated February 20, 2020 expressed an unqualified opinion on those consolidated financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness related to deficient controls surrounding IT Applications in the areas of change management and access controls has been identified and included in management’s assessment. As a result of those deficiencies, automated controls and controls over information produced by the entity could not be relied upon. The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 consolidated financial statements, and this report does not affect our report on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Controls over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
London, United Kingdom
February 20, 2020
In the period, the Group continued to implement a framework of SOX compliant internal controls under its SOX Implementation Programme (SIP), together with a specialist team from its outsourced Internal Audit Partner. Governance for the SIP included a cross functional SOX Steering Group (“SSG”) chaired by the Group’s Chief Financial Officer reporting to the Audit Committee. In addition, the Disclosure Committee, also chaired by the Chief Financial Officer, continued to meet to assist the Chief Executive Officer and Chief Financial Officer in fulfilling their responsibilities in connection with the accuracy of financial reporting. The Group strengthened internal compliance by putting in place new Finance Compliance and Revenue Assurance teams. In addition, the Finance function established a Finance Processes and Compliance Committee. The SIP was implemented during a period of significant change across the organization. Change activities include a phased Finance Transformation Programme and work on the new simplified system architecture as set out in Item 4.B. Business Overview. As part of the governance, the SSG monitors potential adverse impacts of organizational change to the SIP.
The SIP included end-to-end process mapping, walkthroughs, Test of Design and Test of Effectiveness across the Group’s main processes, Hire to Retire, Quote to Cash, Procurement to Pay and Record to Report, as well as IT General Controls (ITGC), leading to the development of documented controls for each process. A Global Process Owner owns each process and its associated controls. In the period, the Group has also reviewed its Entity Level Controls and continued with the implementation of a SOX training plan across relevant parts of the Group. A key work stream of the SIP related to the adequacy of ITGCs. The challenges with the IT systems, including controls acquired with the HPE Software business, were disclosed in our Annual Report and Accounts 2018 and the 2018 Form 20-F. Consequently, the business remained on its legacy IT systems, necessitating business process controls and ITGCs across both systems with the attendant complexity to the control environment. The work undertaken as part of the SIP identified a number of areas for improvement in the Group’s ITGCs. A remediation plan was agreed, which formed part of the SIP. Work in this area was carried out under an IT SOX Compliance Group chaired by the Chief Information Security Officer reporting to the main SSG.
In the Annual Report and Accounts 2018 and the 2018 Form 20-F the Group reported certain weaknesses in its internal control over financial reporting, which under Public Company Accounting Oversight Board auditing standards were considered to be material weaknesses. The material weaknesses related to the fact that the Group did not have sufficient formally documented and implemented processes and review procedures, nor did it have sufficient formality and evidence of controls over key reports and spreadsheets. During the year, under the SIP, management, where possible, put in place a number of actions to remediate these weaknesses and strengthen internal controls. The actions included, but were not limited to, implementing new controls both preventative and detective in nature, increasing the precision with which controls operate, ensuring clear ownership of every control, and implementing checks on the completeness and accuracy of reports that are relied upon as part of key control operation. Within the IT environment, and where technical limitations allowed, improvements included updated change management controls as well as increased access control and monitoring to IT applications.
Remediation
The Group continues its work under the SIP to remediate the material weakness and other control deficiencies, and any other matters, which arise during its progress towards SOX compliance. As set out in Item 4.B. Business Overview, the Group has a project underway to move to a simplified systems architecture enabling further automation of improved processes and controls. To maintain the required control environment the Group relies upon automated, semi- automated and manual controls together with a combination of preventative and detective controls. The material weakness, control deficiencies and other matters may not be able to be remediated by October 31, 2020, and there is a risk that other deficiencies for the purposes of SOX may be identified. Failure to correct the material weakness, or our failure to discover and address any other material weakness or control deficiencies, could result in inaccuracies in our financial statements, and impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. It could also result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of the Group’s financial statements, and could have a material adverse effect on the Group’s business, financial condition, results of operation and prospects.
The Audit Committee includes Richard Atkins who, in the opinion of the Board, is an ‘audit committee financial expert’ and is independent (as defined for this purpose in 17 CFR 240.10A-3). The board considered that the Committee’s members have broad commercial knowledge and extensive business leadership experience, having held between them various roles in major business, financial management, and finance function supervision and that this constitutes a broad suitable mix of business and financial experience on the committee.
Micro Focus has adopted a code of ethics (the Micro Focus Code of Conduct) which applies to all employees including the chief executive officer and chief financial officer and other senior financial management. This code of ethics is available on our website (https://www.microfocus.com/media/guide/micro_focus_code_of_conduct_guide.pdf). The information on our website is not incorporated by reference into this report.
The Audit Committee approves all non-audit work commissioned from the external auditors.
During the 12 months ended October 31, 2019, the 18 months ended October 31, 2018, the 12 months ended April 30, 2017, the Group obtained the following services from the Group’s auditors as detailed below:
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 2017 | ||||||||||
| $m | $m | $m | ||||||||||
Audit fees | 19.7 | 15.1 | 6.1 | |||||||||
Audit-related fees | 0.6 | 0.1 | 0.1 | |||||||||
Tax fees | 0.1 | 0.4 | 0.1 | |||||||||
All other fees | - | 0.6 | 7.5 | |||||||||
| Total | 20.4 | 16.2 | 13.8 | |||||||||
The 12 months ended October 31, 2019 and the 18 months ended October 31, 2018 fees represent fees paid to KPMG LLP, as the current auditor. Fees for the year ended April 30, 2017 represent amounts paid to the previous auditor, PricewaterhouseCoopers LLP.
There were no other fees in the 12 months ended October 31, 2019. Other fees in the 18 months ended October 31, 2018 relate primarily to the auditor’s assurance work in relation to the SUSE divestiture and license verification compliance work. Other fees in the 12 months ended April 30, 2017 relate primarily to the auditor’s work as reporting accountants and due diligence in respect of the acquisition of the HPE Software business.
Independence and objectivity of the external auditors
The committee is responsible for safeguarding the independence and objectivity of the external auditors and has developed a robust policy designed to ensure that this is not compromised. As explained above, the committee manages the risks that the external auditors undertake inappropriate non- audit work, or earn material levels of fees for non-audit services. It also considers the standing and experience of the external audit partner and takes comfort from the fact that KPMG took office relatively recently and from the external auditors’ confirmation that they have complied with relevant UK and US independence standards.
The committee is satisfied that the independence and objectivity of the external auditors has been maintained throughout the year ended 31 October 2019 and to the date of this report.
Not applicable.
On August 29, 2018, the Company announced the start of a share buy-back program for an initial tranche of up to $200m, which was extended on November 5, 2018 to a total value of $400 million (including the initial tranche). On February 14, 2019, the buy-back program was extended into a third tranche of up to $110 million up until the day before the AGM which took place on March 29, 2019 when the current buy-back authority approved by shareholders at the 2017 AGM to make market purchases of up to 65,211,171 ordinary shares expired.
On July 17, 2019, the Company announced a new share buy-back program with an initial tranche of up to $200 million. The Programme was effected in accordance with the terms of the authority granted by shareholders at the 2019 AGM and the Listing Rules. On October 3, 2019, the Company completed the $200 million share buy-back program. The total amount bought back under share buy-back programs was $710.0 million, excluding expenses.
In addition to purchasing ordinary shares on the London Stock Exchange Citi acquired ADRs representing ordinary shares listed on the New York Stock Exchange which it cancelled for the underlying shares and then sold such shares to the Company.
Shares bought back under these programs are held as treasury shares. Treasury share movements and share buy-back costs are shown below:
12 months ended 31 October 2019 | 18 months ended 31 October 2018 | Total | ||||||||||
| Treasury shares | Number | Number | Number | |||||||||
| Share buy-backs | 29,160,054 | 9,858,205 | 39,018,259 | |||||||||
| Shares issued to satisfy option awards | (4,804,817 | ) | - | (4,804,817 | ) | |||||||
| Share reorganization | (4,012,537 | ) | - | (4,012,537 | ) | |||||||
| 20,342,700 | 9,858,205 | 30,200,905 | ||||||||||
| Share buy-backs numbers: | ||||||||||||
| Ordinary shares bought on the London Stock Exchange | 25,766,919 | 8,567,659 | 34,334,578 | |||||||||
| ADRs purchased on the New York Stock Exchange | 3,393,135 | 1,290,546 | 4,683,681 | |||||||||
| 29,160,054 | 9,858,205 | 39,018,259 | ||||||||||
| Share buy-back cost: | $ | m | $ | m | $ | m | ||||||
| Share buy-back cost | 538.8 | 171.2 | 710.0 | |||||||||
| Expenses | 5.9 | 0.5 | 6.4 | |||||||||
| 544.7 | 171.7 | 716.4 | ||||||||||
The weighted average price of shares bought back in the 12 months ended October 31, 2019 was £14.61 per share (18 months ended October 31, 2018 was £13.82 per share).
(a) Total Number of Shares Purchased | (b) Average Price Paid per Share | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares ( or Units) that May Yet Be Purchased Under the Plans or Programs | |||||||||||||
| Period | Number | $ | Number | $m | ||||||||||||
| Brought forward November 1, 2018 | - | - | 9,858,205 | 29.9 | ||||||||||||
Month 1 Beginning November 1 2018; Ending November 30, 2018 | 3,578,352 | 18.19 | 13,436,557 | 164.8 | ||||||||||||
Month 2 Beginning December 1 2018; Ending December 31, 2018 | 5,169,819 | 17.93 | 18,606,376 | 72.1 | ||||||||||||
Month 3 Beginning January 1 2019; Ending January 31, 2019 | 3,072,744 | 18.45 | 21,679,120 | 15.4 | ||||||||||||
Month 4 Beginning February 1 2019; Ending February 28, 2019 | 2,501,024 | 22.34 | 24,180,144 | 69.5 | ||||||||||||
Month 5 Beginning March 1 2019; Ending March 31, 2019 | 2,761,993 | 25.08 | 26,942,137 | - | ||||||||||||
Month 6 Beginning April 1 2019; Ending April 30, 2019 | - | 26,942,137 | - | |||||||||||||
Month 7 Beginning May 1 2019; Ending May 31, 2019 | - | 26,942,137 | - | |||||||||||||
Month 8 Beginning June 1 2019; Ending June 30, 2019 | - | 26,942,137 | - | |||||||||||||
Month 9 Beginning July 1 2019; Ending July 31, 2019 | 1,638,503 | 21.22 | 28,580,640 | 165.2 | ||||||||||||
Month 10 Beginning August 1 2019; Ending August 31, 2019 | 4,149,814 | 18.88 | 32,730,454 | 86.9 | ||||||||||||
Month 11 Beginning September 1 2019; Ending September 30, 2019 | 5,983,282 | 13.87 | 38,713,736 | 3.9 | ||||||||||||
Month 10 Beginning October 1 2019; Ending October 31, 2019 | 304,523 | 14.24 | 39,018,259 | - | ||||||||||||
| Total | 29,160,054 | 18.61 | 39,018,259 | - | ||||||||||||
On April 11, 2017, Micro Focus announced that KPMG LLP (“KPMG”) had been successful in a competitive tender process to serve as its independent registered public accounting firm to audit its consolidated financial statements for the period beginning May 1, 2017. The audit tender process was led by the Audit Committee and arose because PricewaterhouseCoopers LLP (“PwC”) have a joint business arrangement with HPE Software which was expected to and has continued after the close of the business combination between Micro Focus and HPE Software. Consequently, PwC would not have been independent of Micro Focus following the close of the transaction with HPE Software and therefore could not continue to be the Company’s independent registered public accounting firm. On September 1, 2017, PwC resigned as the independent registered public accounting firm of Micro Focus. KPMG was formally appointed as the independent registered public accounting firm at the Micro Focus Annual General Meeting on September 4, 2017.
During the Micro Focus fiscal years ended April 30, 2016 and 2017, and the subsequent interim periods through September 1, 2017, there were “reportable events” as that term is used in Item 16F(a)(1)(v)(A)-(D) of Form 20-F. In relation to the fiscal year ended April 30, 2017, material weaknesses were identified that related to the fact that the Group did not have sufficient formally documented and implemented processes and review procedures, nor did it have sufficient formality and evidence of controls over key reports and spreadsheets.
Micro Focus International plc has a primary listing on the London Stock Exchange. As such, it is required to comply with the UK Corporate Governance Code (the “Code”). For the year ended October 31, 2019 this was the edition of the Code published by the UK’s Financial Reporting Council in April 2016.
The Company’s ADSs are listed on the NYSE. As a Foreign Private Issuer, we are required to comply with some, but not all, of the NYSE’s corporate governance rules, and are required to disclose any significant ways in which the UK corporate governance practices employed by the Company differ from those followed by US companies under the NYSE listing standards.
The directors are committed to ensuring that the Company operates in compliance with the main principles of the Code, as this provides a robust governance framework in support of the delivery of value to shareholders.
Compliance with the Code
UK listed companies are required to include in their Annual Report a narrative statement of (i) how they have applied the principles of the Code and (ii) whether or not they have complied with each of the provisions of the Code.
Throughout the year ended October 31, 2019 the Company has been in full compliance with the principles of the Code, and with each of its provisions, other than provision A.2.1. This single instance of non-compliance is as a result of Kevin Loosemore’s role as Executive Chairman. A separate Chief Executive Officer has been in place at all times during the financial period but the Executive Chairman still retains executive responsibility for strategy, M&A activities, investor relations and executive director development. Stephen Murdoch, as Chief Executive Officer, is responsible for the evolution and delivery of the strategy and the day-to-day operation of the business. Kevin Loosemore continues to work to ensure an orderly transition of executive responsibilities to the Chief Executive Officer.
In order to mitigate any potential concerns around the concentration of decision-making power within the role of the Executive Chairman, the senior independent non-executive director, Karen Slatford, has separate and defined responsibilities, including leading the board’s consideration of and deliberations on governance issues. In the year under review, this included overseeing the annual review of board effectiveness. As a further mitigation against any excess concentration of power, the independent non-executive directors comprise a majority of the board.
The non-executive directors have met without the Executive Chairman present to appraise the Executive Chairman’s performance. The meeting was chaired by the senior independent non-executive director, Karen Slatford. A majority of the board is made up of independent non-executive directors.
On February 14, 2020 the Executive Chairman, Kevin Loosemore, resigned from the Board of directors and on the same date Greg Lock was appointed as a non-executive director and as non-executive Chairman of the Board. The Company’s non-compliance with provision A.2.1 of the Code therefore ended on that date.
Committees of the board of directors
The Company has three principal Board committees that are broadly comparable in purpose and composition to those required by NYSE rules for domestic US companies. For instance, the Company has a Nomination (rather than nominating/corporate governance) Committee and a Remuneration (rather than compensation) Committee. The Company also has an Audit Committee, which NYSE rules require for both US companies and foreign private issuers. All the committees are comprised of Non-Executive Directors only and none of the functions of these committees has been delegated to another committee.
Each Board Committee has clearly defined terms of reference approved by the Board setting out their respective authority and duties. The terms of reference for each committee can be found on the Company’s website at www.microfocus.com.
Under the US Securities Exchange Act of 1934 and the listing standards of the NYSE, the Company is required to have an audit committee that is comprised of at least three members from the independent non-executive directors of the Company’s Board. Our Audit Committee complies, and during the year ended October 31, 2019 has complied, with these requirements. As stated in Item 16.A. above, the Board has determined that Richard Atkins possesses ‘accounting or related financial management expertise’, as required by rule 303A.07 (a) of the NYSE listing rules.
Shareholder approval of equity compensation plans
Under NYSE listing rules, shareholders must be given the opportunity to vote on all equity-compensation plans and material revisions thereto, except for employment inducement awards, certain grants, plans and amendments in the context of mergers and acquisitions, and certain specific types of plans. The Company complies with corresponding UK requirements in the Listing Rules, requiring the Company to seek shareholder approval for employee share schemes and significant changes to existing schemes, save in circumstances permitted by the Listing Rules (Listing Rule 9.4.1).
Corporate Governance Guidelines
Rule 303A.09 of the NYSE listing rules requires listed companies to adopt and disclose corporate governance guidelines. As noted above, in line with its obligations under the UK’s Listing Rules the Company applies the UK Corporate Governance Code and, as required by the Listing Rules, the Annual Report contains an explanation of (i) how it has applied the principles of the Code, and (ii) whether it complies in full with the Code’s provisions, or, where it does not, providing an explanation of any non-compliance and the reasons for this (LR 9.8.6).
In addition, the Company is required to make certain mandatory corporate governance statements in accordance with the UK Listing Authority’s Disclosure Guidance and Transparency Rules, DTR 7, which are also included in the Annual Report.
Code of Business Conduct and Ethics
The Micro Focus Code of Conduct is available on the Company’s website at www.microfocus.com.
Not applicable.
Not applicable.
The financial statements filed as part of this Annual Report on Form 20-F are included in Item 18 on pages F-1 through F-121 hereof.
The following exhibits are filed as part of this transition report:
Articles of Association of Micro Focus International plc. | |
| Description of the rights of each class of securities registered under Section 12 of the Exchange Act | |
| Credit Agreement, among Micro Focus International plc, Micro Focus Group Limited, MA FinanceCo., LLC, the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent. (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form F-4 (File No. 333-219678) filed with the Securities and Exchange Commission on August 4, 2017). | |
List of Significant Subsidiaries | |
Code of Conduct | |
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
Certification of Stephen Murdoch under Section 906 of the Sarbanes-Oxley Act of 2002 | |
Certification of Brian McArthur-Muscroft under Section 906 of the Sarbanes-Oxley Act of 2002 | |
Consent of KPMG LLP. | |
Consent of PricewaterhouseCoopers LLP. | |
Unaudited financial statements for the 12 months ended October 31, 2018 and the six months ended October 31, 2017. | |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Taxonomy Extension Schema Document |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
Signature
Six months ended October 31, 2017 | Six months ended October 31, 2016* | |||||||||||||||||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||||||||||||||
| Note | Before exceptional items | Exceptional items (note 7) | Total | Before exceptional items | Exceptional items (note 7) | Total | ||||||||||||||||||||||
| $’000 | $’000 | $’000 | $’000 | $’000 | $’000 | |||||||||||||||||||||||
| Revenue | 5,6 | 1,234,520 | - | 1,234,520 | 684,743 | - | 684,743 | |||||||||||||||||||||
| Cost of sales comprising: | ||||||||||||||||||||||||||||
| Cost of sales (excluding amortization of product development costs and acquired technology intangibles) | (195,291 | ) | (3,126 | ) | (198,417 | ) | (73,031 | ) | (1,265 | ) | (74,296 | ) | ||||||||||||||||
| - Amortization of product development costs | 14 | (12,375 | ) | - | (12,375 | ) | (12,117 | ) | - | (12,117 | ) | |||||||||||||||||
| - Amortization of acquired technology intangibles | 14 | (63,101 | ) | - | (63,101 | ) | (37,027 | ) | - | (37,027 | ) | |||||||||||||||||
| Cost of sales | (270,767 | ) | (3,126 | ) | (273,893 | ) | (122,175 | ) | (1,265 | ) | (123,440 | ) | ||||||||||||||||
| Gross profit | 963,753 | (3,126 | ) | 960,627 | 562,568 | (1,265 | ) | 561,303 | ||||||||||||||||||||
| Selling and distribution costs | (390,085 | ) | (8,553 | ) | (398,638 | ) | (216,526 | ) | (2,002 | ) | (218,528 | ) | ||||||||||||||||
| Research and development expenses comprising: | ||||||||||||||||||||||||||||
| - Expenditure incurred in the period | (183,115 | ) | (7,402 | ) | (190,517 | ) | (99,263 | ) | (2,175 | ) | (101,438 | ) | ||||||||||||||||
| - Capitalization of product development costs | 14 | 16,878 | - | 16,878 | 15,048 | - | 15,048 | |||||||||||||||||||||
| Research and development expenses | (166,237 | ) | (7,402 | ) | (173,639 | ) | (84,215 | ) | (2,175 | ) | (86,390 | ) | ||||||||||||||||
| Administrative expenses | (88,991 | ) | (79,399 | ) | (168,390 | ) | (57,493 | ) | (35,606 | ) | (93,099 | ) | ||||||||||||||||
| Operating profit | 318,440 | (98,480 | ) | 219,960 | 204,334 | (41,048 | ) | 163,286 | ||||||||||||||||||||
| Share of results of associates | 16 | (438 | ) | - | (438 | ) | (1,127 | ) | - | (1,127 | ) | |||||||||||||||||
| Finance costs | 11 | (69,161 | ) | (6,326 | ) | (75,487 | ) | (49,455 | ) | - | (49,455 | ) | ||||||||||||||||
| Finance income | 11 | 1,146 | 553 | 1,699 | 502 | - | 502 | |||||||||||||||||||||
| Net finance costs | 11 | (68,015 | ) | (5,773 | ) | (73,788 | ) | (48,953 | ) | - | (48,953 | ) | ||||||||||||||||
| Profit before tax | 249,987 | (104,253 | ) | 145,734 | 154,254 | (41,048 | ) | 113,206 | ||||||||||||||||||||
| Taxation | 12 | (64,659 | ) | 25,530 | (39,129 | ) | (28,140 | ) | 5,551 | (22,589 | ) | |||||||||||||||||
| Profit for the period | 185,328 | (78,723 | ) | 106,605 | 126,114 | (35,497 | ) | 90,617 | ||||||||||||||||||||
| Attributable to: | ||||||||||||||||||||||||||||
| Equity shareholders of the parent | 185,024 | (78,723 | ) | 106,301 | 126,135 | (35,497 | ) | 90,638 | ||||||||||||||||||||
| Non-controlling interests | 304 | - | 304 | (21 | ) | - | (21 | ) | ||||||||||||||||||||
| Profit for the period | 185,328 | (78,723 | ) | 106,605 | 126,114 | (35,497 | ) | 90,617 | ||||||||||||||||||||
Micro Focus International plc
/s/ Stephen Murdoch
Stephen Murdoch
Chief Executive Officer
Date: February 20, 2020
Consolidated statementfinancial statements and notes
| F-2 | |
| F-5 | |
| F-11 | |
| F-13 | |
| F-16 | |
| F-17 | |
| F-38 |
To the Shareholders and Board of Directors
Micro Focus International plc:
Micro Focus International plc:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial position of Micro Focus International plc and subsidiaries (the Company) as of October 31, 2019 and 2018, the related consolidated statements of comprehensive income, (unaudited)
Six months ended October 31, 2017 | Six months ended October 31, 2016* | |||||||||||||||||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||||||||||||||
| Note | Before exceptional items | Exceptional items (note 7) | Total | Before exceptional items | Exceptional items (note 7) | Total | ||||||||||||||||||||||
| $’000 | $’000 | $’000 | $’000 | $’000 | $’000 | |||||||||||||||||||||||
| Profit for the period | 185,328 | (78,723 | ) | 106,605 | 126,114 | (35,497 | ) | 90,617 | ||||||||||||||||||||
| Other comprehensive income: | ||||||||||||||||||||||||||||
| Items that will not be reclassified to profit or loss | ||||||||||||||||||||||||||||
| Actuarial gain/(loss) on pension schemes liabilities | 22 | 6,859 | - | 6,859 | (3,521 | ) | - | (3,521 | ) | |||||||||||||||||||
| Actuarial (loss)/gain on non-plan pension assets | 22 | (350 | ) | - | (350 | ) | 2,482 | - | 2,482 | |||||||||||||||||||
| Deferred tax movement | (655 | ) | - | (655 | ) | 326 | - | 326 | ||||||||||||||||||||
| Items that may be subsequently reclassified to profit or loss | ||||||||||||||||||||||||||||
| Cash flow hedge movements | 24 | 1,763 | - | 1,763 | - | - | - | |||||||||||||||||||||
| Currency translation differences | 2,742 | - | 2,742 | (5,708 | ) | - | (5,708 | ) | ||||||||||||||||||||
| Other comprehensive income/(expense) for the period | 10,359 | - | 10,359 | (6,421 | ) | - | (6,421 | ) | ||||||||||||||||||||
| Total comprehensive income for the period | 195,687 | (78,723 | ) | 116,964 | 119,693 | (35,497 | ) | 84,196 | ||||||||||||||||||||
| Attributable to: | ||||||||||||||||||||||||||||
| Equity shareholders of the parent | 195,383 | (78,723 | ) | 116,660 | 119,714 | (35,497 | ) | 84,217 | ||||||||||||||||||||
| Non-controlling interests | 304 | - | 304 | (21 | ) | - | (21 | ) | ||||||||||||||||||||
| Total comprehensive income for the period | 195,687 | (78,723 | ) | �� | 116,964 | 119,693 | (35,497 | ) | 84,196 | |||||||||||||||||||
| Earnings per share expressed in cents per share | cents | cents | ||||||||||||||||||||||||||
| - basic | 10 | 35.83 | 39.57 | |||||||||||||||||||||||||
| - diluted | 10 | 34.64 | 38.12 | |||||||||||||||||||||||||
| Earnings per share expressed in pence per share | pence | pence | ||||||||||||||||||||||||||
| - basic | 10 | 27.50 | 29.49 | |||||||||||||||||||||||||
| - diluted | 10 | 26.58 | 28.41 | |||||||||||||||||||||||||
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of October 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 20, 2020 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1, the Company changed its method of accounting for revenue from contracts with customers as of November 1, 2018 due to the adoption of IFRS 15, Revenue from Contracts with Customers.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The accompanying notescritical audit matters communicated below are an integral partmatters arising from the current period audit of these unaudited Consolidated Financial Statements.the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Identification of performance obligations in certain non-standard bundled customer contracts containing licences
As discussed in Note 2 to the consolidated financial statements, the Company’s total licence revenue recognised in the year ended October 31, 2019 was $800 million, of which a portion relates to licence revenue from certain bundled contracts with non-standard terms. Licence revenue recognition requires the Company to make judgements to identify each separate performance obligation of a contract (for example licence, maintenance, SaaS & other recurring, and consulting), when sold together in a bundle.
We determined the identification of performance obligations in certain non-standard bundled customer contracts containing licences to be a critical audit matter because subjective and complex auditor judgement was required to evaluate the Company’s identification of each performance obligation within these contracts.
The primary procedure we performed to address this critical audit matter included the following. We selected certain non-standard bundled customer contracts containing licences and performed an independent analysis of the performance obligations and compared our judgements and conclusions to those made by the Company.
Evaluation of goodwill impairment analysis
As discussed in Note 10 to the consolidated financial statements, the goodwill balance as of October 31, 2019 was $6,671.3 million, which related to the Company’s single cash generating unit (“CGU”). The Company performs goodwill impairment testing on an annual basis, or whenever events or changes in circumstances indicate possible impairment.
We identified evaluation of goodwill impairment analysis as a critical audit matter. The estimated recoverable amount of the CGU uses forward-looking estimates that involved a high degree of subjective auditor judgement to evaluate. Specifically, the key assumptions of discount rate applied and medium term annual revenue growth rate by product group were challenging to test as reasonably possible changes to those assumptions had a significant effect on the Company’s assessment of the recoverable amount of the CGU.
The primary procedures we performed to address this critical audit matter included the following:
We compared the Company’s historical revenue growth rate to actual results to assess the Company’s ability to accurately project future revenue growth.
We compared the Company’s medium term annual revenue growth rate by product group to external market data such as forecasted growth rates in corporate filings for comparable companies.
We involved a valuation professional with specialised skills and knowledge, who assisted in comparing the discount rate used in the valuation against a discount rate range that was independently developed using publicly available market data for comparable entities.
We performed sensitivity analyses over the medium term annual revenue growth by product group and discount rate assumptions to assess their impact on the Company’s determination that the recoverable amount of the CGU exceeded its carrying value.
/s/ KPMG LLP
We have served as the Company’s auditor since 2017.
London, United Kingdom
February 20, 2020
February 20, 2020
Report of Independent Registered Public Accounting Firm
To the board of directors and shareholders of Micro Focus International plc.
In our opinion, the accompanying consolidated statements of comprehensive income, of changes in equity and of cash flows for the year ended April 30, 2017, before the effects of the adjustments to retrospectively reflect discontinued operations as described in Note 37 and before the effects of the adjustments to retrospectively reflect changes in segment reporting as described in Note 1, present fairly, in all material respects, the results of operations and cash flows of Micro Focus International plc
| Note | October 31, 2017 (unaudited) $’000 | October 31, 2016 (unaudited) $’000 | ||||||||||
| Non-current assets | ||||||||||||
| Goodwill | 13 | 7,934,076 | 2,827,825 | |||||||||
| Other intangible assets | 14 | 7,199,606 | 1,186,184 | |||||||||
| Property, plant and equipment | 15 | 200,326 | 40,537 | |||||||||
| Investments in associates | 16 | 11,019 | 11,584 | |||||||||
| Derivative asset | 20 | 1,307 | - | |||||||||
| Long term pension assets | 22 | 23,650 | 24,120 | |||||||||
| Other non-current assets | 45,348 | 3,230 | ||||||||||
| Deferred tax assets | 209,992 | 208,230 | ||||||||||
| 15,625,324 | 4,301,710 | |||||||||||
| Current assets | ||||||||||||
| Inventories | 465 | 63 | ||||||||||
| Trade and other receivables | 17 | 1,251,582 | 277,958 | |||||||||
| Current tax receivables | - | 3,432 | ||||||||||
| Cash and cash equivalents | 730,372 | 122,970 | ||||||||||
| Assets classified as held for sale | - | 888 | ||||||||||
| 1,982,419 | 405,311 | |||||||||||
| Total assets | 17,607,743 | 4,707,021 | ||||||||||
| Current liabilities | ||||||||||||
| Trade and other payables | 18 | 934,749 | 151,163 | |||||||||
| Borrowings | 19 | 17,727 | 294,192 | |||||||||
| Finance leases | 14,481 | - | ||||||||||
| Provisions | 21 | 55,678 | 15,420 | |||||||||
| Current tax liabilities | 102,709 | 29,583 | ||||||||||
| Deferred income | 1,312,635 | 582,412 | ||||||||||
| 2,437,979 | 1,072,770 | |||||||||||
| Non-current liabilities | ||||||||||||
| Deferred income | 335,463 | 204,342 | ||||||||||
| Borrowings | 19 | 4,831,489 | 1,441,337 | |||||||||
| Finance leases | 18,413 | - | ||||||||||
| Retirement benefit obligations | 22 | 97,647 | 34,599 | |||||||||
| Long-term provisions | 21 | 26,666 | 11,729 | |||||||||
| Other non-current liabilities | 67,586 | 11,021 | ||||||||||
| Deferred tax liabilities | 2,166,639 | 349,464 | ||||||||||
| 7,543,903 | 2,052,492 | |||||||||||
| Total liabilities | 9,981,882 | 3,125,262 | ||||||||||
| Net assets | 7,625,861 | 1,581,759 | ||||||||||
| Capital and reserves | ||||||||||||
| Share capital | 23 | 65,590 | 39,650 | |||||||||
| Share premium account | 36,422 | 190,727 | ||||||||||
| Merger reserve | 24 | 5,780,184 | 988,104 | |||||||||
| Capital redemption reserve | 24 | 666,289 | 163,363 | |||||||||
| Hedging reserve | 1,089 | - | ||||||||||
| Retained earnings | 1,095,246 | 221,593 | ||||||||||
| Foreign currency translation deficit | (20,217 | ) | (22,714 | ) | ||||||||
| Total equity attributable to owners of the parent | 7,624,603 | 1,580,723 | ||||||||||
| Non-controlling interests | 25 | 1,258 | 1,036 | |||||||||
| Total equity | 7,625,861 | 1,581,759 | ||||||||||
Reading, United Kingdom
July 17, 2017, except for the first paragraph of these unauditedthe Note to the Consolidated Financial Statements.Statements of Cash Flows (not presented herein) appearing in the Company’s consolidated financial statements included in the Registration Statement on Form F-4 (No.333-219678) of Micro Focus International plc, as to which the date is August 3, 2017
for the 12 months ended October 31, 2019
Before exceptional items | Exceptional items (note 4) | Total | ||||||||||||||
| Continuing operations | Note | $m | $m | $m | ||||||||||||
| Revenue | 1,2 | 3,348.4 | - | 3,348.4 | ||||||||||||
| Cost of sales | (777.3 | ) | (12.6 | ) | (789.9 | ) | ||||||||||
| Gross profit | 2,571.1 | (12.6 | ) | 2,558.5 | ||||||||||||
| Selling and distribution expenses | (1,216.4 | ) | (8.4 | ) | (1,224.8 | ) | ||||||||||
| Research and development expenses | (491.7 | ) | 0.5 | (491.2 | ) | |||||||||||
| Administrative expenses | (347.1 | ) | (273.7 | ) | (620.8 | ) | ||||||||||
| Operating profit | 515.9 | (294.2 | ) | 221.7 | ||||||||||||
| Finance costs | 6 | (282.4 | ) | - | (282.4 | ) | ||||||||||
| Finance income | 6 | 26.6 | - | 26.6 | ||||||||||||
| Net finance costs | 6 | (255.8 | ) | - | (255.8 | ) | ||||||||||
| Profit/(loss) before tax | 260.1 | (294.2 | ) | (34.1 | ) | |||||||||||
| Taxation | 7 | (38.3 | ) | 54.3 | 16.0 | |||||||||||
| Profit/(loss) from continuing operations | 221.8 | (239.9 | ) | (18.1 | ) | |||||||||||
| Profit from discontinued operation (attributable to equity shareholders of the Company) | 37 | 28.7 | 1,458.5 | 1,487.2 | ||||||||||||
| Profit for the period | 250.5 | 1,218.6 | 1,469.1 | |||||||||||||
| Attributable to: | ||||||||||||||||
| Equity shareholders of the Company | 250.2 | 1,218.6 | 1,468.8 | |||||||||||||
| Non-controlling interests | 0.3 | - | 0.3 | |||||||||||||
| Profit for the period | 250.5 | 1,218.6 | 1,469.1 | |||||||||||||
The accompanying notes form part of the financial statements.
Consolidated statement of comprehensive income continued
for the 12 months ended October 31, 2019
Before exceptional items | Exceptional items (note 4) | Total | ||||||||||||||
| Continuing operations | Note | $m | $m | $ | $m | |||||||||||
| Profit for the period | 250.5 | 1,218.6 | 1,469.1 | |||||||||||||
| Other comprehensive (expense)/income: | ||||||||||||||||
| Items that will not be reclassified to profit or loss | ||||||||||||||||
| Continuing operations: | ||||||||||||||||
| Actuarial loss on pension schemes liabilities | 25 | (26.2 | ) | - | (26.2 | ) | ||||||||||
| Actuarial gain on non-plan pension assets | 25 | 0.3 | - | 0.3 | ||||||||||||
| Deferred tax movement | 13.0 | - | 13.0 | |||||||||||||
| Discontinued operation: | ||||||||||||||||
| Actuarial gain on pension schemes liabilities | 25 | 0.1 | - | 0.1 | ||||||||||||
| Actuarial gain on non-plan pension assets | 25 | 0.1 | - | 0.1 | ||||||||||||
| Deferred tax movement | - | - | - | |||||||||||||
| Currency translation differences - discontinued operation | - | (1.5 | ) | (1.5 | ) | |||||||||||
| Items that may be subsequently reclassified to profit or loss | ||||||||||||||||
| Cash flow hedge movements | 31 | (122.9 | ) | - | (122.9 | ) | ||||||||||
| Current tax movement | 31 | 23.3 | - | 23.3 | ||||||||||||
| Deferred tax movement | 14.0 | - | 14.0 | |||||||||||||
| Currency translation differences - continuing operations | 10, 11 | (206.2 | ) | - | (206.2 | ) | ||||||||||
| Other comprehensive expense for the period | (304.5 | ) | (1.5 | ) | (306.0 | ) | ||||||||||
| Total comprehensive (expense)/income for the period | (54.0 | ) | 1,217.1 | 1,163.1 | ||||||||||||
| Attributable to: | ||||||||||||||||
| Equity shareholders of the Company | (54.3 | ) | 1,217.1 | 1,162.8 | ||||||||||||
| Non-controlling interests | 0.3 | - | 0.3 | |||||||||||||
| Total comprehensive (expense)/income for the period | (54.0 | ) | 1,217.1 | 1,163.1 | ||||||||||||
| Total comprehensive income attributable to the equity shareholders of the Company arises from: | ||||||||||||||||
| Continuing operations | (82.9 | ) | (239.9 | ) | (322.8 | ) | ||||||||||
| Discontinued operations | 28.9 | 1,457.0 | 1,485.9 | |||||||||||||
| (54.0 | ) | 1,217.1 | 1,163.1 | |||||||||||||
| Earnings per share (cents) | ||||||||||||||||
| From continuing and discontinued operations | cents | |||||||||||||||
| - basic | 9 | 388.50 | ||||||||||||||
| - diluted | 9 | 384.35 | ||||||||||||||
| From continuing operations | ||||||||||||||||
| - basic | 9 | (4.87 | ) | |||||||||||||
| - diluted | 9 | (4.87 | ) | |||||||||||||
| Earnings per share (pence) | ||||||||||||||||
| From continuing and discontinued operations | pence | |||||||||||||||
| - basic | 9 | 305.07 | ||||||||||||||
| - diluted | 9 | 301.81 | ||||||||||||||
| From continuing operations | ||||||||||||||||
| - basic | 9 | (3.82 | ) | |||||||||||||
| - diluted | 9 | (3.82 | ) | |||||||||||||
The accompanying notes form part of the financial statements.
Consolidated statement of comprehensive income
for the 18 months ended October 31, 2018
Before exceptional items | Exceptional items (note 4) | Total | ||||||||||||||
| Continuing operations | Note | $m | $m | $m | ||||||||||||
| Revenue | 1,2 | 4,754.4 | - | 4,754.4 | ||||||||||||
| Cost of sales | (1,237.3 | ) | (65.4 | ) | (1,302.7 | ) | ||||||||||
| Gross profit | 3,517.1 | (65.4 | ) | 3,451.7 | ||||||||||||
| Selling and distribution costs | (1,725.0 | ) | (39.2 | ) | (1,764.2 | ) | ||||||||||
| Research and development expenses | (663.4 | ) | (17.4 | ) | (680.8 | ) | ||||||||||
| Administrative expenses | (213.7 | ) | (416.2 | ) | (629.9 | ) | ||||||||||
| Operating profit | 915.0 | (538.2 | ) | 376.8 | ||||||||||||
| Finance costs | 6 | (344.0 | ) | (6.4 | ) | (350.4 | ) | |||||||||
| Finance income | 6 | 7.1 | 0.6 | 7.7 | ||||||||||||
| Net finance costs | 6 | (336.9 | ) | (5.8 | ) | (342.7 | ) | |||||||||
| Profit/(loss) before tax | 578.1 | (544.0 | ) | 34.1 | ||||||||||||
| Taxation | 7 | (125.1 | ) | 798.2 | 673.1 | |||||||||||
| Profit from continuing operations | 453.0 | 254.2 | 707.2 | |||||||||||||
| Profit from discontinued operation (attributable to equity shareholders of the Company) | 37 | 76.9 | - | 76.9 | ||||||||||||
| Profit for the period | 529.9 | 254.2 | 784.1 | |||||||||||||
| Attributable to: | ||||||||||||||||
| Equity shareholders of the Company | 529.8 | 254.2 | 784.0 | |||||||||||||
| Non-controlling interests | 0.1 | - | 0.1 | |||||||||||||
| Profit for the period | 529.9 | 254.2 | 784.1 | |||||||||||||
The accompanying notes form part of these financial statements.
Consolidated statement of comprehensive income continued
for the 18 months ended October 31, 2018
Before exceptional items | Exceptional items (note 4) | Total | ||||||||||||||
| Note | $m | $m | $m | |||||||||||||
| Profit for the period | 529.9 | 254.2 | 784.1 | |||||||||||||
| Other comprehensive (expense)/income: | ||||||||||||||||
| Items that will not be reclassified to profit or loss | ||||||||||||||||
| Continuing operations: | ||||||||||||||||
| Actuarial loss on pension schemes liabilities | 25 | (8.9 | ) | - | (8.9 | ) | ||||||||||
| Actuarial loss on non-plan pension assets | 25 | (5.3 | ) | - | (5.3 | ) | ||||||||||
| Deferred tax movement | 3.8 | - | 3.8 | |||||||||||||
| Discontinued operation: | ||||||||||||||||
| Actuarial loss on pension schemes liabilities | 25 | (1.5 | ) | - | (1.5 | ) | ||||||||||
| Actuarial loss on non-plan pension assets | 25 | (0.5 | ) | - | (0.5 | ) | ||||||||||
| Deferred tax movement | 0.5 | - | 0.5 | |||||||||||||
| Items that may be subsequently reclassified to profit or loss | ||||||||||||||||
| Cash flow hedge movements | 31 | 86.4 | - | 86.4 | ||||||||||||
| Current tax movement | 31 | (16.4 | ) | - | (16.4 | ) | ||||||||||
| Currency translation differences - continuing operations | 10 | (29.5 | ) | - | (29.5 | ) | ||||||||||
| Currency translation differences - discontinued operation | 0.7 | - | 0.7 | |||||||||||||
| Other comprehensive income for the period | 29.3 | - | 29.3 | |||||||||||||
| Total comprehensive income for the period | 559.2 | 254.2 | 813.4 | |||||||||||||
| Attributable to: | ||||||||||||||||
| Equity shareholders of the Company | 559.1 | 254.2 | 813.3 | |||||||||||||
| Non-controlling interests | 0.1 | - | 0.1 | |||||||||||||
| Total comprehensive income for the period | 559.2 | 254.2 | 813.4 | |||||||||||||
| Total comprehensive income attributable to the equity shareholders of the Company arises from: | ||||||||||||||||
| Continuing operations | 483.1 | 254.2 | 737.3 | |||||||||||||
| Discontinued operations | 76.1 | - | 76.1 | |||||||||||||
559.2 | 254.2 | 813.4 | ||||||||||||||
| Earnings per share (cents) | ||||||||||||||||
| From continuing and discontinued operations | cents | |||||||||||||||
| - basic | 9 | 201.70 | ||||||||||||||
| - diluted | 9 | 196.17 | ||||||||||||||
| From continuing operations | ||||||||||||||||
| - basic | 9 | 181.91 | ||||||||||||||
| - diluted | 9 | 176.92 | ||||||||||||||
| Earnings per share (pence) | ||||||||||||||||
| From continuing and discontinued operations | pence | |||||||||||||||
| - basic | 9 | 151.61 | ||||||||||||||
| - diluted | 9 | 147.45 | ||||||||||||||
| From continuing operations | ||||||||||||||||
| - basic | 9 | 136.73 | ||||||||||||||
| - diluted | 9 | 132.98 | ||||||||||||||
The accompanying notes form part of these financial statements.
Consolidated statement of comprehensive income
for the 12 months ended April 30, 2017
Before exceptional items | Exceptional items (note 4) | Total | ||||||||||||||
| Continuing operations | Note | $m | $m | $m | ||||||||||||
| Revenue | 1,2 | 1,077.3 | - | 1,077.3 | ||||||||||||
| Cost of sales | (213.5 | ) | (2.9 | ) | (216.4 | ) | ||||||||||
| Gross profit | 863.8 | (2.9 | ) | 860.9 | ||||||||||||
| Selling and distribution costs | (357.7 | ) | (5.5 | ) | (363.2 | ) | ||||||||||
| Research and development expenses | (116.0 | ) | (6.8 | ) | (122.8 | ) | ||||||||||
| Administrative expenses | (65.5 | ) | (82.0 | ) | (147.5 | ) | ||||||||||
| Operating profit | 324.6 | (97.2 | ) | 227.4 | ||||||||||||
| Finance costs | 6 | (96.8 | ) | - | (96.8 | ) | ||||||||||
| Finance income | 6 | 1.0 | - | 1.0 | ||||||||||||
| Net finance costs | 6 | (95.8 | ) | - | (95.8 | ) | ||||||||||
| Profit/(loss) before tax | 228.8 | (97.2 | ) | 131.6 | ||||||||||||
| Taxation | 7 | (19.1 | ) | 11.6 | (7.5 | ) | ||||||||||
| Profit/(loss) from continuing operations | 209.7 | (85.6 | ) | 124.1 | ||||||||||||
| Profit from discontinued operation (attributable to equity shareholders of the Company) | 37 | 33.7 | - | 33.7 | ||||||||||||
| Profit/(loss) for the period | 243.4 | (85.6 | ) | 157.8 | ||||||||||||
| Attributable to: | ||||||||||||||||
| Equity shareholders of the Company | 243.5 | (85.6 | ) | 157.9 | ||||||||||||
| Non-controlling interests | (0.1 | ) | - | (0.1 | ) | |||||||||||
| Profit/(loss) for the period | 243.4 | (85.6 | ) | 157.8 | ||||||||||||
The accompanying notes form part of these financial statements.
Consolidated statement of comprehensive income continued
for the 12 months ended April 30, 2017
Before exceptional items | Exceptional items (note 4) | Total | ||||||||||||||
| Note | $m | $m | $m | |||||||||||||
| Profit for the period | 243.4 | (85.6 | ) | 157.8 | ||||||||||||
| Other comprehensive (expense)/income: | ||||||||||||||||
| Items that will not be reclassified to profit or loss | ||||||||||||||||
| Continuing operations: | ||||||||||||||||
| Actuarial loss on pension schemes liabilities | 25 | (0.2 | ) | - | (0.2 | ) | ||||||||||
| Actuarial gain on non-plan pension assets | 25 | 0.3 | - | 0.3 | ||||||||||||
| Deferred tax movement | (0.1 | ) | - | (0.1 | ) | |||||||||||
| Discontinued operation: | ||||||||||||||||
| Actuarial gain on pension schemes liabilities | 25 | 0.6 | - | 0.6 | ||||||||||||
| Actuarial loss on non-plan pension assets | 25 | (0.2 | ) | - | (0.2 | ) | ||||||||||
| Deferred tax movement | (0.2 | ) | - | (0.2 | ) | |||||||||||
| Items that may be subsequently reclassified to profit or loss | ||||||||||||||||
| Currency translation differences – continuing operations | (4.9 | ) | - | (4.9 | ) | |||||||||||
| Currency translation differences - discontinued operation | (1.0 | ) | - | (1.0 | ) | |||||||||||
| Other comprehensive expense for the period | (5.7 | ) | - | (5.7 | ) | |||||||||||
| Total comprehensive income/(expense) for the period | 237.7 | (85.6 | ) | 152.1 | ||||||||||||
| Attributable to: | ||||||||||||||||
| Equity shareholders of the Company | 237.8 | (85.6 | ) | 152.2 | ||||||||||||
| Non-controlling interests | (0.1 | ) | - | (0.1 | ) | |||||||||||
| Total comprehensive income/(expense) for the period | 237.7 | (85.6 | ) | 152.1 | ||||||||||||
| Total comprehensive income attributable to the equity shareholders of the Company arises from: | ||||||||||||||||
| Continuing operations | 204.8 | (85.6 | ) | 119.2 | ||||||||||||
| Discontinued operations | 32.9 | - | 32.9 | |||||||||||||
237.7 | (85.6 | ) | 152.1 | |||||||||||||
| Earnings per share | ||||||||||||||||
| Earnings per share (cents) | ||||||||||||||||
| From continuing and discontinued operations | cents | |||||||||||||||
| - basic | 9 | 68.88 | ||||||||||||||
| - diluted | 9 | 66.51 | ||||||||||||||
| From continuing operations | ||||||||||||||||
| - basic | 9 | 54.17 | ||||||||||||||
| - diluted | 9 | 52.31 | ||||||||||||||
| Earnings per share (pence) | ||||||||||||||||
| From continuing and discontinued operations | pence | |||||||||||||||
| - basic | 9 | 53.25 | ||||||||||||||
| - diluted | 9 | 51.42 | ||||||||||||||
| From continuing operations | ||||||||||||||||
| - basic | 9 | 41.88 | ||||||||||||||
| - diluted | 9 | 40.44 | ||||||||||||||
The accompanying notes form part of these financial statements.
| Note | October 31, 2019 $m | October 31, 2018 $m | ||||||||||
| Non-current assets | ||||||||||||
| Goodwill | 10 | 6,671.3 | 6,805.0 | |||||||||
| Other intangible assets | 11 | 5,942.3 | 6,629.3 | |||||||||
| Property, plant and equipment | 12 | 140.5 | 144.3 | |||||||||
| Derivative asset | 27 | - | 86.4 | |||||||||
| Long-term pension assets | 25 | 17.1 | 16.7 | |||||||||
| Contract-related costs | 17 | 31.5 | - | |||||||||
| Other non-current assets | 14 | 44.0 | 38.8 | |||||||||
| 12,846.7 | 13,720.5 | |||||||||||
| Current assets | ||||||||||||
| Inventories | 15 | 0.1 | 0.2 | |||||||||
| Trade and other receivables | 16 | 1,032.9 | 1,272.0 | |||||||||
| Contract-related costs | 17 | 19.3 | - | |||||||||
| Current tax receivables | 22 | 40.1 | 24.5 | |||||||||
| Cash and cash equivalents | 18 | 355.7 | 620.9 | |||||||||
| 1,448.1 | 1,917.6 | |||||||||||
| Current assets classified as held for sale | 37 | - | 1,142.5 | |||||||||
| Total current assets | 1,448.1 | 3,060.1 | ||||||||||
| Total assets | 14,294.8 | 16,780.6 | ||||||||||
| Current liabilities | ||||||||||||
| Trade and other payables | 19 | 611.0 | 676.9 | |||||||||
| Borrowings | 20 | - | 3.7 | |||||||||
| Finance leases | 21 | 11.8 | 13.6 | |||||||||
| Provisions | 24 | 29.3 | 57.4 | |||||||||
| Current tax liabilities | 22 | 104.0 | 124.1 | |||||||||
| Contract liabilities | 23 | 1,045.9 | 1,134.7 | |||||||||
| 1,802.0 | 2,010.4 | |||||||||||
| Current liabilities classified as held for sale | 37 | - | 437.7 | |||||||||
| 1,802.0 | 2,448.1 | |||||||||||
| Non-current liabilities | ||||||||||||
| Contract liabilities | 23 | 149.9 | 178.1 | |||||||||
| Borrowings | 20 | 4,670.7 | 4,842.2 | |||||||||
| Finance leases | 21 | 11.7 | 14.9 | |||||||||
| Derivative liability | 27 | 36.5 | - | |||||||||
| Retirement benefit obligations | 25 | 141.4 | 110.4 | |||||||||
| Provisions | 24 | 49.1 | 35.4 | |||||||||
| Other non-current liabilities | 26 | 50.4 | 58.0 | |||||||||
| Current tax liabilities | 22 | 119.7 | 131.0 | |||||||||
| Deferred tax liabilities | 28 | 987.1 | 1,170.5 | |||||||||
| 6,216.5 | 6,540.5 | |||||||||||
| Total liabilities | 8,018.5 | 8,988.6 | ||||||||||
| Net assets | 6,276.3 | 7,792.0 | ||||||||||
The accompanying notes form part of these financial statements.
Consolidated statements of financial position continued
| Note | October 31, 2019 $m | October 31, 2018 $m | ||||||||||
| Capital and reserves | ||||||||||||
| Share capital | 29 | 47.2 | 65.8 | |||||||||
| Share premium account | 30 | 44.0 | 41.0 | |||||||||
| Merger reserve | 31 | 1,739.8 | 3,724.4 | |||||||||
| Capital redemption reserve | 31 | 2,485.0 | 666.3 | |||||||||
| Hedging reserve | 31 | (29.6 | ) | 70.0 | ||||||||
| Retained earnings | 2,250.7 | 3,275.2 | ||||||||||
| Foreign currency translation reserve | (262.1 | ) | (51.7 | ) | ||||||||
| Total equity attributable to owners of the parent | 6,275.0 | 7,791.0 | ||||||||||
| Non-controlling interests | 32 | 1.3 | 1.0 | |||||||||
| Total equity | 6,276.3 | 7,792.0 | ||||||||||
The accompanying notes form part of the financial statements.
For the 12 months ended April 30, 2017
Share capital | Share premium account | Retained earnings | Foreign currency translation reserve | Capital redemption reserves | Hedging reserve | Merger reserve | Total equity attributable to owners of the parent | Non- controlling interests | Total equity | |||||||||||||||||||||||||||||||||||
| Note | $m | $m | $m | $m | $m | $m | $m | $m | $m | $m | ||||||||||||||||||||||||||||||||||
| Balance as at May 1, 2016 | 39.6 | 190.3 | 228.3 | (17.0 | ) | 163.4 | - | 988.1 | 1,592.7 | 1.0 | 1,593.7 | |||||||||||||||||||||||||||||||||
| Profit for the financial period | - | - | 157.9 | - | - | - | - | 157.9 | (0.1 | ) | 157.8 | |||||||||||||||||||||||||||||||||
| Other comprehensive income/(expense) for the period | - | - | 0.2 | (5.9 | ) | - | - | - | (5.7 | ) | - | (5.7 | ) | |||||||||||||||||||||||||||||||
| Total comprehensive income/(expense) for the period | - | - | 158.1 | (5.9 | ) | - | - | - | 152.2 | (0.1 | ) | 152.1 | ||||||||||||||||||||||||||||||||
| Transactions with owners: | ||||||||||||||||||||||||||||||||||||||||||||
| Dividends | 8 | - | - | (177.5 | ) | - | - | - | - | (177.5 | ) | - | (177.5 | ) | ||||||||||||||||||||||||||||||
| Treasury shares purchased | - | - | (7.7 | ) | - | - | - | - | (7.7 | ) | - | (7.7 | ) | |||||||||||||||||||||||||||||||
| Share options: | ||||||||||||||||||||||||||||||||||||||||||||
| Issue of share capital – share options | 29,30 | 0.1 | 1.8 | (0.1 | ) | - | - | - | - | 1.8 | - | 1.8 | ||||||||||||||||||||||||||||||||
| Share-based payment charge | - | - | 24.0 | - | - | - | - | 24.0 | - | 24.0 | ||||||||||||||||||||||||||||||||||
| Current tax on share options | - | - | 4.1 | - | - | - | - | 4.1 | - | 4.1 | ||||||||||||||||||||||||||||||||||
| Deferred tax on share options | - | - | 23.0 | - | - | - | - | 23.0 | - | 23.0 | ||||||||||||||||||||||||||||||||||
| Reallocation of merger reserve | 31 | - | - | 650.0 | - | - | - | (650.0 | ) | - | - | - | ||||||||||||||||||||||||||||||||
| Total movements for the period | 0.1 | 1.8 | 673.9 | (5.9 | ) | - | - | (650.0 | ) | 19.9 | (0.1 | ) | 19.8 | |||||||||||||||||||||||||||||||
| Balance as at April 30, 2017 | 39.7 | 192.1 | 902.2 | (22.9 | ) | 163.4 | - | 338.1 | 1,612.6 | 0.9 | 1,613.5 | |||||||||||||||||||||||||||||||||
The accompanying notes form part of the financial statements.
Consolidated statement of changes in equity (unaudited)
For the 18 months ended October 31, 2018
Share capital | Share premium account | Retained earnings/ (deficit) | Foreign currency translation reserve (deficit) | Capital redemption reserves | Hedging reserve | Merger reserve | Equity / (deficit) attributable to the parent | Non- controlling interests | Total equity / (deficit) | |||||||||||||||||||||||||||||||||||
| Note | $’000 | $’000 | $’000 | $’000 | $’000 | $’000 | $’000 | $’000 | $’000 | $’000 | ||||||||||||||||||||||||||||||||||
| Balance as at May 1, 2016 | 39,573 | 190,293 | 228,344 | (17,006 | ) | 163,363 | - | 988,104 | 1,592,671 | 1,057 | 1,593,728 | |||||||||||||||||||||||||||||||||
| Currency translation differences | - | - | - | (5,708 | ) | - | - | - | (5,708 | ) | - | (5,708 | ) | |||||||||||||||||||||||||||||||
| Profit for the period | - | - | 90,638 | - | - | - | - | 90,638 | (21 | ) | 90,617 | |||||||||||||||||||||||||||||||||
| Re-measurement on defined benefit pension schemes | 22 | - | - | (3,521 | ) | - | - | - | - | (3,521 | ) | - | (3,521 | ) | ||||||||||||||||||||||||||||||
| Re-measurement on long-term pension assets | 22 | - | - | 2,482 | - | - | - | - | 2,482 | - | 2,482 | |||||||||||||||||||||||||||||||||
| Deferred tax movement pensions | - | - | 326 | - | - | - | - | 326 | - | 326 | ||||||||||||||||||||||||||||||||||
| Total comprehensive income | - | - | 89,925 | (5,708 | ) | - | - | - | 84,217 | (21 | ) | 84,196 | ||||||||||||||||||||||||||||||||
| Transactions with owners: | ||||||||||||||||||||||||||||||||||||||||||||
| Dividends | 9 | - | - | (111,023 | ) | - | - | - | - | (111,023 | ) | - | (111,023 | ) | ||||||||||||||||||||||||||||||
| Movement in relation to share options | 77 | 434 | 11,266 | - | - | - | - | 11,777 | - | 11,777 | ||||||||||||||||||||||||||||||||||
| Deferred tax on share options | - | - | 3,081 | - | - | - | - | 3,081 | - | 3,081 | ||||||||||||||||||||||||||||||||||
| Balance as at October 31, 2016 | 39,650 | 190,727 | 221,593 | (22,714 | ) | 163,363 | - | 988,104 | 1,580,723 | 1,036 | 1,581,759 | |||||||||||||||||||||||||||||||||
| Balance at May 1, 2017 | 39,700 | 192,145 | 902,183 | (22,959 | ) | 163,363 | - | 338,104 | 1,612,536 | 954 | 1,613,490 | |||||||||||||||||||||||||||||||||
| Currency translation differences | - | - | - | 2,742 | - | - | - | 2,742 | - | 2,742 | ||||||||||||||||||||||||||||||||||
| Profit for the period | - | - | 106,301 | - | - | - | - | 106,301 | 304 | 106,605 | ||||||||||||||||||||||||||||||||||
| Re-measurement on defined benefit pension schemes | 22 | - | - | 6,859 | - | - | - | - | 6,859 | - | 6,859 | |||||||||||||||||||||||||||||||||
| Re-measurement on long-term pension assets | 22 | - | - | (350 | ) | - | - | - | - | (350 | ) | - | (350 | ) | ||||||||||||||||||||||||||||||
| Deferred tax movement pensions | - | - | 19 | - | - | - | - | 19 | - | 19 | ||||||||||||||||||||||||||||||||||
| Deferred tax movement on hedging | 24 | - | - | - | - | - | (674 | ) | - | (674 | ) | - | (674 | ) | ||||||||||||||||||||||||||||||
| Cash flow hedge movement | 24 | 1,763 | 1,763 | 1,763 | ||||||||||||||||||||||||||||||||||||||||
| Total comprehensive income | - | - | 112,829 | 2,742 | - | 1,089 | - | 116,660 | 304 | 116,964 | ||||||||||||||||||||||||||||||||||
| Transactions with owners: | ||||||||||||||||||||||||||||||||||||||||||||
| Dividends | 9 | - | - | (133,889 | ) | - | - | - | - | (133,889 | ) | - | (133,889 | ) | ||||||||||||||||||||||||||||||
| Share options: | ||||||||||||||||||||||||||||||||||||||||||||
| Movement in relation to share options | 23 | 43 | 960 | 15,015 | - | - | - | - | 16,018 | - | 16,018 | |||||||||||||||||||||||||||||||||
| Corporation tax on share options | - | - | 931 | - | - | - | - | 931 | - | 931 | ||||||||||||||||||||||||||||||||||
| Deferred tax on share options | - | - | (1,823 | ) | - | - | - | - | (1,823 | ) | - | (1,823 | ) | |||||||||||||||||||||||||||||||
| Acquisitions: | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued to acquire HPE Software | 23,24 | 28,773 | - | - | - | - | 6,485,397 | 6,514,170 | - | 6,514,170 | ||||||||||||||||||||||||||||||||||
| Share reorganization and buy-back: | ||||||||||||||||||||||||||||||||||||||||||||
| Return of Value – share consolidation | 23,24 | (2,926 | ) | - | - | - | 2,926 | - | - | - | - | - | ||||||||||||||||||||||||||||||||
| Issue and redemption of B shares | 23,24 | - | (156,683 | ) | (500,000 | ) | - | 500,000 | - | (343,317 | ) | (500,000 | ) | - | (500,000 | ) | ||||||||||||||||||||||||||||
| Reallocation of merger reserve | 24 | 700,000 | (700,000 | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance as at October 31, 2017 | 65,590 | 36,422 | 1,095,246 | (20,217 | ) | 666,289 | 1,089 | 5,780,184 | 7,624,603 | 1,258 | 7,625,861 | |||||||||||||||||||||||||||||||||
Share capital | Share premium account | Retained earnings | Foreign currency translation reserve | Capital redemption reserves | Hedging reserve | Merger reserve | Total equity attributable to owners of the parent | Non- controlling interests | Total equity | |||||||||||||||||||||||||||||||||||
| Note | $m | $m | $m | $m | $m | $m | $m | $m | $m | $m | ||||||||||||||||||||||||||||||||||
| Balance as at May 1, 2017 | 39.7 | 192.1 | 902.2 | (22.9 | ) | 163.4 | - | 338.1 | 1,612.6 | 0.9 | 1,613.5 | |||||||||||||||||||||||||||||||||
| Profit for the financial period | - | - | 784.0 | - | - | - | - | 784.0 | 0.1 | 784.1 | ||||||||||||||||||||||||||||||||||
| Other comprehensive income for the period | - | - | (11.9 | ) | (28.8 | ) | - | 70.0 | - | 29.3 | - | 29.3 | ||||||||||||||||||||||||||||||||
| Total comprehensive income/(expense) for the period | - | - | 772.1 | (28.8 | ) | - | 70.0 | - | 813.3 | 0.1 | 813.4 | |||||||||||||||||||||||||||||||||
| Transactions with owners: | ||||||||||||||||||||||||||||||||||||||||||||
| Dividends | 8 | - | - | (542.2 | ) | - | - | - | - | (542.2 | ) | - | (542.2 | ) | ||||||||||||||||||||||||||||||
| Share options: | ||||||||||||||||||||||||||||||||||||||||||||
| Issue of share capital – share options | 29,30 | 0.2 | 5.6 | - | - | - | - | - | 5.8 | - | 5.8 | |||||||||||||||||||||||||||||||||
| Share-based payment charge | - | - | 78.6 | - | - | - | - | 78.6 | - | 78.6 | ||||||||||||||||||||||||||||||||||
| Current tax on share options | 7 | - | - | 4.1 | - | - | - | - | 4.1 | - | 4.1 | |||||||||||||||||||||||||||||||||
| Deferred tax on share options | 7 | - | - | (23.7 | ) | - | - | - | - | (23.7 | ) | - | (23.7 | ) | ||||||||||||||||||||||||||||||
| Acquisitions: | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued to acquire the HPE Software business | 29 | 28.8 | - | - | - | - | - | 6,485.4 | 6,514.2 | - | 6,514.2 | |||||||||||||||||||||||||||||||||
| Share reorganization and buy-back: | ||||||||||||||||||||||||||||||||||||||||||||
| Return of Value – share consolidation | 29,31 | (2.9 | ) | - | - | - | 2.9 | - | - | - | - | - | ||||||||||||||||||||||||||||||||
| Issue and redemption of B shares | 30,31 | - | (156.7 | ) | (500.0 | ) | - | 500.0 | - | (343.3 | ) | (500.0 | ) | - | (500.0 | ) | ||||||||||||||||||||||||||||
| Share buy-back | 29 | - | - | (171.7 | ) | - | - | - | - | (171.7 | ) | - | (171.7 | ) | ||||||||||||||||||||||||||||||
| Reallocation of merger reserve | 31 | - | - | 2,755.8 | - | - | - | (2,755.8 | ) | - | - | - | ||||||||||||||||||||||||||||||||
| Total movements for the period | 26.1 | (151.1 | ) | 2,373.0 | (28.8 | ) | 502.9 | 70.0 | 3,386.3 | 6,178.4 | 0.1 | 6,178.5 | ||||||||||||||||||||||||||||||||
| Balance as at October 31, 2018 | 65.8 | 41.0 | 3,275.2 | (51.7 | ) | 666.3 | 70.0 | 3,724.4 | 7,791.0 | 1.0 | 7,792.0 | |||||||||||||||||||||||||||||||||
The accompanying notes are an integralform part of these unaudited Consolidated Financial Statements.the financial statements.
Consolidated statement of cash flows (unaudited)changes in equity
For the 12 months ended October 31, 2019
| Note | Six months ended October 31, 2017 $’000 | Six months ended October 31, 2016 $’000 | ||||||||||
| Cash flows from operating activities | ||||||||||||
| Net profit for the period | 106,605 | 90,617 | ||||||||||
| Adjustments for: | ||||||||||||
| Net interest | 11 | 73,788 | 48,953 | |||||||||
| Taxation | 12 | 39,129 | 22,589 | |||||||||
| Share of results of associates | 16 | 438 | 1,127 | |||||||||
| Operating profit | 219,960 | 163,286 | ||||||||||
| Research and development tax credits | (2,185 | ) | (936 | ) | ||||||||
| Depreciation | 15 | 16,289 | 5,712 | |||||||||
| Loss on disposal of property, plant and equipment | 427 | 484 | ||||||||||
| Amortization of intangibles | 14 | 198,606 | 119,085 | |||||||||
| Share-based compensation | 8 | 18,302 | 15,521 | |||||||||
| Exchange movements | (4,699 | ) | (9,270 | ) | ||||||||
| Provisions movements | 21 | 73,433 | 18,788 | |||||||||
| Changes in working capital: | ||||||||||||
| Inventories | (216 | ) | 30 | |||||||||
| Trade and other receivables | (231,762 | ) | 21,073 | |||||||||
| Payables and other liabilities | 15,490 | (50,118 | ) | |||||||||
| Provision utilization | 21 | (55,489 | ) | (18,581 | ) | |||||||
| Deferred income | 15,868 | (62,308 | ) | |||||||||
| Pension funding in excess of charge to operating profit | 3,129 | (856 | ) | |||||||||
| Cash generated from operations | 267,153 | 201,910 | ||||||||||
| Interest paid | (82,341 | ) | (42,879 | ) | ||||||||
| Bank loan costs | (90,319 | ) | (5,864 | ) | ||||||||
| Tax paid | (20,472 | ) | (18,183 | ) | ||||||||
| Net cash generated from operating activities | 74,021 | 134,984 | ||||||||||
| Cash flows from investing activities | ||||||||||||
| Payments for intangible assets | 14 | (35,650 | ) | (17,571 | ) | |||||||
| Purchase of property, plant and equipment | 15 | (9,845 | ) | (6,454 | ) | |||||||
| Interest received | 1,699 | 502 | ||||||||||
| Payment for acquisition of subsidiaries | 28 | - | (293,797 | ) | ||||||||
| Repayment of bank borrowings on acquisitions | 28 | - | (316,650 | ) | ||||||||
| Net cash acquired with acquisitions | 28 | 320,729 | 68,173 | |||||||||
| Net cash generated from/(used in) investing activities | 276,933 | (565,797 | ) | |||||||||
| Cash flows from financing activities | ||||||||||||
| Proceeds from issue of ordinary share capital | 1,161 | 467 | ||||||||||
| Purchase of treasury shares | - | - | ||||||||||
| Return of value paid to shareholders | 27 | (500,000 | ) | - | ||||||||
| Repayment of bank borrowings | 19 | (215,000 | ) | (126,375 | ) | |||||||
| Proceeds from bank borrowings | 19 | 1,043,815 | 115,000 | |||||||||
| Dividends paid to owners | 9 | (133,889 | ) | (111,023 | ) | |||||||
| Net cash generated from/(used in) financing activities | 196,087 | (121,931 | ) | |||||||||
| Effects of exchange rate changes | 32,348 | 8,536 | ||||||||||
| Net increase/(decrease) in cash and cash equivalents | 579,389 | (544,208 | ) | |||||||||
| Cash and cash equivalents at beginning of period | 150,983 | 667,178 | ||||||||||
| Cash and cash equivalents at end of period | 730,372 | 122,970 | ||||||||||
Share capital | Share premium account | Retained earnings | Foreign currency translation reserve | Capital redemption reserves | Hedging reserve | Merger reserve | Total equity attributable to owners of the parent | Non- controlling interests | Total equity | |||||||||||||||||||||||||||||||||||
| Note | $m | $m | $m | $m | $m | $m | $m | $m | $m | $m | ||||||||||||||||||||||||||||||||||
| Balance as at November 1, 2018 | 65.8 | 41.0 | 3,275.2 | (51.7 | ) | 666.3 | 70.0 | 3,724.4 | 7,791.0 | 1.0 | 7,792.0 | |||||||||||||||||||||||||||||||||
| Impact of adoption of IFRS 15 | - | - | 52.4 | - | - | - | - | 52.4 | - | 52.4 | ||||||||||||||||||||||||||||||||||
| Impact of adoption of IFRS 9 | - | - | (15.6 | ) | - | - | - | - | (15.6 | ) | - | (15.6 | ) | |||||||||||||||||||||||||||||||
| Revised balance at November 1, 2018 | 65.8 | 41.0 | 3,312.0 | (51.7 | ) | 666.3 | 70.0 | 3,724.4 | 7,827.8 | 1.0 | 7,828.8 | |||||||||||||||||||||||||||||||||
| Profit for the financial period | - | - | 1,468.8 | - | - | - | - | 1,468.8 | 0.3 | 1,469.1 | ||||||||||||||||||||||||||||||||||
Other comprehensive income/(expense) for the period1 | - | - | 4.0 | (210.4 | ) | - | (99.6 | ) | - | (306.0 | ) | - | (306.0 | ) | ||||||||||||||||||||||||||||||
| Total comprehensive income/(expense) for the period | - | - | 1,472.8 | (210.4 | ) | - | (99.6 | ) | - | 1,162.8 | 0.3 | 1,163.1 | ||||||||||||||||||||||||||||||||
| Transactions with owners: | ||||||||||||||||||||||||||||||||||||||||||||
| Dividends | 8 | - | - | (439.2 | ) | - | - | - | - | (439.2 | ) | - | (439.2 | ) | ||||||||||||||||||||||||||||||
| Share options: | ||||||||||||||||||||||||||||||||||||||||||||
| Issue of share capital – share options | 29,30 | 0.1 | 3.0 | (3.8 | ) | - | - | - | - | (0.7 | ) | - | (0.7 | ) | ||||||||||||||||||||||||||||||
| Share-based payment charge | - | - | 64.5 | - | - | - | - | 64.5 | - | 64.5 | ||||||||||||||||||||||||||||||||||
| Current tax on share options | 7 | - | - | 13.1 | - | - | - | - | 13.1 | - | 13.1 | |||||||||||||||||||||||||||||||||
| Deferred tax on share options | 7 | - | - | (7.6 | ) | - | - | - | - | (7.6 | ) | - | (7.6 | ) | ||||||||||||||||||||||||||||||
| Share reorganization and buy-back: | ||||||||||||||||||||||||||||||||||||||||||||
| Return of Value – share consolidation | 29,31 | (18.7 | ) | - | - | - | 18.7 | - | - | - | - | - | ||||||||||||||||||||||||||||||||
| Expenses relating to Return of Value | 29 | - | - | (1.0 | ) | - | - | - | - | (1.0 | ) | - | (1.0 | ) | ||||||||||||||||||||||||||||||
| Issue and redemption of B shares | 31 | - | - | (1,800.0 | ) | - | 1,800.0 | - | (1,800.0 | ) | (1,800.0 | ) | - | (1,800.0 | ) | |||||||||||||||||||||||||||||
| Share buy-back | 29 | - | - | (544.7 | ) | - | - | - | - | (544.7 | ) | - | (544.7 | ) | ||||||||||||||||||||||||||||||
| Reallocation of merger reserve | 31 | - | - | 184.6 | - | - | - | (184.6 | ) | - | - | - | ||||||||||||||||||||||||||||||||
| Total movements for the period | (18.6 | ) | 3.0 | (1,061.3 | ) | (210.4 | ) | 1,818.7 | (99.6 | ) | (1,984.6 | ) | (1,552.8 | ) | 0.3 | (1,552.5 | ) | |||||||||||||||||||||||||||
| Balance as at October 31, 2019 | 47.2 | 44.0 | 2,250.7 | (262.1 | ) | 2,485.0 | (29.6 | ) | 1,739.8 | 6,275.0 | 1.3 | 6,276.3 | ||||||||||||||||||||||||||||||||
The accompanying notes are an integralform part of these unaudited Consolidated Financial Statements.financial statements.
1 $21.6m of foreign exchange movements arising on the re-denomination of intangible assets, see note 11, have been recognized as ‘‘currency translation differences – continuing operations’’ and $1.5m of currency translation differences are recorded in retained earnings at October 31, 2019, net of $4.9m of deferred tax.
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 2017 | ||||||||||||||
| Note | $m | $m | m | $m | ||||||||||||
| Cash flows from operating activities | ||||||||||||||||
| Cash generated from operations | 39 | 1,056.3 | 1,424.3 | 564.8 | ||||||||||||
| Interest paid | (227.1 | ) | (301.8 | ) | (81.1 | ) | ||||||||||
| Bank loan costs | - | (101.2 | ) | (6.7 | ) | |||||||||||
| Tax paid | (167.4 | ) | (99.5 | ) | (24.6 | ) | ||||||||||
| Net cash generated from operating activities | 661.8 | 921.8 | 452.4 | |||||||||||||
| Cash flows from/(used in) investing activities | ||||||||||||||||
Payments for intangible assets1 | 11 | (29.3 | ) | (92.1 | ) | (31.4 | ) | |||||||||
Purchase of property, plant and equipment1 | 12 | (56.3 | ) | (40.1 | ) | (11.7 | ) | |||||||||
Finance leases2 | 21 | - | (0.7 | ) | - | |||||||||||
| Interest received | 26.6 | 9.2 | 1.0 | |||||||||||||
| Payment for acquisition of business | 38 | (89.0 | ) | (19.2 | ) | (299.1 | ) | |||||||||
| Repayment of bank borrowings on acquisition of businesses | - | - | (316.6 | ) | ||||||||||||
| Net cash acquired with acquisitions | 38 | 1.2 | 321.7 | 68.1 | ||||||||||||
| Investing cash flows generated from disposals | 37 | 20.0 | - | - | ||||||||||||
| Investing cash flows generated from discontinued operation, net of cash disposed | 37 | 2,473.5 | - | - | ||||||||||||
| Tax paid on divestiture gain | (264.6 | ) | - | - | ||||||||||||
| Net cash from/(used in) investing activities | 2,082.1 | 178.8 | (589.7 | ) | ||||||||||||
| Cash flows used in financing activities | ||||||||||||||||
| Investment in non-controlling interest | 32 | - | (0.1 | ) | (0.1 | ) | ||||||||||
| Proceeds from issue of ordinary share capital | 29,30 | 3.1 | 5.8 | 2.0 | ||||||||||||
| Purchase of treasury shares and related expenses | 29 | (544.7 | ) | (171.7 | ) | (7.7 | ) | |||||||||
| Return of Value paid to shareholders | 29,31 | (1,800.0 | ) | (500.0 | ) | - | ||||||||||
| Expenses relating to Return of Value | 29 | (1.0 | ) | - | - | |||||||||||
| Repayment of working capital in respect of the HPE Software business acquisition | 38 | - | (225.8 | ) | - | |||||||||||
Finance leases2 | 21 | (12.9 | ) | - | - | |||||||||||
| Repayment of bank borrowings | 20 | (212.6 | ) | (252.9 | ) | (372.1 | ) | |||||||||
| Proceeds from bank borrowings | 20 | - | 1,043.8 | 180.0 | ||||||||||||
| Dividends paid to owners | 8 | (439.2 | ) | (542.2 | ) | (177.5 | ) | |||||||||
| Net cash used in financing activities | (3,007.3 | ) | (643.1 | ) | (375.4 | ) | ||||||||||
| Effects of exchange rate changes | (1.8 | ) | 15.3 | (3.5 | ) | |||||||||||
| Net (decrease)/increase in cash and cash equivalents | (265.2 | ) | 472.8 | (516.2 | ) | |||||||||||
| Cash and cash equivalents at beginning of period | 620.9 | 151.0 | 667.2 | |||||||||||||
| 18 | 355.7 | 623.8 | 151.0 | |||||||||||||
| Reclassification to current assets classified as held for sale | 37 | - | (2.9 | ) | - | |||||||||||
| Cash and cash equivalents at end of period | 18 | 355.7 | 620.9 | 151.0 | ||||||||||||
The accompanying notes form part of these financial statements.
1The principal non-cash transactions in the 12 months ended October 31, 2019 were property, plant and equipment finance lease additions of $9.0m (note 12).
The principal non-cash transactiontransactions in the six18 months ended October 31, 2017 was2018 were the issuance of shares as purchase consideration for the HPE Software business acquisition (note 28)38) and property, plant and equipment finance lease additions of $12.0m (note 12).
2Cash outflows in relation to repayments of finance lease liabilities have been reclassified as a financing activity in the current year as repayments relating to all leases will be presented as financing activities in future periods following the adoption of IFRS 16. The comparative continues to be shown as an investing activity.
Consolidated financial statements and notes
| General information |
Micro Focus International plc (“the Company”) is a public limited Companycompany incorporated and domiciled in the UK. The address of its registered office is, The Lawn, 22-30 Old Bath Road, Newbury, RG14 1QN, UK.
Micro Focus International plc and its subsidiaries (together “the Group”“Group”) provide innovative software to clients around the world enabling them to dramatically improve the business value of their enterprise applications. As at October 31, 2017,2019, the Group hashad a presence in 4948 countries (October 31, 2018: 49; April 30, 2017: 40) worldwide and employsemployed approximately 16,100 people.
The Company is listed on the London Stock Exchange and its American Depositary ReceiptsShares are listed on the New York Stock Exchange.
The principal accounting policies adopted by the Group in the preparation of the Group’s April 2017 Annual Report and Accounts and as part of the regulatory filing process in the United States the Group has reviewed its consolidated statement of comprehensive income presentation and decided to re-classify both amortization of product development costs and amortization of acquired technology intangibles from research and development expenses to cost of sales. This presentation complies with IFRS and, in the view of the Company’s Audit Committee, provides investors with a consolidated statement of comprehensive income presentation that is more comparable with other software companies listed on both markets. The six months ended October 31, 2016 comparative has also been re-classified and additional detail is provided on the face of the consolidated statement of comprehensive income in the period.
Going concern
The directors, having made enquiries, consider that the Group has adequate resources to continue in operational existence for the foreseeable future and therefore it is appropriate to maintain the going concern basis in preparing these financial statements.
Consolidated statement of comprehensive income – Prior Period Revision
In the prior period, certain costs were incorrectly presented as administrative expenses ($159.0m) and should have been classified as $43.4m in cost of sales, $94.2m in selling and distribution expenses and $21.4m in research and development expenses. Management have therefore decided to correct the presentation and record these immaterial adjustments to revise the Consolidated statement of comprehensive income for the 18 months ended October 31, 2018. The impact of the revision is to reduce administrative expenses by $159.0m, increase cost of sales by $43.4m, increase selling and distribution expenses by $94.2m and increase research and development expenses by $21.4m as compared with previously reported amounts. The revision has no impact on the operating profit, profit for the period, assets and liabilities or cash flows for the 18 months ended October 31, 2018. This revision has also been reflected in the unaudited financial information for the 12-month period ended October 31, 2018 and the 6-month period ended October 31, 2017 as describedpresented in thoseExhibit 15.4.
Consolidated financial statements and notes
Summary of significant accounting policies continued
B Consolidation
The financial statements of the Group comprise the financial statements of the Company and entities controlled by the Company, its subsidiaries and the Group’s share of its interests in associates prepared at the consolidated statement of financial position date.
Subsidiaries
Subsidiaries are entities controlled by the Group. The Group has control over an entity where the Group is exposed to, or has rights to, variable returns from its involvement within the entity and it has the power over the entity to effect those returns. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing control. Control is presumed to exist when the Group owns more than half of the voting rights (which does not always equal percentage ownership) unless it can be demonstrated that ownership does not constitute control. The results of subsidiaries are consolidated from the date on which control passes to the Group. The results of disposed subsidiaries are consolidated up to the date on which control passes from the Group.
The purchase method of accounting is accessibleused to account for the acquisition of subsidiaries by the Group. The cost of acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, with costs directly attributable to the acquisition being expensed. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill.
Where new information is obtained within the ‘measurement period’ (defined as the earlier of the period until which the Group receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable, or one year from the acquisition date) about facts and circumstances that existed as at the acquisition date and, if known, would have affected the measurement of the amounts recognized as of that date, the Group recognizes these adjustments to the acquisition balance sheet with an equivalent offsetting adjustment to goodwill. Where new information is obtained after this measurement period has closed, this is reflected in the post-acquisition period.
For partly owned subsidiaries, the allocation of net assets and net earnings to outside shareholders is shown in the line ‘Attributable to non-controlling interests’ on the Company’s website.face of the Consolidated statement of comprehensive income and the Consolidated statement of financial position.
Inter-company transactions, balances and unrealized gains on transactions between Group companies are eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.
At October 31, 2019, the Group had an 84.24% (2018: 81.05%; 2017: 74.70%) interest in Novell Japan Ltd which gives rise to the minority interest reported in these financial statements (note 32).
C Assets held for sale and discontinued operations
A current asset (or disposal group) is classified as held for sale if the Group will recover the carrying amount principally through a sale transaction rather than through continuing use. A current asset (or disposal group) classified as held for sale is measured at the lower of its carrying amount and fair value less costs to sell. If the asset (or disposal group) is acquired as part of a business combination it is initially measured at fair value less costs to sell. Assets and liabilities of disposal groups classified as held for sale are shown separately on the face of the balance sheet.
The results of discontinued operations are shown as a single amount on the face of the Consolidated statement of comprehensive income comprising the post-tax profit or loss of discontinued operations and the post-tax gain or loss recognized either on measurement to fair value less costs to sell or on the disposal of the discontinued operation. The Consolidated statement of cash flows has been presented including the discontinued operations.
Consolidated financial statements and notes
Summary of significant accounting policies continued
D Revenue recognition
On November 1, 2018, the Group adopted IFRS 15 using the modified retrospective approach which means that the cumulative impact of the adoption was recognized in retained earnings as of November 1, 2018 and that comparatives are not restated. IFRS 15 replaces guidance in IAS 18 and IAS 11. The accounting policies applied under IAS 18 and IAS 11 in the comparative period are presented below under the heading ‘Revenue recognition policy in the prior period’. This standard establishes a new principle-based model of recognizing revenue from customer contracts. It introduces a five-step model that requires revenue to be recognized when control over goods and services are transferred to the customer. Additionally, there is a requirement in the new standard to capitalize certain incremental contract costs. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
The Group follows the five-step model and recognizes revenue on transfer of control of promised goods or services to customers in an amount that reflects the consideration, which the Group expects to be entitled in exchange for those goods, or services. Customer contracts can include combinations of goods and services, which are generally capable of being distinct and accounted for as separate performance obligations.
Revenue is allocated to the various performance obligations on a relative stand-alone selling price (“SSP”) basis.
On an on-going basis, the Group utilizes available data points based on relevant historical transactions, to establish the observable stand-alone selling prices to be used in allocating transaction consideration. For observable stand-alone sales a reasonable range of prices will be determined to represent the stand-alone selling price of that performance obligation. Given the highly variable selling price of licences, the Group has not established SSP for licences. When SSP is established for the undelivered performance obligations (typically maintenance and professional services), the residual approach is used to allocate the transaction price to the delivered licences.
For performance obligations where observable stand-alone sales are not available, SSP will be estimated using the following methods in the order set out below:
- Market price
- Expected cost plus a margin
- Residual approach
The Group recognizes revenues from sales of software licences (including Intellectual Property and Patent rights) to end-users, resellers and Independent Software Vendors (“ISV”), software maintenance, subscription, Software as a Service (“SaaS”), technical support, training and professional services. ISV revenue includes fees based on end usage of ISV applications that have our software embedded in their applications.
Software licence revenue is the sale of right to use the software on customer premises and is recognized at a point in time when the software is made available to the customer and/or reseller (i.e. when control of the asset is transferred). The Group enters into licence verification arrangements, for customers who are not in compliance with their contractual licence and/or maintenance terms, by agreeing a one-off settlement fee. If the performance obligation can be identified in the contract, revenue is allocated to each performance obligation, otherwise the Group policy is to recognize it as licence revenue. The allocation of revenue does not impact the timing of revenue recognition in these deals, given the performance obligation(s) have already been fulfilled, but will impact the presentation of revenue recognized during the period, (as licence or licence and maintenance).
For Subscriptions and SaaS arrangements where customers access the functionality of a hosted software over the contract period without taking possession of the software, and performance obligations are provided evenly over a defined term, the Group recognizes revenue over the period in which the subscriptions are provided as the service is delivered, generally on a straight-line basis.
In SaaS arrangements where the customer has the contractual right to take possession of the software at any time during the contractual period without significant penalty and the customer can operate, or contract with another vendor to operate the software, the Group evaluates whether the arrangement includes the sale of a software licence. In SaaS arrangements where software licences are sold, licence revenue is generally recognized at a point in time when control of the software is transferred to the customer.
Maintenance revenue is recognized on a straight-line basis over the term of the contract, which in most cases is one year.
Consolidated financial statements and notes
Summary of significant accounting policies continued
D Revenue recognition continued
For time and material-based professional services contracts, the Group recognizes revenue as services are rendered. The Group recognizes revenue from fixed-price professional services contracts as work progresses over the contract period on a percentage of completion basis, as determined by the percentage of labor costs incurred to date compared to the total estimated labor costs of a contract. Estimates of total project costs for fixed-price contracts are regularly reassessed during the life of a contract. Service costs are expensed as incurred; amounts collected prior to satisfying the above conditions are shown as contract liability and included in deferred income.
Rebates paid to resellers as part of a contracted program are accounted for as a reduction of the transaction price and netted against revenue where the rebate paid is based on the achievement of sales targets made by the partner. If the Group receives an identifiable good or service from the reseller that is separable from the sales transaction and for which fair value can be reasonably estimated, the Group accounts for the purchase of the good or service in the same way that it accounts for other purchases from suppliers.
Revenue recognition policy in the prior periods
The Group recognized revenues from sales of software Licences (including Intellectual Property and Patent rights), to end-users, resellers and Independent Software Vendors (“ISV”), software maintenance, subscription, Software as a Service (“SaaS”), technical support, training and professional services, upon firm evidence of an arrangement, delivery of the software and determination that collection of a fixed or determinable fee is reasonably assured. ISV revenue included fees based on end usage of ISV applications that have our software embedded in their applications. When the fees for software upgrades and enhancements, maintenance, consulting and training were bundled with the Licence fee, they were unbundled using the Group’s objective evidence of the fair value of the elements represented by the Group’s customary pricing for each element in separate transactions. If evidence of fair value existed for all undelivered elements and there was no such evidence of fair value established for delivered elements, revenue was first allocated to the elements where fair value has been established and the residual amount was allocated to the delivered elements. If evidence of fair value for any undelivered element of the arrangement did not exist, all revenue from the arrangement was deferred until such time that there was evidence of delivery.
If the arrangement included acceptance criteria, revenue was not recognized until the Group could objectively demonstrate that the acceptance criteria have been met, or the acceptance period lapses, whichever was earlier.
The Group recognized Licence revenue derived from sales to resellers upon delivery to resellers, provided that all other revenue recognition criteria was met; otherwise revenue was deferred and recognized upon delivery of the product to the end-user. Where the Group sold access to a Licence for a specified period of time and collection of a fixed or determinable fee was reasonably assured, Licence revenue was recognized upon delivery, except in instances where future substantive upgrades or similar performance obligations were committed to. Where future performance obligations were specified in the Licence agreement, and fair value could be attributed to those upgrades, revenue for the future performance obligations was deferred and recognized on the basis of the fair value of the upgrades in relation to the total estimated sales value of all items covered by the Licence agreement. Where the future performance obligations were unspecified in the Licence agreement, revenue was deferred and recognized rateably over the specified period.
For Subscription revenue where access and performance obligations were provided evenly over a defined term, the revenue was deferred and recognized rateably over the specified period.
The Group recognized revenue for SaaS arrangements as the service was delivered, generally on a straight-line basis, over the contractual period of performance. In SaaS arrangements, the Group considered the rights provided to the customer (e.g. whether the customer has the contractual right to take possession of the software at any time during the contractual period without significant penalty, and the feasibility of the customer to operate or contract with another vendor to operate the software) in determining whether the arrangement included the sale of a software licence. In SaaS arrangements where software licences were sold, licence revenue was generally recognized according to whether perpetual or term licences are sold, when all other revenue recognition criteria was satisfied.
Maintenance revenue was recognized on a straight-line basis over the term of the contract, which in most cases was one year.
Consolidated financial statements and notes
Summary of significant accounting policies continued
D Revenue recognition continued
For time and material-based professional services contracts, the Group recognized revenue as services are rendered and recognized costs as they were incurred. The Group recognized revenue from fixed-price professional services contracts as work progressed over the contract period on a proportional performance basis, as determined by the percentage of labour costs incurred to date compared to the total estimated labour costs of a contract. Estimates of total project costs for fixed-price contracts were regularly reassessed during the life of a contract. Amounts collected prior to satisfying the above revenue recognition criteria were included in deferred income.
Rebates paid to partners as part of a contracted program were netted against revenue where the rebate paid was based on the achievement of sales targets made by the partner, unless the Company received an identifiable good or service from the partner that was separable from the sales transaction and for which the Group could reasonably estimate fair value.
E Contract-related costs
The Group capitalizes the costs of obtaining a customer contract when they are incremental and, if expected to be recovered, they are amortized over the customer life or pattern of revenue for the related contract.
Normally sales commissions paid for customer contract renewals are not commensurate with the commissions paid for new contracts. It follows that the commissions paid for new contracts also relate to expected future renewals of these contracts. Accordingly, the Group amortizes sales commissions paid for new customer contracts on a straight-line basis over the expected customer life, based on expected renewal frequency. The current average customer life is five years. If the expected amortization period is one year or less the costs are expensed when incurred.
Amortization of the capitalized costs of obtaining customer contracts is classified as sales and marketing expense. Capitalized costs from customer contracts are classified as non-financial assets in our statement of financial position.
F Cost of sales
Cost of sales includes costs related to the amortization of product development costs, amortization of acquired technology intangibles, costs of the consulting business and helpline support and royalties payable to third parties.
G Segment reporting
In accordance with IFRS 8, ‘Operating Segments’, the Group has derived the information for its segmental reporting using the information used by the Chief Operating Decision Maker (“CODM”), defined as the Operating Committee. The segmental reporting is consistent with those used in internal management reporting and the measure used by the Operating Committee is the Adjusted EBITDA, as set out in note 1.
H Exceptional items
Exceptional items are those significant items, which are separately disclosed by virtue of their size, nature or incidence to enable a full understanding of the Group’s financial performance. In setting the policy for exceptional items, judgment is required to determine what the Group defines as ‘exceptional’. The Group considers an item to be exceptional in nature if it is material, non-recurring or does not reflect the underlying performance of the business. Exceptional items are allocated to the financial statement lines (for example: cost of sales) in the Consolidated statement of comprehensive income based on the nature and function of the costs, for example restructuring costs related to employees are classified where their original employment costs are recorded.
Management of the Group first evaluates Group strategic projects such as acquisitions, divestitures and integration activities, Group restructuring and other one-off events such as restructuring programs. In determining whether an event or transaction is exceptional, management of the Group considers quantitative and qualitative factors such as its expected size, precedent for similar items and the commercial context for the particular transaction, while ensuring consistent treatment between favorable and unfavorable transactions impacting revenue, income and expense. Examples of transactions which may be considered of an exceptional nature include major restructuring programs, cost of acquisitions, the cost of integrating acquired businesses or gains on the disposal of discontinued operations.
Consolidated financial statements and notes
Summary of significant accounting policies continued
I Employee benefit costs
a) Pension obligations and long-term pension assets
The Group operates various pension schemes, including both defined contribution and defined benefit pension plans. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. A defined benefit plan is a pension plan that is not a defined contribution plan.
For defined contribution plans the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid. The contributions are recognized as an employee benefit expense when they are due. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in the future payments is available.
Typically, defined benefit plans define an amount of pension benefit that an employee will receive on retirement or termination. This is usually dependent on one or more factors such as age, years of service and compensation.
The liability recognized in the Consolidated statement of financial position in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. Certain long-term pension assets do not meet the definition of plan assets as they have not been pledged to the plan and are subject to the creditors of the Group. Such assets are recorded separately in the Consolidated statement of financial position as long-term pension assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that have terms to mature approximating to the terms of the related pension obligation.
Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in other comprehensive income in the period in which they arise. Past-service costs are recognized immediately in income.
The current service cost of the defined benefit plan, recognized in the Consolidated statement of comprehensive income in employee benefit expense, except where included in the cost of an asset, reflects the increase in the defined benefit obligation resulting from employee service in the current year, benefit changes, curtailments and settlements.
The net interest cost is calculated by applying the discount rate to the net balance of the defined benefit obligation and the fair value of plan assets. This cost is included in finance costs in the Consolidated statement of comprehensive income.
Long-term pension assets relate to the reimbursement right under insurance policies held in the Group with guaranteed interest rates that do not meet the definition of a qualifying insurance policy as they have not been pledged to the plan and are subject to the creditors of the Group. Such reimbursement rights assets are recorded in the Consolidated statement of financial position as long-term pension assets. These contractual arrangements are treated as financial assets measured at fair value through other comprehensive income. Gains and losses on long-term pension assets are charged or credited to equity in other comprehensive income in the period in which they arise.
b) Share based compensation
The Group operated various equity-settled, share based compensation plans during the period.
The fair value of the employee services received in exchange for the grant of the shares or options is recognized as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the shares or options granted. Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. Market vesting conditions are taken into account when determining the fair value of the options at grant date. At each Consolidated statement of financial position date, the Group revises its estimates of the number of options that are expected to become exercisable. It recognizes the impact of the revision of original estimates, if any, in the Consolidated statement of comprehensive income, and a corresponding adjustment to equity over the current reporting period.
The shares are recognized when the options are exercised and the proceeds received allocated between ordinary shares and share premium account. Fair value is measured using the Black-Scholes pricing model. The expected life used in the model has been adjusted, based on management’s best estimate for the effects of non-transferability, exercise restrictions and behavioral considerations. The Additional Share Grants have been valued using the Monte-Carlo simulation pricing model.
Consolidated financial statements and notes
Summary of significant accounting policies continued
I Employee benefit costs continued
b) Share based compensation continued
When the terms of an equity-settled award are modified, the minimum expense recognized is the grant date fair-value of the unmodified award, provided the original terms of the award are met. An additional expense, measured as at the date of modification, is recognized for any modification that increases the total fair value of the share-based payment transaction, or is otherwise beneficial to the employee.
The social security contributions payable in connection with the grant of the share options is considered an integral part of the grant itself, and the charge is treated as a cash-settled transaction.
J Foreign currency translation
a) Functional and presentation currency
The presentation currency of the Group is US dollars. Items included in the financial statements of each of the Group’s entities are measured in the functional currency of each entity.
b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the Consolidated statement of comprehensive income within administrative expenses.
Non-monetary items that are measured in terms of historical costs in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments (including purchased intangible assets) to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the closing rate.
On consolidation, the results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows:
Assets and |
Income and expenses for each Consolidated statement of |
All resulting exchange differences are recognized as a separate component of |
On consolidation, exchange differences arising from the translation of the net investment in foreign entities are taken to other comprehensive income.
Goodwill arising before May 1, 2004 is treated as an asset of the Company and expressed in the Company’s functional currency.
c) Exchange rates
The disclosure requirementsmost important foreign currencies for the Group are Pounds Sterling, the Euro, Canadian Dollar, Israeli Shekel and Japanese Yen. The exchange rates used are as follows:
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 2017 | ||||||||||||||||||||||
| Average | Closing | Average | Closing | Average | Closing | |||||||||||||||||||
| £1 = $ | 1.27 | 1.29 | 1.33 | 1.27 | 1.29 | 1.29 | ||||||||||||||||||
| €1 = $ | 1.12 | 1.12 | 1.18 | 1.14 | 1.09 | 1.09 | ||||||||||||||||||
| C$ = $ | 0.75 | 0.76 | 0.78 | 0.76 | 0.76 | 0.73 | ||||||||||||||||||
| ILS = $ | 0.28 | 0.28 | 0.28 | 0.27 | 0.26 | 0.28 | ||||||||||||||||||
| 100 JYP = $ | 1.10 | 1.08 | 0.90 | 0.92 | 0.91 | 0.90 | ||||||||||||||||||
Consolidated financial statements and notes
Summary of significant accounting policies continued
K Intangible assets
a) Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to IAS 7, ‘Statementthe entity sold. Goodwill is allocated to cash-generating units for the purpose of cash flows’ haveimpairment testing. Each of those cash-generating units represents the Group’s investment in each area of operation by each primary reporting segment.
Where goodwill has been allocated to a cash-generating unit (CGU) and part of the operation within that unit is classified as held for sale, the goodwill associated with the held-for-sale operation is measured based on the relative values of the held-for-sale operation and the portion of the cash-generating unit retained.
b) Computer software
Computer software licences are capitalized on the basis of the costs incurred to acquire and bring into use the specific software. These costs are amortized using the straight-line method over their estimated useful lives of three to seven years.
c) Research and development
Research expenditure is recognized as an expense as incurred in the Consolidated statement of comprehensive income in research and development expenses. Costs incurred on product development projects relating to the developing of new computer software programs and significant enhancement of existing computer software programs are recognized as intangible assets when it is probable that the project will be a success, considering its commercial and technological feasibility, and costs can be measured reliably. Only direct costs are capitalized which are the software development employee costs and third-party contractor costs. Product development costs previously recognized as an expense are not recognized as an asset in a subsequent period.
Product development costs are amortized from the commencement of the commercial production of the product on a straight-line basis over the period of its expected benefit, typically being three years, and are included in costs of sales in the Consolidated statement of comprehensive income.
d) Intangible assets – arising on business combinations
Other intangible assets that are acquired by the Group as part of a business combination are recognized at their fair value at the date of acquisition, and are subsequently amortized. Amortization is charged to the Consolidated statement of Comprehensive income on a straight-line basis over the estimated useful life of each intangible asset. Intangible assets are amortized from the date they are available for use. The estimated useful lives will vary for each category of asset acquired and to date are as follows:
Purchased software | Term licence agreement based, generally three to seven years |
Technology | Three to 12 years |
Trade names | Three to 20 years |
Customer relationships | Two to 15 years |
Lease contracts | Term of the lease agreement |
Amortization of purchased software intangibles is included in administrative expenses, amortization of purchased technology intangibles is included in cost of sales and amortization of acquired purchased trade names, customer relationships and lease contracts intangibles are included in selling and distribution costs in the Consolidated statement of comprehensive income.
Consolidated financial statements and notes
Summary of significant accounting policies continued
L Property, plant and equipment
All property, plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance expenditures are charged to the Consolidated statement of comprehensive income during the financial year in which they are incurred. Depreciation is calculated using the straight-line method to write off the cost of each asset to its residual value over its estimated useful life as follows:
Buildings | 30 years |
Leasehold improvements | Three to 10 years (not exceeding the remaining lease period) |
Fixtures and fittings | Two to seven years |
Computer equipment | One to five years |
Freehold land is not depreciated. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each Consolidated statement of financial position date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing the disposal proceeds with the carrying amount and are included in the Consolidated statement of comprehensive income.
Property held for sale is measured at the lower of its carrying amount or estimated fair value less costs to sell.
M Impairment of non-financial assets
Assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows being cash-generating units. Any non-financial assets other than goodwill which have suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Assets that are subject to amortization and depreciation are also reviewed for any possible impairment at each reporting date.
N Inventories
Inventories are stated at the lower of cost and net realizable value. The cost of finished goods comprises software for resale and packaging materials. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.
When work has been performed and the revenue is not yet recognized, the direct costs of third-party contractors and staff will be treated as work in progress where the probability of invoicing and evidence of collectability can be demonstrated.
O Trade receivables
Trade receivables are initially recognized at fair value and subsequently measured at amortized cost less provisions for impairment based upon an expected credit loss methodology. The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables. A provision of the lifetime expected credit loss is established upon initial recognition of the underlying asset and are calculated using historical account payment profiles along with historical credit losses experienced. The loss allowance is adjusted for forward looking factors specific to the debtor and the economic environment. The amount of the provision is the difference between the asset’s carrying amount and the present value of the probability weighted estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognized in the Consolidated statement of comprehensive income.
P Cash and cash equivalents
Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the Consolidated statement of financial position.
Consolidated financial statements and notes
Summary of significant accounting policies continued
Q Borrowings
Borrowings are recognized initially at fair value, net of transaction costs incurred. Subsequent to initial recognition, interest bearing borrowings are stated at amortized cost with any difference between cost and redemption value being recognized in the Consolidated statement of comprehensive income over the period of borrowing on an effective interest basis.
R Finance and operating leases
A lease is classified at the inception date as a finance lease or an operating lease. A lease that transfers substantially all the risks and rewards incidental to ownership to the Group is classified as a finance lease.
Finance leases are capitalized at the commencement of the lease at the inception date fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognized in finance costs in the Consolidated statement of comprehensive income.
A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term.
An operating lease is a lease other than a finance lease. Operating lease payments are recognized as an operating expense in the statement of profit or loss on a straight-line basis over the lease term.
Operating sub-lease income is recorded as operating income on a straight-line basis over the sub-lease term.
S Taxation
Current and deferred tax are recognized in the Consolidated statement of comprehensive income, except when the tax relates to items charged or credited directly to equity, in which case the tax is also dealt with directly in equity.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated interim financial statements. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit nor loss, it is not accounted for. Deferred tax liabilities are not recognized if they arise from the initial recognition of goodwill. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the Consolidated statement of financial position date and are expected to apply when the related deferred income tax asset is realized, or the deferred income tax liability is settled. Deferred income tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.
Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred tax assets and liabilities are offset where there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.
Current tax is recognized based on the amounts expected to be paid or recovered under the tax rates and laws that have been enacted or substantively enacted at the Consolidated statement of financial position date.
T Ordinary shares, share premium and dividend distribution
Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Dividend distributions to the Company’s shareholders are recognized as a liability in the Group’s financial statements in the period in which the dividends are approved by the Company’s shareholders. Interim dividends are recognized when they are paid.
Consolidated financial statements and notes
Summary of significant accounting policies continued
U Derivative financial instruments and hedge accounting
Financial assets and liabilities are recognized in the Group’s Consolidated statement of financial position when the Group becomes a party to the contractual provision of the instrument. Trade receivables are non-interest bearing and are initially recognized at fair value and subsequently measured at amortized cost less provisions for impairment based upon an expected credit loss methodology. Trade payables are non-interest bearing and are stated at their fair value. Derivative financial instruments are only used for economic hedging purposes and not as speculative investments.
The AmendmentsGroup uses derivative financial instruments, such as interest rate swaps, to hedge its interest rate risks. Such derivative financial instruments are initially recognized at fair value on the date on which the contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.
IFRS 9 replaces the provisions of IAS 12, ‘Income taxes’ do39 that relate to the recognition, classification and measurement of financial assets and financial liabilities, de-recognition of financial instruments, impairment of financial assets and hedge accounting. IFRS 9 also amends certain other standards covering financial instruments such as IAS 1 “Presentation of Financial Statements”.
IFRS 9 was effective for accounting periods beginning on or after January 1, 2018 and the impact of the adoption by the Group with effect from November 1, 2018 can be seen in Section X “Adoption of new and revised International Financial Reporting Standards”.
Hedge accounting is permitted under certain circumstances provided the following criteria are met:
At inception of the hedge, the documentation must include the risk management objective and strategy for undertaking the hedge, identification of the hedging instrument, the hedged item, the nature of the risk being hedged and how the entity will assess the hedging instrument’s effectiveness. Such hedges are expected to be effective in achieving offsetting changes in cash flows and are assessed on an on-going basis to determine the level of effectiveness.
The measurement of effectiveness determines the accounting treatment. For effective results, changes in the fair value of the hedging instrument should be recognized in other comprehensive income in the hedging reserve, while any material ineffectiveness should be recognized in the statement of comprehensive income. If prospective testing is not havesatisfactorily completed, all fair value movements on the hedging instrument should be recorded in the Consolidated statement of comprehensive income.
Hedge accounting is ceased prospectively if the instrument expires or is sold, terminated or exercised; the hedge criteria are no longer met; the forecast transaction is no longer expected to occur.
V Provisions
Provisions for onerous leases, property restoration costs, restructuring costs and legal claims are recognized when the Group has a material impactpresent legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognized for future operating losses.
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to the passage of time is recognized as an interest expense.
W Contingent Liabilities
Contingent liabilities are possible obligations that arise from past events and whose existence will be confirmed only by uncertain future events or present obligations that arise from past events where the transfer of economic resources is uncertain or cannot be reliability estimated. Contingent liabilities are not recognized in the consolidated financial statements, except if they arise from a business combination; they are disclosed in the notes to the consolidated interim financial statements.statements unless the likelihood of an outflow of economic resources is remote.
Consolidated financial statements and notes
Summary of significant accounting policies continued
The accounting policies adopted in these consolidated interim financial statements (unaudited)are consistent with those of the annual financial statements for the 18 months ended October 31, 2018, with the exception of the following standards, amendments to or interpretations of published standards that are now effective and have been adopted during the period:
| IFRS 15 |
IFRS 9 |
Amendments to IFRS 2, |
Annual improvements 2014–2016 (which includes amendments to IFRS |
The effect of initially applying this standard is mainly attributed to:
the earlier recognition of revenue from consideration paid to a customer; and
later recognition of costs of obtaining customer contracts.
IFRS 15 replaces guidance in IAS 18 and IAS 11. This standard establishes a new principle-based model of recognizing revenue from customer contracts. It introduces a five-step model that requires revenue to be recognized when control over goods and services are transferred to the customer. Additionally, there is a requirement in the new standard to capitalize certain incremental contract costs.
Set out below are the three primary areas of difference of the new accounting policy under IFRS 15.
Cost of obtaining customer contracts
The Group has considered the impact of IFRS 15 on the recognition of sales commission costs, which meet the definition of incremental costs of obtaining a contract under IFRS 15. The Group applies a practical expedient to expense the sales commission’s costs as incurred where the expected amortization period is one year or less. An asset is recognized for the sales commissions, which will typically be amortized across the contract length or customer life where the practical expedient cannot be applied. The customer life has been assessed as five years for the Group and six years in the SUSE business, until the date of disposal.
Consolidated financial statements and notes
Summary of significant accounting policies continued
X Adoption of new and revised International Financial Reporting Standards continued
Impact of IFRS 15 ‘Revenue from contracts with customers’ continued.
At transition date, the Group has only capitalized commissions paid for uncompleted contracts at November 1, 2018 and has amortized those balances in the year ended October 31, 2019, as compared to capitalizing all relevant commissions in future periods. By taking this practical expedient there is a benefit to profit before tax in the 12 months ended October 31, 2019 as the capitalization of commissions is greater than the amortization and consequently the overall commission costs is reduced under IFRS 15 compared to prior accounting policies where sales commissions were expensed as incurred.
Rebillable expenses
The Group now reports expenses that are recharged to customers, such as travel and accommodation, as Consulting revenue. Under previous accounting policies, these were presented as an offsetting entry within cost of sales.
Consideration payable to a customer
The Group makes payments, including rebates, to customers. The Group accounts for consideration payable to a customer as a reduction of the transaction price and therefore revenue. An adjustment is recorded as the total expected considerations payable over the contract term is accounted for as variable consideration at the outset of the contract and treated as a reduction in the transaction price to be recognized over the life of the contract, previously amounts were treated as revenue reductions when incurred. Where the payment is for a distinct good or service, then the Group accounts for the purchase in the same way as it does for purchases from suppliers in the normal course of business. Certain marketing costs, which were previously presented as an offsetting entry within revenue, are now presented as a Selling and Distribution cost
Presentation
Under the new IFRS 15 based policies, the Group no longer reports items as deferred revenue and accrued revenue. Instead, we present these as either a contract liability or contract asset. Rights to consideration from customers are only presented as accounts receivable if the rights are unconditional.
IFRS 9 “Financial Instruments”
IFRS 9 replaces the provisions of IAS 39 that relate to the recognition, classification and measurement of financial assets and financial liabilities, de-recognition of financial instruments, impairment of financial assets and hedge accounting. IFRS 9 also amends certain other standards covering financial instruments such as IAS 1 “Presentation of Financial Statements”.
IFRS 9 is effective for accounting periods beginning on or after January 1, 2018 and has been adopted by the Group with effect from November 1, 2018.
The classification and measurement basis for the Group’s financial assets is largely unchanged by the adoption of IFRS 9.
There is no impact on the Group’s accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss and the Group does not have any such liabilities. The de-recognition rules have been transferred from IAS 39 “Financial Instruments: Recognition and Measurement” and have not been changed.
Under the new hedge accounting rules as a general rule, more hedge relationships might be eligible for hedge accounting, as the standard introduces a more principles-based approach. The Group has confirmed that its current hedge relationships continue to qualify as hedges under IFRS 9.
The main impact of adopting IFRS 9 is the application of the expected credit loss model, which requires the recognition of impairment provisions based on expected credit losses (ECL) rather than only incurred credit losses as was the case under the prior standard, IAS 39.
The new impairment requirements apply to the consolidated Group’s financial assets classified at amortized cost, particularly to its trade receivables and contract assets. The Group has elected to apply the practical expedient allowed under IFRS 9 to recognize the full amount of credit losses that would be expected to be incurred over the full recovery period of trade receivables. The adoption of IFRS 9 resulted in an increase to trade receivables loss reserves of $20.0m being recorded on November 1, 2018 against retained earnings. IFRS 9 has no material impact on the carrying value of contract assets. There is no material impact on the Group’s basic or diluted EPS for the periods ended October 31, 2018 or 2019.
Consolidated financial statements and notes
Summary of significant accounting policies continued
X Adoption of new and revised International Financial Reporting Standards
IFRS 9 “Financial Instruments” continued
Reclassification of financial instruments on adoption of IFRS 9
Upon adoption of IFRS 9 on November 1, 2018, there were no changes to the measurement categories of financial instruments. The adoption of IFRS 9 did not result in any changes to the measurement of financial instruments other than as a result of applying the new expected credit loss methodology when determining the trade receivables loss allowance. The change in measure of the trade receivables loss allowance had no material impact on the Group’s basic or diluted earnings per share for the 12 months ended October 31, 2019 or the 18 months ended October 31, 2018.
| Measurement category | Carrying amount | ||||||||||||||||||
Note | IAS 39 | IFRS 9 | October 31, 2018 | IFRS 9 Adjustments1 | November 1, 2018 | ||||||||||||||
| $m | $m | $m | |||||||||||||||||
| Financial assets | |||||||||||||||||||
| Non-current | |||||||||||||||||||
Long-term pension assets | 25 | Available-for-sale financial assets | Fair value through other comprehensive income | 16.7 | - | 16.7 | |||||||||||||
Derivative financial instruments | 31 | Fair value through profit and loss | Fair value through profit and loss | 86.4 | - | 86.4 | |||||||||||||
| Current | |||||||||||||||||||
| Cash and cash | 18 | Amortized cost | Amortized cost | 620.9 | - | 620.9 | |||||||||||||
| Trade and other receivables | 16 | Amortized cost | Amortized cost | 1,212.0 | (20.0 | ) | 1,192.0 | ||||||||||||
| Financial liabilities – financial liabilities at amortized cost | |||||||||||||||||||
| Non-current | |||||||||||||||||||
| Borrowings (gross) | 20 | Amortized cost | Amortized cost | 4,946.6 | - | 4,946.6 | |||||||||||||
| Finance leases | 21 | Amortized cost | Amortized cost | 14.9 | - | 14.9 | |||||||||||||
| Provisions | 24 | Amortized cost | Amortized cost | 35.4 | - | 35.4 | |||||||||||||
| Current | |||||||||||||||||||
| Borrowings (gross) | 20 | Amortized cost | Amortized cost | 50.3 | - | 50.3 | |||||||||||||
| Finance leases | 21 | Amortized cost | Amortized cost | 13.6 | - | 13.6 | |||||||||||||
| Trade and other payables | 19 | Amortized cost | Amortized cost | 676.9 | - | 676.9 | |||||||||||||
| Provisions | 24 | Amortized cost | Amortized cost | 57.4 | - | 57.4 | |||||||||||||
1 The IFRS 9 adjustment of an increase in the trade receivables loss allowance of $20.0m resulted in a corresponding decrease in retained earnings of $20.0m, net of $4.4m of deferred tax.
Summary of quantitative impact of IFRS 15 “Revenue from contracts with customers” and IFRS 9 “Financial Instruments”
Under the IFRS 15 and IFRS 9, adoption methods chosen by the Group, prior period comparatives are not restated to conform to the new policies. Consequently, the period-over-period change of revenue and profit in the 12 months to October 31, 2019 is impacted by the new policies.
We have set out below the estimated impacts on the Group of the areas described above, including the adjustment to retained earnings recorded on the transition date of November 1, 2018, which resulted in a corresponding $52.4m asset being recorded relating to IFRS 15 and a $20.0m liability and related deferred tax asset of $4.4m being recorded relating to IFRS 9 on the balance sheet. The in-year impact of IFRS 9 therefore is immaterial.
Consolidated financial statements and notes
Summary of significant accounting policies continued
X Adoption of new and revised International Financial Reporting Standards continued
Summary of quantitative impact of IFRS 15 “Revenue from contracts with customers” and IFRS 9 “Financial Instruments” continued
The following tables summarize the impact of adopting IFRS 15 on the Group’s Consolidated statement of financial position as at October 31, 2019 and its Consolidated statement of comprehensive income for the 12 months then ended for each of the lines affected. There was no material impact on the Group’s Consolidated statement of cash flows for the 12 months ended October 31, 2019.
Consolidated statement of comprehensive income – impact of IFRS 15 in the year ended October 31, 2019
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | |||||||||||||||||||
Post IFRS 15 | IFRS 15 Adjustments | Pre IFRS 15 | ||||||||||||||||||
| Note | $m | $m | $m | $m | ||||||||||||||||
| Revenue | 1,2 | 3,348.4 | (16.1 | ) | 3,332.3 | 4,754.4 | ||||||||||||||
| Operating profit | 221.7 | (22.1 | ) | 199.6 | 376.8 | |||||||||||||||
| Finance costs | 6 | (282.4 | ) | - | (282.4 | ) | (350.4 | ) | ||||||||||||
| Finance income | 6 | 26.6 | - | 26.6 | 7.7 | |||||||||||||||
| (Loss)/ profit before tax | (34.1 | ) | (22.1 | ) | (56.2 | ) | 34.1 | |||||||||||||
| Taxation | 7 | 16.0 | 1.6 | 17.6 | 673.1 | |||||||||||||||
| (Loss)/profit from continuing operations | (18.1 | ) | (20.5 | ) | (38.6 | ) | 707.2 | |||||||||||||
| Profit from discontinued operation (attributable to equity shareholders of the Company) | 37 | 1,487.2 | 30.6 | 1,517.8 | 76.9 | |||||||||||||||
| Profit for the period | 1,469.1 | 10.1 | 1,479.2 | 784.1 | ||||||||||||||||
| Attributable to: | ||||||||||||||||||||
| Equity shareholders of the parent | 1,468.8 | 10.1 | 1,478.9 | 784.0 | ||||||||||||||||
| Non-controlling interests | 0.3 | - | 0.3 | 0.1 | ||||||||||||||||
| Profit for the period | 1,469.1 | 10.1 | 1,479.2 | 784.1 | ||||||||||||||||
| Earnings per share (cents) | ||||||||||||||||||||
| From continuing and discontinued operations | cents | cents | cents | cents | ||||||||||||||||
| - Basic | 9 | 388.50 | 2.67 | 391.17 | 201.70 | |||||||||||||||
| - Diluted | 9 | 384.35 | 2.64 | 386.99 | 196.17 | |||||||||||||||
| From continuing operations | ||||||||||||||||||||
| - Basic | 9 | (4.87 | ) | (5.42 | ) | (10.29 | ) | 181.91 | ||||||||||||
| - Diluted | 9 | (4.87 | ) | (5.42 | ) | (10.29 | ) | 176.92 | ||||||||||||
| Earnings per share (pence) | ||||||||||||||||||||
| From continuing and discontinued operations | pence | pence | pence | pence | ||||||||||||||||
| - Basic | 9 | 305.07 | 2.10 | 307.17 | 151.61 | |||||||||||||||
| - Diluted | 9 | 301.81 | 2.08 | 303.89 | 147.45 | |||||||||||||||
| From continuing operations | ||||||||||||||||||||
| - Basic | 9 | (3.82 | ) | (4.26 | ) | (8.08 | ) | 136.73 | ||||||||||||
| - Diluted | 9 | (3.82 | ) | (4.26 | ) | (8.08 | ) | 132.98 | ||||||||||||
Consolidated financial statements and notes
Summary of significant accounting policies continued
X Adoption of new and revised International Financial Reporting Standards continued
Summary of quantitative impact of IFRS 15 “Revenue from contracts with customers” and IFRS 9 “Financial Instruments” continued
Consolidated statement of financial position – impact of IFRS 15 on year ended October 31, 2019
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | |||||||||||||||||||
Post IFRS 15 | IFRS 15 Adjustments | Pre IFRS 15 | ||||||||||||||||||
| Note | $m | $m | $m | $m | ||||||||||||||||
| ASSETS | ||||||||||||||||||||
| Non-current assets | ||||||||||||||||||||
| Contract-related costs | 17 | 31.5 | (31.5 | ) | - | - | ||||||||||||||
| Current assets | ||||||||||||||||||||
| Trade and other receivables | 16 | 1,032.9 | (0.9 | ) | 1,032.0 | 1,272.0 | ||||||||||||||
| Contract-related costs | 17 | 19.3 | (19.3 | ) | - | - | ||||||||||||||
| LIABILITIES | ||||||||||||||||||||
| Current liabilities | ||||||||||||||||||||
| Trade and other payables | 19 | (611.0 | ) | - | (611.0 | ) | (676.9 | ) | ||||||||||||
| Contract liabilities | 23 | (1,045.9 | ) | - | (1,045.9 | ) | (1,134.7 | ) | ||||||||||||
| Non-current liabilities | ||||||||||||||||||||
| Contract liabilities | 23 | (149.9 | ) | - | (149.9 | ) | (178.1 | ) | ||||||||||||
| Deferred tax liabilities | 28 | (987.1 | ) | 9.0 | (978.1 | ) | (1,170.5 | ) | ||||||||||||
Table below shows the impact of IFRS 15 on opening retained earnings at November 1, 2018 and the continuing operations and discontinued operation for the 12 months ended October 31, 2019.
| Continuing operations | Discontinued operation | |||||||||||||||||||
Increase / (decrease) in opening retained earnings on November 1, 2018 | Increase / (decrease) in Revenue in the 12 months ended October 31, 2019 | Increase / (decrease) in Operating expenses in the 12 months ended October 31, 2019 | Increase / (decrease) in Profit before tax in the 12 months ended October 31, 2019 | Profit/(loss) from discontinued operation (attributable to equity shareholders of the Company) in the 12 months ended October 31, 2019 | ||||||||||||||||
| $m | $m | $m | $m | $m | ||||||||||||||||
| Cost of obtaining customer contracts | 64.7 | - | (21.2 | ) | 21.2 | (35.4 | ) | |||||||||||||
| Rebillable expenses | - | 2.4 | 2.4 | - | - | |||||||||||||||
| Consideration payable to a customer | 5.0 | 13.7 | 12.8 | 0.9 | (5.0 | ) | ||||||||||||||
| Deferred tax | (17.3 | ) | - | - | - | 9.8 | ||||||||||||||
52.4 | 16.1 | (6.0 | ) | 22.1 | (30.6 | ) | ||||||||||||||
During the 12 months ending October 31, 2019, the Group amortized $10.2m contract-related costs and capitalized $31.4m, resulting in a net increase in profit before tax of $21.2m (note 17).
Consolidated financial statements and notes
Summary of significant accounting policies continued
X Adoption of new and revised International Financial Reporting Standards continued
Summary of quantitative impact of IFRS 15 “Revenue from contracts with customers” and IFRS 9 “Financial Instruments” continued
Retained earnings – impact of IFRS 15 and IFRS 9
Retained earnings at October 31, 2018 | IFRS 15 Adjustment | IFRS 9 Adjustment | Retained earnings at November 1, 2018 | |||||||||||||
| $m | $m | $m | $m | |||||||||||||
| Retained earnings | 3,275.2 | 52.4 | (15.6 | ) | 3,312.0 | |||||||||||
The impact of the application of future new and revised IFRSs, which are expected to have a material impact to the Group is described below:
IFRS 16 “Leases”
In January 2016, the IASB published IFRS 16 “Leases”, which will replace IAS 17 “Leases” and IFRIC 4 “Determining whether an arrangement contains a lease”. IFRS 16 is effective for the Group from November 1, 2019.
IFRS 16 introduces a new definition of a lease, with a single lessee accounting model eliminating the previous distinction between operating leases and finance leases. Under IFRS 16, lessees are required to account for all leases in a similar manner to finance lease accounting under IAS 17. Current finance lease accounting remains largely unchanged and so the primary impact of the standard is on leases that are currently classified as operating leases.
The determination of when an arrangement contains a lease is largely unchanged from current requirements and the Group does not expect to recognize any new leases as a result of adopting IFRS 16.
The Group’s portfolio of leases materially comprises office facilities around the world that the Group uses to conduct its business, and vehicles for use by the workforce.
The Group has elected to implement IFRS 16 on a modified retrospective basis, which means the cumulative effect of initially applying the standard will be adjusted in retained earnings on November 1, 2019. The Group has a choice, on a lease-by-lease basis, to measure the right-of-use asset at either:
its carrying amount as if IFRS 16 had been applied since the commencement of the lease; or
an amount equal to the lease liability, adjusted for accruals or prepayments.
Where historical information is readily available for property leases, we intend to apply the former accounting method. For all other leases, we intend to apply the latter method.
The Group has other elections and accounting policy choices to make in adopting IFRS 16 and as such, the Group has elected not to apply IFRS 16 to leases for which the underlying asset is of low value, nor does the Group intend to apply IFRS 16 to leases of intangible assets.
Consolidated financial statements and notes
Summary of significant accounting policies continued
X Adoption of new and revised International Financial Reporting Standards continued
IFRS 16 ‘Leases’ continued
In adopting IFRS 16, the Group has applied the following practical expedients that are available in IFRS 16:
We have not reassessed whether an arrangement is, or contains, a lease at November 1, 2019. Instead, the Group has applied IFRS 16 to leases that had previously been identified as leases under IAS 17 “Leases” and IFRIC 4 “Determining whether an arrangement contains a lease”;
Where there is a group of leases with reasonably similar characteristics, we have applied a single discount rate to each lease portfolio;
The Group intends to rely on its assessment of whether leases are onerous by applying IAS 37 “Provisions, Contingent Liabilities and Contingent Assets” at October 31, 2019 as an alternative to performing an impairment review on the application date. The Group will adjust the right-of-use asset at November 1, 2019 by the amount of any provision for onerous leases recognized in the Consolidated statement of financial position on October 31, 2019;
The Group will exclude initial direct costs from the measurement of the right-of-use asset at November 1, 2019; and
Where the Group has measured a right-of-use asset as its carrying amount as if IFRS 16 had been applied since its inception, The Group has applied hindsight in assessing extension or termination options.
Effect of IFRS 16 on the Consolidated Statement of Financial Position
While the Group is still evaluating the effect that IFRS 16 will have on the Consolidated financial statements, the Group expects to recognize in the Consolidated Statement of Financial Position on November 1, 2020:
an asset of between $241.0m and $261.0m representing the Group’s right to use leased assets, including $20.9m of assets currently classified as finance leases within property, plant and equipment;
a liability of between $286.0m and $306.0m representing the Group’s contractual obligation to make lease payments (including $23.5m of liabilities currently classified as finance leases); and
a reduction of between $7.0m and $7.8m in retained earnings.
The asset of between $241.0m and $261.0m disclosed above excludes costs related to obligations to restore leased properties, which are capitalized as part of property, plant and equipment under IAS 17, which will be reclassified to right-of-use assets on adoption of IFRS 16.
The recognition of the new lease liability will increase the Group’s debt.
The operating lease expense currently recognized in the Consolidated statement of comprehensive Income will be replaced by a depreciation expense against the right-of-use asset and a finance expense related to the lease liability. The impact on profit before tax for the year ended October 31, 2020 is not expected to be material.
The impact on tax balances as a result of the above changes is still being assessed. There will be no net impact on the Consolidated statement of cash flows, however the operating lease cash out-flows within operating cash-flows will largely be replaced by a financing cash-outflow.
Key judgments and estimates made in calculating the initial impact of adoption include the determination of the lease term, the grouping of leases for the purpose of assigning a discount rate and calculating the discount rate.
The Group’s undiscounted non-cancellable operating lease commitments is $301.2m at October 31, 2019 (October 31, 2018: $228.0m) under IAS 17 “Leases” (note 34).
The lease liability of between $286.0m and $306.0m (inclusive of amounts already reported as finance leases under IAS 17) shown above with be included in Net debt as at November 1, 2019.
Consolidated financial statements and notes
Summary of significant accounting policies continued
X Adoption of new and revised International Financial Reporting Standards continued
The following interpretations and amendments to existing standards are not yet effective and have not been adopted early by the Group:
IFRIC 23, |
| - | Annual Improvements 2017 includes amendments to IFRS 3, “Business combinations”, IFRS 11 “Joint arrangements” and IAS 12 Income taxes applies for periods beginning on or after January 1, 2019. |
| - | Amendments to IAS 28 Investments in Associates and Joint Ventures – “Long-term Interests in Associates and Joint Ventures”, clarifies that IFRS 9 “Financial instruments” applies, including its impairment requirements to long-term interests in an associate or joint venture that form part of the net investment in the associate or joint venture but to which the equity method is not applied. |
| - | Amendments to IAS 19 “Employee Benefits” clarify that on a plan amendment, curtailment or settlement of a defined benefit plan, entities must use updated actuarial assumptions to determine its current service cost and net interest for the period; and the effect of the asset ceiling is disregarded when calculating the gain or loss on any settlement of the plan and is dealt with separately in other comprehensive income, effective January 1, 2019. |
| - | Amendments to References to the Conceptual Framework in IFRS Standards - Amendments to IFRS 2, IFRS 3, IFRS 6, IFRS 14, IAS 1, IAS 8, IAS 34, IAS 37, IAS 38, IFRIC 12, IFRIC 19, IFRIC 20, IFRIC 22, and SIC-32 to update those pronouncements with regard to the revised Conceptual Framework, effective January 1, 2020. |
| - | Amendments to IFRS 3 Business Combinations, effective January 1, 2020, subject to EU endorsement. |
| - | Amendments to IFRS 9, IAS 39 and IFRS 7: Interest rate benchmark reforms, effective January 1, 2020. |
The impact of the other standards, amendments and interpretations listed above will not have a material impact on the consolidated financial statements.
Critical accounting estimates and assumptions
A Potential impairment of goodwill and other intangible assets
Each period, or whenever there are changes in circumstances indicating that the carrying amounts may not be recoverable, the Group carries out impairment tests of goodwill and other assets which require estimates to be made of the value in use of its CGUs. These value in use calculations are dependent on estimates of future cash flows including long-term growth rates, the medium-term annual revenue growth rate by product group and an appropriate discount rate to be applied to future cash flows. Further details on these estimates and sensitivity of the carrying value of goodwill to the discount rate and the medium-term annual revenue growth rate by product group in particular are provided in note 10.
B Retirement benefit obligations
The valuation of retirement benefit obligations is dependent upon a number of assumptions that are estimated at the year-end date, including estimates of mortality rates, inflation, salary growth rates and the rate at which scheme liabilities are discounted. Further detail on these estimates and the sensitivity of the carrying value of the defined benefit obligation to these is provided in note 25.
Consolidated financial statements and notes
Summary of significant accounting policies continued
II Critical accounting estimates, assumptions and judgments continued
C Revenue recognition
The key areas of judgment in respect of recognizing revenue are the timing of recognition and how the different elements of bundled contracts are identified, for example between licence and maintenance revenues.
Revenue recognition under IFRS 15 is significantly more complex than under previous reporting requirements and necessitates the increased use of management judgments and estimates to produce financial information. IFRS 15 also introduces management judgment in relation to the timing of recognition of certain categories of cost. The most significant accounting judgments in applying IFRS 15 are disclosed below.
Identification of performance obligations
Revenue recognition requires significant judgment in identifying each distinct performance obligation requiring separate recognition in a multi-element contract (e.g. licence, maintenance, material rights for option to acquire additional products or services at discounted prices). This judgment impacts the timing of revenue recognition, as certain performance obligations are recognized at a point in time and others are recognized over the life of the contract, as explained in Accounting Policy D, and therefore the quantum of revenue and profit recognized in each period.
D Exceptional item classification
The Group classifies items as exceptional in line with Accounting Policy H. The classification of these items as an exceptional is a matter of judgment. This judgment is made by management after evaluating each item deemed to be exceptional against the criteria set out within the defined accounting policy.
E Provision for income taxes
The Group is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes including structuring activities undertaken by the Group and the application of complex transfer pricing rules. The Group recognizes liabilities for anticipated settlement of tax issues based on judgments of whether additional taxes will be due. Significant issues may take several periods to resolve. In making judgments on the probability and amount of any tax charge, management takes into account:
Status of the unresolved matter;
Strength of technical argument and clarity of legislation;
External advice;
Resolution process, past experience and precedents set with the particular taxing authority;
Agreements previously reached in other jurisdictions on comparable issues; and
Statute of limitations.
Key judgments in the functionalperiod were related to the structuring activities undertaken in relation to the disposal of SUSE and whether these activities would create an additional tax charge through US and other overseas tax legislation. Based on their assessment, the directors have concluded that no additional material tax provisions are required with regards to these matters.
The ultimate tax liability may differ from the amount provided depending on interpretations of tax law, settlement negotiations or changes in legislation. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. There is no estimate associated with the provision for income taxes that could be expected to result in a material change within the next 12 months.
Consolidated financial statements and notes
Summary of significant accounting policies continued
III Financial risk factors
The Group’s multi-national operations expose it to a variety of financial risks that include the effects of changes in credit risk, foreign currency risk, interest rate risk and liquidity risk. Risk management is carried out by a central treasury department under policies approved by the board of each entity.directors. Group treasury identifies and evaluates financial risks alongside the Group’s operating units. The board provides written principles for risk management together with specific policies covering areas such as foreign currency risk, interest rate risk, credit risk and liquidity risk, use of derivative financial instruments and non-derivative financial instruments as appropriate, and investment of excess funds.
A Credit risk
Financial instruments which potentially expose the Group to a concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash equivalents are deposited with high-credit quality financial institutions. The Group usesprovides credit to customers in the localnormal course of business. Collateral is not required for those receivables, but on-going credit evaluations of customers’ financial conditions are performed. The Group maintains a provision for impairment based upon the expected credit losses. The Group sells products and services to a wide range of customers around the world and therefore believes there is no material concentration of credit risk.
B Foreign currency asrisk
The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the functional currency, except for two entities based in Ireland (Novell Ireland Software Limited and Novell Ireland Real Estate Limited), the parent company,Euro, UK Pound Sterling, Israeli Shekel, Japanese Yen and the HPE Software entities, whereCanadian Dollar. Foreign exchange risk arises from future commercial transactions, recognized assets and liabilities and net investments in foreign operations. Foreign exchange risk arises when future commercial transactions, recognized assets and liabilities are denominated in a currency that is not the entity’s functional currency.
There were no foreign currency hedging transactions in place at October 31, 2019 and October 31, 2018. The Group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk.
C Interest rate risk
The Group’s income and cash generated from operations are substantially independent of changes in market interest rates. The Group’s interest rate risk arises from short-term and long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. The Group currently uses four interest rate swaps to manage its cash flow interest rate risk arising from potential increases in the LIBOR interest rate.
D Liquidity risk
Central treasury carries out cash flow forecasting for the Group to ensure that it has sufficient cash to meet operational requirements and to allow the repayment of the bank facility. Surplus cash in the operating units over and above what is required for working capital needs is transferred to Group treasury. These funds are used to repay bank borrowings or are invested in interest bearing current accounts, time deposits or money market deposits of the appropriate maturity period determined by consolidated cash forecasts.
Trade payables arise in the normal course of business and are all current. Onerous lease provisions are expected to mature between less than 12 months and eight years.
At October 31, 2019 gross borrowings of $4,775.0m (October 31, 2018: $4,996.9m) related to our senior secured debt facilities (note 20). $nil (October 31, 2018: $50.3m) is current of which $nil (October 31, 2018: $nil) is the US dollar. Certain HPE Software entities moved to local functional currencies from November 1, 2017, reflecting changesrevolving credit facility. The borrowings disclosed in their underlying business modelthe balance sheet are net of pre-paid facility costs and transactional conditions.original issue discounts.
Consolidated financial statements and notes
1 Segmental reporting
In accordance with IFRS 8, “Operating Segments”, the Group has derived the information for its operating segmentssegmental reporting using the information used by the Chief Operating Decision Maker (“CODM”) for the purposes of resource allocation and assessment of segment performance. The Chief Operating Decision Maker (“CODM”) is defined as the Operating Committee.
For the six12 months ended April 30, 2017 the Chief Operating Decision Marker (“CODM”) was defined as the Executive Committee.
On July 2, 2018, the Group announced the proposed sale of SUSE, one of the Group’s two historical operating segments, approved by the shareholders on August 21, 2018. As a result, for management purposes, following the agreement to dispose of the SUSE business, which is presented as a discontinued operation, the Group is organized into a single reporting segment comprising the Micro Focus Product Portfolio. Consistent with this the Chief Executive Officer of SUSE, Nils Brauckmann, stepped down from the Board on July 11, 2018 to concentrate on the sale. As such, the CODM from July 11, 2018 consisted of the Executive Chairman, the Chief Executive Officer and the Chief Financial Officer.
For the 12 months to October 31, 2017,2019, the CODM for existing Micro Focus and SUSE is defined as the Executive Committee, which consistsconsisted of the Chief Executive Chairman,Officer, Chief Financial Officer, Chief Operating Officer, Vice President Strategy and Planning and the Chief Executive OfficersHR Officer. With the disposal of Micro Focus and SUSE. The CODM for HPE Software in the 2-month post acquisition period to October 31, 2017SUSE business completed, the Group is Chris Hsu.organized into a single reporting segment.
Micro Focus Product Portfolio – The Micro Focus Product Portfolio segment contains mature infrastructure software products that are managed on a portfolio basis akin to a “fund of funds” investment portfolio. This portfolio is managed with a single product group that makes and maintains the software, whilst the software is sold and supported through a geographic Go to MarketGo-to-Market organization. The products within the existing Micro Focus Product Portfolio are grouped together into tenfive sub-portfolios based on industrial logic and management of the Micro Focus sub-portfolios: CDMS, HostApplication Modernization & Connectivity, IAS, Development & ITOM and Collaboration & Network and the newly acquired HPE Software sub-portfolios: IP Operation Management, Application Delivery Management, EnterpriseIT Operations Management, Security Product, Platform and Information Management Business.& Governance.
The internal management reporting that the Operating Committee receives includes a pool of centrally managed costs, arewhich were allocated between the Micro Focus and the SUSE segmentsbusiness (up to the date of disposal) based on identifiable segment specific costs with the remainder allocated based on other criteria including revenue and headcount.
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 20171 | ||||||||||||||
| Note | $m | $m | $m | |||||||||||||
| Reconciliation to Adjusted EBITDA: | ||||||||||||||||
| (Loss)/profit before tax | (34.1 | ) | 34.1 | 131.6 | ||||||||||||
| Finance costs | 6 | 282.4 | 350.4 | 96.8 | ||||||||||||
| Finance income | 6 | (26.6 | ) | (7.7 | ) | (1.0 | ) | |||||||||
| Depreciation of property, plant and equipment | 12 | 66.5 | 88.6 | 9.7 | ||||||||||||
| Amortization of intangible assets | 11 | 716.5 | 903.1 | 206.7 | ||||||||||||
| Exceptional items (reported in Operating profit) | 4 | 294.2 | 538.2 | 97.2 | ||||||||||||
| Share-based compensation charge | 33 | 68.8 | 64.3 | 31.5 | ||||||||||||
| Product development intangible costs capitalized | 11 | (16.5 | ) | (44.4 | ) | (27.6 | ) | |||||||||
| Foreign exchange loss/(credit) | 3 | 11.3 | (37.4 | ) | (2.9 | ) | ||||||||||
| Adjusted EBITDA | 1,362.5 | 1,889.2 | 542.0 | |||||||||||||
For the reportable segment, the total assets were $14,294.8m and the total liabilities were $8,018.5m as at October 31, 2017:
| Micro Focus | ||||||||||||||||||||||||
| Note | Existing Micro Focus | HPE Software | Micro Focus Total | SUSE | Total | |||||||||||||||||||
| $’000 | $’000 | $’000 | $’000 | $’000 | ||||||||||||||||||||
| Revenue before fair value adjustment to acquired deferred revenue | 501,286 | 595,071 | 1,096,357 | 165,263 | 1,261,620 | |||||||||||||||||||
| Unwinding of fair value adjustment to acquired deferred revenue | (948 | ) | (25,329 | ) | (26,277 | ) | (823 | ) | (27,100 | ) | ||||||||||||||
| Segment revenue | 500,338 | 569,742 | 1,070,080 | 164,440 | 1,234,520 | |||||||||||||||||||
| Directly managed costs | (262,936 | ) | (352,750 | ) | (615,686 | ) | (98,614 | ) | (714,300 | ) | ||||||||||||||
| Allocation of centrally managed costs | 19,751 | (3,800 | ) | 15,951 | (15,951 | ) | - | |||||||||||||||||
| Total segment costs | (243,185 | ) | (356,550 | ) | (599,735 | ) | (114,565 | ) | (714,300 | ) | ||||||||||||||
| Adjusted Operating Profit | 257,153 | 213,192 | 470,345 | 49,875 | 520,220 | |||||||||||||||||||
| Exceptional items | 7 | (98,480 | ) | |||||||||||||||||||||
| Share based compensation charge | 8 | �� | (18,302 | ) | ||||||||||||||||||||
| Amortization of purchased intangibles | 14 | (183,478 | ) | |||||||||||||||||||||
| Operating profit | 219,960 | |||||||||||||||||||||||
| Share of results of associates | 16 | (438 | ) | |||||||||||||||||||||
| Net finance costs | 11 | (73,788 | ) | |||||||||||||||||||||
| Profit before tax | 145,734 | |||||||||||||||||||||||
| Adjusted Operating Profit | 257,153 | 213,192 | 470,345 | 49,875 | 520,220 | |||||||||||||||||||
| Depreciation of property, plant and equipment | 15 | 4,605 | 10,385 | 14,990 | 1,299 | 16,289 | ||||||||||||||||||
| Amortization of purchased software intangibles | 14 | 994 | 942 | 1,936 | 817 | 2,753 | ||||||||||||||||||
| Foreign exchange (credit)/debit | (9,511 | ) | 2,331 | (7,180 | ) | 2,481 | (4,699 | ) | ||||||||||||||||
| Net capitalization of product development costs | 14 | (4,503 | ) | - | (4,503 | ) | - | (4,503 | ) | |||||||||||||||
| Adjusted EBITDA | 248,738 | 226,850 | 475,588 | 54,472 | 530,060 | |||||||||||||||||||
| Total assets | 17,607,743 | |||||||||||||||||||||||
| Total liabilities | (9,981,882 | ) | ||||||||||||||||||||||
| Micro Focus | ||||||||||||||||||||||||
| Note | Existing Micro Focus | HPE Software | Micro Focus Total | SUSE | Total | |||||||||||||||||||
| $’000 | $’000 | $’000 | $’000 | $’000 | ||||||||||||||||||||
| Revenue before fair value adjustment to acquired deferred revenue | 541,829 | - | 541,829 | 149,318 | 691,147 | |||||||||||||||||||
| Unwinding of fair value adjustment to acquired deferred revenue | (4,518 | ) | - | (4,518 | ) | (1,886 | ) | (6,404 | ) | |||||||||||||||
| Segment revenue | 537,311 | - | 537,311 | 147,432 | 684,743 | |||||||||||||||||||
| Directly managed costs | (277,297 | ) | - | (277,297 | ) | (81,197 | ) | (358,494 | ) | |||||||||||||||
| Allocation of centrally managed costs | 12,651 | - | 12,651 | (12,651 | ) | - | ||||||||||||||||||
| Total segment costs | (264,646 | ) | - | (264,646 | ) | (93,848 | ) | (358,494 | ) | |||||||||||||||
| Adjusted Operating Profit | 272,665 | - | 272,665 | 53,584 | 326,249 | |||||||||||||||||||
| Exceptional items | 7 | (41,048 | ) | |||||||||||||||||||||
| Share based compensation charge | 8 | (15,521 | ) | |||||||||||||||||||||
| Amortization of purchased intangibles | 14 | (106,394 | ) | |||||||||||||||||||||
| Operating profit | 163,286 | |||||||||||||||||||||||
| Share of results of associates | 16 | (1,127 | ) | |||||||||||||||||||||
| Net finance costs | 11 | (48,953 | ) | |||||||||||||||||||||
| Profit before tax | 113,206 | |||||||||||||||||||||||
| Adjusted Operating Profit | 272,665 | - | 272,665 | 53,584 | 326,249 | |||||||||||||||||||
| Depreciation of property, plant and equipment | 15 | 4,759 | - | 4,759 | 953 | 5,712 | ||||||||||||||||||
| Amortization of purchased software intangibles | 14 | 529 | - | 529 | 45 | 574 | ||||||||||||||||||
| Foreign exchange credit | (7,981 | ) | - | (7,981 | ) | (1,289 | ) | (9,270 | ) | |||||||||||||||
| Net capitalization of product development costs | 14 | (2,931 | ) | - | (2,931 | ) | - | (2,931 | ) | |||||||||||||||
| Adjusted EBITDA | 267,041 | - | 267,041 | 53,293 | 320,334 | |||||||||||||||||||
| Total assets | 4,707,021 | |||||||||||||||||||||||
| Total liabilities | 3,125,262 | |||||||||||||||||||||||
2019. No measure of total assets and total liabilities for each reportable segment has been reported for the 18 months ended October 31, 2018 and the 12 months ended April 30, 2017 as such amounts arethese were not regularly provided to the CODM.
Consolidated financial statements and notes
Notes to the consolidated interimfinancial statements
2 Supplementary information
Analysis by geography
The Group is domiciled in the UK. The Group’s total segmental revenue from external customers by geographical location is detailed below:
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 2017 | ||||||||||
| $m | $m | $m | ||||||||||
| UK | 206.9 | 299.6 | 52.2 | |||||||||
| USA | 1,523.0 | 2,279.8 | 551.5 | |||||||||
| Germany | 220.7 | 309.5 | 86.8 | |||||||||
| France | 123.3 | 195.5 | 43.2 | |||||||||
| Japan | 108.6 | 145.8 | 42.4 | |||||||||
| Other | 1,165.9 | 1,524.2 | 301.2 | |||||||||
| Total | 3,348.4 | 4,754.4 | 1,077.3 | |||||||||
The total of non-current assets other than financial instruments and deferred tax assets as at October 31, 2019 located in the USA is $4,623.0m (October 31, 2018: $5,145.8m), the total in the non-USA is $8,192.2m (October 31, 2018: $8,488.3m). They exclude trade and other receivables, derivative financial instruments and deferred tax.
As at April 30, 2017 the total of non-current assets other than financial instruments and deferred tax assets located in the UK was $147.7m, the total in the USA was $3,778.7m and the total of such non-current assets located in other countries was $67.3m. They exclude trade and other receivables, derivative financial instruments and deferred tax.
Analysis of revenue from contracts with customers
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 2017 | ||||||||||
| $m | $ | $m | $m | |||||||||
| Revenue from contracts with customers | 3,348.4 | 4,754.4 | 1,077.3 | |||||||||
| Being: | ||||||||||||
| Recognized over time: | ||||||||||||
| Maintenance revenue | 2,051.6 | 2,818.9 | 720.7 | |||||||||
| SaaS & other recurring revenue | 278.9 | 365.1 | - | |||||||||
| 2,330.5 | 3,184.0 | 720.7 | ||||||||||
| Recognized at point in time: | ||||||||||||
| Licence revenue | 800.0 | 1,206.1 | 308.4 | |||||||||
| Consulting revenue | 217.9 | 364.3 | 48.2 | |||||||||
| 1,017.9 | 1,570.4 | 356.6 | ||||||||||
| Total revenue | 3,348.4 | 4,754.4 | 1,077.3 | |||||||||
Consolidated financial statements (unaudited)and notes
Notes to the consolidated financial statements
Analysis of revenue by product
Set out below is an analysis of revenue from continuing operations recognized between the principal product portfolios for the six12 months ended October 31 2017 and six2019, 18 months ended October 31 2016:2018 and 12 months ended April 30, 2017. As a result of the acquisition of HPE Software business the Group’s product portfolios have been redefined. The comparatives for the 12 months ended April 30, 2017 have not been represented into the new product portfolios.
Six months ended October 31, 2017: | Licence $’000 | Maintenance $’000 | Subscription $’000 | Consulting $’000 | SaaS $’000 | Total $’000 | ||||||||||||||||||
| Existing Micro Focus: | ||||||||||||||||||||||||
| COBOL Development & Mainframe Solutions | 43,534 | 77,753 | - | 4,771 | - | 126,058 | ||||||||||||||||||
| Host Connectivity | 15,116 | 50,879 | - | 539 | - | 66,534 | ||||||||||||||||||
| Identity, Access & Security | 23,153 | 68,164 | - | 9,041 | - | 100,358 | ||||||||||||||||||
| Development & IT Operations Management Tools | 27,534 | 105,391 | - | 7,290 | - | 140,215 | ||||||||||||||||||
| Collaboration & Networking | 13,523 | 52,895 | - | 1,703 | - | 68,121 | ||||||||||||||||||
| Subtotal existing Micro Focus | 122,860 | 355,082 | - | 23,344 | - | 501,286 | ||||||||||||||||||
| Unwinding of fair value adjustment to acquired deferred revenue | - | (948 | ) | - | - | - | (948 | ) | ||||||||||||||||
| Total existing Micro Focus | 122,860 | 354,134 | - | 23,344 | - | 500,338 | ||||||||||||||||||
| HPE Software Acquisition: | ||||||||||||||||||||||||
| IT Operation Management | 95,717 | 84,345 | - | 31,835 | 1,582 | 213,479 | ||||||||||||||||||
| Application Delivery Management | 40,278 | 99,619 | - | 7,229 | 16,667 | 163,793 | ||||||||||||||||||
| Enterprise Security Product | 42,897 | 46,294 | - | 9,287 | 5,981 | 104,459 | ||||||||||||||||||
| Platform | 18,655 | 10,905 | - | 2,909 | 95 | 32,564 | ||||||||||||||||||
| Information Management Business | 14,866 | 30,002 | - | 4,562 | 31,346 | 80,776 | ||||||||||||||||||
| Subtotal HPE Software Acquisition | 212,413 | 271,165 | - | 55,822 | 55,671 | 595,071 | ||||||||||||||||||
| Unwinding of fair value adjustment to acquired deferred revenue | (7,592 | ) | (13,751 | ) | - | (682 | ) | (3,304 | ) | (25,329 | ) | |||||||||||||
| Total HPE Software Acquisition | 204,821 | 257,414 | - | 55,140 | 52,367 | 569,742 | ||||||||||||||||||
| Total Micro Focus Product Portfolio | 327,681 | 611,548 | - | 78,484 | 52,367 | 1,070,080 | ||||||||||||||||||
| SUSE Product Portfolio | - | - | 163,455 | 1,808 | - | 165,263 | ||||||||||||||||||
| Unwinding of fair value adjustment to acquired deferred revenue | - | - | (823 | ) | - | - | (823 | ) | ||||||||||||||||
| Total SUSE Product Portfolio | - | - | 162,632 | 1,808 | - | 164,440 | ||||||||||||||||||
| Total | 327,681 | 611,548 | 162,632 | 80,292 | 52,367 | 1,234,520 | ||||||||||||||||||
| Six months ended October 31, 2016: | ||||||||||||||||||||||||
| Micro Focus Product Portfolio: | ||||||||||||||||||||||||
| COBOL Development & Mainframe Solutions | 52,447 | 75,320 | - | 5,433 | - | 133,200 | ||||||||||||||||||
| Host Connectivity | 38,898 | 52,998 | - | 935 | - | 92,831 | ||||||||||||||||||
| Identity, Access & Security | 19,845 | 71,078 | - | 10,211 | - | 101,134 | ||||||||||||||||||
| Development & IT Operations Management Tools | 24,509 | 111,974 | - | 7,336 | - | 143,819 | ||||||||||||||||||
| Collaboration & Networking | 11,174 | 57,379 | - | 2,292 | - | 70,845 | ||||||||||||||||||
| Total Micro Focus Product Portfolio | 146,873 | 368,749 | - | 26,207 | - | 541,829 | ||||||||||||||||||
| Unwinding of fair value adjustment to acquired deferred revenue | - | (4,518 | ) | - | - | - | (4,518 | ) | ||||||||||||||||
| Total Micro Focus Product Portfolio | 146,873 | 364,231 | - | 26,207 | - | 537,311 | ||||||||||||||||||
| SUSE Product Portfolio | - | - | 146,811 | 2,507 | - | 149,318 | ||||||||||||||||||
| Unwinding of fair value adjustment to acquired deferred revenue | - | - | (1,886 | ) | - | - | (1,886 | ) | ||||||||||||||||
| Total SUSE Product Portfolio | - | - | 144,925 | 2,507 | - | 147,432 | ||||||||||||||||||
| Total | 146,873 | 364,231 | 144,925 | 28,714 | - | 684,743 | ||||||||||||||||||
Licence | Maintenance | Consulting | SaaS & other recurring | Total | ||||||||||||||||
| $m | $m | $m | $m | $m | ||||||||||||||||
| Application Modernization & Connectivity | 170.9 | 326.1 | 11.7 | - | 508.7 | |||||||||||||||
| Application Delivery Management | 130.3 | 485.4 | 18.2 | 87.8 | 721.7 | |||||||||||||||
| IT Operations Management | 237.5 | 645.8 | 127.5 | 11.0 | 1,021.8 | |||||||||||||||
| Security | 185.7 | 416.7 | 43.9 | 35.0 | 681.3 | |||||||||||||||
| Information Management & Governance | 75.6 | 183.6 | 16.6 | 145.9 | 421.7 | |||||||||||||||
| Subtotal | 800.0 | 2,057.6 | 217.9 | 279.7 | 3,355.2 | |||||||||||||||
| Deferred revenue haircut | - | (6.0 | ) | - | (0.8 | ) | (6.8 | ) | ||||||||||||
| Total Revenue | 800.0 | 2,051.6 | 217.9 | 278.9 | 3,348.4 | |||||||||||||||
18 months ended October 31, 2018:
Licence | Maintenance | Consulting | SaaS & other recurring | Total | ||||||||||||||||
| $m | $m | $m | $m | $m | ||||||||||||||||
| Application Modernization & Connectivity | 256.3 | 497.6 | 17.9 | - | 771.8 | |||||||||||||||
| Application Delivery Management | 185.5 | 646.7 | 41.6 | 114.1 | 987.9 | |||||||||||||||
| IT Operations Management | 363.1 | 869.9 | 192.8 | 15.1 | 1,440.9 | |||||||||||||||
| Security | 291.6 | 580.2 | 81.4 | 41.6 | 994.8 | |||||||||||||||
| Information Management & Governance | 117.2 | 267.2 | 32.6 | 203.1 | 620.1 | |||||||||||||||
| Subtotal | 1,213.7 | 2,861.6 | 366.3 | 373.9 | 4,815.5 | |||||||||||||||
| Deferred revenue haircut | (7.6 | ) | (42.7 | ) | (2.0 | ) | (8.8 | ) | (61.1 | ) | ||||||||||
| Total Revenue | 1,206.1 | 2,818.9 | 364.3 | 365.1 | 4,754.4 | |||||||||||||||
12 months ended April 30, 2017:
Licence | Maintenance | Consulting | SaaS & other recurring | Total | ||||||||||||||||
| $m | $m | $m | $m | $m | ||||||||||||||||
| Application Modernization & Connectivity | 106.0 | 149.7 | 9.5 | - | 265.2 | |||||||||||||||
| Application Delivery Management | 69.1 | 104.9 | 1.9 | - | 175.9 | |||||||||||||||
| IT Operations Management | 48.6 | 141.3 | 18.4 | - | 208.3 | |||||||||||||||
| Security | 55.5 | 219.6 | 13.8 | - | 288.9 | |||||||||||||||
| Information Management & Governance | 29.2 | 112.1 | 4.6 | - | 145.9 | |||||||||||||||
| Subtotal | 308.4 | 727.6 | 48.2 | - | 1,084.2 | |||||||||||||||
| Deferred revenue haircut | - | (6.9 | ) | - | - | (6.9 | ) | |||||||||||||
| Total Revenue | 308.4 | 720.7 | 48.2 | - | 1,077.3 | |||||||||||||||
Consolidated financial statements and notes
Notes to the consolidated interim financial statements (unaudited)
The (loss)/profit before tax is stated after charging/(crediting) the following operating costs/(gains) classified by the nature of the costs/(gains):
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 2017 | ||||||||||||||
| Note | $m | $m | $m | |||||||||||||
| Staff costs | 33 | 1,409.0 | 2,095.0 | 480.7 | ||||||||||||
| Depreciation of property, plant and equipment: | ||||||||||||||||
| - owned assets | 12 | 52.6 | 71.2 | 9.7 | ||||||||||||
| - leased assets | 12 | 13.9 | 17.4 | - | ||||||||||||
| Loss on disposal of property, plant and equipment | 12 | 3.6 | 4.7 | 0.5 | ||||||||||||
| Amortization of intangibles | 11 | 716.5 | 903.1 | 206.7 | ||||||||||||
| Inventories | ||||||||||||||||
| – cost of inventories recognized as a debit (included in cost of sales) | 15 | 0.1 | 0.3 | - | ||||||||||||
| Operating lease rentals payable: | ||||||||||||||||
| - plant and machinery | 7.0 | 8.8 | 2.9 | |||||||||||||
| - property | 58.9 | 85.3 | 18.4 | |||||||||||||
| Provision for receivables impairment | 16 | 16.0 | 40.0 | 2.0 | ||||||||||||
| Foreign exchange gain on derivative financial instruments | (6.9 | ) | - | - | ||||||||||||
| Foreign exchange loss/(gain) | 18.2 | (37.4 | ) | (2.9 | ) | |||||||||||
4 Exceptional items
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 2017 | ||||||||||||||
| Reported within Operating profit: | Note | $m | $m | $m | ||||||||||||
| Integration costs | 245.9 | 279.0 | 27.6 | |||||||||||||
| Pre-acquisition costs | - | 43.0 | 58.0 | |||||||||||||
| Acquisition costs | 1.5 | 27.1 | 2.6 | |||||||||||||
| Property related costs | 16.3 | 38.1 | 5.6 | |||||||||||||
| Severance and legal costs | 32.1 | 129.7 | 3.4 | |||||||||||||
| Divestiture | 2.1 | 21.3 | - | |||||||||||||
| Gain on disposal of Atalla | (3.7 | ) | - | - | ||||||||||||
| 294.2 | 538.2 | 97.2 | ||||||||||||||
| Reported within finance costs: | ||||||||||||||||
| Finance costs incurred in escrow period | 6 | - | 6.4 | - | ||||||||||||
| Reported within finance income: | ||||||||||||||||
| Finance income earned in escrow period | 6 | - | (0.6 | ) | - | |||||||||||
| - | 5.8 | - | ||||||||||||||
| Exceptional costs before tax | 294.2 | 544.0 | 97.2 | |||||||||||||
| Tax: | ||||||||||||||||
| Tax effect of exceptional items | (54.3 | ) | (105.9 | ) | (11.6 | ) | ||||||||||
| Tax exceptional item | - | (692.3 | ) | - | ||||||||||||
| (54.3 | ) | (798.2 | ) | (11.6 | ) | |||||||||||
| Reported within profit from discontinued operation (attributable to equity shareholders of the Company): | ||||||||||||||||
Gain on disposal of discontinued operation | 37 | (1,458.5 | ) | - | - | |||||||||||
| Exceptional profit after tax | (1,218.6 | ) | (254.2 | ) | 85.6 | |||||||||||
Six months ended October 31, 2017 | Six months ended October 31, 2016 | |||||||
| Reported within Operating profit: | $’000 | $’000 | ||||||
| Integration costs | 20,029 | 13,432 | ||||||
| Pre-acquisition costs | 43,025 | 19,669 | ||||||
| Acquisition costs | 25,820 | 1,468 | ||||||
| Property related (release)/ costs | (196 | ) | 2,521 | |||||
| Severance and legal costs | 9,802 | 3,958 | ||||||
| 98,480 | 41,048 | |||||||
| Reported within finance costs: | ||||||||
| Finance costs incurred in escrow period (note 11) | 6,326 | - | ||||||
| Reported within finance income: | ||||||||
| Finance income earned in escrow period (note 11) | (553 | ) | - | |||||
| 5,773 | - | |||||||
| Total exceptional costs | 104,253 | 41,048 | ||||||
F-41
Consolidated financial statements and notes
Notes to the consolidated financial statements
4 Exceptional items continued
Exceptional items are allocated to the financial statement lines (for example: cost of sales) in the Consolidated statement of comprehensive income based on the nature and function of the costs, for example restructuring costs related to employees are classified where their original employment costs are recorded.
Integration costs
Integration costs of $20.0 million$245.9m for the six12 months ended October 31, 2017 (2016: $13.4m)2019 arose from the continuing work being done in integrating the HPE Software business into Micro Focus as referred to in Item 5.A. Operating results. Other activities include system and processes integration costs. Integration costs of $279.0m in the 18 months ended October 31, 2018 (12 months to April 30, 2017: $27.6m) arose mainly from the work done to integrate Serena, GWAVA and the HPE Software organizationsbusiness into the Micro Focus Product Portfolio. Other activities include; development of a new Group intranet and website and system integration costs.business.
There were no pre-acquisition costs of $43.0 million for the six12 months to October 31, 2019. Pre-acquisition costs of $43.0m for the 18 months ended October 31, 2017 (2016: $19.7m) relate2018 (12 month ended April 30, 2017: $58.0m) related to the evaluation of the acquisition of HPE Software (note 28),business which was announced in SeptemberOctober 2016 and was completed on September 1, September 2017. The costs relaterelated to due diligence work, legal work on the acquisition agreements, professional advisors on the transaction and pre-integration costs relating to activities in readiness for the HPE Software acquisition across all functions of the existing Micro Focus business.costs.
Acquisition costs
The acquisition costs of $25.8 million for$1.5m in the six12 months ended October 31, 2017 include2019 related mostly to acquisition of Interset Software Inc. (note 38). The acquisition costs in the 18 months ended October 31, 2018 of $27.1m included external costs in evaluating and completing the acquisition of HPE Software in August 2017 and includes $7.7 million in respect of US excise tax payable on the award of Long Term Incentives and Additional Share Grants to four senior employees arising as a result of the HPE Software acquisition (2016: $1.5 million relatedbusiness and costs relating to the acquisitionsacquisition of Serena in May 2016 and GWAVA in September 2016).COBOL-IT SAS. The external costs mostlymainly relate to due diligence work, legal work on the acquisition agreements and professional advisors on the transaction. Costs of $2.6m in the 12 months to April 30, 2017 related to the acquisitions of Serena in May 2016 and GWAVA in October 2016.
Property related costs of $0.2 million in relation to property related items$16.3m for the six12 months ended October 31, 2017 (2016:2019 (18 months to October 31, 2018: $38.1m, 12 months to April 30, 2017: $5.6m) relate to the assessment and reassessment of leases on empty or sublet properties held by the Group, in particular in North America, and the cost of $2.5m) mainly relates tosite consolidations resulting from the releaseongoing integration of a provision of $1.0 million following the renegotiation of a lease in North America.HPE software business into Micro Focus.
Severance and legal costs
Severance and legal costs of $9.8 million$32.1m for the six12 months ended October 31, 2017 (2016: $4.0m)2019 (18 months ended October 31, 2018: $129.7m, 12 months to April 30, 2017: $3.4m) relate mostly to termination costs for employees after acquisition, relating to the integration of the HPE Software employees after acquisition. 2016business into Micro Focus. The costs relatefor the 12 months ended April 30, 2017 of $3.4m related to termination costs for senior Serena executives after acquisition.
Divestiture
Divestiture costs of $2.1m for the 12 months ended October 31, 2019 relate mostly to employee activities (18 months ended October 31, 2018: $21.3m, 12 months to April 30, 2017: $nil) relate mostly to fees paid to professional advisors involved in the disposal of the SUSE business completed in 2019.
Gain on disposal of Atalla
The non-recurring gain on disposal of $3.7m for the 12 months ended October 31, 2019 (18 months ended October 31, 2018: $nil) relates to Atalla business disposal (note 37).
Finance income and finance costs
Finance costs incurred in escrow period of $6.3 million relates$6.4m and finance income of $0.6m for the 18 months ended October 31, 2018 (12 months to April 30 2017: $nil) related to interest charges(charged and gained) on additional term loan facilities drawn down in relation to the acquisition of the HPE Software business, between the date the facilities were drawn into escrow and the acquisition date of HPE Software.date. No such income or costs arose in the 12 months ended October 31, 2019.
F-42
Consolidated financial statements and notes
Notes to the acquisition between the date the facilities were drawn into escrow and the acquisition date of HPE Software.consolidated financial statements
4 Exceptional items continued
Tax
The estimated total tax effect of exceptional items on the income statement is a credit to the income statement of $25.5 million$54.3m for the six12 months ended October 31, 2017 (2016: $5.6m).
Gain on disposal of discontinued operation
The element of the profit for the period on the discontinued operation related to the gain on disposal is included as an exceptional item (note 37).
5 Services provided by the Group’s auditors and network of firms
During the 12 months ended October 31, 2019, the Group obtained the following services from the Group’s auditors as detailed below which have been disclosed in line with the ICAEW Technical Release “Tech 14/13 FRF” guidance on the disclosure of auditor remuneration for the audit of accounts and other (non-audit) services, in accordance with the requirements of the Companies (Disclosure of Auditor Remuneration and Liability Agreements) Regulation 2008 (Statutory Instrument 2008/489) as amended:
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 2017 | ||||||||||
| $m | $m | $m | ||||||||||
| Audit of Company | 12.8 | 12.2 | 1.0 | |||||||||
| Audit of subsidiaries | 3.9 | 1.9 | 2.5 | |||||||||
| Total audit | 16.7 | 14.1 | 3.5 | |||||||||
| Audit related assurance services | 3.6 | 0.9 | 2.6 | |||||||||
| Other assurance services | - | 0.7 | - | |||||||||
| Total assurance services | 3.6 | 1.6 | 2.6 | |||||||||
| Tax compliance services | - | 0.2 | - | |||||||||
| Tax advisory services | 0.1 | 0.2 | 0.1 | |||||||||
| Services relating to taxation | 0.1 | 0.4 | 0.1 | |||||||||
| Other non-audit services | - | 0.1 | 7.5 | |||||||||
| Total | 20.4 | 16.2 | 13.7 | |||||||||
The 12 months ended October 31, 2019 fees and 18 months ended October 31, 2018 fees represent fees paid to KPMG LLP, as the current auditor. Fees for the years ended April 30, 2017 represent amounts paid to the previous auditor, PricewaterhouseCoopers LLP.
Of the audit related assurance services engagements undertaken in the 12 months ended 31 October 2019 only one was considered to be significant. This related to the controls attestation of the Group’s implementation of Sarbanes-Oxley Section 404, for which a fee of $3.0m was paid.
Audit related assurance services in the 18 months ended October 31, 2018 relate primarily to the additional audit procedures performed on the Micro Focus International plc financial statements that are included in US filings and two interim reviews, for both six-month periods ending October 31, 2017 and April 30, 2018.
Other assurance services in the 18 months ended October 31, 2018 relate primarily to the auditor’s assurance work in relation to the SUSE divestiture and licence verification compliance work.
The remaining non-audit services in the period included a limited amount of tax compliance and tax advice.
Consolidated financial statements and notes
Notes to the consolidated financial statements
6 Finance income and finance costs
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 2017 | ||||||||||||||
| Note | $m | $m | $m | |||||||||||||
| Finance costs | ||||||||||||||||
| Interest on bank borrowings | 225.4 | 276.5 | 81.2 | |||||||||||||
| Commitment fees | 1.9 | 3.3 | 0.8 | |||||||||||||
| Amortization of facility costs and original issue discounts | 46.7 | 60.4 | 14.2 | |||||||||||||
| Finance costs on bank borrowings | 274.0 | 340.2 | 96.2 | |||||||||||||
| Net interest expense on retirement obligations | 25 | 2.4 | 2.8 | 0.6 | ||||||||||||
| Finance lease expense | 2.0 | 2.7 | - | |||||||||||||
| Interest rate swaps: cash flow hedges, transfer from equity | - | 3.4 | - | |||||||||||||
| Other | 4.0 | 1.3 | - | |||||||||||||
| Total | 282.4 | 350.4 | 96.8 | |||||||||||||
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 2017 | ||||||||||||||
| $m | $m | $m | ||||||||||||||
| Finance income | ||||||||||||||||
| Bank interest | 16.3 | 3.6 | 0.4 | |||||||||||||
| Interest on non-plan pension assets | 25 | 0.3 | 0.6 | 0.4 | ||||||||||||
| Interest rate swaps: cash flow hedges, transfer to equity | 9.9 | - | - | |||||||||||||
| Other | 0.1 | 3.5 | 0.2 | |||||||||||||
| Total | 26.6 | 7.7 | 1.0 | |||||||||||||
| Net finance cost | 255.8 | 342.7 | 95.8 | |||||||||||||
| Included within exceptional items | ||||||||||||||||
| Finance costs incurred in escrow period | 4 | - | 6.4 | - | ||||||||||||
| Finance income earned in escrow period | 4 | - | (0.6 | ) | - | |||||||||||
| - | 5.8 | - | ||||||||||||||
7 Taxation
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 2017 | ||||||||||
| $m | $m | $m | ||||||||||
| Current tax | ||||||||||||
| Current period | 163.9 | 245.8 | 33.9 | |||||||||
| Adjustments to tax in respect of previous periods | (35.3 | ) | (14.7 | ) | 1.7 | |||||||
| 128.6 | 231.1 | 35.6 | ||||||||||
| Deferred tax | ||||||||||||
| Origination and reversal of temporary differences | (139.7 | ) | 26.4 | (22.4 | ) | |||||||
| Adjustments to tax in respect of previous periods | 24.5 | 1.2 | (4.4 | ) | ||||||||
| Previously unrecognized temporary differences | (29.4 | ) | - | - | ||||||||
| Impact of change in tax rates | - | (931.8 | ) | (1.3 | ) | |||||||
| (144.6 | ) | (904.2 | ) | (28.1 | ) | |||||||
| Total tax (credit)/expense | (16.0 | ) | (673.1 | ) | 7.5 | |||||||
Consolidated financial statements and notes
Notes to the consolidated financial statements
7 Taxation continued
For the 12 months ended October 31, 2019, a deferred tax debit of $7.6m (18 months ended October 31, 2018: $23.7m debit; 12 months ended April 30, 2017: $23.0m credit) and current tax credit of $13.1m (18 months ended October 31, 2018: $4.1m credit, 12 months ended April 30, 2017: $4.1m credit) have been recognized in equity in relation to share (2016: $111.0 million or 49.74 cents per share)options.
A current tax credit of $23.3m (18 months ended October 31, 2018: $16.4m debit) has been recognized in the hedging reserve (note 31).
In addition, a deferred tax credit of $13.0m (18 months ended October 31, 2018: $4.3m credit, 12 months ended April 30, 2017: $0.3m debit) has been recognized in the Consolidated statement of comprehensive income in relation to defined benefit pension schemes and a deferred tax credit of $14.0m (18 months ended October 31, 2018: $nil, 12 months ended April 30, 2017: $nil) in relation to foreign exchange movements on intangibles.
The tax charge for the 12 months ended October 31, 2019 is higher than the standard rate of corporation tax in the UK of 19.00% (18 months ended October 31, 2018: 19.00%; 12 months ended April 30, 2017: 19.92%). The differences are explained below:
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 2017 | ||||||||||
| $m | $m | $m | ||||||||||
| (Loss)/profit before taxation | (34.1 | ) | 34.1 | 131.6 | ||||||||
| Tax at UK corporation tax rate 19.00% (2018: 19.00%; 2017: 19.92%) | (6.5 | ) | 6.5 | 26.0 | ||||||||
| Effects of: | ||||||||||||
| Tax rates other than the UK standard rate | (4.4 | ) | 17.8 | 0.6 | ||||||||
| Intra-Group financing | (42.8 | ) | (52.5 | ) | (15.7 | ) | ||||||
| Interest restrictions | - | 31.8 | - | |||||||||
| Innovation tax credit benefits | (13.5 | ) | (21.4 | ) | (9.8 | ) | ||||||
| US foreign inclusion income | 43.7 | 39.0 | 0.4 | |||||||||
| US transition tax | - | 238.3 | - | |||||||||
| Share options | 7.1 | 10.2 | - | |||||||||
| Movement in deferred tax not recognized | 14.4 | 7.3 | 0.2 | |||||||||
| Previously unrecognized temporary differences | (29.4 | ) | - | - | ||||||||
| Effect of change in tax rates | - | (931.9 | ) | (1.3 | ) | |||||||
| Expenses not deductible and other permanent differences | 26.2 | (4.7 | ) | 9.8 | ||||||||
| (5.2 | ) | (659.6 | ) | 10.2 | ||||||||
| Adjustments to tax in respect of previous periods: | ||||||||||||
| Current tax | (35.3 | ) | (14.7 | ) | 1.7 | |||||||
| Deferred tax | 24.5 | 1.2 | (4.4 | ) | ||||||||
| (10.8 | ) | (13.5 | ) | (2.7 | ) | |||||||
| Total taxation | (16.0 | ) | (673.1 | ) | 7.5 | |||||||
The Group continues to benefit from the UK’s Patent Box regime, US R&D tax credits and other innovation-based tax credits offered by certain jurisdictions, the benefit for the 12 months ended October 31, 2019 being $13.5m (18 months ended October 31, 2018: $21.4m, 12 months ended April 30, 2017: $9.8m). The Group realized benefits in relation to intra-Group financing of $42.8m for the 12 months ended October 31, 2019 ($52.5m for the 18 months ended October 31, 2018; 12 months ended April 30, 2017: $15.7m). The benefits mostly relate to arrangements put in place to facilitate the acquisitions of the HPE Software business, The Attachmate Group and Serena.
US foreign inclusion income of $43.7m arising in the 12 months ended October 31, 2019 (18 months ended October 31, 2018: $39.0m; 12 months ended April 30 2017: $0.4m) is largely driven by new US tax legislation introduced as part of US tax reforms in 2018.
The Group recognized a net overall charge in respect of share options due to deferred tax credits arising on options held at the balance sheet date being lower than the current tax charge because of the terms of the options.
Consolidated financial statements and notes
Notes to the consolidated financial statements
7 Taxation continued
During the period the directors reassessed the deferred tax asset recognized in relation to interest restrictions and have recognized an asset to the extent that sufficient taxable temporary differences exist at the balance sheet date. Previously a deferred tax asset was not recognized as the directors forecast that the Group would be unable to utilize the interest restrictions in future periods. This has resulted in a credit of $29.4m in the period in respect of historical interest amounts, recognized as previously unrecognized temporary differences above.
The movement in deferred tax assets and liabilities during the period is analyzed in note 28.
The expenses not deductible and other permanent differences charge of $26.2m (18 months ended October 31, 2018: $4.8m credit; 12 months ended April 30, 2017: $9.8m) included $8.1m in relation to uncertain tax positions and $6.1m related to irrecoverable withholding tax.
The Group realized a net credit in relation to the true-up of prior period, current and deferred tax estimates of $10.8m for the 12 months ended October 31, 2019 (18 months ended October 31, 2018: $13.5m; 12 months ended April 30, 2017: $2.7m).
The Group’s tax charge is subject to various factors, many of which are outside the control of the Group, including changes in local tax legislation, and specifically US tax reform, the OECD’s Base Erosion and Profit Shifting project and the consequences of Brexit.
In April 2019, the European Commission published its final decision on its state aid investigation into the UK’s “Financing Company Partial Exemption” legislation and concluded that part of the legislation is in breach of EU State Aid rules. Similar to other UK based international groups that have acted in accordance with the UK legislation in force at the time, the Group may be affected by the finding and is monitoring developments. The UK Government and UK-based international companies, including the Group, have appealed to the General Court of the European Union against the decision. The UK Government is required to start collection proceedings in advance of the appeal results and it is possible that the Group will be required to make a payment in the year ending October 31, 2020. If the decision of the European Commission is upheld, the Group have calculated the maximum potential liability to be $60.3m. Based on its current assessment the Group believes that no provision is required in respect of this issue. The UK legislation affected by this EU Commission finding was amended on January 1, 2019 to be compliant with EU law and therefore no longer impacts the Group and so no additional tax liability will accrue in future periods that could be subject to the same challenge.
8 Dividends
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 2017 | ||||||||||
| Equity - ordinary | $m | $m | $m | |||||||||
| Final paid 58.33 cents (2018: 58.33 cents, 2017: 49.74 cents) per ordinary share | 240.7 | 133.9 | 111.0 | |||||||||
| First Interim paid 58.33 cents (2018: 34.60 cents; 2017: 29.73 cents) per ordinary share | 198.5 | 156.2 | 66.5 | |||||||||
| Second Interim paid nil cents (2018: 58.33 cents; 2017: nil cents) per ordinary share | - | 252.1 | - | |||||||||
| 439.2 | 542.2 | 177.5 | ||||||||||
The directors announce an interimannounced a final dividend of 34.6058.33 cents per share (2016: 29.73 cents per share) payable on February 9, 2018May 7, 2020 to shareholders who are registered at January 19, 2018.April 14, 2020. This interimfinal dividend, amounting to $150.6 million (2016: $66.5 million)$194.5m, has not been recognized, as a liability as at October 31, 2017.2019.
Consolidated financial statements and notes
Notes to the consolidated interim financial statements (unaudited)
The calculation of the basic earnings per share has been based on the earnings attributable to owners of the parent and the weighted average number of shares for each period.
Reconciliation of the earnings and weighted average number of shares:
| Six months ended October 31, 2017 | Six months ended October 31, 2016 | |||||||||||||||||||||||||||||||
Total earnings | Weighted average number of shares | Per share amount | Per share amount | Total earnings | Weighted average number of shares | Per share amount | Per share amount | |||||||||||||||||||||||||
| $’000 | ‘000 | Cents | Pence | $’000 | ‘000 | Cents | Pence | |||||||||||||||||||||||||
| Basic EPS | ||||||||||||||||||||||||||||||||
Earnings attributable to ordinary shareholders 1 | 106,301 | 296,698 | 35.83 | 27.50 | 90,638 | 229,067 | 39.57 | 29.49 | ||||||||||||||||||||||||
| Effect of dilutive securities | ||||||||||||||||||||||||||||||||
| Options | 10,207 | 8,689 | ||||||||||||||||||||||||||||||
| Diluted EPS | ||||||||||||||||||||||||||||||||
| Earnings attributable to ordinary shareholders | 106,301 | 306,905 | 34.64 | 26.58 | 90,638 | 237,756 | 38.12 | 28.41 | ||||||||||||||||||||||||
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 2017 | ||||||||||
| Earnings ($m) | ||||||||||||
| (Loss)/profit for the period from continuing operations | (18.1 | ) | 707.2 | 124.1 | ||||||||
| Profit for the period from discontinued operation | 1,487.2 | 76.9 | 33.7 | |||||||||
| 1,469.1 | 784.1 | 157.8 | ||||||||||
| Number of shares (m) | ||||||||||||
| Weighted average number of shares | 378.1 | 388.7 | 229.2 | |||||||||
| Dilutive effects of shares | 4.1 | 11.0 | 8.2 | |||||||||
| 382.2 | 399.7 | 237.4 | ||||||||||
| Earnings per share | ||||||||||||
| Basic earnings per share (cents) | ||||||||||||
| Continuing operations | (4.87 | ) | 181.91 | 54.17 | ||||||||
| Discontinued operation | 393.37 | 19.79 | 14.71 | |||||||||
| Total Basic earnings per share | 388.50 | 201.70 | 68.88 | |||||||||
| Diluted earnings per share (cents) | ||||||||||||
Continuing operations 1 | (4.87 | ) | 176.92 | 52.31 | ||||||||
| Discontinued operation | 389.16 | 19.25 | 14.20 | |||||||||
Total Diluted earnings per share 1 | 384.35 | 196.17 | 66.51 | |||||||||
| Basic earnings per share (pence) | ||||||||||||
| Continuing operations | (3.82 | ) | 136.73 | 41.88 | ||||||||
| Discontinued operation | 308.89 | 14.88 | 11.37 | |||||||||
| Total Basic earnings per share | 305.07 | 151.61 | 53.25 | |||||||||
| Diluted earnings per share (pence) | ||||||||||||
Continuing operations 1 | (3.82 | ) | 132.98 | 40.44 | ||||||||
| Discontinued operation | 305.59 | 14.47 | 10.98 | |||||||||
Total Diluted earnings per share 1 | 301.81 | 147.45 | 51.42 | |||||||||
| Earnings attributable to ordinary shareholders | ||||||||||||
| From continuing operations | (18.1 | ) | 707.2 | 124.1 | ||||||||
| Excluding non-controlling interests | (0.3 | ) | (0.1 | ) | 0.1 | |||||||
| (Loss)/profit for the period from continuing operations | (18.4 | ) | 707.1 | 124.2 | ||||||||
| From discontinued operation | 1,487.2 | 76.9 | 33.7 | |||||||||
| 1,468.8 | 784.0 | 157.9 | ||||||||||
| Average exchange rate | $ | 1.27/£1 | $ | 1.33/£1 | $ | 1.29/£1 | ||||||
1Earnings As there is a loss from continuing operations attributable to the ordinary equity shareholders isof the profitCompany for the six12 months ended October 31, 20172019 ($18.4m), the Diluted EPS is reported as equal to Basic EPS, as no account can be taken of $106.6 million (2016: $90.6 million), excluding amountsthe effect of dilutive securities under IAS 33. There was total earnings attributable to non-controlling interestsordinary equity shareholders of $0.3 million (2016: $nil).the Company for the 12 months ended October 31, 2019 of $1,468.8m and therefore the effect of dilutive securities can be reflected in the total Diluted EPS above.
The weighted average number of shares excludes treasury shares that do not have dividend rights. Earnings per share, expressed in pence, has used the average exchange rate for the six months ended October 31, 2017 of $1.30 to £1 (2016: $1.34 to £1)rights (note 29).
Six months ended October 31, 2017 | Six months ended October 31, 2016 | |||||||
| $’000 | $’000 | |||||||
| Finance costs | ||||||||
| Interest on bank borrowings | 59,540 | 41,627 | ||||||
| Amortization of facility costs and original issue discounts | 13,448 | 7,302 | ||||||
| Finance costs on bank borrowings | 72,988 | 48,929 | ||||||
| Net interest expense on retirement obligations (note 22) | 579 | 262 | ||||||
| Finance lease expense | 1,161 | - | ||||||
| Interest rate swaps: cash flow hedges, transfer from equity | 456 | - | ||||||
| Other | 303 | 264 | ||||||
| Total | 75,487 | 49,455 | ||||||
| Finance income | ||||||||
| Bank interest | 1,030 | 315 | ||||||
| Interest on non-plan pension assets (note 22) | 231 | 187 | ||||||
| Other | 438 | - | ||||||
| Total | 1,699 | 502 | ||||||
| Net finance cost | 73,788 | 48,953 | ||||||
| Included within exceptional items (note 7) | ||||||||
| Finance costs incurred in escrow period | 6,326 | - | ||||||
| Finance income earned in escrow period | (553 | ) | - | |||||
| 5,773 | - | |||||||
Consolidated financial statements and notes
Notes to the consolidated interim financial statements (unaudited)
| October 31, 2019 | October 31, 2018 | |||||||||||
| Note | $m | $m | ||||||||||
| Cost and net book amount | ||||||||||||
| At November 1 /May 1 | 6,805.0 | 2,828.6 | ||||||||||
| Acquisitions | 38 | 26.8 | 4,863.9 | |||||||||
| Effects of movements in exchange rates | (160.5 | ) | - | |||||||||
| Reclassification to assets held for sale | 37 | - | (887.5 | ) | ||||||||
| 6,671.3 | 6,805.0 | |||||||||||
| A segment-level summary of the goodwill allocation is presented below: | ||||||||||||
| Micro Focus | 6,671.3 | 6,805.0 | ||||||||||
| October 31, 2017 | October 31, 2016 | |||||||
| Cost and Net book value | $’000 | $’000 | ||||||
| At May 1, | 2,828,604 | 2,436,168 | ||||||
| Acquisition (note 28) | 5,105,472 | 391,657 | ||||||
| At October 31 | 7,934,076 | 2,827,825 | ||||||
| A segment-level summary of the goodwill allocation is presented below: | ||||||||
| Micro Focus | 7,074,510 | 1,968,259 | ||||||
| SUSE | 859,566 | 859,566 | ||||||
| 7,934,076 | 2,827,825 | |||||||
Goodwill acquired through business combinations has been allocated to a cash-generating unit (“CGU”) for the purpose of impairment testing.
The additions to goodwill arising in the six12 months ended October 31, 2017 relate2019, related to the acquisition of HPEInterset Software Inc. of $5,105.5 million$26.8m (note 28).38) has been allocated to the Micro Focus CGU as this is consistent with the segment reporting that is used in internal management reporting. Of the additions to goodwill, there is no amount that isall amounts are expected to be deductible for tax purposes.
In addition, during the year, following a review of the allocation of goodwill to foreign operations, the directors have determined that goodwill of $6,497.5m, which arose on previous acquisitions (in particular the acquisitions of the HPE Software business on September 1, 2017 and The Attachmate Group on November 20, 2014, being the two most significant) should have been allocated into functional currencies of the underlying foreign operations. The re-denomination has given rise to a total reduction in the carrying value of goodwill of $160.5m, as a result of foreign exchange movement, that has been recognized in the 12 months ended October 31, 2019. Had this allocation taken place from the acquisition dates, a $154.9m decrease in the carrying value of goodwill would have been recognized in the 18 months ended October 31, 2018 and a cumulative decrease of $69.4m in the carrying value would have been recognized as at May 1, 2017. As this change has no impact on the Group’s profit before taxation, or statement of cash flows and as the net prior-period impact of $224.3m is not material in the context of the overall value of goodwill or net assets, it is, in the judgment of the directors, appropriate to affect the change in allocation in the current period. Movements in Other comprehensive income are not considered a key performance metric.
This change in the carrying value of $160.5m is a part of the amount reflected in the line “effect of movements in exchange rates” in the table above. The change has been recognized within “currency translation differences – continuing operations” in other comprehensive income, and subsequently the translation reserve in equity.
This adjustment has had no impact on the conclusion of the Group’s annual impairment review.
Impairment test
Impairment of goodwill is tested annually, or more frequently where there is indication of impairment. An impairment test is a comparison of the carrying value of the assets of the CGU with their recoverable amount. Where the recoverable amount is less than the carrying value, an impairment results. The Group performed its annual test for impairment as at October 31, 2019 (2018: October 31, 2018), incorporating its knowledge of the business into that testing and noting at that date the market capitalization was less than the net assets of the Group, which was taken into account during the impairment test.
Consolidated financial statements and notes
Notes to the consolidated financial statements
10 Goodwill continued
The recoverable amount of the Micro Focus CGU is determined based on its Value In Use (“VIU”). The VIU includes estimates about the future financial performance of the CGU and is based on five-year projections and then a terminal value calculation. It utilizes discounted board approved forecasts for the first four years and the fifth year reflects management’s expectation of the long-term growth prospects which have been applied based upon the expected operating performance of the CGU and growth prospects in the CGU’s market. The cash flow projections and inputs combine past performance with adjustments as appropriate where the directors believe that past performance and rates are not indicative of future performance and rates. The VIU calculation excludes the cash outflow and resulting cash inflow assumptions arising from the investment decisions made in the Strategic Review and which are included within the board approved forecasts. Impairment reviews under IAS 36 are required to exclude the estimated cash inflow and outflows arising from improving or enhancing the performance of existing assets, and therefore the impairment test performed in the current year considers the recoverable amount of the CGU based on its current condition without the impact of the approved investment plans.
Key assumptions
Key assumptions in the VIU are considered to be the discount rate, medium term annual revenue growth rate by product group and the long-term cash flow growth rate. These have been assessed taking into consideration the current economic climate and the resulting impact on expected growth and discount rates.
The medium-term annual revenue growth rate by product group, long-term cash flow growth rate and discount rate used in the VIU calculation are:
| 2019 | 2018 | |||||||
| Long-term cash flow growth rate | 1.0 | % | 1.0 | % | ||||
Pre-tax discount rate 1 | 10.3 | % | 9.7 | % | ||||
Medium term annual revenue growth rate by product group2 | (2.0)% to 2.1 | % | - | |||||
1 This equates to a Post-tax discount rate of 8.0% (2018: 7.8%)
2 Medium-term annual revenue growth rate by product group was not a key assumption in 2018 and so has not been presented.
Sensitivity analysis
The results of the sensitivity analysis are set out below. In undertaking this analysis, the directors have considered reasonably possible changes in the key assumptions that could have an adverse impact, taking into consideration that the Group is insulated from some significant adverse impacts by its geographical spread and that the Group’s cost base is flexible and could quickly respond to market changes. The headroom and breakeven sensitivities disclosed below are on the VIU calculation which, as explained above, excludes the cash outflow and resulting cash inflow assumptions arising from the investment decisions made in the Strategic Review.
The directors have assessed that a reasonably possible change in the discount rate is an absolute movement of 2.0% (2018: 2.0%) and this increase would cause the carrying value of the Micro Focus CGU to exceed its recoverable amount. An increase in the discount rate of 0.4% to 10.7% (2018: increase of 1.3% to 11.0%) would reduce the amount by which the recoverable amount exceeds its carrying value from $0.5bn to $nil (2018: from $2.2bn to $nil).
The directors have assessed that a reasonably possible change in the average of the medium-term annual revenue growth rate by product group is an absolute reduction of 2.0% and this decrease would cause the carrying value of the Micro Focus CGU to exceed its recoverable amount (2018: not a reasonably possible change). A decrease in the average of the medium-term annual revenue growth rate by product group of 0.7% would reduce the amount by which the recoverable amount exceeds its carrying value from $0.5bn to $nil. This sensitivity has been presented exclusive of mitigating actions, such as cost saving, that would be taken in such a scenario and which would at least partially offset such a reduction in cash flows.
The directors have also assessed that there is not a reasonably possible change in the long-term cash flow growth rate that would reduce the recoverable amount to below its carrying value.
No impairment charge resulted from the goodwill tests for impairment in the 12 months ended October 31, 2019 (18 months ended October 31, 2018: no impairment).
Consolidated financial statements and notes
Notes to the consolidated financial statements
11 Other intangible assets
| Purchased intangibles | ||||||||||||||||||||||||||||||||
Purchased software | Product development costs | Technology | Trade names | Customer relationships | Lease contracts | Total | ||||||||||||||||||||||||||
| Note | $m | $m | $m | $m | $m | $m | $m | |||||||||||||||||||||||||
| Cost | ||||||||||||||||||||||||||||||||
| At November 1, 2018 | 141.1 | 259.1 | 2,158.5 | 267.7 | 5,377.2 | 15.0 | 8,218.6 | |||||||||||||||||||||||||
| Acquisitions – Interset Software Inc. | 38 | - | - | 44.5 | 4.2 | 12.5 | - | 61.2 | ||||||||||||||||||||||||
| Additions | 12.3 | 16.5 | - | - | - | - | 28.8 | |||||||||||||||||||||||||
| Additions – external consultants | - | 0.5 | - | - | - | - | 0.5 | |||||||||||||||||||||||||
| Disposals | (7.4 | ) | (19.1 | ) | - | - | - | - | (26.5 | ) | ||||||||||||||||||||||
| Effects of movements in exchange rates | 0.7 | - | (24.4 | ) | (4.6 | ) | (66.4 | ) | (0.1 | ) | (94.8 | ) | ||||||||||||||||||||
| At October 31, 2019 | 146.7 | 257.0 | 2,178.6 | 267.3 | 5,323.3 | 14.9 | 8,187.8 | |||||||||||||||||||||||||
| Accumulated amortization | ||||||||||||||||||||||||||||||||
| At November 1, 2018 | 50.1 | 206.7 | 478.9 | 48.9 | 801.5 | 3.2 | 1,589.3 | |||||||||||||||||||||||||
| Amortization charge for the period | 34.1 | 26.7 | 200.1 | 20.9 | 424.8 | 9.9 | 716.5 | |||||||||||||||||||||||||
| Disposals | (7.4 | ) | (19.1 | ) | - | - | - | - | (26.5 | ) | ||||||||||||||||||||||
| Effects of movements in exchange rates | 0.1 | - | (10.1 | ) | (1.8 | ) | (22.0 | ) | - | (33.8 | ) | |||||||||||||||||||||
| At October 31, 2019 | 76.9 | 214.3 | 668.9 | 68.0 | 1,204.3 | 13.1 | 2,245.5 | |||||||||||||||||||||||||
| Net book amount at October 31, 2019 | 69.8 | 42.7 | 1,509.7 | 199.3 | 4,119.0 | 1.8 | 5,942.3 | |||||||||||||||||||||||||
| Net book amount at October 31, 2018 | 91.0 | 52.4 | 1,679.6 | 218.8 | 4,575.7 | 11.8 | 6,629.3 | |||||||||||||||||||||||||
| Purchased intangibles | ||||||||||||||||||||||||||||
Purchased software | Product Development costs | Technology | Trade names | Customer relationships | Lease contracts | Total | ||||||||||||||||||||||
| $’000 | $’000 | $’000 | $’000 | $’000 | $’000 | $’000 | ||||||||||||||||||||||
| Net book value | ||||||||||||||||||||||||||||
| At May 1, 2016 | 1,967 | 43,249 | 149,784 | 194,656 | 576,899 | - | 966,555 | |||||||||||||||||||||
| Acquisitions | 79 | - | 90,175 | 22,111 | 210,744 | - | 323,109 | |||||||||||||||||||||
| Additions | 2,226 | 15,048 | - | - | - | - | 17,274 | |||||||||||||||||||||
| Additions – external consultants | - | 297 | - | - | - | - | 297 | |||||||||||||||||||||
| Charge for the period | (574 | ) | (12,117 | ) | (37,027 | ) | (5,501 | ) | (63,866 | ) | - | (119,085 | ) | |||||||||||||||
| Exchange adjustments | (1,966 | ) | - | - | - | - | - | (1,966 | ) | |||||||||||||||||||
| At October 31, 2016 | 1,732 | 46,477 | 202,932 | 211,266 | 723,777 | - | 1,186,184 | |||||||||||||||||||||
| Net book value | ||||||||||||||||||||||||||||
| At May 1, 2017 | 3,665 | 49,127 | 175,931 | 200,772 | 659,875 | - | 1,089,370 | |||||||||||||||||||||
| Acquisition (note 28) | 72,825 | - | 1,775,000 | 188,000 | 4,222,000 | 15,000 | 6,272,825 | |||||||||||||||||||||
| Additions | 18,266 | 16,878 | - | - | - | - | 35,144 | |||||||||||||||||||||
| Additions- external consultants | - | 506 | - | - | - | - | 506 | |||||||||||||||||||||
| Charge for the period | (2,753 | ) | (12,375 | ) | (63,101 | ) | (10,109 | ) | (109,820 | ) | (448 | ) | (198,606 | ) | ||||||||||||||
| Exchange adjustments | 433 | (66 | ) | - | - | - | - | 367 | ||||||||||||||||||||
| At October 31, 2017 | 92,436 | 54,070 | 1,887,830 | 378,663 | 4,772,055 | 14,552 | 7,199,606 | |||||||||||||||||||||
During the period, the estimated useful life of certain purchased software was revised. The net effect of the changes in the current financial period was an increase in amortization expense by $8.9m.
Consolidated financial statements and notes
Notes to the consolidated financial statements
11 Other intangible assets continued
| Purchased intangibles | ||||||||||||||||||||||||||||||||
Purchased software | Product development costs | Technology | Trade names | Customer relationships | Lease contracts | Total | ||||||||||||||||||||||||||
| Note | $m | $m | $m | $m | $m | $m | $m | |||||||||||||||||||||||||
| Cost | ||||||||||||||||||||||||||||||||
| At May 1, 2017 | 24.6 | 213.8 | 398.9 | 239.6 | 972.4 | - | 1,849.3 | |||||||||||||||||||||||||
| Continuing operations: | ||||||||||||||||||||||||||||||||
| Acquisitions - HPE Software business | 38 | 72.8 | - | 1,809.0 | 163.0 | 4,480.0 | 15.0 | 6,539.8 | ||||||||||||||||||||||||
| Acquisitions – COBOL-IT | 38 | - | - | 1.5 | 0.2 | 12.3 | - | 14.0 | ||||||||||||||||||||||||
| Acquisitions – Covertix | 38 | 2.5 | - | - | - | - | - | 2.5 | ||||||||||||||||||||||||
| Additions | 46.8 | 44.4 | - | - | - | - | 91.2 | |||||||||||||||||||||||||
| Additions – external consultants | - | 0.9 | - | - | - | - | 0.9 | |||||||||||||||||||||||||
| Effects of movements in exchange rates | (0.4 | ) | - | - | - | - | - | (0.4 | ) | |||||||||||||||||||||||
| Discontinued operation: | ||||||||||||||||||||||||||||||||
| Reclassification to current assets classified as held for sale | 37 | (5.2 | ) | - | (50.9 | ) | (135.1 | ) | (87.5 | ) | - | (278.7 | ) | |||||||||||||||||||
| At October 31, 2018 | 141.1 | 259.1 | 2,158.5 | 267.7 | 5,377.2 | 15.0 | 8,218.6 | |||||||||||||||||||||||||
| Accumulated amortization | ||||||||||||||||||||||||||||||||
| At May 1, 2017 | 21.0 | 164.7 | 223.0 | 38.8 | 312.5 | - | 760.0 | |||||||||||||||||||||||||
| Continuing operations: | ||||||||||||||||||||||||||||||||
| Amortization charge for the period | 30.7 | 42.0 | 280.5 | 26.7 | 520.0 | 3.2 | 903.1 | |||||||||||||||||||||||||
| Effects of movements in exchange rates | (0.9 | ) | - | - | - | - | - | (0.9 | ) | |||||||||||||||||||||||
| Discontinued operation: | ||||||||||||||||||||||||||||||||
| Amortization charge for the period | 0.8 | - | 13.4 | 9.1 | 16.9 | - | 40.2 | |||||||||||||||||||||||||
| Reclassification to current assets classified as held for sale | 37 | (1.5 | ) | - | (38.0 | ) | (25.7 | ) | (47.9 | ) | - | (113.1 | ) | |||||||||||||||||||
| At October 31, 2018 | 50.1 | 206.7 | 478.9 | 48.9 | 801.5 | 3.2 | 1,589.3 | |||||||||||||||||||||||||
| Net book amount at October 31, 2018 | 91.0 | 52.4 | 1,679.6 | 218.8 | 4,575.7 | 11.8 | 6,629.3 | |||||||||||||||||||||||||
| Net book amount at April 30, 2017 | 3.6 | 49.1 | 175.9 | 200.8 | 659.9 | - | 1,089.3 | |||||||||||||||||||||||||
Intangible assets, with the exception of purchased software and internally generated product development costs, relate to identifiable assets purchased as part of the Group’s business combinations. Intangible assets are amortized on a straight-line basis over their expected useful economic life - see Accounting Policy K.
In addition, during the year, following a review of the allocation of purchased intangible assets to foreign operations, the directors have determined that intangible assets of $7,321.0m which arose on previous acquisitions (in particular the acquisitions of the HPE Software business on September 1, 2017 and The Attachmate Group on November 20, 2014, being the two most significant) should have been allocated into functional currencies of the underlying foreign operations.
The re-denomination has given rise to a total reduction in the carrying value of purchased intangible assets of $61.0m that has been recognized in the 12 months ended October 31, 2019. Had this allocation taken place from the acquisition dates, a $40.5m decrease in the carrying value of purchased intangible assets would have been recognized in the 18 months ended October 31, 2018 and a cumulative decrease of $20.8m in the carrying value would have been recognized as at May 1, 2017. As this change has no impact on the statement of cash flows and as the net prior-period impact of $61.3m and the impact on profit before taxation is not material in the context of the overall value of purchased intangible assets or net assets, it is, in the judgment of the directors, appropriate to effect the change in allocation in the current period. Movements in Other comprehensive income are not considered a key performance metric.
Consolidated financial statements and notes
Notes to the consolidated financial statements
11 Other intangible assets continued
This change in the carrying value of $61.0m consists of $94.8m and $33.8m reflected in the lines “effect of movements in exchange rates” for cost, this includes the cumulative impact on amortization of acquisition intangible assets which is not considered material, and cumulative amortization respectively in the table above. $83.3m of this has been recognized as “currency translation differences – continuing operations” in other comprehensive income, and subsequently the translation reserve in equity, and an offsetting $21.6m of this has been recognized as “currency translation differences – continuing operations” in other comprehensive income and subsequently retained earnings within equity.
Expenditure totaling $35.7 million (2016: $17.6 million)totalling $29.3m (18 months to October 31, 2018: $91.2m) was made in the six12 months ended October 31, 2017,2019, including $17.4 million$17.0m in respect of development costs and $18.3 million$12.3m of purchased software. The acquisition of HPEInterset Software Inc. in the 12 months ended October 31, 2019 gave rise to thean addition of $6,272.8 million $61.2m to purchased intangibles (note 28)38). The acquisitions of the HPE Software business ($6,539.8m), COBOL-IT ($14.0m) and Covertix ($2.5m) in the 18 months ended October 31, 2018 gave rise to an addition of $6,556.3m to purchased intangibles (note 38).
Of the $17.4 million $17.0m of additions to product development costs, in the six$16.5m (18 months to October 31, 2018: $44.4m) relates to internal product development costs and $0.5m (18 months ended October 31, 2017 (2016: $15.3m), $16.9m (2016: $15.0m) relates to internal development costs and $0.5 million (2016: $0.3 million)2018: $0.9m) to external consultants’ product development costs.
At October 31, 2017,2019, the unamortized lives of technology assets were in the range of threetwo to 1510 years, customer relationships in the range of twoone to 1513 years and trade names in the range of three10 to 20 years. The HPE Software business acquired purchased intangibles, the largest component of the Group, have another 10 years life remaining for technology and 13 years life remaining for customer relationships purchased intangibles.
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 2017 | ||||||||||
| For continuing operations: | $m | $m | $m | |||||||||
| Cost of sales: | ||||||||||||
| - amortization of product development costs | 26.7 | 42.0 | 22.4 | |||||||||
| - amortization of acquired purchased technology | 200.1 | 280.5 | 59.0 | |||||||||
| Selling and distribution: | ||||||||||||
| - amortization of acquired purchased trade names, customer relationships and lease contracts | 455.6 | 549.9 | 124.2 | |||||||||
| Administrative expenses: | ||||||||||||
| - amortization of purchased software | 34.1 | 30.7 | 1.1 | |||||||||
| Total amortization charge for the period | 716.5 | 903.1 | 206.7 | |||||||||
| Research and development: | ||||||||||||
| - capitalization of product development costs | 16.5 | 44.4 | 27.7 | |||||||||
Consolidated financial statements and notes
Notes to the consolidated financial statements
12 Property, plant and equipment
Freehold land and buildings | Leasehold improvements | Computer equipment | Fixtures and fittings | Total | ||||||||||||||||||||
| Note | $m | $m | $m | $m | $m | |||||||||||||||||||
| Cost | ||||||||||||||||||||||||
| At November 1, 2018 | 14.3 | 79.2 | 103.3 | 29.1 | 225.9 | |||||||||||||||||||
| Acquisition – Interset Software Inc. | 38 | - | - | 0.2 | 0.1 | 0.3 | ||||||||||||||||||
| Additions | - | 37.7 | 24.6 | 3.0 | 65.3 | |||||||||||||||||||
| Disposals | - | (3.6 | ) | (3.0 | ) | - | (6.6 | ) | ||||||||||||||||
| Reclassification | - | - | 19.8 | (19.8 | ) | - | ||||||||||||||||||
| Effects of movements in exchange rates | (0.3 | ) | 0.2 | (0.5 | ) | 0.8 | 0.2 | |||||||||||||||||
| At October 31, 2019 | 14.0 | 113.5 | 144.4 | 13.2 | 285.1 | |||||||||||||||||||
| Accumulated depreciation | ||||||||||||||||||||||||
| At November 1, 2018 | 2.2 | 34.3 | 36.6 | 8.5 | 81.6 | |||||||||||||||||||
| Charge for the period | 0.3 | 18.8 | 46.1 | 1.3 | 66.5 | |||||||||||||||||||
| Disposals | - | (1.7 | ) | (1.3 | ) | - | (3.0 | ) | ||||||||||||||||
| Reclassification | - | - | 4.6 | (4.6 | ) | - | ||||||||||||||||||
| Effects of movements in exchange rates | (0.3 | ) | 0.3 | (0.9 | ) | 0.4 | (0.5 | ) | ||||||||||||||||
| At October 31, 2019 | 2.2 | 51.7 | 85.1 | 5.6 | 144.6 | |||||||||||||||||||
| Net book amount at October 31, 2019 | 11.8 | 61.8 | 59.3 | 7.6 | 140.5 | |||||||||||||||||||
| Net book amount at November 1, 2018 | 12.1 | 44.9 | 66.7 | 20.6 | 144.3 | |||||||||||||||||||
Net book value of $15.2m of laptop computer equipment previously disclosed as fixtures and fitting have been reclassified as computer equipment in the period.
Consolidated financial statements and notes
Notes to the consolidated financial statements
12 Property, plant and equipment continued
Freehold land and buildings | Leasehold improvements | Computer equipment | Fixtures and fittings | Total | ||||||||||||||||||||
| Note | $m | $m | $m | $m | $m | |||||||||||||||||||
| Cost | ||||||||||||||||||||||||
| At May 1, 2017 | 14.3 | 27.3 | 32.6 | 6.0 | 80.2 | |||||||||||||||||||
| Continuing operations: | ||||||||||||||||||||||||
| Acquisition – HPE Software business | 38 | - | 56.5 | 79.5 | 24.1 | 160.1 | ||||||||||||||||||
| Acquisition – COBOL-IT | 38 | - | - | 0.1 | - | 0.1 | ||||||||||||||||||
| Additions | - | 10.4 | 33.3 | 6.4 | 50.1 | |||||||||||||||||||
| Disposals | - | (7.5 | ) | (27.1 | ) | (4.6 | ) | (39.2 | ) | |||||||||||||||
| Effects of movements in exchange rates | - | (3.4 | ) | (8.2 | ) | (2.5 | ) | (14.1 | ) | |||||||||||||||
| Discontinued operation: | ||||||||||||||||||||||||
| Additions | - | - | 2.0 | - | 2.0 | |||||||||||||||||||
| Disposals | - | - | (0.1 | ) | - | (0.1 | ) | |||||||||||||||||
| Effects of movements in exchange rates | - | - | 0.3 | - | 0.3 | |||||||||||||||||||
| Reclassification to current assets classified as held for sale | 37 | - | (4.1 | ) | (9.1 | ) | (0.3 | ) | (13.5 | ) | ||||||||||||||
| At October 31, 2018 | 14.3 | 79.2 | 103.3 | 29.1 | 225.9 | |||||||||||||||||||
| Accumulated depreciation | ||||||||||||||||||||||||
| At May 1, 2017 | 1.8 | 12.7 | 22.1 | 2.7 | 39.3 | |||||||||||||||||||
| Continuing operations: | ||||||||||||||||||||||||
| Charge for the period | 0.4 | 26.3 | 50.7 | 11.2 | 88.6 | |||||||||||||||||||
| Disposals | - | (4.0 | ) | (26.9 | ) | (3.7 | ) | (34.6 | ) | |||||||||||||||
| Effects of movements in exchange rates | - | (1.3 | ) | (6.4 | ) | (2.9 | ) | (10.6 | ) | |||||||||||||||
| Discontinued operation: | ||||||||||||||||||||||||
| Charge for the period | - | 2.7 | 2.6 | 1.3 | 6.6 | |||||||||||||||||||
| Disposals | - | - | - | - | - | |||||||||||||||||||
| Effects of movements in exchange rates | - | - | 0.1 | - | 0.1 | |||||||||||||||||||
| Reclassification to current assets classified as held for sale | 37 | - | (2.1 | ) | (5.6 | ) | (0.1 | ) | (7.8 | ) | ||||||||||||||
| At October 31, 2018 | 2.2 | 34.3 | 36.6 | 8.5 | 81.6 | |||||||||||||||||||
| Net book amount at October 31, 2018 | 12.1 | 44.9 | 66.7 | 20.6 | 144.3 | |||||||||||||||||||
| Net book amount at May 1, 2017 | 12.5 | 14.6 | 10.5 | 3.3 | 40.9 | |||||||||||||||||||
Depreciation for the 12 months ended October 31, 2019 of $66.5m (18 months ended October 31, 2018: $95.2m) is included within administrative expenses and cost of sales in the Consolidated statement of comprehensive income. The carrying value of computer equipment held under finance leases and hire purchase contracts, as at October 31, 2019 was $20.9m (October 31, 2018: $25.9m).
Consolidated financial statements and notes
Notes to the consolidated financial statements
13 Related undertakings
In accordance with section 409 of the UK Companies Act 2006 (the “Act”), information on all related undertakings of the Group is set out below. Related undertakings are categorized in the Act as being “subsidiaries”, “associated undertakings” and “significant holdings in undertakings other than subsidiary companies”. The information below is stated as at October 31, 2019.
The definition of a subsidiary undertaking in the Act is different from the definition of that term under IFRS. As a result, related undertakings included within this list may not be the same as the related undertakings consolidated in the Group IFRS financial statements. All undertakings in which the Group has an equity interest of greater than 50% are considered as subsidiary undertakings for the purpose of this note:
| Company name | Country of incorporation | Class(es) of shares held1,2 | Principal activities | Key to Registered office address | |
| Subsidiaries | |||||
1 | Attachmate Australasia Pty Limited | Australia | Ordinary Shares AU$1.00 | Sale and support of software | 1 |
2 | Attachmate Group Australia Pty Limited | Australia | Ordinary Shares | Sale and support of software | 1 |
3 | Autonomy Australia Pty Limited | Australia | Ordinary Shares AU$1.00 | Sale and support of software | 1 |
4 | Autonomy Systems Australia Pty Limited | Australia | Ordinary Shares AU$1.00 | Sale and support of software | 1 |
5 | Borland Australia Pty Limited | Australia | Ordinary Shares AU$1.00 | Sale and support of software | 1 |
6 | Entco Australia Pty Limited | Australia | Ordinary Shares AU$1.00 | Sale and support of software | 1 |
7 | Micro Focus Australia Pty Ltd (formerly Entcorp Australia Pty Limited) | Australia | Ordinary Shares AU$1.00 | Sale and support of software | 1 |
8 | Micro Focus Pty Limited | Australia | Ordinary Shares AU$1.00 | Sale and support of software | 1 |
9 | Serena Software Pty Limited | Australia | Ordinary Shares AU$1.00 | Sale and support of software | 1 |
10 | Borland Entwicklung GmbH | Austria | Registered capital | Development of software | 2 |
11 | Autonomy Belgium BVBA | Belgium | Ordinary Shares | Sale and support of software | 3 |
12 | Micro Focus Belgium BV (formerly Entco Belgium BVBA) | Belgium | Ordinary Shares | Sale and support of software | 3 |
13 | Micro Focus Srl (formerly Micro Focus SPRL) | Belgium | Ordinary Shares | Sale and support of software | 4 |
14 | Borland Latin America Ltda | Brazil | Quota RS$1.00 | Sale and support of software | 5 |
15 | Cambridge Technology Partners do Brasil s.c. Ltda | Brazil | Quota RS$1.00 | Dormant | 5 |
16 | Micro Focus Brasil Serviços de Tecnologia Ltda (formerly Entco Brasil Serviços de Tecnologia Ltda) | Brazil | Quota RS$1.00 | Sale and support of software | 5 |
17 | Micro Focus Programmeação de Computadores Ltda | Brazil | Quota RS$1.00 | Sale and support of software | 5 |
18 | Peregrinne Systems do Brasil Limitada | Brazil | Quota RS$1.00 | Sale and support of software | 6 |
19 | Serena Software Do Brasil Ltda | Brazil | Quota RS$1.00 | Sale and support of software | 7 |
Consolidated financial statements and notes
Notes to the consolidated financial statements
13 Related undertakings continued
| Company name | Country of incorporation | Class(es) of shares held1,2 | Principal activities | Key to Registered office address | |
| Subsidiaries | |||||
20 | Verity Worldwide Limited | British Virgin Islands | Ordinary Shares US$50,000.00 | Sale and support of software | 8 |
21 | Micro Focus APM Solutions Limited (EOOD) | Bulgaria | Ordinary Shares BGN1,000.00 | Development of software | 9 |
22 | Micro Focus Bulgaria EOOD (formerly Entco Bulgaria EOOD) | Bulgaria | Ordinary Shares BGN1.00 | Sale and support of software | 10 |
23 | Autonomy Systems (Canada) Limited | Canada | Class A Common Stock | Sale and support of software | 11 |
24 | Borland Canada Software ULC | Canada | Common Shares | Dormant | 12 |
25 | Entcorp Canada, Inc. | Canada | Common Stock | Sale and support of software | 13 |
26 | GWAVA ULC (formerly GWAVA Inc.) | Canada | Common Stock | Holding Company | 12 |
27 | Interset Software Inc. | Canada | Class A Preferred Shares Class B Preferred Shares Class B-1 Preferred Shares Class B-2 Preferred Shares Common Shares | Sale and support of software | 14 |
28 | Micro Focus (Canada) ULC | Canada | Common Shares | Development, sale and support of software | 12 |
29 | Micro Focus Acquisition ULC | Canada | Common Shares | Holding Company | 15 |
30 | Micro Focus Software (Canada), ULC | Canada | Common Shares | Sale and support of software | 16 |
31 | Micro Focus Software Solutions Canada Co. / Solutions Logiciels Micro Focus Canada Cie. (formerly Entco Software Canada Co. Logiciels Entco Canada Cie) | Canada | Common Shares | Sale and support of software | 17 |
32 | NetManage Canada ULC | Canada | Common Shares | Dormant | 12 |
33 | Entco Bellatrix HoldCo | Cayman Islands | Ordinary Shares US$1.00 | Sale and support of software | 18 |
34 | Entco Capital Co | Cayman Islands | Ordinary Shares US$1.00 | Sale and support of software | 18 |
35 | Entco Investment Co | Cayman Islands | Ordinary Shares US$1.00 | Sale and support of software | 18 |
Consolidated financial statements and notes
Notes to the consolidated financial statements
13 Related undertakings continued
| Company name | Country of incorporation | Class(es) of shares held1,2 | Principal activities | Key to Registered office address | |
| Subsidiaries | |||||
36 | Micro Focus International Limited | Cayman Islands | Class A Ordinary Shares US$0.00001 Class B Ordinary Shares US$0.00001 Class C Ordinary Shares US$0.00001 Class L Ordinary Shares US$0.00001 | Dormant | 18 |
37 | Micro Focus IP Limited | Cayman Islands | Class A Ordinary Shares €0.01 Class B Preferred Redeemable Shares €0.01 | Holding Company | 18 |
38 | Entco Marigalante Limited | Cayman Islands | Ordinary Shares US$1.00 | Sale and support of software | 18 |
39 | Autonomy Systems (Beijing) Limited Company | China | Registered Capital | Sale and support of software | 19 |
40 | Borland Software Corporation Beijing Representative Office | China | Branch | In liquidation | 104 |
41 | Shanghai Entco Software Technology Co., Limited | China | Registered Capital | Sale and support of software | 20 |
42 | Shanghai Entco Software Technology Co., Limited, Beijing Branch | China | Branch | Sale and support of software | 21 |
43 | Shanghai Entco Software Technology Co., Limited, Chongqing Branch | China | Branch | Sale and support of software | 22 |
44 | Shanghai Entco Software Technology Co., Limited, Shenzhen Branch | China | Branch | Sale and support of software | 23 |
45 | Singapore Micro Focus Pte Ltd Shanghai Representative Office | China | Branch | Sale and support of software | 24 |
46 | UK Micro Focus Limited Beijing Representative Office | China | Branch | Sale and support of software | 25 |
47 | Micro Focus CentroAmerica CAC Limiteda (formerly Entco CentroAmerica CAC Limitada) | Costa Rica | Quota CRC1,000.00 | Sale and support of software | 26 |
48 | Micro Focus Costa Rica Limiteda (formerly Entco Costa Rica Limitada) | Costa Rica | Quota CRC1,000.00 | Sale and support of software | 26 |
49 | NetIQ Software International Limited | Cyprus | Ordinary Shares of C£1.00 | Dormant | 103 |
50 | Micro Focus Czechia s.r.o (formerly Entco Czechia, s.r.o.) | Czech Republic | Registered Capital | Sale and support of software | 27 |
51 | NOVL Czech s.r.o. | Czech Republic | Registered Capital | Dormant | 28 |
Consolidated financial statements and notes
Notes to the consolidated financial statements
13 Related undertakings continued
| Company name | Country of incorporation | Class(es) of shares held1,2 | Principal activities | Key to Registered office address | |
| Subsidiaries | |||||
52 | Micro Focus Denmark, filial af Micro Focus AS, Norge (Branch) | Denmark | Branch | Sale and support of software | 29 |
53 | Micro Focus Software Denmark ApS (formerly Entco Denmark ApS) | Denmark | Ordinary Shares DKK1.00 | Sale and support of software | 29 |
54 | Attachmate Middle East LLC | Egypt | Cash Shares LE100.00 | In liquidation | 105 |
55 | Micro Focus AS, Filial i Finland (Branch) | Finland | Branch | Sale and support of software | 30 |
56 | Attachmate Group France SARL | France | Ordinary Shares €16.00 | Sale and support of software | 31 |
57 | Borland (France) Sarl | France | Ordinary Shares €15.25 | Sale and support of software | 31 |
58 | Cobol-IT, SAS | France | Ordinary Shares €1.00 | Sale and support of software | 31 |
59 | Micro Focus France SAS (formerly Entco France SAS) | France | Ordinary Shares €1.00 | Sale and support of software | 32 |
60 | Micro Focus SAS | France | Ordinary Shares €10.00 | Sale and support of software | 31 |
61 | Attachmate Group Germany GmbH | Germany | Ordinary Shares €191,000.00 | Sale and support of software | 33 |
62 | Borland GmbH | Germany | Ordinary Shares €49,500.00 Ordinary Shares €450,000.00 Ordinary Shares €100,000.00 Ordinary Shares €500.00 | Dormant | 33 |
63 | GWAVA EMEA GmbH | Germany | Registered Capital | Sale and support of software | 34 |
64 | Micro Focus Deutschland GmbH (formerly Entco Deutschland GmbH) | Germany | Registered Capital | Sale and support of software | 35 |
65 | Micro Focus GmbH | Germany | Registered Capital | Sale and support of software | 33 |
66 | Novell Holdings Deutschland GmbH | Germany | Registered Capital | Holding Company | 36 |
67 | Serena Software GmbH | Germany | Registered Capital | Sale and support of software | 37 |
68 | Attachmate (Hong Kong) Limited | Hong Kong | Ordinary Shares HK$1.00 | Dormant | 38 |
69 | Borland (H.K.) Limited | Hong Kong | Ordinary Shares HK$1.00 | Dormant | 38 |
70 | EntCorp Hong Kong Limited | Hong Kong | Ordinary Shares HK$1.00 | Sale and support of software | 39 |
Consolidated financial statements and notes
Notes to the consolidated financial statements
13 Related undertakings continued
| Company name | Country of incorporation | Class(es) of shares held1,2 | Principal activities | Key to Registered office address | |
| Subsidiaries | |||||
71 | Micro Focus Limited Hong Kong (Branch) | Hong Kong | Branch | Sale and support of software | 38 |
72 | Micro Focus Software HK Limited (formerly Attachmate Group Hong Kong Limited) | Hong Kong | Ordinary Shares HK$10.00 | Sale and support of software | 38 |
73 | NetIQ Asia Ltd. | Hong Kong | Ordinary Shares HK$1.00 | Dormant | 38 |
74 | Autonomy Software Asia Private Limited | India | Equity Shares INR10.00 | Sale and support of software | 40 |
75 | Borland Software India Private Limited | India | Equity Shares INR10.00 | Dormant | 41 |
76 | Entco IT Services Private Limited | India | Equity Shares INR10.00 | Sale and support of software | 42 |
77 | Interwoven, Inc., India Branch | India | Branch | Sale and support of software | 43 |
78 | Micro Focus India Private Limited | India | Equity Shares INR10.00 | Support of software | 41 |
79 | Micro Focus Software India Private Limited | India | Equity Shares INR10.00 | Development, sale and support of software | 41 |
80 | Micro Focus Software Solutions Private Limited (formerly Entco Software India Private Limited) | India | Equity Shares INR10.00 | Sale and support of software | 44 |
81 | Novell India Private Ltd. | India | Equity Shares INR10.00 | Dormant | 45 |
82 | Relativity Technologies Private Limited | India | Equity Shares INR10.00 | Sale and support of software | 41 |
83 | Attachmate Ireland Limited | Ireland | Ordinary Shares €1.27 | Sale and support of software | 46 |
84 | Entsoft Holding Ireland Unlimited Company | Ireland | Ordinary Shares US$1.00 | Holding Company | 46 |
85 | Micro Focus (IP) Ireland Limited | Ireland | Ordinary Shares US$1.00 | Dormant | 47 |
86 | Micro Focus (Ireland 1) Limited (formerly SUSE Linux Holdings Limited) | Ireland | Ordinary Shares US$1.00 | Holding Company | 47 |
87 | Micro Focus (Ireland 2) Limited (formerly SUSE Linux Ireland Limited) | Ireland | Ordinary Shares US$1.00 | Dormant | 47 |
88 | Micro Focus Finance Ireland Limited | Ireland | Ordinary Shares US$1.00 | Holding Company | 48 |
89 | Micro Focus Galway Limited (formerly Entsoft Galway Limited | Ireland | Ordinary Shares €1.00 | Sale and support of software | 46 |
90 | Micro Focus Group Holdings Unlimited Company | Ireland | Ordinary Shares €1.00 | Holding Company | 47 |
91 | Micro Focus International Holdings Limited | Ireland | Ordinary Shares €1.00 | Holding Company | 47 |
Consolidated financial statements and notes
Notes to the consolidated financial statements
13 Related undertakings continued
| Company name | Country of incorporation | Class(es) of shares held1,2 | Principal activities | Key to Registered office address | |
| Subsidiaries | |||||
92 | Micro Focus Ireland Limited | Ireland | Ordinary Shares €1.00 | Development, sale and support of software | 47 |
93 | Micro Focus Software (Ireland) Limited | Ireland | Ordinary Shares €1.25 Ordinary Shares US$1.00 | Development, sale and support of software | 48 |
94 | Micro Focus Software Solutions Ireland Limited (formerly Entsoft Ireland Limited) | Ireland | Ordinary Shares €1.00 | Sale and support of software | 46 |
95 | NetIQ Europe Limited | Ireland | Ordinary Shares €1.00 | Sale and support of software | 46 |
96 | NetIQ Ireland Limited | Ireland | Ordinary Shares €1.00 | Holding Company | 47 |
97 | Novell Cayman Software International Unlimited Company | Ireland | Ordinary Shares US$1.00 | Holding Company | 47 |
98 | Novell Cayman Software Unlimited Company | Ireland | Ordinary Shares US$1.00 | Holding Company | 47 |
99 | Novell Ireland Real Estate Unlimited Company | Ireland | Ordinary Shares €1.25 A Ordinary Shares €1.25 | Holding Company | 47 |
100 | Novell Software International Limited | Ireland | Ordinary Shares US$1.00 | Holding Company | 47 |
101 | Micro Focus Interactive Israel Ltd (formerly Entco Interactive (Israel) Limited) | Israel | Ordinary Shares of NIS1.00 | Sale and support of software | 49 |
102 | Micro Focus Israel Limited | Israel | Ordinary Shares NIS1.00 | Development and support of software | 50 |
103 | Micro Focus Software Israel Ltd (formerly Entcorp Software Israel Limited) | Israel | Ordinary Shares NIS1.00 | Sale and support of software | 49 |
104 | N.Y. NetManage (Yerushalayim) Ltd | Israel | Ordinary Shares NIS1.00 | Dormant | 51 |
105 | Novell Israel Software International Limited | Israel | Ordinary Shares NIS1.00 | In liquidation | 106 |
106 | Enterprise Corp Italiana S.r.l. | Italy | Registered Capital | Sale and support of software | 52 |
107 | Micro Focus Italiana S.r.l. (formerly Entco Italiana Srl | Italy | Registered Capital | Sale and support of software | 53 |
108 | Micro Focus Srl | Italy | Registered Capital | Sale and support of software | 53 |
109 | Serena Software Europe Limited - Italy Branch | Italy | Branch | Sale and support of software | 53 |
110 | Verity Italia S.r.l. | Italy | Registered Capital | Sale and support of software | 54 |
111 | Entcorp Japan K.K. | Japan | Ordinary Shares | Sale and support of software | 55 |
112 | Micro Focus Enterprise Ltd | Japan | Ordinary Shares | Sale and support of software | 56 |
113 | Micro Focus LLC (formerly Micro Focus KK) | Japan | Interest in capital | Sale and support of software | 56 |
Consolidated financial statements and notes
Notes to the consolidated financial statements
13 Related undertakings continued
| Company name | Country of incorporation | Class(es) of shares held1,2 | Principal activities | Key to Registered office address | |
| Subsidiaries | |||||
114 | Novell Japan, Ltd | Japan | Common Stock | Sale and support of software | 56 |
115 | Serena Software Japan LLC (formerly Serena Software Japan KK) | Japan | Interest in Capital | Sale and support of software | 56 |
116 | Micro Focus Korea Limited | South Korea | Units KRW5000 | Sale and support of software | 57 |
117 | Serena Software Europe Limited - Korea Branch | South Korea | Branch | Sale and support of software | 58 |
118 | Micro Focus Finance S.à r.l. | Luxembourg | Ordinary Shares US$1.00 | In liquidation | 59 |
119 | Micro Focus Luxembourg S.à r.l. (formerly Entco Luxembourg Sarl) | Luxembourg | Ordinary Shares | Sale and support of software | 59 |
120 | Minerva Finance S.à r.l. | Luxembourg | Ordinary Shares US$1.00 | In liquidation | 59 |
121 | Verity Luxembourg S.à r.l. | Luxembourg | Ordinary Shares €25.00 | Sale and support of software | 60 |
122 | Micro Focus Malaysia Sdn. Bhd. (formerly Entco Software Malaysia Sdn. Bhd.) | Malaysia | Ordinary Shares RM1,000.00 | Sale and support of software | 61 |
123 | Novell Corporation (Malaysia) Sdn. Bhd. | Malaysia | Ordinary Shares RM1.00 | Sale and support of software | 62 |
124 | Micro Focus International Mexico, S. de R.L. de C.V. (formerly Entco México, S. de R.L. de C.V. ) | Mexico | Equity Interest Quota MXN1.00 | Sale and support of software | 63 |
125 | Micro Focus Limited Mexico (Branch) | Mexico | Branch | Sale and support of software | 64 |
126 | Micro Focus Software Mexico, S. De R.L. De C.V. (formerly Entco Software México, S. de R.L. de C.V.) | Mexico | Equity Interest Quota MXN1.00 | Sale and support of software | 63 |
127 | Micro Focus Software Solutions Mexico, S. de R.L. de C.V. (formerly Entcorp Software México, S. de R.L. de C.V.) | Mexico | Equity Interest Quota MXN1.00 | Sale and support of software | 63 |
128 | Attachmate Group Netherlands B.V. | Netherlands | Ordinary Shares €100.00 | Sale and support of software | 65 |
129 | Authasas Advanced Authentication B.V. | Netherlands | Ordinary Shares €1.00 | Dormant | 65 |
130 | Authasas B.V | Netherlands | Ordinary Shares A €1.00 Ordinary Shares B €1.00 | Sale and support of software | 65 |
131 | Autonomy HoldCo B.V. | Netherlands | Ordinary Shares US$100.00 | Sale and support of software | 65 |
132 | Autonomy Netherlands BV | Netherlands | Common Shares €100.00 | Sale and support of software | 65 |
133 | Borland BV | Netherlands | Ordinary Shares €5.00 | Sale and support of software | 65 |
134 | Entco Eastern Holding B.V. | Netherlands | Ordinary Shares US$100.00 | Holding Company | 65 |
135 | Entco Gatriam Holding B.V. | Netherlands | Ordinary Shares US$100.00 | Holding Company | 65 |
Consolidated financial statements and notes
Notes to the consolidated financial statements
13 Related undertakings continued
| Company name | Country of incorporation | Class(es) of shares held1,2 | Principal activities | Key to Registered office address | |
| Subsidiaries | |||||
136 | Entco HoldCo I B.V. | Netherlands | Ordinary Shares US$100.00 | Holding Company | 65 |
137 | Entco HoldCo II B.V. | Netherlands | Ordinary Shares US$100.00 | Holding Company | 65 |
138 | Entco HoldCo III B.V. | Netherlands | Ordinary Shares US$100.00 | Holding Company | 65 |
139 | Entco HoldCo IV B.V. | Netherlands | Ordinary Shares US$100.00 | Holding Company | 65 |
140 | Entco Holding Berlin B.V. | Netherlands | Ordinary Shares US$100.00 | Holding Company | 65 |
141 | Entco Holding Hague II B.V. | Netherlands | Ordinary Shares US$100.00 | Holding Company | 65 |
142 | Entco Sinope Holding B.V. | Netherlands | Ordinary Shares US$100.00 | Holding Company | 65 |
143 | Entcorp Nederland B.V. | Netherlands | Ordinary Shares €100.00 | Sale and support of software | 65 |
144 | Micro Focus B.V. | Netherlands | Common Shares €100.00 | Sale and support of software | 65 |
145 | Micro Focus Caribe Holding B.V. (formerly Entco Caribe B.V.) | Netherlands | Ordinary Shares US$100.00 | Sale and support of software | 65 |
146 | Micro Focus Eastern Holding II B.V. (formerly Entco Eastern Holding II B.V.) | Netherlands | Ordinary Shares US$100.00 | Holding Company | 65 |
147 | Micro Focus Enterprise B.V. (formerly Entco Enterprise B.V.) | Netherlands | Ordinary Shares US$100.00 | Sale and support of software | 65 |
148 | Micro Focus HoldCo B.V. (formerly Entco HoldCo B.V.) | Netherlands | Ordinary Shares US$100.00 | Holding Company | 65 |
149 | Micro Focus Holding Finance B.V. (formerly Entco Holding Finance B.V.) | Netherlands | Ordinary Shares US$100.00 | Holding Company | 65 |
150 | Micro Focus Holding Hague B.V. (formerly Entco Holding Hague B.V.) | Netherlands | Ordinary Shares US$100.00 | Holding Company | 65 |
151 | Micro Focus Holding PR B.V. (formerly Entco Puerto Rico B.V.) | Netherlands | Ordinary Shares US$100.00 | Sale and support of software | 65 |
152 | Micro Focus International Trade B.V. (formerly Entco International Trade B.V.) | Netherlands | Ordinary Shares US$100.00 | Sale and support of software | 65 |
153 | Micro Focus Nederland B.V. (formerly Entco Nederland B.V.) | Netherlands | Ordinary Shares US$100.00 | Sale and support of software | 65 |
154 | Verity Benelux B.V. | Netherlands | Common Shares of €500.00 | Sale and support of software | 65 |
155 | Micro Focus Software (New Zealand) Unlimited | New Zealand | Ordinary Shares | Sale and support of software | 66 |
156 | Micro Focus AS | Norway | Ordinary Shares NOK1,602.00 | Sale and support of software | 67 |
Consolidated financial statements and notes
Notes to the consolidated financial statements
13 Related undertakings continued
| Company name | Country of incorporation | Class(es) of shares held1,2 | Principal activities | Key to Registered office address | |
| Subsidiaries | |||||
157 | Entcorp Philippines, Inc. | Philippines | Common Stock PHP1.00 | Sale and support of software | 68 |
158 | Micro Focus Polska sp. z o.o. (formerly Entco Polska sp. z.o.o.) | Poland | Ordinary Shares PLN500.00 | Sale and support of software | 69 |
159 | Micro Focus S.L. - Sucursal Em Portugal (Branch) | Portugal | Branch | Sale and support of software | 70 |
160 | Novell Portugal - Informática Lda | Portugal | Ordinary Shares €14,864.18 Ordinary Shares €99.76 | Sale and support of software | 71 |
161 | Micro Focus Caribe Holding B.V. LLC Branch (formerly Entco Caribe B.V. LLC ) | Puerto Rico | Branch | Sale and support of software | 72 |
162 | Micro Focus Holding PR B.V. LLC Branch (formerly Entco Puerto Rico B.V. LLC ) | Puerto Rico | Branch | Sale and support of software | 73 |
163 | Micro Focus Software Romania SRL (formerly Entco Software Romania SRL) | Romania | Ordinary Shares RON10.00 | Sale and support of software | 74 |
164 | Limited Liability Company Micro Focus (formerly Limited Liability Company Entco) | Russian Federation | Interest in Capital | Sale and support of software | 75 |
165 | Micro Focus LLC | Saudi Arabia | Ordinary Shares SAR50 | Sale and support of software | 76 |
166 | Autonomy Systems Singapore Pte. Ltd. | Singapore | Ordinary Shares | Sale and support of software | 77 |
167 | Borland (Singapore) Pte. Ltd. | Singapore | Ordinary Shares | Sale and support of software | 78 |
168 | Entco Software Pte. Ltd. | Singapore | Ordinary Shares | Sale and support of software | 77 |
169 | Mercury Interactive (Singapore) Pte Ltd | Singapore | Ordinary Shares | In liquidation | 107 |
170 | Micro Focus Pte. Ltd. | Singapore | Ordinary Shares | Sale and support of software | 78 |
171 | Micro Focus Software Pte. Ltd. | Singapore | Ordinary Shares | Sale and support of software | 77 |
172 | Autonomy Systems Software South Africa Pty Ltd | South Africa | Ordinary Shares ZAR1.00 | Sale and support of software | 79 |
173 | Micro Focus Software South Africa (Pty) Ltd (formerly Attachmate Group South Africa (Pty) Limited | South Africa | Ordinary Shares ZAR1.00 | Sale and support of software | 80 |
174 | Micro Focus South Africa (Pty) Ltd | South Africa | Ordinary Shares ZAR1.00 | Sale and support of software | 80 |
175 | Micro Focus Field Delivery Spain, S.L.U. (formerly Entco Field Delivery Spain, S.L.U.) | Spain | Ordinary Shares €1.00 | Sale and support of software | 81 |
176 | Micro Focus S.L.U. | Spain | Registered Shares €9.00 | Sale and support of software | 82 |
177 | Micro Focus Software Spain S.L.U. (formerly Entco Software Spain S.L.U.) | Spain | Ordinary Shares €1.00 | Sale and support of software | 81 |
Consolidated financial statements and notes
Notes to the consolidated financial statements
13 Related undertakings continued
| Company name | Country of incorporation | Class(es) of shares held1,2 | Principal activities | Key to Registered office address | |
| Subsidiaries | |||||
178 | Serena Software SA | Spain | Ordinary Shares €546.92 | Sale and support of software | 83 |
179 | Micro Focus AS, Norge, filial i Sverige (Branch) | Sweden | Branch | Sale and support of software | 84 |
180 | Micro Focus Sverige AB (formerly Entco Sverige AB) | Sweden | Quota SEK1.00 | Sale and support of software | 84 |
181 | Micro Focus Enterprise B.V., Amstelveen, Versoix Branch | Switzerland | Branch | Sale and support of software | 85 |
182 | Micro Focus GmbH | Switzerland | Quotas CHF100.00 | Sale and support of software | 86 |
183 | Micro Focus International Suisse Sàrl (formerly Entco International Sàrl ) | Switzerland | Ordinary Shares CHF1,000.00 | Sale and support of software | 85 |
184 | Micro Focus Schweiz GmbH (formerly Entco Schweiz GmbH ) | Switzerland | Ordinary Shares CHF100.00 | Sale and support of software | 86 |
185 | Serena Software GmbH- Swiss Branch | Switzerland | Branch | Sale and support of software | 87 |
186 | Trilead GmbH | Switzerland | Ordinary Shares CHF100.00 | Sale and support of software | 88 |
187 | Interwoven, Inc., Taiwan Branch | Taiwan | Branch | Sale and support of software | 89 |
188 | Novell (Taiwan) Co., Ltd. | Taiwan | Ordinary Shares NT$10.00 | Sale and support of software | 90 |
189 | Micro Focus Enterprise Tunisia SARL | Tunisia | Ordinary Shares TND10.00 | Sale and support of software | 91 |
190 | Micro Focus Teknoloji Çözümleri Limited Şirketi (formerly Entco Turkey Teknoloji Çözümleri Limited Şirketi) | Turkey | Ordinary Shares TRY25.00 | Sale and support of software | 92 |
191 | Serena Software Ukraine LLC | Ukraine | Interest in Capital | Sale and support of software | 93 |
192 | Entco International SARL-Abu Dhabi - Branch | United Arab Emirates | Branch | Sale and support of software | 94 |
193 | Entco International SARL-Jebel Ali Free Zone - Branch | United Arab Emirates | Branch | Sale and support of software | 95 |
194 | Entco Software Services Middle East FZ-LLC | United Arab Emirates | Ordinary Shares AED1,000.00 | Sale and support of software | 96 |
195 | Attachmate Sales UK Limited | United Kingdom | Ordinary Shares £1.00 | Sale and support of software | 97 |
196 | Autonomy Digital Limited | United Kingdom | Ordinary Shares £1.00 | In liquidation | 108 |
197 | Autonomy Systems Limited | United Kingdom | Ordinary Shares £1.00 | Sale and support of software | 98 |
198 | Borland (Holding) UK Ltd | United Kingdom | Ordinary Shares £1.00 | Dormant | 97 |
Consolidated financial statements and notes
Notes to the consolidated financial statements
13 Related undertakings continued
| Company name | Country of incorporation | Class(es) of shares held1,2 | Principal activities | Key to Registered office address | |
| Subsidiaries | |||||
199 | Borland (UK) Limited | United Kingdom | Ordinary Shares £1.00 | Dormant | 97 |
200 | Entcorp Marigalante UK Limited | United Kingdom | Ordinary Shares £1.00 | Sale and support of software | 98 |
201 | Interwoven UK Limited | United Kingdom | Ordinary Shares £1.00 | In liquidation | 108 |
202 | Longsand Limited | United Kingdom | Ordinary Shares £1.00 | Sale and support of software | 98 |
203 | Merant Holdings | United Kingdom | Ordinary Shares £1.00 | Holding Company | 97 |
204 | Meridio Limited | United Kingdom | Ordinary Shares £1.00 | In liquidation | 109 |
205 | Micro Focus (IP) Holdings Limited | United Kingdom | Ordinary Shares US$1.00 | Dormant | 97 |
206 | Micro Focus (IP) Ltd | United Kingdom | Ordinary Shares £1.00 | Holding Company | 97 |
207 | Micro Focus (US) Holdings | United Kingdom | Ordinary Shares US$1.00 | Holding Company | 97 |
208 | Micro Focus APM Solutions Limited | United Kingdom | Ordinary Shares £1.00 | In liquidation | 97 |
209 | Micro Focus CHC Limited | United Kingdom | Ordinary Shares US$0.01 Redeemable Preference Shares US$1.00 C Preference Shares US$1.00 | Holding Company | 97 |
210 | Micro Focus Foreign HoldCo Ltd (formerly Entco Foreign HoldCo Ltd) | United Kingdom | Ordinary Shares £1.00 | Holding Company | 98 |
211 | Micro Focus Global Limited (formerly Novell U.K. Limited | United Kingdom | Ordinary Shares £1.00 | Sale and support of software | 97 |
212 | Micro Focus Group Limited | United Kingdom | Ordinary Shares £1.00 | Holding Company | 97 |
213 | Micro Focus Holdings Unlimited | United Kingdom | Ordinary Shares £0.01 | Holding Company | 97 |
214 | Micro Focus Integration Holdings Limited | United Kingdom | Ordinary Shares US$1.00 | Holding Company | 97 |
215 | Micro Focus Integration Limited | United Kingdom | Ordinary Shares US$1.00 | Sale and support of software | 97 |
216 | Micro Focus IP Development Limited | United Kingdom | Ordinary Shares US$1.00 | Development and support of software | 97 |
Consolidated financial statements and notes
Notes to the consolidated financial statements
13 Related undertakings continued
| Company name | Country of incorporation | Class(es) of shares held1,2 | Principal activities | Key to Registered office address | |
| Subsidiaries | |||||
217 | Micro Focus Limited | United Kingdom | Ordinary Shares £1.00 | Sale and support of software | 97 |
218 | Micro Focus MHC Limited | United Kingdom | A Ordinary Shares £0.00001 B Ordinary Shares £0.00001 | Holding Company | 97 |
219 | Micro Focus Midco Holdings Limited | United Kingdom | Ordinary Shares US$0.01 | Holding Company | 97 |
220 | Micro Focus Midco Limited | United Kingdom | Ordinary Shares US$0.0001 | Holding Company | 97 |
221 | Micro Focus Situla Holding Ltd (formerly Entco Situla Holding Ltd) | United Kingdom | Ordinary Shares £1.00 | Holding Company | 98 |
222 | Micro Focus Software (IP) Holdings Limited | United Kingdom | Ordinary Shares US$0.01 Preferred Shares US$1.00 | Holding Company | 97 |
223 | Micro Focus Software Holdings Ltd (formerly Novell UK Software Limited) | United Kingdom | Ordinary Shares £1.00 | Sale and support of software | 97 |
224 | Micro Focus Software UK Ltd (formerly Entcorp UK Ltd ) | United Kingdom | Ordinary Shares £1.00 | Sale and support of software | 98 |
225 | Micro Focus UK Limited | United Kingdom | Ordinary Shares £1.00 | Dormant | 97 |
226 | NetIQ Limited | United Kingdom | Ordinary Shares £1.00 | Dormant | 97 |
227 | Ryan McFarland Limited | United Kingdom | Ordinary Shares £1.00 | In liquidation | 97 |
228 | Serena Holdings | United Kingdom | Ordinary Shares US$1.00 | Holding Company | 97 |
229 | Serena Software Europe Limited | United Kingdom | Ordinary Shares £1.00 | Sale and support of software | 97 |
230 | XDB (UK) Limited | United Kingdom | Ordinary Shares £1.00 | In liquidation | 97 |
231 | ZANTAZ UK Limited | United Kingdom | Ordinary Shares £1.00 | In liquidation | 108 |
232 | Attachmate Corporation | United States | Common Stock US$0.01 | Development and support of software | 99 |
233 | Borland Corporation | United States | Common Stock US$0.01 | Holding Company | 100 |
234 | Borland Software Corporation | United States | Common Stock US$0.01 | Development and support of software | 100 |
235 | Borland Technology Corporation | United States | Common Stock US$0.01 | Dormant | 100 |
Consolidated financial statements and notes
Notes to the consolidated financial statements
13 Related undertakings continued
| Company name | Country of incorporation | Class(es) of shares held1,2 | Principal activities | Key to Registered office address | |
| Subsidiaries | |||||
236 | Entco Delaware LLC | United States | Interest in Capital | Sale and support of software | 100 |
237 | Entco Holdings, Inc. | United States | Common Stock US$0.01 | Holding Company | 100 |
238 | Entco Technologies, Inc. | United States | Common Stock US$0.001 | Sale and support of software | 100 |
239 | Entco, LLC | United States | Interest in Capital | Sale and support of software | 100 |
240 | GWAVA Technologies Inc | United States | Common Stock of US$1.00 | Sale and support of software | 100 |
241 | Interset Software - US, Inc. | United States | Common Stock US$0.0001 | Sale and support of software | 100 |
242 | MA FinanceCo., LLC | United States | Units | Holding Company | 100 |
243 | Marcel Holdings LLC | United States | Limited Liability Company Interest US$1.00 | Sale and support of software | 101 |
244 | Micro Focus (US) Group, Inc | United States | Common Stock US$0.01 | Holding Company | 100 |
245 | Micro Focus (US) International Holdings, Inc. | United States | Common Stock US$0.01 | Holding Company | 100 |
246 | Micro Focus (US), Inc. | United States | Common Stock US$0.01 | Development and support of software | 100 |
247 | Micro Focus Brazil Holdings LLC (formerly Entco Brazil Holdings LLC) | United States | Interest in Capital | Holding Company | 100 |
248 | Micro Focus Government Solutions LLC (formerly Entco Government Solutions LLC) | United States | Interest in Capital | Sale and support of software | 100 |
249 | Micro Focus LLC (formerly EntIT Software LLC) | United States | Limited Liability Company Interests | Sale and support of software | 100 |
250 | Micro Focus Software Inc. | United States | Voting Common Stock US$0.01 Non-voting Common Stock US$0.01 | Development and support of software | 100 |
251 | MicroLink LLC | United States | Limited Liability Company Interests | Sale and support of software | 102 |
252 | NetIQ Corporation | United States | Common Stock US$0.001 | Development and support of software | 100 |
253 | Novell Holdings, Inc. | United States | Common Stock US$0.01 | Holding Company | 100 |
Consolidated financial statements and notes
Notes to the consolidated financial statements
13 Related undertakings continued
| Company name | Country of incorporation | Class(es) of shares held1,2 | Principal activities | Key to Registered office address | |
| Subsidiaries | |||||
254 | Novell International Holdings, Inc. | United States | Common Stock US$0.01 | Holding Company | 100 |
255 | Seattle SpinCo, Inc. | United States | Class A Common Stock US$0.01 Class B Common Stock US$0.01 | Holding Company | 100 |
256 | Serena Software, Inc. | United States | Common Stock US$0.01 | Holding Company | 100 |
257 | Spartacus Acquisition Holdings Corp | United States | Common Stock US$0.001 | Holding Company | 100 |
258 | Stratify, Inc. | United States | Common Stock US$0.001 | Sale and support of software | 100 |
259 | The Attachmate Group, Inc. | United States | Common Stock US$0.001 | Holding Company | 100 |
260 | Vertica Systems, LLC | United States | Limited Liability Company Interests | Sale and support of software | 100 |
1 The Group has a 100% equity ownership interest in each of the subsidiary undertakings, with the exception of Novell Japan Ltd, in which it has an 84.24% equity interest (note 32).
2. The ultimate parent company is Micro Focus International plc (the “Company”). The Company has a direct interest in Micro Focus Midco Holdings Limited and an indirect interest in all of the other related undertakings. The Company has an effective interest of 100% in all of the related undertakings listed in the table, save as disclosed above.
The financial results of all of the related undertakings listed above are included in the Group’s consolidated financial statements.
None of the related undertakings holds any shares in the Company.
For each of the subsidiaries listed above, the Registered office or, in the case of undertakings other than subsidiaries, the principal place of business is as follows:
Registered office addresses:
| Number | Address |
1 | Level 8, 76 Berry Street, North Sydney, NSW 2060, Australia |
2 | Donau Centre, Hauptstrasse 4-10, Linz, 4040, Austria |
3 | Officenter, Luchthavenlaan 27, 1800 Vilvoorde, Belgium |
4 | EU Parliament, 4th Floor, 37 De Meeussquare, Brussels, 1000, Belgium |
5 | Rua Joaquim Floriano, 466-12 Ander, Sao Paulo, CEP 04534-002, Brazil |
6 | Avenida das nações Unidas, nº 12.901, conjunto 2302, sala 72, Itaim Bibi, São Paulo, CEP 04578-000, Brazil |
7 | Rua Dom Jose de Barros, 177, 3rd Floor, Suite 302, Vila Buarque, Sao Paulo 01038-100, Brazil |
8 | Estera Corporate Services (BVI) Limited, Jayla Place Wickhams Cay 1, Road Town, Tortola, British Virgin Islands |
9 | 76A James Bourchier Blvd, Lozenetz, Sofia, 1407, Bulgaria |
10 | 1715 Sofia, Mladost district, Business Park Sofia, Building 9, Sophia, Bulgaria |
11 | 200-204 Lambert Street, Whitehorse, Y1A 3T2, Canada |
12 | 250 Howe Street, Suite 1400-C, Vancouver, BC V6C 3S7, Canada |
13 | Barker House , Suite 600, Fredericton E3B 6Z6, Canada |
Consolidated financial statements and notes
Notes to the consolidated financial statements
13 Related undertakings continued
Registered office addresses continued
| Number | Address |
14 | 411 Legget Drive, Suite 503, Ottawa ON K2K 3C9, Canada |
15 | Suite 1700, Park Place, 666 Burrard Street, Vancouver BC V6C 2X8, Canada |
16 | 4300 Bankers Hall West, 888 - 3rd Street S.W., Calgary, Alberta T2P 5C5, Canada |
17 | 1300-1960 Upper Water Street, Halifax, Nova Scotia B3J 3R7, Canada |
18 | Estera Trust (Cayman) Limited, PO Box 1350, Clifton House, 75 Fort Street, Grand Cayman, KY1-1108, Cayman Islands |
19 | Unit 601, Block A, Yuanyang International Center, Building 56, Dong Si Huan Zhong Dong Road, Beijing, Chaoyang District, China |
20 | Floor 2, Building 1, No. 799 Naxian Road, Pilot Free Trade Zone, Shanghai, China |
21 | 8 Guangshun Avenue South, B01, 3F, Building 1, Chaoyang District, ,China, |
22 | No. 209, Chuangxin Plaza, No. 5 Keyuanyi Road, Jiulongpo District, Chongqing, China |
23 | 14/F, Office 1436, Times Financial Center, 4001 Shennan Avenue, Futian District, Shenzhen, Guangdong, 518046, China or Unit H 1483 - 04, 14th Floor, Times Financial Center, 4001 Shennan Avenue, Fu’An Community, Futian Street, Shenzhen, Futian District, China |
24 | Room 810, Level 8, International Finance Center, Tower 2, 8 Century Avenue, Pudong, Shangahi 200120, P.R. China |
25 | Madrid 17-02F Suite, 17/F Ping An International Financial Center, Tower B, No. 3 Xin Yuan South Road, Chao Yang District, Beijing China 100027 |
26 | San José, Cantón Montes de Oca, Distrito San Pedro, cincuenta metros al sur del Restaurante Le Chandelier, Edificio Blanco, Costa Rica |
27 | Za Brumlovkou 1559/5, Michle, Prague, 140 00, Czech Republic |
28 | Krizikova 148/34, Karlin, 186 00 Praha 8 Czech Republic |
29 | Borupvang 3, 2750, Ballerup, Denmark |
30 | Accountor Turku Oy, Yliopistonkatu 34,5 krs, Turku FI-20100 |
31 | Tour, Atlantique, La Defense 9, 1 Place de la Pyramide, La Defense, Cedex, Paris, 92911, France |
32 | 1 Avenue du Canada, Les Ulis, 91947, France |
33 | Fraunhoferstrasse 7, Ismaning, 85737, Germany |
34 | Von-Braun-Strabe 38a, 48683 Ahaus, Germany |
35 | Herrenberger Str. 140, 71034 Boeblingen, Germany |
36 | Maxfeldstr. 5, 90409 Nürnberg, Germany |
37 | Nöerdlicher Zubringer 9-11, 40470 Düsseldorf |
38 | 21st floor, Henley Building, 5 Queen’s Road Central, Hong Kong |
39 | 19th Floor, Cityplaza One, 1111 King’s Road, Taikoo Shing, Hong Kong |
40 | 4th Floor, Laurel Building ‘A” Block, Bagmane Tech Park, Survey no.65/2, C.V.Raman Nagar, Byrasandra Village, KR Pura Hobli, Bangalore South Taluk, Bengaluru-560093, India |
41 | Laurel, Block D, 65/2, Bagmane Tech Park, C.V. Raman Nagar, Byrasasdraa Post, Bangalore 560093, India |
42 | 4th Floor, Bagmane Tech Park, Olympia Building Survey Nos. 66/1, 66/66-1 & 66/1-3, CV Raman Nagar, Bangalore, 560093, India |
43 | 602 MMTC House C-22 Bandra Kurla Complex Bandra East, Mumbai, MH 400051, India |
44 | 66/1, 6th Floor, Olympia Building, Bagmane Tech Park, Byrasandra, C V Raman Nagar, Bangalore, Karnataka, 560093, India |
45 | Leela Galleria, 1st Floor, Andheri Kurla Road, Andheri (East), Mumbai - 400059, Maharashtra, India |
46 | Block A, Ballybrit Business Park, Ballybane Road, Galway, Eircode, NE2 2003, Ireland |
47 | One Spencer Dock, North Wall Quay, Dublin 1, Ireland |
48 | Corrig Court, Corrig Road, Sandyford Industrial Estate, Sandyford, Dublin 18, Ireland |
49 | 5 Altalef St., Yahud, Israel |
50 | Matam Advanced Tech Center, Building 5/1, Haifa, 31 905, Israel |
51 | Scientific Industries Center, Haifa, 33263, Israel |
52 | Via Filippo Turati 8, 20121, Milan, Italy |
53 | Viale Sarca 235, 20126, Milan, Italy |
Consolidated financial statements and notes
Notes to the consolidated financial statements
13 Related undertakings continued
Registered office addresses continued
| Number | Address |
54 | Via Santa - Maria alla Porta n.9, 20123, Milan, Italy |
55 | No. 8 Center Plaza Bldg, 5F, 1-10-16 Horidomecho Nihonbashi, Chuo-ku, Tokyo 103-0012, Japan |
56 | Midtown Tower 19F, 9-7-1 Akasaka, Minato-ku, Tokyo, 107-6219, Japan |
57 | Yeoidodong, SK Building, 15F, 31 Gukjegeumyung-ro 8-gil, Yeongdeungpo-gu, Seoul, Korea |
58 | Gangnam Finance Centre, Level 41, 152 Teheren-ro, Gangnam-gu, Seoul - 06236 Korea |
59 | 20, rue des Peupliers, L-2328 Luxembourg, Luxembourg |
60 | 15, Boulevard F.W. Raiffeisen, L - 2411, Luxembourg |
61 | Level 11, 1 Sentral, Jalan Rakyat, Kuala Lumpur Sentral, 50470 59200 Kuala Lumpur, Malaysia |
62 | Unit 501 Lvl 5 Uptwn 1, 1 Jalan SS2, Selangor Darul Ehsan, Malaysia |
63 | Av. Periférico Sur 6751, Col. Toluquilla, Municipio Tlaquepaque, Jalisco, CP 45610, Mexico |
64 | Insurgentes Sur 1898, Pisos 12 y 14, Col. La Florida, Mexico City 1020, Mexico |
65 | Van Deventerlaan 31-51, 3528 AG Utrecht, The Netherlands |
66 | Level 8, 188 Quay Street, Auckland, 1010, New Zealand |
67 | 7th Floor, Dronning Eufemias gate 16, 0191 Oslo, Norway |
68 | 2/F Three World Square, Upper Mckinley Road, Taguig City, Philippines |
69 | Centrum Biurowe Globis, Powstańców Śląskich 7A, 53-332, Wrocław, Poland |
70 | Centro Empresarial Torres de Lisboa, Rua Tomás da Fonseca, Torre G, 1.º, 1600-209 Lisbon, Portugal |
71 | Centro Empresarial Torres de Lisboa, Rua Tomás da Fonseca, Torre G, 1600-203 Lisbon, Portugal |
72 | 110 Highway North Km. 28, Bldg. #1, Aguadilla, 00603, Puerto Rico |
73 | 350 Chardon Avenue, Chardon Tower, Suite 801, San Juan, 00918, Puerto Rico |
74 | 2nd District, 3 George Constantinescu Street, BOC Office Building, Bucharest, Romania |
75 | Leningradskoye shosse 16 A, building 3, floor 10, premise XV, room 16, 125171, Moscow, Russian Federation |
76 | Maazar Street, Futuro Tower, 3rd Floor, P.O. Box 69171, Riyadh 11547, Saudi Arabia |
77 | #12-04/06, 1 Harbourfront Place, Harbourfront Tower 1, 098633, Singapore |
78 | 80 Robinson Road #02 - 00, 068898, Singapore |
79 | PO Box 2238, Florida Hills, 1716, South Africa |
80 | Morning View Office Park 255 Rivonia Road, Morningside, South Africa |
81 | Calle José Echegaray 8, Las Rozas de Madrid, 28232 Madrid, Spain |
82 | Paseo de la Castellana 42, Madrid, 28046, Spain |
83 | Ronda General Mitre 28-30, Barcelona 08017, Spain |
84 | Kronborgsgränd 1, 164 46 Kista, Stockholm, Sweden |
85 | Chemin Jean-Baptiste Vandelle 3A, 1290 Versoix, Switzerland |
86 | Ueberlandstrasse 1, 8600 Dübendorf, Switzerland |
87 | Kirchgasse 24, 8001 Zurich, Switzerland |
88 | Rembach 7, 8852, Altendorf, Switzerland |
89 | 10F.-1 No.66, Jing Mao 2nd Road, Nangang Distric, Taipei City, 115, Taiwan |
90 | Room B 26/F #216 Tun-Hwa S Road Sec, Taipei ROC 106, Taiwan |
91 | ZI Chotrana, Technopole El Ghazala, Lot No 45, Ariana, 2088, Tunisia |
92 | AND Plaza Kozyatağa İçerenköy Mahallesi Umut Sk. 10/12, Kat: 16 34752 Ataşehir/İstanbul, Turkey |
93 | 13 Pimonenko str., building 1, Office 1B/22, Kiev 04050, Ukraine |
94 | Al Hilal Building, Al Falah Road, Office 318, Abu Dhabi, United Arab Emirates |
95 | JAFZA One building, Unit No. AB 1005, Jebel Ali Free Zone, Dubai, United Arab Emirates |
96 | 1204 - 1205, Floor 12 Al Shatha Tower, Dubai, United Arab Emirates |
97 | The Lawn, 22‑30 Old Bath Road, Newbury, Berkshire, United Kingdom, RG14 1QN, England |
98 | Cain Road, Amen Corner, Bracknell, Berkshire, RG12 1HN, United Kingdom |
99 | 505 Union Ave SE STE120, Olympia, WA 98501, USA |
100 | The Corporation Trust Company, Corporation Trust Center, 1209 Orange St, Wilmington, New Castle, DE 19801, USA |
101 | Corporation Service Company, 251 Little Falls Drive, Wilmington, New Castle, DE19808, USA |
102 | 4701 Cox Road, Suite 285, Henrico County, Glen Allen VA 23060, United States |
Consolidated financial statements and notes
Notes to the consolidated financial statements
13 Related undertakings continued
Registered office addresses continued
| Number | Address |
103 | 54 Digeni Akrita, Akritas 2nd Floor, Office 201-202, PC 1061, Nicosia, Cyprus |
104 | Room 1213A Tower B, Full Link Plaza, No 18 Chaoyangmen Wai Avenue, Chaoyang District, Beijing, China |
105 | 19 Helmy El Masry Street, Almaza, Cairo, Egypt |
106 | 17 Hatidhar St., Raannana, 43665, Israel |
107 | 450 Alexandra Road, Singapore 119960, Singapore |
108 | Autonomy House, Cambridge Business Park, Cambridge, Cambridgeshire, CB4 0WZ |
109 | The Innovation Centre, Northern Ireland Science Park, Queen’s Road, Queens Island, Belfast, BT3 9DT |
14 Other non-current assets
| October 31, 2019 | October 31, 2018 | |||||||
| $m | $m | |||||||
| Employee benefit deposit | 33.4 | 31.1 | ||||||
| Long-term rent deposits | 4.9 | 4.1 | ||||||
| Long-term prepaid expenses | 4.5 | 2.9 | ||||||
| Other | 1.2 | 0.7 | ||||||
| 44.0 | 38.8 | |||||||
Employee benefit deposits are held in Germany ($16.4m), Israel ($11.9m), Italy ($2.4m) and the Netherlands ($2.7m) (October 31, 2018: Germany $15.4m, Israel $10.2m, Italy $2.7m and the Netherlands $2.8m). Employers in Germany, Italy and Israel are required by law to maintain funds to satisfy certain employee benefit liabilities, including free time off and compensation for involuntary termination of employment. These investment-based deposits are managed by third parties and the carrying values are marked-to-market based on third-party investment reports. In addition, a cash deposit was held in the Netherlands on behalf of certain employees to cover legacy employment subsistence benefits.
15 Inventories
| October 31, 2019 | October 31, 2018 | |||||||
| $m | $m | |||||||
| Work in progress | - | - | ||||||
| Finished goods | 0.1 | 0.2 | ||||||
| 0.1 | 0.2 | |||||||
The Group utilized $0.1m (18 months to October 31, 2018: $0.3m) of inventories included in cost of sales (2016: $49.1m), $119.9m (2016: $69.4m)during the 12 months to October 31, 2019.
Consolidated financial statements and notes
Notes to the consolidated financial statements
16 Trade and other receivables
| October 31, 2019 | October 31, 2018 | |||||||
| $m | $m | |||||||
| Trade receivables | 877.9 | 1,089.6 | ||||||
| Loss allowance | (42.4 | ) | (41.9 | ) | ||||
| Trade receivables net | 835.5 | 1,047.7 | ||||||
| Prepayments | 53.9 | 60.0 | ||||||
| Other receivables | 87.2 | 79.0 | ||||||
| Contract assets | 56.3 | 85.3 | ||||||
| 1,032.9 | 1,272.0 | |||||||
Concentrations of credit risk with respect to trade receivables are limited due to the Group’s customer base being large and unrelated. The Group considers the credit quality of trade and other receivables on a customer-by-customer basis. The Group considers that the carrying value of the trade and other receivables that is disclosed below gives a fair presentation of the credit quality of the assets. This is considered to be the case as there is a low risk of default due to the high number of recurring customers and credit control policies. In determining the recoverability of a trade receivable, the Group considers the ageing of each debtor and any change in the circumstances of the individual receivable. Due to this, management believes there is no further credit risk provision required in excess of the normal provision determined by the expected credit loss methodology applied.
At October 31, 2019 and October 31, 2018, the carrying amount approximates the fair value of the instrument due to the short-term nature of the instrument. The trade receivables of $877.9m at October 31, 2019 (October 31, 2018: $1,089.6m) are net of the $nil (October 31, 2018: $21.5m) loss allowance in the opening balance sheet for the HPE Software business (note 38) as amounts provided in the prior period have been utilized in the current period.
As at October 31, 2019, a loss allowance of $42.4m (October 31, 2018: $41.9m) was recognized for trade receivables.
The ageing of these receivables is as follows:
Current $m | Up to three months $m | Three to four months $m | Over four months $m | Total $m | ||||||||||||||||
| October 31, 2019 | ||||||||||||||||||||
| Gross trade receivables | 696.0 | 110.1 | 8.9 | 62.9 | 877.9 | |||||||||||||||
| Loss allowance | (8.9 | ) | (3.8 | ) | (1.5 | ) | (28.2 | ) | (42.4 | ) | ||||||||||
| Net trade receivables | 687.1 | 106.3 | 7.4 | 34.7 | 835.5 | |||||||||||||||
| October 31, 2018 | ||||||||||||||||||||
| Gross trade receivables | 798.5 | 153.4 | 13.6 | 124.1 | 1,089.6 | |||||||||||||||
| Loss allowance | - | - | (3.6 | ) | (38.3 | ) | (41.9 | ) | ||||||||||||
| Net trade receivables | 798.5 | 153.4 | 10.0 | 85.8 | 1,047.7 | |||||||||||||||
Movements in the Group provision for impairment of trade receivables were as follows:
| October 31, 2019 | October 31, 2018 | |||||||
| $m | $m | |||||||
| At November 1 / May 1 (calculated under IAS 39) | 41.9 | 2.6 | ||||||
| Accounting policy change (IFRS 9 - recognized against retained earnings on November 1, 2018) | 20.0 | - | ||||||
| Revised November 1 / May 1 | 61.9 | 2.6 | ||||||
| Loss allowance provided in the period | 16.0 | 40.0 | ||||||
| Receivables written off as uncollectable | (35.5 | ) | (0.7 | ) | ||||
| At October 31 | 42.4 | 41.9 | ||||||
Consolidated financial statements and notes
Notes to the consolidated financial statements
16 Trade and other receivables continued
The creation and release of the loss allowance for receivables have been included in selling and distribution costs and $3.2 million (2016: $0.6 million) is included in administrative expenses in the consolidatedConsolidated statement of comprehensive income.
| Freehold land | Leasehold | Computer | Fixtures | |||||||||||||||||
| and buildings | improvements | equipment | and fittings | Total | ||||||||||||||||
| $’000 | $’000 | $’000 | $’000 | $’000 | ||||||||||||||||
| Net book value | ||||||||||||||||||||
| At May 1, 2016 | 13,612 | 14,604 | 8,714 | 3,937 | 40,867 | |||||||||||||||
| Acquisitions | - | 1,057 | 770 | 295 | 2,122 | |||||||||||||||
| Additions | 18 | 2,329 | 3,926 | 181 | 6,454 | |||||||||||||||
| Disposals | - | (286 | ) | (79 | ) | (119 | ) | (484 | ) | |||||||||||
| Charge for the period | (182 | ) | (2,060 | ) | (2,919 | ) | (551 | ) | (5,712 | ) | ||||||||||
| Exchange adjustments | (2,057 | ) | (209 | ) | (366 | ) | (78 | ) | (2,710 | ) | ||||||||||
| At October 31, 2016 | 11,391 | 15,435 | 10,046 | 3,665 | 40,537 | |||||||||||||||
| Net book value | ||||||||||||||||||||
| At May 1, 2017 | 12,512 | 14,518 | 10,552 | 3,374 | 40,956 | |||||||||||||||
| Acquisitions (note 28) | 20,044 | 41,041 | 80,775 | 23,804 | 165,664 | |||||||||||||||
| Additions | 206 | 966 | 6,287 | 2,386 | 9,845 | |||||||||||||||
| Disposals | - | (176 | ) | (20 | ) | (231 | ) | (427 | ) | |||||||||||
| Charge for the period | (296 | ) | (3,648 | ) | (10,296 | ) | (2,049 | ) | (16,289 | ) | ||||||||||
| Exchange adjustments | 229 | 247 | 40 | 61 | 577 | |||||||||||||||
| At October 31, 2017 | 32,695 | 52,948 | 87,338 | 27,345 | 200,326 | |||||||||||||||
The Group usesloss allowance for trade receivables is measured at an amount equal to the equity methodlife-time expected credit losses as allowed for by IFRS 9. Prior to the adoption of accountingIFRS 9 on November 1, 2018, trade receivables were stated net of allowances for its interest in associates. The following table showsestimated irrecoverable amounts due to the aggregate movement in the Group’s investment in associates:identification of a loss event (the incurred loss method).
Contract assets relate to amounts not yet due from customers and contain no amounts past due.
17 Contract-related costs
| October 31, 2019 | October 31, 2018 | |||||||
| $m | $m | |||||||
| Current | 19.3 | - | ||||||
- | ||||||||
- | ||||||||
The Group capitalize the costs of obtaining a customer contract when they are incremental and, if expected to be recovered, they are amortized over the customer life or pattern of revenue for the related contract.
Normally sales commissions paid for customer contract renewals are not commensurate with the commissions paid for new contracts. It follows that the commissions paid for new contracts also relate to expected future renewals of these contracts. Accordingly, we amortize sales commissions paid for new customer contracts on a straight-line basis over the expected customer life, based on expected renewal frequency. The current average customer life is five years. If the expected amortization period is one year or less the Group expenses the costs when incurred.
As at November 1, 2018, the date of transition to IFRS 15, the capitalized commissions paid for uncompleted contracts were $64.7m ($35.4m was disposed of as part of the discontinued operation), of which $14.1m were current and $50.6m non-current.
The amortization expenses in the period for the costs of obtaining customer contracts were $10.2m.
Amortization of the capitalized costs of obtaining customer contracts is classified as sales and marketing expense. Capitalized costs from customer contracts are classified as non-financial assets in our statement of financial position.
| October 31, 2019 | October 31, 2018 | |||||||
| $m | $m | |||||||
| Asset recognized from costs incurred to acquire a contract | 31.4 | - | ||||||
| Amortization and impairment loss recognized as cost of | ( | ) | ||||||
- | ||||||||
| September 30, 2017 | September 30, 2016 | |||||||
| $’000 | $’000 | |||||||
| Non-current assets | 39,201 | 39,879 | ||||||
| Current assets | 51,044 | 61,684 | ||||||
| Current liabilities | (695 | ) | (541 | ) | ||||
| Non-current liabilities | (656 | ) | (367 | ) | ||||
| Equity | 88,894 | 100,655 | ||||||
Consolidated financial statements and notes
Notes to the consolidated interim financial statements (unaudited)
| September 30, 2017 | September 30, 2016 | |||||||
| $’000 | $’000 | |||||||
| Revenue | - | - | ||||||
| Net loss | (3,760 | ) | (8,217 | ) | ||||
| 2017 | 2016 | |||||||
| $’000 | $’000 | |||||||
| Loss attributable to the Group for the six months ended September 30, | (470 | ) | (1,027 | ) | ||||
| Adjustment on estimated October result attributable to the Group | 32 | (100 | ) | |||||
| Loss attributable to the Group for the six months ended October 31, | (438 | ) | (1,127 | ) | ||||
| October 31, 2017 | October 31, 2016 | |||||||
| $’000 | $’000 | |||||||
| Trade receivables | 1,057,150 | 257,486 | ||||||
| Less: provision for impairment of trade receivables | (51,318 | ) | (3,768 | ) | ||||
| Trade receivables net | 1,005,832 | 253,718 | ||||||
| Prepayments | 51,733 | 21,353 | ||||||
| Other receivables | 193,175 | 2,436 | ||||||
| Accrued income | 842 | 451 | ||||||
| Total | 1,251,582 | 277,958 | ||||||
| October 31, 2019 | October 31, 2018 | |||||||||||
| Note | $m | $m | ||||||||||
| Cash at bank and in hand | 292.2 | 387.1 | ||||||||||
| Short-term bank deposits | 63.5 | 236.7 | ||||||||||
| 355.7 | 623.8 | |||||||||||
| Reclassification to current assets classified as held for sale | 37 | - | (2.9 | ) | ||||||||
| Cash and cash equivalents | 355.7 | 620.9 | ||||||||||
At October 31, 20172019 and October 31, 2016,2018, the carrying amount approximates to the fair value. The Group’s credit risk on cash and cash equivalents is limited as the counterparties are well established banks with high credit ratings. The credit quality of cash and cash equivalents is as follows:
| October 31, 2019 | October 31, 2018 | ||||||||
| $m | $m | ||||||||
S&P/Moody’s/Fitch rating: | |||||||||
AAA | 69.8 | 231.5 | |||||||
AA- | 87.6 | 81.0 | |||||||
| A+ | 144.4 | 260.4 | |||||||
| A | 23.4 | 20.1 | |||||||
| A- | 14.4 | 3.8 | |||||||
BBB+ | 1.7 | 4.5 | |||||||
BBB | 4.5 | 1.0 | |||||||
BBB- | 0.8 | 0.6 | |||||||
BB+ | 0.8 | 2.0 | |||||||
BB | 0.3 | - | |||||||
BB- | 6.3 | 15.2 | |||||||
| B+ | 0.2 | - | |||||||
CCC+ | - | 0.2 | |||||||
| C- | - | 0.3 | |||||||
Not rated | 1.5 | 0.3 | |||||||
| 355.7 | 620.9 | ||||||||
Where the opinions of the rating agencies differ, the lowest applicable rating has been assigned to the counterparty.
| October 31, 2019 | October 31, 2018 | |||||||||||||||
October 31, 2017 $’000 | October 31, 2016 $’000 | $m | $m | |||||||||||||
| Trade payables | 89,143 | 14,301 | 105.0 | 46.1 | ||||||||||||
| Tax and social security | 95,018 | 9,250 | 80.7 | 46.5 | ||||||||||||
| Accruals | 750,588 | 127,612 | 425.3 | 584.3 | ||||||||||||
| Total | 934,749 | 151,163 | ||||||||||||||
| 611.0 | 676.9 | |||||||||||||||
At October 31, 20172019 and at October 31, 2016,2018, the carrying amount approximates to the fair value.
| October 31, 2017 | October 31, 2016 | |||||||
| $ | ’000 | $ | ’000 | |||||
| Bank loans secured | 5,047,692 | 1,775,875 | ||||||
| Unamortized prepaid facility arrangement fees and original issue discounts | (198,476 | ) | (40,346 | ) | ||||
| 4,849,216 | 1,735,529 | |||||||
| October 31, 2017 | October 31, 2016 | |||||||||||||||||||||||
| Bank loan secured | Unamortized prepaid facility arrangement fees and original issue discounts | Total | Bank loan secured | Unamortized prepaid facility arrangement fees and original issue discounts | Total | |||||||||||||||||||
| Reported within: | $’000 | $’000 | $’000 | $’000 | $’000 | $’000 | ||||||||||||||||||
| Current liabilities | 37,858 | (20,131 | ) | 17,727 | 307,750 | (13,558 | ) | 294,192 | ||||||||||||||||
| Non-current liabilities | 5,009,834 | (178,345 | ) | 4,831,489 | 1,468,125 | (26,788 | ) | 1,441,337 | ||||||||||||||||
| 5,047,692 | (198,476 | ) | 4,849,216 | 1,775,875 | (40,346 | ) | 1,735,529 | |||||||||||||||||
Consolidated financial statements and notes
Notes to the consolidated interim financial statements (unaudited)
| October 31, 2019 | October 31, 2018 | |||||||
| $m | $m | |||||||
| Bank loan secured | 4,775.0 | 4,996.9 | ||||||
| Unamortized prepaid facility arrangement fees and original issue discounts | (104.3 | ) | (151.0 | ) | ||||
| 4,670.7 | 4,845.9 | |||||||
| October 31, 2019 | October 31, 2018 | |||||||||||||||||||||||
Bank loan secured | Unamortized prepaid facility arrangement fees and original issue discounts | Total | Bank loan secured | Unamortized prepaid facility arrangement fees and original issue discounts | Total | |||||||||||||||||||
| Reported within: | $m | $m | $m | $m | $m | $m | ||||||||||||||||||
| Current liabilities | - | - | - | 50.3 | (46.6 | ) | 3.7 | |||||||||||||||||
| Non-current liabilities | 4,775.0 | (104.3 | ) | 4,670.7 | 4,946.6 | (104.4 | ) | 4,842.2 | ||||||||||||||||
| 4,775.0 | (104.3 | ) | 4,670.7 | 4,996.9 | (151.0 | ) | 4,845.9 | |||||||||||||||||
In April 2019, early repayments totaling $200.0m in total were made against the existing term loans, utilizing some of the proceeds from the sale of the SUSE business. As a result of this no further repayments are expected within the next 12 months. The term of the loans remains unchanged.
The Company announced on April 21, 2017 the successful syndication of the new creditfollowing facilities (the “New Facilities”) on behalf of bothwere drawn as at October 31, 2019:
The $1,414.7m senior secured term loan B-2 issued by MA FinanceCo LLC a wholly owned subsidiary of Micro Focus, and Seattle SpinCo. Inc., the subsidiary that holds HPE Software which merged with a wholly owned subsidiary of Micro Focus at Completion.
The $368.2m senior secured seven-year term loan B-3 issued by MA FinanceCo LLC is priced at LIBOR plus 2.50% (subject to a LIBOR floor of 0.00%) with a numberan original issue discount of financial institutions, $2,600.0 million0.25%;
The $2,486.3m senior secured seven-year term loan B issued by Seattle SpinCo,SpinCo. Inc., $385 million is priced at LIBOR plus 2.50% (subject to a LIBOR floor of 0.00%) with an original issue discount of 0.25%; and
The €452.8m m (equivalent to $505.8m) senior secured seven-year term loan B issued by MA FinanceCo LLC and Eur 470.0 million (valuedis priced at $547.5 millionEURIBOR plus 2.75% (subject to a EURIBOR floor of 0.00%) with an original issue discount of 0.25%.
The following facilities were undrawn as at October 31, 2017) issued by MA FinanceCo LLC.2019:
A senior secured revolving credit facility of $500.0m, “Revolving Facility”, with an interest rate of 3.25% above LIBOR on amounts drawn as at April 30, 2017:
The only financial covenant attaching to these facilities relates to the Revolving Facility, which is subject to an aggregate net leverage covenant only in circumstances where more than 35% of the Revolving Facility is outstanding at a fiscal quarter end.
At October 31, 2017,2019, $nil of the Revolving Facility was drawn together with $5,047.7 million$4,775.0m of Term Loan B-2Loans giving gross debt of $5,047.7 million$4,775.0m drawn.
As a covenant test is only applicable when the Revolving Facility is drawn down by 35% or more, and $nil of Revolving Facility was drawn at October 31, 2017,2019, no covenant test is applicable.
Consolidated financial statements and notes
Notes to the consolidated financial statements
20 Borrowings
The movements on the Group loans in the period were as follows:
Term Loan B-2 | Term Loan B | Term Loan C | Term Loan B-3 | HPE Software Term Loan | Euro Loan | Revolving Facility | Total | |||||||||||||||||||||||||
| $’000 | $’000 | $’000 | $’000 | $’000 | $’000 | $’000 | $’000 | |||||||||||||||||||||||||
| At May 1,2017 | 1,515,188 | - | - | - | - | - | 80,000 | 1,595,188 | ||||||||||||||||||||||||
| Acquisitions | - | - | - | - | 2,600,000 | - | - | 2,600,000 | ||||||||||||||||||||||||
| Repayments | - | - | - | - | - | - | (215,000 | ) | (215,000 | ) | ||||||||||||||||||||||
| Draw downs | - | - | - | 385,000 | - | 523,815 | 135,000 | 1,043,815 | ||||||||||||||||||||||||
| Foreign exchange | - | - | - | - | 23,689 | - | 23,689 | |||||||||||||||||||||||||
| At October 31, 2017 | 1,515,188 | - | - | 385,000 | 2,600,000 | 547,504 | - | 5,047,692 | ||||||||||||||||||||||||
Term Loan B-2 | Term Loan B-3 | Seattle Spinco Term Loan B | Euro Term Loan B | Revolving Facility | Total | |||||||||||||||||||
| $m | $m | $m | $m | $m | $m | |||||||||||||||||||
| At May 1, 2017 | 1,515.2 | - | - | - | 80.0 | 1,595.2 | ||||||||||||||||||
| Acquisitions | - | - | 2,600.0 | - | - | 2,600.0 | ||||||||||||||||||
| Draw downs | - | 385.0 | - | 523.8 | 135.0 | 1,043.8 | ||||||||||||||||||
| Repayments | (11.4 | ) | (2.9 | ) | (19.5 | ) | (4.1 | ) | (215.0 | ) | (252.9 | ) | ||||||||||||
| Foreign exchange | - | - | - | 10.8 | - | 10.8 | ||||||||||||||||||
| At October 31, 2018 | 1,503.8 | 382.1 | 2,580.5 | 530.5 | - | 4,996.9 | ||||||||||||||||||
| At November 1, 2018 | 1,503.8 | 382.1 | 2,580.5 | 530.5 | - | 4,996.9 | ||||||||||||||||||
| Draw downs | - | - | - | - | - | - | ||||||||||||||||||
| Repayments | (89.1 | ) | (13.9 | ) | (94.2 | ) | (15.4 | ) | - | (212.6 | ) | |||||||||||||
| Foreign exchange | - | - | - | (9.3 | ) | - | (9.3 | ) | ||||||||||||||||
| At October 31, 2019 | 1,414.7 | 368.2 | 2,486.3 | 505.8 | - | 4,775.0 | ||||||||||||||||||
Borrowings are stated after deducting unamortized prepaid facility fees and original issue discounts. Facility arrangement costs and original issue discounts are amortized between three and six years. TheLong-term borrowings with a carrying value of $4,775.0m before unamortized prepaid facility fees, have a fair value estimate of borrowings equals their carrying amount.$4,686.0m based on trading prices as at October 31, 2019.
Maturity of borrowings
The maturity profile of the anticipated future cash flows including interest in relation to the Group’s borrowings on an undiscounted basis, which therefore, differs from both the carrying value and fair value, is as follows:
As at October 31, 2017:2019:
Term Loan B-2 | Term Loan B-3 | HPE Software Term Loan | Euro Loan | Revolving Facility | Total | Term Loan B-2 | Term Loan B-3 | Seattle Spinco Term Loan B | Euro Term Loan B | Revolving Facility | Total | |||||||||||||||||||||||||||||||||||||
| $’000 | $’000 | $’000 | $’000 | $’000 | $’000 | $m | $m | $m | $m | $m | $m | |||||||||||||||||||||||||||||||||||||
| Within one year | 68,675 | 18,424 | 124,421 | 20,728 | - | 232,248 | 61.6 | 17.0 | 114.6 | 14.1 | 1.9 | 209.2 | ||||||||||||||||||||||||||||||||||||
| In one to two years | 71,925 | 19,241 | 129,937 | 21,941 | - | 243,044 | 61.5 | 16.9 | 114.3 | 14.6 | 1.9 | 209.2 | ||||||||||||||||||||||||||||||||||||
| In two to three years | 71,505 | 19,127 | 129,168 | 21,819 | - | 241,619 | 1,419.8 | 18.5 | 124.1 | 19.3 | 1.6 | 1,583.3 | ||||||||||||||||||||||||||||||||||||
| In three to four years | 70,777 | 18,929 | 127,834 | 21,608 | - | 239,148 | - | 20.6 | 139.4 | 19.1 | - | 179.1 | ||||||||||||||||||||||||||||||||||||
| In four to five years | 1,461,548 | 18,774 | 126,783 | 21,441 | - | 1,628,546 | - | 373.5 | 2,522.6 | 503.6 | - | 3,399.7 | ||||||||||||||||||||||||||||||||||||
| In more than five years | - | 390,865 | 2,639,609 | 547,338 | - | 3,577,812 | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
| 1,744,430 | 485,360 | 3,277,752 | 654,875 | - | 6,162,417 | |||||||||||||||||||||||||||||||||||||||||||
| Unamortized prepaid facility arrangement fees and original issue discounts | (66,387 | ) | (12,257 | ) | (84,469 | ) | (16,690 | ) | (18,673 | ) | (198,476 | ) | ||||||||||||||||||||||||||||||||||||
| At October 31, 2017 | 1,678,043 | 473,103 | 3,193,283 | 638,185 | (18,673 | ) | 5,963,941 | |||||||||||||||||||||||||||||||||||||||||
| At October 31, 2019 | 1,542.9 | 446.5 | 3,015.0 | 570.7 | 5.4 | 5,580.5 | ||||||||||||||||||||||||||||||||||||||||||
Consolidated financial statements and notes
Notes to the consolidated financial statements
20 Borrowings continued
Maturity of borrowings continued
Less than 1 year | 1-3 years | 3-5 years | After 5 years | Total | ||||||||||||||||
| $m | $m | $m | $m | $m | ||||||||||||||||
| Debt principal repayment | - | 1,431.7 | 3,343.3 | - | 4,775.0 | |||||||||||||||
| Interest payment on debt | 209.2 | 360.6 | 235.7 | - | 805.5 | |||||||||||||||
| At October 31, 2019 | 209.2 | 1,792.3 | 3,579.0 | - | 5,580.5 | |||||||||||||||
As at October 31, 2018:
Term Loan B-2 | Term Loan B-3 | Seattle Spinco Term Loan B | Euro Term Loan B | Revolving Facility | Total | |||||||||||||||||||
| $m | $m | $m | $m | $m | $m | |||||||||||||||||||
| Within one year | 84.3 | 22.4 | 151.2 | 20.1 | 1.9 | 279.9 | ||||||||||||||||||
| In one to two years | 83.8 | 22.2 | 150.2 | 20.0 | 1.9 | 278.1 | ||||||||||||||||||
| In two to three years | 82.9 | 22.0 | 148.6 | 19.8 | 1.9 | 275.2 | ||||||||||||||||||
| In three to four years | 1,462.1 | 21.8 | 147.4 | 19.6 | 1.6 | 1,652.5 | ||||||||||||||||||
| In four to five years | - | 21.6 | 146.1 | 19.5 | - | 187.2 | ||||||||||||||||||
| In more than five years | - | 374.2 | 2,526.8 | 512.7 | - | 3,413.7 | ||||||||||||||||||
| At October 31, 2018 | 1,713.1 | 484.2 | 3,270.3 | 611.7 | 7.3 | 6,086.6 | ||||||||||||||||||
Less than 1 year | 1-3 years | 3-5 years | After 5 years | Total | ||||||||||||||||
| $m | $m | $m | $m | $m | ||||||||||||||||
| Debt principal repayment | 50.3 | 100.7 | 1,528.8 | 3,317.1 | 4,996.9 | |||||||||||||||
| Interest payment on debt | 229.6 | 452.6 | 310.9 | 96.6 | 1,089.7 | |||||||||||||||
| At October 31, 2018 | 279.9 | 553.3 | 1,839.7 | 3,413.7 | 6,086.6 | |||||||||||||||
Assets pledged as collateral
Consolidated financial statements and notes
Notes to the consolidated interim financial statements (unaudited)
| October 31, 2019 | October 31, 2018 | |||||||
| $m | $m | |||||||
| Current | 11.8 | 13.6 | ||||||
| Non-current | 11.7 | 14.9 | ||||||
| 23.5 | 28.5 | |||||||
Finance lease liabilities – minimum lease payments:
| October 31, 2019 | October 31, 2018 | |||||||
| $m | $m | |||||||
| Within one year | 13.1 | 15.1 | ||||||
| Between one and five years | 12.5 | 16.0 | ||||||
| 25.6 | 31.1 | |||||||
| Future lease charges | (2.1 | ) | (2.6 | ) | ||||
| 23.5 | 28.5 | |||||||
The carrying value of computer equipment held under finance leases and hire purchase contracts as at October 31, 2019 was $20.9m (October 31, 2018: $25.9m) (note 12).
| October 31, 2017 | October 31, 2016 | |||||||
| $’000 | $’000 | |||||||
| Onerous leases and dilapidations | 24,932 | 16,687 | ||||||
| Restructuring and integration | 53,771 | 7,340 | ||||||
| Legal | 3,541 | 3,022 | ||||||
| Other | 100 | 100 | ||||||
| Total | 82,344 | 27,149 | ||||||
| Current | 55,678 | 15,420 | ||||||
| Non-current | 26,666 | 11,729 | ||||||
| Total | 82,344 | 27,149 | ||||||
Onerous leases and dilapidations | Restructuring and integration | Legal | Other | Total | ||||||||||||||||
| $’000 | $’000 | $’000 | $’000 | $’000 | ||||||||||||||||
| At May 1, 2017 | 16,243 | 12,132 | 3,220 | 484 | 32,079 | |||||||||||||||
| Acquisitions - HPE Software (note 28) | 11,321 | 21,398 | - | - | 32,719 | |||||||||||||||
| Additional provision in the period | 547 | 74,202 | 809 | - | 75,558 | |||||||||||||||
| Released | (1,006 | ) | (325 | ) | (410 | ) | (384 | ) | (2,125 | ) | ||||||||||
| Utilization of provision | (2,255 | ) | (53,162 | ) | (72 | ) | - | (55,489 | ) | |||||||||||
| Exchange adjustments | 82 | (474 | ) | (6 | ) | - | (398 | ) | ||||||||||||
| At October 31, 2017 | 24,932 | 53,771 | 3,541 | 100 | 82,344 | |||||||||||||||
| Current | 3,338 | 48,799 | 3,541 | - | 55,678 | |||||||||||||||
| Non-current | 21,594 | 4,972 | - | 100 | 26,666 | |||||||||||||||
| Total | 24,932 | 53,771 | 3,541 | 100 | 82,344 | |||||||||||||||
| October 31, 2019 | October 31, 2018 | |||||||
| $m | $m | |||||||
| Within one year | 11.8 | 13.6 | ||||||
| Between one and three years | 10.8 | 13.3 | ||||||
| Between three and five years | 0.9 | 1.6 | ||||||
| 23.5 | 28.5 | |||||||
Onerous leases and dilapidations | Restructuring and integration | Legal | Other | Total | ||||||||||||||||
| $’000 | $’000 | $’000 | $’000 | $’000 | ||||||||||||||||
| At May 1, 2016 | 18,176 | 3,523 | 1,920 | 1,280 | 24,899 | |||||||||||||||
| Acquisitions – Serena | - | 1,201 | 1,344 | - | 2,545 | |||||||||||||||
| Additional provision in the period | 2,128 | 20,358 | - | - | 22,486 | |||||||||||||||
| Released | (344 | ) | (2,077 | ) | (97 | ) | (1,180 | ) | (3,698 | ) | ||||||||||
| Utilization of provision | (3,151 | ) | (15,311 | ) | (119 | ) | - | (18,581 | ) | |||||||||||
| Exchange adjustments | (122 | ) | (354 | ) | (26 | ) | - | (502 | ) | |||||||||||
| At October 31, 2016 | 16,687 | 7,340 | 3,022 | 100 | 27,149 | |||||||||||||||
| Current | 5,120 | 7,278 | 3,022 | - | 15,420 | |||||||||||||||
| Non-current | 11,567 | 62 | - | 100 | 11,729 | |||||||||||||||
| Total | 16,687 | 7,340 | 3,022 | 100 | 27,149 | |||||||||||||||
Consolidated financial statements and notes
Notes to the consolidated interimfinancial statements
22 Current tax receivables, current tax liabilities and non-current tax liabilities
Current tax receivables
| October 31, 2019 | October 31, 2018 | |||||||
| $m | $m | |||||||
Corporation tax | 40.1 | 24.5 | ||||||
The current tax receivable at October 31, 2019 is $40.1m (October 31, 2018: $24.5m).
Current tax liabilities
| October 31, 2019 | October 31, 2018 | |||||||
| $m | $m | |||||||
Corporation tax | 104.0 | 124.1 | ||||||
The current tax creditor at October 31, 2019 is $104.0m (October 31, 2018: $124.1m). The current tax creditor includes liabilities in respect of uncertain tax positions, net of overpayments.
Within current tax liabilities is $78.3m (October 31, 2018: $67.7m) in respect of the Group income tax reserve, the majority of which relates to the risk of challenge from the local tax authorities. The Group does not anticipate that there will be any material change to these provisions in the next 12 months. Due to the uncertainty associated with such tax items, it is possible that at a future date, on conclusion of open tax matters, the final outcome may vary significantly.
Non-current tax liabilities
| October 31, 2019 | October 31, 2018 | |||||||
| $m | $m | |||||||
Corporation tax | 119.7 | 131.0 | ||||||
The non-current tax creditor is $119.7m (October 31, 2018: $131.0m). The non-current creditor reflects the US transition tax payable more than 12 months after the balance sheet date.
23 Contract liabilities
| October 31, 2019 | October 31, 2018 | |||||||
| $m | $m | |||||||
Current | 1,045.9 | 1,134.7 | ||||||
Non-current | 149.9 | 178.1 | ||||||
| 1,195.8 | 1,312.8 | |||||||
Contract liabilities as at October 31, 2019 were $1,195.8m (October 31, 2018: $1,312.8m). The movement in contract liabilities in the period mainly results from new amounts being deferred, where the billing is advance of satisfaction of the related performance obligation, and amounts being recognized as revenue, where performance obligations have been satisfied. The amount of revenue recognized in the reporting period that was included in the contract liability balance as at November 1, 2018 was $1,134.7m.
Revenue billed but not recognized in the Consolidated statement of comprehensive income under the Group’s accounting policy for revenue recognition is classified as contract liabilities in the consolidated statement of financial position to be recognized in future periods. Contract liabilities primarily relates to undelivered maintenance and subscription services on billed contracts.
Remaining Performance Obligations
Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. The remaining revenue allocated to future performance obligations was $1,468.9m as at October 31, 2019, of which approximately 80% of the revenue is expected to be recognized over the next 12 months and the remainder thereafter.
This amount mostly comprises obligations to provide maintenance and SaaS subscriptions as the contracts have durations of one or multiple years.
Consolidated financial statements (unaudited)and notes
Notes to the consolidated financial statements
| October 31, 2019 | October 31, 2018 | |||||||
| $m | $m | |||||||
| Onerous leases and dilapidations | 34.2 | 35.1 | ||||||
| Restructuring | 36.4 | 50.7 | ||||||
| Legal | 5.7 | 7.0 | ||||||
| Other | 2.1 | - | ||||||
| Total | 78.4 | 92.8 | ||||||
| Current | 29.3 | 57.4 | ||||||
| Non-current | 49.1 | 35.4 | ||||||
| Total | 78.4 | 92.8 | ||||||
Onerous leases and dilapidations | Restructuring | Legal | Other | Total | ||||||||||||||||||||
| Note | $m | $m | $m | $m | $m | |||||||||||||||||||
| At November 1, 2018 | 35.1 | 50.7 | 7.0 | - | 92.8 | |||||||||||||||||||
| Acquisitions – Interset Software Inc. | 38 | - | - | - | 0.7 | 0.7 | ||||||||||||||||||
| Additional provision in the period | 19.2 | 49.4 | 5.4 | 2.1 | 76.1 | |||||||||||||||||||
| Released | (7.4 | ) | (19.8 | ) | (6.2 | ) | - | (33.4 | ) | |||||||||||||||
| Utilization of provision | (13.9 | ) | (43.5 | ) | (0.5 | ) | (0.7 | ) | (58.6 | ) | ||||||||||||||
| Unwinding of discount | 1.1 | - | - | - | 1.1 | |||||||||||||||||||
| Effects of movements in exchange rates | 0.1 | (0.4 | ) | - | - | (0.3 | ) | |||||||||||||||||
| At October 31, 2019 | 34.2 | 36.4 | 5.7 | 2.1 | 78.4 | |||||||||||||||||||
| Current | 9.5 | 12.0 | 5.7 | 2.1 | 29.3 | |||||||||||||||||||
| Non-current | 24.7 | 24.4 | - | - | 49.1 | |||||||||||||||||||
| Total | 34.2 | 36.4 | 5.7 | 2.1 | 78.4 | |||||||||||||||||||
Consolidated financial statements and notes
Notes to the consolidated financial statements
24 Provisions continued
Onerous leases and dilapidations | Restructuring | Legal | Other | Total | ||||||||||||||||||||
| Note | $m | $m | $m | $m | $m | |||||||||||||||||||
| At May 1, 2017 | 16.3 | 12.1 | 3.2 | 0.5 | 32.1 | |||||||||||||||||||
| Continuing operations: | ||||||||||||||||||||||||
| Acquisitions – HPE Software business | 38 | 11.3 | 21.4 | 36.5 | - | 69.2 | ||||||||||||||||||
| Additional provision in the period | 17.7 | 133.4 | 1.4 | - | 152.5 | |||||||||||||||||||
| Released | (3.9 | ) | (3.7 | ) | (4.7 | ) | (0.4 | ) | (12.7 | ) | ||||||||||||||
| Utilization of provision | (5.6 | ) | (110.0 | ) | (29.3 | ) | (0.1 | ) | (145.0 | ) | ||||||||||||||
| Effects of movements in exchange rates | (0.7 | ) | (2.5 | ) | (0.1 | ) | - | (3.3 | ) | |||||||||||||||
| Discontinued operation: | ||||||||||||||||||||||||
| Additional provision in the period | 2.8 | 0.2 | - | - | 3.0 | |||||||||||||||||||
| Reclassification of current assets classified as held for sale | 37 | (2.8 | ) | (0.2 | ) | - | - | (3.0 | ) | |||||||||||||||
| At October 31, 2018 | 35.1 | 50.7 | 7.0 | - | 92.8 | |||||||||||||||||||
| Current | 11.2 | 39.2 | 7.0 | - | 57.4 | |||||||||||||||||||
| Non-current | 23.9 | 11.5 | - | - | 35.4 | |||||||||||||||||||
| Total | 35.1 | 50.7 | 7.0 | - | 92.8 | |||||||||||||||||||
Onerous leases and dilapidations provisions
The onerous lease and dilapidations provision relates to leased Group properties and this position is expected to be fully utilized within nineeight years. An additional provision of $19.2m was recorded in the 12 months ended October 31, 2019, mainly across European and US sites, as the property portfolio was reassessed, including planned site vacations and a review of obligations to restore leased property at the end of the lease period.
The provision was increased by $11.9 million$29.0m in the six18 months ended October 31, 2017, mostly2018, due to the acquisition of the HPE Software business ($11.3m) and relating to legal obligations to restore leased properties at the end of the lease period. A provisionperiod and a reassessment of $1.0 million wassites across North America, United Kingdom, Israel and Australia ($17.7m). Provisions of $3.9m were released following the renegotiationrenegotiation/exit of the leaseleases of atwo North American property.properties.
Restructuring and integrationprovisions
Restructuring provisions relate to activities undertaken in readiness for bringing together the Micro Focus and HPE Software organization into one organization across all functions of the existing business and provisions for severance resulting from headcount reductions in the HPE Software business.reductions. The majority of provisions are expected to be fully utilized within 1224 months. Restructuring costs are reported within exceptional costs (note 4).
Legal provisions
Legal provisions include management’sthe directors’ best estimate of the likely outflow of economic benefits associated with ongoingon-going legal matters. Further information on legal matters can be found in note 35, contingent liabilities.
Other provisions
Other provisions during the 12 months ended October 31, 2019 relate to interest on uncertain tax provisions of $2.1m. Releases of other provisions during the period18 months ended October 31, 20172018 relate to future fees no longer considered likely to be incurred.
Consolidated financial statements and notes
Notes to the consolidated financial statements
25 Pension commitments
| October 31, 2017 | October 31, 2016 | |||||||
| $’000 | $’000 | |||||||
| Within Non-current assets : | ||||||||
| Long term pension assets | 23,650 | 24,120 | ||||||
| Within Non-current liabilities: | ||||||||
| Retirement benefit obligations | (97,647 | ) | (34,599 | ) | ||||
| a) | Defined contribution |
The Group has established a number of pension schemes around the world covering many of its employees. The principal funds are those in the US, UK and Germany. These were funded schemes of the defined contribution type.
Pension costs for defined contributions schemes are as follows:
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 2017 | ||||||||||||||
| Continuing operations | Note | $m | $m | $m | ||||||||||||
| Defined contribution schemes | 33 | 32.7 | 43.3 | 10.9 | ||||||||||||
| b) | Defined benefit |
| October 31, 2019 | October 31, 2018 | |||||||
| $m | $m | |||||||
| Within non-current assets: | ||||||||
| Long-term pension assets | 17.1 | 16.7 | ||||||
| Within non-current liabilities: | ||||||||
| Retirement benefit obligations | (141.4 | ) | (110.4 | ) | ||||
The acquisition and subsequent integration of the software segment of Hewlett Packard Enterprise Company (“HPE SoftwareSoftware”) on September 1, 2017 added 3327 defined benefit plans primarily in France, Germany and Switzerland. After the acquisition
As of October 31, 2019 there are 37 (October 2016: three, April 2017: four)a total of 30 defined benefit plans in ten10 countries around the world. Someworld (October 31, 2018: 30). The highest concentration of the planspension schemes are in Germany, where the Group sponsor 11 separate schemes that comprise over 85% of the total net retirement benefit obligation recorded on our Consolidated statement of financial position. Our German schemes are primarily final salary pension plans, which provide benefits to members in the form of a guaranteed level of pension payable for life in the case of retirement, disability and death. The level of benefits provided depends not only on the final salary but also on member’smembers’ length of service, social security ceiling and other factors. Although most of these schemes in Germany are funded at some level, there are no funding requirements in Germany. There are no requirements for the appointment of independent trustees in Germany, and all of these schemes are administered locally with the assistance of German pension experts. Final pension entitlements, including benefits for death in service and disability amounts, are calculated by these experts. Plan assets for three of our German schemes include re-insurance contracts with guaranteed interest rates, while the majority of the schemes invest in funds focusing on equities and debt instruments. Most of our German schemes are closed to new entrants, however, two of the schemes are open to new members.
The remainder of the Group’s defined benefit schemes are comprised of a mix of final salary plans, termination or retirement indemnity plans and other types of statutory plans that provide a one-time benefit at termination. Final pension entitlements are calculated by local actuariesadministrators in the applicable country. They also complete calculations for cases of death in service and disability. Other plans include termination or retirement indemnity plans or other types of statutory plans that provide a one-time benefit at termination. Where required by local or statutory requirements, some of the schemes are governed by an independent Board of Trustees that is responsible for the investment strategies with regard to the assets of the funds, however, other schemes are administered locally with the assistance of local pension experts. Many of the Group’s plans outside of Germany are funded and the Group makes at least the minimum contributions required by local government, funding and taxing authorities. Plan assets for these schemes include a range of assets including investment funds or re-insurance contracts. Not all of ourthese plans are closed for new membership. The Group sponsors 10 plans outside of Germany that are open to new members, most of which are termination or retirement indemnity plans or statutory plans providing a one-time benefit at termination, retirement, death or disability. As a result of the acquisition of HPE Software, the Group participates in multi-employer plans in Switzerland and Japan. These plans are accounted for as defined benefit plans and the Group’s obligations are limited to the liabilities of our employees.
Long-term pension assets
Long-term pension assets relate to the reimbursement rightcontractual arrangement under insurance policies held by the CompanyGroup with guaranteed interest rates that do not meet the definition of a qualifying insurance policy as they have not been pledged to the plan or beneficiaries and are subject to the creditors of the Group. Such reimbursement rights assetsarrangements are recorded in the consolidatedConsolidated statement of financial position as long-term pension assets. FairThese contractual arrangements are treated as financial assets measured at fair value through Other comprehensive income. Movement in the fair value of the reimbursement right assetlong-term pension assets is deemed to be the present value of the related obligation because the right to reimbursement under the insurance policies exactly matches the amount and timing of some or all of the benefits payable under the defined benefit plan.included in Other comprehensive income. All non-plan assets are held in Germany.
Consolidated financial statements and notes
Notes to the consolidated financial statements
25 Pension commitments continued
The movement on the long-term pension asset is as follows:
| October 31, 2019 | October 31, 2018 | |||||||||||
| Note | $m | $m | ||||||||||
| As at November 1 / May 1 | 16.7 | 22.0 | ||||||||||
| Reclassification to assets held for sale | 0.1 | (1.5 | ) | |||||||||
| Interest on non-plan assets | 6 | 0.3 | 0.6 | |||||||||
| Benefits paid | (0.1 | ) | (0.2 | ) | ||||||||
| Contributions | 0.3 | 0.5 | ||||||||||
| Included within other comprehensive income: | ||||||||||||
| - Change in fair value assessment | 0.4 | (6.1 | ) | |||||||||
| - Actuarial gain on non-plan assets | - | 0.3 | ||||||||||
| 0.4 | (5.8 | ) | ||||||||||
| Effects of movements in exchange rates | (0.6 | ) | 1.1 | |||||||||
| As at October 31, | 17.1 | 16.7 | ||||||||||
| Included within other comprehensive income: | ||||||||||||
| Continuing operations | 0.3 | (5.3 | ) | |||||||||
| Discontinued operation | 0.1 | (0.5 | ) | |||||||||
| 0.4 | (5.8 | ) | ||||||||||
| October 31, 2017 | October 31, 2016 | |||||||
| $’000 | $’000 | |||||||
| As at May 1, | 22,031 | 22,272 | ||||||
| Return on non-plan assets (note 11) | 231 | 187 | ||||||
| Benefits paid | (58 | ) | (44 | ) | ||||
| Contributions | 235 | - | ||||||
| Included within other comprehensive income: | ||||||||
| - Actuarial (loss)/gain on non-plan assets | (350 | ) | 2,482 | |||||
| - Reclassification from defined contribution scheme to defined benefit scheme | - | - | ||||||
| (350 | ) | 2,482 | ||||||
| Foreign currency exchange gain/(loss) | 1,561 | (777 | ) | |||||
| At October 31 | 23,650 | 24,120 | ||||||
The non-plan assets are considered to be Level 3 asset under the fair value hierarchy as of October 31, 2019. These assets have been valued by an external insurance expert by applying a discount rate to the future cash flows and taking into account the fixed interest rate, mortality rates and term of the insurance contract. There have been no transfers between levels for the period ended October 31, 2019 (October 31, 2018: none).
Retirement benefit obligations
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 2017 | ||||||||||||||
| Note | $m | $m | $m | |||||||||||||
| Current service charge | 9.0 | 12.6 | 0.5 | |||||||||||||
| Past service credit | - | (5.5 | ) | - | ||||||||||||
| Charge to operating profit | 33 | 9.0 | 7.1 | 0.5 | ||||||||||||
| Current service charge – discontinued operations | 0.1 | 0.3 | 0.1 | |||||||||||||
| Interest on pension scheme liabilities | 4.2 | 5.2 | 0.7 | |||||||||||||
| Interest on pension scheme assets | (1.8 | ) | (2.4 | ) | (0.1 | ) | ||||||||||
| Charge to finance costs | 6 | 2.4 | 2.8 | 0.6 | ||||||||||||
| Total continuing charge to profit for the period | 11.5 | 10.2 | 1.2 | |||||||||||||
Past service chargecredits are the result of $1.9 million (2016: $0.4 million)headcount reductions under the Group’s restructuring and a net finance chargeintegration activities relating to the acquisition of $0.6 million (2016: $0.3 million)the HPE Software business (note 38).
The contributions for the year ended October 31, 20182020 are expected to be broadly in line with the current year.12 months to October 31, 2019. The Group funds the schemes so that it makes at least the minimum contributions required by local government, funding and taxing authorities.
Consolidated financial statements and notes
Notes to the consolidated interim financial statements (unaudited)
The following amounts have been recognized as movements in the Consolidated statement of other comprehensive income:
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 2017 | ||||||||||
| $m | $m | $m | ||||||||||
| Actuarial return on assets excluding amounts included in interest income | 5.9 | 0.6 | - | |||||||||
| Re-measurements – actuarial gains/(losses): | ||||||||||||
| - Demographic | (1.6 | ) | 0.3 | - | ||||||||
| - Financial | (38.8 | ) | (11.1 | ) | 2.8 | |||||||
| - Experience | 8.4 | 1.9 | 0.6 | |||||||||
| (32.0 | ) | (8.9 | ) | 3.4 | ||||||||
| Reclassification from defined contribution scheme to defined benefit scheme | - | (2.1 | ) | (3.0 | ) | |||||||
| Movement in the period | (26.1 | ) | (10.4 | ) | 0.4 | |||||||
| Continuing operations | (26.2 | ) | (8.9 | ) | (0.2 | ) | ||||||
| Discontinued operation | 0.1 | (1.5 | ) | 0.6 | ||||||||
| (26.1 | ) | (10.4 | ) | 0.4 | ||||||||
The weighted average key assumptions used for the pensionvaluation of the schemes were:
| October 31, 2019 | October 31, 2018 | |||||||||||||||||||||||
| Germany | Rest of World | Total | Germany | Rest of World | Total | |||||||||||||||||||
| Rate of increase in final pensionable salary | 2.50 | % | 3.09 | % | 2.65 | % | 2.50 | % | 2.75 | % | 2.61 | % | ||||||||||||
| Rate of increase in pension payments | 1.75 | % | 1.50 | % | 1.75 | % | 2.00 | % | 1.50 | % | 1.99 | % | ||||||||||||
| Discount rate | 1.09 | % | 1.71 | % | 1.20 | % | 1.83 | % | 2.14 | % | 1.92 | % | ||||||||||||
| Inflation | 1.75 | % | 1.16 | % | 1.69 | % | 2.00 | % | 1.26 | % | 1.89 | % | ||||||||||||
October 31, 2017 $’000 | October 31, 2016 $’000 | |||||||
| Rate of increase in final pensionable salary | 2.27 | % | 2.60 | % | ||||
| Rate of increase in pension payments | 1.81 | % | 2.00 | % | ||||
| Discount rate | 1.99 | % | 1.30 | % | ||||
| Inflation | 2.00 | % | 2.00 | % | ||||
During the 12 months ended October 31, 2019, the model used to derive our discount rates was updated to better reflect yields on corporate bonds over the life of our schemes. The key difference in the revised model lies in the extrapolation of yields in the outlying years of the curve and uses AA government bond rates to determine these yields. This change resulted in a decrease in our defined benefit obligation of approximately $14.0m. The old and revised models are both considered standard models devised by our external consolidating actuary.
The mortality assumptions for the pensionGerman schemes are set based on the ‘Richttafeln 2018 G’ by Prof. Dr. Klaus Heubeck. The mortality assumptions for the remaining schemes are set based on actuarial advice in accordance with published statistics and experience in each territory.
These assumptions translate into a weighted average life expectancy in years for a pensioner retiring at age 65:
| October 31, 2019 | October 31, 2018 | |||||||||||||||||||||||
| Germany | Rest of World | Total | Germany | Rest of World | Total | |||||||||||||||||||
| Retiring at age 65 at the end of the reporting period: | ||||||||||||||||||||||||
| Male | 20 | 20 | 20 | 20 | 20 | 20 | ||||||||||||||||||
| Female | 23 | 23 | 23 | 23 | 23 | 23 | ||||||||||||||||||
| Retiring 15 years after the end of the reporting period: | ||||||||||||||||||||||||
| Male | 22 | 23 | 22 | 22 | 22 | 22 | ||||||||||||||||||
| Female | 25 | 26 | 25 | 25 | 25 | 25 | ||||||||||||||||||
Consolidated financial statements and notes
Notes to the territory.consolidated financial statements
25 Pension commitments continued
The net liability included in the consolidatedConsolidated statement of financial position arising from obligations in respect of defined benefit schemes is as follows:
| October 31, 2017 | October 31, 2016 | |||||||||||||||||||||||
| Germany | France | Switzerland | Rest of World | Total | Germany | |||||||||||||||||||
| $’000 | $’000 | $’000 | $’000 | $’000 | $’000 | |||||||||||||||||||
| Present value of defined benefit obligation | 159,865 | 9,159 | 21,330 | 23,797 | 214,151 | 40,120 | ||||||||||||||||||
| Fair value of plan assets | (84,035 | ) | (2,066 | ) | (16,490 | ) | (13,913 | ) | (116,504 | ) | (5,521 | ) | ||||||||||||
| 75,830 | 7,093 | 4,840 | 9,884 | 97,647 | (34,599 | ) | ||||||||||||||||||
| October 31, 2019 | October 31, 2018 | |||||||||||||||||||||||
| Germany | Rest of World | Total | Germany | Rest of World | Total | |||||||||||||||||||
| Present value of defined benefit obligations | 213.5 | 48.0 | 261.5 | 173.8 | 47.4 | 221.2 | ||||||||||||||||||
| Fair values of plan assets | (92.0 | ) | (28.1 | ) | (120.1 | ) | (82.1 | ) | (28.7 | ) | (110.8 | ) | ||||||||||||
| 121.5 | 19.9 | 141.4 | 91.7 | 18.7 | 110.4 | |||||||||||||||||||
The retirementdefined benefit obligation has moved as follows:
| October 31, 2019 | ||||||||||||||||||||||||||||||||||||
| Germany | Rest of World | Total | ||||||||||||||||||||||||||||||||||
| Defined benefit obligations | Defined benefit obligations | Scheme assets | Retirement benefit obligations | Defined benefit obligations | Scheme assets | Retirement benefit obligations | Defined benefit obligations | Scheme assets | Retirement benefit obligations | |||||||||||||||||||||||||||
| $m | $m | $m | $m | $m | $m | $m | $m | $m | ||||||||||||||||||||||||||||
| At November 1, 2018 | 173.8 | (82.1 | ) | 91.7 | 47.4 | (28.7 | ) | 18.7 | 221.2 | (110.8 | ) | 110.4 | ||||||||||||||||||||||||
| Reclassification to assets held for sale | 0.3 | - | 0.3 | 0.2 | (0.2 | ) | - | 0.5 | (0.2 | ) | 0.3 | |||||||||||||||||||||||||
| Current service cost | 6.0 | - | 6.0 | 3.1 | - | 3.1 | 9.1 | - | 9.1 | |||||||||||||||||||||||||||
| Past service credit | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
| Benefits paid | (0.4 | ) | 0.3 | (0.1 | ) | (4.2 | ) | 4.1 | (0.1 | ) | (4.6 | ) | 4.4 | (0.2 | ) | |||||||||||||||||||||
| Contributions by plan participants | 1.5 | (1.5 | ) | - | 0.3 | (0.3 | ) | - | 1.8 | (1.8 | ) | - | ||||||||||||||||||||||||
| Contribution by employer | - | (0.3 | ) | (0.3 | ) | - | (4.2 | ) | (4.2 | ) | - | (4.5 | ) | (4.5 | ) | |||||||||||||||||||||
Interest cost/(income) (note 6) | 3.1 | (1.5 | ) | 1.6 | 1.1 | (0.3 | ) | 0.8 | 4.2 | (1.8 | ) | 2.4 | ||||||||||||||||||||||||
| Included within Other comprehensive income: | ||||||||||||||||||||||||||||||||||||
| Re-measurements - actuarial (gains) and losses: | ||||||||||||||||||||||||||||||||||||
| - Demographic | 1.6 | - | 1.6 | - | - | - | 1.6 | - | 1.6 | |||||||||||||||||||||||||||
| - Financial | 34.0 | - | 34.0 | 4.8 | - | 4.8 | 38.8 | - | 38.8 | |||||||||||||||||||||||||||
| - Experience | (3.2 | ) | - | (3.2 | ) | (5.2 | ) | - | (5.2 | ) | (8.4 | ) | - | (8.4 | ) | |||||||||||||||||||||
| Actuarial return on assets excluding amounts included in interest income | - | (8.0 | ) | (8.0 | ) | - | 2.1 | 2.1 | - | (5.9 | ) | (5.9 | ) | |||||||||||||||||||||||
| 32.4 | (8.0 | ) | 24.4 | (0.4 | ) | 2.1 | 1.7 | 32.0 | (5.9 | ) | 26.1 | |||||||||||||||||||||||||
| Effects of movements in exchange rates | (3.2 | ) | 1.1 | (2.1 | ) | 0.5 | (0.6 | ) | (0.1 | ) | (2.7 | ) | 0.5 | (2.2 | ) | |||||||||||||||||||||
| At October 31, 2019 | 213.5 | (92.0 | ) | 121.5 | 48.0 | (28.1 | ) | 19.9 | 261.5 | (120.1 | ) | 141.4 | ||||||||||||||||||||||||
| October 31, 2017 | October 31, 2016 | |||||||||||||||||||||||
Defined benefit obligations | Scheme assets | Retirement benefit obligations | Defined benefit obligations | Scheme assets | Retirement benefit obligations | |||||||||||||||||||
| $’000 | $’000 | $’000 | $’000 | $’000 | $’000 | |||||||||||||||||||
| At May 1, | 36,480 | (5,707 | ) | 30,773 | 37,524 | (5,855 | ) | 31,669 | ||||||||||||||||
| HPE Software acquisition | 181,456 | (110,011 | ) | 71,445 | - | - | - | |||||||||||||||||
| Current service cost | 1,929 | - | 1,929 | 424 | - | 424 | ||||||||||||||||||
| Benefits paid | (989 | ) | 940 | (49 | ) | (145 | ) | 43 | (102 | ) | ||||||||||||||
| Contributions by plan participants | 1,826 | (1,826 | ) | - | - | (13 | ) | (13 | ) | |||||||||||||||
| Contribution by employer | - | (743 | ) | (743 | ) | - | - | - | ||||||||||||||||
| Interest cost/(income) (note 11) | 941 | (362 | ) | 579 | 311 | (49 | ) | 262 | ||||||||||||||||
| Included within other comprehensive income: | ||||||||||||||||||||||||
| Re-measurements - actuarial losses: | ||||||||||||||||||||||||
| - Demographic | - | - | - | - | - | - | ||||||||||||||||||
| - Financial | (1,058 | ) | - | (1,058 | ) | 3,521 | - | 3,521 | ||||||||||||||||
| - Experience | (4,505 | ) | - | (4,505 | ) | (117 | ) | - | (117 | ) | ||||||||||||||
| Actuarial return on assets excluding amounts included in interest income | - | (1,296 | ) | (1,296 | ) | - | 117 | 117 | ||||||||||||||||
| Reclassification from defined contribution scheme to defined benefit scheme | - | - | - | - | - | - | ||||||||||||||||||
| (5,563 | ) | (1,296 | ) | (6,859 | ) | 3,404 | 117 | 3,521 | ||||||||||||||||
| Foreign currency exchange changes | (1,929 | ) | 2,501 | 572 | (1,398 | ) | 236 | (1,162 | ) | |||||||||||||||
| At October 31 | 214,151 | (116,504 | ) | 97,647 | 40,120 | (5,521 | ) | 34,599 | ||||||||||||||||
Consolidated financial statements and notes
Notes to the consolidated financial statements
| October 31, 2018 | ||||||||||||||||||||||||||||||||||||
| Germany | Rest of World | Total | ||||||||||||||||||||||||||||||||||
| Defined benefit obligations | Defined benefit obligations | Scheme assets | Retirement benefit obligations | Defined benefit obligations | Scheme assets | Retirement benefit obligations | Defined benefit obligations | Scheme assets | Retirement benefit obligations | |||||||||||||||||||||||||||
| $m | $m | $m | $m | $m | $m | $m | $m | $m | ||||||||||||||||||||||||||||
| At May 1, 2017 | 36.5 | (5.7 | ) | 30.8 | - | - | - | 36.5 | (5.7 | ) | 30.8 | |||||||||||||||||||||||||
| HPE Software business acquisition | 121.1 | (77.0 | ) | 44.1 | 60.4 | (33.0 | ) | 27.4 | 181.5 | (110.0 | ) | 71.5 | ||||||||||||||||||||||||
| Reclassification to assets held for sale | (4.8 | ) | 0.7 | (4.1 | ) | (4.3 | ) | 2.9 | (1.4 | ) | (9.1 | ) | 3.6 | (5.5 | ) | |||||||||||||||||||||
| Current service cost | 7.7 | - | 7.7 | 5.2 | - | 5.2 | 12.9 | - | 12.9 | |||||||||||||||||||||||||||
| Past service credit | (0.8 | ) | - | (0.8 | ) | (4.7 | ) | - | (4.7 | ) | (5.5 | ) | - | (5.5 | ) | |||||||||||||||||||||
| Benefits paid | (0.3 | ) | 0.1 | (0.2 | ) | (9.3 | ) | 9.3 | - | (9.6 | ) | 9.4 | (0.2 | ) | ||||||||||||||||||||||
| Contributions by plan participants | 1.5 | (1.5 | ) | - | 1.0 | (0.8 | ) | 0.2 | 2.5 | (2.3 | ) | 0.2 | ||||||||||||||||||||||||
| Contribution by employer | - | (0.1 | ) | (0.1 | ) | - | (3.9 | ) | (3.9 | ) | - | (4.0 | ) | (4.0 | ) | |||||||||||||||||||||
Interest cost/(income) (note 6) | 4.0 | (2.0 | ) | 2.0 | 1.2 | (0.4 | ) | 0.8 | 5.2 | (2.4 | ) | 2.8 | ||||||||||||||||||||||||
| Included within Other comprehensive income: | ||||||||||||||||||||||||||||||||||||
| Re-measurements - actuarial (gains) and losses: | ||||||||||||||||||||||||||||||||||||
| - Demographic | (0.1 | ) | - | (0.1 | ) | (0.2 | ) | - | (0.2 | ) | (0.3 | ) | - | (0.3 | ) | |||||||||||||||||||||
| - Financial | 13.8 | - | 13.8 | (2.7 | ) | - | (2.7 | ) | 11.1 | - | 11.1 | |||||||||||||||||||||||||
| - Experience | 0.5 | - | 0.5 | (2.4 | ) | - | (2.4 | ) | (1.9 | ) | - | (1.9 | ) | |||||||||||||||||||||||
| Actuarial return on assets excluding amounts included in interest income | - | (0.2 | ) | (0.2 | ) | - | (0.4 | ) | (0.4 | ) | - | (0.6 | ) | (0.6 | ) | |||||||||||||||||||||
| Reclassification from defined contribution scheme to defined benefit scheme | - | - | - | 5.5 | (3.4 | ) | 2.1 | 5.5 | (3.4 | ) | 2.1 | |||||||||||||||||||||||||
14.2 | (0.2 | ) | 14.0 | 0.2 | (3.8 | ) | (3.6 | ) | 14.4 | (4.0 | ) | 10.4 | ||||||||||||||||||||||||
| Effects of movements in exchange rates | (5.3 | ) | 3.6 | (1.7 | ) | (2.3 | ) | 1.0 | (1.3 | ) | (7.6 | ) | 4.6 | (3.0 | ) | |||||||||||||||||||||
| At October 31, 2018 | 173.8 | (82.1 | ) | 91.7 | 47.4 | (28.7 | ) | 18.7 | 221.2 | (110.8 | ) | 110.4 | ||||||||||||||||||||||||
Consolidated financial statements and notes
Notes to the consolidated financial statements
25 Pension commitments continued
None of the plan assets are represented by financial instruments of the Group. None of the plan assets are occupied or used by the Group. The major categories of the plan assets are as follows:
| October 31, 2019 | ||||||||||||||||||||||||||||||||||||
| Germany | Rest of World | Total | ||||||||||||||||||||||||||||||||||
| Quoted | Unquoted | Total | Quoted | Unquoted | Total | Quoted | Unquoted | Total | ||||||||||||||||||||||||||||
| $m | $m | $m | $m | $m | $m | $m | $m | $m | ||||||||||||||||||||||||||||
| Funds that invest in: | ||||||||||||||||||||||||||||||||||||
| - Equity instruments | 39.8 | - | 39.8 | - | 5.5 | 5.5 | 39.8 | 5.5 | 45.3 | |||||||||||||||||||||||||||
| - Debt instruments | 46.6 | - | 46.6 | 3.0 | 6.0 | 9.0 | 49.6 | 6.0 | 55.6 | |||||||||||||||||||||||||||
| - Real estate | - | - | - | - | 3.1 | 3.1 | - | 3.1 | 3.1 | |||||||||||||||||||||||||||
| Cash and cash equivalents | - | - | - | - | 1.7 | 1.7 | - | 1.7 | 1.7 | |||||||||||||||||||||||||||
| Re-insurance contracts with guaranteed interest rates * | - | 5.6 | 5.6 | - | - | - | - | 5.6 | 5.6 | |||||||||||||||||||||||||||
| Other | - | - | - | - | 8.8 | 8.8 | - | 8.8 | 8.8 | |||||||||||||||||||||||||||
| Total | 86.4 | 5.6 | 92.0 | 3.0 | 25.1 | 28.1 | 89.4 | 30.7 | 120.1 | |||||||||||||||||||||||||||
| October 31, 2018 | ||||||||||||||||||||||||||||||||||||
| Germany | Rest of World | Total | ||||||||||||||||||||||||||||||||||
| Quoted | Unquoted | Total | Quoted | Unquoted | Total | Quoted | Unquoted | Total | ||||||||||||||||||||||||||||
| $m | $m | $m | $m | $m | $m | $m | $m | $m | ||||||||||||||||||||||||||||
| Funds that invest in: | ||||||||||||||||||||||||||||||||||||
| - Equity instruments | 42.3 | - | 42.3 | 7.6 | 1.6 | 9.2 | 49.9 | 1.6 | 51.5 | |||||||||||||||||||||||||||
| - Debt instruments | 34.3 | - | 34.3 | 3.1 | 5.1 | 8.2 | 37.4 | 5.1 | 42.5 | |||||||||||||||||||||||||||
| - Real estate | - | - | - | 2.0 | 0.1 | 2.1 | 2.0 | 0.1 | 2.1 | |||||||||||||||||||||||||||
| Cash and cash equivalents | - | - | - | - | 2.3 | 2.3 | - | 2.3 | 2.3 | |||||||||||||||||||||||||||
| Re-insurance contracts with guaranteed interest rates * | - | 5.5 | 5.5 | - | - | - | - | 5.5 | 5.5 | |||||||||||||||||||||||||||
| Other | - | - | - | - | 6.9 | 6.9 | - | 6.9 | 6.9 | |||||||||||||||||||||||||||
| Total | 76.6 | 5.5 | 82.1 | 12.7 | 16.0 | 28.7 | 89.3 | 21.5 | 110.8 | |||||||||||||||||||||||||||
* The majority of the re-insurance contracts have guaranteed interest rates of 4.0%, with the remaining at 3.25% or 2.75%.
Risk Management
Through its defined benefit schemes the Group is exposed to a number of risks, the most significant of which are detailed below:
– Changes in bond yields – A decrease in corporate bond yields will increase the Group’s IAS 19 plan liabilities, although this will be partially offset by increases in the value of scheme assets.
– Inflation – Some of the Group pension obligations are linked to inflation, and higher inflation will lead to higher liabilities.
– Life expectancy – The majority of the plan obligations are to provide benefits over the life of the member, so increases in life expectancy will result in an increase in the plan liabilities as benefits would be paid over a longer period.
Consolidated financial statements and notes
Notes to the consolidated financial statements
25 Pension commitments continued
– Asset returns – Returns on plan assets are subject to volatility and may not move in line with plan liabilities. The Group ensures that the investment positions are managed within an asset liability matching (“ALM”) to achieve long-term investments that are in line with the obligations under the pension schemes. Within this framework the Group’s objective is to match assets to the pension obligations by investing in assets that match the benefit payments as they fall due and in the appropriate currency.
Sensitivities
The table below provides information on the sensitivity of the defined benefit obligation to changes to the most significant actuarial assumptions. The table shows the impact of changes to each assumption in isolation, although, in practice, changes to assumptions may occur at the same time and can either offset or compound the overall impact on the defined benefit obligation.
These sensitivities have been calculated using the same methodology as used for the main calculations. The weighted average duration of the defined benefit obligation is 25 years for Germany and 14 years for all other schemes.
| Germany | Rest of World | |||||||||||||||
Change in assumption | Change in defined benefit obligation | Change in assumption | Change in defined benefit obligation | |||||||||||||
| Discount rate for scheme liabilities | 0.50 | % | (11.5 | %) | 0.50 | % | (6.7 | %) | ||||||||
| Price inflation | 0.25 | % | 3.8 | % | 0.25 | % | 0.9 | % | ||||||||
| Salary growth rate | 0.50 | % | 1.0 | % | 0.50 | % | 3.6 | % | ||||||||
| Life expectancy | 1 year | 3.7 | % | 1 year | 1.3 | % | ||||||||||
26 Other non-current liabilities
| October 31, 2019 | October 31, 2018 | |||||||
| $m | $m | |||||||
| Accruals | 50.4 | 58.0 | ||||||
| 50.4 | 58.0 | |||||||
Accruals includes employee benefit liability $33.3m (October 31, 2018: $31.0m) that relates to employee obligations in certain countries, a deferred gain on real estate $8.1m (October 31, 2018: $14.0m) relating to free-rent incentives or tenant improvement allowances given by landlords and an IT contractual liability $6.6m (October 31, 2018: $11.3m).
Consolidated financial statements and notes
Notes to the consolidated financial statements
27 Financial instruments
The tables below set out the values of financial and non-financial assets and liabilities.
Financial October 31, 2019 | Non- financial October 31, 2019 | Total October 31, 2019 | Financial October 31, 2018 | Non- financial October 31, 2018 | Total October 31, 2018 | |||||||||||||||||||||||
| Note | $m | $m | $m | $m | $m | $m | ||||||||||||||||||||||
| Financial and non-financial assets | ||||||||||||||||||||||||||||
| Non-current | ||||||||||||||||||||||||||||
| Long-term pension assets | 25 | 17.1 | - | 17.1 | 16.7 | - | 16.7 | |||||||||||||||||||||
| Derivative financial instruments – Interest rate swaps | 31 | - | - | - | - | 86.4 | 86.4 | |||||||||||||||||||||
| Current | ||||||||||||||||||||||||||||
| Cash and cash equivalents | 18 | 355.7 | - | 355.7 | 620.9 | - | 620.9 | |||||||||||||||||||||
| Trade and other receivables | 16 | 922.7 | 110.2 | 1,032.9 | 1,212.0 | 60.0 | 1,272.0 | |||||||||||||||||||||
| 1,295.5 | 110.2 | 1,405.7 | 1,849.6 | 146.4 | 1,996.0 | |||||||||||||||||||||||
Financial October 31, 2019 | Non- financial October 31, 2019 | Total October 31, 2019 | Financial October 31, 2018 | Non- financial October 31, 2018 | Total October 31, 2018 | |||||||||||||||||||||||
| Note | $m | $m | $m | $m | $m | $m | ||||||||||||||||||||||
| Financial and non-financial liabilities – financial liabilities at amortized cost | ||||||||||||||||||||||||||||
| Non-current | ||||||||||||||||||||||||||||
| Derivative financial instruments – Interest rate swaps | 36.5 | - | 36.5 | - | - | - | ||||||||||||||||||||||
| Borrowings (gross) | 20 | 4,775.0 | - | 4,775.0 | 4,946.6 | - | 4,946.6 | |||||||||||||||||||||
| Finance leases | 21 | 11.7 | - | 11.7 | 14.9 | - | 14.9 | |||||||||||||||||||||
| Provisions | 24 | 49.1 | - | 49.1 | 35.4 | - | 35.4 | |||||||||||||||||||||
| Current | ||||||||||||||||||||||||||||
| Borrowings (gross) | 20 | - | - | - | 50.3 | - | 50.3 | |||||||||||||||||||||
| Finance leases | 21 | 11.8 | - | 11.8 | 13.6 | - | 13.6 | |||||||||||||||||||||
| Trade and other payables | 19 | 530.3 | 80.7 | 611.0 | 676.9 | - | 676.9 | |||||||||||||||||||||
| Provisions | 24 | 29.3 | - | 29.3 | 57.4 | - | 57.4 | |||||||||||||||||||||
| 5,443.7 | 80.7 | 5,524.4 | 5,795.1 | - | 5,795.1 | |||||||||||||||||||||||
Fair value measurement
For trade and other receivables, cash and cash equivalents, trade and other payables, obligations under finance leases and provisions, fair values approximate to book values due to the short maturity periods of these financial instruments. For trade and other receivables, allowances are made for credit risk.
Long-term borrowings with a carrying value of $4,775.0m before unamortized prepaid facility fees, have a fair value estimate of $4,686.0m based on trading prices as at October 31, 2019 (note 20).
Derivative financial instruments measured at fair value are classified as level 2 in the fair value measurement hierarchy as they have been determined using significant inputs based on observable market data. The fair values of interest rate derivatives are derived from forward interest rates based on yield curves observable at the balance sheet date together with the contractual interest rates.
There were no transfers of assets or liabilities between levels of the fair value hierarchy during the period.
Consolidated financial statements and notes
Notes to the consolidated financial statements
27 Financial instruments continued
The Group has four interest rate swaps which are designated in a hedge relationship and also utilized forward exchange contracts to fix Sterling equivalent on the April 2019 Return of Value to shareholders (note 29) and the April 2019 and September 2019 dividend payments. The forward contracts were not designated for formal hedge accounting and matured for delivery within the reporting period.
| October 31, 2019 | October 31, 2018 | |||||||
| $m | $m | |||||||
| Derivative financial instruments- non-current asset – interest rate swaps | - | 86.4 | ||||||
| Derivative financial instruments- non-current liabilities – interest rate swaps | (36.5 | ) | - | |||||
| (36.5 | ) | 86.4 | ||||||
Derivative financial instruments
Derivatives are only used for economic hedging purposes and not as speculative investments. Four interest rate swaps are in place with a total notional value of $2.25bn to hedge against the impact of potential rises in interest rates until September 30, 2022. The swaps are designated against the $2,486.3m (note 20) loan issued by Seattle SpinCo. Inc. and the notional value covers 52.7% of the overall dollar loan principal outstanding for the Group.
The swap contracts require settlement of net interest receivable or payable on a monthly basis. The fixed interest rate for each swap is 1.949% and the Group receives a variable rate in line with LIBOR. The Seattle loan is priced at LIBOR (with a floor) plus a current margin of 2.50% with the swaps aimed at addressing the risk of a rising LIBOR element. As such, the total interest cost of the hedged element of the Seattle loan is 4.44%. For the period to October 31, 2019, net interest received for the swaps amounted to $9.9m. For the life of the swap, net interest received amounted to $6.5m.
Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic effectiveness assessments (adjusted for credit risk) to ensure that an economic relationship exists between the hedged item and the hedging instrument. The testing determined that the hedge was highly effective throughout the financial reporting period for which the hedge was designated.
The impact of changes in the fair value of interest rate swaps in the year ended October 31, 2019 is shown in the Consolidated statement of comprehensive income. Note 31 shows the derivative financial instruments relating to hedging transactions entered into in the period ended October 31, 2019 (other reserves).
| October 31, 2019 | October 31, 2018 | |||||||
| $m | $m | |||||||
| Carrying amount | (36.5 | ) | 86.4 | |||||
| Notional amount (4 x $562.5m) | 2,250.0 | 2,250.0 | ||||||
| Maturity date | September 30, 2022 | September 30, 2022 | ||||||
| Change in fair value of outstanding hedging instruments (note 31) | (122.9 | ) | 86.4 | |||||
| Change in value of hedging instruments adjusted for credit risk | (121.9 | ) | 84.7 | |||||
Credit risk
The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at October 31, 2019 was:
| October 31, 2019 | October 31, 2018 | |||||||||||
| Note | $m | $m | ||||||||||
| Trade receivables (gross) | 16 | 877.9 | 1,089.6 | |||||||||
| Cash and cash equivalents | 18 | 355.7 | 620.9 | |||||||||
| Total | 1,233.6 | 1,710.5 | ||||||||||
Consolidated financial statements and notes
Notes to the consolidated financial statements
27 Financial instruments continued
The Group applies the IFRS 9 expedited approach to measuring expected credit losses, which uses a lifetime expected credit loss allowance for all trade receivables.
A provision of the lifetime expected credit loss is established upon initial recognition of the underlying asset by predicting the future cash flows based upon the days past due status of an invoice and other relevant information. The model uses historical collection data along with historical credit losses experienced. The loss allowance is adjusted for forward-looking factors specific to the receivable and the economic environment.
Trade receivables are written off when there is no reasonable expectation of recovery. Impairment losses on trade receivables are presented as net impairment losses within operating profit. Subsequent recoveries of amounts previously written off are credited against the same line item.
On that basis, the loss allowance as at October 31, 2019 and November 1, 2018 (on adoption of IFRS 9) was determined as follows for trade receivables (note 16):
| October 31, 2019 | October 31, 2018 | |||||||
| $’m | $’m | |||||||
| At November 1 / May 1 – calculated under IAS 39 | 41.9 | 2.6 | ||||||
| Accounting policy change – IFRS 9 (recognized against retained earnings on November 1, 2018) | 20.0 | - | ||||||
| 61.9 | 2.6 | |||||||
| Loss allowance provided in the period | 16.0 | 40.0 | ||||||
| Receivables written off as uncollectable | (35.5 | ) | (0.7 | ) | ||||
| At October 31 | 42.4 | 41.9 | ||||||
In the prior period, the impairment of trade receivables was assessed based on the incurred loss model. Individual receivables, which were known to be uncollectable were written off by reducing the carrying amount directly. The other receivables were assessed collectively to determine whether there was objective evidence that an impairment had been incurred but not yet been identified. Receivables for which an impairment provision was recognized were written off against the provision when there was no expectation of recovering additional cash.
Market risk
The Group’s treasury function aims to reduce exposures to interest rate, foreign exchange and other financial risks, to ensure liquidity is available as and when required, and to invest cash assets safely and profitably. The Group does not engage in speculative trading in financial instruments. The treasury function’s policies and procedures are reviewed and monitored by the Audit committee and are subject to internal audit review.
Foreign exchange risk
The Group’s currency exposures comprise those that give rise to net currency gains and losses to be recognized in the Consolidated statement of comprehensive income as well as gains and losses on consolidation, which go to reserves. Such exposures reflect the monetary assets and liabilities of the Group that are not denominated in the operating or functional currency of the operating unit involved and the Group’s investment in net assets in currencies other than US Dollar.
Note 3 shows the impact on the Consolidated statement of comprehensive income of foreign exchange losses in the 12 months ended October 31, 2019 of $11.3m (18 months ended October 31, 2018: $37.4m gain).
Consolidated financial statements and notes
Notes to the consolidated financial statements
27 Financial instruments continued
Sensitivity analysis
The Group’s principal exposures in relation to market risks are the changes in the exchange rates between the US Dollar and transactions made in other currencies as well as changes in US Dollar LIBOR interest rates. Foreign exchange exposures for all re-measuring balances are tracked and reported to management.
The key drivers are cash, borrowings and inter-company positions with trade receivables and trade payables having less relative aggregate exposure. As at October 31, 2019, the key aggregate exposures involved the Euro, British Sterling, Japanese Yen, Israeli Shekel and Canadian Dollar. The table below illustrates the equity sensitivity analysis of the Group exposures to movements in currency and interest rates.
Group exposure | +/- 5% | +/- 10% | +/- 1% interest | |||||||||||||
| Key aggregate currency exposures | $m | $m | $m | $m | ||||||||||||
| Euro | 512.6 | 25.6 | 51.2 | |||||||||||||
| GBP | 137.2 | 6.8 | 13.7 | |||||||||||||
| JPY | 69.6 | 3.5 | 6.9 | |||||||||||||
| ILS | 36.7 | 1.8 | 3.7 | |||||||||||||
| CAN$ | 26.1 | 1.3 | 2.6 | |||||||||||||
Borrowings -Interest rate LIBOR +1% (based on gross debt excluding the effects of hedging) | n/a | n/a | n/a | 47.75 | ||||||||||||
Capital risk management
The Group’s objective when managing its capital structures is to minimize the cost of capital while maintaining adequate capital to protect against volatility in earnings and net asset values. The strategy is designed to maximize shareholder return over the long-term.
The only financial covenant attaching to these facilities relates to the Revolving Facility, which is subject to an aggregate net leverage covenant only in circumstances where more than 35% of the Revolving Facility is outstanding at a fiscal quarter end. The facility was not utilized as at October 31, 2019 and therefore no covenant test is applicable.
The capital structure of the Group at the Consolidated statement of financial position date is as follows:
| October 31, 2019 | October 31, 2018 | |||||||||||
| Note | $m | $m | ||||||||||
| Bank and other borrowings (net of arrangement fees) | 20 | 4,670.7 | 4,845.9 | |||||||||
| Finance lease obligations | 21 | 23.5 | 28.5 | |||||||||
| Less cash and cash equivalents | 18 | (355.7 | ) | (620.9 | ) | |||||||
| Total net debt | 4,338.5 | 4,253.5 | ||||||||||
| Total equity | 6,276.3 | 7,792.0 | ||||||||||
| Debt/equity % | 69.1 | % | 54.6 | % | ||||||||
Borrowings are shown here net of unamortized prepaid facility arrangement fees of $104.3m. (October 31, 2018: $151.0m). Gross borrowings are $4,775.0m (October 31, 2018: $4,996.9m).
Change in liabilities arising from financing activities for interest bearing loans (note 20) and finance leases (note 21) were as follows:
Interest bearing loans | Finance leases | Total | ||||||||||
| $m | $m | $m | ||||||||||
| At November 1, 2018 | 4,996.9 | 28.5 | 5,025.4 | |||||||||
Draw down/New leases | - | 9.0 | 9.0 | |||||||||
Repayments | (212.6 | ) | (14.9 | ) | (227.5 | ) | ||||||
Foreign exchange | (9.3 | ) | 0.9 | (8.4 | ) | |||||||
| At October 31, 2019 | 4,775.0 | 23.5 | 4,798.5 | |||||||||
Consolidated financial statements and notes
Notes to the consolidated financial statements
28 Deferred tax
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | |||||||||||
| Net Deferred tax liability | Note | $m | $m | |||||||||
| At November 1 / May 1 | (1,170.5 | ) | (118.5 | ) | ||||||||
| Credited/(debited) to consolidated statement of comprehensive income: | 188.7 | (17.1 | ) | |||||||||
| - Continuing operations | 7 | 156.4 | (27.6 | ) | ||||||||
| - Discontinued operation | 32.3 | 10.5 | ||||||||||
| Credited directly to equity in relation to share options | (7.6 | ) | (23.7 | ) | ||||||||
| Credited to other comprehensive income: | 27.0 | 4.3 | ||||||||||
| - Continuing operations | 27.0 | 3.8 | ||||||||||
| - Discontinued operation | - | 0.5 | ||||||||||
| Acquisition of subsidiaries: | - | (1,957.4 | ) | |||||||||
| Acquisition of subsidiaries – HPE Software business | 38 | - | (1,953.5 | ) | ||||||||
| Acquisition of subsidiaries – COBOL-IT | 38 | - | (3.9 | ) | ||||||||
| Impact of adoption of IFRS 9 | 4.4 | - | ||||||||||
| Impact of adoption of IFRS15 | (17.3 | ) | - | |||||||||
| Foreign exchange adjustment | (11.8 | ) | 11.6 | |||||||||
| Reclassification to current assets held for sale | 37 | - | (1.6 | ) | ||||||||
| Effect of change in tax rates – charged to Consolidated statement of comprehensive income | - | 931.9 | ||||||||||
| At October 31 | (987.1 | ) | (1,170.5 | ) | ||||||||
Deferred tax assets and liabilities below are presented net where there is a legally enforceable right to offset and the intention to settle on a net basis.
Deferred Tax Assets
Tax losses and interest restrictions | Share- based payments | Deferred revenue | Prepaid royalty | Tax credits | Intangible fixed assets | Other temporary differences | Total | |||||||||||||||||||||||||
| $m | $m | $m | $m | $m | $m | $m | $m | |||||||||||||||||||||||||
| At May 1, 2017 | 56.7 | 43.7 | 44.5 | - | 33.8 | 5.9 | 23.6 | 208.2 | ||||||||||||||||||||||||
| Acquisition of subsidiaries - HPE Software business | 4.5 | - | (36.5 | ) | 332.0 | 39.0 | - | 43.7 | 382.7 | |||||||||||||||||||||||
| (Charged)/credited to Consolidated statement of comprehensive income – continuing operations | (13.5 | ) | 0.1 | 45.2 | (201.4 | ) | (46.1 | ) | (0.8 | ) | 14.1 | (202.4 | ) | |||||||||||||||||||
| Credited directly to equity | - | (23.7 | ) | - | - | - | - | - | (23.7 | ) | ||||||||||||||||||||||
| Debited to Other comprehensive income | - | - | - | - | - | - | 4.3 | 4.3 | ||||||||||||||||||||||||
| Foreign exchange adjustment | - | (0.3 | ) | - | - | - | - | - | (0.3 | ) | ||||||||||||||||||||||
| Reclassification to current assets held for sale | - | - | - | - | - | - | (1.6 | ) | (1.6 | ) | ||||||||||||||||||||||
| Effect of change in tax rates – credited to Consolidated statement of comprehensive income | (21.1 | ) | (2.4 | ) | 66.7 | (88.7 | ) | 3.0 | (2.1 | ) | (13.3 | ) | (57.9 | ) | ||||||||||||||||||
| Subtotal | 26.6 | 17.4 | 119.9 | 41.9 | 29.7 | 3.0 | 70.8 | 309.3 | ||||||||||||||||||||||||
| Jurisdictional offsetting | (309.3 | ) | ||||||||||||||||||||||||||||||
| At October 31, 2018 | - | |||||||||||||||||||||||||||||||
Consolidated financial statements and notes
Notes to the consolidated financial statements
28 Deferred tax continued
Deferred Tax Assets continued
Tax losses and interest restrictions | Share- based payments | Deferred revenue | Prepaid royalty | Tax credits | Intangible fixed assets | Other temporary differences | Total | |||||||||||||||||||||||||
| $m | $m | $m | $m | $m | $m | $m | $m | |||||||||||||||||||||||||
| At November 1, 2018 | 26.6 | 17.4 | 119.9 | 41.9 | 29.7 | 3.0 | 70.8 | 309.3 | ||||||||||||||||||||||||
| (Charged)/credited to Consolidated statement of comprehensive income – continuing operations | 73.9 | (5.1 | ) | (12.0 | ) | (41.9 | ) | (22.9 | ) | (3.0 | ) | 12.7 | 1.7 | |||||||||||||||||||
| Credited/(charged) to Consolidated statement of comprehensive income – discontinued operation | - | - | 0.7 | - | - | - | (12.3 | ) | (11.6 | ) | ||||||||||||||||||||||
| Credited directly to equity | - | (7.6 | ) | - | - | - | - | - | (7.6 | ) | ||||||||||||||||||||||
| Debited to Other comprehensive income | - | - | - | - | - | - | 13.0 | 13.0 | ||||||||||||||||||||||||
| Foreign exchange adjustment | - | 0.3 | - | - | - | - | - | 0.3 | ||||||||||||||||||||||||
| Impact of adoption of IFRS 9 | - | - | - | - | - | - | 4.4 | 4.4 | ||||||||||||||||||||||||
| Subtotal | 100.5 | 5.0 | 108.6 | - | 6.8 | - | 88.6 | 309.5 | ||||||||||||||||||||||||
| Jurisdictional offsetting | (309.5 | ) | ||||||||||||||||||||||||||||||
| At October 31, 2019 | - | |||||||||||||||||||||||||||||||
A deferred tax charge to equity of $7.6m (October 31, 2018: $23.7m) arises during the period in relation to share-based payments. The change is primarily due to the decrease in the Group’s share price during the 12 months ended October 31, 2019.
The deferred tax asset relating to other temporary differences of $88.6m as at October 31, 2019 (October 31, 2018: $70.8m) has increased during the current period primarily due to hedging movements and also includes temporary differences arising on fixed assets, short-term temporary differences and defined benefit pension schemes. The deferred tax asset relating to tax losses and interest restrictions has increased by $73.9m during the 12 months ended October 31, 2019 due to the recognition of the deferred tax asset relating to interest restrictions. Deferred tax assets are recognized in respect of tax losses carried forward to the extent that the realization of the related tax benefit through the utilization of future taxable profits is probable.
The Group did not recognize deferred tax assets in relation to the following gross temporary differences, the expiration of which is determined by the tax law of each jurisdiction:
| Expiration: | ||||||||||||||||||||||||||||||||
| 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | No expiry | Total | |||||||||||||||||||||||||
| $m | $m | $m | $m | $m | $m | $m | $m | |||||||||||||||||||||||||
| At October 31, 2019 | ||||||||||||||||||||||||||||||||
| Type of temporary difference: | ||||||||||||||||||||||||||||||||
| Losses | 56.3 | 99.2 | 40.1 | 33.6 | 41.8 | 2,191.6 | 50.7 | 2,513.3 | ||||||||||||||||||||||||
| Credits | 3.5 | 3.6 | 2.1 | 1.3 | 0.7 | 1.7 | 28.9 | 41.8 | ||||||||||||||||||||||||
| Other | - | - | - | - | - | - | 23.9 | 23.9 | ||||||||||||||||||||||||
| Total | 59.8 | 102.8 | 42.2 | 34.9 | 42.5 | 2,193.3 | 103.5 | 2,579.0 | ||||||||||||||||||||||||
Consolidated financial statements and notes
Notes to the consolidated financial statements
28 Deferred tax continued
Expiration: | ||||||||||||||||||||||||||||||||
| 2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | No expiry | Total | |||||||||||||||||||||||||
| $m | $m | $m | $m | $m | $m | $m | $m | |||||||||||||||||||||||||
| At October 31, 2018 | ||||||||||||||||||||||||||||||||
| Type of temporary difference: | ||||||||||||||||||||||||||||||||
| Losses | 35.2 | 66.1 | 99.2 | 37.5 | 33.6 | 2,117.7 | 95.6 | 2,484.9 | ||||||||||||||||||||||||
| Credits | 2.2 | 4.4 | 4.0 | 2.4 | 1.3 | 5.2 | 196.4 | 215.9 | ||||||||||||||||||||||||
| Other | 1.9 | - | - | - | - | - | 47.7 | 49.6 | ||||||||||||||||||||||||
| Total | 39.3 | 70.5 | 103.2 | 39.9 | 34.9 | 2,122.9 | 339.7 | 2,750.4 | ||||||||||||||||||||||||
Deferred Tax Liabilities
Intangible fixed assets | Other temporary differences | Total | ||||||||||
| $m | $m | $m | ||||||||||
| At May 1, 2017 | (311.7 | ) | (15.0 | ) | (326.7 | ) | ||||||
| Acquisition of subsidiaries – HPE Software business | (2,324.1 | ) | (12.1 | ) | (2,336.2 | ) | ||||||
| Acquisition of subsidiaries – COBOL-IT | (3.9 | ) | - | (3.9 | ) | |||||||
| Charged/(credited) to Consolidated statement of comprehensive income – continuing operations | 186.8 | (12.0 | ) | 174.8 | ||||||||
| Charged to Consolidated statement of comprehensive income – discontinued operations | 10.5 | - | 10.5 | |||||||||
| Foreign exchange adjustment | 11.9 | - | 11.9 | |||||||||
| Effect of change in tax rates – charged to consolidated statement of comprehensive income | 982.0 | 7.8 | 989.8 | |||||||||
| Subtotal | (1,448.5 | ) | (31.3 | ) | (1,479.8 | ) | ||||||
| Jurisdictional offsetting | 309.3 | |||||||||||
| At October 31, 2018 | (1,170.5 | ) | ||||||||||
Intangible fixed assets | Other temporary differences | Total | ||||||||||
| $m | $m | $m | ||||||||||
| At November 1, 2018 | (1,448.5 | ) | (31.3 | ) | (1,479.8 | ) | ||||||
| Charged to Consolidated statement of comprehensive income – continuing operations | 155.5 | (0.8 | ) | 154.7 | ||||||||
| Charged to Consolidated statement of comprehensive income – discontinued operation | 34.0 | 9.9 | 43.9 | |||||||||
| Credited to other comprehensive income – continuing operations | 14.0 | - | 14.0 | |||||||||
| Impact of adoption of IFRS15 | - | (17.3 | ) | (17.3 | ) | |||||||
| Foreign exchange adjustment | (12.1 | ) | - | (12.1 | ) | |||||||
| Subtotal | (1,257.1 | ) | (39.5 | ) | (1,296.6 | ) | ||||||
| Jurisdictional offsetting | 309.5 | |||||||||||
| At October 31, 2019 | (987.1 | ) | ||||||||||
No deferred tax liability is recognized in respect of temporary differences associated with investments in subsidiaries, branches, associates and interests in joint arrangements because the Group is in a position to control the timing of the reversal of the temporary differences and none are expected to reverse in the foreseeable future.
Consolidated financial statements and notes
Notes to the consolidated financial statements
29 Share capital
Ordinary shares at 10 pence each as at October 31, 2017 (2016:2019 (October 31, 2018: 10 pence each)
| October 31, 2017 | October 31, 2016 | |||||||||||||||
| Shares | $’000 | Shares | $’000 | |||||||||||||
| Issued and fully paid | ||||||||||||||||
| At May 1, | 229,674,479 | 39,700 | 228,706,210 | 39,573 | ||||||||||||
| Shares issued to satisfy option awards | 331,418 | 43 | 584,289 | 77 | ||||||||||||
| Share reorganization | (16,935,536 | ) | (2,926 | ) | - | - | ||||||||||
| Shares issued relating to acquisition of HPE Software (note 28) | 222,166,897 | 28,773 | - | - | ||||||||||||
| At October 31 | 435,237,258 | 65,590 | 229,290,499 | 39,650 | ||||||||||||
| October 31, 2019 | October 31, 2018 | April 30, 2017 | ||||||||||||||||||||||||||
| Note | Shares | $m | Shares | $m | Shares | $m | ||||||||||||||||||||||
| Issued and fully paid | ||||||||||||||||||||||||||||
| At November 1 /May 1 | 436,800,513 | 65.8 | 229,674,479 | 39.7 | 228,706,210 | 39.6 | ||||||||||||||||||||||
| Shares issued to satisfy option awards | 6,109,091 | 0.1 | 1,894,673 | 0.2 | 968,269 | 0.1 | ||||||||||||||||||||||
| Shares utilized to satisfy option awards | (4,804,817 | ) | - | - | - | - | - | |||||||||||||||||||||
| Share reorganisation | (74,521,459 | ) | (18.7 | ) | (16,935,536 | ) | (2.9 | ) | - | - | ||||||||||||||||||
| Shares issued relating to acquisition of the HPE Software business | 38 | - | - | 222,166,897 | 28.8 | - | - | |||||||||||||||||||||
| At October 31 | 363,583,328 | 47.2 | 436,800,513 | 65.8 | 229,674,479 | 39.7 | ||||||||||||||||||||||
“B” shares at 335.859391 pence each (October 31, 2018: 168 pence each)
| October 31, 2019 | October 31, 2018 | April 30, 2017 | ||||||||||||||||||||||
| Shares | $m | Shares | $m | Shares | $m | |||||||||||||||||||
| Issued and fully paid | ||||||||||||||||||||||||
| At November 1 / May 1 | - | - | - | - | - | - | ||||||||||||||||||
| Issue of B shares | 413,784,754 | 1,800.0 | 229,799,802 | 500.0 | - | - | ||||||||||||||||||
| Redemption of B shares | (413,784,754 | ) | (1,800.0 | ) | (229,799,802 | ) | (500.0 | ) | - | - | ||||||||||||||
| At October 31 | - | - | - | - | - | - | ||||||||||||||||||
Deferred D Shares at 10 pence each
| October 31, 2017 | October 31, 2016 | |||||||||||||||
| Shares | $’000 | Shares | $’000 | |||||||||||||
| Issued and fully paid | ||||||||||||||||
| At May 1 | - | - | - | - | ||||||||||||
| Issue of B shares | 229,799,802 | 500,000 | - | - | ||||||||||||
| Redemption of B shares | (229,799,802 | ) | (500,000 | ) | - | - | ||||||||||
| - | - | - | - | |||||||||||||
| October 31, 2019 | October 31, 2018 | April 30, 2017 | ||||||||||||||||||||||
| Shares | $m | Shares | $m | Shares | $m | |||||||||||||||||||
| Issued and fully paid | ||||||||||||||||||||||||
| At November 1 / May 1 | - | - | - | - | - | - | ||||||||||||||||||
| Issue of Deferred shares | 74,521,459 | - | - | - | - | - | ||||||||||||||||||
| Redemption of Deferred shares | (74,521,459 | ) | - | - | - | - | - | |||||||||||||||||
| At October 31 | - | - | - | - | - | - | ||||||||||||||||||
Share issuances during the six12 months to October 31, 20172019
Potential issues of shares
Certain employees hold options to subscribe for shares in the Company at prices ranging from nil pence to 1,875.581,963.00 pence under the following share option schemes approved by shareholders in 2005 and 2006: The Long-Term Incentive Plan 2005, the Additional Share Grants, the Sharesave Plan 2006 and the Employee Stock Purchase Plan 2006.
The number of shares subject to options at October 31, 20172019 was 17,724,174 (2016: 9,271,150)14,533,973 (October 31, 2018: 18,156,060; April 30, 2017: 8,607,889).
F-96
Capital redemption reserve | Merger reserve | Hedging reserve | Total | |||||||||||||
| $’000 | $’000 | $’000 | $’000 | |||||||||||||
| As at May 1, 2016 and October 31, 2016 | 163,363 | 988,104 | - | 1,151,467 | ||||||||||||
| As at May 1, 2017 | 163,363 | 338,104 | - | 501,467 | ||||||||||||
Return of Value- share consolidation 1 | 2,926 | - | - | 2,926 | ||||||||||||
Return of Value- issue and redemption of B shares 1 | 500,000 | (343,317 | ) | - | 156,683 | |||||||||||
Hedge accounting 2 | - | - | 1,763 | 1,763 | ||||||||||||
| Deferred tax movement on hedging | (674 | ) | (674 | ) | ||||||||||||
Acquisition of HPE Software 3 | - | 6,485,397 | - | 6,485,397 | ||||||||||||
Reallocation of merger reserve 4 | - | (700,000 | ) | - | (700,000 | ) | ||||||||||
| As at October 31, 2017 | 666,289 | 5,780,184 | 1,089 | 6,447,562 | ||||||||||||
Consolidated financial statements and notes
Notes to the consolidated financial statements
Share buy-back
On August 29, 2018, the Company announced the start of a share buy-back program for an initial tranche of up to $200m, which was extended on November 5, 2018 to a total value of $400m (including the initial tranche). On February14, 2019, the buy-back program was extended into a third tranche of up to $110m up until the day before the AGM which took place on March 29, 2019 when the current buy-back authority approved by shareholders at the 2017 AGM to make market purchases of up to 65,211,171 ordinary shares expired.
On July 17, 2019, the Company announced a new share buy-back program with an initial tranche of up to $200m. The Program was effected in accordance with the terms of the authority granted by shareholders at the 2019 AGM and the Listing Rules. On October 3, 2019, the Company completed the $200m share buy-back program. The total amount bought back under share buy-back programs was $710.0m, excluding expenses.
In addition to purchasing ordinary shares on the London Stock Exchange, Citi acquired American Depository Receipts representing ordinary shares (“ADRs”) listed on the New York Stock Exchange which it cancelled for the underlying shares and then sold such shares to the Company.
Shares bought back under these programs are held as treasury shares. Treasury share movements and share buy-back costs are shown below:
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | Total | ||||||||||
| Treasury shares | Number | Number | Number | |||||||||
| Share buy-backs | 29,160,054 | 9,858,205 | 39,018,259 | |||||||||
| Shares issued to satisfy option awards | (4,804,817 | ) | - | (4,804,817 | ) | |||||||
| Share reorganisation | (4,012,537 | ) | - | (4,012,537 | ) | |||||||
| 20,342,700 | 9,858,205 | 30,200,905 | ||||||||||
| Share buy-back numbers: | ||||||||||||
| Ordinary shares bought on the London Stock Exchange | 25,766,919 | 8,567,659 | 34,334,578 | |||||||||
| ADRs purchased on the New York Stock Exchange | 3,393,135 | 1,290,546 | 4,683,681 | |||||||||
| 29,160,054 | 9,858,205 | 39,018,259 | ||||||||||
| Share buy-back cost: | $m | $m | $m | |||||||||
| Share buy-back cost | 538.8 | 171.2 | 710.0 | |||||||||
| Expenses | 5.9 | 0.5 | 6.4 | |||||||||
| 544.7 | 171.7 | 716.4 | ||||||||||
The weighted average price of shares bought back in the 12 months ended October 31, 20172019 was £14.61 per share (18 months ended October 31, 2018 was £13.82 per share).
Return of Value
On April 29, 2019, a Return of Value was made to shareholders amounting to $500.0 million (note 27)$1,800.0m (£1,389.7m) in cash (335.89 pence per existing Ordinary Share and American Depositary Shares (“ADS”) held at the Record Time of 6.00 pm on April 29, 2019). The Return of Value was approved by shareholders on 29 April 2019. The Return of Value was effected through an issue and redemption of B shares and resulted in a $500.0 million$1,800.0m increase in the capital redemption reserve and a $343.3 million$1,800.0m reduction in the merger reservereserve. 413,784,754 “B” shares were issued at 335.859391 pence each, resulting in a total $1,800.0m being credited to the “B” share liability account. Subsequently and on the same date, 413,784,754 “B” shares were redeemed at 335.859391pence each and an amount of $1,800.0m was debited from the “B share liability account. The Group entered into a $156.7 million reduction in share premium.forward exchange contract to protect the Company from any foreign exchange movement and the resulting payment to shareholders of $1,800.0m incurred net transaction costs of $1.0m. The returnReturn of valueValue was accompanied by a 0.92630.8296 share consolidation and the share consolidation resulted in the issue of D deferred shares which were subsequently bought back for 1 pence, resulting in a transfer of $2.9 million$18.7m to the capital redemption reserve. The settlement date was May 13, 2019 for the Ordinary Shares.
Consolidated financial statements and notes
Notes to the consolidated financial statements
29 Share capital continued
On August 31, 2017 a Return of Value was made to shareholders amounting to $500.0m. The Return of Value was effected through an issue and redemption of B shares and resulted in a $500.0m increase in the capital redemption reserve, a $343.3m reduction in the merger reserve and a $156.7m reduction in share premium. 229,799,802 “B” shares were issued at 168 pence each, resulting in a total $500.0m being credited to the “B” share liability account. Subsequently and on the same date, 229,799,802 “B” shares were redeemed at 168 pence each and an amount of $500.0m was debited from the “B share liability account. The Return of Value was accompanied by a 0.9263 share consolidation and the share consolidation resulted in the issue of D deferred shares which were subsequently bought back for 1 penny, resulting in a transfer of $2.9m (note 31) to the capital redemption reserve.
30 Share premium account
| October 31, 2019 | October 31, 2018 | April 30, 2017 | ||||||||||||||
| Note | $m | $m | $m | |||||||||||||
| At November 1/ May 1 | 41.0 | 192.1 | 190.3 | |||||||||||||
| Issue and redemption of B shares | 29 | - | (156.7 | ) | - | |||||||||||
| Movement in relation to share options exercised | 33 | 3.0 | 5.6 | 1.8 | ||||||||||||
| At October 31 | 44.0 | 41.0 | 192.1 | |||||||||||||
31 Other reserves
Capital redemption reserve | Merger reserve | Hedging reserve | Total | |||||||||||||||||
| Note | $m | $m | $m | $m | ||||||||||||||||
| As at May 1, 2016 | 163.4 | 988.1 | - | 1,151.5 | ||||||||||||||||
| Reallocation of merger reserve | - | (650.0 | ) | - | (650.0 | ) | ||||||||||||||
| As at April 30, 2017 | 163.4 | 338.1 | - | 501.5 | ||||||||||||||||
| Return of Value - share consolidation | 29 | 2.9 | - | - | 2.9 | |||||||||||||||
| Return of Value - issue and redemption of B shares | 29 | 500.0 | (343.3 | ) | - | 156.7 | ||||||||||||||
Hedge accounting1 | 27 | - | - | 86.4 | 86.4 | |||||||||||||||
Current tax movement on hedging1 | - | - | (16.4 | ) | (16.4 | ) | ||||||||||||||
Acquisition of the HPE Software business2 | 38 | - | 6,485.4 | - | 6,485.4 | |||||||||||||||
Reallocation of merger reserve 3 | - | (2,755.8 | ) | - | (2,755.8 | ) | ||||||||||||||
| As at October 31, 2018 | 666.3 | 3,724.4 | 70.0 | 4,460.7 | ||||||||||||||||
| As at November 1, 2018 | 666.3 | 3,724.4 | 70.0 | 4,460.7 | ||||||||||||||||
| Return of Value - share consolidation | 29 | 18.7 | - | - | 18.7 | |||||||||||||||
| Return of Value - issue and redemption of B shares | 29 | 1,800.0 | (1,800.0 | ) | - | - | ||||||||||||||
Hedge accounting1 | 27 | - | - | (122.9 | ) | (122.9 | ) | |||||||||||||
Current tax movement on hedging1 | - | - | 23.3 | 23.3 | ||||||||||||||||
Reallocation of merger reserve 3 | - | (184.6 | ) | - | (184.6 | ) | ||||||||||||||
| As at October 31, 2019 | 2,485.0 | 1,739.8 | (29.6 | ) | 4,195.2 | |||||||||||||||
A debit of $99.6m was recognisedrecognized in the hedging reserve in relation to hedging transactions entered into in the six12 months ended October 31, 2017.2019 (18 months ended October 31, 2018: $70.0m credit).
On September 1, 2017, the acquisition of the HPE Software business was completed (note 28)38). As a result of this a merger reserve was created of $6,485.4m. The acquisition was structured by way of equity consideration; this transaction fell within the provisions of section 612 of the Companies Act 2006 (merger relief) such that no share premium was recorded in respect of the shares issued. The parent companyParent Company chose to record its investment in the HPE Software business at fair value and therefore recorded a merger reserve equal to the value of the share premium which would have been recorded had section 612 of the Companies Act 2006 not been applicable (i.e. equal to the difference between the fair value of the HPE Software business and the aggregate nominal value of the shares issued).
Consolidated financial statements and notes
Notes to the consolidated financial statements
31 Other reserves continued
In the 12 months ended October 31, 2019, an amount of $184.6m was transferred from the merger reserve to retained earnings. The Companymerger reserve is an unrealized profit until it can be realized by the settlement of the intercompany loan by qualifying consideration. In the 18 months ended October 31, 2018, it was disclosed that $2,755.8m of the merger reserve would be settled in the period. However, as at October 31, 2019, only $2,540.4m of the balance was settled as the balance of $215.4m was not required for any Returns of Value to shareholders. However, the remaining $215.4m and an additional $184.6m is expected to be settled in qualifying consideration during the year ended October 31, 2020 (18 months ended October 31, 2018: $2,540.4m) and as such an equivalent proportion of the merger reserve is considered realized, in accordance with section 3.11(d) of Tech 02/17 and therefore has been transferred anto retained earnings. An amount of $650.0m was transferred from the merger reserve to retained earnings pursuant to the UK company law. The parent company previously transferred the investment in TAG to a wholly owned subsidiary for an intercompany receivable in the amount of $1,373m and the investment to HPE Software to a wholly owned subsidiary for an intercompany receivable in the amount of $6,485.4m. To the extent the loan is settled in qualifying consideration, an amount of $700.0 million from the merger reserve is transferred to retained earnings (2016: $180.0m) that is available for dividend distribution to the parent company shareholders.12 months ended April 30, 2017.
The Group has minority shareholders in one subsidiary, Novell Japan Ltd.
On October 25, 2019, a payment of 340,700 JPY ($3,140) was made to acquire 170,350 ordinary 1 JPY shares held. This payment increased the Group’s shareholding from 81.05% to 84.24%.
| October 31, 2019 | October 31, 2018 | April 30, 2017 | ||||||||||
| $m | $m | $m | ||||||||||
| At November 1 / May 1 | 1.0 | 0.9 | 1.0 | |||||||||
| Share of profit after tax | 0.3 | 0.1 | (0.1 | ) | ||||||||
| At October 31 | 1.3 | 1.0 | 0.9 | |||||||||
Non-controlling interests relate to the companies detailed below:
Company name | Country of incorporation and principal place of business | October 31, 2019 Proportion held | October 31, 2018 Proportion held | April 30, 2017 Proportion held | |||||||||
| Novell Japan Ltd | Japan | 84.24 | % | 81.05 | % | 74.70 | % | ||||||
| Company name | Country of incorporation and principal place of business | October 31, 2017 Proportion held | October 31, 2016 Proportion held | ||||||
| Novell Japan Ltd | Japan | 74.7 | % | 71.5 | % | ||||
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 2017 | ||||||||||
| $m | $m | $m | ||||||||||
| Staff costs | ||||||||||||
| Wages and salaries | 1,204.4 | 1,819.2 | 382.5 | |||||||||
| Redundancy and termination costs (non-exceptional) | 0.5 | 2.1 | 2.1 | |||||||||
| Social security costs | 93.6 | 159.0 | 53.2 | |||||||||
| Other pension costs | 41.7 | 50.4 | 11.4 | |||||||||
| 1,340.2 | 2,030.7 | 449.2 | ||||||||||
| Cost of employee share schemes (Share-based payments section) | 68.8 | 64.3 | 31.5 | |||||||||
| Total | 1,409.0 | 2,095.0 | 480.7 | |||||||||
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 2017 | ||||||||||||||
| Note | $m | $m | $m | |||||||||||||
| Pension costs comprise: | ||||||||||||||||
| Defined benefit schemes | 25 | 9.0 | 7.1 | 0.5 | ||||||||||||
| Defined contribution schemes | 25 | 32.7 | 43.3 | 10.9 | ||||||||||||
| Total | 41.7 | 50.4 | 11.4 | |||||||||||||
Consolidated financial statements and notes
Notes to the November 20, 2017 the proportion held by the Group in Novell Japan Ltd increased to 77.9%.consolidated financial statements
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 2017 | ||||||||||
| Number | Number | Number | ||||||||||
| Average monthly number of people | ||||||||||||
| (including executive directors) employed by the Group: | ||||||||||||
| Continuing Operations | ||||||||||||
| Sales and distribution | 5,413 | 5,860 | 1,818 | |||||||||
| Research and development | 5.056 | 4,323 | 1,400 | |||||||||
| General and administration | 1,991 | 1,378 | 642 | |||||||||
| 12,460 | 11,561 | 3,860 | ||||||||||
| Discontinued Operation | ||||||||||||
| Sales and distribution | 164 | 515 | 323 | |||||||||
| Research and development | 170 | 629 | 476 | |||||||||
| General and administration | 3 | 8 | 4 | |||||||||
| 337 | 1,152 | 803 | ||||||||||
| Total | ||||||||||||
| Sales and distribution | 5,577 | 6,375 | 2,141 | |||||||||
| Research and development | 5,226 | 4,952 | 1,876 | |||||||||
| General and administration | 1,994 | 1,386 | 646 | |||||||||
| Total | 12,797 | 12,713 | 4,663 | |||||||||
Directors and Executive Committee members. The Group has taken advantage of the exemption available under IAS 24, “Related Party Disclosures”, not to disclose details of transactions with its subsidiary undertakings.Key Management
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 2017 | ||||||||||
| $m | $m | $m | ||||||||||
| Directors | ||||||||||||
| Aggregate emoluments | 3.7 | 14.6 | 5.2 | |||||||||
| Aggregate gains made on the exercise of share options | 79.7 | 77.7 | 8.2 | |||||||||
| Company contributions to money purchase pension scheme | - | 0.7 | 0.5 | |||||||||
| Total | 83.4 | 93.0 | 13.9 | |||||||||
6 months ended October 31, 2017 | 6 months ended October 31, 2016 | 12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 2017 | ||||||||||||||||
| $’000 | $’000 | $m | $m | $m | ||||||||||||||||
| Key management compensation | ||||||||||||||||||||
| Short-term employee benefits | 9,997 | 4,749 | 9.5 | 25.9 | 8.0 | |||||||||||||||
| Share-based payments | 9,271 | 6,326 | 25.3 | 44.5 | 9.4 | |||||||||||||||
| 19,268 | 11,075 | |||||||||||||||||||
| Total | 34.8 | 70.4 | 17.4 | |||||||||||||||||
The key management figures above include the executive management team and directors. There are no post-employment benefits.
Consolidated financial statements and notes
Notes to shareholdersthe consolidated financial statements
Share-based payments
The amount charged to the Consolidated statement of comprehensive income in respect of share-based payments was $71.3m for the 12 months ended October 31, 2017 a Return2019 (18 months ended October 31, 2018: $72.2m). The Consolidated statement of Value was made to shareholders amounting to $500.0 million (£386.1 million) in cash (168 pence per existing Ordinary Share held at the Record Time of 6.00pm on August 31, 2017.comprehensive income has been presented split between continuing and discontinued operations. The Return of Value was effected through an issue and redemption of B shares, and was accompanied by a 0.9263 share consolidation to maintain broad comparabilitytable below provides information of the share-based payments on a continuing operations basis. The tables below for each type of share priceoption are presented on a combined continuing and return per share of the ordinary shares before and after the creation of the B Shares.discontinued operations basis.
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 2017 | ||||||||||
| Continuing operations | $m | $m | $m | |||||||||
| Share-based compensation – IFRS 2 charge | 62.0 | 70.9 | 20.8 | |||||||||
| Employer taxes | 6.8 | (6.6 | ) | 10.7 | ||||||||
| 68.8 | 64.3 | 31.5 | ||||||||||
As at October 31, 2017 this was2019, accumulated employer taxes of $1.9m (October 31, 2018: $20.6m; April 30, 2017: $17.0m) are included in trade and other payables and $nil (October 31, 2018: $0.5m; April 30, 2017: $1.2m) is included in other non-current liabilities.
The Group has various equity-settled share-based compensation plans details of which are provided below.
| a) | Incentive Plan 2005 |
On April 27, 2005, the Group’s 5th Returnremuneration committee approved the rules of Valuethe Incentive Plan 2005 (“LTIP”) which permits the granting of share options to shareholdersexecutive directors and this bringssenior management. The total number of options they receive is determined by the performance criteria set by the remuneration committee over a three-year performance period. Prior to April 18, 2011 performance conditions required that cumulative EPS growth over a three-year vesting period is at least equal to Retail Prices Index (“RPI”) plus 11% (at which point 25% of awards will vest), 60% of shares will vest for cumulative EPS growth of RPI plus 13% and for full vesting the cumulative EPS growth will be required to be RPI plus 15% per annum. RPI is the general index of the UK retail prices (for all items) published by the Office of National Statistics or any similar index replacing it. Straight-line vesting will apply between these points.
Awards granted are subject to either Absolute Shareholder Returns (“ASR”) over a three-year period, cumulative EPS growth or a combination of both. ASR is defined as the average closing share price over the period of five days ending on the day prior to the vesting date less the reference price plus the total amount returnedof all dividends and cash distributions and any other measures as determined by the Remuneration Committee between the award date and the vesting date. Where the cumulative EPS growth over a three-year period is at least equal to shareholders since March 25, 2011 through share buy-backs, ReturnsRPI plus 3% per annum 25% of Value and ordinary dividendsawards will vest, with full vesting achieved when the cumulative EPS growth is RPI plus 9% per annum. Straight-line vesting will apply between these points. Where the award is subject to £1,255.0 million which represents 197.63%ASR, the resulting level of vesting will be reduced by 25% if the Market Capitalization at that time.ASR is below 150 pence or increased by 50% if ASR is 300 pence or more.
Consolidated financial statements and notes
Notes to the consolidated interimfinancial statements
33 Employees and directors continued
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | |||||||||||||||
Number of Options | Weighted average exercise price | Number of Options | Weighted average exercise price | |||||||||||||
| ‘000 | pence | ‘000 | pence | |||||||||||||
| Outstanding at November 1 / May 1 | 5,620 | 14 | 4,662 | 29 | ||||||||||||
| Exercised | (3,410 | ) | 17 | (1,283 | ) | 12 | ||||||||||
| Forfeited | (545 | ) | 27 | (582 | ) | 3 | ||||||||||
| Granted | 7,562 | - | 2,823 | - | ||||||||||||
| Outstanding at October 31 | 9,227 | 6 | 5,620 | 14 | ||||||||||||
| Exercisable at October 31 | 1,416 | 34 | 2,270 | 51 | ||||||||||||
The weighted average share price in the period for options on the date of exercise was 1,707 pence for the 12 months ended October 31, 2019 (18 months ended October 31, 2018: 1,781 pence).
The amount charged to the Consolidated statement of comprehensive income in respect of the scheme was $31.1m for the 12 months ended October 31, 2019 (18 months ended October 31, 2018: $30.3m). In addition to this $8.5m (18 months ended October 31, 2018: $4.1m charge) was charged to the Consolidated statement of comprehensive income in respect of National Insurance on these share options.
| October 31, 2019 | October 31, 2018 | ||||||||||||||||||||||||
| Range of exercise prices | Weighted average exercise price pence | Number of options ‘000 | Weighted average remaining contractual life (years) | Weighted average exercise price pence | Number of options ‘000 | Weighted average remaining contractual life (years) | |||||||||||||||||||
£0.10 or less | 1 | 8,982 | 3.4 | 1 | 5,127 | 6.7 | |||||||||||||||||||
£0.11 – £1.00 | 13 | 137 | 3.7 | 13 | 205 | 4.9 | |||||||||||||||||||
£1.01 – £2.00 | - | - | - | - | - | - | |||||||||||||||||||
£2.01 – £3.00 | - | - | - | - | - | - | |||||||||||||||||||
£3.01 - £4.00 | - | - | - | 358 | 146 | 0.7 | |||||||||||||||||||
More than £4.00 | 402 | 108 | 0.7 | 402 | 142 | 1.7 | |||||||||||||||||||
| 6 | 9,227 | 3.4 | 14 | 5,620 | 4.0 | ||||||||||||||||||||
The weighted average fair value of options granted during the 12 months ended October 31, 2019 determined using the Black-Scholes valuation model was £14.54 (18 months ended October 31, 2018: £15.25).
The significant inputs into the model for the 12 months ended October 31, 2019 were:
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | |||||
| Weighted average share price at the grant date | £16.44 | £16.87 | ||||
| Expected volatility | between 48.91% and 49.68% | between 28.59% and 48.54% | ||||
| Expected dividend yield | between 4.78% and 5.87% | between 2.82% and 7.02% | ||||
| Expected option life | 0.76 to four years | three years | ||||
| Annual risk-free interest rate | between 0.49% and 1.38% | between 1.0% and 1.6% |
The volatility measured at the standard deviation of continuously compounded share returns is based on statistical daily share prices over the last three years.
Consolidated financial statements (unaudited)and notes
Notes to the consolidated financial statements
Share based payments continued
| b) | Additional Share grants |
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | |||||||||||||||||||||||||||||||
| Number of Options | Number of Options | |||||||||||||||||||||||||||||||
TAG ASGs | HPE Software ASGs | Total | Weighted average exercise price | TAG ASGs | HPE Software ASGs | Total | Weighted average exercise price | |||||||||||||||||||||||||
| ‘000 | ‘000 | ‘000 | pence | ‘000 | ‘000 | ‘000 | pence | |||||||||||||||||||||||||
| Outstanding at November 1 / May 1 | 3,062 | 7,427 | 10,489 | - | 3,262 | - | 3,262 | - | ||||||||||||||||||||||||
| Granted | - | 458 | 458 | - | - | 13,115 | 13,115 | - | ||||||||||||||||||||||||
| Exercised | (2,601 | ) | - | (2,601 | ) | - | (200 | ) | - | (200 | ) | - | ||||||||||||||||||||
| Lapsed | - | (4,670 | ) | (4,670 | ) | - | - | (2,412 | ) | (2,412 | ) | - | ||||||||||||||||||||
| Cancelled | - | - | - | - | - | (3,276 | ) | (3,276 | ) | - | ||||||||||||||||||||||
| Outstanding at October 31 | 461 | 3,215 | 3,676 | - | 3,062 | 7,427 | 10,489 | - | ||||||||||||||||||||||||
| Exercisable at October 31 | 461 | - | 461 | - | 3,062 | - | 3,062 | - | ||||||||||||||||||||||||
Additional Share Grants – The Attachmate Group (“TAG”) acquisition
The Remuneration Committee awarded Additional Share Grants (“ASGs”) to a number of senior managers and executives, critical to delivering the anticipated results of the acquisition of The Attachmate Group, which completed on November 20, 2014.
The ASGs were nil cost options over ordinary shares. The ASGs became exercisable, subject to the satisfaction of the performance condition, on the third anniversary of the date of Completion or November 1, 2017, whichever is earlier (the “vesting date”) and remained exercisable until the tenth anniversary of Completion.
The performance condition applicable was that the percentage of ordinary shares subject to the ASG which may be acquired on exercise on or after the vesting date was as follows:
(i) 0% if the Shareholder Return Percentage (as defined below) is 50% or less;
(ii) 100% if the Shareholder Return Percentage is 100% or more; and
(iii) A percentage determined on a straight-line basis between (i) and (ii) above.
The “Shareholder Return Percentage” was calculated by deducting 819.425 pence per share (the “Reference Price”), being the average of the 20 days before June 3 2014, from the sum of the “Vesting Price” (calculated as the average closing share price over the period of 20 days ending on the day prior to the vesting date) plus the total of all dividends per share between Completion and the vesting date. This was divided by the Reference Price, multiplying the resulting figure by 100 to obtain the Shareholder Return Percentage.
These TAG ASG options vested in full. As at October 31, 2019, 460,917 of these options were vested but not yet exercised.
Consolidated financial statements and notes
Notes to the consolidated financial statements
33 Employees and directors continued
Share based payments continued
Additional Share Grants – The HPE Software business acquisition
The Remuneration Committee awarded a number of Additional Share Grants (“ASGs”) to a number of senior managers and executives, critical to delivering the anticipated results of the acquisition of the HPE Software business, which completed on September 1, 2017.
The ASGs were nil cost options over ordinary shares. The ASGs became exercisable, subject to the satisfaction of the performance condition, on the third anniversary of the announcement date of September 7, 2016 (the “vesting date”) and remained exercisable for a period of 84 months commencing on the vesting date.
The performance condition applicable was that the percentage of ordinary shares subject to the ASG, which may be acquired on exercise on or after the vesting date was as follows:
(i) 0% if the Shareholder Return Percentage (as defined below) is 50% or less;
(ii) 100% if the Shareholder Return Percentage is 100% or more; and
(iii) A percentage determined on a straight-line basis between (i) and (ii) above.
The “Shareholder Return Percentage” will be calculated by deducting 1,817.75 pence per share (the “Reference Price”), being the average of the 20 days before August 1, 2016, from the sum of the “Vesting Price” (calculated as the average closing share price over the period of 20 days ending on the day prior to the vesting date) plus the total of all dividends per share between the announcement date and the vesting date. This was divided by the Reference Price, multiplying the resulting figure by 100 to obtain the Shareholder Return Percentage.
Amendments made on September 20, 2018
On September 20, 2018, the Group announced that, following a review of existing Additional Share Grant (“ASG”) awards, ASG awards made to Executive Directors on completion of the HPE Software business acquisition on September 1, 2017 were to be cancelled. New ASG awards were granted in order to align with the business plan to deliver value by October 2020 and focus Executive Directors on delivering significant value to shareholders over the three years from completion of the transaction. The Company believed that, in the light of the HPE Software business integration and the wider competitive environment evidenced by recent M&A activity in the software sector, the alignment of the vesting period to September 1, 2020 was essential to provide an effective incentive over the period of the business plan.
The Executive Directors (Kevin Loosemore, Stephen Murdoch and Chris Kennedy) and those who were Executive Directors at the time of the existing award and remained in employment (Nils Brauckmann and Mike Phillips) as at September 20, 2018, agreed to surrender their existing ASG awards made on September 1, 2017 which were due to vest on September 7, 2019. In return, the Company made new ASG awards over ordinary shares in the Company as detailed below, which are due to vest on September 1, 2020 (being three years from the completion of the Transaction).
Number of granted and cancelled nil cost share options over Ordinary Shares | Number of replacement nil cost options over Ordinary Shares | |||||||
| Director | ‘000 | ‘000 | ||||||
| Kevin Loosemore | 1,100 | 1,100 | ||||||
| Stephen Murdoch | 500 | 947 | ||||||
Chris Kennedy1 | 500 | 676 | ||||||
Mike Phillips1 | 676 | 676 | ||||||
Nils Brauckmann1 | 500 | 500 | ||||||
| 3,276 | 3,899 | |||||||
1 These ASG options awarded to Chris Kennedy (all), Nils Brauckmann (all) and Mike Phillips (partial) lapsed as a result of their resignations and subsequent leaving employment.
Consolidated financial statements and notes
Notes to the consolidated financial statements
33 Employees and directors continued
Share based payments continued
b) Additional Share Grants continued
The Total Shareholder Returns (“TSR”) performance thresholds for the new awards were unchanged from the previous awards, save in respect of the period to vesting. The number of new awards was equal to the number of previous awards which they replace, except for Stephen Murdoch and Chris Kennedy where increases of 447,000 and 176,000 awards respectively were made to reflect Stephen’s promotion to Chief Executive Officer and to align Chris’ awards to those granted to his predecessor.
As new ASGs were granted to replace the original ASGs that were cancelled, this was treated under IFRS 2 “Share-based payment” as modification of the original ASG grant. Due to the performance conditions attached to them, the fair value for ASGs was determined using the Monte Carlo simulation method. The fair value of the original awards was determined at the modification date (September 20, 2018) i.e. replacing the original fair values. The incremental fair value of the new awards over the original awards at the date of modification was recognized in addition to the grant date fair value. The original expense continued to be recognized over the original service period, the incremental expense was recognized over the remaining service period for the new awards i.e. to September 1, 2020 rather than September 7, 2019.
Lapses in the 12 months ended October 31, 2019
In the 12 months ended October 31, 2019, 4,669,454 ASGs relating to the HPE Software business acquisition lapsed as a result of either leavers (1,234,454) or performance conditions not met (3,435,000).
Additional Share Grants made in the 12 months ended October 31, 2019
In the 12 months ended October 31, 2019, 458,000 ASG options were granted including 338,000 ASG options to Brian McArthur- Muscroft, the Chief Financial Officer. These ASG grants each had a vesting date of September 1, 2020 with the same performance threshold as the amended grants issued on September 20, 2018.
The weighted average fair value of options granted during the period determined using the Monte-Carlo simulation model was £0.54 (18 months ended October 31, 2018: £4.80).
The significant inputs into the model for the 12 months ended October 31, 2019 were:
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | |||||||
| Weighted average share price at the grant date | £22.81 | £18.35 | ||||||
| Expected volatility | 28.00 | % | Between 28.00% - 31.00% | |||||
| Expected dividend yield | 2.85 | % | Between 3.26% - 5.29% | |||||
| Expected option life | 1.75 years – 1.78 years | 1.96 years | ||||||
| Annual risk-free interest rate | 0.43 | % | Between 0.43% - 0.84% | |||||
The volatility measured at the standard deviation of continuously compounded share returns is based on statistical daily share prices over the last three years.
The amount charged to the Consolidated statement of comprehensive income in respect of the ASGs was $30.6m for the 12 months ended October 31, 2019 (18 months ended October 31, 2018: $45.6m. In addition to this $1.7m (18 months ended October 31, 2018: $2.5m charge) was credited to the Consolidated statement of comprehensive income in respect of National Insurance on these share options in the 12 months ended October 31, 2019.
| October 31, 2019 | October 31, 2018 | ||||||||||||||||||||||||
| Range of exercise prices | Weighted average exercise price pence | Number of options ‘000 | Weighted average remaining contractual life (years) | Weighted average exercise price pence | Number of options ‘000 | Weighted average remaining contractual life (years) | |||||||||||||||||||
£0.00 | - | 3,676 | 7.3 | - | 10,489 | 5.5 | |||||||||||||||||||
| - | 3,676 | 7.3 | - | 10,489 | 5.5 | ||||||||||||||||||||
Consolidated financial statements and notes
Notes to the consolidated financial statements
33 Employees and directors continued
Share based payments continued
c) Sharesave and Employee Stock Purchase Plan 2006
In August 2006, the Company introduced the Micro Focus Employee Stock Purchase Plan 2006 and the Micro Focus Sharesave Plan 2006, approved by members on July 25, 2006. The Group operates several plans throughout the world, but the two main plans are the Sharesave Plan (“Sharesave”) primarily for UK employees and the Employee Stock Purchase Plan (“ESPP”) for employees in the USA and Canada. The Sharesave and ESPP provide for an annual award of options at a discount to the market price and are open to all eligible Group employees. Under these plans employees make monthly savings over a period (Sharesave three years, ESPP two years) linked to the grant of an option with an option price which can be at a discount (Sharesave 20%, ESPP 15%) of the market value of the shares on grant. The option grants are subject to employment conditions and continuous savings.
Further Sharesave and ESPP grants were made during the 12 months to October 31, 2019.
Sharesave
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | |||||||||||||||
Number of options ‘000 | Weighted average exercise price pence | Number of options ‘000 | Weighted average exercise price pence | |||||||||||||
| Outstanding at November 1 / May 1 | 496 | 1,185 | 559 | 1,039 | ||||||||||||
| Exercised | (81 | ) | 1,171 | (294 | ) | 829 | ||||||||||
| Forfeited | (102 | ) | 1,297 | (223 | ) | 1,508 | ||||||||||
| Granted | 125 | 1,374 | 454 | 1,293 | ||||||||||||
| Outstanding at October 31 | 438 | 1,221 | 496 | 1,185 | ||||||||||||
| Exercisable at October 31 | 62 | 1,461 | 47 | 1,116 | ||||||||||||
Number of options | Exercise price per share | |||||||
| ‘000 | Date of grant | pence | Exercise period | |||||
| 61 | August 12, 2016 | 1,465.6 | October 1, 2019 – February 1, 2020 | |||||
| 21 | February 23, 2018 | 1,720.0 | April 1, 2021 – September 30, 2021 | |||||
| 2 | February 23, 2018 | 1,963.0 | April 1, 2021 – September 30, 2021 | |||||
| 221 | August 3, 2018 | 1,023.0 | October 1, 2021 – March 31, 2022 | |||||
| 19 | August 3, 2018 | 1,159.0 | October 1, 2021 – March 31, 2022 | |||||
| 67 | March 7, 2019 | 1,344.0 | April 1, 2022 – September 30, 2022 | |||||
| 4 | March 7, 2019 | 1,533.0 | April 1, 2022 – September 30, 2022 | |||||
| 40 | August 5, 2019 | 1,411.0 | October 1, 2021 – August 4, 2022 | |||||
| 3 | August 5, 2019 | 1,574.3 | October 1, 2021 – August 4, 2022 | |||||
| 438 | ||||||||
Consolidated financial statements and notes
Notes to the consolidated financial statements
33 Employees and directors continued
Share based payments continued
ESPP
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | |||||||||||||||
Number of options | Weighted average exercise price | Number of options | Weighted average exercise price | |||||||||||||
| ‘000 | pence | ‘000 | pence | |||||||||||||
| Outstanding at November 1 / May 1 | 800 | 1,047 | 124 | 1,510 | ||||||||||||
| Exercised | (17 | ) | 1,114 | (110 | ) | 1,598 | ||||||||||
| Forfeited | (44 | ) | 1,440 | (31 | ) | 1,236 | ||||||||||
| Granted | 453 | 1,444 | 817 | 1,057 | ||||||||||||
| Outstanding at October 31 | 1,192 | 1,182 | 800 | 1,047 | ||||||||||||
| Exercisable at October 31 | - | - | - | - | ||||||||||||
Number of Options | Exercise price per share | |||||||
| ‘000 | Date of grant | pence | Exercise period | |||||
| 309 | March 1, 2018 | 1,235.6 | March 1, 2020 – May 31, 2020 | |||||
| 430 | July 1, 2018 | 868.5 | July 1, 2020 – September 30, 2020 | |||||
| 244 | March 1, 2019 | 1,428.0 | March 1, 2021 – May 31, 2021 | |||||
| 209 | October 1, 2019 | 1,462.8 | October 1, 2021 – December 31, 2021 | |||||
| 1,192 | ||||||||
The amount charged to the Consolidated statement of comprehensive income in respect of the Sharesave and ESPP schemes was $2.8m for the 12 months ended October 31, 2019 (18 months ended October 31, 2018: $2.9m).
The weighted average fair value of options granted in the Sharesave and ESPP schemes during the 12 months ended October 31, 2019 determined using the Black-Scholes valuation model was £5.93 (18 months ended October 31, 2018: £6.28).
The significant inputs into the model for the 12 months ended October 31, 2019 were:
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | |||||||
| Weighted average share price at the grant date | £17.56 | £15.48 | ||||||
| Expected volatility | between 49.06% and 49.68% | between 28.82% - 48.60% | ||||||
| Expected dividend yield | between 4.63% and 5.87% | between 3.86% - 7.02% | ||||||
| Expected option life | Two or three years | two or three years | ||||||
| Annual risk-free interest rate | between 0.49% and 1.16% | between 1.3% - 1.5% | ||||||
The volatility measured at the standard deviation of continuously compounded share returns is based on statistical daily share prices over the last three years.
Consolidated financial statements and notes
Notes to the consolidated financial statements
34 Operating lease commitments – minimum lease payments
At October 31, 2019 the Group has a number of lease agreements in respect of properties, vehicles, plant and equipment, for which the payments extend over a number of years.
| October 31, 2019 | October 31, 2018 | |||||||
| $m | $m | |||||||
| Future minimum lease payments under non-cancellable operating leases falling due: | ||||||||
| No later than one year | 78.6 | 65.8 | ||||||
| Later than one year and no later than three years | 123.6 | 86.4 | ||||||
| Later than three years and no later than five years | 61.4 | 53.3 | ||||||
| Later than five years | 37.6 | 22.5 | ||||||
| Total | 301.2 | 228.0 | ||||||
The Group leases various offices under non-cancellable operating lease agreements that are included in the table. The leases have various terms, escalation clauses and renewal rights.
The properties owned or leased and operated by the Group’s subsidiaries are maintained in good condition and are believed to be suitable and adequate for the Group’s present needs. The Group’s headquarters are located at premises in Newbury, England. The Group owns or leases properties amounting to over 2.4 million square feet of space, in over 40 countries worldwide. Two individual leased properties are material to the Group. One is located in Provo, Utah, where the Group currently leases approximately 405,700 square feet of office space. The lease on this facility expires in 2024, with an option to extend for a further three, five-year periods. The Group’s current annual rent under this lease is $8.2m. Since March 1, 2019, part of the property has been sublet. Current annual sub-lease income is $1.0m. The other property is located in Santa Clara, California, where the Group currently lease approximately 635,000 square feet of office space. The lease on this facility expires in 2029, with an option to extend for one further five-year period. The Group’s current annual rent under this lease is $4.6m.
The minimum lease payments payable under operating leases recognized as an expense in the 12 months ended October 31, 2019 were $65.9m (18 months ended October 31, 2018: $94.1m).
The total of future minimum sublease payments expected to be received under non-cancellable subleases as at October 31, 2019 is $3.9m (October 31, 2018: $4.7m)
35 Contingent liabilities
The Company and several of its subsidiaries are, from time to time, parties to legal proceedings and claims, which arise in the ordinary course of business. The directors do not anticipate that the outcome of these proceedings, actions and claims, either individually or in aggregate, will have a material adverse effect upon the Group’s financial position.
Shareholder litigation
Micro Focus International plc and certain current and former directors and officers are involved in two class action lawsuits in which plaintiffs are seeking damages for alleged violations of the Securities Act of 1933 and the Exchange Act of 1934. Plaintiffs allege false and misleading statements or omissions in offering documents issued in connection with the Hewlett Packard Enterprise software business merger and issuance of Micro Focus American Depository Shares (“ADS”) as merger consideration, and other purportedly false and misleading statements. No liability has been recognized in either case as these are still very early in proceedings and it is too early to estimate whether there will be any financial impact.
Patent litigation
Several indirect subsidiaries of Micro Focus International plc are involved in a patent infringement lawsuit in which plaintiffs allege that certain Micro Focus ADM software products infringe three patents in the field of mobile application development and testing. Plaintiffs are seeking monetary damages in an amount that has yet to be specified. No liability has been recognized in these cases as they are still at an early stage in proceedings, and it is too soon to estimate whether there will be any financial impact.
Consolidated financial statements and notes
Notes to the consolidated financial statements
36 Related party transactions
The Group’s related parties are its subsidiary undertakings, key management personnel and post-employment benefit plans.
Subsidiaries
Transactions between the Company and its subsidiaries have been eliminated on consolidation.
Remuneration of key management personnel
The remuneration of key management personnel of the Group (which is defined as the executive management team and directors) is set out in note 33. There are no loans between the Group and the key management personnel.
Transactions with other related parties.
The following transactions occurred with other related parties:
Contributions made to pension plans by the Group on behalf of employees are set out in note 25.
Sales and purchases of goods and services between related parties are not considered material.
Consolidated financial statements and notes
Notes to the consolidated financial statements
37 Discontinued operation, assets classified as held for sale and disposals
Net Assets classified as held for sale
There are no disposal groups classified as held for sale in the current period. At October 31, 2018, the assets and liabilities relating to the SUSE and Atalla businesses were presented as held for sale.
| October 31, 2019 | October 31, 2018 | |||||||||||||||||||||||
Current Assets | Current liabilities | Total | Current assets | Current liabilities | Total | |||||||||||||||||||
| Reported in: | $m | $m | $m | $m | $m | $m | ||||||||||||||||||
| SUSE | - | - | - | 1,114.5 | (427.4 | ) | 687.1 | |||||||||||||||||
| Atalla | - | - | - | 28.0 | (10.3 | ) | 17.7 | |||||||||||||||||
| - | - | - | 1,142.5 | (437.7 | ) | 704.8 | ||||||||||||||||||
The net asset assets held for sale relating to the disposals of SUSE and Atalla are detailed in the tables below. These include non-current assets and non-current liabilities that are shown as current assets and liabilities in the Consolidated statement of financial position.
| A. | SUSE Business |
On July 2, 2018, the Group announced the proposed sale of the SUSE business segment to Blitz 18-679 GmbH (subsequently renamed to Marcel Bidco GmbH), a newly incorporated directly wholly owned subsidiary of EQTVIII SCSp, which is advised by EQT Partners. The total cash consideration of $2.5bn was on a cash and debt free basis and subject to normalization of working capital.
On August 21, 2018, Shareholders voted to approve the proposed transaction whereby the Company agreed to sell its SUSE business segment to Marcel Bidco GmbH, for a total cash consideration of approximately $2.5bn, subject to customary closing adjustments. Following this vote, all applicable antitrust, competition, merger control and governmental clearances were obtained. The sale was completed on March 15, 2019 and the SUSE business segment has been treated as discontinued in these financial statements.
Discontinued operation – Financial performance
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 2017 | ||||||||||||||||||
Before Exceptional Items | Exceptional Items | Total | Total | Total | ||||||||||||||||
| $m | $m | $m | $m | $m | ||||||||||||||||
| Revenue | 127.0 | - | 127.0 | 538.2 | 303.4 | |||||||||||||||
| Operating costs | (89.3 | ) | - | (89.3 | ) | (425.3 | ) | (238.6 | ) | |||||||||||
| Operating profit | 37.7 | - | 37.7 | 112.9 | 64.8 | |||||||||||||||
| Share of results of associate | (0.3 | ) | - | (0.3 | ) | (1.8 | ) | - | ||||||||||||
| Profit on disposal of the SUSE business | - | 1,767.9 | 1,767.9 | - | - | |||||||||||||||
| Profit before taxation | 37.4 | 1,767.9 | 1,805.3 | 111.1 | 64.8 | |||||||||||||||
| Taxation | (8.7 | ) | (309.4 | ) | (318.1 | ) | (34.2 | ) | (31.1 | ) | ||||||||||
| Profit for the period from discontinued operation | 28.7 | 1,458.5 | 1,487.2 | 76.9 | 33.7 | |||||||||||||||
Discontinued operation – Cash flow
The cash flow statement shows amounts related to the discontinued operations:
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 2017 | ||||||||||
| $m | $m | $m | ||||||||||
Net cash inflows from operating activities | 18.6 | 136.1 | 70.4 | |||||||||
Net cash outflows from investing activities | - | (2.5 | ) | (7.4 | ) | |||||||
Net cash flows from financing activities | - | - | - | |||||||||
The assets and liabilities relating to SUSE were presented as held for sale following the shareholder approval on August 21, 2018. Costs to sell have been included in trade and other payables.
Consolidated financial statements and notes
Notes to the consolidated financial statements
37 Discontinued operation, assets classified as held for sale and disposals continued
| A. | SUSE Business continued |
| October 31, 2019 | October 31, 2018 | |||||||||||
| Note | $m | $m | ||||||||||
| Non-current assets | ||||||||||||
| Goodwill | 10 | - | 859.6 | |||||||||
| Other Intangible assets | 11 | - | 165.6 | |||||||||
| Property, plant and equipment | 12 | - | 5.7 | |||||||||
| Investment in associates | - | 9.6 | ||||||||||
| Deferred tax assets | - | 1.6 | ||||||||||
| Long-term pension assets | 25 | - | 1.5 | |||||||||
| Other non-current assets | - | 2.2 | ||||||||||
| - | 1,045.8 | |||||||||||
| Current assets | ||||||||||||
| Trade and other receivables | - | 65.8 | ||||||||||
| Cash and cash equivalents | - | 2.9 | ||||||||||
| - | 68.7 | |||||||||||
| Total assets held for sale | - | 1,114.5 | ||||||||||
| Current liabilities | ||||||||||||
| Trade and other payables | - | (38.0 | ) | |||||||||
| Provisions | 24 | - | (0.7 | ) | ||||||||
| Current tax liabilities | - | (1.2 | ) | |||||||||
| Deferred income | - | (218.3 | ) | |||||||||
| - | (258.2 | ) | ||||||||||
| Non-current liabilities | ||||||||||||
| Deferred income | - | (160.8 | ) | |||||||||
| Retirement benefit obligations | 25 | - | (5.5 | ) | ||||||||
| Long-term provisions | 24 | - | (2.3 | ) | ||||||||
| Other non-current liabilities | - | (0.6 | ) | |||||||||
| - | (169.2 | ) | ||||||||||
| Total liabilities held for sale | - | (427.4 | ) | |||||||||
| Net assets classified as held for sale | - | 687.1 | ||||||||||
Disposal of the SUSE business
On March 15, 2019, the Group disposed of the SUSE business for $2,540.3m. Details of net assets disposed of and the profit on disposal are as follows:
| Carrying value pre-disposal | ||||
| $m | ||||
| Non-current assets classified as held for sale | 989.8 | |||
| Current assets classified as held for sale | 127.3 | |||
| Current liabilities classified as held for sale | (288.5 | ) | ||
| Non-current liabilities classified as held for sale | (177.3 | ) | ||
| Net assets disposed | 651.3 | |||
Consolidated financial statements and notes
Notes to the consolidated financial statements
37 Discontinued operation, assets classified as held for sale and disposals continued
| A. | SUSE Business continued |
The profit on disposal is calculated as follows:
| $m | ||||
| Disposal proceeds | 2,540.3 | |||
| Costs to sell recognized in the period | (45.3 | ) | ||
| Disposal proceeds, less costs to sell recognized in the period | 2,495.0 | |||
| Net assets disposed | (651.3 | ) | ||
| Profit on disposal | 1,843.7 | |||
| Cumulative exchange gain in respect of the net assets of the subsidiaries, reclassified from equity on disposal | (75.8 | ) | ||
| Profit on disposal | 1,767.9 |
The profit on disposal is reflected in the profit for the period from discontinued operations in the Consolidated statement of comprehensive income. All cash flows occurred in the current period.
The inflow of cash and cash equivalents on the disposal of the SUSE business is calculated as follows:
| $m | ||||
| Disposal proceeds, less total costs to sell | 2,495.0 | |||
| Cash disposed | (21.5 | ) | ||
| Investing cash flows generated from discontinued operations, net of cash disposed | 2,473.5 |
| B. | Atalla |
On May 18, 2018 the Company entered into an agreement with Utimaco Inc. (“Utimaco”), under which Utimaco would acquire Atalla for $20m in cash. The deal was subject to regulatory approval by the Committee on Foreign Investment in the United States (“CFUIS”). CFIUS placed the deal into investigation in September and final approval was received October 10, 2018. The deal closed on November 5, 2018 and Utimaco acquired the Atalla HSM product line, the Enterprise Security Manger (“ESKM”) product line, and related supporting assets, including applicable patents and other IP.
The assets and liabilities relating to the Atalla business included in the Financial Statements at October 31, 2018 amount to $17.7m.
| October 31, 2019 | October 31, 2018 | |||||||||||
| Note | $m | $m | ||||||||||
| Goodwill | 10 | - | 27.9 | |||||||||
| Property, plant and equipment | 12 | - | 0.1 | |||||||||
| Non-current assets | - | 28.0 | ||||||||||
| Deferred income | - | (10.3 | ) | |||||||||
| Current liabilities | - | (10.3 | ) | |||||||||
| Net assets classified as held for sale | - | 17.7 | ||||||||||
Consolidated financial statements and notes
Notes to the consolidated financial statements
37 Discontinued operation, assets classified as held for sale and disposals continued
| B. | Atalla continued |
On November 5, 2018, the Group disposed of the Atalla business for a net cash consideration of $20.0m. Details of net assets disposed of and the profit on disposal are as follows:
| Carrying value pre-disposal | ||||
| $m | ||||
| Goodwill | 28.0 | |||
| Property, plant and equipment | 0.3 | |||
| Non-current assets | 28.3 | |||
| Deferred income | (12.0 | ) | ||
| Current liabilities | (12.0 | ) | ||
| Net assets disposed | 16.3 | |||
The profit on disposal which has been recorded as exceptional (note 4) is calculated as follows:
| $m | ||||
| Disposal proceeds | 20.0 | |||
| Net assets disposed | (16.3 | ) | ||
| Profit on disposal | 3.7 |
38 Acquisitions
Summary of acquisitions for
| Consideration | ||||||||||||||||||||||||
Carrying value at acquisition | Fair value adjustments | Goodwill | Shares | Cash | Total | |||||||||||||||||||
| $m | $m | $m | $m | $m | $m | |||||||||||||||||||
Acquisitions in the 12 months ended October 31, 2019: | ||||||||||||||||||||||||
| Interset Software Inc. | 0.9 | 61.3 | 26.8 | - | 89.0 | 89.0 | ||||||||||||||||||
| 0.9 | 61.3 | 26.8 | - | 89.0 | 89.0 | |||||||||||||||||||
Acquisitions in the 18 months ended October 31, 2018: | ||||||||||||||||||||||||
| HPE Software business | (2,487.8 | ) | 4,143.7 | 4,858.3 | 6,514.2 | - | 6,514.2 | |||||||||||||||||
| COBOL-IT | (3.0 | ) | 14.0 | 5.6 | - | 16.7 | 16.7 | |||||||||||||||||
(2,490.8 | ) | 4,157.7 | 4,863.9 | 6,514.2 | 16.7 | 6,530.9 | ||||||||||||||||||
| (2,489.8 | ) | 4,219.0 | 4,890.7 | 6,514.2 | 105.7 | 6,619.9 | ||||||||||||||||||
Consolidated financial statements and notes
Notes to the six months ended October 31, 2017 and 2016:consolidated financial statements
| Consideration | ||||||||||||||||||||||||||||||||
Carrying value at acquisition | Fair value adjustments | Hindsight adjustments | Goodwill | Shares | Cash | Payable | Total | |||||||||||||||||||||||||
| $’000 | $’000 | $’000 | $’000 | $’000 | $’000 | $’000 | $’000 | |||||||||||||||||||||||||
| Acquisitions in the six months ended October 31, 2016: | ||||||||||||||||||||||||||||||||
| Serena Software Inc. | 147,260 | (249,306 | ) | - | 379,669 | - | 277,623 | 277,623 | ||||||||||||||||||||||||
| GWAVA Inc. | 618 | 3,062 | - | 12,767 | - | 16,447 | 16,447 | |||||||||||||||||||||||||
| 147,878 | (246,244 | ) | 392,436 | 294,070 | 294,070 | |||||||||||||||||||||||||||
| Acquisitions in the six months ended October 31, 2017: | ||||||||||||||||||||||||||||||||
| HPE Software (provisional) | (2,277,193 | ) | 3,974,891 | - | 5,105,472 | 6,514,170 | 289,000 | 6,803,170 | ||||||||||||||||||||||||
Acquisitions in the six12 months ended October 31, 2017:2019:
| 1 | Acquisition of Interset Software Inc. |
On February 15, 2019, the Group completed the acquisition of HPEInterset Software Inc. (“Interset”), a worldwide leader in security analytics software that provides highly intelligent and accurate cyber-threat protection. The addition of this predictive analytics technology adds depth to Micro Focus’ Security, Risk & Governance portfolio, and aligns with the Company’s strategy to help customers quickly and accurately validate and assess risk as they digitally transform their businesses.
Consideration of $89.0m consists of a completion payment of $85.0m, working capital adjustments and net cash adjustments. The Group has not presented the full IFRS 3 “Business Combinations” disclosures as this acquisition is not material to the Group, given that it was an acquisition of a business with a carrying value of $5.5m of assets and $4.6m of liabilities.
A provisional fair value review was carried out on the assets and liabilities of the acquired business, resulting in the identification of intangible assets. Adjustments to the provisional fair values have been recorded in the period which has reduced the amount of Goodwill recognized by $7.4m. At the time these consolidated financial statements were authorised for issue, the Group had not yet fully completed its assessment of the Interset Software Inc. acquisition.
The fair value review will be finalised in the 12-month period following completion.
Carrying value at acquisition | Fair value adjustments | Fair value | ||||||||||||||
| Note | $m | $m | $m | |||||||||||||
Intangible assets – purchased 1 | 11 | - | 61.2 | 61.2 | ||||||||||||
| Property, plant and equipment | 12 | 0.3 | - | 0.3 | ||||||||||||
| Other non-current assets | 0.2 | - | 0.2 | |||||||||||||
| Trade and other receivables | 3.8 | - | 3.8 | |||||||||||||
| Cash and cash equivalent | 1.2 | - | 1.2 | |||||||||||||
| Trade and other payables | (1.5 | ) | - | (1.5 | ) | |||||||||||
| Finance leases obligations – short-term | (0.1 | ) | - | (0.1 | ) | |||||||||||
| Provisions – short-term | 24 | (0.7 | ) | - | (0.7 | ) | ||||||||||
Deferred income – short-term 2 | (2.1 | ) | 0.1 | (2.0 | ) | |||||||||||
Deferred income – long-term 2 | (0.2 | ) | - | (0.2 | ) | |||||||||||
| Net assets | 0.9 | 61.3 | 62.2 | |||||||||||||
| Goodwill (note 10) | 26.8 | |||||||||||||||
| Consideration | 89.0 | |||||||||||||||
| Consideration satisfied by: | ||||||||||||||||
| Cash | 89.0 | |||||||||||||||
The fair value adjustments relate to:
| 1 | Purchased intangible assets of $61.2m ($44.5m Technology, $4.2m Trade names, $12.5m Customer Relationships) have been valued based on a market participant point of view and the fair value has been based on various characteristics of the product lines and intangible assets of Interset. |
| 2 | Deferred income has been valued taking account of the remaining performance obligations. |
The value of the goodwill represents the value of the assembled workforce at the time of the acquisition with specific knowledge and technical skills. It also represents the prospective future economic benefits that are expected to accrue from enhancing the portfolio of products available to the Company’s existing customer base with those of the acquired business.
Consolidated financial statements and notes
Notes to the consolidated financial statements
38 Acquisitions continued
Acquisitions in the year ended October 31, 2018:
| 1 | Acquisition of the HPE Software business |
On September 1, 2017, the Company completed the acquisition of HPE’s software business segment (“HPE Software”) by way of merger with a wholly owned subsidiary of HPE incorporated to hold the business of HPE Software in accordance with the terms of the previously announced Mergermerger agreement (“Completion”). Accordingly, on Admission, ADRsAmerican Depositary Shares representing 222,166,897 Consideration Shares were issued to HPE Shareholders, representing 50.1% of the fully diluted share capital of the Company. This has created a global infrastructure software business with pro-forma revenues inThe fair value of the 12 months to Octoberordinary shares issued was based on the listed share price of the Company as of August 31, 2017 of approximately $4.2 billion$6.5 billion. The costs of acquiring the HPE Software business of $70.1m are included in exceptional items (note 4) and Underlying Adjusted EBITDA of approximately $1.4 billion making it the seventh largest pure play software company in the world by revenue and a leading technology stockinclude costs relating to due diligence work, legal work on the LSE.acquisition agreement and professional advisors on the transaction.
There was judgment used in identifying who the accounting acquirer was in the acquisition of the HPE Software business, as the resulting shareholdings were not definitive to identify the entity, which obtains control in the Transaction. As such, thetransaction. The Group considered the other factors laid down in IFRS, such as the composition of the governing body of the combined entity, composition of senior management of the combined entity, the entity that issued equity interest, terms of exchange of equity interests, the entity which initiated the combination, relative size of each entity, the existence of a large minority voting interest in the combined entity and other factors (e.g. location of headquarters of the combined entity and entity name). The conclusion of this assessment is that the Company is the accounting acquirer of the HPE Software business, and the acquisition accounting, as set out below, havehas been performed on this basis.
Details of the net assets acquired and goodwill are as follows:
Carrying value at acquisition | Fair value adjustments | Fair value | ||||||||||||||
| Note | $m | $m | $m | |||||||||||||
| Intangible assets | 11 | 72.8 | 6,467.0 | 6,539.8 | ||||||||||||
| Property, plant and equipment | 12 | 160.1 | - | 160.1 | ||||||||||||
| Other non-current assets | 41.9 | - | 41.9 | |||||||||||||
| Inventories | 0.2 | - | 0.2 | |||||||||||||
| Trade and other receivables | 721.2 | - | 721.2 | |||||||||||||
| Current tax recoverable | 0.5 | - | 0.5 | |||||||||||||
| Cash and cash equivalents | 320.7 | - | 320.7 | |||||||||||||
| Trade and other payables | (686.8 | ) | 1.6 | (685.2 | ) | |||||||||||
| Current tax liabilities | (9.9 | ) | - | (9.9 | ) | |||||||||||
| Borrowings | (2,547.6 | ) | - | (2,547.6 | ) | |||||||||||
| Short-term provisions | 24 | (30.2 | ) | - | (30.2 | ) | ||||||||||
Short-term deferred income 2 | (701.2 | ) | 58.0 | (643.2 | ) | |||||||||||
Long-term deferred income 2 | (116.9 | ) | 8.7 | (108.2 | ) | |||||||||||
| Long-term provisions | 24 | (39.0 | ) | - | (39.0 | ) | ||||||||||
| Retirement benefit obligations | 25 | (71.5 | ) | - | (71.5 | ) | ||||||||||
| Other non-current liabilities | (52.3 | ) | 12.1 | (40.2 | ) | |||||||||||
Deferred tax assets/(liabilities) 3 | 450.2 | (2,403.7 | ) | (1,953.5 | ) | |||||||||||
| Net (liabilities)/assets | (2,487.8 | ) | 4,143.7 | 1,655.9 | ||||||||||||
| Goodwill | 10 | - | 4,858.3 | |||||||||||||
| Consideration | 6,514.2 | |||||||||||||||
| Consideration satisfied by: | ||||||||||||||||
| Shares | 6,514.2 | |||||||||||||||
Carrying value at acquisition | Fair value Adjustments (Provisional) | Fair value (Provisional) | ||||||||||
| $’000 | $’000 | $’000 | ||||||||||
Intangible assets1 | 72,825 | 6,200,000 | 6,272,825 | |||||||||
| Property, plant and equipment | 165,664 | - | 165,664 | |||||||||
| Other non-current assets | 41,929 | - | 41,929 | |||||||||
| Deferred tax assets | 428,624 | (423,663 | ) | 4,961 | ||||||||
| Inventories | 185 | - | 185 | |||||||||
| Trade and other receivables | 726,149 | - | 726,149 | |||||||||
| Current tax recoverable | 736 | - | 736 | |||||||||
| Cash and cash equivalents | 320,729 | - | 320,729 | |||||||||
| Trade and other payables | (468,850 | ) | 1,616 | (467,234 | ) | |||||||
| Current tax liabilities | (9,942 | ) | - | (9,942 | ) | |||||||
| Borrowings | (2,568,270 | ) | - | (2,568,270 | ) | |||||||
| Short-term provisions | (16,425 | ) | - | (16,425 | ) | |||||||
Short-term deferred income 2 | (707,688 | ) | 58,004 | (649,684 | ) | |||||||
Long-term deferred income 2 | (121,617 | ) | 8,652 | (112,965 | ) | |||||||
| Long-term provisions | (16,294 | ) | - | (16,294 | ) | |||||||
| Retirement benefit obligations | (71,445 | ) | - | (71,445 | ) | |||||||
| Other non-current liabilities | (53,503 | ) | 12,145 | (41,358 | ) | |||||||
Deferred tax liabilities 3 | - | (1,881,863 | ) | (1,881,863 | ) | |||||||
| Net (liabilities)/assets | (2,277,193 | ) | 3,974,891 | 1,697,698 | ||||||||
| Goodwill (note 13) | - | 5,105,472 | ||||||||||
| Consideration | 6,803,170 | |||||||||||
| Consideration satisfied by : | ||||||||||||
| Shares | 6,514,170 | |||||||||||
| Cash payable net of pensions and other balance sheet adjustments (provisional) | 289,000 | |||||||||||
| 6,803,170 | ||||||||||||
The Group has used acquisition accounting for the purchase and the goodwill arising on consolidation of $4,858.3m has been capitalized. The Group made a repayment of working capital in respect of the HPE Software business acquisition of $225.8m in the period.
Trade and other receivables are net of a bad debt provision for impairment of $42.8m.trade receivables of $21.5m.
Consolidated financial statements and notes
Notes to the consolidated financial statements
38 Acquisitions continued
Acquisitions in the 12 months ended October 31, 2018 continued:
| 1 | Acquisition of HPE Software business continued |
A provisional fair value review washas been carried out on the assets and liabilities of the acquired business, resulting in the identification of intangible assets. The fair value review, pending finalisation of the cash payable net of pensions and other balance sheet adjustments and other management estimates, will be finalized in the measurement period following completion which ends on August 31, 2018.
The fair value adjustments relate to:include:
| 1 | Purchased intangible assets have been valued based on a market participant point of view and the fair value has been based on various characteristics of the product lines and intangible assets of the HPE |
2 | Deferred income has been valued taking account of the remaining performance obligations; and |
3 | A deferred tax liability has been established relating to the purchase of intangibles. |
The provisional purchased intangible assets acquired as part of the acquisition can be analyzed as follows (note 13)11):
| Fair value | ||||
| $ | ||||
| Technology | ||||
| Customer relationships | ||||
| Trade names | ||||
| Leases | ||||
The value of the goodwill represents the value of the assembled workforce at the time of the acquisition with specific knowledge and technical skills. It also represents the prospective future economic benefits that are expected to accrue from enhancing the portfolio of products available to the Company’s existing customer base with those of the acquired business.
As a consequence of the HPE Software business transaction, the Group is subject to potentially significant restrictions relating to tax issues that could limit the Group’s ability to undertake certain corporate actions (such as the issuance of Micro Focus shares or Micro Focus ADSs or the undertaking of a merger or consolidation) that otherwise could be advantageous to the Group. The Group is obliged to indemnify HPE for tax liabilities relating to the separation of the HPE Software business from HPE if such liabilities are triggered by actions taken by the Group. The Group has usedrobust procedures in place, including on-going consultation with its tax advisors, to ensure no such triggering actions are taken.
| 2 | Acquisition of COBOL-IT, SAS |
On December 1, 2017, the Group completed on the acquisition accounting forof COBOL-IT SAS (“COBOL-IT”). COBOL-IT is in the purchasebusiness of designing, editing and commercialization of software, IT devices and related services.
Consideration of $16.7m consists of a completion payment of Euro 11.3m, retention amounts of Euro 2.7m payable at a later date, working capital adjustments and net cash adjustments. The Group did not present the goodwill arisingfull IFRS 3 “Business Combinations” disclosures as this acquisition was not material to the Group.
A fair value review was carried out on consolidationthe assets and liabilities of $5,105.5 million has been capitalized.the acquired business, resulting in the identification of intangible assets. The fair value review was finalised in the 12 month period following completion, which ended on November 30, 2018. Goodwill of $5.6m (note 10), deferred tax liabilities of $3.9m, purchased intangibles of $14.0m (note 11) (Purchased Technology $1.5m, Customer relationships $12.3m and Trade names $0.2m) and cash of $1.0m were recorded as a result of the COBOL-IT acquisition and no adjustments were identified.
Consolidated financial statements and notes
Notes to the consolidated interim financial statements (unaudited)
Acquisitions in the 12 months ended October 31, 2018 continued:
| Acquisition of |
Under the agreement, the Group paid $2.5m in cash to acquire certain equipment, patents, and licence rights under certain agreements, and seven employees all involved in R&D activities. The estimated results of HPE Software if it had been made atpurchase completed on July 26, 2018.
Under IFRS 3, the beginningCovertix Ltd. acquisition was considered to be a business combination, however due to the immaterial amount of the accounting period May 1, 2017 to October 31, 2017 wouldtransaction, the assets acquired have been as follows:
Acquisitions in the six monthsyear ended October 31, 2016April 30, 2017:
| 1 | Acquisition of Serena Software Inc. |
On May 2, 2016, the Group acquired the entire share capital of Spartacus Acquisition Holdings Corp. the holding company of Serena Software Inc. (“Serena”) and its subsidiaries for $277.6m, payable in cash at completion. The Group then repaid the outstanding Serena bank borrowings of $316.7 million$316.7m as at May 2, 2016, making the total cash outflow for the Group of $528.5m, net of cash acquired of $65.8m. The transaction costs for the Serena acquisition were $0.9m.$0.9m ($0.5m was incurred in the 12 months ended April 30, 2016).
The acquisition is highly consistent with the Group’s established acquisition strategy and focus on the efficient management of mature infrastructure software products.
Serena is a leading provider of enterprise software focused on providing Application Lifecycle Management products for both mainframe and distributed systems. Whilst Serena is headquartered in San Mateo, California the operations are effectively managed from offices in Hillsboro, Oregon and St. Albans in the United Kingdom. It operates in a further 10 countries. The Serena Group’s customers are typically highly regulated large enterprises, across a variety of sectors including banking, insurance, telco, manufacturing and retail, healthcare and government.
Serena was integrated into the Micro Focus Product Portfolio and the revenues reported in the ITOMDevelopment and IT Operations Management Tools sub-portfolio.
The transaction was funded through the Group’s existing cash resources together with additional debt and equity finance arranged through Barclays, HSBC, the Royal Bank of Scotland and Numis Securities. On May 2, 2016, the Group’s existing revolving credit facility was extended from $225.0 million$225m to $375.0 million$375m and the Group raised approximately £158.2 million£158.2m (approximately $225.7m) through a Placing underwritten by Numis Securities incurring $3.0 million$3.0m of costs associated with the Placing in March 2016.
A fair value review was carried out and finalized on the assets and liabilities of the acquired business, resulting in the identification of intangible assets.
Carrying value at acquisition | Fair value adjustments | Fair value | ||||||||||
| $’000 | $’000 | $’000 | ||||||||||
| Goodwill | 462,400 | (462,400 | ) | - | ||||||||
Intangible assets - purchased 1 | - | 317,700 | 317,700 | |||||||||
| Intangible assets - other | 79 | - | 79 | |||||||||
| Property, plant and equipment | 1,927 | - | 1,927 | |||||||||
| Other non-current assets | 167 | - | 167 | |||||||||
| Deferred tax asset | 15,347 | - | 15,347 | |||||||||
| Trade and other receivables | 27,362 | - | 27,362 | |||||||||
| Cash and cash equivalent | 65,784 | - | 65,784 | |||||||||
| Borrowings – short-term | (27,712 | ) | - | (27,712 | ) | |||||||
| Trade and other payables | (11,766 | ) | - | (11,766 | ) | |||||||
| Provisions – short-term | (4,045 | ) | - | (4,045 | ) | |||||||
| Current tax liabilities | (3,173 | ) | - | (3,173 | ) | |||||||
Deferred income – short-term 2 | (72,217 | ) | 3,761 | (68,456 | ) | |||||||
Deferred income – long-term 2 | (14,853 | ) | 798 | (14,055 | ) | |||||||
| Borrowings – long-term | (288,938 | ) | - | (288,938 | ) | |||||||
| Other non-current liabilities | (717 | ) | - | (717 | ) | |||||||
Deferred tax liabilities 3 | (2,385 | ) | (109,165 | ) | (111,550 | ) | ||||||
| Net assets /(liabilities) | 147,260 | (249,306 | ) | (102,046 | ) | |||||||
| Goodwill (note 9) | 379,669 | |||||||||||
| Consideration | 277,623 | |||||||||||
| Consideration satisfied by : | ||||||||||||
| Cash | 277,623 | |||||||||||
The purchased intangible assets acquired as part of the acquisition can be analyzed as follows:
| Fair value | ||||
| $ | ||||
| Technology | ||||
| Customer relationships | ||||
| Trade names | ||||
Consolidated financial statements and notes
Notes to the consolidated financial statements
38 Acquisitions continued
Acquisitions in the 12 months ended October 31, 2017 continued
The value of the goodwill represents the value of the assembled workforce at the time of the acquisition with specific knowledge and technical skills. It also represents the prospective future economic benefits that are expected to accrue from enhancing the portfolio of products available to the Company’s existing customer base with those of the acquired business.
The Group has used acquisition accounting for the purchase and the goodwill arising on consolidation of $379.7 million$379.7m has been capitalized.
Carrying value at acquisition | Fair value adjustments | Fair value | ||||||||||
| $m | $m | $m | ||||||||||
| Goodwill | 462.4 | (462.4 | ) | - | ||||||||
| Intangible assets - purchased | - | 317.7 | 317.7 | |||||||||
Intangible assets1 - other | 0.1 | - | 0.1 | |||||||||
| Property, plant and equipment | 1.9 | - | 1.9 | |||||||||
| Other non-current assets | 0.2 | - | 0.2 | |||||||||
| Deferred tax asset | 15.3 | - | 15.3 | |||||||||
| Trade and other receivables | 27.4 | - | 27.4 | |||||||||
| Cash and cash equivalents | 65.8 | - | 65.8 | |||||||||
| Trade and other payables | (27.7 | ) | - | (27.7 | ) | |||||||
| Current tax liabilities | (11.8 | ) | - | (11.8 | ) | |||||||
| Borrowings – short term | (4.0 | ) | - | (4.0 | ) | |||||||
| Short-term provisions | (3.2 | ) | - | (3.2 | ) | |||||||
Short-term deferred income 2 | (72.3 | ) | 3.8 | (68.5 | ) | |||||||
Long-term deferred income 2 | (14.9 | ) | 0.8 | (14.1 | ) | |||||||
| Borrowings – long term | (288.9 | ) | - | (288.9 | ) | |||||||
| Other non-current liabilities | (0.7 | ) | - | (0.7 | ) | |||||||
Deferred tax liabilities 3 | (2.4 | ) | (109.2 | ) | (111.6 | ) | ||||||
| Net assets/(liabilities) | 147.2 | (249.3 | ) | (102.1 | ) | |||||||
| Goodwill | - | - | 379.7 | |||||||||
| Consideration | - | - | 277.6 | |||||||||
| Consideration satisfied by: | 277.6 | |||||||||||
| Cash | 277.6 | |||||||||||
The fair value adjustments relate to:
| 1 | Purchased intangible assets have been valued based on a market participant point of view and the fair value has been based on various characteristics of the product lines and intangible assets of Serena; |
| 2 | Deferred income has been valued taking account of the remaining performance obligations; and |
| 3 | A deferred tax liability has been established relating to the purchase of intangibles. |
Consolidated financial statements and notes
Notes to the consolidated financial statements
38 Acquisitions continued
Acquisitions in the year ended April 30, 2017 continued:
| 2 | Acquisition of GWAVA Inc. |
On September 30, 2016, the Group acquired the entire share capital of GWAVA Inc. (“GWAVA”) and its subsidiaries for $16.4m, payable in cash at completion. The transaction costs for the GWAVA acquisition were $1.5m.
The acquisition is highly consistent with the Group’s established acquisition strategy and focus on the efficient management of mature infrastructure software products.
GWAVA is a leading company in email security and enterprise information archiving (“EIA”). GWAVA has approximately 90 employees, based in the US, Canada and Germany. More than a million users across 60 countries rely on its products in over 3,000 customer organizations, supported by GWAVA’s global team, with a further 1,000 GWAVA business partners collaborating closely to ensure successful customer solutions. In addition to GWAVA’s award winning EIA product Retain, GWAVA has a full suite of products to protect, optimize, secure and ensure compliance for customers running Micro Focus GroupWise.
A finalized fair value review was carried out on the assets and liabilities of the acquired business, resulting in the identification of intangible assets.
Details of the net assets acquired and goodwill are as follows:
Carrying value at acquisition | Fair value adjustments | Fair value | Carrying value at acquisition | Fair value adjustments | Fair value | |||||||||||||||||||
| $’000 | $’000 | $’000 | $m | $m | $m | |||||||||||||||||||
Intangible assets - purchased 1 | - | 5,330 | 5,330 | |||||||||||||||||||||
Intangible assets - other 2 | 1,180 | (1,180 | ) | - | ||||||||||||||||||||
Intangible assets – purchased1 | - | 5.3 | 5.3 | |||||||||||||||||||||
Intangible assets – other 2 | 1.2 | (1.2 | ) | - | ||||||||||||||||||||
| Property, plant and equipment | 195 | - | 195 | 0.2 | - | 0.2 | ||||||||||||||||||
| Trade and other receivables | 3,096 | - | 3,096 | 3.0 | - | 3.0 | ||||||||||||||||||
| Cash and cash equivalent | 2,389 | - | 2,389 | |||||||||||||||||||||
| Cash and cash equivalents | 2.4 | - | 2.4 | |||||||||||||||||||||
| Trade and other payables | (1,331 | ) | - | (1,331 | ) | (1.4 | ) | - | (1.4 | ) | ||||||||||||||
Deferred income – short-term 3 | (4,094 | ) | 324 | (3,770 | ) | |||||||||||||||||||
| Deferred income – long-term | (817 | ) | - | (817 | ) | |||||||||||||||||||
Short-term deferred income 3 | (4.0 | ) | 0.3 | (3.7 | ) | |||||||||||||||||||
Long-term deferred income 3 | (0.8 | ) | - | (0.8 | ) | |||||||||||||||||||
Deferred tax liabilities 4 | - | (1,412 | ) | (1,412 | ) | - | (1.4 | ) | (1.4 | ) | ||||||||||||||
| Net assets | 618 | 3,062 | 3,680 | 0.6 | 3.0 | 3.6 | ||||||||||||||||||
| Goodwill | 12,767 | 12.8 | ||||||||||||||||||||||
| Consideration | 16,447 | 16.4 | ||||||||||||||||||||||
| Consideration satisfied by : | ||||||||||||||||||||||||
| Consideration satisfied by: | ||||||||||||||||||||||||
| Cash | 16,447 | 16.4 | ||||||||||||||||||||||
The fair value adjustments relate to:
| 1 | Purchased intangible assets have been valued based on a market participant point of view and the fair value has been based on various characteristics of the product lines and intangible assets of GWAVA Inc.; |
| 2 | Other intangible assets relating to historic IP has been written down to nil; |
| 3 | Deferred income has been valued taking account of the remaining performance obligations; and |
| 4 | A deferred tax liability has been established relating to the purchase of intangibles. |
Consolidated financial statements and notes
Notes to the consolidated financial statements
Acquisitions in the year ended April 30, 2017 continued
| 2 | Acquisition of GWAVA Inc. continued |
The purchased intangible assets acquired as part of the acquisition can be analyzed as follows:
| Fair value | ||||
| $ | ||||
| Technology | ||||
| Customer relationships | ||||
| Trade names | ||||
The value of the goodwill represents the value of the assembled workforce at the time of the acquisition with specific knowledge and technical skills. It also represents the prospective future economic benefits that are expected to accrue from enhancing the portfolio of products available to the Company’s existing customer base with those of the acquired business.
The Group has used acquisition accounting for the purchase and the goodwill arising on consolidation of $12.8 million $12.8m has been capitalized.
| Acquisition of |
On DecemberNovember 1, 2016, the Group acquired the OpenATTIC storage management technology and engineering talent from the company it-novum GmbH for a cash consideration of 4.7m Euros ($5.0m). The OpenATTIC technology aligns perfectly with SUSE’s strategy to provide open source, software defined infrastructure solutions for the enterprise and will strengthen SUSE Enterprise Storage solution by adding enterprise grade storage management capabilities to the portfolio. The transaction costs for the OpenATTIC acquisition were $1.2m. OpenATTIC will be included in the Group’s SUSE business disposal.
A fair value review was carried out on the assets and liabilities of the acquired business, resulting in the identification of intangible assets.
Details of the net assets acquired and goodwill are as follows:
Carrying value at acquisition | Fair value adjustments | Fair value | ||||||||||
| $m | $m | $m | ||||||||||
| Intangible assets – purchased technology | - | 5.0 | 5.0 | |||||||||
| Net assets | - | 5.0 | 5.0 | |||||||||
| Goodwill | - | |||||||||||
| Consideration | - | - | 5.0 | |||||||||
| Consideration satisfied by: | ||||||||||||
| Cash | 5.0 | |||||||||||
| 4 | Acquisition of OpenStack |
During the year ended April 30, 2017, the Group acquired purchased technology and talent from HPE for $nil consideration that will expand SUSE’s OpenStack Infrastructure-as-a-Service (“IaaS”) solution and accelerate SUSE’s entry into the growing Cloud Foundry Platform-as-a-Service (“PaaS”) market, subject to regulatory clearances. The last regulatory clearance was received on March 8, 2017 and the deal was completed then. OpenStack will be included in the Group’s SUSE business disposal.
The acquired OpenStack technology assets were integrated into SUSE OpenStack Cloud and the acquired Cloud Foundry and PaaS assets will enable SUSE in the future to bring to market a certified, enterprise-ready SUSE Cloud Foundry PaaS solution for all customers and partners in the SUSE ecosystem. Additionally, SUSE has increased engagement with the Cloud Foundry Foundation, becoming a platinum member and taking a seat on the acquisition of COBOL-IT, SAS. COBOL-IT, SAS is in the business of designing, editing and commercialization of software, IT devices and related services; technical support, training, consulting, and more generally any related missions; modification, migration and adaptation of IT systems from a technical environment to another; and advisory in IT system, and in particular strategy, management, commercial development, partnership or strategic alliances in IT sector.Cloud Foundry Foundation Board.
Consolidated financial statements and notes
Notes to the consolidated interim financial statements (unaudited)
12 months ended October 31, 2019 | 18 months ended October 31, 2018 | 12 months ended April 30, 20171 | ||||||||||||||
| Note | $m | $m | $m | |||||||||||||
| Cash flows from operating activities | ||||||||||||||||
| (Loss) / Profit from continuing operations | (18.1 | ) | 707.2 | 124.1 | ||||||||||||
| Profit from discontinued operation | 1,487.2 | 76.9 | 33.7 | |||||||||||||
| Profit for the period | 1,469.1 | 784.1 | 157.8 | |||||||||||||
| Adjustments for: | ||||||||||||||||
| Gain on disposal of discontinued operation | 37 | (1,767.9 | ) | - | - | |||||||||||
| Net finance costs | 6 | 255.8 | 342.7 | 95.8 | ||||||||||||
| Taxation – continuing operations | 7 | (16.0 | ) | (673.1 | ) | 38.5 | ||||||||||
| Taxation – discontinued operation | 37 | 318.1 | 34.2 | - | ||||||||||||
| Share of results of associates | 0.3 | 1.8 | 1.3 | |||||||||||||
| Operating profit (attributable to continuing and discontinued operations) | 259.4 | 489.7 | 293.4 | |||||||||||||
| - continuing operations | 221.7 | 376.8 | 293.4 | |||||||||||||
| - discontinued operation | 37 | 37.7 | 112.9 | - | ||||||||||||
| 259.4 | 489.7 | 293.4 | ||||||||||||||
| Research and development tax credits | (1.2 | ) | (2.0 | ) | (3.0 | ) | ||||||||||
| Depreciation | 12 | 66.5 | 95.2 | 11.8 | ||||||||||||
| Loss on disposal of property, plant and equipment | 3.6 | 4.7 | 0.5 | |||||||||||||
| Gain on disposal of Atalla | 37, 4 | (3.7 | ) | - | - | |||||||||||
| Amortization of intangible assets | 11 | 716.5 | 943.3 | 236.4 | ||||||||||||
| Amortization of contract-related costs | 10.2 | - | - | |||||||||||||
| Share-based compensation charge | 33 | 71.3 | 72.2 | 34.5 | ||||||||||||
| Foreign exchange movements | 11.1 | (34.6 | ) | (4.9 | ) | |||||||||||
| Provisions movements | 24 | 43.8 | 142.8 | 47.3 | ||||||||||||
| Changes in working capital: | ||||||||||||||||
| Inventories | - | 0.1 | - | |||||||||||||
| Trade and other receivables | 183.0 | (408.8 | ) | 10.3 | ||||||||||||
| Increase in contract-related costs | (36.7 | ) | - | - | ||||||||||||
| Payables and other liabilities | (114.8 | ) | 131.3 | (33.3 | ) | |||||||||||
| Provision utilization | 24 | (58.6 | ) | (145.0 | ) | (43.5 | ) | |||||||||
| Contract liabilities - deferred income | (98.5 | ) | 131.4 | 15.5 | ||||||||||||
| Pension funding in excess of charge to operating profit | 4.4 | 4.0 | (0.2 | ) | ||||||||||||
| Cash generated from operations | 1,056.3 | 1,424.3 | 564.8 | |||||||||||||