a1865s
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the
Month of: July 2020
Commission
File Number: 001-38187
MICRO FOCUS INTERNATIONAL PLC
(Exact name of registrant as specified in its charter)
|
The Lawn, 22-30 Old Bath Road
Newbury, Berkshire
RG14 1QN
United Kingdom
+44 (0) 1635-565-459
(Address of principal executive office)
Indicate
by check mark whether this registrant files or will file annual
reports under cover of Form 20-F or Form 40-F.
Form
20-F ☒ Form 40-F ☐
Indicate by check mark if the registrant is submitting the Form 6-K
in paper as permitted by Regulation S-T Rule
101(b)(1): ☐
Indicate by check mark if the registrant is submitting the Form 6-K
in paper as permitted by Regulation S-T Rule
101(b)(7): ☐
CONTENTS
Exhibit No.
|
Exhibit Description
|
99.1
|
Interim
Results, dated 07 July 2020
|
7 July 2020
Micro Focus International plc
Interim results for the six months ended 30 April
2020
Micro
Focus International plc ("the Company" or "the Group", LSE: MCRO.L,
NYSE: MFGP), the international software product group, announces
unaudited interim results for the six months ended 30 April
2020.
Key highlights:
●
Revenue performance
consistent with the guidance given at the time of our full year
results on 4 February 2020 and our COVID-19 update of 18 March
2020. COVID-19 led to delays in buying behaviours with
customers in April 2020 and reduced revenue by at least 2% period
on period.
●
Impact of COVID-19
largely mitigated at Adjusted EBITDA1 level due
to close management of the cost base. Adjusted EBITDA
margin1 (after
adopting IFRS 16) of 38.0% (30 April 2019: 39.9%
CCY).
●
The Group recorded a
goodwill impairment charge of $922.2m in the period (30 April 2019:
$nil) attributable to the increased economic uncertainty as a
result of COVID-19, which has led to an increase in the pre-tax
discount rate and expected disruption to new sales activity and
timing pressure on renewals.
●
As a result, the Group
generated a statutory operating loss from continuing operations of
$906.7m (30 April 2019: Operating profit of
$32.6m).
●
The Group continues to
make progress against our strategic initiatives to improve
operational efficiency and simplification, as well as to strengthen
our product alignment with customer needs. Accordingly, we continue
to make incremental investments in our operations as far as
possible in light of COVID-19.
●
Successful refinancing
of $1.4bn Term Loan in May 2020. The Group has no term loan
maturities until June 2024.
●
The Group had cash and
cash equivalents of $808.1m as at 30 April 2020 (31 October 2019:
$355.7m), which reflects $633.1m of Operating
cash1 and
$175.0m of RCF drawn as a precautionary measure. The Group's
available liquidity totals $1.1bn.
●
Strong cash performance,
with Adjusted Cash Conversion1 of
131.5% (30 April 2019: 115.1%) and free cash
flow1 of
$304.9m in the six months ended 30 April 2020 (30 April 2019:
$419.5m).
●
Cash generated from
operating activities of $560.4m for the six months ended 30 April
2020 (30 April 2019: $622.6m).
The
table below shows the key results for the Group for the six months
ended 30 April 2020:
Results at a glance
|
Six months
ended
30 April 2020
(unaudited)
|
Six months
ended
30 April 2019
(unaudited)2
|
Growth
/(Decline)
%
|
|
|
|
|
Alternative performance measures from
continuing operations1
|
|
|
|
|
|
|
|
Revenue (versus CCY comparatives)
|
$1,454.2m
|
$1,638.6m
|
(11.3)%
|
Adjusted EBITDA (versus CCY comparatives)
|
$552.2m
|
$653.2m
|
(15.5)%
|
% Adjusted EBITDA margin (versus CCY
comparatives)
|
38.0%
|
39.9%
|
(1.9) ppt
|
|
|
|
|
Adjusted Diluted Earnings per Share ("EPS") - continuing
operations
|
72.10c
|
85.53c
|
(15.7)%
|
|
|
|
|
Net Debt/Adjusted Net Debt
|
$4,312.0m
|
$3,807.5m
|
(13.3)%
|
Net Debt(Adjusted Net Debt)/ Adjusted EBITDA ratio
|
3.4 times
|
2.7 times
|
|
|
|
|
|
Statutory Results
|
|
|
|
Revenue - continuing operations
|
$1,454.2m
|
$1,657.1m
|
(12.2)%
|
Operating (loss)/profit - continuing operations
|
$(906.7)m
|
$32.6m
|
(2,881.3)%
|
(Loss)/profit for the period
|
$(1,032.0)m
|
$1,397.1m
|
(173.9)%
|
Basic EPS - continuing operations
|
(308.40)c
|
(18.79)c
|
(1,541.3)%
|
Diluted EPS - continuing operations
|
(308.40)c
|
(18.79)c
|
(1,541.3)%
|
|
|
|
|
1 The
definition and reconciliations of Adjusted EBITDA, Adjusted EBITDA
Margin, Adjusted Diluted EPS, Operating cash, Net Debt, Adjusted
Net Debt, Adjusted Cash Conversion, Free Cash Flow and Constant
Currency ("CCY") are in the "Alternative Performance Measures"
section of this Interim Statement.
2 On
1 November 2019, the Group adopted IFRS 16. The results for the six
months ended 30 April 2019 have not been restated for the adoption
of this accounting standard.
Stephen Murdoch, Chief Executive Officer, commented:
"I am proud of our employees' resilience and professionalism
throughout the unprecedented disruption caused by the COVID-19
pandemic. Micro Focus' business continuity plans have been
highly effective and we continue to adapt our working practices to
continue supporting our customers and partners. Our
performance during the period has been consistent with our guidance
and the successful refinancing of our debt despite the challenging
market conditions demonstrates confidence in the underlying
strengths of our model. Going forward, we see significant
opportunities to improve our business and we will continue to
progress initiatives to strengthen and simplify our business
operations, and stand ready to take further actions if required in
these uncertain times."
This announcement contains information that was previously Inside
Information, as that term is defined in the Market Abuse Regulation
(Regulation (EU) No 596/2014 of the European Parliament and of the
Council of 16 April 2014) and successor UK
legislation.
Results conference call
A conference call to cover the results for the six months ended 30
April 2020 will be held today at 1.30pm BST. The call will be
accompanied by slides.
A live webcast and recording of the presentation will be available
at https://investors.microfocus.com/
during and after the event. For dial in only, access numbers
are as follows:
UK & International: +44 (0) 20 3003 2666
UK Toll Free: 0808 109 0700
USA: +1 212 999 6659
USA Toll Free: 1 866 966 5335
Enquiries:
Micro Focus
|
Tel: +44 (0) 1635 565200
|
Stephen Murdoch, Chief Executive Officer
Brian McArthur-Muscroft, Chief Financial Officer
|
|
Ben Donnelly, Investor relations
|
|
|
|
Brunswick
|
Tel:
+44 (0) 20 7404 5959
|
Sarah
West
|
MicroFocus@brunswickgroup.com
|
Jonathan
Glass
|
|
|
|
About Micro Focus
Micro Focus (LSE: MCRO.L, NYSE: MFGP) is an enterprise software
Company supporting the technology needs and challenges of customers
globally. Our solutions help organisations leverage existing IT
investments, enterprise applications and emerging technologies to
address complex, rapidly evolving business requirements while
protecting corporate information at all times. Within the Micro
Focus Product Portfolio are the following product groups:
Application Modernisation & Connectivity, Application Delivery
Management, IT Operations Management, Security, and Information
Management & Governance. For more information,
visit: www.microfocus.com.
Forward-looking statements
Certain statements in these interim results are forward-looking.
Although the Group believes that the expectations reflected in
these forward-looking statements are reasonable, it can give no
assurance that these expectations will prove to be correct. Because
these statements involve risks and uncertainties, actual results
may differ materially from those expressed or implied by these
forward-looking statements. The Group undertakes no obligation to
update any forward-looking statements whether as a result of new
information, future events or otherwise.
Chief Executive Officer's Statement
Introduction
Our revenue performance during the period is in line with the
guidance we issued at the time of the full year results announced
in February 2020, supplemented by the additional specific guidance
issued on 18 March 2020 to explain our expectations of the impact
of the pandemic on our revenue performance. Strong cost
management has largely mitigated the impact of the COVID-19 related
decline in revenues on our Adjusted EBITDA
performance.
On 29 May 2020, we successfully refinanced our 2021 term loans,
with the oversubscribed offer demonstrating confidence in our
business model. As a result, we are now fully financed with
no term loan maturities until June 2024.
At the time of our full year results on 4 February 2020, we shared
the output of our Strategic and Operational Review, and the
initiatives we are implementing to strengthen our business. We
are continuing to make progress in executing this plan, albeit with
the additional complexity and impact of the COVID-19 pandemic,
which may require us to adapt our approach in response to the
opportunities and threats arising from continued market
disruption. Progress over the coming months will be focused on
simplifying and strengthening our business operations, improving
the way we sell to and serve our customers, and ensuring our
product development is as relevant and effective as
possible.
COVID-19
The six months ended 30 April 2020 saw significant change and has
affected Micro Focus' business in many areas as we have reacted to
the practical and macro-economic impacts of COVID-19. I am proud of
the way our organisation has responded in these past months and our
primary focus remains the health and safety of our employees and
delivering business continuity for our customers and
partners. We have acted proactively, learning
and adapting our ways of working to be as effective as
possible during this period of uncertainty.
Over
the course of March and April, we transitioned to remote working
whilst continuing to operate the business and support customers.
More than 90% of our people are working from home and we now have
open 11 of our 101 offices, mainly in Asia.
We
have developed and executed a comprehensive internal communications
programme to reassure and inform staff at this difficult time. Our
people have adapted to find effective 'remote' working models in
support of our customers. Additionally, we have hosted our European
and North American customer events, Micro Focus Universe, in
virtual format for the first time. These events saw 4,000 customers
and partners attend live sessions explaining how Micro Focus can
support and help accelerate their digital transformation
programmes.
We
will continue to take a considered and phased return to an office
environment, but this will not be on the same basis as before.
Instead, we will learn from this experience to re-think how we
collaborate, innovate and work to adopt a more flexible hybrid
model going forward.
We
believe our core customer proposition of helping customers navigate
the need to build, operate, secure and analyse the enterprise as
they drive their digital transformation programmes is even more
relevant today as companies seek to rebuild and reshape their
businesses. In helping organisations to bridge the gap between
existing and emerging technologies, we enable our customers to
balance the need to both run and transform their business and to
deliver innovation faster with less risk. We are continually
refining our approach and offerings such that we offer sharper,
more focused solutions for our customers within this new macro
context.
Performance in the period
Our
performance during the period was consistent with guidance
given at the time of our full year results on 4 February 2020,
taking into account the expected disruption to new sales activity
which we highlighted in our COVID-19 update of 18 March
2020.
The Group reported revenues of $1,454.2m (2019: $1,638.6m CCY,
$1,657.1m reported). This is a decline of 11.3% on a CCY basis and
12.2% on a reported basis. Within this overall result there
were examples of good progress but also some disappointing
performances, most notably in ITOM where initial corrective actions
have been identified and are being executed with a more detailed
assessment of additional actions required being conducted in
parallel.
The Group identified a slowdown in customer buying behaviour in
April 2020 resulting in a deferral of projects involving new
licence and services revenues as well as delays to some maintenance
renewals. The impact of this is estimated to be at least 2% on
revenues in the period.
The impact of this COVID-19 related revenue reduction on Adjusted
EBITDA has been largely mitigated due to the management of variable
and discretionary costs in addition to a reduction in certain costs
as a direct result of COVID-19. Therefore, Adjusted EBITDA was
$552.2m (2019: $653.2m CCY) which represents an Adjusted EBITDA
margin of 38.0% (2019: 39.9% CCY).
The Group recorded an impairment charge of $922.2m in relation to
the carrying value of Goodwill. This impairment charge is
attributable to the increased economic uncertainty as a result of
COVID-19, which has led to an increase in the pre-tax discount rate
and expected continued disruption to new sales activity and timing
pressure on renewals. This means that, on a statutory reported
basis, the business generated an Operating loss of $906.7m in the
six months ended 30 April 2020 (2019: $32.6m operating
profit).
The Group continues to generate approximately 70% of revenues from
recurring sources with broad based and longstanding customer
relationships. Our products support mission critical business
applications which are core to the value propositions of the
world's largest companies. The customers we serve are
geographically diverse and often multi-national across a range
of sectors.
Further narrative in respect of the financial performance can be
found in the Financial Review section of this report.
Strategic and Operational Review update
In February, at the time of our full year results, we announced a
number of initiatives which underpin the delivery of our FY23
corporate vision. These initiatives, combined with existing
programmes, are designed to make our business more efficient, agile
and better aligned to our customers' needs:
Evolve our operating model to accelerate and improve the visibility of our
product strategies and drive more differentiation.
Specifically, in the period important hires have been made and
planned organisational changes are progressing to drive more
operational autonomy and effectiveness in our Security and Vertica
product groups.
Transform our Go-to-Market function to improve sales effectiveness. In recent weeks, we
have implemented a new global operating plan and management system.
This is supported by the deployment of a consistent sales
methodology and programmes for team enablement. The Go-to-Market
organisation is being simplified and resources re-aligned to ensure
more balance across our different revenue streams and product
portfolios. This framework is the foundation for delivering
increased sales effectiveness and productivity over
time.
Accelerate the transition of certain portfolios to SaaS or
Subscription to address
market opportunities where these models are emerging or becoming
the de facto market standard. This transition will take place over
multiple financial periods. Work to date has focused on
comprehensive planning to develop these customer offerings for our
Security and Big Data products.
Complete systems and operational simplification
priorities to deliver a
robust and efficient operating platform. The transition to remote
working had an impact on our core systems transformation programme
(Stack C). This is a global programme being executed principally in
the UK, USA and India in conjunction with our Systems Integration
partners. As communicated previously we had two possible cut over
plans as we seek to balance speed and our compliance obligations
under the Sarbanes-Oxley Act which limit the timeframes within
which we can make substantive changes to our operational controls.
The move of this complex programme to remote working has been
executed effectively but the impact of doing this at a critical
time in the project means that we have now moved to our alternative
cutover planning scenario of November 2020 and February 2021 versus
May and November 2020. This will potentially impact the costs of
the programme but work is underway to mitigate this as much as
possible. The full extent of the impact is also heavily dependent
on lockdown restrictions in key geographies.
Overall, the company has reacted quickly to mitigate the immediate
and developing macro risks whilst continuing to make progress on
these initiatives. We are currently executing broadly as planned
but are continually assessing the pace and focus of these
initiatives as we get more clarity on the operational and financial
impacts of COVID-19.
Board update
The Group has continued to strengthen the experience and expertise
of our board in the period by adding two new Non-Executive
Directors.
Robert Youngjohns and Sander Van't Noordende joined the board in
April and June respectively. Robert brings a number of years'
experience in global enterprise software companies and having
previously led the HPE Software division, has a deep understanding
of the HPE Software products and the markets in which they operate.
Sander has previously spent 32 years at Accenture and his expertise
and experience in managing significant change will be very relevant
as we execute on our strategic initiatives.
The board and management team continue to have confidence in the
fundamentals of the business and a clear understanding of the work
which needs to be done. We would like to thank our employees for
their continued professionalism and hard work through these
unprecedented times.
Capital allocation and dividend
In March 2020, the board decided to suspend the FY19 final dividend
as uncertainty increased regarding the scale and potential impact
of COVID-19 on the global economy and hence on the Group.
Subsequently this FY19 final dividend totalling $190m was cancelled
in order to conserve cash, of which approximately $143.0m was used
to reduce gross debt as part of the refinancing in May
2020.
The Group successfully refinanced our $1.4bn term loan facility in
May 2020, meaning the Group's next term loan maturity date is June
2024.
Given the heightened macro-economic uncertainty, we
continue to believe it is right to approach the current
financial period with a reduced risk appetite and heightened sense
of caution. Consequently, the Group will not be paying an interim
dividend.
This is not a decision the board has taken lightly and we
appreciate the patience of our shareholders as we work through
these unprecedented times.
It is the board's intention to propose a final dividend in relation
to the current financial year to the extent it is prudent to do so
within the context of our business performance and the macro
economic environment.
Group Outlook
Micro
Focus delivers mission-critical enterprise software, across
multiple geographies and serving every vertical sector. The
majority of our revenues are contractual and recurring in
nature and the resilience this affords can be seen in the company's
ability to generate cash and manage costs as required. The
Company's balance sheet is strong, and the recent successful
refinancing of the Company's debt, despite current market
conditions, underlines the attractiveness of Micro Focus' financial
model. The board and management team are committed to delivering
the initiatives announced earlier this year. We are confident this
work will improve and simplify operations, strengthen product
portfolios, sharpen our ability to address the needs of our
customers and deliver attractive and sustainable shareholder
returns over the long term.
Despite
the resilience of Micro Focus' customer proposition and financial
model, the ultimate impact on the global economy of the COVID-19
pandemic remains unclear, as does the timing and extent to which
that impact flows through into customer spending plans on
enterprise software. Our current assumption is macro-economic
conditions are unlikely to improve in the second half of the
financial year. As a minimum, we continue to believe it appropriate
to be prepared for further disruption to our new sales activity and
timing pressure on renewals.
The
Group's diversified and recurring revenue base and our highly cash
generative business model represent solid foundations from which to
execute any additional actions required in the event the pandemic
has a prolonged impact on trading performance.
Stephen Murdoch
Chief Executive Officer
6 July 2020
Financial Review
The Group uses certain measures to assess the financial performance
of its business. These measures are termed "Alternative Performance
Measures" because they exclude amounts that are included in, or
include amounts that are excluded from, 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.
The Group uses such measures to assess operating performance and
liquidity in presentations to the board and as a basis for
strategic planning and forecasting, as well as monitoring certain
aspects 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 measures of performance and liquidity.
The Alternative Performance Measures may not be comparable to other
similarly titled measures used by other companies and have
limitations as analytical tools and should not be considered in
isolation or as a substitute for, or superior to, the equivalent
measures calculated and presented in accordance with
IFRS.
An explanation of the relevance of each of the Alternative
Performance Measures, a reconciliation of the Alternative
Performance Measures to the most directly comparable measures
calculated and presented in accordance with IFRS and a discussion
of their limitations is set out below. All results discussed
in this section are from continuing operations, unless otherwise
stated.
IFRS 16 "Leases" was adopted by the Group on 1 November 2019 with
the cumulative retrospective impact reflected as an adjustment to
equity on the date of adoption and therefore the comparative
information has not been restated and continues to be reported
under IAS 17 and IFRIC 4, except where otherwise highlighted to
better enable a period-on-period comparison. See note 3 for further
details.
|
Six months ended
30 April 2020
(unaudited)
|
Six months ended
30 April 2019
(unaudited)
|
|
|
As reported
|
CCY
|
CCY Change
|
Alternative performance measures:
|
$m
|
$m
|
%
|
Revenue
|
1,454.2
|
1,638.6
|
(11.3)%
|
Operating costs included in Adjusted EBITDA
|
(902.0)
|
(985.4)
|
(8.5)%
|
Adjusted EBITDA
|
552.2
|
653.2
|
(15.5)%
|
Adjusted EBITDA margin %
|
38.0%
|
39.9%
|
(1.9) ppt
|
|
|
|
|
|
Six months ended
30 April 2020
(unaudited)
|
Six months ended
30 April 2019
(unaudited)
|
|
|
As reported
|
As reported
|
Change
|
Statutory performance measures:
|
$m
|
$m
|
%
|
Revenue
|
1,454.2
|
1,657.1
|
(12.2)%
|
Operating (loss)/ profit
|
(906.7)
|
32.6
|
(2,881.3)%
|
Loss for the period from continuing operations
|
(1,029.3)
|
(78.3)
|
(1,214.6)%
|
(Loss)/profit for the period from discontinued
operation
|
(2.7)
|
1,475.4
|
(100.2)%
|
(Loss)/profit for the period from continuing and discontinued
operations
|
(1,032.0)
|
1,397.1
|
(173.9)%
|
Revenue
The Group generated revenue of $1,454.2m in the six months ended 30
April 2020, which represents a decline of 12.2% on the results for
the six months ended 30 April 2019. The rate of decline includes a
0.9% decrease due to the strengthening of the dollar against most
major currencies.
In order to fully understand the underlying trading performance of
the continuing operations, the directors feel revenue is better
considered on a constant currency basis ("CCY") between the six
months ended 30 April 2020 and the six months ended 30 April 2019.
Excluding the impact of foreign exchange, revenue declined by
11.3%. Revenue performance presented on a CCY basis can be found
below.
|
Six months ended
30 April 2020(unaudited)
|
|
CCY %
change toSix months ended
30
April 2019(unaudited)
|
|
|
Licence
|
Maintenance
|
SaaS
& other recurring
|
Consulting
|
Total
|
|
Licence
|
Maintenance
|
SaaS
&
other
recurring
|
Consulting
|
Total
|
|
$m
|
$m
|
$m
|
$m
|
$m
|
|
%
|
%
|
%
|
%
|
%
|
Product portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
Application
Modernisation & Connectivity ("AMC")
|
60.4
|
160.5
|
-
|
5.2
|
226.1
|
|
(15.2)%
|
(1.0)%
|
-%
|
(3.7)%
|
(5.3)%
|
Application
Delivery Management ("ADM")
|
46.7
|
223.2
|
38.4
|
7.7
|
316.0
|
|
(25.0)%
|
(9.3)%
|
(8.4)%
|
(23.8)%
|
(12.3)%
|
IT
Operations Management ("ITOM")
|
69.7
|
284.0
|
1.4
|
56.7
|
411.8
|
|
(34.9)%
|
(16.3)%
|
(77.4)%
|
(12.9)%
|
(20.5)%
|
Security
|
65.6
|
206.2
|
16.7
|
17.7
|
306.2
|
|
(4.1)%
|
(0.7)%
|
(11.2)%
|
(25.3)%
|
(3.9)%
|
Information
Management & Governance ("IM&G")
|
25.2
|
92.4
|
68.1
|
8.8
|
194.5
|
|
(19.2)%
|
0.4%
|
(10.2)%
|
3.5%
|
(6.3)%
|
Revenue
before haircut
|
267.6
|
966.3
|
124.6
|
96.1
|
1,454.6
|
|
(21.3)%
|
(7.7)%
|
(12.7)%
|
(14.8)%
|
(11.5)%
|
Haircut
|
-
|
(0.3)
|
(0.1)
|
-
|
(0.4)
|
|
-%
|
(91.9)%
|
(80.0)%
|
-%
|
(90.5)%
|
Revenue*
|
267.6
|
966.0
|
124.5
|
96.1
|
1,454.2
|
|
(21.3)%
|
(7.4)%
|
(12.4)%
|
(14.8)%
|
(11.3)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Regional:
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
101.9
|
493.3
|
94.3
|
32.7
|
722.2
|
|
(33.4)%
|
(11.5)%
|
(10.4)%
|
(23.1)%
|
(15.9)%
|
International
|
118.0
|
366.9
|
23.6
|
51.5
|
560.0
|
|
(12.9)%
|
(3.7)%
|
(22.4)%
|
(9.2)%
|
(7.2)%
|
Asia
Pacific & Japan
|
47.7
|
106.1
|
6.7
|
11.9
|
172.4
|
|
(7.4)%
|
(2.7)%
|
(4.3)%
|
(12.5)%
|
(4.8)%
|
Revenue
before haircut
|
267.6
|
966.3
|
124.6
|
96.1
|
1,454.6
|
|
(21.3)%
|
(7.7)%
|
(12.7)%
|
(14.8)%
|
(11.5)%
|
Haircut
|
-
|
(0.3)
|
(0.1)
|
-
|
(0.4)
|
|
-%
|
(91.9)%
|
(80.0)%
|
-%
|
(90.5)%
|
Revenue*
|
267.6
|
966.0
|
124.5
|
96.1
|
1,454.2
|
|
(21.3)%
|
(7.4)%
|
(12.4)%
|
(14.8)%
|
(11.3)%
|
*The trends discussed in this section are presented after the
impact of the deferred revenue haircut (see Alternative Performance
Measures).
In February 2020, the Group set out the findings of the Strategic
and Operational review, which informed the Company's plan to
stabilise revenues by FY23. This plan included a transformation of
our Go-to-Market function and a transition of elements of the
portfolio to a SaaS or subscription offering, both of which would
have an adverse impact on revenue in the current financial year. As
a result, the Group anticipated a decline in revenues of between
minus 6 to minus 8 percent for the 12 months ending 31 October
2020. Our expectations for the six months ended 30 April 2020 at
the time, were for performance to be broadly consistent with the
decline of 9.3% witnessed in the second half of FY19 as those
transformational activities are undertaken.
This
guidance was issued before the severity of COVID-19 became apparent
which has caused further disruption to new sales activity in the
six months ended 30 April 2020. Specifically, the Group identified
a slowdown in customer buying behaviour in April 2020 resulting in
the deferral of some projects involving new licence and services
revenues as well as delays to some maintenance renewals. The
estimated impact of this was at least 2% on revenues in the
period.
Revenue performance in the six months ended 30 April 2020 by
stream:
Licence Revenue
Licence revenue declined by 21.3% in the six months ended 30 April
2020 on a CCY basis. Licence revenue is generated through new
customer projects and as such, is the revenue stream impacted most
by the Go-to-Market transformation activities undertaken in the
period compounded by COVID-19, as customers seek to delay
investment decisions until the full impact is better
understood.
Within this revenue stream, the Group had contract delays as a
result of COVID-19, which on a combined basis totalled
approximately $20.0m (approximately 6 percentage points of the
decline). The remainder of the decline (approximately 15 percentage
points) was broadly anticipated and driven in part by the
structural changes the Group has made to the sales force in the
current financial period. At a product Group level, the changes
made to the Go-to-Market function were not product specific and
were pervasive across the product groups.
Maintenance Revenue
Maintenance revenue declined by 7.4% in the six months ended 30
April 2020 on a CCY basis with the vast majority of the decline
arising within our ITOM and ADM product groups which declined by
16.3% and 9.3% respectively. Maintenance revenue within the other
segments was broadly flat year-on-year.
The performance in ITOM and ADM was disappointing and compounded
the year-on-year impact of certain one-offs which were factored
into the guidance issued by the Group in February 2020. The timing
of these one offs and the consequential impact on revenue phasing,
means that the maintenance decline is not indicative of the
underlying trend within these product groups, however looking
beyond these one off factors underlying performance needs to
improve. Initial corrective actions have been identified and are in
execution with more comprehensive assessments of any additional,
substantive actions required being undertaken in
parallel.
In April 2020, a small number of customers delayed decisions in
respect of maintenance renewals. The Group believes these to be
delays rather than cancellations and in the majority of cases we
expect the customer to renew in the second half of FY20. There were
also examples of smaller or partial renewals which are being
investigated to ensure mitigation actions are in place to minimise
the impact of this going forward. Renewal rates continue to vary at
a product level and we see opportunity for improvement in all
portfolios. The Group has a comprehensive plan to stabilise the
rate of the maintenance decline and this work is a focus of the
transformation of our Go-to-Market function. In addition, actions
have already been taken to realign resources and improve focus on
improving performance across all portfolios but specifically within
ITOM and ADM.
The longer term impact of COVID-19 on the investment decisions of
our customer base remains largely unknown. However, our software
supports mission critical applications and infrastructure which our
customers rely on to run their businesses.
SaaS and other recurring revenue
SaaS and other recurring revenue decreased by 12.4% in the six
months ended 30 April 2020 on a CCY basis.
In the six months ended 30 April 2020, we have continued to
rationalise unprofitable SaaS operations and practices and
refocused resources and investments. This has led to a revenue
decline in all product segments and geographies as we re-position
offerings and deliver product enhancements.
Longer term we intend to transition certain parts of our portfolios
to subscription or SaaS revenue models. This transition will be a
multi-period transition with FY20 predominately focussing on
developing the capabilities within the Security and Big Data
product areas.
Consulting Revenue
Consulting revenue declined by 14.8% in the six months ended 30
April 2020 on a CCY basis. In the period, the consulting
revenue stream was adversely impacted by COVID-19 with delays in
certain customer projects where physical access to customer sites
is required, in addition to planned reductions.
These reductions arise from the Group's continued actions to
re-position consulting contracts to support the sale of new
licenses and retention of the installed base. This work is broadly
complete and the Group anticipates this revenue stream to stabilise
in future accounting periods subject to the current impact of
COVID-19.
Adjusted EBITDA (after adopting IFRS 16)
The Group generated an Adjusted EBITDA of $552.2m, at an Adjusted
EBITDA margin of 38.0% in the six months ended 30 April 2020 (six
months ended 30 April 2019: $653.2m, 39.9% on a CCY basis). This
includes a year-on-year benefit of approximately $34.7m as a result
of IFRS 16.
The Group has been able to mitigate the COVID-19 revenue impact on
Adjusted EBITDA primarily due to the close management of variable
and discretionary costs in addition to a reduction in certain costs
as a direct result of COVID-19.
The
company has reacted quickly to ensure a balanced approach to
mitigating the immediate risks whilst continuing to make progress
on the actions taken as a result of the Strategic and Operational
Review. As such, the investments outlined as part of that review
are broadly continuing as planned. Outside of these investments,
mitigating actions including a hiring freeze in all but exceptional
circumstances, as well as reductions in all discretionary spending,
are now in place. The Group is prepared to implement further
actions in reducing costs, in the event the pandemic has a
prolonged impact on trading performance.
Currency impact
During
the six months to 30 April 2020, 59.9% of our revenues were
contracted in US Dollars, 19.1% in Euros, 5.1% in Sterling,
3.3% in Canadian Dollars and 12.6% in other currencies. In
comparison, 44.3% of our costs were US Dollar
denominated, 14.4% in Euros, 13.1% in Sterling, 5.7%
in Indian rupee and 22.5% in other
currencies.
The
weighting of revenue and costs means that if the USD
to EUR, CAD, JPY or AUD exchange rates move
during the period, the revenue impact is greater than the costs
impact, whilst if USD to GBP or INR rates move during the
period the cost impact exceeds the revenue impact. Consequently,
actual USD Adjusted EBITDA can be impacted by significant
movements in USD to EUR, AUD, CAD, JPY, GBP and
INR exchange rates.
The
currency movement for the US Dollar against Euro, GBP, CAD,
AUD and INR was a strengthening of 2.9%, 1.1%,
0.9%, 7.3% and 2.8% respectively; and a weakening against JPY of
2.3% when looking at the average exchange rates in the six
months to 30 April 2020 compared to those in the six
months to 30 April 2019.
In
order to provide CCY comparatives, the Group has restated the
revenue and Adjusted EBITDA for the six months ended 30
April 2019 at the same average exchange rates as those
used in the reported results for the six months ended 30
April 2020. In the six months ended 30 April 2019, the
currency impact has reduced the 2019 comparable revenue
and costs by 1.1% and 0.9% respectively. The net impact
for the Group results using CCY was a decrease of the 2019
comparable revenue of $18.5m and a decrease of $9.1m
Adjusted EBITDA.
Operating (loss)/profit to Adjusted EBITDA
The Operating loss for the six months ended 30 April 2020 was
$906.7m, after a goodwill impairment charge of $922.2m, compared to
an Operating profit of $32.6m in the six months ended 30 April
2019.
The Operating (loss)/profit includes the impact of certain items
that management believes do not directly reflect our underlying
performance. These include exceptional items, share based
compensation, amortisation of purchased intangibles and
depreciation of property, plant and equipment.
The key driver for the operating loss in the period reflects the
impairment of goodwill of $922.2m recorded in the period which is
discussed in more detail below.
A reconciliation between Operating (loss)/profit and Adjusted
EBITDA is shown below:
|
Six months
ended
30 April 2020
As reported
(unaudited)
|
Six
months
ended
30
April 2019
As
reported
(unaudited)
|
Change
|
|
$m
|
$m
|
%
|
Operating (loss)/profit
|
(906.7)
|
32.6
|
(2,881.3)%
|
Exceptional items (reported in Operating
(loss)/profit)
|
1,048.4
|
161.4
|
549.6%
|
Share-based compensation charge
|
8.2
|
70.0
|
(88.3)%
|
Amortisation of intangible assets
|
340.4
|
356.3
|
(4.5)%
|
Depreciation of property, plant and equipment
|
61.1
|
32.8
|
86.3%
|
Product development intangible costs capitalised
|
(6.9)
|
(10.3)
|
33.0%
|
Foreign exchange losses
|
7.7
|
19.5
|
(60.5)%
|
Adjusted EBITDA at reported rates
|
552.2
|
662.3
|
(16.6)%
|
Foreign exchange
|
-
|
(9.1)
|
n/a
|
Adjusted EBITDA at CCY
|
552.2
|
653.2
|
(15.5)%
|
Exceptional items (included within Operating
(loss)/profit)
|
Six months
ended
30 April 2020
As reported
(unaudited)
|
Six
months
ended
30
April 2019
As
reported
(unaudited)
|
|
$m
|
$m
|
System
and IT infrastructure costs
|
71.5
|
80.9
|
Integration
costs incurred as a result of HPE Software business
acquisition
|
31.4
|
56.0
|
Severance
as a result of the HPE Software business acquisition
|
21.7
|
15.7
|
Property
costs as a result of the HPE Software business
acquisition
|
1.6
|
10.6
|
MF/HPE Software business integration related costs
|
126.2
|
163.2
|
Goodwill
impairment charge
|
922.2
|
-
|
Gain on
disposal of Atalla
|
-
|
(4.4)
|
Other
acquisition costs
|
-
|
2.6
|
Total exceptional costs (reported in Operating (loss)/profit)
*
|
1,048.4
|
161.4
|
*Exceptional costs exclude the loss from discontinued operation
relating to the disposal of SUSE of $2.7m (six months ended 30
April 2019: profit $1,446.9m), which is separately included in the
(loss)/profit from discontinued operations.
In the six months ended 30 April 2020, exceptional costs reported
in the Operating (loss)/profit increased from $161.4m to $1,048.4m.
The costs incurred in the period primarily include:
●
System and IT
infrastructure costs of $71.5m, which principally reflect the IT
design, build and migration onto a single IT
platform;
●
Integration costs of
$31.4m across a wide range of projects undertaken to conform,
simplify and increase efficiency across the
business;
●
Severance costs of
$21.7m in relation to ongoing headcount reductions as the Group
continues to remove duplication and simplify the continuing
operations as a result of the acquisition of HPE Software;
and
●
Property costs of $1.6m
as the Group continues the process of simplifying the real estate
footprint.
●
A goodwill impairment
charge of $922.2m was made in the period (note 11). This impairment
charge is attributable to the increased economic uncertainty as a
result of COVID-19, which has led to increased discount rates and
expected disruption to new sales activity and timing pressure on
renewals.
As
set out within the Chief Executive Officer's statement, the IT
System development has been re-phased such that the legacy Micro
Focus business is expected to transition to the new IT environment
from November 2020 and the Legacy HPE Software business following
in early 2021. The COVID-19 pandemic has meant that the delivery of
a Single IT platform on a global scale has been delayed in part by
restrictions caused by the virus, particularly due to operational
and travel restrictions in relation to our integration partners and
our staff working on the project.
Further
information on exceptional costs can be found in note 7 to the
Condensed Consolidated Interim Financial Statements.
Net finance costs
Net finance costs were $129.3m in the six months ended 30 April
2020, compared to $132.2m in the six months ended 30 April
2019.
In May 2020, the Group launched the refinancing of its $1,414.7m
Term Loan B-2 due in November 2021. As part of this refinancing,
the Group raised $650m and €600m in new five-year Term Loan B
financing. In addition, the Group repaid approximately $143.0m of
the existing Term Loan B-2 using existing liquidity. As a result of
this refinancing, the cash cost of interest will increase by
approximately $25m per annum.
This debt raising was subject to substantial demand, demonstrating
the strength of the Group's highly cash generative operating model.
The success of the refinancing was particularly notable in light of
the volatility seen in the wider markets as a result of
COVID-19. Following the completion of the Transaction, the
Group has extended the average maturity of Micro Focus's debt
capital structure from 3.2 years to 4.2 years. The Group is now
fully financed with the new Term Loan due for maturity in June
2024.
Taxation
Tax for the six months ended 30 April 2020 was a credit of $6.7m
(2019: credit of $21.3m) on continuing operations. The tax charge
on Adjusted Profit before tax for the six months ended 30 April
2020 was $77.0m (2019: $95.5m), which represents an effective tax
rate ("ETR") on Adjusted Profit before Tax ("Adjusted ETR") of
24.0% (2019: 20.5%). Given the uncertainty in respect of COVID-19
it would not be appropriate to provide Adjusted ETR guidance for
the current financial period. The Group's forecast Adjusted ETR in
the medium term remains at 25%, subject to uncertainties regarding
the longer term impacts of COVID-19, including any potential
changes to relevant tax legislation.
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, including ongoing
appeals. The Group has calculated the maximum potential liability
to be $60.3m, however based on its current assessment the Group
believes that no provision is required in respect of this
issue.
Earnings per share
The Group's earnings per share ("EPS") on a basic, diluted and
adjusted basis are as follows:
|
Six months
ended
30 April 2020
(unaudited)
|
Six
months
ended
30
April 2019
(unaudited)
|
Growth
/(Decline)
|
|
cents
|
cents
|
%
|
EPS from continuing operations:
|
|
|
|
Basic
EPS
|
(308.40)
|
(18.79)
|
(1,541.3)%
|
Diluted
EPS
|
(308.40)
|
(18.79)
|
(1,541.3)%
|
|
|
|
|
Basic
Adjusted EPS
|
73.04
|
88.86
|
(17.8)%
|
Diluted
Adjusted EPS
|
72.10
|
85.53
|
(15.7)%
|
|
|
|
|
Total EPS attributable to the ordinary equity shareholders of the
Company
|
|
|
|
Basic
EPS
|
(309.21)
|
335.32
|
(192.2)%
|
Diluted
EPS
|
(309.21)
|
322.74
|
(195.8)%
|
|
|
|
|
Basic
Adjusted EPS
|
73.04
|
96.30
|
(24.2)%
|
Diluted
Adjusted EPS
|
72.10
|
92.69
|
(22.2)%
|
Full details are set out
in the "Alternative performance measures" section of these interim
financial statements.
Cash Generation
The following section sets out the cash generation for the Group,
the comparative period includes the SUSE business up to the point
at which the operations were sold on 28 February 2019.
The Group's Adjusted cash conversion ratio, defined as cash
generated from operations divided by Adjusted EBITDA less
exceptional items (reported in Operating (loss)/profit and
excluding any goodwill impairment charge, as this is deemed
non-cash related), for the six months ended 30 April 2020 was
131.5% compared to 115.1% in the comparable period. This cash
conversion in the half was at the upper end of our expectations
driven by strong working capital management which is pleasing given
the backdrop of COVID-19.
|
Six
months
ended
30
April 2020
|
Six
months
ended
30
April 2019
|
|
$m
|
$m
|
Cash generated from operations
|
560.4
|
622.6
|
|
|
|
Adjusted
EBITDA
|
|
|
- Continuing
operations
|
552.2
|
662.3
|
- Discontinued
operation
|
-
|
39.8
|
Total Adjusted EBITDA
|
552.2
|
702.1
|
Less:
Exceptional items (reported in Operating
(loss)/profit)
|
(1,048.4)
|
(161.4)
|
Exclude:
Goodwill impairment charge
|
922.2
|
-
|
Adjusted EBITDA less exceptional items
|
426.0
|
540.7
|
|
|
|
Adjusted Cash conversion ratio
|
131.5%
|
115.1%
|
The cash flow for the Group for the six months ending 30 April 2020
was:
|
Six months
ended
30 April 2020
|
Six
months
ended
30
April 2019
|
|
$m
|
$m
|
Total Adjusted EBITDA
|
552.2
|
702.1
|
Less:
|
|
|
Exceptional
items (reported in Operating (loss)/profit)
|
(1,048.4)
|
(161.4)
|
Movements
in provisions
|
22.1
|
23.0
|
Goodwill
impairment charge
|
922.2
|
-
|
Other
non-cash items
|
13.3
|
11.6
|
Cash generated from operations before working capital
|
461.4
|
575.3
|
Movement
in working capital
|
99.0
|
47.3
|
Cash generated from operations
|
560.4
|
622.6
|
Interest
payments
|
(105.5)
|
(117.7)
|
Bank
loan costs
|
(1.1)
|
-
|
Tax
payments
|
(65.5)
|
(39.1)
|
Purchase
of intangible assets
|
(36.5)
|
(12.8)
|
Purchase
of property, plant and equipment
|
(6.1)
|
(23.1)
|
Lease
related interest and capital payments1
|
(40.8)
|
(10.4)
|
Free cash flow
|
304.9
|
419.5
|
1 Lease related interest and
capital payments are now included as a financing cash flow
following the adoption of IFRS 16 (note 3).
The Group generated a free cash flow of $304.9m. The year-on-year
comparison of free cash flow has been impacted by the disposal of
SUSE in the previous accounting period and the adoption of IFRS 16.
The six months ended 30 April 2019 included net cash flows from
operating activities for discontinued operation (i.e. SUSE), which
generated an Adjusted EBITDA of $40.0m compared to $nil in the
current period.
The impact of IFRS 16 is such that the presentation of individual
line items; notably Adjusted EBITDA, Interest payments and lease
related interest and capital payments are not comparable
year-on-year. In the table above, the presentation of free cash
flow in the six months ended 30 April 2019 has been revised to
include lease related interest and capital payments. This means
total free cash flow is not impacted year-on-year by changes to
IFRS 16 and is therefore comparable.
The Group had a working capital inflow of $99.0m in the six months
ended 30 April 2020. This inflow was due to a combination of the
natural seasonality of cash collections within the business in
which the Group typically collects the peak quarter four billings
in the first half of the following financial year combined with a
focus on working capital. The Group continues to target a cash
conversion of between 95-100% over the medium-term.
Net Debt
|
30 April 2020
|
30 April 2020
|
30
April 2019
|
|
Post-IFRS 16
|
Pre-IFRS 16
|
Pre-IFRS
16
|
|
$m
|
$m
|
$m
|
Borrowings
|
(4,855.4)
|
(4,855.4)
|
(4,649.2)
|
Cash
and cash equivalents
|
808.1
|
808.1
|
2,666.2
|
Lease
obligations (2019: finance lease obligations)
|
(264.7)
|
(21.1)
|
(24.5)
|
Net Debt
|
(4,312.0)
|
(4,068.4)
|
(2,007.5)
|
Return
of Value
|
-
|
-
|
(1,800.0)
|
Adjusted Net Debt*
|
(4,312.0)
|
(4,068.4)
|
(3,807.5)
|
|
|
|
|
Trailing 12 months Adjusted EBITDA (continuing
operations):
|
|
|
|
Six
months to 30 April
|
552.2
|
517.5
|
662.3
|
Six
months to 31 October
|
730.5
|
700.2
|
759.1
|
|
1,282.7
|
1,217.7
|
1,421.4
|
|
|
|
|
Net
Debt / Adjusted EBITDA ratio
|
3.4 times
|
3.3 times
|
1.4
times
|
Adjusted
Net Debt / Adjusted EBITDA ratio
|
3.4 times
|
3.3 times
|
2.7
times
|
* Adjusted
Net debt of $3,807.5m for the six months ended 30 April 2019,
excludes the $1,800.0m which was paid to shareholders in May 2019
in relation to the Return of Value.
Post-IFRS 16, the Group's net debt was $4,312.0m which equates to
an Adjusted Net Debt to Adjusted EBITDA ratio of 3.36 times. On 1
November 2019, the Group adopted IFRS 16 which, for the purposes of
leverage has the impact of increasing net debt and Adjusted EBITDA.
The above analysis presents Net debt and leverage pre-IFRS (i.e.
like-for-like with prior year) and post-IFRS which is the basis the
business will adopt going forward.
Net Debt (pre-IFRS 16) was $4,068.4m as at 30 April 2020, compared
to $3,807.5m as at 30 April 2019. The increase in net debt between
the periods was driven by the payment of one off tax liabilities in
relation to the SUSE disposal in the second half of FY19 totalling
approximately $260.0m. Excluding these payments, the Group's cash
generation would have resulted in a reduction in Adjusted Net Debt
in the last twelve months.
The board continues to target a modest level of gearing for a
company with the cash generating qualities of Micro Focus with a
medium-term target net debt to Adjusted EBITDA multiple of 2.7
times. The Group is confident that this level of debt will not
reduce our ability to deliver our strategy, invest in products
and/or make appropriate acquisitions. The level of interest
payments on the term loans remain at a manageable level relative to
the scale of the Group.
The movements on the Group loans, before unamortised facility
costs, in the six months to 30 April 2020 were as
follows:
|
Term Loan
B-2
|
Term Loan
B-3
|
HPE Software
Term Loan
|
Euro
Loan
|
Revolving
Facility
|
Total
|
|
$m
|
$m
|
$m
|
$m
|
$m
|
$m
|
At 1 November 2019
|
1,414.7
|
368.2
|
2,486.3
|
505.8
|
-
|
4,775.0
|
Draw
downs
|
-
|
-
|
-
|
-
|
175.0
|
175.0
|
Foreign
exchange
|
-
|
-
|
-
|
(13.7)
|
-
|
(13.7)
|
At 30 April 2020
|
1,414.7
|
368.2
|
2,486.3
|
492.1
|
175.0
|
4,936.3
|
As noted above, on 29 May 2020, the Group refinanced the Term Loan
B-2 with two new loan tranches, each with a five year maturity,
alongside a $143.0m voluntary repayment.
In addition to the term loans and cash reserves, the Group has
access to a $500m revolving credit facility, of which $175.0m has
been drawn as a precautionary measure following the COVID-19
outbreak.
Consolidated statement of financial position
The Group's Consolidated statement of financial position is
presented later in this document. A summarised version is presented
below:
|
|
|
|
30 April 2020
(unaudited)
$m
|
31
October 2019
(audited)
$m
|
Non-current
assets
|
11,600.6
|
12,846.7
|
Current
assets
|
1,619.3
|
1,448.1
|
Total assets
|
13,219.9
|
14,294.8
|
|
|
|
Current
liabilities
|
1,946.1
|
1,802.0
|
Non-current
liabilities
|
6,269.5
|
6,216.5
|
Total liabilities
|
8,215.6
|
8,018.5
|
Net assets
|
5,004.3
|
6,276.3
|
|
|
|
Total
equity attributable to owners of the parent
|
5,002.9
|
6,275.0
|
Non-controlling
interests
|
1.4
|
1.3
|
Total equity
|
5,004.3
|
6,276.3
|
The net assets of the Group have decreased by $1,272.0m from
$6,276.3m to $5,004.3m from 31 October 2019.
In the period, the key movements were as follows:
●
Non-current assets decreased by
$1,246.1m to $11,600.6m primarily due to a goodwill impairment
charge of $922.2m, a revaluation loss of $150.0m on goodwill, a
$356.2m decrease in other intangible assets (including primarily
$340.4m of amortisation, $50.4m of exchange rate changes, offset by
$36.5m of additions) and an increase of $220.6m for right-of-use
assets related to the adoption of IFRS 16.
●
Current assets increased by $171.2m to
$1,619.3m primarily due to a $452.4m increase in cash and cash
equivalents offset by a $288.0m decrease in trade and other
receivables.
●
Current liabilities increased by
$144.1m to $1,946.1m, primarily due to the drawdown of $175.0m
revolving credit facility, a $70.4m increase in lease obligations
including the impact of IFRS 16, offset by a decrease in trade and
other payables of $109.4m.
●
Non-current liabilities increased by
$53.0m to $6,269.5m, primarily due to an increase of $170.8m in
lease obligations related to the adoption of IFRS 16, a $58.2m
increase in the derivative liability, offset by a $108.7m decrease
in deferred tax liabilities, a $25.7m decrease in provisions and a
$27.4m decrease in contract liabilities.
●
Total equity attributable to the
owners of the parent decreased by $1,272.0m from $6,276.3m to
$5,004.3m in the six months to 30 April 2020. The adoption of IFRS
16 decreased opening equity by $11.3m. Of the remaining $1,260.7m
decrease this was primarily driven by the loss in the period of
$1,032.0m, other comprehensive income movements of $239.1m
(including $195.8m foreign exchange reserve movements and $47.1m of
hedging reserve movements), offset by $12.6m of share option
movements.
Group Risk Factors
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.
The
six months ended 30 April 2020 saw enormous changes, as COVID-19
developed from a localised outbreak in China in early January into
a burgeoning global pandemic by late February. COVID-19
presents fast moving, and in some areas unpredictable, direct and
indirect risks to the Group's business. The board continues to
closely monitor how matters develop and is taking prudent steps to
mitigate any potential impacts to the health and safety of
employees, customers, partners, suppliers and other stakeholders,
and to the successful operation of the business. A complete review
of the Group Risk Register was undertaken for COVID-19 impacts
across the Group, including the impacts on existing risks, and
developments continue to be monitored on a cross-functional basis.
The Group is following the guidance of the World Health
Organization and other governmental health agencies, including with
respect to travel restrictions. The Group remains prepared to
implement appropriate mitigation strategies to minimise any
potential business disruption and will continue to carry out a
regular and robust assessment and management of the Group's
risks. Given the uncertainty still surrounding the ultimate
impact of COVID-19 over the global economy, we, along with other
publicly listed companies, withdrew formal revenue guidance for the
current financial year, as it is not possible to provide reliable
forward guidance in the current environment.
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 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 underlying principal risks and uncertainties facing the Group
have not changed, from those set out in the Annual Report and
Accounts for the 12 months ended 31 October 2019 (pages 57 to 63),
with the exception of the broadening of the "Macro-economic
environment and Brexit" risk to now include the impact of a
pandemic. The principle risks and uncertainties are:
●
Products;
● Go-to-Market models;
●
Competition;
● Employees and culture;
● Business strategy and change
management;
● IT systems and information;
● Legal and regulatory
compliance;
● Intellectual property;
●
Treasury;
●
Tax;
● Macro-economic environment, impact of a pandemic
and Brexit;
● Cyber security; and
● Internal Controls over Financial
Reporting.
These risks could cause future results to differ materially from
historic results. Although the Group still considers these to be
the most relevant risks and uncertainties, the Board's view is
that, because of COVID-19, the overall risk trend is increasing.
COVID-19 has significantly disrupted both global and local
economies and resulted in measures being taken by the respective
governments to mitigate the most severe impacts of the outbreak in
their jurisdictions. In common with many businesses, the outbreak
has resulted in a heightened operating risk environment for the
Group, and so has impacts, both direct and indirect, across the
Group's principal risks and uncertainties to varying degrees. In
particular, the following principal risks and uncertainties are
trending upwards; 'Employees and culture',
'Go-to-Market models', 'Macro-economic environment,
impact of pandemic and Brexit',
'Business
Strategy and Change management'
and 'Cyber
security'. The ongoing impact
of COVID-19 is a significant risk facing the Group at least for the
remainder of the current financial year. COVID-19 is presenting the
Group with a range of challenges relating to remote working,
attendance on client sites and global travel. Similar to most
companies, the Group's employees have been directly impacted by the
lockdown restrictions put in place globally. This has led to more
than 90% of the Group's workforce working from home and the
resultant challenges of securely managing and utilising data
remotely.
In addition, the Group identified a slowdown in customer
buying behaviour in April 2020 leading to a deferral of projects
involving new licence and services revenues as well as delays to
some maintenance renewals. The impact of this is estimated to be at
least 2% on revenues in the period. While the ultimate impact on
the global economy is unknown, as is the timing and extent to which
that impact flows through into customer spending plans on
enterprise software, at a minimum the Group believes it appropriate
to be prepared for a level of disruption to its new sales activity
and timing pressure on renewals
In response to the threats and to minimise the disruption and to
maintain continuity of operations, the Group has established a
cross functional COVID-19 Steering Committee, sponsored by the CEO,
reporting directly to the board. The COVID-19 Steering Committee
directs a global COVID-19 business continuity framework across the
Group, including a network of regional response teams and an IT
COVID-19 incident management group. The Group also maintains a
cross functional COVID-19 resource centre, supporting employees and
business activities in adapting to the changes.
The impact of the COVID-19 pandemic is also referenced in the Chief
Executive Officer's statement and notes 2 and 11 to these unaudited
Condensed Consolidated Interim Financial Statements.
Brian McArthur-Muscroft
Chief Financial Officer
6 July 2020
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The directors confirm that, to the best of their
knowledge:
●
the condensed set of
financial statements has been prepared in accordance with IAS
34 "Interim Financial
Reporting" as adopted by the
EU;
●
the interim management
report includes a fair review of the information required
by:
a) DTR
4.2.7R of
the Disclosure
Guidance and Transparency Rules , being an indication of
important events that have occurred during the first six months of
the financial year and their impact on the condensed set of
financial statements; and a description of the principal risks and
uncertainties for the remaining six months of the year;
and
b) DTR
4.2.8R of
the Disclosure
Guidance and Transparency Rules, being related party
transactions that have taken place in the first six months of the
current financial year and that have materially affected the
financial position or performance of the entity during that period;
and any changes in the related party transactions described in the
last annual report that could do so.
The current executive directors of the Company are Stephen Murdoch
and Brian McArthur-Muscroft.
The current non-executive directors of the Company, all of whom are
independent are Greg Lock, Karen Slatford, Richard Atkins, Amanda
Brown, Lawton Fitt, Robert Youngjohns and Sander Van 't
Noordende.
Biographies for each director are included on the Company's
website: www.microfocus.com.
By
order of the board,
Stephen Murdoch
|
Brian McArthur-Muscroft
|
Chief Executive Officer
|
Chief Financial Officer
|
6 July 2020
Alternative performance measures
The Group uses certain measures to assess the financial performance
of its business. These measures are termed "Alternative Performance
Measures" because they exclude amounts that are included in, or
include amounts that are excluded from, 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.
The Group uses such measures to measure operating performance and
liquidity in presentations to the board and as a basis for
strategic planning and forecasting, as well as monitoring certain
aspects 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 measures of performance and liquidity.
The Alternative Performance Measures may not be comparable to other
similarly titled measures used by other companies and have
limitations as analytical tools and should not be considered in
isolation or as a substitute for analysis of the Group's operating
results as reported under IFRS.
An explanation of the relevance of each of the Alternative
Performance Measures, a reconciliation of the Alternative
Performance 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 Alternative Performance Measures as a substitute for, or
superior to, the equivalent measures calculated and presented in
accordance with IFRS.
The Group has reported unaudited results for the six months ended
30 April 2020 with a comparative unaudited period of the six months
ended 30 April 2019.
1.
Impact of Deferred Revenue Haircut
The following table shows the impact of the acquisition accounting
adjustment of deferred revenue haircut (i.e. the unwinding of fair
value adjustment to acquired deferred revenue) on reported
revenues.
|
Six months
ended
30 April 2020
(unaudited)
|
|
Six
months
ended
30
April 2019
(unaudited)
|
|
Continuing operations
|
Discontinued operation
|
Total
|
|
Continuing
operations
|
Discontinued
operation
|
Total
|
|
$m
|
$m
|
$m
|
|
$m
|
$m
|
$m
|
Revenue before deferred revenue haircut
|
1,454.6
|
-
|
1,454.6
|
|
1,661.3
|
127.1
|
1,788.4
|
Unwinding
of fair value adjustment to acquired deferred revenue
|
(0.4)
|
-
|
(0.4)
|
|
(4.2)
|
(0.1)
|
(4.3)
|
Revenue
|
1,454.2
|
-
|
1,454.2
|
|
1,657.1
|
127.0
|
1,784.1
|
2.
EBITDA and Adjusted EBITDA
EBITDA is defined as net earnings before finance costs, finance
income, taxation, share of results of associates, depreciation of
property, plant and equipment and amortisation of intangible
assets. The Group presents EBITDA because it is widely used by
securities analysts, investors and other interested parties to
evaluate 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 amortisation
expense).
The Group defines Adjusted EBITDA as comprising of EBITDA (as
defined above), exceptional items including the loss/(profit) on
disposal of discontinued operation, share-based compensation,
product development intangible cost capitalised and foreign
exchange gains/losses. Adjusted EBITDA is the primary measure used
internally to measure performance and to incentivise and reward
employees.
Adjusted EBITDA Margin refers to each measure defined above as a
percentage of actual revenue recorded in accordance with IFRS for
the period.
Adjusted EBITDA is a key profit measure used by the board to assess
the underlying financial performance of the Group. Adjusted EBITDA
is stated before the following items for the following
reasons:
● Exceptional
items (note 7), including the loss/(profit) on disposal of
discontinued operation, are excluded by virtue of their size,
nature or incidence, in order to show the underlying business
performance of the Group.
Alternative performance measures continued
2.
EBITDA and Adjusted EBITDA (continued)
● Share-based
payment charges are excluded from the calculation of Adjusted
EBITDA because these represent a non-cash accounting charge for
transactions that could otherwise have been settled in cash or not
be limited to employee compensation. These charges also represent
long-term incentives designed for long-term employee retention,
rather than reflecting the short-term underlying operations of the
Group's business. The directors acknowledge that there is an
ongoing debate on the add-back of share-based payment charges but
believe that as they are not included in the analysis of segment
performance used by the Chief Operating Decision Maker and their
add-back is consistent with metrics used by a number of other
companies in the technology sector, that this treatment remains
appropriate.
● Charges
for the amortisation of intangibles are excluded from the
calculation of Adjusted EBITDA. This is because these charges are
based on judgements about their value and economic life, are the
result of the application of acquisition accounting rather than
core operations, and whilst revenue recognised in the income
statement does benefit from the underlying intangibles that has
been acquired, the amortisation costs bear no relation to the
Group's underlying ongoing operational performance. In addition,
amortisation of acquired intangibles is not included in the
analysis of segment performance used by the Chief Operating
Decision Maker.
● Foreign
exchange movements are excluded from Adjusted EBITDA in order to
exclude foreign exchange volatility when evaluating the underlying
performance of the business.
● Actual
spend on product development costs during the period is deducted
from EBITDA as this reflects the required underlying expenditure.
This is because the capitalisation and subsequent amortisation of
such costs are based on judgements about whether they meet the
capitalisation criteria set out in IAS38 "Intangible Assets" and on
the period of their estimated economic benefit. In addition,
product development costs for the period are included in the
analysis of segment performance used by the Chief Operating
Decision Maker.
The following table is a reconciliation from (loss)/profit for the
period to EBITDA and Adjusted EBITDA:
|
Six months
ended
30 April 2020
(unaudited)
|
|
Six
months
ended
30
April 2019
(unaudited)
|
|
Continuing
Operations
|
Discontinued
Operation
|
Total
|
|
Continuing
operations
|
Discontinued
Operation
|
Total
|
|
$m
|
$m
|
$m
|
|
$m
|
$m
|
$m
|
(Loss)/profit for the period
|
(1,029.3)
|
(2.7)
|
(1,032.0)
|
|
(78.3)
|
1,475.4
|
1,397.1
|
Finance
costs
|
130.9
|
-
|
130.9
|
|
144.7
|
-
|
144.7
|
Finance
income
|
(1.6)
|
-
|
(1.6)
|
|
(12.5)
|
-
|
(12.5)
|
Taxation
|
(6.7)
|
(0.3)
|
(7.0)
|
|
(21.3)
|
289.0
|
267.7
|
Share
of results of associates
|
-
|
-
|
-
|
|
-
|
0.3
|
0.3
|
Depreciation
of property, plant and equipment
|
61.1
|
-
|
61.1
|
|
32.8
|
-
|
32.8
|
Amortisation
of intangible assets
|
340.4
|
-
|
340.4
|
|
356.3
|
-
|
356.3
|
EBITDA
|
(505.2)
|
(3.0)
|
(508.2)
|
|
421.7
|
1,764.7
|
2,186.4
|
Exceptional
items (reported in loss/(profit) from discontinued
operation)
|
-
|
3.0
|
3.0
|
|
-
|
(1,727.2)
|
(1,727.2)
|
Exceptional
items (reported in Operating (loss)/profit)
|
1,048.4
|
-
|
1,048.4
|
|
161.4
|
-
|
161.4
|
Share-based
compensation charge
|
8.2
|
-
|
8.2
|
|
70.0
|
2.5
|
72.5
|
Product
development intangible costs capitalised
|
(6.9)
|
-
|
(6.9)
|
|
(10.3)
|
-
|
(10.3)
|
Foreign
exchange loss/(gain)
|
7.7
|
-
|
7.7
|
|
19.5
|
(0.2)
|
19.3
|
Adjusted EBITDA
|
552.2
|
-
|
552.2
|
|
662.3
|
39.8
|
702.1
|
|
|
|
|
|
|
|
|
Revenue
|
1,454.2
|
-
|
1,454.2
|
|
1,657.1
|
127.0
|
1,784.1
|
Adjusted EBITDA Margin
|
38.0%
|
n/a
|
38.0%
|
|
40.0%
|
31.3%
|
39.4%
|
Alternative performance measures continued
3.
Adjusted profit before tax
Adjusted profit before tax is defined as (loss)/profit before tax
excluding the effects of, share-based compensation, the
amortisation of purchased intangible assets and all exceptional
items including loss/(profit) on disposal of discontinued
operation. These items are individually material items that are not
considered to be representative of the trading performance of the
Group. Adjusted profit before tax is presented as it is required
for the calculation of the Group's effective tax rate. Adjusted
profit before tax is an Alternative Performance
Measure.
The following table is a reconciliation from (loss)/profit before
tax for the period to Adjusted profit before tax:
|
Six months
ended30 April 2020(unaudited)
|
|
Six
months
ended30
April 2019(unaudited)
|
|
Continuing operations
|
Discontinued operation
|
Total
|
|
Continuing
operations
|
Discontinued
operation
|
Total
|
|
$m
|
$m
|
$m
|
|
$m
|
$m
|
$m
|
(Loss)/profit before tax
|
(1,036.0)
|
(3.0)
|
(1,039.0)
|
|
(99.6)
|
1,764.4
|
1,664.8
|
|
|
|
|
|
|
|
|
Share-based
compensation charge
|
8.2
|
-
|
8.2
|
|
70.0
|
2.5
|
72.5
|
Amortisation
of purchased intangibles
|
300.3
|
-
|
300.3
|
|
333.9
|
-
|
333.9
|
Exceptional
items, including loss/(profit) on disposal of discontinued
operation
|
1,048.4
|
3.0
|
1,051.4
|
|
161.4
|
(1,727.2)
|
(1,565.8)
|
Adjusting items
|
1,356.9
|
3.0
|
1,359.9
|
|
565.3
|
(1,724.7)
|
(1,159.4)
|
|
|
|
|
|
|
|
|
Adjusted profit before tax
|
320.9
|
-
|
320.9
|
|
465.7
|
39.7
|
505.4
|
4.
Adjusted Effective Tax Rate
The
Adjusted Effective Tax Rate is defined as the reported tax
(charge)/credit on continuing operations, less tax on adjusting
items on continuing operations (share-based compensation, the amortisation of
purchased intangible assets and exceptional items), divided
by the Adjusted Profit Before Tax on continuing operations (defined
above). This is an Alternative Performance Measure and is
presented because management
believe it is important to understanding the Group's tax position
on its trading performance.
The tax
charge on Adjusted profit before tax for the six months ended 30
April 2020 was $77.0m (2019: $95.5m charge), which represents an
effective tax rate on Adjusted profit before tax ("Adjusted ETR")
of 24.0% (2019: 20.5%). The calculation of the Adjusted ETR is set
out below.
Effective tax rate (continuing operations)
|
Six months
ended
30 April 2020
(unaudited)
|
|
|
Statutory
|
Adjusting
items
|
Adjusted
Measures
|
|
$m
|
$m
|
$m
|
(Loss)/profit before tax
|
(1,036.0)
|
1,356.9
|
320.9
|
Taxation
|
6.7
|
(83.7)
|
(77.0)
|
(Loss)/profit after tax
|
(1,029.3)
|
1,273.2
|
243.9
|
Effective tax rate
|
0.6%
|
|
24.0%
|
|
|
|
|
|
Effective
tax rate (continuing operations)
|
Six months
ended
30 April 2019
(unaudited)
|
|
|
Statutory
|
Adjusting
items
|
Adjusted
Measures
|
|
$m
|
$m
|
$m
|
(Loss)/profit before tax
|
(99.6)
|
565.3
|
465.7
|
Taxation
|
21.3
|
(116.8)
|
(95.5)
|
(Loss)/profit after tax
|
(78.3)
|
448.5
|
370.2
|
Effective tax rate
|
21.4%
|
|
20.5%
|
|
|
|
|
|
In computing Adjusted profit before tax for the six months ended 30
April 2020, $1,356.9m (six months to 30 April 2019: $565.3m) of
adjusting items have been added back and the associated tax credit
of $83.7m (six months ended 30 April 2019: $116.8m) (see Adjusted
profit before tax section above).
Alternative performance measures continued
5.
Adjusted Earnings per Share and Diluted Adjusted Earnings per
Share
The Adjusted Earnings per Share ("EPS") is defined as Basic EPS
where the earnings attributable to ordinary shareholders are
adjusted by adding back all exceptional items including the
loss/(profit) on the disposal of discontinued operation,
share-based compensation charge and the amortisation of purchased
intangibles because they are individually or collectively material
items that are not considered to be representative of the trading
performance of the Group. These are presented as management believe
they are important to understanding the change in the Group's
EPS.
|
Six months
ended
30 April 2020
|
Six
months
ended
30
April 2019
|
|
(unaudited)
|
(unaudited)
|
CENTS
|
|
|
|
|
|
EPS from continuing operations attributable to the ordinary equity
shareholders of the Company
|
|
|
Basic
EPS - cents
|
(308.40)
|
(18.79)
|
Diluted
EPS - cents1
|
(308.40)
|
(18.79)
|
Basic
Adjusted EPS - cents
|
73.04
|
88.86
|
Diluted
Adjusted EPS - cents
|
72.10
|
85.53
|
|
|
|
EPS from discontinued operation
|
|
|
Basic
EPS - cents
|
(0.81)
|
354.12
|
Diluted
EPS - cents1
|
(0.81)
|
340.82
|
Basic
Adjusted EPS - cents
|
-
|
7.44
|
Diluted
Adjusted EPS - cents
|
-
|
7.16
|
|
|
|
Total EPS attributable to the ordinary equity shareholders of the
Company
|
|
|
Basic
EPS - cents
|
(309.21)
|
335.32
|
Diluted
EPS - cents1
|
(309.21)
|
322.74
|
Basic
Adjusted EPS - cents
|
73.04
|
96.30
|
Diluted
Adjusted EPS - cents
|
72.10
|
92.69
|
|
|
|
PENCE
|
|
|
|
|
|
EPS from continuing operations attributable to the ordinary equity
shareholders of the Company
|
|
|
Basic
EPS - pence
|
(240.89)
|
(14.52)
|
Diluted
EPS - pence1
|
(240.89)
|
(14.52)
|
Basic
Adjusted EPS - pence
|
57.05
|
68.67
|
Diluted
Adjusted EPS - pence
|
56.31
|
66.09
|
|
|
|
EPS from discontinued operation
|
|
|
Basic
EPS - pence
|
(0.63)
|
273.64
|
Diluted
EPS - pence1
|
(0.63)
|
263.37
|
Basic
Adjusted EPS - pence
|
-
|
5.75
|
Diluted
Adjusted EPS - pence
|
-
|
5.53
|
|
|
|
Total EPS attributable to the ordinary equity shareholders of the
Company
|
|
|
Basic
EPS - pence
|
(241.52)
|
259.12
|
Diluted
EPS - pence1
|
(241.52)
|
249.39
|
Basic
Adjusted EPS - pence
|
57.05
|
74.42
|
Diluted
Adjusted EPS - pence
|
56.31
|
71.62
|
1 The Group reported a
loss from continuing and discontinued operations attributable to
the ordinary equity shareholders of the Company for the six months
ended 30 April 2020. 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. In the six months ended 30 April 2019,
there were total earnings attributable to ordinary equity
shareholders of the Company of $1,397.1m and therefore the effect
of dilutive securities was reflected in the total Diluted
EPS.
Alternative performance measures continued
5. Adjusted Earnings per Share and Diluted Adjusted
Earnings per Share (continued)
|
Six months
ended
30 April 2020
|
Six
months
ended
30
April 2019
|
|
(unaudited)
|
(unaudited)
|
|
$m
|
$m
|
(Loss)/profit for the period
|
(1,032.0)
|
1,397.1
|
Non-controlling
interests
|
(0.1)
|
-
|
Earnings attributable to ordinary shareholders
|
(1,032.1)
|
1,397.1
|
|
|
|
From
continuing operations1
|
(1,029.4)
|
(78.3)
|
From
discontinued operation
|
(2.7)
|
1,475.4
|
Earnings attributable to ordinary shareholders
|
(1,032.1)
|
1,397.1
|
|
|
|
Adjusting items:
|
|
|
Exceptional
items, including loss/(profit) on disposal of discontinued
operation
|
1,051.4
|
(1,565.8)
|
Share-based
compensation charge
|
8.2
|
72.5
|
Amortisation
of purchased intangibles
|
300.3
|
333.9
|
|
1,359.9
|
(1,159.4)
|
Tax relating to above adjusting items
|
(84.0)
|
163.5
|
|
|
|
Adjusted earnings attributable to ordinary
shareholders
|
243.8
|
401.2
|
|
|
|
From
continuing operations
|
243.8
|
370.2
|
From
discontinued operation
|
-
|
31.0
|
Adjusted
earnings attributable to ordinary shareholders
|
243.8
|
401.2
|
|
|
|
Weighted average number of shares:
|
Number (m)
|
Number
(m)
|
Basic
|
333.8
|
416.6
|
Effect
of dilutive securities - Options
|
4.4
|
16.3
|
Diluted
|
338.2
|
432.9
|
1 For the purposes of calculating
EPS measures Earnings and Adjusted earnings attributable to
ordinary shareholders from continuing operations excludes the
impact of non-controlling interests since these are not
attributable to ordinary shareholders.
|
Six months
ended
30 April 2020
(unaudited)
|
|
Six
months
ended
30
April 2019
(unaudited)
|
|
Continuing operations
|
Discontinued operation
|
Total
|
|
Continuing
operations
|
Discontinued
operation
|
Total
|
|
$m
|
$m
|
$m
|
|
$m
|
$m
|
$m
|
Adjusting items:
|
|
|
|
|
|
|
|
Exceptional
items, including loss/(profit) on disposal of discontinued
operation
|
1,048.4
|
3.0
|
1,051.4
|
|
161.4
|
(1,727.2)
|
(1,565.8)
|
Share-based
compensation charge
|
8.2
|
-
|
8.2
|
|
70.0
|
2.5
|
72.5
|
Amortisation
of purchased intangibles
|
300.3
|
-
|
300.3
|
|
333.9
|
-
|
333.9
|
|
1,356.9
|
3.0
|
1,359.9
|
|
565.3
|
(1,724.7)
|
(1,159.4)
|
Tax relating to above adjusting items
|
(83.7)
|
(0.3)
|
(84.0)
|
|
(116.8)
|
280.3
|
163.5
|
|
1,273.2
|
2.7
|
1,275.9
|
|
448.5
|
(1,444.4)
|
(995.9)
|
Alternative performance measures continued
6.
Operating Cash
Operating cash is defined as cash and cash equivalents excluding
the drawn proportion of the revolving facility (note 12). This is
presented as management believe it is important to understanding
the Group's cash position. This new Alternative Performance Measure
reflects the Group's cash position excluding the drawdown of the
Revolving Credit Facility ("RCF"). The RCF was drawn as a
precautionary measure in order to maximise liquidity in light of
COVID-19. Operating cash excludes this drawn amount as it has not
been generated through operating activities in the
period.
|
30 April 2020
(unaudited)
|
30
April 2019
(unaudited)
|
|
$m
|
$m
|
Cash and cash equivalents
|
808.1
|
355.7
|
Drawn
revolving facility (note 12)
|
(175.0)
|
-
|
Operating cash
|
633.1
|
355.7
|
7. Free
Cash Flow
Free cash flow is defined as cash generated from operations less
interest payments, bank loan costs, tax payments, purchase of
intangible assets, purchase of property, plant and equipment and
interest and capital payments in relation to leases which are now
included as a financing cash flow following the adoption of IFRS 16
(note 3). This is presented as management believe it is
important to the understanding of the Group's cash flow. This
measure has been adjusted for IFRS 16 as the adoption of IFRS 16
has no impact on the Group's cash flow therefore management believe
it would be misleading to show an increase in free cash flow. As a
result, the 2019 comparative has been revised below to present free
cash flow on a consistent basis as in 2020 following the adoption
of IFRS 16.
|
Six months
ended
30 April 2020
(unaudited)
|
Six
months
ended
30
April 2019
(unaudited)
|
|
$m
|
$m
|
Cash generated from operations
|
560.4
|
622.6
|
Less:
|
|
|
Interest
payments
|
(105.5)
|
(117.7)
|
Bank
loan costs
|
(1.1)
|
-
|
Tax
payments
|
(65.5)
|
(39.1)
|
Purchase
of intangible assets
|
(36.5)
|
(12.8)
|
Purchase
of property, plant and equipment
|
(6.1)
|
(23.1)
|
Lease
related interest and capital payments
|
(40.8)
|
(10.4)
|
Free cash flow
|
304.9
|
419.5
|
8. Net Debt and
Adjusted Net Debt
Net Debt is defined as cash and cash equivalents less net
borrowings and lease obligations. The adoption of IFRS 16 has
resulted in all lease obligations being included in Net Debt at 30
April 2020.
|
30 April 2020
(unaudited)
|
31
October 2019
(audited)
|
30
April 2019
(unaudited)
|
|
$m
|
$m
|
$m
|
Borrowings
|
(4,855.4)
|
(4,670.7)
|
(4,649.2)
|
Cash
and cash equivalents
|
808.1
|
355.7
|
2,666.2
|
Lease
obligations (2019: Finance lease obligations)
|
(264.7)
|
(23.5)
|
(24.5)
|
Net debt
|
(4,312.0)
|
(4,338.5)
|
(2,007.5)
|
Return of Value
|
-
|
-
|
(1,800.0)
|
Adjusted Net Debt
|
(4,312.0)
|
(4,338.5)
|
(3,807.5)
|
Alternative performance measures continued
9.
Adjusted cash conversion ratio
The Group's adjusted cash conversion ratio is defined as cash
generated from operations divided by Adjusted EBITDA less
exceptional items (reported in Operating (loss)/profit and
excluding any goodwill impairment charge, as this is deemed
non-cash related). This is presented as management believe it is
important to the understanding the Group's conversion of underlying
results to cash.
|
Six months
ended
30 April 2020
(unaudited)
|
Six
months
ended
30
April 2019
(unaudited)
|
|
$m
|
$m
|
Cash generated from operations
|
560.4
|
622.6
|
|
|
|
Adjusted
EBITDA
|
552.2
|
702.1
|
Less:
exceptional items (reported in Operating
(loss)/profit)
|
(1,048.4)
|
(161.4)
|
Excluded:
Goodwill impairment charge
|
922.2
|
-
|
Adjusted
EBITDA less exceptional items
|
426.0
|
540.7
|
Adjusted cash conversion ratio
|
131.5%
|
115.1%
|
10. Constant Currency
The Group's reporting currency is the US Dollar however, the
Group's significant international operations give rise to
fluctuations in foreign exchange rates. To neutralise foreign
exchange impact and to better illustrate the underlying change in
results from one year to the next, the Group has adopted the
practice of discussing results on an as reported basis and in
constant currency.
The Group uses US Dollar based constant currency models to measure
performance. These are calculated by restating the results of the
Group for the comparable period at the same average exchange rates
as those used in reported results for the current period. This
gives a US Dollar denominated income statement, which excludes any
variances attributable to foreign exchange rate
movements.
The most 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:
|
Six monthsended30 April 2020
|
|
Six
monthsended30 April 2019
|
|
Average
|
Closing
|
|
Average
|
Closing
|
£1
= $
|
1.28
|
1.25
|
|
1.29
|
1.29
|
€1
= $
|
1.10
|
1.09
|
|
1.13
|
1.12
|
C$ =
$
|
0.74
|
0.72
|
|
0.75
|
0.74
|
ILS =
$
|
0.29
|
0.29
|
|
0.27
|
0.28
|
100 JPY
= $
|
0.92
|
0.94
|
|
0.90
|
0.89
|
Micro Focus International plc
Condensed Consolidated Statement of Comprehensive Income
(unaudited)
For the six months ended 30 April 2020
|
|
Six months ended
30 April 2020
(unaudited)
|
Six
months ended
30
April 2019
(unaudited)
|
|
|
Before
Exceptional
Items
|
Exceptional
Items
(note 7)
|
Total
|
Before
Exceptional
Items
|
Exceptional
Items
(note
7)
|
Total
|
Continuing operations
|
Note
|
$m
|
$m
|
$m
|
$m
|
$m
|
$m
|
Revenue
|
6
|
1,454.2
|
-
|
1,454.2
|
1,657.1
|
-
|
1,657.1
|
Cost of
sales
|
|
(349.7)
|
(3.2)
|
(352.9)
|
(397.1)
|
(7.5)
|
(404.6)
|
Gross profit
|
|
1,104.5
|
(3.2)
|
1,101.3
|
1,260.0
|
(7.5)
|
1,252.5
|
Selling
and distribution costs
|
|
(538.7)
|
(9.8)
|
(548.5)
|
(599.8)
|
(2.9)
|
(602.7)
|
Research
and development expenses
|
|
(242.9)
|
(0.5)
|
(243.4)
|
(249.1)
|
(1.4)
|
(250.5)
|
Administrative
expenses
|
|
(181.2)
|
(1,034.9)
|
(1,216.1)
|
(217.1)
|
(149.6)
|
(366.7)
|
Operating (loss)/profit
|
|
141.7
|
(1,048.4)
|
(906.7)
|
194.0
|
(161.4)
|
32.6
|
|
|
|
|
|
|
|
|
Finance
costs
|
|
(130.9)
|
-
|
(130.9)
|
(144.7)
|
-
|
(144.7)
|
Finance
income
|
|
1.6
|
-
|
1.6
|
12.5
|
-
|
12.5
|
Net
finance costs
|
|
(129.3)
|
-
|
(129.3)
|
(132.2)
|
-
|
(132.2)
|
|
|
|
|
|
|
|
|
Loss before tax
|
|
12.4
|
(1,048.4)
|
(1,036.0)
|
61.8
|
(161.4)
|
(99.6)
|
Taxation
|
10
|
(24.1)
|
30.8
|
6.7
|
(7.8)
|
29.1
|
21.3
|
Loss from continuing operations
|
|
(11.7)
|
(1,017.6)
|
(1,029.3)
|
54.0
|
(132.3)
|
(78.3)
|
(Loss)/profit from discontinued operation (attributable to equity
shareholders of the company)1
|
|
-
|
(2.7)
|
(2.7)
|
28.5
|
1,446.9
|
1,475.4
|
(Loss)/profit for the period
|
|
(11.7)
|
(1,020.3)
|
(1,032.0)
|
82.5
|
1,314.6
|
1,397.1
|
|
|
|
|
|
|
|
|
Attributable to:
|
|
|
|
|
|
|
|
Equity
shareholders of the parent
|
|
(11.8)
|
(1,020.3)
|
(1,032.1)
|
82.5
|
1,314.6
|
1,397.1
|
Non-controlling
interests
|
|
0.1
|
-
|
0.1
|
-
|
-
|
-
|
(Loss)/profit for the period
|
|
(11.7)
|
(1,020.3)
|
(1,032.0)
|
82.5
|
1,314.6
|
1,397.1
|
1 $1,446.9m of the
comparative period profit from discontinued operation has been
revised to show the gain on the disposal as an exceptional item
(note 7) in line with the accounting
policy.
The accompanying notes are an integral part of these unaudited
Condensed Consolidated Interim Financial Statements.
Micro Focus International plc
Condensed Consolidated Statement of Comprehensive Income
(unaudited)
For the six months ended 30 April 2020
|
|
Six months ended
30 April 2020
(unaudited)
|
Six months
ended
30
April 2019
(unaudited)
|
|
|
Before
exceptional
Items
|
Exceptional
Items
(note 7)
|
Total
|
Before
e
xceptional
Items
|
Exceptional
Items
(note
7)
|
Total
|
|
Note
|
$m
|
$m
|
$m
|
$m
|
$m
|
$m
|
(Loss)/profit for the period
|
|
(11.7)
|
(1,020.3)
|
(1,032.0)
|
82.5
|
1,314.6
|
1,397.1
|
Other comprehensive (expense)/income:
|
|
|
|
|
|
|
|
Items that will not be reclassified to profit or loss
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
Actuarial
gain/(loss) on pension schemes liabilities
|
14
|
4.8
|
-
|
4.8
|
(1.3)
|
-
|
(1.3)
|
Actuarial
gain on non-plan pension assets
|
14
|
0.4
|
-
|
0.4
|
0.3
|
-
|
0.3
|
Deferred
tax movement on pension schemes
|
|
(1.4)
|
-
|
(1.4)
|
0.8
|
-
|
0.8
|
Discontinued operation:
|
|
|
|
|
|
|
|
Actuarial
loss on pension schemes liabilities
|
14
|
-
|
-
|
-
|
(0.1)
|
-
|
(0.1)
|
Actuarial
gain on non-plan pension assets
|
14
|
-
|
-
|
-
|
0.1
|
-
|
0.1
|
Items that may be subsequently reclassified to profit or
loss
|
|
|
|
|
|
|
|
Cash
flow hedge movements
|
13
|
(58.2)
|
-
|
(58.2)
|
(69.0)
|
-
|
(69.0)
|
Deferred
tax movement on cash flow hedge movements
|
|
11.1
|
-
|
11.1
|
13.1
|
-
|
13.1
|
Deferred
tax movement on currency translation differences
|
|
11.4
|
-
|
11.4
|
-
|
-
|
-
|
Currency
translation differences - continuing operations
|
|
(207.2)
|
-
|
(207.2)
|
35.1
|
-
|
35.1
|
Other comprehensive expense for the period
|
|
(239.1)
|
-
|
(239.1)
|
(21.0)
|
-
|
(21.0)
|
Total comprehensive (expense)/income for the period
|
|
(250.8)
|
(1,020.3)
|
(1,271.1)
|
61.5
|
1,314.6
|
1,376.1
|
Attributable to:
|
|
|
|
|
|
|
|
Equity
shareholders of the parent
|
|
(250.9)
|
(1,020.3)
|
(1,271.2)
|
61.5
|
1,314.6
|
1,376.1
|
Non-controlling
interests
|
|
0.1
|
-
|
0.1
|
-
|
-
|
-
|
Total comprehensive (expense)/income for the period
|
|
(250.8)
|
(1,020.3)
|
(1,271.1)
|
61.5
|
1,314.6
|
1,376.1
|
|
|
|
|
|
|
|
|
Total comprehensive (expense)/income attributable to the equity
shareholders of the company arises from:
|
|
|
|
|
|
|
|
Continuing
operations
|
|
(250.8)
|
(1,017.6)
|
(1,268.4)
|
33.0
|
(132.3)
|
(99.3)
|
Discontinued
operations
|
|
-
|
(2.7)
|
(2.7)
|
28.5
|
1,446.9
|
1,475.4
|
|
|
(250.8)
|
(1,020.3)
|
(1,271.1)
|
61.5
|
1,314.6
|
1,376.1
|
Earnings per share (cents)
|
|
|
|
|
|
|
|
From continuing and discontinued operations
|
|
|
|
cents
|
|
|
cents
|
-
basic
|
9
|
|
|
(309.21)
|
|
|
335.32
|
-
diluted
|
9
|
|
|
(309.21)
|
|
|
322.74
|
From continuing operations
|
|
|
|
|
|
|
|
-
basic
|
9
|
|
|
(308.40)
|
|
|
(18.79)
|
-
diluted
|
9
|
|
|
(308.40)
|
|
|
(18.79)
|
|
|
|
|
|
|
|
|
Earnings per share (pence)
|
|
|
|
|
|
|
|
From continuing and discontinued operations
|
|
|
|
pence
|
|
|
Pence
|
-
basic
|
9
|
|
|
(241.52)
|
|
|
259.12
|
-
diluted
|
9
|
|
|
(241.52)
|
|
|
249.39
|
From continuing operations
|
|
|
|
|
|
|
|
-
basic
|
9
|
|
|
(240.89)
|
|
|
(14.52)
|
-
diluted
|
9
|
|
|
(240.89)
|
|
|
(14.52)
|
The accompanying notes are an integral part of these unaudited
Condensed Consolidated Interim Financial Statements.
Micro Focus International plc
Condensed Consolidated Statement of Financial Position
(unaudited)
|
Note
|
30 April 2020
(unaudited)
$m
|
31 October 2019
(audited)
$m
|
Non-current assets
|
|
|
|
Goodwill
|
11
|
5,599.1
|
6,671.3
|
Other
intangible assets
|
|
5,586.1
|
5,942.3
|
Property,
plant and equipment
|
|
93.4
|
140.5
|
Right-of-use
assets
|
|
220.6
|
-
|
Long-term
pension assets
|
14
|
17.0
|
17.1
|
Contract-related
costs
|
|
36.0
|
31.5
|
Other
non-current assets
|
|
48.4
|
44.0
|
|
|
11,600.6
|
12,846.7
|
Current assets
|
|
|
|
Inventories
|
|
0.3
|
0.1
|
Trade
and other receivables
|
|
744.9
|
1,032.9
|
Contract-related
costs
|
|
21.1
|
19.3
|
Current
tax receivables
|
10
|
44.9
|
40.1
|
Cash
and cash equivalents
|
|
808.1
|
355.7
|
Total
current assets
|
|
1,619.3
|
1,448.1
|
Total assets
|
|
13,219.9
|
14,294.8
|
|
|
|
|
Current liabilities
|
|
|
|
Trade
and other payables
|
|
501.6
|
611.0
|
Borrowings
|
12
|
169.4
|
-
|
Lease
obligations (2019: Finance leases)
|
|
82.2
|
11.8
|
Provisions
|
|
34.3
|
29.3
|
Current
tax liabilities
|
10
|
140.8
|
104.0
|
Contract
liabilities
|
|
1,017.8
|
1,045.9
|
|
|
1,946.1
|
1,802.0
|
Non-current liabilities
|
|
|
|
Contract
liabilities
|
|
122.5
|
149.9
|
Borrowings
|
12
|
4,686.0
|
4,670.7
|
Lease
obligations (2019: Finance leases)
|
|
182.5
|
11.7
|
Derivative
liability
|
13
|
94.7
|
36.5
|
Retirement
benefit obligations
|
14
|
138.4
|
141.4
|
Provisions
|
|
23.4
|
49.1
|
Other
non-current liabilities
|
|
40.6
|
50.4
|
Current
tax liabilities
|
10
|
103.0
|
119.7
|
Deferred
tax liabilities
|
10
|
878.4
|
987.1
|
|
|
6,269.5
|
6,216.5
|
Total liabilities
|
|
8,215.6
|
8,018.5
|
Net assets
|
|
5,004.3
|
6,276.3
|
|
|
|
|
Capital and reserves
|
|
|
|
Share
capital
|
|
47.2
|
47.2
|
Share
premium account
|
|
46.7
|
44.0
|
Merger
reserve
|
|
1,739.8
|
1,739.8
|
Capital
redemption reserve
|
|
2,485.0
|
2,485.0
|
Hedging
reserve
|
|
(76.7)
|
(29.6)
|
Retained
earnings
|
|
1,218.8
|
2,250.7
|
Foreign
currency translation deficit
|
|
(457.9)
|
(262.1)
|
Total equity attributable to owners of the parent
|
|
5,002.9
|
6,275.0
|
Non-controlling interests
|
|
1.4
|
1.3
|
Total equity
|
|
5,004.3
|
6,276.3
|
The
accompanying notes are an integral part of these unaudited
Condensed Consolidated Interim Financial Statements.
Micro Focus International plc
Condensed Consolidated Statement of Changes in Equity
(unaudited)
|
|
Share capital
|
Share premium account
|
Retained
earnings/
(deficit)
|
Foreign currency translation reserve/ (deficit)
|
Capital redemption reserves
|
Hedging reserve
|
Merger reserve
|
Equity attributable to the
parent
|
Non-controlling interests
|
Total
equity
|
|
Note
|
$m
|
$m
|
$m
|
$m
|
$m
|
$m
|
$m
|
$m
|
$m
|
$m
|
Balance at 1 November 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
|
Impact
of adoption of IFRS 16
|
|
-
|
-
|
(11.3)
|
-
|
-
|
-
|
-
|
(11.3)
|
-
|
(11.3)
|
Revised balance at 1 November 2019
|
|
47.2
|
44.0
|
2,239.4
|
(262.1)
|
2,485.0
|
(29.6)
|
1,739.8
|
6,263.7
|
1.3
|
6,265.0
|
(Loss)/profit
for the financial period
|
|
-
|
-
|
(1,032.1)
|
-
|
-
|
-
|
-
|
(1,032.1)
|
0.1
|
(1,032.0)
|
Other
comprehensive (expense)/income for the period
|
|
-
|
-
|
3.8
|
(195.8)
|
-
|
(47.1)
|
-
|
(239.1)
|
-
|
(239.1)
|
Total
comprehensive (expense)/income for the period
|
|
-
|
-
|
(1,028.3)
|
(195.8)
|
-
|
(47.1)
|
-
|
(1,271.2)
|
0.1
|
(1,271.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Share options:
|
|
|
|
|
|
|
|
|
|
|
|
Movement
in relation to share options
|
|
-
|
2.7
|
9.9
|
-
|
-
|
-
|
-
|
12.6
|
-
|
12.6
|
Current
tax on share options
|
|
-
|
-
|
(0.6)
|
-
|
-
|
-
|
-
|
(0.6)
|
-
|
(0.6)
|
Deferred
tax on share options
|
|
-
|
-
|
(1.6)
|
-
|
-
|
-
|
-
|
(1.6)
|
-
|
(1.6)
|
Balance as at 30 April 2020
|
|
47.2
|
46.7
|
1,218.8
|
(457.9)
|
2,485.0
|
(76.7)
|
1,739.8
|
5,002.9
|
1.4
|
5,004.3
|
The
accompanying notes are an integral part of these unaudited
Condensed Consolidated Interim Financial Statements.
Micro Focus International plc
Condensed Consolidated Statement of Changes in Equity
(unaudited) continued
|
|
Share capital
|
Share premium account
|
Retained
earnings/
(deficit)
|
Foreign currency translation reserve/ (deficit)
|
Capital redemption reserves
|
Hedging reserve
|
Merger reserve
|
Equity attributable to the
parent
|
Non-controlling interests
|
Total
equity
|
|
Note
|
$m
|
$m
|
$m
|
$m
|
$m
|
$m
|
$m
|
$m
|
$m
|
$m
|
Balance at 1 November 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
|
Revised balance at 1 November 2018
|
|
65.8
|
41.0
|
3,327.6
|
(51.7)
|
666.3
|
70.0
|
3,724.4
|
7,843.4
|
1.0
|
7,844.4
|
Profit
for the financial period
|
|
-
|
-
|
1,397.1
|
-
|
-
|
-
|
-
|
1,397.1
|
-
|
1,397.1
|
Other
comprehensive (expense)/income for the period
|
|
-
|
-
|
(0.2)
|
35.1
|
-
|
(55.9)
|
-
|
(21.0)
|
-
|
(21.0)
|
Total
comprehensive income/(expense) for the period
|
|
-
|
-
|
1,396.9
|
35.1
|
-
|
(55.9)
|
-
|
1,376.1
|
-
|
1,376.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Transactions with owners:
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
8
|
-
|
-
|
(240.7)
|
-
|
-
|
-
|
-
|
(240.7)
|
-
|
(240.7)
|
Share options:
|
|
|
|
|
|
|
|
|
|
|
|
Issue
of share capital - share options
|
|
0.1
|
0.5
|
(0.5)
|
-
|
-
|
-
|
-
|
0.1
|
-
|
0.1
|
Movement
in relation to share options
|
|
-
|
-
|
59.7
|
-
|
-
|
-
|
-
|
59.7
|
-
|
59.7
|
Current
tax on share options
|
|
-
|
-
|
10.9
|
-
|
-
|
-
|
-
|
10.9
|
-
|
10.9
|
Deferred
tax on share options
|
|
-
|
-
|
(1.0)
|
-
|
-
|
-
|
-
|
(1.0)
|
-
|
(1.0)
|
Share reorganisation and buy-back:
|
|
|
|
|
|
|
|
|
|
|
|
Return
of Value - share consolidation
|
|
(18.7)
|
-
|
-
|
-
|
18.7
|
-
|
-
|
-
|
-
|
-
|
Issue
and redemption of B shares
|
|
-
|
-
|
(1,800.0)
|
-
|
1,800.0
|
-
|
(1,800.0)
|
(1,800.0)
|
-
|
(1,800.0)
|
Expenses
relating to Return of Value
|
|
-
|
-
|
(0.5)
|
-
|
-
|
-
|
-
|
(0.5)
|
-
|
(0.5)
|
Share
buy-back
|
|
-
|
-
|
(343.4)
|
-
|
-
|
-
|
-
|
(343.4)
|
-
|
(343.4)
|
Balance as at 30 April 2019
|
|
47.2
|
41.5
|
2,409.0
|
(16.6)
|
2,485.0
|
14.1
|
1,924.4
|
6,904.6
|
1.0
|
6,905.6
|
The
accompanying notes are an integral part of these unaudited
Condensed Consolidated Interim Financial Statements.
Micro Focus International plc
Condensed Consolidated Statement of Cash Flows
(unaudited)
|
Note
|
Six months ended
30 April 2020
$m
|
Six
months ended
30
April 2019
$m
|
Cash flows from operating activities
|
|
|
|
Cash generated from operations
|
17
|
560.4
|
622.6
|
Interest
paid
|
|
(105.5)
|
(117.7)
|
Bank
loan costs
|
|
(1.1)
|
-
|
Tax
paid
|
|
(65.5)
|
(39.1)
|
Net cash generated from operating activities
|
|
388.3
|
465.8
|
Cash flows from investing activities
|
|
|
|
Payments
for intangible assets
|
|
(36.5)
|
(12.8)
|
Purchase of
property, plant and equipment
|
|
(6.1)
|
(23.1)
|
Payment
for lease liabilities1 (2019: payment
of finance lease liabilities)
|
|
-
|
(10.4)
|
Interest
received
|
|
1.6
|
12.5
|
Payment
for acquisition of business
|
15
|
-
|
(89.7)
|
Net
cash acquired with acquisitions
|
|
-
|
1.2
|
Investing
cash flows generated from disposals
|
|
-
|
20.0
|
Investing
cash flows generated from discontinued operation, net of cash
disposed
|
|
1.3
|
2,476.9
|
Net cash (used in)/generated from investing activities
|
|
(39.7)
|
2,374.6
|
Cash
flows from financing activities
|
|
|
|
Proceeds
from issue of ordinary share capital
|
|
2.7
|
0.6
|
Purchase
of treasury shares and related expenses
|
|
-
|
(343.4)
|
Payment
for lease liabilities1
|
|
(40.8)
|
-
|
Settlement
of foreign exchange derivative
|
|
(21.8)
|
-
|
Proceeds
from bank borrowings
|
|
175.0
|
-
|
Repayment
of bank borrowings
|
|
-
|
(212.6)
|
Dividends
paid to owners
|
8
|
-
|
(240.7)
|
Net
cash generated/(used in) financing activities
|
|
115.1
|
(796.1)
|
Effects
of exchange rate changes
|
|
(11.3)
|
1.0
|
Net
increase in cash and cash equivalents
|
|
452.4
|
2,045.3
|
Cash
and cash equivalents at beginning of period
|
|
355.7
|
620.9
|
Cash and cash equivalents at end of period
|
|
808.1
|
2,666.2
|
1 Cash
outflows in relation to lease liabilities have been classified as a
financing activity in the six months ended 30 April 2020 as
repayments relating to all leases are presented as financing
activities following the adoption of IFRS 16 on 1 November 2019.
The comparative for finance lease obligations only continues to be
shown as an investing activity.
The
accompanying notes are an integral part of these unaudited
Condensed Consolidated Interim Financial Statements.
Micro Focus International plc
Notes to the consolidated interim financial statements
(unaudited)
1. General information
Micro Focus International plc ("Company") is a public limited
company 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
"Group") provide innovative software to clients around the world
enabling them to dramatically improve the business value of their
enterprise applications. As at 30 April 2020, the Group had a
presence in 48 countries (31 October 2019: 48) worldwide and
employed approximately 11,900 people (31 October 2019:
12,100).
The Company is listed on the London Stock Exchange and its American
Depositary Shares are listed on the New York Stock
Exchange.
These unaudited Condensed Consolidated Interim Financial Statements
were authorised for issuance by the board of directors on 6 July
2020.
These Condensed Consolidated Interim Financial Statements do not
comprise statutory accounts within the meaning of section 434 of
the Companies Act 2006. Statutory accounts for the 12 months ended
31 October 2019 were approved by the board of directors on 3
February 2020 and delivered to the Registrar of Companies. The
auditor has reported on the 31 October 2019 accounts; their report
was (i) unqualified, (ii) did not include a reference to any
matters to which the auditor drew attention by way of emphasis
without qualifying their report and (iii) did not contain a
statement under section 498 (2) or (3) of the Companies Act
2006.
2. Basis of
preparation
These Condensed Consolidated Interim Financial Statements for the
six months ended 30 April 2020 have been prepared in accordance
with the Disclosure and Transparency Rules of the Financial Conduct
Authority and with IAS 34, "Interim Financial Reporting". The
Condensed Consolidated Interim Financial Statements should be read
in conjunction with the Annual Report and Accounts for the 12
months ended 31 October 2019, which have been prepared in
accordance with International Financial Reporting Standards as
issued by the International Accounting Standards Board ("IASB") and
in conformity with International Financial Reporting Standards as
adopted by the European Union (collectively "IFRS").
Going concern
In line with IAS 1 'Presentation of financial statements', and the
FRC guidance on 'risk management, internal control and related
financial and business reporting', management has taken into
account all available information about the future for a period of
at least, but not limited to, 12 months from the date of approval
of the interim financial statements when assessing the Group's
ability to continue as a going concern.
Having assessed the principal risks, the directors considered it
appropriate to adopt the going concern basis of accounting when
preparing the interim financial statements. This assessment covers
the period to July 2021, which is consistent with the FRC
guidance.
In making this assessment, the Director's considered the maturity
of the Group's external debt and notably following the refinancing
of the $1.4bn of B2 Term Loan, which occurred in May 2020, the next
term loan maturity date is June 2024. See note 12 for details on
the Group's borrowings and note 18 for details on the post balance
sheet events. In assessing liquidity, the board also considered the
reported net current liability position at 30 April 2020. This is
the result of advance billing for services which is required to be
recognised as a contract liability.
The Strategic report included on pages 10 to 63 in the Annual
Report and Accounts for the year ended 31 October 2019 includes
information on the Group structure, strategy and business model.
The latest performance of each product group is included in
Financial review of these unaudited Condensed Consolidated Interim
Financial statements as well as information on our Group financial
results, financial outlook, cash flow and net debt, and balance
sheet position. Notes 12 and 13 of the Interim Financial Statements
include information on the Group's, borrowings and derivatives.
Details on the Group's dividend policy is included on in the Chief
Executive Officer's Statement. Details on the Group's financial
risk management objectives, hedging policies and exposure to
interest, foreign exchange, credit, liquidity and market risks are
included in pages 155, 165 and 210 of the Annual Report and
Accounts for the year ended 31 October 2019.
Our principal risks and uncertainties are set out in the Financial
review and provides details of any changes in the risks since 31
October 2019. Full description of the risks and how the Group
manages and mitigates them is included on pages 56 to 63 Annual
Report and Accounts for the year ended 31 October 2019. The
directors carried out a robust assessment of the principal risks
affecting the Group, including any that could threaten our business
model, future performance, insolvency or liquidity.
This includes estimating the financial impact for severe but
plausible scenarios impacting both revenue and Adjusted EBITDA
which take into account the Group's principal risks, including a
severe but plausible COVID-19 scenario based upon the impact of
COVID-19 continuing for the entire 12 month going concern
assessment period to July 2021. This stress testing confirmed that
existing projected cash flows and cash management activities
provide us with adequate headroom over the going concern assessment
period.
Notes to the consolidated interim financial statements
(unaudited)
2. Basis of preparation
(continued)
Critical estimates, assumptions and judgements
In preparing these Condensed Consolidated Interim Financial
Statements, the Group has made its best estimates and judgements of
certain amounts included in the financial statements, giving due
consideration to materiality. The Group regularly reviews these
estimates and updates them as required. The Group has reviewed its
critical accounting estimates, assumptions and judgements
considering the impact of COVID-19 and no new critical accounting
estimates, assumptions and judgements were identified other
than extending the judgement on the "potential impairment of
goodwill and other intangible assets" to include whether an
indicator of impairment exists at 30 April 2020. Note 11 Goodwill
explains the judgement on impairment indicators.
The existing critical accounting estimates, assumptions and
judgements set out in section II of the Group's Annual Report and
Accounts for the 12 months ended 31 October 2019 remain relevant to
these Condensed Consolidated Interim Financial Statements. COVID-19
has increased the level of uncertainty in making the estimations
required in relation to the potential impairment of goodwill and
other intangible assets and retirement benefit obligations.
Therefore whilst the nature of these critical accounting estimates,
assumptions and judgements has not changed and so the disclosure
included in section II of the Group's Annual Report and Accounts
remains relevant, updated sensitivity disclosures for these
critical estimates have been included in note 11 Goodwill and note
14 Retirement benefit obligations. COVID-19 has been assessed as
having no material impact on the Group's remaining critical
accounting estimates, assumptions and judgements disclosed in
section II of the Group's Annual Reports and Accounts.
The adoption of IFRS 16 ''Leases'' during the period has resulted
in the determination of lease term also being identified as a
critical accounting judgement for these Condensed Consolidated
Interim Financial Statements, this judgement is described in note
3.
3. Accounting
policies
Other than as described below, the accounting policies,
presentation and methods of calculation adopted are consistent with
those of the Annual Report and Accounts for the 12 months ended 31
October 2019, apart from standards, amendments to or
interpretations of published standards adopted during the period.
Income taxes are accrued using the tax rate that is expected to be
applicable for the full financial year, adjusted for certain
discrete items which occurred in the interim period in accordance
with IAS 34.
The following standards, interpretations and amendments to existing
standards are now effective and have been adopted by the Group. The
impacts of applying these policies are not considered
material:
-
IFRIC 23, "Uncertainty over Income Tax Treatments".
-
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.
-
Amendments to IAS 19 "Employee Benefits".
-
Annual Improvements 2017 includes amendments to IFRS 3, "Business
combinations", IFRS 11 "Joint arrangements" and IAS 12 Income
taxes.
IFRS 16 was adopted by the Group and the primary impacts of
applying the policy are described below:
IFRS 16 'Leases'
IFRS 16 "Leases" was adopted by the Group on 1 November 2019 with
the cumulative retrospective impact reflected as an adjustment to
equity on the date of adoption and therefore the comparative
information has not been restated and continues to be reported
under IAS 17 and IFRIC 4. The Group has applied the following
expedients in relation to the adoption of IFRS 16:
●
Arrangements were not
reassessed to determine whether they are, or contained, a lease at
1 November 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, a single
discount rate has been applied to each lease
portfolio;
●
The Group impaired the
right-of-use asset recognised on adoption by the value of the
provisions for onerous leases held under IAS 37 "Provisions,
Contingent Liabilities and Contingent Assets" at 31 October 2019
instead of performing a new impairment review for those leases at 1
November 2019;
●
The Group excluded
initial direct costs from the measurement of the right-of-use asset
at 1 November 2019;
●
Where the Group measured
right-of-use asset as if IFRS 16 had been applied since the
inception of the lease, the Group applied hindsight in assessing
extension or termination options; and
●
Where the Group measured
the right-of-use asset at an amount equal to the lease liability at
1 November 2019 lease prepayments and accruals previously
recognised under IAS 17 at 31 October 2019 were added to and
deducted from, respectively, the value of the right-of-use assets
on adoption.
Notes to the consolidated interim financial statements
(unaudited)
3.
Accounting policies (continued)
The key differences between the Group's IAS 17 accounting policy
(the 'previous policy' which is disclosed in the Group's Annual
Report and Accounts for the year ended 31 October 2019) and the
Group's IFRS 16 accounting policy (which is provided below), as
well as the primary impacts of applying IFRS 16 in the current
financial period are disclosed below.
Primary impacts of applying the IFRS 16 accounting
policy
The primary impacts on the Group's financial statements, and the
key causes of the movements recorded in the consolidated statement
of financial position on 1 November 2019 (see page 33), as a result
of applying the IFRS 16 ('current') accounting policy in place of
the previous policy are:
● Under IAS 17, lessees classified leases as either
operating or finance leases. Operating lease costs were expensed on
a straight-line basis over the period of the lease. Finance leases
resulted in the recognition, in the statement of financial
position, of an asset and a corresponding liability for lease
payments, at present value. Under IFRS 16 all lease agreements give
rise to the recognition of a 'right-of-use asset' representing the
right to use the leased item and a liability for any future lease
payments (see page 32) over the 'reasonably certain' period of the
lease, which may include future lease periods for which the Group
has extension options;
● Lessee accounting under IFRS 16 is similar to
finance lease accounting for lessees under IAS 17; lease costs are
recognised in the form of depreciation of the right-of-use asset
and interest on the lease liability. The incremental borrowing rate
of the Group for that lease portfolio is generally used for
discounting, although the interest rate implicit in the lease is
used when it is readily determinable. Interest charges will
typically be higher in the early stages of a lease and will reduce
over the term. Lease interest costs are recorded in financing costs
and associated cash payments are classified as financing cash flows
in the Group's cash flow statement;
● Under IFRS 16 cash inflows from operating
activities and payments classified within cash flow from financing
activities both increase, as payments made at both lease inception
and subsequently are characterised as repayments of lease
liabilities and interest. Under IAS 17 operating lease payments
were treated as an operating cash outflows. Net cash flow is not
impacted by the change in policy;
● Lessor accounting under IFRS 16 is similar to IAS
17. The only substantive change is that when the Group sub-leases
right-of-use assets it classifies the lease out as either operating
or finance leases by reference to the terms of head lease contract
whereas under IAS 17 the classification was determined by reference
to the underlying asset leased out. This has resulted in additional
finance leases ('net investment in leases') being recognised under
IFRS 16 (page 33) as the Group only acts as a lessor in relation to
under-utilised property leases;
● The expedients applied at adoption noted above
have resulted in the following changes (page
33);
o reclassifications
of lease-related prepayments and accruals at 1 November 2019 to the
right-of-use assets where the Group has measured the
right-of-use at an amount equal to the
liability.
o release
of lease-related prepayments and accruals at 1 November 2019
against retained earnings where the Group has measured the
right-of-use asset as if IFRS 16 had been applied since inception
of the lease.
o re-classification
of onerous leases provisions at 1 November 2019 to the right-of-use
assets. Provisions remain for any onerous non rental contracts
related to these properties.
During the six months ended 30 April 2019 a rental expense of
$35.5m was charged for operating leases and depreciation and
interest of $8.2m was charged for finance leases. During the six
months ended 30 April 2020, depreciation of $40.0m and
interest of $6.8m has been charged in relation to all
leases.
IFRS 16 Accounting Policy
As a lessee
When the Group leases an asset a 'right-of-use asset' is recognised
for the leased item and a lease liability is recognised for any
lease payments due at the lease commencement date. The right-of-use
asset is initially measured at cost, being the present value of the
lease payments paid or payable, plus any initial direct costs
incurred in entering the lease and less any lease incentives
received.
Right-of-use assets are depreciated on a straight-line basis from
the commencement date to the earlier of the end of the asset's
useful life or the end of the lease term. The lease term is the
non-cancellable period of the lease plus any periods for which the
Group is 'reasonably certain' to exercise any extension options
(see below). The useful life of the asset is determined in a manner
consistent to that for owned property, plant and equipment (as
described in the Group's Annual Report and Accounts for the year
ended 31 October 2019). If right-of-use assets are considered to be
impaired, the carrying value is reduced accordingly.
Lease liabilities are initially measured at the value of the lease
payments that are not paid at the commencement date and are usually
discounted using the incremental borrowing rates of the Group for
the relevant portfolio (the rate implicit in the lease is used if
it is readily determinable). Lease payments included in the lease
liability include both fixed payments and in-substance fixed
payments during the term of the lease.
Notes to the consolidated interim financial statements
(unaudited)
3. Accounting
policies (continued)
After
initial recognition, the lease liability is recorded at amortised
cost using the effective interest method. It is re-measured when
there is a change in future lease payments arising from a change in
an index or rate (e.g. an inflation related increase) or if the
Group's assessment of the lease term changes; any change in the
lease liability as a result of these changes also results in a
corresponding change in the recorded right-of-use
asset.
As a lessor
Where
the Group is a lessor, it determines at inception whether the lease
is a finance or an operating lease. When a lease transfers
substantially all the risks and rewards of ownership of the
underlying asset then the lease is a finance lease; otherwise, the
lease is an operating lease.
Where
the Group is an intermediate lessor, the interest in the head lease
and the sub-lease is accounted for separately and the lease
classification of a sub-lease is determined by reference to the
right-of-use asset arising from the head lease.
Income
from operating leases is recognised on a straight-line basis over
the lease term. Income from finance leases is recognised in full at
lease commencement.
Critical accounting judgements and key sources of estimation
relating to IFRS 16
Lease term
Where leases include additional optional periods after an initial
lease term, significant judgement is required in determining
whether these optional periods should be included when determining
the lease term. As a lessee, optional periods are included in the
lease term if the Group is reasonably certain it will exercise an
extension option or will not exercise a termination option; this
depends on an analysis by management of all relevant facts and
circumstances including the leased asset's nature and purpose, the
economic and practical potential for replacing the asset and any
plans that the Group has in place for the future use of the asset.
Where it is impractical or uneconomic to replace then the Group is
more likely to judge that lease extension options are reasonably
certain to be exercised.
Where extension options are included in the lease term the greater
will be the value of the right-of-use asset and lease liability
recognised. The normal approach adopted for lease term by asset
class is described below.
The lease terms can vary significantly by type and use of asset and
geography. In addition, the exact lease term is subject to the
non-cancellable period and rights and options in each contract.
Generally, lease terms are judged to be the longer of the minimum
lease term and:
●
Up to 5 years for
offices, unless the non-cancellable period exceeds this, with
optional extension periods only included in leases expiring in the
earlier part of this period and where clear plans to extend the
leases are already in place; and
●
Up to 3 years for data
centres with optional extensions periods, where they exist,
included for leases expiring in the next year and for which
relocation of the assets located in the data centre is considered
uneconomic.
For vehicle leases the minimum lease term, typically 3 to 4 years,
is judged to be the lease term. Extension options for vehicles are
not considered reasonably certain as the assets are not highly
customised or difficult to replace.
Adoption judgements
In adopting, and in the ongoing application of, IFRS 16 judgements
and estimates were made in relation to the grouping of leases for
the purpose of assigning a discount rate and in calculating the
discount rates. These judgements and estimates were significant for
the Group's IFRS 16 adoption activities but are not considered
critical accounting estimates or judgements for the Group as they
are not considered to have a significant effect on the amounts
recognised in the Group's financial statements.
Transition disclosures
The weighted average incremental borrowing rate applied to the
Group's lease liabilities recognised in the balance sheet at 1
November 2019 is 4.5%.
The Group's undiscounted operating lease commitments at 31 October
2019 were $301.2m; the most significant differences between the IAS
17 lease commitments and the lease liabilities recognised on
transition to IFRS 16 are set out below:
|
$m
|
Operating lease commitments under IAS 17
|
301.2
|
Committed leases not commenced1
|
(0.3)
|
Cost of reasonably certain extensions1
|
1.3
|
Subtotal
|
302.2
|
Effect of discounting on payments included in the calculation of
the lease liability (excluding finance lease balances)
|
(32.4)
|
Subtotal
|
269.8
|
Other2
|
23.5
|
Lease liability opening balance to be reported as at 1 November
2019 (IFRS 16)
|
293.3
|
1. Undiscounted.
2. Includes
Finance lease liabilities already reported under IAS
17.
Notes to the consolidated interim financial statements
(unaudited)
3. Accounting
policies (continued)
The impact of the adoption of IFRS 16 on the consolidated statement
of financial position at 1 November 2019 is set out
below.
|
31 October 2019
(audited)
$m
|
Impact of adoption of IFRS 16 (unaudited)
$m
|
1 November 2019
(unaudited)
$m
|
Non-current assets
|
|
|
|
Goodwill
|
6,671.3
|
-
|
6,671.3
|
Other
intangible assets
|
5,942.3
|
(1.8)
|
5,940.5
|
Property,
plant and equipment1
|
140.5
|
217.8
|
358.3
|
Long
term pension assets
|
17.1
|
-
|
17.1
|
Contract-related
costs
|
31.5
|
-
|
31.5
|
Other
non-current assets
|
44.0
|
7.1
|
51.1
|
|
12,846.7
|
223.1
|
13,069.8
|
Current assets
|
|
|
|
Inventories
|
0.1
|
-
|
0.1
|
Trade
and other receivables
|
1,032.9
|
3.1
|
1,036.0
|
Contract-related
costs
|
19.3
|
-
|
19.3
|
Current
tax receivables
|
40.1
|
-
|
40.1
|
Cash
and cash equivalents
|
355.7
|
-
|
355.7
|
Total
current assets
|
1,448.1
|
3.1
|
1,451.2
|
Total assets
|
14,294.8
|
226.2
|
14,521.0
|
|
|
|
|
Current liabilities
|
|
|
|
Trade
and other payables
|
611.0
|
1.4
|
612.4
|
Leases
|
11.8
|
74.7
|
86.5
|
Provisions
|
29.3
|
(4.3)
|
25.0
|
Current
tax liabilities
|
104.0
|
-
|
104.0
|
Contract
liabilities
|
1,045.9
|
-
|
1,045.9
|
|
1,802.0
|
71.8
|
1,873.8
|
Non-current liabilities
|
|
|
|
Contract
liabilities
|
149.9
|
-
|
149.9
|
Borrowings
|
4,670.7
|
-
|
4,670.7
|
Leases
|
11.7
|
195.1
|
206.8
|
Derivative
liability
|
36.5
|
-
|
36.5
|
Retirement
benefit obligations
|
141.4
|
-
|
141.4
|
Provisions
|
49.1
|
(12.4)
|
36.7
|
Other
non-current liabilities
|
50.4
|
(13.5)
|
36.9
|
Current
tax liabilities
|
119.7
|
-
|
119.7
|
Deferred
tax liabilities
|
987.1
|
(3.5)
|
983.6
|
|
6,216.5
|
165.7
|
6,382.2
|
Total liabilities
|
8,018.5
|
237.5
|
8,256.0
|
Net assets
|
6,276.3
|
(11.3)
|
6,265.0
|
Capital and reserves
|
|
|
|
Share
capital
|
47.2
|
-
|
47.2
|
Share
premium account
|
44.0
|
-
|
44.0
|
Merger
reserve
|
1,739.8
|
-
|
1,739.8
|
Capital
redemption reserve
|
2,485.0
|
-
|
2,485.0
|
Hedging
reserve
|
(29.6)
|
-
|
(29.6)
|
Retained
earnings
|
2,250.7
|
(11.3)
|
2,239.4
|
Foreign
currency translation deficit
|
(262.1)
|
-
|
(262.1)
|
Total equity attributable to owners of the parent
|
6,275.0
|
(11.3)
|
6,263.7
|
Non-controlling interests
|
1.3
|
-
|
1.3
|
Total equity
|
6,276.3
|
(11.3)
|
6,265.0
|
1 Includes $230.3m of right-of-use
assets recognised as a result of the adoption of IFRS 16 netted
against $12.5m of existing property, plant and equipment which has
been reclassified into the right-of-use asset.
The application of future new and revised IFRSs are not expected to
have a material impact to the Group when adopted.
Notes to the consolidated interim financial statements
(unaudited)
4. 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.
5. Segmental
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 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 six months to 30 April 2020, the Operating Committee
consisted of the Chief Executive Officer, the Chief Financial
Officer, Chief Operating Officer, Chief HR Officer, Company
Secretary and the Vice President Business Operations. The Group is
organised into a single reporting segment.
The Group's segment under IFRS 8 is:
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-Market organisation. The
products within the existing Micro Focus Product Portfolio are
grouped together into five sub-portfolios based on industrial logic
and management of the Micro Focus sub-portfolios: Application
Modernisation & Connectivity, Application Delivery Management,
IT Operations Management, Security and Information Management &
Governance.
The segmental reporting is consistent with that used in internal
management reporting and the profit measure used by the Operating
Committee is Adjusted EBITDA.
The internal management reporting that the Operating Committee
received in the six months ended 30 April 2019, included a pool of
centrally managed costs, which were allocated between Micro Focus
and the SUSE business (up the date of disposal) based on
identifiable segment specific costs with the remainder allocated
based on other criteria including revenue and
headcount.
|
|
Six months
ended
30 April 2020
(unaudited)
|
Six
months
ended
30
April 2019
(unaudited)
|
Reconciliation to Adjusted EBITDA:
|
Note
|
$m
|
$m
|
Loss before tax
|
|
(1,036.0)
|
(99.6)
|
Finance
costs
|
|
130.9
|
144.7
|
Finance
income
|
|
(1.6)
|
(12.5)
|
Depreciation of property, plant and equipment
|
|
61.1
|
32.8
|
Amortisation of intangible assets
|
|
340.4
|
356.3
|
Exceptional items (reported in Operating
(loss)/profit)
|
7
|
1,048.4
|
161.4
|
Share-based compensation charge
|
|
8.2
|
70.0
|
Product development intangible costs capitalised
|
|
(6.9)
|
(10.3)
|
Foreign
exchange credit
|
|
7.7
|
19.5
|
Adjusted EBITDA
|
|
552.2
|
662.3
|
For the reportable segment, the total assets were $13,219.9m (31
October 2019: $14,294.8m) and the total liabilities were $8,215.6m
(31 October 2019: $8,018.5m) as at 30 April 2020.
Notes to the consolidated interim financial statements
(unaudited)
6. Analysis of
revenue
Revenue from contracts with customers
|
Six months ended
30 April 2020
(unaudited)
|
Six months
ended
30 April 2019
(unaudited)
|
|
$m
|
$m
|
Revenue from contracts with customers
|
1,454.2
|
1,657.1
|
|
|
|
Being:
|
|
|
Recognised over time:
|
|
|
Maintenance revenue
|
966.0
|
1,054.3
|
SaaS & other recurring revenue
|
124.5
|
143.1
|
|
1,090.5
|
1,197.4
|
Recognised at point in time:
|
|
|
Licence revenue
|
267.6
|
343.7
|
Consulting revenue
|
96.1
|
116.0
|
|
363.7
|
459.7
|
|
|
|
Total revenue
|
1,454.2
|
1,657.1
|
By Product
Set out below is an analysis of revenue recognised between the
principal product portfolios for the six months ended 30 April 2020
with comparatives:
|
Licence
$m
|
Maintenance
$m
|
SaaS &
other
recurring
$m
|
Consulting
$m
|
Total
$m
|
Six months ended 30 April 2020 (unaudited):
|
|
|
|
|
|
Micro Focus Product Portfolio
|
|
|
|
|
|
Application
Modernisation & Connectivity
|
60.4
|
160.5
|
-
|
5.2
|
226.1
|
Application
Delivery Management
|
46.7
|
223.2
|
38.4
|
7.7
|
316.0
|
IT
Operations Management
|
69.7
|
284.0
|
1.4
|
56.7
|
411.8
|
Security
|
65.6
|
206.2
|
16.7
|
17.7
|
306.2
|
Information
Management & Governance
|
25.2
|
92.4
|
68.1
|
8.8
|
194.5
|
Subtotal
|
267.6
|
966.3
|
124.6
|
96.1
|
1,454.6
|
Deferred
revenue haircut
|
-
|
(0.3)
|
(0.1)
|
-
|
(0.4)
|
Total Micro Focus Product Portfolio
|
267.6
|
966.0
|
124.5
|
96.1
|
1,454.2
|
|
Licence
$m
|
Maintenance
$m
|
SaaS
&
other
recurring
$m
|
Consulting
$m
|
Total
$m
|
Six
months ended 30 April 2019 (unaudited):
|
|
|
|
|
|
Micro
Focus Product Portfolio
|
|
|
|
|
|
Application
Modernisation & Connectivity
|
72.0
|
163.1
|
-
|
5.5
|
240.6
|
Application
Delivery Management
|
63.0
|
246.5
|
42.5
|
10.4
|
362.4
|
IT
Operations Management
|
108.0
|
344.4
|
6.2
|
67.0
|
525.6
|
Security
|
69.1
|
210.0
|
19.2
|
24.4
|
322.7
|
Information
Management & Governance
|
31.6
|
94.0
|
75.7
|
8.7
|
210.0
|
Subtotal
|
343.7
|
1,058.0
|
143.6
|
116.0
|
1,661.3
|
Deferred
revenue haircut
|
-
|
(3.7)
|
(0.5)
|
-
|
(4.2)
|
Total
Micro Focus Product Portfolio
|
343.7
|
1,054.3
|
143.1
|
116.0
|
1,657.1
|
Notes to the consolidated interim financial statements
(unaudited)
7. Exceptional
items
|
Six months
ended
30 April 2020
(unaudited)
|
Six
months
ended
30
April 2019
(unaudited)
|
Reported within Operating (loss)/profit:
|
$m
|
$m
|
Integration
costs
|
102.9
|
136.9
|
Acquisition
costs
|
-
|
2.6
|
Property
related costs
|
1.6
|
10.6
|
Severance
and legal costs
|
21.7
|
15.7
|
Goodwill
impairment
|
922.2
|
-
|
Gain on
disposal of Atalla
|
-
|
(4.4)
|
Exceptional costs before tax
|
1,048.4
|
161.4
|
|
|
|
Tax effect of exceptional items
|
(30.8)
|
(29.1)
|
|
|
|
Reported within (loss)/profit from discontinued operation
(attributable to equity shareholders of the Company):
|
|
|
Loss/(gain)
on disposal of discontinued operation1
|
2.7
|
(1,446.9)
|
|
|
|
Exceptional costs/(profit) after tax
|
1,020.3
|
(1,314.6)
|
1 $1,446.9m of the
comparative period profit from discontinued operation has been
revised to show the gain on the disposal as an exceptional item in
line with the accounting policy.
Integration costs
Integration costs of $102.9m for the six months ended 30 April 2020
(six months ended 30 April 2019: $136.9m) reflect the IT design,
build and migration onto a single IT platform and a wide range of
projects undertaken to conform, simplify and increase efficiency
across the business.
Acquisition costs
The acquisition costs of $2.6m
the six months ended 30 April
2019 related to the acquisition of Interset Software
Inc. (note 15).
Property related costs
Property related costs of $1.6m for the six months ended 30 April
2020 (six months ended 30 April 2019: $10.6m) relate to the
assessment and reassessment of leases on empty or sublet properties
held by the Group and the cost of site consolidations as the Group
simplifies its real estate footprint.
Severance and legal costs
Severance and legal costs of $21.7m for the six months ended 30
April 2020 (six months ended 30 April 2019: $15.7m) and relate
mostly to termination costs for employees as the Group continues to
remove duplication and simplify the continuing operations as a
result of the acquisition of HPE Software.
Goodwill impairment
A goodwill impairment charge of $922.2m was made in the six months
ended 30 April 2020 (six months ended 30 April 2019: $nil), see
note 11 for additional information.
Gain on disposal
Gain on disposal of $4.4m for the six months ended 30 April 2019
relates to Atalla business disposal.
Tax effect of exceptional items
The tax effect of exceptional items on the income statement is a
credit of $30.8m for the six months ended 30 April 2020 (2019:
$29.1m credit).
Loss/(gain) on disposal of discontinued operation
The loss on the disposal of discontinued operation of $2.7m in the
six months ended 30 April 2020 related to conclusion of the working
capital settlement on the disposal of the SUSE business (six months
ended 30 April 2019: gain $1,446.9m).
8.
Dividends
|
Six months
ended
30 April 2020
(unaudited)
|
Six months
ended
30 April 2019
(unaudited)
|
Equity - ordinary
|
$m
|
$m
|
Final paid 31 October 2019 $nil (31 October 2018: 58.33 cents per
ordinary share)
|
-
|
240.7
|
|
-
|
240.7
|
Notes to the consolidated interim financial statements
(unaudited)
8. Dividends
(continued)
As part of the 2019 year-end, the directors initially announced a
final dividend of 58.33 cents per share payable on 7 May 2020 to
shareholders registered at 14 May 2020. The decision was
subsequently taken to cancel this. The directors are not
proposing an interim dividend for the six months ended 30 April
2020.
9. Earnings per
share
The calculation of the basic earnings per share has been based on
the earnings attributable to owners of the parent and the weighted
average number of shares for each period.
Reconciliation of the earnings and weighted average number of
shares:
|
Six months
ended
30 April 2020
(unaudited)
|
Six months
ended
30 April 2019
(unaudited)
|
Earnings ($m)
|
|
|
Loss for the period from continuing operations
|
(1,029.3)
|
(78.3)
|
(Loss)/profit for the period from discontinued
operations
|
(2.7)
|
1,475.4
|
(Loss)/profit for the period
|
(1,032.0)
|
1,397.1
|
|
|
|
Number of shares ('m)
|
|
|
Weighted average number of shares
|
333.8
|
416.6
|
Dilutive effects of shares
|
4.4
|
16.3
|
|
338.2
|
432.9
|
Earnings per share
|
|
|
|
|
|
CENTS
|
|
|
Basic earnings per share
|
|
|
Continuing operations
|
(308.40)
|
(18.79)
|
Discontinued operation
|
(0.81)
|
354.12
|
Total Basic earnings per share
|
(309.21)
|
335.32
|
|
|
|
Diluted earnings per share
|
|
|
Continuing operations1
|
(308.40)
|
(18.79)
|
Discontinued operation1
|
(0.81)
|
340.82
|
Total Diluted earnings per
share1
|
(309.21)
|
322.74
|
|
|
|
PENCE
|
|
|
Basic earnings per share
|
|
|
Continuing operations
|
(240.89)
|
(14.52)
|
Discontinued operation
|
(0.63)
|
273.64
|
Total Basic earnings per share
|
(241.52)
|
259.12
|
|
|
|
Diluted earnings per share
|
|
|
Continuing operations1
|
(240.89)
|
(14.52)
|
Discontinued operations1
|
(0.63)
|
263.37
|
Total Diluted earnings per
share1
|
(241.52)
|
249.39
|
|
|
|
Earnings attributable to ordinary shareholders ($m)
|
|
|
From continuing operations
|
(1,029.4)
|
(78.3)
|
Excluding non-controlling interests
|
0.1
|
-
|
Loss for the period from continuing operations
|
(1,029.3)
|
(78.3)
|
From discontinued operation
|
(2.7)
|
1,475.4
|
|
(1,032.0)
|
1,397.1
|
Average exchange rate
|
$1.28 / £1
|
$1.29 / £1
|
1 The Group reported a
loss from continuing and discontinued operations attributable to
the ordinary equity shareholders of the Company for the six months
ended 30 April 2020. 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 were total earnings attributable to
ordinary equity shareholders of the Company for the six months
ended 30 April 2019 of $1,397.1m and therefore the effect of
dilutive securities was reflected in the total Diluted EPS
above.
The weighted average number of shares excludes treasury shares that
do not have dividend rights.
Notes to the consolidated interim financial statements
(unaudited)
10. Taxation
Tax for the six month period ended 30 April 2020 was a credit of
$6.7m (30 April 2019: credit of $21.3m) with the Group's Effective
Tax Rate ("ETR") being 0.6% (30 April 2019: 21.4%).
The Group realised benefits in relation to intra-Group financing of
$20.7m for the six months ended 30 April 2020 (six months ended 30
April 2019: $12.8m). The benefits mostly relate to arrangements put
in place to facilitate the acquisitions of the HPE Software
business.
The Group's cash taxes paid in the six months ended 30 April 2020
were $65.5m (30 April 2019: $39.1m). Cash taxes are higher than the
prior year comparative period primarily due to the timing of
instalment payments.
The Group is recognising a short-term current tax liability of
$140.8m (31 October 2019: $104.0m), a long-term current tax
liability relating to US tax of $103.0m (31 October 2019: $119.7m)
and a current tax receivable of $44.9m (31 October 2019: $40.1m).
The Group is also recognising a deferred tax liability of $878.4m
(31 October 2019: $987.1m), after jurisdictional
offsetting.
The long-term current tax liability relates to US tax reforms
announced in 2018 and is payable in instalments over eight years to
2026. Within current tax liabilities is $76.0m (31 October 2019:
$78.3m) in respect of provisions for uncertain tax positions, the
majority of which relate to the risk of challenge from local tax
authorities to the transfer pricing arrangements of the Group. 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.
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, the OECD's Base Erosion and Profit Shifting
project, the consequences of Brexit and the COVID-19 outbreak. On
25 April 2019 the EU Commission concluded that an element of the
UK's 'Controlled Foreign Company' legislation, specifically the
'Financing Company Partial Exemption' partially constituted illegal
state aid. Similar to other international companies with UK
activities, the Group has benefited from this legislation and
therefore may be affected by this finding. The Group is currently
reviewing the findings of the EU Commission and discussing the
impact with both advisors and HMRC who are independently reviewing
the Group's application of this legislation. The EU decision and
HMRC's own investigation are both subject to potentially lengthy
appeals processes, and the Group will continue to monitor
developments. The Group has determined that the highest tax
liability it expects to incur would be $60.3m. Based on its current
assessment the Group believes that no provision is required in
respect of the financing arrangements. The UK legislation affected
by this EU Commission finding was amended on 1 January 2019 to be
compliant with EU law and the relevant lending arrangements
subsequently paid off and therefore no longer impact the Group and
so no additional amounts will accrue in future periods that could
be subject to the same challenge.
11. Goodwill
|
|
30 April 2020
|
31
October 2019
|
|
|
(unaudited)
|
(audited)
|
Cost and Net book value
|
Note
|
$m
|
$m
|
At 1
November 2019 / 1 May 2019
|
|
6,671.3
|
6,839.2
|
Acquisitions
|
15
|
-
|
(7.4)
|
Impairment
charge
|
|
(922.2)
|
-
|
Effects
of movements in exchange rates
|
|
(150.0)
|
(160.5)
|
At 30 April 2020 / 31 October 2019
|
|
5,599.1
|
6,671.3
|
|
|
|
|
A segment-level summary of the goodwill allocation is presented
below:
|
|
|
|
Micro Focus
|
|
5,599.1
|
6,671.3
|
Goodwill acquired through business combinations has been allocated
to a cash generating unit ("CGU") for the purpose of impairment
testing.
The goodwill arising in the six months ended 31 October 2019,
related to refinements of the goodwill on the acquisition of the
Interset Software Inc. Total goodwill of $26.8m has been recorded
related to changes in fair value for Interset Software
Inc.
Impairment test
Impairment of goodwill is tested annually, or more frequently where
there is an indication of impairment. The Group's annual test is
performed at 31 October. It has been determined that the adverse
impact of COVID-19 on global economic activity and the challenging
trading environment that results is an indicator that an impairment
exists at 30 April 2020 in light of the relatively low level of
headroom that existed at the date of the last test on 31 October
2019. Therefore, an impairment test has been conducted at 30 April
2020. 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 the impairment test at 30 April 2020
incorporating its knowledge of the business into that testing and
noting at that date the market capitalisation was less than the net
assets of the Group, which was taken into account during the
impairment test.
Notes to the consolidated interim financial statements
(unaudited)
11. Goodwill
(continued)
For the six months ended 30 April 2020, the Group recorded an
impairment charge of $0.9bn (2019: no impairment). The impairment
charge relates solely to goodwill and is recognised in
administrative expenses as an exceptional cost in the Consolidated
statement of comprehensive income. The recoverable amount of the
Micro Focus CGU is $11.5bn, based on value in use
calculations.
The COVID-19 outbreak has developed rapidly in early 2020. Many
countries have required businesses to limit or suspend operations
and implemented travel restrictions and quarantine measures. The
measures taken to contain the virus have adversely affected
economic activity and disrupted many businesses. Although the Group
has not had to suspend any operations or experienced significant
disruption to the Group's operations, the wider economic impact and
disruption many business have experienced has impacted the Group's
customers. As the outbreak continues to progress and evolve, it is
extremely difficult to predict the full extent and duration of this
impact on the Group's customers and therefore the Group's business.
Based on the information available as at 30 April 2020, management
has made additional adjustments to the forecasts used in the
Group's impairment testing in order to reflect the estimated
impact. The impairment charges recognised are based on expected
cash flows after applying these adjustments.
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 utilises
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 and reflect the adjustments noted
above. The challenges and related adjustments noted above have led
to management projecting lower cash flows. However, COVID-19 is not
anticipated to have a significant impact on the terminal year
growth rate, which is a key driver of the Group's value in use
calculation, as the impact is considered to be
shorter-term.
The VIU calculation also continues to exclude the cash outflow and
resulting cash inflow assumptions arising from the investment
decisions made in the Strategic Review and announced in February
2020 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 until the cash flow is
incurred. 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 investment which are in
process of implementation.
The impairment charge recognised in the Micro Focus CGU is
attributable to the aforementioned increased economic uncertainty,
which has led to increased discount rates and expected disruption
to new sales activity and timing pressure on renewals. Consistent
with the fact that we do not expect COVID-19 to have a longer term
impact on the Group, our assumption of a moderation in the revenue
decline and delivery of flat to low single digit growth from the
Strategic Review remains valid. However as disclosed below, over
the five year forecast period, the expected disruption to new sales
activity and timing pressure on renewals has resulted in a
reduction in the range of average annual revenue growth rates by
product group because this is presented on an average basis over
five years.
Key assumptions
Key assumptions in the VIU are considered to be the discount rate,
average 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 average annual revenue growth rate by product group, long-term
cash flow growth rate and discount rate used in the VIU calculation
are:
|
30 April 2020
(unaudited)
|
31
October 2019
(audited)
|
Long-term
cash flow growth rate for terminal value
|
1.0%
|
1.0%
|
Pre-tax
discount rate1
|
10.8%
|
10.3%
|
Average
annual revenue growth rate by product group2
|
(3.4)% to (0.5)%
|
(2.4)%
to 0.8%
|
1 This equates to a
post-tax discount rate of 8.3% (2019: 8.0%)
2 Medium-term annual
revenue growth rate by product group was considered the key
assumption in 2019 with a range of (2.0)% to 2.1% disclosed. Given
the current uncertainty the Group has extended the key assumption
to cover the five years forecasts used for impairment testing. The
key assumption for 2019 has been restated to be presented on a
consistent basis with 2020.
Sensitivity analysis
In undertaking this analysis, the directors have considered
reasonably possible changes in the key assumptions, 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 sensitivities are prepared on the basis that the reasonably
possible change in each key assumption would not have a
consequential impact on other key assumptions used in the
impairment review and therefore leave all other assumptions
unchanged. The headroom and impairments 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
considered whether the range of reasonably possible changes in key
assumptions should be widened as a result of the increased
uncertainty resulting from the COVID-19 outbreak. However, the
Directors concluded that the range of reasonably possible changes
remained appropriate at this time in light of the estimated impact
COVID-19 has had on the Group.
Notes to the consolidated interim financial statements
(unaudited)
11. Goodwill
(continued)
The directors have assessed that a reasonably possible change in
the discount rate is an absolute movement of 2.0% (2019: 2.0%). An
increase in the discount rate of 2% to 12.8% would increase the
impairment recognised at 30 April 2020 by $1.9bn. A decrease
in the discount rate of 2% to 8.8% would decrease the impairment
recognised at 30 April 2020 by $0.9bn and result in headroom of
$2.0bn.
The directors have assessed that a reasonably possible change in
the average annual revenue growth rate by product group is an
absolute reduction of 2.0%. A decrease in the average annual
revenue growth rate by product group of 2% would increase the
impairment recognised at 30 April 2020 by $2.1bn. 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 assessed that a reasonably possible change in
the long-term growth rate is an increase or decrease of 0.5% to
1.5% or 0.5% respectively (2019; not reasonably possible). An
increase of 0.5% would decrease the impairment recognised at 30
April 2020 by $0.6bn. A decrease of 0.5% would increase the
impairment recognised at 30 April 2020 by $0.5bn.
12.
Borrowings
|
30 April 2020
|
31
October 2019
|
|
(unaudited)
|
(audited)
|
|
$m
|
$m
|
Bank
loan secured
|
4,936.3
|
4,775.0
|
Unamortised
prepaid facility arrangement fees and original issue
discounts
|
(80.9)
|
(104.3)
|
|
4,855.4
|
4,670.7
|
|
|
|
Short-term
borrowings
|
169.4
|
-
|
Long-term
borrowings
|
4,686.0
|
4,670.7
|
|
4,855.4
|
4,670.7
|
During the period $175.0m of the senior secured revolving credit
facility was drawn by the Group. Short-term borrowing of $169.4m
relates to the $175.0m senior secured revolving credit facility
less unamortised prepaid facility arrangement fees and original
issue discounts of $5.6m. This was drawn as a precautionary measure
following the COVID-19 outbreak.
The following facilities were drawn as at 30 April
2020:
●
The $1,414.7m 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 $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
an original issue discount of 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 a LIBOR floor of 0.00%) with
an original issue discount of 0.25%;
●
The €452.8m
(equivalent to $492.1m) 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%; and
●
A senior secured
revolving credit facility of $500.0m ($175.0m drawn), ("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%).
At 30 April 2020, $175.0m of the Revolving Facility was drawn (31
October 2019: $nil), together with $4,761.3m of Term Loans giving
gross debt of $4,936.3m drawn. 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. As $175.0m (35%) of Revolving
Facility was drawn at 30 April 2020, no covenant test is
applicable.
Borrowings are stated after deducting unamortised prepaid facility
fees and original issue discounts. Facility arrangement costs and
original issue discounts are amortised between three and six
years.
Notes to the consolidated interim financial statements
(unaudited)
13. Financial
instruments
The tables below sets out the values of financial assets and
liabilities.
|
30 April 2020
|
31 October 2019
|
|
(unaudited)
|
(audited)
|
|
$m
|
$m
|
Financial assets
|
|
|
|
|
|
Non-current
|
|
|
Long-term pension assets (note 14)
|
17.0
|
17.1
|
Current
|
|
|
Cash and cash equivalents
|
808.1
|
355.7
|
Trade and other receivables
|
653.9
|
922.7
|
|
1,479.0
|
1,295.5
|
|
30 April 2020
|
31 October 2019
|
|
(unaudited)
|
(audited)
|
|
$m
|
$m
|
Financial liabilities - financial liabilities at amortised
cost
|
|
|
|
|
|
Non-current
|
|
|
Derivative financial instruments - interest rate swaps
|
94.7
|
36.5
|
|
94.7
|
36.5
|
|
|
|
|
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 $4,936.3m (note 12)
before unamortised prepaid facility fees, have a fair value
estimate of $4,620.1m based on trading prices as at 30 April
2020.
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.
For derivatives and long term pension assets there were no
transfers of assets or liabilities between levels of the fair value
hierarchy during the period.
Long term pension assets
|
30 April 2020
|
31
October 2019
|
|
(unaudited)
|
(audited)
|
|
$m
|
$m
|
Carrying
amount
|
17.0
|
17.1
|
The long-term pension assets are considered to be Level 3 asset
under the fair value hierarchy as of 30 April 2020. 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. The movement in the long-term pension asset is disclosed
in note 14.
Derivative financial instruments
|
30 April 2020
|
31
October 2019
|
|
(unaudited)
|
(audited)
|
|
$m
|
$m
|
Carrying
amount
|
(94.7)
|
(36.5)
|
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
|
(58.2)
|
(122.9)
|
Change
in value of hedging instruments adjusted for credit
risk
|
(56.1)
|
(121.9)
|
Notes to the consolidated interim financial statements
(unaudited)
13. Financial instruments
(continued)
The Group has four interest rate swaps which are designated in a
hedge relationship. Derivatives are only used for economic
hedging purposes and not as speculative investments. The interest
rate swaps in place have a total notional value of $2.25bn to hedge
against the impact of potential rises in interest rates until 30
September 2022. The swaps are hedged against $2.25bn of the loan
issued by Seattle SpinCo. Inc.
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 30 April 2020, net interest paid for the swaps
amounted to $ 4.1m. For the life of the swap, net interest received
amounted to $2.4m.
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 met the IFRS 9 requirements for
the financial reporting period.
The impact of changes in the fair value of interest rate swaps in
the period ended 30 April 2020 is shown in the Condensed
Consolidated Statement of Comprehensive Income.
The Group also utilised a forward exchange contract to fix the
Sterling equivalent (£150.0m) on the cancelled May 2020
dividend payment. The forward contract was not designated for
formal hedge accounting and was settled early for $21.8m within the
reporting period as the proposed dividend was
cancelled.
14. Retirement benefit
obligations
|
30 April 2020
(unaudited)
|
|
31 October 2019
(audited)
|
|
Germany
|
Rest of World
|
Total
|
|
Germany
|
Rest of World
|
Total
|
Within non-current assets:
|
|
|
|
|
|
|
|
Long-term pension assets
|
17.0
|
-
|
17.0
|
|
17.1
|
-
|
17.1
|
|
|
|
|
|
|
|
|
Within non-current liabilities:
|
|
|
|
|
|
|
|
Present value of defined benefit obligations
|
(201.9)
|
(48.9)
|
(250.8)
|
|
(213.5)
|
(48.0)
|
(261.5)
|
Fair values of plan assets
|
85.8
|
26.6
|
112.4
|
|
92.0
|
28.1
|
120.1
|
Retirement benefit obligations
|
(116.1)
|
(22.3)
|
(138.4)
|
|
(121.5)
|
(19.9)
|
(141.4)
|
The decrease in the retirement benefit obligation was due primarily
to activity in Germany, including actuarial gains resulting from
increases in our discount rates. This was partially offset by
decreasing asset values and service costs during the
period.
The movement on the long-term pension asset is as
follows:
|
30 April 2020
|
31
October 2019
|
|
(unaudited)
|
(audited)
|
|
$m
|
$m
|
As at 1
November
|
17.1
|
16.7
|
Reclassification
to assets held for sale
|
-
|
0.1
|
Interest
on non-plan assets
|
0.1
|
0.3
|
Benefits
paid
|
(0.1)
|
(0.1)
|
Contributions
|
-
|
0.3
|
|
|
|
Included within other comprehensive income:
|
|
|
-
Change in fair value assessment
|
0.4
|
0.4
|
|
0.4
|
0.4
|
|
|
|
Effects of movements in exchange rates
|
(0.5)
|
(0.6)
|
As at 30 April/31 October
|
17.0
|
17.1
|
|
|
|
Included within other comprehensive income:
|
|
|
Continuing operations
|
0.4
|
0.3
|
Discontinued operation
|
-
|
0.1
|
|
0.4
|
0.4
|
Notes to the consolidated interim financial statements
(unaudited)
14. Retirement benefit obligations
(continued)
The following amounts have been included in the Consolidated
Statement of Comprehensive Income for defined benefit pension
arrangements.
|
Six months
ended
30 April 2020
(unaudited)
|
Six months
ended
30 April 2019
(unaudited)
|
|
$m
|
$m
|
Current service charge
|
5.1
|
4.6
|
Charge to operating (loss)/profit
|
5.1
|
4.6
|
|
|
|
Interest on pension scheme liabilities
|
1.5
|
2.1
|
Interest on pension scheme assets
|
(0.6)
|
(0.9)
|
Charge to finance costs
|
0.9
|
1.2
|
|
|
|
Total continuing charge to (loss)/profit for the
period
|
6.0
|
5.8
|
The following amounts have been recognised as movements in the
statement of other comprehensive income:
|
Six months
ended
30 April 2020
(unaudited)
|
Six months
ended
30 April 2019
(unaudited)
|
|
$m
|
$m
|
Actuarial (loss)/return on assets excluding amounts included in
interest income
|
(6.2)
|
6.2
|
|
|
|
Re-measurements - actuarial gains/(losses):
|
|
|
- Demographic
|
-
|
-
|
-
Financial
|
11.2
|
(8.1)
|
-
Experience
|
(0.2)
|
0.5
|
|
11.0
|
(7.6)
|
|
|
|
Movement in the period
|
4.8
|
(1.4)
|
|
|
|
Included within other comprehensive income:
|
|
|
Continuing operations
|
4.8
|
(1.3)
|
Discontinued operation
|
-
|
(0.1)
|
|
4.8
|
(1.4)
|
The weighted average key assumptions used for the valuation of the
schemes were:
|
30 April 2020
(unaudited)
|
|
31
October 2019
(audited)
|
|
Germany
|
Rest of World
|
Total
|
|
Germany
|
Rest of
World
|
Total
|
Rate of
increase in final pensionable salary
|
2.50%
|
3.13%
|
2.67%
|
|
2.50%
|
3.09%
|
2.65%
|
Rate of
increase in pension payments
|
1.75%
|
1.50%
|
1.75%
|
|
1.75%
|
1.50%
|
1.75%
|
Discount
rate
|
1.29%
|
1.73%
|
1.37%
|
|
1.09%
|
1.71%
|
1.20%
|
Inflation
|
1.75%
|
1.13%
|
1.69%
|
|
1.75%
|
1.16%
|
1.69%
|
The mortality assumptions for the pension schemes are set based on
actuarial advice in accordance with published statistics and
experience in the territory.
The contributions for the year ended 31 October 2020 are expected
to be broadly in line with the 12 months ended to 31 October 2019.
The Group funds the schemes so that it makes at least the minimum
contributions required by local government, funding and taxing
authorities.
Notes to the consolidated interim financial statements
(unaudited)
14. Retirement benefit obligations
(continued)
Sensitivities
The net present value of the Group's defined benefit obligation is
sensitive to both actuarial assumptions and market conditions.
COVID-19 had caused interest rates to be volatile, which could have
a material impact on our net defined benefit obligation. The table
below provides information on the sensitivity of the defined
benefit obligation to changes to the discount rate, which we feel
have been or could be impacted by COVID-19 in the near future. 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.
|
Germany
|
|
Rest of World
|
|
Increase in assumption
|
Change in defined benefit obligation
|
Decrease in assumption
|
Change in defined benefit obligation
|
|
Increase in assumption
|
Change in defined benefit obligation
|
Decrease in assumption
|
Change in defined benefit obligation
|
Discount rate for scheme liabilities
|
0.50%
|
(11.4%)
|
0.50%
|
13.4%
|
|
0.50%
|
(6.7%)
|
0.50%
|
7.6%
|
15. Acquisitions
Acquisition of Interset Software Inc.
In the prior year, on 15 February 2019, the Group completed the
acquisition of Interset 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
Group's strategy to help customers quickly and accurately validate
and assess risk as they digitally transform their
businesses.
Consideration of $89.0m consists of 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.
A fair value review was carried out on the assets and liabilities
of 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 15 February 2020.
No adjustment have been made to the provisional fair values
disclosed in note 38 of the Group's Annual report and Accounts for
the year ended 31 October 2019 which are now the final
values.
16. 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 consolidated 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 recognised 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 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 recognised
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.
Notes to the consolidated financial statements
(unaudited) continued
17. Cash flow statement
|
Note
|
Six months ended
30 April 2020
(unaudited)
$m
|
Six
months ended
30
April 2019
(unaudited)
$m
|
Cash flows from operating activities
|
|
|
|
Loss
from continuing operations
|
|
(1,029.3)
|
(78.3)
|
(Loss)/profit
from discontinued operation
|
|
(2.7)
|
1,475.4
|
(Loss)/profit
for the period
|
|
(1,032.0)
|
1,397.1
|
Adjustments for:
|
|
|
|
Loss/(gain)
on disposal of SUSE
|
|
3.0
|
(1,727.2)
|
Net
interest
|
|
129.3
|
132.2
|
Taxation
- continuing operations
|
10
|
(6.7)
|
(21.3)
|
Taxation
- discontinued operations
|
|
(0.3)
|
289.0
|
Share
of results of associates
|
|
-
|
0.3
|
Operating (loss)/profit (attributable to continuing and
discontinued operation)
|
|
(906.7)
|
70.1
|
|
|
|
|
- continuing
operations
|
|
(906.7)
|
32.6
|
- discontinued
operation
|
|
-
|
37.5
|
|
|
(906.7)
|
70.1
|
|
|
|
|
Goodwill
impairment charge
|
7,11
|
922.2
|
-
|
Research
and development tax credits
|
|
(1.0)
|
(1.3)
|
Depreciation
|
|
61.1
|
32.8
|
Loss on
disposal of property, plant and equipment
|
|
-
|
3.6
|
Gain on
disposal of Atalla
|
7
|
-
|
(4.4)
|
Amortisation
of intangible assets
|
|
340.4
|
356.3
|
Amortisation
of contract-related assets
|
|
7.4
|
3.5
|
Share-based
compensation charge
|
|
8.2
|
72.5
|
Exchange
movements
|
|
7.7
|
19.2
|
Provisions
movements
|
|
22.1
|
23.0
|
Cash generated from operations before working capital
|
|
461.4
|
575.3
|
Changes in working capital:
|
|
|
|
Inventories
|
|
(0.2)
|
0.1
|
Trade
and other receivables
|
|
270.7
|
282.7
|
Increase
in contract-related costs
|
|
(12.7)
|
(19.4)
|
Payables
and other liabilities1
|
|
(102.6)
|
(120.0)
|
Provision utilisation
|
|
(24.2)
|
(35.2)
|
Contract
liabilities
|
|
(36.7)
|
(63.5)
|
Pension
funding in excess of charge to operating (loss)/profit
|
|
4.7
|
2.6
|
Cash generated from operations
|
|
560.4
|
622.6
|
1 Payables and other liabilities as
at 30 April 2019 have been revised to include the movement in
assets held for sale in line with the presentation adopted at 31
October 2019.
Notes to the consolidated financial statements
(unaudited) continued
18. Post Balance Sheet events
A. Term loan refinancing
On 29 May 2020, the Group announced that it had successfully priced
and allocated €600.0m and a $650m Senior Secured Term Loan B
(together, the "Facilities"). The new five-year Facilities, along
with $143m of existing cash reserves, will be used by the Group to
fully refinance its existing Senior Secured Term Loan B due
November 2021 and pay associated fees and expenses (the
"Transaction").
Final pricing for the new five-year Facilities is 4.50% above
EURIBOR (subject to a 0.0% floor) at an original issue discount of
3.0% on the Euro Tranche, and 4.25% above LIBOR (subject to a 0.0%
floor) at an original issue discount of 2.5% on the US Dollar
denominated tranche.
Following the completion of the Transaction, the average maturity
of the Group's debt capital structure has been extended from 3.2
years to 4.2 years, with the next tranche of Term loans due for
repayment in June 2024.
The transaction was led by JP Morgan in conjunction with Barclays,
HSBC, Natwest, Bank of America and Goldman Sachs. Lazard acted as
the company's advisors.
As part of the Transaction, the board confirmed the final dividend
for the year ended 31 October 2019, which was previously withdrawn,
will not now be paid.
Prepaid facility fees of $12.2m, which were still to be amortised,
in relation to the Senior Secured Term Loan B due November 2021
were included in the $80.9m of unamortised fees at 30 April 2020
(note 12). Following the repayment of this loan in June 2020 the
associated fees will be fully expensed with the cost recorded
within finance costs in the Consolidated Statement of Comprehensive
Income.
Minority Interest
At 31 October 2019, the Group had minority shareholders in one
subsidiary, Novell Japan Ltd. On 10 June 2020, a payment of
2,526,000 JPY ($26,900) was made to acquire 842,000 ordinary 1 JYP
shares held. This payment increased the Group's shareholding from
84.24% to 100.00%. The Group will therefore no longer have any
minority interests.
INDEPENDENT REVIEW REPORT TO MICRO FOCUS INTERNATIONAL
PLC
Conclusion
We have been engaged by the company to review the condensed set of
financial statements in the half-yearly financial report for the
six months ended 30 April 2020, which comprises Consolidated
statement of comprehensive income, Consolidated statement of
financial position, Consolidated statement of changes in equity,
Consolidated statement of cash flow and the related explanatory
notes.
Based on our review, nothing has come to our attention that causes
us to believe that the condensed set of financial statements in the
interim financial report for the six months ended 30 April 2020 is
not prepared, in all material respects, in accordance with IAS
34 Interim Financial
Reporting and the
Disclosure Guidance and Transparency Rules ("the DTR") of the UK's
Financial Conduct Authority ("the UK
FCA").
Scope of review
We conducted our review in accordance with International Standard
on Review Engagements (UK and Ireland)
2410 Review
of Interim Financial Information Performed by the Independent
Auditor of the Entity issued by the Auditing Practices Board for
use in the UK. A review of interim financial information consists
of making enquiries, primarily of persons responsible for financial
and accounting matters, and applying analytical and other review
procedures. We read the other information contained in the interim
financial report and consider whether it contains any apparent
misstatements or material inconsistencies with the information in
the condensed set of financial
statements.
A review is substantially less in scope than an audit conducted in
accordance with International Standards on Auditing (UK) and
consequently does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit
opinion.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has
been approved by, the directors. The directors are responsible for
preparing the interim financial report in accordance with the DTR
of the UK FCA.
As disclosed in note 2, the annual financial statements of the
Group are prepared in accordance with International Financial
Reporting Standards as issued by the International Accounting
Standards Board ("IASB") and in conformity with International
Financial Reporting Standards as adopted by the European Union
("EU") (collectively "IFRS"). The directors are responsible for
preparing the condensed set of financial statements included in the
interim financial report in accordance with IAS
34.
Our responsibility
Our responsibility is to express to the company a conclusion on the
condensed set of financial statements in the half-yearly financial
report based on our review.
The purpose of our review work and to whom we owe our
responsibilities
This report is made solely to the company in accordance with the
terms of our engagement to assist the company in meeting the
requirements of the DTR of the UK FCA. Our review has been
undertaken so that we might state to the company those matters we
are required to state to it in this report and for no other
purpose. To the fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than the company for our
review work, for this report, or for the conclusions we have
reached.
Tudor Aw
for and on behalf of KPMG LLP
Chartered Accountants
15 Canada Square, London, E14 5GL
6 July 2020
SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereto duly authorized.
Date:
07 July 2020
Micro
Focus International plc
|
By:
|
/s/
Brian McArthur-Muscroft
|
|
Name:
|
Brian
McArthur-Muscroft
|
|
Title:
|
Chief
Financial Officer
|