Open Text Corp 8-K/A, filed Apr 10, 2023
Open Text Corp (OTEX)
About this 8-K/A
Open Text Corp filed this 8-K/A on April 10, 2023, reporting on events of January 31, 2023.
Items reported
- Item 2.01: Completed an acquisition or sale of assets
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
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Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
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Securities registered pursuant to Section 12(b) of the Act:
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Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Explanatory Note
On January 31, 2023, Open Text Corporation (“OpenText” or the “Company”), filed with the Securities and Exchange Commission a Current Report on Form 8-K (the “Original Report”) to report that, among other things, effective as of January 31, 2023, the Company completed its acquisition of the entire issued and to be issued share capital of Micro Focus International Limited (formerly known as Micro Focus International plc) (“Micro Focus”), a provider of software technology and services that help customers accelerate digital transformation, through a subsidiary of the Company, Open Text UK Holding Limited, for 532 pence per share in cash, resulting in an aggregate purchase price of approximately $5.8 billion, inclusive of Micro Focus’ cash and debt, subject to final adjustments (the “Acquisition”). The Acquisition was implemented by means of a court-sanctioned scheme of arrangement under Part 26 of the UK Companies Act 2006.
This amendment to the Original Report (the “Amendment”) is being filed solely to amend Item 9.01 of the Original Report in order to provide the consolidated financial statements of Micro Focus and the unaudited pro forma financial information with respect to the Acquisition required by Item 9.01(a) and Item 9.01(b) of Form 8-K, respectively, which were excluded from the Original Report in accordance with the provisions of that item and which are filed as exhibits hereto.
The audited consolidated financial statements of Micro Focus for the years ended October 31, 2022 and 2021 were prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”) and have not been prepared in accordance with U.S. GAAP. IFRS differs in certain respects from U.S. GAAP and thus the consolidated financial statements of Micro Focus may not be comparable to financial statements of U.S. or Canadian companies prepared in accordance with U.S. GAAP. The consolidated financial statements of Micro Focus were approved by Micro Focus’ board of directors prior to closing of the Acquisition and OpenText was not involved in the preparation of such consolidated financial statements of Micro Focus.
The unaudited pro forma financial information included in this Amendment has been prepared for illustrative purposes only, as required by Form 8-K. It is not necessarily indicative of the consolidated financial position or results of operations that would have been realized had OpenText acquired Micro Focus on the dates indicated in the pro forma financial information, nor is it meant to be indicative of any future consolidated financial position or future results of operations that OpenText will experience. The unaudited pro forma financial information combines the historical consolidated balance sheet and results of operations of OpenText and the historical consolidated statement of financial position and results of operations of Micro Focus after giving effect to the Acquisition, the financing of the Acquisition and the pro forma effects of certain assumptions and adjustments described therein. The historical consolidated statement of financial position and results of operations of Micro Focus, utilized for purposes of preparing the unaudited pro forma financial information, are not based on the same period end as OpenText.
For further information regarding the Acquisition and this Form 8-K/A, contact the person signing this Form 8-K/A at the phone number specified on the cover page of this report.
Except as described in this Amendment, all other information in the Original Report remains unchanged.
| Item 2.01 | Completion of Acquisition or Disposition of Assets |
This Amendment on Form 8-K/A amends and supplements the Original Report to include the historical audited consolidated financial statements of Micro Focus and the unaudited pro forma condensed combined financial information required by Item 9.01(a) and Item 9.01(b) of Form 8-K, respectively, which were excluded from the Original Report in accordance with the provisions of that item. All disclosure under Item 2.01 in the Original Report is hereby incorporated by reference into this Item 2.01. Except as set forth herein, no modifications have been made to information contained in the Original Report, and the Company has not updated any information contained therein to reflect events that have occurred since the date of the Original Report. The Original Report is available under the Company’s profile on SEDAR at www.SEDAR.com.
Upon completion of the Acquisition, Micro Focus became an indirect wholly owned subsidiary of the Company. The expected effect of the Acquisition on the Company’s financial position is outlined in the unaudited pro forma condensed combined financial information included in this Amendment. Other than changes as a result of the Acquisition and the integration of Micro Focus, the Company does not currently plan or propose to make any material changes in its business or affairs, either generally or with respect to Micro Focus, that would reasonably be expected to have a significant effect on the results of operations or financial position of OpenText.
To the knowledge of the Company, there has been no valuation opinion obtained within the last 12 months by the Company or Micro Focus required by securities legislation or a Canadian exchange or market to support the consideration paid by the Company for Micro Focus.
The Acquisition was not a transaction with an “informed person” (as such terms are defined in Canadian National Instrument 51-102 – Continuous Disclosure Obligations), associate or affiliate of the Company.
| Item 9.01. | Financial Statements and Exhibits. |
| (a) | Financial statements of businesses or funds acquired. |
The consolidated financial statements of Micro Focus required by Item 9.01(a) of Form 8-K are attached hereto as Exhibit 99.1 and incorporated by reference into this Item 9.01(a).
| (b) | Pro forma financial information. |
The unaudited pro forma financial information required by Item 9.01(b) of Form 8-K is attached hereto as Exhibit 99.2 and incorporated herein by reference into this Item 9.01(b).
| (d) | Exhibits. |
The following exhibits are filed as part of this Current Report:
| Exhibit |
Description | |
| 23.1 | Consent of KPMG LLP, Independent Registered Public Accounting Firm for Micro Focus. | |
| 99.1 | Audited consolidated financial statements of Micro Focus for the years ended October 31, 2022 and 2021. | |
| 99.2 | Unaudited pro forma condensed combined balance sheet as of December 31, 2022, the unaudited pro forma condensed combined statements of operations for the year ended June 30, 2022 and the six months ended December 31, 2022 and the notes related thereto. | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | |
SIGNATURES
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 hereunto duly authorized.
| Date: April 10, 2023 | OPEN TEXT CORPORATION | |||||
| /s/ Michael F. Acedo | ||||||
| Name: | Michael F. Acedo | |||||
| Title: | Executive Vice-President, Chief Legal Officer & Corporate Secretary | |||||
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in Registration Statement Nos. 333-249181, 333-214427, 333-184670, 333-146351, 333-146350, 333-121377, 333-109505 and 333-87024 on Form S-8 and Registration Statement No. 333-261510 on Form S-3 of Open Text Corporation of our report dated January 30, 2023, with respect to the consolidated financial statements of Micro Focus International Limited (formerly Micro Focus International plc), which report appears in this Current Report on Form 8-K/A of Open Text Corporation dated April 10, 2023.
/s/ KPMG LLP
London, United Kingdom
April 10, 2023
Exhibit 99.1
Consolidated financial statements and notes
| Consolidated financial statements | 1 |
MICRO FOCUS INTERNATIONAL PLC
Consolidated statement of comprehensive income
For the year ended 31 October 2022
| Continuing operations |
Note | Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
|||||||||
| Revenue |
2 | 2,534.5 | 2,899.9 | |||||||||
| Cost of sales |
(715.5 | ) | (776.3 | ) | ||||||||
| Gross profit |
1,819.0 | 2,123.6 | ||||||||||
| Selling and distribution expenses |
(1,145.1 | ) | (1,344.6 | ) | ||||||||
| Research and development expenses |
(462.6 | ) | (521.8 | ) | ||||||||
| Administrative expenses |
(730.4 | ) | (522.8 | ) | ||||||||
| Other operating income |
9.0 | — | ||||||||||
|
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|||||||||
| Operating loss |
(510.1 | ) | (265.6 | ) | ||||||||
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|||||||||
| Operating profit prior to depreciation, amortisation and exceptional items |
878.7 | 1,044.9 | ||||||||||
| Depreciation and amortisation |
3 | (890.2 | ) | (1,063.4 | ) | |||||||
| Exceptional items |
4 | (498.6 | ) | (247.1 | ) | |||||||
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| Operating loss |
(510.1 | ) | (265.6 | ) | ||||||||
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| Finance costs |
6 | (262.7 | ) | (253.9 | ) | |||||||
| Finance income |
6 | 111.4 | 1.7 | |||||||||
| Net finance costs |
6 | (151.3 | ) | (252.2 | ) | |||||||
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|||||||||
| Loss before tax |
(661.4 | ) | (517.8 | ) | ||||||||
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| Taxation1 |
7 | 42.5 | 82.7 | |||||||||
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| Loss from continuing operations |
(618.9 | ) | (435.1 | ) | ||||||||
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| Profit from discontinued operation (attributable to equity shareholders of the Company) |
28 | 3.2 | 10.7 | |||||||||
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| Loss for the year |
(615.7 | ) | (424.4 | ) | ||||||||
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| Attributable to: |
||||||||||||
| Equity shareholders of the Company |
(615.7 | ) | (424.4 | ) | ||||||||
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| Loss for the year |
(615.7 | ) | (424.4 | ) | ||||||||
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| 1 | Taxation includes a debit of $0.4m (2021: credit $76.3m) relating to exceptional items, see note 4. |
| Consolidated financial statements | 2 |
MICRO FOCUS INTERNATIONAL PLC
| Note | Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
||||||||||
| Loss for the year |
(615.7 | ) | (424.4 | ) | ||||||||
| Other comprehensive (expense)/income for the year: |
||||||||||||
| Items that will not be reclassified to profit or loss |
||||||||||||
| Continuing operations: |
||||||||||||
| Actuarial gain on pension schemes liabilities |
20 | 81.3 | 33.4 | |||||||||
| Actuarial gain on non-plan pension assets |
20 | 0.5 | 0.2 | |||||||||
| Deferred tax movement on pension schemes |
7 | (20.3 | ) | — | ||||||||
| Continuing operations: Items that may be subsequently reclassified to profit or loss |
||||||||||||
| Cash flow hedge movements |
25 | 105.5 | 42.2 | |||||||||
| Current tax movement on cash flow hedge movements |
25 | (6.8 | ) | (8.0 | ) | |||||||
| Deferred tax movement on cash flow hedge movements |
25 | (16.8 | ) | — | ||||||||
| Deferred tax movement on currency translation differences |
40.2 | (7.8 | ) | |||||||||
| Current tax movement on Euro loan foreign exchange hedging |
(6.3 | ) | 6.0 | |||||||||
| Deferred tax movement on Euro loan foreign exchange hedging |
— | (8.1 | ) | |||||||||
| Currency translation differences |
(320.2 | ) | 68.6 | |||||||||
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| Other comprehensive (expense)/income for the year |
(142.9 | ) | 126.5 | |||||||||
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| Total comprehensive expense for the year |
(758.6 | ) | (297.9 | ) | ||||||||
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| Attributable to: |
||||||||||||
| Equity shareholders of the Company |
(758.6 | ) | (297.9 | ) | ||||||||
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| Total comprehensive expense for the year |
(758.6 | ) | (297.9 | ) | ||||||||
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| Total comprehensive expense attributable to the equity shareholders of the Company arises from: |
||||||||||||
| Continuing operations |
(761.8 | ) | (308.6 | ) | ||||||||
| Discontinued operation |
28 | 3.2 | 10.7 | |||||||||
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| Total comprehensive expense for the year |
(758.6 | ) | (297.9 | ) | ||||||||
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|||||||||
| Earnings per share (cents) |
||||||||||||
| From continuing and discontinued operations |
cents | cents | ||||||||||
| – basic |
9 | (190.13 | ) | (126.12 | ) | |||||||
| – diluted |
9 | (190.13 | ) | (126.12 | ) | |||||||
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|||||||||
| From continuing operations |
||||||||||||
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|||||||||
| – basic |
9 | (191.12 | ) | (129.30 | ) | |||||||
| – diluted |
9 | (191.12 | ) | (129.30 | ) | |||||||
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| Consolidated financial statements | 3 |
MICRO FOCUS INTERNATIONAL PLC
| Note | Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
||||||||||
| From continuing and discontinued operations |
pence | pence | ||||||||||
| – basic |
9 | (151.12 | ) | (91.78 | ) | |||||||
| – diluted |
9 | (151.12 | ) | (91.78 | ) | |||||||
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|
|||||||||
| From continuing operations |
||||||||||||
| – basic |
9 | (151.91 | ) | (94.09 | ) | |||||||
| – diluted |
9 | (151.91 | ) | (94.09 | ) | |||||||
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The accompanying notes form part of the financial statements.
| Consolidated financial statements | 4 |
MICRO FOCUS INTERNATIONAL PLC
Consolidated statement of financial position
As at 31 October 2022
| Note | 31 October 2022 $m |
31 October 2021 $m |
||||||||||
| Non-current assets |
||||||||||||
| Goodwill |
10 | 3,050.6 | 3,725.5 | |||||||||
| Other intangible assets |
11 | 3,475.5 | 4,331.2 | |||||||||
| Property, plant and equipment |
12 | 187.6 | 228.6 | |||||||||
| Non-current tax receivable |
7 | 40.6 | 48.0 | |||||||||
| Deferred tax asset |
7 | 13.0 | 15.0 | |||||||||
| Financial assets |
22 | 69.8 | — | |||||||||
| Trade and other receivables |
14 | 14.3 | 19.6 | |||||||||
| Other non-current assets |
13 | 51.9 | 71.6 | |||||||||
|
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|
|||||||||
| 6,903.3 | 8,439.5 | |||||||||||
| Current assets |
||||||||||||
| Trade and other receivables |
14 | 948.6 | 886.3 | |||||||||
| Other current assets |
13 | 40.1 | 33.0 | |||||||||
| Current tax receivables |
7 | 22.9 | 59.1 | |||||||||
| Cash and cash equivalents |
15 | 536.2 | 558.4 | |||||||||
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|||||||||
| 1,547.8 | 1,536.8 | |||||||||||
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| Current assets classified as held for sale |
28 | — | 370.3 | |||||||||
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| 1,547.8 | 1,907.1 | |||||||||||
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| Total assets |
8,451.1 | 10,346.6 | ||||||||||
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|||||||||
| Current liabilities |
||||||||||||
| Trade and other payables |
16 | 510.5 | 513.2 | |||||||||
| Financial liabilities |
22 | 75.1 | 134.9 | |||||||||
| Provisions |
19 | 143.3 | 65.7 | |||||||||
| Current tax liabilities |
7 | 124.8 | 94.1 | |||||||||
| Contract liabilities |
18 | 934.1 | 984.6 | |||||||||
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|
|||||||||
| 1,787.8 | 1,792.5 | |||||||||||
|
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|||||||||
| Current liabilities classified as held for sale |
28 | — | 68.4 | |||||||||
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|||||||||
| 1,787.8 | 1,860.9 | |||||||||||
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| Consolidated financial statements | 5 |
MICRO FOCUS INTERNATIONAL PLC
| Note | 31 October 2022 $m |
31 October 2021 $m |
||||||||||
| Non-current liabilities |
||||||||||||
| Contract liabilities |
18 | 171.8 | 131.8 | |||||||||
| Financial liabilities |
22 | 3,967.5 | 4,643.7 | |||||||||
| Retirement benefit obligations |
20 | 64.7 | 147.1 | |||||||||
| Provisions |
19 | 13.0 | 19.8 | |||||||||
| Other non-current liabilities |
21 | 9.8 | 31.3 | |||||||||
| Non-current tax liabilities |
7 | 81.0 | 91.9 | |||||||||
| Deferred tax liabilities |
7 | 415.8 | 599.1 | |||||||||
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| 4,723.6 | 5,664.7 | |||||||||||
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| Total liabilities |
6,511.4 | 7,525.6 | ||||||||||
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| Net assets |
1,939.7 | 2,821.0 | ||||||||||
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| Capital and reserves |
||||||||||||
| Share capital |
23 | 47.5 | 47.4 | |||||||||
| Share premium account |
24 | 47.6 | 46.8 | |||||||||
| Other reserves |
25 | 1,983.7 | 3,847.2 | |||||||||
| Retained earnings |
(139.1 | ) | (1,120.4 | ) | ||||||||
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|||||||||
| Total equity |
1,939.7 | 2,821.0 | ||||||||||
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The accompanying notes form part of the financial statements.
| Consolidated financial statements | 6 |
MICRO FOCUS INTERNATIONAL PLC
Consolidated statement of changes in equity
For the year ended 31 October 2022
Year ended 31 October 2022
| Other reserves | ||||||||||||||||||||||||||||||||||||
| Note | Share capital $m |
Share premium account $m |
Retained earnings $m |
Foreign currency translation reserve $m |
Capital redemption reserve $m |
Hedging reserve $m |
Merger reserve $m |
Total equity $m |
||||||||||||||||||||||||||||
| Balance as at 1 November 2021 |
47.4 | 46.8 | (1,120.4 | ) | (268.0 | ) | 2,485.0 | (28.9 | ) | 1,659.1 | 2,821.0 | |||||||||||||||||||||||||
| Loss for the financial year |
— | — | (615.7 | ) | — | — | — | — | (615.7 | ) | ||||||||||||||||||||||||||
| Other comprehensive expense for the year |
— | — | 61.5 | (286.3 | ) | — | 81.9 | — | (142.9 | ) | ||||||||||||||||||||||||||
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| Total comprehensive expense for the year |
— | — | (554.2 | ) | (286.3 | ) | — | 81.9 | — | (758.6 | ) | |||||||||||||||||||||||||
| Transactions with owners |
||||||||||||||||||||||||||||||||||||
| Dividends |
8 | — | — | (91.3 | ) | — | — | — | — | (91.3 | ) | |||||||||||||||||||||||||
| Share options: |
||||||||||||||||||||||||||||||||||||
| Issue of share capital – share options |
23,24 | 0.1 | 0.8 | — | — | — | — | — | 0.9 | |||||||||||||||||||||||||||
| Share-based payment charge |
26 | — | — | 33.6 | — | — | — | — | 33.6 | |||||||||||||||||||||||||||
| Deferred tax on share options |
7 | — | — | 1.3 | — | — | — | — | 1.3 | |||||||||||||||||||||||||||
| Purchase of treasury shares1 |
— | — | (67.2 | ) | — | — | — | — | (67.2 | ) | ||||||||||||||||||||||||||
| Transfer from merger reserve |
25 | — | — | 1,659.1 | — | — | — | (1,659.1 | ) | — | ||||||||||||||||||||||||||
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| Total movements for the year |
0.1 | 0.8 | 981.3 | (286.3 | ) | — | 81.9 | (1,659.1 | ) | (881.3 | ) | |||||||||||||||||||||||||
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| Balance as at 31 October 2022 |
47.5 | 47.6 | (139.1 | ) | (554.3 | ) | 2,485.0 | 53.0 | — | 1,939.7 | ||||||||||||||||||||||||||
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The accompanying notes form part of the financial statements.
| Consolidated financial statements | 7 |
MICRO FOCUS INTERNATIONAL PLC
Year ended 31 October 2021
| Other reserves | ||||||||||||||||||||||||||||||||||||
| Note | Share capital $m |
Share premium account $m |
Retained earnings $m |
Foreign currency translation reserve $m |
Capital redemption reserve $m |
Hedging reserve $m |
Merger reserve $m |
Total equity $m |
||||||||||||||||||||||||||||
| Balance as at 1 November 2020 |
47.3 | 46.5 | (741.3 | ) | (326.7 | ) | 2,485.0 | (63.1 | ) | 1,767.4 | 3,215.1 | |||||||||||||||||||||||||
| Loss for the financial year |
— | — | (424.4 | ) | — | — | — | — | (424.4 | ) | ||||||||||||||||||||||||||
| Other comprehensive income for the year |
— | — | 33.6 | 58.7 | — | 34.2 | — | 126.5 | ||||||||||||||||||||||||||||
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| Total comprehensive expense for the year |
— | — | (390.8 | ) | 58.7 | — | 34.2 | — | (297.9 | ) | ||||||||||||||||||||||||||
| Transactions with owners |
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| Dividends |
8 | — | — | (81.1 | ) | — | — | — | — | (81.1 | ) | |||||||||||||||||||||||||
| Share options: |
||||||||||||||||||||||||||||||||||||
| Issue of share capital – share options |
23,24 | 0.1 | 0.3 | (0.1 | ) | — | — | — | — | 0.3 | ||||||||||||||||||||||||||
| Share-based payment charge |
26 | — | — | 12.0 | — | — | — | — | 12.0 | |||||||||||||||||||||||||||
| Deferred tax on share options |
7 | — | — | (0.2 | ) | — | — | — | — | (0.2 | ) | |||||||||||||||||||||||||
| Purchase of treasury shares1 |
— | — | (27.2 | ) | — | — | — | — | (27.2 | ) | ||||||||||||||||||||||||||
| Transfer from merger reserve |
25 | — | — | 108.3 | — | — | — | (108.3 | ) | — | ||||||||||||||||||||||||||
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| Total movements for the year |
0.1 | 0.3 | (379.1 | ) | 58.7 | — | 34.2 | (108.3 | ) | (394.1 | ) | |||||||||||||||||||||||||
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| Balance as at 31 October 2021 |
47.4 | 46.8 | (1,120.4 | ) | (268.0 | ) | 2,485.0 | (28.9 | ) | 1,659.1 | 2,821.0 | |||||||||||||||||||||||||
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| 1 | During the year ended 31 October 2022 the Micro Focus Employee Benefit Trust (“EBT”) purchased 12 million of the Group’s 10p ordinary shares from the market (year ended 31 October 2021: 4 million 10p ordinary shares). The EBT will hold these shares to satisfy future exercises of share options. In accordance with the requirement of IFRS 10 the EBT is treated as if it is a subsidiary of the Group. As a result, the purchase of shares held by the EBT is reported as a purchase of treasury shares by the Group. |
The accompanying notes form part of the financial statements.
| Consolidated financial statements | 8 |
MICRO FOCUS INTERNATIONAL PLC
Consolidated statement of cash flows
For the year ended 31 October 2022
| Note | Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
||||||||||
| Cash flows from operating activities |
||||||||||||
| Cash generated from operations |
30 | 817.9 | 690.5 | |||||||||
| Interest paid |
(211.0 | ) | (218.1 | ) | ||||||||
| Bank loan costs |
(24.4 | ) | (1.5 | ) | ||||||||
| Tax paid |
(90.8 | ) | (270.3 | ) | ||||||||
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|||||||||
| Net cash generated from operating activities |
491.7 | 200.6 | ||||||||||
| Cash flows from investing activities |
||||||||||||
| Payments for intangible assets |
11 | (103.0 | ) | (47.5 | ) | |||||||
| Purchase of property, plant and equipment |
12 | (18.9 | ) | (17.7 | ) | |||||||
| Interest received |
4.3 | 1.7 | ||||||||||
| Payment for acquisition of business and net cash acquired with acquisitions |
29 | (27.6 | ) | (12.4 | ) | |||||||
| Sub lease income receipts |
17 | 11.8 | — | |||||||||
| Investing cash flows generated from disposals |
28 | 366.8 | — | |||||||||
| Tax paid on disposal |
28 | (10.3 | ) | — | ||||||||
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| Net cash generated from/(used in) investing activities |
223.1 | (75.9 | ) | |||||||||
| Cash flows used in financing activities |
||||||||||||
| Proceeds from issue of ordinary share capital |
23,24 | 0.9 | 0.4 | |||||||||
| Purchase of treasury shares and related expenses |
23 | (67.2 | ) | (27.2 | ) | |||||||
| Payment for lease liabilities |
17 | (67.4 | ) | (79.5 | ) | |||||||
| Repayment of bank borrowings |
22 | (2,085.9 | ) | (114.1 | ) | |||||||
| Proceeds from bank borrowings |
22 | 1,599.3 | — | |||||||||
| Dividends paid to owners |
8 | (91.3 | ) | (81.1 | ) | |||||||
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| Net cash used in financing activities |
(711.6 | ) | (301.5 | ) | ||||||||
| Effects of exchange rate changes |
(25.4 | ) | (2.0 | ) | ||||||||
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| Net decrease in cash and cash equivalents |
(22.2 | ) | (178.8 | ) | ||||||||
| Cash and cash equivalents at beginning of the year |
558.4 | 737.2 | ||||||||||
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| Cash and cash equivalents at end of the year |
15 | 536.2 | 558.4 | |||||||||
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The accompanying notes form part of these financial statements.
| Consolidated financial statements | 9 |
MICRO FOCUS INTERNATIONAL PLC
Summary of significant accounting policies
For the year ended 31 October 2022
General information
Micro Focus International plc (“Company”) is a public limited company incorporated and domiciled in England and Wales. 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 31 October 2022, the Group had a presence in 47 countries (2021: 48) worldwide and employed approximately 10,501 people (2021: 11,355).
As of October 31, 2022 the Company was listed on the London Stock Exchange and its American Depositary Shares are listed on the New York Stock Exchange.
The Group consolidated financial statements were authorised for issuance by the board of directors on 30 January 2023.
I Significant accounting policies
| A | Basis of preparation |
These financial statements have been prepared solely for the purpose of meeting the requirements of the US Securities and Exchange Commission (“SEC”) Rule 3-05 of Regulation S-X in relation to the acquisition of the Group by OpenText on 31 January 2023.
The information in this document, which was approved by the Board of Directors on 30 January 2023, does not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 October 2022, which contain an unmodified audit report under Section 495 of the Companies Act 2006 (which does not make any statements under Section 498 of the Companies Act 2006), will be delivered to the Registrar of Companies in accordance with Section 441 of the Companies Act 2006.
The Consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IASB”).
The consolidated financial statements are prepared on a going concern basis under the historical cost convention.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed below in II, “Critical accounting estimates, assumptions and judgements”.
The principal accounting policies adopted by the Group in the preparation of the consolidated financial statements are set out below.
The accounting policies adopted are consistent with those of the Annual Report and Accounts for the year ended 31 October 2021 apart from standards, amendments to or interpretations of published standards adopted during the year, as set out in Accounting Policy W “Adoption of new and revised 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 available information about the future for a period of at least, but not limited to, 12 months from the date of approval of the consolidated financial statements when assessing the Group’s ability to continue as a going concern.
In making this assessment, the directors considered the Group’s liquidity and solvency position. In January 2022 the Group refinanced $1.6bn of the 2024 term loans, extending their maturity until 2027 and extended its Revolving Credit Facility (RCF) by 18 months to December 2026, reducing the facility to $250m and increasing the Group’s ability to utilise the facility. In February 2022 $335m of the proceeds from the disposal of the Digital
| Consolidated financial statements | 10 |
MICRO FOCUS INTERNATIONAL PLC
Safe business were used to repay borrowings and a further repayment of $100m out of surplus cash was made in July 2022. Following these actions the Group’s borrowings at 31 October 2022 are $3,880.0m with Group cash of $536.2m. At 31 October 2022, the RCF remains undrawn. See note 22 for further details of the Group’s borrowings, including the RCF, and the refinancing. Whilst the Group has quarterly instalment payments due and, dependent on leverage, may be subject to an excess cash sweep against its external borrowing in the period to January 2024, the Group has no term loans maturing until June 2024 when $1,280m is due. Notwithstanding the Group’s proposed acquisition by OpenText (see below). The Group would otherwise expect to refinance these loans prior to maturity. As the directors expect that these loans would be refinanced they are not considered a significant risk to going concern therefore the directors consider the use of a 12-month period to be an appropriate period to assess going concern.
The shareholders of the Company have approved the takeover offer from OpenText. The directors have assessed the impact of this on the going concern basis of accounting and have outlined their considerations below. In addition the directors have assessed the Group’s ability to continue as a going concern in its own right.
Consideration of the acquisition by Open Text Corporation (OpenText)
The Group’s financing arrangements include a change of control clause as detailed in note 22 to the financial statements. Subsequent to announcing the acquisition OpenText have successfully raised all the required funding from capital markets increasing the previously agreed term loans to an aggregate commitment of $3,585m and completing the sale of $1,000m of 6.9% senior secured notes due 2027. In addition the directors reviewed the level of cash and undrawn revolving credit facilities reported by OpenText and these provide sufficient resources to repay the remainder of the Groups’ borrowings and operate the Group after the completion of the acquisition.
The Directors also examined the intention statements outlined in the Scheme Document, including the commitments by and intention of OpenText around the operation of the enlarged group. Accordingly the Directors believe that sufficient liquidity should be in place to allow the Group to continue as a going concern.
The Group’s ability to continue as a going concern in its own right
The Group manages solvency and liquidity as part of its budgeting and performance management. The Group’s forecasting and planning cycle consists of a budget and a long-range plan which are used to generate income statement and cash flow projections. The cash flow projections also forecast the headroom on the Group’s undrawn RCF and expected net leverage. Actual and forecast liquidity are reviewed at least weekly by the Group’s working capital management group which reports to the Chief Financial Officer. As at 31 October 2022, the Group holds a significant level of cash of $536.2m.
The Group’s forecasts, based on reasonable assumptions, indicate that the Group should be able to operate within the level of its currently available and expected future facilities. Under the Group’s forecast the RCF is not forecast to be drawn in the period to January 2024, and therefore no tests of this covenant are expected to apply.
In assessing going concern, the Group has estimated the financial impact of the severe but plausible scenarios considered in assessing viability on the going concern assessment period. This stress testing confirmed that existing projected cash flows and cash management activities provide us with significant headroom over the going concern assessment period. In addition, under the severe but plausible scenarios, there is no point at which the Group would likely need to draw upon the RCF in the period to January 2024 and therefore the covenant test on the RCF would not be expected to apply.
Also, in assessing liquidity, the board considered the reported net current liability position of $240m at 31 October 2022. This is the result of $934m of advance billing for services which is required to be recognised as a contract liability. The cost of delivering these services is fully included in the Group’s forecasting and sensitivities.
Conclusion
Having performed the assessments discussed above, the directors considered it appropriate to adopt the going concern basis of accounting when preparing the consolidated and Company financial statements. This assessment covers the period to January 2024, which is consistent with the FRC guidance.
| Consolidated financial statements | 11 |
MICRO FOCUS INTERNATIONAL PLC
Consolidated statement of financial position
The Group has revised the presentation of the Consolidated statement of financial position to combine line items presented separately in previous periods. Financial liabilities comprises the borrowings and lease obligations previously presented separately, property, plant & equipment comprises the property, plant & equipment and right-of-use assets previously presented separately and other reserves comprises merger reserve, foreign currency translation reserve, capital redemption reserve and hedging reserve previously reported separately. The revised presentation is considered to be simpler to the users of the accounts. The comparatives have been represented to be consistent with the revised presentation format.
| B | Consolidation |
The financial statements of the Group comprise the financial statements of the Company and entities controlled by the Company and its subsidiaries prepared at the consolidated statement of financial position date.
Subsidiaries
Subsidiaries are entities controlled by the Group. The Group has control over an entity where the Group is exposed to, or has rights to, variable returns from its involvement within the entity and it has the power over the entity to effect those returns. Control is presumed to exist when the Group owns more than half of the voting rights (which does not always equal percentage ownership) unless it can be demonstrated that ownership does not constitute control. The results of subsidiaries are consolidated from the date on which control passes to the Group. The results of disposed subsidiaries are consolidated up to the date on which control passes from the Group.
The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, with costs directly attributable to the acquisition being expensed. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill.
Where new information is obtained within the “measurement period” (defined as the earlier of the period until which the Group receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable, or one year from the acquisition date) about facts and circumstances that existed as at the acquisition date and, if known, would have affected the measurement of the amounts recognised as of that date, the Group recognises these adjustments to the acquisition balance sheet with an equivalent offsetting adjustment to goodwill. Where new information is obtained after this measurement period has closed, this is reflected in the post-acquisition period.
Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.
| C | Assets held for sale and discontinued operations |
A non-current asset (or disposal group) is classified as held for sale if the Group will recover the carrying amount principally through a sale transaction rather than through continuing use. A non-current asset (or disposal group) classified as held for sale is measured at the lower of its carrying amount and fair value less costs to sell. If the asset (or disposal group) is acquired as part of a business combination it is initially measured at fair value less costs to sell.
Assets and liabilities classified as held for sale are presented separately as current items in the consolidated statement of financial position and are measured at the lower of their carrying amount and fair value less costs to sell. Property, plant and equipment, right-of-use assets and intangible assets are not depreciated or amortised once classified as held for sale.
The results of discontinued operations are shown as a single amount on the face of the Consolidated statement of comprehensive income comprising the post-tax profit or loss of discontinued operations and the post-tax gain or loss recognised either on measurement to fair value less costs to sell or on the disposal of the discontinued operation. The Consolidated statement of cash flows has been presented including the discontinued operations.
| Consolidated financial statements | 12 |
MICRO FOCUS INTERNATIONAL PLC
| D | Revenue recognition |
The Group follows the principle-based five-step model in IFRS 15 and recognises revenue on transfer of control of promised goods or services to customer when or as the performance obligation is satisfied at an amount that reflects the consideration, which the Group expects to be entitled in exchange for those goods, or services. Customer contracts can include combinations of goods and services, which are generally capable of being distinct and accounted for as separate performance obligations. Typically, a licence deal includes support, a separate performance obligation consisting of: call in assistance and when-and-if available updates. The right to get assistance and updates is not mandatory to use the licence. Contracts may also include professional services, which primarily comprise installation, implementation, configuration, advisory services and staff augmentation; these services are available both from the Group and other external service providers. All software is considered off-the-shelf and most services make use of existing configuration functionality and do not modify or customise the source code within the products, nor do they create custom software. Professional services personalise the software to the customer’s requirements and preferences. Customers can benefit from both the software on its own and the subsequent services, individually and together. On this basis, the Group concludes that services are typically distinct from licences and constitute a separate performance obligation, although this is also assessed on an individual contract basis.
Revenue is allocated to the various performance obligations on a relative stand-alone selling price (“SSP”) basis.
On an ongoing basis, the Group utilises available data points based on relevant historical transactions, to establish the observable stand-alone selling prices to be used in allocating transaction consideration. For observable stand-alone sales a reasonable range of prices will be determined to represent the SSP of that performance obligation. Given the highly variable selling price of licences, the Group has not established SSP for licences. When SSP is established for the undelivered performance obligations (typically maintenance and professional services), the residual approach is used to allocate the transaction price to the delivered licences.
For performance obligations where observable stand-alone sales are not available, SSP will be estimated using the following methods in the order set out below:
| • | Market price |
| • | Expected cost plus a margin |
| • | Residual approach |
The Group recognises revenues from sales of software licences (including Intellectual Property and Patent rights) to end-users, resellers and Independent Software Vendors (“ISV”), software maintenance, Software as a Service (“SaaS”), technical support, training and professional services. ISV revenue includes fees based on end usage of ISV applications that have our software embedded in their applications.
Software licence revenue is the sale of the right to use the software and is recognised at a point in time when the software is made available to the customer and/or reseller (i.e. when control of the asset is transferred and the performance obligation is satisfied). Software licence revenue includes revenue resulting from term/time extensions to existing agreements and the sale of additional use rights associated to existing as well as new licences including granting third party access, virtualization or novation rights. Typically term extensions and these additional rights do not require incremental support as they do not result in an additional licence, only a different use of the existing licences. The Group enters into licence verification arrangements, for customers who are not in compliance with their contractual licence and/or maintenance terms, by agreeing a one-off settlement fee. If more than one performance obligation can be identified in the contract, revenue is allocated to each performance obligation, otherwise the Group policy is to recognise as licence revenue. The allocation of revenue does not impact the timing of revenue recognition in these deals, given the performance obligation(s) have already been fulfilled, but will impact the presentation of revenue recognised during the period, (as licence or licence and maintenance).
The Group sells Subscription SW (or Term Licences) where the bundled price is allocated to Licence revenue (recognised upfront) and Maintenance revenue (recognised rateably over the term) based on the annualised attach rate. Upon renewal of an existing Subscription, the Group recognises Licence revenue on the execution of the agreement and the previous maintenance revenue stream is considered as SSP to allocate Maintenance revenue for the renewal. The residual value is allocated to Licence.
| Consolidated financial statements | 13 |
MICRO FOCUS INTERNATIONAL PLC
For SaaS arrangements, which include cloud arrangements, where customers access the functionality of a hosted software over the contract period without taking possession of the software, and performance obligations are provided evenly over a defined term, the Group recognises revenue over the period in which the subscriptions are provided as the service is delivered, generally on a straight-line basis.
Where customers can access the functionality of hosted software with an increase or decrease in the capacity or move from one functionality to the other over the contract period (consumption based model or SaaS Flex), the Group recognises revenue over the period based on actual consumption.
In SaaS arrangements, which include cloud arrangements, where the customer has the contractual right to take possession of the software at any time during the contractual period without significant penalty and the customer can operate, or contract with another vendor to operate the software, the Group evaluates whether the arrangement includes the sale of a software licence. In SaaS arrangements where software licences are sold, licence revenue is generally recognised at a point in time when control of the software is transferred to the customer.
Maintenance revenue is recognised on a straight-line basis over the term of the contract, which in most cases is one year.
For time and material-based professional services contracts, the Group recognises revenue as services are rendered. The Group recognises revenue from fixed-price professional services contracts as work progresses over the contract period on a percentage of completion basis, as determined by the percentage of labour costs incurred to date compared to the total estimated labour costs of a contract. The estimate is determined at deal inception and reflected in internal milestones driving the accounting Estimates of total project costs for fixed-price contracts are regularly reassessed during the life of a contract. Service costs are expensed as incurred; amounts collected prior to satisfying the above conditions are shown as contract liabilities.
Where consideration is received in advance of satisfying the performance obligation and the performance obligation will be satisfied within one year of receipt of the consideration no significant financing component is recognised. The majority of the Group’s SaaS and maintenance contracts are for periods of one year. In addition, for multi-year contracts where consideration is received in advance, the purpose of the upfront billing is not for the Group to obtain financing, rather to avoid the administrative tasks of subsequent invoicing, cash collection and risk of cancellation.
Rebates paid to resellers as part of a contracted programme are accounted for as a reduction of the transaction price and netted against revenue where the rebate paid is based on the achievement of sales targets made by the partner. If the Group receives an identifiable good or service from the reseller that is separable from the sales transaction and for which fair value can be reasonably estimated, the Group accounts for the purchase of the good or service in the same way that it accounts for other purchases from suppliers.
| E | Contract-related costs |
The Group capitalises the costs of obtaining a customer contract when they are incremental and, if expected to be recovered, they are amortised over the customer life or pattern of revenue for the related contract.
Normally sales commissions paid for customer contract renewals are not commensurate with the commissions paid for new contracts. It follows that the commissions paid for new contracts also relate to expected future renewals of these contracts. Accordingly, the Group amortises sales commissions paid for new customer contracts on a straight-line basis over the expected customer life, based on expected renewal frequency. The current average customer life is five years. If the expected amortisation period is one year or less the costs are expensed when incurred.
Amortisation of the capitalised costs of obtaining customer contracts is classified as sales and marketing expense. Capitalised costs from customer contracts are classified as non-financial assets in our statement of financial position.
| Consolidated financial statements | 14 |
MICRO FOCUS INTERNATIONAL PLC
| F | Cost of sales |
Cost of sales includes costs related to the amortisation of product development costs, amortisation of acquired technology intangibles, costs of the consulting business and helpline support and royalties payable to third parties.
| G | Segment reporting |
In accordance with IFRS 8, “Operating Segments”, the Group has derived the information for its segmental reporting using the information used by the Chief Operating Decision Maker (“CODM”), defined as the operating committee. The segmental reporting is consistent with those used in internal management reporting and the measure used by the operating committee is Adjusted EBITDA as set out in note 1, “Segmental reporting”.
| H | Exceptional items |
Exceptional items are those significant items, which are separately disclosed by virtue of their size, nature or incidence to enable a full understanding of the Group’s financial performance. In setting the policy for exceptional items, judgement is required to determine what the Group defines as “exceptional”. The Group considers whether an item is exceptional in nature by considering its materiality or the frequency of the transaction occurring or whether it reflects the underlying performance of the business. Exceptional items are allocated to the financial statement lines (for example: cost of sales) in the Consolidated statement of comprehensive income based on the nature and function of the costs, for example restructuring costs related to employees are classified where their original employment costs are recorded.
Management of the Group first evaluates Group strategic projects such as acquisitions, divestitures and integration activities and significant Group restructuring or similar activities. In determining whether an event or transaction is exceptional, management of the Group considers quantitative and qualitative factors such as its expected size, precedent for similar items and the commercial context for the particular transaction, while ensuring consistent treatment between favourable and unfavourable transactions impacting revenue, income and expense. Examples of transactions which may be considered of an exceptional nature include major restructuring programmes, cost of acquisitions, the cost of integrating acquired businesses, gains on the disposal of discontinued operations or impairment charges recognised against goodwill.
| I | Employee benefit costs |
a) Pension and other defined benefit obligations and long-term pension assets
The Group operates various pension schemes and long-term employee benefit plans, including both defined contribution and defined benefit plans. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. A defined benefit plan is a pension plan or other long-term employee benefit that is not a defined contribution plan.
For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as an employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available.
Typically, the Group’s defined benefit pension plans define an amount of pension benefit that an employee will receive on retirement or termination. This is usually dependent on one or more factors such as age, years of service and compensation. Additionally, the Group sponsors vacation and other types of leave plans which qualify under IAS 19 as other long-term benefits as these liabilities are not expected to be settled within the next fiscal year. As such, these plans are defined benefit in nature. These plans are typically unfunded.
The liability recognised in the consolidated statement of financial position in respect of defined benefit pension and other long-term employee benefit plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. Certain long-term pension assets do not meet the definition of plan assets as they have not been pledged to the plan and are subject to the creditors of the Group. Such assets are recorded separately in the consolidated statement of financial position as long-term pension assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that have terms to mature approximating to the terms of the related obligation.
| Consolidated financial statements | 15 |
MICRO FOCUS INTERNATIONAL PLC
For defined benefit pension plans, actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in other comprehensive income in the period in which they arise. For other long-term benefit plans actuarial gains and losses are recognised in profit or loss in the period in which they arise.
The current service cost of the defined benefit plans, recognised in the Consolidated statement of comprehensive income in employee benefit expense reflects the increase in the defined benefit obligation resulting from employee service in the current year, benefit changes, curtailments and settlements. Past-service costs are recognised immediately in the Consolidated statement of comprehensive income.
The net interest cost is calculated by applying the discount rate to the net balance of the defined benefit obligation and the fair value of plan assets. This cost is included in finance costs in the Consolidated statement of comprehensive income.
Long-term pension assets relate to the reimbursement right under insurance policies held in the Group with guaranteed interest rates that do not meet the definition of a qualifying insurance policy as they have not been pledged to the plan and are subject to the creditors of the Group. Such reimbursement rights assets are recorded in the Consolidated statement of financial position as long-term pension assets. These contractual arrangements are treated as financial assets measured at fair value through other comprehensive income. Gains and losses on long-term pension assets are charged or credited to equity in other comprehensive income in the period in which they arise.
| b) | Share-based compensation |
The Group operated various equity-settled, share-based compensation plans during the period.
The fair value of the employee services received in exchange for the grant of the shares or options is recognised as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the shares or options granted. Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. Market vesting conditions are taken into account when determining the fair value of the options at grant date. At each Consolidated statement of financial position date, the Group revises its estimates of the number of options that are expected to become exercisable for non-market vesting conditions. It recognises the impact of the revision of original estimates, if any, in the Consolidated statement of comprehensive income, and a corresponding adjustment to equity over the current reporting period.
The shares are recognised when the options are exercised and the proceeds received allocated between ordinary share capital and share premium account. Fair value is usually measured using the Black-Scholes pricing model. The expected life used in the model has been adjusted, based on management’s best estimate for the effects of non-transferability, exercise restrictions and behavioural considerations. Where appropriate, some LTIP options have a fair value measured using the share price or the Monte-Carlo simulation pricing model.
When the terms of an equity-settled award are modified, the minimum expense recognised is the grant date fair value of the unmodified award, provided the original terms of the award are met. An additional expense, measured as at the date of modification, is recognised for any modification that increases the total fair value of the share-based payment transaction, or is otherwise beneficial to the employee.
The social security contributions payable in connection with the grant of the share options is considered an integral part of the grant itself, and the charge is treated as a cash-settled transaction.
| J | Foreign currency translation |
a) Functional and presentation currency
The presentation currency of the Group is US dollars. Items included in the financial statements of each of the Group’s entities are measured in the functional currency of each entity.
| Consolidated financial statements | 16 |
MICRO FOCUS INTERNATIONAL PLC
| b) | Transactions and balances |
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Consolidated statement of comprehensive income within administrative expenses other than amounts related to borrowings denominated in foreign currencies which are not hedged by net investment hedges which are recognised within net finance costs.
Non-monetary items that are measured in terms of historical costs in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments (including purchased intangible assets) to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the closing rate.
On consolidation, the results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows:
| i) | Assets and liabilities for each Consolidated statement of financial position presented are translated at the closing rate at the date of that Consolidated statement of financial position; |
| ii) | Income and expenses for each Consolidated statement of comprehensive income item are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and |
| iii) | All resulting exchange differences are recognised as a separate component of equity. |
On consolidation, exchange differences arising from the translation of the net investment in foreign entities are taken to other comprehensive income.
Foreign exchange gains and losses resulting from the translation to period end exchange rates on borrowings denominated in foreign currencies which are not hedged by net investment hedges are recognised in the Consolidated statement of comprehensive income within net finance costs. Previously the Group had no borrowings denominated in foreign currencies which were not hedged by net investment hedges.
Goodwill arising before 1 May 2004 is treated as an asset of the Company and expressed in the Company’s functional currency.
| c) | Exchange rates |
The most important foreign currencies for the Group are: Pounds Sterling, the Euro, Canadian Dollar, Japanese Yen, Indian Rupee and the Australian Dollar. The exchange rates used are as follows:
| Year ended 31 October 2022 |
Year ended 31 October 2021 |
|||||||||||||||
| Average | Closing | Average | Closing | |||||||||||||
| £1 = $ |
1.26 | 1.16 | 1.37 | 1.37 | ||||||||||||
| €1 = $ |
1.07 | 1.00 | 1.19 | 1.16 | ||||||||||||
| C$ = $ |
0.78 | 0.73 | 0.80 | 0.81 | ||||||||||||
| AUD = $ |
0.70 | 0.64 | 0.75 | 0.75 | ||||||||||||
| 100 INR = $ |
1.29 | 1.21 | 1.36 | 1.33 | ||||||||||||
| 100 JPY = $ |
0.79 | 0.68 | 0.92 | 0.88 | ||||||||||||
| K | Intangible assets |
a) Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is tested annually for impairment or whenever there is an indication that the asset may be impaired. Goodwill is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. Each of those cash-generating units represents the Group’s investment in each area of operation by each primary reporting segment.
| Consolidated financial statements | 17 |
MICRO FOCUS INTERNATIONAL PLC
Where goodwill has been allocated to a cash-generating unit (“CGU”) and part of the operation within that unit is classified as held for sale, the goodwill associated with the held-for-sale operation is measured based on the relative values of the held-for-sale operation and the portion of the CGU retained.
b) Computer software
Computer software licences are capitalised on the basis of the costs incurred to acquire and bring into use the specific software. These costs are amortised using the straight-line method over their estimated useful lives of three to seven years for perpetual licence or based on the length of the agreement for term licences.
c) Research and development
Research expenditure is recognised as an expense as incurred in the Consolidated statement of comprehensive income in research and development expenses. Costs incurred on product development projects relating to the developing of new computer software programmes and significant enhancement of existing computer software programmes are recognised as intangible assets when it is probable that the project will be a success, considering its commercial and technological feasibility, and costs can be measured reliably. Only direct costs are capitalised which are the software development employee costs and third party contractor costs. Product development costs previously recognised as an expense are not recognised as an asset in a subsequent period.
Product development costs are amortised from the commencement of the commercial production of the product on a straight-line basis over the period of its expected benefit, typically being three years, and are included in costs of sales in the consolidated statement of comprehensive income.
d) Intangible assets—arising on business combinations
Other intangible assets that are acquired by the Group as part of a business combination are recognised at their fair value at the date of acquisition and are subsequently amortised. Amortisation is charged to the Consolidated statement of comprehensive income on a straight-line basis over the estimated useful life of each intangible asset. Intangible assets are amortised from the date they are available for use. The estimated useful lives are as follows:
| Purchased software | Licence agreement based, generally three to seven years | |
| Technology | Three to 12 years | |
| Trade names | Three to 20 years | |
| Customer relationships | Two to 15 years | |
Amortisation of purchased software intangibles is included in administrative expenses, amortisation of purchased technology intangibles is included in cost of sales and amortisation of acquired purchased trade names and customer relationships are included in selling and distribution costs in the Consolidated statement of comprehensive income.
| L | Property, plant and equipment |
All property, plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance expenditures are charged to the consolidated statement of comprehensive income during the financial year in which they are incurred. Depreciation is calculated using the straight-line method to write off the cost of each asset to its residual value over its estimated useful life as follows:
| Buildings | 30 years | |
| Leasehold improvements | Three to 10 years (not exceeding the remaining lease period) | |
| Fixtures and fittings | Two to seven years | |
| Computer equipment | One to five years | |
| Consolidated financial statements | 18 |
MICRO FOCUS INTERNATIONAL PLC
Freehold land is not depreciated. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each Consolidated statement of financial position date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing the disposal proceeds with the carrying amount and are included in the Consolidated statement of comprehensive income.
Property held for sale is measured at the lower of its carrying amount or estimated fair value less costs to sell.
| M | Impairment of non-financial assets |
Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment or whenever there is an indication that the asset may be impaired. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows being cash-generating units. Any non-financial assets other than goodwill which have suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Assets that are subject to amortisation and depreciation are also reviewed for any possible impairment at each reporting date.
| N | Trade receivables |
Trade receivables are initially recognised at fair value and subsequently measured at amortised cost less provisions for impairment based upon an expected credit loss methodology. The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables. A provision of the lifetime expected credit loss is established upon initial recognition of the underlying asset and are calculated using historical account payment profiles along with historical credit losses experienced. The loss allowance is adjusted for forward-looking factors specific to the debtor and the economic environment. The amount of the provision is the difference between the asset’s carrying amount and the present value of the probability weighted estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognised in the Consolidated statement of comprehensive income.
| O | Cash and cash equivalents |
Cash and cash equivalents include cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the Consolidated statement of financial position.
| P | Borrowings |
Borrowings are recognised initially at fair value, net of transaction costs incurred. Subsequent to initial recognition, interest bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the Consolidated statement of comprehensive income over the expected life of the of borrowing on an effective interest basis.
| Q | Leases |
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 over the lease term 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 (note 17, “Leases”). The useful life of the asset is determined in a manner consistent to that for owned property, plant and equipment described in L above. If right-of-use assets are considered to be impaired, the carrying value is reduced accordingly.
| Consolidated financial statements | 19 |
MICRO FOCUS INTERNATIONAL PLC
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.
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.
| R | Taxation |
Current and deferred tax are recognised in the Consolidated statement of comprehensive income, except when the tax relates to items charged or credited directly to equity, in which case the tax is also dealt with directly in equity.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit nor loss, it is not accounted for. Deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the Consolidated statement of financial position date and are expected to apply when the related deferred income tax asset is realised, or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.
Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred tax assets and liabilities are offset where there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.
Current tax is recognised based on the amounts expected to be paid or recovered under the tax rates and laws that have been enacted or substantively enacted at the Consolidated statement of financial position date.
| S | Ordinary shares, share premium and dividend distribution |
Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Dividend distributions to the Company’s shareholders are recognised as a liability in the Group’s financial statements in the period in which the dividends are approved by the Company’s shareholders. Interim dividends are recognised when they are paid.
| Consolidated financial statements | 20 |
MICRO FOCUS INTERNATIONAL PLC
| T | Derivative financial instruments and hedge accounting |
Financial assets and liabilities are recognised in the Group’s Consolidated statement of financial position when the Group becomes a party to the contractual provision of the instrument. Trade receivables are non-interest bearing and are initially recognised at fair value and subsequently measured at amortised cost less provisions for impairment based upon an expected credit loss methodology. Trade payables are non-interest bearing and are stated at their fair value. Derivative financial instruments are only used for economic hedging purposes and not as speculative investments.
The Group uses derivative financial instruments, such as interest rate swaps, to hedge its interest rate risks. Such derivative financial instruments are initially recognised at fair value on the date on which the contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.
Non-derivative financial instruments, such as Euro borrowings, have also been designated as hedges for net investments in foreign operations. Hedges of a net investment in a foreign operation are accounted for similarly to cash flow hedges.
Hedge accounting is permitted under certain circumstances provided the following criteria are met:
| • | At inception of the hedge, the documentation must include the risk management objective and strategy for undertaking the hedge, identification of the hedging instrument, the hedged item, the nature of the risk being hedged and how the entity will assess the hedging instrument’s effectiveness. Such hedges are expected to be effective in achieving offsetting changes in cash flows and are assessed on an on-going basis to determine the level of effectiveness. |
| • | The measurement of effectiveness determines the accounting treatment. For effective results, changes in the fair value of the hedging instrument should be recognised in other comprehensive income, while any material ineffectiveness should be recognised in the statement of comprehensive income. If effectiveness testing is not satisfactorily completed, all fair value movements on the hedging instrument should be recorded in the Consolidated statement of comprehensive income. The IFRS 9 hedge accounting requirements are applicable to the interest swaps and net investment hedges that have been designated for hedge accounting. |
Hedge accounting is ceased prospectively if the instrument expires or is sold, terminated or exercised; the hedge criteria are no longer met or the forecast transaction is no longer expected to occur.
| U | Provisions |
Provisions for onerous contracts, property restoration costs, restructuring costs and legal claims are recognised when the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Provisions are not recognised for future operating losses.
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation where the impact is material. The increase in the provision due to the passage of time is recognised as an interest expense.
| V | Contingent liabilities |
Contingent liabilities are possible obligations that arise from past events and whose existence will be confirmed only by uncertain future events or present obligations that arise from past events where the transfer of economic resources is uncertain or cannot be reliability estimated. Contingent liabilities are not recognised in the consolidated financial statements, except if they arise from a business combination; they are disclosed in the notes to the consolidated financial statements unless the likelihood of an outflow of economic resources is remote.
| Consolidated financial statements | 21 |
MICRO FOCUS INTERNATIONAL PLC
| W | Adoption of new and revised International Financial Reporting Standards |
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 year ended 31 October 2021, apart from standards, amendments to or interpretations of published standards adopted during the period.
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:
| • | Amendments to IFRS9, IAS 39, IFRS 7, IFRS 16 and IFRS 4: Interest rate benchmark reforms. Phase 2 effective January 2021 covers further disclosures on transition to a new benchmark. |
Interpretations and amendments
The following interpretations and amendments to existing standards are not yet effective and have not been adopted early by the Group. These interpretations and amendments have been endorsed by the UK Endorsement Board (“UK EB”) except where stated below:
Effective for periods commencing after 1 January 2022 (applicable to the Group from 1 November 2022):
| • | Annual Improvements cycle 2018-2020 includes relevant amendments clarifying capitalisation of transaction fees/inclusion of specific fees in modification/extinguishment test within IFRS 9 Financial Instruments. Other included improvement in IFRS 1 (First time adoption) and IAS 41 (agriculture) are not applicable to the Group. |
| • | Amendments to IFRS 3 “Business combinations”, IAS 16 “Property, plant and equipment” and IAS 37 “Provisions, Contingent assets and Contingent liabilities”. |
Effective for periods commencing after 1 January 2023 (applicable to the Group from 1 November 2023):
| • | Amendments to IAS 1 “Presentation of financial statements” aims to provide guidance on the application of materiality judgements to policy disclosures. |
| • | Amendments to IAS 8 “Accounting policies, changes in accounting estimates and errors” provides clarifications around the definition of accounting estimates and further clarification around the difference between policy changes and estimates. |
| • | Amendments to IAS 12 “Income taxes” covering temporary timing differences for deferred tax on the recognition of asset and liabilities from a single transaction. |
| • | Amendments to IFRS 17 “Insurance contracts”. |
Effective for periods commencing after 1 January 2024 (applicable to the Group from 1 November 2024) and not currently endorsed by the UK EB:
| • | Amendments to IAS 1 “Presentation of financial statements”. Amendment is presentational relates to the classification of liabilities current and non-current (the amendment was deferred until after January 2024). |
The impact of the amendments and interpretations listed above are not expected to have a material impact on the consolidated financial statements.
II Critical accounting estimates, assumptions and judgements
In preparing these consolidated 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 judgements and updates them as required. The Group has reviewed its critical accounting estimates, assumptions and judgements and has made the following amendments to those identified in the prior year:
The estimate identified in the prior year in relation to the potential impairment of goodwill and other intangible assets assessment is no longer considered critical. Potential impairments are assessed using the higher of value in use (“VIU”) or fair value less cost of disposal (“FVLCD”) as the recoverable amount. In the prior year recoverable amount was assessed based on VIU which required significant estimates to be made in determining the assumptions used in the VIU calculation. In light of the proposed acquisition of the Group by OpenText, recoverable amount has been assessed based on the FVLCD of the Group, which is based on the observable OpenText offer price and is higher than VIU. Therefore, estimates for VIU have not been used in determining the recoverable amount for purpose of the impairment testing and these are no longer a significant estimate.
| Consolidated financial statements | 22 |
MICRO FOCUS INTERNATIONAL PLC
Actual results could differ from these estimates. Unless otherwise indicated, the Group does not believe that there is a significant risk of a material change to the carrying value of assets and liabilities within the next financial year related to the accounting estimates and assumptions described below. The Group considers the following to be a description of the most significant estimates and judgements which require the Group to make subjective and complex judgements and matters that are inherently uncertain.
Critical accounting estimates
| A | Retirement benefit obligations |
Having assessed the impact of the assumptions used in estimating the retirement benefit obligation the Group has concluded that only the discount rate and inflation are critical. Mortality rates and salary growth rates are no longer considered critical estimates. Further detail on these estimates and the sensitivity of the carrying value of the defined benefit obligation to these is provided in note 20, “Pension and other long-term benefit commitments”.
| B | Useful economic lives of purchased intangible assets |
The economic lives of the Group’s purchased intangible assets are determined on initial acquisition and reassessed annually or whenever there are changes in circumstances indicating that the economic lives may not be appropriate. In reassessing the lives factors such as changes in actual and expected trading performance of the Group and how these compare to the initial acquisition assessment are considered. Using this information an estimate of the remaining useful economic lives is determined and if different to the currently applied life the remaining life is adjusted prospectively.
Critical accounting judgements
| C | Revenue recognition |
Revenue recognition requires significant use of management judgement to produce financial information. The most significant accounting judgements in applying IFRS 15 are the identification of performance obligations and the determination of the transaction price when the contract contains variable considerations.
Judgement is required to (i) identify each distinct performance obligation requiring separate recognition in a multi element contract (e.g. licence, maintenance, material rights for option to acquire additional products or services at discounted prices), and (ii) allocate the transaction price to the various performance obligations. This judgement impacts the timing of revenue recognition, as certain performance obligations are recognised at a point in time and others are recognised over the life of the contract, as explained in Accounting Policy D “Revenue recognition”, and therefore the judgement impacts the quantum of revenue and profit recognised in a period.
| D | Exceptional item classification |
The Group classifies items as exceptional in line with Accounting Policy H “Exceptional items”. The classification of these items as an exceptional is a matter of judgement. This judgement is made by management after evaluating each item deemed to be exceptional against the criteria set out within the defined accounting policy.
| E | Provision for income taxes |
The Group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the worldwide provision for income taxes including structuring activities undertaken by the Group and the application of complex transfer pricing rules. The Group recognises liabilities for anticipated settlement of tax issues based on judgements of whether additional taxes will be due. Significant issues may take several periods to resolve. In making judgements on the probability and amount of any tax charge, management takes into account:
| • | Status of the unresolved matter; |
| • | Strength of technical argument and clarity of legislation; |
| • | External advice; |
| • | Resolution process, past experience and precedents set with the particular taxing authority; |
| • | Agreements previously reached in other jurisdictions on comparable issues; and |
| • | Statute of limitations. |
| Consolidated financial statements | 23 |
MICRO FOCUS INTERNATIONAL PLC
Key judgements in the year were related to the EU State Aid and UK tax authority challenge in respect of prior periods. Specifically, these judgements covered (i) the probability of success of either the appeal by the UK Government or the appeal by the Group itself in respect of the EU State Aid, (ii) the probability of success of UK tax authority challenge, and therefore recovery of the $40.6m non-current tax receivable, and (iii) the interaction of the two matters in the context of the maximum liability, which we consider to be $51m, associated with both the UK State Aid and UK tax authority challenge. Based on their assessment (and supported by advice received by the Group’s tax advisors), the directors have concluded that no additional tax provisions are required with regards to these matters. See note 7, “Taxation”, for additional details.
The ultimate tax liability may differ materially from the amount provided depending on interpretations of tax law, settlement negotiations or changes in legislation. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the year in which such determination is made.
| Consolidated financial statements | 24 |
MICRO FOCUS INTERNATIONAL PLC
Notes to the consolidated financial statements
For the year ended 31 October 2022
| 1 | 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 year ended 31 October 2022, the operating committee consisted of the Chief Executive Officer, the Chief Financial Officer, Chief Operating Officer, Chief HR Officer and Senior Vice President Business Operations and the Chief Legal Officer. The Group is organised into a single reporting segment.
The Group’s segment under IFRS 8 is the Micro Focus Product Portfolio. The products within the 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 (“AMC”), Application Delivery Management (“ADM”), IT Operations Management (“ITOM”), CyberRes and Information Management & Governance (“IM&G”).
The segmental reporting is consistent with that used in internal management reporting and the profit measure used by the operating committee is Adjusted EBITDA.
As announced on 30 November 2021 the Group has changed the definition of Adjusted EBITDA to exclude capitalised development costs. This change aligns the definition to the definition included in our loan agreements. The table below has been updated to reflect this updated definition including the comparatives. Under the previous definition Adjusted EBITDA would be $791.5m (year ended 31 October 2021: $1040.2m).
| Note | Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
||||||||||
| Reconciliation to Adjusted EBITDA: |
||||||||||||
| Loss before tax |
(661.4 | ) | (517.8 | ) | ||||||||
| Finance costs |
6 | 262.7 | 253.9 | |||||||||
| Finance income |
6 | (111.4 | ) | (1.7 | ) | |||||||
| Depreciation of property, plant and equipment |
12 | 26.2 | 33.7 | |||||||||
| Right-of-use asset depreciation |
17 | 52.2 | 73.3 | |||||||||
| Amortisation of intangible assets |
11 | 811.8 | 956.4 | |||||||||
| Exceptional items (reported in Operating loss) |
4 | 498.6 | 247.1 | |||||||||
| Share-based compensation charge |
26 | 34.1 | 14.3 | |||||||||
| Foreign exchange (gain)/loss |
3 | (35.5 | ) | 0.1 | ||||||||
|
|
|
|
|
|||||||||
| Adjusted EBITDA |
877.3 | 1,059.3 | ||||||||||
|
|
|
|
|
|||||||||
For the reportable segment, the total assets were $8,451.1m (2021: $10,346.6m) and the total liabilities were $6,511.4m (2021: $7,525.6m) as at 31 October 2022.
| Consolidated financial statements | 25 |
MICRO FOCUS INTERNATIONAL PLC
| 2 | Supplementary information |
Analysis by geography
The Group is domiciled in the UK. The Group’s total segmental revenue from external customers by geographical location is detailed below:
| Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
|||||||
| UK |
139.2 | 160.0 | ||||||
| US |
1,181.1 | 1,263.0 | ||||||
| Germany |
174.9 | 223.0 | ||||||
| Canada |
90.6 | 110.3 | ||||||
| France |
83.3 | 100.7 | ||||||
| Japan |
71.0 | 95.6 | ||||||
| Other |
794.4 | 947.3 | ||||||
|
|
|
|
|
|||||
| Total |
2,534.5 | 2,899.9 | ||||||
|
|
|
|
|
|||||
The total of non-current assets as at 31 October 2022 located in the US is $2,771.0m (31 October 2021: $2,798.3m), the total in the rest of the world is $4,132.3m (31 October 2021: $5,641.2m).
Analysis of revenue from contracts with customers
| Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
|||||||
| Revenue from contracts with customers |
2,534.5 | 2,899.9 | ||||||
|
|
|
|
|
|||||
| Being: |
||||||||
| Recognised over time: |
||||||||
| Maintenance revenue |
1,603.9 | 1,791.7 | ||||||
| SaaS & other recurring revenue |
164.8 | 239.8 | ||||||
| Consulting revenue |
46.0 | — | ||||||
|
|
|
|
|
|||||
| 1,814.7 | 2,031.5 | |||||||
| Recognised at point in time: |
||||||||
| Licence revenue |
602.0 | 688.6 | ||||||
| Consulting revenue |
117.8 | 179.8 | ||||||
|
|
|
|
|
|||||
| 719.8 | 868.4 | |||||||
|
|
|
|
|
|||||
| Total Revenue |
2,534.5 | 2,899.9 | ||||||
|
|
|
|
|
|||||
| Consolidated financial statements | 26 |
MICRO FOCUS INTERNATIONAL PLC
Analysis of revenue by product
Set out below is an analysis of revenue recognised between the principal Product Portfolios for the year ended 31 October 2022 with comparatives:
Year ended 31 October 2022:
| Licence $m |
Maintenance $m |
SaaS & other recurring $m |
Consulting $m |
Total $m |
||||||||||||||||
| AMC |
134.4 | 302.8 | — | 12.6 | 449.8 | |||||||||||||||
| ADM |
77.2 | 363.2 | 81.7 | 17.1 | 539.2 | |||||||||||||||
| ITOM |
113.2 | 382.6 | 4.8 | 91.6 | 592.2 | |||||||||||||||
| CyberRes |
178.2 | 324.5 | 43.0 | 28.1 | 573.8 | |||||||||||||||
| IM&G |
99.0 | 230.8 | 35.3 | 14.4 | 379.5 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total Revenue |
602.0 | 1,603.9 | 164.8 | 163.8 | 2,534.5 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
For the year ended 31 October 2022 the Group moved certain portfolios between the ITOM, CyberRes and IM&G product groups. The analysis of revenue by product group for the year ended 31 October 2021 is shown below on the new basis for comparison with the year ended 31 October 2022, and on the previously reported basis.
Year ended 31 October 2021 (represented on new basis):
| Licence $m |
Maintenance $m |
SaaS & other recurring $m |
Consulting $m |
Total $m |
||||||||||||||||
| AMC |
155.3 | 315.9 | — | 10.3 | 481.5 | |||||||||||||||
| ADM |
106.1 | 408.5 | 78.9 | 18.6 | 612.1 | |||||||||||||||
| ITOM |
148.2 | 430.4 | 4.3 | 105.4 | 688.3 | |||||||||||||||
| CyberRes |
168.2 | 361.1 | 36.3 | 29.2 | 594.8 | |||||||||||||||
| IM&G |
110.8 | 275.8 | 120.3 | 16.3 | 523.2 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total Revenue |
688.6 | 1,791.7 | 239.8 | 179.8 | 2,899.9 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Year ended 31 October 2021 (as previously reported):
| Licence $m |
Maintenance $m |
SaaS & other recurring $m |
Consulting $m |
Total $m |
||||||||||||||||
| AMC |
155.3 | 315.9 | — | 10.3 | 481.5 | |||||||||||||||
| ADM |
106.1 | 408.5 | 78.9 | 18.6 | 612.1 | |||||||||||||||
| ITOM |
172.7 | 507.8 | 4.3 | 106.3 | 791.1 | |||||||||||||||
| CyberRes |
174.5 | 383.9 | 36.3 | 29.1 | 623.8 | |||||||||||||||
| IM&G |
80.0 | 175.6 | 120.3 | 15.5 | 391.4 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total Revenue |
688.6 | 1,791.7 | 239.8 | 179.8 | 2,899.9 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Consolidated financial statements | 27 |
MICRO FOCUS INTERNATIONAL PLC
| 3 | Loss before tax |
The loss before tax is stated after charging/(crediting) the following operating costs/(gains) classified by the nature of the costs/(gains):
| Note | Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
||||||||||
| Staff costs |
26 | 1,280.2 | 1,396.0 | |||||||||
| Depreciation of property, plant and equipment |
12 | 78.4 | 107.0 | |||||||||
| Loss on disposal of property, plant and equipment |
12 | 1.9 | 1.2 | |||||||||
| Amortisation of intangible assets |
11 | 811.8 | 956.4 | |||||||||
| Provision for receivables impairment (release)/charge |
14 | (0.9 | ) | 0.6 | ||||||||
| Foreign exchange (gain)/loss within Administrative Expenses |
(35.5 | ) | 0.1 | |||||||||
| Foreign exchange gain within Finance Income |
(102.2 | ) | — | |||||||||
| 4 | Exceptional items |
| Note | Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
||||||||||
| Reported within Operating loss: |
||||||||||||
| Goodwill impairment |
10 | 448.2 | — | |||||||||
| Severance and legal costs |
41.7 | 27.3 | ||||||||||
| Merger and acquisition costs |
67.5 | 3.6 | ||||||||||
| Gain on divestiture |
28 | (58.8 | ) | — | ||||||||
| Integration costs |
— | 98.0 | ||||||||||
| Legal settlement and associated costs |
— | 75.4 | ||||||||||
| Other restructuring costs |
— | 31.7 | ||||||||||
| Property-related costs |
— | 11.1 | ||||||||||
|
|
|
|
|
|||||||||
| Exceptional costs before tax |
498.6 | 247.1 | ||||||||||
| Tax effect of exceptional items |
0.4 | (76.3 | ) | |||||||||
| Reported within profit from discontinued operation (attributable to equity shareholders of the Company): |
||||||||||||
| Gain on disposal of discontinued operation |
28 | (3.2 | ) | (10.7 | ) | |||||||
|
|
|
|
|
|||||||||
| Exceptional costs after tax |
495.8 | 160.1 | ||||||||||
|
|
|
|
|
|||||||||
Exceptional items are allocated to the financial statement lines (for example: cost of sales) in the Consolidated statement of comprehensive income based on the nature and function of the costs; for example restructuring costs related to employees are classified where their original employment costs are recorded. Exceptional items included in operating loss are reported in the following financial statement lines Cost of sales $1.8m (2021: $2.6m), Selling and distribution expenses $1.4m (2021: $4.8m), Research and development expense $nil (2021: $0.4m credit) and Administrative expenses $495.4m (2021: $240.1m).
| Consolidated financial statements | 28 |
MICRO FOCUS INTERNATIONAL PLC
Goodwill impairment
A goodwill impairment charge of $448.2m was made in the year ended 31 October 2022 (2021: $nil), see note 10, “Goodwill”, for additional information.
Severance and legal costs
Severance and legal costs of $41.7m for the year ended 31 October 2022 (year ended 31 October 2021: $27.3m) relate mostly to termination costs for employees as the Group executes the FY22/FY23 cost programmes required to remove $400m-$500m of gross costs ($200m-$300m net of inflation) as we exit FY23.
Merger and acquisition costs
Merger and acquisition costs (“M&A”) of $67.5m for the year ended 31 October 2022 (year ended 31 October 2021: $3.6m) relate to the proposed acquisition by OpenText as well as other M&A activity conducted during the year. M&A costs are considered to be exceptional by virtue of their nature and size. Included in the costs related to the proposed transaction with OpenText are $56.9m of fees related to legal and advisor costs as well as $2.0m in relation to retention related bonus payments.
Gain on Divestiture
Divestiture gain of $58.8m for the year ended 31 October 2022 (year ended 31 October 2021: $nil) relate to the disposal of the Digital safe business that took place in January 2022 and is classified as exceptional by virtue of size and nature.
Integration costs
Integration costs were $nil for the year ended 31 October 2022 (year ended 31 October 2021: $98.0m). The prior year costs reflected the costs incurred in the IT design, build and migration onto a single new IT platform and a wide range of projects undertaken to conform, simplify and increase efficiency across the business.
Legal settlements and associated costs
Legal settlements and associated costs were $nil for the year ended 31 October 2022 (year ended 31 October 2021: $75.4m). Legal settlements and associated costs of $75.4m for the year ended 31 October 2021 related to the Wapp patent infringement case and were exceptional by virtue of size and incidence.
Other restructuring costs
Other restructuring costs were $nil for the year ended 31 October 2022 (year ended 31 October 2021: $31.7m). The prior year costs related to the costs of restructuring of the Group to deliver the target operating model design and cost base and certain IT expenditure required to support the related simplification of the Group.
Property-related costs
Property related costs were $nil for the year ended 31 October 2022 (year ended 31 October 2021: $11.1m). Prior year costs related to the impairment or amendment to the impairments of right-of-use assets held by the Group, any related onerous non-rental costs and the cost of site consolidations. These costs were incurred as the Group simplified and rationalised its real estate footprint.
Tax effect of exceptional items
The tax effect of exceptional items on the income statement is a charge of $0.4m for the year ended 31 October 2022 (year ended 31 October 2021: $76.3m credit). Exceptional items include a tax charge of $14.3m in relation to the gain on divestiture of the Digital Safe business.
Gain on disposal of discontinued operation
The gain on disposal of discontinued operation of $3.2m in the year ended 31 October 2022 (year ended 31 October 2021: $10.7m) relates to adjustments in indemnification amounts owed to SUSE as part of the disposal agreement and is exceptional by virtue of nature.
| Consolidated financial statements | 29 |
MICRO FOCUS INTERNATIONAL PLC
EU State Aid
Whilst no income statement charge has been recognised in the period or prior period, payments totalling $46.8m were made in the year ended 31 October 2021 in relation to the EU State Aid case which we considered to be exceptional. Details of this case are set out in note 7 “Taxation”.
| 5 | Services provided by the Group’s auditors and network of firms |
During the year ended 31 October 2022, the Group obtained the following services from the Group’s auditors as detailed below:
| Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
|||||||
| Audit of Company |
6.6 | 8.0 | ||||||
| ICOFR audit |
3.0 | 4.7 | ||||||
| Audit of subsidiaries |
2.9 | 2.8 | ||||||
|
|
|
|
|
|||||
| Total audit |
12.5 | 15.5 | ||||||
|
|
|
|
|
|||||
| Audit-related assurance services |
0.8 | 0.5 | ||||||
|
|
|
|
|
|||||
| Total assurance services |
0.8 | 0.5 | ||||||
|
|
|
|
|
|||||
| Other non-audit services |
0.1 | — | ||||||
|
|
|
|
|
|||||
| Total |
13.4 | 16.0 | ||||||
|
|
|
|
|
|||||
Of the audit-related assurance services engagements undertaken in the year ended 31 October 2022 only one (2021: one) was considered to be significant. This related to the review procedures over the Group’s interim financial statements, for which a fee of $0.5m (2021: $0.5m) was paid.
| 6 | Finance income and finance costs |
| Note | Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
||||||||||
| Finance costs |
||||||||||||
| Interest on bank borrowings |
184.4 | 163.6 | ||||||||||
| Commitment fees |
0.4 | 1.3 | ||||||||||
| Amortisation of facility costs and original issue discounts |
49.1 | 34.0 | ||||||||||
|
|
|
|
|
|||||||||
| Finance costs on bank borrowings |
233.9 | 198.9 | ||||||||||
| Interest rate swaps: cash flow hedges |
22 | 22.6 | 41.3 | |||||||||
| Other |
6.2 | 13.7 | ||||||||||
|
|
|
|
|
|||||||||
| Total |
262.7 | 253.9 | ||||||||||
|
|
|
|
|
|||||||||
| Consolidated financial statements | 30 |
MICRO FOCUS INTERNATIONAL PLC
| Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
|||||||||||
| Finance income |
||||||||||||
| Foreign exchange gain on borrowings not hedged by a net Investment hedge |
102.2 | — | ||||||||||
| Bank interest |
2.0 | 1.5 | ||||||||||
| Interest on non-plan pension assets |
20 | — | 0.2 | |||||||||
| Interest rate swaps: cash flow hedges |
22 | 0.8 | — | |||||||||
| Gain on repayment of term loan |
3.9 | — | ||||||||||
| Other |
2.5 | — | ||||||||||
|
|
|
|
|
|||||||||
| Total |
111.4 | 1.7 | ||||||||||
|
|
|
|
|
|||||||||
| Net finance costs |
151.3 | 252.2 | ||||||||||
|
|
|
|
|
|||||||||
| 7 | Taxation |
| A | Taxation in the Consolidated statement of comprehensive income |
| Continuing operations |
Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
||||||
| Current tax |
||||||||
| Current year |
129.5 | 145.7 | ||||||
| Adjustments to tax in respect of previous periods |
9.3 | 0.9 | ||||||
|
|
|
|
|
|||||
| 138.8 | 146.6 | |||||||
|
|
|
|
|
|||||
| Deferred tax |
||||||||
| Origination and reversal of temporary differences |
(148.1 | ) | (237.9 | ) | ||||
| Adjustments to tax in respect of previous periods |
(31.8 | ) | (23.3 | ) | ||||
| Impact of changes in tax rates |
(1.4 | ) | 31.9 | |||||
|
|
|
|
|
|||||
| (181.3 | ) | (229.3 | ) | |||||
|
|
|
|
|
|||||
| Total tax (credit)/charge |
(42.5 | ) | (82.7 | ) | ||||
|
|
|
|
|
|||||
For the year ended 31 October 2022, a $1.3m deferred tax credit (2021: $0.2m charge) and no current tax impact (2021: $nil) have been recognised in equity in relation to share options. A current tax charge of $6.8m (2021: $8.0m charge) and a deferred tax charge of $16.8m (2021: $nil) have been recognised through OCI (note 25, “Other reserves”). There is also a current tax charge of $6.3m (2021: $6.0m tax credit) and no deferred tax impact (2021: $8.1m tax charge) in relation to the currency translation differences. In addition, a deferred tax credit of $40.2m (2021: $7.8m) has been recognised in the Consolidated statement of comprehensive income in relation to foreign exchange gains and losses on intangibles and a $20.3m deferred tax charge (2021: $nil) in relation to defined benefit pension schemes.
The tax charge for the year ended 31 October 2022 is higher than the standard rate of corporation tax in the UK of 19.00% (2021: 19.00%). The differences are explained below:
| Consolidated financial statements | 31 |
MICRO FOCUS INTERNATIONAL PLC
| Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
|||||||
| Loss before taxation |
(661.4 | ) | (517.8 | ) | ||||
| Tax at UK corporation tax rate 19.00% (2021: 19.00%) |
(125.7 | ) | (98.4 | ) | ||||
| Effects of: |
||||||||
| Tax rates other than the UK standard rate |
2.3 | (8.6 | ) | |||||
| Intra-Group financing |
(19.4 | ) | 0.3 | |||||
| Innovation tax credit benefits |
(9.8 | ) | (22.3 | ) | ||||
| US foreign inclusion income |
17.4 | 15.5 | ||||||
| US losses |
13.5 | — | ||||||
| Share options |
(0.5 | ) | 1.6 | |||||
| Disposal of Digital Safe |
0.1 | — | ||||||
| Other accruals |
(1.3 | ) | — | |||||
| Movement in deferred tax not recognised |
— | 5.3 | ||||||
| Impact of rate changes |
— | 31.9 | ||||||
| Goodwill impairment |
82.7 | — | ||||||
| Expenses not deductible and other permanent differences |
18.9 | 14.4 | ||||||
| Other deferred tax only adjustments |
1.8 | — | ||||||
|
|
|
|
|
|||||
| (20.0 | ) | (60.3 | ) | |||||
| Adjustments to tax in respect of previous periods: |
||||||||
| Current tax |
9.3 | 0.9 | ||||||
| Deferred tax |
(31.8 | ) | (23.3 | ) | ||||
|
|
|
|
|
|||||
| (22.5 | ) | (22.4 | ) | |||||
|
|
|
|
|
|||||
| Total taxation |
(42.5 | ) | (82.7 | ) | ||||
|
|
|
|
|
|||||
The Group continues to benefit from the UK’s Patent Box regime, US R&D tax credits and other innovation-based tax credits offered by certain jurisdictions, the benefit for the year ended 31 October 2022 being $9.8m (2021: $22.3m).
US foreign inclusion income of $17.4m arising in the year ended 31 October 2022 (2021: $15.5m) is largely driven by new US tax legislation introduced as part of US tax reforms in 2018.
The expenses not deductible and other permanent differences charge of $18.9m (2021: $14.4m) includes $17.4m related to irrecoverable withholding tax (2021: $9.9m), $8.9m related to non-deductible fees and expenses in connection with the proposed acquisition by OpenText, including financial, corporate broking and legal advice (2021: $nil), a $5.7m credit in relation to uncertain tax positions (2021: $6.4m), and no adjustment in respect of US Base Erosion (“BEAT”) rules (2021: $16.3m).
The Group realised a net credit in relation to the true-up of prior periods, current and deferred tax estimates of $22.5m credit for the year ended 31 October 2022 (2021: $22.4m tax credit).
The Group’s tax charge is subject to various factors, many of which are outside the control of the Group, including changes in local tax legislation, and specifically additional changes expected to be introduced in the US and global tax reform as governments respond to COVID-19 and the OECD’s Base Erosion and Profit Shifting (“BEPS”) project.
| Consolidated financial statements | 32 |
MICRO FOCUS INTERNATIONAL PLC
On 8 June 2022, the General Court of the Court of Justice of the European Union (CJEU) found in favour of the European Commission’s decision that the UK’s ‘Financing Company Partial Exemption’ legislation is in breach of EU State Aid rules. The UK Government and UK-based international companies, including the Group, have lodged an appeal against the judgement with the CJEU. The Group has previously received and settled State Aid charging notices from HM Revenue and Customs (including historic interest) which in now recognised as a non-current tax receivable.
In addition, there has been a challenge from the UK Tax Authorities into the historic financing arrangements of the Group. The two challenges arise as a consequence of the same Group financing arrangements. As a matter of tax law, the two challenges are separate and the combined exposure is $88m. However, based on its current assessment of the value of the underlying tax benefit under dispute, and supported by external professional advice, the Group considers the maximum liability of these items to total $51m. Despite the decision of the General Court, based on its current assessment and also supported by external professional advice, the Group believes the Court of Justice will find in favour of the UK Government/taxpayer. The Group therefore continues to believe that it has no liability in respect of these issues. Therefore, no tax charge is required in the current or previous periods and the amounts paid to HMRC under the State Aid charging notices are expected to be repaid. Given that an appeal would be expected to take more than a year, a long term current tax receivable has continued to be recognised in respect of the amounts paid (including movements due to FX) at the balance sheet date.
No additional liability should accrue in future periods in respect of these matters, following (i) an amendment of the UK legislation affected by the EU Commission to be compliant with EU law, and (ii) the unwind of the financing company arrangements in question. The appeal to the Court of Justice, and the progress of the UK Tax Authority challenge into the historic financing arrangements of the Group, both continue to be monitored by Management.
To address concerns about uneven profit distribution and tax contributions of large multinational corporations, various agreements have been reached at the global level, including an agreement by over 135 jurisdictions to introduce a global minimum tax rate of 15%, applicable to multinational groups with global revenue exceeding €750m. In December 2021, the Organisation for Economic Co-operation and Development (OECD) released a draft legislative framework, followed by detailed guidance released in March 2022, that is expected to be used by individual jurisdictions that signed the agreement to amend their local tax laws. The Group has trading operations in a limited number of countries where the statutory tax rate is below 15% and does benefit from additional tax deductions by virtue of IP related tax incentives, and therefore may potentially be subject to a top-up tax in a limited number of instances. However, as a whole, the Group does not believe it falls within the primary purpose behind the legislation in addressing the tax contributions of multinational corporations. The Group is reviewing the draft rules, and also monitoring the status of implementation globally, to understand the potential impact on the group.
The Group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the worldwide provision for income taxes including structuring activities undertaken by the Group and the application of complex transfer pricing rules.
The ultimate tax liability may differ from the amount provided depending on interpretations of tax law, settlement negotiations or changes in legislation. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the year in which such determination is made.
| B | Current tax receivables |
| 31 October 2022 $m |
31 October 2021 $m |
|||||||
| Corporation tax |
22.9 | 59.1 | ||||||
|
|
|
|
|
|||||
| Consolidated financial statements | 33 |
MICRO FOCUS INTERNATIONAL PLC
| C | Non-current tax receivables |
| 31 October 2022 $m |
31 October 2021 $m |
|||||||
| Corporation tax |
40.6 | 48.0 | ||||||
|
|
|
|
|
|||||
The non-current tax receivable is $40.6m (2021: $48.0m). This non-current receivable reflects the payment that was made following the final decision published by the European Commission on its State Aid investigation into the UK’s ‘Financing Company Partial Exemption’ legislation. As this amount was paid in GBP, the long-term debtor balance will vary year on year as a result of foreign exchange gains and losses
| D | Current tax liabilities |
| 31 October 2022 $m |
31 October 2021 $m |
|||||||
| Corporation tax |
124.8 | 94.1 | ||||||
|
|
|
|
|
|||||
The current tax creditor at 31 October 2022 is $124.8m m (2021: $94.1m). The current tax creditor includes liabilities in respect of uncertain tax positions, net of overpayments. Items are netted where there is a corresponding net payable with the same tax authority.
Within current tax liabilities is $67.2m m (2021: $75.1m) in respect of the Group income tax reserve, the majority of which relates to the risk of challenge from the local tax authorities. 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.
| E | Non-current tax liabilities |
| 31 October 2022 $m |
31 October 2021 $m |
|||||||
| Corporation tax |
81.0 | 91.9 | ||||||
|
|
|
|
|
|||||
The non-current tax creditor is $81.0m (2021: $91.9m). The non-current creditor reflects the US transition tax payable more than 12 months after the balance sheet date.
| F | Deferred tax |
| Net Deferred tax liability |
Note | Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
|||||||||
| At 1 November |
(599.1 | ) | (841.1 | ) | ||||||||
| Reallocated to deferred tax assets |
2.0 | (15.0 | ) | |||||||||
| Credited to consolidated statement of comprehensive income: |
181.3 | 229.3 | ||||||||||
|
|
|
|
|
|||||||||
| – Continuing operations |
7A | 181.3 | 229.3 | |||||||||
| – Discontinued operation |
– | – | ||||||||||
|
|
|
|
|
|||||||||
| Credited/(charged) directly to equity |
1.3 | (0.2 | ) | |||||||||
| Credited/(charged) to other comprehensive income: |
3.1 | (15.9 | ) | |||||||||
| Acquisitions in the period |
(4.1 | ) | (1.9 | ) | ||||||||
| Reallocated to liabilities held for sale |
28 | – | 45.5 | |||||||||
| Foreign exchange adjustment |
(0.3 | ) | 0.2 | |||||||||
|
|
|
|
|
|||||||||
| At 31 October |
(415.8 | ) | (599.1 | ) | ||||||||
|
|
|
|
|
|||||||||
| Consolidated financial statements | 34 |
MICRO FOCUS INTERNATIONAL PLC
| Net Deferred tax asset |
Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
||||||
| At 1 November |
15.0 | — | ||||||
| Reallocated from deferred tax liabilities |
(2.0 | ) | 15.0 | |||||
|
|
|
|
|
|||||
| At 31 October |
13.0 | 15.0 | ||||||
|
|
|
|
|
|||||
Deferred tax assets and liabilities below are presented net where there is a legally enforceable right to offset and the intention to settle on a net basis.
Deferred tax assets
| Tax losses and interest restrictions $m |
Share- based payments $m |
Deferred revenue $m |
Tax credits $m |
Intangible assets $m |
Other temporary differences $m |
Research and development $m |
Total $m |
|||||||||||||||||||||||||
| At 1 November 2021 |
141.5 | 4.0 | 98.2 | 7.9 | — | 72.9 | 122.8 | 447.3 | ||||||||||||||||||||||||
| Credited/(charged) to consolidated statement of comprehensive income—continuing operations |
(6.6 | ) | 5.2 | 14.6 | 12.3 | — | (14.2 | ) | (0.6 | ) | 10.7 | |||||||||||||||||||||
| Credited/(charged) directly to equity |
— | 1.3 | — | — | — | — | — | 1.3 | ||||||||||||||||||||||||
| Charged to other comprehensive income |
— | — | — | — | — | (20.3 | ) | — | (20.3 | ) | ||||||||||||||||||||||
| Foreign exchange adjustment |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Subtotal |
134.9 | 10.5 | 112.8 | 20.2 | — | 38.4 | 122.2 | 439.0 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Jurisdictional offsetting |
(426.0 | ) | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| At 31 October 2022 |
13.0 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Consolidated financial statements | 35 |
MICRO FOCUS INTERNATIONAL PLC
| Tax losses and interest restrictions $m |
Share- based payments $m |
Deferred revenue $m |
Tax credits $m |
Intangible assets $m |
Other temporary differences $m |
Research and development $m |
Total $m |
|||||||||||||||||||||||||
| At 1 November 2020 |
133.5 | 0.8 | 90.5 | 16.3 | — | 69.7 | 86.5 | 397.3 | ||||||||||||||||||||||||
| Credited/(charged) to consolidated statement of comprehensive income—continuing operations |
8.0 | 3.3 | 7.7 | (8.4 | ) | — | 11.4 | 36.3 | 58.3 | |||||||||||||||||||||||
| Credited to consolidated statement of comprehensive income—discontinued operation |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Credited directly to equity |
— | (0.2 | ) | — | — | — | — | — | (0.2 | ) | ||||||||||||||||||||||
| Debited to other comprehensive income |
— | — | — | — | — | (8.1 | ) | — | (8.1 | ) | ||||||||||||||||||||||
| Foreign exchange adjustment |
— | 0.1 | — | — | — | (0.1 | ) | — | — | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Subtotal |
141.5 | 4.0 | 98.2 | 7.9 | — | 72.9 | 122.8 | 447.3 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Jurisdictional offsetting |
(432.3 | ) | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| At 31 October 2021 |
15.0 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
A deferred tax credit to equity of $1.3m (2021: $0.2m) arises during the year in relation to share-based payments.
The deferred tax asset relating to other temporary differences of $38.4m as at 31 October 2022 (2021: $72.9m) has reduced during the year primarily due to movements associated with two Defined Benefit pension schemes, financing arrangements and various US short-term timing differences. Deferred tax assets are recognised in respect of tax losses carried forward to the extent that the realisation of the related tax benefit through the utilisation of future taxable profits is probable.
The Group did not recognise deferred tax assets in relation to the following gross temporary differences, the expiration of which is determined by the tax law of each jurisdiction:
| Expiration: 2023 $m |
2024 $m |
2025 $m |
2026 $m |
2027 $m |
Thereafter $m |
No expiry $m |
Total $m |
|||||||||||||||||||||||||
| At 31 October 2022 |
||||||||||||||||||||||||||||||||
| Type of temporary difference: |
||||||||||||||||||||||||||||||||
| Losses |
24.4 | 41.4 | 8.4 | 1.9 | — | 2,089.8 | 19.5 | 2,185.4 | ||||||||||||||||||||||||
| Credits |
1.8 | 1.4 | 1.4 | 1.1 | 1.0 | 3.9 | 42.0 | 52.6 | ||||||||||||||||||||||||
| Other |
— | — | — | — | — | — | 23.9 | 23.9 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total |
26.2 | 42.8 | 9.8 | 3.0 | 1.0 | 2,093.7 | 85.4 | 2,261.9 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Consolidated financial statements | 36 |
MICRO FOCUS INTERNATIONAL PLC
| Expiration: 2022 $m |
2023 $m |
2024 $m |
2025 $m |
2026 $m |
Thereafter $m |
No expiry $m |
Total $m |
|||||||||||||||||||||||||
| At 31 October 2021 |
||||||||||||||||||||||||||||||||
| Type of temporary difference: |
||||||||||||||||||||||||||||||||
| Losses |
0.6 | 7.4 | 23.8 | 40.5 | 8.2 | 2,045.1 | 54.1 | 2,179.7 | ||||||||||||||||||||||||
| Credits |
3.2 | 1.8 | 1.4 | 1.4 | 0.9 | 4.7 | 41.1 | 54.5 | ||||||||||||||||||||||||
| Other |
— | — | — | — | — | 35.3 | 23.9 | 59.2 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total |
3.8 | 9.2 | 25.2 | 41.9 | 9.1 | 2,085.1 | 119.1 | 2,293.4 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Deferred tax liabilities
| Intangible assets $m |
Other temporary differences $m |
Total $m |
||||||||||
| At 1 November 2021 |
(967.7 | ) | (63.7 | ) | (1,031.4 | ) | ||||||
| Credited/(charged) to Consolidated statement of comprehensive income—continuing operations |
166.0 | 4.6 | 170.6 | |||||||||
| Acquisitions |
(4.1 | ) | — | (4.1 | ) | |||||||
| Credited/(charged) to other comprehensive income—continuing operations |
40.2 | (16.8 | ) | 23.4 | ||||||||
| Foreign exchange adjustment |
0.2 | (0.5 | ) | (0.3 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Subtotal |
(765.4 | ) | (76.4 | ) | (841.8 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Jurisdictional offsetting |
426.0 | |||||||||||
|
|
|
|
|
|
|
|||||||
| At 31 October 2022 |
(415.8 | ) | ||||||||||
|
|
|
|
|
|
|
|||||||
| Intangible assets $m |
Research and development $m |
Other temporary differences $m |
Total $m |
|||||||||||||
| At 1 November 2020 |
(1,180.5 | ) | — | (57.9 | ) | (1,238.4 | ) | |||||||||
| Charged to Consolidated statement of comprehensive income—continuing operations |
176.8 | — | (5.8 | ) | 171.0 | |||||||||||
| Credited to other comprehensive income—continuing operations |
(7.8 | ) | — | — | (7.8 | ) | ||||||||||
| Acquisitions |
(1.9 | ) | — | — | (1.9 | ) | ||||||||||
| Deferred tax liabilities reallocated to liabilities held for sale |
45.5 | — | — | 45.5 | ||||||||||||
| Foreign exchange adjustment |
0.2 | — | — | 0.2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Subtotal |
(967.7 | ) | — | (63.7 | ) | (1,031.4 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Jurisdictional offsetting |
432.3 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| At 31 October 2021 |
(599.1 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
No deferred tax liability is recognised in respect of temporary differences associated with investments in subsidiaries because the Group is in a position to control the timing of the reversal of the temporary differences and none are expected to reverse in the foreseeable future.
| Consolidated financial statements | 37 |
MICRO FOCUS INTERNATIONAL PLC
| 8 | Dividends |
| Equity—ordinary |
Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
||||||
| Final paid 20.3 cents (2021: 15.5 cents) per ordinary share |
65.2 | 51.7 | ||||||
| Interim paid 8.0 cents (2021: 8.8 cents) per ordinary share |
26.1 | 29.4 | ||||||
|
|
|
|
|
|||||
| 91.3 | 81.1 | |||||||
|
|
|
|
|
|||||
As a result of the proposed acquisition of the Group by OpenText the directors are not proposing a final dividend for the full year ended 31 October 2022.
| Consolidated financial statements | 38 |
| MICRO | FOCUS INTERNATIONAL PLC |
| 9 | Earnings per share |
The calculation of the basic earnings per share has been based on the earnings attributable to owners of the parent and the weighted average number of shares for each year.
Reconciliation of the earnings and weighted average number of shares:
| Year ended 31 October 2022 |
Year ended 31 October 2021 |
|||||||
| Earnings ($m) |
||||||||
| Loss for the year from continuing operations |
(618.9 | ) | (435.1 | ) | ||||
| Profit for the year from discontinued operation |
3.2 | 10.7 | ||||||
|
|
|
|
|
|||||
| (615.7 | ) | (424.4 | ) | |||||
|
|
|
|
|
|||||
| Number of shares (m) |
||||||||
| Weighted average number of shares |
323.8 | 336.5 | ||||||
| Dilutive effects of shares |
— | — | ||||||
|
|
|
|
|
|||||
| 323.8 | 336.5 | |||||||
|
|
|
|
|
|||||
| Earnings per share |
||||||||
| Basic earnings per share (cents) |
||||||||
| Continuing operations |
(191.12 | ) | (129.30 | ) | ||||
| Discontinued operation |
0.99 | 3.18 | ||||||
| Total Basic earnings per share |
(190.13 | ) | (126.12 | ) | ||||
| Diluted earnings per share (cents) |
||||||||
| Continuing operations1 |
(191.12 | ) | (129.30 | ) | ||||
| Discontinued operation |
0.99 | 3.18 | ||||||
| Total Diluted earnings per share1 |
(190.13 | ) | (126.12 | ) | ||||
| Basic earnings per share (pence) |
||||||||
| Continuing operations |
(151.91 | ) | (94.09 | ) | ||||
| Discontinued operation |
0.79 | 2.31 | ||||||
| Total Basic earnings per share |
(151.12 | ) | (91.78 | ) | ||||
| Diluted earnings per share (pence) |
||||||||
| Continuing operations1 |
(151.91 | ) | (94.09 | ) | ||||
| Discontinued operation |
0.79 | 2.31 | ||||||
| Total Diluted earnings per share1 |
(151.12 | ) | (91.78 | ) | ||||
| Earnings attributable to ordinary shareholders |
||||||||
| From continuing operations |
(618.9 | ) | (435.1 | ) | ||||
| Excluding non-controlling interests |
||||||||
|
|
|
|
|
|||||
| Loss for the year from continuing operations |
(618.9 | ) | (435.1 | ) | ||||
| From discontinued operation |
3.2 | 10.7 | ||||||
|
|
|
|
|
|||||
| (615.7 | ) | (424.4 | ) | |||||
|
|
|
|
|
|||||
| Average exchange rate |
$ | 1.26/ | £1 | $ | 1.37/ | £1 | ||
|
|
|
|
|
|||||
| 1 | The Group reported a loss from continuing operations and a loss for the year attributable to the ordinary equity shareholders of the Company for the years ended 31 October 2022 and 31 October 2021. 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. |
| Consolidated financial statements | 39 |
MICRO FOCUS INTERNATIONAL PLC
The weighted average number of shares excludes treasury shares that do not have dividend rights (note 23, “Share capital”).
| 10 | Goodwill |
| Note | 31 October 2022 $m |
31 October 2021 $m |
||||||||||
| Net book value |
||||||||||||
| At 1 November |
3,725.5 | 3,835.4 | ||||||||||
| Acquisitions |
29 | 13.6 | 7.2 | |||||||||
| Impairment charge |
4 | (448.2 | ) | — | ||||||||
| Effects of movements in exchange rates |
(240.3 | ) | 30.1 | |||||||||
| Transferred to assets held for sale |
28 | — | (147.2 | ) | ||||||||
|
|
|
|
|
|||||||||
| At 31 October |
3,050.6 | 3,725.5 | ||||||||||
|
|
|
|
|
|||||||||
| A CGU-level summary of the goodwill allocation is presented below: |
||||||||||||
|
|
|
|
|
|||||||||
| Micro Focus |
3,050.6 | 3,725.5 | ||||||||||
|
|
|
|
|
|||||||||
Goodwill acquired through business combinations has been allocated to a cash-generating unit (“CGU”) for the purpose of impairment testing. The Group has one CGU, the Micro Focus Product Portfolio, which is consistent with the segment reporting that is used in internal management reporting.
The goodwill arising in the year ended 31 October 2022, relates to the acquisition of Debricked (note 29, “Acquisitions”) (2021: $7.2m related to the acquisitions of Streamworx and Full 360). The amounts relating to goodwill additions are all expected to be deductible for tax purposes.
In the prior period goodwill with a net book value of $147.2m (Costs $253.4m, impairment ($106.2m) was allocated to the Digital Safe business and was reclassified as held for sale and is shown there as part of the current assets held for sale in the consolidated statement of financial position and not included in the balance at 31 October 2021 shown above. See note 28, “Discontinued operation and assets held for sale” for additional details.
Impairment test
Goodwill is tested annually for impairment, or more frequently where there is an indication of impairment. An impairment test is a comparison of the carrying value of the assets of the CGU with their recoverable amount. Where the recoverable amount is less than the carrying value, an impairment results. The Group’s annual test is performed at 31 October.
The Group has performed the impairment test at 31 October 2022 incorporating its knowledge of the business into that testing and noting at that date the offer for the Group from OpenText (which has been approved by the Board of Directors and shareholders) was less than the net assets of the Group. The recoverable amount of the Micro Focus CGU at 31 October 2022 is $6.7bn based on its fair value less costs of disposal (“FVLCD”) (2021: $9.3bn based on value in use (“VIU”) and excluding the Digital Safe business disposed of on 31 January 2022). As of 31 October 2022, for impairment testing purposes, the Group’s carrying value of the net assets of the CGU exceeded its recoverable amount by $0.4bn and an impairment charge, solely related to goodwill, has been recognised in administrative expenses as an exceptional cost in the consolidated statement of comprehensive income (31 October 2021: headroom of $1.2bn based on the Group’s VIU).
The recoverable amount of the Micro Focus CGU at 31 October 2022 is determined based on its FVLCD. The FVLCD , which is considered a level 2 measurement on the fair value hierarchy, includes enterprise value of the Group less estimated costs to complete the sale, including legal, accounting and IT costs of $59m. The enterprise value is calculated based on the proposed acquisition price by OpenText of £5.32 per share plus the fair value of net debt and net pension obligations and contract liabilities. The fair value of contract liabilities is based on their
| Consolidated financial statements | 40 |
MICRO FOCUS INTERNATIONAL PLC
cost of fulfilment plus a reasonable profit margin. The proposed acquisition price of the Group has been applied to the Group’s share capital excluding treasury shares (see note 23. “Share Capital”) adjusted for the net shares to be issued for share options and AWS warrants vested by the transaction, and shares held by the Group’s Employee Benefit Trust. The difference between the OpenText offer price of £5.32 per share on which FVLCD has been based and the group’s share price of £5.20 per share at 31 October 2022 is equivalent to market capitalisation of $48.9m.
The recoverable amount for 2021 was determined based on VIU. The recoverable amount has subsequently reduced during 2022, primarily due to macro-economic factors which may impact future sales and also includes increased interest rates, inflation and a strengthening in the US dollar which may impact both future cash flows and discount rates, and the suspension of operations in Russia.
| 11 | Other intangible assets |
| Note | Purchased software $m |
Product development costs $m |
Purchased intangibles | |||||||||||||||||||||||||
| Technology $m |
Trade names $m |
Customer relationships $m |
Total $m |
|||||||||||||||||||||||||
| Cost |
||||||||||||||||||||||||||||
| At 1 November 2021 |
207.6 | 293.0 | 2,137.4 | 263.4 | 5,204.8 | 8,106.2 | ||||||||||||||||||||||
| Acquisitions |
29 | — | — | 22.6 | — | — | 22.6 | |||||||||||||||||||||
| Additions |
17.2 | 85.8 | — | — | — | 103.0 | ||||||||||||||||||||||
| Disposals |
(104.1 | ) | — | — | — | — | (104.1 | ) | ||||||||||||||||||||
| Effects of movements in exchange rates |
(4.3 | ) | (0.6 | ) | (80.4 | ) | (7.2 | ) | (198.8 | ) | (291.3 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| At 31 October 2022 |
116.4 | 378.2 | 2,079.6 | 256.2 | 5,006.0 | 7,836.4 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Accumulated amortisation |
||||||||||||||||||||||||||||
| At 1 November 2021 |
138.0 | 257.5 | 1,087.9 | 106.9 | 2,184.7 | 3,775.0 | ||||||||||||||||||||||
| Amortisation charge for the year |
30.4 | 25.9 | 237.6 | 19.8 | 498.1 | 811.8 | ||||||||||||||||||||||
| Disposals |
(104.1 | ) | — | — | — | — | (104.1 | ) | ||||||||||||||||||||
| Effects of movements in exchange rates |
(1.8 | ) | (0.5 | ) | (41.1 | ) | (1.9 | ) | (76.5 | ) | (121.8 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| At 31 October 2022 |
62.5 | 282.9 | 1,284.4 | 124.8 | 2,606.3 | 4,360.9 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net book amount at 31 October 2022 |
53.9 | 95.3 | 795.2 | 131.4 | 2,399.7 | 3,475.5 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net book amount at 31 October 2021 |
69.6 | 35.5 | 1,049.5 | 156.5 | 3,020.1 | 4,331.2 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Consolidated financial statements | 41 |
MICRO FOCUS INTERNATIONAL PLC
| Note | Purchased software $m |
Product development costs $m |
Purchased intangibles | Total $m |
||||||||||||||||||||||||
| Technology $m |
Trade names $m |
Customer relationships $m |
||||||||||||||||||||||||||
| Cost |
||||||||||||||||||||||||||||
| At 1 November 2020 |
191.5 | 274.0 | 2,201.2 | 269.2 | 5,364.0 | 8,299.9 | ||||||||||||||||||||||
| Acquisitions |
29 | — | — | 7.8 | — | — | 7.8 | |||||||||||||||||||||
| Additions |
28.4 | 19.1 | — | — | — | 47.5 | ||||||||||||||||||||||
| Disposals |
(13.5 | ) | — | — | — | — | (13.5 | ) | ||||||||||||||||||||
| Effects of movements in exchange rates |
1.2 | (0.1 | ) | 10.4 | 1.2 | 26.3 | 39.0 | |||||||||||||||||||||
| Transferred to current assets classified as held for sale |
28 | — | — | (82.0 | ) | (7.0 | ) | (185.5 | ) | (274.5 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| At 31 October 2021 |
207.6 | 293.0 | 2,137.4 | 263.4 | 5,204.8 | 8,106.2 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Accumulated amortisation |
||||||||||||||||||||||||||||
| At 1 November 2020 |
113.5 | 237.9 | 865.7 | 87.9 | 1,611.9 | 2,916.9 | ||||||||||||||||||||||
| Amortisation charge for the year |
37.4 | 19.6 | 257.2 | 20.7 | 621.5 | 956.4 | ||||||||||||||||||||||
| Disposals |
(13.5 | ) | — | — | — | — | (13.5 | ) | ||||||||||||||||||||
| Effects of movements in exchange rates |
0.6 | — | 2.6 | 0.2 | 4.2 | 7.6 | ||||||||||||||||||||||
| Transferred to current assets classified as held for sale |
28 | — | — | (37.6 | ) | (1.9 | ) | (52.9 | ) | (92.4 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| At 31 October 2021 |
138.0 | 257.5 | 1,087.9 | 106.9 | 2,184.7 | 3,775.0 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net book amount at 31 October 2021 |
69.6 | 35.5 | 1,049.5 | 156.5 | 3,020.1 | 4,331.2 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net book amount at 31 October 2020 |
78.0 | 36.1 | 1,335.5 | 181.3 | 3,752.1 | 5,383.0 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Intangible assets, with the exception of purchased software and internally generated product development costs, relate to identifiable assets purchased as part of the Group’s business combinations. Intangible assets are amortised on a straight-line basis over their expected useful economic life—see Accounting Policy K.
Expenditure totalling $103.0m (2021: $47.5m) was made in the year ended 31 October 2022, including $85.8m in respect of development costs and $17.2m of purchased software.
The acquisition of Debricked in the year ended 31 October 2022 gave rise to purchased intangible additions of $22.6m. The acquisitions of Streamworx and Full 360 in the year ended 31 October 2021 gave rise to additions of $7.8m to purchased intangibles (note 29, “Acquisitions”).
At 31 October 2022, the unamortised lives of technology assets were in the range of one to ten years, customer relationships in the range of one to ten years and trade names in the range of two to 14 years. The HPE Software business acquired purchased intangibles, the largest component of the Group’s purchased intangibles, have up to another seven years’ life remaining for technology (carrying value $708m) and up to ten years’ life remaining for customer relationships purchased intangibles (carrying value $2.3bn), assuming no further investments were made.
| Consolidated financial statements | 42 |
MICRO FOCUS INTERNATIONAL PLC
Included in the consolidated statement of comprehensive income was:
| For continuing operations: |
Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
||||||
| Cost of sales: |
||||||||
| – amortisation of product development costs |
25.9 | 19.6 | ||||||
| – amortisation of acquired purchased technology |
237.6 | 257.2 | ||||||
| Selling and distribution: |
||||||||
| – amortisation of acquired purchased trade names and customer relationships |
517.9 | 642.2 | ||||||
| Administrative expenses: |
||||||||
| – amortisation of purchased software |
30.4 | 37.4 | ||||||
|
|
|
|
|
|||||
| Total amortisation charge for the year |
811.8 | 956.4 | ||||||
|
|
|
|
|
|||||
| Research and development: |
||||||||
| – capitalisation of product development costs |
85.8 | 19.1 | ||||||
|
|
|
|
|
|||||
If the remaining economic lives of all purchased intangibles were one year longer, expected amortisation would be $155.8m lower than that shown in the table above in the year ended 31 October 2022, with consequential impacts in subsequent years. If the remaining economic lives of all purchased intangibles were one year shorter, amortisation would be $295.9m higher than that shown in the table above in the year ended 31 October 2022, with consequential impacts in subsequent years.
| 12 | Property, plant and equipment |
| Note | Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
||||||||||
| Purchased property, plant and equipment |
61.2 | 75.4 | ||||||||||
| Leased right-of-use assets |
17 | 126.4 | 153.2 | |||||||||
|
|
|
|
|
|||||||||
| 187.6 | 228.6 | |||||||||||
|
|
|
|
|
|||||||||
Right-of-use assets arising from the Group’s lease arrangements are recorded within property, plant and equipment with additional disclosure on right-of-use assets included in note 17 “Leases”.
Additions of $42.2m (2021: $38.8m) and a depreciation charge of $52.2m (2021: $73.3m) were recorded in respect of right-of-use assets during the year to 31 October 2022.
| Consolidated financial statements | 43 |
MICRO FOCUS INTERNATIONAL PLC
| Note | Freehold land and buildings $m |
Leasehold improvements $m |
Computer equipment $m |
Fixtures and fittings $m |
Total $m |
|||||||||||||||||||
| Cost |
||||||||||||||||||||||||
| At 1 November 2021 |
14.8 | 76.8 | 109.1 | 8.2 | 208.9 | |||||||||||||||||||
| Additions |
0.1 | 3.4 | 14.7 | 0.7 | 18.9 | |||||||||||||||||||
| Disposals |
— | (6.6 | ) | (68.7 | ) | (0.9 | ) | (76.2 | ) | |||||||||||||||
| Effects of movements in exchange rates |
(2.1 | ) | (4.0 | ) | (12.2 | ) | (0.9 | ) | (19.2 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| At 31 October 2022 |
12.8 | 69.6 | 42.9 | 7.1 | 132.4 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Accumulated depreciation |
||||||||||||||||||||||||
| At 1 November 2021 |
3.0 | 53.0 | 75.4 | 2.1 | 133.5 | |||||||||||||||||||
| Disposals |
— | (5.6 | ) | (68.1 | ) | (0.6 | ) | (74.3 | ) | |||||||||||||||
| Charge for the year |
0.3 | 8.0 | 15.9 | 2.0 | 26.2 | |||||||||||||||||||
| Effects of movements in exchange rates |
(0.4 | ) | (3.1 | ) | (10.0 | ) | (0.7 | ) | (14.2 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| At 31 October 2022 |
2.9 | 52.3 | 13.2 | 2.8 | 71.2 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net book amount at 31 October 2022 |
9.9 | 17.3 | 29.7 | 4.3 | 61.2 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net book amount at 1 November 2021 |
11.8 | 23.8 | 33.7 | 6.1 | 75.4 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Consolidated financial statements | 44 |
MICRO FOCUS INTERNATIONAL PLC
| Note | Freehold land and buildings $m |
Leasehold improvements $m |
Computer equipment $m |
Fixtures and fittings $m |
Total $m |
|||||||||||||||||||
| Cost |
||||||||||||||||||||||||
| At 1 November 2020 |
14.0 | 83.6 | 107.9 | 7.8 | 213.3 | |||||||||||||||||||
| Acquisition |
— | — | — | 0.1 | 0.1 | |||||||||||||||||||
| Additions |
— | 1.2 | 15.6 | 0.9 | 17.7 | |||||||||||||||||||
| Disposals |
— | (4.5 | ) | (14.0 | ) | (0.8 | ) | (19.3 | ) | |||||||||||||||
| Effects of movements in exchange rates |
0.8 | 0.6 | 1.9 | 0.2 | 3.5 | |||||||||||||||||||
| Transferred to current assets classified as held for sale |
28 | — | (4.1 | ) | (2.3 | ) | — | (6.4 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| At 31 October 2021 |
14.8 | 76.8 | 109.1 | 8.2 | 208.9 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Accumulated depreciation |
||||||||||||||||||||||||
| At 1 November 2020 |
2.5 | 47.3 | 69.5 | 0.3 | 119.6 | |||||||||||||||||||
| Disposals |
— | (3.6 | ) | (14.0 | ) | (0.5 | ) | (18.1 | ) | |||||||||||||||
| Charge for the year |
0.4 | 10.9 | 20.3 | 2.1 | 33.7 | |||||||||||||||||||
| Effects of movements in exchange rates |
0.1 | 0.2 | 1.6 | 0.2 | 2.1 | |||||||||||||||||||
| Transferred to current assets classified as held for sale |
28 | — | (1.8 | ) | (2.0 | ) | — | (3.8 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| At 31 October 2021 |
3.0 | 53.0 | 75.4 | 2.1 | 133.5 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net book amount at 31 October 2021 |
11.8 | 23.8 | 33.7 | 6.1 | 75.4 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net book amount at 1 November 2020 |
11.5 | 36.3 | 38.4 | 7.5 | 93.7 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Depreciation for the year ended 31 October 2022 of $26.2m (2021: $33.7m) is included within administrative expenses and cost of sales in the Consolidated statement of comprehensive income.
| 13 | Other assets |
| Note | 31 October 2022 $m |
31 October 2021 $m |
||||||||
| Current |
40.1 | 33.0 | ||||||||
| Non-current |
51.9 | 71.6 | ||||||||
|
|
|
|
|
|||||||
| 92.0 | 104.6 | |||||||||
|
|
|
|
|
|||||||
| 31 October 2022 $m |
31 October 2021 $m |
|||||||||||
| Employee benefit deposit |
4.9 | 22.6 | ||||||||||
| Long-term pension assets |
20 | 15.2 | 17.1 | |||||||||
| Contract-related costs |
71.9 | 64.9 | ||||||||||
|
|
|
|
|
|||||||||
| 92.0 | 104.6 | |||||||||||
|
|
|
|
|
|||||||||
| Consolidated financial statements | 45 |
MICRO FOCUS INTERNATIONAL PLC
Employee benefit deposits
Employee benefit deposits are predominantly held in Israel ($0.6m), Italy ($1.6m) and the Netherlands ($2.3m) (2021: Israel $17.3m, Italy $2.5m and the Netherlands $2.8m). Employers in Italy and Israel are required by law to maintain funds to satisfy certain employee benefit liabilities, including free time off and compensation for involuntary termination of employment. These investment-based deposits are managed by third parties and the carrying values are marked-to-market based on third party investment reports. In addition, a cash deposit was held in the Netherlands on behalf of certain employees to cover legacy employment subsistence benefits.
Contract-related costs
| 31 October 2022 $m |
31 October 2021 $m |
|||||||
| Current |
31.8 | 33.0 | ||||||
| Non-current |
40.1 | 31.9 | ||||||
|
|
|
|
|
|||||
| 71.9 | 64.9 | |||||||
|
|
|
|
|
|||||
The Group capitalises the costs of obtaining a customer contract when they are incremental and, if expected to be recovered, they are amortised over the customer life or pattern of revenue for the related contract. All amounts capitalised relate to commission costs.
Normally sales commissions paid for customer contract renewals are not commensurate with the commissions paid for new contracts. It follows that the commissions paid for new contracts also relate to expected future renewals of these contracts. Accordingly, we amortise sales commissions paid for new customer contracts on a straight-line basis over the expected customer life, based on expected renewal frequency. The current average customer life is five years. If the expected amortisation period is one year or less the Group expenses the costs when incurred.
The amortisation expenses in the year for the costs of obtaining customer contracts were $27.3m (2021: $22.6m).
Amortisation of the capitalised costs of obtaining customer contracts is classified as sales and marketing expense. Capitalised costs from customer contracts are classified as non-financial assets in our statement of financial position.
| 31 October 2022 $m |
31 October 2021 $m |
|||||||
| Asset recognised from costs incurred to acquire a contract |
33.8 | 27.2 | ||||||
| Amortisation and impairment loss recognised as cost of providing services during the year |
(27.3 | ) | (22.6 | ) | ||||
|
|
|
|
|
|||||
| Consolidated financial statements | 46 |
MICRO FOCUS INTERNATIONAL PLC
| 14 | Trade and other receivables |
| 31 October 2022 $m |
31 October 2021 $m |
|||||||
| Current |
948.6 | 886.3 | ||||||
| Non-current |
14.3 | 19.6 | ||||||
|
|
|
|
|
|||||
| 962.9 | 905.9 | |||||||
|
|
|
|
|
|||||
| 31 October 2022 $m |
31 October 2021 $m |
|||||||
| Trade receivables |
674.5 | 738.8 | ||||||
| Loss allowance |
(12.0 | ) | (14.0 | ) | ||||
|
|
|
|
|
|||||
| Trade receivables net |
662.5 | 724.8 | ||||||
| Contract assets |
86.6 | 62.0 | ||||||
| Long-term rent deposits |
3.2 | 8.3 | ||||||
| Net investment in finance sub-leases |
13.4 | 7.9 | ||||||
| Prepaid expenses |
50.4 | 44.1 | ||||||
| Other receivables |
146.8 | 58.8 | ||||||
|
|
|
|
|
|||||
| 962.9 | 905.9 | |||||||
|
|
|
|
|
|||||
Trade receivables
Concentrations of credit risk with respect to trade receivables are limited due to the Group’s customer base being large and unrelated. The Group considers the credit quality of trade and other receivables on a customer-by-customer basis. The Group considers that the carrying value of the trade and other receivables that is disclosed below gives a fair presentation of the credit quality of the assets. This is considered to be the case as there is a low risk of default due to the high number of recurring customers and credit control policies. In determining the recoverability of a trade receivable, the Group considers the ageing of each debtor and any change in the circumstances of the individual receivable. Other than ageing (included below), no other credit rating grades are assessed. Due to this, management believes there is no further credit risk provision required in excess of the normal provision determined by the expected credit loss methodology applied.
At 31 October 2022 and 31 October 2021, the carrying amount approximates the fair value of the instrument due to the short-term nature of the instrument. As at 31 October 2022, a loss allowance of $12.0m (2021: $14.0m) was recognised for trade receivables.
| Consolidated financial statements | 47 |
MICRO FOCUS INTERNATIONAL PLC
The ageing of these receivables is as follows:
| Current $m |
Up to three months $m |
Three to four |
Over four months $m |
Total $m |
||||||||||||||||
| 31 October 2022: |
||||||||||||||||||||
| Gross trade receivables |
614.3 | 44.0 | 3.3 | 12.9 | 674.5 | |||||||||||||||
| Loss allowance |
(2.5 | ) | (1.2 | ) | (0.4 | ) | (7.9 | ) | (12.0 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Net trade receivables |
611.8 | 42.8 | 2.9 | 5.0 | 662.5 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| 31 October 2021: |
||||||||||||||||||||
| Gross trade receivables |
655.3 | 61.3 | 6.6 | 15.6 | 738.8 | |||||||||||||||
| Loss allowance |
(2.6 | ) | (1.1 | ) | (0.5 | ) | (9.8 | ) | (14.0 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Net trade receivables |
652.7 | 60.2 | 6.1 | 5.8 | 724.8 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Movements in the Group provision for impairment of trade receivables were as follows:
| 31 October 2022 $m |
31 October 2021 $m |
|||||||
| At 1 November |
14.0 | 17.9 | ||||||
| Loss allowance (released)/provided in the year |
(0.9 | ) | 0.6 | |||||
| Receivables written off as uncollectable |
(1.1 | ) | (4.5 | ) | ||||
|
|
|
|
|
|||||
| At 31 October |
12.0 | 14.0 | ||||||
|
|
|
|
|
|||||
The creation and release of the loss allowance for receivables have been included in selling and distribution costs in the Consolidated statement of comprehensive income. Amounts charged in the allowance account are generally written off when there is no expectation of recovering additional cash. The Group does not hold any collateral as security. The loss allowance for trade receivables is measured at an amount equal to the lifetime expected credit losses as allowed for under IFRS 9.
Contract assets
Contract assets relate to amounts not yet billed and so not yet due from customers and which are expected to be invoiced to customers. The movement in contract assets in the year is primarily the result of a number of multi-year billing contracts, totalling circa $30.6m, entered into shortly before the period end where the licences were delivered in October. Excluding these contracts, the level of new contract assets that have arisen during the year is consistent with the level of billings on existing contract assets. The Group considers the credit quality of contract assets on a customer-by-customer basis. As with trade receivables, which contract assets convert to upon invoicing, there is considered to be a low risk of default due to the high number of recurring customers. In determining the recoverability of a contract asset, the Group considers the specific circumstances of each contract asset and any change in the circumstances of the balance. Due to this management believes significant provision is not required.
Other receivables
Included within other receivables is reclaimable sales tax of $23.5m (2021: $25.6m) and an insurance receivable relating to the Shareholder litigation of $114.5m (2021: $15.0m) (see note 19 “Provisions and contingent liabilities”).
| Consolidated financial statements | 48 |
MICRO FOCUS INTERNATIONAL PLC
| 15 | Cash and cash equivalents |
| 31 October 2022 $m |
31 October 2021 $m |
|||||||
| Cash at bank and in hand |
408.0 | 355.9 | ||||||
| Short-term bank deposits |
128.2 | 202.5 | ||||||
|
|
|
|
|
|||||
| Cash and cash equivalents |
536.2 | 558.4 | ||||||
|
|
|
|
|
|||||
Cash and cash equivalents of $1.6m are held in countries with restrictions on remittances but where the balances could be used to repay the subsidiaries’ third party liabilities.
At 31 October 2022 and 31 October 2021, the carrying amount approximates to the fair value. The Group’s credit risk on cash and cash equivalents is limited as the counterparties are well established banks with generally high credit ratings. The credit quality of cash and cash equivalents is as follows:
| 31 October 2022 $m |
31 October 2021 $m |
|||||||
| S&P/Moody’s/Fitch rating: |
||||||||
| AAA |
115.6 | 184.8 | ||||||
| AA- |
15.0 | 2.8 | ||||||
| A+ |
385.6 | 348.6 | ||||||
| A |
11.0 | 11.6 | ||||||
| A- |
2.3 | 2.6 | ||||||
| BBB+ to C- |
6.7 | 8.0 | ||||||
|
|
|
|
|
|||||
| 536.2 | 558.4 | |||||||
|
|
|
|
|
|||||
Where the opinions of the rating agencies differ, the lowest applicable rating has been assigned to the counterparty.
| 16 | Trade and other payables |
| 31 October 2022 $m |
31 October 2021 $m |
|||||||
| Trade payables |
89.2 | 80.9 | ||||||
| Tax and social security |
55.4 | 72.9 | ||||||
| Accruals |
365.9 | 359.4 | ||||||
|
|
|
|
|
|||||
| 510.5 | 513.2 | |||||||
|
|
|
|
|
|||||
At 31 October 2022 and at 31 October 2021, the carrying amount approximates to the fair value. At 31 October 2022 accruals include vacation and payroll of $74.0m (2021: $79.7m), commission and employee bonuses of $127.1m (2021: $133.1m), fees related to the OpenText transaction of $46.5m (2021: $nil) and consulting and audit fees of $20.5m (2021: $26.8m).
| 17 | Leases |
The Group enters into leasing arrangements in the normal course of its business including:
| • | Office space (included in “Leasehold land and buildings”); |
| • | Data centres (included in “Leasehold land and buildings”); |
| • | Vehicles (included in “Other”); and |
| Consolidated financial statements | 49 |
MICRO FOCUS INTERNATIONAL PLC
| • | Computer equipment. |
The Group’s lease arrangements can contain a number of features including some or all of:
| • | Extension and break options; |
| • | Variable lease payments; |
| • | Annual or periodic set rental increases; and |
| • | Indexed or market-based rental increases. |
Consistent with the requirements of IFRS 16, extension options are only included in the lease liability where they are considered reasonably certain, see below, and only fixed rental increases are included in the lease liability. Indexed or market-based rental increases are only included in the lease liability once the indexation or rent review date has passed. Variable lease payments are expensed as incurred. The Group makes no material payments for variable payments not included in the lease liability.
Four individual leases are material to the Group. One is located in Provo, Utah, where the Group currently leases approximately 239,100 square feet of office space. This will reduce in June 2024 to approximately 219,900 square feet with a further reduction in floor space from December 2024 to approximately 142,300 square feet. This lease agreement expires in 2034, with an option to extend for a further three, five-year periods. The Group’s current annual rent under this lease is $6.2m (2021: $8.7m) and this will reduce as the floor space reduces to $3.6m per annum from December 2024. Since 1 March 2019, part of the property has been sublet. Current annual sub-lease income is $1.1m (2021: $1.1m). The second property is located in Santa Clara, California, where the Group currently leases approximately 112,000 square feet of office space. The lease on this facility expires in 2029, with an option to extend for one further five-year period. The Group’s current annual rent under this lease is $4.9m (2021: $4.9m). The Group is currently not utilising one and a half floors of this facility and the related right-of-use assets has been tested for impairment with a reduction of $3.4m impairment recognised in the year. The final two material leases relate to extensions which have been agreed on leased properties in Bangalore, which are material to the Group. The Group will be leasing approximately 441,000 square foot of office space in two leases across three buildings with annual rent of c.$7.1m per annum. The leases of the facilities are effective from 1 November 2022 and will expire on 31 October 2027, with an option to extend for a further five-year period.
Right-of-use assets
During the year the Group entered into new leasing arrangements, extended existing leasing agreements and was party to rent reviews and therefore recognised additions to right-of-use assets of $42.2m (2021: $38.8m). No right-of-use assets were transferred to held for sale during the year ended 31 October 2022 (2021: $8.9m), see note 28, “Discontinued operation and Assets held for sale”. Right-of-use assets arising from the Group’s lease arrangements are recorded within property, plant and equipment (Note 12).
| Leasehold land and buildings $m |
Computer equipment $m |
Other $m |
Total $m |
|||||||||||||
| Net book value at 31 October 2022 |
117.0 | 2.2 | 7.2 | 126.4 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net book value at 31 October 2021 |
128.5 | 16.0 | 8.7 | 153.2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Depreciation charge for the year ended 31 October 2022 |
44.4 | 2.3 | 5.5 | 52.2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Depreciation charge for the year ended 31 October 2021 |
56.9 | 9.6 | 6.8 | 73.3 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Consolidated financial statements | 50 |
MICRO FOCUS INTERNATIONAL PLC
Amounts recognised in the statement of comprehensive income:
| Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
|||||||
| Interest on lease liabilities |
7.7 | 10.0 | ||||||
| Depreciation of right-of-use assets |
52.2 | 73.3 | ||||||
| Impairment of right-of-use assets1 |
(3.7 | ) | 5.6 | |||||
| Income from sub-leasing right-of-use assets |
0.5 | 0.2 | ||||||
| 1 | The Group assessed right-of-use assets for indicators of impairment during the year in particular leases, which have become vacant or part vacant or changes in sub-lease expectations on existing vacant properties. As a result, during the period a reduction in impairment of $3.7m was recognised due to expected sub-leases (2021: additional impairment $5.6m). The impairment against the right-of-use asset carrying value reflects any expected sub-lease income over the remainder of the lease. |
Amounts recognised in statement of cash flows:
| Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
|||||||
| Interest payments on lease liabilities |
7.7 | 10.0 | ||||||
| Payments for lease liabilities |
67.4 | 79.5 | ||||||
|
|
|
|
|
|||||
| Payments for lease liabilities |
75.1 | 89.5 | ||||||
| Cash inflow for sub-leases |
(11.8 | ) | — | |||||
|
|
|
|
|
|||||
| Total cash outflow for leases |
63.3 | 89.5 | ||||||
|
|
|
|
|
|||||
Extension options
Some property leases contain extension options exercisable by the Group before the end of the non-cancellable contract period. Where practicable, the Group seeks to include extension options in new leases to provide operational flexibility. The extension options held are exercisable only by the Group and not by the lessors. 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.
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 five 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 three years for data centres with optional extensions periods, where they exist, only included for leases expiring in the next year and for which relocation of the assets located in the data centre is considered uneconomic. |
| Consolidated financial statements | 51 |
MICRO FOCUS INTERNATIONAL PLC
For vehicle leases the minimum lease term, typically three to four 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.
The Group reassesses whether it is reasonably certain to exercise the options if there is a significant event or significant changes in circumstances within its control. Significant changes in assumptions or activities e.g. such as an acquisition or disposal, would impact the expected future cash outflows related to leasing activities. Where a significant event or change in circumstances does not occur, the lease term and therefore the lease liability and right-of-use asset, will decline over time.
The Group’s cash outflow for leases in the year ended 31 October 2022 was $75.1m (2021: $89.5m). Leases with annual cash outflows during the year ended 31 October 2022 of $4.4m (2021: $3.0m) ended and were not renewed or replaced. In addition the Group sub-leases leases to the acquirer of the Digital Safe business with annual cash flows during the year ended 31 October 2022 of $9.7m (2021: nil). These leases will not be renewed by the Group when they expire.
Considering the impact of these terminations and sub-leases and absent significant future changes in the volume of the Group’s activities or strategic changes to lease fewer assets the Group’s cash outflow would be expected to continue for future periods at a consistent level, subject to any contractual price increases. The maturity analysis of the Group’s lease liability, in note 22 “Financial risk management and financial instruments”, only includes the reasonably certain payments to be made; cash outflows in these future periods will likely exceed these amounts as payments will be made on optional periods not considered reasonably certain at present and on new leases entered into in future periods.
Lease obligations:
Under IFRS 16 “Leases”, the Group recognises the discounted future lease payments over the reasonably certain lease term as a liability along with an associated right-of-use asset, see above.
The movement on the Group lease obligations in the year were as follows:
| Note | 31 October 2022 $m |
31 October 2021 $m |
||||||||||
| Balance at 1 November |
194.5 | 250.4 | ||||||||||
| Additions |
41.9 | 35.1 | ||||||||||
| Payments |
(75.1 | ) | (89.5 | ) | ||||||||
| Interest |
6 | 7.7 | 10.0 | |||||||||
| Transferred to held for sale |
28 | — | (11.4 | ) | ||||||||
| Foreign exchange |
(6.4 | ) | (0.1 | ) | ||||||||
|
|
|
|
|
|||||||||
| Balance at 31 October |
162.6 | 194.5 | ||||||||||
| Included within: |
||||||||||||
| Current financial liabilities |
22 | 49.9 | 74.9 | |||||||||
| Non-current financial liabilities |
22 | 112.7 | 119.6 | |||||||||
|
|
|
|
|
|||||||||
| Total |
162.6 | 194.5 | ||||||||||
|
|
|
|
|
|||||||||
Leases as lessor
The Group acts as a lessor where it is able to sub-lease vacant property space. Sub-leases are classified as either finance leases or operating leases dependent upon the transfers of substantially all of the risk and rewards associated with the head lease to the lessee in the sub-lease agreement.
Finance leases
The Group has 112 lease arrangements classified as finance leases. This is an increase from six in the year ended 31 October 2021 as result of the disposal of the Digital Safe business, see note 28, which has resulted in certain leases being sub-let to the acquirer of the Digital Safe business as the leases could not be novated. Net investment in leases of $13.4m as at 31 October 2022 (2021: $7.9m) is included in note 14 “Trade and other receivables”.
| Consolidated financial statements | 52 |
MICRO FOCUS INTERNATIONAL PLC
| 18 | Contract liabilities |
| 31 October 2022 $m |
31 October 2021 $m |
|||||||
| Current |
934.1 | 984.6 | ||||||
| Non-current |
171.8 | 131.8 | ||||||
|
|
|
|
|
|||||
| 1,105.9 | 1,116.4 | |||||||
|
|
|
|
|
|||||
Revenue billed but not recognised in the Consolidated statement of comprehensive income under the Group’s accounting policy for revenue recognition is classified as contract liabilities in the Consolidated statement of financial position and recognised over the period of the contract. Contract liabilities primarily relates to undelivered maintenance and subscription services on billed contracts.
Contract liabilities as at 31 October 2022 were $1,105.9m (2021: $1,116.4m). The movement in contract liabilities in the year mainly results from new amounts being deferred, where the billing is in advance of satisfaction of the related performance obligation, and amounts being recognised as revenue, where performance obligations have been satisfied. The amount of revenue recognised in the reporting year that was included in the contract liability balance as at 1 November 2021 was $984.6m (2021: $981.4m).
Remaining performance obligations
Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognised which includes unearned revenue and amounts that will be invoiced and recognised as revenue in future periods. The remaining performance obligations revenue was $1,469.5m as at 31 October 2022, of which approximately 70% of the revenue is expected to be recognised over the next 12 months and the remainder thereafter.
This amount mostly comprises obligations to provide maintenance and SaaS subscriptions as the contracts have durations of one or multiple years.
| 19 | Provisions and contingent liabilities |
| 31 October 2022 $m |
31 October 2021 $m |
|||||||
| Onerous contracts and dilapidations |
11.5 | 25.4 | ||||||
| Restructuring |
7.3 | 23.0 | ||||||
| Legal |
121.0 | 25.0 | ||||||
| Other |
16.5 | 12.1 | ||||||
|
|
|
|
|
|||||
| Total |
156.3 | 85.5 | ||||||
|
|
|
|
|
|||||
| Current |
143.3 | 65.7 | ||||||
| Non-current |
13.0 | 19.8 | ||||||
|
|
|
|
|
|||||
| Total |
156.3 | 85.5 | ||||||
|
|
|
|
|
|||||
| Consolidated financial statements | 53 |
MICRO FOCUS INTERNATIONAL PLC
| Onerous contracts and dilapidations $m |
Restructuring $m |
Legal $m |
Other $m |
Total $m |
||||||||||||||||
| At 1 November 2021 |
25.4 | 23.0 | 25.0 | 12.1 | 85.5 | |||||||||||||||
| Additional provision in the year |
1.1 | 37.8 | 102.7 | 9.9 | 151.5 | |||||||||||||||
| Released |
(5.2 | ) | (16.0 | ) | (4.1 | ) | (0.6 | ) | (25.9 | ) | ||||||||||
| Utilisation of provision |
(7.7 | ) | (34.9 | ) | (2.4 | ) | (0.5 | ) | (45.5 | ) | ||||||||||
| Effects of movements in exchange rates |
(2.0 | ) | (2.6 | ) | (0.2 | ) | (0.2 | ) | (5.0 | ) | ||||||||||
| Transfer |
(0.1 | ) | – | – | (4.2 | ) | (4.3 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| At 31 October 2022 |
11.5 | 7.3 | 121.0 | 16.5 | 156.3 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Current |
2.8 | 4.8 | 121.0 | 14.7 | 143.3 | |||||||||||||||
| Non-current |
8.7 | 2.5 | – | 1.8 | 13.0 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
11.5 | 7.3 | 121.0 | 16.5 | 156.3 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
Onerous contracts and dilapidations provisions
The onerous contracts include onerous non-rental related property costs and other onerous contracts. Additional onerous contracts in relation to property of $0.7m were recorded in the year ended 31 October 2022 (2021: $4.8m), mainly across European and US sites, as the property portfolio was reassessed, including planned site vacations. In the prior year provisions of $10.4m were recorded for onerous contracts principally related to IT contracts in relation to the Group’s former enterprise platforms. These contract provisions are now fully utilised.
The dilapidations provision relates to obligations to restore leased Group properties. The positions regarding the non-rental related property costs are expected to be fully utilised within 12 years. Additional provisions include $0.4m recorded in the year ended 31 October 2022 (2021: $2.7m) following a review of obligations to restore leased properties at the end of the lease period.
Restructuring provisions
Restructuring provisions relate to severance resulting from headcount reductions. The majority of provisions are expected to be fully utilised within 12 months. Restructuring costs are reported within note 4 “Exceptional items”.
Legal provisions and Contingent liabilities
Legal provisions include the directors’ best estimate of the likely outflow of economic benefits associated with ongoing legal matters. The largest item is the Group’s ongoing shareholder litigation case discussed below.
Patent Litigation
Shareholder litigation
In early 2018, Micro Focus International plc and certain of its former officers and directors were named as Defendants in two lawsuits brought by shareholders asserting claims under the United States securities laws. The cases, which are captioned In re Micro Focus International PLC Securities Litigation, Master File No. 18CIV01549 (Cal. Super. Ct. – San Mateo Cnty.) (the “California State Court Action”) and In re Micro Focus International PLC Securities Litigation, Master File No. 1:18-cv-06763-ALC (S.D.N.Y.) (the “New York Federal Court Action”), are currently pending in the California Superior Court in San Mateo County and the United States District Court for the Southern District of New York, respectively.
Following dismissal of the New York Federal Court Action on 29 September 2020, a $15m settlement of that Action was reached in March 2021, subject to court approval. A $15m provision has previously been recorded for that settlement. However, as of December 2022, that settlement had not received court approval. Previously, no provision has been recorded related to the California State Court Action because no reliable estimate of a probable loss could be made at the time.
| Consolidated financial statements | 54 |
MICRO FOCUS INTERNATIONAL PLC
In December 2022, all parties to the New York Federal Action and the California State Court Action, as well as certain relevant insurers, agreed in principle to a global settlement of all claims asserted in both cases, for a global sum of $107.5 m, which includes plaintiffs’ attorneys’ fees and costs, and benefits to be paid to members of the settlement class. The settlement is subject to court approval by the Superior Court of California for San Mateo County following a number of further steps. The timing for completion of this process is uncertain, but it could take months. A schedule for notice, opt outs, objections and the final approval hearing will likely be set by the Superior Court of California for San Mateo County once the motion for preliminary approval of the settlement has been filed. The members of the settlement class will have the right to opt out of the settlement, and the volume of such opt outs may trigger a termination right with respect to the settlement for the defendants. The Company and all defendants have denied, and continue to deny, the claims alleged in both cases and the settlement in principle does not reflect any admission of fault, wrongdoing or liability as to any defendant.
The settlement amount together with the Group’s related legal fees and costs will be paid from insurance coverage. The Group has recognised a legal provision of $114.5m as its best estimate, which includes the $15m provision previously recorded, and an equal insurance receivable, within other receivables, in respect of this matter, including an estimate for the Group’s related legal fees and costs.
| IBM | Litigation |
On 21 November 2022 IBM filed a complaint in the US District Court in the Southern District of New York. We believe the claims contained in the complaint to be entirely without merit.
Other provisions
Other provisions at 31 October 2022 predominantly relate to interest on uncertain tax provisions of $6.5m (2021: $5.6m) and provisions for potential tax and local country matters of $8m.
Discussion on the EU State Aid tax contingent liability in relation to the EU State Aid case is included in note 7, “Taxation”.
OpenText transaction costs
The Group entered into agreements with third parties in connection with the proposed acquisition by OpenText including financial, corporate broking and legal advice. $46.5m of these fees are only payable on completion of the transaction. As all regulatory conditions have been satisfied these fees have been recognised as an expense in the period along with $10.4m of fees payable in advance of completion (see note 4 “Exceptional items”).
In addition, the Group has confirmed with OpenText the payment of $12m of retention payments to key employees which are contingent on the completion of the transaction and continued employment for a specified period post completion. As these relate to employee services during the specified period post completion these costs will be expensed over that period.
Also, the Group entered into a commercial agreement with Amazon Web Services (“AWS”) on 3 March 2021 to strategically collaborate to accelerate the modernisation of mainframe applications. Micro Focus issued warrants to Amazon NV Investment Holdings LLC to subscribe for up to 15,924,384 ordinary shares in Micro Focus (the “warrants”) at 446.60 pence per share. Vesting of the warrants generally depends on the level of software revenues generated by AWS for Micro Focus under the commercial agreement over the multi-year term, according to revenue targets set out in the agreement. Some warrants vested in the period (see note 23 “Share capital”). The agreement also contains a clause which becomes active on a change of control. Therefore, the remaining 14.3m warrants will vest on completion at a cost of $14.2m.
| 20 | Pension and other long-term benefit commitments |
| a) | Defined contribution |
The Group has established a number of pension schemes around the world covering many of its employees. The principal funds are those in the US, UK and Germany. These were funded schemes of the defined contribution type.
| Consolidated financial statements | 55 |
MICRO FOCUS INTERNATIONAL PLC
Pension costs for defined contribution schemes are as follows:
| Continuing operations |
Note | Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
|||||||||
| Defined contribution schemes |
26 | 37.0 | 34.2 | |||||||||
|
|
|
|
|
|||||||||
| b) | Defined benefit |
| 31 October 2022 $m |
31 October 2021 $m |
|||||||
| Within other non-current assets: |
||||||||
| Long-term pension assets |
15.2 | 17.1 | ||||||
|
|
|
|
|
|||||
| Within non-current liabilities: |
||||||||
| Retirement and other benefit obligations |
(64.7 | ) | (147.1 | ) | ||||
|
|
|
|
|
|||||
As of 31 October 2022, there are a total of 43 defined benefit plans in 13 countries around the world (2021: 36). The highest concentration of the defined benefit plans are in Germany, where the Group sponsors 12 (2021: 12) separate schemes that comprise over 64% (2021: 77%) of the gross defined benefit obligation recorded in the Group’s consolidated statement of financial position. The Group’s German schemes are primarily final salary pension plans, which provide benefits to members either in the form of a lump sum payment or a guaranteed level of pension payable for life in the case of retirement, disability and death. The level of benefits provided depends not only on the final salary but also on member’s length of service, social security ceiling and other factors. Although most of these schemes in Germany are funded at some level, there are typically no funding requirements in Germany. There are no requirements for the appointment of independent trustees in Germany, and all of these schemes are administered locally with the assistance of German pension experts. Final pension entitlements, including benefits for death in service and disability amounts, are calculated by these experts. Plan assets for three of our German schemes include re-insurance contracts with guaranteed interest rates, while the majority of the schemes invest in funds focusing on equities and debt instruments. Most of the Group’s German schemes are closed to new entrants, however, three of the schemes are open to new members.
The remainder of the Group’s defined benefit schemes are comprised of a mix of final salary plans, termination or retirement indemnity plans, other types of statutory plans that provide a one-time benefit at termination and leave plans which allow the participants to carry over leave time earned for a period of time exceeding one year. Final pension entitlements are calculated by local administrators in the applicable country. They also complete calculations for cases of death in service and disability. Where required by local or statutory requirements, some of the schemes are governed by an independent Board of Trustees that is responsible for the investment strategies with regard to the assets of the funds; however, other schemes are administered locally with the assistance of local pension experts. Many of the Group’s plans outside of Germany are funded and the Group makes at least the minimum contributions required by local government, funding and taxing authorities. Plan assets for these schemes include a range of assets including investment funds or re-insurance contracts. Not all of these plans are closed to new members. The Group sponsors 31 plans outside of Germany (2021: 24). Of these, 23 plans are open to new members, most of which are termination or retirement indemnity plans, statutory plans providing a one-time benefit at termination, retirement, death or disability and leave plans. The Group participates in a multi-employer plan in Switzerland which is accounted for as a defined benefit plan and the Group’s obligations are limited to the liabilities of our employees. The multi-employer plan in Japan was transitioned to a defined contribution plan in the year.
There were nine gratuity and leave plans reclassified to the net retirement and other defined benefit obligation during the year ended 31 October 2022 and seven plans reclassified to the net retirement and other defined benefit obligation during the year ended 31 October 2021. None of the plans are final salary plans and none are material.
| Consolidated financial statements | 56 |
MICRO FOCUS INTERNATIONAL PLC
Long-term pension assets
Long-term pension assets relate to the contractual arrangement under insurance policies held by the Group with guaranteed interest rates that do not meet the definition of a qualifying insurance policy, as they have not been pledged to the plan or beneficiaries and are subject to the creditors of the Group. Such arrangements are recorded in the consolidated statement of financial position as long-term pension assets. During the years ended 31 October 2022 and 2021, some of the insurance policies previously unpledged were pledged to the pension plans and transferred to plan assets. These contractual arrangements are treated as financial assets measured at fair value through other comprehensive income. Movement in the fair value of long-term pension assets is included in other comprehensive income. All non-plan assets are held in Germany.
The non-plan assets are considered to be Level 3 asset under the fair value hierarchy as of 31 October 2022. 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 in the year ended 31 October 2022 was ($1.9m) of which $0.5m is due to changes in the fair value assessment. There have been no transfers between levels for the year ended 31 October 2022 (2021: none).
Retirement and other long-term benefit obligations
The following amounts have been included in the consolidated statement of comprehensive income for defined benefit arrangements:
| Note | Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
||||||||||
| Current service charge |
26 | 8.4 | 11.3 | |||||||||
| Prior service costs |
1.2 | – | ||||||||||
| Changes in other long-term benefits |
(7.0 | ) | 1.4 | |||||||||
|
|
|
|
|
|||||||||
| Charge to operating loss |
2.6 | 12.7 | ||||||||||
| Interest on defined benefit liabilities |
3.4 | 2.6 | ||||||||||
| Interest on defined benefit assets |
(2.0 | ) | (1.1 | ) | ||||||||
|
|
|
|
|
|||||||||
| Charge to finance costs |
6 | 1.4 | 1.5 | |||||||||
|
|
|
|
|
|||||||||
| Total continuing charge to loss for the year |
4.0 | 14.2 | ||||||||||
|
|
|
|
|
|||||||||
The contributions for the year ending 31 October 2023 are expected to be broadly in line with the year ended 31 October 2022. The Group funds the schemes so that it makes at least the minimum contributions required by local government, funding and taxing authorities. There are no funding requirements in Germany.
| Consolidated financial statements | 57 |
MICRO FOCUS INTERNATIONAL PLC
The following amounts have been recognised as movements in the statement of other comprehensive income:
| Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
|||||||
| Actuarial return on assets excluding amounts included in interest income |
(13.9 | ) | 20.7 | |||||
| Re-measurements—actuarial gains/(losses): |
||||||||
| – Demographic |
— | 1.3 | ||||||
| – Financial |
90.4 | 9.8 | ||||||
| – Experience |
4.8 | 1.6 | ||||||
|
|
|
|
|
|||||
| 95.2 | 12.7 | |||||||
|
|
|
|
|
|||||
| Movement in the year relating to continuing operations |
81.3 | 33.4 | ||||||
|
|
|
|
|
|||||
The weighted average key assumptions used for the valuation of the schemes were:
| 31 October 2022 | 31 October 2021 | |||||||||||||||||||||||
| Germany | Rest of World |
Total | Germany | Rest of World |
Total | |||||||||||||||||||
| Rate of increase in final pensionable salary |
2.50 | % | 4.20 | % | 2.98 | % | 2.50 | % | 3.10 | % | 2.69 | % | ||||||||||||
| Rate of increase in pension payments 1 |
1.98 | % | 1.50 | % | 1.98 | % | 1.75 | % | 1.50 | % | 1.75 | % | ||||||||||||
| Discount rate |
3.68 | % | 4.64 | % | 3.88 | % | 1.07 | % | 1.87 | % | 1.25 | % | ||||||||||||
| Inflation1 |
1.98 | % | 1.74 | % | 1.94 | % | 1.75 | % | 1.36 | % | 1.69 | % | ||||||||||||
| 1 | Due to the current high rate of inflation in Germany our valuation for the majority of our German plans have been prepared using a rate 18.9% for the next scheduled pension increase on 1 January 2025 with the long-term rate returning to 2% thereafter. Our weighted average assumptions have been calculated on the long-term rate of 2%. |
The mortality assumptions for the German schemes are set based on the ‘Richttafeln 2018 G’ by Prof. Dr. Klaus Heubeck. The mortality assumptions for the remaining schemes are set based on actuarial advice in accordance with published statistics and experience in each territory.
These assumptions translate into a weighted average life expectancy in years for a pensioner retiring at age 65:
| 31 October 2022 | 31 October 2021 | |||||||||||||||||||||||
| Germany | Rest of World |
Total | Germany | Rest of World |
Total | |||||||||||||||||||
| Retiring at age 65 at the end of the reporting year: |
||||||||||||||||||||||||
| Male |
21 | 23 | 21 | 20 | 21 | 21 | ||||||||||||||||||
| Female |
24 | 25 | 24 | 24 | 24 | 24 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Retiring 15 years after the end of the reporting year: |
||||||||||||||||||||||||
| Male |
23 | 24 | 23 | 23 | 22 | 23 | ||||||||||||||||||
| Female |
26 | 25 | 26 | 26 | 25 | 26 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Consolidated financial statements | 58 |
MICRO FOCUS INTERNATIONAL PLC
The net liability included in the consolidated statement of financial position arising from obligations in respect of defined benefit schemes is as follows:
| 31 October 2022 | 31 October 2021 | |||||||||||||||||||||||
| Germany | Rest of World |
Total | Germany | Rest of World |
Total | |||||||||||||||||||
| Present value of defined benefit obligations |
135.1 | 76.4 | 211.5 | 246.1 | 74.5 | 320.6 | ||||||||||||||||||
| Fair values of plan assets |
(108.0 | ) | (38.8 | ) | (146.8 | ) | (138.8 | ) | (34.7 | ) | (173.5 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| 27.1 | 1 | 37.6 | 64.7 | 1 | 107.3 | 39.8 | 147.1 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| 1 | There are six defined benefit schemes with a surplus balance due to current macro-economic events. These schemes have been included in the net defined benefit obligation as the amounts are not material. |
| Consolidated financial statements | 59 |
MICRO FOCUS INTERNATIONAL PLC
The defined benefit obligation has moved as follows:
| 31 October 2022 | ||||||||||||||||||||||||||||||||||||
| Germany | Rest of World | Total | ||||||||||||||||||||||||||||||||||
| Defined benefit obligations |
Defined benefit obligations $m |
Scheme assets $m |
Net defined benefit obligations $m |
Defined benefit obligations $m |
Scheme assets $m |
Net defined benefit obligations $m |
Defined benefit obligations $m |
Scheme assets $m |
Net defined benefit obligations $m |
|||||||||||||||||||||||||||
| At 1 November 2021 |
246.1 | (138.8 | ) | 107.3 | 74.5 | (34.7 | ) | 39.8 | 320.6 | (173.5 | ) | 147.1 | ||||||||||||||||||||||||
| Current service cost |
4.8 | — | 4.8 | 3.6 | — | 3.6 | 8.4 | — | 8.4 | |||||||||||||||||||||||||||
| Prior service cost |
— | — | — | 1.2 | — | 1.2 | 1.2 | — | 1.2 | |||||||||||||||||||||||||||
| Changes in other long-term benefits |
(2.7 | ) | 0.3 | (2.4 | ) | (4.6 | ) | — | (4.6 | ) | (7.3 | ) | 0.3 | (7.0 | ) | |||||||||||||||||||||
| Reclassification from other liabilities/assets |
— | — | — | 26.8 | (15.5 | ) | 11.3 | 26.8 | (15.5 | ) | 11.3 | |||||||||||||||||||||||||
| Transferred/adjustment to current assets classified as held for sale |
— | — | — | (0.3 | ) | 0.2 | (0.1 | ) | (0.3 | ) | 0.2 | (0.1 | ) | |||||||||||||||||||||||
| Transfer from long-term pension assets and other transfers |
— | (0.1 | ) | (0.1 | ) | (7.4 | ) | 7.4 | — | (7.4 | ) | 7.3 | (0.1 | ) | ||||||||||||||||||||||
| Benefits paid |
(2.2 | ) | 2.1 | (0.1 | ) | (3.4 | ) | 3.4 | — | (5.6 | ) | 5.5 | (0.1 | ) | ||||||||||||||||||||||
| Contributions by plan participants |
1.1 | (1.1 | ) | — | 0.5 | (0.5 | ) | — | 1.6 | (1.6 | ) | — | ||||||||||||||||||||||||
| Contribution by employer |
— | (0.5 | ) | (0.5 | ) | — | (2.6 | ) | (2.6 | ) | — | (3.1 | ) | (3.1 | ) | |||||||||||||||||||||
| Interest cost/(income) (note 6) |
2.5 | (1.4 | ) | 1.1 | 0.9 | (0.6 | ) | 0.3 | 3.4 | (2.0 | ) | 1.4 | ||||||||||||||||||||||||
| Included within other comprehensive income: |
||||||||||||||||||||||||||||||||||||
| Re-measurements—actuarial (gains) and losses: |
||||||||||||||||||||||||||||||||||||
| – Financial |
(81.4 | ) | — | (81.4 | ) | (9.0 | ) | — | (9.0 | ) | (90.4 | ) | — | (90.4 | ) | |||||||||||||||||||||
| – Experience |
(3.0 | ) | — | (3.0 | ) | (1.8 | ) | — | (1.8 | ) | (4.8 | ) | — | (4.8 | ) | |||||||||||||||||||||
| Actuarial return on assets excluding amounts included in interest income |
— | 13.2 | 13.2 | — | 0.7 | 0.7 | — | 13.9 | 13.9 | |||||||||||||||||||||||||||
| Effects of movements in exchange rates |
(30.1 | ) | 18.3 | (11.8 | ) | (4.6 | ) | 3.4 | (1.2 | ) | (34.7 | ) | 21.7 | (13.0 | ) | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| At 31 October 2022 |
135.1 | (108.0 | ) | 27.1 | 76.4 | (38.8 | ) | 37.6 | 211.5 | (146.8 | ) | 64.7 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Consolidated financial statements | 60 |
MICRO FOCUS INTERNATIONAL PLC
| 31 October 2021 | ||||||||||||||||||||||||||||||||||||
| Germany | Rest of World | Total | ||||||||||||||||||||||||||||||||||
| Defined benefit obligations |
Defined benefit obligations $m |
Scheme assets $m |
Net defined benefit obligations $m |
Defined benefit obligations $m |
Scheme assets $m |
Net defined benefit obligations $m |
Defined benefit obligations $m |
Scheme assets $m |
Net defined benefit obligations $m |
|||||||||||||||||||||||||||
| At 1 November 2020 |
248.4 | (119.1 | ) | 129.3 | 54.9 | (29.2 | ) | 25.7 | 303.3 | (148.3 | ) | 155.0 | ||||||||||||||||||||||||
| Current service cost |
6.1 | — | 6.1 | 5.2 | — | 5.2 | 11.3 | — | 11.3 | |||||||||||||||||||||||||||
| Changes in other long-term benefits |
1.4 | — | 1.4 | — | — | — | 1.4 | — | 1.4 | |||||||||||||||||||||||||||
| Reclassification from other liabilities/assets |
— | — | — | 20.2 | — | 20.2 | 20.2 | — | 20.2 | |||||||||||||||||||||||||||
| Transferred to current assets classified as held for sale |
— | — | — | (0.2 | ) | — | (0.2 | ) | (0.2 | ) | — | (0.2 | ) | |||||||||||||||||||||||
| Transfer from long-term pension assets |
— | (1.2 | ) | (1.2 | ) | — | — | — | — | (1.2 | ) | (1.2 | ) | |||||||||||||||||||||||
| Benefits paid |
(1.9 | ) | 1.9 | — | (1.9 | ) | 1.9 | — | (3.8 | ) | 3.8 | — | ||||||||||||||||||||||||
| Contributions by plan participants |
1.2 | (1.2 | ) | — | 0.6 | (0.6 | ) | — | 1.8 | (1.8 | ) | — | ||||||||||||||||||||||||
| Contribution by employer |
— | (1.7 | ) | (1.7 | ) | — | (6.0 | ) | (6.0 | ) | — | (7.7 | ) | (7.7 | ) | |||||||||||||||||||||
| Interest cost/(income) (note 6) |
1.9 | (0.8 | ) | 1.1 | 0.7 | (0.3 | ) | 0.4 | 2.6 | (1.1 | ) | 1.5 | ||||||||||||||||||||||||
| Included within other comprehensive income: |
||||||||||||||||||||||||||||||||||||
| Re-measurements—actuarial (gains) and losses: |
||||||||||||||||||||||||||||||||||||
| – Demographic |
— | — | — | (1.3 | ) | — | (1.3 | ) | (1.3 | ) | — | (1.3 | ) | |||||||||||||||||||||||
| – Financial |
(6.7 | ) | — | (6.7 | ) | (3.1 | ) | — | (3.1 | ) | (9.8 | ) | — | (9.8 | ) | |||||||||||||||||||||
| – Experience |
(2.1 | ) | — | (2.1 | ) | 0.5 | — | 0.5 | (1.6 | ) | — | (1.6 | ) | |||||||||||||||||||||||
| Actuarial return on assets excluding amounts included in interest income |
— | (18.8 | ) | (18.8 | ) | — | (1.9 | ) | (1.9 | ) | — | (20.7 | ) | (20.7 | ) | |||||||||||||||||||||
| (8.8 | ) | (18.8 | ) | (27.6 | ) | (3.9 | ) | (1.9 | ) | (5.8 | ) | (12.7 | ) | (20.7 | ) | (33.4 | ) | |||||||||||||||||||
| Effects of movements in exchange rates |
(2.2 | ) | 2.1 | (0.1 | ) | (1.1 | ) | 1.4 | 0.3 | (3.3 | ) | 3.5 | 0.2 | |||||||||||||||||||||||
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| At 31 October 2021 |
246.1 | (138.8 | ) | 107.3 | 74.5 | (34.7 | ) | 39.8 | 320.6 | (173.5 | ) | 147.1 | ||||||||||||||||||||||||
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| Consolidated financial statements | 61 |
MICRO FOCUS INTERNATIONAL PLC
None of the scheme assets are represented by financial instruments of the Group. None of the scheme assets are occupied or used by the Group. The major categories of the scheme assets are as follows:
| 31 October 2022 | ||||||||||||||||||||||||||||||||||||
| Germany | Rest of World | Total | ||||||||||||||||||||||||||||||||||
| Quoted $m |
Unquoted $m |
Total $m |
Quoted $m |
Unquoted $m |
Total $m |
Quoted $m |
Unquoted $m |
Total $m |
||||||||||||||||||||||||||||
| Funds that invest in: |
||||||||||||||||||||||||||||||||||||
| – Equity instruments |
45.5 | — | 45.5 | 1.0 | 2.9 | 3.9 | 46.5 | 2.9 | 49.4 | |||||||||||||||||||||||||||
| – Debt instruments |
55.4 | — | 55.4 | 5.0 | 0.5 | 5.5 | 60.4 | 0.5 | 60.9 | |||||||||||||||||||||||||||
| – Real estate |
— | — | — | 3.8 | — | 3.8 | 3.8 | — | 3.8 | |||||||||||||||||||||||||||
| Cash and cash equivalents |
— | — | — | 0.6 | — | 0.6 | 0.6 | — | 0.6 | |||||||||||||||||||||||||||
| Re-insurance contracts with |
— | 7.1 | 7.1 | — | — | — | — | 7.1 | 7.1 | |||||||||||||||||||||||||||
| Other |
— | — | — | 0.3 | 24.7 | 25.0 | 0.3 | 24.7 | 25.0 | |||||||||||||||||||||||||||
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| Total |
100.9 | 7.1 | 108.0 | 10.7 | 28.1 | 38.8 | 111.6 | 35.2 | 146.8 | |||||||||||||||||||||||||||
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| 1 | The majority of the re-insurance contracts have guaranteed interest rates of 4.0%, with the remaining at 3.25% or 2.75%. |
| 31 October 2021 | ||||||||||||||||||||||||||||||||||||
| Germany | Rest of World | Total | ||||||||||||||||||||||||||||||||||
| Quoted $m |
Unquoted $m |
Total $m |
Quoted $m |
Unquoted $m |
Total $m |
Quoted $m |
Unquoted $m |
Total $m |
||||||||||||||||||||||||||||
| Funds that invest in: |
||||||||||||||||||||||||||||||||||||
| – Equity instruments |
69.0 | — | 69.0 | 4.9 | 3.0 | 7.9 | 73.9 | 3.0 | 76.9 | |||||||||||||||||||||||||||
| – Debt instruments |
61.7 | — | 61.7 | 4.1 | 5.4 | 9.5 | 65.8 | 5.4 | 71.2 | |||||||||||||||||||||||||||
| – Real estate |
— | — | — | 3.5 | 0.1 | 3.6 | 3.5 | 0.1 | 3.6 | |||||||||||||||||||||||||||
| Cash and cash equivalents |
— | — | — | — | 1.6 | 1.6 | — | 1.6 | 1.6 | |||||||||||||||||||||||||||
| Re-insurance contracts with |
— | 8.1 | 8.1 | — | — | — | — | 8.1 | 8.1 | |||||||||||||||||||||||||||
| Other |
— | — | — | — | 12.1 | 12.1 | — | 12.1 | 12.1 | |||||||||||||||||||||||||||
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| Total |
130.7 | 8.1 | 138.8 | 12.5 | 22.2 | 34.7 | 143.2 | 30.3 | 173.5 | |||||||||||||||||||||||||||
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| 1 | The majority of the re-insurance contracts have guaranteed interest rates of 4.0%, with the remaining at 3.25% or 2.75%. |
| Risk | management |
Through its defined benefit schemes the Group is exposed to a number of risks, the most significant of which are detailed below:
| • | Changes in bond yields—A decrease in corporate bond yields will increase the Group’s IAS 19 plan liabilities, although this will be partially offset by increases in the value of scheme assets. |
| • | Inflation—Some of the Group pension obligations are linked to inflation, and higher inflation will lead to higher liabilities. |
| • | Life expectancy—For those plan obligations that provide benefits over the life of the member, increases in life expectancy will result in an increase in the plan liabilities as benefits would be paid over a longer period. |
| • | Asset returns—Returns on plan assets are subject to volatility and may not move in line with plan liabilities. The Group ensures that the investment positions are managed within an asset liability matching (“ALM”) to achieve long-term investments that are in line with the obligations under the pension schemes. Within this framework the Group’s objective is to match assets to the pension obligations by investing in assets that match the benefit payments as they fall due and in the appropriate currency. |
| Consolidated financial statements | 62 |
MICRO FOCUS INTERNATIONAL PLC
| Sensitivities | |
The table below provides information on the sensitivity of the defined benefit obligation to changes to the most significant actuarial assumptions. The table shows the impact of changes to each assumption in isolation, although, in practice, changes to assumptions may occur at the same time and can either offset or compound the overall impact on the defined benefit obligation.
These sensitivities have been calculated using the same methodology which is used for the main calculations. The weighted average duration of the defined benefit obligation is 17.3 years for Germany and 11 years for all other schemes.
| 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 |
2.75 | % | (32.8 | %) | 2.75 | % | 65.3 | % | 2.75 | % | (11.6 | %) | 2.75 | % | 16.6 | % | ||||||||||||||||
| Price inflation/rate of increase in pension |
0.25 | % | 2.5 | % | 0.25 | % | (2.1 | %) | 0.25 | % | 0.5 | % | 0.25 | % | (0.5 | %) | ||||||||||||||||
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| 1 | For the German schemes the same values are used for both the inflation assumption and the rate of increase in pension payments. |
| 21 | Other non-current liabilities |
| 31 October 2022 $m |
31 October 2021 $m |
|||||||
| Accruals |
9.8 | 31.3 | ||||||
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| 9.8 | 31.3 | |||||||
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Accruals of $9.8m (2021: $31.3m) that relate to employee obligations in certain countries.
| Consolidated financial statements | 63 |
MICRO FOCUS INTERNATIONAL PLC
| 22 | Financial risk management and financial instruments |
| Note | 31 October 2022 $m |
31 October 2021 $m |
||||||||||
| Financial assets |
||||||||||||
| Non-current |
||||||||||||
| Derivative asset |
69.8 | — | ||||||||||
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| 69.8 | — | |||||||||||
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| Financial liabilities |
||||||||||||
| Non-current |
||||||||||||
| Borrowings |
3,854.8 | 4,524.1 | ||||||||||
| Lease obligations |
17 | 112.7 | 119.6 | |||||||||
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| 3,967.5 | 4,643.7 | |||||||||||
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| Current |
||||||||||||
| Borrowings |
25.2 | 24.3 | ||||||||||
| Lease obligations |
17 | 49.9 | 74.9 | |||||||||
| Derivative liability |
— | 35.7 | ||||||||||
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| 75.1 | 134.9 | |||||||||||
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| A. | Risk factors and treasury risk management |
The Group’s treasury function aims to reduce exposures to interest rate, foreign exchange and other financial risks, to ensure liquidity is available as and when required, and to invest cash assets safely and profitably. The Group does not engage in speculative trading in financial instruments. The treasury function’s policies and procedures are reviewed and monitored by the audit committee and are subject to internal audit review.
The Group’s multi-national operations expose it to a variety of financial risks that include the effects of changes in credit risk, foreign currency risk, interest rate risk and liquidity/capital risk. Treasury risk management is carried out by a central treasury department under policies approved by the board of directors.
Group treasury identifies and evaluates financial risks alongside business management. The board provides written principles for risk management together with specific policies covering areas such as foreign currency risk, interest rate risk, credit risk and liquidity risk, the use of derivative and non-derivative financial instruments as appropriate, and investment of excess funds.
Liquidity and capital risk
Central treasury carries out cash flow forecasting for the Group to ensure that it has sufficient cash to meet operational requirements and to allow the repayment of the bank facilities. Surplus cash in the operating units over and above what is required for working capital needs is transferred to Group treasury. These funds are used to repay bank borrowings or are invested in interest bearing current accounts, time deposits, earning credit programmes or money market deposits of the appropriate maturity period determined by consolidated cash forecasts.
The Group seeks to maximise financial flexibility and minimise refinancing risk by issuing debt from a variety of sources and with a range of maturities. The level of facilities required are determined through the preparation of cash flow forecasts which consider a range of business performance scenarios. Borrowings are refinanced substantially prior to falling current to minimise refinancing risk.
The Group’s objective when managing its capital structures is to minimise the cost of capital while maintaining adequate capital to protect against volatility in earnings and net asset values. The strategy is designed to maximise shareholder return over the long-term.
| Consolidated financial statements | 64 |
MICRO FOCUS INTERNATIONAL PLC
The Group’s dividend policy has been to pay dividends 5x covered by Adjusted earnings. Under this policy the Group announced an interim dividend of 8.0 cents per share (see note 8 “Dividends”) . Following the proposed acquisition of the group by OpenText, no final dividend is proposed for the year ended 31 Oct 2022.
On 17 January 2022, the Group announced the refinancing of $1.6bn of existing term loans and the revolving credit facility (“RCF”) was refinanced in December 2021, see part C “Borrowings” of this note.
The financial covenants related to the RCF and term loans are disclosed in part C “Borrowings” of this note.
The Group uses cash pooling structures and intercompany loans to mobilise cash efficiently within the Group. The key objectives of the treasury function with respect to cash and cash equivalents are to protect their principal value, concentrate cash centrally, minimise the requirements for external borrowing and optimise yield.
As part of its short-term cash management the Group invests in a range of cash and cash equivalents, including money market funds, which are considered to be highly liquid and not exposed to significant changes in fair value.
Subsidiary companies are funded through share capital, retained earnings and loans from central finance companies on commercial terms. Subsidiary companies do not enter into local borrowings with external counterparties.
Interest rate risk
The Group’s income and cash generated from operations are substantially independent of changes in market interest rates. The Group’s interest rate risk arises from short-term and long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. The Group currently uses interest rate swaps to help manage its cash flow interest rate risk arising from potential increases in variable interest rates.
The objective of the Group’s interest rate risk management policy is to manage the uncertainty and adverse impact on the Group’s net interest charge due to changes in interest rates to an acceptable level. In doing so, the Group seeks to minimise the cost of hedging and the level of associated counterparty risk. Derivatives are only used for economic hedging purposes and not as speculative investments.
The interest rate risk strategy of the group is to maintain a hedge ratio of approximately 50% for all external borrowings for the proceeding three-year period. The Group Treasurer, together with the CFO, monitor this hedge ratio and have the discretion to take action, in line with this policy, to execute trades to adjust this hedge ratio based on market conditions, provided the group maintains a minimum hedge ratio of 25% and a maximum of ratio of 75%. Any hedge ratios outside of these bounds must be reviewed by the Treasury Risk Committee and Audit Committee and require approval from the Board of Directors.
Following the maturity of the IRS swaps in September 2022, the two new forward swaps cover a notional amount of $750m so the overall hedge ratio has reduced below the policy minimum noting that the €750m of Euro loan refinanced in January 2022 is unhedged as at 31 October 2022.
As the Group’s borrowings will be repaid under the proposed acquisition by OpenText no action is proposed at present to rebalance the overall coverage. If the proposed transaction does not proceed, the Treasury Risk Committee and Audit Committee will review the market conditions and advise the hedging ratio to be maintained for the level of risk assessed.
The Group’s borrowing facilities do not contain any covenants with respect to interest cover ratios.
Foreign exchange risk
The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the Euro, UK Pound Sterling, Indian Rupee, Israeli Shekel, Japanese Yen, Australian Dollar, Chinese Yuan, Swedish Krona and the Canadian Dollar. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign operations where the transactions are denominated in a currency that is not the entity’s functional currency.
The Group is subject to exposure on the translation of the net assets of foreign currency subsidiaries into its reporting currency, US dollar. The Group’s primary balance sheet translation exposures are noted in the exposure analysis below. These exposures are kept under regular review with the Group treasury function providing reporting to the treasury risk committee and the audit committee.
| Consolidated financial statements | 65 |
MICRO FOCUS INTERNATIONAL PLC
Group borrowings are denominated in US dollars and Euros. The Group seeks to match the currency profile of borrowings to the cash flows arising from the Group’s operations used to service those borrowings. The May 2021 and January 2022 debt refinancings both included an additional proportion of Euro debt and a reduction in US dollar debt which is intended to better match the currency profile of the Group’s debt with the cash flows used to service that debt (see part “C” “Borrowings” of this note). Group Treasury continually reviews the EBITDA currency profile of the business and to take actions to align the group’s debt profile with its EBITDA.
The Group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk. The Group faces currency exposures arising from the translation of profits earned in foreign currency subsidiaries into the Group’s reporting currency of US dollars. As at 31 October 2022 one net investment hedge of €549.3m has been designated using a non-derivative Euro debt instrument to minimise the volatility in shareholders’ equity arising from foreign currency translation (2021: two net investment hedges totalling €1.03bn).
Exposures also arise from foreign currency denominated trading transactions undertaken by subsidiaries and exposures here are not hedged. The Group utilises constant currency reporting to enable management and investors to understand the underlying performance of the Group excluding exchange rate impacts. Please refer to Alternative Performance Measure 8, “Constant currency”, for additional information.
Credit risk
The Group provides credit to customers in the normal course of business. Collateral is not required for those receivables, but the Group has policies in place requiring appropriate credit checks on potential customers before sales commence and a monitoring process for assessing overdue receivables and customer payment behaviour post sale. These policies and procedures include assessing customer credit limits and the use of third party financial and risk reporting to control our exposure and credit risk.
Financial instruments which potentially expose the Group to a concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable.
The Group maintains a provision for impairment based upon the measurement of lifetime expected credit losses for all trade receivables using the IFRS 9 simplified approach.
The risk management practices noted above provide the historical customer payment profiles and a view on customer behaviour with any historical credit losses experienced. The loss allowance is adjusted for forward-looking factors specific to the debtor and the economic environment resulting in an overall assessment of any provision required.
The Group sells products and services to a wide range of customers around the world and therefore believes there is no significant concentration of customer credit risk.
The Group’s credit risk on cash and cash equivalents is limited as the counterparties are generally well established financial institutions with generally high credit ratings.
Cash deposits and other financial instruments give rise to credit risk on the amounts due from the related counterparties. Generally, the Group aims to transact with counterparties with strong investment grade credit ratings. However, the Group recognises that due to the need to operate over a large geographic footprint, this will not always be possible. Counterparty credit risk is managed on a global basis by limiting the aggregate amount of exposure to any one counterparty, taking into account its credit rating. The credit ratings of all counterparties are reviewed regularly. All derivatives are subject to ISDA (International Swaps and Derivatives Association) agreements or equivalent documentation.
The maximum exposure to the credit risk of financial assets at the balance sheet date is reflected by the carrying values included in the Group’s balance sheet. Please refer to the credit risk table further below. The credit quality of cash and cash equivalents is listed in note 15 “Cash and cash equivalents” with 96% rated from A+ to AAA.
| B | Financial instruments |
The tables below sets out the measurement categories and carrying values of financial assets and liabilities with fair value inputs where relevant.
| Consolidated financial statements | 66 |
MICRO FOCUS INTERNATIONAL PLC
| Note | Measurement category |
Carrying value 31 October 2022 $m |
Fair value 2022 | Fair value hierarchy 2022/2021 |
Carrying value 31 October 2021 $m |
|||||||||||||||||||
| Financial assets: |
||||||||||||||||||||||||
| Non-current |
||||||||||||||||||||||||
| Long-term pension assets |
13 | FV OCI | 15.2 | Fair value insurance-based input | Level 3 | 17.1 | ||||||||||||||||||
| Derivative financial instruments-–interest rate swaps1 |
22 | FV OCI | 69.8 | Fair value Bank institutions | Level 2 | — | ||||||||||||||||||
| Current |
||||||||||||||||||||||||
| Cash and cash equivalent |
15 | Amortised cost | 536.2 | — | — | 558.4 | ||||||||||||||||||
| Trade and other receivables |
14 | Amortised cost | 809.3 | — | — | 784.2 | ||||||||||||||||||
| Contract assets |
14 | Amortised cost | 86.6 | — | — | 62.0 | ||||||||||||||||||
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| 1,517.1 | 1,421.7 | |||||||||||||||||||||||
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| Financial liabilities: |
||||||||||||||||||||||||
| Non-current |
||||||||||||||||||||||||
| Borrowings (gross)2 |
22 | Amortised cost | 3,875.3 | 3,843.8 | — | 4,566.0 | ||||||||||||||||||
| Lease obligations |
17 | Amortised cost | 112.7 | — | — | 119.6 | ||||||||||||||||||
| Current |
||||||||||||||||||||||||
| Derivative financial instruments |
||||||||||||||||||||||||
| – interest rate swaps1 |
22 | FV OCI | — | Fair value Bank Institutions | Level 2 | 35.7 | ||||||||||||||||||
| Borrowings (gross)2 |
22 | Amortised cost | 38.7 | 38.8 | — | 42.0 | ||||||||||||||||||
| Lease obligations |
17 | Amortised cost | 49.9 | — | — | 74.9 | ||||||||||||||||||
| Trade payables and accruals |
16 | Amortised cost | 455.1 | — | — | 440.1 | ||||||||||||||||||
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| 4,531.7 | 5,278.3 | |||||||||||||||||||||||
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| 1 | Derivative interest rate swaps are measured at Fair Value through Other Comprehensive Income (“FV OCI”) as a result of hedge accounting. All interest rate swaps are in designated hedge relationships and there are no other derivative financial instruments held as Fair Value through Profit or Loss (“FVTPL”). |
| 2 | Borrowings have a carrying value (net of unamortised prepaid facility arrangement fees and original issue discount) of $3,880.0m (2021: $4,548.4m). Total borrowings (gross) are shown in this table as $3,914.0m (2021: $4,608.0m) for the fair value comparison. |
Fair value measurement
For trade and other receivables, cash and cash equivalents, trade and other payables, fair values approximate to book values due to the short maturity periods of these financial instruments. For trade receivables, allowances are made for credit risk.
Long-term borrowings with a carrying value of $3,880.0m (2021: $4,548.4m) (part C “Borrowings”) including unamortised prepaid facility fees and discounts, have a fair value estimate of $3,882.6m (2021: $4,598.4m) based on trading prices obtained from external banking providers as at 31 October 2022.
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. Valuations are updated by the counter-party banks on a monthly basis.
| Consolidated financial statements | 67 |
MICRO FOCUS INTERNATIONAL PLC
The long-term pension assets are considered to be Level 3 assets under the fair value hierarchy as of 31 October 2022. 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 assets is disclosed in note 20 “Pension and other long-term benefit commitments”.
For derivatives and long-term pension assets there were no transfers of assets or liabilities between levels of the fair value hierarchy during the year.
The Group had six interest rate swaps active in the reporting period, which were designated in a hedge relationship. The four 2017 interest rate swaps matured at the end of September 2022 and two new forward swaps were traded in the period.
The potential impact of the OpenText proposed transaction on the hedging arrangements is discussed further below.
Interest rate swaps 2017
| Interest rate risk |
31 October 2022 $m |
31 October 2021 $m |
||||||
| Interest rate swaps 2017 (receive variable, pay fixed) |
||||||||
| Fair value of Derivative liability (total of 4 swaps) |
— | (35.7 | ) | |||||
| Notional amount (4 x $562.5m) |
— | 2,250.0 | ||||||
| Maturity date |
|
30 September 2022 |
|
30 September 2022 |
||||
| Change in fair value of outstanding hedging instruments (OCI hedging reserve excluding deferred tax) (note 25 “Other reserves”) |
35.7 | 42.2 | ||||||
| Change in value of hedging instruments (as above adjusted for impact of credit risk) |
35.7 | 41.9 | ||||||
| Hedging ratio (affected by debt repayments in 2022) |
n/a | 1:1 | ||||||
The specific risk management objective of the four interest rate swaps was to hedge the interest rate risk (cash flow risk) due to changes in the 1M-USD LIBOR rate charged on initial $2,250.0m of the debt issued by Seattle Spin Co Inc. between 19 October 2017 and 30 September 2022.
The swap contracts required settlement of net interest receivable or payable on a monthly basis. The fixed interest rate for each swap was 1.949% and the Group received a variable rate in line with LIBOR. The Seattle loan was priced at LIBOR (with a 0% floor) plus a current margin of 2.75% 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 was 4.699%. For the year to 31 October 2022, net interest (finance cost) paid for the swaps amounted to $22.6m. For the life of the swap, net interest paid amounted to $81.0m.
The Group’s 2017 interest rate swaps matured in September 2022 and therefore have no value at 31 October 2022 (31 October 2021: ($35.7m) derivative liability). The movement in fair value of $35.7m has been recognised in the hedging reserve. During the period until the interest rate swaps matured the hedge ratio was 1:0.95 due to the debt repayments made for the Seattle Spinco term loan. The balance on the hedging reserve related to these swaps is now nil.
| Consolidated financial statements | 68 |
MICRO FOCUS INTERNATIONAL PLC
Forward Interest rate swaps 2022
| Interest rate risk |
31 October 2022 $m |
|||
| Interest rate swaps (receive variable, pay fixed) |
||||
| Fair value of Derivative asset (total of 2 swaps) |
69.8 | |||
| Notional amounts (1 x $500m) and (1 x $250m) |
750.0 | |||
| Maturity date |
28 February 2027 | |||
| Change in fair value of outstanding hedging instruments (OCI hedging reserve excluding deferred tax) (note 25) |
69.8 | |||
| Change in value of hedging instruments (as above adjusted for impact of credit risk) |
66.9 | |||
| Hedging ratio |
0.99:1 | |||
The Group traded two new forward interest rate swaps in January 2022. These interest rate swaps have a fair value of $69.8m and are disclosed as a financial asset with the movement in fair value of $69.8m recognised in the hedging reserve. The hedge objective is to minimise the risk of cash flow fluctuations due to variable interest payments on $750m of the Group’s external borrowings with the hedge cash flows effective from the end of September 2022. The hedge ratio is 0.99:1 and the impact of credit risk is estimated at $2.9m which does not dominate the valuation.
The swap contracts require settlement of the net interest receivable or payable on a monthly basis. The fixed interest rate for each swap is 1.656% plus a bank margin and the Group receives a variable rate in line with the Standard overnight financing rate (SOFR). The Seattle loan is priced at SOFR (with a 0.5% floor) plus a current margin of 4% with the swaps aimed at addressing the risk of a rising SOFR element. For the year to 31 October 2022, net interest (finance income) received for the swaps amounted to $0.8m.
Non-Derivative financial instruments—Designated Euro borrowings
| Foreign exchange risk |
31 October 2022 $m |
31 October 2021 $m |
||||||
| Debt designated in hedge relationships |
||||||||
| Euro B-1 2021 tranche €600m, (Borrowing maturity date: June 2025), €549m designated |
547.2 | 676.0 | ||||||
| Foreign exchange gain on revaluation transferred to OCI-CTA |
89.7 | 6.5 | ||||||
| Euro 2017 tranche €453m (Borrowing maturity date: June 2024) €442m designated (hedge ended) |
— | 510.9 | ||||||
| Foreign exchange gain on revaluation transferred to OCI-CTA—hedge failed prospectively as debt was extinguished in January 2022 |
10.5 | 4.8 | ||||||
| Hedge ratio for remaining Net investment hedges |
1:1 | 1:1 | ||||||
During the year ended 31 October 2020 the Group designated two tranches of non-derivative Euro borrowings in two hedge relationships. During the year one of these tranches, the Euro 2017 tranche, was repaid and the hedge relationship ended. At 31 October 2022 the borrowings in place have a designated carrying value of approximately €547m (part C “Borrowings” of this note) hedged against Euro designated net investments in foreign operations.
The specific risk management objective is to carry out a net investment hedge in the consolidated financial statements of the Group, to reduce the foreign currency translation exposure arising from the Group’s investments in foreign entities with Euro functional currency through the use of Euro currency borrowings as hedging instruments as permitted by the Group’s Treasury policy.
Exchange gains of $100.2m have been recognised in other comprehensive income in the period (year ended 31 October 2021: $11.3m gain) as a result of the net investment hedges ($89.7m for the hedge on the Euro B-1 2020 tranche; $10.5m for the hedge on the repaid Euro 2017 tranche in the period to repayment in January 2022). For the Euro 2017 tranche, the hedge failed prospectively upon repayment; none of the $10.5m in the cumulative translation account have been unwound to profit and loss. The Euro 2017 tranche has been replaced by the new €750m 2022 tranche of the Seattle debt arrangement, this new tranche is not in a net investment hedge relationship and as a result $102.2m of foreign exchange gains have been recorded within net finance cost in the profit and loss for the period.
| Consolidated financial statements | 69 |
MICRO FOCUS INTERNATIONAL PLC
Hedge effectiveness
Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic effectiveness assessments to ensure that an economic relationship exists between the hedged item and the hedging instrument. The testing determined that the hedges met the IFRS 9 requirements for the financial reporting year. The IFRS 9 hedging requirements apply to both the interest swaps and the net investment hedges.
The impact of changes in the fair value of interest rate swaps in the year ended 31 October 2022 is shown in the Consolidated statement of comprehensive income. The foreign exchange gains/losses for the revaluation of the net investment hedging instruments are compared against the translation of the net investment including goodwill and intangibles affecting the cumulative translation reserve on consolidation. No amounts have been reclassified from the hedging reserve to the loss for the year.
Hedge effectiveness may be affected by credit risk (in the case of the interest rate swaps) and the net investment hedged items may be affected by events impacting the carrying value of goodwill and intangible assets such as asset disposals or impairment reviews. An additional indicator of impairment was considered in the headroom review but sufficient headroom remains.
Impact of OpenText proposal
The existing borrowing arrangements have change of control clauses requiring repayment of the borrowing in the event of an acquisition. The impact of an early repayment on the Group’s forward swap hedges and the remaining net investment hedge is disclosed below.
2022 forward interest rate swaps: The designated term loan will be extinguished on completion of the proposed acquisition and therefore the hedge will fail. The forward swaps would continue to be valued at market rates (mark to market) with the movement recorded in the income statement until the swaps are either terminated, extinguished, or expired. However, the balances for these swaps in the hedging reserve in other comprehensive income, which is $69.8m (excluding deferred tax) at 31 October 2022, would be reclassified to the income statement upon completion of the acquisition when the hedged cash flows cease.
Net investment hedge: The Euro borrowings used in the designated hedge will be extinguished on completion of the proposed acquisition therefore the hedge will fail prospectively, and the hedge relationship will end. No adjustments are required to the Cumulative Translation account (“CTA”) unless the foreign operation that was hedged is also disposed of which is not the case for the proposed acquisition.
IBOR transition
Managing interest rate benchmark reform
A fundamental reform of major interest rate benchmarks is being undertaken globally, including the replacement of some interbank offered rates (“IBORs”) with alternative nearly risk-free rates (referred to as “IBOR reform”).
The Group has exposures to IBORs on its financial instruments that may be replaced or reformed as part of these market-wide initiatives.
The Treasury risk management committee monitors and manages the Group’s transition to alternative rates. The committee evaluates the extent to which contracts reference IBOR cash flows, whether such contracts will need to be amended as a result of IBOR reform and how to manage communication about IBOR reform with counterparties. The committee reports to the Company’s board of directors quarterly and collaborates with other business functions as needed. It provides periodic reports to management of interest rate risk and risks arising from IBOR reform.
Possible (phase 1 and 2) reliefs available for hedging exposures have not been applied as the benchmark quotes will continue to be available through to June 2023. The interest rate cash flows for the hedged debt have not been and will not be impacted by any IBOR-related matters in the period as referenced benchmarks were still available in the reporting period.
| Consolidated financial statements | 70 |
MICRO FOCUS INTERNATIONAL PLC
The Group has evaluated the extent to which its cash flow hedging relationships are subject to uncertainty driven by IBOR reform as at 31 October 2022. Several of the Group’s hedged items and hedging instruments continued to be referenced to US LIBOR during the year, however the 2017 interest rate swaps ended in September 2022 and have not been replaced. At the year end the Group is therefore exposed to variable outflows based on LIBOR and SOFR for US denominated borrowing.
LIBOR benchmark rates are quoted each day and the IBOR cash flows relating to debt instruments are exchanged with counterparties as usual. This allows market participants to continue to use LIBOR for existing contracts and the Group expects that LIBOR will continue to exist as a benchmark rate until June 2023. The Group is actively working to refinance the remaining LIBOR linked near-term debt of the Group into SOFR-based debt instruments to address the cessation of LIBOR. The Group plans to have all the 2024 LIBOR denominated debt repaid or refinanced prior to the planned LIBOR cessation date of June 2023. The loans maturing in 2025 would either be repaid, refinanced or the Group would plan to elect a 12-month LIBOR option prior to cessation, extending LIBOR loan pricing until June 2024.
Prior to cessation of the interest rate swaps, the Group measured its hedging instruments indexed to LIBOR using available quoted market rates for LIBOR-based instruments of the same tenor and similar maturity and measured the cumulative change in the present value of hedged cash flows attributable to changes in LIBOR on a similar basis.
Credit risk
The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at 31 October 2022 was:
| Note | 31 October 2022 $m |
31 October 2021 $m |
||||||||||
| Trade receivables (gross) |
14 | 674.5 | 738.8 | |||||||||
| Cash and cash equivalents |
15 | 536.2 | 558.4 | |||||||||
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| 1,210.7 | 1,297.2 | |||||||||||
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The Group applies the IFRS 9 expedited approach to measuring expected credit losses, which uses a lifetime expected credit loss allowance for all trade receivables.
A provision of the lifetime expected credit loss is established upon initial recognition of the underlying asset by predicting the future cash flows based upon the days past due status of an invoice and other relevant information. The model uses historical collection data along with historical credit losses experienced. The loss allowance is adjusted for forward-looking factors specific to the receivable and the economic environment.
Trade receivables are written off when there is no reasonable expectation of recovery. Impairment losses on trade receivables are presented as net impairment losses within operating profit. Subsequent recoveries of amounts previously written off are credited against the same line item.
Ageing is the main internal rating assessment around credit quality for trade receivables. The ageing of gross trade receivables and associated loss allowances can be found in note 14, “Trade and other receivables”. Contract assets relate to amounts not yet due from customers and contain no amounts past due.
On that basis, the loss allowance as at 31 October 2022 and 2021 and movements in the loss allowance during each year were as disclosed in note 14 “Trade and other receivables”:
Foreign exchange risk
The Group’s currency exposures comprise those that give rise to net currency gains and losses to be recognised in the Consolidated statement of comprehensive income as well as gains and losses on consolidation, which go to reserves. Such exposures reflect the monetary assets and liabilities of the Group that are not denominated in the operating or functional currency of the operating unit involved and the Group’s investment in net assets in currencies other than US dollar.
| Consolidated financial statements | 71 |
MICRO FOCUS INTERNATIONAL PLC
Note 3 “Loss before tax” shows the impact on the Consolidated statement of comprehensive income of foreign exchange gains/losses (excluding foreign exchange gains/losses on unhedged financial instruments) in’ the year ended 31 October 2022 of $35.5m gain (2021: $0.1m loss).
Exposure report analysis
The Group’s principal exposures in relation to market risks are the changes in the exchange rates between the US dollar and transactions made in other currencies as well as changes in interest rates from US and Euro capital markets. Foreign exchange exposures for all re-measuring balances are tracked and reported to management.
The key drivers for foreign exchange exposure are cash, borrowings and inter-company positions with trade receivables and trade payables having less relative aggregate exposure. The table below represents a key currency extract from the Group exposures to movements in currency presenting exposures in excess of $10m equivalent. The key exposure relates to the increased Euro debt profile since the May refinancing. This Euro exposure is shown in its totality and is not represented by the offsetting net investment hedge The Great British Pound, Japanese Yen, Indian Rupee, Australian Dollar, Canadian Dollar and Israeli Shekel also had key inter-company positions during the year.
Foreign exchange analysis is shown as for reporting to the Treasury Risk committee. Please note that aggregate foreign exchange exposures for the Euro below do not consider the impact of the net investment hedges. However, the impact can be seen in the hedging table above.
| Key aggregate currency exposures |
Group exposure $m |
+/- 5% $m |
+/- 10% $m |
|||||||||
| Euro (EUR) |
1,566.9 | 78.3 | 156.7 | |||||||||
| Great British Pounds (GBP) |
90.5 | 4.5 | 9.1 | |||||||||
| Israeli Shekel |
89.7 | 4.5 | 9.0 | |||||||||
| Indian Rupee (INR) |
65.6 | 3.3 | 6.6 | |||||||||
| Japanese Yen (JPY) |
51.1 | 2.6 | 5.1 | |||||||||
| Chinese Yuan (CNY) |
42.7 | 2.1 | 4.3 | |||||||||
| Russian Ruble (RUB) |
28.1 | 1.4 | 2.8 | |||||||||
| Swedish Krona (SEK) |
25.7 | 1.3 | 2.6 | |||||||||
| Canadian Dollar (CAD) |
22.8 | 1.1 | 2.3 | |||||||||
| United Arab Emirates Dirham (AED) |
20.6 | 1.0 | 2.1 | |||||||||
| Czech Koruna (CZK) |
20.0 | 1.0 | 2.0 | |||||||||
| Danish Krone (DKK) |
17.9 | 0.9 | 1.8 | |||||||||
| Australian Dollar (AUD) |
15.7 | 0.8 | 1.6 | |||||||||
| Turkish Lira (TRY) |
13.2 | 0.7 | 1.3 | |||||||||
| Romanian Leu (RON) |
12.7 | 0.6 | 1.3 | |||||||||
| Hong Kong Dollar (HKD) |
10.8 | 0.5 | 1.1 | |||||||||
Interest rate exposure
| Borrowings exposures to variable interest rate changes |
Note | Group exposure $m |
LIBOR, SOFR, EURIBOR +1% $m |
|||||||||
| Euro |
1,294.3 | 12.9 | ||||||||||
| US dollar |
2,619.7 | 26.2 | ||||||||||
|
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|||||||||
| Total gross debt |
22 | 3,914.0 | 39.1 | |||||||||
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|||||||||
| Consolidated financial statements | 72 |
MICRO FOCUS INTERNATIONAL PLC
| C | Borrowings |
| 31 October 2022 $m |
31 October 2021 $m |
|||||||
| Bank loan secured |
3,914.0 | 4,608.0 | ||||||
| Unamortised prepaid facility arrangement fees and original issue discounts |
(34.0 | ) | (59.6 | ) | ||||
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|
|||||
| Carrying value |
3,880.0 | 4,548.4 | ||||||
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|
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| 31 October 2022 | 31 October 2021 | |||||||||||||||||||||||
| Reported within: |
Bank loan secured $m |
Unamortised prepaid facility arrangement fees and original issue discounts $m |
Total $m |
Bank loan secured $m |
Unamortised prepaid facility arrangement fees and original issue discounts $m |
Total $m |
||||||||||||||||||
| Current liabilities |
38.7 | (13.5 | ) | 25.2 | 42.0 | (17.7 | ) | 24.3 | ||||||||||||||||
| Non-current liabilities |
3,875.3 | (20.5 | ) | 3,854.8 | 4,566.0 | (41.9 | ) | 4,524.1 | ||||||||||||||||
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| 3,914.0 | (34.0 | ) | 3,880.0 | 4,608.0 | (59.6 | ) | 4,548.4 | |||||||||||||||||
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The carrying value for borrowings are stated after deducting unamortised prepaid facility fees and original issue discounts. Facility arrangement costs and original issue discounts are originally amortised between three and six years. The remaining unamortised fees of $34.0m have a remaining period of amortisation of up to three years. Borrowings have a drawn value of $3,914.0m before unamortised prepaid facility fees. The fair value of borrowings before unamortised prepaid facility fees can be found in part B “Financial instruments” of this note.
Short-term borrowing of $25.2m represents capital repayments of $38.7m falling due on the Group borrowings within one year less unamortised prepaid facility arrangement fees and original issue discounts of $13.5m.
The Group’s earliest debt maturity is in June 2024, however as described below, annual instalment payments are required and where applicable a prorate allocation of the free cash flow sweep payment (described below).
On 17 January 2022, the Group announced the refinancing of $1.6bn of existing term loans due in 2024. This refinancing comprised a €750m and a $750m Senior Secured Term Loan B. At this time facility fees of $15.8m (31 October 2021: $nil) were capitalised.
On 6 July 2022, the Group entered into a Dutch auction to repay $100m of the senior secured seven-year term loan B issued by Seattle SpinCo LLC which was successfully implemented at an overall auction price of $94.5m. A portion of unamortised transaction cost of $1.1m were accelerated giving a carry value of debt de-recognised of $98.9m with further banking and advisory costs incurred of $0.6m. The overall gain was taken to finance income in the period.
The following facilities were drawn as at 31 October 2022:
| • | The €549.3m (equivalent to $547.2m) (31 October 2021: €585m, equivalent to $676.0m) senior secured five-year term loan B-1 issued by MA FinanceCo., LLC, maturing in June 2025, is priced at EURIBOR plus 4.5% (subject to a EURIBOR floor of 0.00%) with an original issue discount of 3.0%; |
| • | The $595.4m (31 October 2021: $633.7m) senior secured five-year term loan B-4 issued by MA FinanceCo., LLC, maturing in June 2025, is priced at LIBOR plus 4.25% (subject to a LIBOR floor of 1.00%) with an original issue discount of 2.5%; |
| Consolidated financial statements | 73 |
MICRO FOCUS INTERNATIONAL PLC
| • | The $1,279.9m (31 October 2021: $2,427.9m) senior secured seven-year term loan B issued by Seattle SpinCo, Inc., maturing in June 2024, is priced at LIBOR plus 2.75% (subject to a LIBOR floor of 0.00%) with an original issue discount of 0.25%; |
| • | The €750.0m (equivalent to $747.1m) (31 October 2021: $nil) senior secured five-year term loan B issued by MA FinanceCo., LLC, maturing in January 2027, is priced at EURIBOR plus 4% (subject to a EURIBOR floor of 0.00%) with an original issue discount of 0.5%; |
| • | The $744.4m (31 October 2021: $nil) senior secured five-year term loan issued by Seattle SpinCo, Inc., maturing in January 2027, is priced at SOFR plus 4% (subject to a SOFR floor of 0.50%) with an original issue discount of 1.0%. |
The following facilities were undrawn as at 31 October 2022:
| • | A senior secured RCF of $250m ($nil drawn) maturing in December 2026 with an interest rate of 3.25% above LIBOR on amounts drawn (and 0.7% on amounts undrawn) thereunder, subject to a LIBOR floor of 0%. |
At 31 October 2022, none of the Revolving Facility was drawn (31 October 2021: $nil), together with $3,914.0m of term loans giving gross debt of $3,914.0m drawn.
The following covenants related to net leverage apply to the Group’s term-loan borrowing facilities:
| • | The Revolving Facility was amended during the year and is subject to a single financial covenant, only in circumstances when more than 40% of the Revolving Facility is outstanding at a fiscal quarter end. Throughout the year the applicable covenant threshold was net leverage of 5.00x, however no test was applicable at 31 October 2022 or any previous test date, as the facility was not drawn in excess of the 40% threshold. |
| • | Additional debt repayments when the Group’s net leverage at 31 October exceeds 3.00x, when 25% of excess cash flow for the year is required to be paid, and 3.30x, when 50% of excess cash flow for the year is required to be paid; |
| • | Net proceeds from divestitures in excess of $45m are required to be used to make debt repayments. When the Group’s net leverage exceeds 3.00x, 100% of net proceeds must be used for debt repayments. When net leverage is below 3.00x, 50% of net proceeds must be used to make a debt repayment; however no further debt repayment is required once repayment reduces net leverage below 2.50x on a pro forma basis therefore use of excess disposal proceeds at this point is at the Group’s discretion; and |
| • | An additional 25 basis points of margin is required to be paid on the term loans maturing in June 2024 when net leverage exceeds 3.00x. The Group is currently paying this margin. |
These covenants are not expected to inhibit the Group’s future operations or funding plans.
Net leverage is defined as net debt (see part D “Net Debt” of this note)/Adjusted EBITDA. The credit facility agreements apply frozen GAAP for IFRS 16 and allows certain expected cost savings to be included in the measurement therefore the calculated value differs from that using net debt/Adjusted EBITDA as presented in this annual report. The difference has not exceeded 0.6x during the current period.
In addition to the net leverage related payments the Group’s borrowing arrangements include annual repayments of 1% of the initial par value for both Seattle Spinco B loans and 2.5% of the initial par value for the B-1 and B-4 loans with the amount paid in four equal quarterly instalments and then a final balloon payment on maturity.
| Consolidated financial statements | 74 |
MICRO FOCUS INTERNATIONAL PLC
The movements on the Group loans in the year were as follows:
| Term loan B-1 EUR $m |
Term loan B-3 USD $m |
Term loan B-4 USD $m |
Euro Senior term loan B $m |
Seattle Spinco term loan B $m |
Euro term loan B $m |
USD Senior term loan B $m |
Revolving Facility $m |
Total $m | ||||||||||||||||||||||||||||
| At 1 November 2021 |
676.0 | 359.5 | 633.7 | — | 2,427.9 | 510.9 | — | — | 4,608.0 | |||||||||||||||||||||||||||
| Draw downs |
— | — | — | 849.3 | — | — | 750.0 | — | 1,599.3 | |||||||||||||||||||||||||||
| Repayments/settlements |
(39.1 | ) | (359.5 | ) | (38.3 | ) | — | (1,148.0 | ) | (500.4 | ) | (5.6 | ) | — | (2,090.9 | ) | ||||||||||||||||||||
| Foreign exchange |
(89.7 | ) | — | — | (102.2 | ) | — | (10.5 | ) | — | — | (202.4 | ) | |||||||||||||||||||||||
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| At 31 October 2022 |
547.2 | — | 595.4 | 747.1 | 1,279.9 | — | 744.4 | — | 3,914.0 | |||||||||||||||||||||||||||
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| Term loan B-1 EUR $m |
Term loan B-3 USD $m |
Term loan B-4 USD $m |
Euro Senior term loan B $m |
Seattle Spinco term loan B $m |
Euro term loan B $m |
USD Senior term loan B $m |
Revolving Facility $m |
Total $m |
||||||||||||||||||||||||||||
| At 1 November 2020 |
700.3 | 368.2 | 650.0 | — | 2,486.3 | 528.4 | — | — | 4,733.2 | |||||||||||||||||||||||||||
| Draw downs |
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Repayments/settlements |
(17.9 | ) | (8.7 | ) | (16.3 | ) | — | (58.4 | ) | (12.8 | ) | — | — | (114.1 | ) | |||||||||||||||||||||
| Foreign exchange |
(6.4 | ) | — | — | — | — | (4.7 | ) | — | — | (11.1 | ) | ||||||||||||||||||||||||
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| At 31 October 2021 |
676.0 | 359.5 | 633.7 | — | 2,427.9 | 510.9 | — | — | 4,608.0 | |||||||||||||||||||||||||||
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The maturity of borrowings can be seen in part D “Net Debt” of this note.
Assets pledged as collateral
An all assets security has been granted in the US and England & Wales by certain members of the Micro Focus Group organised in such jurisdictions, including security over intellectual property rights and shareholdings of such members of the Micro Focus Group.
Impact from OpenText proposal
Upon completion of the proposed acquisition from OpenText the change of control clauses in the loan agreements would be triggered. On 1 December 2022 OpenText has announced that they have sold $1bn of 6.9% senior secured notes due 2027 which along with an additional amount of $1.0 billion under the existing term loan credit agreement and together with cash on hand (including undrawn amounts on OpenText $750m revolving credit facility), will be used to repay the Group’s debt.
Alongside the repayments any outstanding unamortised fees would need to be accelerated on completion of the acquisition. These fees are currently $34.0m and amortise at approximately $2.6m per month. This would leave a range of between $28.8m to $21.0m in the first quarter of 2023 with the exact value depending on completion date.
| Consolidated financial statements | 75 |
MICRO FOCUS INTERNATIONAL PLC
| D | Net debt |
The net debt of the Group at the Consolidated statement of financial position date is as follows:
| Note | 31 October 2022 $m |
31 October 2021 $m |
||||||||||
| Borrowings |
(3,880.0 | ) | (4,548.4 | ) | ||||||||
| Cash and cash equivalents |
15 | 536.2 | 558.4 | |||||||||
| Lease obligations |
17 | (162.6 | ) | (194.5 | ) | |||||||
| Lease receivable reimbursed by the Digital Safe business |
8.7 | — | ||||||||||
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|||||||||
| Net debt |
(3,497.7 | ) | (4,184.5 | ) | ||||||||
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Borrowings are shown net of unamortised prepaid facility arrangement fees of $34.0m (2021: $59.6m). Gross borrowings are $3,914.0m (2021: $4,608.0m).
Change in liabilities arising from financing activities for interest bearing loans (part C “Borrowings” of this note) and lease obligations (note 17 “Leases”) were as follows:
| Interest bearing loans $m |
Lease obligations $m |
Total $m |
||||||||||
| At 1 November 2021 |
4,608.0 | 194.5 | 4,802.5 | |||||||||
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| Movements arising from financing cash flows |
||||||||||||
| Repayments/settlements |
(2,090.9 | ) | (75.1 | ) | (2,166.0 | ) | ||||||
| Drawdowns |
1,599.3 | — | 1,599.3 | |||||||||
| Other changes |
||||||||||||
| New leases |
— | 41.9 | 41.9 | |||||||||
| Interest |
— | 7.7 | 7.7 | |||||||||
| The effect of change in foreign exchange rates |
(202.4 | ) | (6.4 | ) | (208.8 | ) | ||||||
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| At 31 October 2022 |
3,914.0 | 162.6 | 4,076.6 | |||||||||
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Maturity analysis of non-derivative and derivative financial liabilities
The following table summarises the contractual maturities of the Group’s financial liabilities as at 31 October 2022. The amounts are reported gross and un-discounted and include contractual interest payments where applicable. As a result, these amounts can differ from both the reported carrying value and fair value.
As at 31 October 2022
| Borrowings $m |
Lease obligations $m |
Derivatives – interest rate swaps $m |
Trade payables & accruals $m |
Total $m |
||||||||||||||||
| Within one year |
287.3 | 49.9 | — | 455.1 | 792.3 | |||||||||||||||
| In one to two years |
1,534.8 | 46.2 | — | — | 1,581.0 | |||||||||||||||
| In two to three years |
1,218.9 | 28.6 | — | — | 1,247.5 | |||||||||||||||
| In three to five years |
96.5 | 30.8 | — | — | 127.3 | |||||||||||||||
| In more than five years |
1,490.0 | 33.6 | — | — | 1,523.6 | |||||||||||||||
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| Total |
4,627.5 | 189.1 | — | 455.1 | 5,271.7 | |||||||||||||||
| Impact of discount/financing rates |
— | (26.5 | ) | — | — | (26.5 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
4,627.5 | 162.6 | — | 455.1 | 5,245.2 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Consolidated financial statements | 76 |
MICRO FOCUS INTERNATIONAL PLC
As at 31 October 2021
| Borrowings $m |
Lease obligations $m |
Derivatives – interest rate swaps $m |
Trade payables & accruals $m |
Total $m |
||||||||||||||||
| Within one year |
202.6 | 74.9 | 35.7 | 440.1 | 753.3 | |||||||||||||||
| In one to two years |
191.1 | 39.9 | — | — | 231.0 | |||||||||||||||
| In two to three years |
3,453.6 | 29.7 | — | — | 3,483.3 | |||||||||||||||
| In three to five years |
1,235.5 | 28.5 | — | — | 1,264.0 | |||||||||||||||
| In more than five years |
— | 49.1 | — | — | 49.1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
5,082.8 | 222.1 | 35.7 | 440.1 | 5,780.7 | |||||||||||||||
| Impact of discount/financing rates |
— | (27.6 | ) | — | — | (27.6 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
5,082.8 | 194.5 | 35.7 | 440.1 | 5,753.1 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| 23 | Share capital |
Ordinary shares at 10 pence each as at 31 October 2022 (2021: 10 pence each).
| 31 October 2022 | 31 October 2021 | |||||||||||||||
| Shares | $m | Shares | $m | |||||||||||||
| Issued and fully paid |
||||||||||||||||
| At 1 November |
364,849,738 | 47.4 | 364,545,377 | 47.3 | ||||||||||||
| Shares required to satisfy option awards |
3,423,459 | 0.1 | 745,910 | 0.1 | ||||||||||||
| Shares utilised to satisfy option awards |
(2,296,555 | ) | — | (441,549 | ) | — | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| At 31 October |
365,976,642 | 47.5 | 364,849,738 | 47.4 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Share issuances during the year ended to 31 October 2022
In the year ended 31 October 2022, 3,423,459 ordinary shares of 10 pence each (2021: 745,910) were required, of which 2,296,555 (2021: 441,549) were transferred from treasury shares by the Company, to settle exercised share options. The gross consideration received in the year ended to 31 October 2022 was $0.1m (2021: $0.1m).
At 31 October 2022, 26,906,523 treasury shares were held (2021: 29,203,078) such that the number of ordinary shares with voting rights was 339,070,119 (2021: 335,646,660) and the number of listed shares at 31 October 2022 was 365,976,642 (2021: 364,849,738 ). In addition, 15,936,281 shares are held by the Micro Focus Employee Benefit Trust (2021: 4,002,089).
Potential issues of shares
Certain employees hold options to subscribe for shares in the Company at prices ranging from nil pence to 1,411 pence under the following share option schemes approved by shareholders in 2005 and 2006: The Long-Term Incentive Plan 2005, the Additional Share Grants, the Sharesave Plan 2006 and the Employee Stock Purchase Plan 2006.
The number of shares subject to options at 31 October 2022 was 25,146,119 (2021: 18,877,264).
Commercial Agreement with Amazon Web Services
On 2 March 2021, the Company entered into a commercial agreement with Amazon Web Services (“AWS”), which granted AWS the right to deploy the Company’s technology to migrate customers to the AWS’ cloud.
1,592,439 warrants have been issued to Amazon NV Investment Holdings LLC, with 1,194,329 issued in the current year and 398,110 issued in the prior year, to subscribe for ordinary shares (the “warrants”) at 446.60 pence per share. As at 31 October 2022, none have been exercised.
| Consolidated financial statements | 77 |
MICRO FOCUS INTERNATIONAL PLC
| 24 | Share premium account |
| Note | 31 October 2022 $m |
31 October 2021 $m |
||||||||||
| At 1 November |
46.8 | 46.5 | ||||||||||
| Movement in relation to share options exercised |
26 | 0.8 | 0.3 | |||||||||
|
|
|
|
|
|||||||||
| At 31 October |
47.6 | 46.8 | ||||||||||
|
|
|
|
|
|||||||||
| 25 | Other reserves |
| Note | Capital redemption reserve1 $m |
Merger reserve2 $m |
Hedging reserve3 $m |
Foreign currency translation reserve4 $m |
Total $m |
|||||||||||||||||||
| As at 1 November 2021 |
2,485.0 | 1,659.1 | (28.9 | ) | (268.0 | ) | 3,847.2 | |||||||||||||||||
| Hedge accounting |
22 | — | — | 105.5 | — | 105.5 | ||||||||||||||||||
| Current tax movement on hedging |
— | — | (6.8 | ) | — | (6.8 | ) | |||||||||||||||||
| Deferred tax movement on hedging |
— | — | (16.8 | ) | — | (16.8 | ) | |||||||||||||||||
| Foreign exchange gains/(losses) |
— | — | — | (286.3 | ) | (286.3 | ) | |||||||||||||||||
| Transfer from merger reserve to retained earnings |
— | (1,659.1 | ) | — | — | (1,659.1 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| As at 31 October 2022 |
2,485.0 | — | 53.0 | (554.3 | ) | 1,983.7 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| As at 1 November 2020 |
2,485.0 | 1,767.4 | (63.1 | ) | (326.7 | ) | 3,862.6 | |||||||||||||||||
| Hedge accounting |
— | — | 42.2 | — | 42.2 | |||||||||||||||||||
| Foreign exchange gains/(losses) |
— | — | — | 58.7 | 58.7 | |||||||||||||||||||
| Current tax movement on hedging |
— | — | (8.0 | ) | — | (8.0 | ) | |||||||||||||||||
| Transfer to merger reserve from retained earnings |
— | (108.3 | ) | — | — | (108.3 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| As at 31 October 2021 |
2,485.0 | 1,659.1 | (28.9 | ) | (268.0 | ) | 3,847.2 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| 1 | The capital redemption reserve, a non-distributable reserve, was created as a result of Returns of Value in prior periods. |
| 2 | The merger reserve is an unrealised profit until it can be realised by the settlement of the intercompany loan by qualifying consideration. In addition, the unrealised profit becomes realised as a result of a realised loss being recognised on the write-down for impairment of the related asset. |
In the year ended 31 October 2021, it was disclosed that $322.0m of the merger reserve would be settled in the following year. As at 31 October 2022, due to the impairment of the intercompany receivables which created the merger reserve creating a realised loss the remaining balance of the merger reserve has been transferred to retained earnings in accordance with section 3.11(d) of Tech 02/17. Therefore, an additional transfer of $1,659.1m from the merger reserve to retained earnings has been recognised.
| 3 | The hedging reserve principally includes the impact of the Group’s cash flow hedges. A credit of $81.9m was recognised in relation to hedging transactions entered into in the year ended 31 October 2022 (2021: $34.2m credit). |
| 4 | The foreign currency translation reserve is used to record cumulative translation differences on the assets and liabilities of foreign operations. |
| Consolidated financial statements | 78 |
MICRO FOCUS INTERNATIONAL PLC
| 26 | Employees and directors |
Staff costs
| Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
|||||||
| Staff costs |
||||||||
| Wages and salaries |
1,106.6 | 1,231.5 | ||||||
| Redundancy and termination costs (non-exceptional) |
0.9 | 1.2 | ||||||
| Social security costs |
93.2 | 103.5 | ||||||
| Other pension costs |
45.4 | 45.5 | ||||||
|
|
|
|
|
|||||
| 1,246.1 | 1,381.7 | |||||||
| Cost of employee share schemes (Share-based payments section below) |
34.1 | 14.3 | ||||||
|
|
|
|
|
|||||
| Total |
1,280.2 | 1,396.0 | ||||||
|
|
|
|
|
|||||
| Note | Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
||||||||||
| Pension costs comprise: |
||||||||||||
| Defined benefit schemes |
20 | 8.4 | 11.3 | |||||||||
| Defined contribution schemes |
20 | 37.0 | 34.2 | |||||||||
|
|
|
|
|
|||||||||
| Total |
45.4 | 45.5 | ||||||||||
|
|
|
|
|
|||||||||
Staff numbers
| Year ended 31 October 2022 Number |
Year ended 31 October 2021 Number |
|||||||
| Average monthly number of people |
||||||||
| (including executive directors) employed by the Group: |
||||||||
| Continuing operations |
||||||||
| Sales and distribution |
3,248 | 4,300 | ||||||
| Research and development |
5,193 | 5,272 | ||||||
| General and administration |
2,422 | 2,210 | ||||||
|
|
|
|
|
|||||
| Total |
10,863 | 11,782 | ||||||
|
|
|
|
|
|||||
| Consolidated financial statements | 79 |
MICRO FOCUS INTERNATIONAL PLC
Directors and key management
| Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
|||||||
| Directors |
||||||||
| Aggregate emoluments |
4.6 | 5.4 | ||||||
| Aggregate gains made on the exercise of share options |
0.1 | — | ||||||
|
|
|
|
|
|||||
| Total |
4.7 | 5.4 | ||||||
|
|
|
|
|
|||||
For further information on the directors of the Company, refer to the Directors’ Remuneration report.
| Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
|||||||
| Key management compensation |
||||||||
| Short-term employee benefits |
12.3 | 13.5 | ||||||
| Share-based payments |
8.8 | 1.9 | ||||||
|
|
|
|
|
|||||
| Total |
21.1 | 15.4 | ||||||
|
|
|
|
|
|||||
The key management figures above include the executive management team and directors.
Share-based payments
The amount charged to the Consolidated statement of comprehensive income in respect of share-based payments was $34.1m for the year ended 31 October 2022 (2021: $14.3m).
| Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
|||||||
| Share-based compensation—IFRS 2 charge |
31.8 | 12.0 | ||||||
| Employer taxes |
2.3 | 2.3 | ||||||
|
|
|
|
|
|||||
| Total |
34.1 | 14.3 | ||||||
|
|
|
|
|
|||||
As at 31 October 2022, accumulated employer taxes of $2.2m (2021: $1.3m) are included in trade and other payables and $1.1m (2021: $nil) is included in other non-current liabilities.
The Group has various share-based plans details of which are provided below.
| a) | Incentive Plan 2005 |
The Micro Focus International plc Incentive Plan 2005 (“LTIP”) permits the granting of share awards to executive directors and selected employees on a discretionary basis. Awards can be granted as conditional awards of shares or as nil-cost options.
| Consolidated financial statements | 80 |
MICRO FOCUS INTERNATIONAL PLC
| Year ended 31 October 2022 |
Year ended 31 October 2021 |
|||||||||||||||
| Number of awards ‘000 |
Weighted average exercise price of awards pence |
Number of awards ‘000 |
Weighted average exercise price of awards pence |
|||||||||||||
| Outstanding at 1 November |
12,716 | — | 14,222 | — | ||||||||||||
| Exercised |
(2,629 | ) | 1 | (576 | ) | 1 | ||||||||||
| Forfeited/lapsed |
(3,209 | ) | — | (5,496 | ) | — | ||||||||||
| Granted |
12,997 | — | 4,566 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Outstanding at 31 October |
19,875 | — | 12,716 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Exercisable at 31 October |
743 | 2 | 732 | 5 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The weighted average share price for awards on the date of exercise was 508 pence for the year ended 31 October 2022 (2021: 469pence).
The amount charged to the consolidated statement of comprehensive income in respect of the LTIP scheme was $27.7m for the year ended 31 October 2022 (2021: $6.7m). In addition to this $2.2m (2021: $2.3m) was charged to the consolidated statement of comprehensive income in respect of National Insurance on these share awards.
| 31 October 2022 | 31 October 2021 | |||||||||||||||||||||||
| Range of exercise prices |
Weighted average exercise price pence |
Number of awards ‘000 |
Weighted average remaining contractual life years |
Weighted average exercise price pence |
Number of awards ‘000 |
Weighted average remaining contractual life years |
||||||||||||||||||
| £0.10 or less |
— | 19,815 | 8.6 | — | 12,607 | 5.0 | ||||||||||||||||||
| £0.11–£1.00 |
13 | 60 | 1.3 | 13 | 109 | 1.8 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| — | 19,875 | 8.6 | — | 12,716 | 4.9 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Unvested awards granted are subject to the following vesting conditions of either:
| Performance criteria |
Unvested options Number ‘000 |
Description | ||||
| Free cash flow/Relative TSR growth |
5,925 | Awards made with a free cash flow target and relative TSR target over a three-year period. | ||||
| Continued employment |
13,102 | Awards under a continuing employment criteria over a two or three-year period. | ||||
| Other |
105 | Various other vesting conditions. | ||||
|
|
|
|||||
| 19,132 | ||||||
|
|
|
|||||
Further details regarding awards to executive directors are provided in the Directors’ Remuneration report.
The weighted average fair value of awards granted during the year ended 31 October 2022 determined using the Black-Scholes valuation model was £2.88 (2021: £4.51). The significant inputs into the model for the year ended 31 October 2022 were:
| Consolidated financial statements | 81 |
MICRO FOCUS INTERNATIONAL PLC
| Year ended 31 October 2022 |
Year ended 31 October 2021 | |||
| Weighted average share price at the grant date |
£3.39 | £5.25 | ||
| Expected volatility |
between 69.71% and 71.88% | between 68.42% and 70.03% | ||
| Expected dividend yield |
between 4.28% and 6.12% | between 4.89% and 5.10% | ||
| Expected option life |
two or three years | two or three years | ||
| Annual risk-free interest rate |
between 0.76% and 2.15% | between 0.75% and 0.80% |
The volatility measured at the standard deviation of continuously compounded share returns is based on statistical daily share prices over the last three years.
The fair value of awards granted in the year ended 31 October 2022, as determined using the Monte Carlo simulation was $2.97 (2021: $2.80) and the fair value of awards granted using the share price at the date of grant was $4.45 (2021: $7.32).
With regard to the proposed acquisition by OpenText, this scheme would be modified/cancelled at the point of change of control, at which point it is expected there would be an acceleration of the remaining charges which are $32.3m at 31 October 2022.
| b) | Additional Share Grants |
| Year ended 31 October 2022 |
Year ended 31 October 2021 |
|||||||||||||||
| Number of options ‘000 |
Weighted average exercise price pence |
Number of options ‘000 |
Weighted average exercise price pence |
|||||||||||||
| Outstanding at 1 November |
406 | — | 446 | — | ||||||||||||
| Exercised |
(406 | ) | — | (40 | ) | — | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Outstanding at 31 October |
— | — | 406 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Exercisable at 31 October |
— | — | 406 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The amount charged to the consolidated statement of comprehensive income in respect of the ASGs scheme was $nil for the year ended 31 October 2022 (2021: $nil). In addition to this $0.1m (2021: $nil) was charged to the consolidated statement of comprehensive income in respect of National Insurance on these share awards.
Additional Share Grants—The Attachmate Group (“TAG”) acquisition
The remuneration committee awarded ASGs to a number of senior managers and executives, critical to delivering the anticipated results of the acquisition of The Attachmate Group, which completed on 20 November 2014. These TAG ASG options vested in full.
As at 31 October 2022, nil (2021: 405,917) of these options were vested but not yet exercised.
| Consolidated financial statements | 82 |
MICRO FOCUS INTERNATIONAL PLC
| 31 October 2022 | 31 October 2021 | |||||||||||||||||||||||
| Range of exercise prices |
Weighted average exercise price pence |
Number of options ‘000 |
Weighted average remaining contractual life years |
Weighted average exercise price pence |
Number of options ‘000 |
Weighted average remaining contractual life years |
||||||||||||||||||
| £0.00 |
— | — | — | — | 406 | 3.1 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| — | — | — | — | 406 | 3.1 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| c) | Sharesave and Employee Stock Purchase Plan 2006 |
In August 2006, the Company introduced the Micro Focus Employee Stock Purchase Plan 2006 and the Micro Focus Sharesave Plan 2006, approved by members on 25 July 2006. The Group operates two all-employee plans; the Micro Focus Sharesave Plan 2006 (“Sharesave”) for UK and Ireland based employees and the Micro Focus Employee Stock Purchase Plan 2006 (“ESPP”) for employees in all other locations. The Sharesave and ESPP provide for an annual award of options at a discount to the market price and are open to all eligible Group employees. Under these plans employees make monthly savings over a period (Sharesave three years, ESPP two years) linked to the grant of an option with an option price which can be at a discount (for Sharesave this can be up to 20% of the market value of the shares on grant and for ESPP, this can be up to 15% of the market value of the shares on grant or maturity, whichever is lower). The option grants are subject to employment conditions and continuous savings.
Further Sharesave and ESPP grants were made during the 12 months to 31 October 2022.
Sharesave
| Year ended 31 October 2022 |
Year ended 31 October 2021 |
|||||||||||||||
| Number of options ‘000 |
Weighted average exercise price pence |
Number of options ‘000 |
Weighted average exercise price pence |
|||||||||||||
| Outstanding at 1 November |
1,972 | 259 | 1,935 | 293 | ||||||||||||
| Exercised |
(74 | ) | 245 | (2 | ) | 241 | ||||||||||
| Cancellations |
(238 | ) | 379 | — | — | |||||||||||
| Forfeited |
(283 | ) | 319 | (316 | ) | 408 | ||||||||||
| Granted |
559 | 257 | 355 | 203 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Outstanding at 31 October |
1,936 | 261 | 1,972 | 259 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Exercisable at 31 October |
4 | 1,457 | 14 | 1,023 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Consolidated financial statements | 83 |
MICRO FOCUS INTERNATIONAL PLC
|
Number of |
Date of grant | Exercise price per share pence |
Exercise period | |||||||||||
| 3 | 5 August 2019 | 1,411.0 | 1 October 2021–31 March 2023 | |||||||||||
| 1 | 5 August 2019 | 1,574.3 | 1 October 2021–31 March 2023 | |||||||||||
| 25 | 5 March 2020 | 617.7 | 1 April 2023–30 September 2023 | |||||||||||
| 1 | 5 March 2020 | 728.2 | 1 April 2023–30 September 2023 | |||||||||||
| 1,132 | 21 August 2020 | 241.3 | 1 October 2023–31 March 2024 | |||||||||||
| 85 | 21 August 2020 | 241.1 | 1 October 2023–31 March 2024 | |||||||||||
| 80 | 5 March 2021 | 373.2 | 1 April 2024–30 September 2024 | |||||||||||
| 6 | 5 March 2021 | 373.2 | 1 April 2024–30 September 2024 | |||||||||||
| 104 | 6 August 2021 | 321.8 | 1 October 2024–31 March 2025 | |||||||||||
| 83 | 2 March 2022 | 363.3 | 1 April 2025–30 September 2025 | |||||||||||
| 416 | 1 September 2022 | 222.6 | 1 October 2025–31 March 2026 | |||||||||||
|
|
|
|||||||||||||
| 1,936 | ||||||||||||||
|
|
|
|||||||||||||
ESPP
| Year ended 31 October 2022 |
Year ended 31 October 2021 |
|||||||||||||||
| Number of options ‘000 |
Weighted average exercise price pence |
Number of options ‘000 |
Weighted average exercise price pence |
|||||||||||||
| Outstanding at 1 November |
3,784 | 384 | 2,255 | 617 | ||||||||||||
| Exercised |
(1,257 | ) | 422 | (1,022 | ) | 1,430 | ||||||||||
| Cancellations |
(260 | ) | 506 | — | — | |||||||||||
| Forfeited |
(903 | ) | 385 | (238 | ) | 1,341 | ||||||||||
| Granted |
1,973 | 308 | 2,789 | 360 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Outstanding at 31 October |
3,337 | 315 | 3,784 | 384 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Exercisable at 31 October |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Number of options ‘000 |
Date of grant | Exercise price per share pence |
Exercise period | |||||||||
| 969 |
1 April 2021 | 369.2 | 1 April 2023–1 May 2023 | |||||||||
| 621 |
1 October 2021 | 344.8 | 1 October 2023–1 November 2023 | |||||||||
| 697 |
1 April 2022 | 369.2 | 1 April 2024–1 May 2024 | |||||||||
| 1,050 |
1 September 2022 | 240.1 | 1 October 2024–1 November 2024 | |||||||||
|
|
||||||||||||
| 3,337 |
||||||||||||
|
|
||||||||||||
The amount charged to the consolidated statement of comprehensive income in respect of the Sharesave and ESPP was $4.1m for the year ended 31 October 2022 (2021: $5.3m).
The weighted average fair value of options granted under Sharesave during the year ended 31 October 2022 determined using the Black-Scholes valuation model was £1.20 (2021: £1.61).
| Consolidated financial statements | 84 |
MICRO FOCUS INTERNATIONAL PLC
The significant inputs into the model for the year ended 31 October 2022 were:
| Year ended 31 October 2022 |
Year ended 31 October 2021 |
|||||||
| Weighted average share price at the grant date |
£3.03 | £4.23 | ||||||
| Expected volatility |
between 70.76% and 71.77% | between 68.86% and 77.52% | ||||||
| Expected dividend yield |
between 5.71% and 6.04% | between 4.73% and 5.78% | ||||||
| Expected option life |
three years | two or three years | ||||||
| Annual risk-free interest rate |
between 1.48% and 1.92% | between 0.52% and 0.76% | ||||||
The volatility measured at the standard deviation of continuously compounded share returns is based on statistical daily share prices over the last three years.
The fair value of ESPP awards granted in the year ended 31 October 2022, as determined using the Monte Carlo simulation was $2.45.
With regard to the proposed acquisition by OpenText, both the SAYE and ESPP schemes would be modified/cancelled at the point of change of control, at which point it is expected there would be an acceleration of the remaining charges which are $1.0m and $4.2m respectively at 31 October 2022.
| 27 | Related party transactions |
The Group’s related parties are its subsidiary undertakings, key management personnel and post-employment benefit plans.
Subsidiaries
Transactions between the Company and its subsidiaries have been eliminated on consolidation.
Remuneration of key management personnel
The remuneration of key management personnel of the Group (which is defined as members of the executive committee including executive directors) is set out in note 26, “Employees and directors”. There are no loans between the Group and the key management personnel.
Transactions with other related parties
The following transactions occurred with other related parties:
| • | Contributions made to pension plans by the Group on behalf of employees are set out in note 20, “Pension and other long-term benefit commitments”. |
| 28 | Discontinued operation and Assets held for sale |
Discontinued operation: SUSE business
The sale of the SUSE business was completed on 15 March 2019. The profit on disposal of the SUSE business for the period ended 31 October 2022 of $3.2m relates to tax indemnities (2021: $10.7m).
Net Assets classified as held for sale: Archiving and Risk Management portfolio (“The Digital Safe business”)
There are no disposal groups classified as held for sale at the year end. At 31 October 2021, the assets and liabilities relating to the Digital Safe business were presented as held for sale.
| Consolidated financial statements | 85 |
MICRO FOCUS INTERNATIONAL PLC
| Year ended 31 October 2022 |
Year ended 31 October 2021 |
|||||||||||||||||||||||
| Reported in: |
Current assets $m |
Current liabilities $m |
Total $m |
Current assets $m |
Current liabilities $m |
Total $m |
||||||||||||||||||
| Digital Safe |
— | — | — | 370.3 | 68.4 | 301.9 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| — | — | — | 370.3 | 68.4 | 301.9 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
On 3 November 2021, the Group announced an agreement to sell its Archiving and Risk Management portfolio to Smarsh Inc with the disposal completing on 31 January 2022. The consolidated statement of comprehensive income for the year ended 31 October 2022 included the following amounts relating to the Digital Safe business within continuing operations.
| Year ended 31 October 2022 $m |
||||
| Revenue |
25.9 | |||
| Operating costs |
(13.6 | ) | ||
|
|
|
|||
| Operating profit |
12.3 | |||
| Profit on disposal |
58.8 | |||
|
|
|
|||
| Profit before taxation |
71.1 | |||
| Taxation |
(17.2 | ) | ||
|
|
|
|||
| Profit for the period related to the Digital Safe business1 |
53.9 | |||
|
|
|
|||
| 1 | As the disposal of the Digital Safe business was not a discontinued operation the results for the Digital Safe business are included in the individual lines of the Consolidated statement of comprehensive income for the current and prior period. |
| Consolidated financial statements | 86 |
MICRO FOCUS INTERNATIONAL PLC
At 31 January 2022, when the disposal completed, the net assets disposed of were $305.3m. Details of assets disposed of are as follows:
| Disposal date 31 January 2022 $m |
||||
| Non-current assets |
||||
| Goodwill |
147.2 | |||
| Other Intangible assets (including purchased software) |
182.1 | |||
| Property, plant and equipment (including right-of-use assets) |
7.9 | |||
|
|
|
|||
| 337.2 | ||||
| Current assets |
||||
| Trade and other receivables |
24.1 | |||
| Other current assets |
5.1 | |||
|
|
|
|||
| 29.2 | ||||
|
|
|
|||
| Total assets held for sale |
366.4 | |||
|
|
|
|||
| Current liabilities |
||||
| Lease obligations |
3.0 | |||
| Contract liabilities |
2.6 | |||
|
|
|
|||
| 5.6 | ||||
| Non-current liabilities |
||||
| Deferred tax liabilities |
45.5 | |||
| Lease obligations |
7.5 | |||
| Contract liabilities |
2.4 | |||
| Other non-current liabilities |
0.1 | |||
|
|
|
|||
| 55.5 | ||||
|
|
|
|||
| Total liabilities held for sale |
61.1 | |||
|
|
|
|||
| Consolidated financial statements | 87 |
MICRO FOCUS INTERNATIONAL PLC
The profit on disposal and inflow of cash and equivalents was calculated as follows:
| Disposal proceeds |
$m | |||
| Consideration |
375.0 | |||
| Working capital adjustment |
9.3 | |||
|
|
|
|||
| Total disposal proceeds1 |
384.3 | |||
| Costs to sell recognised in the period1 |
(17.5 | ) | ||
| Net assets disposed |
(305.3 | ) | ||
| Cumulative exchange gain in respect of the net assets of the subsidiaries, reclassified from equity on disposal |
(2.7 | ) | ||
|
|
|
|||
| Profit on disposal |
58.8 | |||
|
|
|
|||
| 1 | Disposal proceeds received less costs to sell equals $366.8m recognised as investing cash flow. |
| 29 | Acquisitions |
Summary of acquisitions
| Carrying value at acquisition $m |
Intangible assets $m |
Goodwill $m |
Total consideration $m |
|||||||||||||
| Acquisitions in the year ended 31 October 2022: |
0.7 | 22.6 | 13.6 | 32.2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Acquisitions in the year ended 31 October 2021: |
(0.3 | ) | 3.4 | 1.0 | 3.3 | |||||||||||
| Streamworx1 |
0.2 | 4.4 | 6.2 | 9.7 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (0.1 | ) | 7.8 | 7.2 | 13.0 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 1 | The Group has not presented the full IFRS 3 “Business Combinations” disclosures as these acquisitions are not material to the Group. |
Acquisitions in the year ended 31 October 2022:
Debricked
On 8 March 2022, the Group completed the acquisition of 100% of the equity of Debricked AB. Debricked AB, a developer centric open-source intelligence company aimed at innovating how organisations secure their software supply chain for today and the future, will expand CyberRes’ application security portfolio. Total consideration was $32.2m and is made up of $28.7m paid in cash at the point of acquisition and $3.5m of deferred consideration. The business had a carrying value of $1.3m of assets and $0.6m of liabilities. A fair value review was carried out on the assets and liabilities of the acquired business, resulting in the identification of purchased intangible assets of $22.6m with related deferred tax liabilities of $4.7m.
The value of the goodwill represents the value of the assembled workforce at the time of the acquisition with specific knowledge and technical skills. It also represents the prospective future economic benefits that are expected to accrue from enhancing the portfolio of products available to the Company’s existing customer base with those of the acquired business.
Acquisitions in the year ended 31 October 2021:
Full 360
On 11 June 2021, the Group completed the acquisition of Full 360 Inc. Full 360 Inc was integrated into the Vertica portfolio to create proven unified analytics platform in public clouds and in enterprise data centres. Total consideration of $3.3m was paid in cash at the point of acquisition, when the business had a carrying value comprising $0.3m of assets and $0.6m of liabilities. A fair value review was carried out on the assets and liabilities of the acquired business, resulting in the identification of purchased intangible assets of $3.4m.
| Consolidated financial statements | 88 |
MICRO FOCUS INTERNATIONAL PLC
Streamworx
On 19 August 2021, the Group completed the acquisition of Streamworx.ai. Streamworx.ai was integrated into the CyberRes product group to create proven unified analytics platform in public clouds and in enterprise data centres. Total consideration of $9.7m was paid in cash at the point of acquisition, when the business had a carrying value comprising $0.8m of assets and $0.6m of liabilities. A fair value review was carried out on the assets and liabilities of the acquired business, resulting in the identification of purchased intangible assets of $4.4m.
| 30 | Cash flow statement |
| Note | Year ended 31 October 2022 $m |
Year ended 31 October 2021 $m |
||||||||||
| Cash flows from operating activities |
||||||||||||
| Loss from continuing operations |
(618.9 | ) | (435.1 | ) | ||||||||
| Profit from discontinued operation |
3.2 | 10.7 | ||||||||||
|
|
|
|
|
|||||||||
| Loss for the year |
(615.7 | ) | (424.4 | ) | ||||||||
| Adjustments for: |
||||||||||||
| Gain on disposal of discontinued operation |
28 | (3.2 | ) | (10.7 | ) | |||||||
| Net finance costs |
6 | 151.3 | 252.2 | |||||||||
| Taxation—continuing operations |
7 | (42.5 | ) | (82.7 | ) | |||||||
|
|
|
|
|
|||||||||
| Operating loss (attributable to continuing and discontinued operations) |
(510.1 | ) | (265.6 | ) | ||||||||
| Goodwill impairment charge |
10 | 448.2 | — | |||||||||
| Research and development tax credits |
(1.3 | ) | (1.1 | ) | ||||||||
| Property, plant and equipment depreciation |
12 | 26.2 | 33.7 | |||||||||
| Right-of-use asset depreciation |
17 | 52.2 | 73.3 | |||||||||
| Loss on disposal of property, plant and equipment |
12 | 1.9 | 1.2 | |||||||||
| Gain on disposal of business |
28 | (58.8 | ) | — | ||||||||
| Amortisation of intangible assets |
11 | 811.8 | 956.4 | |||||||||
| Leases impairment |
17 | (3.7 | ) | 5.6 | ||||||||
| Share-based compensation charge |
26 | 34.1 | 14.3 | |||||||||
| Foreign exchange (gain)/loss |
3 | (35.5 | ) | 0.1 | ||||||||
| Changes in working capital: |
||||||||||||
| Trade and other receivables and contract-related costs1 |
(112.7 | ) | (195.2 | ) | ||||||||
| Payables and other liabilities |
30.9 | 36.9 | ||||||||||
| Provisions |
19 | 80.1 | 14.1 | |||||||||
| Contract liabilities—deferred income |
54.6 | 16.8 | ||||||||||
|
|
|
|
|
|||||||||
| Cash generated from operations |
817.9 | 690.5 | ||||||||||
|
|
|
|
|
|||||||||
| 1 | Change in trade and other receivables and contract-related costs is adjusted for non-cash movements of ($73.6m) (2021: ($19.0)m). |
| Consolidated financial statements | 89 |
MICRO FOCUS INTERNATIONAL PLC
| 31 | Post balance sheet events |
Subsequent to the end of the reporting period for the year ended 31 October 2022 the following events have taken place:
Acquisition of Micro Focus by OpenText
On 25 August 2022, the boards of Micro Focus and OpenText announced that they had reached agreement on the terms and conditions of a recommended all cash acquisition of the entire issued, and to be issued, share capital of Micro Focus. As set out in the Scheme Document the Acquisition was subject to the Conditions, including receipt of certain antitrust, regulatory and foreign investment approvals. All Regulatory Conditions have now been satisfied and a Court sanction hearing, at which the Court will be asked to sanction the scheme of arrangement to effect the acquisition, is expected to take place on 27 January 2023. This means that the completion date for the acquisition is now expected to be 31 January 2023.
Specific impacts of the acquisition are discussed further in the notes on contingent liabilities (refer to note 19, Provisions), borrowings and hedging (refer to note 22, Financial instruments) and share options (refer to note 26, Employees and Directors).
Shareholder litigation
A global settlement of $107.5m has been agreed in principle in relation to the California and New York securities litigation. Further disclosure in included in note 19 “Provisions and contingent liabilities”.
| Consolidated financial statements | 90 |
MICRO FOCUS INTERNATIONAL PLC
| 32 | Related undertakings |
At 31 October 2022, the Group held directly or indirectly 100% of the ordinary share capital of the following subsidiary undertakings:
| Company name/Country/ Subsidiaries |
Key to Registered office address |
|||
| Australia |
||||
| Sale and support of software |
||||
| Attachmate Group Australia Pty Ltd |
1 | |||
| Full 360 Pty Ltd |
2 | |||
| Micro Focus Australia Pty Ltd |
1 | |||
| Micro Focus Pty Limited |
1 | |||
| Austria |
||||
| Development of software |
||||
| Micro Focus Austria GmbH |
3 | |||
| Belgium |
||||
| Sale and support of software |
||||
| Micro Focus Belgium BV |
4 | |||
| Micro Focus S.r.l |
5 | |||
| Brazil |
||||
| Sale and support of software |
||||
| Borland Latin America Ltda |
6 | |||
| Micro Focus Brasil Serviços de Tecnologia Ltda |
6 | |||
| Micro Focus Programação de Computadores Ltda |
6 | |||
| Peregrine Systems do Brasil Ltda. |
7 | |||
| Serena Software Do Brasil Ltda |
6 | |||
| Dormant |
||||
| Cambridge Technology Partners do Brasil Ltda |
6 | |||
| Bulgaria |
||||
| Development of software |
||||
| Micro Focus APM Solutions EOOD |
8 | |||
| Sale and support of software |
||||
| Micro Focus Bulgaria EOOD |
8 | |||
| Canada |
||||
| Sale and support of software |
||||
| Autonomy Systems (Canada) Ltd. |
9 | |||
| Micro Focus Software Solutions Canada Co. / Solutions Logiciels Micro Focus Canada Cie. |
12 | |||
| Micro Focus Software (Canada) ULC |
11 | |||
| Holding Company |
||||
| GWAVA ULC |
10 | |||
| Consolidated financial statements | 91 |
MICRO FOCUS INTERNATIONAL PLC
| Company name/Country/ |
Key to Registered office address |
|||
| Interset Software ULC |
10 | |||
| Development, sale and support of software |
||||
| Micro Focus (Canada) ULC |
10 | |||
| Dormant |
||||
| NetManage Canada ULC |
10 | |||
| Cayman Islands |
||||
| Sale and support of software |
||||
| Micro Focus Marigalante Ltd. |
13 | |||
| China |
||||
| Sale and support of software |
||||
| Autonomy Systems (Beijing) Limited Company |
14 | |||
| Micro Focus Limited Beijing Representative Office |
15 | |||
| Shanghai Micro Focus Software Technology Co., Ltd |
16 | |||
| Shanghai Micro Focus Software Technology Co., Ltd, Beijing Branch |
17 | |||
| Shanghai Micro Focus Software Technology Co., Ltd. Shandong Branch |
18 | |||
| Shanghai Micro Focus Software Technology Co., Ltd., Chongqing Branch |
19 | |||
| Shanghai Micro Focus Software Technology Co., Ltd., Shenzhen Branch |
20 | |||
| Singapore Micro Focus Pte. Ltd Shanghai Representative Office |
21 | |||
| Colombia |
||||
| Sale and support of software |
||||
| Micro Focus Software LATAM S.A.S |
22 | |||
| Costa Rica |
||||
| Sale and support of software |
||||
| Micro Focus Centroamerica CAC Limitada |
23 | |||
| Micro Focus Costa Rica Limitada |
23 | |||
| Czech Republic |
||||
| Sale and support of software |
||||
| Micro Focus Czechia s.r.o. |
24 | |||
| Denmark |
||||
| Sale and support of software |
||||
| Micro Focus Denmark, filial af Micro Focus AS, Norge Branch |
25 | |||
| Micro Focus Software Denmark ApS |
25 | |||
| Finland |
||||
| Sale and support of software |
||||
| Micro Focus AS, Filial i Finland |
26 | |||
| France |
||||
| Sale and support of software |
||||
| Borland (France) Sarl |
27 | |||
| Cobol-IT, SAS |
27 | |||
| Consolidated financial statements | 92 |
MICRO FOCUS INTERNATIONAL PLC
| Company name/Country/ |
Key to Registered office address |
|||
| Micro Focus France SAS |
28 | |||
| Micro Focus SAS |
28 | |||
| Germany |
||||
| Sale and support of software |
||||
| Attachmate Group Germany GmbH |
29 | |||
| GWAVA EMEA GmbH |
30 | |||
| Micro Focus Deutschland GmbH |
29 | |||
| Micro Focus GmbH |
29 | |||
| Serena Software GmbH |
31 | |||
| Holding Company |
||||
| Novell Holding Deutschland GmbH |
29 | |||
| Dormant |
||||
| Borland GmbH |
29 | |||
| Hong Kong |
||||
| Sale and support of software |
||||
| EntCorp Hong Kong Limited |
32 | |||
| Micro Focus Limited Hong Kong Branch |
33 | |||
| Micro Focus Software HK Limited |
33 | |||
| India |
||||
| Sale and support of software |
||||
| Autonomy Software Asia Private Limited |
34 | |||
| Entco IT Services Private Limited |
35 | |||
| Interwoven, Inc., India Branch |
36 | |||
| Micro Focus Software Solutions India Private Limited |
38 | |||
| Development, sale and support of software |
||||
| Micro Focus Software India Private Limited |
37 | |||
| Indonesia |
||||
| Sale and support of software |
||||
| Micro Focus Software Pte. Ltd. – Representative Office |
42 | |||
| Ireland |
||||
| Sale and support of software |
||||
| Attachmate Ireland Limited |
40 | |||
| Micro Focus Galway Limited |
40 | |||
| Micro Focus Software Solutions Ireland Limited |
40 | |||
| NetIQ Europe Limited |
40 | |||
| In Liquidation |
||||
| Entsoft Holding Ireland Unlimited Company |
40 | |||
| Holding Company |
||||
| Micro Focus Group Holdings Unlimited |
41 | |||
| Consolidated financial statements | 93 |
MICRO FOCUS INTERNATIONAL PLC
| Company name/Country/ |
Key to Registered office address |
|||
| Micro Focus International Holdings Limited |
41 | |||
| NetIQ Ireland Limited |
41 | |||
| Novell Cayman Software International Unlimited Company |
41 | |||
| Novell Cayman Software Unlimited Company |
41 | |||
| Novell Software International Limited |
41 | |||
| Development, sale and support of software |
||||
| Micro Focus Ireland Limited |
41 | |||
| Micro Focus Software (Ireland) Limited |
40 | |||
| Dormant |
||||
| Micro Focus (IP) Ireland Limited |
41 | |||
| Israel |
||||
| Sale and support of software |
||||
| Micro Focus Interactive Israel Ltd |
||||
| Micro Focus Software Israel Ltd |
42 | |||
| Development and support of software |
||||
| Micro Focus Israel Limited |
43 | |||
| Dormant |
||||
| N.Y. NetManage (Yerushalayim) Ltd |
44 | |||
| Novell Israel Software Limited |
45 | |||
| Italy |
||||
| Sale and support of software |
||||
| Micro Focus Italiana S.r.l. |
46 | |||
| Micro Focus S.r.l. |
46 | |||
| Japan |
||||
| Sale and support of software |
||||
| Entcorp Japan K.K. |
47 | |||
| Micro Focus Enterprise Ltd |
48 | |||
| Micro Focus LLC |
48 | |||
| Novell Japan, Ltd |
48 | |||
| Serena Software Japan LLC |
48 | |||
| Luxembourg |
||||
| Sale and support of software |
||||
| Micro Focus Luxembourg S.à r.l. |
49 | |||
| Verity Luxembourg S.à r.l. |
50 | |||
| Malaysia |
||||
| Sale and support of software |
||||
| Micro Focus Malaysia Sdn. Bhd. |
51 | |||
| Novell Corporation (Malaysia) Sdn. Bhd. |
52 | |||
| Mexico |
||||
| Sale and support of software |
||||
| Consolidated financial statements | 94 |
MICRO FOCUS INTERNATIONAL PLC
| Company name/Country/ |
Key to Registered office address |
|||
| Micro Focus International Mexico, S. de R.L. de C.V. |
53 | |||
| Micro Focus Limited Mexico Branch |
53 | |||
| Micro Focus Software Mexico, S. De R.L. De C.V. |
53 | |||
| Micro Focus Software Solutions Mexico, S. de R.L. de C.V. |
53 | |||
| Netherlands |
||||
| Sale and support of software |
||||
| Authasas B.V. |
54 | |||
| Autonomy Netherlands B.V. |
54 | |||
| Entcorp Nederland B.V. |
54 | |||
| Micro Focus B.V. |
54 | |||
| Micro Focus Enterprise B.V. |
54 | |||
| Micro Focus International Trade B.V. |
54 | |||
| Micro Focus Nederland B.V. |
54 | |||
| Verity Benelux B.V. |
54 | |||
| In Liquidation |
||||
| Borland B.V. |
54 | |||
| Holding Company |
||||
| Autonomy HoldCo B.V. |
54 | |||
| Entco Gatriam Holding B.V. |
54 | |||
| Entco Holding Berlin B.V. |
54 | |||
| Entco Holding Hague II B.V. |
54 | |||
| Entco Sinope Holding B.V. |
54 | |||
| Micro Focus Caribe Holding B.V. |
54 | |||
| Micro Focus Eastern Holding II B.V. |
54 | |||
| Micro Focus HoldCo B.V. |
54 | |||
| Micro Focus Holding Finance B.V. |
54 | |||
| Micro Focus Holding Hague B.V. |
54 | |||
| Micro Focus Holding PR B.V. |
54 | |||
| New Zealand |
||||
| Sale and support of software |
||||
| Micro Focus Software (New Zealand) Unlimited |
55 | |||
| Norway |
||||
| Sale and support of software |
||||
| Micro Focus AS |
56 | |||
| Philippines |
||||
| Sale and support of software |
||||
| Micro Focus Software, Inc. |
57 | |||
| Poland |
||||
| Sale and support of software |
||||
| Consolidated financial statements | 95 |
MICRO FOCUS INTERNATIONAL PLC
| Company name/Country/ |
Key to Registered office address |
|||
| Micro Focus Polska sp. z o.o. |
58 | |||
| Portugal |
||||
| Sale and support of software |
||||
| Micro Focus Portugal Informática, Lda |
59 | |||
| Micro Focus, S.L.- Sucursal em Portugal Branch |
59 | |||
| Puerto Rico |
||||
| Sale and support of software |
||||
| Micro Focus Caribe Holding B.V. LLC Branch |
60 | |||
| Micro Focus Holding PR B.V. LLC Branch |
60 | |||
| Romania |
||||
| Sale and support of software |
||||
| Micro Focus Software Romania SRL |
61 | |||
| Russian Federation |
||||
| Sale and support of software |
||||
| Limited Liability Company Micro Focus |
62 | |||
| Saudi Arabia |
||||
| Sale and support of software |
||||
| Micro Focus LLC |
63 | |||
| Singapore |
||||
| In Liquidation |
||||
| Mercury Interactive (Singapore) Pte Ltd |
64 | |||
| Sale and support of software |
||||
| Entco Software Pte. Ltd. |
64 | |||
| Micro Focus Pte. Ltd. |
64 | |||
| Micro Focus Software Pte. Ltd. |
64 | |||
| South Africa |
||||
| Sale and support of software |
||||
| Autonomy Systems Software South Africa Pty Ltd |
65 | |||
| Micro Focus Software South Africa (Pty) Ltd |
66 | |||
| Micro Focus South Africa (Pty) Ltd |
67 | |||
| South Korea |
||||
| Sale and support of software |
||||
| Micro Focus Korea Ltd |
68 | |||
| Spain |
||||
| Sale and support of software |
||||
| Micro Focus Field Delivery Spain S.L.U. |
69 | |||
| Micro Focus S.L.U. |
69 | |||
| Micro Focus Software Spain S.L.U. |
69 | |||
| Sweden |
||||
| Consolidated financial statements | 96 |
MICRO FOCUS INTERNATIONAL PLC
| Company name/Country/ |
Key to Registered office address |
|||
| Sale and support of software |
||||
| Micro Focus AS, Norge, filial i |
||||
| Sverige Branch |
71 | |||
| Micro Focus Sverige AB |
71 | |||
| Development and support of software |
||||
| debricked AB |
70 | |||
| Switzerland |
||||
| Sale and support of software |
||||
| Micro Focus Enterprise B.V., Amstelveen, Wallisellen Branch |
72 | |||
| Micro Focus GmbH |
73 | |||
| Micro Focus International Suisse Sàrl |
74 | |||
| Micro Focus Schweiz GmbH |
73 | |||
| Taiwan |
||||
| Sale and support of software |
||||
| Micro Focus Taiwan Co., Ltd |
76 | |||
| In Liquidation |
||||
| Entco, LLC Taiwan Branch |
75 | |||
| Tunisia |
||||
| Dormant |
||||
| Micro Focus Enterprise Tunisia SARL |
77 | |||
| Turkey |
||||
| Development and support of software |
||||
| Atarlabs Bilişim Anonim Şirketi |
78 | |||
| Sale and support of software |
||||
| Micro Focus Teknoloji Cozumleri Limited Şirketi |
79 | |||
| Ukraine |
||||
| Sale and support of software |
||||
| Micro Focus Ukraine, LLC. |
80 | |||
| United Arab Emirates |
||||
| Sale and support of software |
||||
| Micro Focus International Suisse SARL— Jebel Ali Free Zone Branch |
82 | |||
| Entco International SARL-Abu Dhabi Branch |
81 | |||
| Micro Focus Software Middle East FZ-LLC |
83 | |||
| United Kingdom |
||||
| Sale and support of software |
||||
| Autonomy Systems Limited |
84 | |||
| Longsand Limited |
84 | |||
| Micro Focus Global Limited |
84 | |||
| Micro Focus Limited |
84 | |||
| Consolidated financial statements | 97 |
MICRO FOCUS INTERNATIONAL PLC
| Company name/Country/ |
Key to Registered office address |
|||
| Micro Focus Marigalante Ltd.— UK Branch |
84 | |||
| Micro Focus Software Holdings Ltd |
84 | |||
| Micro Focus Software UK Ltd |
84 | |||
| In Liquidation |
||||
| Attachmate Sales UK Limited |
84 | |||
| Borland (Holding) UK Limited |
84 | |||
| Borland (UK) Limited |
84 | |||
| Merant Holdings |
84 | |||
| Micro Focus (IP) Ltd |
84 | |||
| Serena Holdings |
84 | |||
| Serena Software Europe Limited |
84 | |||
| Holding Company |
||||
| Entco Holding Berlin B.V.— UK Branch |
84 | |||
| Micro Focus (US) Holdings |
84 | |||
| Micro Focus CHC Limited |
84 | |||
| Micro Focus Foreign HoldCo Ltd |
84 | |||
| Micro Focus Group Limited |
84 | |||
| Micro Focus Holdings Unlimited |
84 | |||
| Micro Focus Integration Limited |
84 | |||
| Micro Focus MHC Limited |
84 | |||
| Micro Focus Midco Holdings Limited |
84 | |||
| Micro Focus Midco Limited |
84 | |||
| Micro Focus Situla Holding Ltd |
84 | |||
| Micro Focus Software (IP) Holdings Limited |
84 | |||
| Dormant |
||||
| Micro Focus (IP) Holdings Limited |
84 | |||
| Micro Focus UK Limited |
84 | |||
| Development and support of software |
||||
| Micro Focus IP Development Limited |
84 | |||
| United States |
||||
| Sale and support of software |
||||
| Entco Delaware LLC |
86 | |||
| Entco, LLC |
86 | |||
| Full 360 Inc |
87 | |||
| GWAVA Technologies, Inc. |
86 | |||
| Micro Focus Government Solutions LLC |
86 | |||
| Micro Focus LLC |
86 | |||
| Stratify, Inc. |
86 | |||
| Vertica Systems, LLC |
86 | |||
| Consolidated financial statements | 98 |
MICRO FOCUS INTERNATIONAL PLC
| Company name/Country/ |
Key to Registered office address |
|||
| Development and support of software |
||||
| Attachmate Corporation |
85 | |||
| Borland Software Corporation |
86 | |||
| Micro Focus (US), Inc. |
86 | |||
| Micro Focus Software Inc. |
86 | |||
| NetIQ Corporation |
86 | |||
| Serena Software, Inc. |
86 | |||
| Holding Company |
||||
| Full 360 Group Inc. |
86 | |||
| MA FinanceCo., LLC |
86 | |||
| Micro Focus (US) Group, Inc. |
86 | |||
| Micro Focus (US) International |
||||
| Holdings, Inc. |
86 | |||
| Micro Focus Brazil Holdings LLC |
86 | |||
| Novell Holdings, Inc. |
86 | |||
| Novell International Holdings, Inc. |
86 | |||
| Seattle SpinCo, Inc. |
86 | |||
| The Attachmate Group, Inc. |
86 | |||
| Dormant |
||||
| Borland Technology Corporation |
86 | |||
The Group has a 100% equity ownership interest in each of the subsidiary undertakings.
The ultimate parent Company is Micro Focus International plc (the “Company”). The Company has a direct interest in Micro Focus Midco Holdings Limited and an indirect interest in all of the other related undertakings. The Company has an effective interest of 100% in all of the related undertakings listed in the table.
The financial results of all of the related undertakings listed above are included in the Group’s consolidated financial statements. None of the related undertakings holds any shares in the Company.
For each of the subsidiaries listed above, the registered office or, in the case of undertakings other than subsidiaries, the principal place of business is as follows:
Registered office addresses:
| Number |
Address | |
| 1 | Level 8, 76 Berry Street, North Sydney NSW 2060, Australia | |
| 2 | Suite 9, 191 Victoria Road, Gladesville NSW 2111, Australia | |
| 3 | Donau-City-Straße 7, 40. OG, 1220 Wien, Austria | |
| 4 | Officenter, Luchthavenlaan 27, 1800 Vilvoorde, Belgium | |
| 5 | EU Parliament, 4th Floor, 37 De Meeussquare, 1000 Brussels, Belgium | |
| 6 | Rua Joaquim Floriano, 466 – 12 Andar, Ed. Corporate, Itaim Bibi, São Paulo, SP, 04534-002, Brazil | |
| 7 | Avenida das Nações Unidas, 12.901, conjunto 2.302, sala 72, Itaim Bibi, São Paulo, CEP 04578-000, Brazil | |
| 8 | 76A James Boucher Blvd., Hill Tower 3rd floor, Lozenets District, Sofia, 1407, Bulgaria | |
| 9 | 200-204 Lambert Street, Whitehorse Y1A 3T2, Canada | |
| Consolidated financial statements | 99 |
MICRO FOCUS INTERNATIONAL PLC
| Number |
Address | |
| 10 | 250, Howe Street, Suite 1400-C, Vancouver BC V6C 3S7, Canada | |
| 11 | 4300 Bankers Hall West, 888—3rd Street S.W., Calgary T2P 5C5, Canada | |
| 12 | 1300-1969 Upper Water Street, McInnes Cooper Tower—Purdy’s Wharf, Halifax NS B3J 3R7, Canada | |
| 13 | Ocorian Trust (Cayman) Limited, Windward 3, Regatta Office Park, PO Box 1350, West Bay Road, Grand Cayman, KY1-1108, Cayman Islands | |
| 14 | Unit 601, Block A, Yuanyang International Center, No. 56 Dong Si Huan Zhong Road, Beijing, Chaoyang District, China | |
| 15 | Unit 04, B01,3rd Floor, 101, 1st Floor, No.1 building, No.8 Yard Guangshun South Avenue, Chaoyang District, Beijing, China | |
| 16 | Floor 2, Building 1, No. 799 Naxian Road, Pilot Free Trade Zone, Shanghai, China | |
| 17 | 8 Guangshun Avenue South, B01, 3F Building 1, Chaoyang District , China | |
| 18 | 1807-1811, 18th Floor, Kechuang Building, interchange of Yingxiong Mountain Road and 2nd Ring South Rd, Shizhong District, Jinan, Shangdong, China | |
| 19 | No. 209, Chuangxin Plaza, No. 5 Keyuanyi Road, Jiulongpo District, Chongqing, China | |
| 20 | 14/F, Office 1436, Times Financial Center, 4001 Shennan Avenue, Futian District, Shenzhen, Guangdong, 518046, China | |
| 21 | Unit B011, 3rd Floor, No. 1 building, No.799 Naxian Road, Free Trade Zone, Shanghai, China | |
| 22 | Calle 111 # 47A-96, Bogotá D.C., Colombia | |
| 23 | San José, Cantón Montes de Oca, Distrito San Pedro, cincuenta metros al sur del Restaurante Le Chandelier, Edificio Blanco, Costa Rica | |
| 24 | Za Brumlovkou 1559/5, Michle, Prague, 140 00, Czech Republic | |
| 25 | Borupvang 3, 2750, Ballerup, Denmark | |
| 26 | Accountor Turku Oy, Yliopistonkatu 34,5 krs, Turku, FI-20100, Finland | |
| 27 | 5 place de la Pyramide, Tour Ariane, La Défense 9, 92088, Paris, France | |
| 28 | Tour Carpe Diem, 31 Place des Corolles, 92400, Courbevoie, France | |
| 29 | Herrenberger Strasse 140, 71034, Böblingen, Germany | |
| 30 | Von-Braun-Strabe 38a, 48683, Ahaus, Germany | |
| 31 | Nördlicher Zubringer 9-11, 40470, Düsseldorf, Germany | |
| 32 | 19th Floor, Cityplaza One, 1111 King’s Road, Taikoo Shing, Hong Kong | |
| 33 | 21st Floor, Henley Building, 5 Queens Road Central, Hong Kong | |
| 34 | Laurel Building, A Block, 3rd Floor, Survey No. 65/2, Bagmane Tech Park, Sir C.V. Raman Nagar, Bangalore – 560093, Karnataka, India | |
| 35 | 4th Floor, Bagmane Tech Park, Olympia Building Survey Nos. 66/1, 66/66-1 & 66/1-3, CV Raman Nagar , Bangalore, 560093, India | |
| 36 | 7th Floor, Unit 705 Leela Business Park, Andheri – Kurla Road, Andheri East, Mumbai, 400059, India | |
| 37 | Laurel Block D 65/2, Bagmane Tech Park, C.V. Raman Nagar Byrasandra Post, Bangalore, India | |
| 38 | 66/1, 6th Floor, Olympia Building, Bagmane Tech Park, Byrasandra, C V Raman Nagar, Bangalore, Karnataka, 560093, India | |
| 39 | WTC 3, Unit no. 207, Jalan Jenderal Sudirman Kav 29-31, Kel. Karet Semanggi, Kec. Setiabudi, Kota Adm, Jakarta Selatan, DKI Jakarta, Indonesia | |
| 40 | Block A, Ballybrit Business Park, Ballybane Road, Galway, H91 WP08, Ireland | |
| 41 | One Spencer Dock, North Wall Quay, Dublin 1, D01 X9R7, Ireland | |
| 42 | 5 Altalef St., Yahud, Israel | |
| 43 | Matam Advanced Tech Center, Building 5/1, Haifa, 31 905, Israel | |
| Consolidated financial statements | 100 |
MICRO FOCUS INTERNATIONAL PLC
| Number |
Address | |
| 44 | Scientific Industries Center, Haifa, 33263, Israel | |
| 45 | 17 Hatidhar St, Raannana, 43665, Israel | |
| 46 | Viale Sarca 235, 20126, Milan, Italy | |
| 47 | No. 8 Center Plaza Bldg, 5F, 1-10-16 Horidomecho Nihonbashi, Chuo-ku, Tokyo 103-0012, Japan | |
| 48 | Midtown Tower 19F, 9-7-1 Akasaka, Minato-ku, Tokyo, 107-6219, Japan | |
| 49 | 12 rue Jean Engling, L-1466, Luxembourg | |
| 50 | 15, Boulevard F.W. Raiffeisen, L—2411, Luxembourg | |
| 51 | Level 11, 1 Sentral, Jalan Rakyat, Kuala Lumpur Sentral, 50470 59200 Kuala Lumpur, Malaysia | |
| 52 | Unit 501, Level 5, Uptown 1, 1 Jalan SS21/58, Damansara Uptown, Petaling Jaya, 47400 Selangor Darul Ehsan, Malaysia | |
| 53 | Av. Periférico Sur 6751, Col. Toluquilla, Municipio Tlaquepaque, Jalisco, CP 45610, Mexico | |
| 54 | Van Deventerlaan 31, 3528 AG, Utrecht, Netherlands | |
| 55 | Level 26, PWC Tower, 15 Customs Street West, Auckland, 1010, New Zealand | |
| 56 | C/O House of Business AS, 7th Floor Dronning Eufemias gate 16, Oslo, 0191, Norway | |
| 57 | 2/F Three World Square, Upper Mckinley Road, Taguig City, Philippines | |
| 58 | ul. Sucha 2/3, 50-086 Wrocław, Poland | |
| 59 | Centro Empresarial Torres de Lisboa, Rua Tomás da Fonseca, Torre G, 1.º, Sala 111, Freguesia de São Domingos de Benfica, 1600 203, Lisboa, Portugal | |
| 60 | Metro Office Park, Metro Parque 7, Street # 1, Suite 204, Guaynabo, PR 00968, Puerto Rico | |
| 61 | 2nd District, 3 George Constantinescu Street, BOC Office Building, 4th floor, entrance B, 2nd District, Bucharest, PC 020339, Romania | |
| 62 | Leningradskoye shosse 16 A, building 3, floor 10, premise XV, room 16, 125171, Moscow, Russian Federation | |
| 63 | Nimr Al Nakheel Centre, Building A, 1st floor, Imam Saud Bin Abdulaziz Bin Muhammad Road, Riyadh, 11564, Saudi Arabia | |
| 64 | #12-04/06, 1 Harbourfront Place, Harbourfront Tower 1, Singapore, 098633, Singapore | |
| 65 | 78 Sophia Street, Fairland, 2195, South Africa | |
| 66 | Novell House, MorningWedge Office, 255 Rivonia Road, Morningside, 2196, South Africa | |
| 67 | Morningside Wedge Office Park, 255 Rivonia Road, Morningside Sandton, Gauteng, 2057, South Africa | |
| 68 | Yeoidodong, SK Building, 15F, 31 Gukjegeumyung-ro 8-gil, Yeongdeungpo-gu, Seoul, Korea, Republic of | |
| 69 | Planta 16, Paseo de la Castellana, 259D, 28046 Madrid, Spain | |
| 70 | C/0 Minc, Anckarsgripsgatan 3, 211 19 Malmo, Sweden | |
| 71 | Kronborgsgränd 1, 164 46 Kista, Stockholm, Sweden | |
| 72 | Richtistrasse 7, 8304 Wallisellen, Switzerland | |
| 73 | Wallisellen Business Park, Offices 201-204, Richtistrasse 7, 8304, Wallisellen, Switzerland | |
| 74 | Chemin Jean-Baptiste Vandelle 3A, 1290 Versoix, Switzerland | |
| 75 | 10F.-1 No.66, Jing Mao 2nd Road, Nangang District, Taipei City, 115, Taiwan | |
| 76 | 9F., No. 200, Sec. 1, Keelung Rd., Xinyi Dist., Taipei City, 110, Taiwan | |
| 77 | ZI Chotrana, Technopole El Ghazala, Lot No 45, Ariana, 2088, Tunisia | |
| 78 | Üniversiteler Mahallesi 1605 Cad. No: 3A, Çankaya, Ankara, Turkey | |
| 79 | AND Plaza Kozyatağa İçerenköy Mahallesi Umut Sk. 10/12, Kat: 16 34752 Ataşehir/İstanbul, Turkey | |
| 80 | 13 Pimonenko Str., building 6, Office 6A/61, Kyiv, 04050, Ukraine | |
| 81 | Al Hilal Building, Al Falah Road, Office 318, Abu Dhabi, United Arab Emirates | |
| Consolidated financial statements | 101 |
MICRO FOCUS INTERNATIONAL PLC
| Number |
Address | |
| 82 | JAFZA One building, Unit No. AB 1005, Jebel Ali Free Zone, Dubai, United Arab Emirates | |
| 83 | 1204—1205, Floor 12 Al Shatha Tower, Dubai, United Arab Emirates | |
| 84 | The Lawn, 22-30 Old Bath Road, Newbury, Berkshire, RG14 1QN, United Kingdom | |
| 85 | Corporation Service Company, MC-CSC1, 300 Deschutes Way SW, Suite 208, Tumwater, WA98501, United States | |
| 86 | Corporation Service Company, 251 Little Falls Drive, Wilmington, Delaware 19808, United States | |
| 87 | Corporation Service Company, 80 State Street, Albany, NY 12207-2543, United States | |
| Consolidated financial statements | 102 |
MICRO FOCUS INTERNATIONAL PLC
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Micro Focus International plc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial position of Micro Focus International plc and subsidiaries (the Company) as of October 31, 2022 and 2021, the related consolidated statements of comprehensive income, changes in equity, and cash flows for each of the years in the two-year period ended October 31, 2022, the summary of significant accounting policies, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of October 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended October 31, 2022, in conformity with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Identification of performance obligations in certain multi-element customer contracts containing licences
As discussed in Note 2 to the Consolidated financial statements, the Company’s total licence revenue recognized in the year ended October 31, 2022 was $602.0 million, a portion of which related to licence revenue from certain multi-element customer contracts. As discussed in Note II.C, the Company makes significant judgements to identify each separate performance obligation in multi-element contracts (for example granting of licences, maintenance, SaaS & other recurring and consulting services) which may impact the timing of revenue recognition.
We determined the identification of performance obligations in certain multi-element customer contracts containing licences as a critical audit matter. Subjective and complex auditor judgement was required to evaluate the Company’s identification of each performance obligation within these contracts.
The following is the primary procedure we performed to address this critical audit matter. We selected certain multi-element customer contracts containing licences and performed an independent analysis of the performance obligations and compared our judgements and conclusions to those made by the Company.
| Consolidated financial statements | 103 |
MICRO FOCUS INTERNATIONAL PLC
/s/ KPMG LLP
We have served as the Company’s auditor since 2017.
London, United Kingdom
January 30, 2023
| Consolidated financial statements | 104 |
Exhibit 99.2
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information combines the historical consolidated balance sheet and results of operations of Open Text Corporation (the “Company” or “OpenText”) and the historical consolidated statement of financial position and results of operations of Micro Focus International Limited, formerly known as Micro Focus International plc (“Micro Focus”), after giving effect to the Acquisition (as defined in Note 1 – Description of the Acquisition and Financing Transactions) and the pro forma effects of certain assumptions and adjustments described in “Notes to the Unaudited Pro Forma Condensed Combined Financial Information” below.
The unaudited pro forma condensed combined financial information has been prepared to give effect to the following:
| • | Application of the acquisition method of accounting under the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 805, Business Combinations (“ASC 805”) where the assets and liabilities of Micro Focus will be recorded by OpenText at their respective fair values as of the date the Acquisition was completed; |
| • | Adjustments to conform accounting policies and financial statement presentation of Micro Focus to those of OpenText, based upon preliminary assessment by OpenText; |
| • | Adjustments to reconcile Micro Focus’ historical financial statements prepared in accordance with IFRS as issued by the International Accounting Standards Board (“IASB”) to the generally accepted accounting principles in the United States (“U.S. GAAP”) (the “Micro Focus Conversion”); |
| • | Adjustments to reflect the settlement of Micro Focus’ $3.9 billion outstanding debt as of October 31, 2022, the drawdown on the Acquisition Term Loan Facility (as defined in Note 1 – Description of the Acquisition and Financing Transactions) by OpenText of $3.585 billion, the drawdown on the revolving credit facility by OpenText of $450.0 million, and the expense related to the issuance of $1.0 billion in aggregate principal amount of senior secured notes, which were issued on December 1, 2022 (collectively, the “Financing Transactions”); |
| • | The payment of approximately $2.2 billion (subject to customary closing adjustments) in exchange for the right, title and interest in and to all of the outstanding shares of Micro Focus; and |
| • | Adjustments to reflect transaction costs, such as costs expected to be incurred for financial and corporate banking advice, legal, public relations and other professional services, advice and other costs and expenses that would have been incurred had the Acquisition been effected. |
The following unaudited pro forma condensed combined balance sheet as of December 31, 2022 and the unaudited pro forma condensed combined statements of operations for the year ended June 30, 2022 and the six months ended December 31, 2022 are derived from and should be read in conjunction with OpenText’s (i) audited historical consolidated financial statements filed in the Annual Report on Form 10-K of OpenText for the year ended June 30, 2022 and (ii) unaudited interim condensed consolidated financial statements filed in the Quarterly Report on Form 10-Q of OpenText for the three- and six-month periods ended December 31, 2022 and Micro Focus’ (i) audited historical consolidated financial statements filed in the Annual Report on Form 20-F of Micro Focus for the year ended October 31, 2021, (ii) unaudited interim condensed consolidated financial statements for the six-month period ended April 30, 2022 furnished in the interim report on Form 6-K, (iii) unaudited interim condensed consolidated financial statements for the six-month period ended April 30, 2021 furnished in the interim report on Form 6-K and (iv) audited historical consolidated financial statements for the year ended October 31, 2022, which is included in Exhibit 99.1 of this Current Report on Form 8-K/A. The unaudited pro forma condensed combined financial information gives effect to the Micro Focus Conversion, the Acquisition and the Financing Transactions as if it had occurred on (i) December 31, 2022 for purposes of the unaudited pro forma condensed combined balance sheet, and (ii) July 1, 2021 for the purposes of the unaudited pro forma condensed combined statements of operations for the year ended June 30, 2022 and the six months ended December 31, 2022.
The unaudited pro forma financial information has been derived from the financial statements of OpenText and Micro Focus after giving pro forma effect to the Micro Focus Conversion, the Acquisition and the Financing Transactions. The unaudited pro forma condensed combined financial statements data has been prepared by OpenText’s management for illustrative purposes only and is not necessarily indicative of the consolidated financial position or results of operations that would have been realized had the Micro Focus Conversion, the Acquisition and the Financing Transactions occurred on the dates indicated, nor is it meant to be indicative of any future consolidated financial position or future results of operations that OpenText will experience. Pro forma adjustments reflected in the unaudited pro forma condensed combined financial statements are based on available information and certain assumptions that we believe are reasonable and supportable, and do not reflect any cost savings, operating synergies or revenue synergies that may result from the Acquisition or the costs to achieve such synergies. The financial statements of Micro Focus used to prepare the unaudited pro forma condensed combined statements of operations were prepared for the purpose of the unaudited pro forma condensed combined statements of operations for the year ended June 30, 2022 and the six months ended December 31, 2022 and do not conform with the financial statements of Micro Focus included elsewhere in this Form 8-K/A.
The unaudited pro forma condensed combined financial information has been prepared using the acquisition method of accounting under U.S. GAAP, which requires all of the following steps: (a) identifying the acquirer; (b) determining the acquisition date; (c) recognizing and measuring the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree; and (d) recognizing and measuring goodwill or a gain from a bargain purchase. For the Acquisition, OpenText is determined to be the accounting acquirer of Micro Focus. The identifiable assets acquired, and liabilities assumed, and goodwill are measured and recorded at their acquisition date fair value, with limited exceptions. The results of operations for the combined company will be reported prospectively after the Acquisition date. OpenText intends to finalize the valuations, other studies, and the purchase price allocation as soon as practicable within the measurement period, but in no event later than one year following the closing date of the Acquisition. The assets and liabilities of Micro Focus have been measured based on various preliminary estimates using assumptions that OpenText believes are reasonable, based on information that is currently available. Accordingly, actual adjustments may differ materially from the amounts reflected in the unaudited pro forma condensed combined financial information and the differences may be material. We therefore caution you not to place undue reliance on the unaudited pro forma condensed combined financial information. An initial review of the accounting policies was completed to determine material differences and OpenText will continue to review the accounting policies and practices of Micro Focus, and as a result, may identify differences between the accounting policies and practices of the two companies that, when conformed, could have an impact on the financial statements of the Company after giving effect to the Acquisition.
As a result of the foregoing, the pro forma adjustments are preliminary and are subject to change as additional information becomes available and as additional analysis is performed. The preliminary pro forma adjustments have been made solely for the purpose of providing the unaudited pro forma condensed combined financial information.
1
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of December 31, 2022
($ in thousands)
| OpenText as of December 31, 2022 Historical |
Micro Focus as of October 31, 2022 As converted U.S. GAAP (Note 4, 5, 6) |
Transaction Accounting Adjustments– Acquisition |
Note 8 |
Transaction Accounting Adjustments– Financing |
Note 8 |
Pro Forma Combined |
||||||||||||||||||
| Assets |
||||||||||||||||||||||||
| Current assets: |
||||||||||||||||||||||||
| Cash and cash equivalents |
$ | 2,820,927 | $ | 535,117 | $ | (6,125,652 | ) | (a) | $ | 3,872,416 | (a) | $ | 1,102,808 | |||||||||||
| Accounts receivable trade, net of allowance for credit losses |
470,794 | 674,113 | — | — | 1,144,907 | |||||||||||||||||||
| Contract assets |
25,613 | 103,253 | (25,315 | ) | (k) | — | 103,551 | |||||||||||||||||
| Income taxes recoverable |
10,300 | 22,852 | — | — | 33,152 | |||||||||||||||||||
| Prepaid expenses and other current assets |
131,172 | 211,925 | (19,035 | ) | (k) | (6,847 | ) | (h) | 317,215 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total current assets |
3,458,806 | 1,547,260 | (6,170,002 | ) | 3,865,569 | 2,701,633 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Property and equipment |
250,706 | 117,608 | (4,319 | ) | (m) | — | 363,995 | |||||||||||||||||
| Operating lease right of use assets |
194,415 | 145,615 | — | — | 340,030 | |||||||||||||||||||
| Long-term contract assets |
18,603 | — | — | — | 18,603 | |||||||||||||||||||
| Other assets: |
||||||||||||||||||||||||
| Goodwill |
5,250,136 | 3,050,594 | 280,485 | (c) | — | 8,581,215 | ||||||||||||||||||
| Acquired intangible assets |
883,748 | 3,327,427 | 170,773 | (b) | — | 4,381,948 | ||||||||||||||||||
| Deferred tax assets |
811,142 | 13,000 | — | — | 824,142 | |||||||||||||||||||
| Other assets |
303,559 | 177,490 | (101,636 | ) | (j) (k) | (54,917 | ) | (i) | 324,496 | |||||||||||||||
| Long-term income taxes recoverable |
47,091 | 40,612 | — | — | 87,703 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total assets |
$ | 11,218,206 | $ | 8,419,606 | $ | (5,824,699 | ) | $ | 3,810,652 | $ | 17,623,765 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Liabilities and shareholder’s equity |
||||||||||||||||||||||||
| Current liabilities: |
||||||||||||||||||||||||
| Accounts payable and accrued liabilities |
$ | 459,360 | $ | 645,044 | $ | (58,181 | ) | (e) | $ | — | $ | 1,046,223 | ||||||||||||
| Current portion of long-term debt |
10,000 | 21,772 | (21,772 | ) | (d) | 485,850 | (l) | 495,850 | ||||||||||||||||
| Operating lease liabilities |
58,299 | 49,923 | — | — | 108,222 | |||||||||||||||||||
| Deferred revenues |
879,226 | 959,250 | — | — | 1,838,476 | |||||||||||||||||||
| Income taxes payable |
87,549 | 51,226 | — | — | 138,775 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total current liabilities |
1,494,434 | 1,727,215 | (79,953 | ) | 485,850 | 3,627,546 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Long-term liabilities: |
||||||||||||||||||||||||
| Accrued liabilities |
18,705 | 55,022 | (4,353 | ) | (e) | (53,496 | ) | (i) | 15,878 | |||||||||||||||
| Pension liability |
57,349 | 43,052 | — | — | 100,401 | |||||||||||||||||||
| Long-term debt |
5,193,158 | 3,849,471 | (3,849,471 | ) | (d) | 3,378,298 | (l) | 8,571,456 | ||||||||||||||||
| Long-term operating lease liabilities |
188,809 | 112,741 | — | — | 301,550 | |||||||||||||||||||
| Long-term deferred revenues |
84,681 | 171,837 | — | — | 256,518 | |||||||||||||||||||
| Long-term income taxes payable |
40,878 | 154,647 | — | — | 195,525 | |||||||||||||||||||
| Deferred tax liabilities |
18,808 | 403,662 | 42,693 | (f) | — | 465,163 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total long-term liabilities |
5,602,388 | 4,790,432 | (3,811,131 | ) | 3,324,802 | 9,906,491 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Shareholders’ equity: |
||||||||||||||||||||||||
| Share capital and additional paid-in capital |
2,092,079 | 2,078,814 | (2,078,814 | ) | (g) | — | 2,092,079 | |||||||||||||||||
| Accumulated other comprehensive income (loss) |
(1,028 | ) | — | — | — | (1,028 | ) | |||||||||||||||||
| Retained earnings |
2,171,236 | (176,855 | ) | 145,199 | (e) (g) | — | 2,139,580 | |||||||||||||||||
| Treasury stock, at cost |
(142,126 | ) | — | — | — | (142,126 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total OpenText shareholders’ equity |
4,120,161 | 1,901,959 | (1,933,615 | ) | — | 4,088,505 | ||||||||||||||||||
| Non-controlling interests |
1,223 | — | — | — | 1,223 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total shareholders’ equity |
4,121,384 | 1,901,959 | (1,933,615 | ) | — | 4,089,728 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total liabilities and shareholders’ equity |
$ | 11,218,206 | $ | 8,419,606 | $ | (5,824,699 | ) | $ | 3,810,652 | $ | 17,623,765 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
2
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Year Ended June 30, 2022
($ in thousands, except per share data)
| OpenText for the Year Ended June 30, 2022 Historical |
Micro Focus for the Twelve Months Ended April 30, 2022 As converted U.S. GAAP (Note 4, 5, 6) |
Transaction Accounting Adjustments– Acquisition |
Note 9 |
Transaction Accounting Adjustments– Financing |
Note 9 |
Pro Forma Combined |
Note 9 | |||||||||||||||||||
| Revenue: |
||||||||||||||||||||||||||
| Cloud services and subscriptions |
$ | 1,535,017 | $ | 213,700 | $ | — | $ | — | $ | 1,748,717 | ||||||||||||||||
| Customer support |
1,330,965 | 1,705,100 | — | — | 3,036,065 | |||||||||||||||||||||
| License |
358,351 | 657,995 | — | — | 1,016,346 | |||||||||||||||||||||
| Professional service and other |
269,511 | 168,900 | — | — | 438,411 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total revenues |
3,493,844 | 2,745,695 | — | — | 6,239,539 | |||||||||||||||||||||
| Total cost of revenues |
1,062,201 | 712,364 | (36,711 | ) | (a) | — | 1,737,854 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Gross profit |
2,431,643 | 2,033,331 | 36,711 | — | 4,501,685 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Operating expenses: |
||||||||||||||||||||||||||
| Research and development |
440,448 | 511,007 | — | — | 951,455 | |||||||||||||||||||||
| Sales and marketing |
677,118 | 650,700 | — | — | 1,327,818 | |||||||||||||||||||||
| General and administrative |
317,085 | 324,537 | — | — | 641,622 | |||||||||||||||||||||
| Depreciation |
88,241 | 68,776 | (159 | ) | (e) | — | 156,858 | |||||||||||||||||||
| Amortization of acquired customer-based intangible assets |
217,105 | 590,400 | (328,791 | ) | (a) | — | 478,714 | |||||||||||||||||||
| Special charges (recoveries) |
46,873 | — | 31,656 | (b) | — | 78,529 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total operating expenses |
1,786,870 | 2,145,420 | (297,294 | ) | — | 3,634,996 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Income (loss) from operations |
644,773 | (112,089 | ) | 334,005 | — | 866,689 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Other income (expense), net |
29,118 | 13,000 | — | — | 42,118 | |||||||||||||||||||||
| Interest and other related expense, net |
(157,880 | ) | (188,300 | ) | — | (223,407 | ) | (d) | (569,587 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Income (loss) before income taxes |
516,011 | (287,389 | ) | 334,005 | (223,407 | ) | 339,220 | |||||||||||||||||||
| Provision (benefit) for income taxes |
118,752 | (37,635 | ) | 83,501 | (c) | (55,851 | ) | (c) | 108,767 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net income (loss) |
$ | 397,259 | $ | (249,754 | ) | $ | 250,504 | $ | (167,556 | ) | $ | 230,453 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net (income) loss attributable to non-controlling interests |
(169 | ) | — | — | — | (169 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net income (loss) attributable to OpenText |
$ | 397,090 | $ | (249,754 | ) | $ | 250,504 | $ | (167,556 | ) | $ | 230,284 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Earnings per share -- basic attributable to OpenText |
$ | 1.46 | $ | 0.85 | (f) | |||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||||
| Earnings per share -- diluted attributable to OpenText |
$ | 1.46 | $ | 0.85 | (f) | |||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||||
| Weighted average number of Common Shares –outstanding -- basic (in thousands) |
271,271 | 271,271 | (f) | |||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||||
| Weighted average number of Common Shares – outstanding -- diluted (in thousands) |
271,909 | 271,909 | (f) | |||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||||
3
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Six Months Ended December 31, 2022
($ in thousands, except per share data)
| OpenText Six Months Ended December 31, 2022 Historical |
Micro Focus Six Months Ended October 31, 2022 As converted U.S. GAAP (Note 4, 5, 6) |
Transaction Accounting Adjustments- Acquisition |
Note 9 |
Transaction Accounting Adjustments- Financing |
Note 9 |
Pro Forma Combined |
Note 9 | |||||||||||||||||||
| Revenue: |
||||||||||||||||||||||||||
| Cloud services and subscriptions |
$ | 813,325 | $ | 71,100 | $ | — | $ | — | $ | 884,425 | ||||||||||||||||
| Customer support |
633,859 | 778,022 | — | — | 1,411,881 | |||||||||||||||||||||
| License |
170,508 | 314,169 | — | — | 484,677 | |||||||||||||||||||||
| Professional service and other |
131,784 | 83,000 | — | — | 214,784 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total revenues |
1,749,476 | 1,246,291 | — | — | 2,995,767 | |||||||||||||||||||||
| Total cost of revenues |
520,041 | 331,614 | (10,672 | ) | (a) | — | 840,983 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Gross profit |
1,229,435 | 914,677 | 10,672 | — | 2,154,784 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Operating expenses: |
||||||||||||||||||||||||||
| Research and development |
219,898 | 261,504 | — | — | 481,402 | |||||||||||||||||||||
| Sales and marketing |
344,341 | 325,998 | — | — | 670,339 | |||||||||||||||||||||
| General and administrative |
155,677 | 650,754 | — | — | 806,431 | |||||||||||||||||||||
| Depreciation |
46,032 | 32,843 | (70 | ) | (e) | — | 78,805 | |||||||||||||||||||
| Amortization of acquired customer-based intangible assets |
107,884 | 251,900 | (121,097 | ) | (a) | — | 238,687 | |||||||||||||||||||
| Special charges (recoveries) |
24,587 | — | — | — | 24,587 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total operating expenses |
898,419 | 1,522,999 | (121,167 | ) | — | 2,300,251 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Income (loss) from operations |
331,016 | (608,322 | ) | 131,839 | — | (145,467 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Other income (expense), net |
(25,882 | ) | 3,254 | — | — | (22,628 | ) | |||||||||||||||||||
| Interest and other related expense, net |
(79,097 | ) | (68,853 | ) | — | (121,235 | ) | (d) | (269,185 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Income (loss) before income taxes |
226,037 | (673,921 | ) | 131,839 | (121,235 | ) | (437,280 | ) | ||||||||||||||||||
| Provision (benefit) for income taxes |
84,399 | (39,630 | ) | 32,959 | (c) | (30,308 | ) | (c) | 47,420 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net income (loss) |
$ | 141,638 | $ | (634,291 | ) | $ | 98,880 | $ | (90,927 | ) | $ | (484,700 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net (income) loss attributable to non-controlling interests |
(81 | ) | — | — | — | (81 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net income (loss) attributable to OpenText |
$ | 141,557 | $ | (634,291 | ) | $ | 98,880 | $ | (90,927 | ) | $ | (484,781 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Earnings (loss) per share -- basic attributable to OpenText |
$ | 0.52 | $ | (1.80 | ) | (f) | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||||
| Earnings (loss) per share -- diluted attributable to OpenText |
$ | 0.52 | $ | (1.80 | ) | (f) | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||||
| Weighted average number of Common Shares outstanding -- basic (in thousands) |
269,997 | 269,997 | (f) | |||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||||
| Weighted average number of Common Shares outstanding -- diluted (in thousands) |
270,009 | 269,997 | (f) | |||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||||
4
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION
Note 1 - Description of the Acquisition and Financing Transactions
The Acquisition
On August 25, 2022, Open Text Corporation (“OpenText” or the “Company”) announced pursuant to Rule 2.7 of the UK City Code on Takeovers and Mergers a firm intention to make a cash offer to acquire, through its wholly-owned direct subsidiary, Open Text UK Holding Limited (“Bidco”), the entire issued and to be issued share capital of Micro Focus. On January 31, 2023, the Company completed the acquisition (the “Acquisition”) of all of the outstanding ordinary shares of Micro Focus for 532 pence per share and upon such further terms as described in the Rule 2.7 Announcement, which was previously disclosed in a Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission (the “SEC”) on August 25, 2022, as amended by the Amendment No. 1 on Form 8-K/A filed with the SEC on August 29, 2022, resulting in an aggregate purchase price of approximately $6.1 billion, inclusive of Micro Focus’ cash, subject to final adjustments. The Acquisition was implemented by means of a court-sanctioned scheme of arrangement under Part 26 of the UK Companies Act 2006.
The unaudited pro forma condensed combined financial information includes various assumptions, including those related to the preliminary purchase price allocation of the assets acquired and liabilities assumed of Micro Focus based on OpenText management’s best estimate of fair value. The final purchase price allocation may vary based on final valuations and analyses of fair value of the acquired assets and assumed liabilities. The actual results of Micro Focus for periods subsequent to October 31, 2022 may result in material differences to the pro forma results had they been prepared on the basis of subsequent periods. Accordingly, the pro forma adjustments are preliminary and have been made solely for illustrative purposes.
The Financing Transactions
In order to finance the Acquisition and repayment of Micro Focus’ existing indebtedness, the Company (i) entered into, on August 25, 2022, a first lien term loan facility (the “Acquisition Term Loan Agreement”), (ii) amended, on December 1, 2022, the Acquisition Term Loan Agreement (together with the Acquisition Term Loan Agreement, the “Acquisition Term Loan Amendment”), to provide for a senior secured delayed-draw term loan facility in an aggregate principal amount of $3.585 billion (the “Acquisition Term Loan Facility”) and (iii) issued and sold, on December 1, 2022, $1.0 billion in aggregate principal amount of 6.90% senior secured notes due 2027 (the “2027 Senior Secured Notes”) in connection with the funding of the Acquisition of Micro Focus. In connection with the consummation of the Acquisition, on January 31, 2023, the Company drew down the entire $3.585 billion available under the Acquisition Term Loan Facility to pay a portion of the purchase price and other fees and expenses related thereto. Additionally, in connection with the consummation of the Acquisition, on January 27, 2023, the Company drew down $450.0 million on its existing revolving credit facility. The proceeds from the Acquisition Term Loan Amendment, the 2027 Senior Secured Notes, and the revolving credit facility (collectively, the “Financing Transactions”) as well as cash on hand provided the cash consideration for the Acquisition, settlement of existing debt of Micro Focus, and payment of fees and expenses in connection with the Acquisition and Financing Transactions.
Note 2 – Basis of Presentation
The unaudited pro forma condensed combined financial statements are based on the historical consolidated financial statements of OpenText and Micro Focus, respectively, as adjusted to give pro forma effect to the Micro Focus Conversion, the Acquisition, and the Financing Transactions. OpenText’s fiscal year-end is June 30, whereas Micro Focus’ fiscal year-end is October 31. OpenText’s historical consolidated financial statements have been prepared in accordance with U.S. GAAP and are presented in U.S. Dollars. The historical financial statements of Micro Focus have been prepared in accordance with IFRS and are presented in U.S. Dollars. The unaudited pro forma condensed combined financial statements as of and for the six months ended December 31, 2022 and for the year ended June 30, 2022, have been prepared using calculated historical results of Micro Focus (“Micro Focus as converted U.S. GAAP”) (see Note 4).
The unaudited pro forma condensed combined balance sheet as of December 31, 2022, the unaudited pro forma condensed combined statement of operations for the year ended June 30, 2022 and the unaudited pro forma condensed combined statement of operations for the six months ended December 31, 2022 presented herein are based on the historical financial statements of OpenText and Micro Focus. The following financial information was combined:
| • | The unaudited pro forma condensed combined balance sheet as of December 31, 2022 is presented as if the Acquisition, the drawdown on the Acquisition Term Loan Facility, and the drawdown on the revolving credit facility had occurred on December 31, 2022 and combines the historical unaudited condensed consolidated balance sheet of OpenText as of December 31, 2022 with the historical audited consolidated balance sheet of Micro Focus as of October 31, 2022. Note the 2027 Senior Secured Notes were issued in December 2022 and as such, is not further reflected in the unaudited pro forma condensed combined balance sheet as it is included in OpenText’s historical results as of December 31, 2022. |
| • | The unaudited pro forma condensed combined statement of operations for the year ended June 30, 2022 has been prepared as if the Acquisition and Financing Transactions had occurred July 1, 2021, the first day of the beginning of OpenText’s fiscal year 2022 and the beginning of OpenText’s annual period presented, and combines OpenText’s historical audited consolidated statement of operations for the year ended June 30, 2022 with Micro Focus’ historical unaudited consolidated statement of operations for the twelve months ended April 30, 2022. The Micro Focus unaudited pro forma condensed combined statement of operations for the twelve months ended April 30, 2022 is derived from: the six months ended April 30, 2022 unaudited condensed consolidated statement of operations, plus the fiscal year ended October 31, 2021 audited consolidated statement of operations, less the six months ended April 30, 2021 unaudited condensed consolidated statement of operations. |
| • | The unaudited pro forma condensed combined statement of operations for the six months ended December 31, 2022 has been prepared as if the Acquisition and Financing Transactions had occurred on July 1, 2021 and combines OpenText’s historical unaudited condensed consolidated statement of operations for the six months ended December 31, 2022 with Micro Focus’ historical unaudited consolidated statement of operations for the six months ended October 31, 2022. The Micro Focus unaudited pro forma condensed combined statement of operations for the six months ended October 31, 2022 is derived from: the fiscal year ended October 31, 2022 audited consolidated statement of operations, less the six months ended April 30, 2022 unaudited condensed consolidated statement of operations. |
The Acquisition is accounted for as a business combination using the acquisition method of accounting under the provisions of ASC 805 and using the fair value concepts defined in ASC 820, Fair Value Measurements. Under ASC 805, all assets acquired and liabilities assumed are recorded at their acquisition date fair value, subject to certain exceptions for contracts that fall under the scope of ASU 2021-08, while transaction costs associated with the business combination are expensed as incurred. The excess of acquisition consideration over the estimated fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill. The determination of the fair values of the assets acquired and liabilities assumed (and the related determination of estimated useful lives of amortizable identifiable intangible assets) requires significant judgment and estimates. The estimates and assumptions used include the projected timing and amount of future cash flows and discount rates reflecting risk inherent in the future cash flows related to the businesses acquired. The preliminary fair value estimates of the net assets acquired are based upon preliminary calculations and valuations, and those estimates and assumptions regarding certain tangible assets acquired and liabilities assumed, the valuation of intangible assets acquired, income taxes, and goodwill are subject to change as the Company obtains additional information during the measurement period (up to one year from the Acquisition date). Although the Company believes the fair values assigned to the assets acquired and liabilities assumed from the Acquisition are reasonable, new information may be obtained about facts and circumstances that existed as of the date of the Acquisition during the twelve-month period following the Acquisition which could cause actual results to differ materially from the unaudited pro forma condensed combined financial information.
The unaudited pro forma condensed combined financial statements do not include the realization of any cost savings from operating efficiencies, synergies or other restructuring activities which might result from the Acquisition.
5
Note 3 – Significant Accounting Policies
The accounting policies under U.S. GAAP used in the preparation of the unaudited pro forma condensed combined financial statements are those set forth in OpenText’s financial statements included in its Annual Report on Form 10-K for the year ended June 30, 2022.
The accounting policies of Micro Focus under IFRS are as described in Note ‘Summary of significant accounting policies’ to its historical consolidated financial statements for the year ended October 31, 2022 which have been included in Exhibit 99.1 of this Current Report on Form 8-K/A. The conversion of Micro Focus’ historical consolidated financial statements from IFRS to U.S. GAAP is discussed further in Note 4 below.
Note 4 – Adjustments to Micro Focus Historical Financial Statements to Conform to U.S. GAAP and OpenText Accounting Policies
Balances and transactions presented in the historical financial statements of Micro Focus included within the unaudited pro forma condensed combined financial information have been reclassified to conform to the presentation of financial statements of OpenText in the tables below:
6
BALANCE SHEET IFRS TO U.S. GAAP CONVERSION AND RECLASSIFICATIONS AS OF OCTOBER 31, 2022
Italicized financial statement line items below represents Micro Focus historical financial statement line items
| (in thousands) |
Micro Focus Historical |
IFRS to U.S. GAAP Conversion |
Note 4 |
Reclassification Adjustments |
Note 5 |
Micro Focus U.S. GAAP and reclassed |
Policy Alignment Adjustments |
Note 6 |
Micro Focus as converted U.S. GAAP |
|||||||||||||||||||||
| Assets |
||||||||||||||||||||||||||||||
| Current assets: |
||||||||||||||||||||||||||||||
| Cash and cash equivalents |
$ | 536,154 | $ | — | $ | (1,037 | ) | (w) | $ | 535,117 | $ | — | $ | 535,117 | ||||||||||||||||
| Accounts receivable trade, net of allowance for credit losses |
— | — | 674,113 | (a) | 674,113 | — | 674,113 | |||||||||||||||||||||||
| Trade and other receivables |
948,651 | — | (948,651 | ) | (a) | — | — | — | ||||||||||||||||||||||
| Contract assets |
— | — | 103,253 | (a) (c) | 103,253 | — | 103,253 | |||||||||||||||||||||||
| Income taxes recoverable |
— | — | 22,852 | (b) | 22,852 | — | 22,852 | |||||||||||||||||||||||
| Current tax receivables |
22,852 | — | (22,852 | ) | (b) | — | — | — | ||||||||||||||||||||||
| Prepaid expenses and other current assets |
— | 4,382 | (c) (g) | 211,022 | (a) (c) (f) | 215,404 | (3,479 | ) | (a) | 211,925 | ||||||||||||||||||||
| Other current assets |
40,100 | — | (40,100 | ) | (c) | — | — | — | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
| Total current assets |
1,547,757 | 4,382 | (1,400 | ) | 1,550,739 | (3,479 | ) | 1,547,260 | ||||||||||||||||||||||
| Property and equipment |
— | (78,272 | ) | (a) (b) | 211,863 | (f) | 133,591 | (15,983 | ) | (b) (c) | 117,608 | |||||||||||||||||||
| Operating lease right of use assets |
— | 21,368 | (b) (c) | 124,247 | (f) | 145,615 | — | 145,615 | ||||||||||||||||||||||
| Trade and other receivables |
14,263 | — | (14,263 | ) | (d) | — | — | — | ||||||||||||||||||||||
| Other assets: |
||||||||||||||||||||||||||||||
| Other non-current assets |
51,826 | — | (51,826 | ) | (e) | — | — | — | ||||||||||||||||||||||
| Property, plant and equipment |
187,646 | — | (187,646 | ) | (f) | — | — | — | ||||||||||||||||||||||
| Goodwill |
3,050,594 | — | — | 3,050,594 | — | 3,050,594 | ||||||||||||||||||||||||
| Acquired intangible assets |
— | — | 3,327,427 | (g) (f) | 3,327,427 | — | 3,327,427 | |||||||||||||||||||||||
| Other intangible assets |
3,475,529 | — | (3,475,529 | ) | (g) | — | — | — | ||||||||||||||||||||||
| Deferred tax asset |
13,000 | — | — | 13,000 | — | 13,000 | ||||||||||||||||||||||||
| Other assets |
— | 40,548 | (c) (f) (g) | 136,942 | (d) (e) (i) (w) | 177,490 | — | 177,490 | ||||||||||||||||||||||
| Long-term income taxes recoverable |
— | — | 40,612 | (h) | 40,612 | — | 40,612 | |||||||||||||||||||||||
| Non-current tax receivables |
40,612 | — | (40,612 | ) | (h) | — | — | — | ||||||||||||||||||||||
| Financial assets |
69,815 | — | (69,815 | ) | (i) | — | — | — | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
| Total assets |
$ | 8,451,042 | $ | (11,974 | ) | $ | 0 | $ | 8,439,068 | $ | (19,462 | ) | $ | 8,419,606 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
| Liabilities and equity |
||||||||||||||||||||||||||||||
| Current liabilities: |
||||||||||||||||||||||||||||||
| Accounts payable and accrued liabilities |
$ | 510,456 | $ | (8,700 | ) | (d) | $ | 143,288 | (m) | $ | 645,044 | $ | — | $ | 645,044 | |||||||||||||||
| Current portion of long-term debt |
— | (3,451 | ) | (h) | 25,223 | (j) | 21,772 | — | 21,772 | |||||||||||||||||||||
| Operating lease liabilities |
— | — | 49,923 | (j) | 49,923 | — | 49,923 | |||||||||||||||||||||||
| Financial liabilities |
75,146 | — | (75,146 | ) | (j) | — | — | — | ||||||||||||||||||||||
| Deferred revenues |
— | 25,136 | (e) | 934,114 | (k) | 959,250 | — | 959,250 | ||||||||||||||||||||||
| Contract liabilities |
934,114 | — | (934,114 | ) | (k) | — | — | — | ||||||||||||||||||||||
| Income taxes payable |
— | (73,600 | ) | (i) | 124,826 | (l) | 51,226 | — | 51,226 | |||||||||||||||||||||
| Current tax liabilities |
124,826 | — | (124,826 | ) | (l) | — | — | — | ||||||||||||||||||||||
| Provisions |
143,288 | — | (143,288 | ) | (m) | — | — | — | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
| Total current liabilities |
1,787,830 | (60,615 | ) | — | 1,727,215 | — | 1,727,215 | |||||||||||||||||||||||
| Long-term liabilities: |
||||||||||||||||||||||||||||||
| Accrued liabilities |
— | 32,300 | (f) | 22,722 | (n) (r) | 55,022 | — | 55,022 | ||||||||||||||||||||||
| Other non-current liabilities |
9,753 | — | (9,753 | ) | (n) | — | — | — | ||||||||||||||||||||||
| Pension liability |
— | (21,600 | ) | (f) | 64,652 | (q) | 43,052 | — | 43,052 | |||||||||||||||||||||
| Long-term debt |
— | (5,241 | ) | (h) | 3,854,712 | (o) | 3,849,471 | — | 3,849,471 | |||||||||||||||||||||
| Long-term operating lease liabilities |
— | — | 112,741 | (o) | 112,741 | — | 112,741 | |||||||||||||||||||||||
| Financial liabilities |
3,967,454 | — | (3,967,454 | ) | (o) | — | — | — | ||||||||||||||||||||||
| Long-term deferred revenues |
— | — | 171,837 | (p) | 171,837 | — | 171,837 | |||||||||||||||||||||||
| Long-term income taxes payable |
— | 73,600 | (i) | 81,047 | (s) | 154,647 | — | 154,647 | ||||||||||||||||||||||
| Contract liabilities |
171,837 | — | (171,837 | ) | (p) | — | — | — | ||||||||||||||||||||||
| Retirement benefit obligations |
64,652 | — | (64,652 | ) | (q) | — | — | — | ||||||||||||||||||||||
| Provisions |
12,968 | — | (12,968 | ) | (r) | — | — | — | ||||||||||||||||||||||
| Non-current tax liabilities |
81,047 | — | (81,047 | ) | (s) | — | — | — | ||||||||||||||||||||||
| Deferred tax liabilities |
415,782 | (12,120 | ) | (j) | — | 403,662 | — | 403,662 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
| Total long-term liabilities |
4,723,493 | 66,939 | — | 4,790,432 | — | 4,790,432 | ||||||||||||||||||||||||
| Shareholders’ equity: |
||||||||||||||||||||||||||||||
| Share capital and additional paid-in capital |
— | — | 2,078,814 | (t) (u) (v) | 2,078,814 | — | 2,078,814 | |||||||||||||||||||||||
| Share capital |
47,487 | — | (47,487 | ) | (t) | — | — | — | ||||||||||||||||||||||
| Share premium account |
47,567 | — | (47,567 | ) | (u) | — | — | — | ||||||||||||||||||||||
| Other reserves |
1,983,760 | — | (1,983,760 | ) | (v) | — | — | — | ||||||||||||||||||||||
| Retained earnings |
(139,095 | ) | (18,298 | ) | (a)-(h) | — | (157,393 | ) | (19,462 | ) | (a) -(c) | (176,855 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
| Total shareholder’s equity |
1,939,719 | (18,298 | ) | — | 1,921,421 | (19,462 | ) | 1,901,959 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
| Total liabilities and shareholders’ equity |
$ | 8,451,042 | $ | (11,974 | ) | $ | — | $ | 8,439,068 | $ | (19,462 | ) | $ | 8,419,606 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
7
STATEMENT OF OPERATIONS IFRS TO U.S. GAAP CONVERSION AND RECLASSIFICATIONS FOR THE TWELVE MONTHS ENDED APRIL 30, 2022
Italicized financial statement line items below represents Micro Focus historical financial statement line items
| (in thousands) | Micro Focus Historical |
IFRS to U.S. GAAP Conversions |
Note 4 |
Reclassification Adjustments |
Note 5 |
Micro Focus U.S. GAAP and Reclassed |
Policy Alignment Adjustments |
Note 6 |
Micro Focus as converted U.S. GAAP |
|||||||||||||||||||||
| Revenue: |
||||||||||||||||||||||||||||||
| Cloud services and subscriptions |
$ | 213,700 | $ | — | $ | — | $ | 213,700 | $ | — | $ | 213,700 | ||||||||||||||||||
| Customer Support |
1,705,100 | — | — | 1,705,100 | — | 1,705,100 | ||||||||||||||||||||||||
| License |
656,100 | 1,895 | (e) | — | 657,995 | — | 657,995 | |||||||||||||||||||||||
| Professional service and other |
168,900 | — | — | 168,900 | — | 168,900 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total revenues |
2,743,800 | 1,895 | — | 2,745,695 | — | 2,745,695 | ||||||||||||||||||||||||
| Total cost of revenues |
756,000 | (16,436 | ) | (a) | (27,200 | ) | (a) | 712,364 | — | 712,364 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Gross profit |
1,987,800 | 18,331 | 27,200 | 2,033,331 | — | 2,033,331 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Operating expenses: |
||||||||||||||||||||||||||||||
| Research and development |
— | 40,807 | (a) | 470,200 | (b) | 511,007 | — | 511,007 | ||||||||||||||||||||||
| Research and development expenses |
493,500 | — | (493,500 | ) | (b) | — | — | — | ||||||||||||||||||||||
| Sales and marketing |
— | — | 650,700 | (c) | 650,700 | — | 650,700 | |||||||||||||||||||||||
| Selling and distribution expenses |
1,251,800 | — | (1,251,800 | ) | (c) | — | — | — | ||||||||||||||||||||||
| General and administrative |
— | 65,537 | (b) (d) (f) (g) | 259,000 | (d) | 324,537 | — | 324,537 | ||||||||||||||||||||||
| Administrative expenses |
327,000 | — | (327,000 | ) | (d) | — | — | — | ||||||||||||||||||||||
| Other operating income |
(9,000 | ) | — | 9,000 | (e) | — | — | — | ||||||||||||||||||||||
| Depreciation |
— | (62,500 | ) | (b) (c) | 129,200 | (a) (b) (c) (d) | 66,700 | 2,076 | (b) (c) | 68,776 | ||||||||||||||||||||
| Amortization of acquired customer-based intangible assets |
— | — | 590,400 | (b) (c) | 590,400 | — | 590,400 | |||||||||||||||||||||||
| Special charges (recoveries) |
— | — | — | — | — | — | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total operating expenses |
2,063,300 | 43,844 | 36,200 | 2,143,344 | 2,076 | 2,145,420 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Income (loss) from operations |
(75,500 | ) | (25,513 | ) | (9,000 | ) | (110,013 | ) | (2,076 | ) | (112,089 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Other income (expense), net |
— | 4,000 | (c) | 9,000 | (e) | 13,000 | — | 13,000 | ||||||||||||||||||||||
| Interest and other related expense, net |
— | 16,900 | (b) (c) (h) | (205,200 | ) | (f) | (188,300 | ) | — | (188,300 | ) | |||||||||||||||||||
| Finance costs |
(267,800 | ) | — | 267,800 | (f) | — | — | — | ||||||||||||||||||||||
| Finance income |
62,600 | — | (62,600 | ) | (f) | — | — | — | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Net finance costs |
(205,200 | ) | — | 205,200 | — | — | — | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Income (loss) before income taxes |
(280,700 | ) | (4,613 | ) | — | (285,313 | ) | (2,076 | ) | (287,389 | ) | |||||||||||||||||||
| Provision (benefit) for income taxes |
— | (1,035 | ) | (j) | (36,600 | ) | (g) | (37,635 | ) | — | (37,635 | ) | ||||||||||||||||||
| Taxation |
(36,600 | ) | — | 36,600 | (g) | — | — | — | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Net income (loss) |
$ | (244,100 | ) | $ | (3,578 | ) | $ | — | $ | (247,678 | ) | $ | (2,076 | ) | $ | (249,754 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Net (income) loss attributable to non-controlling interests |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Net income (loss) attributable to OpenText |
$ | (244,100 | ) | $ | (3,578 | ) | $ | — | $ | (247,678 | ) | $ | (2,076 | ) | $ | (249,754 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
8
STATEMENT OF OPERATIONS IFRS TO U.S. GAAP CONVERSION AND RECLASSIFICATIONS FOR THE SIX MONTHS ENDED OCTOBER 31, 2022
Italicized financial statement line items below represents Micro Focus historical financial statement line items
| (in thousands) |
Micro Focus Historical |
IFRS to U.S. GAAP Conversions |
Note 4 |
Reclassification Adjustments |
Note 5 |
Micro Focus U.S. GAAP and Reclassed |
Policy Alignment Adjustments |
Note 6 |
Micro Focus as converted U.S. GAAP |
|||||||||||||||||||||
| Revenue: |
||||||||||||||||||||||||||||||
| Cloud services and subscriptions |
$ | 71,100 | $ | — | $ | — | $ | 71,100 | $ | — | $ | 71,100 | ||||||||||||||||||
| Customer Support |
778,022 | — | — | 778,022 | — | 778,022 | ||||||||||||||||||||||||
| License |
332,800 | (18,631 | ) | (e) | — | 314,169 | — | 314,169 | ||||||||||||||||||||||
| Professional service and other |
83,000 | — | — | 83,000 | — | 83,000 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total revenues |
1,264,922 | (18,631 | ) | — | 1,246,291 | — | 1,246,291 | |||||||||||||||||||||||
| Total cost of revenues |
350,865 | (12,451 | ) | (a) | (6,800 | ) | (a) | 331,614 | — | 331,614 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Gross profit (loss) |
914,057 | (6,180 | ) | 6,800 | 914,677 | — | 914,677 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Operating expenses: |
||||||||||||||||||||||||||||||
| Research and development |
— | 40,995 | (a) | 220,509 | (b) | 261,504 | — | 261,504 | ||||||||||||||||||||||
| Research and development expenses |
231,509 | — | (231,509 | ) | (b) | — | — | — | ||||||||||||||||||||||
| Sales and marketing |
— | — | 325,998 | (d) | 325,998 | — | 325,998 | |||||||||||||||||||||||
| Selling and distribution expenses |
583,798 | — | (583,798 | ) | (d) | — | — | — | ||||||||||||||||||||||
| General and administrative |
— | 34,627 | (b) (d) (f) (g) | 616,127 | (e) | 650,754 | — | 650,754 | ||||||||||||||||||||||
| Administrative expenses |
644,127 | — | (644,127 | ) | (e) | — | — | — | ||||||||||||||||||||||
| Other operating income |
— | — | — | — | — | — | ||||||||||||||||||||||||
| Depreciation |
— | (20,200 | ) | (b) (c) | 51,700 | (a) (b) (c) (d) (e) | 31,500 | 1,343 | (b) (c) | 32,843 | ||||||||||||||||||||
| Amortization of acquired customer-based intangible assets |
— | — | 251,900 | (c) (d) | 251,900 | — | 251,900 | |||||||||||||||||||||||
| Special charges (recoveries) |
— | — | — | — | — | — | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total operating expenses |
1,459,434 | 55,422 | 6,800 | 1,521,656 | 1,343 | 1,522,999 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Income (loss) from operations |
(545,377 | ) | (61,602 | ) | — | (606,979 | ) | (1,343 | ) | (608,322 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Other income (expense), net |
— | 3,254 | (c) | — | 3,254 | — | 3,254 | |||||||||||||||||||||||
| Interest and other related expense, net |
— | 4,262 | (b) (c) (h) | (73,115 | ) | (f) | (68,853 | ) | — | (68,853 | ) | |||||||||||||||||||
| Finance costs |
(122,913 | ) | — | 122,913 | (f) | — | — | — | ||||||||||||||||||||||
| Finance income |
49,798 | — | (49,798 | ) | (f) | — | — | — | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Net finance costs |
(73,115 | ) | — | 73,115 | — | — | — | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Income (loss) before income taxes |
(618,492 | ) | (54,086 | ) | — | (672,578 | ) | (1,343 | ) | (673,921 | ) | |||||||||||||||||||
| Provision (benefit) for income taxes |
— | (12,120 | ) | (j) | (27,510 | ) | (g) | (39,630 | ) | — | (39,630 | ) | ||||||||||||||||||
| Taxation |
(27,510 | ) | — | 27,510 | (g) | — | — | — | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Net income (loss) |
$ | (590,982 | ) | $ | (41,966 | ) | $ | — | $ | (632,948 | ) | $ | (1,343 | ) | $ | (634,291 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Net (income) loss attributable to non-controlling interests |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Net income (loss) attributable to OpenText |
$ | (590,982 | ) | $ | (41,966 | ) | $ | — | $ | (632,948 | ) | $ | (1,343 | ) | $ | (634,291 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
9
IFRS differs in certain respects from U.S. GAAP. The following adjustments have been made to align Micro Focus’ historical accounting policies under IFRS to OpenText’s accounting policies under U.S. GAAP for purposes of this pro forma presentation.
| (a) | Expense software development costs: Represents an adjustment to expense development costs related to software for sale incurred by Micro Focus. These costs are capitalized under IFRS; however, these costs would be expensed under U.S. GAAP as the dates relating to the achievement of technological feasibility and general release of the product have substantially coincided. In addition, no significant costs have been incurred subsequent to the establishment of technological feasibility. This adjustment therefore expenses such costs as research and development costs. This adjustment also reverses historical amortization of previously capitalized costs in Cost of revenues, where it was historically recorded under IFRS. The unaudited pro forma condensed combined balance sheet impact as of October 31, 2022 resulted in a derecognition of Property and equipment of $81.2 million. The impact to the unaudited pro forma condensed combined statement of operations for the twelve months ended April 30, 2022 was a $16.4 million reversal of intangible asset amortization and a $40.8 million increase to Research and development. The impact to the unaudited pro forma condensed combined statement of operations for the six months ended October 31, 2022 was a $12.5 million reversal of intangible asset amortization and a $41.0 million increase to Research and development. |
| (b) | Operating lease (lessee): Represents an adjustment related to Micro Focus’ leases. Under IFRS, lessees have only one lease classification, which is similar to the finance lease classification under U.S. GAAP. Under U.S. GAAP, almost all of Micro Focus’ leases would be classified as operating leases. In addition, leasehold improvements that are lessee-owned assets were reclassed from right of use assets to Property and equipment in accordance with U.S. GAAP. The impact to the unaudited pro forma condensed combined balance sheet as of October 31, 2022 was an increase to Operating lease right of use assets of $17.6 million and an increase to Property and equipment of $2.9 million. Additionally, expense is adjusted to replace the historical amortization of the right-of-use assets and interest expense with straight-line lease expense. The impact to the unaudited pro forma condensed combined statements of operations was an increase to General and administrative expense of $60.5 million for the twelve months ended April 30, 2022 and of $30.0 million for the six months ended October 31, 2022. The impact to Depreciation was a decrease of $64.9 million for the twelve months ended April 30, 2022 and of $23.4 million for the six months ended October 31, 2022. The adjustment to Interest and other related expense, net is a decrease of $9.5 million for the twelve months ended April 30, 2022 and of $3.2 million for the six months ended October 31, 2022. |
| (c) | Operating lease (sublessor): Reflects the change in classification of subleases where Micro Focus is the sublessor. Under IFRS, when classifying a sublease, the asset analyzed is the right-of-use asset arising from the head lease, which resulted in finance lease classification for certain of Micro Focus’ subleases. Under IFRS, Micro Focus accounted for these subleases by derecognizing the right-of-use asset held under the head lease and recognizing a net investment in the sublease asset. Sublease income was classified as interest income, and lease expense under the head lease was recognized as interest expense related to the lease liability. Under U.S. GAAP, when classifying a sublease, the asset analyzed is the underlying asset rather than the right-of-use asset. This results in operating lease classification of certain of Micros Focus’ subleases under U.S. GAAP. As a result, this adjustment reverses the net investment in the sublease asset previously recognized under IFRS and recognizes the right-of-use asset and the related depreciation under the head lease. In addition, sublease income is adjusted to be recognized on a straight-line basis under U.S. GAAP and is also reclassed from Interest and other related expense, net to Other income. The unaudited pro forma condensed combined balance sheet impact as of October 31, 2022 resulted in a $3.8 million increase to Operating lease right of use assets, a $1.5 million decrease to non-current Trade and other receivables (reclassed to Other assets for OpenText) and a $2.0 million decrease to current Trade and other receivables (reclassed to Prepaid expenses and other current assets for OpenText). The impact to the unaudited pro forma condensed combined statements of operations was an increase to Depreciation of $2.4 million for the twelve months ended April 30, 2022 and of $3.2 million for the six months ended October 31, 2022. The impact to Other income (expense), net was an increase of $4.0 million for the twelve months ended April 30, 2022 and of $3.3 million for the six months ended October 31, 2022. The impact to Interest and other related expense, net was an increase of $0.3 million for the twelve months ended April 30, 2022 and of $0.1 million for the six months ended October 31, 2022. |
| (d) | Provisions: Reflects both the elimination of a current provision for onerous contracts as well as an adjustment to severance accrual due to a difference in timing of recognition under U.S. GAAP. Under IFRS, Micro Focus recognized a provision for contracts where the unavoidable costs of meeting the contractual obligations exceeded the economic benefits expected to be received. Under U.S. GAAP, provisions are generally not recognized for onerous contracts unless the entity has ceased using the rights under the contract. In addition, under IFRS, Micro Focus recognized a provision related to severance that under U.S. GAAP would not meet the criteria for recognition. The unaudited pro forma condensed combined balance sheet impact as of October 31, 2022 resulted in a derecognition of current provisions (reclassed to Accounts payable and accrued liabilities for OpenText) of $8.7 million. The impact to General and administrative expenses in the unaudited pro forma condensed combined statements of operations was a decrease of $3.7 million for the twelve months ended April 30, 2022 and an increase of $2.7 million for the six months ended October 31, 2022. |
10
| (e) | Revenue: Reflects a difference in the timing of revenue recognition related to software license renewals. Under IFRS, revenue related to the license renewal contract is recognized when the renewal is agreed. Under U.S. GAAP, the revenue is recognized when the renewal period is effective. Due to the differing effective dates of the relevant license renewals commencing in each period, this resulted in an increase in revenue recognition in the twelve months ended April 30, 2022, and a decrease in revenue in the six months ended October 31, 2022. The impact to the unaudited pro forma condensed combined balance sheet as of October 31, 2022 was an increase in current Contract liabilities of $25.1 million (reclassed to current Deferred revenues for OpenText) as of October 31, 2022. The impact to the unaudited pro forma condensed combined statements of operations was an increase in License revenue of $1.9 million for the twelve months ended April 30, 2022 and decrease of $18.6 million for the six months ended October 31, 2022. |
| (f) | Long-term vacation: Reflects an adjustment related to long-term vacation benefits. Under IFRS, long-term vacation benefits are treated as long-term employee benefits and an expense is recognized for actuarial movements related to the employee benefit. Under U.S. GAAP, actuarial movements are not recognized, resulting in an adjustment to the amount of expense and related accrual. The liability related to long-term vacation benefits is classified as an accrued liability under U.S. GAAP, resulting in a reclassification from Pension liability, where the liability was historically recorded, to Accrued liabilities. The impact to the unaudited pro forma condensed combined balance sheet as of October 31, 2022 was an increase in Other assets of $13.5 million, an increase in Accrued liabilities of $32.3 million and a decrease in Pension liability of $21.6 million. The impact to General and administrative expenses in the unaudited pro forma condensed combined statements of operation was a $2.4 million increase for the twelve months ended April 30, 2022 and a $1.2 million decrease for the six months ended October 31, 2022. |
| (g) | Cloud computing implementation costs: Reflects the capitalization of implementation costs incurred in a cloud computing arrangement that is a service contract. U.S. GAAP requires capitalization of such implementation costs whereas generally such costs would not be capitalized under IFRS. This adjustment also reflects the recognition of amortization of these capitalized costs under U.S. GAAP. The unaudited pro forma condensed combined balance sheet impact as of October 31, 2022 resulted in the recognition of Prepaid expenses and other current assets of $6.3 million and Other assets of $28.5 million. The impact to the unaudited pro forma condensed combined statements of operations was an increase to General and administrative expenses of $6.3 million for the twelve months ended April 30, 2022 and of $3.2 million for the six months ended October 31, 2022. |
| (h) | Debt modification: Reflects the accounting for a debt modification under U.S. GAAP. Under IFRS, the debt modification was accounted for as a termination of the old debt arrangement and creation of a new debt arrangement. Financing fees related to entering the new debt arrangement were expensed as incurred. Under U.S. GAAP, financing fees are capitalized and amortized over the term of the debt arrangement. Additionally, under IFRS original issue discounts related to the debt arrangement were amortized over the expected debt term. However, under U.S. GAAP, original issue discounts are amortized over the contractual term of the debt arrangement. The unaudited pro forma condensed combined balance sheet impact as of October 31, 2022 was a decrease to financial liabilities (reclassed to Long-term debt for OpenText) of $5.2 million and a decrease to current financial liabilities (reclassed to Current portion of long-term debt for OpenText) of $3.5 million as of October 31, 2022. The impact to the unaudited pro forma condensed combined statements of operations was a decrease to Interest and other related expense, net of $7.7 million for the twelve months ended April 30, 2022 and of $1.2 million for the six months ended October 31, 2022. |
| (i) | Uncertain tax position: Reflects the reclassification of uncertain tax liabilities under U.S. GAAP. Under IFRS, uncertain tax liabilities are presented as current tax liabilities or deferred tax liabilities. Under U.S. GAAP, uncertain tax liabilities are presented as a current tax liability to the extent the liability is expected to be cash settled within the next twelve months. The unaudited pro forma condensed combined balance sheet impact as of October 31, 2022 was a reclassification of $73.6 million from Income taxes payable to Long-term income taxes payable. |
| (j) | Income taxes: Represents an adjustment to reflect the income tax impact of the IFRS to U.S. GAAP conversion adjustments. The pro forma impact to the unaudited pro forma condensed combined balance sheet as of October 31, 2022 resulted in a net decrease to Deferred tax liabilities of $12.1 million. The net impact to the unaudited pro forma condensed combined statements of operations was an incremental benefit to the Provision for income taxes of $1.0 million for the twelve months ended April 30, 2022 and of $12.1 million for the six months ended October 31, 2022. |
11
Note 5 – Reclassification Adjustments
Reclassification of historical Micro Focus financial statement line items was required as of October 31, 2022, for the twelve months ended April 30, 2022 and the six months ended October 31, 2022 to conform to the expected financial statement line items of the combined company following the Acquisition.
Pro Forma Combined Balance Sheet reclassification adjustments as of October 31, 2022 included the following:
| (a) | Reclassification of $674.1 million of trade receivables, net of loss allowance from Trade and other receivables to Accounts receivable trade, net of credit allowances; |
Reclassification of $75.4 million of contract assets from Trade and other receivables to Contract assets;
Reclassification of $199.1 million of accrued income, prepayments, and other receivables from Trade and other receivables to Prepaid expenses and other current assets;
| (b) | Reclassification of $22.9 million from Current tax receivables to Income taxes recoverable; |
| (c) | Reclassification of $27.9 million of contract assets from Other current assets to Contract assets; |
Reclassification of $12.2 million of inventories, interest receivables, and accruals from Other current assets to Prepaid expenses and other current assets;
| (d) | Reclassification of $14.3 million of other non-current assets from Trade and other receivables (non-current) to Other assets; |
| (e) | Reclassification of $51.8 million of long-term pension assets, long-term deposits, and long-term contract assets from Other non-current assets to Other assets; |
| (f) | Reclassification of $63.4 million from Property, plant and equipment to Property and equipment; |
Reclassification of $124.2 million of leased assets from Property, plant and equipment to Operating lease right of use assets;
Reclassification of $148.1 million from Acquired intangible assets to Property and equipment;
Reclassification of $0.4 million from Prepaid expenses and other current assets to Property and equipment;
| (g) | Reclassification of $3,475.5 million from Other intangible assets to Acquired intangible assets; |
| (h) | Reclassification of $40.6 million from Non-current tax receivables to Long-term income taxes recoverable; |
| (i) | Reclassification of $69.8 million of derivative assets from Financial assets to Other assets; |
| (j) | Reclassification of $25.2 million of short-term borrowings, net from Financial Liabilities (current) to Current portion of long-term debt; |
Reclassification of $49.9 million of current portion of lease liabilities from Financial Liabilities (current) to Operating lease liabilities;
| (k) | Reclassification of $934.1 million from Contract liabilities to Deferred revenues; |
| (l) | Reclassification of $124.8 million from Current tax liabilities to Income taxes payable; |
| (m) | Reclassification of $143.3 million of provisions related to legal provisions, restructuring provisions, and onerous contract provisions from Provisions to Accounts payable and accrued liabilities; |
| (n) | Reclassification of $9.8 million of accruals, income on share options, and other non-current liabilities from Other non-current liabilities to Accrued liabilities; |
| (o) | Reclassification of $3,854.7 million of debt, net of transaction costs from Financial liabilities (non-current) to Long-term debt; |
Reclassification of $112.7 million of non-current portion of lease liabilities from Financial liabilities (non-current) to Long-term operating lease liabilities;
| (p) | Reclassification of $171.8 million from Contract liabilities to Long-term deferred revenues; |
| (q) | Reclassification of $64.7 million from Retirement benefit obligations to Pension liability; |
| (r) | Reclassification of $13.0 million of provisions related to legal provisions, restructuring provisions, and onerous contract provisions from Provisions (non-current) to Accrued liabilities; |
| (s) | Reclassification of $81.0 million from Non-current tax liabilities to Long-term income taxes payable; |
| (t) | Reclassification of $47.5 million from Share Capital to Share capital and additional paid-in capital; |
| (u) | Reclassification of $47.6 million from Share premium account to Share capital and additional paid-in capital; |
| (v) | Reclassification of $1,983.8 million from Other reserves to Share capital and additional paid-in capital; and |
| (w) | Reclassification of $1.0 million from Cash and cash equivalents to Other assets. |
Pro Forma Combined Statement of Operations reclassification adjustments for the twelve months ended April 30, 2022 included the following:
| (a) | Reclassification of $27.2 million of depreciation expense from Cost of revenues to Depreciation; |
| (b) | Reclassification of $470.2 million from Research and development expenses to Research and development; |
Reclassification of $22.8 million of depreciation expense from Research and development expenses to Depreciation;
Reclassification of $0.5 million of amortization expense from Research and development expenses to Amortization of acquired customer-based intangible assets;
| (c) | Reclassification of $650.7 million from Selling and distribution expense to Sales and Marketing; |
Reclassification of $11.2 million of depreciation expense from Selling and distribution expense to Depreciation;
Reclassification of $589.9 million of amortization expense from Selling and distribution expense to Amortization of acquired customer-based intangible assets;
| (d) | Reclassification of $259.0 million from Administrative expenses to General and administrative; |
Reclassification of $68.0 million of depreciation expense from Administrative expenses to Depreciation;
| (e) | Reclassification of $9.0 million from Other operating income to Other income (expense), net; |
| (f) | Reclassification of $267.8 million from Finance costs to Interest and other related expense, net; |
Reclassification of $62.6 million from Finance income to Interest and other related expense, net; and
| (g) | Reclassification of $36.6 million from Taxation to Provision (benefit) for income taxes. |
Pro Forma Combined Statement of Operations reclassification adjustments for the six months ended October 31, 2022 included the following:
| (a) | Reclassification of $6.8 million of depreciation expense from Cost of revenues to Depreciation; |
| (b) | Reclassification of $220.5 million from Research and development expenses to Research and development; |
Reclassification of $11.0 million of depreciation expense from Research and development expenses to Depreciation;
| (c) | Reclassification of $0.5 million of amortization expense from Amortization of acquired customer-based intangible assets to Depreciation; |
| (d) | Reclassification of $326.0 million from Selling and distribution expense to Sales and Marketing; |
Reclassification of $5.4 million of depreciation expense from Selling and distribution expense to Depreciation;
Reclassification of $252.4 million of amortization expense from Selling and distribution expense to Amortization of acquired customer-based intangible assets;
| (e) | Reclassification of $616.1 million from Administrative expenses to General and administrative; |
Reclassification of $28.0 million of depreciation expense from Administrative expenses to Depreciation;
| (f) | Reclassification of $122.9 million from Finance costs to Interest and other related expense, net; |
Reclassification of $49.8 million from Finance income to Interest and other related expense, net; and
| (g) | Reclassification of $27.5 million from Taxation to Provision (benefit) for income taxes. |
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Note 6 – Conforming Accounting Policies
The Company performed an initial review of the accounting policies of Micro Focus to determine if differences in accounting policies require reclassification or adjustment. The following adjustments have been made to align Micro Focus’ historical accounting policies to OpenText’s accounting policies for purposes of this pro forma presentation.
| (a) | Prepaid expenses and other current assets: Represents an adjustment to reflect the write off of prepaid assets to conform to OpenText’s accounting policy. The impact to the unaudited pro forma condensed combined balance sheet was a decrease of $3.5 million to Prepaid expenses and other current assets as of October 31, 2022. |
| (b) | Property and equipment: Represents an adjustment to reflect the write down of property and equipment to align to OpenText’s accounting policy on useful lives for the acquired assets in accordance with OpenText’s useful lives. The impact to the unaudited pro forma condensed combined balance sheet was a decrease of $12.0 million to Property and equipment as of October 31, 2022. The impact to the unaudited pro forma condensed combined statements of operations was an increase to Depreciation of $2.0 million for the twelve months ended April 30, 2022 and of $1.1 million for the six months ended October 31, 2022. |
| (c) | Acquired software: Represents an adjustment to reflect the write down of purchased software to conform with OpenText’s accounting policy on useful lives for the acquired assets in accordance with OpenText’s useful lives. The impact to the unaudited pro forma condensed combined balance sheet was a decrease of $3.9 million to Property and equipment as of October 31, 2022. The impact to the unaudited pro forma condensed combined statements of operations was an increase to Depreciation of $0.1 million for the twelve months ended April 30, 2022 and of $0.2 million for the six months ended October 31, 2022. |
Certain items within the historical statements of operations of OpenText and Micro Focus, may not be aligned due to differences in each companies’ method or policy for allocation of costs. The Company is reviewing the differences to align on policies for ongoing reporting. Any possible reclasses would not have an overall impact to the statement of operations as differences would result in changes only to financial statement line items within the statements of operations. When the Company completes a final review of Micro Focus’ accounting policies, additional differences may be identified that, when conformed, could have a material impact on the unaudited pro forma condensed combined financial information.
Note 7 – Preliminary Purchase Price Allocation
| (a) | Estimated Purchase Consideration |
The total estimated purchase consideration is calculated as follows:
Purchase Consideration
| (in thousands) |
Amount | |||
| Consideration for Micro Focus shares (1) |
$ | 2,157,388 | ||
| AWS warrants exercise (2) |
18,716 | |||
| Stamp duty |
11,213 | |||
|
|
|
|||
| Total consideration paid to shareholders (3) |
$ | 2,187,317 | ||
| Micro Focus closing indebtedness as of October 31, 2022 settled by OpenText |
3,913,961 | |||
|
|
|
|||
| Aggregate purchase consideration |
$ | 6,101,278 | ||
|
|
|
|||
| (1) | Reflects the cash consideration paid for Micro Focus shares outstanding, including Micro Focus shares issued on the exercise of options or vesting of awards under the Micro Focus Share Plans. |
| (2) | Reflects the cash consideration paid for Micro Focus shares issued on the net exercise of Amazon NV Investment Holdings LLC warrants (“AWS warrants”). The vesting of the AWS warrants was accelerated due to the change in control of Micro Focus, which was triggered by the Acquisition. |
| (3) | Note the foreign currency translation rate used for purposes of determining purchase consideration is as of January 31, 2023, which was used to determine the U.S. Dollars amounts for the consideration for Micro Focus shares, the AWS warrant exercise, and stamp duty. The Company entered into derivative positions, specifically the GBP contingent forwards and GBP non-deal contingent forward to fix the total cash consideration to be paid. |
The purchase price consideration calculated above and applied in the unaudited pro forma condensed combined financial information is preliminary and subject to modification based on the final purchase price. This will likely result in a difference from the preliminary purchase consideration calculated above and that difference may be material. Purchase consideration will also include the fair value of the replacement awards attributable to pre-Acquisition vesting, while the remaining portion will be recognized as post-Acquisition compensation expense over the remaining vesting periods.
| (b) | Preliminary Purchase Price Allocation |
The preliminary aggregate purchase consideration allocation to assets acquired and liabilities assumed is provided throughout these notes to the unaudited pro forma condensed combined financial statements. The following table provides a summary of the preliminary aggregate purchase consideration allocation by major categories of assets acquired and liabilities assumed based on OpenText’s management’s preliminary estimate of their respective fair values:
13
Preliminary Aggregate Purchase Consideration Allocation
| (in thousands) |
Amount | |||
| Total aggregate purchase consideration, net of $604.9 million of cash acquired (1) |
$ | 5,496,345 | ||
| Assets: |
||||
| Accounts receivable trade, net of allowance for credit losses |
674,113 | |||
| Contract assets (2) |
77,938 | |||
| Income taxes recoverable |
22,852 | |||
| Prepaid expenses and other current assets (2) |
192,890 | |||
| Property and equipment (3) |
113,289 | |||
| Operating lease right of use assets |
145,615 | |||
| Acquired intangible assets (4) |
3,498,200 | |||
| Deferred tax assets |
13,000 | |||
| Other assets (1) (2) |
75,854 | |||
| Long-term income taxes recoverable |
40,612 | |||
| Liabilities: |
||||
| Accounts payable and accrued liabilities |
645,044 | |||
| Operating lease liabilities |
49,923 | |||
| Deferred revenues |
959,250 | |||
| Income taxes payable |
51,226 | |||
| Long-term liabilities: |
||||
| Accrued liabilities |
55,022 | |||
| Pension liability |
43,052 | |||
| Long-term operating lease liabilities |
112,741 | |||
| Long-term deferred revenues |
171,837 | |||
| Long-term income taxes payable |
154,647 | |||
| Deferred tax liabilities (5) |
446,355 | |||
|
|
|
|||
| Net assets acquired (6) |
2,165,266 | |||
|
|
|
|||
| Pro forma goodwill |
$ | 3,331,079 | ||
|
|
|
|||
| (1) | Reflects the settlement of Micro Focus’ derivative positions related to the Micro Focus debt that was repaid. See Note 8(j). |
| (2) | Reflects the removal of Micro Focus’ capitalized commissions. See Note 8(k). |
| (3) | Reflects an adjustment to Property and equipment to step-down the amounts to fair value. See Note 8(m). |
| (4) | Reflects an adjustment to Acquired intangible assets to step-up the amounts to fair value. See Note 8(b). |
| (5) | Reflects deferred taxes resulting from pro forma fair value adjustments primarily related to the acquired intangibles. See Note 8(f). |
| (6) | Reflects the settlement of Micro Focus existing indebtedness. See Note 8(d). |
The preliminary aggregate purchase consideration allocation above reflects preliminary estimated goodwill of $3.3 billion as of the Acquisition date. Goodwill represents the excess of the aggregate purchase consideration over the preliminary estimated fair values of recorded tangible and intangible assets acquired and liabilities assumed in the Acquisition. The actual amount of goodwill to be recorded in connection with the Acquisition is subject to change once the valuation of the fair value of tangible and intangible assets acquired and liabilities assumed has been completed. The final valuation of such assets and liabilities is expected to be completed as soon as practicable but no later than one year after the consummation of the Acquisition.
Note 8 – Adjustments to the Unaudited Pro Forma Condensed Combined Balance Sheet
| (a) | The change in cash and cash equivalents was determined as follows: |
Cash and Cash Equivalents
| (in thousands) |
Amount | |||
| Transaction accounting adjustments - Acquisition |
||||
| Uses for Acquisition of Micro Focus: |
||||
| OpenText transaction costs |
$ | 36,009 | ||
| Cash consideration transferred |
2,187,317 | |||
| Settlement of Micro Focus’ existing debt |
3,913,961 | |||
| Settlement of Micro Focus’ transaction costs |
58,181 | |||
| Settlement of Micro Focus’ derivatives |
(69,816 | ) | ||
|
|
|
|||
| Pro forma adjustment – acquisition to Cash and cash equivalents |
$ | 6,125,652 | ||
|
|
|
|||
Cash and Cash Equivalents
| (in thousands) |
Amount | |||
| Transaction accounting adjustments – Financing |
||||
| Sources for Acquisition of Micro Focus: |
||||
| Proceeds from draw on the revolving credit facility |
$ | 450,000 | ||
| Proceeds from draw on the Acquisition Term Loan Facility |
3,585,000 | |||
| Less: Capitalized debt issuance costs and transaction costs for financing |
(61,881 | ) | ||
| Less: Original issue discount on debt |
(107,550 | ) | ||
|
|
|
|||
| Subtotal |
3,865,569 | |||
| Settlement of GBP contingent forwards and GBP non-deal contingent forwards |
6,847 | |||
|
|
|
|||
| Pro forma adjustment – financing to Cash and cash equivalents |
$ | 3,872,416 | ||
|
|
|
|||
| (b) | Represents an adjustment of $170.8 million to intangible assets acquired from Micro Focus in connection with the Acquisition, consisting of the following: |
Intangible Assets
| (in thousands) |
Amount | Estimated Weighted Average Useful Life (in years) |
||||||
| Acquired technology |
$ | 1,380,600 | 6.4 | |||||
| Customer relationships |
2,117,600 | 8.2 | ||||||
| Removal of Micro Focus’ historical intangible assets |
(3,327,427 | ) | ||||||
|
|
|
|||||||
| Pro forma net adjustment to Acquired intangible assets |
$ | 170,773 | ||||||
|
|
|
|||||||
The fair value estimates for all identifiable intangible assets are preliminary and are based on assumptions that market participants would use in pricing an asset, based on the most advantageous market for the asset (i.e., its highest and best use). The final fair value determination for identifiable intangible assets may differ materially from this preliminary determination.
The estimated fair value of Micro Focus’ preliminary identified intangible assets includes acquired technology and customer relationships. The adjustment to intangible assets records identifiable intangible assets acquired at their fair value based on preliminary estimates. For purposes of estimating the fair values of the intangible assets, benchmarking information, publicly available information as well as a variety of other assumptions, including market participant assumptions, were used. The fair values of acquired technology was valued using the relief from royalty method under the income approach. The fair value of customer relationships was valued using the multi-period excess earnings method under the income approach.
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| (c) | Represents the elimination of Micro Focus’ historical goodwill and the recognition of the preliminary goodwill for the amount of estimated purchase consideration in excess of the fair value of the net assets acquired in connection with the Acquisition: |
Goodwill
| (in thousands) |
Amount | |||
| Fair value of consideration transferred in excess of the preliminary fair value of assets acquired and liabilities assumed |
$ | 3,331,079 | ||
| Removal of Micro Focus’ historical goodwill |
(3,050,594 | ) | ||
|
|
|
|||
| Pro forma net adjustment to Goodwill |
$ | 280,485 | ||
|
|
|
|||
The adjustment to goodwill is calculated based on Micro Focus’ historical goodwill as of October 31, 2022.
| (d) | The following table reflects the settlement of Micro Focus’ existing indebtedness, resulting in the decrease in debt balances as follows: |
Settlement of Historical Micro Focus Debt
| (in thousands) |
Amount | |||
| Use of proceeds: |
||||
| Settlement of Micro Focus’ outstanding indebtedness |
$ | 3,913,961 | ||
| Write-off of capitalized debt issuance costs |
(42,718 | ) | ||
|
|
|
|||
| Settlement of existing Micro Focus indebtedness |
$ | 3,871,243 | ||
| Pro forma net adjustment to Current portion of long-term debt |
$ | 21,772 | ||
|
|
|
|||
| Pro forma net adjustment to Long-term debt |
$ | 3,849,471 | ||
|
|
|
|||
| (e) | Represents $42.7 million of total OpenText transaction costs expected to be incurred in connection with the Acquisition, of which approximately $11.0 million was incurred and $6.7 million has been paid by OpenText, resulting in $4.4 million accrued as of December 31, 2022. The remaining costs of $31.7 million were not yet accrued or incurred. The adjustment reflects a reduction in cash of $36.0 million to give effect to the settlement of accrued transaction costs of $4.4 million and $31.7 million that is expected to be incurred in addition to a reduction of accrued liabilities of $4.4 million and an increase to retained earnings of $31.7 million. |
OpenText Transaction Costs
| (in thousands) |
Amount | |||
| OpenText transaction costs incurred as of December 31, 2022 |
$ | 11,043 | ||
| OpenText transaction costs not yet incurred as of December 31, 2022 |
31,656 | |||
|
|
|
|||
| Total OpenText transactions costs |
$ | 42,699 | ||
| Transaction costs paid by OpenText as of December 31, 2022 |
(6,690 | ) | ||
|
|
|
|||
| Total OpenText transaction costs to be paid (1) |
$ | 36,009 | ||
|
|
|
|||
| (1) | Transaction costs incurred by OpenText related to the Acquisition. See Note 8(a). |
Represents $61.7 million of total Micro Focus transaction costs expected to be incurred in connection with the Acquisition, of which approximately $3.5 million has been paid by Micro Focus as of October 31, 2022. The settlement of the transaction costs for Micro Focus results in a reversal of the accrued liability upon settlement and a reduction in cash of $58.2 million.
15
Micro Focus Transaction Costs
| (in thousands) |
Amount | |||
| Micro Focus transaction costs incurred as of October 31, 2022 |
$ | 61,663 | ||
| Transaction costs paid by Micro Focus as of October 31, 2022 |
(3,482 | ) | ||
|
|
|
|||
| Micro Focus transaction costs funded by OpenText (1) |
$ | 58,181 | ||
|
|
|
|||
| (1) | Transaction costs to be incurred by Micro Focus and paid by OpenText related to the Acquisition. See Note 8(a). |
| (f) | Reflects deferred taxes resulting from pro forma fair value adjustments primarily related to the acquired intangible assets based on the estimated blended statutory tax rate of approximately 25.0%. The effective tax rate of the combined company could be significantly different (either higher or lower) depending on post-acquisition activities, including cash needs, the geographical mix of income and changes in tax law. Because the tax rates used for the pro forma financial information are estimated, the blended rate will likely vary from the actual effective rate in periods subsequent to completion of the Acquisition. This determination is preliminary and subject to change based upon the final determination of the fair value of the acquired assets and assumed liabilities. |
Deferred Tax Adjustment
| (in thousands) |
Amount | |||
| Deferred tax based on preliminary fair value of acquired intangibles |
$ | 874,550 | ||
| Less: Micro Focus’ historical deferred tax liabilities |
(831,857 | ) | ||
|
|
|
|||
| Deferred tax adjustment due to PPA adjustments |
$ | 42,693 | ||
|
|
|
|||
| (g) | Represents the elimination of Micro Focus’ historical equity balances. |
| (h) | Represents the settlement of the GBP contingent forwards and GBP non-deal contingent forwards that would settle on the Acquisition date. The derivative asset of $0.3 million, which is net of $29.6 million related to success fees, would be eliminated to reflect the settlement of the GBP contingent forwards and $6.6 million to reflect the settlement of the GBP non-deal contingent forward, with a corresponding impact to cash. The adjustment for the settlement of derivative positions is based on the values as of December 31, 2022 and as a result, will differ from the fair value upon settlement. |
| (i) | Represents the removal of $53.5 million in Accrued liabilities related to deferred issuance costs accrued by OpenText as of December 31, 2022 for the Acquisition Term Loan Agreement and the removal of the $54.9 million corresponding impact to Other assets. Upon drawdown on the Acquisition Term Loan Facility, an incremental $8.4 million was incurred and the total of $63.3 million of deferred issuance costs are deferred and amortized over the term of the debt. See Note 8(l). The $61.9 million payment of the deferred financing costs related to the Acquisition Term Loan Agreement reflects the total deferred issuance costs net of $1.4 million paid as of December 31, 2022. See Note 8(a). |
| (j) | Represents the settlement of Micro Focus’ derivative assets of $69.8 million in Other assets. The derivative positions are related to Micro Focus’ debt, which is settled upon Acquisition, and as such, the derivative positions are also settled. The settlement of Micro Focus’ debt is reflected in Note 8(d). The adjustment for the settlement of derivative positions is based on the values as of October 31, 2022, and as a result, will differ from the fair value upon settlement. |
| (k) | Represents the removal of assets related to capitalized commission expenses that are not part of the net assets acquired at the closing of the Acquisition. The current portion of $44.3 million included $19.0 million in Prepaid expenses and other current assets and $25.3 million in Contract assets, and the long-term portion of $31.8 million was in Other assets. |
| (l) | Represents the drawdown on the Acquisition Term Loan Facility and drawdown on the revolving credit facility, resulting in the increase in debt balances as follows: |
Debt, net
| (in thousands) |
Amount | |||
| Drawdown on Acquisition Term Loan Facility |
$ | 3,585,000 | ||
| Drawdown on revolving credit facility |
450,000 | |||
| Less: Discounts on debt |
(107,550 | ) | ||
| Less: Financing transaction costs |
(63,302 | ) | ||
|
|
|
|||
| Total long-term debt, net |
$ | 3,864,148 | ||
| Less: Current portion of debt |
(485,850 | ) | ||
|
|
|
|||
| Noncurrent portion of long-term debt, net |
$ | 3,378,298 | ||
|
|
|
|||
| (m) | Represents a $4.3 million decrease in Property and equipment to reflect the step down in fair value attributable to Micro Focus’ building. |
Note 9 – Transaction Adjustments to the Unaudited Pro Forma Condensed Combined Statement of Operations
| (a) | Represents an adjustment to reflect a decrease to amortization expense for the estimated fair value adjustment of acquired intangible assets on a straight-line basis over the remaining useful life as follows: |
Amortization of Technology-Based Intangibles
| (in thousands) |
Estimated Weighted Average Useful Life |
Estimated Fair Value |
For the Six Months Ended December 31, 2022 |
For the Year Ended June 30, 2022 |
||||||||||||
| Acquired technology |
6.4 | $ | 1,380,600 | $ | 108,576 | $ | 217,152 | |||||||||
|
|
|
|
|
|||||||||||||
| Less: Micro Focus’ historical amortization in Cost of revenues |
(119,248 | ) | (253,863 | ) | ||||||||||||
|
|
|
|
|
|||||||||||||
| Pro forma net adjustment to Cost of revenues |
$ | (10,672 | ) | $ | (36,711 | ) | ||||||||||
|
|
|
|
|
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Amortization of Customer-Based Intangibles
| (in thousands) |
Estimated Weighted Average Useful Life |
Estimated Fair Value |
For the Six Months Ended December 31, 2022 |
For the Year Ended June 30, 2022 |
||||||||||||
| Customer relationships |
8.2 | $ | 2,117,600 | $ | 130,803 | $ | 261,609 | |||||||||
| Less: Micro Focus’ historical amortization in Operating expenses |
(251,900 | ) | (590,400 | ) | ||||||||||||
|
|
|
|
|
|||||||||||||
| Pro forma net adjustment to Operating expenses |
$ | (121,097 | ) | $ | (328,791 | ) | ||||||||||
|
|
|
|
|
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The amortization related to these amortizable identifiable intangible assets is reflected as a pro forma adjustment in the unaudited pro forma condensed combined statements of operations. The identifiable intangible assets and related amortization are preliminary and are based on management’s estimates after consideration of similar transactions as well as based on an analysis of the net present value of the projected cash flows for Micro Focus, over the weighted-average estimated useful lives. For purposes of the pro forma adjustment for the amortization of the intangible assets, the estimated useful lives used are consistent with the Company’s accounting policy. As discussed above, the amount that will ultimately be allocated to identifiable intangible assets and liabilities, and the related amount of amortization, may differ materially from this preliminary allocation. In addition, the periods the amortization impacts will ultimately be based upon the periods in which the associated economic benefits or detriments are expected to be derived or, where appropriate, based on the use of a straight-line method. Therefore, the amount of amortization following the closing of the Acquisition may differ significantly between periods based upon the final value assigned and amortization methodology used for each identifiable intangible asset. The final valuation of such assets and liabilities is expected to be completed as soon as practicable but no later than one year after the consummation of the Acquisition.
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| (b) | Reflects the $31.7 million incremental buyer transaction costs incurred or expected to be incurred related to the Acquisition. Total expected transaction costs are $42.7 million, of which $11.0 million has already been incurred in OpenText’s statement of operations for the six months ended December 31, 2022. |
| (c) | Reflects the income tax impact of the pro forma adjustments utilizing an estimated blended statutory income tax rate of approximately 25.0% for the year ended June 30, 2022 and for the six months ended December 31, 2022. The effective tax rate of the combined company could be significantly different (either higher or lower) depending on activities following the consummation of the Acquisition, including cash needs, the geographical mix of income and changes in tax law. |
| (d) | The following table summarizes the removal of historical Micro Focus interest expense and the pro forma interest expense related to the Acquisition Term Loan Facility, revolving credit facility, and 2027 Senior Secured Notes: |
Interest Expense
| (in thousands) |
Principal Balance | Assumed Weighted Average Effective Interest Rate |
For the Six Months Ended December 31, 2022 |
For the Year Ended June 30, 2022 |
||||||||||||
| Interest expense |
$ | 5,035,000 | 8.47 | % | $ | 189,953 | $ | 379,908 | ||||||||
| Amortization of capitalized debt issuance costs |
14,670 | 29,799 | ||||||||||||||
| Removal of historical interest expense recognized on the 2027 Senior Secured Notes |
(5,955 | ) | — | |||||||||||||
| Less: Micro Focus’ historical interest expense |
(77,433 | ) | (186,300 | ) | ||||||||||||
|
|
|
|
|
|||||||||||||
| Pro forma net adjustment to Interest and other related expense, net |
$ | 121,235 | $ | 223,407 | ||||||||||||
|
|
|
|
|
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There was approximately $4.0 billion aggregate principal amount related to additional variable-rate indebtedness upon the consummation of the Acquisition on a pro forma basis. Borrowings under the Acquisition Term Loan Facility will bear interest at Term SOFR plus an applicable margin of 3.50% and the SOFR Adjustment (as defined in the Acquisition Term Loan Amendment). Financing costs are sensitive to changes in interest rates. For each 0.125% change (increase or decrease) in actual or assumed interest rates, interest expense for the year ended June 30, 2022 would increase or decrease by approximately $5.0 million and increase or decrease by approximately $2.5 million for the six months ended December 31, 2022.
| (e) | Reflects the decrease in depreciation expense due to the step down of property and equipment to adjust Micro Focus’ building to the acquisition date fair value. See Note 8(m). Depreciation expense will decrease by $0.2 million for the year ended June 30, 2022 and $0.1 million for the six months ended December 31, 2022. |
| (f) | The following tables calculate the unaudited pro forma combined basic and diluted earnings per share, which is adjusted to reflect the pro forma net income for the year ended June 30, 2022 and for the six months ended December 31, 2022, as presented on the unaudited pro forma condensed combined statement of operations: |
| Six Months Ended December 31, 2022 | ||||||||
| (in thousands, except per share amounts) |
Basic | Diluted | ||||||
| Numerator: |
||||||||
| Pro forma combined net income (loss) |
$ | (484,700 | ) | $ | (484,700 | ) | ||
| Pro forma combined net (income) loss attributable to noncontrolling interests |
(81 | ) | (81 | ) | ||||
|
|
|
|
|
|||||
| Pro forma combined net income (loss) attributable to common stockholders |
$ | (484,781 | ) | $ | (484,781 | ) | ||
|
|
|
|
|
|||||
| Denominator: |
||||||||
| Historical and pro forma weighted average shares outstanding |
269,997 | 269,997 | ||||||
| Pro forma net income (loss) per share |
$ |
(1.80 |
) | $ | (1.80 | ) | ||
| Year Ended June 30, 2022 | ||||||||
| (in thousands, except per share amounts) |
Basic | Diluted | ||||||
| Numerator: |
||||||||
| Pro forma combined net income (loss) |
$ | 230,453 | $ | 230,453 | ||||
| Pro forma combined net (income) loss attributable to noncontrolling interests |
(169 | ) | (169 | ) | ||||
|
|
|
|
|
|||||
| Pro forma combined net income (loss) attributable to common stockholders |
$ | 230,284 | $ | 230,284 | ||||
|
|
|
|
|
|||||
| Denominator: |
||||||||
| Historical and pro forma weighted average shares outstanding |
271,271 | 271,909 | ||||||
| Pro forma net income (loss) per share |
$ | 0.85 | $ | 0.85 | ||||
17