FORM 6-K
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MICRO FOCUS INTERNATIONAL PLC
(Exact name of registrant as specified in its charter)
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Exhibit No.
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Exhibit Description
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99.1
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Annual
Financial Report, dated 21 February 2019
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Micro Focus
Tim
Brill, IR Director
Ben
Donnelly, IR Manager
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Tel: +44 (0)1635 565200
Tel: +44 (0)1635 565574
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Products
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Risk Trend
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Link to Business Model: Make software
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Risk Category: Marketplace
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Principal Risk Description
To
remain successful, the Group must ensure that its products continue
to meet the requirements of customers and must be effectively
balanced between growth and legacy products. Investment in research
and innovation in product development is essential to meet customer
and partner requirements in order to maximise 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 prioritised considering
the expected future prospects, to ensure an effective balance
between growth and legacy products. The Group’s business and
reputation may be harmed by errors or defects in its
products.
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Potential Impact
If
products do not meet the requirements of customers, they will seek
alternative solutions, resulting in the loss of 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.
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Mitigation
When
considering investment priorities, both organic and inorganic, the
Group evaluates its options against a set of characteristics mapped
to each stage of the product life-cycle, enabling the
categorisation of its product portfolio into the following: new
models, growth drivers, optimise and core (further details are set
out on page 23 (Business Model section)).
As set
out on page 24 (Business Model section) the Group continues to
align resources and develop propositions across four main focus
areas: Enterprise DevOps; Hybrid IT Management; Security, Risk
& Governance; and Predictive Analytics and to improve the
interaction between Product Management, Product Development, Sales
and Marketing. The Micro Focus product portfolio consists of five
product groups with over 300 product lines, as set out on page 28
(Portfolio Review), which are uniquely positioned to help customers
maximise existing software investments and embrace innovation. The
Group has improved alignment and applied robust application of the
four-box model across the Enlarged Group, as set out on page 23
(Business Model section). The product portfolio is focused on
delivering “customer centric innovation” that delivers
tangible business impact for customers in all stages of the
software life-cycle.
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Go-To-Market (“GTM”) Models
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Risk Trend
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Link to Business Model: Sell software
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Risk Category: Marketplace
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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 channel opportunities and
focus the sales force on all types of customer categories. In
addition, effective GTM models may be more successful if
accompanied by compelling Micro Focus brand awareness programmes.
The Group is dependent upon the effectiveness of its sales force
and distribution channels to maintain and grow licence, maintenance
and consultancy sales.
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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 using the wrong product offerings
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Mitigation
As set
out on page 19 of the Chief Executive’s Strategic Review,
there has been good progress in the development of the Group's
customer and partner proposition. Across the five product
categories that the Group reports against, the Group has great
depth of capability and experience to help its customers address
some of the most complex challenges they face. To best enable the
Group's customers to exploit this breadth and depth it is aligning
resources and developing compelling propositions across four focus
areas – Enterprise DevOps; Hybrid IT Management; Security,
Risk & Governance; and Predictive Analytics.
Sales
execution has received considerable attention and improvement
measures have focused on the consistent execution of simpler, more
effective sales processes, better alignment and accountability
within the sales management teams through the removal of
unnecessary global structures and management layers, organisational
changes to align marketing and product teams much more tightly and
investments made to build a consistent approach to enablement
globally. We have strengthened the team through the appointment of
Jon Hunter as Chief Revenue Officer.
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Competition
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Risk Trend
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Link to Business Model: Sell software
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Risk Category: Marketplace
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Principal Risk Description
Comprehensive
information about the markets in which Micro Focus and SUSE operate
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.
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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 be able to
compete effectively against its competitors, it is likely to lose
market share, which may result in decreased sales and weaker
financial performance.
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Mitigation
Group
product plans contain an analysis of competitive threats and
subscriptions to industry analyst firms are leveraged to better
understand market dynamics and competitor strategies. In addition,
customer contact programmes are analysed for competitive
intelligence. Micro Focus and SUSE continue to monitor and review
intelligence on market threats to focus on offering best in class
service to customers.
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Employees and Culture
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Risk Trend
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Link to Business Model: Make, Sell, Support software
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Risk Category: Infrastructure
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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 a
well-communicated vision and values, for the Group to achieve
alignment and a common sense of corporate purpose among the
workforce.
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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 organisational alignment and inadequate
incentivisation may lead to poor performance and instability. It
could also have an adverse impact on the realisation of strategic
plans.
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Mitigation
Successful cultural alignment across the Group is intrinsic to the
way we do business and is a key focus for the Group. Leading by
example from the top is a key driver. The Group has policies in
place to help ensure that it is able to attract and retain
employees of a high calibre with the required skills. These
policies include training, career development and long-term
financial incentives. The Group also has in place a performance
management and appraisal system. Succession plans have been
developed and are in place for key leadership positions within the
Company. During the period a new Chief Human Resources Officer was
appointed. In the period the Group also took significant action to
develop its management capability both internally, by training and
promotions, and through external hires.
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Tax
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Risk Trend
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Link to Business Model: Support software
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Risk Category: Financial
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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.
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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.
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Mitigation
Tax
laws, regulations and interpretations are kept under on-going
review by the Group and its advisors. The Group reviews its
operations, including the structuring of intra-Group arrangements,
on a periodic basis to ensure that all relevant laws are complied
with and that risks are identified and mitigated appropriately.
External professional advice is obtained ahead of material
structuring activity and to support positions taken in financial
statements and local tax returns where there is significant
uncertainty or risk of challenge. During the period, a governance
framework and process has been developed to remind relevant
employees of the requirements and guiding principles to comply with
the obligations under the TMA.
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Business Strategy and Change Management
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Risk Trend
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Link to Business Model: Make, Sell, Support software
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Risk Category: Marketplace
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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 standardise systems and processes. The successful
integration of businesses will build a solid base for further
expansion. These projects expose the Group to significant
transformation risks. The Group’s strategy may involve the
making of further acquisitions 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.
The
integration of the HPE Software business and the divestment of SUSE
are both complex transactions with a range of integration and
separation 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. Successful execution of the
SUSE divestment may be compromised by adding a new level of
complexity to an existing heightened operation environment across
the Group and be a distraction to deliver business
plans.
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Potential Impact
Failure
to analyse, execute and co-ordinate the various integration,
divestment and transformation programmes successfully may result in
the disruption of the on-going business without delivering the
anticipated strategic and operational benefits of such
transactions. In addition, this may affect the ability to execute
strategic plans for growth.
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Mitigation
As set
out on page 15. The Group has an established acquisition strategy
and focus on efficient execution in the mature infrastructure
software market. The delivery and execution of the HPE Software
business integration and the SUSE divestment is controlled and
mitigated by respective dedicated full-time programme offices.
During the period there have been enhancements made to programme
governance. The operating plan is focused on delivering targeted,
relevant business outcomes and the simplification of business
operations to improve empowerment, speed and accountability of
decision-making and drive a heightened sense of urgency across all
aspects of execution. Programme risks and interdependencies are
managed carefully including the utilisation of detailed deep dives,
cross functional integration/divestment walk the walls sessions, a
cadence of weekly and daily cross functional calls and risk
assessments to ensure that execution of the various projects are
successfully aligned to minimise any disruption to business as
usual. The integration and harmonisation will continue as a key
area of principal risk in the forthcoming year.
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Intellectual Property (“IP”)
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Risk Trend
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Link to Business Model: Make software
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Risk Category: Marketplace
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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.
Some of the Group’s SUSE products utilise Open Source
technology, which is dependent upon third party developers. The
Group’s products and services depend in part on intellectual
property and technology licenced from third parties, and
third-party claims of intellectual property infringement against
the Group may disrupt its ability to sell its products and
services.
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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.
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Mitigation
There
are procedures in place across the Group to ensure the appropriate
protection and use of the Group’s brands and IP and these are
monitored by the IP Panel and Legal team. During the period, the IP
Panel and Group IP procedures were updated and extended across the
Enlarged Group.
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Legal and Regulatory Compliance
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Risk Trend
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Link to Business Model: Support software
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Risk Category: Reputational
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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.
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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.
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Mitigation
The Group has in place policies and procedures to mitigate these
risks. The Group’s legal and regulatory team, enhanced by
specialist external advisors as required, monitor and review
compliance. There is a Compliance Committee, which reports into the
board. All staff are subject to mandatory compliance training. The
Group is committed to ensuring ongoing compliance with anti-bribery
and corruption, data protection and market abuse and insider
dealing laws. A new, integrated Code of Conduct was rolled out in
August 2018, with supporting training materials distributed to all
employees during October 2018. Significant work was undertaken
during the period to ensure compliance with the General Data
Protection Regulation (“GDPR”). This included the
approval of four new data protection policies by the board, GDPR
Awareness training being circulated to all employees, and regular
communications to employees is on-going regarding the importance of
compliance with the requirements. Data protection compliance is
subject to on-going monitoring by our privacy team. The compliance
environment is also strengthened by the implementation of SOX
controls, as set out on page 41.
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Macro Economic Environment and Brexit
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Risk Trend
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Link to Business Model: Sell, Support software
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Risk Category: Marketplace
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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. 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.
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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.
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Mitigation
The
spread of jurisdictions allows the Group to be flexible to adapt to
changing localised risk to a certain extent. The Group has business
continuity plans and crisis management procedures in place in the
event of political events or natural disasters.
The
Group has a cross functional Brexit Working Group with processes in
place to assess, respond, monitor and track the impact of Brexit on
our businesses, and associated risks, as matters progress and how
the business can seek to mitigate these risks. Areas under review
for possible impacts include people, tax, treasury, regulatory and
commercial matters.
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IT Systems and Information
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Risk Trend
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Link to Business Model: Support software
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Risk Category: Infrastructure
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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. Integration of HPE Software
business with the existing businesses, including the respective IT
systems, may be more time consuming and costly than anticipated,
given the amount of change management that is involved. The Group continues to operate on two
IT architectures with the attendant complexity to business
operations and the control environment.
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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.
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Mitigation
The
Group continues to focus its efforts on the stabilisation of the
HPE Software business infrastructure. Progress has been made with
the system now being stable and able to support the business. 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. A Vendor
Management process is in place to allow for better involvement and
engagement with third party IT providers. In relation to the SUSE
divestment, a dedicated IT Program Director is in place to lead the
SUSE IT separation and execution, working under the Divestment
Programme Management office.
There
is an on-going programme of simplification being delivered, with a
parallel project approved by the board and now underway to build
the future, simplified systems architecture for the Group (as set
out in the Chief Executive’s Strategic Review set out on page
20). The IT control environment is also being improved as part of
the implementation of controls to meet Sarbanes-Oxley Act 2002
(SOX) compliance, as set out on page 41.
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Cyber Security (previously
part of IT systems and information)
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Risk Trend:
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Link to Business Model: Support software
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Risk Category: Infrastructure
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Principal Risk Description
Risk of
hacking or other cybersecurity threat leading to data loss and/or
disruptions to business. The IT environments of both the Group and
its customers may be subject to hacking or other cybersecurity
threats, which may harm customer relationships, financial
performance and the market perception of the effectiveness of the
Group’s products.
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Potential Impact
Data
loss, which could harm client and customer relationships,
compliance and/or perception of the effectiveness of the Group's
products.
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Mitigation
The
Group works continually to counter the risk posed by the current
and emerging cyber security threat landscape. The cyber team
manages the security of our data, technology and training programme
to protect the performance and availability of the Group IT
systems. Group-wide cyber readiness policies and processes are in
place. Cyber security testing in critical areas of the business is
on-going, Group-specific vulnerabilities are reviewed and
continuously managed.
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Treasury
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Risk Trend
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Link to Business Model: Support software
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Risk Category: Financial
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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 to Adjusted EBITDA 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.
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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.
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Mitigation
The
Group’s operations are diversified across a number of
currencies, with limited exposure to £ Sterling. Key currency
exposures are detailed on page 144. Changes in foreign exchange
rates are monitored, exposures regularly reviewed and actions taken
to reduce exposures where necessary. The Group provides extensive
constant currency reporting to enable investors to better
understand the underlying business performance.
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. Currency change fluctuations as a
result of Brexit are being monitored by the Brexit Working
Group.
The
Group holds interest rate swaps to hedge against the cash flow risk
in the LIBOR rate charged on $2,250.0m of the debt issued by a
Group subsidiary company, Seattle Spinco, Inc. from 19 October 2017
to 30 September 2022. Under the terms of the interest rate swaps,
the Group pays a fixed rate of 1.94% and receives one month USD
LIBOR.
Monitoring
policies and procedures are in place to reduce the risk of any
covenant breaches under the Group’s banking arrangements. At
31 October 2018, $nil of the Revolving Facility was 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 31 October 2018, no covenant test is applicable.
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By:
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/s/
Brian McArthur-Muscroft
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Name:
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Brian
McArthur-Muscroft
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Title:
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Chief
Financial Officer
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